## POTENTIAL IMPACT OF THE SIMANDOU IRON ORE PROJECT ON THE ECONOMY, POVERTY, AND INEQUALITY IN GUINEA

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---

### A. Introduction and context
- Mining sector and poverty:
  - Mining sector accounted for 21% of GDP in 2022 and over 90% of exports.
  - About 43% of Guinean households live below the poverty line (INS, 2020).
  - In 2019, the richest 10 percent of households made 42 percent of total income, while the bottom 50 percent made only 17 percent (Chancel & all, 2022).
- Resource endowments:
  - Guinea has the largest bauxite reserves in the world and high hydroelectric capacity in West Africa.
  - The Simandou deposit is estimated to contain approximately 4 billion tons of high-grade recoverable iron ore (Rio Tinto, 2023).

### B. The Simandou project and the iron ore market
- Potential production and market position:
  - Production could total almost 120 million mt after completion.
  - The project could double the value of Guinea’s current mining exports according to Rio Tinto.
  - The project could make Guinea the fifth largest producer of iron ore in the world, with a country share in world production of 4.5 percent (likely a bit lower).
- Text Table 1 (selected figures as presented):
  - World mine production: 2,680 (million mt of usable ore); Reserves: 180,000 (million mt of usable ore).
  - Australia: 912 (production), 51,000 (reserves).
  - Brazil: 431 (production), 34,000 (reserves).
  - China: 394 (production), 20,000 (reserves).
  - India: 273 (production), 5,500 (reserves).
  - Guinea*: 120 (production), 4,000* (reserves).
- Project structure and revenues:
  - Consortium includes Rio Tinto, China Baowu Steel Group Corp and other Chinese companies.
  - WCS and the State of Guinea hold blocks 1 and 2 with stakes of 85 percent and 15 percent, respectively.
  - Simfer Mining Consortium and the State of Guinea hold blocks 3 and 4 with stakes of 85 percent and 15 percent, respectively (DNPEC, 2023).
  - Total expected government revenues could amount to 3.4 percent of GDP from 2030 to 2039.
  - Total mining revenues were 2.2 percent of GDP in 2022 (Rio Tinto (2023)).
- Infrastructure and investment:
  - Planned railroad and new mining port; railroad designed to have an extra-capacity of around 25% for non-mining activities (Rio Tinto, 2023).
  - Construction expected to employ 50,000-60,000 people.
  - Total investment could sum up to roughly 20 billion USD over more than one decade (roughly equivalent in magnitude to Guinea’s 2022 GDP).
  - Rio Tinto expects 90% of this investment to be carried out over 2022-25.
- Timeline and permits:
  - First production expected at the end of 2025 and first exports in the beginning of 2026 (Rio Tinto).
  - As of January 2023 the project had received 119 out of 208 necessary permits.
  - Closing by Chinese banks expected for March 2024 according to Rio Tinto.
- Rio Tinto tax expense estimates (project full timeline):
  - 0.6 bn USD per year from 2025 to 2029.
  - 1.4 bn USD per year from 2030-2039.
  - 1.8 bn USD per year afterwards.
  - This would average to 3.2 percent of current GDP over 2025 to 2040 (footnote).

### C. Methodology and scenarios
- Models used:
  - DIGNAR (Debt, Investment, Growth, and Natural Resources) for short- and medium-term macroeconomic impacts.
  - MIMMI (Multi-Sector Macro-Inequality Model) for long-term impacts on poverty and inequality.
- Simandou scenario specification (DIGNAR implementation notes):
  - Ramp-up from 11.4 mt in 2025 to a plateau of 118.6 mt in 2030.
  - Additional production from Simandou calculated using an expected export price of $70 per mt (Rio Tinto (2023)).
  - 25 percent of rail investment assumed available for non-mining activities and modeled as additional public investment financed by grants (fiscally neutral).
  - All private investment in the railroad (75%), mining infrastructure, and the mining port are modeled endogenously.
- Policy scenarios (debt neutral; financed by grants):
  - Policy Scenario 1: tax revenues amounting to 3 percent of GDP used for public investment starting from 2025.
  - Policy Scenario 2: tax revenues amounting to 3 percent of GDP per year invested in infrastructure starting from 2025.
  - Policy Scenario 3: tax revenues amounting to 3 percent of GDP per year invested in infrastructure and education in equal shares (1.5 percent of GDP each).
  - Sensitivity: +/-15 percent shock on iron ore export price in year 2025 for positive/negative price shock scenarios.
- MIMMI implementation details:
  - Step 1: increase mining sector TFP to match long-term mining GDP growth implied by Simandou exports.
  - Step 2: introduce additional public rail infrastructure equal to 25 percent of half of the total infrastructure investment estimated by Rio Tinto (2022) for 2030 (exogenously assumed).

### D. Key simulation results and projections
- Macroeconomic impacts (DIGNAR):
  - Level of real GDP would be 26 percent higher by 2030 compared to the baseline without Simandou.
  - Currency appreciation of around 3.4 percent in 2025 and 1.8 percent in 2030.
  - Debt to GDP ratio could fall by 2.5 percent points of GDP in 2025 and 2030.
  - Employment increase by about four percent compared to the baseline.
  - Private consumption increases during the construction phase, before decreasing from 2025.
- Sensitivity to prices:
  - A positive shock of 15 percent to iron ore export prices results in higher effects on the economy; a negative shock of 15 percent lowers the positive effects.
- Long-run social impacts (MIMMI):
  - Project alone reduces the poverty rate by 0.6 percentage points and the poverty depth by 0.9 percentage points (deviation from baseline).
  - The Gini index could increase (worsening inequality), especially in rural areas, due to rising salaries of the most skilled workers and increased demand for skilled labor.
- Policy scenarios — summary of impacts:
  - Policy Scenario 1 (3 percent of GDP to public investment):
    - Faster and more sustained real GDP growth and a stronger decline in the debt to GDP ratio compared to Simandou without additional spending.
    - More favorable effects on employment, non-mining sector growth, and tax revenues.
    - Doubling investment efficiency (Policy Scenario 1A) yields even stronger positive effects.
    - Spending 3 percent of GDP each year in transfers (Policy Scenario 1B) produces the highest effect on private consumption but less favorable effects on other indicators.
  - Policy Scenario 2 (3 percent of GDP to infrastructure):
    - Substantial poverty reduction: the poverty rate could decrease by 24 percent points (long-run deviation from baseline as reported).
    - Infrastructure investment alone can increase inequality as high-skilled labor benefits relatively more.
  - Policy Scenario 3 (1.5 percent of GDP to infrastructure + 1.5 percent to education):
    - Produces the highest reduction of poverty across scenarios.
    - Can decrease inequality in both rural and urban areas, though country-level Gini could still rise modestly; education partially offsets inequality-increasing effects of infrastructure by lifting productivity of unskilled workers.
- Additional quantitative notes from figures and text:
  - Text Figure 3 reported deviations (as presented): poverty deviations such as 0.6, 1.4, 0.2 and inequality deviations including values 5.2, 3.8, 4.2, 2.3, -1.5, -4.1 in figure legend and bars.

### E. Fiscal policy, tax administration, and local content
- Current fiscal context:
  - Mining revenues currently account for only 2 percent of GDP.
  - The mining sector accounted for 21 percent of GDP in 2022.
- Tax and export price recommendations:
  - Ensure iron ore from Simandou is exported at a price commensurate with international iron ore prices and limit tax exemptions.
  - Apply a fair export price, especially for firms of the same holding company.
  - Explore a transfer pricing reform similar to the one implemented for bauxite.
  - Strengthen customs authorities' capacity to control mining exports.
- Local content and employment:
  - Promote more local content in investment spending, encourage employment, and award contracts to local firms where possible to improve the project's impact on the local economy and private consumption.
- Macroeconomic impact of using tax revenues:
  - Tax revenues and their investment in infrastructure and education produce larger positive effects on the Guinean economy.
- IMF engagement:
  - The IMF stands ready to support the authorities.

### F. DIGNAR and DIGNAD model setups, calibration, and key parameters
- DIGNAR calibration parameters (as presented):
  - 1.a GDP growth rate (in percent) 4.99
  - 1.b Exports/GDP*100 (in percent) 41.81
  - 1.c Imports/GDP*100 (in percent) 40.94
  - 1.d Public consumption/GDP*100 (in percent) 13.74
  - 1.e Public investment/GDP*100 (in percent) 3.25
  - 1.f Private investment/GDP*100 (in percent) 13.57
  - 1.g Mining value added (natural resource production)/GDP*100 (in percent) 19.33
  - 1.h Public domestic debt / GDP*100 (in percent) 13.42
  - 1.i Private foreign debt/GDP*100 (in percent) 0.33
  - 1.j Concessional debt/GDP*100 (in percent) 2.86
  - 1.k Public external commercial debt/GDP*100 (in percent) 21.42
  - 1.l Grants/GDP*100 (in percent) 0.46
  - 1.m Total public revenues/GDP*100 (in percent) 13.01
  - 1.r Foreign aid to GDP ratio (in percent) 0.46
  - Interest rates:
    - 2.a Annualized domestic net real interest rate (in percent) 5.00
    - 2.b Annualized net real interest rate paid on concessional debt (in percent) 0.00
    - 2.c Annualized net real risk-free rate (in percent) 4.00
    - 2.d Annualized net real interest rate paid on government external commercial debt (in percent) 5.00
  - Structural parameters:
    - 3.a Steady-state efficiency of public investment (i.e. share of investment turned into actual capital) (in percent) 28
    - 3.b Share of optimizers (i.e. savers, Ricardian households) in the economy (in percent) '30
    - 3.c Elasticity of substitution between the two types of labor (in tradables and nontradables) 0.01
    - 3.d Elasticity of substitution between traded and non-traded goods 0.99
  - Natural resource and revenue shares:
    - 4.a Share of government natural resource revenues in total government revenues (in percent) 17.02
    - 5.a Share of labour taxes in total public revenue (in percent) 7.64
    - 5.b Share of consumption taxes in total public revenue (in percent) 36.50
- DIGNAD calibration highlights (climate/disaster model):
  - Return on standard infrastructure investment: 25 (percent)
  - Return on adaptation infrastructure investment: 30 (percent)
  - Public standard infrastructure investment to GDP ratio: 3.3 (percent)
  - Depreciation rate of standard public infrastructure: 7.5 (percent)
  - Depreciation rate of adaptation public infrastructure: 3 (percent)
  - Public investment efficiency: 50 (percent)
  - Grants to GDP ratio: 0.5 (percent)
  - Labor income tax rate: 11.73 (percent)
  - Consumption tax rate: 7.52 (percent)
  - Public domestic debt to GDP ratio: 13.6 (percent)
  - Public concessional debt to GDP ratio: 2.89 (percent)
  - Public external commercial debt to GDP ratio: 21.73 (percent)
  - Assumed Guinea total capital stock: 150 percent of GDP; global average physical damage among large floods: 4 percent of GDP; implied damage to total capital: 2.7 percent; assumed output loss from the flood: 1.5 percent.

### G. Natural disasters, climate policy, resilience, and energy context
- Natural disasters and emissions:
  - Natural disasters, especially floods, have become more frequent and severe in Guinea.
  - Mining sector growth could push up carbon emissions significantly.
  - Guinea has large hydropower potential estimated at around 6,000 MW.
- Emissions decomposition and historical trends:
  - Agriculture and LULUCF accounted for 73.4 percent of total GHG emissions in Guinea in 2022.
  - Energy sector contributed 13.7 percent of total GHG emissions in Guinea in 2022.
  - Share of CO2 emissions in total GHG emissions averages at 45.3 percent from 2000 to 2022.
  - Guinea’s annual CO2 emissions have broadly increased since 1965, with a dramatic acceleration in 2014.
- Hydropower and renewable energy:
  - Share of electricity generated with hydro and marine powers stayed above 60 percent since 2016 and increased to 87 percent in 2021.
  - Together with 1 percent from solar power, renewables accounted for 88 percent of electricity generation in 2021.
  - Key projects and capacities:
    - Souapiti Dam: 450 MW.
    - Amaria Dam: 300 MW.
    - Koukoutamba Dam: 294 MW.
    - Kaleta Dam: 240 MW.
    - Fomi Dam: 90 MW.
  - Solar capacity notes:
    - Khoumagueli: 40 MW.
    - Authorities plan, with donor support, a competitive procurement scheme to deliver an additional 100 MW of solar.
    - AfDB (2021) estimate: Guinea will need to add 600 MW of solar capacity to the generation fleet by 2030.
- Climate adaptation findings (DIGNAD scenarios):
  - When post-disaster recovery is financed by debt, ranking of outcomes (best to worst): Scenario 3 > Scenario 2 > Scenario 1.
  - Scenario 1 produces the largest GDP loss by about 1.5 percent and the largest need for ex post reconstruction investment, leading to higher total public debt.
  - Scenario 3 (ex ante adaptation financed by grants + PIE reforms raising PIE from 50 percent to 70 percent) yields the smallest GDP loss and lowest rise in public debt, with highest private investment growth and private consumption growth.
  - When post-disaster recovery is financed by domestic revenue mobilization, labor income tax rate rises the most in Scenario 1 (to 14.5 percent) and less so for Scenarios 2 and 3 (about 13 percent).
- Policy implications on adaptation and mitigation:
  - Early ex ante adaptation investment financed by grants and complemented by PIE reforms yields the best macroeconomic outcomes.
  - Implementation of Guinea’s National Adaptation Plan would cost at least USD14 billion; financing should not jeopardize debt sustainability.
  - Prioritize public investment in adaptation programs with positive externalities and address market imperfections that hinder private adaptation.

### H. Sovereign–bank nexus, risks, and policy recommendations
- Recent developments and exposures:
  - Banks’ exposure to the public sector increased from 15.2 percent in 2014 to 29.6 percent of banks’ total assets at end-2023.
  - Government securities account for 28.6 percent of banks’ assets (compared to 21.5 percent in December 2022 and 14.7 percent in 2014).
  - Exceptional bond issuance, September–October 2023:
    - Tranche i) GNF 2000 billion, a 4-year bond with an issued yield of 9 percent on September 26.
    - Tranche ii) GNF 3000 billion, a 5-year bond with an issued yield of 13 percent on October 4.
    - Total exceptional issuance: GNF 5,000 billion or 2.8 percent of GDP.
- Risks and stress test evidence:
  - Supervisory 2022 stress test replication: 600 bps decrease applied to T-bills observed in 2014 led to a decrease in solvency ratio by 0.5-4.2 percent; resulting range of solvency ratios: 21.8 percent to 10.3 percent (regulatory standard: 10 percent).
  - Liquidity risk is elevated due to inexistence of a secondary government security market and buy-and-hold investor behavior; BCRG liquidity facilities apply a 10 percent haircut.
- Policy recommendations to address sovereign–bank nexus:
  - Reduce banks’ exposure to sovereigns by diversifying government funding through a robust Medium-Term Debt Strategy (MTDS).
  - Diversify the investor base: boost investor relations, promote creation of investment schemes, develop a non-bank investor base.
  - Develop interbank and repo markets over the medium term.
  - Strengthen prudential framework and bank resilience: implement Pillar 2 requirements, consider an ICAAP requirement, enact and implement the new Banking Law (crisis management, bank resolution, safety net components).
  - Strengthen banking supervision and address staffing constraints at the BCRG.
  - Strengthen fiscal framework: better targeting of spending and strengthening medium-term fiscal frameworks to build resilience.

### I. Public investment effectiveness and implementation recommendations
- Improve public investment management (C-PIMA February 2023 recommendations):
  - Establish a unified regulatory framework for public investment management.
  - Create a bank of evaluated projects awaiting selection.
  - Build capacity for analysis and review of feasibility studies.
  - Carefully integrate public-private partnerships (PPP) into public investment.
- Education and social policy recommendations:
  - Spend Simandou tax revenues on a mix of education and infrastructure to reduce inequality and support long-term growth.
  - Target measures to promote girls' education; consider permanent school canteen programs and well-targeted social protection, health care, and social services.
- Trade-offs and distributional considerations:
  - Infrastructure investment yields large poverty reduction via productivity spillovers but can raise inequality unless combined with education spending that benefits unskilled workers.
  - Without active policies, private consumption and long-run poverty/inequality improvements from the project could be limited.

*Source: IMF staff estimates and analysis as presented in the chapter "POTENTIAL IMPACT OF THE SIMANDOU IRON ORE PROJECT ON THE ECONOMY, POVERTY, AND INEQUALITY IN GUINEA."*

### References _______________________________________________________________________________ 15

### POTENTIAL IMPACT OF THE SIMANDOU IRON ORE PROJECT ON THE ECONOMY, POVERTY, AND INEQUALITY IN GUINEA

### A. Introduction and Context
- Guinea is resource-rich; the mining sector accounted for 21% of GDP in 2022 and over 90% of exports.
- About 43% of Guinean households live below the poverty line (INS, 2020).
- In 2019, the richest 10 percent of households made 42 percent of total income, while the bottom 50 percent made only 17 percent (Chancel & all, 2022).
- Guinea has the largest bauxite reserves in the world and high hydroelectric capacity in West Africa.
- The Simandou deposit is estimated to contain approximately 4 billion tons of high-grade recoverable iron ore (Rio Tinto, 2023).

### B. The Simandou Project and the Iron Ore Market
- Potential production and market position:
  - Production could total almost 120 million mt after completion.
  - The project could double the value of Guinea’s current mining exports according to Rio Tinto.
  - The project could make Guinea the fifth largest producer of iron ore in the world, with a country share in world production of 4.5 percent (likely a bit lower).
- Text Table 1 figures (as presented):
  - World mine production: 2,680 (million mt of usable ore); Reserves: 180,000 (million mt of usable ore).
  - Australia: 912 (production), 51,000 (reserves).
  - Brazil: 431 (production), 34,000 (reserves).
  - China: 394 (production), 20,000 (reserves).
  - India: 273 (production), 5,500 (reserves).
  - Guinea*: 120 (production), 4,000* (reserves).
- Project structure and revenues:
  - Consortium includes Rio Tinto, China Baowu Steel Group Corp and other Chinese companies.
  - WCS and the State of Guinea hold blocks 1 and 2 with stakes of 85 percent and 15 percent, respectively.
  - Simfer Mining Consortium and the State of Guinea hold blocks 3 and 4 with stakes of 85 percent and 15 percent, respectively (DNPEC, 2023).
  - Total expected government revenues could amount to 3.4 percent of GDP from 2030 to 2039.
  - Total mining revenues were 2.2 percent of GDP in 2022 (Rio Tinto (2023)).
- Infrastructure and investment:
  - Planned railroad and new mining port; railroad designed to have an extra-capacity of around 25% for non-mining activities (Rio Tinto, 2023).
  - Construction expected to employ 50,000-60,000 people.
  - Total investment could sum up to roughly 20 billion USD over more than one decade (roughly equivalent in magnitude to Guinea’s 2022 GDP).
  - Rio Tinto expects 90% of this investment to be carried out over 2022-25.
- Timeline and permits:
  - First production expected at the end of 2025 and first exports in the beginning of 2026 (Rio Tinto).
  - As of January 2023 the project had received 119 out of 208 necessary permits.
  - Closing by Chinese banks expected for March 2024 according to Rio Tinto.

### C. Methodology
- Two complementary IMF models used:
  - DIGNAR (Debt, Investment, Growth, and Natural Resources) model for short- and medium-term macroeconomic impacts.
  - MIMMI (Multi-Sector Macro-Inequality Model) for long-term impacts on poverty and inequality.
- Scenarios simulated:
  - Baseline: average mine production growth rate of 5 percent and average GDP growth rate of around 5 percent.
  - Simandou project scenario: ramp-up from 11.4 mt in 2025 to a plateau of 118.6 mt in 2030; includes 25 percent of new rail infrastructure available for non-mining activities; sensitivity of +/-15 percent on iron ore export price.
  - Policy Scenario 1: tax revenues amounting to 3 percent of GDP used for public investment starting from 2025.
  - Policy Scenario 2: tax revenues amounting to 3 percent of GDP per year invested in infrastructure starting from 2025.
  - Policy Scenario 3: tax revenues amounting to 3 percent of GDP per year invested in infrastructure and education in equal shares (1.5 percent of GDP each).
- Financing assumption for policy scenarios: all scenarios are debt neutral and are financed by grants (note in Text Figure 2).

### D. Key Simulation Results and Projections
- Macroeconomic impacts (DIGNAR):
  - Level of real GDP would be 26 percent higher by 2030 compared to the baseline without Simandou.
  - Currency appreciation of around 3.4 percent in 2025 and 1.8 percent in 2030.
  - Debt to GDP ratio could fall by 2.5 percent points of GDP in 2025 and 2030.
  - Employment increase by about four percent compared to the baseline.
  - Private consumption increases during the construction phase, before decreasing from 2025.
- Sensitivity to prices:
  - A positive shock of 15 percent to iron ore export prices results in higher effects on the economy; a negative shock of 15 percent lowers the positive effects.
- Long-run social impacts (MIMMI):
  - Project alone reduces the poverty rate by 0.6 percentage points and the poverty depth by 0.9 percentage points (deviation from baseline).
  - The Gini index could increase (worsening inequality), especially in rural areas, due to rising salaries of the most skilled workers and increased demand for skilled labor.
- Effects of policy scenarios:
  - Policy Scenario 1 (3 percent of GDP to public investment):
    - Faster and more sustained real GDP growth and a stronger decline in the debt to GDP ratio compared to Simandou without additional spending.
    - More favorable effects on employment, non-mining sector growth, and tax revenues.
    - Doubling investment efficiency (Appendix Policy Scenario 1a) yields even stronger positive effects.
    - Spending 3 percent of GDP each year in transfers (Appendix Policy Scenario 1b) produces the highest effect on private consumption but less favorable effects on other indicators.
  - Policy Scenario 2 (3 percent of GDP to infrastructure):
    - Substantial poverty reduction: the poverty rate could decrease by 24 percent points (long-run deviation from baseline as reported).
    - However, infrastructure investment alone can increase inequality as high-skilled labor benefits relatively more.
  - Policy Scenario 3 (1.5 percent of GDP to infrastructure + 1.5 percent to education):
    - Produces the highest reduction of poverty across scenarios.
    - Can decrease inequality in both rural and urban areas, though country-level Gini could still rise modestly; education partially offsets inequality-increasing effects of infrastructure by lifting productivity of unskilled workers.
- Additional quantitative notes from figures and text:
  - Rio Tinto estimates tax expenses for the entire project: 0.6 bn USD per year from 2025 to 2029, 1.4 bn USD per year from 2030-2039 and 1.8 bn USD per year afterwards; this would average to 3.2 percent of current GDP over 2025 to 2040 (footnote).
  - Text Figure 3 reported deviations: Simandou and policy scenarios’ impacts on Gini Index, Rural Gini, Urban Gini include values such as 0.6, 1.4, 0.2 (poverty deviations) and 5.2, 3.8, 4.2, 2.3, -1.5, -4.1 (inequality deviations) as presented in the figure legend and bars.

### E. Discussion and Policy Recommendations
- Recommended fiscal use of Simandou tax revenues:
  - Spend tax revenues on a mix of education and infrastructure to reduce inequality and support long-term growth.
  - Target measures to promote girls' education; consider permanent school canteen programs and well-targeted social protection, health care, and social services.
- Public investment effectiveness:
  - Increasing the effectiveness of public investment would amplify positive impacts; recommendations include implementing C-PIMA (February 2023) suggestions:
    - Establish a unified regulatory framework for public investment management.
    - Create a bank of evaluated projects awaiting selection.
    - Build capacity for analysis and review of feasibility studies.
    - Carefully integrate public-private partnerships (PPP) into public investment.
- Trade-offs and distributional considerations:
  - Infrastructure investment yields large poverty reduction via productivity spillovers but can raise inequality unless combined with education spending that benefits unskilled workers.
  - Without active policies, private consumption and long-run poverty/inequality improvements from the project could be limited.

*Source: IMF staff estimates and analysis as presented in the chapter "POTENTIAL IMPACT OF THE SIMANDOU IRON ORE PROJECT ON THE ECONOMY, POVERTY, AND INEQUALITY IN GUINEA."*

### 22.      To increase tax revenues, the government can ensure that iron ore from Simandou is

### 1ginea2024002 - 22.      To increase tax revenues, the government can ensure that iron ore from Simandou is

### Fiscal policy and Simandou: tax revenue, transfers, and administration
- Mining revenues currently account for only 2 percent of GDP.
- The mining sector accounted for 21 percent of GDP in 2022.
- Policy recommendations and findings:
  - Ensure iron ore from Simandou is exported at a price commensurate with international iron ore prices and limit tax exemptions.
  - Apply a fair export price, especially for firms of the same holding company.
  - Explore a transfer pricing reform similar to the one implemented for bauxite.
  - Strengthen customs authorities' capacity to control mining exports.
  - Promote more local content in investment spending, encourage employment, and award contracts to local firms where possible to improve the project's impact on the local economy and private consumption.
- Macroeconomic impact of using tax revenues:
  - Tax revenues and their investment in infrastructure and education produce larger positive effects on the Guinean economy.
- The IMF stands ready to support the authorities.

### DIGNAR model: setup, Simandou implementation, and key assumptions
- Model description:
  - The IMF’s Debt, Investment, Growth, and Natural Resources (DIGNAR) Model is a dynamic, stochastic model of a small open economy with traded and nontraded sectors and a natural resource sector.
  - Calibrated to match Guinea's macroeconomic characteristics; Rio Tinto provided data on the Simandou project.
- Simandou scenario implementation details:
  - Add expected mining production of Simandou starting from 2025.
  - Additional production from Simandou is calculated by dividing projected value of exports from Simandou by an expected export price of $70 per mt (Rio Tinto (2023)).
  - Sharing of rails with non-mining activities modeled as additional public investment financed by public grants, amounting to 25% of the total value of the investment in the rails (DNPEC, 2023). This 25% is assumed to be a grant (fiscally neutral).
  - All private investment in the railroad (75%), mining infrastructure, and the mining port are modeled endogenously.
- Public Investment Efficiency (PIE) assumption:
  - Assume a Public Investment Efficiency (PIE) of 50% of Sub-Saharan countries average in Policy Scenario 1.

### DIGNAR calibration parameters (as presented)
- Macroeconomic ratios and fiscal/sector shares:
  - 1.a GDP growth rate (in percent) 4.99
  - 1.b Exports/GDP*100 (in percent) 41.81
  - 1.c Imports/GDP*100 (in percent) 40.94
  - 1.d Public consumption/GDP*100 (in percent) 13.74
  - 1.e Public investment/GDP*100 (in percent) 3.25
  - 1.f Private investment/GDP*100 (in percent) 13.57
  - 1.g Mining value added (natural resource production)/GDP*100 (in percent) 19.33
  - 1.h Public domestic debt / GDP*100 (in percent) 13.42
  - 1.i Private foreign debt/GDP*100 (in percent) 0.33
  - 1.j Concessional debt/GDP*100 (in percent) 2.86
  - 1.k Public external commercial debt/GDP*100 (in percent) 21.42
  - 1.l Grants/GDP*100 (in percent) 0.46
  - 1.m Total public revenues/GDP*100 (in percent) 13.01
  - 1.r Foreign aid to GDP ratio (in percent) 0.46
- Interest rates:
  - 2.a Annualized domestic net real interest rate (in percent) 5.00
  - 2.b Annualized net real interest rate paid on concessional debt (in percent) 0.00
  - 2.c Annualized net real risk-free rate (in percent) 4.00
  - 2.d Annualized net real interest rate paid on government external commercial debt (in percent) 5.00
- Structural parameters:
  - 3.a Steady-state efficiency of public investment (i.e. share of investment turned into actual capital) (in percent) 28
  - 3.b Share of optimizers (i.e. savers, Ricardian households) in the economy (in percent) '30
  - 3.c Elasticity of substitution between the two types of labor (in tradables and nontradables) 0.01
  - 3.d Elasticity of substitution between traded and non-traded goods 0.99
- Natural resource and revenue shares:
  - 4.a Share of government natural resource revenues in total government revenues (in percent) 17.02
  - 5.a Share of labour taxes in total public revenue (in percent) 7.64
  - 5.b Share of consumption taxes in total public revenue (in percent) 36.50

### Model results framing and scenarios (figures and notes)
- Figures analyze impacts 2022-2040 under different iron ore price scenarios and policy packages; selected notes include:
  - Positive price shock entails a 15% price shock in year 2025; Negative price shock entails a -15% price shock in year 2025.
  - Figure scenarios definitions:
    - Baseline: includes natural resource output as in the macro-framework, excluding Simandou.
    - Simandou: Includes a Shock in Resource Output and 25% of Additional Public CAPEX due to Simandou Project.
    - Policy (1): 3% of GDP Additional Public Investment 2025 onwards.
    - Policy (1A): 3% of GDP Additional Public Investment 2025 onwards + Higher Public Investment Efficiency (PIE).
    - Policy (1B): 3% of GDP on Public Transfers to Households.
  - All scenarios are debt neutral, and are financed by grants.
- Outcomes evaluated (figure panels):
  - Impact on Real GDP Growth (Percent)
  - Impact on Real Exchange Rate (Percent/delta from steady state) (note: +/- indicates Depreciation/Appreciation)
  - Impact on Total Public Debt (Delta from steady state, percentage points of GDP)
  - Impact on Resource Revenue (Percent of total revenue)
  - Impact on Labour (Percent/delta from steady state)
  - Impact on Private Consumption (Delta from steady state, percentage points of GDP)

### Multi-Sector Macro-Inequality Model: distributional channels and policy levers
- Model features:
  - Infinite-horizon macroeconomic model distinguishing urban and rural households, formal and informal sectors, and sectors: mining, agriculture, manufacture, services.
  - Calibrated to mimic the Guinean economy and can modify policy parameters for infrastructure investments, education, and mining taxation.
- Implementation of the Simandou project in the model:
  - Step 1: Increase mining sector TFP to match long-term mining GDP growth implied by adding expected value of Simandou exports (Rio Tinto (2023)) to observed mining GDP in 2022 and calculating implied growth between 2022 and 2040.
  - Step 2: Introduce additional public rail infrastructure equal to 25 percent of half of the total infrastructure investment estimated by Rio Tinto (2022) for 2030 (25% reflects portion of railroad shared with the public; half assumes half of total investment is spent on railroad and half on the port). This public rail infrastructure is exogenously assumed; other capital investments are determined endogenously.
- Labor and local effects:
  - Project linked marginally through small-time hiring of unskilled rural workers; assumed to hire highest-ability rural workers who would otherwise work in agriculture.
  - Without active policy, the overall impact is small.
- Policy implications:
  - High quality, efficient investment in education raises working skills by an absolute amount, evening the playing field and enabling technology adoption and growth.
  - High quality, efficient, growth-oriented public infrastructure investment raises productivity for small and large firms and informal workers by stimulating regional trade and integrating labor and product markets, expanding the production possibility frontier.

### Natural disasters, climate policy, and resilience (Selected Issues Paper highlights)
- Natural disasters, especially floods, have become more frequent and severe in Guinea.
- Mining sector growth could push up carbon emissions significantly; Guinea has large hydropower potential estimated at around 6,000 MW.
- Key prescriptions:
  - Ex ante resilience investment, financed by grants and complemented with public investment efficiency reforms, yields the best macroeconomic outcomes after natural disasters.
  - Accelerate implementation of recent TA recommendations on C-PIMA and improve collaboration between Ministry of Environment and other project planning/implementation ministries to enhance resilience.
  - Reduce emissions from the agriculture sector, slow down or reverse deforestation, and continue efforts to mitigate emissions while ensuring sustainable expansion of Guinea’s renewable energy sector.
- Contextual facts:
  - Mining and agriculture together contributed about 40 percent of real GDP growth in 2023.
  - Guinea ranks among the 20 countries with the lowest coping capacity to climate risk in terms of institutional and infrastructural factors.
- Data sources and tools:
  - The SIP uses the IMF’s Debt, Investment, Growth, and Natural Disasters (DIGNAD) model and the IMF’s Machine Learning Toolbox for Climate Policy Analysis for emissions overview.

*Source: IMF staff report text as provided in the supplied content unit.*

### 4.      This section uses the Debt, Investment, Growth, and Natural Disasters (DIGNAD) model to

### 1ginea2024002 - 4.      This section uses the Debt, Investment, Growth, and Natural Disasters (DIGNAD) model to 

### DIGNAD model and calibration
- The Debt, Investment, Growth, and Natural Disasters (DIGNAD) model is used to study the macroeconomic implications of Guinea’s climate adaptation efforts.
- Purpose of the model:
  - Analyze additional benefit of investing in more resilient infrastructures (“adaptation capital”, e.g., roads that can survive severe floods) relative to standard infrastructures.
  - Provide a general equilibrium framework to conduct cost-benefit analyses under various scenarios for assessing resilient investment plans and resulting macroeconomic outcomes.
- Key model features:
  - Adaptation capital is more resilient to natural disasters and depreciates less in normal times.
  - Adaptation capital is more expensive than standard capital, implying larger ex ante costs and the need for comprehensive cost-benefit analyses.
- Calibration: The model is calibrated to match the main macroeconomic characteristics of the Guinean economy (see Annex 1 in the source).

### Scenarios and simulation design
- Common assumptions across scenarios:
  - Exactly the same natural disaster hits in 2029.
  - For each scenario, simulations first consider post-disaster recovery financed by debt, then recovery financed by domestic revenue mobilization.
- Investment assumption used in all scenarios: authorities spend an additional 1 percent of GDP per year on infrastructures above steady-state values between 2024 and 2028, reflecting commonly used simulation magnitude for large disasters.
- Scenario definitions:
  - Scenario 1 (standard):
    - Additional 1 percent of GDP per year spent on standard infrastructures between 2024 and 2028.
    - Financed by concessional debt.
    - Serves as baseline.
  - Scenario 2 (ex ante adaptation investment financed by debt):
    - Additional 1 percent of GDP per year spent on ex ante investment in climate-resilient infrastructures (instead of standard) between 2024 and 2028.
    - Financed by concessional debt.
  - Scenario 3 (ex ante adaptation investment financed by grants, complemented with Public Investment Efficiency (PIE) reforms):
    - Additional 1 percent of GDP per year adaptation investment financed by grants (or “windfall” revenues).
    - PIE reforms increase PIE from 50 percent to 70 percent.

### Macroeconomic impacts when post-disaster recovery is financed by debt
- Summary ranking of outcomes (best to worst): Scenario 3 > Scenario 2 > Scenario 1.
- Key findings:
  - Scenario 1 produces the largest GDP loss by about 1.5 percent and the largest need for ex post reconstruction investment, leading to higher total public debt.
  - Scenario 2: accumulation of resilient capital reduces GDP loss relative to Scenario 1; public debt rises pre-disaster to finance ex ante adaptation but accumulates less in the long run than Scenario 1 after the disaster.
  - Scenario 3: smallest GDP loss and lowest rise in public debt among the three scenarios because:
    - Ex ante resilient infrastructure accumulation reduces damage and reconstruction needs.
    - Ex ante resilience investment is financed by grants, limiting post-disaster debt accumulation.
  - Private investment growth and private consumption growth (proxy for welfare) are highest under Scenario 3.
- Specific quantitative markers preserved in source:
  - Natural disaster causes the largest GDP loss by about 1.5 percent in Scenario 1.
  - Text Figure captions and panels in the source display:
    - Real GDP deviations (percent deviation from steady state) across 2023–2041.
    - Total Public Debt (Percent of GDP) across 2023–2041.
    - Private Consumption Growth and Private Investment Growth (Percent deviation from steady state) across 2023–2041.

### Macroeconomic impacts when post-disaster recovery is financed by domestic revenue mobilization
- Mechanism: labor income tax must rise to pay for post-disaster reconstruction in all three scenarios.
- Key findings:
  - Scenario 1 yields the largest GDP losses and largest rise in labor income tax rate.
  - Scenario 3 yields the smallest GDP losses and smallest rise in labor income tax rate.
  - Quantitative outcomes preserved in source:
    - Labor income tax rate rises the most in Scenario 1 (to 14.5 percent) and less so for Scenarios 2 and 3 (about 13 percent).
  - Private investment growth and private consumption growth are highest under Scenario 3.

### Emissions, mitigation, and sectoral context
- Analytical tool:
  - The Machine Learning Toolbox for Climate Policy Analysis (MLCPA) is used to analyze Guinea’s emission dynamics and identify structural pattern changes with minimal assumptions; it applies a decomposition of emissions based on an accounting identity (Kaya Identity).
- Sectoral decomposition of Guinea’s GHG emissions (2022):
  - Agriculture and LULUCF are the largest contributors; the top two sectors accounted for 73.4 percent of the total in Guinea in 2022.
  - Energy sector contributed 13.7 percent of total GHG emissions in Guinea in 2022.
  - Subsequent analysis focuses on CO2 emissions because MLCPA is designed for cross-country settings with valid CO2 data.
  - Share of CO2 emissions in total GHG emissions averages at 45.3 percent from 2000 to 2022.
- Historical emissions dynamics:
  - Guinea’s annual CO2 emissions have broadly increased since 1965, with a dramatic acceleration in 2014.
  - Only one mild downward trend shift in 1981 and a short-lived downward trend shift in 2011 were identified in the period analyzed.
  - Major global climate agreements (1992 UNFCCC and 2015 Paris Agreement) were not associated with downward trend shifts in Guinea’s emissions in this unconditional analysis.
- Drivers of emissions (Kaya decomposition):
  - Emission increases mainly reflect improvements in GDP per capita, increases in population, and higher energy intensity.
  - Population and GDP per capita contributions have steadily increased since 1965.
  - Energy intensity contributed to emission decreases during the 1990s (relative to 1965) but not through most of 2000–2019, likely reflecting increased deforestation and a higher share of mining.
  - Carbon intensity contributed negatively to total emissions between 2000 and 2017, but this trend reversed in 2018 and 2019 (temporary reversal as share of renewables increased again in 2021).

### Hydropower and renewable energy context
- Hydropower share:
  - Share of electricity generated with hydro and marine powers stayed above 60 percent since 2016 and increased to 87 percent in 2021.
  - Together with 1 percent from solar power, renewables accounted for 88 percent of electricity generation in 2021.
- Key projects and capacities:
  - Souapiti Dam: 450 MW capacity.
  - Amaria Dam: 300 MW.
  - Koukoutamba Dam: 294 MW.
  - Kaleta Dam: 240 MW.
  - Fomi Dam: 90 MW.
- Operational note: Souapiti helps regulate Konkouré River flow, improving downstream hydropower efficiency (e.g., Kaleta Dam) and electricity supply stability given rainfall seasonality.

### Policy implications and recommendations
- Adaptation:
  - Early ex ante adaptation investment yields higher growth and lower rise in debt ex post after a disaster.
  - Scenario 3 (adaptation financed by grants + PIE reforms) yields the best long-term outcomes for growth, debt, and welfare.
  - Investing in adaptation over longer horizons, allowing public adaptation capital to accumulate before a disaster, further mitigates disaster impacts—highlighting the importance of early adaptation investment.
- Financing and efficiency:
  - Tapping grants, “windfall revenues”, and other concessional financing sources for resilience investments is crucial to preserve medium-term debt sustainability.
  - Implementation of Guinea’s National Adaptation Plan would cost at least USD14 billion, and its financing should not jeopardize debt sustainability.
  - Public adaptation infrastructure investment scale-up should be accompanied by reforms to raise public investment efficiency (PIE).
  - Authorities should prioritize public investment in adaptation programs with positive externalities and address market imperfections and policies that make private adaptation inefficient.

*Source: IMF staff, extracted from the supplied content unit.*

### 17.      Implementing recent TA recommendations on C-PIMA and enhancing the collaborations

### 17.      Implementing recent TA recommendations on C-PIMA and enhancing the collaborations

### Implementation, planning, and inter-ministerial collaboration
- Involving the Ministry of Environment at project budgeting and planning stages would ensure resilience to natural disasters is taken into account from the beginning.
- Enforce climate-resilient elements during construction and inspection stages of projects through enhanced collaborations between the Ministry of Environment and other project planning/implementation ministries.
- Promptly complete the compilation of granular climate data to enable enhanced monitoring and assessments of carbon emissions.

### Mitigation policies and timelines
- Continue ongoing efforts on mitigation, including:
  - Signing and enforcing the climate executive decree, which is expected to be signed in June 2024 and cover both public and private projects.
  - Continuing productive engagements with multilateral partners to design and implement carbon pricing, including the set-up of an Emission Trading System and proper calibration of emission quotas, while ensuring high compliance of the main stakeholders.
  - Reducing emissions from the agriculture sector and slowing down or reversing deforestation to arrest the rising trend of total GHG emissions.
- Note: the authorities estimate related fiscal exposure at more than 70 percent of 2021 GDP.

### Renewable energy sector development and constraints
- To sustainably expand renewable energy:
  - Accelerate completion of transmission infrastructure to fully utilize the production capacity of Souapiti and other hydropower dams, including channeling hydropower to industrial consumers to mitigate emissions further and enhance Souapiti’s commercial viability.
  - Continue venturing into solar energy to diversify Guinea’s energy mix, while avoiding over-capacity in the domestic market through thorough feasibility studies and market analyses.
- Solar capacity context:
  - Khoumagueli: 40 MW (first solar power being developed).
  - Authorities plan, with donor support, a competitive procurement scheme to deliver an additional 100 MW of solar.
  - AfDB (2021) estimate: Guinea will need to add 600 MW of solar capacity to the generation fleet by 2030.

### DIGNAD model application to Guinea — setup, assumptions, and calibrated parameters
- Model: Debt, Investment, Growth, and Natural Disasters (DIGNAD) model (Marto, Papageorgiou, and Klyuev, 2018) used to study macroeconomic implications of climate adaptation efforts.
- Hypothetical disaster scenario:
  - Natural disaster year in simulations: 2029.
  - Disaster type focused on: large floods (those that cause more than 1 percent of GDP in physical damage) from the EM-DAT database.
  - Global average physical damage among these large floods: 4 percent of GDP.
  - Assumption of Guinea total capital stock as of now: 150 percent of GDP.
  - Calculated damage to total capital: 4 percent/150 percent = 2.7 percent damage to total capital (2.7 percent of public capital and 2.7 percent of private capital).
  - Assumed output loss from the flood: 1.5 percent.
- Fiscal and efficiency assumptions:
  - Steady-state effective consumption tax rate: 7.52 percent.
  - Steady-state labor income tax rate: 11.73 percent.
  - Public investment efficiency: 50 percent.
- Calibrated parameter values (Text Table AI.1 — Definition and Value (percent)):
  - Return on standard infrastructure investment: 25
  - Return on adaptation infrastructure investment: 30
  - Public standard infrastructure investment to GDP ratio: 3.3
  - Depreciation rate of standard public infrastructure: 7.5
  - Depreciation rate of standard public infrastructure: 3
  - Public investment efficiency: 50
  - Grants to GDP ratio: 0.5
  - Labor income tax rate: 11.73
  - Consumption tax rate: 7.52
  - Public domestic debt to GDP ratio: 13.6
  - Public concessional debt to GDP ratio: 2.89
  - Public external commercial debt to GDP ratio: 21.73
- Some structural parameters not available specifically for Guinea (e.g., related to adaptation capital) are taken from Marto, Papageorgiou, and Klyuev (2018). Simulation results are based on assumptions under different scenarios and are broadly robust within a reasonable range for the relevant parameters.

### Sovereign–bank nexus: recent developments, risks, and transmission channels
- Overview and trend:
  - Banks’ exposure to the public sector increased from 15.2 percent in 2014 to 29.6 percent of banks’ total assets at end-2023.
  - Government securities account for 28.6 percent of banks’ assets (compared to 21.5 percent in December 2022 and 14.7 percent in 2014).
  - Drivers of the increase:
    - Conjectural factors: pandemic-related spending, exceptional bonds issued by the Government in September-October 2023, and securitization of government domestic arrears.
    - Structural factors: narrow investor base in the government bond market, limited monetary financing, and commercial banks’ appetite for lower-risk assets.
    - Regulatory and supervisory factors: prudential regulation on large exposures excludes limits on own sovereign exposures; liquidity standards and eligibility of government securities to the BCRG’s refinancing windows favor sovereign debt holding.
- Exceptional bond issuance, September–October 2023:
  - Tranche i) GNF 2000 billion, a 4-year bond with an issued yield of 9 percent on September 26.
  - Tranche ii) GNF 3000 billion, a 5-year bond with an issued yield of 13 percent on October 4.
  - Total exceptional issuance: GNF 5,000 billion or 2.8 percent of GDP.
  - These bonds were exceptional in issuance modality (tripartite agreement between the BCRG, the Government, and the banking sector), size, and use of monetary tools to provide liquidity room to banks.
- Key transmission channels in the nexus:
  - Exposure channel: banks’ exposure to sovereign debt through government debt stock.
  - Safety net channel: guarantees of the sovereign to banks.
  - Macroeconomic channel: indirect connection through non-financial firms.
- Risk types and evidence:
  - Concentration and credit risks: government securities concentration amplifies credit risk; central bank guarantee mitigates direct bank losses but would impair the BCRG balance sheet in case of sovereign default.
  - Interest Rate Risk in the Banking Book (IRRBB):
    - Supervisory 2022 stress test replication of historical shock (600 bps decrease applied to T-bills observed in 2014) led to a decrease in solvency ratio by 0.5-4.2 percent.
    - Resulting range of solvency ratios: 21.8 percent to 10.3 percent.
    - Solvency regulatory standard: 10 percent.
  - Liquidity risk:
    - Higher liquidity risk driven by inexistence of a secondary government security market; underdevelopment of interbank, repo, and secondary government securities markets.
    - Most investors follow a buy-and-hold strategy until maturity, increasing uncertainty over banks’ ability to liquidate government securities in liquidity needs.
    - BCRG liquidity facilities are primary tools for obtaining liquidity, with a 10 percent haircut.

### Policy recommendations to address sovereign–bank nexus and climate fiscal risks
- Reduce banks’ exposure to sovereigns:
  - Diversify government’s sources of funding through a robust Medium-Term Debt Strategy (MTDS).
  - Diversify the investor base following AFRITAC West (AFW) 2022 action plan: boost investor relations practices (short-term), promote creation of investment schemes, and develop strategy to build a non-bank investor base (medium term).
  - Develop interbank and repo markets over the medium term.
- Strengthen prudential framework and bank resilience:
  - Implement Pillar 2 requirements effectively, including a methodology to introduce and calibrate a capital surcharge to discourage excessive concentration to the sovereign.
  - Consider developing an Internal Capital Adequacy Assessment Process (ICAAP) regulatory requirement over the medium term.
  - Enact and implement the new Banking Law (crisis management, bank resolution, and safety net components); ongoing IMF TA project to revise the current Banking Law.
  - Strengthen banking supervision, addressing long-standing staffing constraints at the BCRG as recommended by AFW and prior missions.
- Strengthen fiscal framework:
  - Better targeting of spending and strengthening medium-term fiscal frameworks to build resilience and mitigate the impact of adverse shocks, as noted in the Global Financial Stability Report (April 2022), chapter 2.

*Source: IMF staff report chapter titled “Implementing recent TA recommendations on C-PIMA and enhancing the collaborations”.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2024/english/1ginea2024002.pdf_