## Appendix V. ## Source details **Canonical URL:** [Appendix V.](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr0637.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr0637.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr0637.pdf.json) --- ### Executive summary - Economic deterioration drivers and outcomes: - Real GDP growth slowed to about 2.5 percent. - Inflation accelerated to about 30 percent. - International reserves fell to less than one month of imports. - External public debt rose to almost 100 percent of GDP and is unsustainable. - Policy response: - New economic team in early 2005 tightened financial policies and initiated unification and liberalization of the foreign exchange market. - IMF management approved a staff-monitored program (SMP) covering April 2005–March 2006. - Staff short-term projections for 2005: - Real GDP growth: 3 percent. - Inflation (end-2005): about 28 percent (government objective: less than 19 percent). - Gross international reserves: increase from 0.8 to 1.3 months of imports. - Immediate and medium-term priorities: - Stabilize the economy and reduce inflation to single digits. - Establish institutions to handle mining cyclicality and sustain macro stability. - Secure debt sustainability including reaching the HIPC completion point and the MDRI. - Promote private sector development through structural reforms. ### Background and policy challenges - Growth and inflation history: - 1990s: growth averaged about 4.5 percent a year; inflation reached single digits by late 1990s. - 2000–04: growth averaged about 2.5 percent a year; inflation accelerated to about 28 percent by 2004. - Fiscal and external developments: - Fiscal deficit: averaged just over 3 percent of GDP in second half of 1990s; averaged 4.8 percent of GDP in 2000–04. - Share of mining sector revenue in total government revenue: declined from about 40 percent (first half of 1990s) to about 20 percent (2000–04); mining sector revenue dropped by 2.5 percentage points of GDP. - Central bank foreign assets declined from 2.7 months of imports (second half of 1990s) to 1.8 months of imports (2000–04). - External public debt increased to about 100 percent of GDP; external arrears started to accumulate. - External sector drivers: - Bauxite accounts for about half of Guinea’s exports. - Nominal price of bauxite in 2002 was 35 percent below the price in 1991; in the three years prior to the report it stood 10 percent below 1991 level. - Estimated impact: current account deficit would have been about 2.5 percentage points of GDP lower on average during 1995–2001 if bauxite price had remained at its 1991–92 nominal level. - Aid and debt-relief context: - Official assistance fell from an average of 3.7 percent of GDP in late 1990s to 0.6 percent of GDP in 2004. - Guinea reached the HIPC decision point in 2000; interim HIPC assistance was suspended in 2003 due to poor program performance. - Social indicators: - UNDP Human Development Index rank: 156 out of 177 (2005). - Poverty (national data): 62 percent of households in 1994; 49 percent in 2002; estimated 52 percent in 2005. - Net primary enrollment ratio: 60 percent. - Proportion living on less than one U.S. dollar a day: 40 percent in 1995; 27 percent in 2001. ### Recent economic developments and outlook (selected indicators and projections) - 2004 outcomes: - Real GDP growth: 2.7 percent (2004); 1.2 percent (2003). - Inflation (end of period): 27.6 percent (2004). - External current account deficit: nearly 6 percent of GDP in 2004 (up from 4 percent in 2003). - Selected macro indicators (period averages / end of period where noted): - Real GDP growth (% change): 2002: 4.2; 2003: 1.2; 2004: 2.7; 2005 (Proj.): 3.0; 2006 (Proj.): 5.0. - Inflation (end of period, % change): 2002: 6.1; 2003: 14.8; 2004: 27.6; 2005 (Proj.): 27.9; 2006 (Proj.): 8.7. - Terms of trade (% change): 2002: 2.4; 2003: -2.4; 2004: -16.8; 2005 (Proj.): -11.0; 2006 (Proj.): -3.0. - Broad money (% change, end of period): 2002: 19.2; 2003: 35.3; 2004: 37.0; 2005 (Proj.): 33.6; 2006 (Proj.): 10.5. - Current account balance (excl. grants, % of GDP): 2002: -5.6; 2003: -4.1; 2004: -5.8; 2005 (Proj.): -4.6; 2006 (Proj.): -4.5. - Foreign reserves (months of imports, end of period): 2002: 2.3; 2003: 1.2; 2004: 0.8; 2005 (Proj.): 1.3; 2006 (Proj.): 1.6. - NPV of external debt to exports (1/2): 2002: 208.2; 2003: 192.4; 2004: 191.5; 2005 (Proj.): 173.9; 2006 (Proj.): 174.1. - Debt service ratio (% of XGS): 2002: 18.6; 2003: 22.6; 2004: 23.6; 2005 (Proj.): 20.5; 2006 (Proj.): 20.3. ### Policy priorities and program measures - Fiscal policy: - Broaden revenue base and strengthen expenditure management. - Specific revenue measures: adopt WAEMU common external tariff; eliminate ad-hoc tax/customs exemptions; strengthen tax and customs administration. - Expected nonmining revenue: increase from 12 percent of GDP in 2005 to 13.5 percent in 2008. - Monetary and exchange rate policy: - Reinforce central bank operations to manage foreign exchange market and monetary instruments. - Complete unification and liberalization of the foreign exchange market; publish daily weighted reference rate. - Increase reserve requirement coefficient on bank deposits: raised from 5½ percent to 9½ percent in October 2005; authorities may consider increase to 11½ percent if excess liquidity continues. - Use TRM auctions as monetary instruments; hold TRM and treasury bond auctions on different days. - Banking sector and financial stability: - Strengthen banking supervision; new banking law adopted in July 2005; microfinance law submitted to National Assembly. - NPLs to total assets: 26 percent in 2004; about 22 percent at end-June 2005; provisions cover over 97 percent of NPLs. - Capital adequacy: two banks dipped below 10 percent prudential limit in mid-2005. - Commercial bank credit to private sector: 23 percent of total bank assets; banks’ credit to government: 28 percent of total assets. - External debt strategy: - Regularize arrears; pursue HIPC completion point and MDRI to restore debt sustainability. - NPV of debt-to-exports (end-2004): about 192 percent (well above 100 percent threshold). - Scenario with HIPC completion point and MDRI in 2007 would reduce NPV of debt-to-exports and keep it below 100 percent over 2007–25 under assumptions of sound policies and no major shocks. - Structural reforms: - Improve business environment, public services, infrastructure; eliminate tax and customs exemptions; integrate poverty-reduction programs into the budget. - Privatization program: shares or assets of 10 government companies to be sold in 2005; intend to privatize 20 enterprises over next three years. - Mining sector: review legal framework; participate in EITI; finalize new mining sector policy statement soon. ### SMP performance, 2005 outcomes, and corrective actions - SMP objectives for 2005: - Real GDP growth: 3 percent. - Year-end consumer price inflation: below 19 percent. - Increase gross central bank reserves by one-third of a month of imports. - End-June 2005 performance: - All end-June quantitative targets met except accumulation of central bank net foreign assets. - Net foreign assets of central bank expanded by US$13.4 million in first half of 2005 but remained US$3.6 million short of SMP target. - Fiscal revenue targets achieved; overall fiscal balance (cash basis) surplus of 0.2 percent of GDP in first half of 2005 (program: deficit of 1 percent of GDP). - Reserve money expansion fell from 49 percent (12-month) by March 2005 to 36 percent by end-June 2005. - Inflation overrun decomposition (contributions to inflation overrun at end-August 2005, In percent): - Additional contribution of petroleum prices: 2.7 (calculated as (b - a) * c with a. Programmed price increase in May = 40; b. Actual = 55; c. Pass-through coefficient = 0.18) - Additional pass-through from exchange rate: 6.3 (calculated as (b - a) * c with a. Programmed depreciation for H1 2005 = 25; b. Actual = 50; c. Pass-through coefficient = 0.25) - Total: 9.0 - Short-term outlook updates: - External current account deficit: expected to narrow to about 4.6 percent of GDP in 2005. - Overall balance: expected improvement from deficit of 2.5 percent of GDP in 2004 to surplus of 0.1 percent of GDP in 2005. - Gross central bank international reserves: expected increase to 1.3 months of imports in 2005. - Corrective measures for late-2005 slippages: - Place additional treasury bonds with commercial banks, including by raising interest rates. - Purchase foreign exchange in the market to rebuild central bank NFA. - Reduce external arrears by end-December to below program ceiling. - Improve policy coordination via treasury and liquidity committees. ### Risks and vulnerabilities - Political and regional risks: - Medium-term outlook vulnerable to fragile political stabilization. - Nationwide municipal elections set for December 18, 2005; campaign tense but calm. - Regional instability could increase refugee and security pressures. - Program implementation risks: - Slippages in October–November 2005: rapid expansion of central bank credit to government; increased external arrears in October–November. - Need for efficient program monitoring mechanism. ### Debt sustainability analysis (external and public sector DSA) - Main finding: - Guinea is in debt distress. - Even upon reaching HIPC completion point (assumed early 2007), the country would be at high risk of debt distress into the medium-term under baseline. - Domestic debt levels add risk to debt distress probability. - End-2004 public and publicly guaranteed external debt: US$3,270 million. - Multilateral creditors: 65 percent of total. - Paris Club: 22 percent of total. - Policy-based thresholds (Table 1) and actual ratios: - NPV of debt-to-exports (end-2004): about 192 percent (policy threshold: 100 percent). - Under baseline, NPV of debt-to-exports would fall below 100 percent in 2015. - DSA macro assumptions (Box 1 highlights): - Real GDP: 3.0 percent in 2005; annual average 5.5 percent over 2006–10; 5.0 percent over 2011–2025. - Average CPI inflation: 17.5 percent in 2004; expected 30.7 percent in 2005; 9.6 percent in 2006–08; 5.0 percent thereafter. - Export growth: average about 7.2 percent over 2005–10; 8.2 percent over 2011–25. - Fiscal revenue: about 13 percent of GDP in 2005; 13.2 percent in 2006–08; 14.7 percent in 2009–15; 17.2 percent in 2016–25. - Financing: mainly concessional, significantly from IDA. - Key DSA results (selected): - NPV of external debt-to-exports (percent): 191.5 (2005), 173.9 (2006), 174.1 (2007), 152.7 (2008), 146.8 (2009), 141.3 (2010), 97.4 (2015), 54.1 (2025). - NPV of external debt (percent of GDP): 39.7 (2005), 46.8 (2006), 48.3 (2007), 42.2 (2008), 40.4 (2009), 38.7 (2010), 27.6 (2015), 16.5 (2025). - Debt service-to-exports (percent): 21.0 (2005), 18.4 (2006), 18.3 (2007), 8.8 (2008), 7.8 (2009), 6.6 (2010), 7.8 (2015), 5.1 (2025). - Scenarios and sensitivity tests: - Vulnerable to export shock and one-time depreciation. - Historical-average scenario sharply increases risk; external debt ratios would rise if key variables remain at historical averages. - MDRI/G-8 debt relief simulation (implementation in 2007) reduces external debt ratios by about half and keeps ratios well below thresholds across the projection period. - Public sector DSA highlights: - Domestic debt (end-2004): about 22 percent of GDP (central bank advances 15 percent; treasury bills by banks 4 percent; arrears 3 percent). - NPV of total public sector debt to fiscal revenues ratio (2005): 577 percent (very high). - Public sector debt (percent of GDP): 119.5 (2005), 109.7 (2006), 102.2 (2007), 94.5 (2008), 85.9 (2009), 37.4 (2015). - NPV of public sector debt-to-revenue ratio (percent): 496.8 (2005), 429.8 (2006), 400.0 (2007), 365.1 (2008), 321.3 (2009), 140.8 (2015). - Policy implications from DSA: - Limit domestic borrowing from the central bank and avoid accumulation of domestic arrears to the private sector. - Maintain fiscal consolidation and sustain structural reforms to reach completion point and benefit from HIPC/MDRI. ### Governance, social priorities, and statistics - Governance and judicial reforms: - Action plan to combat corruption adopted; National Agency to Combat Corruption strengthened. - Anticorruption law to be submitted in first half of 2006. - EITI process: first workshop April 2005; Steering Committee established June 2005; publication of nonaudited data expected by March 2006; audited data by June 2006. - PRSP and MDGs: - Authorities continued PRSP measures; second annual progress report being finalized. - MDG progress report completed February 2005; key challenges: eradication of poverty and hunger; gender equality; environmental protection and access to safe water. - Authorities plan action plan in 2006 to alleviate MDG obstacles. - Staff and authorities concurred that pro-poor growth and annual growth above 6 percent beyond 2008 would be needed to reach MDGs. - Statistical issues: - Monetary and fiscal statistics generally adequate but unrecorded transactions concern. - Real sector and balance of payments statistics need substantial improvement. - Guinea participates in GDDS since December 2003; encouraged to design strategy to comply with GDDS obligations. ### Donor relations, IMF obligations, and World Bank cooperation - Donor resumption conditions: - Successful reform implementation key for resumption of external budget support; most donors stopped budgetary assistance since 2002. - European Union could resume assistance in 2006 after municipal elections and if a PRGF-supported program is in place. - Other donors willing to resume assistance if Guinea agrees on a financial program with the IMF. - IMF obligations and payments: - Guinea had difficulty making payments to the IMF until August 2005; authorities deposited funds in their SDR account to cover obligations until end-2005. - Projected payments to Fund (without HIPC Assistance; SDR million): 2005 Total: 3.40; 2006 Total: 13.78; 2007 Total: 14.60; 2008 Total: 12.38; 2009 Total: 8.79. - World Bank / IDA portfolio (selected): - IDA approvals: 63 credits as of end-July 2005; total value about US$1,460 million equivalent; disbursed to date US$1,334 million. - Current Bank portfolio: eight projects totaling US$236.6 million; undisbursed balance US$133.6 million. - Bank–Fund collaboration on PRSP, public expenditure management, trade reforms, and Poverty and Social Impact Analysis. ### Staff appraisal and Directors’ priorities (selected recommendations) - Maintain tight fiscal policies to consolidate primary balance and reduce overall fiscal deficit (excluding grants). - Strengthen foreign exchange market functioning; eliminate remaining multiple currency practices (publish daily weighted reference rate based on intra-day transactions). - Improve central bank liquidity management to stabilize exchange rate and reduce inflationary pressures. - Continue structural reforms to strengthen private sector environment and expand access to public services; accelerate privatization and sectoral action plans (water, electricity, telecommunications). - Avoid central bank financing of budget operations; develop domestic government securities market. - Ensure petroleum products priced in line with international prices via automatic monthly adjustment mechanism in 2006 budget law. - Continue regularization of external arrears and pursuit of HIPC completion point and MDRI. ### Program monitoring and near-term calendar - SMP monitored on quantitative indicators and structural benchmarks for end-September and end-December 2005 and end-March 2006. - Targets adjusted for central bank balance sheet revision (about US$23 million downward) and for changes in expected external assistance (e.g., EU financing). - Next quarterly staff assessment based on end-September 2005 data; staff monitoring continued through March 2006 SMP end. *Source: Appendix V, _cr0637 - Appendix V.* ### Appendix V. ### Appendix V. ### Executive Summary - Economic deterioration driven by weaker policy framework, regional insecurity, and low commodity prices: - Real GDP growth slowed to about 2.5 percent. - Inflation accelerated to about 30 percent. - International reserves fell to less than one month of imports. - External public debt rose to almost 100 percent of GDP and is unsustainable. - Policy response and program support: - New economic team in early 2005 tightened financial policies and initiated unification and liberalization of the foreign exchange market. - IMF management approved a staff-monitored program (SMP) covering April 2005-March 2006. - Short-term outlook (staff projections for 2005): - Real GDP growth expected to recover moderately to 3 percent. - Inflation expected to be about 28 percent at end-2005 (government objective: less than 19 percent). - Gross international reserves expected to increase from 0.8 to 1.3 months of imports during 2005. - Immediate and medium-term priorities: - Stabilize the economy and reduce inflation to single digits. - Establish economic institutions (budget and central bank operations) that can handle mining sector cyclicality and sustain macro stability. - Secure debt sustainability including reaching the HIPC completion point and the MDRI. - Promote private sector development via structural reforms to strengthen public services, develop infrastructure, and address legal and governance issues. - SMP performance: - Guinea met all end-June quantitative targets and structural benchmarks except: - Accumulation of central bank net foreign assets. - Introduction of a new multiple currency practice. - Authorities’ Letter of Intent and Memorandum of Economic and Financial Policies (MEFP) outline additional measures to keep the program on track. ### Background and Policy Challenges - Growth and inflation trends: - 1990s: growth averaged about 4.5 percent a year; inflation reached single digits by late 1990s. - 2000-04: growth slowed to an average of about 2.5 percent a year; inflation accelerated to about 28 percent by 2004. - Fiscal and external developments: - Fiscal deficit averaged just over 3 percent of GDP in second half of 1990s; rose to an average of 4.8 percent of GDP in 2000-04. - Share of mining sector revenue in total government revenue declined from an average of about 40 percent during first half of 1990s to an average of about 20 percent during 2000-04 (mining sector revenue dropped by 2.5 percentage points of GDP). - Central bank foreign assets declined from an average of 2.7 months of imports (second half of 1990s) to 1.8 months of imports (2000-04). - External public debt increased to about 100 percent of GDP; external arrears started to accumulate. - External sector drivers: - Bauxite accounts for about half of Guinea’s exports; decline in bauxite prices contributed materially to external deterioration. - Nominal price of bauxite in 2002 was 35 percent below the price in 1991; by the past three years prior to this report it had recovered but still stood 10 percent below 1991 level. - Estimated impact: current account deficit would have been about 2.5 percentage points of GDP lower on average during 1995-2001 if bauxite price had remained at its 1991-92 nominal level. - Aid and debt-relief context: - Official assistance fell from an average of 3.7 percent of GDP in late 1990s to 0.6 percent of GDP in 2004. - Guinea reached the HIPC decision point in 2000, but due to poor program performance, interim HIPC assistance was suspended in 2003 by Paris Club members, the IMF, and the African Development Bank. - Social indicators: - Guinea ranks 156 out of 177 countries on the 2005 UNDP Human Development Index. - Poverty (national data): declined from 62 percent of households in 1994 to 49 percent in 2002, then increased to an estimated 52 percent in 2005. - Net primary enrollment ratio is now 60 percent. - Proportion living on less than one U.S. dollar a day fell from 40 percent in 1995 to 27 percent in 2001 (more recent data unavailable). - Key policy challenges summarized: - Achieve macroeconomic stability with fiscal and monetary stance consistent with single-digit inflation. - Broaden revenue base, strengthen expenditure management, and reinforce central bank capacity for foreign exchange market operation and monetary instruments. - Reach HIPC completion point and MDRI to secure debt sustainability. - Diversify export base, improve business environment, strengthen public infrastructure, and enhance public utilities. ### Recent Economic Developments and Outlook - 2004 performance: - Real GDP growth increased to 2.7 percent (from 1.2 percent in 2003). - Inflation rose from 15 percent in 2003 to 28 percent in 2004. - External current account deficit widened from 4 percent of GDP in 2003 to nearly 6 percent of GDP in 2004; mostly financed through accumulation of external arrears. - Guinea failed to meet primary convergence criteria of the West Africa Monetary Zone for the second consecutive year. - Updated balance of payments data: - Current account deficit, excluding official transfers, is now estimated at 5.8 percent of GDP in 2004 (compared with 4.2 percent estimated at time of SMP preparation). - Selected macroeconomic indicators (period averages/end of period where noted): - Real GDP growth (% change): 2002: 4.2; 2003: 1.2; 2004: 2.7; 2005 (Proj.): 3.0; 2006 (Proj.): 5.0. - Inflation (end of period, % change): 2002: 6.1; 2003: 14.8; 2004: 27.6; 2005 (Proj.): 27.9; 2006 (Proj.): 8.7. - Real effective exchange rate (% change): 2002: -2.3; 2003: -4.3; 2004: -5.7. - Terms of trade (% change): 2002: 2.4; 2003: -2.4; 2004: -16.8; 2005 (Proj.): -11.0; 2006 (Proj.): -3.0. - Broad money (% change, end of period): 2002: 19.2; 2003: 35.3; 2004: 37.0; 2005 (Proj.): 33.6; 2006 (Proj.): 10.5. - Current account balance (excl. grants, % of GDP, period average): 2002: -5.6; 2003: -4.1; 2004: -5.8; 2005 (Proj.): -4.6; 2006 (Proj.): -4.5. - Foreign reserves (in months of imports, end of period): 2002: 2.3; 2003: 1.2; 2004: 0.8; 2005 (Proj.): 1.3; 2006 (Proj.): 1.6. - NPV of external debt to exports (1/2): 2002: 208.2; 2003: 192.4; 2004: 191.5; 2005 (Proj.): 173.9; 2006 (Proj.): 174.1. - Debt service ratio (% of XGS): 2002: 18.6; 2003: 22.6; 2004: 23.6; 2005 (Proj.): 20.5; 2006 (Proj.): 20.3. ### Policy Priorities and Program Measures (as discussed in report) - Fiscal policy: - Broadening revenue base and strengthening expenditure management emphasized to support stabilization and attainment of program goals. - Monetary and exchange rate policies: - Reinforce central bank operations to manage foreign exchange market and monetary instruments; complete unification and liberalization of foreign exchange market. - Banking sector and financial stability: - Continue strengthening financial sector soundness and prudential oversight (details in full report sections and tables). - External debt strategy: - Pursue regularization of arrears and steps to reach HIPC completion point and MDRI to restore debt sustainability. - Structural reforms to support growth and poverty reduction: - Improve business environment, public services, infrastructure, and governance; eliminate tax and customs exemptions; integrate poverty-reduction programs into the budget. *Source: Appendix V, _cr0637 - Appendix V.* ### 9. The disappointing macroeconomic performance in 2004 reflected the continued ### _cr0637 - 9. The disappointing macroeconomic performance in 2004 reflected the continued ### Macroeconomic performance and policy stance (2003–2004) - Overall fiscal deficit (excluding grants) reached 9 percent of GDP in 2003 and was almost 6 percent of GDP in 2004. - Some tightening of fiscal policy in 2004 was offset by higher-than-budgeted defense spending and interest outlays, preventing attainment of fiscal targets. - Monetary policy continued to accommodate government financing needs, with broad money expanding by over 35 percent for the second consecutive year. ### Policy shift in 2005: fiscal and monetary tightening - Fiscal primary balance improved from a deficit of almost ½ percent of GDP in 2004 to a surplus of over 2 percent of GDP by June 2005. - Overall fiscal deficit (excluding grants) declined from almost 6 percent of GDP in 2004 to 0.2 percent of GDP by June 2005. - Net central bank credit to the government increased by just over 1 percent of reserve money in the first half of 2005, compared with 10 percent of reserve money in the same period of 2004. - Reserve money expansion (12-month basis) had reached 49 percent by March 2005 and dropped to 36 percent by end-June 2005. ### Foreign exchange market liberalization and effects - Authorities abandoned rationing through official auctions, liberalized foreign exchange operations, and published a reference exchange rate based on market quotes; the reference exchange rate is calculated as a simple average and published weekly. - The official foreign exchange auctions were suspended in March 2005; the unified foreign exchange market includes both banks and authorized exchange bureaus, and the official exchange reference rate is calculated as an average of all reported exchange rates. - Multiple currency practices were largely—although not fully—eliminated; a residual MCP arises because the weekly publication of the official reference rate can permit deviations of more than 2 percent from daily interbank rates. - The gap between exchange rates at commercial banks and exchange bureaus shrank from 25–30 percent in early 2005 to less than 5 percent by mid-2005 and to about 2 percent by October 2005. - Liberalization released pent-up demand for foreign currency assets, evidenced by a buildup in the foreign exchange position of local banks; pent-up demand has largely been satisfied as indicated by slowing depreciation and narrowing differentials. ### Exchange rate depreciation and competitiveness - Nominal depreciation of the Guinean franc since end-February 2005 amounted to about 38 percent (staff estimate). - Real effective exchange rate was about 20 percent overvalued at end-2004; a nominal depreciation of about 25 percent was assessed as needed to bring the real exchange rate back to its equilibrium level. - The real effective exchange rate depreciated by 15 percent during the first eight months of 2005. ### Banking sector and financial indicators - Ratio of nonperforming loans (NPLs) to total assets declined from 26 percent in 2004 to about 22 percent at end-June 2005; provisions cover over 97 percent of NPLs. - Capital adequacy ratios of two banks dipped below the 10 percent prudential limit in mid-2005. - Commercial bank credit to the private sector is 23 percent of total bank assets; banks’ credit to the government represents about 28 percent of total assets. - The government reduced its share in the largest national bank’s capital from 38 percent to 15 percent through partial privatization. ### IMF engagement: Staff-Monitored Program (SMP), April 2005–March 2006 - SMP objectives for 2005: reach real GDP growth of 3 percent; reduce year-end consumer price inflation to below 19 percent; increase gross central bank reserves by the equivalent of one-third of a month of imports. - All end-June quantitative targets under the SMP were met except accumulation of central bank net foreign assets. - Fiscal revenue targets were achieved; expenditure commitments were kept under control. Overall fiscal balance (cash basis) reached a surplus of 0.2 percent of GDP in the first half of 2005, compared with a deficit of 1 percent of GDP under the program. - Reserve money expansion fell from 49 percent (12-month) by March 2005 to 36 percent by end-June 2005. - Net foreign assets of the central bank expanded by US$13.4 million in the first half of 2005 but remained US$3.6 million short of the SMP target. - Structural benchmarks: all end-June structural benchmarks were met except the continuous benchmark on refraining from introducing new multiple currency practices. - Fiscal reforms implemented included adoption of the WAEMU common external tariff and advances in customs, tax administration, and public expenditure management; action plans to reduce fraud and enhance efficiency in water and electricity sectors were adopted. ### Short-term outlook and 2005 projections - Real GDP growth projected at 3 percent in 2005 driven by agriculture, construction, and mining. - Inflation expected to fall from 43 percent (12-month basis) in July 2005 to 28 percent by end-2005; authorities’ objective was less than 19 percent for the year. - Inflation overrun in 2005 mainly reflects faster-than-expected currency depreciation and a higher-than-programmed increase in domestic petroleum prices in May 2005. - Contributions to inflation overrun at end-August 2005 (In percent): - Additional contribution of petroleum prices: 2.7 (calculated as (b - a) * c with a. Programmed price increase in May = 40; b. Actual = 55; c. Pass-through coefficient = 0.18) - Additional pass-through from exchange rate: 6.3 (calculated as (b - a) * c with a. Programmed depreciation for H1 2005 = 25; b. Actual = 50; c. Pass-through coefficient = 0.25) - Total: 9.0 - External current account deficit expected to narrow by just over 1 percentage point of GDP to about 4.6 percent of GDP in 2005. - Overall balance expected to improve from a deficit of 2.5 percent of GDP in 2004 to a surplus of 0.1 percent of GDP in 2005. - Gross central bank international reserves expected to increase to 1.3 months of imports during 2005. ### Fiscal and monetary projections (selected) - Primary balance: deficit of 0.4 percent of GDP in 2004 to a surplus of 3 percent of GDP in 2005 and 3.6 percent of GDP in 2006. - Overall budget deficit (excluding grants): about 6 percent of GDP in 2004; expected 2 percent of GDP in 2005 and 1.2 percent of GDP in 2006. - Expansion of reserve money (12-month) expected to decline from 49 percent at end-March 2005 to 28 percent by end-2005 and to 9 percent by end-2006. - Broad money expansion in 2005 expected to remain somewhat faster than programmed because of higher-than-expected depreciation and increased dollarization. ### Savings, investment, and medium-term projections (2005–2008) - Domestic savings expected to increase by about 2½ percentage points of GDP in 2005, mainly from a substantial rise in government savings and real depreciation effects. - Private sector savings expected to decline slightly in 2005 by about ½ percent of GDP. - Private investment expected to increase in 2005, driven by continued investment in the mining sector. - Medium-term baseline projections (selected indicators; annual change or percent of GDP as indicated): - GDP at constant prices: 2005 = 3.0; 2006 = 5.0; 2007 = 5.4; 2008 = 6.1 - Consumer price index (end of period): 2005 = 27.9; 2006 = 8.7; 2007 = 5.0; 2008 = 5.0 - Broad money (annual change): 2005 = 33.6; 2006 = 10.5; 2007 = 13.4; 2008 = 12.1 - Investment: 2005 = 12.0; 2006 = 13.2; 2007 = 14.5; 2008 = 15.4 - Government primary balance (percent of GDP): 2005 = 2.9; 2006 = 3.6; 2007 = 3.9; 2008 = 3.9 - Overall fiscal deficit, excluding grants (percent of GDP): 2005 = -2.0; 2006 = -1.2; 2007 = -0.7; 2008 = -0.7 - External current account deficit (excluding official transfers, percent of GDP): 2005 = -4.6; 2006 = -4.5; 2007 = -3.3; 2008 = -2.7 - Gross reserves in months of imports: 2005 = 1.3; 2006 = 1.6; 2007 = 2.0; 2008 = 2.5 ### Risks and vulnerabilities - The medium-term outlook remains vulnerable to political conditions in Guinea; political stabilization is fragile despite current improvements. - Nationwide municipal elections set for December 18, 2005; campaign tense but calm. - Regional instability in neighboring countries could exacerbate refugee and security pressures in border regions. ### Policy priorities agreed with IMF staff - Maintain tight fiscal policies to consolidate the improvement in the primary balance and reduce overall fiscal deficit (excluding grants) toward projected levels. - Strengthen functioning of the foreign exchange market and continue liberalization to eliminate remaining multiple currency practices (including considering daily calculation of the reference rate to avoid MCP arising from weekly publication). - Improve central bank liquidity management to stabilize the exchange rate and reduce inflationary pressures. - Continue structural reforms to strengthen the private sector environment and expand access to public services, including customs and tax administration reforms, public expenditure management, and sectoral efficiency improvements in water and electricity. *Source: IMF staff report (Guinea), extracted from the PDF chapter/section titled "_cr0637 - 9. The disappointing macroeconomic performance in 2004 reflected the continued".* ### 24. The authorities have stressed their determination to implement prudent fiscal ### The authorities have stressed their determination to implement prudent fiscal policies. ### Fiscal policy stance and central objective - Key to restoring stability: tighten fiscal policy to allow a reduction in central bank financing of the government deficit and thereby regain control over monetary expansion. ### Revenue-strengthening measures - Implemented measures include: - (i) the application of the common external tariff of the West African Economic and Monetary Union (WAEMU). - (ii) the elimination of all ad-hoc tax or customs tariff exemptions. - (iii) the strengthening of tax and customs administration. - Medium-term emphasis: - Consolidate the new tariff system adopted in early 2005 and continue to strengthen tax and customs administration. - Expected revenue outcome: increase from 12 percent of GDP in 2005 to 13.5 percent in 2008. ### Expenditure control and medium-term budget framework - Short-term actions: - Cut current spending by at least 10 billion Guinean francs (0.3 percent of GDP) in the last quarter of 2005, primarily by limiting outlays related to missions abroad and containing transfers and subsidies. - Authorities noted constraints due to the larger-than-expected depreciation on government outlays; the mission remarked a larger cut would have been desirable. - Medium-term framework: - Envisages a gradual increase in priority spending over 2006-08, offset by a reduction in nonpriority spending as a percent of GDP. ### Public expenditure management reforms - Implemented measures to improve monitoring, streamline procedures, and increase transparency: - (i) enforce application of budget and accounting rules and procedures. - (ii) close loopholes allowing government entities to exceed budgetary allocations. - (iii) make the computerized budget management system fully operational. - (iv) unify existing personnel management systems. - Additional specifics from authorities: - (i) provided training to budget inspectors at the central and local levels. - (ii) published in the budget law a limited list of expenditures that could be executed outside normal budgetary procedures. - (iii) adopted ceilings for public procurement contracts that could be awarded by regional offices. ### Concerns about recent fiscal measures - Identified problematic practices: - Government pledged future tax revenues as guarantees for funds advanced from large mining companies to pay for current government obligations, introducing significant budgetary rigidity. - Authorities committed in their November 2005 MEFP (Appendix I, paragraph 13) to stop using future tax payments to pay for current obligations. - Context: main mining companies agreed to provide tax advances of US$18 million in August 2005 (½ percent of GDP); these resources are being used to pay external creditors, including the IMF. The authorities indicated these funds have been provided at no interest and will be repaid over one to two years through deductions from taxes owed by the mining companies. These tax advances are reflected fully in the fiscal accounts as nonbank financing. - Government agreed to provide a subsidy—in the form of an exchange rate guarantee—to rice importers during July-September 2005; arrangement was never operative but constituted an open-ended and unbudgeted fiscal commitment. - Authorities committed in their November 2005 MEFP (Appendix I, paragraph 13) to avoid any such exchange rate guarantee scheme in the future. ### 2006 budget and statistical coverage - 2006 budget work underway based on: - Strengthened revenue collection, control of expenditure expansion, elimination of central bank financing of the government, and reduction of domestic and external arrears. - Authorities intend to improve coverage of financial operations of public administration entities in government statistics. ### Monetary and exchange rate policies - Inflation and overall stance: - Inflation remains above the authorities’ objective for 2005, but staff agreed the overall stance of financial policies remains broadly adequate. - Main reason for inflation overrun: higher-than-expected depreciation of the Guinea franc. - Foreign exchange market measures (based on August 2005 MFD technical assistance recommendations): - Obtain information from banks to calculate a weighted average reference exchange rate on an intra-day basis. - Publish the reference rate daily and ensure bank-provided information reflects true market conditions. - Reorganize and modernize the central bank’s foreign exchange department: separate front-office and back-office operations; improve statistical information flow; hire additional staff. - Eliminate the backlog in banks’ foreign exchange transfers abroad. - Design a market-based strategy to allow the central bank to manage its net foreign assets more flexibly. - Central bank liquidity management: - Banking system maintains very large levels of unremunerated excess reserves in the central bank, reflecting lack of lending opportunities. - As of June 2005, banks’ excess reserves in the central bank amounted to over 2½ times the level of required reserves. - Measures taken: - Increased the reserve requirement coefficient on bank deposits from 5½ percent to 9½ percent in October 2005. - Authorities indicated they may consider a further increase to 11½ percent if excess bank liquidity continues to be a problem. - Enhance role of auctions of central bank bills (TRMs) as a monetary policy instrument, by holding auctions separate from treasury bond auctions. - Reactivate the treasury committee to improve communication between the treasury and the central bank. - Set up an internal committee to refine liquidity forecasting and management. - International reserves and accounting adjustment: - Central bank international reserves adjusted downward by US$23 million (about one-third of a month of imports). - Adjustment reflected a 2003 central bank cash payment to a government supplier not previously recorded. - Central bank credit to the private sector was adjusted upward by the same amount. - Inquiry launched into the unrecorded payment; supplier also received payment in the form of treasury bonds and was effectively paid twice. - Central bank has initiated action to ensure the supplier repays the central bank with proceeds of the treasury bonds as they mature; staff emphasized use of these resources to rebuild international reserves. ### Banking sector reforms and supervision - Legal and supervisory changes: - Deepening capacity of central bank’s banking supervision department and stepping up on-site bank inspections. - New banking law adopted in July 2005; microfinance law submitted to the National Assembly. - Staff emphasized need to ensure all banks comply with minimum capital requirements and other prudential ratios. - Anti–money laundering and counterterrorism financing: - Authorities committed to accelerate implementation; a law is being finalized and will be presented to the National Assembly by the end of the year. - MFD has provided detailed comments on the draft of this law. ### External sector policies and debt sustainability - Trade regime and diversification: - Adoption of the WAEMU common external tariff and removal of nontariff barriers have produced a more open trade regime. - Authorities intend to promote export diversification while maintaining a liberal trade system and to follow up on DTIS recommendations to reduce supply constraints. - Identified diversification sectors: agricultural products, fishing, and tourism. - Key impediments: lack of appropriate infrastructure and storage facilities and weaknesses in provision of public and financial services. - Guinea performs below the average among sub-Saharan African countries on 13 out of 39 survey-based indicators of the business environment compiled by the World Bank. - External debt service and arrears: - 2005 budget provides for payment of all external current debt obligations and settlement of US$8.4 million (0.2 percent of GDP) of external arrears, notably to multilateral creditors and on post-cutoff Paris Club debt. - Rescheduling agreements concluded with: Arab Bank for Economic Development in Africa, the Saudi Fund for Development, and the Islamic Development Bank; agreement with Romania expected by end-December 2005. - Guinea obtained informal agreement on debt service forbearance with selected Paris Club members. - Authorities continue to seek rescheduling as an interim step toward a comprehensive solution under the enhanced HIPC Initiative. - Debt sustainability analysis (DSA) update: - Confirms Guinea’s external debt will remain unsustainable until it benefits from the HIPC completion point and the MDRI. - Net present value of debt-to-exports ratio at end-2004 estimated at about 192 percent, above the policy-based indicative threshold of 100 percent. - Scenario including reaching HIPC completion point and MDRI in 2007 would reduce the net present value of debt-to-exports ratio and keep it below the 100 percent threshold over the 2007-25 projection period, reestablishing external debt sustainability. - Scenario assumptions: continued implementation of sound macroeconomic policies and structural reforms under the SMP, adoption of a PRGF-supported program in 2006, attainment of the HIPC completion point and MDRI in early 2007, and no major exogenous shock or policy reversal after 2007. Reflects authorities’ macroeconomic framework for 2005-08 and conservative macroeconomic assumptions beyond 2008. ### Donor relations and IMF payments - Donor resumption conditions: - Successful reform implementation important for resumption of external budget support; most donors stopped budgetary assistance since 2002 due to weak program implementation. - European Union could resume assistance in 2006 after municipal elections and if a PRGF-supported program is in place. - Other donors indicated willingness to resume assistance if Guinea agrees on a financial program with the IMF. - IMF obligations: - Guinea had difficulty making payments to the IMF until August 2005 but has taken action to prevent further delays. - Authorities deposited enough funds in their SDR account to cover all obligations to the IMF falling due until the end of 2005. - Staff emphasized timely payments to the IMF as essential to establishing a good policy track record. ### Domestic petroleum sector - Price mechanism and losses: - Authorities agreed on need to adopt an automatic price adjustment mechanism for petroleum products to fully reflect exchange rate and international oil price conditions; to be part of the 2006 budget law. - Aim for a price structure similar to neighboring countries, potentially by reducing current taxes; mission emphasized identifying alternative revenue sources if taxes are reduced. - Interim action: limited adjustments of domestic oil prices during the last quarter of 2005. - Current situation: despite a large price hike in May, rapid increases in international oil prices and depreciation of the Guinea franc mean petroleum products are currently being sold at a loss domestically. - Authorities estimate accumulated losses of the petroleum companies exceed US$10 million (⅓ percent of GDP); these losses may impair oil companies’ ability to ensure necessary bank financing for oil imports. - Mechanism note: when sale price differs from actual cost by more than 5 percent, resulting loss or gain is lodged in an account called the arrondi; accumulated losses in this account constitute a contingent government liability. ### Business environment and structural reforms - Structural reforms and privatization: - Government working to improve business environment by implementing structural reforms, improving mining investment conditions, and strengthening the judicial system. - Adopted action plans to improve quality and availability of electricity and water. - Telecommunications: adopted a new regulatory framework and preparing enabling legislation. - Privatization program: - Shares or assets of 10 government companies to be sold in 2005 (including shares in the largest domestic bank). - Authorities intend to privatize 20 enterprises over the next three years. - Staff encouraged implementation of sectoral action plans and progress on privatization as planned. - Mining sector transparency and investment climate: - Government will review legal framework for mining investment to align with international best practices. - Participation in the Extractive Industry Transparency Initiative (EITI) to improve transparency in state-investor relations. - A new mining sector policy statement that embodies these initiatives will be finalized soon. *Source: IMF staff report (content unit: _cr0637 - 24. The authorities have stressed their determination to implement prudent fiscal)* ### 44. The mission discussed with the authorities recent progress in strengthening ### The mission discussed with the authorities recent progress in strengthening ### Governance and the Judicial System - Recent national and regional seminars on governance and corruption led to the adoption of an action plan to combat corruption. - The National Agency to Combat Corruption has been strengthened. - An anticorruption law will be submitted to the National Assembly during the first half of 2006. - The authorities are implementing the decrees signed in March 2005 on the reorganization of the judicial system. - EITI-related developments (as reported in the source): - The first EITI workshop was held in April 2005. - The government issued a decree establishing the EITI Steering Committee in June 2005. - On July 1, the second meeting of the EITI Steering Committee took place, approving a set of rules and procedures to implement the EITI. - The process to select an international auditor will start in November 2005. - Publication of nonaudited data is expected to begin by March 2006. - The target date to publish audited data is June 2006. ### Poverty Reduction Strategy (PRS) and Millennium Development Goals (MDGs) - The authorities have continued implementing policies and measures included in the poverty reduction strategy paper (PRSP) despite recent economic difficulties. - The mission emphasized the close link between a stable macroeconomic situation and the ability to implement far-reaching poverty-reducing policies. - The mission stressed the need to ensure sectoral investment plans reflect government priorities set out in the PRSP. - The government is finalizing the second annual progress report on PRS implementation. - Progress made in priority sectors, especially education, but overall implementation hampered by Guinea’s macroeconomic instability. - Authorities indicated they were unable to compensate for lower levels of foreign assistance received in 2003 and 2004 by mobilizing additional domestic resources. - Authorities are concentrating efforts on: - Improving the policy formulation process and its link to budgetary resources. - Putting in place a system of performance indicators to facilitate closer monitoring of the budget strategy. - In February 2005, with donor assistance, the authorities completed a second progress report on achieving the MDGs; the report concluded that reaching the MDGs remains a significant challenge, particularly: - (i) the eradication of poverty and hunger, - (ii) the promotion of gender equality, and - (iii) environmental protection and access to safe water. - The authorities intend to adopt in 2006 an action plan to alleviate the key obstacles to achieving the MDGs, particularly in the three areas above. - The authorities and staff concurred that a pro-poor growth strategy and an annual economic growth rate higher than 6 percent would be needed beyond 2008 to reach the MDGs. ### Statistical Issues and Program Monitoring - Available statistics allow for adequate program monitoring, but improvements are needed in several areas. - Monetary and fiscal statistics are generally adequate, although unrecorded transactions remain a concern. - Compilation of real sector and balance of payment statistics needs substantial improvement. - Staff encouraged improved collection and reconciliation of external and domestic debt data to prepare for a full-fledged DSA required if Guinea reaches the completion point under the HIPC Initiative. - Guinea became a participant in the General Data Dissemination System (GDDS) in December 2003. - The mission encouraged authorities to design an overall strategy to comply with GDDS obligations, to be included in the PRSP framework and supported by the IMF’s Statistics Department and other donors. - SMP program implementation will continue to be monitored on the basis of the quantitative targets and structural benchmarks specified in the authorities’ memorandum of May 31, 2005. - The next quarterly staff assessment of the program will take place on the basis of data for end-September 2005. ### Staff Appraisal: Macroeconomic Outlook, Policy Priorities, and Recommendations - Macroeconomic outlook and conditional projection: - If the authorities maintain sound policies, the Guinean economy could reach an average real GDP growth rate of 6 percent in the medium term and single-digit inflation even sooner. - External debt relief in the context of the enhanced HIPC Initiative and the MDRI is an essential element of the medium-term scenario. - Key policy areas to consolidate progress and move towards medium-term objectives: - Strengthening government revenue mobilization and expenditure management. - Reinforcing the operations of the central bank. - Deepening structural reforms, including in the foreign exchange market and public utilities. - Addressing institutional and capacity constraints to policy design and implementation. - Improving the business environment for the private sector. - Recent policy stance and reforms: - Staff welcomes authorities’ tightening of macroeconomic policy under the SMP and the shift since the beginning of the second quarter of 2005 to tight fiscal and monetary policies. - Staff welcomes authorities’ determination to reform the foreign exchange market, customs and tax administration, expenditure management, and public utilities. - Foreign exchange market reforms: - Staff commends the March 2005 measures to unify and liberalize the foreign exchange market; these steps helped make the exchange rate flexible and market-determined and allowed the real exchange rate to come close to its underlying equilibrium value. - Staff urges measures to deepen foreign exchange market reform, including ensuring daily and accurate reporting by banks of their foreign exchange transactions and reorganizing the foreign exchange department of the central bank. - Staff notes changes eliminated the multiple currency practice arising from the previous institutional setup, but a multiple currency practice is still in effect; staff does not recommend its approval and encourages elimination by calculating the reference exchange rate on the basis of intra-day exchange rates quoted by banks and exchange bureaus. - Near-term stabilization challenges and commitments: - Progress towards macroeconomic stability is fragile; inflation, although declining, exceeds the authorities’ objective. - Authorities committed (in the attached Letter of Intent and MEFP referred to in the source) to implementing all necessary additional policies to strengthen macroeconomic stabilization and achieve the SMP’s objectives to build a track record for eventual movement to an IMF-supported arrangement. - Immediate challenges: bring inflation under control and ensure the central bank can achieve its net foreign assets objective. - Required actions: continue tight fiscal policies, strengthen the operation of the foreign exchange market, and reinforce the central bank’s liquidity management operations. - 2006 budget guidance: - The 2006 government budget should embody a prudent fiscal policy consistent with the stabilization objective for next year. - Budget framework should be based on improving revenue collection, controlling expenditure while allowing allocations to priority sectors to expand, and containing bank financing in line with prudent monetary management. - Continued progress in customs and tax administration and public expenditure management will be key. - The 2006 budget will include measures to ensure petroleum products in the domestic market are priced in line with international prices. - Structural reforms and governance: - Staff welcomes structural reform and governance measures and encourages continued pursuit. - Improving operations of water and electricity companies is essential to enhance growth prospects and well-being. - Progress in the divestiture program is needed to boost economic efficiency. - Steps to combat corruption and improve the justice system will reduce the costs of doing business in Guinea. - Social priorities and PRSP linkage: - The extent of poverty in Guinea remains worrisome. - Staff encourages authorities to give priority to the social sectors in government spending and investment plans within the PRSP framework. - Staff urges keeping the PRSP under constant review and ensuring investment plans of government agencies reflect PRSP priorities. - IMF payment behavior and safeguards: - Guinea had significant difficulties in the past in making payments to the IMF on time. - To prevent recurrence, authorities are depositing funds in their SDR account in advance of upcoming obligations. - Staff encourages addressing underlying difficulties that gave rise to repeated delays in payments—such as poor planning and unpredictability of foreign exchange inflows. *Source: _cr0637 - 44. The mission discussed with the authorities recent progress in strengthening* ### 60. It is proposed that the next Article IV consultation be held on the standard 12-month ### _cr0637 - 60. It is proposed that the next Article IV consultation be held on the standard 12-month ### Overview and procedural note - It is proposed that the next Article IV consultation be held on the standard 12-month cycle. ### Selected economic and financial indicators (Guinea, 2003–08; annual percentage change and ratios) - GDP at constant prices (annual percent change): 1.2, 2.7, 3.0, 5.0, 5.4, 6.1 (2003–2008 Est./Proj.) - GDP at current prices (annual percent change): 13.7, 24.9, 32.6, 18.9, 12.7, 10.8 - GDP deflator (annual percent change): 12.3, 21.7, 28.7, 13.3, 6.9, 4.4 - Consumer prices (average annual percent change): 12.9, 17.5, 31.1, 17.6, 7.0, 5.0 - Consumer prices (end of period percent change): 14.8, 27.6, 27.9, 8.7, 5.0, 5.0 - Exports, f.o.b. (U.S. dollar terms, annual percent change): 3.3, 1.6, 8.5, 1.9, 8.2, 8.2 - Imports, f.o.b. (U.S. dollar terms, annual percent change): -3.0, 22.4, -0.7, 4.9, 4.8, 6.3 - Terms of trade (percentage change): -2.4, -16.8, -11.0, -3.0, 1.0, 1.7 - Average effective exchange rates (depreciation -): Nominal index -11.7, -17.3; Real index -4.3, -5.7 - Net foreign assets (percent of broad money stock at beginning of period): -15.2, 10.1, 12.3, 3.4, 8.1, 9.8 - Net domestic assets (percent of broad money stock at beginning of period): 50.5, 26.9, 21.3, 7.1, 5.3, 2.3 - Net claims on government (net) 1/: 34.0, 22.2, 6.6, 8.1, 2.2, -2.4 - Credit to nongovernment sector 1/: 14.2, 3.2, 7.9, 1.4, 4.4, 5.8 - Broad money (annual percent change): 35.3, 37.0, 33.6, 10.5, 13.4, 12.1 - Reserve money (annual percent change): 27.4, 33.0, 27.7, 8.8, 8.9, 8.4 - Velocity (GDP relative to average M2): 7.7, 7.0, 6.9, 6.8, 6.8, 6.7 ### Central government finances (percent of GDP, 2003–08) - Total revenue and grants: 13.2, 11.4, 12.8, 13.4, 13.5, 13.7 - Nonmining revenue: 9.0, 8.5, 9.1, 9.2, 9.5, 9.5 - Current expenditure: 13.0, 11.3, 9.9, 9.7, 9.9, 9.9 - Capital expenditure and net lending 2/: 6.3, 5.0, 4.1, 4.1, 4.1, 4.3 - Overall budget balance (commitment basis) - Including grants: -6.1, -4.9, -1.2, -0.5, -0.5, -0.5 - Excluding grants: -8.9, -5.9, -2.0, -1.2, -0.7, -0.7 - Primary balance: -2.6, -0.4, 2.9, 3.6, 3.9, 3.9 Notes: - 1/ In percent of broad money stock at beginning of period. - 2/ Includes expenditure for restructuring. ### National accounts and demand composition (2002–08; shares and levels) - GDP at market prices (billions of Guinean francs): 6,340.3 (2002), 7,209.8, 9,004.1, 11,938.5, 14,190.8, 15,993.6, 17,718.0 (2008 proj.) - Consumption (billions GNF and percent of GDP): 5,763.6 (90.9% of GDP) in 2002 rising to 15,223.4 (85.9% of GDP) in 2008 proj. - Public consumption (billions GNF): 477.5 (2002) to 1,052.7 (2008 proj.) - Private consumption (billions GNF): 5,286.1 (2002) to 14,170.7 (2008 proj.) - Investment (gross) (billions GNF and percent of GDP): 828.0 (13.1% of GDP) in 2002 to 2,731.5 (15.4% of GDP) in 2008 proj. - Government fixed capital formation: 254.9 (4.0% of GDP) to 604.4 (3.4% of GDP) - Other sectors fixed capital formation: 559.5 (8.8% of GDP) to 2,126.5 (12.0% of GDP) - Foreign balance (net exports, billions GNF): -251.4 (2002) to -236.9 (2008 proj.) - Exports of goods and nonfactor services (billions GNF): 1,550.9 (2002) to 4,918.4 (2008 proj.) - Imports of goods and nonfactor services (billions GNF): 1,802.3 (2002) to 5,155.2 (2008 proj.) - Domestic savings (percent of GDP): 9.1, 7.5, 6.8, 9.4, 10.5, 12.6, 14.1 (2002–08) - Government savings: 1.5, -0.4, 1.6, 4.5, 5.3, 5.4, 5.6 - Nongovernment savings: 7.6, 8.0, 5.2, 4.9, 5.2, 7.2, 8.5 - Current account balance including official transfers (percent of GDP): -4.3, -3.4, -5.5, -3.8, -3.8, -3.0, -2.5 (2002–08) ### GDP by sector at constant 1996 prices (2002–08; annual percent change and levels) - GDP at factor cost (billions of 1996 GNF): 4,716.0 (2002) to 5,800.2 (2008 proj.) - Sectoral contributions (levels and annual percent change shown in source): - Primary sector (agriculture, livestock, fisheries, forestry): agriculture levels from 581.9 to 749.3 (2002–2008) and growth rates such as 5.9, 2.9, 3.5, 3.6, 5.8, 6.0, 4.1 - Secondary sector (including mining, manufacturing, construction): mining levels 801.2 to 975.3; manufacturing 200.9 to 239.2 - Tertiary sector (trade, transport, administration, other): trade levels 1,248.3 to 1,468.4; tertiary total 2,281.6 to 2,703.2 - GDP at market prices (annual percent change): 4.2, 1.2, 2.7, 3.0, 5.0, 5.4, 6.1 (2002–08) ### Government financial operations (2004–08; selected items, in billions of Guinean francs and percent of GDP) - Revenue and grants (levels, Dec. program/actual/prog/est/proj): entries include Revenue and grants: 1027.4, 706.6, 752.3, 1069.6, 1158.0, 1531.4, 1901.7, 2165.9, 2426.5 (various columns) - Revenue (levels) and composition: - Mining sector revenue examples: 171.0, 160.5, 162.1, 249.5, 258.5, 348.8, 495.8, 610.7, 703.6 (columns) - Nonmining sector: 765.0, 498.0, 554.5, 742.7, 845.0, 1,086.8, 1,302.6, 1,518.1, 1,682.8 - Indirect taxes and goods/services, nontax revenue, grants, HIPC debt relief figures appear in the detailed table. - Total expenditures and net lending (levels): 1,464.2, 732.8, 739.9, 1,110.1, 1,204.9, 1,672.6, 1,966.4, 2,243.4, 2,512.0 (columns) - Current expenditures, primary current expenditures, salary and wage, goods and services, transfers and interest on debt—detailed levels provided in table. - Primary balance (1/): -40.3, 186.0, 250.2, 259.7, 345.5, 351.6, 515.3, 622.7, 684.7 (levels in table) - Overall balance, commitments basis (including and excluding grants): including grants -436.8, -26.2, 12.5, -40.5, -46.9, -141.2, -64.7, -77.5, -85.5 (columns) - Overall balance, cash basis examples: -444.3, -118.5, 14.1, -144.7, -126.3, -139.9, -84.7, -103.1, -90.5 - Financing (levels): 444.3, 118.5, -14.1, 144.7, 126.3, 139.9, -198.6, -257.2, -169.9 - Domestic financing and banking financing breakdowns provided with detailed subitems (central bank, other banks, nonbank financing, privatization revenue, government bonds, amortization of domestic debt). - External financing and amortization due figures appear in table. - Memorandum fiscal ratios (percent of GDP): Expenditure in priority sectors in percent of GDP: 2.9, 1.5, 1.5, 2.4, 2.5, 3.4, 3.4, 3.6, 3.8 (various columns) - Nominal GDP (in billions of Guinean francs) shown: 9,004.1; 11,938.5; 11,938.5; etc., culminating 17,718.0 (2008 proj.) Notes: - 1/ Revenue minus noninterest expenditure, excluding foreign-financed investment projects. - 2/ Change in short-term unpaid expenditure commitments; see table footnote for consolidation with arrears. ### Monetary survey and central bank (2004–08; levels in billions GNF and selected USD equivalents) - Central bank net foreign assets (millions of U.S. dollars, selected): -75.4, -74.1, -40.3, -62.1, -12.7, 35.6, 52.2, 169.0, 314.1, 524.8 (columns covering 2004–2008 Mar proj.) - Corresponding USD series: -29.6, -22.7, -12.6, -16.2, -3.9, 8.6, 12.0, 37.4, 68.2, 111.7 - Reserve money (levels, billions GNF): 763.3, 913.3, 926.2, 871.5, 942.5, 908.8, 974.7, 1,060.5, 1,155.2, 1,252.7 - Currency outside banks: 604.1 to 950.3 (2004–2008 proj.) - Bank reserves and deposits breakdown included. - Deposit money banks: net foreign assets, bank reserves, claims on central bank (sterilization bills), domestic credit, credit to government, claims on private sector, liabilities to private sector (deposits) — detailed levels in table (e.g., liabilities to private sector (deposits): 875.4, 1,027.1, 1,061.3, 1,120.4, 1,096.7, 1,175.1, 1,220.1, 1,365.7, 1,598.2, 1,836.5) - Monetary survey (broad money M2 levels, billions GNF): 1,484.6, 1,687.6, 1,741.0, 1,772.4, 1,798.4, 1,888.7, 1,983.7, 2,192.1, 2,485.6, 2,786.8 - Foreign currency deposits (part of deposits): 271.0, 411.1, 389.2, 492.1, 373.2, 532.0, 557.7, 624.3, 730.6, 839.5 - Memorandum items (percent of beginning-of-period broad money, year-on-year change): net foreign assets 10.1, 9.8, 3.9, 7.9, 5.4, 12.7, 12.3, 3.4, 8.1, 9.8; net domestic assets 26.9, 34.9, 28.2, 26.6, 20.2, 19.2, 21.3, 7.1, 5.3, 2.3; broad money 37.0, 44.7, 32.2, 34.6, 25.6, 31.9, 33.6, 10.5, 13.4, 12.1 - Reserve money (annual percent change): 33.0, 49.0, 44.8, 36.3, 32.6, 27.9, 27.7, 8.8, 8.9, 8.4 ### Banking sector prudential indicators (2002–June 2005; averages across seven banks and counts) - Net capital (GNF billion) average: 9.2 (2002), 8.7 (2003), 10.8 (2004), 14.6 (June 2005) - Regulatory capital to risk-weighted assets (%): 18.4, 15.8, 12.2, 12.7 (2002–June 2005) - Loans larger than 15 percent of capital to regulatory capital (ratio): 1.4, 1.8, 1.7, 2.9 - Number of loans larger than 25 percent of capital (count): 0, 2.1, 2.6, 1.3, 2.1 (table entries) - Loans to managers and insiders to regulatory capital (%): 11.3, 9.3, 7.7, 6.5 - Liquid assets to short-term liabilities (%): 363.6, 172.8, 214.8, 175.4 - Open foreign exchange position to regulatory capital (%): 7.7, 11.0, 17.2, 19.3 - Quality of loan portfolio: - Unpaid loans to total loans (%): 29.4, 31.5, 27.5, 22.1 - Nonperforming loans (NPLs) to total loans (%): 25.7, 28.0, 26.2, 21.8 - Coverage of NPLs with provisions (%): 88.5, 83.7, 98.0, 97.5 Notes: - Averages based on seven banks. - Minimum regulatory net capital was GNF 2 billion before March 2002; ratio changes noted in footnotes. ### External sector and balance of payments (2004–09; in millions of U.S. dollars and percent of GDP) - Merchandise trade balance (2004–09 proj., millions USD): 35.3, 103.4, 84.1, 115.9, 139.5, 163.7 - Exports, f.o.b. (millions USD): 743.3, 806.6, 821.7, 888.7, 961.4, 1,037.3 (2004–2009) - Of which: mining products: 666.9, 722.8, 726.0, 787.5, 855.2, 924.4 (2004–2009) - Imports, f.o.b. (millions USD): -707.9, -703.2, -737.6, -772.8, -821.9, -873.6 - Composition of imports detailed (food, other consumption goods, petroleum, intermediate and capital goods) - Services trade balance (millions USD): -197.2, -190.3, -173.7, -181.0, -190.4, -219.3 - Services exports: 80.7, 82.5, 84.6, 89.0, 96.0, 103.4 - Services imports: -277.9, -272.8, -258.3, -270.0, -286.4, -322.7 - Income balance (millions USD): -59.8, -46.5, -43.1, -36.5, -41.9, -43.3 - Interest on public debt 1/: -53.2, -44.3, -44.6, -41.6, -47.6, -49.0 - Transfers (millions USD): 2.3, 9.6, 9.5, -3.4, -1.9, 5.5 (includes net private transfers and official transfers; HIPC assistance noted for earlier years) - Current account (millions USD, including official transfers): -219.4, -123.9, -123.1, -105.0, -94.7, -93.3 (2004–2009 proj.) - Capital account (millions USD): 25.6, 7.6, 7.4, 8.1, 8.6, 8.9 - Financial account (millions USD): 113.1, 120.2, 83.6, 80.4, 88.4, 87.1 - Direct and other private investment (net): 97.9, 114.6, 107.5, 104.2, 84.6, 80.1 - Errors and omissions: -19.1, 0.0, 0.0, 0.0, 0.0, 0.0 - Overall balance (millions USD): -99.8, 3.9, -32.1, -16.4, 2.3, 2.7 Financing and reserves: - Financing (millions USD): 99.8, -3.9, -3.2, -34.9, -24.1, -22.0 - Change in net official reserves (millions USD): -3.9, -41.6, -25.4, -30.8, -43.5, -40.0 - Debt relief and suspended debt service figures provided (e.g., suspended debt service to Paris Club: 20.2, 27.3, 29.3, 0.0, 0.0, 0.0; debt relief: 34.8, 23.3, 17.8, 21.0, 19.4, 18.0) - Memo ratios: - Current account–GDP ratio (percent, including official transfers): -5.5, -3.8, -3.8, -3.0, -2.5, -2.3 - Exports–GDP ratio (percent): 20.8, 27.0, 27.6, 27.9, 27.8, 27.6 - Imports–GDP ratio (percent): -24.8, -29.6, -30.4, -29.7, -29.1, -29.0 - External medium- and long-term public debt (millions USD): 3,270; 3,221; 3,248; 3,301; 3,358; 3,404 (columns) - In percent of GDP: 82.4, 97.7, 99.0, 94.1, 88.2, 82.5 - Debt-service ratio, before debt relief (percent of exports of goods and nonfactor services): 23.6, 20.5, 20.3, 19.1, 16.0, 14.3 - Net present value of external debt (after debt relief): 191.5, 173.9, 174.1, 152.7, 146.8, 141.3 - Gross reserves (millions USD): 92.3, 107.7, 128.6, 169.5, 213.0, 269.2 - In months of imports of the following year: 0.8, 1.3, 1.6, 2.0, 2.5, 2.7 - Nominal GDP (millions USD): 3,970; 3,297; 3,281; 3,507; 3,809; 4,127 (2004–2009) ### Poverty reduction target reference - Millennium Development Goal (excerpt): - Target 1/ Goal 1. Eradicate extreme poverty and hunger - Target 1: Halve, between 1990 and 2015, the proportion of people whose income is less than one dollar a day. *Sources: Guinean authorities; and IMF staff estimates and projections.* ### 1. Population below US$1 a day (percent).. 40.327.2.. 20.0 ### 1. Population below US$1 a day (percent).. 40.327.2.. 20.0 ### Millennium Development Goals indicators (Guinea) - Target 1: Eradicate extreme poverty and hunger - 1. Population below US$1 a day (percent): 40.3 27.2 .. 20.0 - 2. Poverty gap ratio at US$1 a day (percent): .. .. .. .. - 3. Share of income or consumption held by poorest 20 percent (percent): 6.4 .. .. .. - Target 2: Halve, between 1990 and 2015, the proportion of people suffering hunger - 4. Prevalence of child malnutrition (percent of children under 5): .. 9.0 .. 5.0 - 5. Population below minimum level of dietary energy consumption (percent): 40.0 23.0 32.0 .. 15.0 - Goal 2: Achieve universal primary education (Target 3) - 6. Net primary enrollment ratio (percent of relevant age group): 42.0 60.0 .. 100.0 - 7. Percentage of cohort reaching grade 5: 58.8 54.1 84.4 .. .. - 8. Youth literacy rate (percent, ages 15-24): .. .. .. .. - Goal 3: Promote gender equality and empower women (Target 4) - 9. Ratio of girls to boys in primary and secondary education (percent): 43.1 48.6 .. 75.4 100.0 - 10. Ratio of young literate females to males (percent, ages 15-24): .. .. .. .. - 11. Share of women employed in the nonagricultural sector (percent): .. .. .. .. - 12. Proportion of seats held by women in the national parliament (percent): 7.0 9.0 .. .. - Goal 4: Reduce child mortality (Target 5) - 13. Under-five mortality rate (per 1,000): 240.0 208.0 169.0 .. 90.0 - 14. Infant mortality rate (per 1,000 live births): 145.0 129.0 95.0 .. 35.0 - 15. Immunization against measles (percent of children under 12 months): 35.0 45.0 52.0 .. 80.0 - Goal 5: Improve maternal health (Target 6) - 16. Maternal mortality ratio (modeled estimate, per 100,000 live births): 700.0 650.0 .. .. 220.0 - 17. Proportion of births attended by skilled health personnel: 30.5 .. 55.0 .. 95.0 - Goal 6: Combat HIV/AIDS, malaria, and other diseases (Target 7) - 18. HIV prevalence among females (percent, ages 15-24): .. 2.5 .. .. - 19. Contraceptive prevalence rate (percent of women ages 15-49): 2.0 .. 6.2 .. .. - 20. Number of children orphaned by HIV/AIDS: .. 30,000 .. .. - Target 8: Halt by 2015, and begin to reverse, the incidence of malaria and other major diseases - 21. Prevalence of death associated with malaria: .......... - 22. Share of population in malaria risk areas using effective prevention and treatment: .......... - 23. Incidence of tuberculosis (per 100,000 people): .. 270.4 .. .. - 24. Tuberculosis cases detected under DOTS (percent): 38.0 40.0 .. .. - Goal 7: Ensure environmental sustainability (Target 9) - 25. Forest area (percent of total land area): 29.6 .. 28.2 .. .. - 26. Nationally protected areas (percent of total land area): 0.7 0.7 0.7 .. - 27. GDP per unit of energy use (PPP $ per kg oil equivalent): .. .. .. .. - 28. CO2 emissions (metric tons per capita): 0.2 0.2 0.2 .. .. - 29. Proportion of population using solid fuels: .......... - Target 10: Halve by 2015 proportion of people without access to safe drinking water - 30. Access to improved water source (percent of population): 45.0 .. 48.0 .. 100.0 - Target 11: Achieve by 2020 significant improvement for at least 100 million slum dwellers - 31. Access to improved sanitation (percent of population): 55.0 .. 58.0 .. 100.0 - 32. Access to secure tenure (percent of population): .. .. .. .. .. - Goal 8: Develop a Global Partnership for Development (selected indicators) - 45. Unemployment rate of population ages 15-24 (total): Female .. .. .. .... Male .......... - 46. Proportion of population access with access to affordable essential drugs: .......... - 47. Fixed line and mobile telephones (per 1,000 people): 1.5 10.1 .. 15.0 - 48. Personal computers (per 1,000 people): 1.4 4.0 .. .. ### SMP progress, macroeconomic outcomes, and policy measures (September 2005 – March 2006) - Program context and objectives - Guinea is implementing a staff-monitored program (SMP) covering April 2005-March 2006. - Program aims: stabilize the economy, accelerate growth, reduce poverty, and support attainment of the Millennium Development Goals. - Recent economic developments and projections - Real GDP growth is expected to reach 3 percent in 2005. - Inflation is expected to reach 28 percent by the end of 2005 (12-month basis). - Exchange rate movements: 2,850 Guinea francs per U.S. dollar on March 1; 3,827 on June 30; program reference was 3,200. - Balance of payments (2005): Current account deficit expected to contract from 5½ percent of GDP in 2004 to 3.8 percent of GDP in 2005. - Overall balance expected to improve from a deficit of 2.5 percent of GDP in 2004 to a surplus of 0.1 percent of GDP in 2005. - Gross international reserves expected to increase from 0.8 to 1.3 months of imports during 2005. - Central bank net foreign assets expanded by US$13 million in the first half of 2005 (insufficient to meet SMP target). - Fiscal and monetary outcomes through mid-2005 - All end-June quantitative targets and structural benchmarks were met except accumulation of central bank net foreign assets (NFA) and the continuous benchmark on refraining from introducing new multiple currency practices. - Overall fiscal balance (cash basis) reached a surplus of 0.2 percent of GDP in the first half of the year, compared to a deficit of 1 percent of GDP under the program. - Reserve money expansion dropped from 49 percent (12-month) by March 2005 to 36 percent by end-June. - Broad money expanded by 34.6 percent in the year ended June 2005 (program: 32.1 percent). - Specific fiscal measures and commitments - End-August primary surplus was 0.5 percentage points of GDP higher than targeted; overall deficit, excluding grants, was 0.2 percentage points lower than expected. - Government will reduce expenditures on goods and services by at least 10 billion relative to the latest projections in the last quarter of the year. - Government received an interest-free advance of tax payments for US$18 million from mining companies in August; government undertakes not to use future tax payments to meet current obligations during the SMP. - Authorities provided an exchange rate guarantee to rice importers through September 2005; future similar actions will be consulted with the IMF. - 2006 government budget preparation priorities: strengthen revenue collection, control expenditure expansion, reduce central bank financing, refrain from nonconcessional external resources, improve control over off-budget activities, consult IMF for technical assistance, and address petroleum pricing mechanism and poverty reduction strategy recommendations. - Monetary and exchange rate policies and actions - Central bank will follow recommendations of the August 2005 IMF MFD mission. - Central bank to calculate the reference exchange rate as a weighted average of amounts transacted by banks and exchange houses. - Steps to guarantee timely and complete reporting by banks and exchange bureaus of actual exchange rates and volumes transacted, including on-site inspections. - Central bank intends to start publishing a daily reference rate based on intra-day data to eliminate multiple currency practice. - Central bank will continue reducing backlogs in transferring banks’ foreign exchange to correspondents abroad. - In the last quarter of 2005 the central bank will: - set up an internal control structure for its foreign exchange operations; - conclude an agreement detailing obligations of the central bank and commercial banks in the foreign exchange market; - reorganize its Foreign Exchange Department; - review foreign exchange market regulations to reflect institutional changes; - assess the operation of the regulation on maximum withdrawals of foreign exchange cash; - work with customs, the banking system, and exporters to ensure full repatriation of export revenues in accordance with existing regulations. - Structural reform and sectoral developments - Initial steps to liberalize the foreign exchange market were implemented in March; a multiple currency practice remained due to potential spread > 2 percent between interbank spot rates and the central bank’s reference rate. - WAEMU common external tariff adopted; reforms advanced in customs, tax administrations, and public expenditure management. - Divestiture progress: sale of shares in the largest commercial bank to a foreign bank for about US$2 million in September 2005. - Action plans adopted to reduce fraud and enhance efficiency in water and electricity sectors. - Audits of central bank accounts and foreign asset position are almost complete. - Petroleum sector and Fund obligations - Domestic petroleum sector faces serious difficulties; petroleum companies selling at a loss due to rapid international oil price increases and exchange rate depreciation. - As of June 30 SMP test date, Guinea had overdue obligations amounting to SDR 3 million (settled mid-August). - Government will adopt strategy of paying upcoming obligations in advance of due dates and has deposited necessary funds in its SDR account to cover IMF obligations due in 2005. *Source: Guinean authorities; and United Nations; excerption from Memorandum of Economic and Financial Policies and Table 8 (Guinea: Millennium Development Goals).* ### 17. The central bank will implement policies that will allow it to transmit to the ### _cr0637 - 17. The central bank will implement policies that will allow it to transmit to the ### Monetary policy transmission and central bank operations - Increase reserve requirement coefficient on bank deposits in October 2005 to 9 ½ percent of bank deposits, after consultation with the commercial banks. - Extend the period for calculation of compliance with reserve requirements from 10 to 15 days. - Conduct auctions of Treasury bills and central bank bills (TRMs) on different days of the week to enhance the role of TRM auctions as a monetary policy instrument. - Reactivate the Treasury Committee to enhance communication between the Treasury and the central bank. - Establish a Liquidity Committee within the central bank. - Begin work to revise regulations pertaining to central bank advances to the government, with a view to eliminate statutory advances in the future. - Rationale: Address structural excess liquidity in the market, apparent in the large level of excess reserves that the banks maintain in the central bank. ### Petroleum sector pricing policy - Introduce an automatic price adjustment mechanism for petroleum products in the 2006 budget law. - The mechanism will fully reflect exchange rate and international oil price conditions. - It will be applied on a regular monthly basis. - If the government lowers domestic petroleum taxes as part of the new price mechanism to keep Guinea’s price structure aligned with neighboring countries, other measures amounting to an equal amount of resources will be identified to reach a neutral fiscal effect. - Interim measure: Start implementing limited monthly adjustments of domestic oil prices in the fourth quarter of 2005. ### Program monitoring and quantitative targets - Program implementation monitored on basis of quantitative indicators and structural benchmarks specified in the Memorandum of May 31, 2005, for end-September and end-December 2005 and end-March 2006. - Two adjustments to the Memorandum targets: - Stock of net foreign assets of the central bank revised downwards throughout by about US$23 million, following adjustment to the central bank balance sheet related to a 2003 import operation (repayments received by the central bank corresponding to this operation will not count towards meeting the program objectives). - Target for accumulation of net foreign assets of the central bank revised: - Revised upwards from June 2005 for US$1 million of exceptional budget assistance received from China. - Revised downwards from December 2005 for 75 percent of US$8.2 million of projected foreign financing from the European Union that is no longer expected to be received during the SMP period. - Next quarterly staff assessment based on data for end-September 2005. ### Structural benchmarks and fiscal/administrative measures (selected) - Tax administration - Adoption of an action plan with a timetable for strengthening tax and customs administrations, based on IMF technical assistance recommendations. Implementation date: End-June 2005. Status: Completed. - Moratorium on new ad hoc tax or customs tariff exemptions. Implementation: On a continuous basis. - Expenditure control - Establish monitoring committee for computerized expenditure management system and prepare terms of reference for a complete computer network audit. Implementation date: End-June 2005. Status: Completed. - Amend Article 31 of the General Rules on Public Accounting to eliminate possibility of extra budgetary transactions. Implementation date: End-September 2005. - Launch call for bids for audit of the computerized expenditure management system. Implementation date: End-September 2005. - Closing of all accounts held by individuals on the books of the central bank. Implementation date: End-December 2005. - Completion of an audit of government’s domestic debt and cross debts between public enterprises and the government. Implementation date: End-December 2005. - Fiscal issues regarding public enterprises - Adoption by the Council of Ministers of an action plan to combat fraudulent use of electricity and drinking water. Implementation date: End-June 2005. Status: Completed. - Adoption of an action plan to strengthen financially the electricity and water companies. Implementation date: End-September 2005. - Adoption of a plan to settle cross debts between public enterprises and the government. Implementation date: End-December 2005. - Safeguards measures - Completion of the special audit of the central bank’s international reserves. Implementation date: End-September 2005. - Completion of the financial audit of the central bank itself. Implementation date: End-December 2005. - Governance - Adoption of an action plan to combat corruption, including concrete objectives and performance indicators, and an implementation schedule. Implementation date: End-September 2005. - Exchange rate regime - Refrain from introducing any new multiple currency practices. Implementation: On a continuous basis. Status: Not met. ### Selected quantitative notes and memoranda items - Program targets adjusted downward throughout by about US$23 million following adjustment to central bank balance sheet due to a foreign exchange transaction between the Central Bank and a private company. - Targets from end-June adjusted upward for US$1 million of budgetary assistance obtained from China in June 2005. - Reserve money reported at program exchange rates: - 3200 GNF/USD for end-June; - 3276 GNF/USD for end-September; - 3335 GNF/USD for end-December; - 3496 GNF/USD for end-March 2006. - Target for NFA from end-December 2005 adjusted downward for 75 percent of US$8.2 million of EU budgetary assistance that was programmed but not expected to be received as scheduled. Net bank credit to the government adjusted upward for the same amount in Guinean francs, recalculated at program exchange rates. ### Guinea’s relations with the Fund (selected data points) - Membership Status: Joined on September 28, 1963; Article VIII. - Quota: 107.10 (SDR million) — 100.00 percent of quota. - Fund holdings of currency: 107.03 (SDR million) — 99.93 percent. - Reserve position in Fund: 0.08 (SDR million) — 0.07 percent. - SDR Department: - Net cumulative allocation: 17.60 (SDR million) — 100.00 percent of allocation. - Holdings: 3.42 (SDR million) — 19.41 percent of allocation. - Outstanding Purchases and Loans: - PRGF arrangements: 64.24 (SDR million) — 59.98 percent of quota. - Financial Arrangements (selected): - PRGF approved 05/02/2001; expiration 05/01/2004; Amount approved 64.26 (SDR million); Amount drawn 25.70 (SDR million). - ESAF/PRGF approved 01/13/1997; expiration 01/12/2001; Amount approved 70.80; Amount drawn 62.94. - ESAF approved 11/06/1991; expiration 12/19/1996; Amount approved 57.90; Amount drawn 46.32. - Projected payments to the Fund (without HIPC Assistance; SDR million; based on existing use of resources and present holdings of SDRs): - 2005 Principal: 3.13; Charges/interest: 0.27; Total: 3.40. - 2006 Principal: 13.09; Charges/interest: 0.69; Total: 13.78. - 2007 Principal: 13.98; Charges/interest: 0.62; Total: 14.60. - 2008 Principal: 11.83; Charges/interest: 0.56; Total: 12.38. - 2009 Principal: 8.29; Charges/interest: 0.50; Total: 8.79. ### HIPC Initiative and IMF disbursements (selected) - Decision point date: 12/20/2000. - Assistance committed by all creditors (US$ million): 545.00. - Of which: IMF assistance (US$ million): 31.40 (SDR equivalent in millions: 24.24). - Disbursement of IMF assistance (SDR million): - Amount disbursed to the member (Interim assistance): 5.17. - Completion point balance: 0.00. - Total disbursements: 5.17. ### Safeguards assessment and exchange arrangements - Safeguards assessment concluded substantial risks in the central bank’s external audit mechanism, financial reporting framework, and system of internal controls. - Following recommendations, the BCRG contracted a reputable international firm to conduct a special audit of the foreign assets of the central bank and of the BCRG itself; other measures are monitored by staff. An updated assessment will be needed with regard to a new arrangement. - Exchange arrangements: - On March 1, 2005, the Guinean authorities unified and liberalized the foreign exchange system and abandoned the foreign exchange rate auction mechanism. - The Central Bank calculates the reference exchange rate weekly as the arithmetic average of exchange rates quoted by deposit money banks and foreign exchange bureaus. - A multiple currency practice arises from the potential spread of over 2 percent of effective rates between the Central Bank’s reference rate and the interbank market rate. ### Technical assistance and resident representation (selected) - Numerous IMF technical assistance missions and resident advisor inputs across FAD, MFD, STA departments from 1998 through 2005 covering customs reform, treasury management, monetary operations, liquidity management, bank supervision, monetary and exchange operations, statistics, and budget/accounting procedures. - Resident Representative: Mr. Jones has been Resident Representative since July 2003. *Source: _cr0637 - 17. The central bank will implement policies that will allow it to transmit to the (IMF PDF).* ### 5. As of end-July 2005, the IDA has approved 63 credits for Guinea, of which eleven ### 5. As of end-July 2005, the IDA has approved 63 credits for Guinea, of which eleven ### World Bank / IDA portfolio and recent approvals - IDA approvals: 63 credits for Guinea as of end-July 2005. - Sectoral breakdown of the 63 credits: - transport and infrastructure: eleven - energy, mining, water, and telecommunications: thirteen - strengthening the country’s management capability: three - public sector/governance: five - financing rural sector development: twelve - urban sector: three - health sector: five - education sector: seven - social protection: one - financial sector: three - Total value of these projects: about US$1,460 million equivalent. - Disbursed to date: US$1,334 million. - Approvals during FY1998/2005: - Two adjustment operations: Public Expenditure Management Adjustment Credit and the Fourth Structural Adjustment Credit. - Nine investment operations: National Rural Infrastructure Project; Decentralized Rural Electrification; Education for All; Village Community Support Program; Capacity Building for Service Delivery Program; Microfinance LIL; Pre-Service Teacher Education LIL; Urban Project; Population and Reproductive Health Project. - Current Bank portfolio in Guinea: - Eight projects totaling US$236.6 million. - Grant portion: US$20.3 million. - Undisbursed balance: US$133.6 million. - Capacity Building for Service Delivery Project: - Original amount: US$19 million. - Undisbursed balance at reporting: $14.3 million. - Closed on June 30, 2004; retroactively extended to May 31, 2005 to permit financing of a forensic audit. - Non-lending program components: fiduciary assessment; public expenditure review (PER); analysis of public finance management and audit systems; cross-cutting assessment of Guinea’s social, structural, and sector development under the PRSP; Bank/Fund collaborative work on social impact analysis. ### Proposed World Bank lending program (CAS low-case scenario) - For FY2004/06 the proposed program will support: - National Rural Infrastructure Project: $30.3 m (approved August 2004). - Second Health Sector Project: US$25 million (approved early June 2005). - Second Village Community Support Program: (US$45 million) included in FY06. - Conditional scenario: - A second phase of the Urban APL in FY07 could be advanced if Guinea moves up to the base case. ### Bank–Fund collaboration: overview - The IMF and World Bank staffs collaborate in supporting the government’s poverty reduction strategy and structural reforms. - The Bank supports policy reforms in a set of areas in collaboration with the Fund (see subsections below). ### Public Expenditure Management - Government priority since 1996: improvements in public expenditure management. - Division of labor: - Fund: leading dialogue on tax policy. - Bank: focusing on strategic resource allocation and operational efficiency of public expenditures. - Bank assistance: - Preparation of the medium-term expenditure framework (MTEF). - Support to strengthen the budget process and allocation of resources to pro-poor priority areas at the decentralized level. - Analytical work undertaken: - Country Procurement Assessment Review (CPAR) in 2002. - Public Expenditure Review (PER) in 2004 (managed by the Bank; strong government ownership; extensive consultation; close collaboration with the Fund and the AfDB). - A full Country Financial Accountability Assessment (CFAA) focusing on public expenditure management systems, auditing of public finances, and related governance issues. ### Poverty and Social Impact Analysis (PSIA) - Bank and Fund country teams are discussing the Poverty and Social Impact Analysis. - Potential areas for analysis: - Impact on social output indicators of government spending in health and education. - Impact of adoption of the Common External Tariff of the West African Economic and Monetary Union (WAEMU) on taxation of basic consumer goods. - Impact of exchange rate flexibility on consumer prices. - Social impact analysis of trade reforms. - Analysis of the impact of taxation on growth and income distribution. - Criteria for selecting reforms to analyze: importance of expected poverty and social impacts; prominence in the government’s agenda; timing and urgency of the reform; level of national debate. - Data developments: - The 2002 household survey was completed during the first semester of 2005. - An updated poverty diagnostic is about to be finalized. ### Public Service Reform and Service Delivery - Recent initiatives supported by the Bank and donors aim to improve administrative performance, accountability, transparency, and integrity. - Bank-supported programs and actions: - Economic Management Technical Assistance Project (PAGE), 1993–2000. - Capacity Building for Service Delivery Project (PRCI), 2000–2004. - Governance and corruption surveys launched by the former Anti-Corruption Commission (CNLC). - A grant to strengthen the capacity of the Finance Committee of the National Assembly and the Chamber of Accounts. - Outcomes and challenges: - Reforms target improved service delivery and financial accountability through capacity building and decentralization support. - PAGE had limited impact on public service efficiency and effectiveness. - PRCI was suspended in August 2003 because of corruption, leaving most of the project’s results indicators unachieved. - Evaluation of corruption surveys is ongoing and expected to lead to a medium term governance and anti-corruption strategy by the end of 2005. - Progress made in strengthening capacity of the Parliament’s Finance Committee and the Chamber of Accounts. - Areas of Bank–Fund cooperation: aspects of public sector reform with direct impact on fiscal stability and public sector financial management. ### Trade Reforms - Joint Bank and Fund support to establish a pro-growth trade framework. - Division of labor: - Fund: lead in reforms of the tariff regime. - Bank: fostering trade through the Integrated Trade Framework and engaging in regional dialogue on trade reforms in the context of WAEMU. ### World Bank contact - World Bank Contact Person: Mr. Wilfried Engelke (Phone: 473-2062). ### World Bank loan and grant operations (selected figures from 2000–06 table) - Aggregate project credit disbursements (annual totals shown): - 2000 Actual: 34.9 - 2001 Actual: 33.3 - 2002 Actual: 37.8 - 2003 Actual: 43.1 - 2004 Actual: 50.7 - 2005 Proj.: 51.1 - 2006 Proj.: 43.0 - Selected project disbursements by project (annual values shown in table; examples): - National Rural Infrastructure (3/90): 2005 Proj.: 4.5; 2006 Proj.: 7.6 - Agriculture Export Promotion (7/92): 2000: 1.7; 2001: 0.9; 2002: 1.8 - Health Nutrition Sector Project (3/94): 2000: 2.2; 2001: 3.6; 2002: 3.7; 2003: 0.1 - Urban III (4/99): 2000: 0.5; 2001: 1.6; 2002: 2.1; 2003: 1.8; 2004: 4.5; 2005 Proj.: 4.8; 2006 Proj.: 0.8 - Third Water Supply (4/97): 2000: 3.9; 2001: 3.4; 2002: 1.3; 2003: 8.4; 2004: 15.4; 2005 Proj.: 16.6; 2006 Proj.: 0.8 - Water Supply and Sanitation Project (12/78): 2000: 6.3; 2001: 6.3; 2002: 8.1; 2003: 18.1; 2004: 6.9; 2005 Proj.: 1.4 - Education for All (7/01): 2002: 3.5; 2003: 2.2; 2004: 12.7; 2005 Proj.: 11.2; 2006 Proj.: 18.9 - Village Community Support Program (2/99): 2000: 1.3; 2001: 2.0; 2002: 2.9; 2003: 5.3; 2004: 5.8; 2005 Proj.: 3.4; 2006 Proj.: 0.1 - Multi-Sectoral AIDS Project (12/02): 2003: 1.7; 2004: 1.3; 2005 Proj.: 6.1; 2006 Proj.: 8.3 - Decentralized Rural Electrification (7/02): 2004: 0.7; 2005 Proj.: 1.0; 2006 Proj.: 2.5 - Adjustment operations (II): - 2002 Actual: 49.3 (SAC IV (07/01) shows 49.3 in 2002 and 0.4 in 2003 in the table). - MIGA guarantees (IV) annual figures in table: - 2000: 0.0 - 2001: 51.5 - 2002: 39.4 - 2003: 17.5 - 2004: 15.7 - 2005: 0.0 - 2006: 0.0 ### Statistical issues: data adequacy and major weaknesses - General assessment: - Economic and financial data provided to the Fund are generally adequate for program monitoring and surveillance, but scope exists to improve internal consistency of fiscal data and consistency with monetary accounts. - GDDS participation: - Guinea participates in the General Data Dissemination System (GDDS); metadata were first posted on the DSBB on December 12, 2003. - The metadata on the DSBB were written in March 2002 and require updating; plans for improvements and metadata for all data categories need to be updated. - Main statistical weaknesses and institutional issues: - Improvements seen in availability of detailed government finance data; serious problems remain in compilation of real sector and balance of payments statistics. - Changes in the financial system adversely affected data quality for deposit money banks. - A law on statistics approved in 1995 created the National Direction of Statistics (DNS) and a technical committee, but these have not seemed to improve statistical quality. - Real sector statistics: - Real sector statistics are weak, incomplete, and not published timely enough to support policy making. - Only the consumer price index (CPI) is published monthly in a timely manner. - Monthly surveys on mining, industrial and agricultural production are produced with very long delays. - Employment and population statistics are published only annually. - A program to reinforce national accounts is being undertaken with AFRISTAT and GTZ technical assistance; work expected to lead to production of input-output matrices on an annual basis. - CPI for Conakry: available monthly with a one-month lag. - Export prices: estimated from information supplied by mining companies. - Import prices: based on weighted average of partner countries’ export prices. - Exchange rates: reported weekly. - Additional agriculture data published sporadically via FAO/UNDP surveys. - No data on employment or labor costs are published. - A STA mission in March 2000 identified lack of budget for current statistics compilation and insufficient training as main causes of weakness; Guinea developed an action plan but financial resources for many measures remain to be identified. - Balance of payments statistics: - Some recommendations from a May 1995 BOP mission were implemented: expanded coverage of trade in services, private transfers, and capital flows via annual surveys of service providers and large companies; survey is not comprehensive and lacks sanctions for nonresponse. - Quarterly compilation recommendation not implemented. - Merchandise trade statistics reported in Harmonized System, net of imports by diplomats and transit trade, but data are inconsistent with actual developments; possible causes: smuggling and compilation errors (e.g., reported significant exports of aluminum products not produced in the country). - These data are substantially adjusted prior to publication. - BOP weaknesses affect national accounts; national accounts use trade data that include transit trade and imports by diplomats, overestimating openness. - National accounts use estimates of trade in services well below those from central bank surveys. - Authorities requested additional STA technical assistance for BOP statistics. - Monthly data on international reserves have not been reported to the IMF Statistics Department since December 2002. - Government finance statistics: - Comprehensive monthly central government budgetary data compiled by the Ministry of Economy and Finance on a cash basis for revenue and on commitment and cash bases for expenditure. - AFR receives preliminary data within one month. - Budgetary data often not internally consistent. - Consolidated central government operations data come from the Treasury. - Budget excludes a number of “satellite” accounts not directly incorporated. - Significant differences exist between national definition of general government and GFSM definition. - Autonomous funds (e.g., Road Fund) only partly incorporated in the budget; for the Road Fund, 100 percent of resources are “committed” through the budget and transferred from the budget to the fund; actual disbursements are at the Road Fund’s discretion (monitored through its central bank account). - Fuel tax is not expressly earmarked for the Road Fund; it is received by the general budget and transferred to the Road Fund through the budget. - Latest GFS Yearbook data published: 1999 (cash data only). - Guinea does not report fiscal data for publication in International Financial Statistics (IFS). - Monetary accounts statistics: - Monthly data on monetary authorities, deposit money banks, and interest rates are provided to AFR with a one-month delay, but not provided to STA with the same time lag. - Financial system developments (liquidation and restructuring of banks) are not fully reflected in monetary statistics due to problems in data collection, instrument classification, and sectorization. - Authorities have made some progress in adopting recommendations of a STA mission in 2000, but further work needed to update and strengthen deposit money banks’ reporting practices, including classification of nonperforming loans. - Beginning in 2001, authorities undertook regular reporting of monetary data for publication in IFS. - Following deterioration in 2003, authorities report monetary data for IFS more frequently, although not monthly. - Latest monetary data published in IFS are for June 2005. *Source: IMF staff report content provided in the input document.* ### 1. This annex assesses the external and public debt dynamics of Guinea using the ### Annex: External and Public Debt Dynamics of Guinea (LIC DSA) ### Main finding - Guinea is in debt distress. - Upon reaching completion point under the Enhanced HIPC Initiative (assumed to take place in early 2007), the country would be at a high risk of debt distress into the medium-term under the baseline scenario. - Preliminary results from the public sector DSA reveal that domestic debt levels represent an additional risk to the probability of debt distress in Guinea. ### Background - Guinea reached the decision point under the Enhanced HIPC Initiative in December 2000, qualifying for US$545 million (in NPV terms) in debt relief. - Interim debt relief has been provided by all main creditors including the IMF and IDA until early 2003 when the PRGF went off-track. Only IDA and the European Union and two Paris Club creditors have continued to provide interim relief under the Initiative. - Total external arrears to multilateral and bilateral creditors accumulated at end-2004 amounted to US$62.4 million (about 2.0 percent of GDP). - HIPC debt relief will restart irrevocably once the completion point is reached. - At end-2004, Guinea’s public and publicly guaranteed external debt is estimated to be US$3,270 million. - Multilateral creditors account for 65 percent of the total, with the World Bank and the African Development Bank group making up three-quarters of the multilateral’s share. - The Paris Club group of creditors accounts for 22 percent of total, while non-Paris Club creditors and commercial creditors make up the rest. - Over 70 percent of Guinea’s external debt denominated in euros, yen and SDR; depreciation of the U.S. dollar since decision point increased the U.S. dollar value of Guinea’s external debt. ### Policy-based thresholds (from Table 1) - Table 1: Policy-Based External Debt Burden Indicators - Thresholds 1/ - 20042007-25 2/ - NPV of debt in percent of: - Exports10019297 - GDP304028 - Revenues200382208 - Debt service in percent of: - Exports 15217 - Revenues 3/ 20425 - 1/ Shows policy indicative thresholds as used in the joint IMF-World Bank low-income country DSA framework for a poor policy performer. The quality of policies and institutions is measured by the World Bank’s CPIA. - 2/ Simple average. - 3/ Revenues excluding grants. - Guinea’s Ratios ### External Debt Sustainability Analysis (2005-25) - At end-2004, the NPV of debt-to-exports ratio is estimated at 191.5 percent, well above the relevant policy based indicative threshold. - Under the baseline scenario, the NPV of debt-to-exports ratio would fall below the 100 percent threshold in 2015. - The NPV of debt-to-GDP and revenues ratios also breach the policy-based thresholds under the baseline scenario before declining below the thresholds in the medium-term. - The external debt service ratio quickly falls below the relevant threshold once HIPC debt relief resumes in full at completion point. - Baseline macroeconomic framework assumptions: - Continued implementation of sound macroeconomic policies and structural reforms under the SMP. - Adoption of a PRGF-supported program in mid-2006. - Attainment of the completion point in early 2007. - No major exogenous shock or policy reversal after 2007. - All new loans will be on concessional terms. - Sensitivity and stress tests: - Baseline debt burden indicators are most vulnerable to an exogenous shock to export growth and a one-time depreciation of the Guinean franc against the U.S. dollar. - A one standard deviation shock to exports for two years and a one-time franc/U.S. dollar exchange rate depreciation significantly increase debt ratios and slow their return to thresholds. - A scenario where key macroeconomic variables remain at historical values sharply increases the risk of debt distress; external debt ratios would follow a continuous upward path if key economic variables remain at their historical averages from 2005. - MDRI / G-8 debt relief scenario: - Simulating G-8 debt relief implementation in 2007 reduces Guinea’s external debt ratios by about half on average and keeps ratios well below policy-based thresholds for the entire projection period. - The simulation underscores the importance of sustained policy reform to reach completion point and potentially benefit from G-8 debt relief. ### Box 1 — Macroeconomic assumptions underlying the DSA - Real GDP: - 3.0 percent in 2005. - Annual average of 5.5 percent over 2006-10. - 5.0 percent over 2011-2025. - Average CPI Inflation: - 17.5 percent in 2004. - Expected to reach 30.7 percent in 2005. - Average 9.6 percent in 2006-08. - 5.0 percent for remaining forecast period. - Total nominal depreciation for 2005 is expected to reach 38 percent in foreign currency terms in 2005. - Export growth: - Projected to average about 7.2 percent over 2005-10. - 8.2 percent over 2011-25. - External current account deficit, excluding official transfers: - 5.8 percent of GDP in 2004. - Forecast to decline to 4.6 percent in 2005. - 2.5, on average, over the 2006-25 period. - Fiscal policy: - Revenues averaged 11.0 percent of GDP during 1995-04. - Anticipated about 13 percent of GDP in 2005. - 13.2 percent in 2006-08. - 14.7 percent in 2009-15. - 17.2 percent in 2016-25. - Primary surplus projected to decrease from an average of 3.8 percent of GDP in 2006-08 to 2.9 percent of GDP in 2016-25. - New borrowing and financing: - Financing gap filled mainly with concessional funds, significantly from IDA. ### Box 2 — HIPC DSA update and comparison to the LIC DSA framework - Using HIPC methodology updates: - As of end-2004, NPV of debt after full delivery of enhanced HIPC assistance estimated to be US$1,521 compared with US$1,293 projected for end-2004 in the decision point document. - NPV of external debt-to-exports ratio is estimated at 189 percent as of end-2004. - Factors contributing to change in NPV debt-to-exports ratio (end-1999 to end-2004): - New borrowing (2000-04): 14.0 (Anticipated Change) and -4.3 (Unanticipated Change) leading to 9.7 total change. - Export growth (2000-04): -53.6 (Anticipated) and 49.4 (Unanticipated) leading to -4.1 total change. - Changes in parameters: 25.3 total change (of which due to changes in discount rates 11.7 and due to changes in exchange rates 13.6). - Other factors 3/: 8.4. - End-2004 NPV of debt-to-exports ratio: - HIPC method: 189.0 - LIC DSA framework: 192 percent (noted elsewhere in the annex) - Methodological differences between HIPC and LIC DSA frameworks include: - LIC DSA uses annual exports rather than a three-year backward-looking average. - LIC DSA uses exchange rate projections from the WEO rather than end-2004 exchange rates. - LIC DSA uses a single discount rate of 5 percent rather than currency-specific discount rates. - In Guinea’s case, change in exchange rates used to project future debt streams increases debt ratios more than offsetting changes in discount rates and exports between the two methods. ### Public Sector Debt Sustainability Analysis (2005-25) - Historical fiscal performance: - Central government fiscal deficit (commitment basis, including grants) averaged 6.3 per cent of GDP during 1994-2004. - Deficit deteriorated from 5.3 percent of GDP in 1999 to 8.9 percent of GDP by end-2003. - Expenditures averaged 17.2 percent of GDP while revenues (including grants) averaged 13.7 percent of GDP during the period. - Domestic debt (end-2004): - Government domestic debt represented about 22 percent of GDP. - Composition included advances from the central bank (15 percent), treasury bills owned by commercial banks (4 percent) and accumulated arrears to the private sector (3 percent). - A sizable amount of non-certified debt to the private non-financial sector and public enterprises awaits certification by external auditors; this category is not captured in the data used in this analysis. - Authorities intend to complete an audit of this debt by end-December 2005. - Baseline expectations and projections: - Fiscal adjustment via increasing revenues and restrained spending expected to reduce public sector borrowing requirement. - Domestic debt stock assumed to fall to 7 percent of GDP by the end of the projection period. - Starting levels are extremely high: NPV of total public sector debt to fiscal revenues ratio estimated at 577 percent and NPV of public debt to GDP at 134 percent in 2005 (Table 4). - Sensitivity analysis: - In the no reform scenario (primary balance maintained at 2004 level), all debt burden indicators increase significantly relative to baseline; NPV of public debt to revenues ratio increases on average about 130 percentage points. - A one-time 30 percent real depreciation in the franc generates a significant increase in debt burden indicators. - One LIC DSA stress test assumes a 10 percent of GDP increase in debt-creating flows in 2006, which could approximate inclusion of non-certified domestic debt. *Source: Joint IMF-World Bank staff DSA annex for Guinea (selected excerpts).* ### 12. The results of the public sector DSA underscore the importance of domestic ### 12. The results of the public sector DSA underscore the importance of domestic debt management, especially the limiting of domestic borrowing from the central bank and the accumulation of domestic arrears to the private sector. ### Key findings on external debt sustainability (2005–2025) - NPV of external debt (percent of GDP / percent of exports) - NPV of external debt (percent of GDP): 39.7 (2005), 46.8 (2006), 48.3 (2007), 42.2 (2008), 40.4 (2009), 38.7 (2010), 36.3 (2011), 42.1 (2015 average), 27.6 (2015), 16.5 (2025) - In percent of exports: 191.5 (2005), 173.9 (2006), 174.1 (2007), 152.7 (2008), 146.8 (2009), 141.3 (2010), 132.2 (2011), 153.5 (2015 average), 97.4 (2015), 54.1 (2025) - Debt service-to-exports ratio (in percent): 21.0 (2005), 18.4 (2006), 18.3 (2007), 8.8 (2008), 7.8 (2009), 6.6 (2010), 7.0 (2011), 11.2 (2015 average), 7.8 (2015), 5.1 (2025) - Total gross financing need (billions of U.S. dollars): 0.2 (2005), 0.1 (2006), 0.1 (2007), 0.0 (2008), 0.0 (2009), 0.1 (2010), 0.1 (2011), 0.1 (2015 average), 0.2 (2015), 0.4 (2025) - Non-interest current account deficit (percent of GDP): 4.2 (2005), 4.3 (2006), 1.7 (2007), 2.3 (2008), 2.7 (2009), 2.5 (2010), 1.7 (2011), 2.0 (2015 average), 2.0 (2015), 2.2 (2025) - Identified net debt-creating flows: -6.0 (histor), -3.4 (2005), -5.2 (2006), -5.6 (2007), -5.6 (2008), -4.1 (2009), -4.1 (2010), -1.7 (2015 average), 0.1 (2025) ### Endogenous debt dynamics and macro assumptions (external) - Endogenous debt dynamics (contribution): -6.6 (histor), -1.5 (2005), -3.5 (2006), -4.2 (2007), -4.4 (2008), -3.8 (2009), -3.6 (2010), -2.1 (2015 average), -1.1 (2015) - Contribution from nominal interest rate: 1.3 (histor), 1.5 (2005), 1.4 (2006), 0.8 (2007), 0.8 (2008), 0.7 (2009), 0.6 (2010), 0.5 (2015 average), 0.4 (2015) - Contribution from real GDP growth: -2.3 (histor), -3.0 (2005), -4.9 (2006), -5.0 (2007), -5.3 (2008), -4.5 (2009), -4.2 (2010), -2.7 (2015 average), -1.5 (2015) - Contribution from price and exchange rate changes: -5.7 (histor) - Key macroeconomic assumptions (selected) - Real GDP growth (in percent): 2.7 (histor), 3.3 (2004), 1.4 (2005), 3.0 (2006), 5.0 (2007), 5.4 (2008), 6.1 (2009), 5.5 (2010), 5.5 (2015), 5.1 (2015 average), 5.0 (2025) - GDP deflator in US dollar terms (change in percent): 6.5 (histor), -2.2 (2004), 8.9 (2005), -19.2 (2006), -5.9 (2007), 2.8 (2008), 2.4 (2009), 2.7 (2010), 3.4 (2015), -2.3 (2015 average), 2.3 (2025), 1.9 (2025) - Effective interest rate (percent): 1.6 (histor), 1.4 (2004), 0.3 (2005), 1.5 (2006), 1.4 (2007), 0.9 (2008), 1.0 (2009), 0.8 (2010), 0.8 (2015), 1.1 (2015 average), 1.0 (2025), 1.4 (2025) - Growth of exports of G&S (US dollar terms, in percent): 2.8 (histor), 1.6 (2004), 4.5 (2005), 7.9 (2006), 1.9 (2007), 7.9 (2008), 8.1 (2009), 7.9 (2010), 9.3 (2015), 7.2 (2015 average), 7.9 (2025), 7.1 (2025) - Growth of imports of G&S (US dollar terms, in percent): 7.1 (histor), 2.1 (2004), 6.8 (2005), -1.0 (2006), 3.1 (2007), 4.7 (2008), 5.4 (2009), 9.5 (2010), 9.8 (2015), 5.3 (2015 average), 8.4 (2025), 7.5 (2025) - Memorandum item: Nominal GDP (billions of US dollars): 4.0 (histor), 3.3 (2004), 3.3 (2005), 3.5 (2006), 3.8 (2007), 4.2 (2008), 4.5 (2009), 6.5 (2015 average), 13.4 (2025) ### Sensitivity analyses and scenarios (external) - Baseline, historical, most extreme stress test, policy-dependent threshold, MDRI scenario are simulated for indicators through 2025 (displayed in figures and Table 3). - Table 3 scenario highlights (NPV of debt-to-GDP; NPV of debt-to-exports; debt service-to-exports; projections for selected years) - Baseline NPV of debt-to-GDP: 47 (2005), 48 (2006), 42 (2007), 40 (2008), 39 (2009), 36 (2010), 28 (2015), 16 (2025) - A1 (historical averages) NPV of debt-to-GDP: 47 (2005) rising to 97 (2025) - B6 (one-time 30 percent nominal depreciation in 2006) NPV of debt-to-GDP: 47 (2005), 71 (2006), 62 (2007), 59 (2008), 57 (2009), 53 (2010), 41 (2015), 24 (2025) - Baseline NPV of debt-to-exports: 174 (2005), 174 (2006), 153 (2007), 147 (2008), 141 (2009), 132 (2010), 97 (2015), 54 (2025) - A1 NPV of debt-to-exports: 174 (2005) to 318 (2025) - Debt service-to-exports baseline and stress outcomes reported in Table 3 and Figure 3. ### Public sector debt sustainability (2005–2025) - Public sector debt (percent of GDP) - Public sector debt: 114.4 (2004), 133.8 (histor average), 119.5 (2005), 109.7 (2006), 102.2 (2007), 94.5 (2008), 85.9 (2009), 59.9 (2015 average), 37.4 (2015) - Foreign-currency denominated: 95.2 (2004), 117.0 (histor), 104.3 (2005), 96.1 (2006), 89.9 (2007), 84.0 (2008), 77.3 (2009), 55.3 (2015 average), 31.4 (2015) - Change in public sector debt: -0.7 (2004), 19.4 (histor average), -14.3 (2005), -9.8 (2006), -7.5 (2007), -7.7 (2008), -8.6 (2009), -4.0 (2015 average), -1.3 (2015) - Identified debt-creating flows: 2.3 (histor), 21.6 (2004), -16.2 (2005), -13.0 (2006), -10.3 (2007), -9.3 (2008), -9.2 (2009), -4.2 (2015 average), 0.9 (2015) - Primary deficit and fiscal aggregates - Primary deficit: 2.4 (histor), 2.0 (2004), 1.4 (2005), -1.4 (2006), -1.9 (2007), -1.2 (2008), -1.1 (2009), -1.0 (2015 average), -1.1 (2015), -1.3 (2025) - Revenue and grants (percent of GDP): 11.4 (histor), 12.9 (2004), 13.5 (2005), 13.5 (2006), 13.7 (2007), 14.0 (2008), 14.4 (2009), 15.8 (2015 average), 16.6 (2015) - Primary (noninterest) expenditure (percent of GDP): 13.8 (histor), 11.5 (2004), 11.6 (2005), 12.4 (2006), 12.5 (2007), 13.0 (2008), 13.4 (2009), 15.5 (2015 average), 19.4 (2015) - Automatic debt dynamics and contributions - Automatic debt dynamics: 0.5 (histor), 23.4 (2004), -13.9 (2005), -9.7 (2006), -7.3 (2007), -6.6 (2008), -6.7 (2009), -3.3 (2015 average), -1.8 (2015) - Contribution from interest rate/growth differential: -6.3 (histor), -6.8 (2004), -7.9 (2005), -7.2 (2006), -7.0 (2007), -6.1 (2008), -5.7 (2009), -3.2 (2015 average), -1.8 (2015) - Contribution from real exchange rate depreciation: 6.8 (histor), 30.2 (2004), -6.0 (2005), -2.4 (2006), -0.3 (2007), -0.5 (2008), -1.1 (2009) - NPV of public sector debt (percent of GDP): 66.5 (2004), 74.2 (histor), 66.9 (2005), 58.1 (2006), 54.7 (2007), 51.0 (2008), 46.4 (2009), 33.1 (2015 average), 23.4 (2015) - o/w foreign-currency denominated: 47.3 (2004), 57.4 (histor), 51.7 (2005), 44.5 (2006), 42.5 (2007), 40.5 (2008), 37.8 (2009), 28.5 (2015 average), 17.5 (2015) - o/w external: 44.7 (2004), 55.1 (histor), 49.6 (2005), 42.6 (2006), 40.8 (2007), 39.1 (2008), 36.6 (2009), 27.9 (2015 average), 16.6 (2015) - Gross financing need (percent of GDP): 8.9 (histor), 4.3 (2004), 4.9 (2005), 2.4 (2006), 2.2 (2007), 2.6 (2008), 2.5 (2009), 3.2 (2015 average), 3.1 (2015) - NPV of public sector debt-to-revenue ratio (in percent): 582.8 (2004), 577.1 (histor), 496.8 (2005), 429.8 (2006), 400.0 (2007), 365.1 (2008), 321.3 (2009), 210.1 (2015 average), 140.8 (2015) - o/w external: 391.5 (2004), 428.2 (histor), 368.5 (2005), 315.1 (2006), 298.2 (2007), 279.7 (2008), 253.6 (2009), 177.1 (2015 average), 100.1 (2015) - Debt service-to-revenue ratio (in percent): 48.3 (2004), 37.5 (histor), 44.8 (2005), 24.5 (2006), 22.4 (2007), 24.1 (2008), 23.4 (2009), 20.7 (2015 average), 11.4 (2015) - Primary deficit that stabilizes the debt-to-GDP ratio: 3.0 (2004), -20.7 (histor), 12.5 (2005), 8.6 (2006), 6.4 (2007), 6.7 (2008), 7.6 (2009), 3.7 (2015 average), 4.1 (2015) ### Sensitivity analyses and scenarios (public sector) - Table 5 selected scenario outcomes (NPV of debt-to-GDP; NPV of debt-to-revenue; debt service-to-revenue) - Baseline NPV of debt-to-GDP: 74 (2005), 67 (2006), 58 (2007), 55 (2008), 51 (2009), 46 (2010), 33 (2015), 23 (2025) - A1 (Real GDP growth and primary balance at historical averages) NPV of debt-to-GDP: 74 (2005) to 44 (2025) - A2 (Primary balance unchanged from 2004) NPV of debt-to-GDP: 78 (2005) to 40 (2025) - B4 (One-time 30 percent real depreciation in 2006) NPV of debt-to-GDP: 74 (2005), 91 (2006), 79 (2007), 74 (2008), 70 (2009), 64 (2010), 47 (2015), 31 (2025) - Baseline NPV of debt-to-revenue: 577 (2005), 497 (2006), 430 (2007), 400 (2008), 365 (2009), 321 (2010), 210 (2015), 127 (2025) - Debt service-to-revenue baseline: 38 (2005), 45 (2006), 24 (2007), 22 (2008), 24 (2009), 23 (2010), 21 (2015), 11 (2025) ### Policy implications and recommendations (derived from DSA results and staff statement) - Emphasize domestic debt management: - Limit domestic borrowing from the central bank and avoid accumulation of domestic arrears to the private sector. - Fiscal and structural priorities evidenced in the staff statement (December 23, 2005): - Maintain improvements in the fiscal primary balance (fiscal primary balance was a surplus of 2.9 percent of GDP in the first nine months of 2005 versus a target of 2.2 percent of GDP). - Address higher-than-target inflation: 12-month inflation expected close to 29 percent by end-2005 versus SMP objective of 19 percent; monthly inflation declined from a peak of 6 percent in June 2005 to 0.8 percent in November 2005. - Continue policy implementation to avoid slippages; recent indicators suggest real GDP growth and balance of payments developments in 2005 remain in line with staff report expectations. - Governance and institutional reforms undertaken / recommended: - Amend general rules on public accounting to eliminate the possibility of extrabudgetary spending. - Launch and complete audit of the computerized expenditure management system. - Adopt and implement an action plan to combat corruption; finalize draft anti-corruption law; strengthen citizen ability to report corruption and increase public awareness. - Develop a broader good governance strategy with support from the World Bank and the European Union. - Adopt action plans to strengthen the financial situation of the water and electricity companies, including reducing fraud, clarifying government-utility financial relationships, ensuring timely payment of government bills, and preparing an opening balance for 2006. - Maintain no new ad-hoc tax or customs exemptions (continuous structural benchmark). - Complete and respond to external audit of the central bank’s international reserve position (external auditor final report submitted in October 2005; central bank forwarded reactions by end-September). *Source: Staff simulations, projections, and Statement by the IMF Staff Representative, December 23, 2005.* ### 5. However, there were serious slippages in program implementation during ### _cr0637 - 5. However, there were serious slippages in program implementation during ### Program implementation slippages (October–November 2005) - Several of the SMP’s end-December 2005 quantitative targets may not be attained due to slippages in October-November 2005. - As of end-November: - Base money had almost reached the level of the end-December target. - Central bank NFA had dropped to their end-December program levels. - External arrears, which had contracted until September 2005, increased in October-November. - Main problems identified: - Very rapid expansion of central bank credit to the government (reflecting in part higher government expenditures that had been delayed from earlier in the year and reduced commercial bank financing to the government). - Absence of an efficient program monitoring mechanism. ### Corrective measures being taken by the authorities - Measures to bring the program back on track: - Efforts to place additional treasury bonds with the commercial banks, including by raising interest rates. - Purchasing foreign exchange in the market to rebuild central bank NFA. - Reducing external arrears by end-December to below the program ceiling. - Improving policy coordination between fiscal and monetary authorities by setting up the treasury and liquidity committees, as specified in the November 2005 MEFP. ### Structural reform progress and benchmarks (late 2005) - Most end-December structural benchmarks under the SMP are likely to be achieved; one is not expected to be completed on time. - Benchmarks expected to be met: - Audit of the 2004 accounts of the central bank. - Closing private accounts in the central bank. - Performing an inventory of cross-debts between the government and the public enterprises. - Adopting a plan to settle these cross debts. - Benchmark not expected to be completed on time: - Audit of domestic government debt to the private sector. - Other positive developments in the last few months: - Wage demands kept under control despite social pressure. - Number of military personnel was reduced substantially in the last quarter of 2005. - Civil service census is advancing as planned. - Central bank actions on monetary and exchange rate policy: - Taking action to publish the reference exchange rate on a daily and weighted basis. - Reinforcing its foreign exchange department. - Raising reserve requirements. - Government sold a significant proportion of its shares in the largest commercial bank to a key foreign investor. - Three foreign investors announced plans to develop large alumina refinery plants in Guinea. - Nationwide local elections took place on December 18, 2005; elections were peaceful although voter participation seems to have been very low. ### IMF assessment and country context (from Public Information Notice No. 06/7) - Background economic summary (as presented): - Growth: Having averaged 4.7 percent in the late 1990s, economic growth since 2000 slowed to an average of about 2.5 percent. - Inflation accelerated to almost 30 percent. - International reserves fell to less than one month of imports. - External public debt rose to almost 100 percent of GDP and is unsustainable. - 2005 near-term outlook: - Real GDP growth expected to recover moderately in 2005; modest improvement to 3 percent. - Inflation expected to be nearly 28 percent at end-2005 (government objective was less than 19 percent). - Gross international reserves expected to edge up from 0.8 to 1.3 months of import cover during 2005. - Policy measures and results in 2005: - Tightening of fiscal and monetary policy early in the year. - Implementation of first steps to unify and liberalize the foreign exchange market. - Overall fiscal deficit (excluding grants) contracted from 6 percent of GDP in 2004 to 0.2 percent of GDP by June 2005. - Net central bank credit to the government increased by just over 1 percent of reserve money in the first half of 2005, compared with 10 percent of reserve money in the same period of 2004. - Nominal depreciation of the Guinean franc amounted to about 38 percent since end-February 2005. - IMF support: - IMF management approved a staff-monitored program (SMP) covering April 2005–March 2006. - Guinea met all end-June and end-September indicative quantitative targets and structural benchmarks under the SMP, except for the end-June accumulation of central bank net foreign assets and the introduction of a new multiple currency practice. ### Executive Directors’ assessment and recommendations - Directors’ views and encouragements: - Welcomed commitment of the new economic team and actions in 2005 (fiscal/monetary tightening, FX unification/liberalization, structural reforms). - Disappointed by year-end slippages but welcomed corrective measures. - Noted recent declines in inflation in the last few months, narrowing external current account deficit, and small rebound in economic growth. - Key priorities emphasized by Directors: - Implement promptly and vigorously the measures in the authorities’ economic program and establish an efficient policy coordination and monitoring mechanism. - Fiscal consolidation is key to return to higher sustained growth and sustainable debt. - Adopt a prudent 2006 budget consistent with stabilization objectives. - Continue to improve tax and customs administration and widen the tax base. - Control growth of government outlays while promoting priority expenditures. - Deepen public expenditure management and intensify reform of public utilities. - Address institutional and capacity constraints to policy design, implementation and monitoring. - Allow domestic petroleum product prices to move in line with international prices. - Monetary and financial sector recommendations: - Strengthen monetary control through institutional and operational strengthening of the central bank and financial sector reform. - Avoid central bank financing of budget operations; issue government securities such as treasury bills to develop domestic capital markets. - Liberalize interest rates to help reverse recent dollarization and to allow interest rates to signal monetary policy stance. - Reinforce banking supervision and maintain vigilant prudential oversight given high non-performing loans and concentration of credit. - Address shortcomings identified in the audit of the central bank’s 2004 accounts and foreign exchange position. - Calculate the reference exchange rate on the basis of a weighted average of intra-day market transactions and publish it daily to further liberalize the FX market and eliminate remaining multiple currency practice. - Structural and governance priorities: - Continue water and electricity sector reforms and privatization of state-owned enterprises to stimulate private sector-led growth and improve social conditions. - Accelerate efforts to combat corruption and improve the justice system. - Accelerate efforts to combat money laundering and terrorism financing. - Diversify the export base; adopt the WAEMU common external tariff and remove non-tariff barriers. - Debt and arrears management: - Stay current on external debt payments; authorities decided to remain current and ensure timely payments to the Fund. - Remain in close contact with external creditors to work toward a plan to clear arrears. ### Selected quantitative indicators (as reported) - Growth and inflation: - Changes in real GDP: 2001: 4.0; 2002: 4.2; 2003: 1.2; 2004: 2.7; 2005 (Est./Proj.): 3.0. - Changes in consumer prices (annual average): 2001: 5.4; 2002: 3.0; 2003: 12.9; 2004: 17.5; 2005 (Est./Proj.): 31.1. - External sector (in millions of U.S. dollars): - Exports, f.o.b.: 2001: 722.8; 2002: 708.5; 2003: 731.7; 2004: 743.2; 2005 (Est./Proj.): 806.6. - Imports, f.o.b.: 2001: 561.9; 2002: 596.2; 2003: 578.5; 2004: 707.9; 2005 (Est./Proj.): 703.2. - Current account balance, excluding official transfers: 2001: -145.8; 2002: -180.5; 2003: -148.1; 2004: -229.3; 2005 (Est./Proj.): -151.3. - Gross official reserves (in millions of U.S. dollars): 2001: 208.4; 2002: 170.0; 2003: 113.5; 2004: 92.3; 2005 (Est./Proj.): 107.7. - Reserves (in months of imports): 2001: 2.7; 2002: 2.3; 2003: 1.2; 2004: 0.8; 2005 (Est./Proj.): 1.3. - Debt service due (including to the Fund): 2001: 20.0; 2002: 18.6; 2003: 22.6; 2004: 23.6; 2005 (Est./Proj.): 20.5 (in percent of exports of goods and nonfactor services, before debt relief). - Fiscal and financial variables (in percent of GDP unless otherwise indicated): - Government revenue: 2001: 11.3; 2002: 12.0; 2003: 10.5; 2004: 10.4; 2005 (Est./Proj.): 12.0. - Domestic primary balance (definition: domestic revenue minus noninterest expenditure excluding externally-financed capital expenditure): series indicates variability with a reported figure for 2005 of -0.4 and 2.9 noted in the table (presented in source). - Overall fiscal balance (commitment basis, excluding grants): 2001: -7.5; 2002: -6.2; 2003: -8.9; 2004: -5.9; 2005 (Est./Proj.): -2.0. - Velocity (GDP/average M2): 2001: 9.4; 2002: 8.6; 2003: 7.7; 2004: 7.0; 2005 (Est./Proj.): 6.9. - Interest rate (Treasury bill rate, end-of-period): 2001: 13.4; 2002: 13.3; 2003: 14.1; 2004: 14.7; 2005 (Est./Proj.): not specified. *Content based on IMF Public Information Notice and SMP documentation as provided in the source PDF.* ### Introduction ### _cr0637 - Introduction ### Authorities' assessment and program stance - Guinean authorities express appreciation for staff's assessment of macroeconomic developments in 2005 and performance under the Staff Monitored Program (SMP). - Authorities remain strongly committed to successful implementation of the SMP to establish a track record for a new PRGF arrangement aimed at improving economic performance and fighting pervasive poverty. - All end-June quantitative targets under the SMP were met, with the exception of the central bank net foreign assets (NFA). - Structural reform targets were met except for the benchmark on refraining from introducing new multiple currency practices, due to lack of capacity; authorities commit to implementing recommendations of the August 2005 MFD mission. - Central bank will start publishing, instead of a weekly rate, a daily reference rate based on intra-day data to eliminate remaining multiple currency practices. ### Recent economic developments and SMP performance - Real GDP growth: - Will reach 3 percent in 2005 from 1.2 in 2003. - Growth driven by buoyant agricultural activity and stronger growth in the construction and mining sectors. - Inflation: - Expected to decrease from 43 percent in July 2005 to 29 percent by end-December 2005. - Remains above authorities’ target of less that 19 percent. - Acceleration in 2005 attributed to exchange rate adjustment and domestic petroleum price adjustments. - Exchange rate and petroleum price moves: - Guinean Franc depreciated by 38 percent since end-February. - Domestic petroleum prices increased by 55 percent in 2005. - International reserves: - Gross international reserves expected to increase from 0.8 to 1.3 months of imports. - Fiscal outcomes and administration: - Fiscal primary balance improved from a deficit to a surplus of over 2 percent of GDP by June. - Overall fiscal deficit, excluding grants, declined from almost 6 percent in 2004 to 0.2 percent of GDP by June 2005. - Under the SMP, fiscal revenue targets were achieved and expenditure commitments were kept under control as programmed. - Strengthening of tax and customs administration pursued; ad-hoc exemptions eliminated; WAEMU external tariff system put in place. - To remain current on external payments, authorities used advance tax payments from mining companies and deposited necessary funds in their SDR account to cover obligations due in 2005; same mechanism to be used for future Fund payments. - Monetary sector and banking system: - Monetary policy was less expansionary in 2005; depreciation slowed since mid July. - Only the target on central bank foreign assets was missed at end-June due to lack of external support and the need to be current on external payments. - Banking system remains sound and profitable; main soundness ratios are above prudential limits. - Central bank implementing changes in legal and supervisory framework following adoption of new banking law in last July. - National Assembly approved the microfinance law; law on money laundering and financing of terrorism under consideration. - Social and structural measures: - Nearly 1,500 civil servants and 2,000 military being retired at the end of 2005 as part of expenditure control. - Authorities completed second progress report on achieving the MDGs in last February and intend to adopt in 2006 an action plan to alleviate key obstacles to achieving the MDGs. - Action plans adopted for improving water and electricity companies’ operations. - Decision implemented to reduce to less than 20 percent the state’s share in the capital of Banque Internationale pour le Commerce et l’ Industrie de la Guinée (BICIGUI). - Anti-corruption and judicial improvement measures implemented; EITI working group established with World Bank assistance. ### Problems identified and remedial measures - Difficult circumstances evidenced by rapid growth in central bank credit and reduction of central bank NFA. - Remedial measures already adopted to maintain SMP on track: - Allowing interest rates on treasury bonds to rise to increase commercial bank financing of the government. - Purchasing foreign exchange in the market to meet central bank NFA targets. - Repaying arrears as called for under the program. - Enhancing policy coordination between fiscal and monetary authorities. ### Medium-term program and policies for 2006 — Fiscal policy - Authorities will maintain expenditures under control to further reduce government net indebtedness with the central bank. - Focus on increasing expenditures in priority sectors while decreasing non-priority expenditures. - Continue improving efficiency of tax and customs administration. - Undertake not to use future tax payments to meet external debt service obligations to avoid rigidity from advance tax payments by mining companies. - 2006 budget defined as a key instrument to consolidate SMP progress; authorities requested Fund technical assistance to improve public finance management. ### Medium-term program and policies for 2006 — Monetary and exchange rate policies - Objectives: achieve single digit inflation, increase international reserves, and improve financial intermediation. - Commitments and measures: - Encourage participation of economic agents in the formal foreign market. - Publish a daily reference exchange rate weighting the average transactions by the banks and exchange houses. - Set up an internal control structure within the central bank for its foreign exchange operations and an agreement detailing obligations of the central bank and commercial banks in the foreign exchange market. - Reflect new institutional changes in foreign exchange market regulations. - Improve coordination among customs administration, the banking system, exporters and the central bank to ensure repatriation of export proceeds in accordance with existing regulations. - Revise regulations pertaining to central bank advances to government to eliminate statutory advances in the future. - Reactivate the Treasury Committee to enhance central bank–Treasury communication; create a Liquidity Committee within the central bank. - Safeguards and transparency: - Under Fund safeguards assessment policy, an audit of the central bank covering its foreign assets and its full 2004 accounts was conducted by a reputable international firm. - Authorities determined to implement remedial recommendations contained in the audit report. ### Medium-term program and policies for 2006 — Structural reforms - Continue deepening structural reforms to lay groundwork for a PRGF-supported program. - In 2006 budget law, introduce an automatic price adjustment mechanism for petroleum products to address financial difficulties of oil companies and the government due to increases in international oil prices. - Fully implement action plan for water and electricity companies to enhance efficiency and reduce fraud. - Promote export diversification while maintaining a liberal trade regime; fully implement measures recommended by the Diagnostic Trade Integration Study (DTIS) to reduce supply constraints. ### Conclusion and outlook - Authorities determined to pursue sound policies and structural reforms to strengthen progress and achieve SMP objectives. - Request sustainable support from the international community to achieve macroeconomic stability and foster economic growth. - Authorities hopeful that SMP efforts will lead to a new PRGF-supported program early 2006, enabling the country to reach the completion point under the Enhanced HIPC Initiative and benefit from the Multilateral Debt Relief Initiative (MDRI). *Source: _cr0637 - Introduction* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr0637.pdf_