## _cr1263 ## Source details **Canonical URL:** [_cr1263](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr1263.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr1263.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr1263.pdf.json) --- ### Executive summary and 2011 outcomes - Political stabilization in 2011 supported macroeconomic improvement, governance progress, and large windfall mining revenue. - One-off mining payment: $700 million (about 15 percent of GDP) received in 2011. - Fiscal and monetary outcomes in 2011: - Basic balance deficit reduced from 13 percent of GDP in 2010 to an estimated 2.5 percent in 2011. - Shortfall in expected budget support: about 0.8 percent of GDP in 2011. - Gross official reserves increased to about 5 months of imports of goods and non-factor services by end-2011 (also reported as 4.5 months of imports in other sections). - Inflation: 19 percent (year-on-year) by December 2011; 18.5 percent year-on-year in January 2012. - Central bank financing of the budget avoided; excess liquidity reduced from large advances in 2009–10. ### Fiscal developments, 2011–12 (outturns and 2012 budget) - Revised 2011 budget allowed use of windfall revenue for urgent infrastructure, especially power; actual use lower than budgeted. - Key measures and outcomes: - Fuel price increase: 27 percent in mid-October 2011 (reduced retail-to-cost gap to about 10 percent). - Deficit on the basic balance estimated around 2.5 percent of GDP for 2011 (below revised budget target of 4.9 percent of GDP discussed with staff). - Investment expenditure higher than programmed; current spending adjustment stronger than envisaged. - 2012 budget main features: - Revenue (percent of GDP): 2011 = 17.2; 2012 Prog. = 17.7; 2013 = 18.8; 2014 = 19.5; 2014 Est. = 19.8. - Non-mining revenue (percent of GDP): 2011 = 13.0; 2012 Prog. = 13.2; 2013 = 15.1; 2014 = 15.6; 2014 Est. = 15.9. - Grants (percent of GDP): 2011 = 3.5; 2012 Prog. = 3.4; 2013 = 3.2; 2014 = 3.0; 2014 Est. = 3.1. - Current expenditures (percent of GDP): 2011 = 16.3; 2012 Prog. = 16.0; 2013 = 16.8; 2014 = 15.9; 2014 Est. = 15.5. - Investment expenditures (percent of GDP): 2011 = 6.7; 2012 Prog. = 8.1; 2013 = 11.9; 2014 = 10.0; 2014 Est. = 11.0. - Domestically-financed investment (percent of GDP): 2011 = 3.7; 2012 Prog. = 5.1; 2013 = 6.8; 2014 = 5.0; 2014 Est. = 5.9. - Basic balance (percent of GDP): 2010 = -12.6; 2011 = -2.0; 2012 Prog. = -2.5; 2013 = -3.8; 2014 = -0.7; 2014 Est. = -0.9. - Overall balance (percent of GDP): 2010 = -14.0; 2011 = -2.4; 2012 Prog. = -2.9; 2013 = -6.7; 2014 = -3.4; 2014 Est. = -3.7. - Planned 2012 subsidies and transfers: - Electricity operating subsidy: about 0.6 percent of GDP in 2012 for additional thermal generating capacity. - Agricultural subsidies budgeted to increase by more than 30 percent to almost 0.9 percent of GDP. ### Special Investment Fund (SIF) and one-off mining revenue - 2011 windfall: $700 million collected in May 2011 (Rio Tinto SIMFER payment). - 2011 budget committed $185.5 million; $145 million for urgent public investments (mostly electricity). - 2012 budget provides $214 million of these resources for public investment (primarily electricity). - $50 million may be committed to possible BCRG recapitalization later in 2012. - Authorities intend to reserve remaining $250 million to help finance medium-term public investment program (PIP). - SIF design and rules: - Created by 2012 budget law as a budgetary account in Guinea francs at the central bank; foreign exchange counterpart part of BCRG international reserves. - SIF to fund on-budget public investment projects subject to additional governance and transparency requirements. - Implementing texts (criteria, rules on deposits and commitments) to be adopted by end-March 2012 (structural benchmark). - SIF Steering Committee to include civil society and donors. - 2012 budget foresees additional one-off mining revenue of $250 million: first $125 million for general budget financing; next $125 million to SIF. - If one-off revenues exceed $250 million in 2012, at least 75 percent of any excess transferred to SIF. ### Monetary policy, exchange rate, and banking liquidity - Monetary stance and tools: - BCRG raised policy rate and reserve requirement in March and October 2011 (reserve requirement increased to 22 percent on October 19, 2011). - Objective: reduce inflation via orderly unwinding of excess liquidity and decline in reserve money during 2012. - BCRG stands ready to sell foreign exchange to offset liquidity from windfall revenue drawdowns. - Plans to develop a broader range of instruments (TRM, Treasury bills, bonds) and publish monthly balance sheet and monetary analysis. - Authorities plan to strengthen BCRG capital and adopt IFRS; possible recapitalization of BCRG by $50 million in second half of 2012 from windfall revenue. - Exchange rate developments: - Market rate depreciated almost 20 percent in first two months of 2011; then appreciated after regulatory changes and weekly FX auctions; gap between market and official rates narrowed to about 2–3 percent by year-end. - BCRG conducts weekly foreign exchange auctions (~$5 million) since March 2011; auction rate = weighted average of winning bids; banks to trade within 3 percent band around auction rate. - Exchange bureaus conduct bulk of FX transactions (cash-only) and set their own rates; important FX suppliers include informal gold and diamond exporters. - Banking liquidity and credit: - Currency in circulation converted into bank deposits as political situation stabilized. - Credit to the private sector almost doubled from very low levels in 2009–10; private sector credit stagnated around 5 percent of GDP for much of previous decade, accelerated to around 70 percent year-on-year in H2 2011 (trade credit demand). - Broad money growth estimated much below increase in nominal GDP, reducing liquidity overhang. - Liquidity in banking system remained high despite policy tightening. ### Financial sector soundness and regulatory actions - Bank-level indicators (end-September 2011): - Several banks failing to meet minimum capital requirements; at end-September, 5 banks did not fulfil equity capital norm of GNF 50 million. - Selected bank equity-to-risk ratios ranged from 9.6 to 241.7 across listed banks. - High risk concentrations notably to oil importers. - Supervisory and development actions: - Staff supported rebuilding banking supervisory capacity with technical assistance from Fund and Banque de France; BCRG to develop comprehensive financial sector development plan during 2012. - AML/CFT regime to be assessed by GIABA in June 2012. - BCRG increased supervision staffing by hiring 18 inspectors at end-2011; external audits and publication of BCRG audited financial statements required by end-2012 (structural benchmark). ### External sector, arrears, and program financing (ECF request) - Arrears and creditor relations: - All arrears with multilateral institutions cleared in 2011; arrears to bilateral creditors deferred pending Paris Club rescheduling and HIPC Initiative. - Some 90 percent of external debt (including arrears) held by multilateral and Paris Club creditors who signaled intention to participate under enhanced HIPC Initiative. - Paris Club creditors provided financing assurances on February 17, 2012; negotiations expected in April 2012. - ECF arrangement and Fund support: - Authorities requested a three-year (2012–15) ECF arrangement: SDR 128.52 million (120 percent of quota). - Proposed ECF disbursements phased in equal semiannual tranches of SDR 17.1 million (17.1 = 18.36 percent of quota entries shown) — total 120.0 — 128.52. - IMF approved ECF of SDR 128.52 million; immediate disbursement SDR 18.36 million; interim HIPC assistance SDR 1.2852 million approved. - Program performance monitored via quantitative indicators, performance criteria, and structural benchmarks (Tables summarized in the source). - Financing projections and gaps (summary table figures preserved): - Gross financing requirements row: 5052,0572,3632,4141,932 (series as presented). - Total available financing: 5051,9972,3062,3561,903 (series as presented). - Foreign direct investment, net: 1501,2251,8671,8861,450 (series). - Debt relief and debt rescheduling: 81485149161107 (series). - Financing gap series: 060585829 (columns as presented); residual financing: 060585829 including ECF disbursement entries 58585829. - 2012 financing specifics: - Deficit on the basic balance of 3.8 percent of GDP in 2012 expected to be financed mainly by domestic resources and debt relief. - Total domestic financing 5.7 percent of GDP: 3.8 percent reflects use of some 2011 windfall revenue; $250 million to be deposited in the SIF. - Authorities expect additional exceptional mining sector revenue of at least $250 million (4.5 percent of GDP), half to finance the deficit and half to SIF in absence of external budget support. - External debt service due in 2012 before new debt relief projected at 4.1 percent of GDP. - Including clearance of outstanding arrears, overall financing gap would be 8.8 percent of GDP, expected to be filled by new debt relief (including HIPC and MDRI). ### Debt sustainability, DSA conclusions, and scenarios - Debt distress status and relief effects: - Guinea has been in debt distress; anticipated HIPC completion point and MDRI would reduce debt stock to sustainable levels. - Under baseline (no HIPC completion), Guinea at high risk of debt distress; key end-2011 indicators above thresholds: PV external debt-to-GDP = 41.3 percent (threshold 30 percent); PV debt-to-exports = 137 percent (threshold 100 percent); PV debt-to-revenue = 234 percent (threshold 200 percent). - With HIPC/MDRI relief implemented (assumed fourth quarter 2012), PV external debt-to-GDP estimated to fall from 41.3 percent to 20.3 percent at end-2012; with additional bilateral relief projected to 13.4 percent. - Alternative scenarios: - Scenario 1 (HIPC/MDRI relief): debt ratios fall below policy thresholds; risk of debt distress shifts to moderate. - Scenario 2 (HIPC/MDRI plus $2.5 billion additional borrowing for SIMFER during 2013–15): PV external debt-to-GDP breaches thresholds in 2013–17; debt-service and liquidity indicators deteriorate sharply. - Policy implication: avoid non-concessional borrowing for large projects; consult Fund/World Bank before committing to large debt; prioritize debt management strengthening. ### Medium-term outlook and mining sector implications - Mining investment scale and timing: - Approved projects in bauxite, alumina, and iron ore would entail some $40 billion in capital spending; government considering proposals totaling further $9 billion. - SIMFER (Mt. Simandou northern concession) latest cost estimate: $13 billion (1/3 mining; 2/3 railroad and port transportation) — equals three times 2011 GDP. - SIMFER production expected to begin in 2015, initially raising real GDP by 15 percent; peak production by 2020. - Firms increased bauxite and alumina production by 6 percent in 2011 (to October); CBG undertaking a $300-million extension adding 18 percent capacity by 2018. - Exploration permits: nearly 100,000 km2 for additional bauxite; over 50,000 km2 for iron ore. - Macroeconomic baseline and assumptions: - Real GDP growth projected in range 4–5 percent per year during 2012–14; jump to about 18–19 percent during 2015–17 as megaprojects come on stream (series shows 19.8, 19.9 for years of ramp-up). - Inflation targeted to drop to single digits; program aims for 12 percent year-on-year by end-2012 and single digits thereafter. - Gross official reserves to be maintained at least equivalent to 2.5 months of imports (excluding imports for large mining projects). - FDI could be as high as 40 percent of GDP or more per year during 2012–14. ### Risks, policy priorities, and mitigation - Main risks: - Renewed political instability, especially before legislative elections expected in 2012. - High vulnerability to international mineral price developments: mineral exports > 90 percent of total exports and about 20 percent of government revenue. - Limited absorptive and implementation capacity could aggravate bottlenecks if large one-off revenue is used imprudently. - Short-term stabilization priorities: - Reduce inflation via coordinated fiscal, monetary, and structural reforms. - Fiscal policy to avoid new net domestic bank credit (other than drawdown of 2011 windfall deposits). - BCRG to offset liquidity effects from windfall deposit drawdowns by FX sales. - Staff recommended widening trading band around auction rate for banks; authorities prefer cautious approach but may widen band later with Fund technical assistance. - Medium-term fiscal priorities: - Contain budget deficit to facilitate inflation reduction and maintain debt sustainability. - Improve public financial management and quality of spending; increase allocations to priority sectors. - Raise non-mining revenue-to-GDP ratio to regional average via tax reform and improved administration. - Contain wage bill, limit subsidies by improving public utility efficiency, reform agricultural support, and reduce military expenditure through security sector reform. - Use of windfall revenue: - Staff supports gradual use over the medium term; recommends developing comprehensive medium-term public investment program during 2012 in context of new PRSP. - Staff supports SIF design and offers assistance to develop regulatory framework to ensure transparency and governance; framework should cover all substantial windfall revenue with clear rules. ### Structural reform agenda and sectoral priorities - Structural benchmarks and deadlines (selected): - Adopt implementing texts and general terms and conditions for SIF — end-March 2012. - Adopt comprehensive plan for electricity sector reform — end-March 2012. - Adopt and publish implementing decrees and a standard mining contract — end-June 2012. - Develop plan to implement tax reforms — end-June 2012. - Adopt medium-term public investment program — end-September 2012. - Certify, by independent external auditor, statistical data on program performance at test dates and BCRG board approval of investment policy/guidelines — end-December 2012. - Revise investment code and terminate expired benefits — end-August 2012. - Sectoral focus: - Mining: implement new mining code, increase transparency, finalize standard contract, audit existing concessions, rehabilitate mining cadastre, adhere to EITI and Kimberley Process. - Electricity: increase generating capacity, rehabilitate EDG, reduce technical/nontechnical losses (>43 percent losses noted), adopt tariff adjustments to limit subsidies; Kaléta dam and micro-dams under way. - Agriculture: implement PNIA/PNIASA aiming for food security by 2014; gradually reduce input subsidies and improve producer loan collection. - Public enterprise reforms: adopt withdrawal strategy by end-December 2012; list of enterprises to privatize by end-June 2012. - Business climate: improve Doing Business ranking by at least 10 places in three years; operationalize APIP and one-stop window. ### Program conditionality, performance criteria, and monitoring - Quantitative performance criteria and indicative targets include: - Basic fiscal balance (floor) cumulative change from end-December 2011 with specified end-Mar/Jun/Sep/Dec 2012 targets (series preserved in source). - Net domestic assets of BCRG (ceiling) and net international reserves (floor) with specified targets (US$ millions series preserved). - Continuous performance criteria: no new nonconcessional medium-/long-term external debt except as defined; no stock of outstanding short-term external debt; no new external arrears. - Indicative targets: expenditure in priority sectors (floor) series for end-quarters in 2012 (values shown in source). - Reporting and data provision: - Detailed monthly, quarterly, and annual reporting obligations specified (Table 1): central bank and commercial bank balance sheets monthly; prudential indicators quarterly; use of exceptional mining revenues quarterly; CPI monthly; national accounts annually; external debt monthly, etc. - BCRG 2011 external audit to be completed by end-June 2012 and published by end-August 2012. ### Staff appraisal and recommendations - Achievements: strong progress addressing 2009–10 imbalances; program performance under SMP very satisfactory with quantitative and structural benchmarks met. - Short-term priorities: reduce inflation via coordinated fiscal and monetary policies; limit net domestic bank financing to drawdown of windfall deposits; central bank ready to counter excess liquidity via FX sales; enhance transparency of exchange rate and eliminate multiple currency practice. - Medium-term: adopt comprehensive financial sector development plan; prioritize structural reforms with quick returns given limited implementation capacity; strengthen debt management; avoid non-concessional borrowing for large projects. - Fund support: staff supports ECF in amount of 120 percent of quota and further interim HIPC assistance; ECF will help maintain adequate reserves while 2011 windfall revenue used for investment. *Executive Summary and IMF staff report content provided in the source PDF for content unit _cr1263.* ### Executive Summary ...................................................................................................... ### Executive Summary ### Overview and 2011 outcomes - Guinea’s outlook improved substantially during 2011 as the political situation stabilized, severe macroeconomic imbalances were reduced, and improved governance resulted in large windfall revenue from the mining sector and new investment in mining projects. - A one-off payment of $700 million, some 15 percent of GDP, was received in 2011. - Following sizeable depreciation early in the year, the official exchange rates stabilized and the gap between the official and market exchange rate narrowed. - Central bank financing of the budget was avoided; excess liquidity stemming from large central bank advances in 2009–10 was reduced. - Gross official reserves increased to the equivalent of about 5 months of imports of goods and non-factor services by end-2011. - Inflation was 19 percent (year-on-year) by December 2011 and was slightly lower than at the same time in 2010. ### Macroeconomic adjustment and performance under the 2011 SMP - The fiscal deficit on the budget’s basic balance was reduced from 13 percent of GDP in 2010 to an estimated 2.5 percent in 2011. - Performance under the 2011 staff-monitored program (SMP) was good: quantitative targets for June and September were met with wide margins. Provisional data indicate performance was close to program targets for end-December despite a shortfall in budget support and higher public investment spending under a revised budget prepared in consultation with staff. - There was a shortfall in expected budget support of about 0.8 percent of GDP in 2011. - For January–September 2011 the budget’s basic balance was in surplus by 0.5 percent of GDP, compared to a program target of a deficit of 1.3 percent of GDP and a deficit of 8 percent of GDP during the same period in 2010. - The adjustment in current spending was larger than envisaged; several tax measures were taken early in 2011 but overall revenue was lower than projected because of a delay in adjusting domestic fuel prices from July to October. - Structural reform progress included adoption of a new mining code. ### Medium-term outlook and key challenges - Key medium-term challenges are to reduce inflation while preparing the economy for an expected substantial increase in mining activity. - Planned new investment in the mining sector of 40 percent or more of GDP per year during 2012–14 should result in much higher levels of output and government revenue by the middle of the decade. - The legacy of weak governance and intermittent unrest leaves Guinea among Africa’s poorest countries with weak institutions and limited technical capacity; completing the transition to full constitutional rule and security sector reform remain priorities. ### Medium-term policy framework - Fiscal policies aim at avoiding the use of domestic bank credit while ensuring (post-HIPC) debt sustainability. - Key fiscal objectives are to raise the revenue effort, redirect expenditure to priority sectors, and use windfall revenue to increase public investment—especially in electricity and roads. - The government’s medium-term structural reform agenda focuses on developing natural resources (mining, hydroelectricity, and agriculture), improving government services including utilities, and improving the business climate. ### Program support and expectations - Staff supports the authorities’ request that the Fund support their program for January 2012–December 2014 under the Extended Credit Facility (ECF) for an amount of SDR 128.52 million (120 percent of quota). - Good performance under the program may allow Guinea to reach the completion point under the HIPC Initiative later in the second half of 2012. *Executive Summary, _cr1263 — IMF staff report content provided in the source PDF.* ### 6. Fiscal adjustment continued during the last quarter notwithstanding a pickup in ### _cr1263 - 6. Fiscal adjustment continued during the last quarter notwithstanding a pickup in ### Fiscal developments and short-term outcomes - Interim parliament adopted a revised 2011 budget in October allowing use of some windfall revenue to address urgent infrastructure needs (especially power shortages). - Actual use of windfall revenue was lower than budgeted and current expenditure remained constrained during the last quarter. - Revenue drivers and fiscal outcomes: - 27 percent increase in fuel prices in mid-October (reducing the gap between retail prices and calculated cost to about 10 percent). - Stepped-up revenue collection efforts contributed to revenue gains. - Deficit on the basic balance is estimated at around 2.5 percent of GDP for 2011. - This outturn is somewhat higher than envisaged under the SMP but considerably lower than the revised budget target of 4.9 percent of GDP discussed with staff. - Investment expenditure was higher than programmed under the SMP; adjustment in current spending was stronger than initially envisaged. ### Monetary conditions and banking liquidity - Good fiscal performance supported a tight monetary policy stance. - The central bank raised the central bank rate and the reserve requirement in March and October. - Liquidity in the banking system remained high despite these measures. - Currency in circulation has gradually been converted into bank deposits as the political situation stabilized. - Credit to the private sector almost doubled (from a very low level in 2009–10), but this was more than offset by a decline in the banking system’s net credit to the government. - Broad money growth is estimated to have remained much below the increase in nominal GDP, reducing the liquidity overhang. ### Exchange rate developments and foreign exchange system - After a rapid depreciation early in 2011, the exchange rate stabilized: - The market exchange rate depreciated by almost 20 percent in the first two months of 2011. - Following regulatory changes in March and the start of weekly foreign exchange auctions, the market rate appreciated and the official rate depreciated. - The gap between market and official rates narrowed to about 2–3 percent by year-end. - The real effective exchange rate is estimated to have remained broadly constant. - The foreign exchange system components and practices: - The BCRG conducts government exchange transactions using the daily official foreign exchange rate (reference rate = weighted average of previous day’s commercial bank rates). - Since March 2011, the BCRG conducts weekly foreign exchange auctions of around $5 million, open to all commercial banks; the auction rate is the weighted average rate of winning bids. - Commercial banks conduct FX transactions for clients; their buying and selling rates are to remain within a band of 3 percent around the auction rate. - Exchange bureaus conduct the bulk (by amount) of FX transactions in Guinea but are limited to cash transactions and set their own buying and selling rates. - Important suppliers of foreign exchange include informal gold and diamond exporters. ### External relations, debt, and structural reform progress - All arrears with multilateral institutions were cleared in 2011, allowing resumption of budget support and project assistance. - Guinea deferred clearance of arrears and payment of current debt service to bilateral creditors until addressed through Paris Club rescheduling and the HIPC Initiative. - Structural reform progress in 2011: - Adoption of a new mining code (September 2011) compatible with international standards; expected to increase transparency and future revenue share. - Preparations for electricity sector reforms advanced. - Major effort to strengthen public financial management begun, including legislation to establish a single treasury account. - Progress in cleaning up the civil service database; reform efforts started in the judiciary and the security sector. ### Medium-term macroeconomic outlook and framework - Outlook driven by large investments in the mining sector (FDI could be as high as 40 percent of GDP or more per year during 2012–14): - Large FDI will raise output, imports, and the external current account deficit, and should boost employment via infrastructure construction (railroads and ports). - By 2015, investment is set to taper off and production to start, producing a sharp turnaround in the current account and higher government revenue; mining-related employment will stabilize at a lower level. - Baseline scenario assumptions: - Real GDP growth in the range of 4–5 percent per year during 2012–14. - A drop in inflation to the single digits. - Maintenance of gross official reserves at a level at least equivalent to 2.5 months of imports (excluding imports for large mining projects). ### Mining outlook, major investments, and implications - Approved projects in bauxite, alumina, and iron ore would entail some $40 billion in capital spending; government is considering project proposals totaling a further $9 billion. - Recent mining activity and projects: - Firms increased bauxite and alumina production by 6 percent in 2011 (to October). - Compagnie de Bauxite de Guinée (CBG) is undertaking a $300-million extension, adding 18 percent to its capacity by 2018. - Other firms hold permits to explore nearly 100,000 km2 for additional bauxite. - The first major iron ore project (northern concession of Mt. Simandou) is under construction. - Latest cost estimates: $13 billion (1/3 for mining and 2/3 for railroad and port transportation). - This amount equals three times 2011 GDP and entails a surge in FDI-financed imports in the near term. - Production is expected to begin in 2015, raising real GDP by 15 percent initially; peak production set to be reached by 2020. - Other firms hold permits to explore over 50,000 km2 for additional iron ore. - Risks to mining export value and fiscal revenues depend on prevailing prices; bauxite and alumina prices have been stable (long-term contracts), iron ore prices are volatile. ### Risks, policy priorities, and mitigation - Downside and upside risks to the outlook: - Main risk: renewed political instability, especially before legislative elections expected in 2012; social unrest would affect short- and long-term growth and reform implementation. - Vulnerability to international market developments: mineral exports > 90 percent of total exports and about 20 percent of government revenue; two-thirds of non-mining imports are fuel and food. - Risk of decline in mineral prices is high; existing long-term contracts reduce immediate impact. - Improved fiscal and reserve positions strengthen ability to deal with shocks; use of one-off revenue can allow gradual adjustment but is unsustainable as a permanent financing source. - Additional large one-off revenue from mining contract reviews would strengthen the external position but could aggravate bottlenecks due to limited implementation and absorptive capacity; a special investment fund is intended to mitigate this risk. - Short-term stabilization priorities: - Reduce inflation via coordinated fiscal, monetary, and structural reforms. - Fiscal policy aim: avoid taking up new credit from the banking system; drawing down 2011 windfall savings may add domestic liquidity. - BCRG stands ready to offset liquidity effects by selling foreign exchange to the market. - Staff recommended widening the band around the auction rate for banks’ trading; authorities preferred a cautious approach but may widen the trading band later with Fund technical assistance. - Medium-term fiscal policy aims: - Contain the budget deficit to facilitate inflation reduction and maintain debt sustainability. - Improve public financial management and the quality of spending while increasing allocations to priority sectors. - Increase (non-mining) revenue-to-GDP ratio to the regional average by tax reform and improved administration. - Contain the wage bill, limit subsidies by improving public utility efficiency, reform agricultural support, and reduce military expenditure through security sector reform. - Outlays to social sectors are expected to benefit from debt relief. - Public financial management: - Implement a comprehensive reform and capacity-building strategy in coordination with external partners, including the Fund and AFRITAC West. - Structural reform focus to manage large mining inflows and foster inclusive growth: - Remove bottlenecks to investment and growth: poor governance, weak judiciary, severe power shortages, inadequate road infrastructure. - Increase spending on education and health and strengthen government services, including utilities. - Implement a comprehensive action plan to improve the business climate and governance. - Sectoral policies: - Mining: raise contribution to government revenue, enhance transparency, ensure level playing field for investors. - Electricity: improve supply, strengthen management and financial viability of EDG, develop hydroelectric potential. - Agriculture: ensure food security and improve competitiveness; agriculture provides employment and income to the bulk of the population. * _cr1263 - 6. Fiscal adjustment continued during the last quarter notwithstanding a pickup in* ### 21. The government also believes that Guinea’s financial sector needs to play a ### _cr1263 - 21. The government also believes that Guinea’s financial sector needs to play a ### Financial sector role and banking system soundness - Credit to the private sector stagnated at around 5 percent of GDP for much of the last decade. - During the second half of 2011, private sector credit growth accelerated sharply to around 70 percent year-on-year, largely due to an increase in demand for trade credit. - Level of nonperforming loans remains modest, but preliminary financial soundness indicators prepared by the BCRG (Table 6) show: - Several banks failing to meet minimum capital requirements. - High levels of risk concentration, particularly to oil importers. - Staff supported efforts to quickly rebuild banking supervisory capacity and strengthen the regulatory framework (MEFP ¶ 41), with technical assistance from the Fund and Banque de France. - The BCRG is to develop a comprehensive financial sector development plan during 2012. - In the context of weak governance and institutions, and significant production of precious minerals: - Effective implementation of the AML/CFT regime would contribute to improving the business climate and to enhancing transparency and revenue collection in the gold and diamond sectors. - Guinea’s AML/CFT regime will be assessed by GIABA, a FATF-style regional body, in June 2012. ### Debt restructuring and debt sustainability - Authorities attach great importance to attaining the HIPC completion point as soon as possible. - Updated debt sustainability analysis for low income countries (LIC DSA) shows that, while Guinea has been in debt distress, the anticipated debt relief at the completion point would reduce the debt stock to a sustainable level. - Following approval of the ECF arrangement, authorities intend to seek a rescheduling from Paris Club creditors and other external official bilateral and commercial creditors, and have initiated discussions. - Progress on HIPC completion point triggers (MEFP ¶15): - PRSP 2007–10, as extended for 2011–12, implemented since early 2011; full-year report on its implementation expected by end-March 2012. - Two remaining measures—audit of large public procurement contracts and update of the poverty database—being completed with World Bank and donor support. - Completion point could be reached later in the second half of 2012 following at least six months of satisfactory performance under the ECF arrangement. - Authorities intend to have prepared a new PRSP covering 2013–15 by that time. - Authorities have not decided on government participation in mining-related projects that could involve very large financing needs; investigating public-private partnerships. - Authorities agreed with staff on importance of maintaining medium-term debt sustainability and ensuring terms on any new debt should be concessional; committed to discussing possible large borrowings, including for hydroelectricity projects, with Fund and World Bank staffs to ensure post-HIPC debt sustainability indicators are met (MEFP ¶ 56). ### Fiscal policy stance and projections - Government’s medium-term program (January 2012–December 2014) aims to: - Achieve a rapid decline in inflation to 12 percent year-on-year by end-2012 and a gradual decline into single digits thereafter. - Maintain gross official reserves at least equivalent to 2.5 months of imports by end-2014. - Fiscal policy guided by need to maintain expenditure within constraints of net domestic financing objective and limited external financing while ensuring (post-HIPC) debt sustainability (MEFP ¶ 23–24, Text Table 2). - Revenue: - Expected benefit from implementation of a plan for reforming tax policy and tax administration (structural benchmark for end-June 2012), to be adopted by government by mid-2012 (MEFP ¶ 25–26). - Expenditure policies aim at: - Containing the wage bill by reforming the civil service, supported by the World Bank (MEFP ¶ 29–30). - Reducing subsidies (MEFP ¶ 31–32) while using windfall revenue to increase infrastructure spending (MEFP ¶ 33). - Basic balance deficit projected to increase in 2012 due to sharp rise in domestically-financed investment and higher outlays on subsidies; staff considers temporary increase warranted. - Basic balance deficit projected to fall sharply in 2013 (by 3 points of GDP) as exceptional outlays end. - Overall deficit (including grants) projected to decline sharply to 3.4 percent GDP in 2013 and remain about that level over the medium term. - A small basic primary surplus is projected beginning in 2013 to generate resources to service interest payments. - Net domestic bank financing will be limited to drawdown of deposits from mining sector windfall revenue. - Attainment of the HIPC completion point is estimated to result in debt relief of about 2.6–2.7 percent of GDP in 2013–14. ### 2012 budget main features and numerical projections - Budget for 2012 approved in line with the program (prior action) by the interim parliament in December. - Key features: - Increase in revenue in percent of GDP, helped by gradual closing of the gap between retail fuel prices and costs and re-instatement of the monthly automatic adjustment mechanism for fuel prices by mid-2012 (structural benchmark for July 1, 2012). - Administrative reforms planned for 2012 (MEFP ¶ 27) expected to boost revenue in following years. - Wage bill to decline slightly as share of GDP despite a general wage increase of about 10 percent in January 2012 and some planned new hiring; offsets include retirement of almost 4,000 military in December 2011 and removal of some 2,000 ghost workers. - Increase in outlays on subsidies and transfers mainly reflects additional subsidies to the electricity company and the agricultural sector (MEFP ¶ 31–32). - Government plans to provide a subsidy of about 0.6 percent of GDP in 2012 to finance operating costs of additional thermal generating capacity. - Subsidies to the agricultural sector budgeted to increase by more than 30 percent, to almost 0.9 percent of GDP. - Reforms with external partners could lead to substantially lower net subsidies later in 2012 (MEFP ¶ 32, 51–52). - Sharp increase in capital expenditure, financed by the 2011 windfall revenue and renewed donor support. - Almost two-thirds of domestically-financed investment in 2012 (equivalent to $214 million) is to be financed from the 2011 windfall revenue; bulk in the electricity sector. - Project financing by donors, notably the European Union (EU) and the World Bank, expected to rise sharply. - Text Table 2: Guinea: Fiscal Developments and Projections, 2010–14 (Percent of GDP) — key figures as presented in source: - Revenue: 2010 = 15.3; 2011 = 17.2; 2012 Prog. = 17.7; 2013 = 18.8; 2014 = 19.5; 2014 Est. = 19.8 - Non-mining revenue: 2010 = 11.5; 2011 = 13.0; 2012 Prog. = 13.2; 2013 = 15.1; 2014 = 15.6; 2014 Est. = 15.9 - Grants: 2010 = 0.4; 2011 = 3.5; 2012 Prog. = 3.4; 2013 = 3.2; 2014 = 3.0; 2014 Est. = 3.1 - Current expenditures: 2010 = 20.5; 2011 = 16.3; 2012 Prog. = 16.0; 2013 = 16.8; 2014 = 15.9; 2014 Est. = 15.5 - Wages and salaries: 2010 = 5.7; 2011 = 6.2; 2012 Prog. = 5.4; 2013 = 5.3; 2014 = 5.3; 2014 Est. = 5.1 - Goods and services: 2010 = 9.4; 2011 = 4.9; 2012 Prog. = 5.6; 2013 = 5.5; 2014 = 5.4; 2014 Est. = 5.3 - Subsidies and transfers: 2010 = 3.4; 2011 = 3.5; 2012 Prog. = 3.3; 2013 = 4.1; 2014 = 3.6; 2014 Est. = 3.6 - Interest on domestic debt: 2010 = 1.3; 2011 = 0.9; 2012 Prog. = 0.9; 2013 = 0.9; 2014 = 0.9; 2014 Est. = 0.9 - Interest on external debt: 2010 = 0.7; 2011 = 0.8; 2012 Prog. = 0.9; 2013 = 1.0; 2014 = 0.8; 2014 Est. = 0.7 - Investment expenditures: 2010 = 9.1; 2011 = 6.7; 2012 Prog. = 8.1; 2013 = 11.9; 2014 = 10.0; 2014 Est. = 11.0 - Domestically-financed: 2010 = 8.1; 2011 = 3.7; 2012 Prog. = 5.1; 2013 = 6.8; 2014 = 5.0; 2014 Est. = 5.9 - Externally-financed: 2010 = 1.0; 2011 = 3.0; 2012 Prog. = 3.0; 2013 = 5.1; 2014 = 5.0; 2014 Est. = 5.1 - Base balance: 2010 = -12.6; 2011 = -2.0; 2012 Prog. = -2.5; 2013 = -3.8; 2014 = -0.7; 2014 Est. = -0.9 - Overall balance: 2010 = -14.0; 2011 = -2.4; 2012 Prog. = -2.9; 2013 = -6.7; 2014 = -3.4; 2014 Est. = -3.7 - Domestic financing: 2010 = 14.0; 2011 = 3.4; 2012 Prog. = 4.5; 2013 = 5.7; 2014 = 1.6; 2014 Est. = 1.5 - External financing: 2010 = 0.2; 2011 = -0.9; 2012 Prog. = -1.5; 2013 = 0.9; 2014 = 1.8; 2014 Est. = 2.1 ### 2012 financing and Special Investment Fund (SIF) - Deficit on the basic balance of 3.8 percent of GDP in 2012 expected to be financed mainly by domestic resources and debt relief (MEFP ¶ 34): - Total domestic financing amounts to 5.7 percent of GDP. - Of this, 3.8 percent of GDP reflects the use of some of the 2011 windfall revenue. - A further amount—$250 million—of this revenue to be deposited in the Special Investment Fund (SIF—Box 4). - Authorities expect additional exceptional mining sector revenue of at least $250 million (4.5 percent of GDP), half of which will, in absence of external budget support, be used to finance the deficit, and the other half will be deposited in the SIF. - The 2012 budget does not anticipate new external budget support, which amounted to 2.3 percent of GDP in 2011. - External debt service due in 2012 before new debt relief is projected at 4.1 percent of GDP. - Including clearance of outstanding arrears, overall financing gap would be 8.8 percent of GDP, expected to be filled by new debt relief (including HIPC and MDRI). - Box 4: Public Investment and the Special Investment Fund (SIF) — key points: - Government collected an unexpected windfall of $700 million of one-off mining revenue in May 2011. - Of this, government committed $185.5 million in the 2011 budget, $145 million of which for urgent public investments, mostly in the electricity sector. - The 2012 budget provides $214 million of these resources for public investment, primarily in electricity. - $50 million may be committed to a possible recapitalization of the BCRG later in 2012. - Authorities intend to reserve the remaining $250 million to help finance their medium-term public investment program (PIP) to be finalized by end-September 2012 (structural benchmark under the ECF-supported program). - SIF details: - Created by 2012 budget law to strengthen control over the balance of the 2011 one-off revenue and possible future one-off revenue. - SIF will be a budgetary account in Guinea francs at the central bank; the foreign exchange counterpart will be part of BCRG’s international reserves. - SIF will fund on-budget public investment projects subject to additional governance and transparency requirements beyond general public financial management rules. - Authorities, in consultation with Fund and World Bank staff, plan to adopt implementing texts setting criteria for SIF operations (structural benchmark for end-March 2012), including rules on deposits and commitments after 2012. - Government will establish a SIF Steering Committee with representatives of civil society and donors. - Once implementing texts are adopted, remaining $250 million of the 2011 one-off revenue will be transferred to the SIF. - 2012 budget foresees additional one-off mining revenue of $250 million: - First $125 million available for general budget financing and next $125 million transferred to the SIF. - If one-off revenues exceed the budget forecast, at least 75 percent of any amount beyond $250 million would be transferred to the SIF. ### Public financial management and governance - Government intends to align legislative and legal framework with international and regional practices (MEFP ¶ 35–36). - Measures planned for 2012 (drawing on recent technical assistance) include: - Preparation of a new framework budget law. - New public procurement code. - New general government accounting regulations and chart of accounts. ### Monetary and exchange rate policy - Main objective of the BCRG’s monetary policy is to reduce inflation through an orderly unwinding of the economy’s remaining excess liquidity (MEFP ¶ 37). - Present policy stance judged adequate given developments in inflation and stabilization of the market exchange rate by end-2011, but: - Broad money remains at historically high levels in relation to GDP. - BCRG stands ready to further tighten policy to achieve the inflation target, guided by objective to achieve a decline in reserve money during 2012. - In addition to using foreign exchange sales to absorb excess liquidity, BCRG intends to further develop its range of instruments (MEFP ¶ 38). - Authorities plan to strengthen BCRG’s capital position in conjunction with accounting improvements and adoption of the International Financial Reporting Standards (MEFP ¶ 43). - Improved international reserves increase scope for their use to support monetary policy (MEFP ¶39–40). - In determining size of weekly foreign exchange auctions, BCRG will consider need to offset effect on domestic liquidity of drawdown of government deposits stemming from 2011 windfall revenue, within constraints of international reserve target and external competitiveness. ### Structural reforms and sectoral priorities - Reform agenda, in line with extended PRSP, includes: - Mining sector (MEFP ¶ 45–47): - Adoption and publication of implementing orders for the new mining code and a standard binding contract to be completed by June 2012 (structural benchmark). - Consultation with Fund staff before adoption of any amendments to the new mining code that would affect tax revenue (structural benchmark). - Authorities will review and may renegotiate existing mining concessions. - Guinea pursuing reintegration into Extractive Industries Transparency Initiative process. - Electricity sector (MEFP ¶ 48–49): - First priority to reduce severe shortages by adding generating capacity and strengthening EDG. - Following donor round-table (prior action), government expects to adopt a comprehensive sector plan by end-March 2012 (structural benchmark). - Plan will focus on developing hydroelectric potential, including reforming institutional and legal framework and upgrading law on public-private partnerships to international best practices. - Agricultural sector: - Reform based on National Plan for Agricultural Investment and Food Security (PNIASA) (MEFP ¶ 51–52). - Plan expected to be approved early in 2012; aims to ensure food security by 2014 and become a food exporter thereafter. - Authorities intend to gradually reduce input subsidies by harmonizing assistance methods with World Bank and IFAD, starting with 2012 agricultural season (structural benchmark for end-March 2012). - Other reforms to improve general business environment (MEFP ¶ 53): - Aim to raise Guinea’s Doing Business ranking (currently 179 out of 182). - Policies to streamline investment approval process, promote private sector investment, reinforce judiciary independence and training, and strengthen National Governance and Anti-Corruption Agency by adopting the anti-corruption law. ### Program financing, arrears, and risks - Guinea has arrears to official bilateral and commercial creditors, which it intends to regularize; program assumes treatment of all arrears (MEFP ¶10, 55). - Guinea cleared external debt service arrears with multilateral creditors during first three quarters of 2011. - Discussions with Paris Club creditors are underway to negotiate rescheduling of external debt service arrears and maturities by end of April; staff expects financing assurances for the program to be in place by mid-February. - Authorities to approach other official bilateral creditors for rescheduling on terms comparable to Paris Club creditors in context of HIPC initiative. - Government committed to good faith, collaborative discussions with external commercial creditors aiming for debt relief through open and transparent dialogue based on inter-creditor equity. - Staff considers government’s strategy consistent with the “good faith” criterion of the Fund’s lending into arrears policy. *Source: IMF staff report content provided in content unit _cr1263 - 21. The government also believes that Guinea’s financial sector needs to play a* ### 36. External financing difficulties reflected, in part, the need to clear arrears with ### _cr1263 - 36. External financing difficulties reflected, in part, the need to clear arrears with ### External financing, arrears, and reserves - External financing difficulties reflected, in part, the need to clear arrears with multilateral creditors and to rebuild official reserves from the very low level at end-2010. - International reserves position improved substantially in 2011 because of the windfall revenue, but these resources will be depleted over time as they are used to finance public investment in support of poverty-reduction policies. - Notwithstanding a resumption of external financial support, primarily from multilateral creditors, external debt service arrears continued to be accumulated by the authorities. - Guinea obtained financing assurances from the European Commission regarding remaining arrears on a European Development Fund loan managed by the European Investment Bank, which provides for their clearance when the HIPC completion point is reached. - Some 90 percent of external debt (including arrears) is held by multilateral and Paris Club creditors who have signaled their intention to participate under the enhanced HIPC Initiative. - The remaining financing gaps are expected to be filled by disbursements under the ECF arrangement, and interim HIPC assistance (50 percent of eligible ECF principal repayment obligations in 2012). ### Financing outlook 2012–15 and HIPC/MDRI expectations - Financing gaps during 2012–15 are expected to be filled by debt rescheduling and multilateral support. - Following substantial external budget support in 2011 from multilateral creditors to facilitate arrears clearance operations, support is expected to be primarily in the form of budget project grants and loans in the coming years. - The bulk of debt relief is expected in 2012, reflecting the restructuring of arrears, and thereafter the projected HIPC completion point and provision of relief under the MDRI in the latter half of 2012. - For other creditors, some have already signaled their willingness to participate and the authorities are engaging in a collaborative approach with the remainder to obtain their participation. - HIPC completion point triggers that still have to be met, including satisfactory performance under the program, are expected to be met in the latter half of 2012 (MEFP ¶15, 54). ### Program modalities (ECF request and Fund support) - The authorities have requested a three-year (2012–15) arrangement under the ECF. - Access is proposed at 120 percent of quota (SDR 128.52 million). - This access is based on the staff’s assessment of the overall financing needs (Table 7), and is consistent with the access norm for a country with outstanding credit below 100 percent of quota (Guinea’s current outstanding credit is 25.3 percent of quota). - Disbursements would be phased in equal semiannual tranches subject to completion of reviews (Table 8). - Fund support would help maintain an adequate reserve level as the 2011 windfall revenue is gradually used for growth-enhancing investment and catalyze support from donors, including through debt relief, and would permit the resumption of interim HIPC assistance from the IMF. - The authorities have requested an allocation of interim HIPC assistance in the amount of SDR 1.2852 million, which would cover eligible debt service in 2012. - Guinea has a track record of meeting its obligations to the Fund and an adequate capacity to pay (Table 9), which would be further strengthened, provided the country takes the needed action to secure HIPC debt relief. - Program performance would be monitored on the basis of quantitative indicators (Table 10) and structural benchmarks (Table 11). ### Risks, vulnerabilities, and safeguards - Main risks to the program are domestic and reflect the post-conflict environment. - Political situation remains fragile; successful completion of the election cycle will be important. - Government faces tight financial constraints but large potential resource needs for energy sector and infrastructure. - Public expectations are demanding as tangible benefits from improved fiscal management and reining in inflation are only beginning to emerge. - Guinea remains vulnerable to external shocks, particularly in the mining sector, food price increases, and a prolonged global slowdown in growth. - Preliminary findings of an update of the 2007 safeguards assessment indicate that the governance and safeguards frameworks of the BCRG continue to require strengthening. - The January 2012 safeguards mission found limited capacity and infrastructure to manage reserves, a weak internal control environment, and shortcomings related to monetary data compilation. - Proposed mitigation measures: external auditors should continue to verify monetary data at test dates; the BCRG should publish audited annual financial statements within statutory deadlines (immediately for 2010—prior action); and the Board should approve an investment policy and guidelines (structural benchmark). ### Data provision and capacity - Guinea’s data provision has some shortcomings, but is broadly adequate for surveillance. - Authorities are resuming efforts, interrupted in 2009, to improve their capacity to compile and disseminate data. - Data deficiencies include delays in the monetary survey (specifically, commercial banks), discrepancies between the monetary survey and the monthly fiscal accounts, and the lack of standard financial soundness indicators. - Guinea participates in the GDDS. ### Staff appraisal: achievements, policy priorities, and recommendations - Authorities made strong progress in addressing serious imbalances inherited from the 2009–10 military regime; immediate fiscal actions were crucial in stabilizing inflation and the exchange rate. - The improving political and governance environment contributed to resumption of economic growth and renewed investor interest in developing Guinea’s natural resources; the country’s medium-term outlook improved significantly during 2011. - Performance under the SMP has been good despite implementation difficulties; quantitative targets for June and September were met with substantial margins, and provisional data indicate performance was close to program targets for end-December. - Short-term policy priority: reduce the still-high inflation rate through close coordination of fiscal and monetary policies. - Fiscal policy should aim at limiting net domestic bank financing of the government to the gradual drawdown of the deposits of the 2011 windfall revenue. - The central bank should stand ready to counter a possible resulting increase in domestic excess liquidity by associated foreign exchange sales. - Authorities should continue to improve transparency in the determination of the exchange rate and eliminate the existing multiple currency practice to build confidence in the Guinean franc. - Over the medium term, adopt and implement a comprehensive financial sector development plan to support diversified economic growth; continued progress in rebuilding central bank capacity in banking supervision is encouraging. - Urgent need for structural reforms to maximize benefits from mining sector development; given limited implementation capacity, prioritize reforms that provide quick returns for growth and poverty reduction and secure strong technical assistance from development partners. - Use of windfall revenue: - Recent establishment of a special investment fund is an important step to increase scrutiny of large investment projects. - Staff stands ready, in coordination with the World Bank, to assist in developing the regulatory framework for the fund; framework should cover all substantial windfall revenue and include clear rules for its use to ensure transparency and good governance. - Staff supports gradual use of this revenue over the medium-term and encourages development of a comprehensive medium-term public investment program during 2012 in the context of a new PRSP. - On government participation in large mining and related infrastructure projects: - Potential financing needs for government participation and for large prospective hydroelectric projects are very large and concessional financing will be difficult to find. - It is vital that the authorities avoid non-concessional financing and maintain medium-term debt sustainability; staff recommends seeking assistance from the Fund and the World Bank before committing to possible new large debt. - High priority should be given to strengthening debt management. - Staff supports the authorities’ request for assistance under the ECF in the amount of 120 percent of quota and for further interim HIPC assistance. - The ECF arrangement will allow Guinea to maintain an adequate level of international reserves as the 2011 windfall revenue from the mining sector is being used over the medium-term to finance urgently needed public investment. - Recognizes Guinea as a fragile state with considerable political risks and vulnerability to declines in mineral prices, but notes authorities’ commitment to strong fiscal management and the improved external reserves position mitigate these risks. *IMF staff appraisal and program documents (excerpt).* ### 50. It is proposed that during the ECF arrangement Guinea stay on a 24-month ### It is proposed that during the ECF arrangement Guinea stay on a 24-month Article IV cycle in accordance with the decision on consultation cycles. ### Consultation cycle - Proposal: Guinea to remain on a 24-month Article IV cycle in accordance with Decision No. 14747-(10/96) (9/28/2010). ### Macroeconomic outlook and projections (selected indicators, annual percentage change unless otherwise indicated) - GDP at constant prices: 4.9, -0.3, 1.9, 4.0, 3.6, 4.7, 4.8, 5.0, 19.8, 19.9 (2008–2016 series as shown). - GDP excluding large mining project: 4.9, -0.3, 1.9, 4.0, 3.6, 4.7, 4.8, 5.0, 5.0, 5.0. - GDP deflator: 14.1, 6.8, 20.2, 19.6, 21.0, 12.3, 7.9, 5.8, 5.4, 5.2. - GDP at market prices: 19.7, 6.5, 22.5, 24.3, 25.3, 17.6, 13.1, 11.2, 26.3, 26.2. - Consumer prices (average): 18.4, 4.7, 15.5, 19.6, 21.1, 21.4, 15.0, 11.2, 7.3, 6.0, 5.9. - Consumer prices (end of period): 13.5, 7.9, 20.8, 17.1, 21.0, 19.0, 12.0, 8.7, 6.2, 5.9, 5.9. ### External sector (levels in US$ unless otherwise indicated) - Exports, f.o.b. (annual percent change): 28.2, -21.3, 15.3, 17.9, 11.7, 11.4, 3.5, 5.4, 74.3, 51.9. - Imports, f.o.b. (annual percent change): 12.2, -19.8, 28.2, 28.5, 18.3, 72.3, 10.6, 3.6, 15.2, 8.6. - Exports f.o.b. (US$ millions, memorandum): 1,470.8, 1,157.4, 1,334.9, 1,508.6, 1,490.6, 1,660.8, 1,718.2, 1,811.8, 3,158.9, 4,798.0. - Imports f.o.b. (US$ millions, memorandum): 1,366.1, 1,096.1, 1,404.9, 1,677.0, 1,661.4, 2,862.5, 3,165.3, 3,279.2, 3,777.2, 4,103.4. - Overall balance of payments (US$ millions, memorandum): -42.4, 245.9, -177.8, 527.1, 497.7, -323.7, -227.6, -241.3, 232.0, 69.5. - Gross available reserves (months of imports): 0.6, 0.8, 0.8, 5.5, 5.9, 4.5, 3.3, 3.3, 3.1, 4.1, 5.2. - External debt stock (percent of GNFS exports): 197.6, 261.2, 225.0, 200.6, 200.1, 169.8, 162.9, 154.5, 90.7, 63.3. ### Money and credit (selected annual percent changes and ratios) - Net Foreign Assets (percent of beginning-of-period M2): 14.3, 4.7, -5.5, 43.4, 49.1, 36.9, -9.6. - Net Domestic Assets (percent of beginning-of-period M2): 24.7, 21.2, 79.9, -36.6, -37.8, -21.4, 15.6. - Net Claims on government (percent of beginning-of-period M2): 20.8, 28.7, 67.9, -38.0, -47.6, -30.1, 5.4. - Credit to nongovernment sector (percent of beginning-of-period M2): 1.9, 3.1, 8.9, 3.5, 10.4, 11.1, 12.7. - Reserve Money (annual percent change): 13.8, 81.7, 73.0, 1.7, -1.7, 4.4, -7.5. - Broad money (M2, annual percent change): 39.0, 25.9, 74.4, 6.8, 11.2, 15.5, 6.1. - Interest rate (short term T-bill): 21.5, 15.0, 13.0, ... , 13.0, 13.0 (series presented). ### Central government finances (percent of GDP and levels in billions of GNF) - Total revenue and grants (percent of GDP): 16.1, 16.5, 15.7, 20.7, 15.0, 21.1, 22.0, 22.5, 22.9, 25.2, 26.8. - Revenue (percent of GDP): 15.6, 16.2, 15.3, 17.2, 12.5, 17.7, 18.8, 19.5, 19.8, 22.9, 24.9. - Nonmining revenue (percent of GDP): 12.1, 12.9, 11.5, 13.0, 9.2, 13.2, 15.1, 15.6, 15.9, 16.2, 17.3. - Grants (percent of GDP): 0.5, 0.4, 0.4, 3.5, 2.5, 3.4, 3.2, 3.0, 3.1, 2.3, 2.0. - Total expenditure and net lending (percent of GDP): 17.5, 23.7, 29.7, 23.1, 13.8, 24.1, 28.7, 25.9, 26.6, 28.7, 30.3. - Current expenditure (percent of GDP): 13.4, 16.5, 20.5, 16.3, 11.3, 16.0, 16.8, 15.9, 15.5, 15.1, 14.5. - Interest payments (percent of GDP): 2.6, 2.1, 2.0, 1.8, 1.1, 1.8, 1.8, 1.6, 1.6, 1.5, 1.0. - Capital expenditure and net lending (percent of GDP): 4.0, 7.2, 9.1, 6.7, 2.6, 8.1, 11.9, 10.0, 11.0, 13.7, 15.7. - Overall budget balance (commitment basis) including grants (percent of GDP): -1.3, -7.1, -14.0, -2.4, 1.2, -2.9, -6.7, -3.4, -3.7, -3.5, -3.4. - Overall budget balance excluding grants (commitment basis) (percent of GDP): -1.8, -7.5, -14.4, -5.9, -1.3, -6.4, -9.9, -6.4, -6.7, -5.8, -5.4. - Basic fiscal balance (percent of GDP): 1.6, -5.6, -12.6, -2.0, 0.6, -2.5, -3.8, -0.7, -0.9, 0.2, 1.7. - Selected levels (Billions of GNF): - Revenue and grants: 3,352; 3,662; 4,258; 6,848; 5,092; 7,173; 8,798; 10,156; 11,509; 14,028; 16,542. - Revenue: 3,249; 3,582; 4,155; 5,687; 4,245; 6,012; 7,526; 8,795; 9,968; 12,742; 15,336. - Mining sector revenue: 738; 725; 1,032; 1,383; 1,117; 1,518; 1,489; 1,741; 1,981; 3,741; 4,648. - Grants (levels): 103; 81; 103; 1,161; 848; 1,161; 1,272; 1,361; 1,540; 1,286; 1,206. - Total expenditures and net lending: 3,627; 5,240; 8,049; 7,650; 4,698; 8,175; 11,465; 11,703; 13,343; 15,970; 18,663. - Current expenditures: 2,787; 3,655; 5,570; 5,419; 3,828; 5,434; 6,696; 7,179; 7,800; 8,373; 8,956. - Capital expenditures: 837; 1,577; 2,479; 2,227; 870; 2,737; 4,759; 4,512; 5,529; 7,582; 9,690. ### Fiscal operations and financing (selected items, 2008–16 series) - Basic fiscal balance (GNF billions): 334, -1,239, -3,424, -663, 183, -864, -1,518, -295, -466, 106, 1,058. - Overall balance excluding grants (GNF billions): -379, -1,658, -3,894, -1,963, -453, -2,162, -3,939, -2,908, -3,374, -3,228, -3,326. - Financing (total, GNF billions): 332, 1,650, 3,861, -1,966, -418, 1,001, -857, 376, 493, 1,015, 1,241. - Domestic financing (net): 225, 1,686, 3,801, 1,112, -102, 1,525, 2,291, 720, 755, 776, -256. - External financing (drawings): 333, 204, 177, 624, 517, 624, 815, 907, 1,027, 1,715, 2,858. - Exceptional revenue (one-off mining revenue in 2011 included under non-bank financing): 0, 0, 0, 4,981, 4,583, 4,583, 1,816, 0, 0, 0, 0 (as presented). ### Monetary sector and banking (selected accounts and indicators) - Central bank net foreign assets (billions GNF): -734, 822, 414, 4,614, 4,109, 2,890. - Reserve Money (end-period, billions GNF): 2,221; 4,035; 6,982; 7,101; 7,287; 6,744. - Broad money (M2, billions GNF): 4,724; 5,945; 10,368; 11,074; 11,975; 12,703. - Deposit dollarization (percent): 43.7, 27.8, 21.5, 19.4, ..., 25.4 (series as shown). - Money multiplier (M2/reserve money): 2.1, 1.5, 1.5, 1.6, 1.6, 1.9. - Commercial bank credit to the private sector (annual percentage change): 18.4, 15.8, 44.6, 22.0, 70.0, 55.0. ### Financial sector soundness (end-September 2011, bank-level indicators) - Regulatory norms: Equity to credit, market, and operational risks >10%; Current assets versus liabilities >100%; Transformation coefficient >60%; Large exposures to equity >800% (norms presented). - Selected bank solvency and liquidity ratios (end-September 2011): - Bank 1: Equity-to-risk ratio 12.2; Current assets versus liabilities 181.6; Transformation coefficient 212.8. - Bank 2: 10.9; 137.8; 297.8. - Bank 3: 23.1; 239.1; 168.6. - Bank 4: 57.0; 332.9; 477.4. - Bank 5: 34.2; 259.6; 1,168.6. - Bank 6: 51.1; 209.2; 2,249.8. - Bank 7: 9.6; 149.6; 292.3. - Bank 8: 17.5; 155.8; 384.4. - Bank 9: 31.9; 290.9; 647.9. - Bank 10: 13.6; 121.5; 276.0. - Bank 11: 241.7; 302.2; 497.9. - Bank 12: 85.4; 235.3; 139.1. - Note: At end-September, 5 banks did not fulfil the equity capital norm of GNF 50 million. ### Balance of payments and external financing (selected balances, US$ millions) - Merchandise trade balance (US$ millions): 104.7, 61.3, -69.9, -168.5, -170.8, -120.1, -144.7, -146.7, -618.4, 694.7 (series shown). - Services trade balance (US$ millions): -337.1, -258.6, -333.1, -304.0, -310.1, -505.9, -558.8, -582.3, -556.9, -621.4. - Income balance (US$ millions): -524.0, -505.6, -456.9, -414.1, -355.1, -479.0, -488.8, -502.6, -519.6, -538.3. - Transfers (US$ millions): 290.2, 246.2, 251.0, 433.7, 493.0, 266.6, 258.0, 259.0, 300.8, 308.2. - Current account including official transfers (US$ millions): -466.1, -456.6, -608.9, -453.0, -343.0, -1,920.0, -2,236.6, -2,293.2, -1,394.0, -156.7. - Current account including official transfers (percent of GDP): -10.3, -9.9, -12.4, -9.7, -6.6, -34.9, -38.8, -37.9, -19.1, -1.8. - Direct and other private investment (net) (US$ millions): -162.2, -193.1, -279.8, 127.1, 82.2, 1198.5, 1660.8, 1745.3, 1452.1, 102.3. - Of which: large mining projects (US$ millions): 378.5, 138.2, 107.7, 419.3, 307.3, 1539.6, 2015.4, 2115.9, 1828.8, 797.7. - Overall balance (US$ millions): -42.4, 245.9, -177.8, 527.1, 497.7, -323.7, -227.6, -241.3, 232.0, 69.5. ### Program implementation and indicative targets (2011 staff-monitored program, selected quantitative targets) - Basic fiscal balance (floor) (GNF billions, cumulative change from end-December 2010): -3,424 (2010 actual), -59 (end Mar. actual), -330 (end Jun. prog), 616 (end Jun. actual) — Status: Met; -429 (end Sep. prog), 183 (end Sep. actual) — Status: Met; -663 (end Dec. prog), -864 (end Dec. est). - Net domestic assets of the central bank (ceiling): 6,741 (end-2010), 6,741 (end-Mar prog), 1,760 (end-Mar actual), -12 (status: Met), 2,045 (end-Sep prog), 1,495 (end-Sep actual) — Status: Met; 2,488 (end-Dec prog), 2,780 (end-Dec est). - Domestic bank financing of the government (ceiling): 4,037 (2010); series showing met statuses for quarters; end-Dec est: -3,518. - Net international reserves of the central bank (floor); US$ millions: 22 (end-2010), 103 (end-Mar prog), 802 (end-Mar actual) — Met; 1,026 (end-Sep prog), 774 (end-Sep actual) — Met; 669 (end-Dec prog), 541 (end-Dec est). - New nonconcessional medium- or long-term external debt contracted or guaranteed by the government or central bank (ceiling); US$ millions: n.a., 0, 0, 0 — Met (quarters shown). - Stock of outstanding short-term external debt due or guaranteed by the government or the central bank (ceiling); US$ millions: n.a., 0, 0, 0 — Met (quarters shown). - Memorandum: Reserve money (end-period levels shown): 6,982; 6,979; 6,984; 7,167; 6,998; 6,863; 7,101; 6,889 (periods presented). *Sources: Guinean authorities; and Fund staff estimates and projections.* ### 1. Gross financing requirements5052,0572,3632,4141,932 ### _cr1263 - 1. Gross financing requirements5052,0572,3632,4141,932 ### Gross financing requirements (summary table) - Gross financing requirements (rows correspond to columns in source): 5052,0572,3632,4141,932 - External current account deficit: 4631,9272,2372,2931,394 - Capital account balance: -715-262-12-120 - Debt amortization: 179171160155170 - Change in arrears, net 1/: 78375000 - Gross reserves accumulation: 500-157-23-30360 - Fund repayments: 04288 Notes: - 1/ For 2011, the program assumed toleration of arrears by Paris Club and other bilateral creditors. For the columns 2011 Est. Sep and 2011 proj, figures show actual accrual of arrears. ### Available financing (summary) - Total available financing: 5051,9972,3062,3561,903 - Foreign direct investment, net: 1501,2251,8671,8861,450 - Identified disbursements: 274287289309346 - Grants: 178175173185148 - Project: 58168173185148 - Program: 1207000 - Loans: 96112116124198 - Project: 96112116124198 - Program: 00000 - Other flows: 00000 - Debt relief and debt rescheduling: 81485149161107 - Debt rescheduling and cancellation (incl. on arrears) 2/: 81485149161107 Notes: - 2/ For 2012 and following years, assumes Paris Club debt relief for end-2011 arrears and maturities falling due in 2012-14 on terms similar to those under the 2008 Paris Club agreement. Comparable terms are assumed for other bilateral creditors. HIPC and MDRI relief is assumed to be delivered effective October 2012. ### Financing gap and residual financing - Financing gap: 060585829 - Possible financing: 00000 - Residual financing: 060585829 - Of which: ECF disbursement: 58585829 - IMF interim HIPC assistance2 ### Sources for tables - Sources: Guinean authorities and IMF staff estimates and projections. --- ### ECF Schedule of Disbursements and Timing of Reviews (2012–15) - Recurrent disbursement entries (SDR millions / In percent of quota): - 17.1 — 18.36 — February 24, 2012 — Executive Board approval of the three-year arrangement under the ECF. - 17.1 — 18.36 — August 15, 2012 — Observance of all relevant performance criteria, including the performance criteria for June 2012 and completion of the first review under the ECF arrangement. - 17.1 — 18.36 — February 15, 2013 — Observance of all relevant performance criteria, including the performance criteria for December 2012 and completion of the second review under the ECF arrangement. - 17.1 — 18.36 — August 15, 2013 — Observance of all relevant performance criteria, including the performance criteria for June 2013 and completion of the third review under the ECF arrangement. - 17.1 — 18.36 — February 15, 2014 — Observance of all relevant performance criteria, including the performance criteria for December 2013 and completion of the fourth review under the ECF arrangement. - 17.1 — 18.36 — August 15, 2014 — Observance of all relevant performance criteria, including the performance criteria for June 2014 and completion of the fifth review under the ECF arrangement. - 17.1 — 18.36 — February 15, 2015 — Observance of all relevant performance criteria, including the performance criteria for December 2014 and completion of the sixth review under the ECF arrangement. - Total: 120.0 — 128.52 - Source: IMF staff. ### Indicators of Capacity to Repay the Fund, 2012–25 (selected figures) - Fund obligations based on existing credit — Credit outstanding: - 24.48, 23.10, 18.21, 13.31, 8.42, 3.52, 0.00 (2012–2018 then zeros through 2025) - Percent of quota (existing credit): 22.86, 21.57, 17.00, 12.43, 7.86, 3.29, 0.00 (2012–2018 then zeros) - Repayment of principal (existing): 2.57, 1.38, 4.90, 4.90, 4.90, 4.90, 3.52, 0.00... - Charges and interest (existing): 0.05, 0.05, 0.10, 0.09, 0.07, 0.06, 0.05, 0.05... - Fund obligations from prospective drawings under the new ECF — Credit outstanding: - 36.72, 73.44, 110.16, 128.52, 128.52, 126.68, 117.50, 100.98, 77.11, 51.41, 27.54, 11.02, 1.84, 0.00 (2012–2025) - Percent of quota (prospective): 34.32, 68.64, 102.95, 120.11, 120.11, 118.39, 109.81, 94.37, 72.07, 48.05, 25.74, 10.30, 1.72, 0.00 - Repayment of principal (prospective): 0.00, 0.00, 0.00, 0.00, 0.00, 1.83, 9.18, 16.52, 23.87, 25.70, 23.87, 16.52, 9.18, 1.84 - Charges and interest (prospective): 0.00, 0.00, 0.23, 0.31, 0.32, 0.32, 0.30, 0.27, 0.22, 0.15, 0.09, 0.04, 0.01, 0.00 - Total obligations based on existing and prospective credit — Credit outstanding: - 61.20, 96.54, 128.37, 141.83, 136.94, 130.20, 117.50, 100.98, 77.11, 51.41, 27.54, 11.02, 1.84, 0.00 - Percent of quota (total): 57.14, 90.14, 119.86, 132.43, 127.86, 121.57, 109.71, 94.29, 72.00, 48.00, 25.71, 10.29, 1.71, 0.00 - Percent of gross foreign available reserves: 16.15, 26.49, 37.17, 24.71, 20.28, 16.55, 13.72, 10.87, 8.13, 5.31, 2.79, 1.09, 0.18, 0.00 - Total payments to the Fund (percent of exports and external public debt service metrics included): - Total payments to the Fund (SDR millions): 2.62, 1.42, 5.23, 5.30, 5.29, 7.11, 13.05, 16.84, 24.13, 25.91, 24.01, 16.61, 9.24, 1.88 - Percent of exports of goods and services: 0.24, 0.12, 0.43, 0.26, 0.17, 0.17, 0.27, 0.32, 0.43, 0.46, 0.42, 0.29, 0.16, 0.03 - Percent of external public debt service: 4.36, 4.09, 22.73, 7.05, 7.53, 9.42, 13.77, 15.97, 23.14, 23.86, 20.46, 12.84, 6.18, 1.10 Memorandum items (selected): - Prospective purchases: 36.72, 36.72, 36.73, 18.36 - Exports of goods and services, US$ millions (2012–2025): 1,751.84; 1,811.00; 1,906.79; 3,266.40; 4,920.31; 6,606.73; 7,556.72; 8,171.35; 8,858.13; 8,935.44; 9,018.02; 9,106.67; 9,202.39; 9,306.31 Sources: Guinean authorities and IMF staff projections. --- ### Performance Criteria and Indicative Targets, ECF 2012 (selected) - Units: Billions of Guinean francs unless otherwise indicated. - Basic fiscal balance (floor) 3/: 183; -864; -1,102; -1,497; -1,418; -1,518 (actual/est./targets across dates) - Net domestic assets of the central bank (ceiling): 1,495; 3,178; 4,484; 3,385; 3,541; 3,854 - Domestic bank financing of the government (ceiling) 3/: -4,964; -3,120; 1,300; 197; 348; 650 - Net international reserves of the central bank (floor); US$ millions 4/: 927; 541; 435; 585; 504; 458 - New nonconcessional medium- or long-term external debt contracted or guaranteed by the government or central bank (ceiling); US$ millions 5/ 6/: 0 00 0 0 0 - Stock of outstanding short-term external debt contracted or guaranteed by the government or the central bank (ceiling); US$ millions 6/: 0 00 0 0 0 - New external arrears (ceiling) 6/: 00 0 0 - Indicative targets — Expenditure in priority sectors (floor) 3/ 7/: 2,100; 1,765; 2,501; 3,208; 3,910; Memorandum items: Reserve money: 6,863; 7,287; 7,083; 7,078; 6,644; 6,744 Notes: - 1/ Definitions and adjustors are included in the technical memorandum of understanding (TMU). - Performance criteria for end-June and end-December 2012; indicative targets for end-March and end-September 2012. - 2/ Flow over 2011 for fiscal criteria and stock for end-December 2011 for monetary and external debt criteria. - 3/ Cumulative change from end-December 2011. - 4/ Calculated using the program exchange rates. - 5/ External debt contracted or guaranteed other than with a grant element equivalent to 35 percent or more, calculated using a discount rate based on the OECD commercial interest rates. Excludes borrowing from the IMF. - 6/ Continuous performance criterion. - 7/ Priority sectors include education, health, agriculture, energy, justice, social affairs, and public works (as defined in the TMU). --- ### Prior Actions and Structural Benchmarks (ECF 2012) Prior actions (completed or status): - Adopt a 2012 budget law as discussed with November 2011 mission — Completed — Rationale: Preserve program budget objectives - Provide IMF staff with a copy of the Rio Tinto contract with the government — Contract annex still pending — Rationale: Promote transparency in government operations - Conduct a roundtable on the electricity sector in order to define the sector reform program — Completed — Rationale: Reduce the burden of transfers and subsidies on the budget - Publish the central bank’s 2010 audited financial statements on its website, together with the auditors’ opinions — Completed — Rationale: Promote accountability and transparency Structural benchmarks (dates and rationale): - Consult with the IMF before approving any modification to the new mining code or implementing regulations that could have a tax impact (MEFP ¶ 47) — Continuous — Rationale: Protect budget revenue - Adopt a comprehensive plan for reform of the electricity sector (MEFP ¶ 49) — End-March 2012 — Rationale: Reduce the burden of transfers and subsidies on the budget - Harmonize methods and procedures for assistance to the agriculture sector ... (MEFP ¶ 32) — End-March 2012 — Rationale: Ensure control of agricultural subsidies and improve rate of collections for producer credits - Adopt implementing texts and general terms and conditions of operation for the Special Investment Fund ... (MEFP, Box 2) — End-March 2012 — Rationale: Improve public infrastructures while preserving sustainability of public finances - Reintroduce mechanism for regularly adjusting petroleum product prices based on international market prices and exchange rate (MEFP ¶ 27) — Continuous from July 1, 2012 — Rationale: Protect budget revenue and ensure budget sustainability - Adopt and publish implementing decrees for the new mining code as well as a standard mining contract (MEFP ¶ 47) — End-June 2012 — Rationale: Ensure a larger share for the government in Guinea's mining revenues - Develop a plan to implement tax reforms (MEFP ¶ 26) — End-June 2012 — Rationale: Promote predictability in public finance reforms - Certify, by an independent external auditor, the statistical data on the program performance at test dates submitted to the IMF by the BCRG, and approve an investment policy and guidelines by end-December 2012 by the BCRG board of directors (MEFP ¶ 42, 43) — End-December 2012 — Rationale: Ensure appropriate utilization of resources entrusted to the BCRG - Based on an exhaustive list of companies benefitting from the investment code and their tax advantages, terminate benefits of companies whose eligibility periods have expired, and adopt a revised investment code (MEFP ¶ 27) — End-August 2012 — Rationale: Reduce tax expenditures and improve the business environment - Adopt a medium-term public investment program, based on advice provided by the development partners (MEFP, Box 2) — End-September 2012 — Rationale: Create a pipeline of viable projects that could receive funding from the SIF Note: - 1 The IMF is solely responsible for assessing compliance with the conditions. --- ### Letter of Intent and Program Request (high-level points) - Date/location: Conakry, February 11, 2012. - Government requests IMF support for a three-year economic and financial program under the Extended Credit Facility (ECF). - Financial request: equivalent to 120 percent of quota share, or SDR 128.520 million, and a first disbursement of SDR 18.36 million (17.1 percent of quota) following Board approval. - Government requests continuation of interim assistance under the HIPC Initiative, amount SDR 1.2852 million. - Government objectives: consolidate staff-monitored program results, restore growth, reduce poverty, reduce inflation, mobilize agricultural, hydroelectric, and mining potential, improve business climate, infrastructures, social services, and strengthen governance and anticorruption. - Government commitment: achieve HIPC completion point; refrain from contracting or guaranteeing non-concessional debt that would jeopardize debt sustainability or the HIPC Initiative; consult IMF on additional measures or policy changes; provide information required for program monitoring. - Government authorizes IMF to publish the letter, attached MEFP, TMU, IMF staff report on the Article IV consultation, and the request for an ECF arrangement. --- ### Memorandum of Economic and Financial Policies — Introduction (selected observations) - Background 2009–10: military regime’s lax management led to severe macroeconomic instability; basic fiscal balance declined from a surplus of close to 2 percent of GDP in 2008 to a deficit of almost 13 percent of GDP in 2010; inflation spiraled to almost 21 percent by end-December 2010; international reserves reduced to less than one month of imports; large exchange rate depreciation and parallel market premium close to 20 percent. - Actions since January 2011: significant structural reforms and corrective economic and financial measures; reform of security sector; new mining code adopted; implementation of cash-based government expenditure management system with monthly cash flow plan chaired by the Prime Minister; avoidance of advances to the Treasury by BCRG; prudent monetary and proactive exchange rate policies; staff-monitored program covering January–December 2011 approved by IMF management on June 30, 2011 and presented for information on July 1, 2011. *Sources: Guinean authorities and IMF staff estimates, projections, and documents contained in the provided content unit.* ### 3. The government’s vision for the medium term is to consolidate economic and ### _cr1263 - 3. The government’s vision for the medium term is to consolidate economic and ### Medium-term vision and investment priorities - Consolidate economic and financial stabilization and lay foundations for sustained and shared real growth. - Major public investment efforts needed to equip the country with essential infrastructure and build a solid foundation for private investment. - Windfall mining revenue to be mobilized in part and allocated on a priority basis to: - increasing the capacity to produce electrical energy; - developing the agriculture sector; and - transport infrastructure. - Structural measures to improve the business climate are intended to help diversify the economy and mitigate “Dutch disease” risks from rapid mining-sector development. ### Poverty reduction and specific goals (PRSP framework) - Government determined to lay foundations for strong economic growth to significantly reduce poverty; specific goals under the Poverty Reduction Strategy: - consolidate social peace by organizing peaceful elections and completing the reform of the security sector; - reform the public sector to improve productivity and intensify governance and business climate improvements, including combating corruption and strengthening the judicial system; - restore confidence and credibility of economic, financial, and monetary institutions by stabilizing inflation and the exchange rate; - develop the potential of the mining sector and its synergistic growth with other sectors; - improve infrastructure by developing and implementing a public investment program in concert with development partners; - increase agricultural production to attain food self-sufficiency in the medium term, reduce dependence on imports, and increase agricultural exports in the long term; - enhance production and distribution of electrical energy by tapping hydroelectric potential. ### Windfall Mining Revenue in 2011 (Box 1) - On April 22, 2011, agreement signed with Rio Tinto concerning Simandou south concession (Blocs 3 and 4). - Rio Tinto subsidiary SIMFER paid US$700 million to the Treasury in May 2011; amount deposited in an account with the BCRG. - For 2011, government committed to use US$145 million of these resources for priority and urgent investments, 70 percent of which in the electricity sector. - US$40 million intended for financing other budgetary spending under the supplementary budget approved by the CNT on October 15, 2011. ### Performance under the Staff-Monitored Program in 2011 - Overall assessment: performance very satisfactory; all quantitative and structural benchmarks for end-June and end-September 2011 met. - Macroeconomic outcomes: - real growth increased to almost 4 percent in 2011, up from 1.9 percent in 2010; - basic fiscal deficit, excluding investments funded with windfall mining revenues, reduced from 13 percent of GDP in 2010 to less than 1 percent of GDP in 2011; - money supply expanded by less than 10 percent during 2011 compared to 74 percent in 2010; - consumer price index rise stabilized at 19 percent at end-December 2011, year-on-year; - international reserves replenished to 4.5 months of imports of goods and services. - Budget execution and fiscal stance: - April 2011 CNT-approved budget projected a basic fiscal deficit of 2 percent of GDP in 2011 and net bank financing of 3.6 percent of GDP; - at end-September, basic fiscal balance for first nine months was a surplus of 0.5 percent of GDP; - government reduced its net debt to the banking system by over 1 percent of GDP excluding deposits of windfall revenue; - after October 2011 revised budget authorizing use of windfall revenue for investments, indications are government reduced the basic fiscal deficit for 2011 to less than 1 percent of GDP excluding investments financed from windfall revenue, and to 2.5 percent of GDP if these investments are included. - Key measures contributing to outturns: - increased fuel prices by 27 percent in October 2011; - intensified efforts to increase contributions from autonomous revenue-collecting agencies; - reduced budget appropriations for current expenditures; - postponed several investment projects to 2012–13; - reduced net borrowing from banking system (excluding windfall deposits) in line with program objectives despite missing World Bank budget support equivalent to nearly 0.8 percent of GDP. ### External financing and arrears clearance - Relations with development partners normalized and external budgetary assistance resumed in 2011. - Arrears owed to multilateral financial institutions cleared in 2011. - Arrears payable to the World Bank cleared using its budgetary support. - Some arrears to the European Investment Bank cleared with a grant; agreement reached to clear remaining arrears to reach completion point under the HIPC Initiative. ### Monetary and exchange rate policy actions - Objectives: mop up excess liquidity from 2009–10 and stabilize inflation and the exchange rate. - Measures taken by BCRG: - raised policy rate from 16.75 to 22 percent on March 23, 2011; - increased reserve requirement rate by 7.5 percentage points, to 17 percent on March 23, and by an additional 5 points to 22 percent on October 19, 2011; - improved regulations for exchange bureaus: bureaus closed in early March, Instruction 025 of April 29, 2011 clarified conditions, bureaus reopened on April 7, 2011; exchange bureau rates freely determined and BCRG’s official rate set as average of commercial banks’ rates for the preceding day; - revived the interbank foreign exchange market (IFEM) in March 2011, allowing allocation of about US$170 million to banks to finance imports during 2011. - Institutional actions: monetary programming committee established; monthly monetary and exchange policy bulletin prepared since June 2011; BCRG began building banking supervision capacity with IMF West AFRITAC assistance. ### Fiscal control and public financial management measures - Revenue measures: - eliminated ad hoc exemptions from customs tariffs; - extended list of products subject to import verification; - increased excise taxes on beer and tobacco; - intensified collection of back taxes; - strengthened control of contributions from autonomous revenue-collecting agencies, enabling recovery of exceptional nontax receipts in non-mining sectors representing more than 1 percent of GDP. - Expenditure control measures: - froze 2009–10 government contracts totaling over 40 percent of GDP that were signed in violation of procurement code and overbilled, following World Bank-funded audit by French Audit Court experts; - reinstated competitive selection as normal process for awarding government contracts (Ministerial Decree of March 11, 2011) and prohibited signing contracts without budget appropriation caps and without the Finance Minister’s signature; - began applying the Treasury Single Account law to all public structures, including government-owned companies. ### Structural reforms and governance actions - Mining sector: - implemented a new mining policy and on September 9, 2011 adopted and promulgated a new mining code conforming to international standards; - implementing texts and a standard contract expected to be finalized in 2012; - resumed participation in the Extractive Industries Transparency Initiative on March 1, 2011 and began steering committee action plan to validate Guinea’s EITI. - Energy sector: - institutional audit of the energy sector completed and submitted in September 2011 with World Bank and AFD support; roundtable held January 16–17, 2012 to define sector reform program; - discussions under way with Electricité de France (EDF) for technical assistance to Electricité de Guinée (EDG). - Justice and security: - forum on justice organized and program to restructure armed forces, gendarmerie, and police adopted; - biometric census of military completed for Conakry garrisons in October 2011 and in progress for interior garrisons; - retirement of 3,928 military personnel in December 2011; - creation of a judicial framework for the military and adoption of corresponding statute. - Agriculture: - launched broad agricultural sector recovery program to attain food self-sufficiency in the medium term and develop agricultural exports in the long term; - reinstated structures for agricultural training and extension and executed major distribution program for inputs, seeds, and agricultural materials. - Private sector and investment climate: - with World Bank and IFC support, promoted private sector reforms; public-private dialog framework became operational in May 2011 with a public-private roundtable; - private investment promotion agency (APIP) established in November 2011 and implemented a one-stop window for creating enterprises in early December 2011; - renewed access to US markets under AGOA in October 2011. - Tourism: - three hotels privatized (Hôtel Kaloum, Hôtel du Niger, and Hôtel Camayenne), paving way to increasing sector capacity within next 18 months. ### Social protection and emergency measures - PRSP II (2007–10) extended to cover 2011–12; PRSP III and new poverty survey under preparation. - Emergency measures to address urgent needs: - system established to facilitate access to essential goods (rice, flour, sugar, vegetable oil) at affordable prices, operating parallel to private sector and transitioning to partnership with private sector over time; - ad hoc and temporary waiver of duties and taxes on government imports of these goods. ### HIPC completion-point structural triggers and audits - Quarterly audits of public contracts through June-2009 completed. - Contract audits for second half of 2009 and for 2010 mostly completed with World Bank and French Audit Court support; remaining work aimed to be completed by February 2012. - Audit of contracts concluded in first half of 2011 launched. - Anti-corruption Agency reports through end-2010 produced and published on PRS website; report for 2011 to be prepared and published by end-March 2012. - Harmonization of Ministry of Health and World Bank data enabled achievement of a health indicator trigger for HIPC completion point. ### Major challenges ahead - Inflation remains a primary short-term macroeconomic concern despite 2011 stabilization. - Very heavy burden of external public debt. - Weak infrastructure in electricity, water, transport, and telecommunications sectors limits revival of growth. - Structural reforms needed to prepare economy for massive mining-sector investments expected in coming years. ### Economic and financial program for 2012–14 - Government intends to adopt and implement a program for 2012–14 to: - consolidate 2011 results under the Staff-Monitored Program; - resume growth and reduce poverty; - reduce inflation and lay foundations for accelerated and diversified growth. - Program aligned with extended PRSP for 2011–12 and the 2011–15 five-year plan, serving as basis for PRSP III (2013–16). - Economic vision centers on mobilizing agricultural, hydroelectric, and mining potential; increasing competitiveness via improved infrastructure and social services (education, public health); and strengthening good governance and anti-corruption efforts. *Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr1263.pdf* ### 18. The government will continue to make every effort to receive the support of the ### _cr1263 - 18. The government will continue to make every effort to receive the support of the ### A. Medium-Term Macroeconomic Objectives - Mining sector megaprojects heavily influence the medium-term macroeconomic framework. - Foreign direct investments in the sector, particularly for development of iron deposits, could represent over 40 percent of GDP per year on average during 2012–14. - During 2012–14, the economic impact of these investments will essentially produce: - a substantial increase in imports and the external current account deficit. - When production and exports from the megaprojects begin in 2015: - these deficits should decline markedly, - the real growth rate and government revenue should sharply increase. - Main macroeconomic objectives: - achieve real growth of 4.7 percent in 2012 and an average rate of 4–5 percent in 2013–14; - reduce inflation to an annual average of 15 percent in 2012 and close to 12 percent year-on-year by end-2012, and gradually aim for levels well below 10 percent in 2014; - maintain the level of exchange reserves above 2.5 months of imports (excluding imports for megaprojects financed by foreign investment) to protect against exogenous shocks. - Policy emphasis: - strengthen economic and financial policy coordination; - mobilize government revenue and strengthen public expenditure management; - fiscal policy to play a key role in reducing inflation given weak financial markets; - constrain the budget deficit by avoiding net domestic bank financing (excluding use of deposits of exceptional resources), availability of financing from development partners, and need to maintain debt sustainability before and after HIPC completion point; - use windfall mining resources mainly to finance infrastructure, with planned medium-term resource use given limited absorptive capacity; - tighten monetary policy to mop up excess liquidity and curb inflation; - adopt proactive exchange policy to limit erratic fluctuations and prevent real exchange rate appreciation that would diminish non-mining competitiveness. - Structural reforms to manage the mining boom and improve governance: - renegotiate mining contracts in a spirit of partnership; - far-reaching energy sector reforms to increase electrical supply and strengthen EDG technical, commercial, and financial management, including a tariff adjustment; - sector studies to reorganize public enterprises (transportation, telecommunications); - implement a credible, realistic public investment program in line with the Poverty Reduction Strategy and the five-year plan; - strengthen judicial system and legal/institutional framework for private sector; - continue defense and security forces reform via retirement programs and support/training; - continue government reform and modernization (improved procedures, government-wide automation, capacity building, increase proportion of young and female employees); - develop the agricultural sector with development partners to achieve food self-sufficiency and develop agro-industry. ### B. Fiscal Policy - Fiscal policy pillars: - (i) increased mobilization of government revenue; - (ii) control and improvement of quality of public spending and reorientation toward priority sectors within available resources; - (iii) caps on the budget deficit and debt while maintaining fiscal and public debt sustainability. - Revenue and expenditure dynamics: - goal of convergence towards the ECOWAS standard in 2014: a tax ratio of 20 percent of GDP, compared with close to 17.5 percent in 2011. - after an increase in 2012, current expenses should decrease slightly as a percentage of GDP by 2014. - investment expenses will increase sharply in 2012 and remain above 10 percent of GDP in 2013–14. - basic fiscal deficit will increase from 2.5 percent of GDP in 2011 to 3.8 percent in 2012, but will fall to around 1 percent of GDP in 2013 and 2014. - Financing objectives and conditions: - prevent budget-based monetary expansion (other than growth associated with use of deposits of windfall revenue); - maintain public debt at sustainable level; - budget will not be financed with advances from the BCRG; proceeds of bond and debt issues will be used to reduce outstanding advances; - deposits of windfall 2011 earnings will be gradually used over the medium term; - framework assumes, after IMF approval of the ECF arrangement, Paris Club rescheduling of remaining arrears and debt service obligations during the program period, and comparable treatment from other bilateral creditors within HIPC; - residual financing requirement expected to be met after reaching the completion point under the enhanced HIPC Initiative in 2012; - donor conference expected after legislative elections to mobilize additional external resources. Revenue - Tax ratio increase strategy: - strict compliance with existing laws and regulations plus reforms of tax administration and policy. - implement new mining code strictly and transparently and the standard mining contract after its completion in 2012; expected to stabilize current mining revenue at around 4 percent of GDP by 2014. - fuel taxes contribute close to 15 percent of revenue and will be safeguarded by controlled implementation of a system of flexible prices at the pump to gradually eliminate petroleum product revenue losses. - MEF will develop a plan to implement tax reforms by end-June 2012 (structural benchmark) based on technical assistance received in 2011. - Tax policy reform steps include: - (i) simplification of the tax system by consolidating certain duties and taxes; - (ii) changing tax brackets for taxpayers; - (iii) making the minimum income tax progressive; - (iv) expanding the VAT to medium-sized enterprises; - (v) making payroll taxes consistent with corporate taxes; - (vi) gradually decentralizing taxation based on capacity at the local level. - Tax administration reform measures include: - (i) greater segmentation of the taxpayer population via creation of large, medium-sized, and small enterprise directorates; - (ii) transition from administrative assessment to voluntary filing; - (iii) restructuring tax and customs administration to separate management, steering, and monitoring of operational functions; - (iv) strengthening reporting, survey, and supervision to combat tax fraud and tax evasion; - (v) enhanced auditing of autonomous government agencies to guarantee contribution to government budget; - (vi) accelerated computerization and connection with offices outside Conakry and with users (VERITAS, carriers, importers); - (vii) redeployment of customs officers to land border stations. - Objectives accompanied by performance contracts and audited performance indicators. Planned revenue measures for 2012 (selected) - reintroduce mechanism for regularly adjusting fuel prices based on international market prices and exchange rate starting July 1, 2012 (structural benchmark); revenue losses were estimated at over 3 percent of GDP between January and September 2011. - revive unit in charge of the investment code to track implementation; draw up exhaustive list of companies benefiting from the code and their tax advantages by end-March 2012; terminate benefits for companies whose eligibility expired; revise code for adoption by government by end-August 2012 (structural benchmark) to limit tax revenue cost while remaining competitive. - submit proposals for changing rate and scope of certain taxes; increase in fixed-rate and prorated business taxes to be adopted in general tax code; rate of withholdings at source on nonwage income raised from 10 to 15 percent in 2012 budget law. - improve VAT credit reimbursement system to reduce complaints, accelerate refunds, and avoid impairing corporate cash flow. - review regulatory and contractual exemptions by end-June 2012 to eliminate exemptions that no longer serve their purpose; refrain from granting exemptions other than those provided under ordinary law. - install a mobile scanner at the port of Conakry and a pallet scanner at Conakry airport. - improve technical framework: secure and computerized taxpayer census; computerization of tax units and revenue stations and online connection with other administrations. - conduct institutional and regulatory audit of all revenue-generating services; MEF to prepare exhaustive list and, by end-September 2012, draw up performance contracts with revenue authorities; revise share of revenue of autonomous agencies accruing to government budget by end-December 2012 while safeguarding financial equilibrium of these entities. - complete inventory of government-owned buildings by end-September 2012 and change management approach to ensure revenue reaches the Treasury; submit to parliament a draft law reviewing all texts allocating revenue from end-September 2012 to place them under Finance Minister responsibility based on “single pot” principle while preserving financial autonomy of recipients. - complete tax audits begun in 2011 with AFD regarding effective collections and dispute resolution; publish list of delinquent taxpayers owing more than GNF 1 billion every six months; bring tax appeal commission on stream during first half of 2012; strengthen investigation and research units at National Tax Directorate and General Customs Directorate. Expenditure - Continue controlling public expenditure, improving quality, and channeling spending toward priority social and economic sectors. - Stabilize the wage bill as a percentage of GDP and rationalize subsidies. - Reform of the security sector expected to redirect spending toward health, education, justice, and infrastructure. - Windfall mining revenue to increase investment potential; government created a Special Investment Fund (SIF) to manage these revenues. - Medium-term objective to revamp legal, organizational, and technical framework of public financial management with partner technical assistance. Wage bill and public employment - Government will institute reforms to contain public sector wage bill: - limit wage bill to around 5.3 percent of GDP during 2012–14. - based on PREMA to be approved in first quarter 2012, adopt civil service reform plan by end-2012 to control number of government employees and enhance productivity. - Budget for 2012 includes a 16 percent increase in the wage bill to partially adjust wages to increased cost of living. - Continue measures from 2011: biometric census, elimination of duplicate/deceased payroll records, effective retirement provisions, harmonization of civil service staff and payroll files and online availability. - Launch PREMA priority actions: (i) redefining government’s missions; (ii) streamlining public administration; (iii) enhancing coordination and effectiveness of government work; (iv) consolidating decentralization. Subsidies and transfers - Government will continue to rationalize subsidies. - Spending on subsidies and transfers expected to increase to 4 percent of GDP in 2012 because of agricultural subsidies and transfers to EDG, and to be stabilized at around 3.4 percent of GDP in 2013–14. - Stabilization contingent on results of security reform, cleanup of student subsidy register, rationalization of government agricultural interventions, and electricity sector reform. Key subsidy reform components - Electricity sector: - government should subsidize cost of operating new thermal plants, estimated at 0.6 percent of GDP in 2012. - government organized a roundtable on January 16–17, 2012 to draw up measures to overhaul EDG management; adopt resulting action plan by end-March 2012, including increase in electricity rates to keep 2012 subsidies at indicated amount. - Agriculture sector: - harmonize methods and procedures for assistance (distribution of inputs, seeds, agricultural materials), extension, and collection of agricultural loans based on World Bank and IFAD advice by start of 2012 crop year (April 2012) to control agricultural subsidies and improve collection of producer loans (structural benchmark). Investment - Investment expenditures projected to remain high to meet urgent needs, particularly energy and infrastructure. - Investment financed domestically will rise to an average of 6 percent of GDP per year from 2012 to 2014, about two thirds of which are expected to be financed with windfall mining revenue in 2012–13 and one third in 2014, including the SIF. - Investments will be mainly geared towards electricity and infrastructure in line with PRSP and the five-year plan. - With resumption of relations with development partners, externally financed investment projects expected to increase rapidly in 2013–14. *Source: _cr1263 - 18. The government will continue to make every effort to receive the support of the* ### 34. The government estimates that the 2012 budget can be financed. In a context of ### The government estimates that the 2012 budget can be financed. ### Budget financing and Special Investment Fund (SIF) - Financing context: declining budgetary assistance; financing requirements to be met with domestic resources and external debt relief (see paragraph 55 in source). - Treasury and windfall revenue: - Use of US$215 million (about 4 percent of GDP) of the windfall revenue collected in 2011 and deposited with the BCRG. - Anticipated windfall revenue in 2012: US$250 million; half earmarked for financing general budget expenditure and half to be deposited in the SIF, improving the Treasury’s net position vis-à-vis the BCRG. - In March 2012, the SIF will receive the equivalent of US$250 million in start-up funds from the 2011 windfall mining revenue. - If windfall revenue exceeds US$250 million in 2012, at least 75 percent of the additional amounts would be transferred to the SIF. - In the event of such additional revenue, program objectives would be adjusted by 80 percent of the additional amount for net foreign reserves (upwards), for net domestic bank financing of government (downwards), and for net domestic assets of the BCRG (downwards), allowing for the immediate use of 20 percent of this revenue. - Government will consult with IMF staff before using additional windfall revenue in excess of the US$250 million provided in the 2012 budget. - Treasury bills and bonds to develop monetary/financial markets: - Increase balance of Treasury bills by GNF 300 billion (usually subscribed by commercial banks). - Issue bonds of GNF 300 million. - To maintain zero banking system financing of government operations other than use of windfall deposits, government will use those funds for an additional GNF 600 million in repayments to the BCRG. ### Public financial management and structural benchmarks - Legislative and regulatory modernization (timelines in source): - Draft new framework budget law in 2012, adopted and submitted to parliament by end-June 2012. - New public procurement code approved and implemented by end-2012. - General government accounting regulations adopted by end-September 2012. - New budget nomenclature prepared by end-September 2012. - New government chart of accounts prepared by end-December 2012 for implementation in time for preparation and execution of the 2014 budget law. - Revision of the general tax code; drafting of book on tax procedures; adaptation of customs and investment codes. - Capacity-building support: assistance from the IMF, West AFRITAC, and other development partners. - Structural benchmarks related to SIF and mining: - Adopt implementing texts and general terms and conditions of operation for SIF by end-March 2012 (structural benchmark). - Adopt implementing decrees and a standard mining contract and publish by end-June 2012 (structural benchmark). - Adopt medium-term public investment program by end-September 2012 (structural benchmark). - Prepare and publish external audit of BCRG 2011 financial statements by end-June 2012 and publish results, including auditor’s opinion, on BCRG website by end-August 2012. - BCRG board of directors to approve an investment policy and guidelines by end-December 2012 (structural benchmark). ### Procurement and contract management - Continued emphasis on transparent, competitive bidding for government contracts. - 2011 enforcement: strict enforcement of public procurement regulations to prevent 2009–10 problems. - Late-2011 exceptions: two major contracts awarded by direct negotiation for urgent needs in agriculture and energy (thermoelectric generators from Brazil; tractors, combine harvesters and other agricultural equipment). - Going forward: government will refrain from negotiated transactions that violate the procurement code. - Contracts signed in 2009–10 that were frozen: - Cancel those for which execution had not begun. - Create contract adjustment committee to reclassify others to be compatible with budget provisions and strict specifications. ### Monetary policy priorities and BCRG operations - Primary monetary objective: control inflation by regularly mopping up excess liquidity. - BCRG to maintain a very rigorous monetary policy, limiting growth of base money to the inflation reduction target. - Sterilize the equivalent amount in Guinea francs of inflows of foreign exchange intended to cover local expenses of mining megaprojects to curb inflationary pressures from mining acceleration in 2012. - Instruments and market development: - Revitalize market instruments and interventions on the foreign exchange market. - Resume interventions using BCRG monetary regulation securities (TRM) following the increase in the required reserves ratio to 22 percent in October 2011. - Prepare a study, with MEF, on consolidation and conversion of BCRG advances into Treasury bills and use of Treasury securities to implement monetary policy. - With IMF technical assistance, develop tools for improved assessment of liquidity conditions and publish monthly BCRG balance sheet and monetary situation analysis on its website and in local newspapers. - International reserves and exchange-rate strategy: - Maintain gross international reserves at a level equal to at least 2.5 months of goods and services imports (excluding imports for major mining sector projects financed by foreign direct investment). - Objective to improve rate determination by market forces, minimize daily fluctuations, and reduce exchange premium between official and informal markets. - Plans to expand the band around the reference rate and subsequently eliminate it; reference rate determined as weighted average of commercial bank rates. - Increase transparency of weekly IFEM auctions; draft memorandum clarifying IFEM operating regulations approved by the Foreign Exchange Commission—by end-March 2012. - Ensure foreign exchange positions of primary banks comply with regulations. - Seek IMF technical assistance to amend foreign exchange regulation and propose measures to eliminate multiple currency practice. - Strengthen operational foreign exchange capacities via establishment of a foreign exchange trading room and personnel training; request for technical and financial assistance submitted to the World Bank. ### BCRG governance, supervision, and capacity-building - Bank supervision: - Staffing: increased staffing of the financial institutions supervision directorate by hiring 18 inspectors at end-2011. - Training focus in 2012, with support from West AFRITAC and Banque de France. - Request technical assistance from IMF and West AFRITAC to strengthen bank supervision regulations. - Prepare a comprehensive financial sector development plan in 2012. - Transparency and audits: - External audit of BCRG 2011 financial statements to be completed by end-June 2012; results published by end-August 2012. - An independent external auditor will certify accounting and statistical data on program performance at test dates submitted to the IMF. - Audit of information system carried out; technical assistant hired in November 2011 to assist reorganization of IT directorate; new IT master plan adopted in December 2011. - Financial position and safeguards: - Implement most recommendations of January 2012 IMF mission updating the 2007 safeguards assessment in 2012 (including revitalization of audit committee, publication of audited financial statements, strengthening external audit mechanism). - BCRG board to approve an investment policy and guidelines by end-December 2012. - Request technical assistance from World Bank RAMP to strengthen external asset management. - Request technical assistance to modify accounting system to comply with IFRS; this could necessitate an increase in the bank’s capital partly to cover losses from huge banknote orders in 2009–10. - Government intends to recapitalize the BCRG by US$50 million during the second half of 2012, drawn from windfall mining revenue. ### Structural reforms and megaproject-related challenges - Medium-term objective: create an environment favorable to diversified economic growth and prepare the economy for the mining boom. - Investment scale and timing: - Volume of investment in megaprojects during 2011–14, including transportation infrastructures, is estimated at US$25 billion, or more than 5 times the 2011 GDP. - Start of production expected toward the middle of the decade. - Key reform areas: mining sector, energy sector, promotion of agricultural sector, improvement of business climate. - Mining policy pillars: - (i) development of agriculture and industrial fabric in mining zones and along transportation routes; - (ii) protection of the environment through monitoring of environmental management plans and escrow fund control; - (iii) community development via institutional capacity building for local governments and community development agreements; - (iv) regular surveillance of mining activities to improve government revenue. - Specific 2012 mining policy actions: - Finalize implementing regulations for the new mining code; adopt and publish implementing decrees and a standard mining contract by end-June 2012 (structural benchmark). - Audit and revise existing contracts with specialized firms; audit of mining companies expected to be completed by end-2012. - Rehabilitate and audit the mining cadastre; competitive bidding selected independent external firm; audit scheduled to be completed by end-June 2012. - Governance, transparency, and standards: - Harmonize the standard mining contract drafted in 2008 with the new mining code. - Consult with the IMF before approving any modification of the new mining code or implementing regulations that could impact tax revenue (continuous structural benchmark). - Commit to adhere to EITI and the Kimberley Process to increase transparency and ensure traceability of diamonds in international trade. - Train personnel to supervise, monitor, and potentially execute construction and operation of mining projects. *Source: IMF staff report content (provided content unit).* ### 48. The medium-term policy for the energy sector is based on two components: ### _cr1263 - 48. The medium-term policy for the energy sector is based on two components: ### Energy sector: medium-term policy - Policy has two components: - (i) restructuring and rehabilitation of the sector, including the EDG semipublic monopoly; and - (ii) development of Guinea’s enormous hydroelectric potential. - Current situation and problems: - Lack of maintenance and technical and commercial losses of more than 43 percent of production have led to the near-total unavailability of electricity in most areas of the country. - Reform of the sector is one of the government’s most important priorities because of the disastrous effect on economic growth and living conditions in Guinea. - Ongoing projects: - Kaléta dam on the Konkouré River and micro-dam projects have been launched to increase local availability of power and create opportunities to export electricity to neighboring countries. ### 2012 priorities for the energy sector (rehabilitation and restructuring) - Following the energy sector audit, the government, with support from development partners, will undertake an in-depth reform to: - increase the supply of electric power; and - strengthen the technical, commercial, and financial management of EDG, including the adjustment of tariffs. - Roundtable outcomes: - A sector roundtable organized in Conakry on January 16–17, 2012 reviewed the consultant’s audit report and the 2011–14 energy sector investment program and agreed an action plan including: - the investment program; - a tariff adjustment calendar; and - rehabilitation measures aimed at reducing technical and nontechnical losses and strengthening the commercial and financial management of EDG. - Structural benchmark and governance: - The government plans to adopt a comprehensive plan for reform for the sector by end-March 2012 (structural benchmark); this plan will include a tariff adjustment to ensure that budgetary support to EDG remains within the limit established in the budget law. - The government will choose a strategic partner to provide technical assistance for management. ### Water sector reforms - Government intends to rehabilitate and improve management of the water sector. - Planned actions in 2012: - An institutional audit of the sector is planned during 2012. - A roundtable of partners will be held thereafter with support from the AfDB and World Bank. - The process is expected to lead to definition of a program for restructuring and investment in the water sector, including selection of a strategic partner for technical assistance. ### Agricultural sector: objectives and 2012 focus - Long-term objectives: - Ensure food security by 2014 and ultimately position Guinea as an exporter of agricultural products. - Modernize family farms and promote the agricultural private sector; interventions will be guided by improving economic efficiency and social equity. - Main actions envisaged: - promote the development of a dynamic agricultural private sector by putting in place sustainable mechanisms for financing the sector; - in cooperation with development partners, strengthen agricultural infrastructures to facilitate private investment in agro-industry; - diversify food production beyond rice while sustainably developing rice cultivation by improving control of water resources; - increase productivity and yields per hectare through policies encouraging improved inputs and seeds and appropriate mechanization. - 2012 policy objective and measures: - Enhance sustainability of assistance measures initiated in 2011. - Ministry of Agriculture and development partners drew up a National Agricultural Investment Plan (PNIA), soon to be adopted by the government. - With assistance of the World Bank, continue refocusing public expenditure in accordance with PNIA priorities. - Gradually adjust the current system for facilitating access to agricultural inputs to ensure competitiveness and optimize use of budget subsidies: - initially prefinancing and subsidizing seeds, fertilizer, and agricultural equipment while ensuring recovery of the producer’s share; - thereafter gradually reduce subsidies as agricultural production expands to reduce fiscal burden and avoid supporting artificial competitiveness. ### Improving the business climate: objectives and actions - Objective: - Improve Guinea's Doing Business ranking by at least 10 places in the next three years (Guinea was ranked 181 out of 183 countries worldwide in 2011). - 2012 actions to facilitate economic activity and private investment: - Promote competition and public-private partnerships in strategic sectors such as energy. - Strengthen institutional framework for private investment in 2012 by: - (a) initiating operations of the private investment promotion agency (APIP) and the one-stop window and building capacities to respond to investor requests; - (b) streamlining private sector professional organizations. - Prepare and adopt a policy letter for the promotion of private investment by end-September 2012 with assistance from development partners. - Establish a coordination unit for private sector reforms within the Ministry of Industry and Small and Medium Enterprises. - Request technical and financial assistance from the World Bank and the IFC for reforms to promote the private sector, improve the business climate, and encourage investment in non-mining sectors. - Judicial and governance reforms: - Enhance credibility and authority of the judiciary to increase independence, integrity, and accessibility: - put in place a continuing education program for judges and judiciary personnel in 2012; - strengthen capacities of associations of attorneys, auctioneers, and other officers of the court to execute court decisions. - Continue quarterly audits of major government contracts. - Strengthen the National Governance and Anti-Corruption Agency by adopting and promulgating the anti-corruption law transposing anti-corruption provisions of United Nations and African Union conventions into national laws. - Initiate a second survey to assess extent of corruption in 2012. - Public enterprise reforms: - Institute reforms of public enterprises and implement an improved monitoring mechanism. - Adopt a strategy for withdrawal of the government from businesses by end-December 2012. - Draw up a list of enterprises to be privatized by end-June 2012. - Redefine the method of managing the 19 enterprises returned to the government’s portfolio in 2011. ### HIPC Initiative priorities - High priority on reaching the HIPC Initiative completion point as soon as possible. - Government actions: - Make every effort to quickly meet remaining triggers, including satisfactory implementation of a program supported by the IMF under the ECF. - Update the poverty profile with data from the ongoing household survey to fine-tune policies to better protect the poor. - Publish audit reports on government contracts exceeding GNF 100 million to establish transparency in public financial management. ### External financing strategy and constraints - 2012 financing and creditor strategy: - Seek debt relief from creditors to fulfill financing requirements and normalize relations with external creditors. - Following IMF Executive Board approval of the program, approach Paris Club creditors to request debt rescheduling on exceptional terms similar to those accorded in 2008. - Initiate discussions with bilateral non-Paris Club creditors with accumulated arrears to reach agreement on treatment of the debt on terms comparable to those of the Paris Club and in the context of the HIPC Initiative. - Reaching the HIPC Initiative completion point will permit coverage of a portion of program financing requirements. - Request resumption of interim assistance granted by the IMF under the HIPC Initiative representing the fourth tranche amounting to SDR 1.2852 million. - In the meantime, disbursements linked to the ECF-supported program will cover remaining balance of payments requirements. - Debt management and major project financing: - Mobilize only grants and concessional debts to ensure prudent debt management. - The Simandou 3 and 4 iron ore project provides for a government interest of up to 51 percent in the infrastructure company associated with the project, which could require a contribution of over US$4 billion in financing from Guinea. - The government will provide IMF staff with details on financing of its contribution before end-June 2012. - To ensure debt sustainability before and after HIPC completion point: - submit any proposed new debt agreements or debt guarantees to the National Debt Directorate to ensure terms are concessional; - consult with IMF staff on terms and concessionality of any new proposed debt agreements before contracting or guaranteeing external debt. - Regarding IMF debt service, the BCRG will keep a sufficient balance in its SDR account with the IMF to cover all payments falling due during the next quarter. ### Statistics and technical assistance needs - Statistical system improvements: - Implement the National Statistics Development Strategy (SNDS). - Finalize establishment of the National Statistics Institute by appointing its board of directors during first quarter of 2012. - Implement capacity building programs negotiated with development partners. - Technical assistance in macroeconomic management: - Wide range of needs identified due to weakened institutional capacities, further declined during 2009–10. - Authorities requested technical assistance from partners including the IMF and West AFRITAC; these organizations have provided recommendations since February 2011 in areas including fiscal policy, tax and customs administration, public financial management, the foreign exchange market, monetary policy, bank supervision, and national accounts. - Coordination of technical assistance: - Appointment of a technical assistant from the AFD to coordinate technical assistance and improve monitoring of donor actions. - Development partners asked to better coordinate actions; European Union has joined with: - (i) IMF for modernization of legal framework and improvement of accounting management; - (ii) World Bank for establishment of public procurement regulatory agency; - (iii) France for strengthening of the supervisory body. - Other partner projects (AfDB, World Bank, UNDP, EU, USAID) address crosscutting areas including training, automation of the Ministry of Economy and Finance, financial deconcentration and decentralization, capacity building for economic and financial coordination, government reform and modernization; mobilization of domestic revenue and external financing; macroeconomic framing and cash flow and budget management; and support to multiple ministries and the High Commission on Government Reform and Administrative Modernization. ### Program monitoring, assessment, and supervision - Monitoring mechanism: - Reform Coordination Committee (CCR); - Technical Support Committee for the CCR; and - Program Monitoring Technical Unit (CTSP) as a unit of the Ministry of Economy and Finance. - These bodies will provide periodic reports to the government, the BCRG, international financial institutions, and development partners on progress, outlook, and envisaged measures. - Program reviews and timelines: - Program reviewed semiannually by the IMF Executive Board on the basis of quantitative monitoring indicators and structural benchmarks (Tables 4 and 5 attached) as defined in the Technical Memorandum of Understanding (TMU, Annex 1). - First year of the program covers January to December 2012. - The first (second) program review based on performance criteria as at end-June 2012 (end-December 2012) is expected to be completed no later than October, 2012 (April 30, 2013). *Source: _cr1263 - 48. The medium-term policy for the energy sector is based on two components.* ### 62. During the program period, the government agrees not to introduce or increase ### _cr1263 - 62. During the program period, the government agrees not to introduce or increase ### Program obligations and conditionality - During the program period, the government agrees not to: - introduce or increase restrictions on the balance of payments or transfers pertaining to current international transactions, - introduce multiple currency practices, - enter into bilateral payment agreements inconsistent with Article VIII of the IMF Articles of Agreement, - impose or increase any import restrictions for BOP balancing purposes. - The authorities agree to adopt — in consultation with IMF staff — any additional financial or structural measures that prove necessary to the program’s success. ### Indicative targets under the SMP in 2011 (selected quantitative outcomes) - Basic fiscal balance (floor), cumulative change from end-December 2010: - 2010 actual (flow over 2010): -3,424 - end Mar. actual: -330 - end Jun. prog.: 616 (Status: Met) - end Jun. actual: -429 (Status: Met) - end Sep. prog.: 183 (Status: Met) - end Sep. actual: -663 - end Dec. est.: -864 - Net domestic assets of the central bank (ceiling): - 2010 end Dec.: 6,741 - end Mar. actual: 1,760 - end Jun. actual: -12 (Status: Met) - end Jun. prog.: 2,045 (Status: Met) - end Sep. prog.: 1,495 (Status: Met) - end Sep. actual: 2,488 - end Dec. est.: 2,780 - Domestic bank financing of the government (ceiling), cumulative change from end-December 2010: - 2010 end Dec.: 4,037 - end Mar. actual: -4,682 - end Jun. prog.: -5,558 (Status: Met) - end Jun. actual: -4,397 (Status: Met) - end Sep. prog.: -4,964 (Status: Met) - end Sep. actual: -3,943 - end Dec. est.: -3,518 - Net international reserves of the central bank (floor); US$ millions (calculated using the program exchange rates): - 2010 end Dec.: 22 - end Mar. actual: 103 - end Jun. prog.: 802 (Status: Met) - end Jun. actual: 1,026 (Status: Met) - end Sep. prog.: 774 (Status: Met) - end Sep. actual: 927 - end Dec. est.: 669 - end Dec. est. (alternate row): 541 - New nonconcessional medium- or long-term external debt contracted or guaranteed by the government or central bank (ceiling); US$ millions: - program rows: 0 0 0 0 0 (all Met / n.a. as applicable) - Stock of outstanding short-term external debt due or guaranteed by the government or the central bank (ceiling); US$ millions: - program rows: 0 0 0 0 0 (all Met / n.a. as applicable) - Memorandum item — Reserve money (levels): - 2010 end Dec.: 6,982 - end Mar. 2011: 6,979 - end Jun. 2011: 6,984 - end Jun. actual: 7,167 - end Sep. prog.: 6,998 - end Sep. actual: 6,863 - end Dec. est.: 7,101 - end Dec. est. (alternate row): 6,889 - Note on interpretation: staff notes that although current estimates show some overruns compared to program targets, if the additional investments financed with the exceptional revenue and already discussed with staff are excluded, performance is stronger than envisaged under the program. If those investments are excluded, the end-Dec 2011 basic fiscal balance would be a deficit of GNF 356 billion, smaller than the deficit envisaged under the program. For net domestic assets of the central bank, domestic bank financing of the government, and reserve money, the valuation of the exceptional revenue uses the program exchange rate. ### Structural reforms under the Staff-Monitored Program (selected actions and status) - No payment by the central bank for the account of the government without the prior signature of the Minister of Economy and Finance or his alternate/representative (MEFP ¶6). - Macroeconomic impact: Restore budgetary control and procedures. - Status: Observed until September 2011. - No new tax and customs exemptions (MEFP ¶8). - Impact: Restore budgetary control and ensure government revenue. - Status: Observed, with the exception of essential goods. - Monthly publication in the local media of a brief summary and analysis of the monetary outlook (MEFP ¶21). - Impact: Inform economic agents about monetary developments. - Status: Monthly memorandum on monetary and exchange policy prepared since June, and published in January 2012. - No new extra-budgetary expenditure (MEFP ¶18). - Impact: Restore budgetary control and prevent expenditure overruns. - Status: Observed until September 2011. - No net civil service recruitment in sectors other than health, education, and justice; recruitment offset by elimination of ghost workers and duplicates (MEFP ¶13). - Impact: Prevent a structural increase in wage expenditure (improve expenditure efficiency). - Status: Freeze announced by joint (interministerial) decree of March 22, 2011. - Execute a cash-basis budget with no BCRG financing in 2011 (MEFP ¶6, 16). - Impact: Enforce fiscal discipline and contain inflation. - Status: Observed until September 2011. - Publication of a circular-letter reinstating competitive selection for public procurement (MEFP ¶18). - Date: March 31, 2011. - Impact: Enforce public financial management rules. - Status: Completed per Ministerial Decree of March 11, 2011. - Adoption of the law on the Treasury single account (MEFP ¶18). - Date: April 30, 2011. - Impact: Improve control of government funds and reduce borrowing costs. - Status: Completed, Law 2011/002/CNT. - Submission for government approval of a standard mining contract conforming to international best practices (MEFP ¶28). - Date: June 30, 2011. - Impact: Improve business environment in the mining sector and ensure government revenue. - Status: Mining code adopted by CNT on September 9, 2011; implementation decrees and the standard mining contract will be adopted by end-June 2012. - Publication of the decree promulgating the law on the Treasury single account (MEFP ¶18). - Date: June 30, 2011. - Status: Completed. - Submission by the Tax Directorate to the Minister of Economy and Finance of an interim report on results of the tax audit of government contracts signed in 2009–10 (MEFP ¶12). - Date: September 30, 2011. - Impact: Restore fiscal discipline and increase revenue. - Status: A report is prepared and a tax audit is undertaken with support from the Agence Française de Développement (AFD). - Publication of the central bank’s audited financial statements on its website, together with the auditors’ opinions. - Date: October 31, 2011. - Impact: Inform economic agents about the central bank’s activities and its position. - Status: Final audit report available and published on BCRG’s website. - Institutional audit of the energy sector carried out in partnership with the World Bank and the AFD (MEFP ¶27). - Date: December 31, 2011. - Impact: Undertake a restructuring of the electricity sector, an obstacle to economic growth. - Status: Report of the firm Conseil Nodalis finalized. ### Status of HIPC Initiative completion point triggers (selected assessments) - Poverty Reduction: - Full PRSP prepared and satisfactorily implemented for one year: Partially Implemented. First PRSP adopted in 2002; second PRSP issued in 2007; implementation interrupted by military coup of December 2008; new government extended PRSP-II to 2011–12; midterm report prepared in June 2011. Government will prepare a report of full implementation for 2011 for review by World Bank and IMF. - Improvement of poverty database and monitoring via living standards measurement survey and poverty monitoring system: Partially Implemented. Comprehensive poverty survey conducted in 2002–03 (finalized 2004–05), CWIQ, Demographic and Health Survey 2007/2008. Five income thresholds established; 54 poverty indicators defined. National Statistical Office completed first phase activities of the CWIQ II survey (in December 2011) and working with Bank/UNDP and AfDB on second phase to be completed no later than March 2012. - Maintain macroeconomic stability as evidenced by satisfactory implementation of the ECF-supported program: Not Implemented. PRGF-supported program approved December 21, 2007 went off-track after the first review. Government built strong track record under the IMF Staff-Monitored Program. Negotiations on an ECF-supported program are under way. - Regulatory framework for microcredit institutions: Implemented. New law adopted in November 2005. - Governance and combating corruption: - Make publicly available a one-year progress report of CNLC: Implemented. 2002 and 2010 activity reports published. 2011 report scheduled for publication in March 2012. - Audit all government contracts > GNF 100 million and publish results quarterly: Partially implemented. Comprehensive audit of 2002–04 presented in 2007; system of quarterly audits based on sample of large contracts put in place in 2008. Reports for 2007, 2008, first half 2009 completed; most audits for second half 2009 and 2010 completed; remaining reports to be completed by February 2012. For 2011, audit of contracts signed in first six months expected to be completed by end-March 2012. - Education: - Increase gross enrollment rates and targets for girls: Implemented. Gross enrollment reached 79 percent in 2006 and 2007; girls reached 71 percent in 2006 and 2007. Provisional 2009–2010 data show target achieved; 2011 Education Statistics Yearbook being prepared. - Increase number of new primary school teachers by at least 1,500 per year: Implemented. On average 1,673 trained and recruited each year from 2001 through 2007; about 1,500 teachers hired between 2009–11 on average, meeting the trigger. - Health: - Increase immunization rates for children under one: Implemented. 52 percent in 2001; 58 percent in 2002; 85 percent in 2007. Report on health data 2008–2011 being prepared. - Increase percentage of pregnant women benefiting from at least one prenatal consultation: Implemented. Trigger met at 88% in 2010 per Health Information System review by WB staff in 2012. ### Performance criteria and indicative targets, ECF 2012 (selected figures) - Quantitative performance criteria (cumulative change from end-December 2011): - Basic fiscal balance (floor): - end Sep. 2011 actual: 183 - end Dec. 2011 actual: -864 - end Mar. 2012 indicative target: -1,102 - end Jun. 2012 PC: -1,497 - end Sep. 2012 target: -1,418 - end Dec. 2012 PC: -1,518 - Net domestic assets of the central bank (ceiling): - end Sep. 2011 actual: 1,495 - end Dec. 2011 est.: 3,178 - end Mar. 2012 indicative: 4,484 - end Jun. 2012 PC: 3,385 - end Sep. 2012 target: 3,541 - end Dec. 2012 PC: 3,854 - Domestic bank financing of the government (ceiling): - end Sep. 2011 actual: -4,964 - end Dec. 2011 est.: -3,120 - end Mar. 2012 indicative: 1,300 - end Jun. 2012 PC: 197 - end Sep. 2012 target: 348 - end Dec. 2012 PC: 650 - Net international reserves of the central bank (floor); US$ millions (calculated using program exchange rates): - end Sep. 2011 actual: 927 - end Dec. 2011 est.: 541 - end Mar. 2012 indicative: 435 - end Jun. 2012 PC: 585 - end Sep. 2012 target: 504 - end Dec. 2012 PC: 458 - New nonconcessional medium- or long-term external debt contracted or guaranteed by the government or central bank (ceiling); US$ millions: - program rows show: 0 0 0 0 0 (continuous performance criterion; excludes IMF borrowing) - Stock of outstanding short-term external debt contracted or guaranteed by the government or the central bank (ceiling); US$ millions: - program rows show: 0 0 0 0 0 (continuous performance criterion) - New external arrears (ceiling): program row entries show 0 0 0 (continuous performance criterion) - Indicative targets: - Expenditure in priority sectors (floor): - end Sep. 2011 actual: 2,100 - end Dec. 2011 est.: 1,765 - end Mar. 2012 indicative: 2,501 - end Jun. 2012 PC: 3,208 - end Sep. 2012 target: 3,910 - Memorandum item — Reserve money (levels): - end Sep. 2011 actual: 6,863 - end Dec. 2011 est.: 7,287 - end Mar. 2012 indicative: 7,083 - end Jun. 2012 PC: 7,078 - end Sep. 2012 target: 6,644 - end Dec. 2012 PC: 6,744 ### Prior actions and structural benchmarks, ECF 2012 (selected measures and dates) - Prior actions (completed): - Adopt a 2012 budget law as discussed with November 2011 mission. — Completed. Rationale: Preserve program budget objectives. - Conduct a roundtable on the electricity sector in order to define the sector reform program. — Completed. Rationale: Reduce the burden of transfers and subsidies on the budget. - Publish the central bank’s 2010 audited financial statements on its website, together with the auditors’ opinions. — Completed. Rationale: Promote accountability and transparency. - Provide IMF staff with a copy of the Rio Tinto contract with the government. — Contract annex still pending. Rationale: Promote transparency in government operations. - Structural benchmarks and dates: - Consult with the IMF before approving any modification to the new mining code or implementing regulations that could have a tax impact. — Continuous. Rationale: Protect budget revenue. - Adopt a comprehensive plan for reform of the electricity sector. — End-March 2012. Rationale: Reduce the burden of transfers and subsidies on the budget. - Harmonize methods and procedures for assistance to the agriculture sector (distribution of inputs, seeds, and agricultural materials) and for extension and collection of agricultural loans, based on World Bank and IFAD advice. — End-March 2012. Rationale: Ensure control of agricultural subsidies and improve collections for producer credits. - Adopt implementing texts and general terms and conditions of operation for the implementation of the Special Investment Fund, based on IMF and World Bank advice. — End-March 2012. Rationale: Improve public infrastructures while preserving sustainability of public finances. - Reintroduce mechanism for regularly adjusting petroleum product prices based on changes in international market prices and exchange rate. — Continuous from July 1, 2012. Rationale: Protect budget revenue and ensure budget sustainability. - Adopt and publish implementing decrees for the new mining code as well as a standard mining contract. — End-June 2012. Rationale: Ensure a larger share for the government in Guinea's mining revenues. - Develop a plan to implement tax reforms. — End-June 2012. Rationale: Promote predictability in public finance reforms. - Certify, by an independent external auditor, the statistical data on program performance at test dates submitted to the IMF by the BCRG, and approve an investment policy and guidelines by end-December 2012 by the BCRG board of directors. — End-December 2012. Rationale: Ensure appropriate utilization of resources entrusted to the BCRG. - Based on an exhaustive list of companies benefitting from the investment code and their tax advantages, terminate benefits of companies whose eligibility periods have expired, and adopt a revised investment code. — End-August 2012. Rationale: Reduce tax expenditures and improve the business environment. - Adopt a medium-term public investment program, based on advice provided by the development partners. — (date truncated in source). *Source: IMF staff and Guinean authorities as presented in the referenced IMF document.* ### Box 2) ### Box 2) ### Introduction - Sets out understandings between the Guinean authorities and IMF staff regarding definitions of the quantitative performance criteria and indicative targets for the program supported under the ECF, and related reporting requirements. - Quantitative performance criteria, indicative targets, and cut-off dates are detailed in Table 4 of the Memorandum of Economic and Financial Policies (MEFP). ### Key definitions — General - "Government" means the central government of the Republic of Guinea and excludes local governments, the Central Bank of the Republic of Guinea (BCRG), or any other public entity with autonomous legal personality, notably administrative public entities (établissements publics administratifs). ### Key definitions — A. Quantitative Performance Criteria - Basic fiscal balance: difference between government revenue, excluding grants, and basic government expenditure. Definitions align with the government flow of funds table (TOFE). - Net domestic assets (NDA) of the BCRG: NDA = Reserve Money – Net Foreign Assets (NFA) of the BCRG, both calculated at the program exchange rate (based on the BCRG balance sheet). - Net foreign assets (NFA): difference between gross foreign assets of the BCRG (including foreign assets not part of reserve assets) and foreign liabilities of the BCRG. - Domestic bank financing of the government (net domestic bank credit) comprises: - (i) central bank financing of the Treasury: change in the net position of the Treasury with the central bank (NTP1), including the HIPC account and accounts for exceptional resources, such as the Special Investment Fund (SIF), but excluding changes in the net position of “satellite” government accounts with the central bank; - (ii) commercial bank financing of the Treasury: changes in the stock of Treasury bills held by banks, excluding changes in the net position of “satellite” government accounts held in commercial banks. - Net international reserves (NIR) of the BCRG: difference between reserve assets (external assets readily available to and controlled by the BCRG as per the fifth edition of the IMF’s Balance of Payments Manual) and foreign exchange liabilities of the BCRG to residents and nonresidents (including foreign exchange deposits of local banks with the BCRG and off-balance sheet liabilities). Excludes long-term liabilities such as SDR allocations. - Gold valuation: gold holdings valued at the gold price in effect on December 30, 2011 (US$1565 per oz.) for the first half of 2012 and at the price in effect on June 30, 2012 for the second half of 2012. - Program exchange rates for U.S. dollar value of reserve assets (other than gold) and foreign exchange liabilities: - For the first half of 2012, exchange rates in effect on December 30, 2011: 7089.53 GNF/US$, SDR (1.5353 US$/SDR), Euro (1.2961 US$/EUR), and other currencies as published in International Financial Statistics. - For the second half of 2012, exchange rates in effect on June 30, 2012. - Medium- and long-term external debt contracted or guaranteed by the government or the central bank: external debt contracted for a period of one year or more during the period under review. - Debt is concessional if it has a grant element equivalent to 35 percent or more of the net present value (NPV). - NPV calculation: - For debts with maturity of 15 years or more: use average of the OECD commercial interest reference rates (CIRRs) for the previous 10 years. - For debts with maturity less than 15 years: use average OECD CIRRs for the previous six months (January 1 to June 30 or July 1 to December 31). - Same margins added to the two averages: 0.75 point if repayment period is less than 15 years, 1 point if repayment period between 15 and 19 years, 1.15 points if repayment period between 20 and 29 years, and 1.25 points if repayment period is 30 years or more. - This definition does not apply to financing granted by the IMF. - Short-term external debt: stock as of a specific date of external debt contracted or guaranteed with initial contractual maturity of less than one year. Excludes normal import-related suppliers’ credits and foreign currency deposits at the central bank. - New external arrears: all debt-service obligations (principal and interest) arising from loans contracted or guaranteed by the government or the BCRG that are due but not paid on the due date, and unpaid penalties or interest charges associated with these loans. - For the performance criterion, an obligation not paid within 30 days after falling due will be considered a “program” arrear. - Arrears not considered for the performance criteria (“non-program” arrears): - (i) arrears on the service of external debt for which there is a request for rescheduling or restructuring; and/or - (ii) litigious amounts. ### Key definitions — B. Indicative Target and Memorandum Item - Expenditure in priority sectors (indicative target) includes spending under: - Title 2 (wages and salaries), Title 3 (goods and services), Title 4 (transfers and subsidies), and Title 5 (domestically financed investment) by the Ministries of: - (i) Justice, - (ii) Agriculture, - (iii) Fisheries and Aquaculture, - (iv) Livestock, - (v) Public Works and Transport, - (vi) Urban Planning, Housing and Construction, - (vii) Health and Public Hygiene, - (viii) Social Affairs, Women Promotion and Children, - (ix) Pre-University Instruction and Civic Education, - (x) Labor, Technical Education and Professional Training, - (xi) Higher Education and Scientific Research, - (xii) Alphabetization and Promotion of National Languages, - (xiii) Energy and Environment. - Includes spending under Title 6 (Financial Investment and Capital Transfers) by the Ministry of Public Health and utility charges for water, electricity, and telephone (Title 3 of the ministries listed above). - Excludes spending under Title 4 of the Ministry of Higher Education and Scientific Research. - Reserve money (memorandum item): comprises local banks’ deposits and other private sector deposits with the BCRG (including bank reserve requirements) denominated both in Guinean francs and in foreign currencies, Guinean francs in circulation, and Guinean francs in the vaults of local banks. Foreign currency amounts converted to Guinean francs at the program exchange rate. ### Key definitions — C. External Debt - “External debt” as per point 9 of the Guidelines on Performance Criteria with Respect to Foreign Debt (IMF Executive Board Decision referenced). - “Debt” for program purposes: current (not contingent) liabilities created under a contractual arrangement through provision of value in assets or services, requiring future payments in assets or services to discharge principal and/or interest. - Primary forms of external debt: - loans (including deposits, bonds, debentures, commercial loans, buyers’ or suppliers’ credits, repurchase agreements, official swap arrangements, swaps, or leases); - suppliers’ credits (deferred payment contracts); - leases: debt equals present value (at inception) of all lease payments expected during the agreement, excluding payments covering operation, repair, or maintenance. - Under this definition, arrears, penalties, and judicially awarded damages arising from failure to make payment under a contractual obligation that constitutes debt are debt. Failure to make payment on an obligation not considered debt (e.g., payment on delivery) will not give rise to debt. - Government and central bank agree not to contract or guarantee any nonconcessional external debt as defined in paragraph 8, except reschedulings. Government undertakes to consult IMF staff on terms and concessionality of all proposed new loan agreements before contracting or guaranteeing external debt. ### Adjustments to program performance criteria - Quantitative performance targets are calculated on basis of projected amounts of: - (1) net external assistance; - (2) exceptional revenues of the mining sector; - (3) net change of “program” arrears. - Net external assistance (program definition): difference between: - (a) cumulative budgetary assistance (grants and loans), impact of debt relief granted by external creditors, and net change in “non-program” arrears; and - (b) cumulative payments of external debt service due after relief, for loans on which debt relief is secured. - Guinea: External Assistance and Exceptional Mining Revenues, 2012 (Millions of U.S. dollars, cumulative from end-December 2011) — table line preserved as in source: - Net external assistance -22.17-60.99 -85.00 -106.48 - Budgetary assistance (grants + loans) 1.523.88 5.23 6.75 - Impact of debt relief obtained 391.07409.44 428.10 485.11 - External debt service due -40.21-99.78 -143.79 -223.70 - Interest -8.46-25.21 -35.92 -52.74 - Principal -31.75-74.57 -107.87 -171.05 - Net change in “non-program” arrears -374.54-374.54 -374.54 -374.54 - Exceptional mining revenues expected 0.00250.00 250.00 250.00 - The floor for NIR, ceilings on NDA of the BCRG and bank financing of the government, and the floor for the basic fiscal balance will be adjusted if net external assistance, net change in “program” arrears, and/or exceptional mining revenues differ from projections. - Adjustments for net external assistance: - If net external assistance exceeds program forecasts: floor for the basic fiscal balance adjusted downward by amount equal to surplus external assistance (allowing entire surplus to be used for supplementary expenditures). Floor for NIR and ceilings on NDA of the BCRG and bank financing of the government will not be adjusted. - If net external assistance is below program forecasts: floor on NIR adjusted downward by 80 percent of the shortfall; ceilings for NDA of the BCRG and bank financing of the government adjusted upward by 80 percent of the shortfall; floor for the basic fiscal balance adjusted upward by 20 percent of the shortfall (requiring a fiscal adjustment equivalent to 20 percent of the shortfall). - Adjustment related to net change in “program” arrears: - If net change in “program” arrears exceeds projections: floor for NIR adjusted upward by amount equal to surplus net change in arrears; ceilings on NDA of the BCRG and bank financing of the government adjusted downward by amount equal to surplus net change in arrears; floor for the basic fiscal balance not adjusted. - If net change in “program” arrears is below projections: floor on NIR adjusted downward by 80 percent of the difference; ceilings for NDA of the BCRG and bank financing of the government adjusted upward by 80 percent of the difference; floor for the basic fiscal balance adjusted upward by 20 percent of the difference (requiring a fiscal adjustment equivalent to 20 percent of the difference). - Adjustments for exceptional mining revenues: - Surplus up to US$500 million: floor for NIR adjusted upward and ceilings on NDA of the BCRG and bank financing of the government adjusted downward by 80 percent of the surplus; floor for the basic fiscal balance adjusted downward by 20 percent of the surplus (allowing surplus to be used for supplementary expenditures up to amount of US$100 million or 2 percent of GDP). - Surplus in excess of US$500 million: floor for NIR adjusted upward and ceilings on NDA of the BCRG and bank financing of the government adjusted downward by 100 percent of the surplus beyond US$500 million; floor for the basic fiscal balance not adjusted (resulting in saving of surplus beyond US$500 million pending review and cost-benefit and sustainability analysis before excess revenues are committed). - Shortfalls up to US$125 million: floor for NIR adjusted downward and ceilings on NDA of the BCRG and bank financing of the government adjusted upward by total amount of the shortfall; floor for the basic fiscal balance not adjusted (2012 budget calls for a deposit of US$125 million from exceptional mining revenues, or 2 percent of GDP). - Shortfalls in excess of US$125 million: floor for NIR adjusted downward by equivalent of 80 percent of the shortfall; ceilings on NDA of the BCRG and bank financing of the government adjusted upward by equivalent of 80 percent of the shortfall; floor for the basic fiscal balance adjusted by equivalent of 20 percent of the shortfall (requiring a fiscal adjustment of up to the equivalent of 20 percent of the US$125 million (or up to 0.5 percent of GDP), the amount of new exceptional mining revenues that the 2012 budget set aside for general budgetary financing). ### Definitions for purpose of the TOFE (Section IV) - Government revenue: includes tax and nontax revenue; excludes external grants, proceeds of privatizations, and exceptional mining revenues (the latter two recorded as financing). - Tax revenue categories (consistent with 1986 GFS manual, Section IV.A.1): - Title 1: taxes on income, profit, and dividends; - Title 2: taxes on property; - Title 3: taxes on international trade (including import duties, export duties, surtax on consumption, liquidation levy (redevance de liquidation), and penalties related to international trade); - Title 4: taxes on goods and services (including general sales taxes, value-added taxes on domestic sales and imports, single tax on vehicles (TUV), business tax (TAF), taxes on petroleum products, export taxes on mining products, tax on mining products, taxes on diamonds, tax on precious metals); - Title 5: other tax revenues (stamp taxes and registration fees). - Tax receipts also include taxes borne by the government for purchase of externally financed capital goods. - Nontax revenue: royalties and dividends (excluding revenue from sale of telephone licenses), administrative duties and fees, fines and forfeitures (Title 6), other nontax revenue (Title 7) including incidental revenues, and capital revenues (Title 8). Capital revenues include proceeds from sale of government assets, but exclude privatization proceeds. - Government expenditure: measured at the stage of acceptance by the Treasury, regardless of execution procedure. - In regular and simplified delegated spending authority procedures, expenditures are accepted by the Treasury immediately after payment order issued. - For simplified procedures and delegated spending authority or payments without prior authorization, Treasury accepts expenditure at time payment is ordered; no expenditure is measured on basis of adjusting payment orders (mandatements de régularisation) when adjustment to payment order basis is done. - For refunds of VAT credits, acceptance by Treasury occurs when refund requests are transmitted by the National Tax Directorate to the National Director of the Treasury. - Government expenditure includes all central government expenditure, including subsidies and transfers to autonomous public entities, and loans granted or on-lent by the government to public enterprises and other sectors, net of repayments on such loans. *Source: Attachment II—Guinea: Technical Memorandum of Understanding, February 2012 (Box 2) from the provided IMF document.* ### 23. Basic expenditure is defined as total fiscal expenditure, less expenditure on interest ### _cr1263 - 23. Basic expenditure is defined as total fiscal expenditure, less expenditure on interest ### Definitions and financing concepts - Basic expenditure: - "Basic expenditure is defined as total fiscal expenditure, less expenditure on interest on the external debt and expenditure financed by external grants or loans or by counterpart funds." - External financing comprises: - (i) disbursements of external loans; - (ii) principal owed on government external debt; - (iii) relief and rescheduling of government external debt, net of HIPC assistance obtained from multilateral institutions, which is considered part of grants; and - (iv) the net change in external arrears (interest and principal, to be shown separately). ### Data reporting for program monitoring (implementation timing) - Structural benchmarks: - Information on implementation and/or execution of the structural benchmarks under the program (as specified in Table 5 of the SEFP) will be reported to the IMF’s African Department within two weeks of the planned date of implementation. - The status of the implementation of other structural measures included in the program will be transmitted within 30 days of the end of each month. - General reporting obligations: - "The authorities will report the information summarized in Table 1 below to the IMF’s African Department by the deadlines set in this table. Barring any indication to the contrary, the data will take the form mutually agreed upon by the authorities and the IMF. The authorities will supply the Fund with any additional information that its staff may request for program monitoring purposes." ### Table 1 — Guinea: Data Reporting Requirements for Program Monitoring (selected entries) - Financial and monetary data (Monthly, deadline: 30th of the month for the previous month): - Central bank balance sheet, consolidated commercial bank balance sheet, monetary survey (at the current exchange rate as well as at the program exchange rate). - Detailed net treasury position (NTP) and net government position (NGP). - Interest rates and stock of government and central bank securities (BDT and TRM). - Foreign exchange budget. - General Treasury balances. - Cash-flow plan. - Government fiscal reporting table (TOFE). - Execution of budgetary expenditures from HIPC resources and other priority expenditures. - Balance of current expenditures, VAT credits to be refunded, and domestic debt arrears. - Nonbank financing, indicating operations in Guinean francs and those in foreign currencies. - Prudential indicators for commercial banks: - Quarterly; deadline: One month after the end of the quarter. - Use of exceptional mining revenues: - Quarterly; deadline: 30th of the month after the end of the quarter. - Real sector data and prices: - Consumer price index, Conakry — Monthly; deadline: 30th of the month for the previous month. - National accounts — Annually; "Summary estimates three months after the end of the year." - Balance of payments: - Imports by use and exports by major product, trade balance — Quarterly; "Three months after the end of the quarter." - Price and volume indices of imports and of exports — Quarterly; "Three months after end of quarter." - Consolidated balance of payments estimates — Annual; "Summary estimates: six months after the end of year." - External debt (Monthly; deadline: 30th of the month for the previous month): - Debt service due before and after debt relief. - Debt service paid. - Debt service reconciliation table. - End-of-month outstanding debt and stock of daily debt service outstanding (after relief) and unpaid, stock of daily arrears according to the program definition. - Drawings on new loans. - External grants and loans: - Disbursements — Quarterly; deadline: 30th of the month for the previous quarter. - Monthly transfers of debt relief amounts under the HIPC Initiative, by creditor — Monthly; deadline: 30th of the month for the previous month. ### Relations with the Fund — key data and program facts (as of December 31, 2011 / document details) - Membership: - Joined: September 28, 1963. Article VIII. - General Resources Account (SDR Million; % Quota): - Quota 107.10 100.00 - Fund holdings of currency (Exchange Rate) 107.03 99.93 - Reserve Tranche Position 0.08 0.07 - SDR Department (SDR Million; % Allocation): - Net cumulative allocation 102.47 100.00 - Holdings 61.45 59.97 - Outstanding Purchases and Loans (SDR Million; % Quota): - ECF Arrangements 27.05 25.26 - Latest Financial Arrangements (Type / Arrangement Date / Date of Expiration / Amount Approved (SDR Million) / Amount Drawn (SDR Million)): - ECF 1/ Dec 21, 2007 Dec 20, 2010 69.62 24.48 - ECF 1/ May 02, 2001 May 01, 2004 64.26 25.70 - ECF 1/ Jan 13, 1997 Jan 12, 2001 70.80 62.94 - Projected Payments to the Fund (SDR Million; based on existing use of resources and present holdings of SDRs): - Forthcoming 2012 2013 2014 2015 2016 - Principal 2.571.384.904.904.90 - Charges/Interest 0.05 0.050.100.090.07 - Total 2.62 1.424.994.984.97 - HIPC Initiative implementation: - Assistance committed by all creditors (US$ Million): 545.00 - Of which: IMF assistance (US$ million) 31.40 - (SDR equivalent in millions) 24.24 - Decision point date Dec 2000 - Completion point date Floating - Disbursement of IMF assistance (SDR Million): - Assistance disbursed to the member 10.02 - Interim assistance 10.02 - Completion point balance -- - Total disbursements 10.02 - Safeguards assessment (Central Bank of the Republic of Guinea, BCRG): - A safeguards assessment mission visited in January 2012; preliminary findings indicate governance and safeguard frameworks continue to require strengthening, limited capacity to manage reserves, weak internal control environment, and predominantly manual compilation of program data. - Proposed mitigations: external auditors verify monetary data at test dates; BCRG publish audited annual financial statements within statutory deadlines (immediately for 2010); Board approve an investment policy and guidelines. - Exchange rate arrangement: - "Guinea is returning to a managed float system with no predetermined path, after an interruption of the system during 2009–10; the de facto arrangement is classified as 'other managed arrangement'." - System includes a multiple currency practice with a one-day lag between the official rate and the weighted average commercial bank rate. - Guinea accepted obligations under Article VIII, sections 2, 3 and 4 of the IMF’s Articles of Agreement. - Article IV Consultation: - "The last Article IV consultation was concluded by the Executive Board on December 21, 2007." *Prepared by the African Department (Informational Annex, Staff Report for the 2011 Article IV Consultation and Requests for a Three-Year Arrangement Under the Extended Credit Facility, and for Additional Interim Assistance Under the Enhanced Initiative for Heavily Indebted Poor Countries, February 13, 2012).* ### 6. Furthermore, a second FSF programme will support the National Statistics ### _cr1263 - 6. Furthermore, a second FSF programme will support the National Statistics ### FSF programme and mining sector governance support - A second FSF programme will support the National Statistics Development Strategy (NSDS) and the conduct of the Third General Population and Housing Census (RGPH-III). - The Bank intends to support mining sector governance through its private sector window and legal support facility. This will entail: - (i) support for Guinea’s accession to the EITI, already initiated under PARCGEF; - (ii) support to Mining Code Reform, which includes a 15 percent State participation in all mining concessions, the strengthening of transparency and introduction of penalties for non-compliance with the legislation; - (iii) support for the revision of mining agreements; - (iv) involvement in the operational audit of mining companies; and - (v) the conduct of economic and financial studies on mining contracts (their value, production costs and transfer prices, etc.). ### Trust funds and complementary instruments - The Bank could mobilize supplementary Trust Fund resources to finance complementary operations in sectors covered by the 2012–16 CSP. - Example initiative: Rural Water Supply and Sanitation Initiative to prepare a strategy in that area. - Other available instruments: the Partial Risk Guarantee Instrument; the Global Environment Fund; and Africa Carbon Facility and Green Fund. ### AfDB and Fund staff collaboration - Staffs will share information on: - the ECF-supported program, - the macroeconomic situation, - the budget, - progress in structural reform, - planned missions, and - mission reports. ### ADF 13 (2011–13) and FSF operations programming (UA million) — selected figures preserved - Pillar I – Support Good Economic and Financial Governance - Budget Support 2011: 20.00 - Targeted Support 2011: 2.50 - Sub-Total Pillar I: 22.50 - Pillar II – Support Energy and Transport Infrastructure (selected projects) - CLSG Interconnection 2012: ADF 12.00; Regional Funds 24.00; Total 36.00 - Boké-Quebo Road 2013: ADF 3.67; Regional Funds 7.34; Total 11.01 - OMVG 2013: Regional Funds 12.00; Total 36.00 (regional funds and totals shown in table) - Sub-Total Pillar II: ADF 27.67; Regional Funds 55.34; Total 83.01 - Total programming (table totals): ADF 47.67; FSF 2.50; Regional Funds 55.34; Grand Total 105.51 - Economic and Sector Work (selected entries with years) - Private Sector Profile 2012: x - Guinea Vision 2035 2013: x - Study on Financial Sector Reforms 2013: x - PPP Framework Feasibility Study 2013: x - Study on Economic Partnership Agreements (EPA) 2012: x ### Millennium Development Goals — selected indicators and figures (as presented) - Malnutrition prevalence, weight for age (% of children under 5): 26.8 .. 32.7 .. 29.6 21 13.4 - Primary completion rate, total (% of relevant age group): 19 20 33 55 58 62 - School enrollment, primary (% net): 27 .. 47 67 66 73 - Immunization, measles (% of children ages 12–23 months): 35 61 42 71 68 51 - Mortality rate, infant (per 1,000 live births): 139 124 110 91 88 - Mortality rate, under 5 (per 1,000): 234 209 183 163 130 142 - Births attended by skilled health staff (% of total): 31 .. 35 38 44 46 - Contraceptive prevalence (% of women ages 15–49): 2 .. 67 21 ... - Prevalence of HIV, female (% ages 15–24): ......1.4 3.8 0.9 - CO2 emissions (metric tons per capita): 0.2 0.2 0.2 0.1 0.9 0.1 - Improved sanitation facilities (% of population with access): 14 .... 18 31 19 - Improved water source (% of population with access): 44 .... 50 60 71 - Aid per capita (current US$): 475 518 194 425 - Debt service (PPG and IMF only, % of exports, excl. workers' remittances): 19.6 24.3 14.2 11.3 3.1 11.2 - Fertility rate, total (births per woman): 6.5 6.3 5.6 5.6 5.0 5.3 - GNI per capita, Atlas method (current US$): 430 490 400 420 1,134 370 - Population, total (millions): 6.2 7.5 8.4 9.4 8.4 10.1 - Sources cited in table: World Development Indicators database, June 2011; and Guinean authorities, Second Poverty Reduction Strategy Paper, August 2007. ### Statistical issues and data adequacy for surveillance - General assessment: Guinea’s data provision has some shortcomings, but is broadly adequate for surveillance. - Data suspension: Official data provision was suspended during 2009–10 when government statistical capacity was seriously hindered. - National accounts: - Real sector statistics are incomplete and published with insufficient timeliness. - Monthly surveys of mining, industrial and agricultural production are produced with delays. - Employment and population statistics are only published annually. - A program for annual input-output matrices was interrupted in 2009. - West AFRITAC has sent missions to work on methodologies and provisional estimates for 2009–10. - Price statistics: Monthly consumer price index (CPI) is being published in a timely manner. - Government finance statistics: - The Ministry of Economy and Finance compiles comprehensive monthly budgetary central government data on a cash basis for revenue and on commitment and cash bases for expenditure. - During 2009–10 many operations executed on behalf of government were not recorded under the TOFE. - Provision of monthly data to AFR has resumed, albeit with some delays. - Treasury Single Account law adoption in 2011 is expected to improve transparency. - Monetary statistics: - During 2009–10 many government accounts were created at the central bank and commercial banks outside treasury control, creating large inconsistencies. - The government is closing these accounts and bringing operations under the net position of the treasury (PNT). - Central bank and deposit money bank accounts and the monetary survey are compiled and shared monthly with AFR. - Balance of payments: - Presentation follows BPM5; conversion to BPM6 methodology to be reviewed during an external sector statistics mission scheduled for March 2012. - Technical Committee on Balance of Payments Harmonization reportedly reactivated. - Results of weekly foreign exchange auctions are reported regularly online and in main newspapers; exchange rates published daily. - Data standards and quality: - Guinea participates in the General Data Dissemination System since 2003. - No data ROSC is available. ### Debt sustainability: key findings and indicators - Status and risk assessments: - Guinea has been in debt distress since 2007, evidenced by external debt service arrears. - With approval of the proposed ECF arrangement and accompanying bilateral debt relief, the risk of debt distress would shift to high risk. - Under scenarios assuming full delivery of relief under HIPC and MDRI at the Completion Point and of “beyond-HIPC” debt relief after the Completion Point, the debt burden would imply a moderate risk of debt distress. - Public sector DSA indicates domestic debt is significant but expected to decrease over the longer run and does not alter the assessment. - The initial debt level is high; debt position remains vulnerable to macroeconomic shocks, indicating the need for prudent fiscal policies and debt management. - Historical and stock figures: - At end-2010, public and publicly guaranteed external debt: US$3,144 million, or 64 percent of 2010 GDP. - Arrears accounted for a growing share, amounting to 10 percent of end-2010 debt outstanding. - Multilateral creditors accounted for 66 percent of the total external debt; AfDB group and IDA accounted for almost four-fifths of the multilaterals’ share. - Paris Club creditors accounted for 25 percent of total; official bilateral non-Paris Club and commercial creditors made up the rest. - External debt service arrears reached US$315 million at end-2010. - Paris Club creditors accounted for 33 percent of the arrears; multilateral financial institutions accounted for 30 percent of the arrears, including 19 percent for IDA (no overdue obligations to the IMF). - Public domestic debt dynamics: - Government liabilities to the domestic banking system increased from 13 percent of GDP in 2008, to 19 percent in 2009, and 30 percent in 2010. - Some three-quarters of domestic debt were owed to the central bank; remainder in short-term treasury bills to domestic banks. *Prepared by the Staffs of the World Bank and the International Monetary Fund, February 17, 2012.* ### 6. The baseline macroeconomic framework assumes a sizeable expansion in ### _cr1263 - 6. The baseline macroeconomic framework assumes a sizeable expansion in ### Baseline macroeconomic framework and risks - Assumptions: - Political stability, sound macroeconomic management, prudent borrowing policies, and advancement in structural reforms over the medium term. - Substantial rise in public investment, especially in long-neglected infrastructure and the energy sector. - Government support to develop agriculture and improve the business climate. - Private investment increases, economy diversification, and unlocking Guinea’s long-run growth potential driven by the start of large mining investments. - Key risks: - Renewed political instability, especially in the run-up to parliamentary elections expected in 2012. - Developments in the global economic outlook and mineral prices. - Possibility of projected mining production and revenues not materializing. ### Macroeconomic assumptions for 2011–31 (Box 1) - Real GDP growth: - Stagnation during 2009–10; rebound to 3.6 percent in 2011. - Projected to increase to almost 5 percent on average during 2012–14. - Projected to jump to 18 percent on average during 2015–17 as production from a major mining project begins and ramps up. - After 2020 growth is expected to return to about 3 percent per year. - Mineral prices: - Bauxite and gold projections for 2012–17 based on the Fund’s World Economic Outlook (WEO). - Long-run average annual price increase assumed: 1 percent for bauxite and 2 percent for gold. - Iron ore price projections based on industry estimates, beginning 2015 when the SIMFER mine comes on stream. - WEO projects iron ore prices to decline by about 40 percent by 2015 from 2011 levels. - Inflation: - As measured by the GDP deflator in U.S. dollar terms, projected to be around 3 percent in the long term. - Fiscal policy: - Primary balance deterioration reached 12 percent of GDP in 2010. - Primary balance reduced to 1.3 percent in 2011 after policy-induced correction. - Primary deficit steadily declines and moves into surplus in 2023, leveling off at around 1.5 percent. - Total revenues (excluding grants) projected to rise from 15.3 percent of GDP in 2010 to 19.8 percent in 2014. - Total primary expenditure: contraction from 27.7 percent of GDP in 2010 to 22.4 percent in 2011; rises to around 25.2 percent by 2016; then gradually falls to around 19 percent of GDP. - External current account balance (excluding official transfers): - Expected to expand sharply to 32.7 percent of GDP on average during 2012–15. - Swings into a small surplus by 2017. - Moves back into deficit in 2023, rising gradually to about 3 percent by 2031. - External financing: - Loan and grant disbursements resumed in 2011 and projected to reach 5 percent of GDP in 2012, of which half takes the form of grants. - Official financing expected to average 5 percent of GDP per year in the medium term. - Share of concessional loans expected to decline from 80 percent during 2011–15 to 60 percent during 2023–31. - Foreign direct investment: - Net FDI expected to surge temporarily to 32.8 percent of GDP per year on average during 2012–15. - Net FDI falls subsequently and over the long-run shifts between small net inflows and outflows. - Net outflows on the income account increase as repatriation and distribution of profits from the mining sector rises. ### SIMFER project assumptions and fiscal implications - SIMFER mining and infrastructure project total cost estimated at about $13 billion (one-third mining and two-thirds for infrastructure) in proportion to each shareholder’s equity stake. - Mine projected to come on stream in 2015 and attain maximum production capacity of 95 million tons by 2018. - Government to receive a 15 percent stake in the mine at no cost; options to hold an additional 20 percent fully-contributing stake in the mine and up to 51 percent in the infrastructure project. - Baseline and first alternative scenarios assume the government does not exercise these options and/or arranges financing through a PPP with no contingent liabilities for the government. - If government participates with fully-contributing stakes, potential additional borrowing need up to a maximum of about $4.6 billion, unlikely to be available on concessional terms. ### External debt sustainability — baseline scenario - Assessment: - Under baseline (no HIPC completion point), Guinea is at high risk of debt distress. - End-2011 debt burden indicators (PV of external debt related) estimated above policy thresholds: - PV of external debt-to-GDP: 41.3 percent (threshold: 30 percent). - PV of debt-to-exports: 137 percent (threshold: 100 percent). - PV of debt-to-revenue: 234 percent (threshold: 200 percent). - Debt service indicators were just below policy thresholds at end-2011. - Projections: - PV of external debt-to-GDP and PV of external debt-to-exports projected to remain above threshold for four years. - Liquidity indicators fall with strengthened revenue collection and assumed Paris Club debt relief, then level off and decline rapidly to 2020 as deferred arrears and debt service are repaid. - Stress-test findings: - If historical economic variables persist and policy improvements/growth dividend do not materialize, PV of debt-to-GDP would remain above threshold until 2027 and then decline. - Debt burden indicators are highly sensitive to exogenous shocks, especially shocks on exports and non-debt creating flows (such as net FDI). ### Public sector debt sustainability (including domestic debt) - Inclusion of domestic debt worsens debt burden indicators, though domestic debt burden expected to decrease over time. - PV of public debt-to-GDP estimated at 51 percent at end-2011 and projected to decline in the medium term. - Domestic bank borrowing: large increase in 2009–10; virtually eliminated new borrowing in 2011; no bank financing planned for the 2012 budget. - Under fixed primary balance and extreme shock scenarios, public debt burden indicators would be at least twice as high compared to baseline trajectories in the long term. ### Alternative scenarios with further debt relief - Two scenarios examined: 1. HIPC and MDRI relief (corresponding to proposed ECF arrangement and HIPC Completion Point in third quarter of 2012 under assumptions). 2. HIPC/MDRI relief plus higher government borrowing of $2.5 billion during 2013–15 to finance SIMFER. - Impact of HIPC/MDRI relief: - Debt stock and debt service ratios would immediately fall and remain below policy thresholds. - Sharp drop reflects multilaterals’ relief, especially World Bank (61 percent share at end-2010). - If HIPC/MDRI relief implemented from fourth quarter of 2012, outstanding external debt (NPV) estimated to be cut from 41.3 percent of GDP to 20.3 percent at end-2012. - A scenario with additional bilateral relief projects NPV of external debt-to-GDP at end-2012 of 13.4 percent. - First alternative scenario specifics: - Similar public spending level but lower financing gap; same composition of new borrowing as baseline. - Fiscal savings from reduced debt service used to lower foreign borrowing while maintaining public spending; growth projections identical to baseline. - Second alternative scenario specifics: - Government incurs new borrowing of $2.5 billion during 2013–15 ($1 billion in each of 2013 and 2014, and $0.5 billion in 2015). - Financing assumed 60 percent from official bilateral and 40 percent from commercial creditors during 2013–15. - Borrowing equivalent to 51 percent of 2010 GDP (45 percent of projected 2012 GDP). - Result: PV of external debt-to-GDP breaches threshold during 2013–17; PV of external debt-to-exports and to-revenues breach during 2013–15; liquidity indicators rise substantially. - Scenario does not incorporate government rate of return on equity stake; even if returns assumed, debt service ratios remain elevated given short grace periods (1–7 years) and maturities (6–23 years). ### Conclusions and policy implications - Under baseline, risk of debt distress is high: - PV of debt-to-GDP, PV of debt-to-exports, and PV of debt-to-revenue projected to stay above thresholds for next few years before declining over projection period. - Stress tests show vulnerabilities with persistent threshold breaches for some indicators; debt service indicators remain below thresholds. - Inclusion of domestic debt raises burden indicators moderately but does not alter overall assessment. - Achieving sustainable external debt requires delivery of HIPC and MDRI debt relief backed by sound macroeconomic policies: - With HIPC/MDRI, external debt would decline to a sustainable level and the risk of debt distress would shift to moderate, but vulnerability to adverse shocks and policy reversals would remain. - Expansion of mining sector activity is key to boosting growth, exports, and revenues, and hence to sustainability. - Large-scale nonconcessional government borrowing to finance SIMFER would significantly deteriorate external debt position: - Three debt burden indicators would breach policy thresholds even after HIPC/MDRI relief. - Stress tests’ impact would be exacerbated, especially on debt-service ratios which could rise close to or breach thresholds. - Policy recommendations emphasized: - Sustained implementation of sound macroeconomic policies and prudent debt management, especially regarding new large nonconcessional borrowing. - Government participation modalities in SIMFER and other large projects should avoid significant borrowing on nonconcessional terms to preserve post-HIPC sustainability. *Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr1263.pdf* ### conclusions of the DSA. ### _cr1263 - conclusions of the DSA. ### Indicators of Public and Publicly Guaranteed External Debt (2011-2031) - Figures and panels presented for debt dynamics under baseline, historical scenario, and most extreme shock (the most extreme stress test is the test that yields the highest ratio in 2021). - Key indicator panels shown: - a. Debt Accumulation: Rate of Debt Accumulation; Grant-equivalent financing (% of GDP); Grant element of new borrowing (percent, right scale). - b. PV of debt-to-GDP ratio. - c. PV of debt-to-exports ratio. - d. PV of debt-to-revenue ratio. - e. Debt service-to-exports ratio. - f. Debt service-to-revenue ratio. - Scenarios noted where the most extreme shock corresponds to a Combination shock across multiple panels. ### Sensitivity Analysis for External Debt Indicators (2011-2031) - PV of debt-to-GDP ratio (baseline and scenarios): - Baseline: 137, 119, 113, 106, 61, 41, 25, 26, 26, 26, 25, 24, 23, 22, 21, 19, 19 (series shown across projection years). - A1 (historical averages): 137, 114, 105, 98, 76, 65, 53, 54, 54, 54, 54, 52, 51, 49, 48, 46, 49. - A2 (less favorable loan terms): 137, 116, 112, 108, 63, 44, 32, 33, 34, 35, 35, 34, 34, 33, 32, 31, 33. - B1–B6 bound tests and shocks series (examples): - B5 Combination shock: 137, 208, 301, 291, 172, 117, 71, 70, 69, 68, 66, 62, 59, 56, 53, 50, 51. - B6 One-time 30 percent nominal depreciation: 137, 114, 109, 104, 59, 40, 25, 25, 25, 25, 25, 23, 23, 21, 20, 19, 19. - PV of debt-to-exports and PV of debt-to-revenue ratios reported similarly across baseline, alternative scenarios, and bound tests (tables provide year-by-year series). ### Baseline External Debt Sustainability Table (Selected values, 2008–2031) - External debt (nominal) series (selected years and values): 77.5; 71.5; 70.5; 55.8; 51.2; 47.9; 44.9; 36.9; 31.6; 24.3; 14.6 (values shown across 2008–2016 and projections). - Change in external debt (series): -0.4; -6.0; -1.0; -14.7; -4.6; -3.2; -3.0; -8.1; -5.2; 0.0; -1.3. - Identified net debt-creating flows (series): -1.6; 4.9; 5.7; -16.0; -1.0; 0.6; -0.2; -14.0; -10.4; -0.3; -0.1. - Non-interest current account deficit (series): 9.0; 9.2; 11.6; 4.6; 4.9; 5.8; 34.3; 38.3; 37.4; 18.5; 1.3; -0.8; 3.2; -0.1. - Endogenous debt dynamics (series): -4.9; -1.3; -3.5; -1.5; -1.8; -1.8; -1.8; -6.8; -5.6; -0.3; -0.2. - Contribution from nominal interest rate (series): 1.3; 0.7; 0.7; 0.9; 0.6; 0.6; 0.5; 0.6; 0.5; 0.3; 0.2. - Contribution from real GDP growth (series): -3.5; 0.2; -1.3; -2.4; -2.5; -2.4; -2.3; -7.4; -6.1; -0.6; -0.5. - Contribution from price and exchange rate changes (series): -2.7; -2.2; -3.0; ... - Residual (3-4) (series): 1.2; -10.9; -6.7; 1.3; -3.7; -3.8; -2.8; 6.0; 5.2; 0.4; -1.2. - o/w exceptional financing (series): -1.4; -0.9; -1.8; -0.1; -2.0; -2.6; -2.7; -1.5; -1.1; 0.0; 0.0. - PV of external debt (selected projections): 54.4; 41.3; 38.0; 35.7; 33.5; 27.0; 22.7; 16.4; 9.2 (series across projection years). - In percent of exports (selected): 192.0; 136.6; 119.3; 113.4; 106.2; 60.5; 40.9; 25.1; 19.5. - Debt service-to-exports ratio (selected years): 3.8; 2.3; 2.5; 13.7; 8.1; 8.2; 7.0; 6.9; 4.2; 1.8; 2.4. - PPG (public and publicly guaranteed) debt service-to-revenue ratio (selected): 8.5; 3.8; 4.6; 23.5; 13.7; 13.2; 11.1; 15.3; 12.1; 6.5; 5.0. - Total gross financing need (Billions of U.S. dollars) (series): 0.2; 0.3; 0.5; -0.5; 0.2; 0.3; 0.2; -0.3; -0.2; 0.2; 0.3. - Non-interest current account deficit that stabilizes debt ratio (selected): 9.4; 15.2; 12.7; 20.5; 3; 9.0; 41.5; 40.5; 26.6; 6.5; -0.8; 4.6. ### Key Macroeconomic and Financing Assumptions (selected) - Real GDP growth (in percent) series: 4.9; -0.3; 1.9; 2.6; 1.7; 3.6; 4.7; 4.8; 5.0; 19.8; 19.9; 9.6; 2.5; 3.0; 4.4. - GDP deflator in US dollar terms (change in percent) series: 3.6; 2.9; 4.3; 3.5; 16.4; 2.1; 0.8; -0.1; 0.0; 1.0; 1.1; 0.8; 0.9; 1.4; 1.3. - Effective interest rate (percent) series: 1.9; 0.9; 1.1; 1.4; 0.3; 1.3; 1.2; 1.1; 1.1; 1.6; 1.6; 1.3; 1.4; 1.4; 1.4. - Growth of exports of G&S (US dollar terms, in percent) series: 32.0; -22.1; 13.6; 7.6; 14.4; 12.9; 11.1; 3.4; 5.3; 71.3; 50.6; 25.8; 0.9; -6.7; 4.9. - Growth of imports of G&S (US dollar terms, in percent) series: 19.6; -21.2; 26.2; 8.5; 14.4; 14.3; 68.1; 10.3; 3.7; 12.3; 9.1; 19.6; 1.5; -4.5; 3.6. - Grant element of new public sector borrowing (in percent) (selected projection values): 45.0; 45.0; 45.0; 45.0; 39.4; 39.4; 43.1; 34.1; 34.1; 35.5. - Government revenues (excluding grants, in percent of GDP) series: 15.6; 16.2; 15.3; 17.7; 18.8; 19.5; 19.8; 20.1; 19.2; 18.5; 23.0; 19.7. - Aid flows (Billions of US dollars) series (o/w Grants): 0.0; 0.0; 0.0; 0.2; 0.3; 0.3; 0.3; 0.3; 0.3; 0.2; 0.0. - Grant-equivalent financing (in percent of GDP) series (selected): 4.0; 3.9; 3.7; 3.8; 2.9; 2.7; 0.9; 0.1; 0.7. - Grant-equivalent financing (in percent of external financing) series (selected): 84.2; 82.1; 81.7; 81.7; 67.8; 59.5; 44.5; 38.9; 44.5. ### Public Sector Debt Sustainability (Baseline, 2008–2031) — Selected Metrics - Public sector debt (percent of GDP, series): 90.9; 90.3; 99.9; 69.6; 64.0; 60.9; 58.0; 48.4; 40.4; 27.7; 15.6. - o/w foreign-currency denominated: 77.5; 71.5; 70.5; 55.8; 51.2; 47.9; 44.9; 36.9; 31.6; 24.3; 14.6. - Change in public sector debt (series): 1.0; -0.7; 9.7; -30.3; -5.6; -3.2; -2.9; -9.6; -8.0; -0.6; -1.4. - Identified debt-creating flows (series): 1.8; -1.7; 11.1; -9.0; 0.5; -0.7; -0.5; -7.5; -6.2; -0.4; -2.1. - Primary deficit (series): -1.3; 5.0; 12.0; 2.4; 4.3; 1.3; 5.2; 2.0; 2.3; 1.7; 1.8; 2.4; 0.2; -1.6; -0.6. - Revenue and grants (series): 16.1; 16.5; 15.7; 21.1; 22.0; 22.5; 22.9; 22.1; 20.7; 18.8; 23.0. - Primary (noninterest) expenditure (series): 14.8; 21.6; 27.7; 22.4; 27.2; 24.5; 25.2; 23.8; 22.5; 19.0; 21.4. - Automatic debt dynamics (series): 3.5; -6.8; -0.8; -10.3; -4.7; -2.7; -2.8; -9.2; -8.0; -0.6; -0.5. - Contribution from interest rate/growth differential (series): -12.3; -3.4; -14.7; -18.5; -9.0; -6.0; -4.8; -10.7; -9.2; -1.5; -1.1. - Contribution from real exchange rate depreciation (series): 15.8; -3.4; 13.8; 8.2; 4.2; 3.3; 2.0; 1.5; 1.2; ... - Residual, including asset changes (series): -0.8; 1.1; -1.5; -21.3; -6.1; -2.5; -2.4; -2.1; -1.8; -0.2; 0.7. - PV of public sector debt (selected projections): 83.8; 55.1; 50.8; 48.6; 46.6; 38.5; 31.5; 19.8; 10.2. - o/w foreign-currency denominated / external: 54.4; 41.3; 38.0; 35.7; 33.5; 27.0; 22.7; 16.4; 9.2. - Gross financing need (series): 1.3; 7.1; 14.0; 6.9; 9.1; 5.9; 5.8; 5.9; 4.8; 1.9; -0.4. - PV of public sector debt-to-revenue and grants ratio (selected): 534.1; 261.1; 230.9; 216.1; 203.2; 174.3; 152.3; 105.5; 44.5. - PV of public sector debt-to-revenue ratio (selected): 547.3; 311.5; 269.9; 249.5; 234.7; 191.9; 164.2; 107.4; 44.5. - o/w external (selected): 355.2; 233.7; 201.7; 183.2; 168.8; 134.6; 118.4; 88.9; 39.9. - Debt service-to-revenue and grants ratio (in percent) (selected): 16.4; 12.6; 12.8; 26.8; 17.8; 17.3; 15.3; 19.1; 14.6; 8.9; 5.3. ### Public Debt Sensitivity Tables (Selected) - Table 2b presents sensitivity analysis for PV of Debt-to-GDP Ratio, PV of Debt-to-Revenue Ratio, and Debt Service-to-Revenue Ratio for various alternative scenarios and bound tests across projection years (values shown in tabular series). - Memorandum item: Grant element assumed on residual financing (applies to all stress scenarios except A2): 34 (repeated across years). ### Selected Memoranda and Metadata - Nominal GDP (Billions of US dollars) series: 4.5; 4.6; 4.9; 5.2; 5.5; 5.8; 6.0; 7.3; 8.9; 13.7; 20.3. - Nominal dollar GDP growth series: 8.7; 2.6; 6.3; 5.7; 5.5; 4.7; 5.0; 21.0; 21.2; 10.5; 3.5; 4.5; 5.7. - PV of PPG external debt (Billions of US dollars) series (selected): 2.4; 2.0; 2.0; 2.0; 2.0; 1.9; 2.0; 2.2; 1.8. - (PVt-PVt-1)/GDPt-1 (in percent) series: -8.3; -0.3; -0.4; 0.0; -0.7; 0.5; -1.5; 0.6; -0.6; 0.0. *Statement by the IMF Staff Representative February 24, 2012* ### 1. This statement provides information that has become available since the issuance of ### _cr1263 - 1. This statement provides information that has become available since the issuance of ### Program implementation and recent developments - Updated preliminary information indicates that all quantitative indicative targets under the authorities’ staff-monitored program for end-December were met. - Compared to the estimates for the end-December outturn included in the staff report: - Lower fiscal revenue was more than offset by somewhat less current spending and especially by a shortfall in capital spending. - The shortfall in capital spending reflected delays in spending on a large contract in the electricity sector, which also contributed to higher net international reserves than estimated for the end of the year. - Inflation declined to 18.5 percent year-on-year in January 2012. - The Guinean authorities confirmed they observed the continuous structural reform measures under the 2011 staff-monitored program through end-December, 2011. - All prior actions for the program to be supported under the Extended Credit Facility have been completed. - On February 17, 2012, Paris Club creditors provided financing assurances for the medium-term economic program; negotiations for a rescheduling of Guinea’s outstanding external debt to Paris Club creditors are expected to be held in April 2012. ### IMF decisions and financing - The Executive Board approved a three-year Extended Credit Facility (ECF) arrangement for Guinea in an amount equivalent to SDR 128.52 million (about US$198.9 million). - The Board’s decision enabled an immediate disbursement equivalent to SDR 18.36 million (about US$28.41 million). - The Board approved an amount equivalent to SDR 1.2852 million (about US$1.99 million) in interim assistance for Guinea under the enhanced HIPC Initiative. ### Macroeconomic outcomes and outlook - 2011 outcomes and near-term outlook: - Growth picked up in 2011 to 3.6 percent. - The basic fiscal deficit is estimated to have been reduced from 12.6 percent of GDP in 2010 to 2.5 percent in 2011. - Central bank financing of the government was stopped, and monetary policy was tightened. - Following a large inflow of exceptional mining revenue, gross available international reserves increased to the equivalent of 4.5 months of imports at end-2011, from less than one month of imports a year earlier. - Medium-term program objectives (January 2012–December 2014) include: - Real GDP growth in the range of 4–5 percent per year during 2012–14. - A drop in inflation to the single digits. - Maintenance of gross official reserves at a level at least equivalent to 2.5 months of imports (excluding imports for large mining projects). - Risks and drivers: - The macroeconomic outlook is driven by large investments in the mining sector; foreign direct investment (FDI) in the mining sector could be as high as 40 percent of GDP or more per year during 2012–14. - The outlook is subject to downside risks, mainly renewed political instability and social unrest. - Use of 2011 windfall mining revenue over the program period will negatively affect international reserves, partly offset by ECF support. ### Policy priorities and recommendations (IMF Executive Directors’ assessment and Fund guidance) - Near-term priorities: - Continue efforts to reduce still high inflation. - Close coordination of monetary and fiscal policies to improve liquidity management. - Monetary policy should remain sufficiently tight by containing bank financing of the budget. - Maintain a market-determined exchange rate and eliminate the multiple currency practice. - Further enhance central bank supervisory capacity and strengthen governance and safeguards. - Fiscal policy guidance: - Continue to contain the budget deficit to support inflation reduction and ensure debt sustainability while generating fiscal space for priority investments and social spending. - Key fiscal measures include improved tax policy and tax administration, stronger public financial management, and streamlined expenditures, particularly eliminating subsidies. - Avoid non-concessional borrowing and give high priority to strengthening debt management capacity. - Exercise caution regarding direct state participation in large new mining and related infrastructure projects; consult closely with the Fund and the World Bank. - Managing mining revenue and structural reforms: - Ensure windfall mining revenues are used in a cost-effective and sustainable manner. - Establish effective institutional structures to support strong project appraisal and implementation for large investment projects; a special investment fund was established to strengthen oversight. - Remove bottlenecks to non-mining activity development through investment in basic infrastructure, efficient and financially sustainable public utilities, and an improved business environment. - Implement the new mining code, review and possibly renegotiate existing mining concessions, and pursue reintegration into the Extractive Industries Transparency Initiative process. - Electricity sector priorities include adding generating capacity, strengthening the electricity company (EDG), adopting a comprehensive sector plan, developing hydroelectric potential, and upgrading the law on public-private partnerships to international best practices. - Agricultural reform to be based on the National Plan for Agricultural Investment and Food Security (PNIASA), expected to aim for food security by 2014 and becoming a food exporter thereafter. ### Key statistics and indicators (as reported) - Inflation declined to 18.5 percent year-on-year in January 2012. - Real GDP growth: - 2011: 3.6 percent. - Program target 2012–14: 4–5 percent per year. - Basic fiscal balance: - 2010: -12.6 percent of GDP. - 2011: -2.5 percent of GDP. - Gross available international reserves: - End-2011: 4.5 months of imports (excluding imports for large foreign-financed mining projects). - Program objective: at least 2.5 months of imports. - IMF financing approved: - ECF: SDR 128.52 million (about US$198.9 million). - Immediate disbursement: SDR 18.36 million (about US$28.41 million). - Interim HIPC assistance: SDR 1.2852 million (about US$1.99 million). - Potential mining-sector FDI: could be as high as 40 percent of GDP or more per year during 2012–14. *Source: IMF staff report and related Public Information Notices and Press Release as summarized in the provided text.* ### Introduction ### Introduction ### Overview - Authorities express appreciation for IMF management and staff support for the staff-monitored program (SMP) and development of a medium-term economic and financial adjustment program. - Following December 2010 Presidential elections and the formation of a new Government, authorities began in early 2011 a fiscal and monetary adjustment program monitored by staff, aiming to pave the way for a three-year program under an Extended Credit Facility (ECF) and to reach the completion point under the HIPC initiative as soon as possible. - Authorities have undertaken political and security-sector reforms, and initiated political dialogue to hold free and fair legislative elections scheduled for May 2012. ### Recent Economic Developments and Performance under the SMP - Implementation and compliance - In 2011, an ambitious SMP with unprecedented economic, financial and structural measures was implemented successfully. - All quantitative and structural benchmarks for end-June and end-September under the program were met. - Provisional data for end-December indicate that program targets remain on track. - Real sector - Real GDP growth: 4.0 percent in 2011 versus 1.9 percent in 2010. - Improved performance in agricultural and mining areas; significant public investments increased electricity and water supply and improved infrastructure. - Fiscal performance - Basic fiscal balance reduced from 12.6 percent of GDP in 2010 to less than 1 percent of GDP in 2011. - Measures implemented: elimination of ad hoc customs tariff exemptions; intensified collection of back taxes; strengthened control of contributions from autonomous revenue-collecting agencies; establishment of the Treasury Single Account for all public entities. - Expenditure controls: cash-based expenditure management, freezing of Government contracts totaling 40 percent of GDP that were signed in violation of the procurement code following external audits; enforcement of competitive selection for awarding government contracts and strict expenditure controls. - Elimination of central bank financing led to reduced Treasury net borrowing from the banking system in line with the SMP. - Mining and fiscal transparency - April 2011 agreement on the Simandou south concession resulted in US $ 700 million paid to the Treasury and deposited with the central bank. - October 2011 fuel price increase of 27 percent helped reduce losses in tax revenue and facilitated implementation of a pass-through adjustment mechanism. - Intensified efforts to normalize financial relations with foreign creditors, including clearance of arrears to development partners. - Monetary and financial sector - Central bank policy rate raised from 16.75 to 22 percent in March 2011. - Reserve requirement rate increased in March and October to stand at 22 percent. - Measures contributed to reduced inflation and exchange rate stabilization. - Streamlining of regulations for exchange bureaus and establishment of an interbank foreign exchange market. - With IMF technical assistance, the central bank strengthened banking supervision capacities. - Structural reforms - Established framework for public-private sector dialogue, set up a private investment agency, and implemented a one-stop window for creating enterprises. - Launched justice and security services reform program. - Completed institutional audit of the energy sector (with World Bank and AFD support), leading to a January 2012 round-table to restructure the electricity company. - Promulgated a new mining code in September 2011; resumed participation in the Extractive Industries Transparency Initiative (EITI). - Initiated a broad agricultural recovery program and launched structures for agricultural training and extension services nationwide. ### Macroeconomic Objectives under the ECF-Program - Authorities committed to continue and strengthen reform efforts under an ECF-supported program to sustain macroeconomic stability, resume higher growth, fight poverty, and improve the business climate. - Coordination and monitoring mechanisms established: Reform Coordination Committee at the ministerial level, Technical Support Committee, and a Program Monitoring Technical Unit within the Ministry of Economy and Finance. - Program targets: - Real growth of 4.7 percent in 2012 and an average rate of 4-5 percent in 2013-14. - Reduce inflation gradually to single digits by 2014. - Maintain exchange reserves at above 2.5 months of imports. ### Fiscal Policy (under ECF) - Revenue targets and measures - Raise tax ratio to 20 percent of GDP in 2014 from 17.5 percent in 2011 to meet the ECOWAS convergence criterion. - Continue measures to improve tax policy and tax administration. - Reinstitute mechanism to regularly adjust fuel prices to world prices and exchange rate as of July 1, 2012. - Review regulatory and contractual exemptions by end-June 2012 to eliminate those that no longer respond to purposes. - Conduct institutional and regulatory audit of all revenue-generating services and complete tax audits initiated in 2011. - Expenditure control and priorities - Continue controlling public outlays, improving quality of expenditure, and channeling spending toward priority social and economic sectors. - Wage bill to be stabilized around 5.3 percent of GDP. - Implement further subsidy rationalization, including reforms in electricity and agricultural sectors, and reform of the security sector. - With development partner assistance, develop well-designed safety nets targeting poverty reduction and human capital development. - Financing and deficits - In context of declining budgetary assistance, financing through increased domestic resource mobilization and external debt relief. - Creation of a Special Investment Fund (SIF) with windfall mining revenue received in May 2011 for infrastructure financing. - Overall deficit projected to decline to 3.4 percent of GDP in 2013 and remain at that level over the medium-term. ### Monetary and Exchange Policies - Primary objective: substantially reduce inflation by regularly mopping up excess liquidity. - Policy measures: - Limit growth of base money to the inflation reduction target by revitalizing use of market instruments and interventions on the foreign exchange market. - Pursue efforts to improve rate determination by market forces, with IMF technical assistance, to unify the official and parallel markets. - Intensify strengthening of banking supervision by the central bank, modernize and increase transparency in conduct of operations. - Implement IMF recommendations to update the 2007 safeguards assessment in 2012. ### Structural Reforms and Competitiveness - Objectives - Create an environment conducive to diversified and sustained economic growth. - Ensure population benefits from natural resource exploitation and promote synergies with the rest of the economy. - Improve business climate, encourage mining and energy investment, and promote agricultural development. - Planned actions and deadlines - Continue promoting competition and public-private partnerships, enhance credibility and authority of the judiciary, and strengthen the National Governance and Anti-Corruption Agency. - Adopt a strategy to withdraw the government from business by end-December 2012 and establish a list of enterprises to be privatized by end-June 2012. - Rehabilitate state-owned electricity company (EDG) and develop hydroelectric potential; adopt a comprehensive reform plan for the energy sector by end-March 2012 following the January 2012 round-table; include a tariff adjustment to limit budgetary support to EDG within the budget law. - Conduct an institutional audit of the water sector in 2012 and hold a round-table of partners thereafter. - Mining sector: finalize adoption of implementing texts for the new mining code, audit and revise existing contracts to comply with the new code, rehabilitate the mining cadastre, and fully implement EITI and the Kimberly Process to increase transparency and credibility in mining revenue management. ### Debt Sustainability and HIPC Completion Point - Determination to reach the completion point under the HIPC initiative without delay to ensure public finance sustainability, normalize creditor relations, and refocus budget priorities on poverty reduction and infrastructure. - Progress on completion point triggers: implementation of the PRSP extended for 2011-12, audit of large public procurement, and update of poverty database. - Commitment to satisfactory implementation of the ECF-supported program. - Debt strategy: - Seek debt rescheduling from Paris Club creditors and initiate discussions with other external official bilateral and commercial creditors. - Commit to prudent debt management by mobilizing only grants and concessional loans. - Objective to reach the completion point by end-June 2012 to alleviate unsustainable debt burden and direct resources toward education, health and infrastructure. ### Conclusion and Request - Authorities reaffirm strong commitment to sound policies and structural reforms under the ECF-supported program to sustain fiscal and debt stability, enhance resource mobilization, increase competitiveness and growth, and fight poverty and unemployment. - Based on the good track record under the SMP and commitment to reforms, authorities request Directors’ support for a three-year program under the Extended Credit Facility and for quick additional interim assistance under the HIPC initiative. *Source: _cr1263 - Introduction* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr1263.pdf_