Public Information Notice No. 00/18

Public Information Notice: IMF Concludes Article IV Consultation with Guinea

March 8, 2000

On December 21, 1999, the Executive Board concluded the Article IV consultation with Guinea.¹

Background

Towards the end of 1998, the Guinean authorities confronted a numbers of serious shocks that were beyond their control. The global economic crisis resulted in a drop in demand for its main export products—alumina and bauxite. The deteriorating security situation in neighboring countries required increasing financial commitments to regional peacekeeping forces and continued expenditure to defend its own borders and host a refugee community between 5 and 10 percent of its population. These problems were aggravated by a drop off in commercial activity related to the presidential elections.

Together, these shocks constrained economic activity and posed difficult budgetary management problems. Real GDP in 1998 grew by 4.5 percent, compared to 4.8 percent in 1997, with mining activity being sluggish and service sector growth slowing. On average, prices rose to 5.1 percent, compared to 1.9 percent in 1997. Government revenue was 10.6 percent of GDP, 0.7 of a percentage point lower than in 1997, with taxes on mining revenue and international trade being below expectations. Some of the revenue shortfall was compensated by curbing current expenditure, but the primary surplus fell to 2.4 percent of GDP, compared to 2.8 percent in 1997. Broad money grew by 6.1 percent; credit to the government declined by 3.5 percent of beginning-of-period money, and net foreign assets increased by 5.6 percent on the same basis. The Guinean franc depreciated by 13.4 percent in 1998 and the spread between official and parallel rates widened. The current account deficit, excluding public transfers, narrowed from 6.3 percent of GDP in 1997 to 6.0 percent in 1998, thanks in part to the establishment of new gold mines. There was a sharp deterioration of the capital account, reflecting a fall in both public and private investment. In the face of budgetary difficulties, some 1998 debt payments were postponed, while other arrears occurred because of problems with the debt management system. All external arrears were cleared early in 1999.

The authorities made significant progress in restoring the health of the banking system. Restructuring agreements for two banks were signed in 1998; they have since been recapitalized by private shareholders and the government, and the restructuring of their operations have begun. However, the situation of a third bank remains precarious because the private shareholders have not yet supplied the additional capital. The government is continuing with the judicial proceedings to recover the bad loans of a fourth bank, which had been closed in 1997. The restructuring plan for the social security fund (CNSS) was adopted by the government in November 1998.

The problems encountered in late 1998 carried over into 1999. There was an expenditure overhang from 1998, resulting from weak budgetary controls and efforts to meet end-1998 budgetary targets. The initial 1999 budget counted on the success a peace settlement in Sierra Leone which did not hold. Thus, expenditures outstripped revenue in the first four months of 1999, with credit to the government from the central bank and the money supply ballooning, and net foreign assets declining sharply. Recognizing the danger of the situation, the authorities adopted a new budget in the second quarter of 1999 with higher revenue from improved customs and tax administration and cuts in nonpriority expenditures. Substantial progress was made between end-April and end-September in restoring macroeconomic equilibrium, with credit to the government declining, the money supply stabilizing and some reaccumulation of net foreign assets. Notable progress has also been made regarding external debt-service payments; the government has been making all external debt service payments without any delay.

Executive Board Assessment

Executive Directors noted that the overall performance in 1999 had been mixed. Exogenous factors, in particular the fall in the price of bauxite and alumina and political instability in neighboring countries, had adversely affected economic growth and the macroeconomic situation. Directors commended Guinea for the important role it had played in regional peacekeeping, and noted the severe domestic budgetary pressures resulting from this intervention. Directors regretted the serious weaknesses in fiscal and monetary management that had exacerbated the effect of the adverse external developments on macroeconomic stability. While welcoming the prompt remedial actions taken to deal with slippages that had helped put the program back on track, they stressed that, nevertheless, considerable work remained to be done to establish a sound policy environment for sustained economic growth.

Directors underscored the importance of reinforcing fiscal discipline. They regretted the continuing weak revenue performance in 1999, and stressed the need to secure a durable improvement in revenue collection. To this end, they emphasized the need to widen the tax base. They welcomed the measures already taken to reform customs, but underscored the necessity for rigorous implementation and for further reform. In addition, Directors noted the importance of strict expenditure control, containing in particular the growth of the wage bill, especially in light of the high level of poverty and the need to increase spending on priority social sectors. Several Directors also stressed the need to improve fiscal transparency and strengthen budgetary procedures. In this connection, they underscored that off-budget spending must be avoided.

Directors stressed the need for a realistic exchange rate and noted that the authorities should allow the Guinean franc to float freely. While welcoming the establishment of the foreign exchange auction, they emphasized the need to deepen the auction by ensuring that parastatal foreign exchange continues to be sold in the auction. Directors welcomed the progress in the reform of the banking system, which they considered should continue, and also urged the authorities to proceed expeditiously with an audit of the central bank of Guinea.

Directors commended the authorities for initiating the reform of the social security fund and stressed the urgency of establishing a sound and transparent social security system for all Guinean workers. They also welcomed the continuing efforts to privatize public enterprises.

Directors observed that governance problems remain an important concern in Guinea. They welcomed the actions taken by the government to fight corruption, which would also be crucial for ensuring continued donor support. They urged the government to establish without delay the envisaged anticorruption commission, and to show its determination to eradicate corruption by dealing swiftly, firmly, and transparently with pending cases of corruption as well as any new cases that come to light. They stressed that such efforts would be facilitated by strengthening the justice system.

Directors expressed concern regarding the weak social indicators in Guinea despite the fact that per capita income is above the sub-Saharan African average. They stressed the importance of the government's formulating a comprehensive poverty reduction strategy, and of this being done through a broad-based and transparent participatory process.

Directors agreed that Guinea was eligible for assistance under the enhanced HIPC Initiative, with a decision point possible in 2000, but underscored the importance of sustained program implementation under the Poverty Reduction and Growth Facility (PRGF) in this connection. They urged the authorities to prepare an interim poverty reduction strategy paper to be presented at the decision point, while work was ongoing in establishing a full-fledged framework for poverty reduction.

It is expected that the next Article IV consultation with Guinea will be held on the standard 12-month cycle.