Press Release No. 01/21

Press Release: IMF Approves Three-Year, US$82 Million PRGF Arrangement for Guinea

May 2, 2001

The Executive Board of the International Monetary Fund (IMF) today approved a three-year arrangement for Guinea under the Poverty Reduction and Growth Facility (PRGF)¹ of SDR 64.26 million (about US$81.3 million) to support Guinea's efforts to foster macroeconomic stability, promote accelerated growth, improve social services, and reduce poverty. The decision will enable Guinea to shortly draw up to SDR 12.85 million (about US$16 million).

Following the Executive Board discussion on Guinea, Stanley Fischer, First Deputy Managing Director of the IMF and Acting Chairman, made the following statement:

"Guinea's new medium-term program focuses on maintaining macroeconomic stability and accelerating growth as the foundation of the government's poverty reduction strategy. It emphasizes the promotion of private sector activity by strengthening economic infrastructure, improving governance, and enhancing the legal and regulatory frameworks. These overall objectives and the policies intended to achieve them are fully consistent with the strategy set out in the authorities' interim poverty reduction strategy paper.

"Guinea has been adversely affected by an ongoing border conflict that has had severe humanitarian costs which the government has been helping to offset. This conflict could endanger economic and social progress and jeopardize implementation of Guinea's poverty reduction strategy. A concerted effort, involving assistance from the international community, will be needed to ensure that the new economic and financial program is successfully implemented under these adverse conditions.

"Fiscal consolidation is the key to maintaining macroeconomic stability and achieving sustainable growth. Improving revenue mobilization is the main fiscal policy challenge over the medium term, and the authorities intend to intensify their efforts to reduce excessive exemptions and to complete administrative reforms, especially at customs. The authorities will need to maintain firm control over public expenditure, while increasing allocations to the priority social sectors. These efforts will need to be extended to the local administrations to ensure that the ongoing decentralization process does not lead to a loss of fiscal discipline.

"Monetary policy will aim to keep inflation in check and to improve bank liquidity management. The authorities should promptly restructure two smaller banks which are still in difficulty, and take the necessary steps to bring Guinea into compliance with the Basel Core Principles for bank supervision over the medium term.

"Full and timely implementation of the structural reform agenda is crucial. In particular, the public enterprise restructuring and privatization program should be carried out expeditiously to strengthen Guinea's economic infrastructure and to attract investment. The authorities have begun to reform the civil service, and intend to proceed with the reform of the social security system. The fight against corruption, coupled with judicial reform, will strengthen private sector confidence and help mobilize the full support of civil society for the poverty reduction effort," Mr. Fischer said.

ANNEX

Recent Economic Developments

The implementation of Guinea's PRGF-supported program in 2000 was hampered by adverse external events that contributed to program slippages in early 2000. These included a pronounced negative terms of trade shock, an increasingly severe border conflict, and a substantial shortfall in expected external assistance, reflecting to some extent delays in implementing agreed policy measures.

In 2000, output growth slowed to 1.8 percent, from 3.9 percent in 1999, with only the fisheries sector showing some dynamism, while growth slowed in the key sectors of agriculture and mining.

The fiscal outturn was somewhat worse than projected at the time of the Article IV consultation and midterm review in December 2000. Overall revenue reached 11.1 percent of GDP, primarily because of lower customs and value-added tax receipts resulting from slower activity. Overall expenditure, at 16.7 percent of GDP, was also lower than projected earlier, despite defense spending being considerably higher than originally budgeted.

Program Summary

The new medium-term economic program aims at increasing growth to an average of 6.1 percent during 2002-04 from 1.8 percent in 2000; at lowering inflation to under 3 percent of the GDP by 2004; and at maintaining an external current account deficit of 5.5 percent of GDP on average during the same period. The main challenge, however, lies in improving revenue mobilization, with a view to raising the revenue-to-GDP ratio to over 15 percent by 2004, from 11 percent in 2000. Key to this will be reducing the pervasive system of exemptions, as well as the gradual extension of the tax base to cover previously untaxed activities, including in the informal sector. Greater administration efficiency is also targeted, particularly in the customs service, where an ongoing reform program will be completed.

Fiscal policy over the medium term will focus on continuing the consolidation of public finances, building on the progress made over the past two years in strengthening the management of public expenditure and improving its composition.

Monetary policy in 2001 will aim to maintain a single-digit rate of inflation. Money demand is expected to continue to increase in 2001, though at a slower pace than the year before, as inflation is reflected to pick up in the first half of the year. However, the government will begin to reduce its indebtness to the central bank as foreign disbursements begin in the second half of the year.

Key elements of the structural reform agenda are accelerating the public enterprise strategy, starting civil service reforms; reforming the legal system; and improving governance. A technical unit in charge of preparing operations for privatizing and restructuring public enterprises will be created in the near future, and a review of the framework for private sector participation in the public utilities sector has been conducted with the support of the World Bank. With regard to public service reform, a pilot program of contract-based employment will be introduced in the agricultural sector, which could lead to more attractive remuneration packages for farmers.

In the area of governance, the National Anticorruption Committee has been active in examining specific issues, including several cases of fiscal mismanagement and fraud. Its overall effectiveness is however hampered by the absence of a specific legal status and of a detailed action plan. Both of these are expected to be completed by the middle of 2001, with donor assistance.

A poverty reduction strategy is being discussed in a series of consultations throughout the country, and a first draft of the full Poverty Reduction Strategy Paper (PRSP) is due to be prepared by end-August. In addition to the programs already established in health, education, rural development, and transportation, poverty-reducing policies have been defined and costed, and intermediate outcome indicators established, in the areas of public housing and urban sanitation, justice, social affairs, and fisheries.

Moreover, the expected gains from restructuring and privatization in the public enterprise and financial sectors should contribute to freeing government resources for poverty-reducing activities. In addition, an increasing share of available resources will be allocated to the priority social sectors, including the full amount available under the enhanced HIPC Initiative.

External indebteness will be reduced to sustainable levels in the context of the enhanced HIPC Initiative, and the authorities intend to continue to limiting new external borrowing to loans on highly concessional terms and to increasing the share of grants in overall external financing.

Guinea joined the IMF on September 28, 1963. Its quota² is SDR 107.10 million (about US$136 million), and its outstanding use of IMF credit currently totals SDR 94.5 million (about US$119 million).