Typical street scene in Santa Ana, El Salvador. (Photo: iStock)
IMF Survey: Policy Reforms, Mining Boom Power Guinea's Recovery
April 6, 2012
- Authorities have taken drastic measures to address macroeconomic imbalances
- Better political environment has triggered large new mining sector investment
- Debt relief would free up resources for poverty reduction spending
Strong policy reforms and large mining-sector investments have helped revive Guinea’s economic growth performance from near-stagnation two years ago.
Bauxite mining in Guinea, where improved political environment has led to large new mining sector investment (photo: Georges Gobet/Newscom)
ECONOMIC HEALTH CHECK
After drastic measures to cut its budget deficit and curb inflation, the West African country’s growth rate has rebounded and its exchange rate has stabilized.
In its regular assessment of Guinea’s economy, the IMF said the country’s economic growth rate is expected to remain robust in the medium term on the basis of reform measures and large mining investments. Guinea’s GDP growth reached an estimated 3.6 percent last year, after contracting by 0.3 percent in 2009.
A critical year
Despite abundant natural resources, Guinea remains among the poorest countries in the world. In addition to gold and diamonds, the country possesses bauxite and iron deposits. There is a large potential in hydroelectricity as well as climatic conditions favorable for agriculture. However, poor economic governance and political instability discouraged the development of these resources.
Between 2009 and 2010, the ruling military abandoned fiscal control. As a result, the budget deficit amounted to about 1 percent of GDP per month which was financed by advances from the central bank and by running up external arrears. Broad money supply doubled, the market exchange rate depreciated, and inflation rose to over 20 percent year-on-year by end-2010.
Following the first democratic elections since independence in 1958, a new government took office in January 2011 and took drastic measures to address the macroeconomic imbalances. Under its economic program for 2011, Guinea’s budget deficit was cut by more than 10 per cent of GDP. Monetary policy was tightened and the central bank acted to improve the foreign exchange market.
As a result, the rising trend in inflation was stopped and the exchange rate stabilized. Renewed confidence and the improved political situation contributed to a rebound in growth. The government also adopted structural reforms that included the adoption of a new mining code.
Despite these reforms, Guinea has yet to break out of the vicious cycle of poverty, weak institutions, and political instability. The transition from the 2009–10 military government to a normal constitutional situation remains to be completed by parliamentary elections, presently scheduled for July 2012. The authorities also need to complete security sector reform, which is supported by the United Nations and other development partners.
Medium-term reforms
The government’s program for 2012–14, which is supported under the IMF’s Extended Credit Facility—a $199 million loan—aims at consolidating macroeconomic stabilization and at creating an environment to encourage higher growth and poverty reduction, and to prepare for the expected rapid growth of mining production over the coming years.
Prudent fiscal policy—including use of windfall mining sector revenue in 2011 for public infrastructure investment over the medium term—will remain the key element of macroeconomic policy. It will be supported by a continuing cautious monetary policy to manage the economy’s remaining excess liquidity.
Structural reforms aim at improving infrastructure and strengthening the business climate. Key elements are the rehabilitation of the electricity sector, including new investment in generating capacity, and support for the agricultural sector—which employs and provides income for the bulk of the population. The authorities are also planning to improve Guinea’s business climate indicators by strengthening the judiciary and streamlining the investment process.
Diversifying the economy
The main medium-term goal is to ensure that the development of the mining sector results in broad-based growth. The improved political environment has already led to the start of substantial new investment in the mining sector, which could average 40 percent of GDP or more per year during the coming years. A large new iron ore mine—with a total investment of about three times GDP—is expected to start production by the middle of the decade. This could transform Guinea’s economy and boost government revenue.
This year, the government plans to finalize implementation decrees for the new mining code, which would also lay the basis for bringing existing mining concessions within the terms of the new code. Measures aim to ensure that the mining sector is integrated in the economy and to avoid the crowding out of other sectors.
Provided all triggers are met, Guinea could qualify for the full delivery of debt relief under the enhanced Heavily Indebted Poor Countries initiative later this year. The resulting decline in the debt service burden would free up resources for priority spending, including on health, education, the justice system, and infrastructure.