French version

Conakry, December 7, 1999

Mr. Michel Camdessus
Managing Director
International Monetary Fund
Washington, D.C. 20431
U.S.A.

Dear Mr. Camdessus:

1.  The objectives of Guinea's program of economic and financial adjustment for the three-year period 1999-2001 are set out in the updated policy framework paper prepared in close collaboration with the staffs of the Fund and the World Bank, which is being transmitted to you under separate cover.

2.  The attached memorandum of economic and financial policies, based on the policy framework paper referred to above, sets out the objectives and policies that the government of Guinea intends to pursue during 1999-2000. In support of these objectives and policies, the government hereby requests the third annual arrangement under the Enhanced Structural Adjustment Facility (ESAF) in an amount equivalent to SDR 23.6 million (30 percent of quota). In this context, Guinea also requests an extension of the original three-year ESAF commitment period to January 12, 2001.

3.  The government of Guinea will provide the Fund with such information as the Fund requests in connection with the progress made in implementing the economic and financial policies and achieving the objectives of the program.

4.  The government of Guinea believes that the policies and measures set out in the attached memorandum are adequate to achieve the objectives of its program; it will take any further measures that may become appropriate for this purpose. During the period of the third annual ESAF arrangement, the government will consult with the Managing Director on the adoption of any measures that could be appropriate, at the initiative of the government or whenever the Managing Director requests such a consultation. Moreover, after the period of the third annual ESAF arrangement and while Guinea has outstanding financial obligations to the Fund arising from loans under the arrangement, the government will consult with the Fund from time to time, at the initiative of the government or whenever the Managing Director requests consultation on Guinea's economic and financial policies.

5.  The government of Guinea will conduct with the Fund the first review of its program supported by the third annual arrangement not later than June 30, 2000 and the second review not later than December 31, 2000.

I.  Introduction

1.  In the context of the three-year arrangement under the Enhanced Structural Adjustment Facility (ESAF), approved by the International Monetary Fund on January 13, 1997, the government of Guinea's economic and financial program for 1998 was supported by the second annual arrangement approved on April 3, 1998. The third annual arrangement was to have supported the program for 1999; unfortunately, the economic and financial situation deteriorated in the early months of 1999, requiring corrective measures. As the situation has since stabilized, the government is hereby presenting a program for the period October 1, 1999-September 30, 2000 for which IMF support is requested.

2.  This memorandum describes the implementation of the 1998 program, as well as economic developments in Guinea during this period and the first eight months of 1999. Furthermore, it sets out the objectives that the government of Guinea intends to achieve during the remainder of 1999 and in 2000 and the accompanying policies. The structural adjustment program for 1999-2000, in support of which the government of Guinea requests the third annual arrangement under the ESAF, is cast within a medium-term framework outlined in the updated policy framework paper (PFP) for 1999-2001. The program remains focused on creating an enabling environment for private sector development, which will be the engine of economic growth in Guinea.

II.  Program Implementation During 1998

3.  In 1998, several events had an impact on economic activity. First, the preparations for the presidential elections on December 14 slowed economic activity. In addition, there was a serious deterioration in security in the region, as well as a downturn in world prices for Guinean exports, particularly bauxite and gold. Thus, real GDP growth of 4.5 percent was slightly lower than in 1997, while inflation, as measured by the change in the Conakry price index on a year-over-year basis, stood at 4.5 percent, as compared to 5.2 percent in 1997.

4.  Most of the financial and structural benchmarks for December 31, 1998 were observed, except for the targets on net foreign assets of the Central Bank of the Republic of Guinea (BCRG), external debt arrears, and nonmining government income. The reporting of public expenditure commitments, payment orders and payments was done in a timely fashion. Nevertheless, the results had to be corrected manually due to continuing problems with the computer system.

5.  The budget situation was very difficult, particularly at year-end, on account of delays in foreign aid disbursements and lower-than-expected revenue, which reached 10.6 percent of GDP (i.e., a shortfall of 0.7 percent of GDP compared with the program), essentially owing to low trade tax receipts. Furthermore, because of the pressure on expenditure as a result of the elections and the security situation in the subregion, certain 1998 commitments had to be carried over to 1999 to achieve the primary surplus target. Unavoidable overruns in budgetary appropriations (particularly for maintaining security in the subregion) led to lower-than-anticipated spending in the priority sectors of health and education. The government did, however, release its contribution to the restructuring of banks in difficulty and reduce its domestic arrears, partly by issuing bonds to its suppliers.

6.  In the monetary area, the money supply (M2) grew by 6.1 percent during 1998, as compared with 11.4 percent in the revised program. This lower-than-expected increase reflected a smaller accumulation of net foreign assets as well as a more substantial reduction in the banking sector's net credit to the government, which more than compensated for a larger expansion of credit to the private sector. The central bank was unable to reach its net foreign assets target owing to the difficulties in buying foreign exchange on the interbank market, which was not operational, while the banks accumulated foreign reserves. The reference exchange rate for the Guinean franc, as calculated by the BCRG, depreciated by 12 percent on average during the year relative to the U.S. dollar, while the gap between the reference rate and the parallel market rate widened at the end of the year, to more than 10 percent.

7.  In the external sector, the current account deficit, excluding official transfers, declined slightly to the equivalent of 6 percent of GDP, reflecting both an increase in exports and a contraction in imports, the latter of which was linked to a slowdown in the public investment program. All bilateral agreements with Paris Club members (except Russia) under the 1997 debt rescheduling were signed. Nevertheless, the existence of external arrears at least partially attributable to breakdowns in the monitoring of external debt, led to a delay in the disbursement of the 1998 tranche of the Paris Club rescheduling; it was finally released in August 1999 after all arrears had been cleared. The commercial debt buy back operation was completed with World Bank support and the debt buy back operation with Argentina was finalized. Little progress was made in the discussions on the rescheduling of Russian debt.

8.  Structural reforms continued in 1998-99 according to the program timetable. The rehabilitation of three ailing banks was a qualified success. Their operations continued to be restructured under central bank supervision and while two of them made progress, the third still faces problems. The recapitalization of two banks was completed as programmed. As for the third, the government paid up its shares but the other shareholders are delaying their contributions. Furthermore, liquidation of the Banque Internationale pour l'Afrique en Guinée (BIAG) is nearing completion.

9.  The anticipated strengthening of bank supervision took place according to schedule. Bank inspection, in particular, was reinforced through the restructuring of the BCRG's Inspection Department and the creation of a group of bank and insurance inspectors recruited by competitive examination. The government also gave responsibility for the supervision of micro-finance institutions to the BCRG.

10.  Other structural reforms have generally progressed as expected. The court of arbitration has commenced operations. The restructuring plan for the CNSS was adopted by the Council of Ministers in November 1998, and the restructuring of the financial and accounting departments is under way. However, efforts to sell savings bonds to the private sector to encourage domestic saving were delayed to April 1999 and have not been very successful.

III.  Economic And Financial Developments from January-August 1999

11.  The wait-and-see attitude of economic agents observed during the election period in the last quarter of 1998 continued throughout the early months of 1999, and security in the subregion did not improve as had been hoped. At the same time, the government's financial situation deteriorated significantly. The lack of foreign aid and a continued weak revenue performance, combined with the aforementioned carryover of certain expenditure commitments from 1998 and the increase in costs resulting from Guinea's military engagement in Sierra Leone and Guinea Bissau, meant that in the first four months of the year the government had to resort to banking system financing equivalent to 1.4 percent of GDP; this was accompanied by a monetary expansion of 8.8 percent and a decline in net foreign assets of the BCRG of US$33.3 million to US$80.5 million at end-April.

12.  To stem this deterioration, the authorities, in consultation with IMF staff, decided to have a period of consolidation during which they could restore rigorous financial management before presenting a new program for IMF support. Expenditure controls were strengthened and the expenditure monitoring system fine-tuned. Measures were also taken to improve tax administration, particularly in the customs area, where recommendations of the April 1999 IMF technical assistance mission began to be implemented. Monthly fiscal and monetary targets were also established to guide the government's financial recovery.

13.  End-August 1999 results were close to the targets set, reflecting a more stable macroeconomic and financial situation. Despite a sudden drop in the tax yield on petroleum products, which was adversely affected by the increase in the world prices and by the deterioration in the exchange rate, budgetary revenue collected during the period May-August 1999 was 8 percent larger than in the preceding four months and the primary surplus amounted to GF 64 billion, or more than three times the level reached at end-April. Net banking system credit to the government was reduced from GF 167.9 billion at end-April to GF 137.4 billion, while the BCRG's net foreign assets remained at their end-April level of US$80.8 million.

14.  Revenue in September was weaker than envisaged, particularly customs receipts which declined as a result of an erosion of taxable imports. As a result, banking system credit to the government increased to GF 142.8 billion at end-September, while net foreign assets of BCRG declined to US$75.4 million.

15.  On the structural reform side, the main actions in the first eight months of the year involved the preparation of a new computerized expenditure system with technical and financial assistance from various donors (World Bank, Canada, and the European Union), and the launching of a foreign exchange auction on September 1, 1999.

IV.  Economic Program for End-1999 and 2000

16.  The last months of 1999 will continue to be difficult for Guinea because of the high prices of petroleum products and the risks related to the ongoing conflicts in neighboring countries. Despite a good performance in the mining sector, growth projections for the year have been revised downward to 3.7 percent in real terms on account of weaker-than-anticipated activity particularly in the services sector; consumer prices are expected to increase by 4.5 percent on average in 1999. Given limited prospects for external aid from now until the end of the year and continued tight fiscal policies, the current account deficit (excluding official transfers) is expected to be 6 percent of GDP, while external reserves at year end should cover the equivalent of about three months of imports.

17.  To achieve these goals, the target for the primary surplus has been set at 2.4 percent of GDP, the same level as in 1998. Given the weak revenue performance in September, revenue for 1999 is projected at 10.4 percent of GDP, despite an increase in the prices at the pump to restore tax receipts on petroleum products. Expenditures will be compressed so as to maintain the primary surplus target, while maintaining spending in the priority sectors (particularly where such spending is a condition for mobilizing European Union financial assistance), and accounting for the additional costs associated with maintaining security along Guinea's borders, where there have recently been new incursions from neighboring countries. The money supply growth target has been limited to 9.5 percent for the year. Government credit will fall from GF 142.8 billion at end-September to GF 140.2 billion at end-December 1999, which will allow net foreign assets of the BCRG to increase from US$75.4 million to US$84.2 million over the same period.

18.  Some improvement in the world price for bauxite and the expected resumption of international aid allows for a more optimistic outlook for 2000. The authorities are determined to deepen and accelerate the current structural reforms, particularly in the areas of government finance management, public sector reform, and strengthening of the banking supervision system. They are also determined to improve governance and pursue the stabilization of the country's financial situation.

19.  The government's program for 2000 is based on a projected 5 percent growth of real GDP, stemming from an increase in value added in the fisheries, water, and electricity (particularly with the completion of the Garafiri dam). The program aims at reducing inflation, as measured by the Conakry consumer price index, to an end-period rate of 4 percent, containing the current account deficit (excluding official transfers) at 6.3 percent of GDP, and bringing gross external reserves to the equivalent of some 3.2 months of imports.

A.  Financial Policies

20.  To achieve the program's macroeconomic objectives for 2000, the primary budgetary surplus on a commitment basis will increase to 2.7 percent of GDP (GF 147 billion, i.e., an improvement of 1/3 percentage point of GDP compared with 1999), corresponding to an overall deficit (excluding grants) of 5.3 percent of GDP (GF 290 billion). The primary surplus will not be sufficient to finance external and domestic debt service obligations (GF 298 billion and GF 15 billion, respectively) and the programmed net reduction in: (i) domestic payments arrears (GF 0.2 billion); (ii) government indebtedness to the Guinean banking system (GF 24 billion); and (iii) domestic debt to the private sector (GF 8.2 billion), leaving a financing gap estimated at GF 118 billion. Budgetary aid already identified amounts to GF 87 billion, leaving a supplementary financing gap of approximately GF 31 billion (US$20 million), which could come from a new rescheduling by the Paris Club.

21.  Revenue is forecast to amount to 11.5 percent of GDP (GF 634 billion), an improvement of more than one percentage point of GDP. This increase should result from improved nonmining revenue following the introduction of measures by customs to improve supervision of exemptions and imports, particularly under the simplified procedures for the informal sector. These measures, which were recommended by the IMF Fiscal Affairs technical assistance mission, will be implemented according to the attached timetable (Table 3), with help from IMF technical assistance already in Conakry. For its part, the tax directorate will continue to improve the efficiency of its staff and will strengthen the collection of nontax revenue.

22.  Total primary expenditure has been limited to 8.8 percent of GDP (GF 487 billion), against 8.0 percent in 1999. This slight increase takes account of the spending required to maintain security in the subregion and defend the nation, as well as that required for the general and local elections initially scheduled for December 1999. It also takes account of nonwage operating expenditure of the priority sectors, which will increase from GF 48.3 billion in 1999 to GF 57 billion in 2000. The wage bill would increase by 4.3 percent, reflecting the full-year effect of 1999 army promotions, and the 7 percent civil service raise granted on October 1, 1999, as well as the new recruitment in education.

23.  Reforms intended to improve budgetary management and public accounting will continue, with a special focus on treasury reform and computerization. Key to these efforts will be the introduction, with donor support, of a new computerized expenditure monitoring system that is both more efficient and less costly to maintain than the current system; it should become operational before January 15, 2000 for the core offices of the Ministry of Finance and on June 30, 2000 for all ministries. It will allow for fully automated, and hence more rigorous, monitoring of expenditure. The treasury reform is designed to give accounting officers more responsibility in operations, while allowing the Treasury Director to fulfill his role of organizing and monitoring their work. This reorganization is aimed at ensuring the regular production of consolidated monthly balances for the treasury, and thus more timely expenditure management. To increase budget transparency, a new budgetary nomenclature was adopted and will be implemented starting with the 2000 budget.

24.  Monetary policy will continue to aim at controlling inflation and keeping foreign exchange reserves at a satisfactory level. Under the program, the increase in the money supply will be limited to 10 percent in 2000, while the increase in base money is set at 8.7 percent. An accumulation of US$25.5 million in net reserves of the BCRG is anticipated and claims on the government should decline by GF 24 billion. On this basis, the private sector could benefit from an 9 percent increase in banking system credit. In order to achieve its net foreign assets target for 2000, the BCRG has established monthly benchmarks and proposes to intervene in the foreign exchange auction market, as needed, to observe them.

25.  The BCRG is committed to maintaining a floating exchange rate regime without any intervention by the authorities, except to achieve the net foreign assets targets of the BCRG. In this context, the BCRG is aware that it is important for the foreign exchange auction market (MED) to operate without impediment. After having tried various auction modalities, the BCRG finally adopted a marginal price Dutch auction system which will be maintained until at least the midterm review. The BCRG will closely monitor the auction in order to avoid any collusion between participants. It will try to expand the number of participants. In addition, it will regularly monitor the reserve position of banks and will take all necessary steps to ensure compliance with the existing regulations. The BCRG will take necessary actions to ensure that foreign exchange of the public enterprises will be sold in the MED. Finally, it raised minimum interest rates on remunerated deposits in December 1999.

26.  The BCRG will continue to strengthen its management and supervision of banks and credit institutions. As a first step, there will be an audit of the BCRG accounts by an international firm. The new chart of accounts for commercial banks will become effective on January 1, 2001. To allow for more regular monitoring of banking activity, the BCRG's bank inspection department will produce a monthly report on compliance with banking regulations (exchange position and required reserves, internal auditing, and insider-lending) beginning on October 1, 1999. Furthermore, to enable banks to develop in an environment of fair competition, the special tax agreements under which they operate will be harmonized. The BCRG will produce, for the IMF, a memorandum on the effort to establish a concordance between national banking legislation and the Basle Committee principles by March 31, 2000. By June 30, 2000, a draft law covering microcredit institutions, for which new regulations will be formulated. The Crédit Mutuel de Guinée will be fully recapitalized by January 31, 2000.

B.  Structural Policies

27.  The government is determined to pursue structural reforms to improve its administration and to create an enabling environment for private sector development. In addition to the measures already listed to improve fiscal and tax management and the health of the banking system, structural reforms will be pursued also in the public enterprise sector. The government is determined to reduce government participation in the productive sector to the benefit of the private sector. To this end, with donor assistance, it is preparing a reform program that focuses on liberalizing the economic environment and improving the incentive framework for private sector development. With donor assistance, the government has reviewed the 63 public enterprises to assess their viability and has decided: (a) to liquidate by June 30, 2000 12 enterprises that have ceased their activities and that are almost all wholly state-owned (AGRIMA - Trade, APILEC - Agro-industry, EGUIMAT - Trade, FRUITEX - Industrial, OCR - Trade, ONACIG - Cinema, SIAG KASSA - Industry, SOMIDRAT - Transport, SOPAG - Industry, SOPRAG - Industry, UNICO - Industry, and ENELGUI - Electricity); and (b) to reduce government participation in 7 enterprises in which it still has a minority shareholding and which would have been deemed viable by end-July 2000 (SGH - Services, SOGUICO - Construction, SOGUILUBE - Industry, SOGUIRUSSE - Mining, SOPROCHIM - Industry, UGAR - Insurance, SOMIAG - Trade). For the others, the government will work out an action plan with the donors that best responds to its concern for divestment and safeguarding the public interest. The government will examine the law on privatization and regulations in the area of bankruptcy and liquidation with a view to ensuring an effective liquidation process.

28.  Reorganization of the Natural Social Security Fund (CNSS) will continue with actions aimed at establishing its viability (an actuarial study) and measuring its receipts (updating the contributor file and determining outstanding balances, for which a collection plan will be prepared and implemented). In addition, the reorganization of the financial and accounting departments, begun in 1999, will be completed by June 2000. Lastly, the reliability of its accounts will be improved by the production of yearly accounts for the preceding financial year, and their certification by a firm of independent auditors before June 30, 2000.

29.  The reforms undertaken to improve the performance of the judiciary, which is a priority sector, will be deepened with the assistance of Guinea's development partners. Draft laws reforming the status of the magistrates, notaries, auctioneers, and bailiffs will be submitted to the National Assembly for adoption at the next session (April 2000). The prison administration will be reorganized and prison management improved, taking into account its current weaknesses and the increase in the prison population.

C.  Governance

30.  The government is resolved to continue the struggle against corruption and further improve governance. It has already initiated several actions aimed at halting the misuse of public monies and intends to conclude them as soon as possible, including auditing the payment of duties and taxes by four public enterprises-the Port of Conakry, SOGEL, SOTELGUI, and SEEG. A decision on the reform of ANAIM (the National Agency for Developing Mining Infrastructure) and an action plan will be presented to the IMF and the World Bank by March 31, 2000. By December 1999, the government will also put in place a committee to combat corruption, which will be responsible for coordinating the actions to be undertaken in this area.

D.  External Sector

31.  The balance of payments will be most affected by the rapid growth of gold exports (17.4 percent and 22.7 percent annually, in 1999 and 2000, respectively) mainly reflecting recent investments in the gold sector. Bauxite and aluminum will continue to represent more than half the value of exports but will grow at a lesser rate, in value terms. The evolution of imports will reflect the increase in the volume of imports of intermediate and capital goods, which is closely linked to investment in the public sector and mining, and the higher prices for petroleum products. The latter is an important factor in the estimated 6.7 percent deterioration in the 1999 terms of trade. The current account deficit (excluding official transfers) should rise from 5.9 percent of GDP in 1998 to 6.3 percent of GDP in 2000. During the period 1999-2000, public debt amortization should exceed capital inflows; however, the authorities are hoping to reschedule part of the debt in the context of an extension of the 1997 Paris Club agreement and a possible rescheduling of the Russian and Chinese debts. An agreement with Russia and with non-Paris-Club creditors should also make it possible to eliminate the stock of reschedulable arrears as at December 31, 1998, estimated at US$0.5 billion.

32.  Guinea's monitoring of its external debt improved over the course of the past few months on account of reforms implemented in the Debt and Investment Division (DDI), which was recently charged to the National Public Debt Directorate (NPDD). Additional progress is required in harmonizing the NDD's database with those of the donors, and in enhancing the software currently used, a task for which financing is being sought.

E.  Program Monitoring

33.  In quantitative terms, program implementation will be monitored according to the performance criteria set for end-March 2000 as well as the benchmarks for end-December 1999. Indicative benchmarks will also be set for end-June and end-September 2000 (see Table 1). Performance criteria and updated benchmarks for end-June and end-September 2000 will be set at the time of the midterm review. The structural benchmarks and structural performance criteria are shown in Table 2. The nonaccumulation of new external payment arrears is a performance criterion that will be applied on a continuous basis. Program implementation and the economic results recorded in connection with program targets will be subject to reviews by Fund staff in accordance with the third annual arrangement under the ESAF. The attainment of the BCRG's targets in regard to net foreign assets will be monitored monthly. Any deviation from these net foreign assets targets will trigger a consultation with Fund staff. The second disbursement under this arrangement will be conditional upon observance of the quantitative and structural performance criteria for end-March 2000 and completion of the first review before end-June 2000. The first review will focus on the conduct of exchange rate policy and the progress in reforming customs. The third disbursement will be conditional upon observance of the quantitative and structural performance criteria for end-September 2000 and completion of the second review before December 2000.

34.  During the period of implementation of the third annual arrangement under the ESAF, the Guinean government will not, without Fund approval, introduce new or raise existing exchange restrictions, introduce or intensify any multiple currency practice, impose or intensify import restrictions for balance of payments reasons, or conclude bilateral payments agreements which are inconsistent with Article VIII.