Press Release No. 98/11

Press Release: IMF Approves Second Annual ESAF Loan for Guinea

April 3, 1998

The International Monetary Fund (IMF) has approved the second annual loan under the Enhanced Structural Adjustment Facility (ESAF)¹ for Guinea, in an amount equivalent to SDR 23.6 million (about US$31 million), to support the government’s economic program for 1998-2000. The loan is available in two equal semiannual installments, the first of which, equivalent to SDR 11.8 million (about US$16 million), will be made available on April 15, 1998.

Background

Guinea made important progress during 1997 in its efforts to consolidate and advance economic reforms that were launched in the latter part of 1996 and are being supported by the IMF under a three-year ESAF loan. Real GDP grew by 4.7 percent, and the overall budgetary situation improved, with the domestic primary budget surplus rising to an estimated 2.8 percent of GDP from 1.3 percent in 1996. Actions were also taken to address the difficulties of several ailing banks, and Guinea has begun to establish a favorable track record of policy implementation. Nevertheless, shortfalls in revenue are a matter of concern, as they continue to force unplanned expenditure cuts, and inflation picked up at the end of the year as a result of an increased depreciation of the Guinean franc and a stronger-than-programmed expansion in broad money.

The Program for 1998

The 1998 program calls for tight financial policies and further structural reforms to consolidate the stabilization under way and to create appropriate conditions for sustainable and diversified economic growth. The basic macroeconomic objectives are to (1) achieve a growth rate of 5.0 percent in real terms; (2) bring down inflation to about 3.5 percent; and (3) contain the current account deficit at 7.7 percent of GDP, excluding official transfers, and increase gross official reserves to 3.4 months of imports. To meet these objectives, fiscal policy is targeting a domestic primary budget surplus of 2.9 percent of GDP. On the revenue side, further improvements in tax and customs administration, actions to ensure compliance with the VAT, the introduction of a new unified real estate tax, and a lower VAT threshold for enterprises in the service sector, will enable the government to raise total revenues to 11.6 percent of GDP. On the expenditure side, the rise in total expenditure will be limited to 12 percent in nominal terms, while providing increased allocations to the priority sectors of health, primary education, rural development and roads, and sufficient counterpart funds for foreign-financed investment projects. Budget management is being reformed to improve its efficiency and transparency, and a new computerized expenditure monitoring system is about to become operational. Monetary policy is designed to support the external sector and achieve the inflation objectives of the program.

Structural Reforms

The government will complete the liquidation of the Banque Internationale pour l’Afrique en Guinée (BIAG) and the restructuring of three ailing banks. Bank supervision will be tightened and prudential regulations will be enforced more strictly. In addition to these banking sector reforms, the government intends to quicken the pace of privatization and public sector restructuring, accelerate the reform of the judicial sector, and reinforce the efficiency of the civil service. A program of reduction in costs already initiated in some public enterprises is being extended to others in the mining and energy sectors, while a timetable for divestiture will be prepared by end-June 1998. The authorities are also taking additional steps to improve the legal environment for business activity by creating an arbitration court and preparing reforms to reinforce transparency and efficiency in the judicial system.

Addressing Social Needs

With the support of donors and lenders, significant progress has already been made in education: imbalances between rural and urban areas have been reduced, and enrollment ratios for girls have improved to 35.5 percent in 1996/97 from 25.7 percent in 1993/94. The government will continue to reorient resources toward primary education in order to increase the gross primary school enrollment ratio from its current level of 51 percent (compared with 29 percent in the early 1990s) to 60 percent by year 2000. At least 1,600 new teachers will be hired each year over the next three years. Despite improvements achieved in the health sector, resource allocation is still inadequate, and health indicators remain low compared to other sub-Saharan countries. The government will therefore increase its nonwage expenditure on health and ensure its efficient use.

The Challenge Ahead

Improvements in economic governance initiated by the authorities are pivotal to the success of Guinea’s financial and structural adjustment program that should lead to sustainable growth and improved living conditions for the population. Resource mobilization remains crucial to ensure adequate resources for the priority sectors, and a tight and consistently implemented monetary policy is essential to quell inflation from the onset. Financing of the program for 1998 depends on the successful conclusion of debt-relief negotiations with Guinea’s bilateral creditors, the implementation of the recently arranged buy- back operation for eligible commercial debts, and the effective disbursement of committed donor support.

Guinea joined the IMF on September 28, 1963, and its quota² is SDR 78.7 million (about US$105 million). Its outstanding use of IMF financing currently totals SDR 71.7 million (about US$96 million).