Posted by: africanpressorganization | 5 August 2008

International Monetary Fund / Guinea / Letter of Intent and Technical Memorandum of Understanding


 

International Monetary Fund / Guinea / Letter of Intent and Technical Memorandum of Understanding

 

CONAKRY, Guinea, August 5, 2008/African Press Organization (APO)/ — Dear Sir,

1. Further to our letter of December 4, 2007, and the accompanying Memorandum on

Economic and Financial Policies (MEFP), we are hereby reporting the progress made in

implementing the three-year program supported by the International Monetary Fund under the

Poverty Reduction and Growth Facility (PRGF). Implementation of our new Poverty

Reduction Strategy that underpins this program and achievement of the completion point

under the HIPC Initiative are our government’s major priorities. The Prime Minister

appointed on May 20 has confirmed the determination of the newly formed consensus

government to implement this program, keep up the good performance achieved, and

continue the implementation of reforms we started with the support of our foreign partners.

2. Macroeconomic performance in the fourth quarter of 2007 broadly met program

targets. Mining sector activity strengthened, which led to a slight increase in the expected

GDP growth rate of 1.5 percent in 2007. Inflation declined below the target level (the yearon-

year increase in prices was less than 13 percent in December compared with 15 percent

envisaged in the program) as a result of implementation of economic stabilization policies

and the good performance of the national currency. The budget deficit and growth of the

money supply were kept within program limits. However, the external position remains very

tenuous.

3. Most of the quantitative performance criteria established for end-December 2007

were met (Table 1). Thus, despite the government’s lower-than-expected mining revenue, we

maintained the basic fiscal balance above the program floor as a result of good year-end

expenditure control. Similarly, the Treasury’s budgetary float remained largely below the

ceiling we had set. Unfortunately, two criteria were not met. The target for accumulation of

net international reserves was not met due to higher-than-expected public expenditure in

foreign exchange at year-end. Furthermore, it was difficult to monitor this objective because

of a misunderstanding on the definition of this criterion in the program. Inadequate foreign

exchange reserves led to the accumulation of external payment arrears to certain multilateral

creditors from December 31, 2007. However, the arrears were paid in full on March 31,

2008.

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4. The structural reform agenda is moving ahead and the structural performance criteria

were met (Table 2). The prohibition of exports of agricultural products from forestry and

fishing was lifted on December 31, 2007. Also, the audit firm confirmed the consistency of

the data used to calculate the quantitative performance criteria at end-2007 with the central

bank’s balance sheet. The preliminary audit report of the central bank’s financial statements

at end-December 2007 will be transmitted to the staff by end-June 2008. The two structural

benchmarks for the first quarter of 2008 were met with a slight delay. The upgrading to

international standards of surveillance, management and monitoring of international reserve

accounts was completed with the creation of an investment committee on May 12, 2008. In

order to restore the government’s cash unit, the BCRG instructed the commercial banks on

March 13, 2008 to close all the accounts of nonautonomous public entities and to transfer the

balances to the treasury account.

5. The government has updated the macroeconomic framework taking into account, in

particular, the impact of the unexpected increase in world oil and food prices on our already

fragile economy. In 2008 these increases will have a strong negative impact on the balance of

payments and will reduce our growth by a half-point of GDP to 4.5 percent. Mostly as a

result of imported inflation, the year-on-year increase in prices should reach 15 percent at

year-end instead of the 10 percent initially projected.

6. Despite this exogenous shock, we expect to limit the changes to our main economic

policy objectives for 2008 in order to reestablish macroeconomic stability and strengthen our

external position. The government’s basic primary balance will be maintained at its 2007

level (a reduction of 0.2 percentage points of GDP compared with the original program

target) in order to create enough fiscal space to accommodate accompanying measures. The

growth of base money will be limited to that of nominal GDP, and the target for

accumulation of foreign exchange reserves will be kept at one month of imports.

7. On the fiscal front, revenue projections were revised downward to take into account

the impact of the improved performance of the Guinean franc in 2007 on our tax base, and

the outturn of the first quarter of 2008. Increased efforts to collect mining revenue (especially

through tax audits), and the expected effects of the implementation by the international

company VERITAS of a program to audit imports in May, will partially offset these losses.

The program to strengthen tax and customs administrations will be continued, controls on

exemptions will be strengthened, and the recommendations of IMF technical assistance

missions will be implemented as planned. We will organize quarterly monitoring of the

execution of performance contracts approved by the two revenue collection departments at

the beginning of the year.

8. We have introduced measures to cope with the surge in international prices for oil and

food products. The freezing of petroleum products pump prices placed the budget at great

risk. On April 1, 2008 normal taxes on all petroleum products have been restored causing a

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significant increase in pump prices. However, in the current social context it seems

indispensable to postpone the implementation of the mechanism to adjust these prices on a

monthly basis to reflect world prices to end-November (an end-June structural performance

criterion). The revenue loss resulting from this delay could reach 0.3 percent of GDP, if

international oil prices remain at the current level.

9. With the assistance of our development partners we will put in place an action plan to

improve the targeting of accompanying measures to benefit the poor. Meanwhile, to cushion

the impact of the increase in prices at the pump on transport users, we have increased the

transport allowances for government employees and student scholarships and have granted

subsidies for school transport. To mitigate the impact of the surge in prices of basic

foodstuffs such as rice we have decided to suspend import duties on this product for

4 months (until the next harvest of rice in October). We also launched, with World Bank

support, targeted aid programs in urban area school canteens and in prenatal health centers, as

well as “food for work” programs. All in all, the costs of these measures will amount to about

0.4 percentage points of GDP1, of which about slightly less than half will be financed by the

World Bank through budget support. In addition, we plan to mobilize emergency food aid

and support to finance projects geared toward increasing agricultural production by making

seeds, fertilizers, and pesticides more readily available.

10. To finance the remaining cost of the accompanying measures and take into account

the downward revision of revenue in 2008, we decided to reduce expenditures by an amount

equivalent to 0.5 percentage points of GDP. About one-fourth of those reductions will come

from freezing a portion of budget allocations that had been earmarked for hiring new civil

servants and creating incentive bonuses in the civil service. The government will continue to

execute the budget without net monetary financing from the BCRG. Following the recent

turmoil in the military over wage arrears dating back to 1996, and to restore social peace, we

have recognized these arrears (about 0.4 percent of GDP) and agreed to gradually reimburse

them in 2008, by using the additional resources from updated external debt relief projections.

11. The BCRG will continue to implement a prudent monetary policy that is consistent

with the goal of reducing structural inflation. It will use all available instruments to keep the

money supply within the limits of the original program for 2008, through proactive

management of bank liquidity, including, if necessary, by improving the attractiveness for

banks of monetary regulation securities. Monetary and foreign exchange policies will be

closely coordinated and will continue to be based on adherence to market mechanisms.

1 We are also mobilizing emergency food assistance targeted to the poorest from WFP (World Food Program)

and other UN agencies of the United Nations.

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12. Macroeconomic policy in the first half of 2008 will be consistent with the

performance criteria and quantitative benchmarks for end-June, as defined in the attached

Table 1. These criteria have been revised to reflect adjustments of our policies described

above. Moreover, the lag in late 2007, the size of the exogenous shock on international food

and oil prices, and delays in mobilizing international aid to cope with this situation have led

us to revise downward the end-June 2008 target of net international reserves accumulation.

However, we have prepared a monthly “catch-up” plan for 2008 that helped us accumulate

net international reserves since April 2008. Between end-December 2007 and end-May 2008

we have accumulated US$24 million.

13. Improved fiscal management remains a priority for government action. The multiyear

plan that we prepared with the assistance of our main development partners will be adopted

by the Council of Ministers by end-June, 2008 (cf. Table 3 on prior actions for the first

review). Its execution and implementation of the IMF’s technical assistance

recommendations will be closely monitored.

14. The financial situation of the Guinean electricity company Électricité de Guinée

(EDG) deteriorated in 2007. Work on rehabilitating the existing infrastructure made it

possible to bring a few thermal and hydro units back into the network, increasing electricity

production by about 21 percent. Although overall revenues have increased by 26 percent in

2007, and transmission and distribution losses were reduced, the progress made was not

sufficient to improve EDG’s financial situation in light of prevailing tariffs and the strong

rise in the petroleum import price and the cost of spare parts. As a result, the increased

production and higher fuel prices inflated operating deficits (by about 0.15 percent of GDP)

and deepened EDG’s overdraft at the BCRG. The continued increase in fuel prices and the

practice of charging 80 percent of private subscribers (representing 30 percent of sales) a flat

rate for electricity usage may worsen the situation in 2008. Short-term measures are needed to

stem the financial hemorrhage, which threatens to compromise the progress made as well as

our fiscal and external balances. Therefore, total outstanding debt of public enterprises

(mostly EDG) owed to the BCRG has been frozen at its end-April level (new quantitative

benchmark). Moreover, the Council of Ministers will approve an emergency plan by end-

June 2008 (prior action) which includes measures to (i) significantly reduce the rate of

technical losses; (ii) improve billing and collection rates, including by installing meters;

(iii) combat fraud; and (iv) increase tariffs. For better monitoring of the financial situation,

EDG will submit a management report to the government within one month from the end of

each quarter, starting in July 2008 in a format that will be developed with assistance from the

World Bank.

15. Continued efforts by the government to achieve good management and transparency

in extractive industries are key to developing our resources and improving the business

climate. The Council of Ministers will adopt by end-July a standard mining contract based on

best international practices, which will serve as the basis for the ongoing renegotiation of

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current mining arrangements and negotiation of new contracts. To complement this approach,

draft mining and oil codes will be completed by the end of the year with technical assistance

from the World Bank and the IMF. Transparency of the revenue the government earns from

mining activity was further enhanced with the publication of the audit report for 2005. The

results of the 2006 audit will be finalized and published by end-November, 2008.

16. Other actions to improve governance and transparency are ongoing. The audit of

government bodies initiated by the government has been completed, except for the Ministry

of Public Works, Urban Development and Housing. The irregularities uncovered by these

audits are subject to collection actions. The government intends to speedily implement

recommendations that the government’s inspectorate general will finalize by August 2008 on

the follow-up of these ministerial audits, in particular regarding administrative sanctions,

collection of misappropriated government assets, and elimination of ghost workers. The

actions we intend to take in this area should yield at least GF10 billion for the government in

2008.

17. The management and governance of the central bank are also being enhanced largely

in compliance with the recommendations of the BCRG’s external auditors and the IMF’s

safeguards assessment mission. BCRG staff have prepared a draft law establishing the central

bank that guarantees BCRG independence and the transparency of its operations. After it is

discussed with social partners, this draft will be adopted by the Council of Ministers and

submitted to the National Assembly by end-November 2008 (a structural performance

criterion for end-June 2008). The three-month slippage with respect to the structural

performance criterion set in the original program makes it possible for Guinea to receive IMF

technical assistance.

18. We will continue our efforts to consolidate the sustainability of our external debt. We

will continue in particular to refrain from contracting or renewing any nonconcessional

external loans to the government or to the central bank or guaranteed by them. We have

entered into bilateral talks with our Paris Club creditors to finalize the January 2008

agreement (agreements have been already signed with four countries) and have asked our

bilateral creditors that are not members of the Paris Club to provide us with debt restructuring

deals on comparable terms in order to reach an equitable solution regarding the pending debt.

We have obtained from the World Bank, the African Development Bank (AfDB) and the

Arab Bank for Economic Development in Africa (BADEA) supplemental interim assistance

under the HIPC Initiative, and we will continue to request from our multilateral creditors debt

treatment that is aligned with the Initiative. The financing gap of the 2008 program will be

covered through budgetary support from our main external partners, in particular the World

Bank, the European Union, and France.

19. Because improvement in the coverage and quality of statistical data is crucial for

program monitoring, our efforts in this area are continuing as planned. We have just started a

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major revision of the national accounts based on SNA 1993. Following the recommendations

of a recent IMF mission on balance of payments statistics, we will develop an improvement

plan and launch the necessary surveys (in particular of enterprises making direct investments

in Guinea) to correct the main deficiencies and will produce a quarterly balance of payments

data that meet the minimum standards of quality within three months after the end of

September 2008. We will immediately start collecting the necessary data to document PRSP

monitoring indicators and prepare the report on the first year of PRSP implementation.

20. In order to strengthen program monitoring and coordination at the highest level, the

committee that has been created to monitor the program will provide us with a bi-weekly

progress report on program implementation, including the payment of external debt

obligations (to prevent accumulation of new arrears). A monthly meeting of the committee,

which we will attend with the IMF representative in Conakry, will also be organized to

examine the documentation prepared by our staff with respect to the requirements set forth in

the Technical Memorandum of Understanding. Attached are the paragraphs of the TMU that

were revised to fine tune the program adjustors and strengthen ours commitments regarding

the reporting of data to monitor the program.

21. In light of the good overall execution of our program, and of the corrective actions we

have taken to remedy the problems and delays in meeting the two quantitative performance

criteria, we request the necessary waivers to conclude the first review. In response to the

recent external shocks and to cover the residual financing gap, we are requesting an

exceptional increase in access to PRGF resources of 20 percent of our quota, equivalent to

SDR 21.42 million, in the form of an increment of SDR10.71 million in the two

disbursements scheduled for 2008. The second and third reviews under the PRGF

arrangement will be carried out no later than end-December 2008 and end-June 2009

respectively.

Sincerely yours,

/sgd/ /sgd/

Daouda Bangoura Ousmane Doré

Governor of the BCRG Minister of Economy, Finance,

and Planning

 

SOURCE : International Monetary Fund (IMF)


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