GUINEA MAKES FAVORABLE IMPRESSION DURING IMF TECHNICAL TEAM

UNCLAS SECTION 01 OF 03 CONAKRY 000497 SIPDIS TREASURY FOR OFFICE OF AFRICAN NATIONS TREASURY FOR USED IMF AND USED WORLD BANK SENSITIVE SIPDIS E.O. 12598: N/A TAGS: EFIN ECON IMF PGOV GV SUBJECT: GUINEA MAKES FAVORABLE IMPRESSION DURING IMF TECHNICAL TEAM VISIT Ref: Conakry 1718 -------------- Summary -------------- ¶1. (SBU) Summary. A nine-day visit by an IMF technical team ended May 4 with the new IMF team leader, Jean Le Dem, expressing optimism that Guinea may be on track to negotiate its return to a funded program. Le Dem and resident IMF representative Alvin Hilaire believe Guinea's FY 2007 macroeconomic objectives are both attainable and reasonable: 1.5 percent growth; inflation at or below 15 percent, and closing Guinea's 31 million USD funding gap. The donor community was decidedly less optimistic than the technical team, expressing concern over Guinea's exchange rate, which has fluctuated wildly for the past month, and raising questions about lingering corruption issues at the Central Bank. The next IMF technical team visit is not firmly scheduled, but a technical expert is to be dispatched to Guinea to provide assistance before the end of May. If directed by IMF headquarters, the full technical team may return as soon as late June or early July. End Summary. -------------- A for Effort -------------- ¶2. (SBU) In a May 4 meeting with members of donor community and the World Bank, new IMF team leader Jean Le Dem shared the findings of what he characterized as a "diagnostic mission." The visit was the first since November 2006 (reftel),so the effects of the January-February 2007 strike and state of siege were factored into the team's assessment. The visit was also the first under the new Guinean government of broad consensus. The team's key interlocutors within the Ministry of Economy, Finance and Planning were led by Minister Ousmane Dore, a former IMF official. The four-member team evaluated the objectives of the new government, particularly in the areas of monetary and fiscal policy, transparency and good governance. ¶3. (SBU) Le Dem said the technical team was optimistic that Guinea's stated FY 2007 macroeconomic goals are reasonable and attainable. (Note: Le Dem replaced the former IMF team leader Israel de la Piedra, whose November 2006 assessment of Guinea's macroeconomic performance was terse and far less optimistic. See reftel.) Three macroeconomic markers outline Guinea's basic monetary policy goals for FY 2007: 1.5 percent growth; inflation below 15 percent, and closing Guinea's 31 million USD financing gap. ¶4. (SBU) On May 7, Econoff spoke with Guinea's resident IMF representative, Alvin Hilaire, who shares Le Dem's optimism. Citing Le Dem's written report, Hilaire gave the finer details of Le Dem's briefing. -------------- Budget Remains An Outstanding Issue -------------- ¶5. (SBU) Guinea's Budget is in shambles. There are two major issues that hinder Guinea's ability to present a balanced or even feasible budget: financing and balance of payments. Characterized as a "budget of transition," Guinea's FY 2007 budget does not yet exist, even in draft form. The government will operate under a Continuing Resolution until at least June 2007. Although the government told the IMF team the donor community has pledged some 10 million USD for electoral assistance, the projected income has not been accounted for. Stated priorities like necessary repairs for strike-related damaged infrastructure throughout the country have not been accounted for in projected spending. The Guinean government is in the process of prioritizing spending targets, but currently the Minister of Finance and Prime Minister address ad hoc appeals for money as they are brought before them. -------------- Closing the Financing Gap -------------- ¶6. (SBU) The financing gap is a simple budget deficit that has historically been caused by undisciplined government spending which the new government has curbed, but not stopped. Previous governments have made a habit of financing their high expenditures -- particularly on the military -- through the Central Bank. Complicating these matters is the fact that spending often occurs outside of the budget and budgetary process. Paying extra-budgetary expenditures from the Central Bank in is a breech of both the budget source, and process. The government told the IMF it has now CONAKRY 00000497 002 OF 003 implemented more state control over spending. ¶7. (SBU) The gap is being closed partially by higher receipts from the mining sector which had sufficient stores to continue export even during the strike. Tax revenue has also increased as the bauxite prices have increased worldwide. Still, there remains a 31 million USD gap that Guinea must bridge in order to be fiscally solvent. Until these issues are addressed, the Central Bank will be obliged to maintain a heavily managed currency float, a longstanding Guinean monetary policy the Minister of Finance wants to abandon. ¶8. (SBU) The government is establishing a system to have a daily diagnostic process to assess the reserves of the treasury. This is necessary as the Central Bank still has a tendency to debit the treasury in its accounting, which in turn upsets the reported balance of payments. There is a newly implemented commission to regularize all accounts and consolidate the debt at the Central Bank. -------------- Monetary Policy Remains Weak -------------- ¶9. (SBU) As for general monetary policy, the Central Bank lacks control of its balance sheet, that is to say, there are expenditures that are unaccounted for various reasons, including invocations of national security. The Finance Minister has deployed internal auditors to control this process, but some sectors, particularly the military, are resistant and have kept records closed. There is still a need for the "cleaning" of accounts within the Central Bank. The new government wishes to respect international conventions and, to that end, they have established a commission of experts to change the Central Bank statutes and methods of operation. However, Hilaire concludes that President Lansana Conte's influence is still strong and that he resists any action that hinders his unfettered access to money. ¶10. (SBU) With regard to the exchange rate, the Minister of Finance wants to abandon "managed float," but it is unfeasible to do so at this time. After the IMF team's insistence, Dore conceded that any temporary benefits of the overvalued GNF are not in the long-term best interests of the economy. Le Dem reported that recent fluctuations are due to "technical problems" the details of which, for now, remain the purview of the Guinean government, the IMF and World Bank. The team concluded that, in addition, there in an insufficiency of physical currency. The current official rate does not necessarily reflect the actual value of the currency. They confirm that there are sufficient liquid reserves. The IMF believes the recent fluctuation is a temporary issue, partly caused by the strong demand for GNF. Le Dem told the donors they government is planning to import new bank notes and the problem should "resolve itself." -------------- Lingering Economic Concerns -------------- ¶11. (SBU) The February reduction of the gas tax (to lower the price at the pump) remains in place. With the market price of oil down and the fixed price of fuel still relatively high, the government continues to take advantage of these receipts to make accelerated payments on the arrears owed Shell and Total. The February rice subsidy is also still in place. The government said it plans to contractualize this process, working with the importers and distributors to develop a plan of action. Authorities accept the idea that they should not be using their budget to pay for rice subsidies and report that they are not sure if they will apply the promised reduction of customs tariffs for the rice importers. The IMF realizes these concessions were used to broker an end to the strikes and concede it will be difficult to repeal or amend them in the short term. -------------- -------------- Guinean Reaction: That Went Well, Don't You Think? -------------- -------------- ¶12. (SBU) On May 7, Econoff spoke with Ministry of Finance senior advisor Oumar Diakite. Diakite was ebullient about the IMF team visit and final assessment and asked Econoff "Yes, that went well, don't you think?" Econoff asked Diakite what the government of Guinea would do in the aftermath of the team's visit. Diakite said the team left the government specific targets and structured goals, but declined to say what they were. When asked if all this positive news meant Guinea is moving towards a funded program, Diakite said he is hopeful. He also said the IMF team offered a shadow program, but the Minister of Finance refused such, preferring to wait for a CONAKRY 00000497 003 OF 003 reassessment in June or July in hopes of reinstating a Staff-Monitored Program. Citing the IMF's comfort with the new government and the new Minister of Finance in particular, Diakite concluded, "Credibility was our problem, but that's not a problem anymore." -------------- Potential For A Funded Program -------------- ¶13. (SBU) When asked by the donors if Guinea was close to a funded program, Le Dem emphasized that the IMF team was in Guinea on a diagnostic mission, not to negotiate a funded program. However, he conceded that they are technically able to react quickly and, if headquarters directed the start of negotiations, the IMF could theoretically return by the end of June for negotiations. Le Dem emphasized that this would all depend on the Prime Minister's visit to Washington at the beginning of June. Le Dem said the government will have the opportunity to explain its views and current position in Washington and any decision on a formal program would be made accordingly. Several of the G-8 Ambassadors urged the team to support Guinea's reform process by re-establishing a Staff Monitored Program or moving directly toward a formal program with the IMF. -------------- COMMENT -------------- ¶14. (SBU) The IMF's assessment was both an admonition of Guinea's still weak fiscal and monetary policies, and a legitimization of the new direction of this government. Since 2003, the IMF has presented Guinea with a series of targets, and Guinea has generally complied. The notable exceptions were Guinea's stubborn adherence to managed float and its inability to bring transparency into the spending because of endemic corruption and entrenched interests. It is notable that this new team leader made no mention of the "prior actions" such as resolving the saga of accounts between the goverment and Futurelec. Perhaps the position of a former IMF colleague as Minister of Finance and the key arbiter of economic reforms has helped Guinea on its return to a funded program. Although many obstacles remain, clearly the IMF and World Bank feel they have a credible partner in Guinea's new government McDONALD