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

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Summary
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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.

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A for Effort
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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.

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Budget Remains An Outstanding Issue
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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.

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Closing the Financing Gap
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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.

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Monetary Policy Remains Weak
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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."

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Lingering Economic Concerns
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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.

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Guinean Reaction: That Went Well, Don't You Think?
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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."

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Potential For A Funded Program
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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.

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COMMENT
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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