GUINEA'S ECONOMY FALLING FAST

UNCLAS SECTION 01 OF 02 CONAKRY 000490 SIPDIS SENSITIVE E.O. 12958: N/A TAGS: ECON EFIN EINV EMIN PGOV PREL GV SUBJECT: GUINEA'S ECONOMY FALLING FAST ¶1. (U) Summary: Guinea's notoriously poorly governed economy is now starting to feel the chokehold of the global economic crisis and the inexperience of the ruling junta. While consumer prices have slightly decreased, so have the prices of the mining commodities on which the GOG,s budget relies. International aid isolation has removed access to several external sources of funding and the GOG is facing massive budget shortfalls. Though the inflation rate has remained stable, the government will have to continue to implement prudent monetary policies and start cutting government spending significantly to maintain monetary stability. The GOG doesn't seem to have any clear plan on how to improve the current economic situation and may be spending well beyond its budget. END SUMMARY. -------------- DECREASING COMMODITY PRICES -------------- ¶2. (U) The health of Guinea's economy relies primarily on its mining sector. A mineral-rich country, Guinea has nearly one-third of the world's known bauxite (eventually processed into aluminum) reserves as well as large deposits of gold, diamonds, iron, nickel, and graphite. The global economic crisis has spurred a drop in global demand and commodity prices. Aluminum alone has lost nearly 60% of its value since this time last year.. Guinea's export revenues, of which at least 90% come from the mining sector, are expected to decrease by 50% in 2009. The Central Bank claims that the production of bauxite, diamonds, aluminum and gold decreased 9%, 20%, 21%, and 36% respectively during the first five months of 2009. The precipitous drop in commodity prices has seen a decrease of nearly 50% in revenue from mining. ¶3. (SBU) Since taking power, the CNDD has waged contract campaigns against several large international mining companies including Rio Tinto, Rusal, and Ashanti Gold. The GOG is instituting populist policies and many solid international investors are hesitant to enter into the unstable political situation. Companies already operating in Guinea have slowed down exploration efforts considerably in fear that falling prices and government intervention could precipitate massive investment losses. -------------- BUDGET CONSTRAINTS -------------- ¶4. (SBU) International donors, including the G-8, the International Monetary Fund (IMF),and the World Bank (WB), cut their development programming significantly in response to the coup. The 2007 three-year IMF poverty reduction and growth facility has also been suspended, since multilateral donor assistance was cut. With a nearly $3 billion USD external debt burden and a country in dire need of infrastructural reform and development, it is unclear where the government will find the necessary capital to support public projects. One way the government is attempting to limit revenue shortfalls is by collecting unpaid taxes, and in some cases advance tax revenue, from the mining sector. In March, Ashanti Gold mining company paid the GOG $20 million USD in taxes, temporarily alleviating some budget constraints. ¶5. (SBU) The GOG remains current on its debt payments. However, the GOG will be faced with a twice annual payment of $7 million USD in November of this year. Unless the GOG finds another source of outside funding, it will be difficult to meet the required payment, which would officially put them in arrears. Though the government has cut expenditures in several sectors, program spending appears to have increased substantially within the Ministry of Defense. These defense expenditures remain opaque, and it is unclear how the government plans to control and direct these funds. Government spending may be unsustainable if world commodity prices do not rise drastically. The WB estimates a fiscal deficit of nearly 1.2% of GDP for 2009, mandating cuts in spending, domestic borrowing and possibly domestic debt rescheduling. -------------- GDP, INFLATION, AND MONETARY POLICY -------------- CONAKRY 00000490 002 OF 002 ¶6. (U) The World Bank projects that the GDP growth rate will lower to 0% by the end of the year due to decreased activity in the mining sector as well as the cut in donor funding and FDI. Last year, the GDP growth rate was around 4.5%. ¶7. (SBU) The official inflation rate remains stable around 14% due to sound monetary policy and low oil and food prices. The informal exchange shows the Guinean Franc losing value quickly against the dollar. While the official exchange rate hovers around 5000, the unofficial market is currently selling dollars for up to 7000. The government seems to be maintaining the sound monetary policies that decreased Guinea's inflation level substantially in 2008. However, it is possible that the GOG will print money to support their fiscal deficit and continue their extensive military expenditures. While the Embassy has heard several rumors suggesting that such a monetary policy is already quietly taking place, there have been no official pronouncements to indicate expansive monetary policy. -------------- COMMENT -------------- ¶8. (SBU) The combination of poor governance, international aid suspension, and the global economic crisis has created a precarious environment under which the government budget must operate. For now, it is unlikely that FDI and international donor funding levels will increase. International economists also do not predict a swift rise in commodity prices or demand for Guinea's mineral resources. The current government has little experience in managing economic affairs, and it appears that economic technocrats are slowly being pushed to the sidelines (septel). With a annual per capita GNI of $432, Guinea's population is extremely poor. The need to cut the GOG's already limited non-military spending and the possibility of expansionary policy could bring about an even more dire economic situation for Guinea's poorest. At the moment, the GOG does not seem to have a concrete plan to address the economic situation. BROKENSHIRE