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.


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DECREASING COMMODITY PRICES
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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.

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BUDGET CONSTRAINTS
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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.

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GDP, INFLATION, AND MONETARY POLICY
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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.

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COMMENT
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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