Dcunmnt of

The World Bank

FOR OFFMCIAL USE ONLY

Reot No. 8826

PROGRAM PERFORMANCE AUDIT REPORT

GUINEA

FIRST STRUCTURAL ADJUSTMENT CREDIT(CREDITS 1659-GUI AND SFA AOl1)

JUNE 25, 1990

Operations Evaluation Department

This document has a restricted distribution and may be used by recipients only In the performance oftheir official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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CURRENCY EQUIVALENTTS

(Annual Average. Guinean Francs per US Dollar)

1986: GP 345; 1987: GF 428; 1988: GF 475

FISCAL YEAR

January 1 - December 31

ABBREVIATIONS AND ACRONYMS

CBG Compagnie des Bauxites de Guinee (bauxite company)CCEF Economic and Financial Coordinating CommitteeENCOBE Entreprise de commercialisation du betailEPCOA Prefectoral Agency for Agricultural Produce MarketingFAPA Ferme Agro-Pastorale d'Arrondissement (District Collective Farm)MEF Ministry of Economy and FinanceMPCI Ministry of Planning and International CooperationMRAEP Ministry of Administrztive Reform and Civil ServiceONAH Hationwl Hydrocarbons Company (petroleum products import and distribution)PROSECO State enterprise responsible for Product Exports (coffee and palm ke.rnels)SGC Soc.iete Guineenne de Commerce (Joint ventura trading company)

FOR OFFMCLAL US ONLYTHE WORLD BANK

Washington. D.C 20433U.S.A.

Office tel OvfftEv.GWaIOp0srat tvattutm

June 25, 1990

MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT

SUBJECT: Program Performance Audit Report on Guinea -First Structural Adjustment Credit(Credits 1659-GUI and SPA AOIl)

Attached, for information, is a copy of a report entitled "ProgramPerformance Audit Report on Guinea - First Structural Adjustment Credit(Credits 1659-GUI and SFA A0ll)" prepared by the Operations EvaluationDepartment.

Attachment

This documient has a mttited distrbutiont and may be used by moipients only in the pM. .aefof their officil dutLe Its conenttat my wat otherwise be diwoe without Wol Bsnk auwzin

FOR OMCIAL USE ONLY

PROGRAM PERFORMANCE iUDIT REPORT

GUINEAFIRST STRUCTURAL ADJUSTMENT CREDIT

(CREDITS 1659-GUI AND SFA AO11)

TABLE OF CONTENTS

Page NQ.

Preface . ........................................................... iBasic Data Sheet ................................................... iiEvaluation Summary ................................................. iii

PROGRAM PERFORMANCE AUDIT MEMORANDUM

I. BACKGROUND ................................................... 1

II. CONCEPT AND DESIGN OF SAL I .................................. 2

III. IMPLEMENTATION ............................................... 4

A. Monetary and Banking Reform .............................. 4B. The Incentive System ..................................... 5C. The Public Sector ........................................ 6

IV. IMPACT AND INITIAL RESULTS ..................... 8

V. FINDINGS AND ISSUES .................................. 9

PROGM COMPLETION REPORT

I. INTRODUCTION ........................ ......................... 13

II. SETTING ........................... ........................... 13

III. THE ECONOMIC AND FINANCIAL REFORM PROGRAM .................... 15

IV. PROGRAM IMPLEMENTATION ........ ........... .................... 16

V. GOVERNMENT MONITORING OF THE PROGRAM .......... .. ............. 29

VI. BANK SUPERVISION ......... ............. ....................... 30

VII. DISBURSEMENT AND PROCUREMENT .............. .. ................. 31

VIII. THE IMPACT OF SAL I .......................................... 31

IX. LESSONS LEARNED ....................... ....................... 33

This document has a restricted distribution and may be used by recipients only in the performanceof their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

PROGRAM PERFORMANCE AUDIT REPORT

GUINEA

FIRST STRUCTURAL ADJUSTMENT CREDIT(CREDITS 1659-GUI AND SPA A011)

PREFACE

1. This is a Program Performance Audit Report (PPAR) on the FirstStructural Adjustment Program, involving an IDA credit in the amount of SDR22.9 million and an SFA credit in the amount of SDR 15.6 million to theGovernment of Guinea, with the objective of supporting Guinea's Economicand Financial Reform Program designed to free the economy from pervasivestate controls, lessen public sector intervention and to put in place apolicy framework favoring a market-oriented economic system. The creditswere approved on February 11, 1986, and became effective on May 19, 1986.Closing date of the credits was December 31, 1988; and final disbursementswere made on February 23, 1989. A Second Structural Adjustment Credit,No.1926-GUI in ttv amount of SDR 47 million, was approved on June 16, 1988and became effective on March 2, 1989.

2. The PPAR consists of the Program Performance Audit Memorandum(PPAM) prepared by the Operaticns Evaluation Department (OED) and theProject Completion Report (PCR) prepared by the Africa Region. The PPAM isbased on the attached PCR, the President's Report, the loan documents, thetranscripts of the meeting of the Executive Directors at which the programwas considered, on a study of program files, and on discussions with Bankstaff. An OED mission visited Guinea in Octoberl/ovember 1989, anddiscussed the effectiveness of the Bank's assistance with the Ministry ofFinance, the Planning Office and the Central Bank. Their kind cooperationand valuable assistance in the preparation of this report is gratefullyacknowledged.

d3. The PCR p' vides a complete account and assessment of the projectexperience, and discusses the performances of the Bank and the programexecuting agencies. The PPAM elaborates on particular aspects such as theconcept and design of SAL I, the incentive system, and the impact andinitial results; and sets out the major findings of the audit.

4. Following standard OED procedures, copies of the draft PPAR weresent to the Government. However, no comments were received.

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PROGRAM PERFORM4ANC3 AUDIT REPORT

GUINEAFIRST STRUCTURAL ADJUSTMENT CREDIT(CREDITS 1659-GUI AND SFA AOl1-GUI)

BASIC D SHEET

KEY PROECT DATA

Original Amount Disbursed OutstanaOng(as at 31 March 1989)

IDA Credit No 1659-GUI* 25 (SOR 22.9) 29.09 0SFA A011* 17 (SOR 15.6) 19.62 0

*Denominated In SORe

Source: Statement of Development Credits

CUKULATIVE CREDIT DISBURSEMENT

FY 86 FY 87 FY 88 FY 89

(I) PlannedCUSS million) 34.20 42.00 0.00 0.00

(I1) Actual Total 12.72 22.75 39.12 48.71

o/w A 011 4.97 10.84 17.10 19.621659-GUI 7.75 11.91 22.02 29.09

Ciii) as percent of (I)* 37 54 93 116

* Disbursed USS amounts exceed original USSamount due to SOR/USS parity changes.

Appraisal Mar. 10, 1985Documents to Nov. tt, 1985Loan CommitteeNegotiatio'us Dec. 12, 1985Board Approval Feb. 11, 1986Signature of DCA Feb. 27, 1986Effectiveness may 19, 1986Credit closing Dec. 31, 1988

FOLLOW-UP ADJUSTMENT OPERATIONS

Guinea: Second Structural Adjustment Program, Credit No 1926-GUI approvedon June 16, 1988 in the amount of SDR 47 million (US$65 million equi-valent). The Credit was signed on June 29, 1988 arnd became effective onMarch 2, 1989.

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PROGRAM PERFORMANCE AUDIT REPORT

GUINEAFIRST STRUCTURAL ADJUSTMENT CREDIT(CREDITS 1659-GUI AND SFA AOlI)

EVALUATION SUMMARY

The Background

1. After more than two decades of economic mismanagement the economyof Guinea was in a state of complete disarray by the early 1980s. The centrallyplanned state-led development model had failed to produce growth and moderniza-tior. Instead, despite its favorable resource endowment, Guinea remained oneof tht poorest countries in Africa with comparatively unfavorable social in-dicators.

2. A 1982 stand-by agreement with the IMF soor became inoperative asthere was no clear government commitment with regard to systemic reforms and therequired radical adjustment of the exchange rate. Under a new government,assuming power after the death of Sekou Toure in 1984, the prospects for basicchanges in Guinea''s economic policies improved. The government demonstratedits commitment to policy reform by abolishing all internal barriers to themovement of goods and by stopping compulsory sales by farmers to the government,thereby giving the private sector access to all activities previously under themonopoly of the state.

The SAL I - Concegt and Desi

3. There were long negotiations on an adjustment program with the Fundand the Bank during all of 1985. It was clear to both sides that systemicreforms had to take place in the Guinean economy toward a market-oriented systemwhich would, in combination with the large needs for rehabilitation in allsectors, require several years to be implemented. IDA's First StructuralAdjustment Credit approved by the Board in February 1986 was to be the first ofa series of operations in support of Guinea's Economic and Financial ReformProgram started by the regime which came to power in April 1984.

4. Due to the deep financial disarray of the country the adjustmentprocess had to be initiated with a monetary and banking reform, devaluing theGuinean currency by a factor of twelve and replacing the inefficient state bantkswith a new banking system based on private joint-venture banks. The largeexternal deficit of the country required a joint effort of the internationaldonor community adding up to almost US$150 million including special jointfinancing and cofinancing from bilateral donors. While the Fund's and the Bank'scontributions covered only a fraction of the financial gap, their support ofGuinea's adjustment program was instrumental in mobilizing additional externalassistance.

5. The adjustment program was designed to be carried out in threephases. Phase I, from end-1985 to mid-1986, consisted of a range of major

iv

monetary, pricing and fiscal adjustments, complemented by multilateral debtrescheduling in the framework of the Paris Club. Phase 1I (during 1986) was toconsolidate the reorientation of the economy to the new exchange rate and pricingsystem by a progressive liberalization of the productive sectors, the establish-ment of the new banking system and by improving public sector performance. InPhase III, from 1987 onwards, the private sector was to play the major role inemployment generation following public sector rationalization. The essentialactions in these phases were directly linked to specific conditions for therelease of the second tranche of the SAL, which was delayed by a year-and-a-half pending the satisfaction of these conditions but ensured a constructivedialogue and positive action in most areas.

Implementation

6. The monetary and banking reforms were carried out swiftly by theGuinean authorities. A foreign exchange auction system wa' introduced afterthe initial large devaluation and four new private banks were established. Thepursuit of an active exchange rate policy was hampered however by the continuinginternal financial disarray, particularly with regard to the public budget.

7. The reforms of the incentive system for the private sector proceededrelatively well with regard to price adjustments (rice, petroleum, coffee, palmkernels) and the simplification of the tariff regime. However, an increase inthe petroleum tax as well as the tariff reforms did not result in a substantialincrease of budgetary revenucs due to 'leakages' from parastatals and aninefficient customs service. The establishment of a coherent institutional andlegal framework for a market-oriented economy proceeded on a piecemeal basis onlyand was not completed under SAL I.

8. The public sector reforms, namelv the reduction of the civil serviceby 10,000 employees and the privatization and liquidation of public enterprises,were initiated quickly but soon encountered difficulties due to insufficientplanning and monitoring as well as a certain loss of credibility in the view ofthe public because of exonerations and irregularities. The civil servicereduction was fully implemented but the creation of alternative employmentopportunities in the private sector was very limited. The economic benefits ofthe privatization of public enterprises have been qualified by the granting ofmonopoly rights, high protection and generous fiscal holidays to some privatizedenterprises. However, quantitative targets for privatization have been met,though with some delay.

Impact and Results

9. The Guinean economy has reacted favorably to the adjustment measureswith GDP growth rates of 3.1X in 1987 and 5.9X in 1988. The inflation ratedeclined but fiscal and balance of payments deficits remained high, due toslippages in financial discipline and a persisting weakness in the managementcapacities of the economic ministries. Despite the comprehensive deregulationand liberalization policies there has been no significant increase in privateinvestment, rneither local nor foreign, except in the agriculture, trade sectorsand housing where a positive supply response could be felt. It was clearly too

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optimistic to expect significant employment creation in the private sectoralready under SAL 1.

Evaluation - Findings and Issues

10. As the first phase in a sequence of policy-based lending operationsthe contents and conditionality of SAL I appear appropriate in view of the severedistortions of the Guinean economy. Quick results in all aspects could not beexpected, given the weak human resources and the physical deterioration of thecountry. The gradual improvements since the start of the adjustment programcan be regarded as a success; but the remaining requirements for reform areenormous, and in view of the weak financial position of the country and theexpected deterioration in its terms of trade medium-term growth prospects areonly modest.

11. There were some weaknesses in the design and implementation of theprogram. Among the more important the following issues have been identified:

- - The adjustment program wab designed by Bank and Fund staff and wasnot fully internalized by the Guinean authorities. This deficiencywas only partly compensated by continuous dialogue between theresident missions and the government on the details of theimplementation of the program.

- - The companion TA operation for economic management was not sufficientto substitute for the fundamental management deficiencies in theGuinean admiristration.

- - SAL I focussed mainly on the establishment of a rational publicinvestment program but neglected revenue generation and budgetarymanagement in general.

-- The Bank's approach was flexible with regard to the conditionalityand the timetable for program implementation, but somewhatsuperficial in the design and monitoring of comprehensive reformprograms such as the restructuring of the public service and thepublic enterprise reform.

Lessgns

12. This PPAM essentially agrees with the statement of lessons learnedcontained in the program completion report. While some reforms hinge onexecutive and or legislative decision and can be implementcd quickly, theeconomic response and effects depend on changes in the behavior of people andare much slower in becoming manifest. Still other reforms involve institutionalchanges which can be put in place only slowly and which are dependent on theavailability of skilled people to design, implement and manage these changes.In both cases realistic expectations require that an adequate time span isallowed for the desired effects to appear.

PROGRAM PERFORMANCE AUDIT MEMORANDUM

GUINEAFIRST STRUCTURAL ADJUSTMENT CREDIT(CREDITS 1659-GUI AND SFA-AO11)

I. BACKGROUND

1.01 Despite its great agricultural, mining and hydroelectric potentialGuinea still belongs to the least developed countries with a GNP per capita ofabout US$300. In the quarter century after its independence the Guinean economyhad changed drastically: from a net food exporter, based on a vital agriculturalsector, the country became the world's largest bauxite exporter, a major aluminaproducer and exporter, and a net food importer. Except for a short period in themid-1970s, when bauxite operations expanded, economic growth r6-ained below thepopulation growth rate of approximately 3 percent per annum. The low level ofdevelopment is reflected in comparatively unfavorable social indicators: lifeexpectancy at birth, literacy rate and health standards are considerably lowerthan in the average low income Africa South of tne Salhara.

1.02 Starting from very difficult conditions at indeper-'ence Guinea chosea model of centrally planned state-led development whici. -ight have beenappropriate at the outset but produced increasingly unfavorable t'sults as timepassed. A network of state enterprises in all economic sectors replaced foreignventures and private enterprises, but did not achieve the expected modernizationand industrialization objectives. Due to the lack of producer incentives and poorperformance of public support services, agricultural exports declined and mostof the agricultural sector retreated into subsistence farming. Urbanizationincreased rapidly and the economy grew severely dualistic as between the officialand non-official sectors. The former depended mainly on the bauxite enclaveeconomy and functioned through an unsustainable system of administered pricesand a highly overvalued currency, while the expanding parallel marketsincreasingly overtook the function of satisfying urban and rural consumer demand.

1.03 By the early 1980s the Guinean economy was in a state of completedisarray. The external deficit gree, and public investments outside the miningenclave failed to generate returns adequate to service external debt. Thegovernment's internal fiaancial position eroded due to increasing transfers tothe parastatals and to declining tax receipts as the non-official sector grewto dominate consumer trade. The Guinean currency, the syli, traded on theparallel market at more than twenty times the official rate by 1985. Thesituation was aggravated by the declining performance of the inefficient andoverstaffed public sector, in which remuneration consisted largely of officialrations, notably rice. It was also aggravated by the severely deterioratedinfrastructure, such. as the road network, energy supply, telecommunication linksand the physical deterioration of the capital city of Conakry.

1.04 The pressure of the economic situation led to some tentative economicreforms in the early 1980s. In 1982 Guinea entered a one-year stabilizationprogram with the IMF, which included policy elements aiming at longer-termrecovery. There was, however, no clear government commitment to the necessary

2

refor-ms of the regulatory framework of the economy and to the required radicaladjustment of the exchange rate. Thus the stand-by soon became inoperative.

1.05 Only after the death of President Sekou Toure in March, 1984, and thesubsequent assumption of power by a group of military officers did the prospectsfor basic changes in Guinea's political, and economic policies improve. The newgovernment expressed its determination to set the economy on a new path towardsrealizing its full development potential and appealed to the internationalcommunity for support.

1.06 During 1984 and 1985 the Bank and the Fund held discussions with thegovernment of Guinea on the economic reform program. Najnr stumbling stones inthe nvgotiations on an IMF stand-by and a Structural Adjustment Credit from theBank were the weak capacity for policy formulation on the Guinean side leadingto a slow pace in decision making, and the hesitation of the government withregard to a radical devaluwtion of the Guinean syli. However, the governmentdemonstrated its commitment to policy reform by initial reform measures in 1984and 1985 directed toward eliminating all internal barriers to the movement ofgoods. It also abolished compulsory sales by farmers to the state. By enactinga ne- investment Code, a Banking Law and a Commercial Law, and by abolishing thestate monopoly for foreign trade, the government gave to the private sectoraccess to all activities previously under the monopoly of state-owned enter-prises, leading virtually to the legalization of the non-official sector of theeconomy.

1.07 When in the last quarter of 1985 the details of a structural adjustmentprogram were discussed by the Bank and the Government of Guinea it was clear toboth sides that the rehabilitation of the Guinean economy would be a long-termendeavour, that the centrally planned state-led development strategy had to befurther changed in favor of a market-oriented economic system with a greater rolefor the private sector. It was also clear that the first phase of the reformprogram had to consist of a set of short-term fiscal and monetary measures tostabilize the economy and set the stage for subsequent structural reforms witha medium-term perspective.

1.08 The urgent financial needs of Guinea, reflected in an accumuletion ofpayments arrears amounting to over US$300 million at end-1985, required the jointeffort of the international donor community as the financial contributions ofthe Bank (US$25 million IDA Credit sa'd US$17 million African Facility Credit)and the Fund (US$36.3 million) were riot sufficient to cover the financial gap.The total financing package committed in 1986, including Special Joint Financingfrom Germany and Japan, and cofinancing from Switzerland, France and the UnitedStates, added up to almost US$150 million. The Bank's and Fund's support forGuinea's economic recovery program was instrumental in mobilizing thisassistaitce. Furthermore, a Paris Club meeting for the rescheduling of officialdebts was scheduled for March 1986 and a Consultative Group conference for oneyear later.

II. CONCEPT AND DESIGN OF SAL I

2.01 In its Statement of Development Policy the Government of Guineaformulated four main development priorities. First, the exchange rate issue had

3

to be resolv&.1 as a prerequisite for the removal of price distortions and theunification of the official and parallel economies. Second, the capacity andperformance of the public secto., particularly in supplying basic infrastructureand social services, had to be greatly improved. Third, the environment forprivate sector development had to be established. Fourth, export earnings hadto be boosted by diversification out of bauxite, and rice imports had to be cutby augmenting domestic production.

2.02 The program was to be carried out in three phases.

Phase I, from end-1985 to mid-1986, consisted of a rangeof major monetary, pricing and fiscal adjustments, suchas the devaluation followed by a floating exchange rate;an increase '.n the prices of rice and petroleum productsto reflect prices on the international market at the newexchange rate; a corprehensive debt rescheduling andstrict control of credit and the money supply; measuresto increase tax collection and to control publicexpenditure through reduced transfers to public enter-prises and reduced 1ublic sector employment; a corepublic investment program to rehabilitate and completeongoing projects with assured viability and economicreturns; a new investment code and other fiscal andadministrative measures to encourage private investment;reform of tariffs and import/export procedures; and theopening of new, privately-managed commercial banks toreplace the former Government banks, which were to beliquidated.

Phase II (during 1986) was to consolidate the reorienta-tion of the economy to the new exchange rate and pricingsystem by maintaining price flexibility and progressiveliberalization of the productive sectors, largelythrough rapid withdrawal of government involvement andintervention; establishment of institutions to supportthis process - particularly a viable and efficientbanking system; and improving public sector economicperformance.

In Phase III, from 1987 onwards, the private sectorwould play the major role in employment creationfollowing public sector rationalization, the firmreestablishment of financial sector institutions, andthe expansion of smallholders agriculture and consumerdemand. New or rehabilitated physical and socialinfrastructure should support this growth.

2.03 Due to the major distortions in the regulatory framework of theGuinean economy the program was focussed mainly on monetary and fiscal stabili-zation, based on the advice of the Fund, and on deregulation and liberalizationof the economy. Other program elements dealt with the legal and institutionalset-up of the emerging market-oriented economy. Most of these program elements

4

were to be carried out during 1986, while the major supply responses, based onprivate sector initiative, were expected to materialize during Phase III, whichwaa left conceptually relatively open, apparently to be filled with more policyactions under a subsequent structural adjustment credit. Taking into account theweak administrative capacities of the Guinean Government, it was a veryambitious and tight schedule for reform. It seems that the Bank didn't want tot iss the opportunity of a highly committed government, ready to accept theadvice of the Fund and the Bank, and pushed ahead for major deregulatoryreforms, leaving some of the complex problems of the transformation of theproductive system and the establishment of new viable structures in theproductive sectors to the future.

2.04 The short time frame of SAL I was reflected in the intention todisburse the second tranche of the credit (US$17 million) already in the secondhalf of 1986, following a performance review. Specific conditions for therelease of the second tranche referred to the establishment of a new legalframework (investment code, commercial law, petroleum code); the start of theliquidation program for the state-controlled primary banks; the reduction in thenumber of public employees by 10,000 persons; a review of rice stocking anddistribution arrangements; and adjustment of the prices of rice, coffee, palmkernels and petroleum. Additionally, the government agreed to pay regularly itscharges for water and electricity; establish an action plan for the restructur-ing of the non-industrial parapublic sector and to consult with the Bank beforeformation of or taking participation in new state enterprises and before makingany changes in the contractual or fiscal arrangements pertaining to theexploitation of bauxite.

2.05 The implementation of the reforms was to be supported by a TechnicalAssistance Project (Cr. 1559-GUI) and by advisors and consultants financed byFrance, the IDF and UNDP. The support of the advisors was geared mainly to thebanking and public enterprise reform programs, the implementation of the publicservice reform and reduction effort, and to the ministerial coordination bodyCCEF (Economic and Financial Coordination Committee).

III. IMPLEMENTATION

A. Monetary and Banking Reform

3.01 In a major reform in 1986 the Guinean franc replaced the syli asGuinea's currency. The currency was devalued by a factor of twelve for publictransactions and by a higher rate for private sector activities, to be unifiedby mid-year and continuously adjusted afterwards. A weekly foreign exchangeauction system was introduced, principally open to all current transactions ofthe private and parastatal sectors. However, the auction system - which was infact more a fixirng by the Central Bank after receiving bids from the largeforeign exchange buyers - did not capture all foreign exchange earnings from theparallel market and therefore a considerable spread remained for some time infavor of the parallel market. During 1986 and 1987 the exchange rate policy didnot fully comply with the lIF's policy prescription and only from late 1988

onwards did the authorities pursue a more active exchange rate policy, which

5

was, however, hampered by the continuing internal financial disarray, part-icularly with regard to the public budget.

3.02 At end-1985 all six state banks were closed and replaced with three newmajority private joint-venture banks. A fourth joint-venture bank followed in1988. The liquidation of the state banks - being a conditi .or the secondtranche release - proceeded with some irregularities and a cons.derable increasein liquidity due to the reimbursement of depositors, but was completed, thoughwith considerable delay, by es -1,18.

3.03 Although the moneta' - .4 banking reforms, having been carried out withcourage and determination by ta.- authorities, .§present a great leap forwardcompared with the pre-reform sy:tem, some major deficiencies remained after SALI to be straightened out in the medium-term. Confidence in the new banks hasbeen rising, but their intermediary role is still weak due to negative realinterest rates for deposits and the absence of a legal framework for bankingsureties and to the reluctance of banks to undertake medium and long-termlending. Apart from continuous institutional improvements in the banking system,efforts towards greater macroeconomic stability (inflation stood still at 25percent in 1989) and financial soundness (budget deficit) will be required forlonger term economic development.

B. The Incentive System

3.04 After the legalization of a large part of the parallel market forconsumer goods and after the abolition of most state trading monopolies andprice controls in 1984 and 1985, price and marketing policy issues under SAL Ifocussed on the politically sensitive import commodities-rice and petroleum- aswell as the major agricultural export products-coffee and palm kernels. In thecase of rice the government abolished the system of ration cards but wasreluctant to free the commercial rice trade completely. There prevailedconsiderable government involvement in trade licencing and price regulation.While the Bank tried to avoid the disincentive effects of subsidized prices andoversupply of imported (and food aid) rice on local production, the governmentfeared the political repercussions of supply bottlenecks and rising prices ofa staple commodity in times of stagnating private incomes. As the government infact raised the price of rice only from 20 Guinean sylis/kg to 100 Guineanfrancs/kg after the devaluation by a factor of twelve, the Bank flagged a non-compliance with the condition to review rice stocking and distribution arrange-ments.' Following devaluation etrolem prices were increased more than two-fold to reflect international prices at the prevailing exchange rate. Asimultaneous increase in the petroleum tax did, however, not lead to theexpected revenue increase, due to severe 'leakages' from ONAM, the statepetroleum import and distribution company. For both commodities, rice andpetroleum, price differentials to neighboring countries provide an incentive forconsiderable re-exports, which are difficult to control due to the weakness ofthe customs administration. For coffee and Ralm kernels prices were alsoadjusted upwards. The state monopoly for the marketing of agricultural exports

Further liberalization measures were considered under the subsequentSAL II.

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was abolished in 1986, leading to a better remuneration for producers and afavorable supply response among coffee growers.

3.05 The revamping of the tariff regime following the devaluation of January1986 resulted in a highly simplified regime of border taxes. With a fewexemptions, imports became subject to a base rate of 10 percent, with a flatturnover tax of 10 percent, and surcharges of 20-40 percent for luxury goods.Considering the virtually oper. borders of the country, higher import tariffscould serve neither protective nor fiscal purposes. Even at the low tariff ratesprevailing after the reform the inefficient customs service has not been in aposition to recover more than a fraction of the expected revenues.

3.06 Work on the establishment of a coherent institutional and legalframework for a market-oriented economy had already started before SAL I withthe enactment of a new investment code, a commercial law and a banking law.However, the Bank supported a revision of the investment code and the commerciallaw in order to establish consistency between the different codes and laws andto remove disincentives for private investment. The revised codes were adoptedbut private investors still regard the Guinean legal system, with its absenceof clear procedures for legal recourse and unclear property ownership rights ashighly unreliable. Thus, the response from private, particularly foreigninvestors has been disappointing.

C. The Public Sector

3.07 The public sector reforms had two main objectives: reduction of thesize and cost of public administration, and withdrawal of the state from theproductive sectors of the economy. The first objective was to be attained mainlyby the reduction and rationalization of public sector employment; the second byrestructuring, and partly liquidating and privatizing the public enterprisesector. Additionally, the public investment budget was to be reoriented towardsthe rehabilitation and maintenance of existing infrastructure and budget controlwas to be strengthened by overhauling the government's procurement regulationsand other measures.

3.08 As a condition for second tranche release it was agreed to reduce thenumber of public employees - estimated at 90,000 persons - by 10,000. Simul-taneously, public salaries - insufficient to assure even a minimal standard ofliving without outside employment - were to be increased considerably. Thequantitative target of staff reduction was attained, albeit with some delay, byenforcing the retirement age, offering a voluntary departure scheme and creatingan "administrative reserve" with continuing salaries for employees of publicenterprises to be closed. Additionally, a staff testing and evaluation processwas initiated for virtually the entire administration with the aim of matchingjob requirements with staff qualifications and of identifying redundant staff.The testing program turned out to be a long, costly and complex procedure,whereby some discrete exonerations questioned the credibility of the wholeprocess. However, by end-1989 the testing program was terminated and a civilservice census finally established. Apparently, the timetable for the admin-istrative reform had been far too optimistic and the planning of the reform hadbeen devised more in an ad-hoc manner than on the basis of a well-definedconcept. The absorption of redundant c'.vil servants into the private sector was

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more dIfficult than expected. An employment advisory service, providing donor-funded loans and technical assistance for the preparation of bankable projects,had only limited success and suffers apparently from repayment problems. At end-1989 about 15,000 persons still remain in the "administrative reserve",receiving a basic salary, due to the very limited scope for alternativeemployment opportunities in the private sector.

3.09 The reform of the public enterprise sector took a quick start in 1986,when a number of industrial and commercial parastatals were privatized orprepared for liquidation. As there existed neither an appropriate legalframework for both privatizations and liquidations nor a plan setting outschedules, rules and procedures for the divestiture process, it was carried outin an ad-hoc manner leading to some irregularities as well as a certain loss ofcredibility with the public. Consequently, implementation slowed down when thegovernment encountered difficulties which were not foreseen at the outset. Theprivatization process suffered from discrete political interventions andsomewhat arbitrary decisions by the government, even after negotiations withprivate investors had been successfully terminated. Some decisions were clearlybased on vested interests, e.g. when monopoly rights, high protection andgenerous fiscal holidays were granted to some privatized companies or whenpublic assets were sold at very low prices. The liguidation of public enter-prises proceeded slower than anticipated, mainly due to the reluctance of thegovernment to close down some inefficient companies. A particular weakness wasthe absence of a plan to meet the financial requirements of the divestitureprogram, i.e. for the settling of debt arrears, severance pay for employees etc.Despite the support of the government by Bank staff and consultants, thedivestiture process was marked by a considerable degree of indecision, confusionand improvisation. However, by end-1988 about 20 public enterprises, mainlyindustrial, had been privatized; 69 had been closed and were in an advancedstage of liquidation. Only a few of the more than hundred public enterprises inexistence in 1986 are to remain in the public portfolio. As there is no centralmonitoring unit for public enterprises as yet, it is difficult to assess theirfinancial status and the progress of their rehabilitation. In general, thequantitative targets of the divestiture program have been met, but the qualityof the outcome leaves much to be desired. In retrospect, it is difficult tojudge if a more careful planning effort supported by the Bank would haveproduced better results. As vested interests have in fact been stronger than thegeneral commitment for reform, the impact of external influence has been limitedanyhow. It can be questioned however, if it was wise to set quantitative targetsfor divestiture, when there was no appropriate degree of control of itsimplementation.

3.10 The first Public Investment Program (PIP) for 1986 as well as a three-year rolling investment program prepared for the period 1987-89 and presentedto the Consultative Group for Guinea in March 1987 had been reviewed andendorsed by the Bank. Both programs reflected the reorientation towardsrehabilitation and maintenance of existing infrastructure and the enlarged roleof the private sector. With the support of the companion Technical AssistanceProject for Economic Management the investment planning procedures, organizationand structure of the Ministry of Planning, Commerce and Industry were revamped.It proved to be very difficult, however, to introduce a rational process ofbalancing the competing claims on public resources and an adequate degree of

8

control of the investment program. It was not possible to create a binding linkbetween the PIP and budgetary expenditure allocations, which were under theauthority of the Ministry of Finance. Thus, several projects of doubtfuleconomic merit were decided upon by individual ministers with the consent of thePresident, but without involvement of the Ministry of Planning or the Economicand Financial Coordination Committee (CCEF). Before the introduction of aprocurement code by end-1988 project costs were often judged excessive by theBank. Despite the focussing of the PIP on the new economic priorities thequality of the investment budget continued to reflect the inadequate programmingand control procedures and the lack of formal monitoring capacities.

3.11 Duriitg the negotiations on the adjustment program no reliable budgetarydata were available, and no strict budgetary limits could be established. UnderSAL I the Ministry of Finance was neither in a position to effectively controlexpenditures nor to manage revenue generation in an appropriate manner. Thus,the government did not comply with the SAL I provision for prompt settlement ofbills for water and electricity services. However, as the public utilities werein a complete financial disarray themselves, the Bank waived this condition. Thefirst meaningful budget was established for the year 1988, but the budgetaryprocess is still weak, particularly on the revenue side. In retrospect, itappears to have been a mistake to concentrate the public finance component ofthe adjustment program only on investment programming and not on public financein general. As the companion TA operation also focussed on the support of theMinistry of Planning, the needed improvement of institutional capacities in theMinistry of Finance has been delayed until end-1989, when under SAL II anongoing French TA program for the Ministry was complemented by Bank financedadvisers, particularly for the improvement of revenue generating mechanisms.Four years after the launching of the adjustment program the low level of non-mining tax revenues (4-5% of GDP) and the continuing financial disarray in thepublic sector remains the major weakness of economic policy in Guinea.

IV. IMPACT AND INITIAL RESULTS

4.01 With GDP growth rates of 3.1% in 1987 and 5.9% in 1988 the economy hasreacted favorably to the adjustment measures. This growth is due mainly to apositive supply response of the agricultural sector, the diversification of themining sector (gold, diamonds, quarries) as well as increased activities inconstruction, agro-industry, transport and trade. The inflation rate hasdeclined from 72% in 1986 to 34% in 1987 and 27% in 1988, but the fiscal andbalance of payments deficits did not decline as planned: in 1988 the budgetdeficit amounted to about 9% of GDP, the current account deficit to over 11% ofGDP. The slippages in financial discipline which led to those unsustainablemacroeconomic developments distorted the relations between Guinea and the Fundand were also a major reason for the delay of the second tranche release of theSAL which was effected only in January 1988, almost two years after effective-ness of the credit.

4.02 Major progress was achieved in the area of monetary and bankingreforms. The massive devaluation at the outset of the program was a successfuloperation, as it laid the foundation for the unification of the official andnon-official sectors ot the economy and for the resumption of economic growthand relative monetary stability. The SAL, in combination with the Fund's

9

policies, was instrumental in creating the conditions for a major externalsupport operation by the donor community, without which the devaluation wouldhave been inconceivable in the view of the Guinean authorities. The bankingreform can also be regarded as successful, with four private banks replacing theformer inefficient system of state banks. However, due to the inadequate legalframework and the structural deficiencies of the economy the intermediary roleof the banks is still weak and they provide almost no medium to long-terminvestment financing for the productive sectors.

4.03 In the other areas of reform the progress under SAL I has been slow andnot without setbacks, but the actions taken by the government, e.g. for thereduction and restructuring of the civil service, have been courageous. Both thecivil service reform and the privatization and liquidation of public sectorenterprises were devised in an ad-hoc manner by the Bank, leading to somedebatable results and a certain loss of credibility of the government's policiesin the view of the public. The reform of the incentive system (tariff and pricereforms, institutional and legal framework) led to some favorable results in theagricultural and trade sectors. However, there has been no significant increasein private investment, neither local nor foreign, in other sectors. It seems,that a propitious climate for private investment will emerge only when the legaland institutional framework is developed further and when the deterioratedphysical infrastructure of the country is rehabilitated. It was clearly toooptimistic to expect a major supply response from the private sector alreadyduring 1987 (para. 2.04), leading to significant employment creation in theformal sector of the economy. It appears, that there has been some employmentcreation in the urban construction, small-scale and informal sectors, compensat-ing partly for the reduction of the number of civil servants. The socialconsequences of these processes are difficult to assess however, as under SALI there has been no systematic monitoring of the social effects on differentgroups in the society.

V. FINDINGS AND ISSUES

5.01 Taking into account the weak institutional capacities of the Guineanadministration, particularly the scarce human resources at the middle level ofthe public institutions, the schedule of reforms under SAL I was very ambitious.However, if SAL I is seen as the first phase in a sequence of policy-basedlending operations, its contents and conditionality appear appropriate in viewof the severe distortions of the Guinean economy. It was a logical st..p tocommence with a thorough monetary reform and concentrate the subsequentstructural reform measures on deregulation and liberalization on the one handand on public sector reform on the other. After many years of economic mis-management the human resources and the material base of the country wereweakened to such an extent, that quick results could not be expected. Seen fromthat angle, the gradual improvements since the start of the adjustment programcan be regarded as a success, but the remaining requirements for reform areenormous. The medium-term growth perspectives are only modest, taking intoaccount the weak financial position of the country and the expected deteriora-tion in its terms of trade.

5.02 As the Guinean government was not in the position to design a coherent

10

adjustment program on its own, this function was necessarily performed by Bankand Fund staff with the consequence that the program was not internalizedsufficiently by the Guinean authorities. However the resident missions of theFund and the Bank engaged in a close dialogue with the government on details ofthe implementation. The supporting role of the Bank's resident mission was veryimportant in that phase and there was good coordination with the Fund mission.However, technical support through the resident missions and in the frameworkof the companion TA operation for economic management was not sufficient tosubstitute for the fundamental management deficits in the Guinean administra-tion. It would have been necessary to devise a comprehensive human resourcedevelopment plan for the core ministries in order to provide for a medium-termimprovement of institutional capacities and thus for a better internalizationof subsequent SAL's. A technical unit attached to the coordinating body CCEFcould perform this function only partly under the subsequent SAL II.

5.03 The administrative deficiencies were felt particularly in the area ofpublic finance, where SAL I focussed mainly on the establishment of a rationalpublic investment program but neglected revenue generation and btudgetarymanagement in general. The persistent fiscal weakness remains the majorbottleneck in economic policy making in Guinea.

5.04 Due to the weak data base at the outset, the conditionality of SAL Iwas not very precise and there were almost no quantitative policy targets. Thisapproach, as well as the waiving of some conditions appears to be appropriatein view of the prevailing conditions of the country. Despite the flexibility ofthe Bank it took almost two years until the second tranche of the credit couldbe disbursed, throwing some light on the difficulties the government had inimplementing the reforms. This flexible and ad-hoc approach of the Bank had itsdisadvantages when it came to comprehensive reform programs such as therestructuring of the public service and the public enterprise reform. in theseareas more thorough planning and support would have been required. The Bank'sapproach was somewhat hasty, not wanting to miss the opportunity of thegovernment's commitment to reform. As Guinea's reform requirements as well asits requirements for support are definitely of a long-term nature, there seemsto be no need for hasty reforms, but for persistence and determination withregard to the implementation of agreed measures. As there have been no majordisagreements in substance between the Bank and the Guinean authorities, butonly in the timing of spec.:fic measures, there appears to be a good basis forfurther collaboration.

11

PROGRAM COMPLETION REPORT

GUINEA

FIRST STRUCTURAL ADJUSTMENT CREDIT

(CREDITS 1659-GUI AND SFA AO11)

June 28, 1989

Country Operations DivisionOccidental and Central Africa Department

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FIRST STRUCTURAL ADJUSTMENT CREQIT(CREDITS 1659-GUI AND SFA A011)

PROGRAM COMPLETION REPORT

I. Introduction

1. The first structural adjustment loan (SAL I) was approved by theExecutive Directors on February 11. 1986 after an extensive preparationeffort that began in April of 1984. SAL I was the instrument through whichthe Bank and bilateral donors embarked with the Republic of Guinea on anew, revitalized partnership made possible largely by the dramatic shift inpolicy direction taken by the new Government under the Second Republic.

2. This completion report on SAL I describes the setting withinwhich the program was devised and carried out: its objectives, the measuresundertaken, the degree of success in implementation, and in so far as it ispossible, their economic impact. A short section is devoted todisbursement and other loan supervision matters. Finally, an attempt ismade to identify lessons learned from the experience.

3. It is difficult to carry out a retrospective assessment of thefirst phase of Guinea's structural adjustment program, or to attempt todraw meaningful lessons for the future, without a review of the backdropfor the shift in policy direction, a useful measure of the formidablechallenges then faced by the new Government.

II. Setting

4. The death of President S4kou Toure in late March 1984 and thesubsequent assumption of power by a group of military officers largelyunknown to the outside world marked the end of a political era and Guinea'sfirst twenty five years of independence. A quarter century ofmismanagement had brought the country to the brink of economic collapse,denpite agricultural, mineral and energy resources that make Guinea one ofthe best endowed countries in Africa.

5. Per capita income in this country of 5.6 million (1986)inhabitants is less than US$300 (1986), placing it among the leastdeveloped countries as defined by the United Nations. Living standards areuniformly poor, as reflected in key social indicators: life expectancy is37 years, infant mortality is about 160 per thousand, more than 80 percentof the population lacks access to safe water and 80 percent of thepopulation is illiterate.

6. From being a major exporter of agricultural products atindependence, Guinea's economy was transformed by the mid-1970s into thatof a major bauxite exporter and a net food importer. The private sectorwas largely displaced by a pervasive network of state enterprises in allsectors of the economy. Urbanization accelerated as farming becameunprofitable and productive activities and 4ncomes were increasinglyshifted from the rural to the urban sector.

7. Emphasis on state-led development achieved none of the expectedmodernization and industrialization objectives; the currency becameincreasingly overvalued under pressure from the inefficient and overstaffed

14

public sector which financed its decisions through monetary expansion.further preventing the development of exports or efficient importsubstitution activities; the inability to mobilize domestic savings led toan increasingly heavy debt burden; and the once dynamic agricultural sectorretreated into subsistence production. Throughout the 1958-84 period, theeconomy produced at levels well below potential due to the lack of producerincentives and deteriorating infrastructure: By the early 1980s, the roadnetwork had become virtually unusable, electricity supply was erratic atbest, telecommunication links within the country and with the outside worldwere all but impossible, and the capital city of Conakry had itselfphysically deteriorated to an extent probably unparalleled in peacetime.

8. Guinea's centrally-planned model of development led to anincreasingly dualistic economy. The official sector depended on baux.Lteexports for its income and functioned through an elaborate system ofadministered prices linked to the highly overvalued currency 1I while thenon-official sector, which derived its income from clandestine exports andprivate transfers from abroad, was supplied largely by smuggled or pilferedimports. Its scope expanded steadily by necessity as the supply of goodsimported through official channels became insufficient to meet demand forfoodstuffs and other essential goods.

9. The extended deterioration of Guinea's economy was reflected inincreasingly severe financial difficulties by the early 1980s. Thefinancial position of the Government itself wa3 eroded chiefly by poorperformance in the parastatal sector. Tax receipts and transfers frompublic enterprises declined as the "underground0 private sector grew todominate consumer trade, while budgetary subsidies to public enterprisesexpanded. The economy's external position became unsustainable, chieflythe result of public investment outside the mining enclave which failed togenerate returns adequate to service the associated external debt.Mounting debt service obligstions and private capital flight, unmatched byincrements in capital inflows, resulted in a continual rise in the foreignliabilities of the Central Bank and a massive accumulation of paymentarrears.

10. From all accounts, the run-down state of the economy inheritedby the new Government was of near tragic proportions in the human andinstLtutional areass repressive policies sapped Guinea of itsintellectuals and its best entrepreneurs who emigrated in vast numbersduring the first two decades of independence; traditional values weredisplaced by ideological doctrine; farmers living only at subsistence levelwere forced to make compulsory sales to the State and movement of goods andpeople was severely constrained; the legal system was in shambles asarbitrary authority substituted for due process; and ineffectual publicinstitutions proliferated to absorb an inflated civil service whoseremuneration consisted largely of official rations, notably rice.

1/ The Guinea Syli (GS) traded officially at 23 GS/US$ at the end of 1985as against a parallel market rate of about 400 GS/US$.

15

III. The Economic and Financial Reform Proeram

11. The military coup that brought a new regime to power in April1984 was accompanied by a dramatic change in Guinea's political andeconomic policies. Acknowledging the bleak economic situation itinherited, and cn the advice of the IMF and the Bank, the new Governmentmoved quickly to free private sector initiative. Among the first actionstaken by the new Government, all internal barriers to the movement ofgoods. and compulsory sales by farmers to the State, were abolished in May1984. as were tLe ENCOBEs (State cattle-trading companies) and the FAPAs(State agropastoral farms). A new investment code was enacted in October1984, and a new banking law in March 1985. With these and other initialsteps taken by the Government, the private sector became primarilyresponsible for the importation of all commodities except rice andpetroleum products. The Government also promulgated a new commercial lawgoverning all trading activities. These steps demonstrated theGovernment's intention to rely increasingly on private sector initiative inall activities previously under the monopoly of state-owned enterprises.They also paved the way for ihe Bank to prepare SAL I which was to becomplemented by Special Joint Financing from Germany and Japan, andcofinancing from Switzerland, France, and the United States. SAL. I wasapproved by the Board on February 11, 1986 and was declared effective onMay 15, 1986. The Government's program of reforms was further supported bythe IMF under a thirteen month stand-by arrangement which expired ,n April1987 after being extended for an additional month.

12. The overriding objective of the Government's program supportedby the international financial community was to free the economy frompervasive state controls and Government intervention and to put in place apolicy framework supporting a market-oriented economic system. Specificmeasures to meet this broad objective were designed to: (i) correct theserious overvaluation of the currency; (ii) establish a new, reliablebanking system to replace bankrupt state banks; (iii) decontrol prices;(iv) liberalize internal and external trade; (v) introduce institutionalreforms to promote private sector savings and investment; (vi) reduce thescale and improve the efficiency of the public sector by cutting employmentlevels and by withdrawing from commercial and industrial activity; md(vii) reorient public investment towards supporting the directly productivesectors.

13. While the Fund and the Bank supported jointly all the elementsof the Government program, the Fund took the lead in advising theGovernment in areas falling within its domain, i.e. exchange rateadjustment and monetary reform and related measures (price adjustment.establishment of a new trading company, reorganization of the CentralBank), public finance management, credit policy and external debtmanagement. The Fund also supported the Bank-financed SAL program, i.e.the reform of the banking system (establishment of new banks), thereduction of the civil service and public sector salary policy, theparapublic enterprise reform, import liberalization and tariff reform. Inaddition, the Bank focussed on necessary measures to improve the incentivesystem and on reforms aimed at reinforcing the legal/institutionalframework to support private sector initiative. These reforms were further

16

supported by a Technical Assistance Project (Cr. 1559-GUI) which wasapproved by the Board on March 14, 1985.

14. The specific conditions fcr the release of the SAL secondtranche weres (i) satisfactory progress on the overall program; (ii)promulgation of an investment code and suitable implementation procedures,a revised commercial law and a petroleum code, acceptable to the Bank;(iii) negotiation of a multilateral debt rescheduling; (iv) start of aliquidation program for the state-controlled primary banks; (v) reductionin the number of public employees by 10,000 persons below the number onduty on January 1, 1986; (vi) a review of rice stocking and distributionarrangements for 1986; and (vii) adjustment of the price of rice, zoffee,palm kernels and petroleum in a marler acceptable to the Batik, and on thebasis of a review of these prices in the second quarter of 1986. Secondtranche was released on January 15, 1988.

15. In addition to the specific conditions for second trancherelease, three particular covenants are worthy of note 21/

(i) Section 3.02. Payment by government agencies and departments ofcharges for water and electricity delivered to them not laterthan 30 days after receipt of a bill for such services;

(ii) Section 3.03. Establishment, not later than March 31, 1986, of aplan of action for the restructuring of the non-industrialparapublic sector, acceptable to the Association;

(iii)Section 3.04. Consulting with the Association prior to: (a)making any changes in the contractual or fiscal arrangementspertaining to the exploitation of bauxite; and (b) creating anew state enterprise or participating in a new mixed enterprise.

The Government's statement of development policy is in Annex I.

IV. Program Imolementation

16. In reviewing Guinea's implementation of the structuraladjustment program, several factors need to be borne in mind

- The program was largely designed by the Bank and IMFstaff at the request of the new military Governmentwhich adopted it;

- The conditions that existed at the time, particularlythe need for the new leaders to consolidate politicaland administrative authority made impossible a widerinternalization of the program before its launching;

2 Article III of the Development Credit and African Facility Agreements.

17

- Among the conditions inherited by the 'w Governmentwas an administration in disarray whiL' was itselftargeted under the reform program.

A. Monetarl and Banking Reform

17. This is an area where impressive progress was achieved owing tothe decisiveness of the authorities in implementing the necessary reformsin the earliest phase of program implementation. In early 1986, theGovernment devalued the currency for public transactions by a factor oftwelve (from GS 3 to GS 300lUS$) while a second window for private sect,,ractivities was established initially at the rate of GS 345/US$ andsubsequently subject to a weekly auction. Shortly thereafter, the Guineanfranc (GF) replaced the syli as the country's currency. Finally, in May1986, the Central Bank unified t.he two exchange windows, requiring theGovernment to purchase foreign exchange at the rate determined at theweekly auctions, which became open to most current account transactions ofthe private and parastatal sectors. After the initial large devaluation in1986, the rate of exchange was continuously adjusted; however, withinflation only declining from 72Z in 1986 to 34Z in 1987, the adjustmentwas not sufficient to maintain Guinea's competitiveness. The authoritieswere also reluctant to allow supply and demand of foreign exchange tofreely determine the rate, relying instead on a system of fixing by theCentral Bank. It was only in late 1988 at the urging of both the IMF andthe Bank, that the authorities began to use the exchange rate as aninstrument of macroeconomic policy by acting to regain the lostcompetitiveness and keep the rate at realistic levels.

18. During the SAL I program, the Central Bank did not pursue aflexible interest rate policy, a macroeconomic variable that admittedly wasnot considered explicitly in the design of the program. 31 Interest rateson deposits were introduced in 1986 but remained highly negative in realterms, fueling demand for foreign exchange which along with tangible assetswere preferred to Guinean franc holdings. No doubt, this policy obstructedefforts to maintain adequate levels of reserves and reduce the gap betweenthe official and parallel market rates of exchange. The persisting foreignexchange constraints in Guinea, at times severe, continually posed the riskthat the Central Bank would resort to discretionary restrictions andinformal administrative quotas to try and curb import demand rathe- thanuse more aggressively the price mechanism. The Central Bank did mI.ntain asystem of prior import declarations (descriptifs d'importation) which, witha few exceptions, proved more of a nuisance for the private sector than arestriction on its access to foreign exchange. Nonetheless, it has beensuggested that private investment has been inhibited by the uncertainprospect of foreign exchange availability.

31 Neither the letter of Development Policy nor the Bank's President'sReport made any mention of interest rate policy. This is understandable,given that these were formulated in the period of transition from a state-owned to a private banking system during which time virtually no bankingactivity was taking place. However, during the second phase of theadjustment program interest rates are being progressively liberalized.

18

19. As part of the program of monetary reform, all six state bankswere closed just prior to the change in currency and replaced with threenew majority private joint-venture banks. A fourth new commercial bank wassubsequently set up in early 1988. The domestic liabilities of the closedbanks were identified, small depositors reimbursed, and the position of thebanks vis-a-vis correspondent banks was established with a portion of theseliabilities rescheduled. The Bank accepted the timetable submitted by the..overnment, calling for completion of the acco,unting liquidation by end-1988. In effect, the liquidation of the state-controlled banks, a complexprocess, proceeded in a satisfactory marner, satisfying the specifictranche release provision. Confidence in the new banking system seems tohave been quickly restored, judging by the readiness with which privateGuineans opened (mostly foreign exchange) accounts with the new banks,despite the difficult environment in which these have had to operate 4/ andthe evolving process of establishing the Central Bank as a full-fledgedmonetary authority.

20. While the Guinean banking system made reasonable progresstowards the objectives of private resource mobilization and intermediation,it operated within a distorted incentive environment and displayed a numberof structural weaknesses. With money in circulation comprising 70? oftotal money supply, the dominance of the Central Bank in managing liquidityhas been overwhelming. A more flexible interest rate policy reflecting thescarcity of capital might have helped the mobilization of savings and theirchannelling to efficient activities. Moreover, the lack of an adequatelegal framework (para 31) for financial contracts appears to have been animportant factor in encouraging private banks to be risk-averse inextending credit from their own resources, currently limited to short-termtrade activities; under externally funded lines of credit, banks assumelittle or no commercial risks. 5/

B. Price and MarketinR Policy

21. As indicated earlier, during the first phase of structuraladjustment all prices were decontrolled by the Government with fewexceptions, notably the prices for rice and petroleum products. Importswere also liberalized and the private sector could engage freely in alllevels of internal and external marketing. In practice, the private sectorhas had to face obstacles posed by an unwieldy and disorganizedadministration, traditionally used to controlling and regulating, andunaccustomed to the new support role that a market economy requires.Nonetheless, the prevailing economic environment shaped by Governmentpolicy stands in marked contrast to the centrally-planned economy of thepast and by any reasonable standard, the country has made considerable

4./ In one bank (BICIGUI) which became the first institution with branchesin the interior and the principal financial intermediary for externallyfinanced lines of credit, including the Bank's Industrial Rehabilitationand Promotion Project (Cr. 1234-GUI), the Bank provided extensiveassistance which included payment of salaries for foreign personnel.

5/ In the case of the Bank line of credit (Cr. 1234-GUI), the commercialrisk is assumed by the Government.

19

strides in its economic liberalization program. The burst of freeenterprise that followed the decontrol of prices and the liberalization oftrade is quite apparent as is the unifying of the official and parallelmarkets which played an important role in generating a favorable supplyresponse in the agricultural sector (para 54). While the exchange ratereform corrected the most highly distorted *price" in the Guinean economy,its impact on relative prices of tradeables and non-tradeables would haveclearly remained partial had the Government not addressed at the same timethe pervasive system of price controls.

22. In the specific case of rice, the Government ceased to interveredirectly in its distribution and abolished the system of ration cards thatexisted in the previous administration. Initially, most, if not all,commercial rice imports were handled by the Guinean Commercial Company(SGC), a joint venture newly set up with bilateral financing from France.In time, the private traders were allowed to enter the rice import marketbut their activities, particularly their profit margins were regulated.This practice along with a policy consisting of fixing administratively thewholesale price of imported rice tended to restrict the trade to a handfulof operators, a situation which in turn encouraged continued Governmentscrutiny of their activities. The authorities have been reluctant to freethe commercial rice trade completely ar.d allow prices to be determinedsolely by market conditions within a more competitive domestic environment.While perceived political risks inherent to such a sensitive commodity maypartly explain the reluctance, other considerations are often citedincluding the relatively small size of the Guinean market (150,000 tons ofcommercial rice imports in 1986) which is seen as discouraging market entryof new international traders, the unpredictable timing of food aid riceshipments which alter considerably the domestic supply and demand picturegiven the limited stocking capacity that exists in Conakry, and unclearweights attached by Government to two potentially conflicting objectives:self-sufficiency and relatively stable and low consumer prices.

23. Under SAL I, the Government was to carry out a review of itsrice stocking and wholesale distribution arrangements. The wholesale priceof imported rice was also to be reviewed quarterly and the release of thesecond tranche was conditioned upon making any necessary adjustment toensure that the price reflects full import costs at the prevailing exchangerate and thus does not compete unfairly with domestic production. Thereview of the rice stocking and wholesale distribution arrangements doesnot appear to have been formally conducted although a half dozen studies onthe rice sector have been carried out with financing, provided by bilateraland other multilateral institutions, notably UNCTAD and UNDP since early1986, leading to different conclusions and ultimately confrontingGovernment with conflicting advice. In the event, the Bank was satisfiedduring the second tranche review with the distribution arrangementsdescribed above.

24. The wholesale price of imported rice was fixed at FG 80/kgimmediately following the devaluation in early January 1986, representingan import-parity price. Subsequent to the unification of the exchangerates for public sector operations and private sector transactions, in May1986, the wholesale price was increased to GF100/kg to reflect the newexchange rate of FG 360 per US dollar. Furthermore, since mid-1987 the

20

Government has allowed commercially imported rice, after negotiations withtraders in co-nection with each shipment, to be sold at market prices bothat the wholesale and retail levels. Food aid rice which represented aboutone-third of imports in 1988 was kept subject to the administratively fixedwholesale price of FG 100/kg or 20-25 percent less than economic cost atthe time of second tranche review in December 1987.

25. This non-comoliance with the SAL I provision was flagged by Bankstaff who nonetheless recommended the release of the second tranche in thelight of overall satisfactory progress achieved on other fronts inconnection with the implementation of the program.

26. Rice pricing and marketing issues have commanded a large shareof attention in the Bank's dialogue due to actions taken by the Governmentthat were seen by Bank staff as running counter to the spirit or the letterof the Government's Policy Declaration Letter. Such instances inclutda theoccasions when the price of rice did not reflect import parity, when thedecision, temporary as it turned out, was taken to prohibit the marketingof rice outside of Conakrv where a shortage was feared, or when a publicentity (l'Office de Ravitaillement) was also temporarily resurrected tomarket rice at subsidized prices.

27. The Bank has used the SAL process effectively to conduct adialogue that has been successful in the sense that Government involvementin the rice sector has been kept minimal, the system of productionincentives has also remained by and large sound, and there is a growingconstituency within the Government that resists state interventionism. Butthe frequency with which rice issues re-surface as a major element in theoverall dialogue, including their continued consideration in the design ofSAL II, suggests that there may still be less than full agreement on allthe elements of a policy that can be internalized in Guinea and receive thesupport of all donors, notably USAID (the largest provider of food-aidrice) and UN-affiliated institutions which have financed most of thestudies and long-term consultants in the rice sector.

28. The retail price of petroleum products was also adjusted at thetime of the unification of the exchange rate in May, 1986 from FG 115 to FG140/litre, with the FG 25 per litre increase representing a specific tax.Subsequently, on December $1, 1987, the Government increased the specifictax by FG 110/litre, resulting in a retail price for petroleum products ofFG 250/litre. With this latter increase, also a condition of the TransportCredit (Cr. 1815-GUI) approved by the Board on June 4, 1987, the Governmentresponded fully to the Bank's concerns regarding the underexploitation ofthe revenue potential of hydrocarbon consumption and the significant re-exports to neighboring countries. Unfortunately, only a part of theexpected tax revenues were actually realized due to the serious operatingdeficiencies of ONAH, the petroleum import and distribution company.aLeakages" from ONAH have been unacceptably large, averaging more than halfof the domestic market value of distributed petroleum products over thepast three years. At the advice of the Bank, the Government has recentlyentrusted the responsibility for the ma..agement of ONAH to anadministrator, pending the conclusion of an agreement with a consortium ofinternational oil companies to set up a new company to distribute petroleumproducts. The Government intends subsequently to liquidate ONAH.

21

29. The price at which PROSECO, the state enterprise in charge ofmarketing and exports, would purchase coffee and palm kernels in Conakrywas set at end-1985 at FG 500/kg and FG 100/kg, respectively. Followingthe abolition of PROSECO's monopoly in early 1986, the private sector tookover the marketing of coffee almost entirely. Due to significantcompetition among traders and developments in the international market, theprice received by farmers was significantly above the PROSECO price. Inview of the level of remuneration for producers, which demonstrated thatliberalization in prices would not merely benefit the traders, and theinability of PROSECO to market sizeable quantities of coffee in 1986, theGovernment decided that there were no good reasons for maintaining PROSECOas a full; state-owned company. The Government still announces officialprices for their informational value to producers, but these seem to haveno effect on the market. The level of these prices for the 1987 campaignwere deemed satisfactory by the Bank, in the light of prevailinginternational market prices for coffee and palm kernels.

C. Trade and Tariff policy

30. Import and export procedures were radically simplified. Allimport licensing was abolished and replaced with an import declaration,granted to all registered traders. While the forms are filed withcommercial banks, until end-1988 the Central Bank retained the authorityfor final approval for the purposes of the foreign exchange auction, attimes exercising administrative discretion in a process designed to beautomatic. Following the devaluation of January 1986, a highly simplifiedtariff regime was introduced with rates set at low levels. With a fewexemptions, imports have been made subject to a base rate of 10 percent,with a flat turnover tax of 10 percent, and surcharges of 20-40 percent forluxury goods. Overall rates were purposely set at low levels to takeaccount of the increase in the taxable base and dampen inflationary effectsof imports following the devaluation, reduce tax evasion, and avoidexcessive protection to import-substituting industries. Unfortunately,only a fraction of the budgetary revenues expected from import tariffs wererealized until the recent improvements which result from the steps taken torevamp the inefficient customs service and improve tax on revenuecollec.tion in general, a major objective of SAL II. In addition, thescheme of deductibility of turnover taxes on imported inputs is not beingapplied systematically or uniformly. Notwithstanding these problems whichare inherent in the country's weak institutional fabric, Guinea has adopteda tariff regime that must be considered one of the most liberal in Africa.

D. Legal and Institutional Reforms

31. Under SAL I, the Government began the difficult and long processof establishing a new legal/institutional framework to complement theincentive system supportive of efficient private sector growth. Threemajor new codes relating to investment, mining and petroleum were adapted.The new Investment Code which many private investors have found too

22

complex, 61 provides the country with guidelines applicable to investmentsworthy of encouragement, including time-bound fiscal incentives designed tobe neutral in their impact on production decisions. The preparation of acustoms code has also been recently completed and laws pertaining toregulations of the banking sector and of commercial activity have .een alsoadopted. In early 1989, several long-term legal advisors financed underthe Technical Assistance Project have taken up their assignment after abouttwelve months delay, to assist in drawing up economic legislation and toadvise the authorities in contract negotiations. For policy reasons, theBank was not in a position to respond favorably to a Government request forthe financing of a larger program of legal assistance to help in theestablishment of a badly needed judicial system including training ofmanpower from clerks to judges. The weakness of the current frameworkcharacterized by an absence of clear procedures for legal recourse orremedy and unclear property ownership rights is cited by foreign investorsas the major impediment to investment in the country. It is also believedto have affected the international image of Guinea which is involved innumerous financial litigation cases in foreign courts. In theseconditions, IFC, for example, continues the practice of requiring off-shoreaccount arrangements and a presidential approval in lieu of a legal opinionin connection with its investments. This situation reflects thedilapidated legal system the current Government has inherited. It is hopedthat other, particularly bilateral, donors would assist in rebuilding thelegal system. The establishment of due process is indeed an essentialcomplement to the new economic orientation of the country and a majordeterminant of foreign investors' confidence. 7/

E. Administrative Reform

32. If the over&ul of the economic incentive structure wassuccessfully carried "t in spite of the weak administration,implementation of the civ4l service and parapublic sector reformsencountered major difficulties.

33. The Second Republic inherited an overstaffed, largely unskilled,underpaid and unmotivated civil service. The primary objective of theAdministrative Reform program was to develop an efficient and motivatedpublic sector work force by reducing the number of redundant and unskilledemployees, improving the organization and management of public agencies andupgrading the employment conditions of remaining staff, including grantingsubstantial salary increases to offset the loss of ration privileges and tocompensate for inflation.

34. (il Staff Reductions. At the time the reform was launched atend-1985, a reduction of 20,000 staff by end-1986 was projected from aninitial stock of 88,000 public sector employees. This target proved to be

6/ See IFC/FIAS 1988 review of the Guinean Investment Code

71 A range of issues relating to the private sector incentive frameworkwill be addressed under the forthcoming Private Sector Promotion Creditfrom IDA.

23

overly ambitious and unrealistic given the political sensitivity of themeasures as well as the administrative requirements of putting in place anadequate framework for implementing the reform with minimum socialdisruption. While accomplishments at the time of second tranche review fellshort of initial expectations, a reduction estimated at more than 10,000was attained in the number of active duty civil servants, satisfying thespecific SAL provision. This was achieved by: (i) enforcing the retirementage; (ii) instituting obligatory early retirement for civil servants with25-30 years of service and/or of 55 years of age; (iii) placing thoseformerly employed in the now closed public enterprises, including banks, inan interim status of "administrative reserve" (disponibilit4 speciale),which allowed them to continue to receive their monthly salaries albeit atthe level prevailing at the time of departure for a specified period, and(iv) granting a resignation bonus to civil servants opting for a voluntarydeparture scheme.

35. The precise number of staff placed in each of the abovecategories is difficult to ascertain given the lack of a reliable census ofcivil servants and the absence of a centralized payroll system for theadministration, two unremedied weaknesses that have considerably hamperedthe reorganization of the administration. A significant number, believedto be considerably less than the 10,000 target set under SAL I, tookadvantage of the voluntary departure scheme and qualified for severancepayments equivalent to about 5 years salary. Most of those who did nottake advantage of the voluntary departure scheme have remained in theadministrative reserve status and continued to draw a salary beyond thetransition limit set under this arrangement.

36. In an effort to ease the absorption of redundant civil servantsinto the private sector, the Government created an employment advisoryservice to provide donor-financed technical assistance in the preparationof banKable projects. Under this scheme, the severance pay could be usedas downpayment to secure loans up to five times that amount se thatdeparting civil servants with worthy projects could have access tofinancial resources up to the equivalent of 25 years' salary. By the endof 1988 about 1750 projects had been submitted for bank financing and 750had actually been approved under externally financed lines of credit. Theslower than anticipated rate of absorption of civil servants into theprivate sector no doubt discouraged other civil servants from opting forthe voluntary departure scheme and made it difficult for the Government toend salary payments to those in administrative reserve status.

37. (ii) Reoraanization of the Administration. During the SAL Iperiod work began (with UNDP financing) on defining the new organizationalstructures of Government departments. A program to match staffrequirements to available staff through a testing and evaluation process.with termination of redundant staff, was initiated. In addition,Government instituted a program of incentives for early retirement. Muchof the conceptual work was completed quickly, but the actual implementationof the program suffered from extensive delay due to the complex processinvolved in the conduct of tests for virtually the entire administration;this occurred at the same time as efforts were being made to ascertain itsexact size and to develop a central payroll system. It was only in late1988, that the Ministry of Administrative Reform and Civil Service (MRAFP)

24

which had been recently created, began to effectively update the civilservice census, implement in an orderly fashion the testing program andgive impetus to the process of defining new organizational structures ofGovernment departments. Until then, the Guinean administration had beenvirtually paralyzed and the burden of implementing and monitoring thecountry's ambitious program of economic reforms as well as in tending tothe day-to-day administration of a nation, fell on the shoulders of a veryfew motivated individuals, many of whom had returned under the SecondRepublic from exile abroad. It was not really until SAL II, i.e. early1989, that significant progress was achieved in creating the conditionsnecessary for developing an efficient and motivated public sector workforce, a major objective of the SAL I program.

38. (iii) Salaries. At the time the reform program was launched atend-1985, the average civil service salary stood at FG 5,500 per month.Following the devaluation of the currency and the dramatic increases in theprices of rice and petroleum products, the Government introduced a cost-of-living and a transport allowance. With an increase in base salary of 80percent in May 1986, average civil service pay, inclusive of allowancesreached FG 16,400 (USS 45) per month. Thus, the average Guinean civilservant earned in 1987 approximately 15 percent of the remunerationreceived by his Togolese and Beninese counterparts and less than 10 percentof that earned by the Ivorian civil servant. Bank staff have alwaysrecognized that an increase in remuneration levels is clearly a necessarycondition, although in itself not a sufficient one, for promoting civilservice efficiency in Guinea. Despite recent increases in general salarylevels, average civil service salaries in Guinea remain low and, underthese circumstances, it is not surprising that the administration continuesto be plagued by lack of motivation and high rates of absenteeism. In viewof persisting financial constraints, Guinea will have to manage the civilservice wage bill carefully. Further progress in completing the program ofadministrative reform, including the elimination of redundant staff, willundoubtedly facilitate this task in the future, as there is improvement inthe principa. areas slated for progress under SAL II (i.e. revenuecollection and public finance management in general).

F. Parapublic Sector Reform

39. The restructuring of the public enterprise sector in Guinea wasseen as essential for the efficient utilization of existing assets, theminimization of budgetary subsidies and transfers and the increasedresponsiveness of the sector to the demands of the new, liberal economicenvironment. Substantial progress was achieved in this element of thereform program. In keeping with its economic orientation, the Governmentsuccessfully divested from most public enterprises, maintaining in itsportfolio mainly the essential service industries, utilities and existingjoint-venture mining companies. Despite the significant difficultiesencountered due to a lack of adequate accounts, resistance from parAstatalstaff, and the late promulgation of a legal liquidation framework inNovember 1987, twenty five industrial public enterprises have beenprivatized since the beginning of 1986, mostly in that year; 69 were closedand are in various stages of liquidation, of which 33 were agriculturalmarketing centers (EPCOA) and 6 oanks. A further 74 enterprises, mainlycommercial parastatals are currently in various stages of privatization or

25

liquidation. Only a dozen public enterprises of the nearly 180 inexistence in 1986 are currently scheduled to remain in the publicportfolio.

40. While quantitative objectives were clearly met, the financialand economic objectives of the program i.e. the reduction of the debtburden and the increases in public revenue through privatization were attimes lost in the process. Liquidation of closed enterprise assets has notcontributed in any significant manner to meeting the enterprises' debtobligations. Some privatized public enterprises were also sold atrelatively low prices with generous grace periods. Perhaps moresignificantly, the importance of maintaining a competitive marketenvironment to foster efficient production was neglected in certain cases.New monopoly rights (e.g. ENTAG, the cigarette factory; BONAGUI, soft drinkcompany; SIPECO, paint factory) and generous fiscal holidays were granted.In these cases, economic efficiency objectives were unfortunatelysacrificed and potential tax revenues foregone.

41. The divestiture program continues to generate much criticism ir.Government circles, on account of the generous terms granted to investorsand the slow pace at which the privatized enterprises have effectivelyresumed activity, more than half requiring substantial additionalinvestment that has not yet materialized. 8! In retrospect, the quality ofthe program did suffer, justifying some criticism, due to some of theconditions under which it was implemented, notably a lack if priorguidelines for the program and an insufficient degree of transparency inthe actual process. At the same time, in terms of its scope and therelative speed with which it was carried out, the results of thedivestiture program have clearl.y been impressive.

42. Non-industrial public enterprises were also slated forliquidation ard the Bank was satisfied with the calendar proposed byGovernment, a provision of SAL I. The target date was end 1988; however,this date has now proved to be unrealistic. Even less progress wasachieved in the rehabilitation of public enterprises slated to remain inthe Government portfolio. At present, these are managed essentially asdepartments of the central Government and their supervision is diffusedamong sector ministries (in charge of technical supervision), the Ministryof Economy and Finance (in charge of financial supervision) and theMinistry of Labor (responsible for employment issues), resulting in theabsence of a coordinated approach. The rehabilitation of publicenterprises involves a necessarily longer and technically more difficultprocess than is involved in liquidation or even privatization, a processfor which the Bank is providing support under its traditional lendingprogram in various sectors. The restructuring of the enterprises in thetransport sector is well advanced under two ongoing Bank projects (Cr.1815-GUI and Cr. 1915-GUI) as is the restructuring of the water sector

8/ In a press conference given in May 1988, the President of Guineadeplored the generous terms granted to investors, expressed hisdisappointment with the small volume of private resource inflows associatedwith the privatization program and indicated that some of the contractswould be reviewed.

26

under a recently-approved Bank project (Cr. 1985-GUI) while for othersectors, projects are still currently in various stages of preparation.Most urgent is the rehabilitation of the electricity and telecommunicationscompanies whose physical services and financial management are in need ofvast improvement to sustain the economic recovery and contribute to thedesired improvement in public finances. Under these circumstances, theGoveranent has not complied with the SAL I provision for prompt settlementof bills for water and electricity s -vices provided to government agenciesand departments. Until a minimum of X nancial management responsibilitycan be developed by these utilities, ideally in the context ofcomprehensive rehabilitation plans, Government would seem well advised tocontinue restr5cting the amount of financial resources it provides.

43. It was a provision of SAL I that the Goverrment would conaultwith the Bank prior to making any changes in the contractual or fiscalarrangements pertaining to the exploitation of bauxite. It also undertookto consult with the Bank prior to creating a new state enterprise orparticipating in a new mixed enterprise. While the Government compliedwith the first provision and Bank staff comments on the CBG (Compagnie desBauxites de Guinee) bauxite contract were taken into account, theexperience with regard to the second provision was mixed. The Bank wasinformed only a Posteriori of the creation of a public housing company(SOLOPRIMO) and a state-owned housing bank (CREMONA). At the urging of theBank, the Government agreed to undertake a housing sector policy study tolook into the desirability of setting up such structures, which have neverbecome operational, and to formulate a comprehensive policy, includingappropriate financial mechanisms, to help meet the substantial need forhousing in the country. The results of the study have become available andBank support is envisaged in connection with an urban project currentlyunder preparation. The Bank was informed of the creation of the jointventure for the management of the airport (SOGEAC), a project thatmaterialized with French bilateral support. For the newly privatizedcompanies in which the Government had decided to retain minority shares,consultations took place, but only after Bank prodding and in most caseswhen negotiations with private partners were already too advanced to permita constructive input on the part of the Bank.

G. Public Investment

44. Guinea's first public investment program (PIP) was prepared for1986, a year of transition for investment programming as, in fact, for manyother aspects of economic management in the country. The focus of thisexercise was (i) to draw up as exhaustive an inventory of projects underimplementation as possible; (ii) to restrict the PIP to ongoing projectsonly; and (iii) to exclude from the PIP projects of questionable econoxicand social merit. This "weeding out" was done largely on the basis of Bankstaff's knowledge of then ongoing projects without any rigorous costbenefit analysis. Subsequently, the Government adopted its first three-year rolling public investment program for the period 1987-89 which waspresented to the first Consultative Group for Guinea in March 1987. 7heBank reviewed and endorsed the PIP which reflected the new, enlarged roleof the private sector and placed appropriate emphasis on the Government'srole in rehabilitating physical and human infrastructure and publicservices in support of the private sector. After this encouraging start,

27

investment programming and control procedures in particular remainedwoefully inadequate as sufficient capacity could not be developed for theformal monitoring of disbursements or physical progress. Contributing tothe insufficient progress in this area was the extensive recourse toautorisation de paiement for expenditures on projects outside theinvestment budget. The implementation of the PIP also suffered from a lackof Government procurement procedures. A procurement code was prepared withfinancing provided under the Technical Assistance Project but itspromulgation became hostage to disagreements between the HPCI and the tEF,which competed for a larger degree of control of the investment program.There have been some recent improvements, notably the promulgation of aprocurement code in December 1988 and reasonably timely adoption of the1989 budget (both provisions of SAL II), but project preparation andimplementation continue to be of insufficient quality. The sheer size ofthe PIP 91, the large number of projects in the portfolio, and thepersisting weakness in economic and financial project preparation at thelevel of all ministries, has understandably stretched the Government's verylimited capabilities and improvement may well be expected to be onlygradual. The first Technical Assistance Project was instrumental in makingoperational the revamped MPCI but this has to be considered only a f!rstsmall step in the process of building Guinea's institutional capacity foreconomic planning and management. While SAL II and the second TechnicalAssistance Project have been designed specificall; with a view to achievingthis objective, there is an urgent need to establish clearly the respectiveroles of the MPCI, MEF and the technical ministries and set up monitoringsystems, and information and coordination networks among them. The absenceof a clear delineation of responsibilities within the administration hasserved to aggravate normal interministerial rivalries concerning spheres ofjurisdiction. Frictions have been particularly acute between HPCI and MEFover the power of payment authorization (ordonnancement) in connection withthe implementation of the PIP. Moreover, the refining of the programmingexercise will yield little benefit, however, if the PIP is not in turntranslated into a meaningful operational instrument in the form of aninvestment budget with binding exper.diture allocations.

45. During SAL I, two large projects (involving the construction ofarmy barracks and 500 classrooms) of doubtful economic justification werethe subject of extensive discussion between the Bank and the Government anda major topic of a meeting between the Bank's Regional Vice-President andthe President of Guinea. Differences of view had less to do with the meritof the projects than with their cost which was judged excessive by theBank. The fact that these investments jeopardized second tranche releaseuntil a compromise was reached on their phasing and cost should notovershadow the accomplishments of the Bank's dialogue with the Guineanauthorities on public investment; it is indeed a reflection of its quality

91 Expenditures programmed for 1987, at FG 87 billion, were 84 percenthigher than actual spending in 1986. Subsequent to this big increase in1987, the programming for 1988 and 1989 shows some levelling off, with the1989 level of investments being only 23 percent higher than the 1987 level.Preliminary indications are that total spending in 1987 was only 80 percentof programmed amounts, representing, nonetheless, a healthy increase intotal capital expenditures of 47 percent over 1986.

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and of the Government's commitment to the spirit of reforms that the numberof questionable investments was small only three years after the launchingof the economic reform program.

H. Coordination of External Assistance and Debt rescheduling

46. Special features of Guinea's PIP are a near 1002 recourse toexternal financing or concessional terms for its capital requirements andfor a significant share of current expenditures (e.g. local staff salaries)associated with their implementation, a large number of active donors (alltraditional bilateral and multilateral institutions including virtually allspecialized agencies of the UN system, most Arab and OPEC institutions,China and a large numDer of Eastern European countries are active inGuinea), a vast number of projects (over 300), and anart from the few inwhich the Bank is directly associated in connection with its lendingprogram, their relatively small size (about 'US$ 500,000 on average). Forany developing country, management of a portfolio with thesecharacteristics would be difficult. For a country with as weak aninstitutional capacity as that of Guinea, it is a daunting task whichimpacts negatively on the utility of resource transfers. Currently, manyprojects still tend to be seen as enclaves of individual donors,incorporating different design and policy features that contradict or evenundermine each other's objectives 10/. Ongoing Bank efforts to improvethe utility of aid flows include the First and Second Technical AssistanceProjects aimed at improving Guinea's own institutional capacity for theefficient planning and use of available resources and the support providedunder other traditional and policy-based operations to develop nationalpolicies that would help direct donor-sponsored activities and improvetheir impact. This is certainly the right approach which should pay off inthe long run but in view of the urgent improvements that are needed -- andtheir potential benefit for Guinea -- interim solutions deserve to be moreaggressively explored. The next Consultative Group Meeting for Guineacould be an ideal opportunity to discuss qualitative improvements in aidtransfers and to identify flexible coordination mechanisms: indications arethat the Guinean authorities and traditional donors would welcome placingthe issue prominently on the agenda.

47. The last provision of SAL I for a debt rescheduling wassatisfied. A Paris Club meeting was held in April 1986 to rescheduleGuinea's payment arrears as well as debt service obligations falling duebetween January 1, 1986 and February 29, 1987. Another reschedulingagreement with the Paris Club was reached in April 1989. The Governmnt ofGuinea has also initiated contacts with its other official bilateralcreditors, including the Eastern European countries, but no reschedulixg

10/ An example is the rice sector where no less than four projects within a100 mile radius are under implementation with different cost recoverypolicies for inputs ranging from free provision to full cost recovery. Asanother illustration, there are 6 lines of credit provided by externaldonors for the manufacturing sector carrying different onlending conditions(terms and iDterest rates), Government guarantee requirements andprovisions for the assumption of foreign exchange and interest variabilityrisks.

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agreements have yet been concluded. Finally, the Government hasrescheduled some of its obligations vis-a-vis private creditors, includingfinancial institutions and suppliers which did not fall within the purviewof the Paris Club.

I. The Social Dimension of Adiustment

48. The Government has been keen to ensure that adjustment withgrowth is not pursued at the expense of equity. While the main thrust ofthe program was in favor of private producers, particularly rural, theGovernment adopted a number of transitional measures during the first phaseof the adjustment program in order to cushion its adverse effects onvulnerable groups in urban areas. These measures which chiefly benefitedcivil servants, includeds (i) additional payments to compensate for theincreases in the cost of living and transport resulting from thedevaluation and the increase in petroleum prices; (ii) continued payment ofsalaries to laid off civil servants; (iii) voluntary departure bonuses withaccess to loans at favorable rates; (iv) advisory services to theretrenched civil servants; and (v) labor intensive work prograv3 to createemployment in Conakry funded in part through the Bank's urban project.

49. Structural adjustment almost always involves winners and losers.While the case of Guinea is no exception to this rule, the number ofwinners which encompasses all the rural population and a majority of urbandwellers is overwhelming in comparison to the rumber of people who lostfrom the process, chiefly the laid off civil servants. There is probablylittle that can be done in addition to what the authorities have themselvesundertaken with external assistance, to attenuate the impact of adjustmenton this small vulnerable group. The Bank itself realized this in thecourse of preparation of a project initially conceived only to minimize theimpact of adjustment on adversely affected groups (SocioeconomicDevelopment Support Project, Cr. 1995-GUI, approved by the Board on March28, 1989). As preparation proceeded, the design of the project wasrefocussed - and its impact broadened - to benefit the poorest segments ofthe population, whose lives do not seem to have been directly affected yet,by the adjustment program. Through pilot schemes, the project will fostertheir participation in the process of economic growth. Future Bankactivities will pick up on the results to further assist the Government inits efforts aimed at ensuring that the benefits of Guinea's adjustment arewidely and equitably shared.

V. Government Monitoring of the Program

50. The implementation of the SAL program has suffered from theabsence of a monitoring and coordinating body at the technical level. AnEconomic and Financial Coordination Committee (CCEF) composed of cabinetmembers was established in January 1986 to facilitate the decision-makingprocess, largely on issues requiring approval of the Council of Ministers.The CCEF was not however equipped to conduct policy analysis or effectivelymonitor the implementation of decisions, much less ensure internalconsistency in the actions of individual departments. The CCEF wasassisted by the IMF representative in the country, a Bank staff member onsecondment to the IMF. He also managed the Secretariat of the CCEF,

30

preparing the agenda for discussion and the related background documents, arole which proved useful in identifying operational issues that wereflagged to the Bank and IMP. While the CCEF has served a criticallyimportant purpose given the administration's disarray, two factors have inretrospect inhibited its role. First, the severe shortage of competentGuineans on whom CCEF members could rely, has led to their involvement withtoo many technical details consuming a large share of their already limitedtime available for the management of their individual departments.Understandably, meetings became infrequent, at times not taking place formonths in a row. Second, the CCEF included fourteen cabinet members, acomposition, which on balance, was too large for its primary responsibilityof facilitating decisions by the Council of Ministers. The large size, nodoubt, helped foster the internalization of the program within theGovernment by allowing exhaustive discussion and cross-fertilization amongeconomic and technical ministries represented. The price, however, wasfrequent postponement of meetings due to lack of a quorum and, mostimportantly, long delays in achieving a consensus. As an example, twelvesessions of CCEF were devoted to the legal technical assistance contractfinanced under the Technical Assistance Project. As a consequence, afterthe initial spate of reforms undertaken in late 1985 and the early part of1986 in the areas of banking and monetary policy, trade and tariff policyand administrative reform, the program progressed slowly and in some areassuch as rice pricing and marketing actually experienced temporary setbacks,raising doubts within the international financial community about theresolve of the Government to proceed w..th the reforms. This explains thefact that the second tranche of SAL I was released only on January 15,1988, almost two years after the loan was approved by the ExecutiveDirectors and 20 months after it became effective. It was really only inmid-1988 when the Government created a technical monitoring unit 111 on theadvice of the Bank and IMP, and took steps to reduce the size of the CCEF,that the momentum of the reform program substantially picked up. TheBank's second technical assistance project has been specifically designedto provide support to the newly established technical monitoring committeeunder the continued guidance of the CCEF.

VI. Bank Supervision

51. Close to 82 staff weeks were spent on supervision of SAL I, ofwhich 50 staffweeks by programs staff, 25 by project staff and 7 by theResident Mission. This is doubtless an underestimate since much timerecorded under other tasks, particularly in the case of projects andResident Mission staff contributed to the structural adjustment process.The supervision effort was hampered by difficulties in communicationsbetween headquarters and Guinea: telex facilities which became operationalonly in 1987 suffered from frequent breakdown, mail correspondence wasslow, and reliable telephone links did not exist until late in 1988.Moreover, the poorly organized administration which lacked for the mostpart even adequate physical facilities made program implementation andtracking of its progress very difficult. These conditions also partly

111 The Committee is composed of representatives from MPCI, MEF, MRAPP andthe Central Bank including a Bank staff member on secondment to MPCI.

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explain the long time it took to release second tranche of SAL I. The roleplayed by the Bank-seconded IMF representative in Conakry and the closecoordination between the Fund and the Bank ensured the follow-up of themost critical elements of the program and facilitated its progress.

VII. Disbursement and Procurement

52. Disbursements under the IDA and SFA credits were made intoSpecial Accounts opened at the Central Bank, with regular replenishments onthe basis of statements of expenditure and evidence that the funds wereused for eligible imports. A technical subgroup of the CCEF, withrepresentatives of the Central Bank and the MEF was to be established forthe purpose of preparing and certifying withdrawal applications, to besigned by the Minister of Economy and Finance. The technical subgroup wasexpected in particular to review import declarations to verify thoseeligible for financing. Again for reasons that can be traced only to theweakness of the administration, disbursements were extremely slow and thecredit was not fully disbursed until February 23, 1989. There is noevidence that the technical subgroup was formally established, whichundoubtedly complicated the verification of import declarations for theireligibility and contributed to the delays in drawing down the funds underthe IDA and SFt credits.

53. The credit agreements stipulated that imports by the publicsector would be based on international competitive bidding for amountsexceeding US$ 400,000 equivalent, but all contracts submitted for financingwere below this amount.

VIII. The Impact of SAL I

54. During the first phase of the adjustment program. Guinea adoptedmost of the initial corrective measures needed to eliminate the distortionsinherited from the past and to restore financial stability. These reformshave yielded encouraging results. The economy grew by 6 percent in realterms in 1987, implying an increase of over 3 percent in real per capitaincomes. Preliminary estimates suggest a similar performance in 1988showing that structural changes are having the desired impact. Specificarea studies indicate a significant supply response to relative pricechanges in the agricultural zones, with the rehabilitation and renewal ofcoffee plantations and the significant expansion in areas under ricecultivation in the last two years. The private sector rapidly replaced theoperations of the state company, PROSECO, and producers have reportedlyreceived as much as 80 percent of the Conakry FOB price for their coffee.Exports of coffee rose to nearly 7,000 metric tons in 1987 compared tonegligible amounts in 1985. The small-scale enterprise and servicessectors, principally construction, agroindustry, transport and trade, arealso exhibiting significant increases in their activities. Preliminaryresults from an informal-sector survey undertaken by the Ministry of Planand International Cooperation point to a 50 percent increase in the numberof informal businesses since early 1984 with the creation of as many as21,000 jobs in Conakry alone. These supply responses reflect the shift in

32

the terms of trade away from the public sector towards the rural andprivate industry and service sectors.

55. These accomplishments should not suggest that the process ofstructural adjustment in Guinea is complete. On the contrary, thelaunching of this far-reaching program at end-1985 signalled only thebeginning of the process of adjustment for the Guinean economy and of along period of collaboration between the Bank and the Government.Particularly in view of the starting point of the reforms, there is roomfor considerable improvement in the performance of the Guinean economy andin the Administration's economic management capabilities.

56. In view of a projected deterioration in Guinea's terms of tradeand the limited prospects for rapid replacement of expected losses ofbauxite-based public resources in the short-term, Guinea confronts a dropin export earnings and budgetary revenue at a time when it needs additionalresources to sustain the structural adjustment process and to restore thecountry's physical infrastructure. Transport infrastructure, the singlemost severe impediment to output recovery at this time, has to be rebuiltalmost entirely in order to restore the links between the capital city andthe interior. As mentioned earlier, power, water and telecommunicationnetworks need to be built up to reduce the infrastructural costs ofinvestments and to meet the growing demands of the private sector. Foreignprivate investment which has not met Government expectations, would nodoubt be stimulated by the improved investment climate that the pursuit ofreforms will make possible, particularly on the legal and institutionalfronts.

57. While the country's new banking sector has made progress towardsmobi.lizing domestic financial resources since its establishment in late1985, it continues to face challenges. Branch banking has only recentlybegun, major legal issues have not yet been fully resolved to permitexpansion of banking activities, and the role of the Central Bank is stillseen to be pervasive. Further development and expansion of the sector isessential to facilitate intermediation and support the growth of privatesector savings and investment throughout the country.

58. The Guinean administration remains poorly equipped toeffectively manage a liberal, market-oriented economy. Public financemanagement is particularly weak both in expenditure control and in revenuegeneration measures. Major additional efforts are needed to enhanceGuinea's non-mining revenues, which represent less than 2,5 percent of GDP(1987), through stricter recovery of existing taxes and duties. This isalso true for improvements in investment programming and budgeting, toensure uniformity in portfolio quality and strengthen monitoring ofphysical and financial implementation of projects. To this end, improvedinstitutional links between the technical ministries, the Ministry of Planand the Ministry of Economy and Finance would appear to be an importantrequisite, Strengthening the public administration's ability to supportand service the market-oriented economy requires, above all, thetransformation of the unskilled, underpaid, and unmotivated civil serviceinherited from the previous regime, into a trained, motivated and effectivecadre, responsive to the needs of the private sector. At a morefundamental level, education and vocational training demand an extensive

33

overhaul if manpower skills are to support a steadily expanding privatesector and a lean efficient public administration.

59. Nonetheless, the magnitude of progress achieved so far, in theface of massive distortions iLlherited from the past and the limited humanresource base, is remarkable. With the disastrous economic and sociallegacy of the Sekou Toure era as a backdrop, the long-term nature of thesystemic change embarked upon by the new regime and the significantprogress achieved to date, can be fully appreciated. But the momentum ofthe adjustment process must be maintained to consolidate gains and layfurther the basis for sustai-ned growth over the long term.

IX. Lessons learned

60. One of the most positive elements that seems to have evolvedfrom the ongoing relationship between the Bank and the Government is theshared recognition that it is both unrealistic and unproductive to assumethat twenty five years of mismanagement which had resulted in an economy inshambles, can be reversed in the span of a few years.

61. From Guinea's perspective, the euphoria during the launching ofthe program with its heightened expectations, has given way to realismabout what can be achieved and what must still be done. It is a reflectionof this realism that the pace of reforms which had slowed during most of1987 and a good part of 1988, has regained momentum, facilitating theconclusion of SAL II, a new Fund Program and a second Paris Clubrescheduling. More indicative perhaps is the fact that some of the reformswere undertaken outside the Bank and IMF programs or at a quicker pace thanthese envisaged. 12i

62. From the view of Bank staff, there is a better appreciation ofthe difficulties inherent in efforts to transform an inward-lookingcentrally-planned economy into an open, free enterprise system,

12/ The Government has completed a major phase of the administrative reformby finally announcing earlier this year, the results of tests forministries where these were conducted. (in some cases more than 12 monthsago). It has also taken important decisions on the final status of civilservants not retained, including thc3e on administrative reserve. Thesedecisions exceeded the expectations of the Bank which had anticipated amuch more gradual phasing out of civil servants from the payroll than wasactually decided on by the Government. Those already on administrativereserve status had their remuneration severed and the total number of civilservants thus laid off now exceeds the initial target of 20,000. Also, theGovernment had agreed with the Fund on a target rate of exchange at the endof the period (December 31, 1989) covered by the new Program (second yearSAF) with quarterly benchmarks. Luring the first quarter of 1989 the rateof devaluation of the Guinean franc has far exceeded the mid year target,resulting in the largest ever quarterly coverage of gross Central Banksales by purchases. Finally, important actions have been taken by theauthorities to reduce foregone revenues and restructure thetelecommunications, electricity and customs agencies, for which Ba.kassistance is expected.

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particularly those of an institutional nature which involve more a processthat needs fostering than well defined discrete actions. With it has comethe clearer recognition that it is for the Government to adapt the pace ofthe reform program to the country's rapidly changing environment which alsoargues in favor of flexibility in the very design of the program. In thisconnection, overall progress is more important than the specificity ofactions. SAL I had the merit of containing few specific conditions eventhough the design of the program adopted by the Oovernment wascomprehensive and ambitious. While the contribution of the SAL process hasbeen very positive, it is hoped that the regrettably long time it took torelease the second tranche, 17 months later than initially expected 13/,just like the renewed momentum of the program, has contributed to thematuring of the dialogue between the Bank and the Government over the threeyears of the relaLionship, auguring well for its long term future.

13/ Supplementary Data Sheet, Annex III, President's Report (P - 4162-GUI)