Policy Reforms, Mining Boom Power Guinea's Recovery

Authorities have taken drastic measures to address macroeconomic imbalances

Better political environment has triggered large new mining sector investment

Debt relief would free up resources for poverty reduction spending

After drastic measures to cut its budget deficit and curb inflation, the West African country’s growth rate has rebounded and its exchange rate has stabilized.

In its regular assessment of Guinea’s economy, the IMF said the country’s economic growth rate is expected to remain robust in the medium term on the basis of reform measures and large mining investments. Guinea’s GDP growth reached an estimated 3.6 percent last year, after contracting by 0.3 percent in 2009.

A critical year

Despite abundant natural resources, Guinea remains among the poorest countries in the world. In addition to gold and diamonds, the country possesses bauxite and iron deposits. There is a large potential in hydroelectricity as well as climatic conditions favorable for agriculture. However, poor economic governance and political instability discouraged the development of these resources.

Between 2009 and 2010, the ruling military abandoned fiscal control. As a result, the budget deficit amounted to about 1 percent of GDP per month which was financed by advances from the central bank and by running up external arrears. Broad money supply doubled, the market exchange rate depreciated, and inflation rose to over 20 percent year-on-year by end-2010.

Following the first democratic elections since independence in 1958, a new government took office in January 2011 and took drastic measures to address the macroeconomic imbalances. Under its economic program for 2011, Guinea’s budget deficit was cut by more than 10 per cent of GDP. Monetary policy was tightened and the central bank acted to improve the foreign exchange market.

As a result, the rising trend in inflation was stopped and the exchange rate stabilized. Renewed confidence and the improved political situation contributed to a rebound in growth. The government also adopted structural reforms that included the adoption of a new mining code.

Despite these reforms, Guinea has yet to break out of the vicious cycle of poverty, weak institutions, and political instability. The transition from the 2009–10 military government to a normal constitutional situation remains to be completed by parliamentary elections, presently scheduled for July 2012. The authorities also need to complete security...