Revised Schedule of IDA'S HIPC Debt Relief to Guinea I. INTRODUCTION

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Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Revised Schedule of IDA'S HIPC Debt Relief to Guinea I. INTRODUCTION 1.

1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Revised Schedule of IDA'S HIPC Debt Relief to Guinea I. INTRODUCTION 1. Guinea reached its decision point under the Enhanced HIPC Initiative in December 2000.' At that time, IDA committed to provide US$ million of HIPC Initiative debt relief in NPV terms (US$233.6 million in nominal terms). The debt relief would be delivered through a 50 percent reduction in the debt service falling due to IDA until the total amount of debt relief was delivered. According to the decision point calculations, the required assistance would be delivered in full by end-september As part of the actions taken at the decision point, the Executive Directors approved the delivery of interim debt relief in accordance with the policies approved by the Board in IDA started delivering debt relief to Guinea on January 1,2001, subject to the normal limit that cumulative interim debt relief in NPV tenns not exceed one-third of the total NPV of IDA debt relief (US$50.5 million in NPV term^).^ 3. In exceptional cases, the Executive Directors have authorized Management to increase the limit on interim relief up to a maximum of 50 percent of the NPV of total debt relief, subject to satisfactory progress in policy performance and the likely benefits of extending interim debt relief. In particular, staff assessment of satisfactory progress needs to be based on: (i) progress in actions to meet the floating completion point triggers, including progress in the preparation of the PRSP; and (ii) maintenance of a sound macroeconomic program, as indicated by performance under an IMF-supported PRGF program. 11. COUNTRY BACKGROUND 4. Worsening social and economic conditions since 2001 culminated in popular unrest and the emergence of a reform-minded government. In the early 2000s, regional conflict in neighboring countries spilled over to Guinea which resulted in armed attacks on border towns, villages and refugee camps, a significant destruction of infrastructure in some parts of the country and inflow of refugees. In 2002, Guinea went ' See "Guinea. Enhanced HIPC Debt Initiative: President's Memorandum and Recommendation Decision Point Document," IDNR , December 1,2000. See "Heavily Indebted Poor Countries (HIPC) Initiative: Note on Modalities for Implementing HIPC Debt Relief Under the Enhanced Framework," IDA/R2000-4, January 10,2000. The Board endorsed the principle that the NPV of interim relief should not exceed one-third of total IBRDDDA debt relief committed at decision point in order to encourage HIPCs to meet the completion point triggers in a timely manner. 4 Management is required to inform the Board of any decision regarding the increase in the interim relief limit at least five business days in advance of the effectiveness of the decision. See "Enhanced HIPC Initiative: Proposals Concerning Sunset Clause and Provision of Interim Relief," IDNR , September 15,

off-track on its PRGF program, after passing only one review. Contributing factors were overspending related to security outlays, lax monetary policy, and a distorted exchange rate.

2 off-track on its PRGF program, after passing only one review. Contributing factors were overspending related to security outlays, lax monetary policy, and a distorted exchange rate. As a result, growth averaged only 2.5 percent between 2001 and 2006 and the endof-period inflation rose from 1.1 percent in 2001 to almost 40 percent in Living conditions for most Guineans worsened and public service delivery deteriorated in terms of both quantity and quality. The population living below the poverty line is estimated to have increased from 49 percent in 2002 to 54 percent in A new reform-minded government came to power in March 2007 following nationwide strikes earlier in the year which resulted in violent clashes and over 100 deaths. The new government under the leadership of Prime Minister Lansana Kouyatk pledged to carry out fundamental reforms to restore good governance and promote sustainable growth, employment and poverty reduction based on a second generation PRSP, which was completed in August ASSESSMENT OF PROGRESS IN THE IMPLEMENTATION OF THE COMPLETION POINT TRIGGERS 6. In the six months through September 2007, the authorities pursued fiscal and monetary tightening to stabilize the economy. Despite pressing needs, the government contained spending within its monthly revenue envelope. This strict fiscal policy is projected to lead to an improvement of 1.7 percent of GDP in the basic primary balance (excluding foreign-financed spending) in Strict fiscal management and discontinuation of central bank (BCRG) purchases on the foreign exchange market contributed to rapid disinflation and stabilization of the exchange rate, with the twelvemonth inflation being reduced from 39 percent in December 2006 to 17 percent in September 2007 (despite food-related price increases). As part of these efforts, the government has applied monthly expenditure ceilings for line ministries, suspended automatic debits of treasury accounts by the BCRG and prohibited extra-budgetary expenditures and ad hoc tax or customs exemptions. It initiated audits for most ministries, started a review of several mining contracts and implemented measures related to the Extractive Industries Transparency Initiative (EITI).' Finally, the authorities pushed forward with reforms in the BCRG to strengthen its accounting system and independence. 7. Based on the positive economic performance over the last six months, a PRGF supported program was approved by the IMF Board on December 21,2007. The program covers a three-year period starting on July 1,2007.~ In staffs' view, the retroactive approval of the PRGF-supported program provides the evidence on the maintenance of a sound macroeconomic program required under current guidelines for an extension of interim HIPC debt relief beyond the one-third NPV limit.7 Also, in a Guinea adhered to the EITI in The first EITI report auditing government revenue data from six mining companies for 2005 was published in October It found that payments reported by the authorities and the companies matched closely. 6 A first review of the program will be based on economic outcomes per end of December As per current guidelines, the maintenance of a sound macroeconomic program should be indicated by performance under an PRGF-supported program.

3 meeting on November 14-15,2007, the Paris Club provided financing assurances for the program, including the prospects for a debt rescheduling in January 2008 on Cologne terms (90 percent NPV reduction). Such rescheduling would constitute part of the Paris Club's interim HPC debt relief to Guinea. 8. Guinea has made significant progress towards meeting the HIPC Completion Point triggers. Progress has been made concerning macroeconomic performance since June 2007 and the anticipated support through the upcoming PRGF will deepen such initial progress. Implementation of PRSP I was disappointing in earlier years but since early April 2007 the new government has been satisfactorily implementing its program of planned reforms and interventions as detailed in PRSP 11. With regard to the governance trigger, activity reports by the former Anti-Comption Committee (CNLS) and now the National Agency for the Fight against Corruption (ANLC) have been published for the years up to 2005, with 2004 partly covered in the 2005 report, the first year of full ANLC activity. Regarding public procurement, the authorities have undertaken a comprehensive audit of public procurement contracts granted during the years 2002 to In line with the HIPC trigger formulation, the authorities are committed to publish quarterly audit reports on the largest procurement contracts beginning with the first quarter of The triggers for the education sector have been met or surpassed. The objectives in the health sector were met earlier in the decade but could not be maintained because of weak macroeconomic policies. Furthermore, a new law establishing an adequate framework for micro-credit institutions was adopted in IV. POTENTIAL IMPACT ON DELIVERY OF HIPC DEBT RELIEF 9. A recalculation of the debt service relief schedule by staff shows that the pace at which IDA has delivered its interim debt relief to Guinea has run ahead of the one-third NPV limit. The recalculated figures indicate that the one-third NPV limit was reached in November 15,2005. Debt relief provided since that date would be counted towards the 50 percent NPV limit. 10. If interim assistance to Guinea is increased to 50 percent of the NPV of total debt relief committed at decision point (US$75.8 million in NPV terms), IDA'S interim debt relief would continue until May 2008.~ Thereafter, IDA'S delivery of debt relief would be suspended until Guinea reaches its completion point under the HPC ~nitiative.~ For the purpose of recalculating the IDA'S debt service relief schedule, it is assumed that Guinea reaches its HIPC completion point on December 30,2008. lo Under this scenario (Table I), IDA's debt relief to Guinea would total US$238.9 million in If approved, Guinea will become the second country to benefit from an increase in the HIPC interim debt relief ceiling. The first country to benefit from such an extension was Haiti. Guinea's debt service due on eligible debt will be reduced by 50 percent until May lst, 2008 and by 17.6 percent on May 15,2008. 'O These adjustments to the schedule maintain IDA's delivery of total HIPC assistance consistent with its commitment in NPV terms (US$151.5 million) under the proportional burden-sharing approach. If Guinea reaches its completion point at a date different than end-december 2008, a revised schedule of nominal debt service relief will be presented to the Board that fully delivers IDA's share of HIPC debt relief.

4 nominal terms." The increase of the ceiling for interim relief from US$5 1.5 million in NPV terms (one-third NPV limit) to US$75.8 million in NPV terms (50 percent NPV limit) will result in a commensurate increase of the combined assistance that Guinea will receive under the HIPC Initiative and MDRI.'~ V. CONCLUSION 1 1. Given: i) Guinea's satisfactory performance in implementing its floating completion point triggers, ii) Guinea's satisfactory economic performance over the last six months, that has paved the way for the PRGF-supported program approved by the IMF Board on December 2 1,2007 (covering a three-year period starting on July 1,2007)' and iii) the potential impact that such extension is likely to have on the country's prospects towards reaching its completion point; Management has increased the limit of interim assistance to the maximum allowed under the Bank's HIPC policies (50 percent of the NPV of total HIPC Initiative debt relief committed at decision point).13 Robert B. Zoellick President by: Graeme Wheeler Managing Director Ngozi N. Okonjo-Iweala Managing Director 'I This compares to US$233.6 million approved at the time of the decision point l2 This is a general consequence for any extension of interim debt relief beyond the one-thn-d NPV limit approved by the Executive Board at the time of the decision point. l3 Upon reaching completion point, Guinea will receive MDRI debt relief from IDA, the IMF and the AfDB.

Guinea: Status of HIPC Completion Point Triggers Triggers Status as of November 26,2007 I Poverty reduction A full PRSP has been prepared through a participatory process and satisfactorily

5 Guinea: Status of HIPC Completion Point Triggers Triggers Status as of November 26,2007 I Poverty reduction A full PRSP has been prepared through a participatory process and satisfactorily implemented for one year as evidenced by the Joint Staff Assessment of the country's annual progress report. Improvement of the poverty database and monitoring capacity by preparing a living standards measurement survey which will include establishment of poverty lines and indicators based thereon, and the establishment of a poverty monitoring system involving key stakeholders. The government formed in March 2007 under the leadership of Prime Minister Lansana KouyatC finalized the second PRSP (PRSP 11) which is being implemented. The PRSP I1 will be presented to the IMF Board on December 21,2007 and to the World Bank Board on January 8,2008. The objectives of the PRSP I1 aim at recapturing ground lost over the past five years through fundamental reforms to restore good governance and promote sustainable growth, employment creation and poverty reduction. An emergency program to stabilize the economy and address urgent service delivery needs was adopted in May 2007 as part of PRSP I1 and is also currently being implemented. A poverty survey was conducted in and finalized in The survey helped to update and improve the poverty database and to define poverty lines and establish corresponding indicators in line with poverty conditions in Guinea. The new indicators are measurable and can be monitored. The monitoring capacity of the Permanent Depament for the Poverty Reduction Strategy and the monitoring system are currently being strengthened with donor assistance. The inclusion of stakeholders in the monitoring system is still weak. Capacity building projects are supporting the government to regularly bring in stakeholders on a regional basis for implementation of PRSP Macroeconomic and structural reforms Continued maintenance of macroeconomic stability as evidenced by satisfactory implementation of the PRGF-supported program. Since assuming power in March 2007, the government has tightened fiscal and monetary policies to stabilize the economy, in particular through the elimination of extra-budgetary spending and the implementation of cash budget management. As a result, the public deficit has been significantly reduced. These efforts brought inflation down from 39 percent at end 2006 to 17 percent in September 2007, while also strengthening the Guinean franc. A PRGF supported program is scheduled for IMF Board presentation on December 2 1,2007. The program covers a three-year period starting on July 1,2007. A first review of the program will be based on economic outcomes per end of December Further progress towards macroeconomic stabilization is a key objective of the PRGF supported program.

6 Develop and take steps to provide an appropriate regulatory framework for micro credit institutions. A new law establishng an adequate framework for micro credit institutions was adopted in November Governance and Anticorruption Make publicly available a oneyear progress report (showing resources and activities) of the Anti- Corruption Committee. Audit all large government procurement contracts over GNF 100 million and publish results of these audits on a quarterly basis. Since decision point the institutional set-up for governance and anti-corruption has been revised. In 2004 the National Agency for the Fight against Corruption (ANLC) replaced the previous Anticorruption Committee (CNLS). Under the direction of the ANLC, a comprehensive survey on the perception of corruption in the country was conducted in 2003/2004 and finalized in The survey has been widely disseminated and publicly discussed. It serves as a basis for a medium term anti-corruption and good governance strategy. Activity reports have been issued by the CNLS for the years 2002 and The ANLC has published a report covering part of the year 2004 (a transition year) and the year A report for 2006 is about to be issued. The 2007 report is scheduled to become available by June The government commissioned a comprehensive audit covering procurement contracts for the years 2002 to 2004 for which the final report was presented in The conclusions of the audit report feed into the on-going dialogue on procurement reform. No quarterly publication of audits has been undertaken so far, as the audit capacity has been weak. Under the 2007 PRGF, the government has committed to publish quarterly audits of large procurement contracts beginning with the first quarter of Education Increase gross enrollment rate for Gross enrollment has gradually increased since 1999 primary school students from 56 and reached 79 percent in Gross enrolment of percent in 1999 to 62 percent in 2001 girls showed an even larger increase, from 40 percent and to 71 percent in 2002, of which in 1999 to 71 percent in 2006, thereby significantly the gross enrollment rate of girls reducing the enrollment gap between boys and girls. should be 40 percent in 1999,51 percent in 2001 and 61 percent in Increase the number of new primary school teachers hired by at least 1,500 per year for each year until the HIPC completion point, fiom an estimated base of about 15,000 primary school teachers in A total of 14,240 new teachers has been trained and recruited during the period 2001 to 2005, at least 2500 year. The total number of primary school teachers for 2006 and 2007 is expected to become available shortly.

7 Health 1 Increase immunization rates for The immunizations objectives have been met in 2001 children under 1 year of age, in and 2002 but weak macroeconomic policies and percent (DTP3: diphtheria, tetanus, budget execution prevented those targets to be pertussis) from 45 percent in 2000, to maintained. Recently renewed efforts by the 50 percent in 2001, and to 55 percent government, which are assisted by development in partners including IDA, aim to improve vaccination coverage. Improve the percentage of pregnant women benefiting from at least 1 prenatal consultation from 70 percent in 2000, to 80 percent in 2001, and to 85 percent in According to the Demographc and Health Survey percent of pregnant women benefited from at least one prenatal consultation. More recent data are currently not available.

9 Table 1 Guinea Schedule of Debt Service Reduction Under the Enhanced Heavilv Indebted Poor Countries Initiative Calendar Year Amount to be reduced (In thousands of U.S. dollars) TOTAL Dec 1-31, Note: This schedule assumes that Guinea reaches its HIPC completion point at end-december If the completion point is reached at a different date, the schedule will have to be revised. The revised schedule will be presented in the Memorandum of the President accompanying the HIPC completion point document.

FOR OFFICAL USE ONLY MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS

Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Document of The World Bank FOR OFFICAL USE ONLY MEMORANDUM AND RECOMMENDATION OF THE