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

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1 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 PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON ASSISTANCE TO THE REBUBLIC OF GUINEA Report No. P7755-GN UNDER THE ENHANCED HEAVILY INDEBTED POOR COUNTRIES INITIATIVE AND THE MULTILATERAL DEBT RELIEF INITIATIVE September 5, 2012 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

2 CURRENCY EQUIVALENTS (Exchange rate effective as of September 4, 2012) Currency Unit = Guinean franc (GNF) US$1.00 = 7190 WEIGHTS AND MEASURES Metric System FISCAL YEAR January 1 December 31 ABBREVIATIONS AND ACRONYMS DRA ECF HIPC IDA IMF JSAN MDRI PR PRGF PRSP PV Debt Relief Analysis Enhanced Credit Facility Heavily Indebted Poor Countries International Development Association International Monetary Fund Joint Staff Advisory Note Multilateral Debt Relief Initiative Progress Report Poverty Reduction and Growth Facility Poverty Reduction Strategy Paper Present Value Vice President, AFR Vice President, PRM Country Director Sector Director, AFTPM Sector Director, PRMED Sector Manager, AFTP4 Task Team Leaders Task Team Members : Makhtar Diop : Otaviano Canuto : Ousmane Diagana : Marcelo Giugale : Jeffrey Lewis : Miria Pigato : Emmanuel Fiadzo (AFTP4), Ralph van Doorn (PRMED) : Sebastien Dessus, Judite Fernandes (AFTP4), Eric Bell (AFTP3), Sidra Rehman, Signe Zeikate (PRMED)

3 MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON ASSISTANCE TO THE REPUBLIC OF GUINEA UNDER THE ENHANCED HEAVILY INDEBTED POOR COUNTRIES (HIPC) INITIATIVE AND THE MULTILATERAL DEBT RELIEF INITIATIVE (MDRI) Table of Contents I. Background... 1 II. Fulfillment of Completion Point conditions... 2 III. Completion Point considerations... 3 IV. IDA's Delivery of Assistance Under the Enhanced HIPC Initiative... 4 V. IDA s Delivery of Assistance Under MDRI... 4 VI. Prospects for Long-Term Debt Sustainability After Debt Relief Under the Enhanced HIPC Initiative and MDRI... 5 VII. Satisfactory Financing Assurances from Guinea s Creditors... 5 VIII. Recommendation... 5 List of Figures Figure 1. Guinea: Potential costs of the Enhanced HIPC Initiative by Creditor Group,... 3 Figure 2. Guinea: Debt Service to IDA after HIPC Relief and MDRI... 5 List of Annexes Annex 1. Guinea: IDA Credits Subject to Debt Service Reduction Under the Enhanced Heavily Indebted Poor Countries Initiative... 7 Annex 2. Guinea: Schedule of Debt Service Reduction Under the Enhanced Heavily Indebted Poor Countries Initiative... 9

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5 MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON ASSISTANCE TO THE REPUBLIC OF GUINEA UNDER THE ENHANCED HEAVILY INDEBTED POOR COUNTRIES (HIPC) INITIATIVE AND THE MULTILATERAL DEBT RELIEF INITIATIVE (MDRI) 1. I submit for your approval the following Memorandum and Recommendation on the assistance to be provided to the Republic of Guinea (Guinea) under the Enhanced Heavily Indebted Poor Countries (HIPC) Initiative with respect to the debt owed by this country to the International Development Association (IDA). This report and its recommendations address the criteria for reaching the Completion Point under the Enhanced HIPC Initiative as agreed by the Executive Directors of IDA and the International Monetary Fund (IMF) in December 2000, and for the debt relief to be provided irrevocably with respect to the debt owed to IDA. Upon reaching the Completion Point, Guinea will become eligible for debt relief under the Multilateral Debt Relief Initiative (MDRI) from IDA. 2. This document complements the joint IDA-IMF Board document entitled Republic of Guinea: Enhanced Heavily Indebted Poor Countries (HIPC) Initiative Completion Point and Multilateral Debt Relief Initiative (MDRI), concurrently submitted with this document. The Completion Point document presents: (i) Guinea s progress in fulfilling the triggers of the Completion Point under the Enhanced HIPC Initiative; (ii) an update of Guinea s reconciled public external debt and the debt relief committed at the Decision Point under the Enhanced HIPC Initiative; (iii) the status of creditor participation since the Decision Point; (iv) the provision of MDRI relief; and (v) prospects for the country s long term debt sustainability. I. BACKGROUND 3. Guinea reached the Decision Point under the Enhanced HIPC Initiative in November Based on the Debt Relief Analysis (DRA) presented in the Decision Point document, debt relief under the Enhanced HIPC Initiative amounted to US$545 million in present value (PV) terms as of December 31, 1999 under the HIPC Initiative s exports window. This would have reduced Guinea's PV of debt after full application of traditional debt relief from US$1,727 million to US$1,182 million in end-1999 PV terms. Such debt relief would have corresponded to a common reduction factor of 31.6 percent of the PV of debt outstanding as of December 31, 1999 for all creditors. Debt relief attributed to multilateral creditors in the Decision Point document amounted to US$328 million (60.2 percent of total HIPC Initiative relief) in PV terms. 4. At the Decision Point, eligible debt from IDA amounted to US$479.5 million in December 31, 1999 PV terms. Total assistance from IDA under the Enhanced HIPC Initiative agreed at the Decision Point was approved in the amount of US$151.5 million in PV terms. The Executive Directors approved the provision of interim debt relief beginning in January 2001 through a reduction of 50 percent of the debt service falling

6 2 due on disbursed and outstanding IDA credits as of December 31, At the completion point under the enhanced HIPC Initiative the provision of the remaining HIPC assistance would become irrevocable. II. FULFILLMENT OF COMPLETION POINT CONDITIONS 5. In accordance with the decision of the Executive Directors of IDA and the IMF at the Decision Point, the conditions for reaching the Completion Point require that Guinea has completed the following: (i) prepare a full PRSP through a participatory process and implement satisfactorily for one year as evidenced by the Joint Staff Assessment of the country s annual progress report; (ii) improve the poverty database and monitoring capacity by preparing a living standards measurement survey that establishes poverty lines and indicators based thereon, and establishment of a poverty monitoring system involving key stakeholders; (iii) continued maintenance of macroeconomic stability as evidenced by satisfactory implementation of the PRGF 1 -supported program; (iv) develop and take steps to provide an appropriate regulatory framework for microcredit institutions; (v) make publicly available a one-year progress report (showing resources and activities) of the Anti-Corruption Committee (CNLS); (vi) audit all government procurement contracts over GNF 100 million and publish results of these audits on a quarterly basis; (vii) increase gross enrollment rate for primary school students from 56 percent in 1999 to 62 percent in 2001 and 71 percent in 2002, of which the gross enrollment rate of girls should be 40 percent in 1999, 51 percent in 2001 and 61 percent in 2002; (viii) increase the number of new primary school teachers hired by at least 1,500 a year for each year until the HIPC Completion Point, from an estimated base of about 15,000 primary school teachers in 2000; (ix) increase immunization (DTP3: diphtheria, tetanus, pertussis) rates for children under 1 year of age, from 45 percent in 2000, to 50 percent in 2001, and to 55 percent in 2002; (x) 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 The Staffs of IDA and the IMF are of the view that Guinea has fulfilled the requirements to reach the Completion Point by implementing nine floating Completion Point triggers and making satisfactory progress on the remaining one, for which a waiver has been requested by the authorities, supported by Staffs. The first full PRSP was approved by the government in January 2002, and was endorsed by the IMF and IDA Boards in July The PRSP-II which was adopted in August 2007, covered the period , but its implementation was interrupted by a military coup in December The PRSP-II was then extended in early 2011 to cover In May 2012 the government completed a Progress Report (PR) of the implementation of the Extended PRSP-II. The PR and JSAN are distributed to the Board together with the HIPC Completion Point document. Since 2011 the government has established a strong track record under the IMF Staff-Monitored Program and under the recent ECF arrangement. All but one of the Completion Point triggers have been met based on the evidence presented by the authorities and reviewed by the Staffs of IDA and the IMF. With regard 1 The Poverty Reduction and Growth Facility has been succeeded by the Extended Credit Facility (ECF).

7 3 to the audit of all government procurement contracts over GNF 100 million, very good progress was made by the authorities following a less ambitious but more practical system of quarterly audits, covering a representative sample of large contracts. The authorities are requesting a waiver for not having audited all contracts; the staffs of IDA and the IMF support this request since the broad objective of the trigger was maintained while implementation was improved. Staffs are, therefore, of the view that Guinea has met the requirements for the floating Completion Point set out at the Decision Point. III. COMPLETION POINT CONSIDERATIONS 7. Based on additional information received from creditors and obtained through the debt reconciliation exercise, the updated DRA has resulted in an increase of the nominal stock of debt at end-december 1999 by US$44.3 million to US$3,419 million and the PV of debt after traditional debt relief has been revised upward by US$38.4 million to US$1,766 million. 2 As a result, the common reduction factor increases from 31.6 percent to 36.2 percent, and total HIPC assistance to Guinea increases from US$545 million to US$639 million in end-1999 PV terms (Figure 1). 3 In light of these revisions, it is proposed that the Executive Directors approve an upward revision of IDA s assistance in PV terms from US$151.5 million to US$173.6 million. Figure 1. Guinea: Potential costs of the Enhanced HIPC Initiative by Creditor Group (end-1999 PV terms) Paris Club creditors 29.4% Non-Paris Club creditors 10.2% Commercial creditors 0.4% World Bank 27.2% Other multilateral creditors 12.4% Source: IMF and World Bank Staff Estimates IMF 5.6% AfDB Group 14.8% 8. Staff is of the view that Guinea does not meet the requirements for exceptional topping-up under the Enhanced HIPC Initiative. The PV of debt-to-exports ratio as of end-december 2011 is percent after full HIPC relief and falls to 98.2 percent after full HIPC relief and additional debt relief beyond HIPC by bilateral creditors, which is 2 Equal to about 3.4 percent of the post-hipc debt target of US$1,126.5 in PV terms. 3 In accordance with the Information Reporting in the Context of HIPC Initiative Assistance, approved by the members of the Executive Board of the IMF (EBS/02/36 and BUFF/02/50) and IDA (IDA/SecM ), March 4, 2002, the assistance for Guinea will be revised upward based on the new common reduction factor of 36.2 percent.

8 4 well below the 150 percent threshold for consideration of topping-up assistance defined under the enhanced HIPC Initiative (Table 3 of the Completion Point document). IV. IDA'S DELIVERY OF ASSISTANCE UNDER THE ENHANCED HIPC INITIATIVE 9. Upon Executive Directors approval of the upward revision to the total amount of debt relief in PV terms to be provided to Guinea, IDA s debt relief would be revised upward in PV terms from US$151.5 million to US$173.6 million. 10. IDA has provided relief through debt service reduction on IDA credits during the interim period. These resources were used to cover 50 percent of the debt service owed to IDA during the interim period (subject to the ceiling of one-half of total debt relief to be provided on PV terms). 4,5 11. At the Completion Point, the remaining share of HIPC assistance from the World Bank Group would be provided through further 68.5 percent debt service reduction on IDA credits from October 2012 until December V. IDA S DELIVERY OF ASSISTANCE UNDER MDRI 12. Upon approval of the Completion Point under the Enhanced HIPC Initiative, Guinea will qualify for additional debt relief from IDA under the MDRI. IDA will provide MDRI debt forgiveness by irrevocably canceling the borrower s payment obligations under eligible IDA credits. Debt service savings under the MDRI would cover all remaining IDA credit balances through maturity on all loan balances disbursed as of December 31, 2003 and still outstanding as of September 30, 2012, to Guinea. 6,7 13. The MDRI would result in the cancelation of almost all remaining IDA credits after HIPC relief. IDA would provide debt stock relief under the MDRI amounting to US$761.2 million in nominal terms ($542.6 million in end-2011 PV terms, Table A9 of the Completion Point document). MDRI debt relief from IDA would imply average debt 4 See Guinea - Enhanced Heavily Indebted Poor Countries (HIPC) initiative: President's memorandum and recommendation, November 29, At Decision Point, the Board agreed to provide interim relief through 50 percent debt service reduction. Interim relief was to be continued until the country reached the Completion Point or when the interim debt relief exceeded 33 percent of total relief to be provided on PV terms. In January 2008, IDA Management approved the increase of interim relief to Guinea from 33 to 50 percent of IDA s PV of relief committed under the HIPC Initiative (see Revised Schedule of IDA'S HIPC Debt Relief to Guinea, IDA/SecM , December 26, 2007), resulting in interim relief until May From May 2008 until September 2012 interim relief has been suspended. The Executive Directors have authorized Management to increase the limit on interim relief up to a maximum of 50 percent of the PV of total debt relief in exceptional cases, based on Staff s assessment of satisfactory progress in policy performance. See "Enhanced HIPC Initiative: Proposals Concerning Sunset Clause and Provision of Interim Relief," IDNR , September 15, So far, the Democratic Republic of the Congo, Guinea, Guinea-Bissau and Haiti have benefited from the increase in interim debt relief ceiling. 6 See International Development Association, The Multilateral Debt Relief Initiative: Implementation Modalities for IDA, November 18, See IDA's implementation of the Multilateral Debt Relief Initiative, IDA/R /2 (March 14, 2006).

9 5 service savings of $27 million per year over the next 30 years. Figure 2 illustrates the impact of MDRI on projected debt service due to IDA as of January Figure 2. Guinea: Debt Service to IDA after HIPC Relief and MDRI (In millions of US dollars) IDA debt service before full HIPC assistance IDA debt service after full HIPC assistance IDA debt service after full HIPC and MDRI assistance Source: World Bank Staff Estimates. VI. PROSPECTS FOR LONG-TERM DEBT SUSTAINABILITY AFTER DEBT RELIEF UNDER THE ENHANCED HIPC INITIATIVE AND MDRI 14. Full delivery of HIPC debt relief, MDRI and additional multilateral and bilateral assistance beyond HIPC at the Completion Point will reduce Guinea s external debt burden significantly. The PV of debt-to-exports ratio would fall from 186 percent at end to 48.9 percent at end-2012 thanks to the delivery of MDRI and beyond HIPC assistance; thereafter it is projected to fall further to 17.7 percent at end 2031, mainly attributable to an increase in exports following the start of production of a new mining project in However, the future evolution of these indicators is highly uncertain and will depend on several factors, particularly economic growth and the terms of new external financing. VII. SATISFACTORY FINANCING ASSURANCES FROM GUINEA S CREDITORS 15. Financing assurances for the provision of debt relief to Guinea under the Enhanced HIPC Initiative have been obtained from creditors representing 97.5 percent of total HIPC debt relief in end-1999 PV terms, as revised at the Completion Point. Guinea s authorities will continue their efforts toward securing the participation of all remaining creditors. VIII. RECOMMENDATION 16. In view of the above, I recommend that the Executive Directors endorse the staffs assessment contained in the Completion Point document concerning Guinea s

10 6 fulfillment of the requirements for reaching the Completion Point under the Enhanced HIPC Initiative. 17. I further recommend that the Executive Directors endorse the staffs assessment contained in the Completion Point document concerning Guinea s fulfillment of nine out of ten requirements for reaching the Completion Point under the Enhanced HIPC Initiative, and grant a waiver for the remaining trigger regarding the audit of all government procurement contracts over GNF 100 million since the broad objective of the trigger was maintained while implementation was improved. 18. I finally recommend that Executive Directors agree with staffs recommendation that the proposed revision of the stock of debt in PV terms as of the Decision Point warrants a revision of the amount of HIPC Initiative assistance. Jim Y. Kim President by Sri Mulyani Indrawati Managing Director Mahmoud Mohieldin Managing Director Washington, D.C. September 5, 2012

11 7 Annex 1. Guinea: IDA Credits Subject to Debt Service Reduction Under the Enhanced Heavily Indebted Poor Countries Initiative Credit Project Name Currency Balance at December 31, 1999 In original currency In USD equivalent LIVESTOCK DEVELOPMENT SDR 1,311,043 1,799, FIRST POWER SDR 20,111,000 27,602, INDUSTRIAL REHAB & PROMOTION SDR 15,196,268 20,857, SECOND EDUCATION SDR 8,881,152 12,189, CONAKRY PORT SDR 11,236,273 15,421, PETROLEUM EXPLORATION SDR 7,203,093 9,886, THIRD HIGHWAY SDR 25,039,286 34,366, CONAKRY URBAN DEVELOPMENT SDR 9,544,500 13,099, CONAKRY URBAN DEVELOPMENT SDR 3,402,000 4,669, TECHNICAL ASSISTANCE SDR 9,213,538 12,645, SECOND POWER & TECH. ASSIST. SDR 7,975,642 10,946, GUECKEDOU AGRICULTURAL DEV. SDR 6,363,379 8,733, AGRICULTURAL SERVICES SDR 5,339,298 7,328, MINERAL SECTOR MANAGEMENT SDR 3,548,280 4,870, STRUCTURAL ADJUSTMENT SDR 21,984,000 30,173, LIVESTOCK SECTOR RAHAB. SDR 8,202,500 11,258, TRANSPORT SECTOR SDR 41,730,000 57,274, HEALTH SERVICES DEVE. SDR 14,291,761 19,615, NATIONAL SEEDS SDR 6,492,591 8,911, FOURTH HIGHWAY SDR 38,191,138 52,417, SECOND STRUCTURAL ADJ. CREDIT SDR 45,590,000 62,572, SECOND STRUCTURAL ADJ. CREDIT SDR 67,900 93, NTL RESEARCH AND EXTENSION SDR 13,916,000 19,099, ND ECONOMIC MGT SUPPORT SDR 11,074,000 15,199, SECOND WATER SUPPLY SDR 28,904,596 39,671, SOCIO-ECONOMIC DEVE. SUPPORT SDR 6,397,250 8,780, FORESTRY AND FISHERIES MGMT. SDR 6,300,000 8,646, NATIONAL RURAL INFRASTRUCTURE SDR 30,997,834 42,544, SECOND URBAN SDR 42,345,977 58,120, PRIVATE SECTOR PROMOTION SDR 38,700,000 53,116, EDUCATION SECTOR ADJUSTMENT SDR 15,400,000 21,136, PUBLIC ENTERPRISE SECTOR SDR 2,550,807 3,501, NTL AGRICUL EXPORT PROMOTION SDR 8,064,639 11,068, SECOND POWER SDR 34,316,464 47,099, POST & TELECOMMUNICATIONS SDR 7,909,906 10,856, HEALTH & NUTRITION SECTOR SDR 10,626,422 14,584, FINANCIAL SECTOR ADJUSTMENT SDR 16,036,674 22,010, EQUITY & SCHOOL IMPROVEMENT SDR 15,751,715 21,619, HIGHER EDUCATION MGMNT SUPPORT SDR 2,145,693 2,944, NATIONAL AGRICULTURAL SERVICES SDR 18,310,966 25,131, MINING SECTOR INVESTMENT PROMO SDR 6,762,976 9,282, PUBLIC EXPENDITURE MGMNT SDR 50,769,220 69,681, PRE-SERVICE TEACHER EDUCATION SDR 1,214,695 1,667, POPULATION & REPRODUC HEALTH SDR 1,116,568 1,532,501

12 8 (Annex 1 continued) Credit Project Name Currency Balance at December 31, 1999 In original currency In USD equivalent VILLAGE COMMUNITIES SUPPORT SDR RD URBAN DEV (PHASE I) SDR 329, ,460 A0110 STRUCTURAL ADJUSTMENT SDR 14,976,000 20,554,710 N0170 THIRD WATER SUPPLY & SANITAT. SDR 2,084,766 2,861, PINEAPPLE DEVELOPMENT USD 5,355,000 5,355, FIRST HIGHWAY USD 10,920,000 10,920, EDUCATION USD 6,953,521 6,953, FIRST WATER SUPPLY & SANITATN. USD 10,855,575 10,855, RICE DEVELOPMENT USD 9,360,000 9,360, SECOND HIGHWAY USD 11,464,645 11,464,645

13 9 Annex 2. Guinea: Schedule of Debt Service Reduction Under the Enhanced Heavily Indebted Poor Countries Initiative Calendar Year Amount to be reduced (in thousands U.S. dollars) TOTAL 327, , , , , , , , , , , , , , , , , ,361

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