Report No. 27347-GUI Guinea Strengthening Public Expenditure Management for Poverty Reduction and Growth Public Expenditure Review June 10, 2004 PREM 4 Africa Region Document of the World Bank iii ICR Rapport d'Achbvement IDA Association pour le DCveloppement International IGE Inspection Ge`ne`ralede 1'Etat IGF Inspection Ge`ne`raledes Finances MAE Ministbre de 1'Agriculture et de 1'Elevage MAE Ministbre des Affaires Etrangbres M A S Ministbre des Affaires Sociales MD Ministbre de la DBfense MEF Ministbre de 1'Economie et des Finances MEFP Ministerede 1'Emploi et de laFonctionPublique MEPU Ministbre de 1'Enseignement PrC-Universitaire MFTFP Ministbre de la FormationProfessionnelle MHE Ministbre de 1'Enseignement SupCrieur MIGA Agence MultilatCrale de Garantie des Investissements M J Ministbre de la Justice MP Ministbre du Plan MPA Ministbre de la Psche et de 1'Aquaculture MS Ministbre de la SantB MTPT Ministbre des Travaux Publics et des Transports MUA Ministere de 1'Urbanisme et de 1'Habitat OCD Ordonnateurs DClCguCsde CrBdit OCDE Organisationde CoopCration et de DBveloppement Economiques ODM Objectifs de DCveloppement du MillCnium OED DCpartementde 1'Evaluation de la Banque PAAB Programme BudgCtaire Annuel PETS EnquQtede traqage des DCpensespubliques PIB Produit IntBrieur Brut PPTE Pays Pauvres trirs EndettCs PRCI Programme de Renforcement des CapacitBsinstitutionnelles RDP Revue des DCpensesPubliques REER Taux de Change EffectifRCel SMP Programme de Suivipar les Services du Fonds SRP Strategie de RBduction de la PauvretB TMI Taux de Mortalit6 Infantile U5MR Taux de Mortalit6 Infantile (moins de 5 ans) UE Union EuropCenne UEMOA Union Economique et MonCtaire de 1'Afrique de l'Ouest VAN Valeur ActualisCe Nette ZMOA Seconde Zone MonBtaire de 1'Afrique de 1'Ouest Country Director: Mamadou Dia Sector Director: PaulaDonovan Sector Manager Robert R. Blake Task Team Leader: EzzeddineLarbi iv TABLE OF CONTENTS ACKNOWLEDGMENTS .................................................................................................................. vii IMPLEMENTATIONOFFOLLOW UPTO THE PER .............................................................. viii EXECUTIVE SUMMARY ................................................................................................................. ix INTRODUCTION ............................................................................................................................ xvii PART I:CROSS-CUTTINGISSUES ................................................................................................. 1 1. THE MACROECONOMIC FRAMEWORKAND FISCAL SUSTAINABILITY ..................2 BACKGROUND THECURRENT CRISIS........................................................................................................................ 3 ................................................................................................................................... 2 FISCALSUSTAINABILITY ................................................................................................................... 5 FISCALSUSTAINABILITY AND REVENUEMOBILIZATION .................................................................. 9 MOBILIZATION OF TAXES ........................................................................................... 10 CONCLUSION................................................................................................................................... 13 AND DUTIES Recommendations ........................................................................... 13 2.POVERTY REDUCTIONTHROUGHACCELERATEDGROWTH .................................. 15 INTRODUCTION ................................................................................................................................ 15 POVERTY AND GROWTH .................................................................................................................. 16 POVERTY IMPACTANALYSIS ........................................................................................................... 19 STRUCTUREOF GROWTH ................................................................................................................. 22 GROWTH FACTORSAND OPPORTUNITIES ......................................................................................... 25 GrowthFactors ............................................................................................................................ 25 CONCLUSION................................................................................................................................... 29 Growth Opportunities................................................................................................................... 27 3.PUBLIC EXPENDITURES: MANAGEMENT AND ACCOUNTABILITY ......................... 30 BACKGROUND ................................................................................................................................. 30 THEREFORMAGENDA.................................................................................................................... 31 BudgetPreparation .............. Budget Execution TheDecentralization of Expenditures Public Enterprises........................................................................................................................ 38 ACCOUNTABILITY ........................................................................................................................... 38 CONCLUSIONS AND RECOMMENDATIONS ....................................................................................... 41 4.THE FUNCTIONAL AND ECONOMIC COMPOSITION OF PUBLIC EXPENDITURES .................................................................................................. 43 FINDINGS OFTHE 1996PER............................................................................................................ 43 FUNCTIONALCOMPOSITIONOFEXPENDITURES 1998-2002............................................................... 50 1997-2002............................................................ 44 ECONOMIC COMPOSITIONOF EXPENDITURES FINANCING OF THE BUDGET DEFICIT.............................................................................................. 52 GovernmentFinanced InvestmentProject Expenditures ............................................................. 52 ExternallyJinanced expenditures................................................................................................. 54 CONCLUSION AND RECOMMENDATIONS ......................................................................................... 57 5.A STRONGERCIVIL SERVICEFORBETTER SERVICEDELIVERY ............................ 59 THERECRUITMENTOF CONTRACTPERSONNELFORTHE PRIORITY SECTORS ................................ 61 REWARDING PERFORMANCEAND INCREASING EQUITY ................................................................... 68 RECOMMENDATIONS ....................................................................................................................... 71 V PART 11: KEY SECTOR-SPECIFICISSUES ................................................................................ 73 6. IMPROVING EFFICIENCY. EQUITY AND IMPACT OF EDUCATIONEXPENDITURES ......................................................................................... 74 EDUCATION 74 STRATEGIES .................................................................................................................................... 75 SECTORPOLICY.......................................................................................................... EDUCATIONSECTOREXPENDITURES .............................................................................................. 76 Intra-Sector Allocation ................................................ ..................................... 77 TheRecruitmentandktanagement of Teachers........................ Unit Costs in Primary. Secondary. Technic ImprovingExpenditures Controls in Prima Education Sector Outputs and Outcomes.... ..................................................... a1 Private Education........................................................ ....................................... 85 LEARNINGOUTCOMES ................................... RECOMMENDATIONS ....................................................................................................................... 88 7. IMPROVING THE IMPACT AND EQUITY OF HEALTHEXPENDITURES ...................89 HEALTHSECTORPOLICY ................................................................................................................ 89 HEALTH OUTCOMESAND OUTPUTS ................................................................................................ 89 HEALTH EXPENDITURES ................................................................................................................. 96 CONCLUSIONS................................................................................................................................. 99 Recommendations.......... ...................................................... 100 8. DEVELOPINGTHE RURAL SECTOR TO FIGHT POVERTYAND DRIVE GROWTH ...................................................................................................................... 101 INTRODUCTION .............................................................................................................................. 101 POLICYAND PLANNINGINTHE SECTOR ........................................................................................ 102 THECOMPOSITIONOFEXPENDITURES .......................................................................................... 104 OUTPUTSAND OUTCOMES ............................................................................................................ 108 RECOMMENDATIONS ..................................................................................................................... 113 FOLLOW UPTO THE PER ............................................................................................................ 114 Six month RollingAction Plan ................................................................................................... 117 Summary of PER Recommendations .......................................................................................... 100 PUBLICEXPENDITUREREVIEW: FOLLOW-UP .................................................................... 123 ANNEXES ANNEX 1.1: FISCALSOLVENCY AND SUSTAINABILITY .................................................................... 142 ANNEX 1.2: EXTERNALAND DOMESTICDEBT-TO-GDPRATIOS. 2001-2006 ..................................... 147 ANNEX 1.3: SELECTEDECONOMICINDICATORS. 1997-2006 ........................................................... 148 ANNEX 1.4: CENTRALGOVERNMENTFINANCE 1998-2002 .............................................................. 149 ANNEX 2.1 LONG-RUNGROWTHAND SHORT-TERM VAR MODEL ................................................. 150 ANNEX 2.2 ESTIMATEDIMPACTONPOVERTYOF WEAKENEDIMPLEMENTATIONOF STRUCTURES AND MACROECNOMICREFORMS ................................................................................... 151 ANNEX 2.3: BUDGETDEFICITS. TERMS OF TRADE SHOCKSAND CAUSALITY .................................... 152 ANNEX 3: EXPENDITUREACCOUNTABILITYASSESSMENT AND ACTIONPLANAAP) ...................... ANNEX 3.1 NON-WAGE RECURRENTEXPENDITURESAT THEDECONCENTRATIONLEVEL ..............153 156 ANNEX 4.1 CIVIL SERVICEEMPLOYMENT: STRUCTURE. TRENDS AND PREVIOUSREFORM EXPERIENCE ................................................................................................................. 157 ANNEX 4.2: DISTRIBUTIONOFTHEWAGEBILLBY SECTOR .............................................................. 164 ANNEX 5: EDUCATION .................................................................................................................. 165 ANNEX 6: HEALTH ........................................................................................................................ 166 ANNEX 7: RURALDEVELOPMENT .................................................................................................. 169 vi TABLES Table 1.1: 3 Base Case Scenario. 2001-2006.......................................................................................... Key MacroeconomicIndicators. 1997-2003....................................................................... Table 1.3: 9 Table 1.4: 9 Tax Structure. inpercent of GDP...................................................................................... Sensitivity Analysis on Lower LevelNon-MiningRevenue Mobilization......................... Table 1.5: 10 Table 1.7: Total PlannedExpenditure(Government and Externally Financed)by Function ............45 Tax Revenue StructureinSelectedCountries. inpercentof GDP.................................... 12 Table 4.1: Table 4.2: 46 Public Spendingon Health and EducationSelectedCountries......................................... Executionof GovernmentFinanced Spendingby Function ............................................. Table 4.3: 47 Table 4.4: Resource Utilization in SelectedMinistries...................................................................... 48 Table 4.5: Public Expenditureinthe Six Priority Sectors. Defense and Security.............................. 50 Table 4.6: 51 Economic Composition of Public Expenditure.percent of the Total................................ Economic Composition ofPublic Expenditureas apercentage ofGDP .......................... Table 4.7: 51 Table 4.8: ExecutedExpenditureon Government Projectsby Functions.......................................... 53 Table 4.9: ExecutedExpenditureon Government Projectsby Functions.......................................... 53 Table 4.10:Structure ofExternally FinancedExpendituresby SummaryFunction............................ 54 Table 4.11:Structure of Externally FinancedExpendituresby SummaryFunction ............................ 55 Table 5.1: 60 Distributionof the Wage Billby Sector............................................................................ Sub-regionalComparisonofthe Cost ofthe Civil Service............................................... Table 5.2: 62 Table 5.3: Wage and Salaries as a Share of Total Spendingby Sector.............................................. 62 Table 5.4: 65 Table 6.1: The Education for All Sector Strategy and Strategic Plan................................................ Comparisonof the numbers of teachers beingpaid andteaching..................................... 75 Table 6.2: Total Public Expenditureon Education............................................................................ 77 Table 6.3: UnitCosts inEducation.................................................................................................... 80 Table 6.4: 80 Trends inEducationUnitCosts ........................................................................................ International ComparisonofUnit Costs inPrimary Education......................................... Table 6.5: 81 Table 6.6: 82 83 Internal EfficiencyTrends Between2000 and 2002......................................................... EstimatedCost of Inefficiency for Primary Education..................................................... Lower Secondary Admissions by Region......................................................................... Table 6.7: Table 6.8: 84 Table 6.7: 85 Table 6.8: SchoolAttendance and StandardofLiving....................................................................... Admissions into Primary School2001-2002.................................................................. 86 Table 6.9: Percent Attaining MinimumLearning Outcomes............................................................. 87 Table 7.1: Health Indicators ofthe Country inComparisonwith the Sub-SaharanAfrica ................90 Table 7.2: Child Mortality by Socio-Economic Characteristicsat the Community and HouseholdLevels....................................................................................................... 92 Table 7.3: Availability of Human Resources: ComparisonofPrivileged and Under-Privileged Groups................................................................................................. -93 Table 7.4: Access to Health and Other HealthRelatedServices ........................................................ 95 Table 7.5: Plannedand Actual Public Sector Allocations for the Health Sector ............................... 96 Table 7.6: Table 8.1: Share ofRural Sector inTotal Expenditures................................................................... Plannedversus Actual Expendituresfor Major MOH Function....................................... 99 105 Table 8.2: Economic composition of Expendituresinthe Rural Sector ........................................... 106 Table 8.3: Budget Allocation (Payment Basis) inthe Rural Sector at Central and DecentralizedLevels ................................................................................... 107 Table 8.4: Agricultural exports' share oftotal exports of goods and services ................................. 111 vii ACKNOWLEDGEMENTS The Public Expenditure Review (PER) has been prepared by a team comprising counterparts fiom the Government of Guinea (GOG) and staff of the World Bank, in collaboration with the International Monetary Fund(IMF), the European Union (EU) and the African Development Bank (AiDB). The chief o f the Government Counterpart Team is Mr. El Hadj Sow, Secretary General, Ministryof Economy and Finance (MEF). Other Government o f Guinea team members include: Mr. Alpha Ousman Diallo, Advisor to the Ministry of Economy and Finance and Coordinator o f the Public Expenditure National Committee (PER-NC), and members of the PER-NC at the Ministry of Economy and Finance, the Ministry of Planning (MOP), Ministry of Pre-University Education (MPE), Ministry of Higher Education (MHE), Ministry of Health (MOH), Ministry of Agriculture and Livestock (MAE), Ministry of Employment and Civil Service (MOECS) and the Medium-Term Expenditure Framework units. The team would like to extend its most sincere thanks to the Government of Guinea Counterpart Team for its significant contributions to the overall product. The team comprised the following members: Ezzeddine Larbi, (Task Team Leader, AFTP4), Boubacar-Sid Barry, Kevin Lumbila and Issa Sanogo, (AFTP4); Sarah Lacoche (PRMHP); Linda English, Atou Seck, Tonia Marek and Astrid Helgeland- Lawson (AFTH2); Agnes Soucat (DECWD); Sarbani Chakraborty (ECSHD); Suzanne Piriou-Sal1 and Amadou Oury Diallo (AFTR2); Michael Wilson (AFTP4/AFTR2); Jack Titsworth (AFCMZ); David Webber (LOAG1); Bella Lelouma Diallo (AFTFM); Mathieu Meguhe (AFTPC); and Rose Mungai (AFTKL). Other participants included: Pierre Van den Boogaerde and Mwanza Nkusu (IMF); A. Aziz and M. Kaba (EU), and A. Charaf-Eddine (AfDB). The team has benefited from the overall guidance of Emmanuel Akpa, Sector Manager (AFTP4) and from comments made by the peer reviewers: William Dorotinsky and Anand Rajaram, (PRMPS). Logistical support was provided by Judite Fernandes and Faye Harbottle (AFTP4). viii IMPLEMENTATIONOF FOLLOW UP TO THE PER Given the macroeconomic crisis, the Decision Meeting decided to send Government a Policy Note accompanied by a Six Month Action Plan, based on the core recommendations o f the PER. The Note was communicatedjointly by the Bank and the Fundto Guinea's Prime Minister on December 11,2003. The Prime Minister replied on April 8, 2004, confirming the conclusions and recommendations o f the Note and accepting the Plan. The Prime Minister confirmed the need for greater transparency in and better accounting o f defense and security expenditures - one o f the main recommendations o f the PER, pointing out, however, that the security outlook remained uncertain. H e also indicated that high level committees had been established to implement urgent revenue and expenditure measures, including the suppression of illegal and unjustified exonerations fromduties -another key measure proposedby the PER. Ajoint Bank/Fundmission followed up onthe government's response on May 12, 2004. The mission objectives were to: assess Guinea's progress in implementing macroeconomic and structural measures; assess the implementation o f Guinea's Poverty Reduction Strategy (PRS) inthe light o fthe recent Progress Report; andparticipate inthe Government workshop charged with reviewing the conclusions and recommendations o f the PER and studying measures for their speedy implementation. The Joint Staff Assessment of the PRS highlighted the importance o f the PER process, particularly with regard to the targeting of decentralized expenditures, measuring their impact and improvingmechanisms for control andpublic oversight. The PER workshop enjoyed record attendance - 230 participants versus 180 scheduled invitees - and was characterized by strong government ownership, with a high level of participation by the National Committees for the PRS and for the PER and by those directly responsible for improved service delivery through better management o f expenditures. All ranks o f those responsible were present: governors, prefects, regional directors o f education, health and rural development, together with inspectors and financial officers from the concerned departments. This wide representation will provide a useful network for getting feedback on improvements to the PER process and for implementing annual PER exercises focusing on urgent issues, for example, the refinement o f procedures for decentralizing expenditures with enhanced public oversight, planned for 2004/2005. As noted in the aide-memoire o f the May mission, there remain formidable challenges before Guinea can establish a track record which would pave the way for the resumption o f concessionary aid. However, significant progress has been made with regard to broad recognition o f the fundamental problems, including the lack o f governance (openly discussed inthe Workshop), and to the development o f the analytical tools which are needed to backstop sound macroeconomic management and implement the PRS. ix EXECUTIVESUMMARY 1. Public expenditure management i s at the heart o f Guinea's strategy for poverty reduction and growth. The impact o f public expenditureson the economy and the poor hinges on the government's ability to improve its performance in the three major areas: (i)the restorationofmacroeconomic stability throughprudentpolicies andimproved revenue mobilization (the stabilization issue); (ii)the strategic allocation of resources reflecting priority sectors (the allocation issue); and (iii)the efficient execution o f expenditures, notably with regard to externally financed expenditures, to enhance delivery o f basic public services through the decentralization and the accountability inthe management o f expenditures, and the implementation o f civil service reforms (the execution issue). The PER addressesthese three key issues - stabilization, allocation, and execution - as well as the effectiveness o f expenditures in the three priority sectors o f education, health and rural development interms of outputs and outcomes MAINFINDINGS The Stabilization Issue 2. Despite relative stability in the period 1997-2002, adverse external factors began to undermine the economy, leading to erratic performance. Duringthe period real GDP grew at an average rate o f 4 percent per annum, inflation averaged less than 5 percent, the parallel market premiumwas kept to less than 2 percent, and average fiscal and external deficits were limited to 3 and 6 percent o f GDP, respectively. However, adverse external factors began to erode this apparent stability. These included substantial weakening o f terms of trade for bauxite and worsening security conditions in three neighboring countries, leading to unplanned defense and security expenditures. These effects were compounded by inefficiencies in tax and customs administration. Consequently, significant slippages in the macroeconomic framework resulted in 1999 and early 2000. After stability was restored over the following months, a third annual ESAF arrangement was concluded in December 2000, preparingthe ground for a three- year PRGF program, negotiated inMay 2001. Throughout 2002, the PRGF program was again undercut by unanticipated security expenditures, and went o f f track in December 2002. The Current Crisis 3. Guinea's economy continues to deteriorate, with low growth, an expansionary fiscal policy due defense spending, accelerating money growth and inflation, and escalating domestic public debt. The outlook is continued macroeconomic instability, due mainly to unplanned defense and security expenditures, withprimarycurrent expenditures exceedingtarget by 0.1 percent o f GDP; falling mining revenues; and poor performance inother taxes and duties. Inflationaveraged 13.5 percent X for 2003, compared with just 3.0 percent on average in 2002. The gap between the official and parallel market exchange remains wide, above 20 percent at the end of September, 2003. The overall budget deficit will likely reach 3.6 percent of GDP. The fiscal situation continues to weaken. Revenues were 0.3 percent of GDP, less than projected for the first three quarter of the year. Extra budgetary spending was financed by monetization, constraining credit to the private sector, and fueling inflation. Growth is now unlikely to reachthe projected low 2.1 percent of GDP. This is less thanpopulation growth and well below the PRSP objectives. GDP per capita has lapsed into negative growth in2003 versus growth of about 1percentper year inthe period 1997-2002. 4. Guinea faces serious liquidityproblemswhich undermineimplementationof the PRSP.The fund's tranche ofHIPC interimassistance expired inJune 2003, while the AfDB interim relief will end in December 2003 and significant Paris Club debt cancellations are postponed. The net impact of these reductions i s grave. The estimated financing foregone for the four year period is US$185.5 million. The 2004 budget year will see no improvement unless urgent measures are taken to restore stability. Containment of defense expenditures is the number one priority. 5. Six Month Rolling Action Plan. Urgent measures must be taken to restore macroeconomic stability and donor confidence, paving the way for re-allocation of domestic funds from low to high priority sectors, new aid flows and successful implementation of the PRS. They include setting ceilings for defense and security spending, modifying the 2004 budget, and integrating defense and security into the MTEF programming and budgeting process. A six month rolling action plan presents an integrated panel of PER, CFAA, AAP and CPAR recommendations, designed to help move Guineatoward a SMP, while protecting the priority social sectors. 6. Fiscal sustainability. In short to medium-term, government commitment to managing public expenditures efficiently will determine the macroeconomic stability, Over the medium-term, trends in economic growth, the stock o f external debt and domestic inflation will be critical for sustainability. The PER examined two scenarios: the current crisis, highlighting the negative impact of uncontrolled spending, and a scenario reflecting a decisive restoration of macroeconomic stability. Ifthe current crisis continues, the results would be high inflation, slow growth, and higher poverty incidence. Substantial efforts would be required to restore fiscal sustainability, equivalent to 2.1 percent of GDP in 2004, and 2 percent of GDP in 2005 and 2006. However, if the government were to forcefully adjust its fiscal stance by limiting and monitoring defense and security spending and other expenditures such as central administration, while shifting resources to the priority social sectors, the ground could be prepared for an IMF Staff Monitored Program (SMP). 7. Revenue mobilizationand growth. Poverty reduction will depend on increased revenue mobilization and economic growth (CAS 2003). So far, reduction o f poverty has been modest. In order to maintain fiscal sustainability and at the same time finance poverty reduction, government must stabilize its debt-to-GDP ratio at sustainable levels and mobilize additional revenues. If it fails to increase non-mining revenues as a percentage of GDP, government will have no other choice but to cut expenditures by 1 xi percent o f GDP in2004 and by almost 3 percent o f GDP in2006. However, some current expenditures - such as wages, administration, and defense - are not easily reduced inthe short run. Consequently, investment expenditures are likely to be targeted for cuts, leading to lower growth and further undermining o f the poverty reduction strategy. Guinea must mobilize more revenues to remain on a fiscally sustainable path. The main factors constraining revenue mobilization are: 0 A cumbersome tax code which fails to reflectthe realrevenue potential; 0 Weak collection, particularly o fthe VAT tax, due to a lack o f incentives andpoor capacity; and 0 The large number o f import duty exemptions, often unjustified, which particularly favor the miningsector. 8. Opportunities for Growth. Revenue mobilization will depend on accelerated economic growth. To achieve this, Guinea must diversify its economy. The principal areas o f opportunity are: 0 Mining. This sector will continue to drive overall growth, as new mining operations and extensions o f existing operations come on line. In particular, the integration o f the bauxite-alumina-aluminum sector through the development o f hydro-electric resources could realize greater domestic value-added; 0 Agriculture. The potential i s high but productivity i s low. Over the decade, the rural sector averaged about 18 percent o f GDP, with growth mainly attributable to more land being brought under cultivation. The sector can grow faster through exports and contribute decisively to economic growth, ifthe required investments ininfrastructure, researchandextension are implemented; and e Fisheries and livestock also offer good prospects. Fisheries grew at an average o f 7 percent p.a. over the last decade. The livestock sector i s already exporting to the Region and looks to meeting EUstandards inthe near future. 9. Private Sector. Economic growth depends on participation o f the private sector. The sector continues to encounter obstacles relating to rent seeking and other bureaucratic obstructions, credit, transport, and for agricultural exports, problems related to cold storage, shipping and airfreight. Other impediments to investment include the traditional, often arbitrary arrangements for leasing land that offer insufficient legal protection or financial leverage. Efficient public utilities are key to private sector-led growth. The restructuring o f public utilities, water and electricity, in particular, is urgentlyneeded. The Issues of Budget Allocation and Execution 10. Poverty reduction will depend on improved prioritization o f budget allocation, to correct current anomalies in inter and intra sector allocations. It will also hinge on xii government' s ability to significantly improve budget execution, particularly with regard to externally financed and HIPC expenditures. The Allocation Issue 11. Inter and intra sector allocation. While the Medium Term Expenditure Framework (MTEF) has significantly increased allocations to the priority sectors, there are still anomalies: The highbudget share o f defense and security i s in competition with allocations for the priority sectors; Wages and administration absorb an excessive share o f resources; Overall allocations to education and health are still too low to achieve Millennium goals; Intra sector allocations favor tertiary rather than primary and secondary care in health, while in education the possibility o f an increase in higher education admissions threatens to divert resources from primary and secondary education; and Investment and non-salary recurrent costs o f the key programs in the priority sectors (the education sector program, the public health programs, and agriculture) rely on external financing, while the domestic effort remains weak. The ExecutionIssue 12. Although the allocation o f expenditures to priority sector has considerably improved thanks to the adoption o f the Computerized Budget Management System (CBMS), execution remains weak, reducing their impact on poverty, particularly with regard to: (i)the execution of decentralized expenditures for improved service delivery under the 2002 pilot initiative; and (ii) the implementation of externally financed project expenditures: The Public Expenditure Tracking Survey (PETS) found that only 16 percent o fnon-wage expenditures effectively arrive at designated schools, and only 30 percent o f funds reached rural health; and e Evenas external financing is declining, the utilization rate o f external funds is inexcusably low due to poor procurement performance, weak project management and inadequate monitoring. MAINRECOMMENDATIONS 13. The PER recommendations can be grouped in five main categories: (i) restoring macroeconomic and fiscal discipline, to promote growth and poverty reduction; (ii) improving budget allocation and execution inthe priority sectors; (iii) reforming the civil xiii service for better service delivery; (iv) improving the effectiveness o f spending in education, health and rural development: and (v) strengthening budget management and accountability. (i) Restoring Macroeconomic and Fiscal Discipline by implementation of the six month rolling actionplan. Key actions are: e Set ceilings for defense, security and wage expenditures in order to limit unplanned expenditures; e Revise expenditure projections for 2004, with priority to expenditures in social sectors, and containing expenditures especially for security defense and wages with close monitoring o f budget execution; e Maintainprudent borrowing policies; e Rationalize the tax regime, exploring alternatives for taxes and for their collection; e Assess the tax revenue potential at the macro-level, targeting an agreed percentage o f national income to be raised through direct taxes, domestic non-tax revenue and through imports; e Rationalize current exemptions from import duties, suspending illegal or unwarrantedexemptions; e Exploit opportunities for diversifiedgrowth -inmining, agriculture, livestock and fisheries; and e Implement structural policies aimed at triggering private sector-led growth through the creation o f an improved business environment. (ii) ImprovingBudgetAllocationandExecutioninthePrioritySectors e Integrate the defense sector into the MTEF, with budget ceilings and a more transparent review process; e Re-allocate budget funds from the central government services such as defense and foreign affairs to the priority and productive sectors to meet non-salary recurrent expenditures and key infrastructureneeds; e Upgrade the capacity o f the CBMS linking it to the Treasury and gradually extend it to the regions andtrain local stakeholders; e Introduce more robust procedures for the transfer o f funds to the local level with improved controls by the Inspection Ge'ne'raledes Finances (IGF) and oversight by local stakeholders; xiv 0 Institutionalize the PETS and quality-of- service surveys; and 0 Improve the monitoring and the procurement process inthe utilization o f external assistance. (iii) Reformingthe civilservicefor better servicedelivery. Civil service reformis crucial to Guinea's successful achievement o f poverty reduction through the improved delivery o f basic services. The challenges are: (i)balancing new recruitment against the need to contain the wage bill and to protect essential non-salary operating expenditures; (ii)improving personnel management and payroll procedures; and (iii) upgrading the quality and performance o f staff, with equitable deployment, and enhancing controls over contract personnel. Key measures are: 0 Update and maintain the computerized central personnel file to include all short- term, contractual employees, together with information on their grade, pay, qualifications and their geographic assignment, with real time linkages to payroll andthe line ministries' personnel files; 0 Initiate urgent measures to address the serious discrepancies in personnel and payroll files for primary and other teachers; e Conduct a review o f staff deployment problems in health and rural development and prepare an action planfor resolving them; and 0 Revise the 2001 law and regulations to establish a performance-based evaluation system linked to career development and providing for disciplinary measures. SECTOR SPECIFIC RECOMMENDATIONS Education Guinea must find a way to coordinate the monitoring and updating o f the policy framework and expenditure program of the Education for All (EFA) in the education sector; Increase the number o f learning contact hours to reflect international standards; Increase the budget share for key pedagogical inputs, such as books and other learning materials, pre-service teacher training, in-service training and teacher supervision; Implement systems and procedures for improved financial management at the school level, and for personnel management at the level o f regional inspectorates and secondary schools; and Improve internal efficiency, reducing costs, by eliminating grade repetition and introducing remedial instruction. xv Health 14. Guinea needs to adopt an adequate cost recovery policy inthe health sector so as to reduce the burden o f health care spending on the poor, and increase their access to health services, biased toward the rich. Possible policy options include: Increasing public financing o f health care to meet the cost o f the minimum package, with better accounting and utilization o f private expenditures; Re-structuring Ministry o f Health (MOH) to re-deploy personnel toward primary and secondary healthcare, with incentives for field managers and technicians; Expedite a review o f the continuing inequities in budget allocation, in access to health services and between ethnic and groups and regions; and Expenditures should be progressively switched from administration and central services to field operating and maintenance expenditures. Rural Sector 15. More than 80 percent o f the poor are involved in agricultural activities, but they account for only 20 percent o f GDP. Developing the potential o f the rural sector will depend on: 0 Switching recurrent spending from wage and salaries to operations and maintenance; 0 Increase investment for agricultural production, for markets access and for the other economic infrastructure required for exporting; 0 Re-structure the MAEto focus on its technical advisory and regulatory roles, with out sourcing o f other functions and services; and Evaluate the performance o f the research and extension services, with consultation o f the beneficiaries, as a condition o f increased budget allocations to meet operating costs. SPECIFIC MEASURES FOR BUDGET MANAGEMENT AND ACCOUNTABILITY 16. The lack o f an adequate institutional framework for managing public expenditure programs has limited government's implementation o f the PRSP. Enhanced governance and accountability are essential elements o f this framework. Although the government has successfully put inplace an anti-corruption committee and enacted an anti corruption law, there i s still much to be done to make public spending more transparent. Improving the quality ofpublic expenditure management will depend on: xvi Shortto Medium-termReforms: e Improving the coordination of budget preparation between the National Budget Directorate and the sector planning and financial directors; e Tighter monitoring of the Country Financial Accountability Assessment (CFAA) and Accountability Assessment andAction Plan (AAP) benchmarks; and e Strengthening the capacity ofthe public audit bodies to audit public expenditures. Mediumto Long-termReforms: e Adoption of a decentralized budget management system, with beneficiary and community involvement in setting priorities and in the execution and control of thebudgetary process; e Extension of the MTEF process, based on strategic sector plans and program budgets to all sectors; and e Harmonization of the preparation of the current and investment budgets so as to insure that recurrent costs of existing and new investments are adequately taken into account. xvii INTRODUCTION 1. Purpose and Process. The Public Expenditure Review (PER) seeks to guide the public expenditure reform process in support o f poverty reduction and growth. The first 1996 PER was largely donor driven. The Bank expressed the hope that the report would become the basis for frank and open discussions and that "the PER would become a regular home bred exercise allowing for the thorough review o f all sectors in several iterations". The conditions are now more favorable to that goal. The climate for the 2003 PER has been characterized by frank discussion and there is now a strong degree o f ownership, with establishment o f a well-staffed national committee charged with coordinating the PER process, led by a senior government official. There is also no doubt that the adoption o f a more participatory approach to the budget process has helped open up the review to broader public scrutiny. Institutionalizing the PER process, with full participation o f all stakeholders, is still a challenge. It will require both capacity building and strong support from the donor community. 2. Highlights and Coverage. Public expenditure is a vital ingredient o f the growth and poverty reduction strategy in Guinea. The link between public expenditure, growth and poverty is a key feature o f this PER. The issue o f poverty reduction through growth and service delivery, as well as the impact and sustainability o f public expenditure are covered inPart Ias cross-cuttingissues. PARTI:CROSS-CUTTINGISSUES: 0 The urgent need to stabilize the macro economy and to ensure fiscal discipline i s the theme o f Chapter 1, while opportunities for poverty reduction through accelerated economic growth are explored inChapter 2; 0 Ifpoverty reductionspending is to be better targeted, the management and accountability o f public expenditures, with particular reference to decentralization and to financialhiduciary controls, will require significant strengthening (Chapter 3); 0 Achieving poverty reduction targets will depend on better allocation o f resources between and within sectors, together with significantly improved implementation of expenditures (Chapter 4); and 0 Changes in the management and deployment o f the civil service are essential if service delivery is to improve (Chapter 5). 3. The issues highlighted inPart Ifind their reflection inPart I1which examines the issues o f budget allocation and execution, financial and personnel management, service delivery, and expenditure outcomes in the three priority sectors o f education, health and rural development. xviii PART11.KEYSECTOR ISSUES 0 The issues o f low efficiency, lack o f equity and low impact o f education spending and weak management o f the teaching force are analyzed inChapter 6; 0 The unacceptably low outcomes o f the health sector are examined in Chapter 7, together with inequities in spending between socioeconomic groups and geographic regions; and 0 The need to diversify the rural economy through improved research and, extension and better targeting o f expenditures is examined inChapter 8. 4. The report concludes with the proposals for strengthening and institutionalizing the PER process, together with specific short and medium-term measures to address the key issues identified by the review. PARTI t CROSS-CUTTINGISSUES 2 Guinea 1. THE MACROECONOMICFRAMEWORKAND FISCAL SUSTAINABILITY This chapter highlights the persistent issue of overspending, notably for defense and security, which is undermining macroeconomic stability. It assesses the negative impact of the current crisis scenario on fiscal sustainability, resource allocation to priority sectors, and on the prospects for poverty reduction and long-term growth. The chapter shows that Guineacan restore macro stability andput the economy back on track toward growth. Finally, the chapter examines how the government can improve Jiscal sustainability on the revenue side, making recommendations on the tax regime, import duty exemptions and collectionprocedures. BACKGROUND 1.1 Guinea has pursued the development of a market economy with mixed results.After almost three decades o f central planning, the Guinean economy inthe late 1980s was marked by a bloated and inefficient public sector, sizeable internal and external imbalances, a weak economic and social infrastructure, and limited private activity outside mining and agriculture. In the 1990s, the government implemented a package of reforms aiming at stabilizing the macroeconomic environment and creating favorable conditions for growth based on the utilization of the diversified country's potential. The results were mixed. Some progress was realized in the reform o f the judiciary system by the enactment of anti-corruption law. With regard to the financial sector, the regulatory and supervisory framework for financial institutions, including the micro finance sector, was strengthened. Finally, in the area o f trade, the tariff structure was simplified and preparations made for the launching o f the second monetary zone o f the West African Economic Community of West African States (ECOWAS), scheduled for mid-2005. However, progress was weak in terms o f restructuring and privatizing public enterprises, inimproving the efficiency o f the tax and customs administration and with regard to civil service reform. More fundamentally, public expenditures remained poorly targeted andpoorly controlled. 1.2 Despite relative stability in the period 1997-2002, adverse external factors beganto underminethe economy, leadingto erratic performance.Duringthis period, real GDP grew at an average rate o f 4 percent per annum, inflation averaged less than 5 percent, the parallel market premium was keptto less than 2 percent, and average fiscal and external deficits were limited to 3 and 6 percent o f GDP, respectively. However, adverse external factors began to erode this apparent stability. These included substantial weakening o f terms o f trade for bauxite and worsening security conditions in three neighboring countries, leading to unplanned defense and security expenditures. These effects were compounded by inefficiencies in tax and customs administration. Consequently, significant slippages in the macroeconomic framework resulted in 1999 and early 2000. After stability was restored over the following months, a third annual ESAF arrangement was concluded in December 2000, preparing the ground for a three- year PRGF program, negotiated in May 2001. A full PRSP was endorsed by the Public Expenditure review 3 executive boards of the Bank and the Fund in July 2002. Throughout 2002, the PRGF program was again undercut by unanticipated security expendituresinresponseto hostile incursions on the southern and eastern borders. The combination of budgetary pressures linkedto the security situation andincreasedcentral bank financing threatenedto increase inflation, under control for more than a decade, and led to the PGRF going off track in December 2002. Security concerns continue into 2003, a presidential election year, and may well exacerbate already weak macroeconomic conditions. Table 1.1: Key Macroeconomic Indicators, 1997-2003 1997 1998 1999 2000 2001 2002 2003est. (Annualpercent change) RealGDP at 1996 prices 5.0 4.8 4.6 1.9 3.8 4.2 2.1 Broadmoney 17.3 6.1 8.8 23.4 14.8 19.2 18.0 Reserve money 15.1 14.0 15.0 17.0 11.0 18.3 10.4 Inflation(CPI average) 1.9 5.1 4.6 6.8 5.4 3.0 13.5 Average REER (depreciation-) -0.7 -3.5 -6.0 -10.3 -3.2 -2.3 (In percent of GDP, unless otherwisespecified) Total revenue and grants 14.6 14.1 13.1 13.4 14.7 14.3 15.5 Total expenditures and net lending 17.5 14.7 16.1 16.5 18.8 20.2 18.8 Primary balance 2.9 2.6 2.4 2.5 0.6 0.0 0.6 Overallbudget balance, commitment basis Includinggrants -3.0 -0.7 -3.0 -3.2 -4.1 -5.9 -3.3 Excluding grants -6.0 -3.6 -5.3 -5.5 -7.5 -8.2 -7.2 BOP deficit 7.0 8.5 7.6 7.3 2.4 6.5 4.9 Gross int. reserves (in months of imports) 2.6 3.1 2.8 2.0 2.6 2.0 1.7 Sources: MEF and IMF THECURRENTCRISIS 1.3 Guinea's economy continues to deteriorate. Guinea's economic situation i s deteriorating further with low growth, an expansionary fiscal policy due defense spending, accelerating money growth and inflation, and escalating domestic public debt. The spread between the official and parallel exchange rates remains wide and reserves are very low. The outlook is continued macroeconomic instability, due mainly to: (i) unplanned defense and security expenditures; (ii)falling mining revenues; (iii) poor performance in other taxes and duties; (iv) the rapid growth of the wage component in order to increase service delivery in education and health and for defense; and (v) to an unsustainable level o f administrative expenditures at the central level. Inflation averaged 13.5 percent for 2003, compared with 3.0 percent on average in 2002. The gap between the official and parallel market exchange remains wide, above 20 percent at the end of September, 2003. The overall budget deficit will likely reach 3.3 percent of GDP but may be worse ifsome progressis not made inrevenues. 1.4 The fiscal situation continues to weaken. Revenues were 0.3 percent of GDP, less than projected for the first three quarter o f the year, while primary current expenditures exceeded target by 0.1 percent o f GDP, due to defense and security spending and extra budgetary spending on goods and services equivalent to 0.5 percent of GDP, financed by the issuance of bonds. As a result, the primary fiscal balance was 0.4 4 Guinea percent of GDP 'over target at end August. This overspending impacted negatively on expenditures for priority social expenditures, down by 0.2 percent of GDP. Meanwhile external payment arrears have risen by 0.2 percent of GDP, with escalating domestic debt. Overall, the global deficit has exceededthe ceiling of 0.7 percent of GDP, forcing recourse to bank credit. Credit to the banking system rose from 45.6 percent of total net domestic debt to 55.7 percent in 2002, with the projected 2003 share at the same level. This high public domestic debt is impacting negatively on the money supply, constraining credit to the private sector, and fueling inflation. 1.5 Economic growth, already in decline, is stalled. Growth is now unlikely to reachthe projected low 2.1 percent of GDP. This is less than population growth and well below the PRSP objectives. GDP per capita has lapsed into negative growth in 2003 versus growth of about 1percent per year inthe period 1997-2002. Serious electricity and water shortages attributable to delays ininstalling the newthermal generatingplants have beena major factor inthe fall-off ingrowth. Output for electricity andwater has fallen by an estimated 40 percent in2003, impacting negatively on mining, construction and on the private sector ingeneral. 1.6 Guinea faces serious liquidity problemswhich undermineimplementationof the PRSP. The Fund's tranche of HIPC interim assistance expired in June 2003, while the AfDB interim relief will expire in December 2003 and significant Paris Club debt cancellations are postponed. The net impact o f these reductions is grave: in 2003 total grants and bilateral relief fell from an expected US$60 million to US$32.5 million or from 11 percent of total revenues to 5.9 percent. Thereafter, the decline is likely to be abrupt and the impact devastating in terms o f PRSP financing. The estimated financing foregone from HIPC for the four-year period (2003-2006) is US$l85.5 million. In addition, multilateral and bilateral project financing i s likely to be at a significantly reduced rate, reflecting government's lack o f commitment to macroeconomic stability and therefore to the PRSP. External financing i s also likely to be limited by Guinea's weak project implementation capacity, notably inprocurement. Disbursementtargets are rarely met so there is no incentive for the donors to commit more project funds. Only close monitoring and capacity building are likely to improve absorptive capacity. Mining revenues are not likely to pick up in the foreseeable and the effort required to improve domestic revenues is significant. 1.7 The 2004 budget year will see no improvement unless urgent measures are taken to restorestability. Defense and security spending are projectedto retain their 10 percent budget share while spending for the priority sectors is expected to decline by at least 4 percent. It is not clear, however, whether defense's share fully incorporates new hiring and back pay. Ifit does not, and ifunplanned expenditures go unchecked, then the priority sectors are likely to suffer even more. The impact is already being felt in 2003, hiring of primary school teachers fell 500 short of the targeted 1500, limiting new enrolments. Civil society is feeling the pinch. Preliminary results from the household survey (Core Welfare Indicators Questionnaire - CWIQ) found that 36 percent of respondents felt themselves poorer than in the previous year; only 8 percent were satisfied with the quality of the health services; and ineducation the levels of satisfaction 8 for primary and secondary education were only 18 percent and 7.3 percent, respectively. Public Expenditure review 5 1.8 Containment of defense expenditures is the number one priority. Non- concessionary loans contracted for defense are likely to pose a heavy debt service burden through 2006, postponing any eventual "peace dividend". Additionally, the defense wage bill will spike in2004 as volunteer soldiers are regularized and back pay is settled and is likely to remain highthereafter until such time as an effective program o f demobilization can be launched. Experience in other countries (notably Sierra Leone) suggests that this will be complex tax, requiringjob training and the structuring o f economic opportunities inagriculture and small enterprises. 1.9 Full integration of defense and security into the MTEF programming and budgeting process must be achieved. At present, only expenditures by category are known, usually after commitment by special procedure, and there i s no information on objects o f expenditure, nor is there any scrutiny o f the procurement process, with the probability that expenditure i s inefficient. Social expenditures for the sector are also very high. The sector should be fully integrated into the MTEF and into the new budget process introduced in 2003, with the definition o f strategies, a rolling three year plan, annual budget ceilings and expenditure reviews. Procurement should be on a competitive basis, except for clear cut sole source exceptions, with commitments recorded ex ante and tracked by the CBMS. As in other countries, oversight could be provided by a parliamentary commission, with provisions for respecting national security which could also permit rapid response to emergency requests for funding not included inthe budget. Bilateral donors can tap a wealth o f experience in defense planning, budgeting and procurement which could be brought to bear on the defense issue through a co-financed program o f technical assistance, chaired by a bi-lateral donor. A first step towards integration o f defense into the MTEF should be a sector specific expenditure review to be implementedin2004-2005 by an internationally selected defense planning consultancy. FISCALSUSTAINABILITY 1.10 The major risks for fiscal sustainability' are persistent overspending in defense and security and the low level of revenues. In the short to medium-term, government commitment to managing public expenditures efficiently will determine the macroeconomic stability. Over the medium-term, trends ineconomic growth, the stock o f external debt and domestic inflation will be critical for sustainability. The paragraphs below examine the first of these risks through two scenarios: the current crisis, highlightingthe negative impact o f uncontrolled spending, and a scenario reflecting a decisive restoration o f macroeconomic stability. Fiscal solvency and sustainability are presented in Annex 1.1. The second risk - lower revenue mobilization - is examined through sensitivity analysis. ' Given Government budget constraint, fiscal sustainability will depend on five key factors: (i)the ratio of external and domestic debt to GDP, as well as domestic and international interest rates; (ii) openness and competitiveness, measured by the ratio of exports to GDP and export growth; (iii)the real exchange rate; (iv) the velocity of money demand; and (v) inflation rates. The trends in economic growth, the stock of external debt and domestic inflation will be critical for fiscal sustainability over the medium-term. Scenarios for these three parameters are presentedinAnnex 1.1. 6 Guinea Scenario I.The Continuing Crisis-High Inflation, Escalating Debt and Slow Growth 1.11 In 2002-2003, defense and security spending absorbed some 20 percent of the budget, contributing to build up a budget deficit of 8.2 percent of GDP (Table 1.1). Unlike previous years when external resources were available to finance the budget deficit, money creation became the main source of government financing in 2002, some 57 percent leading to two-digit inflation (13.5 percent on average for 2003) for the first time ina decade. Any further monetizationof budget deficits is likely to leadto galloping inflationand negative growth. 1.12 Overspendingon defense and securityis likely to crowd out expendituresfor the priority sectors. Overall, the priority social sectors will lose some 0.2 percent of GDP in 2003. Education, health and rural development are already under funded and are likely to receive even less resources if urgent measures are not taken, compromising poverty reduction andthe PRSP objectives andconstraining long-term growth. 1.13 Ifthe currentcrisis were to continue,the resultswouldbe highinflation,slow growth, and higher poverty incidence. In this scenario, Guinea would see its foreign aid dries up. It would lose more than 70 percent of the interim HIPC relief funds scheduledover the medium-termandbilateral or multilateral aid flows would be severely limited. As a result, the government would be obliged to increase the money supply, leading to high inflation, or to borrow at exorbitant interest rates. The vicious cycle of high inflation, and low growth would continue. Substantial efforts would be requiredto restore fiscal sustainability, equivalent to 2.1 percent o f GDP in 2004, and 2 percent of GDP in2005 and 2006 (Table 1.2). Table 1.2: EstimatedSustainabilityAdjustment Neededto Restore FiscalSustainability(in percentageof GDP) 2003 2004 2005 2006 Primary surplus* (actual and projected) 0.7 1.4 1.9 2.0 Sustainable primary balance" Scenario I: Crisis scenario 2.9 3.6 4.0 3.9 Scenario 11: Macro stability scenario -0.5 -1.5 -0.9 -0.6 Estimated Sustainability Effort Needed*** Scenario I: Crisis scenario 2.2 2.1 2.0 1.9 Scenario II: Macro stability scenario -1.2 -2.9 -2.8 -2.6 Sources:Guinean authorities, IMF's Brief Article IV (2003). and staff estimates. 'Primary Surplus is defined as revenue minus non-interest expenditures, excluding foreign financed investment projects. "Sustainable primary balance is the estimated level of balance (- is deficit and + Is surplus) required to maintain fiscal sustainabilitv. ***The fiscal sustainability adjustment effortis the difference between the sustainable primary actual or projected primary balance. No adjustmenteffort is needed when the difference is negative. Public Expenditure review 7 Scenario 11-A DecisiveRestoration of Macroeconomic Stability, with Low Inflation, Increased ExternalAid andHigh Growth 1.14 If the government were to forcefully adjust its fiscal stance by limiting and monitoring defense and security spending and other expenditures such as central administration, while shifting resourcesto the priority social sectors, the ground would be prepared for an IMF Staff Monitored Program (SMP). If successfully implemented, the SMP would open the door to increasedexternal assistance including budgetary support. 1.15 External debt sustainability would also improve through the medium and long- term, given eligibility for assistance under the enhancedHIPC initiative. Assuming sound macroeconomic performance and achievement of the trigger points, Guinea would receive enhanced HIPC assistance at completion point, leading to reduction in the stock o f debt and manageable inflation. With HIPC assistance2, the Net Present Value (NPV) of external debt-to-revenues would decrease from 811 percent in 1999 to an average of 222 percent for 2003-2006, and to 153 percent from 2007 through 2018. Providing new borrowing was prudent3and the macro-economy remained stable, the outstanding public external debt would be reducedand the external debt-to-GDP ratio would decrease from almost 93 percent of GDP in 2001 to 47 percent in 2006 (Annex 1.2), with fiscal sustainability inthe period 2004-2006 (Table 1.2). HIPC assistance grants provided by multilateral creditors are equivalent to debt service reduction, therefore, they do not reduce the nominal stock of debt. Paris Club creditors are expected to reduce Guinea's nominal stock of debt by around $600 million at completion point, with comparable treatment on bilateral and commercial debt by non-ParisClub creditors. It was assumedthat the governmentwould adopt prudent borrowing policies, contracting new debt under highly concessionalterms, at low interest rates not exceeding 1.5 percent inaverage. Assuming that,' in 2005 debt reduction under Cologne terms, is granted by Paris Club creditors, with comparabletreatment by other bilateral creditors. 8 Guinea Box 1.1: HIPCAssistanceand Fiscal Sustainability Under the scenario of restored stability, HIPC assistance would improve fiscal sustainability by reducing debt service obligations. HIPC assistance is treated as follows in fiscal accounts: debt service reduction from multilateral institutions accounts as grants; debt service relief from flow rescheduling, such as the Paris Club rescheduling under Cologne terms, is treated as exceptional financing. These resources are estimated to have been $62 million in 2001 and $66 million in 2002, equivalent to 15 percent of government revenues. They are projected to average $65 million per year from 2003 to 2006, or 11percent of government revenues. Interim relief under HIPC assistance started in2001. It has beenlower than projected inthe decisionpoint documentbecause o f (i) technical delays inthe implementation ofdebt reliefagreements; and (ii) non-participation of non-ParisClub creditors. ' HIPCassistance(inmillionsofUSDunless otherwiseindicated) Actual Projected 2001 2002 2003 2004 2005 2006 Grants(multilateral) 20 23 28 39 40 35 IDA 5 11 12 12 13 14 IMF 3 2 5 10 10 5 AfDB 11 11 10 17 17 16 Financing(bilateraldebt relief) 43 43 32 28 28 28 ParisClub 43 43 32 28 28 28 NonParisClub Total 62 66 60 67 68 63 Totalas a shareofrevenues(%) 15 15 11 12 11 10 Source: staff estimates The thrust o f the enhanced HIPC framework was to strengthenthe link between HIPC assistance and poverty reduction by ensuringthat HIPC assistance provides additional resources for poverty-reduction programs. The primary surplus of Guineawas reducedfrom 2.6 percent of GDP in 2000 to 0.6 percent o f GDP in 2001, mainly because of security outlays, but also because of poverty reduction expenditures. So far Iraq, Kuwait, Romania, Saudi Arabia, and Thailand have not yet agreed to provide HIPC relief, while decision-point projections assumed that a treatment comparableto the Cologne flow providedby Paris Club creditors would be providedby non-ParisClub creditors. 1.16 If Guinea can restore macroeconomic stability, reallocation of resources from defense and security to priority sectors and new flows of external assistance will help the PRS get back on track. The government's fiscal position would be sustainable and no adjustment efforts would be needed. This scenario (Annex 1.1) is based on growth picking up in 2004, and its momentum continuing throughout 2006, reaching 6 percent of real growth in 2006. These assumptions foresee growth in the medium-term being driven by a diversified, export-oriented agriculture sector and by infrastructure, if mining revenues were to lag because of depressed bauxite prices.' It is assumedthat prudent fiscal policies would be maintained through the medium-term,with tight control of spending and a strong revenue effort. Between2001 and 2002, averagegrowth rates inconstruction and agriculture were above 7 percent and 6 percent, respectively. Public Expenditure review 9 FISCAL SUSTAINABILITYAND REVENUE MOBILIZATION 1.17 Sensitivity analysis shows that lower revenue mobilization will result in reduced investment and slower growth, undermining the Poverty Reduction Strategy. In order to maintain fiscal sustainability and at the same time finance poverty reduction, government must stabilize its debt-to-GDP ratio at sustainable levels and mobilize additional revenues. If it fails to increase non-mining revenues as a percentage o f GDP, as projected under the base case scenario (Table 1.3), govenunent will have no other choice but to cut expendituresby 1percentof GDP in2004 andby almost 3 percent o f GDP in 2006 (Table 1.4). However, some current expenditures - such as wages, administration, and defense - are not easily reduced in the short run. Consequently, investment expenditures are likely to be targeted for cuts, leading to lower growth and further undermining of the poverty reduction strategy. Guinea must mobilize more revenuesto remainon a fiscally sustainablepath. Table 1.3: Base Case Scenario, 2001-2006 (inpercentageof GDP) 2001 2002 2003 2004 2005 2006 Governmentrevenues 11.3 12.0 12.3 12.4 12.9 13.0 Mining 2.8 2.3 1.7 1.7 1.7 1.I NonMining 8.5 9.7 10.7 10.8 11.1 11.3 Expenditureandnet lending 18.8 20.2 19.5 18.8 18.3 18.0 Primarycurrentexpenditures 10.0 10.6 9.7 9.3 9.1 9.2 Wage bill 3.6 3.7 3.6 3.5 3.4 3.3 Public investment 7.1 7.8 7.9 7.8 7.6 7.5 Primarybalance 0.7 0.0 0.7 1.4 1.9 2.0 Overallbalance, commitments basis Including grants -4.1 -5.9 -3.0 -2.4 -1.6 -1.3 Excluding grants -7.5 -8.2 -7.2 -6.3 -5.4 -5.0 Source: IMFGuinea staffreport for the 2003 Article IV Consultation, July 2003 Table 1.4: Sensitivity Analysis on Lower LevelNon-Mining RevenueMobilization, 2001-2006 (in percentageof GDP) 2001 2002 2003 2004 2005 2006 Government revenues 11.3 10.8 10.2 10.2 10.2 10.2 Mining 2.8 2.3 1.7 1.7 1.7 1.7 NonMining 8.5 8.5 8.5 8.5 8.5 8.5 Required deficit adjustment 0.0 1.2 2.2 2.3 2.6 2.8 Expenditure and net lending 18.8 18.9 17.3 16.5 15.6 15.2 Primary current expenditures 10.0 10.6 9.7 9.3 9.1 9.2 Wage bill 3.6 3.7 3.6 3.5 3.4 3.3 Public investment 7.1 6.5 5.7 5.5 5.0 4.7 Primary balance 0.7 0.0 0.7 1.4 1.9 2.0 Source: Staff estimates 10 Guinea MOBILIZATION OF TAXES AND DUTIES 1.18 Guinea's revenue mobilization performance fails to match its potential. In Figure 1.1: Tax Revenue and Terms of the last decade, the ratio of tax revenue to Trade (1998-2002) GDP remained at an average level o f 11.4 I 140 1 percent, reflecting falling mining revenues due to lower world prices for bauxite (Figure 1.1 and Table 1.5). Mining revenues fell i from 10.6 percent of GDP in 1990 to a mere 2.4 percent in 2002. Direct and petroleum taxes also performed poorly. Some 20 40 improvement has been achieved in indirect 0 1 taxation, with the VAT contributing an 1998 1999 2000 2001 2002 additional 5 percent to total revenue and ...-..Tax revenue +,TOT grants. Table 1.5: Tax Structure, in percent of GDP, 1996-2002 1996 1997 1998 1999 2000 2001 2002 Revenueand grants 13.4 14.8 13.9 13.1 13.4 15.0 16.3 Revenue 10.3 11.5 11.0 10.8 11.1 11.5 12.6 O/w: Miningrevenue 2.7 3.0 2.9 2.4 2.7 2.9 2.4 Non-miningrevenue 7.5 8.5 8.2 8.3 8.3 8.7 10.1 Directtaxes 1.7 1.7 1.6 1.2 1.1 1.3 1.6 Indirecttaxes 3.5 3.9 4.0 4.8 4.0 4.3 5.1 O/w: Value-addedtax (VAT)* _ _ _ _ 2.2 2.1 2.2 2.7 3.0 O h : petroleum taxes 1.7 1.5 1.5 1.5 0.9 1.2 1.3 Taxes on internationaltrade 1.6 2.1 1.8 1.7 2.2 2.0 2.3 Nontax revenue 0.6 0.8 0.7 0.7 1.0 1.1 1.1 Grants 3.2 3.3 2.9 2.3 2.3 3.5 3.7 Source:Secretary of Planning, December 2002. Note: The VAT, introduced inAugust 1996, replacedthe turnover tax. 1.19 Urgent rationalization of the tax system, with the application of sanctions and penalties, is essential to improving fiscal revenues. In2002, at least 14 different taxes were levied on income andprofits, 11 on property, 4 on goods and services, and 15 on international trade transactions, each with its own specific regulations. This cumbersome regime favors tax evasion and fraud. Reformhas beenunderway since 1991, but the agenda remains largely unaddressed except for the introduction of the new tax code and the adoption of the VAT in 1996. The latter brought Guinea into line with the CFA countries of the sub region where VAT was introduced in 1994 following the devaluation of the CFA franc. Implementing the VAT remains a difficult exercise because the informal sector i s large and elusive, and the tax administration i s poor. The latter can be attributed to a combination of poor supervision, a lack o f performance incentives andtraining, and inadequate informationtechnology and transport. 1-20 Tax exemptions severely limit Guinea's revenue collection performance. As of 2000, the most significant exemptions have relatedto mining, the investment code, and Public Expenditure review 11 grants (Table 1.6)6. In 2001, exemptions to import duties alone exceeded the duties collected, and 50 percent o f all categories o f imports were exempted from tax. The real value o f exemptions may be higher than actually recorded since many o f them have been granted informally over the years to individual traders, either as a favor or on a rent- seeking basis. Given the implicit favoritism o f the current exemptions, a simpler, more transparent import duty regime, competitive with those o f neighboring countries, would surely prove more attractive to investors. Table 1.6: Exempted Import Dutiesby Regime, inpercentof GDP, 1997-2002 1997 1998 1999 2000 2001 2002 Total ExemptedImport Duties 3.1 0.9 3.7 1.5 2.8 2.I InvestmentLaw Provisions 0.5 0.6 0.4 0.3 0.4 0.3 Mining Law Provisions 0.0 0.0 0.0 0.6 1.3 0.7 Diplomaticmissionsand int`l organizations 0.2 0.0 0.1 0.0 0.1 0.0 InternationalAid 0.7 0.0 0.6 0.1 0.2 0.1 InternationalAgreements 1.4 0.2 0.8 0.1 0.0 0.2 NGO 0.0 0.0 0.0 0.0 0.0 0.0 Other 8.8 0.5 1.7 0.3 0.7 0.6 Memo item Total Import Duties 2.0 1.a 1.6 2.1 1.9 2.2 Source: Guinean authoritiesand Bank staff estimates 1.21 There are few formal incentivesfor tax officials strictly to apply the tax code, Following the model o f the French Treasury, other Francophone countries in the region reserve a "quote part," or share o f 3 to 5 percent o f the proceeds o f specific taxes to be retained by the collecting department which then distributes them as bonuses to individual tax officers on the basis o f their performance. Guinea should consider implementing this approach, which is well documented in terms o f systems and procedures. Alternatively, it may wish to explore the efficiencies which could result from entrustingtax collection to an independent autonomous agency. 1.22 The goal is to channel more of the tax proceeds to local authorities. Despite the low level of revenues, Guinea has already begun to restitute tax proceeds to local communities in support o f the decentralization o f government and services and local development priorities, sending a positive message. The overall tax product i s still small, representing 0.12 percent o f GDP (1.3 1percent o f fiscal revenues) in2002, up from 0.05 percent o f GDP (0.69 percent o f fiscal revenues). This doubling o f the effort indicates seriousness o f intent. The local development tax has been repatriated in full since 1995. The vehicle tax was first returned to communities in 2001 at the rate o f 30 percent and reached 50 percent in 2002, while the tax on services has been returning 80 percent to rural areas. in full to rural areas since 2001. Finally, 80 percent o f the product o f the property tax is being repatriated to the rural communities. This i s potentially the most While mining accountedfor 16 percentof GDP and 80 percentoftotal exports, the sector delivered only two percentoftax revenues oftotal exports in2002. 12 Guinea fruitful tax butthere is the danger of inequity ifproperty taxes become too great a factor in local financing since the value o f real estate property varies considerably between urban and peri-urban areas (where construction i s modern) and rural areas (here construction may be o f more primitive materials such as "banco"). Similarly, the vehicle tax could be a disincentive to the modernization o f agriculture if motor cycle powered light trucks and small, walk behind motorized plows/tillers are classified as motor vehicles. The product and socio-economic impact o f current taxes, as well as alternatives, should be evaluated to ensure that this important reform has maximum impact on development at the community level. 1.23 Failure to increase revenues will pose serious risk to macroeconomic and fiscal sustainability, and risks undermining the poverty reduction strategy. Rigorous pursuit o f customs reform is essential to improving revenues. A high priority is the rationalization o f the current tax exemption regime that favors the mining sector and certain key importers conspicuously and excessively. The current cost o f these exemptions in terms o f lost revenue i s estimated to be 20 percent o f total revenue or about 3 percent o f GDP. 1.24 Current revenue from taxes and duties falls short of potential. The public sector's role will be to mobilize sufficient revenues to finance spending for the high priority sectors through the medium-term. Guinea's current revenueperformance falls far short o f potential and compares poorly with countries o f the same or lower development levels (Table 1.7). Given that tax targets have generally been met suggests strongly that better performance in tax collection i s possible. However, it will be important to ensure that the level o ftaxes and duties and the procedures for their collection do not constitute a disincentive to investors. Clearly, government will have to walk a fine line in mining, balancing potential revenues against the incentives that are necessary for Guinea to compete with other countries, notably with regardto bauxite and its derivative products. Table 1.7: Tax Revenue Structure in Selected Countries, inpercent of GDP(average 1999-2001) - Fiscal Revenue I/ IaxK8vi5fm Total of which, Other revenue Per capita GDP Total Revenue Directtaxes lnderect taxes Trade taxes 21 (US dollar) (In percent of GDP, unless otherme noted) Guinea(in 2001) 148 113 1 2 4 8 5 3 3 5 414 PRGF Sub-SaharanAfrican Countries 17.6 13.7 3.9 5.5 4.6 3.9 323 Of Which: selected COUfltrieS Cameroun 17.8 12.2 3.3 6.5 2.5 5.6 570 Mali 14.7 14 2.6 5 5.4 0.7 210 Senegal 17.3 16.8 3.6 6.6 6.5 0.5 454 Zimbabwe 28.1 26.3 16 10 4 1.8 665 PRGFAsian countries 16.2 12.8 3.1 7.3 2.3 3.4 427 of which: selected countries Vietnam 20.6 15.6 5.5 6.3 3.4 5 410 Mongolia31 28.5 20.8 5.3 13.4 2.1 7.7 400 Source:IMFstaffcounny reports and Staffesfimates .'Damrefirnontax " lo average of I999-200l Includes ond capitalrevenue Orher revenues includesonlynonlat Public Expenditure review 13 CONCLUSION 1.25 Guinea must take urgent measures to restoremacroeconomic stability if the Poverty ReductionStrategy is to be implemented.Fiscal sustainability will depend on government's effectiveness in managing public expenditures, implementing expenditure controls, notably for defense, security, wages and the central administration, which would permit the transfer of resources from the less productive sectors, departments and services to those o f highpriority. The defense and security expenditure overruns o f 2002 and 2003 are a warning. government was forced to make adjustments that crowded out key recurrent expenditures for the priority social services which are already seriously under funded. As the economic program veered off track, donor confidence weakened and external aid flows dried up, forcing government to resort to domestic bank credit, fueling inflation and constrainingprivate sector development. The consequence has been serious weakening o f the PRS. Preliminary results from the household survey (CWIQ) suggest that the citizens are feeling the impact o f the crisis on their incomes and on the delivery o f education and health services. Guinea faces significant challenges in maintaining fiscal sustainability in the medium-term. Slow economic growth, due to unfavorable terms of trade, i s a continuing risk given the dependence o f the economy on mineral exports. In the medium-term, enhanced growth will hinge on diversification of the sources o f growth and on the successful implementation o f reforms inthe electricity, water and telecommunications sectors (notably the privatization o f the management o f power and water), in governance and in terms o f improving the framework for private sector development. Finally, failure to raise adequate revenues would leave government with only two options: cut public expenditures or resort again to domestic bank financing, continuing the vicious circle o f inflation, low growth and poverty. Decisive action i s required to restore macroeconomic stability through better control o f defense and security expenditures, containment o fthe wage bill and improvedrevenuemobilization. Recommendations A. MacroeconomicStability Implementurgentmeasuresto restore macroeconomic stability and donor confidence, paving the way for re-allocation o f domestic funds from low to high priority sectors, new aid flows and successful implementation o fthe PRSP. Set ceilings for defense and security spending, modifying the 2004 budget. Integrate defense and security into the MTEF programming and budgetingprocess. Develop procedures for reviewing and expediting emergency budget requests in the sector which respect national security. Initiate an expenditure review o fthe sector and measures to make procurement more efficient. 14 Guinea B. RevenueMobilization Review and modernize the tax regime and collection procedures to maximize revenuepotential. Review import duties and current exemptions, eliminating illegal or unwarranted exemptions. Introduce meaningful sanctions for non-compliance. Take measures to strengthen collection o f taxes and duties, including structured incentives for tax officials and customs agents, with exploration o f alternative collection mechanisms. Set quarterly targets for each category o f revenue collection, taking corrective action when the targets are not beingmet. Review taxes which are repatriated to local communities, assessingtheir potential andthat o fother revenue measures. Assess the arrangements at the local level for allocation and management o f tax funds. Public Expenditure review 15 2. POVERTYREDUCTIONTHROUGH ACCELERATEDGROWTH This chapter examines the current status of poverty and assesses the impact of medium and long-term macroeconomic policies on poverty at the household level. It also reviews the past structure and determinants of growth, identijjing opportunities for accelerating growth in the medium-term. INTRODUCTION 2.1 Poverty reduction through the financing of the priority sectors (education, health, rural development) cannot be sustained unless Guinea achieves accelerated economic growth. Growth will depend on restoring good macroeconomic management, improving basic infrastructure, enhancing financial intermediation, forcefully addressing governance issues, and implementing structural and institutional reforms to attract investments and foster a viable formal private sector, making a commitment to trade liberalization and privatization. In the short-term, both the political situation (pending presidential elections) and security conditions (incursions fkom Liberia and skirmishes on the frontier with Cote d'Ivoire) risk discouraging investment. 2.2 Growth has been slow. Guinea's real gross domestic product (GDP) grew at an average rate o f 4 percent per year duringthe past decade, constrained by the failure to re- structure the public sector and to unlock Guinea's full economic potential. Barriers to private sector led growth continue to include weak governance and corruption. Slow growth has meantthat Guinea has only beenable to mobilize some 12 percent o f its GDP infiscal revenues, limiting its capacity to finance the highpriority sectors which impact most on poverty. 2.3 In order to lay the foundations for growth, the economy must be diversified, to offset dependence on bauxite revenues, vulnerable to changes in the terms of trade. Diversification will depend on targeting spending over the medium-term on telecommunications and ports - in order to stimulate broad-based, private sector growth, agriculture, fisheries, livestock and transport, as well as on infrastructure - power, water, centered on exports. Investment in agriculture, the main source of employment o f the poor in rural areas, can have a decisive impact on poverty reduction. Attracting foreign direct investment in a vertically integrated mining sector, which emphasizes domestic value-added, can increase mining revenues while reducing their vulnerability to external shocks. 16 Guinea POVERTY AND GROWTH 2.4 Achieving the Millennium Development Goals (MDGs) will depend on sustained financing o f the priority sectors through the promotion o f economic growth. The PRSP provides a sound framework for the implementation o f poverty reduction strategies and for the coordination o f donor assistance. Its main strengths are: the quality o f the participatory process, leading to full ownership by the citizens and its comprehensiveness, notably investment in the priority sectors together with the creation o f jobs and increase in income through a more diversified, private sector led economy. However, implementing the strategy will require progress on three fronts: (i) strong and sustainable economic growth to increase revenues and finance the high priority sectors; (ii) incomes,particularlyinruralareas,toimprovethequalityoflife(cleanwater, raising education, health care); and (iii) developingthe institutional and human capacity, withthe promotion o f sound governance, required for the efficient and effective management of public expenditure. 2.5 There is still a long way to go toward achieving the MDGs. In particular, Guinea must attain better coverage in primary education and health care through the provision o f more and better deployed teachers and health workers, essential inputs such as books, school materials, medicines and vaccine, as well as physical facilities. There are few economies possible, since staffing ratios and utilization rates for facilities are inflexible and the provision o f inputs increases pari passu with pupils and patients, if minimumnorms are to berespected. Table 2.1: MDGs and PRSPTargets MDGs Guinea PRSPtarget Cut in half between 1990 and 2015 the While Guinea's objective to reducepoverty by 25 percentby 2010 proportion of people whose income is less is less ambitious than that o f the MDG (50 percent), attaining it than one dollar per day. will entail higher economic growth. Ensure that all children will be able to With only 40 percent of school age children currently completing complete a full course of primary primary school, reaching the MDGs in education, including schooling by 2015. enrolment of all children in grade one by 2005, will require significant outlays for teachers and no-salary recurrent expenditures, as well as significantly improved performance in classroomconstruction. End gender disparity in primary and According to UNDP estimates, Guinea is likely to reach the secondary education, by 2005, and in all objectives on gender equality and empowerment of women (Gross levels of educationnot later than 2015. enrolment in primary school is currently 70 percentand 63 percent for girls). Reduce the under five mortality rate by IfGuineaisto reachachild mortality rateof 40 by 2015, this will two thirds. between 1990and 2015. reauire considerableinvestment inmimarv health care. Reduce the maternal mortality rate by three quarters, between 1990and 2015. Halt the spread of HIV/AIDS by 2015 and Guinea has stepped up the fight against HIV/AIDS and may begin to reverse the incidence of infection. eventually be able to keep prevalence below 5 percent, if preventive education is extendedto rural women and maintained at ahighlevel for the rest ofthe poDulation. includingchildren 12+ . Cut in half between 1990 and 2015 the Access to drinking water has improved due to a major effort to proportion of people without sustainable provide water to rural areas. Guinea can achieve the MDG if the access to safe drinking water. current level o f investment is maintained. ource: CAS 2003 Public Expenditure review 17 2.6 Access to education has improved markedly during the past ten years, but issues o f equity inaccess and quality still needto be addressed. Guineahas experienced average enrolment growth rates of 10 percent per year (12 percent for girls) during the 1990s, resulting in significant improvements in girls' schooling, survival, and literacy rates. Learning outcomes in both French and math have also improved during the past five years. Nevertheless, Guinea needs to address serious disparities and management issues inthe sector inorder to meetthe MDGofhaving all childrencompleteprimary schoolby 2015. 2.7 Guinea has made progress towards achieving the MDGs for health, but much more needs to be done. Since adopting the Bamako Initiativeandreorganizing its health system in 1991, Guinea has significantly reducedinfant and under-five mortality and maternal mortality, especially in the rural areas. Guinea has also increased immunization coverage against measles from 35 percent in 1990 to 52 percent in 2001, and improved access of women to prenatal care from 57 to 65 percent of pregnant women. 2.8 Achieving the MDG relative HIV/AIDS will require continued strong financial support in order to deepen preventive measures. HIV/AIDS prevalence is rising in Guinea. According to a July 2001 survey, HIV/AIDS prevalence among pregnant women had reached4.4 percent inurbanareas (5 percent inConakry). The war- affected regions show an even higher prevalence rate of 7 percent. The gender ratio of HIV/AIDS infected patients has shifted from eight men to one woman in 1989 to two women for one man in 2001. Preventive measures will have to be deepened, including HIV/AIDS education beginning inthe late primary grades, and extended to reach more rural women, while continuing to address high risk groups. 2.9 Achievingthe MDG for clean water supply now seems possible. Itwill require maintaining the current pace o f bore hole provisionat 350-400 per year, with measures to improve waste water management, financed by HIPC resources. 2.10 Poverty Reduction. The incidence of poverty in Guinea remains high, 40 percent of the population, and has slightly changed over the last decade. Guinea ranked 157 out of 175 countries listed inthe UNDP's 2003 HumanDevelopment Report, only marginally better than its 1994 ranking when it was 161 out of 174 countries. Although some poverty indicators, such as gross enrollment and infant mortality rates, have improved in recent years, per capita gross national income has recently declined, from US$450 in 2000 to US$410 in2002 (World Bank Atlas method). This trend, if not reversed, clearly risks underminingthe relative gains inthe social welfare indices, 2.1 1 Povertyvaries considerablyby region. Haute GuinCe, a vast, dry savannahwith only a few isolated mines, is the poorest; 60 percent o f its population lives below the poverty line. Next ranked are Moyenne Guinea and GuinCe Foresti&re where, respectively, 50 percent and 40 percent of the population are included amongst the poor. Both regions, which have borders with Sierra Leone, Liberia and Cote d'Ivoire, have been affected negatively by security problems and the influx of refugees. The instability began in 1991, with half a million refugees fleeing Liberia's Nimba County, and has 18 Guinea continued with incursions through 2002, with negative growth that year inthe rural areas fronting the Liberian border. Both regions continue to be hampered by inadequate infrastructure and roads, although thejourney from Conakry to Nzerekore (700 kms.) no longer takes two to three days as it did in 1996. Basse Guinea has the least number of poor, 30 percent. It also has good roads, notably the ConakryKamsarKindiaandFaranah axes that favor domestic commerce. 2.12 Farmers and their families are the worst off. They account for 68 percent of the poor, although they make up just 50 percent of the population. Growth in the agriculture sector is key to improving the incomes of farm families. It will require investmentinagricultural extension andresearchinsupport of crop diversification, better access to factor inputs (seeds, fertilizers, tools and mechanization) through the private sector, improved access to markets through the construction and maintenance of feeder roads and through improved delivery of the key services--health, education and clean water--that enhance the quality of life and increasehumanproductivity. 2.13 Impact of growth on poverty. Typically, one percentage point of growth can result in increases inhousehold income ranging from a modest 0.6 percent to a robust 3.5 percent (Ravallion, 2001) with income inequality between groups acting such as to reduce the impact of growth on incomes (poverty ela~ticity).~ the case of Guinea, the In two figures (2.1 and 2.2) below illustrate the respective impact of a 5.6 percent growth rate (optimistic scenario) and a continuation of the average 4 percent growth of the last decade, under four separate assumptions about poverty elasticity: a low -0.93 percent; the actual 1988-96 average of -1.10; a high rate of -1.24 percent; and, fourthly a rate double that of the 1988-96average, -2.20 percent. Under the higher growth rate, an elasticity of - 2.20 results in a poverty incidence of about 17 percent whereas 25 percent results under the lower growth rate. 'Traditionally,the inequality is considered to be high when the Gini coefficient measures 60 percent, and to be low when it stands at 30 percent. Guinea's Gini coefficient stands at 40%. Public Expenditure review 19 Figure 2.1: I m p a c t o f g r o w t h on poverty with relative optimistic growth rates 40 3 5 Incid. ence 30 o f poverty 2 5 20 1 9 9 5 2000 2005 2010 --- elasticity = ~ - - - _- ppoverty eiaslicity = o v e r t y -0.93 -poverty elasticity = elasticity = -1 10 -1 24 - - - W C p o v e r t y -2.20 Figure 2.2: I m p a c t o f growth on poverty w i t h less optimistic growth rates 40 35 Incid- 30 ence o f 25 poverty20 1 5 ! , , , , , , , , # , , , , , I 1995 2000 2005 2010 elasticity = ~ ~. - ~ - ppoverty elasticity = o v e r t ye l a ~ t i c i t y= --1 9 3 0 -poverty elasticity = -1 10 24 -poverty - 2 20 POVERTY IMPACT ANALYSIS' 2.14 The 1-2-3 PRSP general equilibrium model is used to analyze the macro and micro impact of implementing key policy issues identified by the public expenditure re vie^.^ The analysis examines: (i) income and expenditure structure the of households; (ii)the impactofshort andmedium-termstructural policies onpoverty; and(iii)the effect of long-term macroeconomic policies on households. Due to the lack of recent household data, the 1994 survey data (EIBC) has been used. The assumption is that although the level of income and expenditure could have changed, their structure is not likely to have varied significantly since 19941°. This report is based on the data of the 1994 integrated household survey (Enquete Integree Budget Consommation, EIBC aupres des menages). The second EIBC is currently being carried out and the results are not expected before early 2004. The 1-2-3 PRSP is a quantitative framework developed by the Bank to evaluate macroeconomic aspects of the PRSPs. This model has been used for Senegal (CEM, 2003) and Zambia (Zambia PER, 2001). A description ofthe models can be found in Devarajan and Go (1998 and 2002), Devarajan et a1(1993,1999) and Ginsburg and Keyzer (1997). loAccording to the 1994 survey, poverty stoodat 40 percentofthe population. I 20 Guinea 2.15 Household Income and Expenditure Table 2.2: Income & Expenditure Distribution Structure. Poor households earn most of their income from domestic profits (91 percent of Deciles PiD PIE W Exp MExpD 1 99% 1% 0% 23% 77% their total income) while richhouseholds rely on 2 94% 5% 1% 24% 76% both domestic profit income (54%) and wages 3 91% 6% 3% 26% 74% (42%). Most households are involved in small- 4 81% 6% 13% 28% 72% scale trade and agricultural activities and own 5 74% 4% 22% 28% 72% their dwelling (the imputedrent o f the latter is 6 53% 2% 45% 29% 71% included as income). The low level o f education 7 47% 1% 52% 30% 70% o f the poor prevents them from entering wage- 8 53% 1% 46% 30% 70% earningjobs inthe public andprivate sectors. 9 48% 1% 51% 31% 69% 10 51% 13% 36% 30% 70% 2.16 On the expenditure side, poor and Poor(1 to4) rich households target, respectively, 75 and 91% 4% 4% 25% 75% Rich(5 to6) 54% 4% 42% 30% 70% 70 percent of their spending on domestic Source Staff estimates goods and services. Agriculture, fisheries, trade PiD: Domestic Profit Income and crafts are the main suppliers o f domestic PiE: ExternalProfit Income W: Wages goods and services. The remaining 30 percent o f Exp M:Import-relatedExpenditures spendingrelates to imported goods and services. Exp D: Domestic Expenditures 2.17 The impact of selected mediumand long-termstructuraland macroeconomic policieson poverty.Guinea is implementingan actionplanto improve domestic revenue collection. Additional revenues together with any proceeds from public enterprise divestiture would permit an increase in the level o f public spending for priority social sectors in the medium-term. This will depend on successful implementation o f customs reform, reducing excessive and illegal import duty exemptions, as well as on measures aimedat broadening the tax base and at improving the collection o f VAT inthe informal sector. Some progress has been made: a single customs clearance procedure has been introduced and a uniform taxpayer database established (2003). Guinea has also launched a trade liberalization program aiming at integrating the country with the WAEMU. Inthe medium-term the program is expected to improve the terms of trade o f goods and services (excluding bauxite) between Guinea and the West Africa region. O n the macroeconomic front, Guinea should aim at keeping inflation under control and stabilizing the exchange regime so as to prepare for entry to the second monetary zone (SMZ) o f the ECOWAS and for meeting the MDGsby 2005 and 2015, respectively." Scenario 1: Changesin terms of trade and GovernmentExpenditure 2.18 One percentagepoint increase in government spendingand a similar gain in terms of trade would tend to increase real output by about 1percentagepoint, and the medium-term, respectively. The estimated coefficients o f the trivariate - GDP, increasethe income and expenditure of the poor by 7 and 5 percentagepoints over The macroeconomicconditions of the creation of a single currency inWest Africa are the following: (i) GDP; (ii)Central Bank financing ofthe budget should be Attachment: Adopted plan o f action 8 .3 v1 P T N r I d s L 0 B 0 N $ B828 P rt3 n f VI 138 Guinea FINAL STATEMENTOF THE WORKSHOPFORTHE ENDORSEMENTOF THE PUBLIC EXPENDITUREAND FINANCIAL ACCOUNTABILITYREVIEW THE WORKSHOP WAS HELD ON MAY19-20, 2004 IN CONAKRY, GUINEA, IN THE NOVOTELCONFERENCE CENTER. The opening ceremony was attended by many prominent persons and officials, , includingthe followingmembersofthe Government: Mr. Madikaba CAMARA, Minister of Economic and Financial Affairs, Honorary Chairman ofthe Opening Ceremony; Mr. KBmo Charles ZoglClBmou, Minister of the Presidency responsible for Economic and FinancialInspection; Mr.GalBmaGUILAVOGUI, MinisterofPre-UniversityEducation; Mr.IbrahimaSOUMAH,MinisterofTechnicalEducationandVocationalTraining; Ms. Hadja Mariama ARIBOT, Minister for Social Affairs, Women's Promotion, and Childhood; Mr.ElHadjCellouDaleinDIALLO, MinisterofFishingandAquaculture; Mr.EugeneCAMARA,MinisterofPlanning; Mr.AlphaIbrahimaKEYRA, Ministerof EmploymentandCivil Service; Mr.ELHadjFodBSOUMAH, MinisterofYouth, SportsandCulture; Ms.HadjaKoumbaDIAKITE, MinisterofTourism, HotelsandArtisanActivities; Dr. DjBnB Saran CAMARA, Minister of Trade, Industry, and Small and Medium Sized Enterprises;and Mr. Alkaly Mohamed DAFFE, Governor of the Central Bank of the Republic of Guinea (BCRG). The workshop was also attended by representatives of the development partners (IMF, World Bank, European Union, French Agency for Development (AFD), African Development Bank (ADB), GermanDevelopment Bank (KFW), WHO, FAO, and UNDP) and the members of the IMF/WB/AfricanDevelopmentBankJoint Mission. Of the 232 workshop participants, 180 were official guests. They includedexperts ofthe World Bank and other donors, and officials of the central and decentralized units of Finance, Planning, Education, Health, Rural Development, Civil Service, Public Works, and Territorial Administration. 1'Ecole" - the "Friends o f Education" - and NGOs) together with the specialists of the PER task Representatives of civil society organizations (Parenthtudent Associations, "Amis de force also participatedinworkshop proceedings. Six workinggroups were set upwithin the workshop to discuss issues relatedto the macroeconomicframeworkandthe budgetcycle, financial accountabilityassessment,civil service, andthe education, health, andruraldevelopment sectors. Public Exuenditure Review 139 Each group examinedthe recommendationsof the PERI1reportrelativeto its particular domain.proposedmeasures,identifiedthe responsiblegovernment unitsandestablished timetables for implementingthe measures. PlenaryMeeting The plenary meeting was chaired by Mr. Alpha Ousmane DIALLO, PER I1National Committee Coordinator, and Mr. Ezzeddine LARBI, Senior Economist of the World Bank for Guinea. The discussions were followed by the adoption of the PER I1 report, and the main recommendationsare listedbelow: I. THE MACROECONOMIC FRAMEWORK, BUDGETARY SUSTAINABILITY and POVERTY REDUCTION * Bringing inflation under control * Broadening the tax base by promoting theformalization of the informal sector through the replacementof the currentflat-rate system with aself-assessment system * Implementing sectol policies aimed at boosting private sector growth by improving the business environment * Diversifiingproduction through an increase of value added in the mining sector and export- orientedproduct-differentiation in agriculture * Cutting down on unbudgeted expenditure, setting ceilings on security and defense spending, and establishingmore transparentreviewprocedures 11. FINANCIAL ACCOUNTABILITY ASSESSMENT: * Holding statutory meetings tojustifL the end-use of funds * Prioritizingthejght against corruption inpublicfunds management * Minimizing expenditure incurred under emergencyprocedures * Checkingand reducingtax exemptions * Building the capacities of public audit bodies. 111. CIVIL SERVICE: * Strengtheningamlining the management of civil service andpayrolljles * Strengthening the management of contract employees * Establishinga system of results-basedpersonnel management, conducive to thepromotion of women 140 Guinea * Setting up a socialprotection mechanism * Formulating a nationalpolicy of initial and advancedtrainingfor civil servants IV. EDUCATION: * Enhancing the relevance and quality of educationprograms ** Raising education standards Improving the availability of school textbooksand teachingmaterials * Reducinggrade repetition and dropping out of school * Strengthening budgetary decentralization and monitoring public expenditure with a view to greater efJiciency V. HEALTH: * Raising the health sector'sshare of the State3 budget to the average of the sub region * Redeployinghealth staff as needed * Building the capacitiesof local management committeesfor better health-care quality control * Promoting health insurance benefit societies through the negotiation of contracts between group-health associationsand healthserviceproviders * Improving access to qualified healthpersonnel * Correcting imbalancesin regional budget allocations * Improving access to generic drugs * Reducingexpendituresfor central administrative staff andfor tertiary services VI. RURALDEVELOPMENT: * Restructuring the Ministry of Agriculture andAnimal Husbandry * Building capacity in research and extension * Increasing public and private investment to assist in diversi$cation toward potential high gwoth sub sectors * Promoting "ownership" of reforms and better accounting of the utilization of externally funded resources * Ensuring the evaluation of theperformance of the research and extensionservices by the beneficiaries Public Expenditure Review 141 ANNEXES 142 Guinea ANNEX 1.1:FISCAL SOLVENCY AND SUSTAINABILITY34 FiscalSolvency The concept of public sector's solvency can be derived from the definition that, as an entity, it has to satisfy the inter-temporal budget constraint: (1) lI s* exp.(g - r) dt = B/Y where, s* is primary balance in period t expressed in proportion o f output, r is the discount rate, g is the output growth rate, B i s the initial level o f public debt, and Y is output (GDP). Solving for s* yields: (2) s* =B/Y(r - g) Equation (2) states that for a net debtor country, i.e. B/Y>O, a primary budget surplus is required to attain fiscal solvency since the real rate o f interest exceeds output growth, i.e., (r - g) > 0. In addition, the higher the level o f indebtedness, the higher the level o f primary surplus to be generated, assuming constant r and g. In 2001 for example, with an external debt reaching 93.5 percent o f GDP, a real GDP growth rating o f 3.8 percent, and average commercial interest reference (discount) rates fluctuated around 5 percent, Guinea needed to generate at least 3.7 percent o f GDP in primary balance, to be solvent (Table 1). The actual primary balance stood however, at 0.7 percent o f GDP in 2001. The difference between s* and the actual primary deficit measures how far additional fiscal efforts need to be undertaken to restore solvency to the public sector and is referred to as fiscal solvency-adjustment. A positive number indicates that fiscal adjustment to restore solvency i s needed while a negative number implies that no adjustment i s needed. For example, Guinea's fiscal solvency adjustment should have been at least 4.4 percent o f GDP in 2001. In a dynamic context, what matters, however, is not whether the public sector is solvent, but whether the current fiscal stance would move the country away from or closer to solvency and fiscal sustainability. FiscalSustainability The notion o f fiscal solvency requires knowledge o f the long-run variables - real interest and real GDP growth rates. Both are not directly observable and have to be approximated. Alternatively, one might observe fiscal sustainability, under a one-period budget constraint, to make inferences about solvency in the future. Thus, once defined as one-period condition for ensuringfuture solvency can be assured in the future, fiscal sustainability can be derived from an instantaneous view o f the budget constraint. In other words, sustainability o f the 34 Sources: Agenor, P-R, The Economics of Adjustment and Growth" Academic Press, 2000; W. Easterly, W., " Rodriguez C.A, and Schmidt-Hebbel, K., "Public Sector Deficits and MacroeconomicPerformance," 1994,The World Bank. Public Expenditure Review 143 public sector's fiscal stance can be evaluated by comparing the present value of the contractual debt service to the present value of its anticipated future revenues, net of expenditures. Ifthe discounted net revenues exceed the discounted contractual debt service flow, the government'sfiscal stance is saidto be sustainable. Ifoneconsidersthe government's budgetconstraint: (3) G -T iEB i*E (I-p)B* = AB +EAB*(l-p) A M + + + G =totalgovernmentexpenditures, net ofinterestpayments, T =totalgovernmenttax revenues i,i* =domestic andexternal(concessional) interestrate B, B* =domestic andexternaldebt (bothare indexedto the USdollar) E =nominalexchangerate (GNFLJSD) M =the monetary base c1 =proportionforeigngrants inthe budget. The fiscal deficit, consistingofthe primarydeficit (D=G - T), plus interestpayments onthe public debt, is equal to the sum of changes in the public debt (domestic and external) and in the monetarybase (y). Expressingequation(3) in real terms by dividing by P, definingd=(G-T)/P, m=M/P, b=B/P, b*=EB/P, AB/P=Ab +bn, EAB*/P=Ab* - b*(C - x),assumingthat m grows at a constant rate of the output growth, g, andrearrangingyields, we obtain: (4) d+ ib -bx (i*n* + e)(l-p)b* =Ab + (1-p)Ab* +m (n +g) + - Usingthe quantitytheory o fmoney formulaMV=PY, it followsthat m/Y=l/v and expressing all the variables interms o f outputgives: (5) d/y rb/y + (r* + C)(l-p)b*/y = Ab/y + (1-p) Ab*/y + l/v (x +g) + where r*=i*- x* Definingb/y =13, b*/z=D* impliesthat Ab/y =A 13 + Dgand Ab*/z =A D* + z; where g and are the growthratesofy andz respectively. Expressingforeign in terms of output, Ab*/y = dy (AB* + D*i) and substituting in equation (5) yields (6) d/y=AR+D(g-r)+(l-p)dyAD* +(l-p)dyD*(z-r* -e)+ l/v(x+g) Equation 6 is a snapshot o f the government budget constraint, highlighting its major determinants:the existing stock of domestic and foreign debt 13 and 13*; real interest and growth rates, r and g; the proportionof exports in national output dy; export growth z; real internationalinterest rate r*; real exchange rate change C; and the inverse of the velocity of money demandm/y and inflationrate x. Settingthe conditionfor public sector sustainabilityas one with A D=A13*=0, 144 Guinea or (7) d/y = I3 (g -r) +(l-p)z/y 13*(z- r* - C) + l/v (n+g) shows that there are three possible sources o f financing the primary fiscal deficit in a sustainable way. First, the government can rely on domestic borrowing if output growth i s greater than the interest rate on domestic debt. Second, external borrowing can be envisaged when export growth is higher than international interest rates, plus currency depreciation. Finally, the government can finance its deficit by money creation if it is consistent with seignorage. Because equation 7 relates to a one-period budget constraint, it also shows the liquidity constraint o fthe public sector. Defining s** =-d/y as the primary surplus (in percent o f output) needed to achieve debt sustainability for the public sector. (8) s** = I3 (r g) +(l-p) z/y B*(r* - + Q -2) - l/v (n; +g) Equation 8 represents the necessary and sufficient condition for debt sustainability o f the public sector. To assess fiscal policy performance, the above formulation o f the sustainable level o fprimary surplus, s**, needs to be compared to the actual fiscal deficit. The difference between the sustainable primary balance and the actual primary balance represents fiscal sustainability adjustment. A positive number indicates the need for fiscal adjustment and a negative number indicates no adjustment is required as far as fiscal sustainability is concerned. The evolution o f this number i s important from a policy standpoint because its indicates whether the existing fiscal stance would drive the country away or towards sustainability. In the case o f Guinea, both the solvency and sustainability analysis will be conducted only on the central government because o f data limitation on other parts o f the public sector (states-owned enterprises, parastatals, government agencies...). Inconclusion, Equation (8) shows clearly that, in the case o f Guinea, domestic debt would not be a sustainable option given that real domestic interest rates are higher than real growth rate. Foreign debt would be an efficient way o f financing the deficit since the real export growth exceeds slightly the real (concessional) interest rates at which Guinea contracts its debts had the level o f the outstanding level (92.3 percent o f GDP) was not too high.The third source o f financing, money creation, may be costly given the risks of inflation that it could generate. Consequently, the government o f Guinea's best options would be to mobilize sufficient internal resources or if not possible, it should contain the level o f its non- productive expenditures (wages, administration, security) to its available revenues. Recent economic developments in Guinea suggest that the trends in stock o f external debt, economic growth, and domestic inflation will be critical for fiscal sustainability over the medium-term. Three scenarios using these three parameters are presented below to assess fiscal sustainability. A. Macro Instabilitv Scenario: Imprudent fiscal policy has led to two-digit inflation in 2003 for the first time in almost a decade, Ifthis continues and worsens, leading to a hrther deceleration o f economic growth, high inflation rates inthe range o f 15 to 18percent between 2004 and 2006, accumulation o f debt, and currency depreciation, fiscal sustainability would not be possible, without considerable adjustment efforts o f about 2 percent o f GDP in 2004, 2005, and 2006, to restore sustainability. Public Expenditure Review 145 CentralGovernmentSolvency and Sustainability (inpercentofGDPunless otherwise indicated) 1.1 Macro instability scenario 2001 2002 2003 2004 2005 2006 b (domestic debt in % of GDP) 0.045 0,069 0.072 0.075 0.062 0.050 r (real domesticinterest rate) 0.102 0.071 0.060 0.048 0.053 0.058 g (real GDP growth) 0,038 0,042 0.021 0.018 0.015 0,015 b(r-g) 0.003 0.002 0.003 0.002 0.002 0.002 u (foreign grants in % of GDP) 0.030 0.030 0.030 0.035 0.040 0.042 1-u 0.970 0.970 0.970 0.965 0.960 0.958 zly (export-to-GDP-ratio) 0.270 0.242 0.258 0.265 0.259 0.248 B' (stock of external debt in % of GDP) 0.929 0.851 0.851 0.870 0.890 0.910 R' (real effectiveinterest rate) 0.045 0.045 0.045 0.045 0.045 0.045 e (real exchange ratedepreciation) 0.100 0.150 0.200 0.200 0.200 0.200 z* (real export growth) 0.089 -0.035 0.049 0.043 0.018 0.008 @"+e-z*) 0.056 0.230 0.196 0.202 0.227 0.237 (1-u)z/yb*(r*+e-z) 0.014 0.046 0.042 0.045 0.050 0.051 v (velocity of money) 9.400 9.400 10.000 12.000 13.000 14.000 Ihr 0.106 0.106 0.100 0.083 0.077 0.071 p (domestic inflation) 0.054 0.061 0.135 0.120 0.150 0.180 p (real GDP growth) - . - . 0.038 0.042 0.021 0.018 0.015 0.015 l/v(p+g) 0.010 0.011 0.016 0.012 0.013 0.014 S* (Primary balance for solvency) 0.062 0.026 0.036 0.028 0.036 0.041 sH (Primary balancefor sustainability) 0.007 0.037 0.029 0.036 0.040 0.039 Sources: IMF's BriefArticle IV (2003). EnhancedHlPC Initiative: Preliminarydocument (2001), and Author's estimates and pfojections. g deccelerates, R* is4.5 percent, e depreciates by 20 percent,v increases Macro instabilitvscenario B' increases beginning in 2003 0.929 0.851 0.851 0.870 0.890 0.910 p deteriorates beginning in 2004 0,054 0.061 0.100 0.120 0.150 0.180 s" (Primary balance for sustainability) 0.672 3.697 2.894 3.569 3.992 3.946 Primarysurplus (actual and projected) 0.600 0.000 0.700 1.400 1.900 2.000 Sustainability effort neededifpincreases 0.072 3.697 2.194 2.169 2.092 1.946 B. Macro Stabilitv Scenario: Guinea can still stabilize its macroeconomic environment and create conditions for higher economic growth. The macro stability scenario is basedon growth picking up in2004, and its momentum continuing throughout 2006, reaching 6.1 percent o f real growth in 2006. With a stable macro environment, the country is also expected to benefit from debt relief mechanisms though notably the PIPC initiative. As a result, the external debt-to-GDP ratio is estimated to decrease from almost 93 percent o f GDP in 2001 to 47 percent in 200635.The outcome o fa macro stability scenario is sustainability duringthe period 2004-2006. ''Assuming that, in2005, debt relief under Cologne terms i s granted by Paris Club creditors, with comparable treatment by other bilateral creditors. I46 Guinea CentralGovernmentSolvency and Sustainability (inpercentofGDPunlessotherwiseindicated) 1.1Macro stability scenario 2001 2002 2003 2004 2005 2006 b (domesticdebt in % of GDP) 0.045 0.069 0.072 0.075 0.062 0.050 r (real domestic interest rate) 0.102 0.071 0.060 0.048 0.053 0.058 g (real GDP growth) 0.038 0.042 0.021 0.050 0.057 0.061 bfr-9) 0.003 0.002 0.003 0.000 0.000 0.000 u (foreigngrants in % of GDP) 0.030 0.030 0.030 0.035 0.040 0.042 I-u 0.970 0.970 0.970 0.965 0.960 0.958 z/y (export-to-GDP-ratio) 0.270 0.242 0.258 0.265 0.259 0.248 B* (stock of external debt in % of GDP) , 0.929 0.886 0.794 0.717 0.510 0.468 R* (real effective interest rate) 0.045 0.045 0.045 0.045 0.045 0.045 e (realexchange ratedepreciation) 0.032 0.032 0.050 0.030 0.020 0.020 z* (realexport growth) 0.089 -0.035 0.049 0.073 0.048 0.026 (r*+e-z*) -0.012 0.112 0.046 0.002 0.017 0.039 (I-u)z/y b*(r*+e-z) -0.003 0.023 0.009 0.000 0.002 0.004 v (velocityof money) 9.400 9.000 9.000 8.600 8.600 9.000 l/v 0.106 0.111 0.111 0.116 0.116 0.117 p (domestic inflation) 0.054 0.061 0.135 0.080 0.035 0.035 g (real GDP growth) 0.038 0.042 0.021 0.050 0.057 0.061 I/v(p+gl 0.010 0.011 0.017 0.015 0.011 0.011 S* (Primary balance for solvency) 0.062 0.027 0.034 -0.002 -0.002 -0.002 S- (Primary balance for sustainability) -0.010 0.014 -0.005 -0.015 -0.009 -0.006 Sources: IMF's BriefArticle IV (2003), Enhanced HlPC Initiative:Preliminary document (2001), and Author's estimates and projections. Macro stabilitv S c " 0 B* decreasesas p improves 0.929 0.886 0.794 0.717 0.510 0.468 s** (Primary balance for sustainability) -1.000 1.400 -0.500 -1.500 -0.900 -0.600 Primarysurplus (actualand projected) 0.600 0.000 0.700 1.400 1.900 2.000 Sustainabilityneededeffort ifB* unchanged -7.600 1.400 -1.200 -2.900 -2.800 -2.600 Public Exvenditure Review 147 ANNEX 1.2: EXTERNALAND DOMESTIC DEBT-TO-GDP RATIOS, 2001-2006 Actual Proiected 2001 2002 2003 2004 2005 2006 Debt-to GDP -- External 98 96 86 80 57 52 93 89 79 72 51 47 Domestic 5 7 7 8 6 5 Interest rates -- External 1.1 1.4 1.5 1.6 1.6 1.5 Domestic 10.2 7.1 6.0 4.8 5.3 5.8 Source: Staff estimates 148 Guinea ANNEX 1.3: SELECTED ECONOMIC INDICATORS, 1997-2006 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 ( A m d percentagechange; unlessotherwiseindicated) Inwme GDPat constantprices 5.0 4.8 4.6 1.9 3.8 4.2 3.6 5.0 5.7 6.0 GDP at current prices 7.3 7.1 8.2 13.2 9.0 7.2 8.7 8.7 8.3 8.8 GDPdeflator 1.7 2.2 3.5 11.1 5.0 2.9 4.9 3.5 2.4 2.7 Consumerprices Average 1.9 5.1 4.6 6.8 5.4 3.0 6.2 3.0 3.0 3.0 Endofperiod 5.3 4.5 6.2 7 2 1.1 6.1 5.5 3.0 3.0 3.0 Externalsector Exports, f,o.b. (inU.S.dollarterms) 1.8 3.7 -2.7 4.9 8.4 -3.1 10.8 7.3 4.8 2.6 Imports,f.0.b. (inU.S.dollarterms) -6.9 7.4 -4.1 4.3 -3.7 15.6 5.6 2.2 6.6 7.7 T m of trade Percentagechange 15.4 8.0 -8.5 -7.9 8.0 -5.6 -2.6 4.1 3.5 1.5 Averageeffectiveexchwgerates(depreciation-) Nominalindex -0.6 -6.8 -8.9 -14.0 -6.0 -3.3 ... ... Realindex -0.7 -3.5 -6.0 -10.3 -3.2 -2.3 (InpercentofGDP) Centralgovernment k m c e s Totalrevenueandgrants 14.6 14.1 13.1 13.2 14.7 14.3 16.5 16.4 16.7 16.7 Ofwhich: nonminingrevenue 8,5 8.3 8.3 8.2 8.5 9.7 10.7 10.8 11.1 11.3 Currentexpenditure 9.1 8.7 8.9 9.3 11.6 12.2 11.4 10.9 10.6 10.4 Capital expenditureandnet lending I/ 8.4 6.O 7.2 7.2 7.2 8.0 8.1 7.9 7.7 7.6 Overallbudgetbalance 0.0 0.o 0.0 Includinggrants(commitment) -3.0 -0.7 -3.0 -3.2 -4.1 -5.9 -3.0 -2.4 -1.6 -1.3 Excludinggrants(commihnent) -6.0 -3.6 -5.3 -5.5 -7.5 -8.2 -7.2 -6.3 -5.4 -5.0 Primarybalance 2.9 2.6 2.4 2.5 0.6 0.0 0.7 1.4 1.9 2.0 NationalAccounts Gross investment 23.6 21.0 22.1 22.0 21.9 22.7 19.1 20.9 22.6 24.5 Government2 8.2 5.6 7.2 7.1 7.1 7.8 7.9 7.8 7.6 7.5 Nongovemment 15.4 15.3 14.9 14.8 14.8 14.9 11.2 13.1 15.0 17.0 Domesic savings 20.3 15.3 17.0 16.8 20.0 17.2 15.4 18.6 19.9 20.6 Govemment 4.0 3.9 3.4 3.3 1.3 1.5 2.6 3.2 3.7 3.9 Nongovemment 16.3 11.4 13.7 13.5 18.8 15.7 12.8 15.4 16.2 16.8 Externalcurrentacwuntbalance Including official transfers -7.0 -8.5 -7.6 -7.3 -2.4 -6.5 -5.0 -4.2 -4.5 -5.5 Excludingofficial trmsfers -7.2 -10.2 -8.3 -8.1 -3.8 -7.8 -6.1 -5.2 -5.4 -6.4 Overallbalanceofpaynents 2.0 1.8 -1.0 2.2 -0.5 -2.6 -1.9 -0.4 -0.1 -1.7 (Inpercentofexportearnings) Externalpublicdebt 422.9 450.6 465.0 443.9 390.9 395.9 337.8 302.4 278.5 260.3 Memorandumilems: (Inmillions ofUSdollars; unless otherwiseindicated) Exports31 629.5 653.0 635.7 666.6 722.8 700.4 775.9 832.5 872.2 894.9 Immrts31 543.2 583.3 559.4 583.3 561.9 619.6 686.1 701.5 741.8 805.5 Gross officialreserves(inmonths ofimports) 2.6 3.1 2.8 2.0 2.6 2.0 1.9 2.8 3.9 3.9 NominalGDP(inbillionsofGuinean francs) 4,144.4 4,438.2 4,802.2 5,436.9 5,924.9 6,350.2 6,903.3 7,501.1 8,124.7 8,843.3 sources: IMF 11Includes expenditure for reshucturing. 2Fixedcapitalformation. 31Merchandisetrade figuresonly. Public Expenditure Review I49 ANNEX 1.4: CENTRAL GOVERNMENT FINANCE 1998-2002 1998 1999 2000 2001 2002 (In billions of GuineanSans) Revenueandgrants 719.8 634 5 628.3 763.9 sns 7 Revenue 496.7 517.2 594.5 670.2 871 n Miningsectorrevenue 126.4 117.3 146.4 166.6 145.4 Nonminingsector revenue 370.4 399.9 448.1 503.6 618.5. Directtaxes 48.1 57.7 58.3 78.1 94.9 Indirecttaxes 289.3 309.4 335.9 362.5 452.4 Taxes on internationaltrade 71.9 80.8 119.1 114.0 139.1 Nontaxrevenue 32.9 32.8 53.9 63.1 71.3 Grants 127.8 111.1 125.3 202.8 145.8 Expenditureandnet lending 655.6 773.6 893.0 1,113.8 1,28 1.8 Currentexpenditure 387.7 429.5 504.0 684.7 776.1 Wages andsalaries 181.2 194.7 206.2 215.1 236.9 Othergoods andservices 89.4 89.6 110.4 133.9 209.9 Subsidiesandtransfers 53.0 70.7 97.6 246.1 224.0 Interestdue on externaldebt 55.2 59.5 73.9 62.1 74.1 Interestondomesticdebt 8.9 15.0 15.9 27.5 31.2 Public investmentprogram 250.4 343.9 386.6 423.4 493.4 Extemallyfinanced 209.0 295.0 345.0 388.7 415.0 Domesticallyfinanced 41.4 48.9 41.6 34.7 78.4 Bankingsystem restructuring 13.6 0.0 0.0 4.5 7.9 Net lending 3.9 0.2 2.4 1.3 4.4 Balance,commitmentbasis Includinggrants -31.1 -145.3 -173.2 -240.8 -517.9 -117 1 Excludinggrants -158.8 -256.4 -298.5 -443.6 Excludingminingrevenue -285.2 -373.7 -444.9 -610.2 -663.3 Changeinpaymentsarrears -73.6 -3.4 -38.0 -4.4 -52.4 Domestic 1/ -12.2 0.4 -43.3 -4.1 -49.5 External -1.4 -3.8 5.4 -0.3 -2.9 Adjustment for cash balances in bank 0.0 0.3 10.9 -15.9 -26.8 Overall balance, cash basis -104.7 -148.4 -200.3 -261.1 -451.2 Financing 104.7 148.4 200.3 261.1 457.3 Net externalfinancing 93.7 105.7 110.4 244.8 196.2 Drawings 153.1 203.4 224.3 346.5 307.5 Project financing 115.7 200.9 221.2 229.1 305.5 Other 31.3 2.5 3.1 117.4 1.9 Amortizationdue -75.4 -88.2 -140.0 -234.1 -191.1 Arrears(reduction-) 15.9 -9.5 26.1 0.5 -1.7 Debt relief 0.0 0.0 0.0 133.5 83.1 Debtrepurchase 0.0 0.0 0.0 -1.6 -1.7 Netdomestic financing 11.0 42.7 89.9 16.2 261.1 Bankingsystem -12.7 47.0 105.5 21.8 230.3 Nonbankfmancing 23.7 -4.3 -15.6 -5.6 30.8 Errorsandomission/Net fmancinggap 0.0 0.0 0.0 0.0 -6.1 (InpercentofGDP) 14'7 Memorandumitem: Revenueandgrants 14.1 13.1 13.2 20.2 14.3 Expenditure 14.8 16.1 16.4 18.8 Balance, commitmentbasis Includinggrants -0.7 -5.9 -5.3 -3.0 -5.5 -3.2 -7.5 -4.1 Excludinggrants -3.6 -8.2 Balance, cash basis -2.4 -3.1 -3.7 -4.4 -7.1 Domesticprimarybalance2/ Includingminingrevenue 2.6 2.4 2.5 0.7 0.0 Excludingminingrevenue -0.3 -0.1 -0.2 -2.1 -2.3 Source: GuineanAuthorities and staffestimates. li Comprisesthe change inoutstandingdomesticarrearsandthe changeinthe float betweenexpenditurecommitmentsand case paymentsfor the current fiscal year. 2iRevenueminusnoninterestexpenditure,excludingforeign-financed investmentprojects,net lendingandbankrestructuring. 150 Guinea ANNEX 2.1: "GET REAL" LONG-RUNGROWTHAND SHORT-TERM VAR MODELESTIMATESOF THE IMPACTS OF STRUCTURAL AND MACROECOMIC REFORMSONPOVERTYA/ YOChangein Growth Determinants YOChangein Growth Unit As Usedin Model Value %-change New values Coefficient Elasticity Effect on growth 1. BMP, %-points 2% 0.0% 2.0% -0.0153 0,000 -0.03% 2. M2 as YoofGDP 16 -20% 13.1 0.0004 0.007 0.52% 3. Inflation 5% -40% 3.0% -0.0014 0,000 0.00% 4. RER, 1995=100* 75% 0% 75.0% -0.0087 -0.007 -0.65% 5. Sec. enrollment, Gross, % 20 0% 20.0 0.0003 0.006 0.60% 6. Log# Tel. lines/1000 people 5.00 100% 5.69 0.0054 0.027 3.07% 7. Terms oftrade gain as % of GDP 0.1% 1% 0.05% 0.21215 0.000 0.01% 8. Intereston extemaldebt, % ofGDP 2.0 -50% 1.oo -0.0029 -0.006 -0.29% 9. OECDtradingpartnergrowth 2.0 25% 2.50 0.0021 0.004 0.53% 10 log Initial Income(85ppp) 3.30 0% 3.30 -0.0105 -0.035 -3.47% 11.Intercept 0.0236 2.36% 12 Shift parameter 0.0046 0.46% ReferenceLong-RunGrowth 4.0% Average populationgrowth, % 3.o% Average per capita GDPgrowth 1.O% Total effect on GDP per capita 3.1% Population growth 3.0% Adjustment for HIV/AIDs 1.O% Total effecton AggregateGDPGrowth 6.1% Deviationfrom ReferenceRun GDPGrowth 2.1% Adjustmentof the 123PRSPLong-Run Growth 2004 2005 2006 2007 GDP growthdeviationsfrom the baselineprojection causedby GE and TOT shocks to the short-termand the 0.0% 0.9% 0.8% 2.1% long-termcomponentsof GDP growth I/Estimatesfromthe"123PRSP"model. I 0" 152 Guinea ANNEX 2.3: BUDGET DEFICITS, TERMS OF TRADE SHOCKS AND CAUSALITYINGUINEA The methodology o f the Granger (1969) causality test can be briefly described as follows. Ifpredictions o f a given series y can be obtained by adding to lagged values o f y current and lagged values o f another given variable x, then x i s said to Granger-cause y. That is, x is said to precede temporally y in that changes inx take place first, then changes iny. Three other possible results are: the cases o f unilateral causality from y to x: bi-directional causality (or feedback), and independence. It i s important to note that temporal precedence does not imply a cause and effect relationship, however, establishing the order o ftemporal precedence betweentwo variables can be very useful for understanding the nature o f several economic problems. Findings:Usingannual data for government budgetdeficits and externalterms o ftrade changes over the period 1986 to 2001, we have found unilateral causality o f terms o f trade on budget deficits. The same exercise carried out for the case o f budget deficits and real exchange rate depreciations shows no causality effect between the two variables. These results suggest that, in the case o f Guinea, terms o f trade shocks precede temporal (or Granger-cause) budget deficits, while any gain in external competitiveness has a neutral causal effect on budget deficits. Test equations: yt =a, +sly,-, + +...+P1xl-l +P,x-, + X, = a, alx,-, + +aPx,-, +...+Plyt-,+&Y-, +pf The null hypothesis is that x does not Granger-cause y in the first regression and that y does not Granger-cause x inthe second regression: p1=p2=...=p, 0 = The test results for the causality between the terms o f trade and the budget deficit (Wald F-statistics for thejoint hypothesis): Painvise Granger Causality Tests Date: 09/30/03 Time18:04 Sample: 1986 2001 Lags: 4 NullHypothesis: Obs F-Statistic Probability BDEFNdoes not Granger Cause TOT 12 3.64418 0.15823 TOT does not Granger Cause BDEFN 7.84372 0.06108 N m x 1 .-f rC ec c c c Ma r% t- E 2 .C .Iet .I 'L tk e zcc. d c c c1 c i ct I a c a a c c +cb E e +abeC o o i o S 0 - m w m - - w c$ HN-2 22 a 2a f+Q fc m o m o c l 0 ..i! U at i .I 7 5 7E ~ m - m r E c+a f c+I B! B! e E e E :c : 9a :: C - 4:: 5e 2C Public Expenditure Review 157 ANNEX 4.1: CIVIL SERVICE EMPLOYMENT: STRUCTURE,TRENDSAND PREVIOUS REFORMEXPERIENCE Structureand Organizationof Civil Service Employmentin Guinea Guinean public employment is structured as shown below (Figure 4.1). The administrative management file o f the public sector includes civil servants and permanent contractual employees. Civil servants who work in public companies (around 15,000 employees) are paid directly by the companies and are excluded from the file. The file has major inconsistencies, notably between the number o f paid employees in the file and those actually paid by government. The file reflects neither the true number o f employees in the "contractual" civil service grade nor the growing number o f short-term, non-civil service contractual employees, mainly in education and health. Furthermore, it does not incorporate the security and armed forces personnel (an estimated 10,000) that have grown significantly since 1998 due to border conflicts. Additionally, the file still incorporates files o f deceased and fictitious employees (an in-depth review o f the file in 1992 identified 8000 files in these categories). Finally, there are serious time lags inthe incorporation o f new personnel files. Figure 5.1: The Structure of Government Employment, 2003 TOTALPUBLIC EMPLOYMENT I I SOEEMPLOYEES(!) I 7 1 15 WO GENERALGOMRNMEM I I 1 Population(2001) :7.6 millions Labor fordopulation :47.2% ClV. cent. m i p o p : O.??? Civ. Cent. mhb.For.: 1.4% I I Ruraldevelopwnt (lli) 86M1 I Police t 158 Guinea Trends in Civil Service Employment: An Historical Perspective The size of the civil service remained stable, with a small increase o f 0.3 percent ftom 1990 to 2002 (Table 1). The implementation o f the civil service reform led to a global decrease from 1992 to 2001. In 2002, however, the civil service increased by almost 4 percent due to the implementation o f the poverty reduction strategy which increased employment in high priority social sectors such as education. According to the Ministryo f Employment and Civil Service (MOECS), the total number of employees is around 53,456 in 2002. The recruitment schedule for 2003 will increase this to at least 57,000 employees. The recruitment policy in the priority sectors (mainly education, health and rural development) will reinforce this trend for the next few years, with an average o f 5,000 newemployees beingrecruited annually. Table 1: Civil Service Employment Trends (1990-2003) Category Permanent Total Ratios A B C Contractuals Nb Growth(%) Nb Growth(%) Nb Growth(%) Nb Growth(%) Nb Growth(%) B/A C/B 1990 12,931 - 18.807 10,972 - 8,848 - 51,558 - 1.45 0.58 ~ 1991 14041 8.58 19.357 2.92 11.133 1.47 6.454 -27.08 50.985 -1.11 1.38 058 1992 14,452 293 19,550 1.00 10,931 -1.81 6,339 -1.78 51,272 0.56 135 058 1993 15,849 967 20,421 4.46 10,158 -7.07 8,042 -4.69 52,470 2.34 129 050 1994 16,046 124 20,355 -0.32 9,957 -1.98 5,814 -7.08 51,972 -0.95 127 049 1995 16,541 308 20,122 -1.14 9,872 -0.85 5,879 4.72 52,414 0.85 122 049 1996 15,231 -7 92 19,311 -4.03 11,559 17.09 6,518 10.84 52,617 0.39 127 080 1997 16,307 706 20,907 8.26 9,080 -21.45 5,556 -14.73 51,850 -1.46 128 043 1998 16,424 072 21,402 2.37 9,330 2.75 5,391 -2.97 52,547 1.34 130 044 1999 16,419 -0 03 21,202 -0.93 9,259 -0.76 5,233 -2.93 52,113 -0.83 129 044 2000 17,174 460 20,729 -2.23 9,028 -2.49 4,762 -9.00 51,693 -0.81 121 044 2001 17,516 199 20,616 -0.55 8,681 -3.84 4,620 -2.98 51,433 -0.50 118 042 2002 18,508 566 22,114 7.27 8,895 0.16 4,139 -10.41 53,456 3.93 119 039 2003(1st quarter) 18,438 - 21,771 - 8,618 4,034 52,881 118 040 Average(90-2002) 3.13 1.42 - - -1.57 -5.61 0.31 Source: Ministryof Employmentand Civil Sewice Following the second civil service reform o f 1996, the increase in civil service employment is due mainly to an increase in category A (senior technicians and Figure2: Trends in Size of Civil Service Employment, by Cabgo!y (1992-2003) managers) and B (middle-level employees) (Figure 2). The first civil service reform implemented from 1985 to 1993 sought to reclassify and reduce the high number of A and B categories of employees inherited from the former Marxist regime. This first reform also reduced the number o f categories from seven to three in 1987. The old E, F and G categorieswere eliminated, with these -20- 1 5 ~ employees assuming contractual status, leading to an increase in the number o f - 2 5 ~I C category and contractuals over the -30. Years period 1992-1997. The failure to reduce -A +B-C C T R L Public ExpenditureReview 159 the number o f high and middle level employees has hampered the compression o f salaries, by Figure3: Guinea EmploymentPyramid (1990-2003) maintaining the average wage o f A and B categories at relatively low levels. Neither the first nor the second reforms 200 succeeded in addressing the issue o f the 200 overstaffed A and B categories. This trend has been reinforced in recent years by the recruitment policy in the priority sectors, mainly in education, where all new civil servants are in the A or B categories. Overstaffing is reinforced by Law 2001/028, which sets the retirement age at 60 years for grades B and C, with the risk o f there being an inverted employment pyramid for many years (Figure 3 above). 0% 20% 40% 60% 80% 100% The numbers o f category C (low ' educational level) and o fthe permanent contract personnel decreasedfrom 1997to 2002. The decrease o f category C employment seems to be attributable to: (i)the reclassification schedule implemented by the second reform o f 1996; and to (ii)the contracting out o f services in health and rural development (SAC IVY2001). Although some o f these contract (mainly teachers) became civil servants in grades A and B after a few years, the explanation for the decrease of the number o f permanent contractuals remains unclear, owing to the inconsistencies in different sources o f data. The apparent lack o f coordination between MOECS and MOF (Ministry o f Finance), as well as with line ministries, makes it difficult to get consistent data, not only for this category, but also on the overall size of civil service employment. Distributionof Civil ServiceEmploymentby Grades, Sector and Gender 0 Central government employment (excluding armed forces) is concentrated in three sectors: on a three years average (1999-2001), 39.1 percent o f all central civil servants, mainly teachers, are in the education sector; 15.7 percent are in rural development: and 12.2 percent are in the health sector(Figure 4). Given the number of new, short-term contract hires, mainly in the education and health sectors, these percentages are likely to be higher in 2002 and 2003, and there will be rapid growth over the next few years. To meet the social sectors' needs, the number o f short-term contract staff will continue growing quickly for the next few years. Unfortunately, there i s not a single, consistent or reliable source o f information on this category o f employees. 160 Guinea Fiflun 4 Sectonl Sham of Civilian Centnl governmentmmployees (1999-2001) 45 1 90.0- 40 80.0- 35 70.0- 30 60 0 % 25 % 500 20 40 0 15 30 0 10 20 0 5 10 0 0 Educatio Healt Rural 0 0 ^ , . Othe A B C CP Sectors Grades 0 The majority o f central government civil servants (76 percent) are in grades A (35 percent) and B (41 percent) in 2003 (Figure 5). The education sector commands by far the largest share ofthese two categories: 32.5 percent o f grade A and 62.4 percent o f grade Bymainly teachers. As for the distribution o f permanent contractuals, it appears that other Ministries hire more than the priority sectors. For instance, for security reasons, Guinea has hired 2,038 police employees (50.5 percent o f the overall number o f permanent contractuals). The short-term contractuals hiredby the priority sectors are not counted in the MOECS database o f civil servants for which the payroll databaseo fthe MOF isthe main source ofinformation. 0 According to this database, the education sector hires the largest number o f short- term contract employees (at least 80% o f government's total number o f short-term employees). Since 1997, the number o f short-term contract staff has grown five-fold to 13,000 in the education sector since 1997. This rapid growth is due mainly to the implementation o f the Education For All program (EPT), mainly at the primary school level, and poses serious monitoring problems (Table 2). The PER tracking survey for the education sector reveals that, in 2002, around 9,000 employees are paid by the payroll, but the files o fthe Ministryof Primary Education cannot confirm that they effectively work in that field. Inthis regard, almost 80 percent o f the GNF 18.7 billions paid as wage and salaries to the 11,335 primary education short-term employees may be misallocated in2002. Public Expenditure Review I61 Table 2: Trends ofFixedTerm Employmentin EducationSector 1997 1998 1999 2000 2001 2002 Average (97-2000) Total Education 2,756 2,902 5,438 8,014 10,450 13,033 Share(%) 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Growth (%j 5.3 87.4 47.4 30.4 24.7 39.0 O M(i) MEPU 2,237 2,280 4,790 7,270 9,891 11,335 Share(%) 81.2 78.6 88.1 90.7 92.7 87.0 86.4 Growth (%) 1.9 110.1 51.8 33.3 17.0 42.8 MET 289 324 350 445 450 1,312 Share(%) 10.5 11.2 6.4 5.6 4.3 10.1 8.0 Growth (%) 12.1 8.0 27.1 1.1 191.6 48.0 MES 230 298 298 299 309 386 Share(%) 8.3 10.3 5.5 3.7 3.0 3.0 5.6 Growth (%) 29.6 0.0 0.3 3.3 24.9 11.6 Source: MOFlDNBlPayrollService (i): OM=Of Which 0 The gender distribution o f central civil servants (Figure 6) Figure6: Sectoral share of Women Inthe civilian government shows that the majority o f employment (2003) female staff is either in grade C 80.0 or in the permanent contractual 70.0 category. This imbalanced 60.0 gender distribution i s 50.0 characteristic o f low-income countries because many fewer %`a40.0 girls and young women 30.0 complete secondary school and 20.0 university compared with their 10.0 male counterparts. Guinea's health sector, followed by the 0.0 A B C CP education sector, i s the largest Grades employer o f women: 32.8 percent, 57.3 percent, 57.1 percent and 66.8 percent, o f respectively A, ByC grades and permanent contractuals. This is due mainly to the new hiringpolicy for nurses and midwives that has been implemented since 2002. Personneland Wage BillManagement 0 While the ultimate goals are to reduce poverty and enhance government effectiveness, civil service reforms generally target more specific objectives. These range from objectives that are primarily structural - with an impact on service delivery and government effectiveness - to objectives that have a more direct link to macroeconomic stability. In practice, there is no easy divide between structural and macro-fiscal concerns in civil service management, since each directly affects the other. The structural issues o f employment and career path, pay policy and organizational arrangements are key to improved accountability and service delivery, 162 Guinea but can also have a significant fiscal impact. Inturn, ahigh civil servicewage bill can threaten macroeconomic stability; but measures to reduce the wage bill can have important structural effects, as noted in the first PER o f 1996.The 1996 PER highlighted major obstacles with regard to the efficient management of the civil service. The main issues were: (i)weaknesses in the organizational and institutional framework of the civil service (poor definition o f missions andjob descriptions; lack o f measurable objectives and inadequate systems and procedures; (ii)a lack o f reliable information due to inadequate information systems and to the lack o f coordination between the MOECS and the MOF; and (iii) the mismanagementofthe civil service pension system. The first PER recommended: (i) reducing the number o f departments involved in the management of personnel and the clearer definition o f their missions; (ii)reducing the number of civil servants (mainly in the agriculture sector) and compressing the wage bill; (iii)creating incentives for civil servants; (iv) harmonizing the retirement rights o f the armed forces with those o f other civil servants; and (iv) ensuring that the civil service pension system is consistent with revenues. The SAC IV ICR reiteratedthese recommendations: 0 Government has not implemented all o f these recommendations, but the MOF and the MOECS have launched a number of important initiatives: reorganizing the pay file (1997) and the personnel management file, twice in 1997 and 1999 in order to eliminate "ghostyyworkers (the previous purge in 1992eliminated 8,000 "ghosts"); 0 contracting short-term staff in the health (basic health care services), education (teachers) and agricultural sectors and inthe MOF; 0 restructuring the civil service pension system (CNSS) to make it actuarially sound; 0 recruitment and promotionpolicies (Law 028 on the statute o fthe civil service and Law 029 on its management, together with corollary administrative regulations); and 0 However, the reforms have had limited effect and most o fthe institutional and organizational problems remain. InstitutionalMandates Law No. 2001/029/AN, gives the MOECS the responsibility of creating any new organizational structure, on the basis o f the organizational frameworks and staffing plans proposed by ministries on an annual or a mid-term basis. These plans identify quantitative and qualitative needs in terms o f permanent civil servants. The MOECS is the line Ministry charged with monitoring the management of public services and their personnel. Monitoring procedures are published inthe bulletinof the MOECS, but their implementation i s entrusted to individual ministries' Directorate of Financial and Administrative Management (DAAF). The DAAFs have three main missions: (i)budget execution; (ii)acquiring and managing materials and equipment; and (iii)managing and monitoring personnel to assure coherent management o f public expenditures. Article 43 o f the Law permits each Ministry to create services responsible for human resource management. In practice, these HR units often introduce anomalies and distortions. A case in point is the MOF's "Commission d'assainissement". This commission has actually increased the over-staffed A and B Public Expenditure Review 163 categories by re-assigning and promoting staff without clear justification. Although it provides for more involvement o f civil servants in their own management issues through a participatory approach, Article 9 o f Law No. 2001/028/AN establishes some relationships that are not clear. In particular, it creates consultative groups (commissions and councils) without any regulatory framework36. Recruitment,Promotionand Dismissal Applicants join the civil service through a competitive process (Law L/2001/028/AN). In practice, the recruitment policy is driven by the number o f employees budgeted for by the Ministry of Finance (MOF) in the "Loi des Finances". Because of this budget-constrained approach, there is a disincentive for ministries to present a case for new posts based on overall priorities, job descriptions, objectives, expected results and performance indicators to be negotiated with the MOECS and the MOF. To escape from this rigid, centralized, budget- driven approach, SAC IV sought to decentralize the responsibility for the identification of teaching and health personnel needs and their management. Though this initiative would introduce more flexibility in the management o f personnel in their deployment for local service delivery, implementation has beendelayed. Only two sectors (security and education) are currently hiringon a local competitive basis. Promotionand the "Two Stream" System Regarding promotion policy, the recent 2001 Laws are predicated on a merit-based policy administered by supervisors. Unfortunately, the approach is subjective. It lacks fimctional job descriptions and objective measures o f performance, and is based upon criteria such as perceived rather than measuredoutput, punctuality, devotion to work, health status, discipline and overall professional knowledge. Grades A, B and C are divided into multiple steps. Within grades, employees' promotion to the next step depends on their annual performance. Employees are graded from 0 (unsatisfactory) to 4 (outstanding). Movement from a grade to a higher one i s more complex, and may require additional training. Under SAC IVY government proposed a performance-based approach to civil service reform. The proposal is to set up two categories o f staff: (i) opting to participate in a performance-based those system, characterized by more stringent recruitment and performance criteria along with higher total salary emoluments (with the possibility o f bonuses) and (ii) who opt to those remain in the traditional civil service, with limitations for career advancement and lower salaries. 36Five consultative groups are imbedded in the MOECS: "Conseil supdrieur de la Fonction Publique, Commission Nationale de Gestion des Carrikres, de Formation et de Perfectionnement de la Fonction Publique, Commission Nationale des Contrats de la Fonction Publique, Conseil de Discipline de la Fonction Publique". 164 Guinea ANNEX 4.2: DISTRIBUTIONOF THE WAGE BILL BY SECTOR (SHARE AND GROWTH) 1997(1) 1998 1999 2000 2001 2002 Average Wane Bill (current) - I O 9 GNF 171.7 181.2 194.7 206.6 214.6 236.9 206.8 Growth(%) 5.5 7.5 6.1 3.9 10.4 6.7 Wage Bill (constant) IO9 GNF 155.0 155.5 159.9 158.8 156.4 166.7 159.5 Growth (%) 0.4 2.8 -0.7 -1.5 6.6 1.5 Education io9GNF 48.45 46.17 49.92 53.88 54.89 59.27 52.8 Share (%) 28.2 25.5 25.6 26.1 25.6 25.0 25.6 (2) GrowthNT (%) -4.7 8.1 7.9 1.9 8.0 6.5 (3) GrowthRT (%) -9.4 3.4 1.0 -3.4 4.3 1.3 Health I O 9 GNF 116 9 115 9 11.88 13.07 8.81 14.07 11.9 Share (%) 6.8 6.4 6.1 6.3 4.1 5.9 5.8 (2) GrowthNT (%) -0.9 2.5 10.0 -32.6 59.7 9.9 (3) Growth RT (%) -5.7 -2.0 3.0 -36.1 54.2 4.8 RuralDevelopment 1O9 GNF 18.24 17.87 18.97 19.09 19.91 21.80 19.5 Share (%) 10.6 9.9 9.7 9.2 9.3 9.2 9.5 (2) GrowthNT (%) -2.0 6.2 0.6 4.3 9.5 5.1 (3) Growth RT (%) -6.8 1.6 -5.8 -1.1 5.7 0.1 Security 10' GNF 10.62 10.66 12.32 12.37 12.54 10.51 11.7 Share (%) 6.2 5.9 6.3 6.0 5.8 4.4 5.7 (2) GrowthNT (%) 0.4 15.5 0.4 1.3 -16.2 0.3 (3) GrowthRT (%) -4.5 10.5 -6.0 -3.9 -19.1 -4.6 Other I O 9 GNF 82.72 94.91 101.61 108.16 118.42 131.25 110.9 Share (%) 48.2 52.4 52.2 52.4 55.2 55.4 53.5 (2) Growth NT (%) 14.7 7.1 6.4 9.5 10.8 8.5 (3) GrowthRT (%) 9.1 2.4 -0.3 3.8 7.0 3.2 2.36 2.89 3.67 11.68 10.71 14.91 7.7 1.14 1.51 2.02 6.11 5.91 8.26 4.2 Source:MOF and Authors Calculation (1): Estimatedby Authors becauseof inconsistencyin data collected (2): Growth rate in Nominal Terms;Average rate Is from 1999to 2002 (3): Growthrate in Real Termswhichis Current Wagebill to CPI (1994-100) ratio; Average rate is from 1999to 2002 Public ExuenditureReview 165 ANNEX 5: EDUCATION IMPROVINGACCOUNTABILITY AT THE SCHOOLAND DISTRICT LEVEL At theprimary and secondary school level 0 Budgeting: Reallocate operating resources, managed at the center, to primary and secondary schools; 0 Budget Management: Appoint and train each school principal as financial officer, with the authority to administer funds under the supervision of a School Management Committee comprising students' parents, members o f the community and teachers, with technical assistancefrom the SAF andthe DPE; 0 Management Tools: Draft, test and distribute a guide for the financial managementof schools, including a manual on goods and equipment inventory, management and accounting; 0 Reporting: Design and test a simple budget expenditure and record of the use of school supplies. Each DFE will consolidate these accounts before transmitting them to the responsible DAAF. No new budget allocation would be made until the previous year's accountshad beenreceived; and 0 Audit: Carry out an internal audit o f the school principals' accounts on a 25 percent random sample basis, with an external audit on a sample o f 10percent o fthe schools. At the regional level: 0 Management: Transfer responsibility for recruitment, career management, posting and teacher re-deployment to the regional inspectorate (IRE); 0 Identification: Set up a data base o f all the existing schools, teachers and classrooms, eachto be assigned a unique identification; 0 Payment: Design and test software which will only authorize salary payment if a teacher's IDnumber matchesthe classroom assignmentnumber tallies; and 0 Responsibility: Holdthe school principalaccountable for any fictitious staff. At the secondary school level: A similar strategy is recommended although it will have to take into account that subject matter teachers teach in more than one classroom and at different levels: 0 Staflng Plans: Determining staff requirements per school. The optimal staffing by school, by subject, by level will be evaluated for each secondary school on the basis of teaching hour requirements; 0 Budgeting: Provide each school with a budget based on the number of budgeted posts; 0 Payment: Pay salaries only ifthe registration number matchesa budgeted post; and 0 Streamlining: Re-deploy identified, non-teaching teachers, to the classroom. . ... . . . . .. . . . . 1 e . 3 .. . . . .. . . .. D . 8 8 Y B*4 n -34 Y Q, 4 W .L c, 6 2 *z 0 0 C W8 ..3 5 E .I I Public ExpenditureReview 171 REFERENCES Devarajan S., D.S. Go and H. Li. (1999). "Quantifling the Fiscal Effects of Trade Reform: a General Equilibrium Model Estimated for 60 Countries", World Bank Policy ResearchWorking Paper 2162. 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