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Statement by Peter Gakunu, Executive Director for Burundi and Dieudonne Nintunze, Senior Advisor to the Executive Director

Author(s):
International Monetary Fund
Published Date:
January 2008
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Introduction

1. The Burundian authorities have remained steadfast in implementing prudent macroeconomic policies and ambitious structural reforms, which have resulted in commendable performance. This has been achieved despite a very difficult post-conflict environment and exogenous shocks dominated by drought and considerable delays in disbursement of programmed budgetary supports. The authorities are grateful to the Fund for the constructive engagement and support, and are appreciative to staff for their frank policy dialogue and advice under the program.

2. The authorities sustained their efforts towards economic recovery, and accordingly overall macroeconomic performance is satisfactory. All but one quantitative performance criteria were observed. A small amount of external payment arrears, accumulated at end 2006, was rapidly settled in January 2007. Implementation of the structural reform agenda was also satisfactory, although the pace was slower than targeted due mainly to capacity constraints. In this connection, the structural performance criterion on the establishment of a unified computerized payroll management file was not observed at end-June 2007, given that the census of civil servants was delayed as the associated TA was made available later than envisaged. However, the authorities made every effort to speed up implementation of the structural reform agenda in general, and correctives measures were implemented towards improving the public finance management reforms in particular, including the launch of taskforce units in May 2007 to reinforce reform of accounting system, treasury management, and enhance the operationalization of the Integrated Financial Management Information System (IFMIS). All the eleven prior actions, set for the completion of the Sixth Review of the PRGF supported program, were implemented in a timely manner.

3. The authorities broadly agree with the thrust of the staff appraisal, and will take appropriate steps to implement the policy recommendations. Given the good performance and continued commitment to successful program implementation, they request Directors’ support for the completion of the review and granting of the associated waivers.

Recent Economic Developments

4. The Burundian economy recorded good economic performance over the recent years, as a result of prudent macroeconomic policies and enhanced implementation of structural reforms, notwithstanding a very complex environment. Although economic growth was volatile, due mainly to the impact of bad weather conditions and the associated shortfalls in hydropower energy production, it remained robust and reached 5.1 percent in 2006. The real GDP growth is, however, estimated to have decelerated to 3.6 percent in 2007, due to the depression in coffee production arising from drought and cyclical factors. Inflation levels were maintained within the authorities’ program objectives in 2006 and 2007. The recent inflationary pressures reflect increases in oil prices and the tax measures implemented to increase revenue performance and mitigate the budgetary financing gap resulting from an unbudgeted payment to a domestic petroleum import and distribution company “the interpetrol”, as well as delays in disbursements of donors’ budgetary support. It should be observed, however, that the authorities took prompt and strong actions to tackle a governance-related incident on this unbudgeted payment made to, “the Interpetrol” for an amount equivalent to about 1.6 percent of GDP in April-May 2007, which would otherwise have weakened the overall macroeconomic stability. Despite the volatility characterizing the external position, the gross official foreign reserves were higher than programmed, reaching 3.7 months of imports cover at end-2006, and are estimated to have reached 3.9 months at end-2007. Burundi currency remained stable and the real effective exchange rate (REER) is estimated to have depreciated by 11.4 percent in 2007.

5. The fiscal position improved as a result of the authorities’ strong commitment to fiscal discipline and macroeconomic stability. Improved budget execution resulted in better than programmed indicators. Revenue performance remained robust in line with the program target, while the non-priority primary expenditure level was reduced by about 3.5 percent and 2.6 percent of GDP in 2006 and 2007, respectively. Accordingly, the primary fiscal deficit, in 2006-2007, was lower than programmed. The authorities have commendably started to restructure public expenditure towards more pro-poor spending at about 9 percent of GDP in 2006-2007, against only 6.8 percent in 2005. Nonetheless, the budget execution suffered from development expenditure adjustments to take into account the lower than programmed donors disbursements; and this impacted negatively on implementation of the authorities’ investment programs, including in priority sectors.

6. Monetary policy remained prudent in support of low inflation objectives. Reserve money increased moderately, but remained below the program indicative target at end-December 2006 and end-September 2007. The medium-term lending rates, applied by commercial banks, continued their slight downward trend, reflecting the elimination of the tax on banking transactions and the reduction of the central bank refinancing rate, in support to economic recovery. The Bank of the Republic of Burundi (BRB) has continued to strengthen banking sector supervision, including progressive increase in minimum capital requirements and restructuring plans with non-complying and weak banks. Furthermore, the BRB has made strong progress in modernizing its internal operations system and monetary policy instruments, and will continue improving its operational capacity, with Fund TA and the FIRST initiative support.

Outlook and Policies for 2008 and in the Medium-Term

7. The economic prospects are favorable in 2008 and in the medium-term, as the general environment in the country is improving. Real GDP growth is projected to reach 6 percent in 2008 and to be broad-based across sectors, including a recovery in coffee production, and to remain at a robust pace in the medium term. Inflation is projected to be contained in single digits and is expected to remain low, on average, in 2008 and in the medium-term, due to the authorities’ commitment to prudent fiscal and monetary policies. The fiscal and external positions should continue improving following the overall economic recovery prospects.

8. The robust performance and favorable outlook notwithstanding, the main challenges for the authorities are to sustain macroeconomic stability and strengthen implementation of structural reforms necessary to achieve a higher per capita income, with a view to substantially reducing poverty, responding appropriately to the urgent reconstruction and social needs, and making substantial progress in reaching the Millennium Development Goals (MDGs). In this connection, the authorities are determined to deepen implementation of their PRSP which offers an appropriate framework for the diversification of the sources of growth and exports, improvements in public finance management and capacity building, and integration in the regional and global economy.

Fiscal Policy

9. The authorities have reaffirmed their commitment to fiscal sustainability. The 2008 budget projects an increase in domestic revenue to 19.2 percent of GDP and around 20 percent in the medium-term, and the primary fiscal deficit is expected to narrow progressively, while the overall fiscal balance, including grants, would be in equilibrium. The authorities would continue their effort of improving public expenditure quality and effectiveness in favor of increased pro-poor and productivity-enhancing spending. Despite the implementation of nominal wage bill increases announced earlier in May 2007, but postponed to 2008, the overall wage bill as a percentage of GDP would stabilize at the level of 2007. It would trend downward to attain more sustainable levels in the medium-term, in line with the accelerated growth objectives. The authorities are strengthening the implementation of the public finance management and accountability reforms with the support of development partners, including the World Bank and IMF. In this regard, the Integrated Financial Management and Information System (IFMIS) will be extended to line ministries, with a view to improving transparency, monitoring, reporting and efficiency in public sector operations. A physical census of all public employees will be carried out to strengthen wage bill management and inform public service reforms. The authorities have also undertaken a comprehensive review of the tax and customs code, supported by the Fund and donors assistance, with a view to further strengthening tax administration, broadening the tax base, and making the tax system more equitable and efficient. The work on the introduction of the VAT is also in progress.

Monetary and exchange rate policies

10. The BRB will continue implementing prudent monetary policy in accordance with low inflation objective. It is enhancing its monetary policy capacity management with the support of the Fund TA and modernizing its instruments, including strengthening financial intermediation, and development of financial market, starting with the introduction of government securities. The BRB will continue improving its coordination with the Treasury in this regard. The non-performing loans in the financial sector have been reduced substantially with the implementation of the authorities’ strategy to clear domestic arrears. Financial sector supervision will be further strengthened. The managed floating exchange rate regime has served Burundi well so far. The BRB has liberalized current international transactions and is committed to a flexible exchange rate regime.

Structural reforms

11. The authorities are committed to stepping up implementation of their structural reform agenda. This includes improving governance and business environment, promotion of efficiency in productive sectors, and enhancing openness of trade to take full advantage of integration of the economy to regional and global markets. These reforms would help sustain high economic growth and substantially reduce poverty. The authorities are committed to continue strengthening institutional capacity and national statistics systems. In this regard, they count on further TA support from development partners, including the World Bank and the Fund.

Debt Sustainability and Debt Relief Initiatives

12. The full delivery of the HIPC and MDRI assistance would have a very moderate impact and Burundi would remain highly vulnerable to debt distress, as the NPV of debt-to-exports ratio remains above the 100 percent threshold over the long-term period, 2007-2027. Consequently, the authorities would welcome exceptional efforts by development partners to provide additional financial support, including by raising further interim relief, given Burundi’s financing needs for the enormous post-conflict reconstruction, poverty reduction programs, and the attainment of the MDGs. The authorities are committed to reaching the completion point under the HIPC initiative in 2008. In this regard, they are stepping up implementation of the triggers selected for this purpose, and are strengthening debt management capacity.

Conclusion

13. The authorities’ continued commitment to prudent macroeconomic policies has contributed to encouraging economic outcomes in recent years. They are conscious that much remains to be done to consolidate the progress achieved and substantially improve the living conditions of the Burundian population. In this regard, the authorities are resolved to redouble their effort to deepen structural reforms, with a view to making stronger progress towards reaching the MDGs. They are determined to sustain macroeconomic stability and diversify exports with a view to strengthening resilience of the economy against exogenous shocks.

14. The authorities are determined to remain engaged with the Fund and look forward to discussing a successor PRGF-supported program as soon as possible.

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