1. My Burundian authorities are committed to strengthening the country’s macroeconomic fundamentals and to continue the implementation of sound policies and reforms under their economic program. They are confident that this will contribute to consolidate economic and political gains, promote new growth drivers and inclusive growth, reduce poverty and help shield the economy from exogenous shocks. They are, however, mindful that internal and external constraints could hamper the success of their economic program. Nevertheless, with their strong policy commitment and continued support from the Fund and their development partners, my authorities are confident that they will succeed in implementing their economic program.
2. My authorities are appreciative of the Fund’s constructive engagement and support under the ECF, and thank staff for the helpful policy dialogue and advice. Going forward, they are determined to further strengthen this engagement as they make progress toward achieving their key national and regional objectives as set out in the PRSP II and the EAC protocols.
3. My authorities have made steady progress in the implementation of the program despite the difficult global environment. All performance criteria and indicative targets for end-March 2012 were met, and the fiscal slippages have been adequately addressed through the revised 2012 budget. In view of this strong performance, my authorities request Directors’ support for the conclusion of the first review under the ECF, and modification of performance criteria for end-September 2012.
Recent economic and policy developments
4. Burundi’s economic activity continues to be adversely affected by protracted high fuel and food prices, poor weather conditions and declining donor flows. As a result, real GDP growth forecast for 2012 has been revised downwards to 4.2 percent from the earlier forecast of 4.8 percent. The expansion of services and foreign investments in the secondary sector remained the major drivers of growth while agricultural output was weak on account of drought conditions. Consequently, prices of foodstuffs rose sharply in addition to the continued increase in fuel prices. The authorities have also adjusted electricity and water tariffs. As a result, inflation rose sharply to 25 percent by end-March 2012.
5. The authorities’ 2011 fiscal outturn reflected progress made in strengthening their fiscal framework in line with the program targets. In this regard, domestic revenue mobilization improved and expenditure was kept within the program envelope. Although expenditure fell short of projection, the authorities did maintain pro-poor spending at the targeted level. Subsequently, to further protect the vulnerable, the authorities extended tax relief by eliminating custom duties, VAT, and administrative charges on 13 imported and locally produced food products amounting to 0.3 percent of GDP. Additionally, the authorities waived excise taxes on oil products to offset soaring oil prices and its effect on inflation. In response to declining external budget support, and the reduction of the revenue collections on foodstuffs and oil products, the government reviewed the 2012 budget with further expenditure cuts and increasing domestic revenue by introducing new taxes. These budget adjustments also respond to the program’s goals.
6. Monetary policy has been tightened further to curb inflation. Consequently, the rate of growth of credit to the economy has moderated. Supervision of financial institutions has been improved and the Central Bank (BRB) continues to implement measures aimed at strengthening its financial safeguards. In this vein, it has established an audit committee and adopted a new audit charter that conforms to best practice. The BRB also continues to pursue a flexible exchange rate policy in order to mitigate external shocks. However, given the recent sharp depreciation of the domestic currency, it intervened in the foreign exchange market to reduce volatility.
7. On the external side, the current account widened owing to the deterioration of the terms of trade, the decline in external budget support and the high prices of imported food and fuel. As a result, official reserves fell to 4 months of import cover from 4.4 months in December 2011.
8. My authorities completed preparation of the second Poverty Reduction and Growth Strategy Paper (PRSP-II) which focuses on the transformation of the Burundian economy. The key pillars of the strategy include the consolidation of good governance, achieving sustainable growth and job–creation, strengthening of national solidarity and improving management of land and the environment. The growth projections in the PSRP-II are necessarily ambitious, because of the transformative nature of its objectives. However, the authorities, like staff, are aware of the risks to the outlook. These relate to the ongoing international economic crisis, low international coffee prices and shortfalls in budget support. The authorities will take measures as necessary and in consultation with the Fund, to adjust policies in the event the adverse scenarios materialize. The authorities intend to organize an international conference of donors in October 2012 on PRSP-II.
Policy framework and reforms going forward
Fiscal policy and reforms
9. The authorities have made substantial progress with regard to the implementation of public financial management reforms. Significant gains were achieved in the areas of budget credibility, supervision, cash management, and government accounting. Going forward, they remain committed to further strengthening public financial management and, in this regard, intend to develop and implement a new public financial management strategy for 2012–2014 in order to consolidate the gains attained thus far. The legal and institutional framework will be improved and strengthened for more effective financial governance, promoting transparency and accountability. They have also simplified customs clearance procedures and created a one-stop border post with Tanzania, the main entry point of Burundi’s foreign trade.
10. Given the downward trend in external aid inflows, the authorities are determined to further strengthen their capacity to mobilize domestic resources by enhancing tax administration, and widening the tax base. Critical steps will be taken to close fiscal loopholes in order to maximize tax collection. The authorities welcome IMF technical assistance in assessing the tax exemption system and fuel pricing mechanism, and look forward to further support going forward.
11. My authorities are mindful of the country’s risk of debt distress and, in this regard, they remain committed to pursuing the mobilization of concessional external financing. The authorities are also committed to completing and fully implementing their medium–term debt management strategy focused on improving the legal framework governing the issuance of guarantees and on lending; strengthening the debt management structure and building capacity for the analysis of cost indicators and basic debt risks. They intend to create a high-level committee to coordinate public debt management processes and to ensure that total public debt is consistent with the country’s macroeconomic objectives.
12. The authorities’ monetary policy framework will continue to be focused on curbing inflation and streamlining credit to the private sector. The authorities believe that the flexible exchange rate has helped to stabilize the BRB’s reserves and improve the liquidity of the financial sector. Nonetheless, they are concerned about the repercussions of this policy stance on inflation especially with the recent depreciation of the exchange rate.
Financial sector reforms
13. The BRB will continue strengthening its supervisory and regulatory services to the financial institutions with a view to broadening access to financial services under its inclusive finance framework. The BRB will also continue strengthening its internal control and risk management systems, and the modernization of its payment systems. Mobile banking will be a key pillar for deepening inclusive finance. Therefore, the legal and regulatory framework will be implemented. Furthermore, in the spirit of the strengthening investor protection and deepening of the financial sector, the central bank will strengthen the creditor rights framework.
Other structural reforms
14. Given the good progress in improving the business climate, “Doing Business 2012” rated Burundi the seventh most improved economy in the world. However, challenges in this area remain. In that regard, the authorities will pursue efforts to improve the investment climate, strengthen the capacity of the Export and Investment Promotion agency and consolidate “one stop shop” for starting business, enhance customer services and implement the private and public partnership framework.
15. The authorities are pursuing implementation of deeper reforms in the coffee sector, energy and the privatization of public enterprises. The reforms in the mineral sector are ongoing guided by the modernization of the mineral code. With regard to its membership of the East African Community, reforms will be focused on enhancing of the economy’s competitiveness.
16. The implementation of the ECF-supported program could be hampered by internal and external environment challenges. The authorities will maintain an appropriate mix of fiscal and monetary policies, as well as deepened structural reforms to support growth and reduce poverty. Given the large financial needs, the authorities count on the catalytic impact of IMF engagement to support Burundi in the mobilization of grants and high concessional resources. With their policy stance and continued support from the Fund and other development partners, my authorities are confident that they will succeed in achieving the objectives of their economic program.