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Country Focus: Burundi Emerges from Civil Conflict to a Brighter Future

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
November 2006
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Decades of political instability and civil conflict severely undermined Burundi’s institutional and productive capacity. But today, according to a recent IMF country study, Burundi is looking to a brighter future as it works toward securing macroeconomic stability and implementing structural reforms to boost economic growth and reduce poverty.

Burundi was taking its first steps toward democracy when a coup d’état erupted in 1993. The protracted civil conflict that ensued devastated the economy (see Chart 1). As security degenerated, large numbers of people were displaced, economic activity dropped sharply, and donors reduced their financial assistance. A blockade imposed by neighboring countries in 1996 led to even more intense economic restrictions.

Chart 1Widespread devastation

Civil conflict resulted in a collapse in per capita income, and the external debt situation became unsustainable.

Citation: 35, 20; 10.5089/9781451968835.023.A010

Data: Burundi authorities and IMF staff estimates.

Between 1993 and 2005, real income per capita in Burundi dropped by almost half—to about $110 a year—and the poverty rate reached almost 60 percent in 2001. According to the United Nations Development Program, Burundi is now one of the least developed countries in the world. By 2000, financial imbalances had widened, the external debt had become unsustainable, and the state’s heavy participation in the economy had severely weakened the productive sector. Total factor productivity declined steadily between 1993 and 2000, especially in agriculture, which accounts for roughly half of Burundi’s GDP.

The poor performance of public enterprises, exacerbated by falling international commodity prices in the late 1990s, led to large financial losses, external and domestic payments arrears, and decapitalization of crucial agricultural production in crops such as coffee, which accounts for 80 percent of exports. These losses worsened Burundi’s fiscal situation, even as an accumulation of nonperforming loans weakened the financial system.

Burundi at a glance

Capital: Bujumbura

Area: 10,740 square miles

Population: 7.6 million (2006)

GDP per capita: $107 (2006)

Life expectancy: 42 years (men), 44 years (women)

Main exports: coffee, tea, sugar, cotton, hides

Data: Burundi authorities and IMF staff estimates.

Burundi Faces Key Challenges of Boosting Growth and Raising Social Spending

A recent economic review by the IMF focused on the key challenges to launching the economy on a higher growth path and raising social spending to achieve the Millennium Development Goals. The program, supported by the IMF’s Poverty Reduction and Growth Facility, was on track in 2005, although growth fell short of target, largely because of a poor coffee harvest and drought in the north. Inflation fell markedly in the second half of the year, reflecting the tightening of monetary policy and the appreciation of the nominal exchange rate.

IMF Executive Directors commended the authorities for their progress in implementing the program in 2005 in a difficult post-conflict environment. Good progress had been made in the fiscal, monetary, and foreign exchange areas, although reforms in the productive sectors, fundamental for a sustained recovery, had been delayed. They encouraged the authorities to proceed with structural reforms that would stimulate private sector activity, improve the business climate, and reactivate the privatization agenda.

Burundi
Proj.
2003200420052006
(percent change)
GDP at constant prices-1.24.80.96.1
Consumer price index10.78.013.42.5
(percent of GDP)
Total expenditure and net lending34.939.836.841.8
Current account balance21.1-25.5-34.3-37.9
Data: Burundi authorities and IMF staff estimates.
Data: Burundi authorities and IMF staff estimates.

Directors welcomed Burundi’s strong fiscal and buoyant revenue performances, despite import duty reductions. Public expenditure management needs to be improved, and budget execution, financial control, and public procurement practices reinforced. Governance and transparency need to be further strengthened, including through the progressive withdrawal of state intervention in the economy. Directors emphasized the need to bolster banking supervision and to pass laws to combat money laundering and reinforce central bank independence. They emphasized that Burundi would need continued access to grant financing.

Prospects for 2006 are for a rebound in growth and a further reduction in inflation. The program provides fiscal space to start addressing urgent social needs, consistent with macroeconomic stability, in part through a shift from security to social spending. Implementation of the program could help make 2006 a pivotal year in Burundi’s economic turnaround.

Early steps to economic recovery

Building on the 2000 Arusha peace accord, Burundi began to make progress on several fronts, and a window of opportunity opened to secure macroeconomic stability and implement reforms to reduce poverty and accelerate economic growth. With improved security and renewed support from the international community, including through a disarmament, demobilization, and reintegration project launched in 2004, economic growth began to recover to an average of 2 percent in 2001–05.

The country also began to reduce its large financial imbalances and ease exchange and trade restrictions. The authorities reduced the top import tariff rate from 100 percent in 2003 to 30 percent in 2005, and the spread between the parallel and official exchange rates disappeared (see Chart 2). Reforms improved tax recovery and boosted revenue; together with rising external support, they allowed the government to spend more, particularly on basic social needs and investment.

Chart 2Turning a corner

Liberalization of the exchange regime and economic reforms have stabilized the exchange rate, and the parallel market has been reabsorbed.

Citation: 35, 20; 10.5089/9781451968835.023.A010

(average exchange rate; Burundi francs per U.S. dollar)

Data: Burundi authorities and IMF staff estimates.

In 2005, the government also began to reduce the role of the state in the coffee sector by liberalizing trade. Its next step is to privatize the state-owned washing and hulling enterprises. The government’s overriding objective is not only to increase productivity but also to create conditions for Burundi to become a niche producer of high-value mountain-grown Arabica coffee. If the reform is carried out, the production and quality of coffee could recover and even surpass previous highs. For example, had the 2005 vintage been comparable to the 1990–93 average, producers’ per capita income would have been 50 percent higher.

In August 2005, a democratically elected government took office. In September 2006, the last holdout rebel group signed a peace accord with the government.

Challenges ahead

Burundi is on the right path but still faces major challenges that will require sustained reform efforts. These efforts are outlined in a Poverty Reduction Strategy Paper that Burundi adopted in September 2006. The country must create a business-friendly environment to attract private investment, which will allow the private sector to drive growth. In the public sector, administrative capacity and the quality of institutions need to be strengthened with the help of the international community.

To address entrenched social problems, the government must shift the composition of budget expenditure so that more spending benefits the poor. Constraints in the agricultural sector, which employs more than 80 percent of the labor force, will also need to be tackled. Burundi has adopted a graduated approach to liberalize the state’s extensive holdings, attract private investment, and boost value added.

A strengthening of public financial management is important to ensure that the government’s spending is efficient and prioritized. Toward that end, in 2004-05, Burundi installed a computerized system that has improved the control, tracking, and reporting of expenditures. The next steps, with IMF technical assistance, are to expand the system to line ministries, incorporate payroll management, and integrate revenue and project spending. The authorities also plan to elaborate a medium-term expenditure framework to help them implement their poverty reduction strategy.

Paul Mathieu, Alvaro Manoel, and Olivier Basdevant

IMF African Department

This article is based on Country Report No. 06/307, Burundi: Selected Issues and Statistical Appendix. Copies are available for $15.00 each from IMF Publication Services. Please see page 324 for ordering details.

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