Burundi
Enhanced Initiative for Heavily Indebted Poor Countries: Decision Point Document
Author:
International Monetary Fund
Search for other papers by International Monetary Fund in
Current site
Google Scholar Close
Publication Date:
13 Sep 2005
eISBN:
9781451802894
Language:
English
Keywords:
ISCR; CR; HIPC assistance; public expenditure; exchange rate; Burundi authorities; central bank; reform agenda; present value; GDP deflator; financial support
Download PDF (3 MB)

This paper explains Burundi’s Enhanced Initiative for Heavily Indebted Poor Countries (HIPC). Burundi’s social indicators reflect the effects of poverty compounded by decades of violence. The government’s Interim Poverty Reduction Strategy Paper (I-PRSP) is based on broad consultations, but limited in some provinces by security conditions. The debt sustainability analysis (DSA) shows that even after HIPC assistance, Burundi would remain above the HIPC threshold for a considerable period of time, leaving it vulnerable to prolonged risk of debt distress.

Abstract

This paper explains Burundi’s Enhanced Initiative for Heavily Indebted Poor Countries (HIPC). Burundi’s social indicators reflect the effects of poverty compounded by decades of violence. The government’s Interim Poverty Reduction Strategy Paper (I-PRSP) is based on broad consultations, but limited in some provinces by security conditions. The debt sustainability analysis (DSA) shows that even after HIPC assistance, Burundi would remain above the HIPC threshold for a considerable period of time, leaving it vulnerable to prolonged risk of debt distress.

I. Introduction

1. This paper presents an assessment of Burundi’s eligibility for assistance under the enhanced Initiative for Heavily Indebted Poor Countries (HIPC). The Executive Boards of the IMF and IDA discussed the preliminary HIPC document for Burundi on January 19 and 27, 2005, respectively. On these occasions, Executive Directors made a preliminary determination that Burundi could be eligible for assistance under the enhanced HIPC Initiative on the basis of its heavy debt burden, its track record of performance under IDA-and IMF-supported programs, and its status as an IDA-only and PRGF-eligible country. Directors generally agreed that Burundi could reach its decision point by mid-2005, provided that policy implementation under the government’s macroeconomic and structural program is satisfactory. They noted that Burundi’s heavy debt burden would require strong export growth and external assistance in the form of grants or loans on highly concessional terms.

2. The debt sustainability analysis (DSA) herein indicates that Burundi’s external debt would remain above the HIPC threshold even after the full application of traditional debt-relief mechanisms. The present value (NPV) of debt-to-exports ratio is estimated at 1,772 percent at end-2004 and is projected to remain above 150 percent throughout the projection period.

3. With the implementation of the Arusha Peace accord of August 2000, Burundi has achieved, through early 2005, demonstrable progress with economic stabilization and reform, and the authorities have remained committed to policies of macroeconomic and financial stability, growth and poverty reduction. In light of such progress and commitment and of Burundi’s heavy debt burden, it is the opinion of IDA and IMF staff that Burundi has met the conditions for reaching the HIPC decision point.

4. Section II provides background information on eligibility and qualification for the enhanced HIPC Initiative, the dimensions of poverty, political and security developments, and the policy track record. Section III discusses the Poverty Reduction Strategy Paper (PRSP) process, medium-term macroeconomic objectives, and the sectoral and structural reforms to be implemented before reaching the completion point. Section IV presents the DSA. Section V lists the proposed floating completion point triggers, specifies how the enhanced HIPC Initiative assistance after the decision point will be used and tracked, and reports the views of the authorities. Finally, Section VI presents issues for discussion by the Boards of Executive Directors.

II. Background and Assessment of Eligibility and Qualification for HIPC Assistance

A. PRGF and IDA Status

5. Burundi is an IDA-only country, with a nominal per capita GDP of about US$83 in 2003, and is eligible to receive resources under the IMF’s Poverty Reduction and Growth Facility (PRGF). Burundi will continue to need substantial concessional assistance from the international community and is likely to remain an IDA-only country and eligible for PRGF resources for many years to come.

B. Dimensions of Poverty

6. Although income per capita in Burundi has recovered since 2000, it still remains less than one-half the historic high of US$180 attained before civil conflict erupted in 1993. Since 1992, the percentage of people living below the poverty line has doubled, from 35 percent overall to 68 percent in 2002 (68.7 percent in rural areas, 66.0 percent in urban areas). In terms of social welfare indicators, Burundi is the fourth least developed country in the world (2004 Human Development Index).1 The government’s immediate priority is to restore pre-conflict levels of social services recognizing that meeting the Millennium Development Goals (MDGs) will be a challenge.

7. Burundi’s social indicators reflect the effects of poverty compounded by decades of violence (Box 1). In addition, child malnutrition has risen from 35 percent in 1987 to 45 percent in 2000. Access to safe water and health services remains extremely low, at less than 48 percent and 20 percent of the population, respectively. Displaced persons (some 200,000 internally and in refugee camps, down from one million at the peak of the fighting) suffer from deprivation, malnutrition, and lack of sanitation, health, and education services. HIV/AIDS prevalence is rising, particularly in the refugee camps, and an estimated 1 in 9 sexually active Burundians is infected. The number of people with HIV/AIDS in 1999 was about 360,000 in the 15–49 age group, and 19,000 for those under 15. There are some 200,000 AIDS orphans (out of a total of some 556,000 orphans).

Poverty and Social Indicators

(In percent, unless otherwise specified; as of latest year for which data are available)

article image
Sources: Burundi I-PRSP; World Bank, African Development Indicators 2004 and World Development Report 2005; and UNESCO database.

C. Recent Political and Security Developments

8. After independence in 1962, Burundi was one of the best performers in the economic and social areas in sub-Saharan African countries, although progress was marred by periods of ethnic violence. However, with the 1993 civil conflict progress was halted and, combined with the effects of a regional economic embargo in 1996–99, Burundi underwent a ten-year period of economic decline. The turning point was the signing in August 2000 of a peace and reconciliation accord among 39 political-ethnic groups, in Arusha, Tanzania. A transition government and ethnically balanced senate and parliament chambers were established in 2002, and a peaceful rotation of the president from a Tutsi to a Hutu took place as envisaged in 2003. The remaining holdout rebel group agreed to a cease-fire in May 2005. The political transition is now drawing to a close. In February 2005, a national referendum overwhelmingly approved a new constitution and, on June 23, communal elections were held. Parliamentary elections were held on July 4, 2005. The new parliament is to elect a new president by late August; subsequent presidents will be directly elected by popular vote. The new constitution provides for majority rule while maintaining rights and representation for minorities and women; minority Tutsis are assured 40 percent of seats in the National Assembly and of positions in the council of ministers.

9. The creation of a new, ethnically balanced army and national police force began in late 2004 by incorporating former rebel combatants. The United Nations maintains operations in Burundi (ONUB), including a peacekeeping force of 5,650 (including civilians), which is assuring security and supporting the national Disarmament, Demobilization, Reinsertion, and Reintegration Program (DDR), along with IDA and bilateral donors through the regional Multi-Country Demobilization and Reintegration Program (MDRP). By end-May 2005, almost 10,000 ex-combatants had been demobilized. A National Commission on Reintegration of Refugees was established in 2003, and has since assisted the resettlement of some 500,000 refugees and internally displaced persons. In January 2005, a National Truth and Reconciliation Commission was set up with a two-year mandate to investigate acts of ethnic violence between Burundi’s independence in 1962 and the 2000 peace accord.

D. Macroeconomic and Structural Adjustment Record

10. Within a difficult political environment, and starting from dire economic and social conditions, Burundi has made good initial progress in stabilizing the economy, implementing financial and structural reforms, and beginning to restore social services. However, large challenges remain, including the consolidation of democracy, full demobilization of armed combatants, promotion of private sector-led growth, and, especially, addressing widespread deep poverty.

11. Burundi’s economic and social recovery has been supported by IDA and the IMF. IDA has provided an Emergency Economic Recovery Credit in 2000, an Economic Recovery Credit in 2002, sector grants and credits (including for DDR), and managed support through a trust fund for multilateral debt service.2 A Post-Conflict Transition Economic Recovery grant (US$50 million) is planned for 2005. In 2001–02, Burundi implemented an IMF Staff-Monitored Program and, subsequently, received support under the IMF’s Emergency Post-Conflict Assistance policy (2002–03), which led to approval of a three-year PRGF arrangement beginning in January 2004 (SDR 69 million). The first review of the PRGF-supported program was concluded by the Executive Board of the IMF on January 19, 2005. The European Union and bilateral donors have also provided important assistance and in a donor forum in January 2004, Burundi received pledges of more than US$1 billion over three years.

12. Since 2002, the authorities have maintained generally prudent financial policies and implemented structural reforms that have helped to establish the conditions to resume economic growth. Real GDP growth has picked up, inflation has been broadly contained, and the international reserve position has strengthened, while financial support from the international community has been mobilized (Table 1). During 2004 and early 2005, performance under the PRGF-supported program has been good. Such progress is all the more noteworthy in that it has been achieved in a difficult political and economic environment of strong expenditure pressures stemming from the establishment of the transitional institutions envisaged in the Arusha peace accord to include representatives from former rebel factions and the need to restore social programs. The heavy political agenda, which has drawn out the transition process, has, at times, delayed sensitive structural reforms (Box 2).

Table 1.

Burundi: Selected Economic and Financial Indicators, 2003–08

article image
Sources: Burundi authorities; and Fund staff estimates and projections.

The program column for 2005 has been revised to reflect a reclassification of fiscal spending on the police force and of external program grants.

Data through April 2005.

The program and revised program columns for 2005 have been adjusted to reflect a reclassification of fiscal spending on the new police force from projects to recurrent spending

Data through June 15, 2005.

The program columns for 2004 and 2005 reflect a reclassification of program grants from the capital account to official transfers.

Table 2.

Burundi: Balance of Payments, Medium-Term Scenario, and Sensitivity Analysis, 2004–24

article image
Sources: Burundi authorities; and Fund staff estimates and projections.

Program grants have been reclassified from the capital account to current transfers.

Including the March 2004 Paris Club rescheduling at Naples terms, and assuming rescheduling of current debt service and arrears to non-Paris Club.

International prices are assumed to be 25 percent higher than the World Economic Outlook (WEO) baseline projection throughout the projection period.

Non-fuel import prices are assumed to be 5 percent higher than the WEO projection baseline projection for 2005–09.

13. Real economic growth picked up in 2004 to close to 5 percent and is expected to be sustained at that level in 2005. Continued vigor in the service sector would offset a cyclically smaller coffee crop in 2005 and uncertainties regarding the food crop. Consumer price inflation did not decline as planned in 2004, but rose to almost 12 percent, owing to the impact on food prices of drought in the north, the surge in imported petroleum prices, and pressure on nontradable goods prices from the increasing international presence in the capital.3 The continued impact of these factors, together with rapid monetary growth, led to a further increase in inflation in early 2005. On the external side, the current account deficit, including grants, in 2004 (7.2 percent of GDP) was significantly smaller than expected and international reserves increased. Exports rose strongly on account of a large coffee harvest and a strong recovery in world coffee prices, while imports rose less than projected, owing to lower-than-expected humanitarian assistance.

14. Fiscal performance was broadly in line with the PRGF-supported program in 2004, although the primary deficit was somewhat higher than programmed, owing to higher domestic counterpart outlays for project spending that was only partially offset by a lower-than-expected wage bill. Overall revenues exceeded the program target, reflecting strengthened tax administration. Social sector spending rose to 6.7 percent of GDP. Fiscal performance in the first quarter of 2005 was well within program targets.

Selected Economic Policy and Structural Measures, 2003–05

article image

15. A key strand of fiscal policy in 2005 is the transition from a “conflict” to a “peacetime” budget. The security sector projects (military integration and creation of the national police force), which are vital for securing durable peace, will raise the share of military and security spending in the short term, while the demobilization effort will eventually permit a shift from military spending to social outlays. As a result, the share of military spending in total expenditure would rise in 2005, while the share of social sector spending would decline slightly.4 Assuming the pace of demobilization is maintained, and given the smaller number of soldiers and ex-combatants than originally assumed, budget savings on security spending appear possible from late 2005.

16. The management of public finances, severely weakened by the loss of skilled and experienced staff because of the conflict and low wages, is being strengthened. Key actions have been undertaken in public expenditure management, supported by IDA since 2000 and currently under the Economic Management Support Project (EMSP). These include adoption of a unified functional and economic classification of budgetary expenditure and a double-entry accounting system, implementation of a system for monitoring the flows of external assistance and government expenditures, and computerization of expenditure management.5 In addition, civil service payroll management is being strengthened. In May 2005, an inventory of domestic payments arrears of the government was completed, on which an external audit is expected to begin shortly. A sustained effort in these areas will be needed, supported by technical assistance from the IMF and IDA. Measures to improve budget transparency include the establishment of an audit court (Cour des Comptes) in 2004, which began a review of the 2004 government accounts in April 2005. Revenue mobilization reforms include strengthened tax administration and collection, the introduction of a single taxpayer identification number, the elimination of loopholes in the import pre-shipment inspection regime, and the income tax liability of Burundian nationals working for international organizations is now being recognized and enforced.

17. For the remainder of 2005, the authorities aim to contain monetary growth with a view to reducing inflation to 10 percent by year-end. To this end, the BRB has taken measures to enhance the efficiency and effectiveness of its liquidity management. In April 2005, liquidity auctions were introduced and the central bank’s specific credit ceiling system was abolished.

18. Major progress has been made in liberalizing the foreign exchange system since 2000, which has led to the gradual convergence of the parallel and official exchange rates, to about 3 percent by late 2004. Restrictions on current transactions were removed in 2003 and in December 2004, the BRB abolished the mandatory nature of its foreign exchange auction reference price for commercial transactions and changed the determination of the official exchange rate to the daily weighted average of banking system transactions. In early January 2005, the remaining foreign exchange surrender requirement on export earnings was abolished.

19. Further structural and sectoral reforms are being undertaken or have been initiated as follows:

  • A reform program with IDA support is being implemented to strengthen the capacity of the Ministry of Development Planning and Reconstruction, in particular to collect and process statistical information, leading to timely and reliable availability of national accounts, estimates, and forecasting.

  • Reform of the justice system to bring about ethnic balance, and ensure equity and human rights. To that end, a Judiciary Reform Strategy is to be prepared with assistance from IDA’s EMSP project.

  • The coffee sector reform strategy, adopted in October 2004, is under way. The first step was the opening of the state marketing board (OCIBU) auctions to a wider range of participants in December 2004. In January 2005, private entry and investment in the sector and operations at all levels of the supply chain was liberalized. The coffee production tax (loyer verger) was abolished in April and a ministerial order was issued in June freeing coffee sales outside of the state marketing board (OCIBU). In mid-2005, the privatization of state assets in the coffee sector is expected to begin with the launching of offers to sell of washing stations and processing factories. Later in 2005, an action plan will be adopted defining the new roles of coffee sector institutions (including OCIBU) to be in place for the start of the 2006 crop season (April 2006), consistent with the coffee sector reform strategy.

  • A tea and cotton sector reform strategy was approved in October 2004.

  • The sugar sector was also liberalized in May 2005 with the abolition of export restrictions, minimum import prices, and domestic price controls.

III. Medium-Term Strategy for Poverty Reduction

A. The PRSP Formulation Process

20. The government’s Interim Poverty Reduction Strategy Paper (I-PRSP) is based on broad consultations, limited in some provinces by security conditions. The I-PRSP presents a long-term vision of development based on six strategic themes for promoting sustainable, equitable economic growth deemed essential for poverty alleviation: (i) peace and democratic governance; (ii) reintegration of conflict victims and disadvantaged groups into the economy; (iii) private sector development; (iv) human capital development; (v) fighting HIV/AIDS; and (vi) advancing the role of women in development. These priorities were confirmed in a 2004 opinion survey covering 3,000 respondents nationwide. The survey found that (i) while more than 80 percent of respondents think that poverty has remained constant or increased over the last 5 years, some 40 percent predict that poverty will decrease in the next five years; (ii) poverty is related to the inability for households to feed their family, have decent housing, and pay for health care; (iii) satisfaction with the quality of public services is low, except for primary schooling; (iv) the end of the conflict is cited as the most important factor for reducing poverty, and together with the provision of education services, is seen as the most important action that the government can undertake; and (v) improving food security and increasing youth employment are also seen as important areas for government intervention.

21. With the forthcoming finalization of Burundi’s full PRSP, it will be essential to put in place a sound monitoring and evaluation system. At present, reliable and detailed data are lacking to monitor poverty and other social indicators in Burundi, and to assess who benefits from public spending. The last available household survey, dated 1998–99, estimates poverty at close to two-thirds of the population. The situation has likely changed over the last seven years. The implementation in 2005 of a new nationally representative extended Core Welfare Indicators Questionnaire (CWIQ) will be an opportunity to reassess the level of poverty in the country and the main vulnerable groups, and to provide a benchmark assessment of the state of social services delivery. Budgetary and delivery data for social services also need to be strengthened in order to better target and assess pro-poor spending, including specifying what expenditure should be considered pro-poor. To this end, data will be collected among potential users of facilities such as hospitals, clinics, and schools to help measure more precisely user-satisfaction with basic service delivery and identify unmet needs, and assess how to more effectively transfer resources to end-users.

22. The Joint Staff Assessment (JSA) of the I-PRSP by IDA and IMF staff, endorsed by the respective Boards of Directors, concluded that the I-PRSP framework was sound. A PRSP Preparation Status Report (PSR), issued by the Burundi authorities in April 2005, indicates that Burundi is on track to adopt a full PRSP based on a comprehensive participatory process at the colline (neighborhood) level, with local and provincial reports now completed. The analysis and synthesis of the results, including existing sources of poverty data, especially the household surveys, is expected to be completed by mid-July. The authorities now expect the full PRSP to be finalized in late 2005 (compared with end-August in the PSR), to account for the possibility of further technical delays and the possible impact of the current electoral process. It will be important to prepare well-costed sector strategies that would be integrated into the budgetary process. In a Joint Staff Advisory Note (JSAN) on the PSR, IDA and IMF staff found that the authorities’ revised PRSP preparation timetable appears feasible.

B. Macroeconomic Objectives

23. The authorities’ medium-term macroeconomic objectives are to achieve sustained economic growth of some 5 percent per annum, lower inflation to about 4–5 percent, maintain foreign reserves at 6 months of imports of goods and services, reduce the external current account deficit (after grants) to some 5½ percent of GDP by 2015, limit external financing to grants and highly concessional credits, restore a sustainable external debt position, and boost private savings and investment. To achieve these objectives, the government’s reform agenda focuses on promoting private-sector-led growth, including through privatization, improved governance, and nurturing a business and regulatory environment that encourages private sector activity. Sustained export-led growth will also be essential and policies to attain this objective are addressed in a recently completed Diagnostic Trade Integration Study (DTIS), prepared in the context of the Integrated Framework and will be furthered by an IDA Sources of Growth study to be completed by June 2006.6

C. Governance, Structural and Institutional Reforms

24. Good governance is a major aspiration of the Burundian people as evidenced in the Arusha Accord and in the I-PRSP. Measures taken include the appointment of a state minister for good governance in 2003, the establishment of an inter-ministerial committee to promote good governance and fight corruption, the preparation of a governance action plan, the strengthening of the Inspectorate General of Finances and the creation of an audit court, and the establishment of an International Commission of Inquiry on political prisoners. Outside the government, an Observatory for the Fight against Corruption and Economic Embezzlement (OLUCOME) provides vocal criticism of malfeasance.

25. Private sector development underpins pro-poor growth. As with public resources, attention to the local and ethnic aspects of privatization programs is essential in order to reduce the origins of violent conflict. Actions undertaken to promote the private sector include programs to clear the government’s arrears to private sector suppliers, the implementation of a revised corporate law, and preparation of a new commercial law. Revisions to the bankruptcy law and improvements in the arbitration system are under way, and a policy framework to implement the public enterprise privatization program has been prepared. Like other countries in conflict, Burundi has experienced major net disinvestment and destruction and as a result now has a deteriorated capital stock. Durable peace is necessary, as well as further policy actions, to improve the business environment and sustain the revival of growth. The DTIS will also provide guidance on the pro-private sector growth strategy.

26. Other key reforms concern community development and decentralization. The government’s priority in this area is effective decentralization and improved social services delivery through a community-driven project, supported by IDA. The main goals of the project are to: (i) promote social cohesion within and across communities; (ii) facilitate and support the reintegration of social groups displaced, or marginalized, as a result of the conflict; and (iii) foster local accountability through a participatory decision-making process for communities’ investments.

D. Social and Sectoral Policies

27. Burundi is far from meeting the MDGs related to health, education, including both child and general mortality. Public sector contributions to social services have been neither sufficient to restore services that were diminished or lost to the effects of conflict, nor—despite extensive programs—to raise the level of services to previously disadvantaged groups to national levels. Large-scale population displacements have seriously disrupted the delivery of social services, while the equally large return of refugees and displaced persons will place new burdens on overloaded local services.

28. Human resource development. Programs for the rehabilitation of education and health infrastructure are being implemented. Priorities are to improve access to these services in formerly underserved ethnic communities, decentralize health management to improve coverage and quality of basic health services, introduce an independent and autonomous management structure for public hospitals, and use cost-recovery mechanisms to improve and ensure sustainable provision of health services. A multi-sector strategy for the fight against HIV/AIDS is under way.

29. Education sector. The government’s efforts in the short term will be focused on rehabilitating facilities, ensuring the availability of minimum supplies, redeploying teachers to where there are shortages, and organizing teacher-training courses. In addition to these emergency actions, strategies need to be launched to revive the development of the sector. Key actions needed to reach the objectives of universal primary enrollment and improved access, quality and relevance for secondary and higher education include: (i) training of teachers at all levels in sufficient quantity and quality; (ii) updating technical education and university curricula and regulation; (iii) providing suitable teaching materials; (iv) upgrading the status and career prospects of teachers; (v) improving school planning and the distribution of schools; and (vi) implementing a framework for community empowerment and participation in primary and secondary schools.

30. Health sector. The government has embarked on a national consultation process to formulate a strategy that aims at improving access to affordable basic services to the general population. In line with the short-term objective of restoring services to pre-crisis performance levels, the government is focusing its efforts on: (i) improving health care coverage by rehabilitating and strengthening existing basic health services, establishing new facilities in line with the health map, and re-equipping health centers; (ii) strengthening preventive (reproductive health, immunization, sanitation, and nutrition education) and curative care through structured management and monitoring of epidemics, particularly HIV/AIDS; (iii) improving the availability of medical services and drugs by enhancing local production capacities and improving distribution channels; and (iv) redeploying health workers to, and offering incentives to retain available human resources in, areas of shortages especially rural and secondary towns, while continuing to train medical personnel. The medium-term objective is to institute and carry through reforms including: (i) establishing an independent national drug agency with management autonomy; (ii) initiating and developing a decentralized health sector management system; and (iii) establishing a coherent operational research program to identify and adequately address vulnerability and inequalities.

31. Gender and social protection. Actions taken include the preparation of a gender action plan, and establishment of a fund to support the development of micro-finance institutions in rural communities and safety net mechanisms to assist the poor and victims of conflict. The matrimonial code has been revised to grant property rights to wives, including the right of widows to inherit land. Campaigns to promote the role of women have been undertaken. Representation of women in public offices has been increased (the new Constitution assures 40 percent of parliamentarians are women, and the Arusha Accord established a minimum threshold that 30 percent of public office holders must be women).

32. Rural sector. This sector contributes nearly 50 percent of GDP and supports more than 90 percent of the population. Therefore, increasing agricultural productivity and diversification and rural development are among the government’s major priorities to revitalize the economy and reduce poverty. Implementation of the coffee sector reform strategy is expected to raise the income levels of some 800,000 small rural producers of this main cash crop. Measures have been implemented to rebuild livestock herds. Demographic pressures have led to the degradation of land and the government is addressing this through an Agriculture Rehabilitation and Sustainable Land Management Program supported by IDA. While seeking to increase the area available for farming, the government gives priority to programs for resettling war victims and returning refugees and reintegrating them in agricultural activities, restoring them where possible to their former properties, and arranging new properties or vocations for others.

33. Agriculture. The government’s priorities include enactment of new land legislation that would reduce disincentives against on-farm investment; implementation of a matching grant program designed to provide training and funding support to farmers’ groups for the start-up of productive and income-generating activities; a national program to enhance the supply and the quality of training and extension services to small producers, and to provide backstopping support to farmers’ organizations; and a National Action Program to address the problem of land degradation. Beginning in 2005, activities funded by IDA and the Global Environment Facility (GEF) are expected to reduce pressure on critical fragile marshlands, help maintain hydrological cycles, and contribute to carbon storage and nutrient cycling in forests and wetlands.

34. Infrastructure. The I-PRSP establishes a direct link between limited access to infrastructure services and the deteriorated social and economic indicators. The government strategy for the sector emphasizes seven areas: (i) preservation of the existing road networks; (ii) an increase in local financial resources for road maintenance; (iii) improvement of sector management; (iv) involvement of beneficiary populations; (v) improvement of access to the sea and balanced development of road infrastructure; and (vi) improvement of road safety. Labor-intensive techniques, together with active community ownership and participation, can help speed up an increase in the stock of sustainable infrastructure and the delivery of services in rural and urban areas, while making a direct contribution to poverty reduction. IDA will continue to support this area through a supplement to its ongoing Public Works and Employment Creation project.

35. Mining. The mining sector holds some promise. The government’s strategy is to relaunch a national mining exploration promotion program and to improve the legal and regulatory framework for the sector in order to attract private local and foreign investment. The government—with technical and financial assistance from UNDP, Germany, and France—has been exploring Burundi’s mineral potential with the objective of developing sufficient information to attract foreign investments.

IV. Debt Sustainability Analysis and Enhanced HIPC Initiative Assistance

A. Debt Reconciliation Status

36. The DSA presented below was prepared jointly by the authorities and IDA and IMF staff, based on loan-by-loan data provided by the authorities and creditors for public and publicly guaranteed debt outstanding and disbursed as of end-December 2004. All outstanding debt data has been reconciled with creditors.

B. The Structure of External Debt

37. At end-December 2004, Burundi’s public and publicly guaranteed external debt, including arrears, is estimated at US$1,384 million.7 Multilateral creditors account for 84.5 percent of this debt and Paris Club bilateral creditors for 10.5 percent (Box 3). Other official and commercial creditors account for the remaining 5 percent. After assuming full use of traditional debt relief mechanisms for bilateral and commercial debt, and excluding remaining multilateral arrears (which have been cleared primarily through external grants), the stock of external debt outstanding at end-2004 in present value (NPV) terms is US$902 million (Table 3, Figures 1 and 2).8

Table 3.

Burundi: Nominal and Net Present Value of External Debt Outstanding by Creditor Groups, End-December 2004

article image
Sources: Burundi authorities; and Bank-Fund staff estimates.

Includes a stock-of-debt operation on Naples terms at end-2004; and at least comparable action by other official bilateral and commercial creditors on eligible debt (pre-cutoff and non-ODA). The increase in the NPV of debt for the African Development Bank group, the European Union, and BADEA reflects the counting of arrears rescheduling and forgiveness operations in 2004. The concessional element of the rescheduling of US$16.7 million owed to BADEA and the cancellation of US$23.0 million owed to the AfDB group are considered as part of the HIPC relief effort. US$27.1 million in arrears owed to the European Development Fund were paid by the government of Burundi with a grant provided by the European Commission as budget support.

Paris Club cutoff date is June 30, 1999.

Figure 1.
Figure 1.

Burundi: Composition of Stock of External Debt at End-December 2004 Before Full Use of Traditional Debt-Relief Mechanisms

Citation: IMF Staff Country Reports 2005, 329; 10.5089/9781451802894.002.A001

Sources: Burundi authorities; and staff estimates.
Figure 2.
Figure 2.

Burundi: Composition of Stock of External Debt at End-December 2004 After Full Use of Traditional Debt-Relief Mechanisms

Citation: IMF Staff Country Reports 2005, 329; 10.5089/9781451802894.002.A001

Paris Club Rescheduling

Paris Club creditors agreed, on March 4, 2004, to a restructuring of Burundi’s public external debt, following the approval of a PRGF arrangement in January 2004. The deadline for concluding the bilateral agreements was extended from end-September 2004 to March 2005 and further to September. By February 2005, bilateral agreements had been signed with all but one creditor (Austria is waiting to sign a write-off with an elected government). The reconciliation of the debt was carried out in the context of the bilateral agreements. A total of US$85 million was treated, of which US$4 million was cancelled. The specifics are summarized below:

  • The agreement treats both accumulated arrears as of end-2003 and current maturities falling due in 2004–06 under Naples terms.

  • Pre-cutoff date (June 20, 1999) official development aid (ODA) debts are rescheduled over 40 years, with 16 years grace, at interest rates at least as favorable as the original interest rates.

  • Pre-cutoff date commercial credits are rescheduled over 23 years, with 8 years of grace, at market interest rates, with a present value reduction of 67 percent.

  • 75 percent of interest accruing in 2005–06 on rescheduled amounts was capitalized, with repayment (in equal semi-annual installments) between September 2008 and March 2016.

  • Creditors agreed to top-up the reduction rate to 90 percent (Cologne terms) as soon as Burundi has reached its decision point under the enhanced HIPC Initiative.

  • Burundi committed to seek comparable treatment from other external creditors.

38. Burundi had reached agreements to clear all its arrears to multilateral by end-2004 (Box 4). At end-2004, the total stock of remaining arrears amounted to US$78.6 million or 6 percent of total debt outstanding. This represents a US$106.1 million decrease compared to end-2003. About 27 percent of total arrears (US$21.3 million) were owed to multilateral creditors, but either resources have already been pledged to clear the arrears (conditioned on reaching the decision point) or the government has reached an understanding with the creditor to reschedule the arrears. The remaining 73 percent of total arrears (US$57.3 million) were owed to bilateral and commercial creditors, of which arrears to Paris Club bilateral creditors amounted to US$13.8 million (Box 4). US$43.5 million of arrears was still outstanding to other bilateral and commercial creditors.

Arrears Clearance

Burundi has made major efforts to normalize relations with creditors, and from 2003 to February 2005 reached the following agreements with multilateral and bilateral creditors:

  • The African Development Bank Group (AfDB) approved a framework for assisting post-conflict countries (PCC) to clear their arrears to the AfDB in July 2004. The framework is based on sharing the financing cost amongst the country, donors, and the AfDB PCC facility determined on a case-by-case basis. Earlier in 2004, Burundi had paid UA 6.7 million to clear 30 percent of total UA 22.6 million (US$35.9) in arrears at end-2003.1 Donors (France and the EU) committed UA 8.0 million and the AfDB Board of Directors approved a UA 8.0 million grant from the PPC facility to complete the arrears clearance program in October 2004.

  • The OPEC Fund implemented a Commodity Import Program (CIP) to achieve a concessional rescheduling of US$6.0 million in arrears at end-1998. The program was frozen after Burundi failed to repay US$1.5 million falling due in 1999. The CIP was resumed in 2003, after a payment from Burundi. The OPEC Fund granted an additional CIP to clear US$3.2 million in arrears accrued since 1998.

  • BADEA agreed on consolidating US$16.7 million in arrears in July 2003 and repayments falling due from August 2003 to end-2004. The total amount of US$17.3 million will be repaid on concessional terms over 11 years.

  • Arrears to the European Union totaling US$27.1 million to the EU and the European Investment Bank were cleared in mid-2004 entirely with a grant provided by the European Commission as budget support.

  • Arrears to Paris Club creditors were cleared in the context of the March 2004 rescheduling, with the last bilateral agreement signed in February 2005. Austria is awaiting an elected government with which to sign a write-off of its debt (Box 3).

1

The PCC facility is a legal autonomous entity under the auspices of the African Development Fund (AfDF) for the sole purpose of providing grant resources to assist qualifying PCCs clear their AfDB Group arrears. The facility is financed from UA 100 million from the AfDB net income allocations, UA 100 million from ADF-10 resources, and UA 7 million from Nigeria Trust Fund income allocations.

C. Debt Sustainability Analysis

39. The underlying macroeconomic projections assume that Burundi’s economy continues to recover in line with the government’s 2005 program, with the support of external financing on highly concessional terms (Box 5). According to the baseline scenario, which incorporates a domestic savings effort taking hold as recovery continues, Burundi’s external debt is projected to remain above the HIPC threshold for a considerable period and even after HIPC assistance (Tables 4-7). To reach the HIPC threshold at an early date would require a very high proportion of external financing to be provided as grants early in the projection period to finance priority expenditure (see sensitivity analysis below) and deep reforms to underpin stronger growth and export performance.

Table 4.

Burundi: HIPC Initiative—Assistance Under a Proportional Burden-Sharing Approach 1/ 2/

(In millions of U.S. dollars, unless otherwise indicated)

article image
Sources: Burundi authorities; and staff estimates.

The proportional burden-sharing approach is described in “HIPC Initiative—Estimated Costs and Burden-Sharing Approaches.”

Includes a hypothetical stock-of-debt operation on Naples terms (December 2004) and comparable treatment treatment by other official bilateral creditors.

Includes official bilateral creditors and commercial debt.

Each creditor’s NPV reduction in percent of its exposure at the decision point.

Based on end-2004 data after full application of traditional debt-relief mechanisms.

Based on the three-year export average (backward-looking average, i.e., 2002–04).

Table 5.

Burundi: Discount and Exchange Rate Assumptions at End-2004

article image
Sources: OECD; and IMF, International Financial Statistics.

The discount rates used are the average commercial interest reference rates over the six-month period prior to end-December 2004, i.e., the end of the period for which actual debt and export data are available.

The exchange rates are expressed as national currency per U.S. dollar at end-December 2004.

Table 6.

Burundi: External Debt Service, 2005–24 1/

(In millions of U.S. dollars, unless otherwise indicated)

article image
article image
Sources: Burundi authorities; and staff estimates and projections.

All debt indicators refer to public and publicly guaranteed (PPG) debt and are defined after rescheduling, unless otherwise indicated.

Includes only scheduled debt service on current maturities and does not include projected interest on arrears.

Assumes a hypothetical stock-of-debt operation by the Paris Club creditors on Naples stock terms and comparable treatment from other bilateral and commercial creditors; excludes multilateral arrears clearance.

Creditors are generally assumed to start providing HIPC assistance through the interim period and to provide the balance of their assistance at the completion point expected in end-2006. Specifically, the IMF, World Bank, AfDB, the EU and OPEC Fund (as a result of current negotiations presented in Box 4) are expected to start providing assistance during the interim period, while the remaining multilaterals are assumed to provide their assistance at the completion point.

Paris Club creditors are assumed to provide a Cologne flow rescheduling on eligible debt during the interim period and to provide a stock of debt operation on Cologne terms at the completion point. Other bilateral and commercial creditors are assumed to provide assistance on comparable terms.

HIPC assistance is supposed to be delivered from August 2005. For Paris Club and other bilateral and commercial creditors, HIPC assistance is measured by the debt service reduction between the projected debt service after full use of traditional debt relief and debt service after the application of HIPC relief. For multilateral creditors, HIPC assistance is measured by the debt service reduction between the debt service following arrears clearance operations and after the application of HIPC relief.

As defined in IMF, Balance of Payments Manual, 5th edition, 1993. Refers to current year exports. 10/ Revenues are defined as central government revenues, excluding grants.

Revenues are defined as central government reveunes, excluding grants.

Table 7.

Burundi: Net Present Value of External Debt After HIPC Assistance, 2004–24

(In millions of U.S. dollars, unless otherwise indicated)

article image
article image
Sources: Burundi authorities; and staff estimates and projections.

In terms of simple historical three-year average of exports of goods and nonfactor services.

Shows the external debt situation after the full use of traditional debt-relief mechanisms, and assuming at least comparable treatment from official bilateral creditors.

Assumes interim relief under the enhanced Initiative in August 2005-December 2006 and full delivery of assistance in December 2006. For the assumptions, see footnote 6 of Table 6.

Assumes also a flow rescheduling on Naples terms during the consolidation period, since Burundi has received on March 2004 a Naples flow for the consolidation period which clears all arrears to Paris Club creditors before the decision point. Then during the interim period, assumes a flow rescheduling under cologne term, and a stock operation under Cologne term at the completion point.

Relief includes the cancellation of 2/3 or arrears to the African Development Bank.

Relief includes the concessional element of the arrears rescheduling agreed with BADEA.

NPV of debt shows the results of the (hypothetical) unconditional commitment and delivery of enhanced HIPC assistance at end-2004.

As defined in IMF, Balance of Payments Manual, 5th edition, 1993. Refers to current year exports.

Three-year backward looking average of exports of goods and nonfactor services.

Revenues are defined as central government reveunes, excluding grants.

40. The medium-term outlook envisages strong economic growth, continued consolidation of the peace process, macroeconomic stability, a deepening of structural reforms, and full normalization of relations with creditors. Real GDP growth is projected to be maintained at 5 percent, a pace that could be exceeded early in the projection period, under the impulse of the reconstruction effort, as returning refugees and demobilized combatants begin productive activities, land and other property in recently insecure locations are reclaimed and are put to economic use, and structural reforms take hold (Box 5 and Table 10). Starting from a low base in 2004, exports are projected to drive growth over the long term, with the recovery of traditional sectors such as coffee, tea and cotton, as reforms and privatization take effect. In particular, coffee sector reforms are geared toward enhancing the quality of production and Burundi’s coffee is projected once again to fetch a premium over international prices starting in 2008. Nontraditional sectors in areas such as horticulture, fresh fruits and vegetables, and tourism are expected to make an increasing contribution with the expected return of direct air links to Europe, as the security situation continues to improve. Securing these developments will require the authorities to energetically implement their private sector growth strategy. With imports easing after the reconstruction period, the trade balance of goods and services improves over the projection period. The current account deficit is projected to widen initially to above 10 percent of GDP, before narrowing to about 3.5 percent of GDP by 2024, while gross investment and national savings gradually rise to 13.7 and 10.1 percent of GDP, respectively, by 2024. Program financing is assumed to be on IDA credit terms, while project financing is assumed to be 50 percent on IDA terms and 50 percent on ODA terms. The financing gap would be covered by enhanced HIPC Initiative debt relief.

Table 8.

Burundi: External Debt Indicators and Sensitivity Analysis, 2004–24 1/

(In percent, unless otherwise indicated)

Sources: Burundi authorities; and staff estimates and projections.

All debt indicators refer to public and publicly guaranteed (PPG) debt and are defined after HIPC assistance assumed delivered unconditionally at end-2004.

As defined in IMF, Balance of Payments Manual, 5th edition, 1993. 2001 excludes service exports to MONUC.

Based on a three-year average of exports on the previous year (e.g., export average over 1999–2001 for NPV of debt-to-exports ratio in 2001).

Revenue is defined as central government revenue, excluding grants.

Assumes 1 percent lower export growth from 2005 to 2023.

Assumes that non-oil import prices would increase 5 percent more each year in 2005–09 and would increase at the same rate assumed in the baseline scenario thereafter.

Assumes that the interest rate on all debt is 2 percentage point higher than in the baseline from 2005 onwards.

Assumes that project financing and budget support (excluding the PRGF) are in the form of grants, from 2006 to 2007; in 2008–11 financing will be in the form of 50 percent grants and 50 percent concessional loans, before returning to the same level as in the baseline.

As defined in IMF, Balance of Payments Manual, 5th edition, 1993. Refers to current year exports.

Three-year backward-looking average of exports of goods and nonfactor services.

Table 8.

Burundi: External Debt Indicators and Sensitivity Analysis, 2004–24 1/

Sources: Burundi authorities; and staff estimates and projections.

All debt indicators refer to public and publicly guaranteed (PPG) debt and are defined after HIPC assistance assumed delivered unconditionally at end-2004.

As defined in IMF, Balance of Payments Manual, 5th edition, 1993. 2001 excludes service exports to MONUC.

Based on a three-year average of exports on the previous year (e.g., export average over 1999–2001 for NPV of debt-to-exports ratio in 2001).

Revenue is defined as central government revenue, excluding grants.

Assumes 1 percent lower export growth from 2005 to 2023.

Assumes that non-oil import prices would increase 5 percent more each year in 2005–09 and would increase at the same rate assumed in the baseline scenario thereafter.

Assumes that the interest rate on all debt is 2 percentage point higher than in the baseline from 2005 onwards.

Assumes that project financing and budget support (excluding the PRGF) are in the form of grants, from 2006 to 2007; in 2008–11 financing will be in the form of 50 percent grants and 50 percent concessional loans, before returning to the same level as in the baseline.

As defined in IMF, Balance of Payments Manual, 5th edition, 1993. Refers to current year exports.

Three-year backward-looking average of exports of goods and nonfactor services.
Table 9.

Burundi: External Resource Transfer, 2005–24

(In millions of U.S. dollars, unless otherwise indicated)

article image
Sources: Burundi authorities; and staff estimates and projections.

Includes only scheduled debt service on current maturities and does not include projected penalty interest on arrears.

Arrears clearance reflects a Naples flow operation with special treatment in the form of capitalization of moratorium interest for Paris Club creditors and comparable treatment by non-Paris Club bilateral creditors, and rescheduling of arrears by multilateral creditors.

Assumes a hypothetical stock-of-debt operation on Naples terms and comparable treatment from other bilateral creditors, and multilateral arrears clearance.

Paris Club and commercial creditors are assumed to deliver their share of relief as of the completion point (beginning February 2006). Non-Paris Club creditors are assumed to provide a Cologne flow rescheduling on eligible debt, and the remaining eligible debt, and the remaining of the required HIPC assistance is to be delivered at the completion point through a stock-of-debt operation. Multilateral creditors are also assumed to provide HIPC debt relief as of the completion point, except for the IMF, the World Bank, the EU, and OPEC Fund for which the delivery would start as of the decision point (August 2005).

Includes debt service after arrears clearance and after HIPC assistance and, from 2005 onwards, the debt service on new borrowing.

After the projected assistance under the enhanced HIPC Initiative.

Table 10.

Burundi: Long-Term Macroeconomic Assumptions, 2003–24

Sources: Burundi authorities; and staff estimates and projections.
Sources: Burundi authorities; and staff estimates and projections.

Main Assumptions in the Debt Sustainability Analysis

Real GDP growth averages 5 percent over 2004–24, underpinned by a peacetime broad-based recovery in agricultural production and other private sector activities.

CPI inflation (end-period) is projected to decelerate from 12 percent in 2004 to 10 percent in 2005, and subsequently to drop steadily to 4 percent by 2011 and remain at that level through 2024.

Fiscal policy aims at achieving the government’s spending priorities while maintaining macroeconomic stability. Revenues, excluding grants, are assumed to rise from about 18 percent of GDP in 2005 to about 21 percent of GDP by 2024.

Gross official external financing (grants plus loan disbursements) is expected to be about 22 percent of GDP during 2004–05, then trend down to about 10 percent by 2009 and further to 6 percent of GDP in 2024. Net resource transfers are expected to remain positive throughout the projection period trending down from 32 percent in 2005 to 9 percent of GDP in 2024.

Official financing: program loans (excluding the IMF) are assumed to be entirely at concessional rates on IDA or comparable terms. The financing gap would be covered by HIPC debt relief. Project loans would be evenly split between official ODA terms and IDA terms.

Export receipts in U.S. dollars are expected to remain stable in 2006, rise by 21 percent in 2007, and then rise annually at rates between 7 and 11 percent, with coffee production gradually reaching about 55,000 tons. Coffee quality is assumed to improve, reflecting the impact of the sector’s reform, and the price discount relative to world prices is assumed to revert to a premium after 2008. The composition of exports is expected to gradually shift from predominantly coffee and tea to include other sectors (other agricultural products, processed foods and light manufactures). In volume terms export growth would average 6.5 percent over the projection period, including a spurt to 8 percent in the 2015–20 period from non-traditional sectors. The GDP share of exports of goods and services is projected to rise from 10 percent in 2005 to about 13 percent in 2024.

Imports of goods and services in U.S. dollars are projected to average 34 percent of GDP in 2004–05 and, with emergency assistance and reconstruction-related imports winding down, to decline to 25 percent of GDP in 2013 and subsequently trend gradually down to 22 percent of GDP in 2024. In volume terms, import volumes would rise an average of 4.5 percent from 2009 onwards, following the 2006–08 period of consolidation.

41. The projected baseline growth rates and export performance may appear optimistic, especially seen against Burundi’s past experience. The rate of real GDP growth slightly exceeds that observed in periods of peace during the 1980s, but is in line with evidence from post-conflict recovery elsewhere. It is likely that growth will be bolstered by the economic contribution of the hundreds of thousands of returning refugees and displaced persons, and the reintegration of tens of thousands of former armed combatants into productive society. Moreover, the baseline does not incorporate a likely post-conflict catch-up period with higher rates of growth. Coffee exports are projected to about triple over the next twenty years, consistent with Burundi’s potential and historical high production. The projections also take into account an export-led diversification of the economy, which has potential to expand into agro-based goods, light industrial manufactures, and possibly high value mineral resources.

42. On the basis of these assumptions, and taking into account the phased-in provision of enhanced HIPC Initiative assistance, the NPV of outstanding debt-to-exports ratio would remain significantly above 150 percent throughout the interim period (Table 7 and Figure 3), notwithstanding the assumed high share of grants in official assistance. The estimates for the amount of HIPC assistance are based on the NPV of the stock of multilateral debt at end-2004 prior to arrears clearance and on the end-2004 NPV of bilateral and commercial debt assuming the full use of traditional debt relief mechanisms as simulated by a hypothetical stock-of-debt operation on eligible debt on Naples terms. After the full delivery of HIPC assistance, the ratio of the NPV of debt to exports is projected to rise initially to 168 percent in 2010 and then to decline steadily to 86 percent in 2024. This profile reflects significant new reconstruction and adjustment lending by multilaterals on highly concessional terms or as grants in the 2005–06 period.9

Figure 3.
Figure 3.

Burundi: External Debt Profile: External Sustainability Indicators, 2004–24

(In percent)

Citation: IMF Staff Country Reports 2005, 329; 10.5089/9781451802894.002.A001

Sources: Burundi authorities; and staff estimates and projections.

D. Possible HIPC Initiative Assistance

43. To bring the external debt-to-exports ratio down to the target ratio of 150 percent requires, after the full use of traditional debt-relief mechanisms, a common reduction factor of 91.5 percent for all creditors or relief in the amount of US$826 million in NPV terms (Table 4). Possible assistance from multilateral creditors would be about US$701 million in NPV terms, and relief from bilateral and commercial creditors would amount to US$124 million. Paris Club are expected to provide US$86 million of relief in NPV terms, commercial creditors US$5 million, and other official bilateral creditors US$33 million. Assuming the time profile and modalities laid out below, this translates into about US$1,495 million of debt relief in nominal terms over time.10 The following assumptions were made in projecting the time profile of possible enhanced HIPC Initiative assistance:

  • Paris Club bilateral creditors. There would be a flow rescheduling on Cologne terms—or a 90 percent NPV reduction—after reaching the decision point (which is assumed to take place at end-June 2005), with delivery of the remaining required assistance at the completion point expected at end-2006, through a stock-of-debt operation. Paris Club creditors agreed to grant a topping-up of the debt reduction to Cologne terms once Burundi reaches decision point under the HIPC Initiative.

  • Comparable treatment would be provided by non-Paris Club official bilateral and commercial creditors.

  • IMF assistance would total US$27.84 million in NPV terms. Immediately following the approval of the decision point by the Boards of IDA and the IMF, the IMF would provide interim assistance equivalent to about 50 percent of debt-service falling due (equivalent to interest obligations on PRGF borrowing) from the decision point in 2005 through end-2006. PRGF principal repayments are due to the IMF beginning August 2009. Therefore, most of the IMF’s remaining HIPC relief would be delivered following the completion point, with debt-service reduction through 2015 (Table 11).

  • IDA would provide total assistance amounting to US$424.8 million in NPV terms. Immediately following the approval of the decision point by the Boards of IDA and the IMF, IDA would begin to provide interim assistance in the form of debt-service reduction on debt outstanding and disbursed at end-2004, and, assuming that Burundi reaches the completion point at end-2006, would continue until 2039 (Table 12). Delivery of the interim assistance by IDA is expected to start in August 2005. Savings as a percent of debt service due to IDA for 2005 is expected to be 39 percent and to increase to 90 percent thereafter.11

Table 11.

Burundi: Possible Delivery of IMF Assistance Under the Enhanced HIPC Initiative, 2005–15 1/

(In millions of U.S. dollars, unless otherwise indicated)

article image
Source: Fund staff estimates and projections.

Total IMF assistance under the enhanced HIPC Initiative is US$ 27.84 million in NPV terms calculated on the basis of data available at the decision point, excluding interest earned on Burundi’s account and on committed but undisbursed amounts as described in footnotes 5 and 6.

Debt service for 2005 includes obligations from July onward.

Forthcoming obligations are as of end-May 2005.

The first delivery of interim assistance would be deposited into Burundi’s account in August 2005 to cover PRGF interest obligations falling due to the Fund over the next 12 months. Since there are no principal repayment obligations falling due to the Fund until August 2009, HIPC assistance will be applied to cover PRGF interest obligations falling due between 2005 and end-2008.

Most of the IMF’s grant HIPC assistance assumed to be disbursed into Burundi’s account at the completion point at end-2006, which is reflected in the calculation of interest.

Includes estimated interest earnings on: (a) amounts held in Burundi’s account; and (b) up to the completion point, amounts committed but not yet disbursed. It is assumed that these amounts earn a rate of return of 5.25 percent in U.S. dollar terms, but actual interest earnings may be higher or lower. Interest accrued during a calendar year will be used toward the first repayment obligation(s) falling due in the following calendar year except in the final year, when it will be used toward payment of the final obligation(s) falling due in that year. Interest accrued during the interim period will be used toward the repayment of obligations falling due during 2009–11.

Table 12.

Burundi: Possible Delivery of World Bank Group’s Assistance Under the Enhanced HIPC Initiative, 2005–38 1/

(In millions of U.S. dollars, unless otherwise indicated)

article image
Source: Staff estimates.

Enhanced HIPC assistance of US$426 million in end-2004 NPV terms proposed to be delivered over about 34 years through a 90 percent relief on the debt service falling due to IDA on credits outstanding at end-2004, correspondent to a nominal relief of US$773 million.

Decision point is expected to be reached in August 2005. Delivery of the interim assistance by the World Bank Group is expected to start on August 15, 2005.

Table 13.

HIPC Initiative: Status of Country Cases Considered Under the Initiative, June 1, 2005

article image
Sources: IMF and World Bank Board decisions, completion point documents, decision point documents, preliminary HIPC documents, and staff calculations.

Assistance levels are at countries’ respective decision or completion points, as applicable.

In percent of the net present value of debt at the decision or completion point (as applicable), after the full use of traditional debt-relief mechanisms.

Côte d’Ivoire reached its decision point under the original framework in March 1998. The total amount of assistance committed thereunder was US$345 million in NPV terms.

Nonreschedulable debt to non-Paris Club official bilateral creditors and the London Club, which was already subject to a highly concessional restructuring, is excluded from the NPVof debt at the completion point in the calculation of this ratio.

Equivalent to SDR 1,722 million at an SDR/USD exchange rate of 0.6804, as of June 1, 2005.

It is suggested that enhanced HIPC relief for Côte d’Ivoire overtake the commitments made under the original HIPC framework.

44. All other multilateral creditors are assumed to provide debt-service reduction until their contributions meet the requirement under the enhanced HIPC Initiative. Discussions are ongoing with the AfDB and other multilaterals as to the precise modalities.

E. Impact of HIPC Initiative Assistance

45. Based on the underlying macroeconomic projections, the NPV of debt-to-exports ratio would not decline below 150 percent until 2013, and significant donor support on grant terms will be necessary through the medium term. However, HIPC assistance would considerably reduce the debt-service burden over the medium term. After the clearance of arrears owed to multilateral creditors and notwithstanding the relief received from Paris Club creditors in 2004, scheduled debt service would rise as a consequence of the reprofiled repayment terms on the arrears and the repayments of moratorium interest (Table 6). HIPC assistance in the interim period (July 2005 to end-2006) would reduce debt service due from 52 percent of exports and 29 percent of fiscal revenue in 2005 to 12.6 percent of exports and 6.2 percent of fiscal revenue in 2006.12 Debt service would subsequently trend down to an average of 5.3 percent of exports and 3.2 percent of fiscal revenue in 2015–24. Additional external resources, including from the recovery of exports, will more than offset debt service obligations and result in a net positive inflow during the interim period and beyond. In the interim period projected ratios of debt service to exports after HIPC relief do not compare favorably with the average ratio (8.2 percent in 2004) of the 27 countries that have reached their decision or completion points because of the limited number of creditors assumed to provide interim relief and debt service on new borrowing. The reduction of debt service as a result of HIPC assistance is expected to average nearly US$26 million in 2005–06, increasing to an annual average of about US$46 million after the completion point.13 The amount of resources freed by HIPC relief would permit a sizeable increase in Burundi’s poverty reducing spending, and is projected to exceed current expenditure on health and education.

F. Sensitivity Analysis

46. Four scenarios were carried out to test the sustainability of Burundi’s external debt after HIPC Initiative assistance (Table 8, Figure 4).

Figure 4.
Figure 4.

Burundi: Sensitivity Analysis, 2004–24

(In percent)

Citation: IMF Staff Country Reports 2005, 329; 10.5089/9781451802894.002.A001

Sources: Burundi authorities; and staff estimates.

47. A first scenario highlights the risks of failing to achieve robust and prolonged export growth. The baseline scenario assumes that exports would significantly contribute to growth over the medium and long term. If the assumption is changed so that export volumes are projected to increase at a rate 1 percentage point lower than that of the baseline scenario, the NPV of debt-to-exports ratio is projected to average 29 percentage points more than the baseline scenario in the period 2004–14 and 130 percentage points above the baseline level at the end of the projection period.

48. The second scenario considers the sensitivity of the baseline projections to higher non-oil prices on imports, assuming an unchanged level of investment and private and public consumption. Non-oil prices are assumed to be 5 percentage points higher than projected during 2006–09 and thereafter to increase according to the baseline scenario. The higher import growth is assumed to be partially financed by additional concessional borrowing for the whole projection period. Under these assumptions, the debt-to-exports ratio worsen considerably at an average of almost 50 percentage points above the baseline in 2004–14 and remaining at about 105 percentage points above the baseline thereafter. The debt service ratio, however, would deteriorate only slightly.

49. The third scenario considers the impact of a two percentage point increase in interest rates paid on all loans, starting in 2005 and remaining in place throughout the projection period. This scenario highlights the need to maintain prudent debt management in the long run, given the low export base. Both export receipts and government revenues are assumed to remain unchanged from the baseline scenario. Under these assumptions, the ratio of the NPV of debt to exports would remain on average almost 60 percentage points higher than the baseline scenario over the period 2004–14, while the debt-service-to-exports ratio would average some 6 percentage points higher, a differential that would be maintained to the end of the projection period.

50. A fourth scenario illustrates the effect on debt ratios of assuming future financing (excluding the IMF) is entirely in grants until the ratio of NPV of debt to exports reaches 150 percent. Under this scenario, Burundi would benefit from 100 percent grant financing during the period 2006–07. After 2007, financing needs would be met by a mix of 70 percent grants and 30 percent concessional loans to maintain the NPV of debt permanently below the HIPC threshold. The highly concessional financing lowers the debt-service ratio only marginally with respect to the baseline scenario over the projection period.

51. The sensitivity analysis indicates that Burundi’s ability to service external debt after HIPC relief is very vulnerable to external shocks and export performance. The achievement of a robust external debt position is also heavily influenced by the composition and terms of external assistance. The small export base constrains the amount of debt that Burundi will be able to service in the medium and long term, especially if public expenditure is to give priority to achieving the MDGs. The analysis underscores the importance of a strong and sustained domestic reform effort, an active program to develop exportable production (traditional and nontraditional), prudent debt management strategy, and external assistance heavily weighted toward grants.

G. Summary of Findings from the DSA

52. The DSA shows that even after HIPC assistance Burundi would remain above the HIPC threshold for a considerable period of time, leaving it vulnerable to prolonged risk of debt distress.14 Furthermore, the sensitivity analysis underscores the vulnerability of Burundi’s debt situation to exogenous shocks and export performance. In particular, the analysis highlights the fact that Burundi’s small export base implies that relatively modest shocks can lead to substantial changes in the risk of debt distress as measured by the ratio of the NPV of debt to exports. In addition, achievement of a robust external position is heavily influenced by the composition and terms of external assistance.

53. The evolution of Burundi’s debt situation will depend critically on action in several policy areas. First, the small export base constrains the amount of debt that Burundi will be able to service in the medium and long term, especially if public expenditure is to give priority to achieving the MDGs. This underscores the importance of a strong and sustained domestic reform effort, notably an active program to develop exportable production (traditional and nontraditional), aimed at promoting private sector investment and improved infrastructure. Second, as underlined by the fourth scenario, the provision of external financial assistance would need to be heavily weighted (more so than in the past) toward grants. Third, a prudent debt management strategy should be pursued.

V. The Floating Completion Points

A. Triggers for the Floating Completion Point

54. IDA and IMF staff have reached understandings with the authorities on the choice of completion point triggers, summarized in Box 6, which also reflect the views expressed by Executive Directors during the discussion of the preliminary HIPC document. These include (a) the standard general triggers pertaining to (i) the preparation of a full PRSP through a participatory process and one year of implementation, duly documented in an annual progress report that has been the subject of analysis in a Joint Staff Advisory Note; (ii) maintenance of macroeconomic stability as evidenced by satisfactory performance under the program supported by a PRGF arrangement; and (iii) utilization of enhanced HIPC Initiative budgetary savings in line with the priorities identified at the decision point and in the PRSP and approved by parliament, and to be monitored by a national independent oversight committee (see section C below); and (b) specific and monitorable policy measures on public expenditure management, governance, demobilization, structural reforms, key social sectors (health and education), and debt management. These triggers are considered essential to the success of the enhanced HIPC Initiative in Burundi. The governance trigger reflects the need to raise the knowledge base and undertake the analyses necessary to improve service delivery in key sectors. The trigger on demobilization reflects the importance of security to a durable peace and development. Similarly, privatization will play a key role in attracting investment and in achieving higher growth rates, not least in the key coffee sector. Should Burundi remain on track with regard to implementation of its poverty reduction strategy and economic reforms supported by IDA and the IMF, the HIPC completion point could be reached as early as end-2006.

Triggers for the Floating Completion Point

1. PRSP

Preparation of a full PRSP through a participatory process and its satisfactory implementation for one year, as evidenced by an Annual Progress Report that has been the subject of analysis in a Joint Staff Advisory Note.

2. Macroeconomic stability

Maintenance of macroeconomic stability as evidenced by satisfactory performance under the PRGF-supported program.

3. Use of budget savings resulting from HIPC-related debt-service relief during the interim period

Use of budgetary savings from debt relief in accordance with the priorities identified at the decision point and in the PRSP duly documented and discussed by a national Independent Oversight Committee on a semi-annual basis.

4. Public expenditure management

Establishment of an integrated public expenditure computerized system that provides a budget monitoring and control system, in particular for poverty-related spending, and the production of at least two quarterly budget execution reports based on the new unified budget nomenclature.

5. Governance measures and the delivery of services in key sectors

Completion for the education, health, and justice sectors of (i) a budget tracking exercise (budget monitoring) of public spending on the delivery of pro-poor services; (ii) an evaluation by users of the quality of services provided; (iii) an evaluation by providers of constraints to effective delivery of pro-poor services; and (iv) preparation of an action plan to address problems identified.

6. Demobilization

Execution of the National DDR Program in line with the pace and final objectives set forth in the Letter of Demobilization Policy to the World Bank, dated 19 February 2004.

7. Structural measures:

Tendering for sale the state holdings in a majority of coffee washing stations.

8. Social sectors

Education: Increase in the gross national enrollment rate in primary schools from 74 percent in 2003/04 to 77 percent in 2006; and from 16 percent in 2003/04 to 18 percent in 2006 in secondary schools, subject to the provision that the average increase in provinces with lower than average enrollment rates in 2004 must be higher than the increase in the national rate over the same time period.

Health: Increase in the national immunization rate for children of less than one year of age from 75 percent in 2004 to 85 percent in 2006, subject to the provision that the average increase in provinces with lower than average immunization rates in 2004 must be higher than the increase in the national rate over the same time period.

9. Debt management

Production of monthly external debt reports, including projections for the upcoming three months, for at least six months before the completion point.

B. Monitoring the Floating Completion Point Triggers

55. IDA and IMF staff will work together closely to monitor the completion point triggers, with each institution leading on issues where its staff has primary competence, while also incorporating contributions of the staff from the other institutions. IMF staff will take the lead in monitoring macroeconomic stability. IDA staff will take the lead in monitoring progress in the preparation and implementation of the PRSP, as well as progress on sector-related triggers, including those pertaining to governance, service delivery, public expenditure management and tracking of poverty-related expenditures (including those financed by enhanced HIPC Initiative assistance), and demobilization. IMF and IDA staffs will jointly monitor budget control and management, structural reform, and progress in improving debt management.

C. The Use and Monitoring of Enhanced HIPC Initiative Debt Relief

56. The authorities are committed to ensuring that assistance under the enhanced HIPC Initiative is used to enhance poverty-related spending. Securing the effective use of debt relief assistance for poverty reduction and, more generally, the capacity to implement and monitor a shift in the composition of expenditure toward poverty-related objectives, is a key element of the enhanced HIPC Initiative. The authorities are committed to continuing efforts to strengthen the programming, management and control of expenditure, and to improve service delivery in key sectors. Within this framework, the technical assistance that is already being provided in the area of public expenditure management by IDA, particularly through the EMSP and by the IMF, will be essential to establishing adequate budget management capacity.

57. A new budget nomenclature has been put in place with the 2005 budget to enable the tracking of poverty-related resources allocated by activity and region, and the monitoring of the efficiency of resource use for poverty reduction. In addition, financial management is to be strengthened by the introduction of a computerized integrated public expenditure management system in 2005. A special treasury subaccount will be established in the central bank where the budgetary savings from the debt relief will be deposited. IDA’s EMSP and a grant on procurement reform will provide resources to strengthen and modernize the public procurement system with the adoption and implementation of a legal, regulatory, and institutional framework in line with international best practices.

58. The government intends to use the HIPC-related savings to fund activities identified in the I-PRSP and PRSP (which is expected to be completed by late-2005) These activities and the related financing from enhanced HIPC Initiative debt relief would be incorporated in a supplementary budget for 2005 and/or the 2006 budget. The related spending will be codified as HIPC expenditures in the integrated public expenditure management system, using the new budget nomenclature, to permit the monitoring and evaluation of poverty-related expenditures in general and those funded from enhanced HIPC Initiative debt relief in particular. A proposed, but nonexclusive, set of areas where the use of enhanced HIPC Initiative debt relief assistance could have a significant impact on poverty reduction in Burundi is shown in Box 7.

Expenditure Priorities for the Use of HIPC Debt Relief

National reconciliation and security

  • Resettlement of internally displaced people and refugees.

  • Economic reintegration of civil strife victims.

  • Justice system reform.

Health

  • Public awareness programs to control the spread of HIV/AIDS.

  • Rehabilitation and strengthening of existing basic health facilities and services and, establishment of new facilities in under served areas.

  • Training and retraining of health personnel of all categories and using incentives to deploy and retain them in the health facilities, especially in rural areas and secondary towns.

  • Reinforcing programs for the prevention and control of the major endemic-epidemic diseases and promoting health education.

  • Improving the availability of drugs in urban and rural facilities.

  • Improving the performance of national child vaccination program.

  • Improving access to potable water supplies particularly in the rural areas.

Education

  • Rehabilitation or reconstruction of rural schools.

  • Provision of suitable teaching materials for rural and urban schools.

  • Increasing the number of teaching personnel, particularly in rural and underserved areas.

Infrastructure

  • Rehabilitation and expansion of coverage of rural water supply systems.

  • Rehabilitation of key rural roads and bridges.

  • Construction of new roads and bridges in urban and rural areas.

Agriculture

  • Strengthening research and development through support to agricultural research institutions.

  • Promoting private sector involvement.

59. The expenditures financed by enhanced HIPC Initiative debt relief will be monitored by an Independent Oversight Committee made up of national and local representatives, as well as members of the international donor community. This approach has been successfully implemented in other countries in the region. The use of enhanced HIPC Initiative assistance would be subject to independent technical and financial audits to ensure the effective use of these resources for poverty reduction, and all such audits would be made publicly available.

D. The Views of the Authorities

60. The Burundi authorities have emphasized that Burundi’s external debt and debt service remain unsustainably high and could further delay national reconstruction and social improvement. They have also noted that Burundi is one of the poorest countries in sub-Saharan Africa, with a large segment of its population lacking access to basic needs such as education, health, and safe water, and that the conflict aggravated the level of poverty by the massive destruction of infrastructure, especially in rural areas. Debt relief that could be available under the enhanced HIPC Initiative would help free financing for critical social and infrastructure programs, and allow the government to accelerate and intensify reconstruction efforts, as well as improve access to primary education, preventive health care, and urban and rural infrastructure.

VI. Issues for Discussion

61. This paper presents a decision point assessment of Burundi’s eligibility for assistance under the enhanced HIPC Initiative, and seeks the Executive Boards’ endorsement of this assessment. In addition, Executive Directors’ views and guidance are sought on the following issues:

  • Eligibility and decision point. Do Directors agree that Burundi is eligible for relief under the enhanced HIPC Initiative, and do they recommend approval of a decision point?

  • Amount and delivery of assistance. In order to reduce the NPV of debt to exports ratio to 150 percent, the total amount of assistance under the enhanced HIPC Initiative is estimated at US$826 million in NPV terms (Table 4). Of this amount, US$424.8 million is to be provided by IDA and US$27.9 million by the IMF. The staff and management recommend that the World Bank and IMF provide interim assistance in line with existing guidelines. Do Directors agree that the IMF and IDA should provide interim assistance between the decision and completion points, in line with existing guidelines?

  • Completion point. Do Directors agree that the floating completion point will be reached when the triggers in Box 6 have been met and satisfactory assurances of other creditors’ participation under the enhanced HIPC Initiative have been received?

Figure 5.
Figure 5.

Burundi: External Debt Profile: Fiscal Sustainability Indicators, 2004–24

(In percent)

Citation: IMF Staff Country Reports 2005, 329; 10.5089/9781451802894.002.A001

Sources: Burundi authorities; and staff estimates and projections.
Figure 6.
Figure 6.

Burundi: External Debt Profile: Net Present Value of Debt-to-GDP Ratio, 2004–24

(In percent)

Citation: IMF Staff Country Reports 2005, 329; 10.5089/9781451802894.002.A001

Sources: Burundi authorities; and staff estimates and projections.

ANNEX I: Burundi: Debt Management Capacity

1. The “Direction de la Dette Extérieure” (DDE) at the Ministry of Finance is responsible for debt management; while the central bank, Banque de la République du Burundi (BRB), collects and gathers debt and external sector statistics.

2. The main impediment to debt management remains the lack of trained human resources at the DDE and the lack of communication among the units responsible for the management of external debt. This considerably limits the authorities’ debt management capacity particularly in the context of the enhanced HIPC Initiative debt sustainability analysis (DSA) process. During 2004, the authorities have benefited from training on the enhanced HIPC Initiative, debt rescheduling, and debt management by Debt Relief International. The authorities recognize the urgent need to reinforce the DDE and are planning a major restructuring of the DDE and a strengthening of capacities. At present, debt management is tracked and monitored by SYGADE software, but due to limited trained human resources SYGADE is not used in its full capacity. However, data produced on the level of debt disbursed, amount of debt serviced, and payment plan schedules are accurate and up to date. Also, while Debt-Pro software has been installed it is not yet being used. Furthermore, for effective external debt management, Burundi should have well-coordinated institutional arrangements that are fully integrated within the overall macroeconomic policymaking framework. In this regard, the DDE should be strengthened to be able to better coordinate with the cabinet of the Finance Minister and all services in charge of IMF/WB program monitoring. Support to address these weaknesses and improve the authorities’ debt management capacity is planned as part of the World Bank’s Economic Management Support Project (EMSP).

3. Years of civil war have affected Burundi’s dialogue with its creditors and its debt-servicing capacity, which has resulted in poor records on the existing level of indebtedness. However, in the recent past Burundi has made major efforts to remain current with respect to key creditors and to reach agreements on the repayment of arrears. Looking ahead, the country’s engagement in the enhanced HIPC Initiative will further improve its relations with creditors and its awareness of its level of indebtedness.

ANNEX II: Burundi: Debt Sustainability Analysis for Low-Income Countries Framework (LIC DSA)

1. This annex assesses the external and public debt dynamics of Burundi using the forward-looking framework for debt sustainability for low-income countries (LIC DSA), and draws some conclusions on the forward-looking sustainability of the country’s debt.1

Baseline scenario

2. The baseline scenario reflects continued growth of real GDP sustained by an increase in export volumes, and financing in the form of grants or highly concessional borrowing (Box 5 in the main text). The medium-term outlook envisages achieving macroeconomic stability and solid economic growth, supported by a consolidation of the peace process, a deepening of structural reforms, and full normalization of relations with creditors. Exports are projected to drive growth over the long term based on the recovery of traditional export sectors and development of nontraditional exports. The current account deficit is projected to widen initially to above 10 percent of GDP in 2006, before narrowing to about 3.5 percent of GDP by 2024, while gross investment and national savings gradually rise to 13.7 percent and 10.1 percent of GDP, respectively, by 2024. Unless otherwise indicated, all debt ratios in this annex assume full delivery of HIPC assistance as proposed for the decision point and reflected in the HIPC DSA reported in the main text.

External debt sustainability assessment

3. The results under the baseline scenario indicate that, even after full delivery of HIPC assistance, Burundi faces a considerable risk of debt distress. The NPV of debt-to-exports ratio remains above the indicative threshold for countries with comparable policies and institutions for a considerable period of time before falling below it in 2020 (Box 1). Even though all other debt burden indicators are below their respective threshold during the projection period, the NPV of debt to exports ratio indicates that even after HIPC relief, and assuming future financing on highly concessional terms, that a debt distress situation would remain a concern over the next 15 years.

4. At end-2004, Burundi’s stock of public and publicly guaranteed (PPG) external debt was US$1,384 million, or US$895 in NPV terms. Assuming the full delivery of HIPC assistance,2 the NPV of debt would amount to US$76.3 million, corresponding to 13.8 percent of GDP, 155.6 percent of exports, and the ratio of debt service to exports would be 123.1 percent.3 The debt sustainability indicators are projected to remain virtually unchanged or improve in 2005. Thereafter the profiles of the debt and debt service ratios over the long-term are as follows:

  • The NPV of debt-to-exports indicator remains above the indicative threshold for much of the projection period, increasing over the medium term before gradually improving over the long-term (Table 1 and Figure 1). The NPV of debt-to-exports declines from 155.6 percent at end-2004 to 76.2 percent in 2024.

  • The external debt service indicators suggest a more modest and manageable debt burden both in the short and medium terms. Public external debt service is projected to average about 9.6 percent of exports during the 2005–24 period and the projected trajectory shows an initial decline and then an increase through 2012, before decreasing to 6.1 percent in 2024 (Table 1 and Figure 1). Generally, the relatively low debt-service-to-exports indicators reflect: (i) a stable and relatively high grant element on the debt stock resulting in a relatively low debt service requirement, and (ii) high export growth during the period when debt service requirements increase as a result of the end of grace periods. The external debt service to fiscal revenues (including grants) follows a broadly similar trajectory and is well below the indicative threshold.

  • The ratio of the NPV of debt to GDP is projected to increase to 18.3 percent in 2009, before declining to 10 percent in 2024.

Table 1.

Burundi: External Debt Sustainability Framework, Baseline Scenario, 2004–24 1/

(In percent of GDP, unless otherwise indicated)

article image
Source: Staff projections and simulations.

Includes both public and private sector external debt.

Derived as [r - g - ρ(1+g)]/(1+g+ρ+gρ) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, and ρ = growth rate of GDP deflator in U.S. dollar terms.

Includes exceptional financing (i.e., changes in arrears and debt relief); changes in gross foreign assets; and valuation adjustments. For projections also includes contribution from price and exchange rate changes.

Assumes that NPV of private sector debt is equivalent to its face value.

Current-year interest payments devided by previous period debt stock.

Historical averages and standard deviations are derived over the past 4 years (from 2001), subject to data availability.

Figure 1.
Figure 1.

Burundi: Indicators of Public and Publicly Guaranteed External Debt Under Alternative Scenarios, 2005–2024 1/

(In percent)

Citation: IMF Staff Country Reports 2005, 329; 10.5089/9781451802894.002.A001

Source: Staff projections and simulations.1/ Most extreme stress test is test that yields highest ratio in 2015.

5. Alternative scenarios and stress tests indicate that lower growth, less concessional borrowing, and macroeconomic instability substantially increase the risk of debt distress. Under the LIC framework an alternative scenario is shown in which the main parameters that determine the debt dynamics are assumed to remain at their historical averages. For Burundi, the period considered to calculate the historical averages is 2001–04, starting after the implementation of the Arusha Peace accord of August 2000. The historical scenario is intended to provide an indication about how optimistic the baseline is relative to the country’s past performance during normal times. As shown in Figure 1, all debt burden indicators under the historical scenario present a significant deterioration compared to the baseline. In particular, the ratios of the NPV of debt to GDP and to exports exhibit an upward trend. The significant deterioration of debt and debt service indicators under the “historical scenario” underlines the critical importance of realizing the overall growth and export growth projections under the baseline.

6. Stress tests signal the vulnerability of Burundi to adverse developments. Burundi’s debt sustainability indicators experience a considerable deterioration under stress tests assuming lower GDP and export growth or exchange rate depreciation (Table 2). For the NPV of debt-to-GDP ratio, there is a sizeable increase relative to the baseline when all the main parameters determining the debt dynamics are assumed to be one-half standard deviation below their respective historical averages during the period 2006–07. A significant increase in the external debt-to-exports and debt service-to-exports ratios is observed when exports are assumed to grow at the historical average minus one standard deviation.

Table 2.

Burundi: Sensitivity Analyses for Key Indicators of Public and Publicly Guaranteed External Debt, 2005–24

(In percent)

article image
Source: Staff projections and simulations.

Variables include real GDP growth, growth of GDP deflator (in U.S. dollar terms), non-interest current account in percent of GDP, and non-debt creating flows.

Assumes that the interest rate on new borrowing is by 2 percentage points higher than in the baseline., while grace and maturity periods are the same as in the baseline.

Exports values are assumed to remain permanently at the lower level, but the current account as a share of GDP is assumed to return to its baseline level after the shock (implicitly assuming an offsetting adjustment in import levels).

Includes official and private transfers and FDI.

Depreciation is defined as percentage decline in dollar/local currency rate, such that it never exceeds 100 percent.

Applies to all stress scenarios except for A2 (less favorable financing) in which the terms on all new financing are as specified in footnote 2.

Fiscal sustainability analysis

7. The baseline macroeconomic scenario (Table 3 and Figure 2) is premised on increasing government revenues and financing the reconstruction effort and poverty reduction in the medium to long term primarily with grants. This would allow the public sector borrowing requirement to fall over time, while keeping expenditures consistent with the government’s poverty reduction strategy. In particular, it is assumed that revenues as a percentage of GDP rise from 18 percent of GDP in 2004 to 21 percent of GDP in 2024 and that borrowing decreases from 7.6 percent to 1 percent of GDP between 2005 and 2024.

Table 3.

Burundi: Public Sector Debt Sustainability Framework, Baseline Scenario, 2004–24

(In percent of GDP, unless otherwise indicated)

article image
Sources: Country authorities; and staff estimates and projections.

Burundi’s public debt is defined as external public and publicly guaranteed debt and domestic central government debt, gross basis.

Gross financing need is defined as the primary deficit plus debt service plus the stock of short-term debt at the end of the last period.

Revenues including grants.

Debt service is defined as the sum of interest and amortization of medium and long-term debt.

Historical averages and standard deviations are generally over the past four years (from 2001), subject to data availability.

Figure 2.
Figure 2.

Burundi: Indicators of Public Debt Under Alternative Scenarios, 2005–24 1/

(In percent)

Citation: IMF Staff Country Reports 2005, 329; 10.5089/9781451802894.002.A001

Source: Staff projections and simulations.1/ Most extreme stress test is test that yields highest ratio in 2015.2/ Revenue including grants.

8. Given the relatively strong revenue effort, fiscal debt (external and domestic) burden indicators are projected to remain below their respective indicative thresholds.4 The NPV of debt-to-revenue ratio is projected to drop from 101.8 percent in 2004 to 49.6 percent in 2024, and the debt service-to-revenue ratio is projected to decline from 36.6 percent in 2004 to 12.3 percent in 2010 before dropping to 8.9 percent in 2024 (Table 3 and Figure 2).

9. As in the external debt sustainability analysis, alternative scenarios and bound tests signal a significant increase in Burundi’s risk of debt distress over the medium term. The no reform scenario, which maintains the primary balance at the 2004 level, signals an increase in all debt indicators (Table 4). However, if the envisaged fiscal restraint is implemented, such a scenario would be a pessimistic benchmark. But, if there was no improvement in the fiscal primary balance after 2004, the NPV of debt-to-revenue indicator is projected to increase to 283 percent in 2024, a difference of 233 percentage points with respect to the baseline (Figure 2).

Table 4.

Burundi: Sensitivity Analysis for Key Indicators of Public Debt, 2005–24

article image
Sources: Country authorities; and staff estimates and projections.

Assumes that real GDP growth is at baseline minus one standard deviation divided by the square root of 20 (i.e., the length of the projection period).

Revenues are defined inclusive of grants.

10. Other stress tests highlight the negative impact of temporary shocks on debt burden indicators. In particular, an exchange rate depreciation of 30 percent has the largest impact on debt stock indicators (Table 4 and Figure 2).

Summary of Baseline Debt Sustainability Indicators 1/

article image
Note: Figures in italics are under the indicative thresholds.

All debt indicators assume the full delivery of HIPC relief and refer to the NPV of public and publicly guaranteed external debt.

Threshold over which countries with similar evaluations of policies and institutions would have at least a 25 percent chance of having a prolonged incident of debt distress in the coming year. Burundi lies within the bottom quintile of countries ranked by the World Bank’s Country Policy and Institutional Assessment Index (CPIA).

Conclusion

11. Burundi’s NPV of external debt-to-exports ratio after enhanced HIPC assistance, is projected to remain above its indicative threshold over the period 2005–20. In addition, the DSA indicates that adverse shocks would negatively impact the debt sustainability indicators and would place Burundi in the high debt distress category for low-income countries. The debt sustainability indicators for total (domestic and external debt) suggest a more robust position, reflecting a strong domestic revenue effort. However, as reflected in the external debt indicators, the foreign exchange constraint could be binding. Indeed, the external debt sustainability indicators suggest that particular attention be given to exports as the driver of overall growth.

12. Sensitivity analysis reveals that if the pace of GDP (or export growth) falters, or the exchange rate depreciates, the debt burden could become unsustainable in the medium term. The sensitivity analysis highlights the importance of sustained export-led growth and macroeconomic stability to decrease Burundi’s risk of debt distress.

13. The debt sustainability analysis indicates that in order for Burundi to lower its high debt stock ratios with respect to exports and to maintain the other debt indicators below their respective thresholds, particular emphasis needs to be placed on four aspects of future economic performance. First, the authorities will need to implement a strong and sustained reform effort, especially to develop a diversified export base, to support robust growth in exports and GDP. Second, the authorities need to implement prudent fiscal and monetary policies to ensure fiscal discipline and macroeconomic stability. Third, together with prudent debt management, future financing needs to be mainly in the form of grants and highly concessional loans. Fourth, attention should be given to strengthening of policies and institutions, which would raise the indicative debt thresholds for the risk of debt distress.

Impact of the Use of the LIC Framework Methodology on the End-2004 NPV of Debt-to-Exports Ratio

Using the new LIC framework methodology, Burundi’s NPV of debt-to-exports ratio is estimated to have reached 155.6 percent at end-2004. This is 5.6 percentage points higher compared with the 150 percent obtained using the HIPC methodology, assuming full delivery of HIPC assistance. The increase is due to three factors:

  • (i) a 34 percentage points increase is due to the change in the exchange rates used to calculate the projected debt service streams (projected exchange rates from WEO; under the LIC framework versus end-2004 exchange rates under the HIPC methodology),

  • (ii) a 7.9 percentage points decrease is explained by the change in the discount rate used to calculate the NPV of debt (a single 5 percent discount rate under the LIC framework versus currency-specific discount rates under the HIPC methodology), and

  • (iii) a 20.5 percentage points increase is due to the change in the denominator used to calculate the ratio (current exports under the LIC framework versus a three-year backward-looking average under the HIPC framework).

Burundi: Decomposition of the decrease in the NPV of debt-to-exports ratio at end-2004 1/

(in percentage points, unless otherwise indicated)

article image

Refers to public and publicly guarenteed external debt.
1

The United Nations Development Program (UNDP) Human Development Index measures a country’s achievements in three aspects of human development: longevity, knowledge, and a decent standard of living.

2

Belgium, Italy, the United Kingdom, France, and Norway have supported an IDA-managed trust fund for debt service and arrears clearance to the African Development Bank.

3

The only available CPI is for Bujumbura, which may not accurately reflect price developments for the country as a whole.

4

The share of social spending may be higher by year-end taking into account the use of possible HIPC debt relief and the payment of retroactive wage adjustments to teachers.

5

An integrated public expenditure computerized system connected to the central bank (BRB) designed for (i) efficient and transparent public finance management, (ii) poverty spending monitoring, including HIPC resources, and (iii) accurate reporting and closing of budget execution account books, is expected to be introduced by October 2005.

6

The DTIS provided a comprehensive assessment of Burundi’s strengths, weaknesses and opportunities, and necessary steps to be taken to improve trade performance through the promotion of trade facilitation. Burundi’s integration into the global economy would be enhanced through better market access, further liberalization of its trade regime, an investment climate conducive to the development of a strong private sector, and promotion of sectors with high export and growth potential to expand the export base and generate sustained growth for poverty reduction.

7

Or a net increase of US$33 million compared to the stock of debt at end-2003 reported in the preliminary document on the HIPC Initiative for Burundi. This is mainly due to new borrowing from IDA (US$43 million) and under the PRGF (US$10 million) and the effect of the devaluation of the dollar vis-à-vis other currencies in 2004.

8

The clearance of arrears to multilateral creditors (or an agreement in principle to do so) is a condition to reach the HIPC decision point and, as a rule, the concessional element embedded in the treatment of the arrears counts toward the creditor’s share of HIPC debt relief (“HIPC Debt Initiative-Approach to Arrears to Multilateral Institutions,” March 2, 1998).

9

During the period June 2005 to June 2006, IDA will provide financing of about US$ 120 million in the form of grants, according to IDA allocation rules for fiscal year 2005/06. Multilateral lending includes disbursements under the current PRGF arrangement and the ongoing lending program on the AfDB.

10

Paris Club creditors, together with IDA, the IMF, and the AfDB, represent 84 percent of the NPV of debt.

11

Savings as a percentage of debt service are expected to be 85 percent of debt service due during the period August-December 2005 and 90 percent thereafter through August 2038.

12

Interim relief is assumed to be provided by the IMF, IDA, the African Development Bank, other multilateral creditors and the Paris Club.

13

In nominal flow terms, HIPC assistance by multilateral creditors is defined as the reduction in debt service due after arrears clearance and after HIPC assistance. For bilateral and commercial creditors it is defined as the difference between debt service due after traditional debt relief and that due after HIPC assistance.

14

The DSA using the low-income country (LIC) DSA framework reported in Annex II confirms this assessment.

1

See “Debt Sustainability in Low-Income Countries: Proposal for an Operational Framework and Policy Implications” and “Debt Sustainability in Low-Income Countries: Further Considerations on an Operational Framework and Policy Implications.” This DSA was prepared jointly by the staffs of the Fund and the Bank.

2

The NPV of debt-to-exports ratio in the HIPC DSA methodology is 150 percent. Annex II Box 2, presents the methodological differences between the HIPC framework and the LIC framework in the calculation of the NPV debt-to-exports ratio, as well as the impact of such differences

3

Debt service in 2004 includes the repurchase of SDR 19.2 million previously drawn under the IMF’s post-conflict emergency assistance policy.

4

In the LIC DS A methodology, the ratio of debt service to revenue is calculated with revenue including budgetary grants. Under the HIPC DSA framework, grants are excluded.

Same Series

Other IMF Content

Other Publishers

  • Collapse
  • Expand
Cover IMF Staff Country Reports
Burundi: Enhanced Initiative for Heavily Indebted Poor Countries: Decision Point Document
Author:
International Monetary Fund
Volume/Issue:
Volume 2005: Issue 329
Publisher:
International Monetary Fund
ISBN:
9781451802894
ISSN:
1934-7685
Pages:
62
DOI:
https://doi.org/10.5089/9781451802894.002
  • Figure 1.
    View in gallery
    Figure 1.

    Burundi: Composition of Stock of External Debt at End-December 2004 Before Full Use of Traditional Debt-Relief Mechanisms

  • Figure 2.
    View in gallery
    Figure 2.

    Burundi: Composition of Stock of External Debt at End-December 2004 After Full Use of Traditional Debt-Relief Mechanisms

  • View in gallery
  • View in gallery
  • Figure 3.
    View in gallery
    Figure 3.

    Burundi: External Debt Profile: External Sustainability Indicators, 2004–24

    (In percent)

  • Figure 4.
    View in gallery
    Figure 4.

    Burundi: Sensitivity Analysis, 2004–24

    (In percent)

  • Figure 5.
    View in gallery
    Figure 5.

    Burundi: External Debt Profile: Fiscal Sustainability Indicators, 2004–24

    (In percent)

  • Figure 6.
    View in gallery
    Figure 6.

    Burundi: External Debt Profile: Net Present Value of Debt-to-GDP Ratio, 2004–24

    (In percent)

  • Figure 1.
    View in gallery
    Figure 1.

    Burundi: Indicators of Public and Publicly Guaranteed External Debt Under Alternative Scenarios, 2005–2024 1/

    (In percent)

  • Figure 2.
    View in gallery
    Figure 2.

    Burundi: Indicators of Public Debt Under Alternative Scenarios, 2005–24 1/

    (In percent)

Figure 1.

Burundi: Composition of Stock of External Debt at End-December 2004 Before Full Use of Traditional Debt-Relief Mechanisms
Figure 2.

Burundi: Composition of Stock of External Debt at End-December 2004 After Full Use of Traditional Debt-Relief Mechanisms
Figure 3.

Burundi: External Debt Profile: External Sustainability Indicators, 2004–24

(In percent)
Figure 4.

Burundi: Sensitivity Analysis, 2004–24

(In percent)
Figure 5.

Burundi: External Debt Profile: Fiscal Sustainability Indicators, 2004–24

(In percent)
Figure 6.

Burundi: External Debt Profile: Net Present Value of Debt-to-GDP Ratio, 2004–24

(In percent)
Figure 1.

Burundi: Indicators of Public and Publicly Guaranteed External Debt Under Alternative Scenarios, 2005–2024 1/

(In percent)
Figure 2.

Burundi: Indicators of Public Debt Under Alternative Scenarios, 2005–24 1/

(In percent)