Burundi
Second Review Under the Extended Credit Facility—Staff Report; Staff Supplement; Press Release on the Executive Board Discussion

The Burundian economy faced several adverse shocks. The government responded by allowing greater exchange rate flexibility and by tightening its monetary policy. The fiscal stance was in line with the program, and program implementation has been broadly satisfactory despite difficult circumstances. Sustaining revenue mobilization remains a top priority. Public financial management needs to be bolstered significantly and the country remains at high risk of debt distress, underscoring the importance of reinforcing debt management. Monetary policy should remain tight until inflation falls.

Abstract

The Burundian economy faced several adverse shocks. The government responded by allowing greater exchange rate flexibility and by tightening its monetary policy. The fiscal stance was in line with the program, and program implementation has been broadly satisfactory despite difficult circumstances. Sustaining revenue mobilization remains a top priority. Public financial management needs to be bolstered significantly and the country remains at high risk of debt distress, underscoring the importance of reinforcing debt management. Monetary policy should remain tight until inflation falls.

Recent Developments and Program Implementation

1. The Burundian economy faced several adverse shocks. The confluence of high food and fuel prices and declining coffee prices led to a deterioration of terms of trade by 27 percent, cumulatively during 2011–12.1 Inflation rose sharply, peaking at 25.3 percent (y-o-y). Budget support from partners fell from 5 percent of GDP in 2010 to 3.2 percent in 2012. These shocks, combined with tight monetary policy, reduced liquidity, which constrained credit to the private sector. The recent repatriation of 35,000 refugees from Tanzania, and spillovers from the conflict in Eastern Congo have added pressures on the political and economic environment.

2. The authorities responded to the shocks by allowing greater exchange rate flexibility and by tightening monetary policy (Figures 1 and 2). Real GDP growth was revised from 4.8 percent at the beginning of the year to 4 percent. Inflation declined sharply from its earlier peak to 11.8 percent (y-o-y) in December due to tight monetary policy and the temporary removal of taxes on food products. A tighter monetary stance by the central bank contributed to a deceleration in growth of credit to the private sector from a peak of 40 percent (y-o-y) at end-2011 to 15 percent in October. The exchange rate depreciated by 14 percent (y-o-y) through end-December.

Figure 1.
Figure 1.

Burundi: Recent Developments, 2005–12

Citation: IMF Staff Country Reports 2013, 064; 10.5089/9781475563757.002.A001

Source: Burundi authortities and IMF staff estimates and projections.
Figure 2.
Figure 2.

Burundi: Monetary Developments, 2008–12

Citation: IMF Staff Country Reports 2013, 064; 10.5089/9781475563757.002.A001

Source: Burundi authortities and IMF staff estimates and projections.

3. The fiscal stance was in line with the program. Despite the corrective measures implemented in mid-2012, revenues were lower than expected due mainly to the foregone fuel-related excise taxes and the economic slowdown. The shortfall in revenues was compensated by lower-than-programmed domestically financed current and capital expenditures. As a result, the domestic primary deficit excluding grants (3.7 percent of GDP) was slightly lower than programmed (3.9 percent of GDP).2

4. Program implementation has been broadly satisfactory despite difficult circumstances. All quantitative performance criteria for September 2012 were observed although the indicative target on pro-poor spending was missed by a small margin (MEFP, Table I-1).3 Structural reforms are on track, notably, some progress has been made toward controlling discretionary exemptions, the reorganization of the Ministry of Finance, the adoption of a decree on budget governance (MEFP, Table I-2), and safeguard measures.

Outlook and Risks

5. The outlook for 2013 will remain subject to risks arising from an uncertain external environment and unpredictable donor inflows. Economic growth is expected to rise to 4.5 percent and inflation to decline further to about 9 percent (y-o-y) owing to lower international food and fuel prices. Nevertheless, the terms of trade are expected to deteriorate further as coffee prices are projected to continue to decline. Other risks include managing refugees from the conflict in eastern Congo and reintegrating the recently repatriated refugees from Tanzania.

Policy Discussions

A. Sustaining Revenue Mobilization in a Difficult Environment

6. The 2013 budget that was adopted last December is broadly in line with the program. Relative to previous projections (Country Report No. 12/226), total revenues in 2013 are expected to be lower by 0.7 percentage points of GDP reflecting the impact of adverse shocks to the economy. Spending is projected to be 3¾ percentage points of GDP lower, owing to the impact of revisions to expected foreign financing of capital spending and containing the size of the wage bill by limiting recruitment to priority sectors and constraining wage increases below the growth rate of GDP.4 The fiscal stance is stronger as indicated by a lower domestic primary balance.5

7. Greater efforts are needed to mobilize revenues (MEFP ¶23). While revenues have increased steadily since 2009 and now cover about 88 percent of current domestic spending, they have fallen by about ¾ of a percentage point to 14.8 percent of GDP due to foregone revenues from petroleum products.6 Staff discussed mechanisms to limit the cost of petroleum-product subsidies (¾ of a percent of GDP), while emphasizing their unsustainability especially in the context of declining budget support, and the impact of foregone revenues on medium-term objectives. The authorities noted that the current fuel pricing policy is a temporary measure aimed at mitigating the impact of high cost of living on the poor. Although prices on gasoline and diesel prices were increased by 3.4 percent and 4.9 percent respectively in October 2012, this adjustment was insufficient to compensate for the noncollection of excise taxes for most of 2012. The authorities see the need to close the fuel price gap; but noted that the timing of this measure is being discussed to take into account constraints related to the fragility of the socio-political environment. They also indicated that the exemption of taxes on food products would be lifted in mid-2013 as inflationary pressures have begun to ease.

8. The authorities reiterated their commitment to implementing reforms aimed at strengthening the legal framework and to widen the tax base (MEFP ¶23). The reforms represent a key pillar under the public financial management (PFM) strategy governing revenue mobilization and improved cash flow management. To this end, a decree clarifying responsibilities of the Burundi Revenue Authority (BRA) is envisaged (end-March benchmark 2013 (MEFP Table I. 3)). The income tax, tax procedures and VAT (June 2013 benchmark) laws, which were recently adopted by the government, represent important steps toward further bolstering the legal framework, governing revenue collections and the role of the BRA. These laws address inconsistencies between exemptions under the tax code and under the investment code with a view to limit discretionary exemptions, and are expected to improve the short to- medium-term outlook for revenue collection. Good progress has been made on border posts through the establishment of one-stop clearance windows to facilitate customs procedures. The roll-out of a procedures manual to complement these efforts is envisaged (end-September 2013 benchmark). In a bid to further widen the tax base, the authorities have requested technical assistance (TA) to design a comprehensive excise tax law, and to rationalize the remaining legal texts that could give rise to discretionary exemptions.

B. Bolstering Public Financial Management (PFM) Reforms

9. The recent adoption of the 2012–14 PFM strategy represents an important signal of ownership of reforms by the authorities. The strategy comprises several key objectives to be implemented over the medium term and subject to performance indicators. These include: (i) finalization of the legal and institutional framework; (ii) strengthening revenue mobilization; (iii) strengthening budget preparation and execution; (iv) implementing an efficient information system; and (v) enhancing the implementation capacity of the Ministry of Finance and Planning. A recent evaluation of the previous PFM strategy (2009–11) noted that satisfactory progress was made, notably on the modernization of the legal framework, and budget preparation and execution. However, important weaknesses persist in the effectiveness and control of the expenditure chain, in the preparation and adoption of the budget, and in treasury cash flow management (MEFP ¶8). The authorities recognized the importance of efficient and transparent PFM systems which underpin the poverty reduction strategy (PRSP-II) as a safeguard against governance slippages and the increased emphasis by donors on results-based assistance. A resident PFM advisor was recently selected to facilitate the implementation of these reforms and to strengthen capacity through hands-on training.

10. Corrective measures were taken to address weaknesses in budget execution. The staff noted payment delays on government contracts due to the disconnect between commitment, procurement, and treasury cash flow plans. The authorities pointed out weaknesses in budget execution that led to unpaid extra-budgetary spending from previous fiscal years, mainly related to the procurement of goods and services by the military, health, and education sectors (MEFP ¶8).7 Agreements were reached with the authorities to correct these weaknesses, including deploying commitment controllers in all ministries, the conduct of an audit of extra-budgetary spending, and the implementation of a joint treasury cash flow and commitment plans (MEFP Table I. 3).

C. Safeguarding Debt Sustainability

11. Safeguarding debt sustainability constitutes a key objective of the program. To this end, the authorities have implemented initial reforms that support this goal, including an evaluation of debt management by the World Bank and the subsequent development of a strategy. Weaknesses remain, however, as illustrated by the recent preliminary agreement on a PPP in the energy sector that was subsequently canceled once it became clear that it posed unacceptable fiscal risks. Hence, a key recommendation of the strategy is the adoption of an overarching debt management legal framework governing the contracting of debt, its purpose, and the role of guarantees (MEFP Table I. 3). The authorities are also seeking assistance from development partners in the design of a legal framework for PPPs (MEFP ¶34). The recent restructuring of the Ministry of Finance and Planning is expected to lead to better coordination with the central bank on cash flow management and the issuance of domestic debt. The quarterly publication of debt reports (MEFP Table I. 3) would signal improvements in capacity, coordination, and transparency.

12. The debt sustainability analysis points to a slight deterioration in key indicators relative to the 2011 DSA, and the classification remains at “high risk of debt distress” (Appendix I). The deterioration is due to (i) the revision of the macroeconomic outlook following recent adverse shocks, mainly due to the terms of trade; (ii) the addition of new loans; and (iii) the lower discount rate. The main conclusion is broadly similar, i.e., under the baseline scenario, the present value (PV) of debt-to-exports ratio breaches the policy threshold during the medium term while other indicators remain below the respective policy thresholds.8 Burundi’s risk of high risk of debt distress warrants retaining a minimum grant element of 50 percent required under the program. Burundi is in a position to service its public and publicly guaranteed debt, and is not accumulating external arrears.

D. Reining in Inflation and Strengthening Liquidity Management

13. The authorities agreed to keep a tight monetary stance until inflation falls to single digits (MEFP ¶28). Interest rates have risen by a cumulative 464 basis points since March 2011, when monetary tightening started, to 11.6 percent. The projected decline in international food and fuel prices in 2013 should contribute to lower domestic inflation (Box 1). The combination of Burundi being landlocked and congestion at ports in neighboring countries appears to contribute to the persistence in inflation. If the current deceleration of key monetary aggregates continues and inflation expectations are well anchored, the authorities and staff agreed to revisit the monetary stance to address the risks of a slowdown in growth and revenue mobilization. However, in the event inflation accelerates, the monetary stance should be tightened further, through recourse to deposit auctions, a higher reserve requirement ratio, and/or a lower loan-to-deposit ratio. The central bank has established a monetary policy committee to better fulfill its mandate of price stability.

E. Ensuring Soundness of the Financial Sector

14. Tight liquidity conditions and payment delays by the authorities spilled over to the financial sector (Table 8). Staff discussed with the authorities and representatives of commercial banks the causes of the reversal from excess to tight liquidity conditions. This originated mainly from (i) the decline in donor financial assistance since 2010; (ii) the worsening of the trade balance stemming mainly from the deterioration of terms of trade; (iii) delays in the payment of government suppliers; and (iv) the financing needs of the coffee sector.9 In particular payment delays to government suppliers led to roll-overs of loans which effectively understated the deterioration in macroprudential indicators. As a result, liquidity and profitability ratios have significantly worsened in recent months warranting the need for heightened surveillance of the banking system. Moreover, the commencement of operations by two new large regional banks might strain the financial soundness of smaller banks.

15. The central bank stands ready to take appropriate measures to safeguard the soundness of the financial system (MEFP ¶30). Based on recommendations from recent IMF TA missions, measures included (i) more frequent reports to the central bank on rolled-over loans and justification of the non-classification to non-performing loans (NPLs); (ii) the harmonization of the definition of NPLs in line with international standards; (iii) calculation of liquidity ratios based on local currency deposits (currently the ratio includes foreign deposits); and (iv) a change in the legal framework to allow the central bank to swiftly intervene in troubled banks to prevent and to contain emerging crises.

Burundi: Inflation From Global to Local Shocks10

Burundi’s geographic features are important factors that explain the country’s inflation patterns. Being a small and landlocked country with poor transport infrastructure and access to markets, increases Burundi’s costs of doing business. Households spend about 50 percent of their income on food products, half of which are imported.

Burundi’s inflation is persistent and prone to shocks stemming from global food and fuel prices. Imported inflation tends to lead headline inflation. Its components, international food and fuel prices tend to pass-through to domestic inflation with rates of 77 and 48 percent, respectively with lags of between three to six months. Similarly, the pass-through of the exchange rate to headline inflation is strong at about 56 percent.11 Finally, changes in headline inflation feed through to core inflation relatively quickly. However, core inflation reverts more slowly to headline inflation implying that shocks to headline inflation (e.g. those caused by commodity price spikes) would feed into inflation expectations and price setting (Figure 1).12 These findings suggest Burundi is prone to sustained inflationary effects stemming from commodity price shocks. In light of the persistence of inflation, these results suggest the need for the central bank to act in a timely manner and to maintain a tight monetary stance in the face of commodity shocks in order to contain inflation expectations.

uA01fig06

Burundi: Inflation components and exchangerate, 2005-12

Citation: IMF Staff Country Reports 2013, 064; 10.5089/9781475563757.002.A001

Source: Burundi authorities and IMF staff estimates

F. Other Macro-Critical Reforms

16. The privatization in the coffee sector is advancing (MEFP ¶17). Foreign Direct Investment by international firms has generated employment along the value chain in washing, sorting, and drying of coffee beans. Certification of growers by these firms is expected to have a demonstration effect through higher price premia and facilitate the rebranding of Burundi’s coffee. The third round of privatization is underway but in the near-term, production is likely to decline owing to aging of existing trees and costliness of their replacement. Unreliable and inadequate electricity supply, however remains an obstacle for the efficient operation of coffee processing plants, even if production were to increase substantially.

17. Measures are being taken to remove bottlenecks to growth MEFP ¶18, ¶19, and ¶34). In the 2013 Doing Business rankings, Burundi was listed among the top ten reformers having undertaken reforms that facilitated starting a business, ease in obtaining construction permits, registering a property and trade across borders. Notwithstanding this progress, the authorities recognized the need to redouble efforts to improve governance and safeguarding creditor rights. The ongoing construction of a hydroelectric plant (20 mega watts) although insufficient, will help to address the energy shortage before regional hydroelectric plants come on line.13

Program Issues

18. The end-March and end-September 2013 quantitative performance criteria are proposed for net foreign assets and net domestic assets of the central bank and net domestic financing of the government, with adjusters to deal with aid volatility. Continuous performance criteria include zero ceilings for (i) new nonconcessional external debt contracted or guaranteed by the government or the BRB; (ii) short-term external debt of the government; and (iii) accumulation of external payment arrears of the government. The end-June and end-December indicative targets are proposed for domestic arrears accumulation, reserve money, and pro-poor spending (MEFP, Table I.2).

19. The fourth special audit of government disbursements and transfers processed by the central bank completed in March 2012 concluded that the recommendations of the previous special audits had generally been implemented, but stressed the need for further enhancements. These will be discussed in the context of the third review under the ECF.

20. Burundi’s capacity to repay the Fund is adequate. Obligations to the Fund based on existing and prospective credit, measured in relation to official reserves or exports of goods and services, do not show solvency or liquidity risks (Table 6).

21. The program is subject to several risks. In addition to those mentioned in ¶5, there are risks of fiscal slippage in the run-up to the 2015 presidential elections. Governance slippages or the failure to make measurable progress in PFM reforms could disrupt donor support. Reintegrating repatriated refugees is likely to add to unemployment and could increase social conflict over access to land.

Staff Appraisal

22. Performance under the ECF has been satisfactory under difficult circumstances. Despite a declining trend in donor support, and the deterioration of terms of trade, the authorities undertook corrective measures to keep the program on track.

23. Sustaining revenue mobilization remains a top priority. In the context of declining aid inflows, revenue collection should be stepped up to permit greater financing of public investments critical to growth. The recent adoption of several laws augurs well for strengthening the legal framework and widening the tax base. Nevertheless, greater efforts are needed to control discretionary exemptions and for establishing a sustainable policy on pricing petroleum products.

24. Public financial management needs to be bolstered significantly. Weaknesses in expenditure control, budget prepration and execution, and treasury cash flow management continue to constrain the effectiveness of economic policies. The recent adoption of the 2012–14 PFM strategy is welcome. Decisive implementation is now needed. In particular, better management of treasury cash flow and expenditure commitments will be critical in preventing payment delays to suppliers and mitigating negative spillovers to the banking system.

25. Burundi remains at high risk of debt distress, underscoring the importance of reinforcing debt management. Staff urges the authorities to adopt an overarching debt management strategy expeditiously, including by adopting a legal framework governing the contracting of debt. Better coordination is needed to avoid instances such as the recent preliminary agreement on a PPP in the energy sector which had to be canceled once it became clear that it posed unacceptable fiscal risks. The development of a solid legal framework for PPPs should be a priority.

26. Monetary policy should remain tight until inflation falls to single digits. Inflation has declined, but remains in double digits and well above levels in neighboring countries. The current stance of monetary policy will help to anchor inflation expectations and help contain second round effects. The recent deterioration in macroprudential indicators reflects rising stresses in the financial sector, partly related to tight liquidity conditions and government payments delays. Staff urges the authorities to reinforce prudential oversight, including by strengthening the central bank’s capacity for crisis prevention and management.

27. Staff recommends completion of the second review under the ECF arrangement and supports the setting of the quantitative targets from end-March through end-December 2013 and structural benchmarks for 2013.

Table 1.

Burundi: Selected Economic and Financial Indicators, 2010–16

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

IMF Country Report 12/226.

Table 2a.

Burundi: Central Government Operations, 2010–16

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

Sale of fixed capital assets included in nontax revenue rather than under expenditure.

Includes reimbursement for the Africa Mission to Somalia (AMISOM Fund).

Compensation due to the repayment of w age arrears and arrears in payments to ONATEL.

A negative sign denotes a reduction of financial assets.

As percent of GDP.

Table 2b.

Burundi: Central Government Operations, 2010–16

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

Sale of fixed capital assets included in nontax revenue rather than under expenditure.

Includes reimbursement for the Africa Mission to Somalia (AMISOM Fund).

Compensation due to the repayment of w age arrears and arrears in payments to ONATEL.

A negative sign denotes a reduction of financial assets.

Table 3.

Burundi: Monetary Survey, 2010–13

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

IMF Country Report 12/126.

Table 4.

Burundi: Central Bank Accounts, 2011–13

article image
Sources: Burundi authorities; IMF staff estimates and projections.
Table 5.

Burundi: Balance of Payments, 2010–16

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

Based on preliminary information provided by donors.

Table 6.

Burundi: Indicators of Capacity to Repay the Fund, 2013–25

article image
Sources: IMF staff estimates and projections.

Total debt service includes IMF repurchases and repayments.

Table 7.

Burundi: Tentative Schedule of ECF Disbursements and Reviews, 2012–15

article image
Source: IMF staff estimates.
Table 8.

Burundi: Banking Systems Soundness Indicators, 2009–2012

(percent, unless otherwise indicated)

article image
Sources: Burundi authorities.

Letter of Intent

Bujumbura, January 28, 2013

Ms. Christine Lagarde

Managing Director

International Monetary Fund

Washington, D.C., 20431

Dear Ms. Lagarde:

On January 27, 2012, the Executive Board of the International Monetary Fund (IMF) approved a new three-year arrangement under the Extended Credit Facility (ECF) in favor of the Republic of Burundi. This arrangement is intended to support our medium-term program and to strengthen macroeconomic stability, expedite growth, and reduce poverty. Under this arrangement, the government of Burundi and an IMF mission recently assessed implementation of the program as part of the second review of the arrangement. This review focused on program implementation from April 1, 2012 to September 30, 2012, as well as on the outlook and the economic and financial measures to be implemented in 2013.

In 2012, Burundi continued to endure the effects of external shocks related to rising food and oil prices and the slowing global economy. These shocks led to higher living costs, declining budgetary assistance, terms of trade deterioration, and sluggish domestic demand, which adversely affected our macroeconomic policy.

These shocks notwithstanding, program implementation at end-September 2012 was satisfactory overall. All performance criteria and indicative targets were observed, with the exception of the indicative target on pro-poor expenditure, owing to spending cuts and the delay in the disbursement of budgetary assistance. Nevertheless, the government intends to press ahead with the program in pursuit of the objectives of fiscal and debt sustainability and the country’s economic recovery in the medium term. In particular, the government intends to conduct prudent fiscal and monetary policies in the short term in an effort to curb inflationary pressures and maintain a sustainable debt position, while safeguarding pro-poor expenditure.

In light of the appreciable progress in implementing the program supported by the ECF arrangement, the government is requesting completion of the second review as well as the third disbursement of SDR 5 million under the ECF arrangement.

The government is convinced that the policies defined in this MEFP are sufficient for attainment of the program objectives and are consistent with the orientations of the second-generation Poverty Reduction and Growth Strategy Paper (PRSP-II). It also stands ready to adopt any additional measures that may be required for this purpose. The government will consult with the IMF in advance of the adoption of such measures and/or of revisions to the policies contained in the MEFP, in accordance with the IMF’s policies on such consultations.

The government will provide the IMF with such information as it may request to ensure implementation of the program. That information as well as arrangements for monitoring implementation of the program and the performance criteria, quantitative targets, and structural benchmarks are detailed in the Technical Memorandum of Understanding, which is also attached to this letter. We expect the third review based on the end-March 2013 performance criteria to be completed by July 31, 2013 and the fourth review based on the end-September performance criteria to be completed by January 31, 2014.

The Burundi authorities wish to make this letter available to the public, along with the attached MEFP and Technical Memorandum of Understanding (TMU), as well as the IMF staff report on this second review. We therefore authorize their publication and posting on the IMF website, subject to Executive Board approval. These documents will also be posted on the official websites of the Burundian government.

Sincerely yours,

Tabu Abdallah MANIRAKIZA

Minister of Finance and

Economic Development Planning

Jean CIZA

Governor, Bank of the Republic of Burundi

Gervais RUFYIKIRI

Attachments: Memorandum of Economic and Financial Policies (MEFP)

Technical Memorandum of Understanding (TMU)

Attachment I. Amendements to the Memorandum of Economic and Financial Policies

I. Introduction

1. Burundi’s economic and financial program, supported by the International Monetary Fund (IMF) under the Extended Credit Facility (ECF), aims to consolidate economic and political gains, promote inclusive economic growth, contain inflation, and strengthen policies designed to combat endemic poverty in rural and urban areas. This Memorandum supplements the December 2011 and July 2012 MEFPs. It reports on implementation of the program’s quantitative targets and benchmarks through end-September 2012 and defines the economic policies and reforms the government intends to implement in 2013 to achieve the objectives of its economic and financial program. The program measures and objectives are consistent with the Poverty Reduction and Growth Strategy Paper (PRSP-II)

2. Burundi faces the negative effects of commodities price shocks, which complicate the formulation and implementation of macroeconomic policies. The combined effects of these shocks and the country’s social fragility threaten to derail the significant progress made thus far. More specifically, because the country’s narrow tax base, the terms of trade deterioration and the marked decline in budgetary assistance cannot be wholly offset by the increased mobilization of domestic resources. Consequently, Burundi still needs technical and financial support from the U.N. agencies and from other bilateral partners to complete the transformation of its economy and strengthen its political institutions.

3. The Burundi development partners conference held in Geneva in October 2012 also provided a forum for the government to apprise its partners of the considerable advances Burundi has made, particularly with regard to good governance, peace consolidation, and social services. Despite this progress, the government is aware that much remains to be done in these areas. The authorities have therefore requested political support and additional resources to promote sustainable economic growth, curb unemployment, and reduce endemic poverty.

II. Economic Developments and Implementation of the Economic Program In 2012

4. Economic performance was severely affected by external shocks. GDP growth stood at 4.0 percent, in contrast to the initial program forecast of 4.8 percent. This slump in economic activity reflects the cutback in investment spending prompted by the decline in budgetary assistance, terms of trade deterioration, and the tightening of monetary policy to contain inflation, which fell 13 percentage points in December 2012 from a high of 25 percent in March. The exemption of food products also helped slow the prices of goods and services in the household basket.

5. The external current account (including transfers) widened slightly to 16.3 percent of GDP in 2012. The combined effects of terms of trade deterioration and the decline in budgetary assistance are largely to blame for this negative development. Gross official reserves fell to the equivalent of 3.3 months of imports in 2012.

6. Reflecting the decline in budgetary assistance, the terms of trade deterioration, and the increased need for public and private sector imports, the monetary situation at end-September 2012 was characterized by a contraction in net foreign assets of approximately -6.5 percent of the money supply at the start of 2012. The growth of credit to the economy slowed to 15 percent, compared to 40 percent at end-2011. The money supply, however, remained stable. To mitigate the effects of external shocks on domestic production, the country’s foreign exchange policy became more flexible. The daily reference exchange rate is now determined by the weighted average of foreign exchange buying and selling rates set the preceding day by the commercial banks. Foreign exchange auctions are held twice weekly and foreign exchange is allocated at the rates offered by the banks. To protect international reserves, the BRB recently reduced the amounts of its interventions. Facing a banking sector liquidity crisis, the central bank received technical assistance from the IMF Money and Capital Markets Department, the conclusions and recommendations of which will enable the monetary authorities to improve the monetary and exchange policy framework.

7. On the fiscal front, domestic resource mobilization improved significantly but is below forecasts, and expenditures were cut to remain within the envelope of available resources. As a result, the overall deficit was in line with projections, despite the decline in budgetary assistance in 2012. At end-December 2012, the overall budget deficit (cash basis, non-HIPC grants included) is estimated at 1.7 percent of GDP. The tax burden eased and now stands at 14.8 percent of GDP, owing to the elimination of oil excises, the exemption of foodstuffs, and the slowing of economic activity. Total expenditure exceeds projections by approximately 1.0 percent point of GDP, due in large measure to the increase in current spending, particularly other externally financed expenditure (Global Fund). Pro-poor spending remains below the fiscal targets owing to the low level of budgetary assistance disbursements.

8. Improvement of the public financial management system led to the identification of extra-budgetary commitments covering the 2003-11 period. The outstanding amount of these commitments, estimated at FBu 90 billion, results from extrabudgetary spending on cartage, goods and services for the army, education, and health. The government will audit these commitments in 2013 in order to develop a payment plan (new structural benchmark). To avoid the accumulation of new arrears, the new Public Financial Management Strategy (PFMS-II) calls for the appointment of expenditure commitment auditors in all ministries by end-June 2013, following reconfiguration of the SIGEFI system to take account of the decentralization of the expenditure chain. The cash flow committee will be strengthened to ensure consistency between commitment plans and available cash (new structural benchmark).

9. The downward trend of the wage bill as a percentage of GDP continued. It was 8.0 percent of GDP in 2012, a decrease of 0.7 percent from 2011. The roll-out of payroll software led to the elimination of ghost workers from the payroll.

10. At end-September 2012, revenue grew more slowly than projected (about 0.6 percent of GDP) despite measures to eliminate the additional deficit created by exemptions to counter the high cost of living. The amount of forgone revenue, estimated at FBu 20 billion, was larger than expected. The taxes on alcoholic beverages, beer, and telephone communications adopted in the context of revising the 2012 Budget Law yielded mixed results, with FBu 22 billion collected instead of the initially projected FBu 27 billion.

11. Program implementation is broadly satisfactory. By end-September 2012, the quantitative performance criteria had been met. All the indicative targets were met, except the target on pro-poor spending. Significant progress was also made in implementing structural measures.

A. Implementation of structural measures

12. In the area of public financial management (PFM), the government adopted a new strategy for 2012-14, developed in collaboration with Burundi’s technical and financial partners to consolidate the gains achieved through implementation of the first Public Financial Management Strategy (PFMS-1). Indeed, early assessments indicate substantial progress in many aspects of PFM, particularly the modernization of the legal and institutional framework of PFM and budget programming and preparation. The implementing texts of the decree establishing the general regulation on budget management – such as the decree on fiscal governance and the order concerning the appointment of commitment controllers in three ministries – have been adopted, but implementation of the measure was delayed by the pending reconfiguration of the SIGEFI system to take account of the decentralization of the expenditure chain. The new organizational chart of the Ministry of Finance and Economic Development Planning (MFPDE) has also been adopted. The government is continuing its efforts to make a lasting impact on revenue. In addition to the taxpayer awareness campaign, the government simplified the customs clearance procedures and are creating three one-stop border posts on the borders with Tanzania and Rwanda to facilitate the flow of goods across those borders and promote foreign trade (new structural benchmark).

13. Efforts to improve debt management continue. A World Bank debt management performance assessment (DEMPA) mission was carried out in April and a final assessment report was submitted to the authorities. A second mission visited Bujumbura in August to help the Burundi authorities prepare an action plan for the implementation of debt management reforms based on the results of the DEMPA. The final action plan is expected from the World Bank at end-December 2012. The reorganization of the MFPDE included the establishment of a modern debt management unit.

14. To improve the monetary policy framework, the central bank (BRB) introduced repo operations, the development of which was impeded by the contraction of banking system liquidity observed in 2012. As part of the financial system reform, the BRB continues to implement the project designed to strengthen the financial infrastructure and modernize the payment systems (RTGS and electronic clearing). The contract for the modernization of the computing room was signed with the winning bidder on October 3, 2012. Implementation of the project began on October 4, 2012, with the work scheduled to be completed by end-February 2013. The task of wiring the BRB buildings began on October 1, 2012 and is expected to be completed by end-June 2013. In addition, the bidding documents for the establishment of the clearing and settlement infrastructure and the e-money system were forwarded to the World Bank to obtain its non-objection. However, because the September 2012 competitive bidding procedure for the provision and installation of an automated banking system was unsuccessful, the BRB is waiting for the World Bank’s non-objection to reissue the international call for bids. The financial sector development plan was adopted by the government.

15. In the field of banking supervision, business continuity planning was adopted by the banking sector, and the banking supervision department was reorganized to include the function of financial stability assessment. However, preparation of the methodology and of the detailed risk-based supervision manual and the relevant draft circular was delayed. The final migration to IFRS reporting is also behind schedule as it requires banks to incorporate the sectoral chart of accounts into their IT systems and purchase the necessary software. To date, only one bank (ECOBANK) and one financial institution (BNDE) have done so. The revision of the banking law is nearing completion. To ensure consistency in financial sector regulation, it will take into account the legal framework governing mobile banking and microfinance institutions. The draft regulations on the role of

16. e-money, payment services, and commercial agents in Bank operations and payment services are being finalized to expand the legal framework of mobile banking and e-money. They will be published following promulgation of the revised banking law, from which they derive. A draft revision of the decree governing microfinance institutions was reviewed and will be finalized following validation of the draft revised banking law by the Bank’s management, to avoid contradictions in the two texts, especially with regard to payment services (including mobile banking). Two new banks from Kenya and Tanzania opened branches in Burundi, thus strengthening financial integration in the EAC (East African Community).

17. In line with the safeguards recommendations, the BRB hired an international audit firm to (i) conduct a special audit of large disbursements on behalf of the government processed by the BRB during June 30, 2011–March 31, 2012, (ii) evaluate the implementation of the new decree on public expenditures management, and (iii) ascertain the status of implementation of earlier special audit recommendations contained in the 2011 report of the audit firm, Deloitte GPO. Although some progress has been made, especially in the area of central bank internal controls, the audit findings continue to indicate ongoing control weaknesses that need to be addressed, including the lack of supporting documents for certain transactions and the partial implementation of the decree establishing the General Regulation on Government Budget Management. The final audit report has been forwarded to the General Council, the Audit Committee, and the Minister of Finance. In keeping with the safeguards recommendations, the central bank will submit quarterly reports on reserve operations to its General Council.

18. In the coffee sector, the government plans to pursue its program of privatizing washing stations, 41 of which were sold to domestic and international private investors in two bidding procedures, while at the same time ensuring the access of coffee growers to reserved shares in keeping with the government’s commitment (25 percent of the capital). A new invitation to bid will be issued in 2013 for the remaining 76 washing stations, following an assessment of their value. The government recognizes the preponderant role that the private sector should play in the coffee sector, as part of its strategy to boost production and minimize the cyclical effects of coffee production.

19. With respect to good governance, the policy of zero tolerance toward acts of corruption is beginning to produce results. The 2012 version of the Transparency International report ranks Burundi second among the EAC member countries. This achievement is attributable in particular to the actions of the anti-corruption committees established in all public institutions and, more specifically, to the involvement of the country’s highest authorities in the fight against economic malfeasance. Regarding implementation of the Good Governance and Anti-Corruption Strategy, an initial interim assessment is now available and the technical secretariat responsible for executing the relevant action plan is already functioning. To enhance effectiveness in the fight against corruption, the government is currently preparing a draft law revising the legal framework. A workshop to discuss, exchange views, and raise awareness of governance issues was held in mid-December 2012.

20. Government reforms to make the business climate more attractive to private investors continue. Substantial progress has been made in eliminating constraints related to: (i) business startups; (ii) the issuance of building permits; (iii) property transfers; and (iv) regional trade, which no longer pose an obstacle to entrepreneurship. Thanks to government efforts to improve the business climate, Burundi is ranked seventh among the most reform-oriented countries in the Doing Business 2013 report, rising 13 places from 172nd to 159th, respectively, in the 2012 and 2013 rankings.

III. Economic Outlook and Policies for 2013

A. Macroeconomic Framework

21. The uncertainties weighing on the global economy represent a major challenge for implementation of the program. The slowing of global economic activity, particularly in Europe, a strategic partner of Burundi, and sociopolitical tensions in the subregion (in the DRC) are downside risks that could affect the level of economic activity, the external accounts, and the public finances of Burundi.

22. Despite these risks, GDP growth is estimated to climb to 4.5 percent, compared to 4.0 percent in 2012. This recovery would be driven essentially by the secondary and tertiary sectors. Moreover, the start of construction of the hydroelectric dam (Kabu 16) in 2013 and work on the road projects financed by Japanese cooperation and the African Development Bank should support this growth. Agricultural exports, however, are expected to fall off sharply, owing to the cyclical nature of coffee production. Inflation is expected to slow to around 9 percent in 2013. The current account deficit is likely to widen (in nominal terms) as a result of the drop in coffee export receipts and the growth of imports related to petroleum products and investments in the energy sector. Official reserves are projected to increase to 3.6 months of imports, reflecting the cutback in BRB interventions on the foreign exchange market.

B. Fiscal Policies

23. The aim of fiscal policy is to support growth and improve the composition of expenditure, with a view to mitigating the effects of shocks on the most vulnerable segments of the population. Total government revenue and expenditure are estimated at 29.5 percent and 31.2 percent of GDP, respectively, thanks to expenditure controls and improved revenue collection. The overall fiscal balance deficit (cash basis, including grants) should be contained at 1.7 percent of GDP. Thus, pro-poor spending will continue to grow without jeopardizing fiscal consolidation, and the wage bill will be brought under control.

24. Fiscal revenue is expected to total FBu 615 billion, compared to FBu 527.5 billion in 2012, an increase of 0.1 percent of GDP. The administrative reforms implemented in prior years, such as expansion of the tax base, measures to combat fraud and tax evasion, and efforts to control exemptions, will drive revenue growth. Other initiatives will also boost revenue mobilization, particularly the introduction of a 10 percent tax on the remuneration of political representatives; the gradual expansion of the use of the tax identification number (TIN), including in the informal sector, and of the effects of the excise tax on beer; and the elimination or reduction of exemptions for foodstuffs and petroleum products. The income tax law that was adopted is designed to correct the existing inconsistencies between exemptions granted under the tax code and under the investment code. The creation of one-stop border posts will facilitate regional trade and, in so doing, boost customs revenue. Finally, the government will submit a draft law on the VAT to parliament, designed to expand the base of that tax and reduce the size of the informal sector. It will also request IMF technical assistance for drafting an excise code and for restructuring the system of tax exemptions to strengthen domestic revenue collection.

25. Total expenditure in 2013 could rise by 4.5 percent, to FBu 1,290.9 billion. This increase, following the 3.8 percent growth expected in 2012, reflects the need to strengthen economic and social infrastructures. The wage bill is projected at FBu 300.8 billion, or 7.3 percent of GDP, in response to the human resource requirements of the key sectors of education, health, and agriculture. Overall, domestically-financed capital expenditure is expected to increase to

26. FBu 108.8 billion, or approximately 2.6 percent of GDP.

27. In the health sector, the government will continue the policy of providing free healthcare for children under 5 years of age and covering the costs of childbirth. Additional infrastructure investments are planned to meet the growing demand for health services. The government will continue to give priority to the hiring of medical personnel in a context of wage bill stabilization. These measures will contribute to higher quality medical care,

28. In the education sector, the government also intends to continue the program of free primary school tuition and will expand it to include higher education. It plans to build new classrooms and hire teachers in order to reduce the teacher-student ratio.

29. In the agricultural sector, the government, in close collaboration with donors, plans to combat the high cost of living and eliminate food insecurity. Accordingly, the government will implement the National Agricultural and Livestock Investment Plan, the priorities of which are as follows: (i) sustainable growth of food production and security; (ii) professionalization of producers and promotion of innovation; (iii) development of industries and agribusiness, including livestock and fishery activities; and (iv) institution building.

C. Monetary and Exchange Policies

30. Inflation reduction will remain the focus of monetary policy. Given the relatively high rate of inflation, a tight monetary policy stance will be maintained. The BRB will carefully monitor the growth of inflation and improve its capacity to forecast this macroeconomic indicator. If inflationary pressures pose no threat to economic activity, the BRB, in consultation with IMF staff, will weigh the possibility of gradually easing monetary policy to provide the economy with the resources necessary to function without reigniting inflationary pressures. The liquidity condition is expected to improve gradually, mainly as a result of the repatriation of coffee export receipts.

31. The BRB will take steps to revitalize the interbank foreign exchange market and, in order to preserve international reserves, will continue cutting back on the frequency and amounts of its interventions on the foreign exchange market.

32. The BRB will analyze the conclusions and recommendations of the IMF Monetary and Capital Markets Department mission of December 2012 with a view to promoting the health of the financial sector. It will also continue to monitor trends and will take appropriate steps to mitigate the effects of the accumulation of public sector arrears, which are siphoning off bank liquidity and weakening the financial health of primary banks.

D. Structural measures

33. The government intends to build on the progress made in the reform of public financial management. Accordingly, the decree on the appointment and legal status of the Commissioner of the Burundian Revenue Office (OBR) will be submitted for review by the Council of Ministers. This decree defines the function of the OBR Commissioner and determines the scope of his authority and his relations with the senior government accountant (new structural benchmark). The OBR Commissioner also assumes the functions the office’s Receiver General.

34. The government is committed to maintaining a prudent debt policy to avoid overindebtedness and therefore intends to request funds in the form of grants or highly concessional loans with a grant element of at least 50 percent, sufficient to cover its financing requirements. Measures to strengthen public debt management capacity will be pursued in 2013, based essentially on the recommendations of the World Bank DEMPA mission of August 2012, with special emphasis on the preparation of a legal framework governing debt management. These measures would encompass the publication of quarterly debt reports by the Ministry of Finance (new structural benchmark). The law on debt management will be submitted to parliament by December 30, 2013 (new structural benchmark).

35. A national survey on financial inclusion was carried out, revealing the difficulties experienced by the poorest segments of the population in gaining access to formal sector financial institutions. The causes of the low rate of financial inclusion are: (i) income poverty (ii) the inadequate banking network in rural areas, (ii, sic) the large minimum deposits demanded by banks to open an account, (iii) the collateral required for borrowing, and (iv) bank products unsuited to rural needs. Based on these findings, the BRB and the financial institutions plan to develop strategies to expand access to financial services for a larger number of people.

36. Energy issues such as low power generation capacities and frequent power cuts stand in the way of the economic transformation described in the PRSP-II. The government plans to pursue its policy aimed at supplying more of the country with electricity and improving the financial position of REGIDESO. The government envisages launching a public-private partnership program to diversify energy production possibilities, with assistance from the World Bank and the African Development Bank. Power generation capacity is expected to be boosted by approximately 157 MW over the next four years, thanks to financing provided by the European Development Fund, the World Bank, and Exim Bank of India. In addition to a rate adjustment, the management of REGIDESO was strengthened with a view to more effectively combating fraud. The collection of consumer bills was also improved by greatly expanding the prepaid meter system. An organizational audit of REGIDESO is scheduled for 2013.

IV poverty Reduction and Growth Strategy Paper

37. To mobilize the political support and resources necessary to finance the priority action program contained in the Poverty Reduction and Growth Strategy Paper (PRSP-II), the government organized a donor conference in Geneva in October 2012. The financial commitments of our development partners are encouraging in light of the sluggish global economy. In collaboration with its partners, Burundi will organize sectoral conferences to facilitate disbursement of the commitments made in Geneva and thus mobilize all the funds needed to ensure successful implementation of the PRSP-II.

38. The PRSP-II, which is a key component of the effort to consolidate peace and kick-start economic growth, is structured around four strategic pillars:

  • Strengthening of the rule of law, consolidation of good governance, and promotion of gender equality;

  • Transformation of the Burundian economy to achieve sustained, job-creating growth;

  • Improvement of the accessibility and quality of basic services and strengthening of national solidarity; and

  • Management of land and the environment in keeping with sustainable development principles.

A. Improvement of Statistics

39. To ensure that reliable socioeconomic indicators are regularly available, the government is determined to strengthen its data collection units. To that end, an appropriation for hiring 12 statisticians was included in the 2013 budget and a draft decree on the establishment, organization, and composition of the central ministerial statistics services was reviewed by the National Statistical Information Board and will be submitted to the Council of Ministers in the first quarter of 2013.

40. In addition, the government plans to launch a national survey on household living conditions in the first quarter or 2013, with a view to updating the household basket and achieving national CPI coverage.

I. Program Monitoring

41. Semiannual monitoring of the program by the IMF Executive Board will continue, based on the quantitative monitoring indicators and structural benchmarks set out in Tables 1 and 3. These indicators are defined in the attached Technical Memorandum of Understanding (TMU). The semiannual reviews will be based on the data at end-March and end-September. The third program review will be based on the performance criteria for end-March 2013. To ensure the success of the program, the authorities will take all the steps necessary to meet the new proposed quantitative targets and structural benchmarks on which understandings were reached with IMF staff.

Table 1.

Burundi: Performance Criteria and Indicative Targets for 2012-13

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

Indicative targets.

The ceiling or the floor will be adjusted as indicated in the TMU.

Continuous performance criterion.

See definitions in TMU.

Table 2.

Structural benchmarks for 2012

article image
article image
article image
Table 3.

Structural Benchmarks for 2013

article image
article image

Attachment II. Amendments to the Technical Memorandum of Understanding

1. This technical memorandum of understanding covers the agreements on monitoring implementation of the program supported by the Extended Credit Facility (ECF) Arrangement. It sets out the definitions of program variables to monitor implementation of the program and the reporting requirements for the government of Burundi and the Bank of the Republic of Burundi (BRB). It defines quantitative performance criteria, indicative targets, and applicable adjustors.

A. Quantitative Program Targets

Quantitative performance criteria and indicative targets

2. The quantitative performance criteria for the program as shown in the MEFP are as follows:

  • net foreign assets of the BRB (floor);

  • net domestic assets of the BRB (ceiling);

  • net domestic financing of the government (ceiling);

  • external payment arrears of the government (ceiling, continuous);

  • stock of short-term external debt (maturity of less than one year) of the government (ceiling, continuous); and new nonconcessional external debt contracted or guaranteed by the government or the BRB (ceiling, continuous).

3. The quantitative indicative targets for the program, shown in the MEFP, are as follows:

  • accumulation of domestic arrears (ceiling);

  • reserve money (ceiling), and

  • pro-poor spending (floor).

Definitions and measurement

4. The net foreign assets of the BRB are defined as the difference between (i) gross official reserves (valued at market prices) and other claims; and (ii) foreign exchange liabilities to nonresident entities (including the use of Fund resources, and liabilities arising from the use of any SDR allocation). The gross official reserves of the BRB are defined as those foreign assets that are liquid and freely available to the BRB.

5. The net domestic assets of the BRB are defined as the difference between (i) reserve money, comprising currency in circulation, reserves of commercial banks, and other deposits held at the BRB; and (ii) net foreign assets of the BRB.

Adjustor for changes in the compulsory reserves coefficients

6. The ceiling on net domestic assets of the BRB will be adjusted symmetrically for any change in the compulsory reserves coefficient applied to deposits in commercial banks by the amount of the new coefficient minus that stipulated in the program, multiplied by bank deposits subject to compulsory reserves. The rate stipulated in the program is currently 3 percent.

7. Net domestic financing of the government is defined as the change in (i) outstanding loans, advances, and other credit to the government from the BRB and all of Burundi’s commercial banks; (ii) plus the stock of all government securities held by the nonbank public denominated in Burundi francs, including that held by nonresidents; (iii) less government deposits held in the BRB or in Burundi’s commercial banks. The coverage of government is defined as central government and any other special funds or operations that are part of the budgetary process or have a direct impact on the government’s financial position.

8. The stock of external payment arrears of the government for program monitoring purposes is defined as the end-of-period amount of external debt service due and not paid within the grace period defined by a creditor, including contractual and late interest, for which a clearance agreement is not in place or for which arrears are not reschedulable. For arrears to exist, a creditor must claim payment of amounts due and not paid. Amounts in dispute are not considered arrears. Arrears for which a clearance framework has been agreed with the creditor or which are subject to rescheduling or restructuring are not considered arrears for program monitoring purposes. Program arrears would include any debt service due under such agreements that have not been paid.

Definition of debt

9. The program includes a ceiling on new nonconcessional external debt contracted or guaranteed by the government or the BRB. For the purpose of this program, external debt is defined as all debt contracted in a currency other than the Burundian Franc. This performance criterion applies to the contracting or guaranteeing by the government, local governments, the BRB and REGIDESO of new nonconcessional external debt (as specified below) with an original maturity of one year or more, including commitments contract