Burundi: Sixth Review Under the Extended Credit Facility Arrangement, and Request for Extension and Augmentation of Access—Debt Sustainability Analysis Update
Author:
International Monetary Fund. African Dept.
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Publication Date:
01 Apr 2015
eISBN:
9781484311936
Language:
English
Keywords:
ISCR; CR; real GDP; ECF arrangement; low-inflation environment; IMF Executive Board; Burundian authorities; debt-to-exports ratio; debt-to-revenue ratio; revenue-to-GDP ratio; sustainability indicator; Debt sustainability analysis; Debt sustainability; Public and publicly-guaranteed external debt
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KEY ISSUES Context: Corrective revenue measures helped keep the program on track and macroeconomic conditions improved in late 2014 following the decline in oil prices. Uncertainties related to the 2015 general elections weigh on the outlook. Program: The Executive Board approved the three-year arrangement under the Extended Credit Facility (ECF) on January 27, 2012, with a total access of 39 percent of quota (SDR 30 million). The fifth review was completed on August 25, 2014. For the sixth review, all performance criteria were observed, aided by the revenue measures taken in July to address the fiscal slippage that emerged earlier in 2014. Satisfactory progress has been made on structural reforms. The authorities have requested a one-year extension of the current ECF arrangement, which expires in March 2015, to enable provision of additional Fund resources via an augmentation of access by an amount equivalent to SDR 10 million (13 percent of quota). Outlook and risks: The macroeconomic outlook is broadly favorable, driven by continued public investment and a gradual recovery in agriculture; however, external vulnerabilities persist due to a protracted decline in coffee exports and high volatility of coffee prices. Under normal harvest conditions, inflation in 2015 is expected to remain in low single digits. Expenditure pressures in the context of the elections constitute a key risk to the fiscal outlook. Staff views: Staff supports the completion of the sixth review under the ECF and the authorities’ requests for an augmentation of access and extension of the current ECF arrangement through March 2016, which will be instrumental to catalyze donor support needed to address Burundi’s protracted balance-of-payments problem. Completion of the review will result in disbursement of an amount equivalent to SDR 5 million under the ECF arrangement.

Abstract

KEY ISSUES Context: Corrective revenue measures helped keep the program on track and macroeconomic conditions improved in late 2014 following the decline in oil prices. Uncertainties related to the 2015 general elections weigh on the outlook. Program: The Executive Board approved the three-year arrangement under the Extended Credit Facility (ECF) on January 27, 2012, with a total access of 39 percent of quota (SDR 30 million). The fifth review was completed on August 25, 2014. For the sixth review, all performance criteria were observed, aided by the revenue measures taken in July to address the fiscal slippage that emerged earlier in 2014. Satisfactory progress has been made on structural reforms. The authorities have requested a one-year extension of the current ECF arrangement, which expires in March 2015, to enable provision of additional Fund resources via an augmentation of access by an amount equivalent to SDR 10 million (13 percent of quota). Outlook and risks: The macroeconomic outlook is broadly favorable, driven by continued public investment and a gradual recovery in agriculture; however, external vulnerabilities persist due to a protracted decline in coffee exports and high volatility of coffee prices. Under normal harvest conditions, inflation in 2015 is expected to remain in low single digits. Expenditure pressures in the context of the elections constitute a key risk to the fiscal outlook. Staff views: Staff supports the completion of the sixth review under the ECF and the authorities’ requests for an augmentation of access and extension of the current ECF arrangement through March 2016, which will be instrumental to catalyze donor support needed to address Burundi’s protracted balance-of-payments problem. Completion of the review will result in disbursement of an amount equivalent to SDR 5 million under the ECF arrangement.

Background

1. The Debt Sustainability Analysis update indicates that Burundi continues to face a high risk of debt distress. While the update of the debt sustainability analysis (DSA) shows some improvements, notably in view of a better coverage of exports of services, Burundi remains assessed as being at high risk of debt distress, with the PV of external debt-to-exports ratio breaching the sustainability threshold in the baseline scenario, and debt service-to-exports as well as the PV of public debt-to-GDP ratios breaching their respective sustainability thresholds in the most extreme shock scenarios (Figures 1–2 and Tables 1–4). The DSA update suggests that Burundi has limited borrowing space, underscoring that loans should continue to be highly concessional given its narrow export base.2

Figure 1.
Figure 1.

Burundi: Indicators of Public and Publicly Guaranteed External Debt under Alternative Scenarios, 2014–2034 1/

Citation: IMF Staff Country Reports 2015, 088; 10.5089/9781484311936.002.A002

Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio on or before 2024. In figure b. it corresponds to a Non-debt flows shock; in c. to a Non-debt flows shock; in d. to a Non-debt flows shock; in e. to a Exports shock and in figure f. to a One-time depreciation shock
Figure 2.
Figure 2.

Burundi: Indicators of Public Debt Under Alternative Scenarios, 2014–2034 1/

Citation: IMF Staff Country Reports 2015, 088; 10.5089/9781484311936.002.A002

Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio on or before 2024.2/ Revenues are defined inclusive of grants.
Table 1.:

External Debt Sustainability Framework, Baseline Scenario, 2011–20341/

(In percent of GDP, unless otherwise indicated)

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

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 PV of private sector debt is equivalent to its face value.

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

Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.

Defined as grants, concessional loans, and debt relief.

Grant-equivalent financing includes grants provided directly to the government and through new borrowing (difference between the face value and the PV of new debt).

Table 2.

Burundi: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, 2014–2034

(In percent)

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

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.

Table 3.

Burundi: Public Sector Debt Sustainability Framework, Baseline Scenario, 2011–2034

(In percent of GDP, unless otherwise indicated)

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

[Indicate coverage of public sector, e.g., general government or nonfinancial public sector. Also whether net or gross debt is used.]

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 excluding 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 derived over the past 10 years, subject to data availability.

Table 4.

Burundi: Sensitivity Analysis for Key Indicators of Public Debt 2014–2034

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 the length of the projection period.

Revenues are defined inclusive of grants.

2. Burundi is a weak policy performer for the purpose of determining the debt burden thresholds under the Debt Sustainability Framework (DSF). Burundi’s 2013 rating in the World Bank’s Country Policy and Institutional Assessment (CPIA) remained at its 2012 level. A relatively low performance with an average for the last three years—3.20 on a scale of 1 to 6—keeps Burundi in the group of weak policy performers.3

3. In 2012–13, Burundi’s debt ratios declined, reflecting real GDP growth (4.5 percent) and a real depreciation of the Burundi franc against the U.S. dollar (about 8 percent). The public debt- and external debt-to-GDP ratios declined by about 3 and 2 percentage points to 32.7 and 19.6 percent, respectively. At end-2013, Burundi’s public and publicly guaranteed external debt stood at $538 million. About 86 percent of Burundi’s outstanding nominal external public and publicly guaranteed (PPG) debt is owed to multilateral creditors, with bilateral creditors accounting for the remainder. The domestic debt stock reached about $359.5 million (FBu 554 billion), 70 percent of which are medium and long-term (30 percent in government securities) at end-2013.

Text Table 1.

Burundi: Stock External Debt, end-2013

(Millions of US dollars)

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

Underlying Assumptions

4. The baseline macroeconomic assumptions for the current DSA are consistent with the macroeconomic framework underlying the current ECF arrangement. In the short- to medium-term, they are mainly based on the poverty reduction strategy. In the longer run, they reflect: (1) a stable macroeconomic environment, with continued growth momentum, contained inflation, and fiscal consolidation; (2) responsible fiscal policy and prudent debt policy; and (3) continued improvements to the business environment that would promote private sector growth and export diversification. Reflecting these assumptions, the DSA macroeconomic framework shows that all but one principal EAC convergence criteria are met starting in 2014. The reserve coverage in terms of months of imports (4.5 months) is expected to be met starting in 2021. All the indicative criteria are expected to be met starting in 2014, with the exception of the fiscal revenue-to-GDP ratio (set at 25 percent).

Text Table 2.

Burundi: Selected Macroeconomic Indicators, 2013–2034

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

5. Risks to the macroeconomic outlook stem mostly from the fragile social and security situation and the external environment. The protracted Euro Area debt crisis and sluggish economic growth in emerging markets continue to engender negative spillovers through trade and investment channels. High volatility of coffee production and international coffee prices also adds to risks. On the positive side, Burundi is benefiting from a sharp decline in international oil prices, through a lower import bill and inflation; however, these effects may not be long-lasting and are highly dependent on domestic policy response. Meanwhile, the uncertainty in donor support also poses risks. Moreover, reintegrating repatriated refugees is likely to add to unemployment, increase demand for public services, and fuel conflict over access to land. Finally, the socio-political environment surrounding the 2015 election is highly unpredictable.

External DSA

6. Under the baseline scenario, one indicator breaches the policy threshold during the medium term. The PV of debt-to-exports ratio, although gradually declining, is projected to stay above the 100 percent policy threshold until around 2021. Also the debt service-to-exports ratio is projected to breach the sustainability threshold in the short run in the most extreme shock scenario.4 These results are mostly due to Burundi’s narrow export base and the relatively limited export potential at this time. In contrast, the PV of debt-to-GDP ratio, the PV of debt-to-revenue ratio, and the debt service-to-revenue ratio are expected to remain well below the indicative policy dependent thresholds throughout the projection period. Moreover, those indicators are somewhat stabilizing in the medium term and show a declining trend in the long run, indicating an improvement of the debt sustainability profile in the long run (Figure 1 and Table 1). This stems from the intention of the authorities to pursue sound macroeconomic and prudent debt policies. The combination of such policies is expected to alleviate debt burden indicators. In particular, keeping the PV of debt-to-GDP ratio below 10 percent in the long term is essential to bringing the PV of debt-to-exports below the sustainability threshold in the baseline scenario starting in 2020 and converging to the sustainability threshold in the most extreme shock scenario by 2030.

Burundi: Macroeconomic Assumptions, 2015–2034

In the medium term (2015–19), projections are consistent with the macroeconomic framework of the sixth ECF Review. Long-term (2012–2034) projections assume a more stable political environment, continued growth in coffee exports, and positive returns in terms of macroeconomic stabilization and economic growth from increased public investments and policies implemented in previous years under successive IMF programs.

  • Real GDP growth is projected to accelerate over the period 2015–2034 to about 6 percent per year, exceeding performance over 2005–2014. Growth is expected to be driven by continued macroeconomic stability, improvements in infrastructure, gradual emergence of the nickel sector, and stronger performance of the agricultural sector based on favorable international prices and additional investment. Economic activity would also benefit from continued consolidation of political stability.

  • CPI inflation over the long-term is projected to remain stable at around 5 percent per year, reflecting improved performance in agriculture and policies geared toward maintaining price stability.

  • Fiscal consolidation is expected to continue over the projection period (2015–2034). The primary fiscal balance is projected to remain at about 1 percent of GDP from 2015 onwards, providing a strong anchor for long-term fiscal sustainability. This trend reflects: (1) a gradual decline in grants from 13 percent in 2014 to about 8 percent in 2034, improved economic conditions in Burundi and budgetary constraints in donor countries; (2) a domestic revenue-to-GDP ratio stabilized at about 14 percent; and (3) a gradual decline in primary expenditures from 29 percent of GDP in 2014 to 23.4 percent of GDP in 2034. The overall budget deficit is expected to hover at around 2 percent of GDP.

  • The current account deficit (including official grants) is expected to persist, but would decline gradually to about 12 percent of GDP in 2034. This reflects: (1) the positive impact of an increase in exports of goods and services by about 1 percentage points of GDP over the projection period, with a gradual development of the export potential in mining (especially nickel); (2) the deceleration of imports of goods and services by about 7 percentage points of GDP, in part reflecting the impact of terms of trade improvements and import substitution in agriculture and manufacturing from ongoing and envisaged investments in these sectors; (3) a gradual decline in official transfers, in part due to declining grants; and (4) a gradual increase in FDI, driven by improvements in the business environment and greater regional integration.

  • The cost of new financing reflects: (1) an increase in highly concessional loans in the short and medium-tem; (2) a gradual decline of external financing from about 60 percent of total financing in 2014 to about 50 percent by 2034; and (3) a gradual decline in highly concessional loans.

7. Alternative scenarios and stress tests highlight the vulnerability of the debt sustainability profile to adverse shocks. Under a scenario of combined adverse shocks on GDP growth, exports, and FDI flow, the debt indicators worsen compared to the baseline scenario; the PV of debt-to-export indicator breaches the threshold in the medium term and return to the baseline in the long run.5 Also, the indicator of debt service-to-exports worsens and breaches the threshold for one year in the very near term. Under a scenario that assumes continuation of policies during the last ten years, only the PV of debt-to-exports breaches the threshold, but most indicators would increase significantly compared to that under the baseline scenario and would not improve even in the long run.6 These results underscore the need to foster a sound macroeconomic environment that would promote growth, export diversification, and inflow of foreign direct investment, and to continue the reforms to avoid the return to unsustainable policies of the past.7

8. All scenarios suggest that Burundi’s narrow export base is the most significant factor that contributes to its vulnerability of debt sustainability. In particular, the PV of debt-to-exports ratio is projected to remain above the policy threshold of 100 percent until 2021 in the baseline scenario, until 2030 in the most extreme shock scenario, and throughout the projection period in the historical scenario.

Public DSA

9. Public debt indicators, including external and domestic, are expected to gradually improve under the baseline scenario. The improvement is due primarily to a decline in the public sector borrowing requirement, reflecting the widening of the revenue base and the gradual decline in government spending in the post reconstruction period. The ratios of the PV of public debt-to-GDP and public debt-to-revenue remain low, reflecting Burundi’s reliance on grants and highly concessional loans to finance reconstruction and poverty reduction.

10. However, public debt indicators are highly vulnerable to shocks. Under a shock scenario that combines a lower GDP growth and a larger primary deficit, the PV of debt-to-GDP ratio is projected to rise by 5 percentage points (above the baseline scenario) throughout the projection period, and the PV of debt-to-revenue ratio by about 20 percentage points.8 Moreover, the benchmark for the public debt-to-GDP ratio is also breached under the most extreme shock. These results underscore the need for prudent fiscal policy and show a limited scope for the recourse to additional borrowing in case of a fiscal shock. A swift implementation of a strategy based on the 2012 Debt Management Performance Assessment (DeMPA) would be crucial. The debt service-to-revenue ratio remains subdued in the baseline scenario but is significantly affected by alternative scenarios and shocks, especially in near short term, even though most additional borrowing is expected to be on highly concessional terms.

Conclusion

11. Based on this LIC-DSA, staff is of the view that Burundi continues to face a high risk of debt distress. The debt sustainability indicators improved compared to the 2014 DSA, although not sufficiently to warrant a change in the classification. In particular, as in the 2014 DSA, the PV of debt-to-exports ratio remains for a significant period above the policy threshold under the baseline scenario and deteriorates in the historical and most extreme shock scenarios.

12. Based on this high risk classification and on the vulnerabilities shown through the alternative and stress tests scenarios, Burundi should pursue sound macroeconomic and prudent debt policies. In particular, the analysis points to the importance of increasing exports by expanding the export base beyond the traditional coffee sector, and of diversifying export markets. This would include decisive implementation of reforms in the coffee sector, focusing on increasing its productivity and financial health, and unlocking export potential in other sectors (mining, tea, horticulture, and tourism). It is also essential for Burundi to capitalize on its fiscal reforms and macroeconomic stability to continue sound policies and avoid policy reversals, which could, as shown in the analysis, undermine debt sustainability. While the authorities scaled back their plans to engage in PPPs, it is important that any such projects are conducted and financed in a manner that does not jeopardize debt sustainability. Finally, given the high risk of debt distress and the vulnerabilities, staff encourages the authorities to continue to seek maximum concessionality in their external financing, with all nonconcessional borrowing regularly reviewed, monitored, and reported to ensure full transparency and sound governance. Staff encourages the authorities to finalize the new law on public debt, which would provide an overreaching legal debt framework and help determine the objective, strategy, signing authority, and other aspects of debt management. The strengthening of debt management practices now underway is a good step towards reinforcing debt sustainability. Staff encourages the authorities to expedite the implementation of the recommendations of the World Bank DeMPA mission assessment to facilitate putting in place a comprehensive medium-term debt strategy.

13. The authorities broadly share staffs’ assessment. The authorities are keen to benefit from the recent change in the debt limits policy, notably to increase borrowing for critically important projects in energy, transport infrastructure, and agriculture. Nevertheless, they recognize that scaling up external borrowing for these purposes would require addressing the weaknesses that make Burundi prone to debt distress.

1

The DSA has been produced jointly by Fund and Bank staff, in collaboration with the Burundi authorities. The fiscal year for Burundi is January to December.

2

Coffee and tea account for about 80 percent of exports. The current analysis does not include informal exports, notably of gold and other high-value minerals, which are not covered in the official BOP data, but are deemed to have increased to significant levels in recent years, implying that their inclusion could alter the assessment.

3

A score below 3.25 corresponds to a weak policy performance, according to the LIC Debt Sustainability Framework (DSF).

4

The analysis excludes remittances, which are reported to be insignificant relative to exports. Their inclusion would make the sustainability criteria more stringent; however, without a significant impact on the conclusions.

5

The combination of shocks assumes that during 2015–16, GDP growth, export growth, the USD GDP deflator and non-debt creating flows will be at their historical averages minus one-half standard deviation.

6

The historical scenario assumes that throughout the projection period, key macroeconomic variables will be at their respective last ten-year average levels. Some economic variables in 2009 were adjusted as Burundi benefited from the Heavily Indebted Poor Countries Initiative and the Multilateral Debt Relief Initiative during that year.

7

If the assumption on coffee production does not materialize and the country falls back into a fragility trap, the debt indicators would significantly worsen.

8

The scenario assumes that, in 2013–14, GDP growth and the primary balance will be at their historical average minus one-half standard deviation.

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Cover IMF Staff Country Reports
Burundi: Sixth Review Under the Extended Credit Facility Arrangement, and Request for Extension and Augmentation of Access
Author:
International Monetary Fund. African Dept.
Volume/Issue:
Volume 2015: Issue 088
Publisher:
International Monetary Fund
ISBN:
9781484311936
ISSN:
1934-7685
Pages:
76
DOI:
https://doi.org/10.5089/9781484311936.002
  • Figure 1.
    View in gallery
    Figure 1.

    Burundi: Indicators of Public and Publicly Guaranteed External Debt under Alternative Scenarios, 2014–2034 1/

  • Figure 2.
    View in gallery
    Figure 2.

    Burundi: Indicators of Public Debt Under Alternative Scenarios, 2014–2034 1/

Figure 1.

Burundi: Indicators of Public and Publicly Guaranteed External Debt under Alternative Scenarios, 2014–2034 1/
Figure 2.

Burundi: Indicators of Public Debt Under Alternative Scenarios, 2014–2034 1/