Annex I. Political and Economic Developments

1. A political crisis in 2015 led to a deterioration in the security situation and strained Burundi’s relationship with the international community. The crisis, while deeply rooted in the history of protracted tension between Burundi’s major ethnic groups, was triggered by President Nkurunziza’s decision to run for a third term in office, which opposition groups asserted violated the terms of the 2000 Arusha Peace and Reconciliation Agreement that had brought closure to a nearly two-decade long civil war.

2. In elections held on May 20, 2020, Mr. Evariste Ndayishimiye, the incumbent party’s presidential candidate, received 68 percent of the vote with his party also securing a large majority in the Parliament. Mr. Ndayishimiye and his government took office on June 18, earlier than previously planned following the death of outgoing President Nkurunziza in early June.

3. The lack of Article IV consultations since 2014 and data weaknesses hamper staff’s understanding of economic trends and policies. While the authorities have recently resumed data sharing in a fashion that is comparable to practices under previous financial arrangements, data coverage and quality remain weak. Nevertheless, staff can glean key trends and policies from available information.

4. The 2015 political crisis, subsequent withdrawal of most external support and the authorities’ policies since then have led to a difficult economic situation marked by low growth, elevated public debt, external imbalances, and banking system fragility. Aid used to contribute about half of the government’s total revenue. Following the events of 2015, donors withdrew all budget support and suspended most project aid. Over 2014–16, aid fell from 8.5 percent to 2.3 percent of GDP.

• After contracting during the 2015–16 crisis, the economy has recovered only slowly.¹ With population growth of around 3 percent per year, per-capita GDP has fallen by about 16 percent over the past five years. As a result, poverty has likely grown further (a 2013 survey found that 72 percent of the population lived below the international poverty line). Further, human development indicators remain among the weakest in the world (with Burundi ranking 185th out of 189 countries in the UN Human Development Index). The economy remains heavily focused on low-productivity agriculture (which accounts for about 30 percent of GDP but more than 80 percent of employment).

• Inflation rose quickly following the crisis but has since been brought down. Inflation has tracked money growth quite closely in recent years, while food prices, driven in part by the impact of climatic conditions on harvests, are also an important driver of price dynamics. Monetary conditions have been restrictive since 2017, which in combination with substantial bank financing of large fiscal deficits implies continued crowding out of credit to the private sector.

• Fiscal deficits rose sharply, averaging 7 percent of GDP a year during 2015–19, despite cuts to investment and social spending and progress in revenue mobilization, pushing public debt to elevated levels. With external financing sources drying up, deficits have been financed by borrowing first from the central bank, then from commercial banks, and also through accumulation of arrears to suppliers. Domestic debt is estimated to have risen to 39.6 percent of GDP in 2019 (from 16.6 percent in 2014), while external debt has fallen slightly to 17.8 percent of GDP (from 19.6 percent of GDP). However, data discrepancies suggest that both domestic and external public and publicly guaranteed debt could be underestimated.

• Large external imbalances have developed, consistent with overvaluation of the exchange rate.

  • The real effective exchange rate has appreciated by 18 percent since end-2014 and a parallel market has emerged—the premium was at 55 percent at end-2019, up from near zero in 2014. The central bank allocates scarce foreign exchange in a discretionary manner to priority imports such as fuel, fertilizer and medicine.

  • Despite some import compression, the current account deficit has remained high following the withdrawal of donor budget support and corresponding reduction in current transfers. Exports have grown only modestly in recent years, due in part to weakening world market prices for coffee and tea, Burundi’s traditional main exports.

  • The financial and capital accounts deteriorated as well. In particular, FDI inflows appear to have largely stopped.

  • Foreign currency reserves have dwindled to around one month of imports (from 4 months of imports in 2014).

  • Sizeable errors and omissions suggest unrecorded foreign exchange inflows, possibly from under-reported exports, external borrowing, or other inflows. (The Fund is providing limited technical assistance on external sector statistics.)

• The banking sector has become fragile and contributes little to the financing of the private sector. Banks’ claims on the government have more than doubled, reaching 45 percent of their assets at end-2019, creating an important feedback loop between the health of the government finances and the health of the banking system.

• The central bank is under-capitalized. It has accumulated large operating losses since 2017, leading to a drop in its equity to 2.3 percent of assets by June 2019, well below its mandatory minimum of 10 percent of assets.

Appendix I. Letter of Intent

Bujumbura

July 14, 2020

Ms Kristalina Georgieva

Managing Director

International Monetary Fund

Washington, D.C. 20431

Madame Managing Director,

1. The COVID-19 pandemic has had repercussions for many countries around the world and Burundi has not been spared. The number of citizens afflicted by the disease is growing. The economic impact, including from the containment measures in partner countries in general and neighboring countries in particular, is substantial, giving rise to an exceptional balance of payments need. This letter of intent describes our policy commitments for addressing the pandemic and its impacts.

2. Economic impacts include lower economic growth; deterioration of the public finances through the decline in tax revenue and increase in expenditure needed to address the pandemic; the deterioration of the balance of payments through a fall in exports, fall in remittances by migrants, and rise in imports; and difficulties in the banking sector due to unpaid debts. This has led IMF staff to revise their economic growth projections for 2020 to -3.2 percent, against 2.1 percent growth projected before the onset of the pandemic. IMF staff also found that the pandemic creates a need for external financing of 4.7 percent of GDP and a need for budgetary financing of 6.9 percent of GDP, cumulated over 2020 and 2021.

3. We have already taken certain measures to ward off the COVID-19 pandemic. In particular, we have quarantined travelers from affected countries, stopped providing entry visas, and closed the borders except for merchandise trade, humanitarian, and medical travel and transport. Other measures taken include notably the massive COVID-19 testing campaign in the entire country, the intensification of awareness campaigns aimed at preventing and reducing human-to-human transmission and the strengthening of laboratories with COVID-19 diagnostic equipment. In addition, each health facility has been provided with a team responsible for testing COVID-19 and, if necessary, providing supervision and monitoring of persons that may have been infected.

4. Our intentions for addressing the pandemic and its adverse effects comprise the following:

• Public health measures: We intend to fully implement our pandemic response plan. The plan aims to strengthen the health care system, the social safety net, and parts of the road network to facilitate access to sick people. To strengthen the health system, we intend to intensify the communication on the risks of COVID-19 and enhance the screening capacity, the equipment of hospitals and health centers, and the stock of drugs. We estimate that the cost of the response plan will reach at least US$150 million (4.7 percent of GDP) cumulatively over 2020 and 2021. With the exception of the already promised US$5 million by the World Bank, we currently do not have cash buffers or credit sources that allow us to make these expenditures. We have already contacted and will continue to contact our development partners to request additional support for our pandemic response plan.

• Fiscal policy: In addition to spending on the pandemic response plan, we are considering providing support to hard-hit sectors such as the transport and hotel sectors. The cost of this plan will depend on the evolution of the pandemic, and we intend to meet it largely by reprioritizing the existing budget, with a net financing need of about US$12 million (0.4 percent of GDP) over 2020 and 2021.

• Monetary and exchange rate policy: We will continue to gear monetary policy to containing inflation. The economy continues to be constrained by foreign exchange shortages that have necessitated the use of direct intervention by the central bank to ensure financing for critical imports. Given the low level of reserves, there is presently no room to draw down reserves any further to address the external need created by the pandemic. We are however developing a strategy to broaden access to foreign exchange as inflows increase.

• Financial sector supervision: We will monitor the impact of the COVID-19 shock on loan performance as part of our efforts to protect financial stability. In particular, we will work with banks to encourage, on a targeted and time-bound basis, an extension of loan maturities to borrowers in hard-hit sectors, applying existing regulation in a flexible manner.

• To face the emerging large budgetary and external financing gaps, and given the large balance of payments need created by the impact of the coronavirus, the Government of Burundi requests grants under the Catastrophe Containment window of the CCRT of SDR17.96 million, equivalent to 11.7 percent of our quota, to cover our debt service to the IMF falling due in the period from July 21st, 2020 to April 13, 2022, or as much as is available from resources. This debt relief will free up budgetary resources to address public health needs and help contain the exceptional balance of payments need resulting from the pandemic.

• We will ensure that the best possible use will be made of the funds provided in the context of COVID-19. The Court of Auditors, in consultation with the development partners concerned, will undertake and publish an ex post audit of expenses related to COVID on the government’s website within 9 months after the end of the fiscal year.

5. We are working with IMF staff in seeking to maintain broad macroeconomic stability. We are actively seeking additional support from the IMF to face the emerging large budgetary and external financing gaps, including under the Rapid Credit Facility.

6. We authorize the IMF to publish this Letter of Intent and the staff report for the request for financial support under the CCRT.

/s/	/s/
Jean Ciza	Dr. Domitien Ndihokubwayo
Governor	Minister of Finance, Budget, and Development Bank of the Republic of Burundi Cooperation

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/s/	/s/
Jean Ciza	Dr. Domitien Ndihokubwayo
Governor	Minister of Finance, Budget, and Development Bank of the Republic of Burundi Cooperation