Burundi: Request for Disbursement Under the Rapid Credit Facility—Debt Sustainability Analysis
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International Monetary Fund. African Dept.
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Publication Date:
12 Nov 2021
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9781557755476
ISBN:
9781557755476
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English
Keywords:
debt vulnerability; burden indicator; sustainability framework; dynamics equation; creating flow; Debt sustainability; Fiscal consolidation; Global; Africa
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46BURUNDI

Abstract

46BURUNDI

Title page

BURUNDI

REQUEST FOR DISBURSEMENT UNDER THE RAPID CREDIT FACILITY—DEBT SUSTAINABILITY ANALYSIS

October 6, 2021

Approved by

Dhaneshwar Ghura and Anna Ilyina (IMF) and Marcello Estevão and Asad Alam (IDA)

The Debt Sustainability Analysis (DSA) has been prepared jointly by the staff of the International Monetary Fund (IMF) and the International Development Association (IDA), in consultation with the authorities, using the debt sustainability framework for low-income countries approved by the Boards of both institutions.

Burundi Joint Bank-Fund Debt Sustainability Analysis

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Burundi is at high risk of external and overall debt distress.1 Two external debt burden indicators and one overall public debt indicator breach the respective thresholds under the baseline, signaling a high risk of debt distress rating for external and overall public debt. The breach in the PV of the public debt-to-GDP ratio is significant and protracted. The breaches in the external debt indicators under the baseline are mild, and the indicators fall below but near the threshold in the medium term. Stress tests find that external debt sustainability is particularly vulnerable to shocks to exports, while overall public debt sustainability is most vulnerable to shocks to real GDP growth. Staff assesses Burundi’s debt as sustainable based on the authorities’ commitment to fiscal consolidation from unwinding of COVID-related spending and moderate improvement in revenue collection, expectations of donor financing, and a positive macroeconomic outlook, including robust exports and GDP growth. Prospects for further re-engagement with the international community and availability of grants and concessional loans to finance high-return projects would be beneficial for the country’s growth and debt outlook, while further flexibility in exchange rate management and other reforms to enhance competitiveness would improve the growth outlook. With these assumptions and given the country’s good track record in servicing its debt, there is a high likelihood that Burundi will be able to meet all its current and future financial obligations. This assessment is subject to significant risks. Delays in fiscal consolidation, delays in structural reforms to boost exports and growth, lack of up-to-date information on arrears and a prolonged COVID-19 shock would heighten debt vulnerabilities. Burundi’s debt is especially vulnerable to exports and growth shocks. Stronger GDP growth supported by prospects of stronger low-cost donor financing and the new SDR allocation (SDR 147.6 million equivalent to 6.6 percent of GDP) mitigate debt vulnerabilities.

Background

A. Public Debt Coverage

1. Public debt coverage includes external and domestic debt of the central government (Text Table 1).2 Data limitations prevent expanding public debt coverage to other entities of the general government or State-Owned Enterprises (SOEs). However, they are not likely to represent a major contingent external liability for the government as subnational government entities and SOEs cannot take up external debt without a government guarantee. They can borrow in domestic markets without central government guarantees; however, this is limited by guarantee requirements—a physical guarantee is required for loans higher than BIF 5 million. Central bank debt is excluded from coverage, except those amounts borrowed on the behalf of the government (IMF loans). External debt is based on residency.

Text Table 1.

Public Debt Coverage Under the Baseline Scenario

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2. The contingent liability stress test accounts for an external loan contracted by the central bank in 2019 to replenish reserves, potential domestic arrears accumulation since 2018 and data coverage limitations (Text Table 2). The central bank contracted in December 2019 a government-guaranteed loan of $40 million from AFREXIM bank (3-year maturity), with a remaining balance of US$ 35 million (1.1 percent of GDP) at end-2020. Potential domestic arrears that may have accumulated since 2018 are accounted through a contingent liability assumed to amount to 1.4 percent of GDP at end-2020 (para. 8. ). In addition, accounting for data limitations, contingent liabilities on SOEs’ debt are set at the default value of 2 percent of GDP to cover fiscal risks that may arise from SOEs’ weak reporting and domestic arrears. Data limitations also prevent a clear view of Burundi’s financial sector liabilities. Commercial banks’ liabilities (about 60 percent of GDP at end-2020) likely account for most of financial sector liabilities, and commercial banks appear well capitalized with improving returns on assets and declining NPLs (about 1 percent of GDP at end-2020). Nonetheless, provisions allowing recurrent restructuring of loans to some of their customers may mask vulnerabilities. Assumed contingent liabilities from financial markets are hence set at their default value of 5 percent of GDP (slightly less than 10 percent of Burundi’s commercial banks’ liabilities) to account for potential support to the financial system. Overall, total contingent liabilities are assumed at about 9.5 percent of GDP.

Text Table 2.

Coverage of Contingent Liabilitie Stress Tests

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The default shock of 2% of GDP will be triggered for countries whose government-guaranteed debt is not fully captured under the country’s public debt definition (1.). If it is already included in the government debt (1.) and risks associated with SoE’s debt not guaranteed by the government is assessed to be negligible, a country team may reduce this to 0%.

B. Debt Developments

3. Burundi received HIPC and MDRI debt relief in 2009, which lowered external debt from 134 percent of GDP at end-2008 to 27 percent of GDP at end-2009.

4. Public debt has grown rapidly since 2015 (the year of the last DSA) mainly driven by domestic debt (Text Tables 3 and 4). Domestic debt almost tripled from 17.4 percent of GDP at end-2014 to 49 percent of GDP at end-2020, driven by strong issuance of bonds and treasury bills to commercial banks and significant borrowing from the central bank. External debt declined from 20.6 percent of GDP at end-2014 to 18 percent of GDP at end-2020. As a result, total public debt rose from 38 percent of GDP at end-2014 to 67 percent of GDP at end-2020.

Text Table 3.

Burundi: Domestic Debt Stock by Creditor at end-2014 and end-2020

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

5. The sharp increase in public debt reflects the economic difficulties that Burundi has faced since 2015. Donor aid used to contribute about half of the government’s total revenue. Following the 2015 political and security crisis, donors withdrew budget support and suspended most project financing. Over 2014–16, aid fell from 8.9 percent of GDP to 2.4 percent of GDP. The economy initially contracted sharply and has been recovering only slowly since. Fiscal deficits rose sharply, averaging 6.5 percent of GDP a year during 2015–19, but were contained thanks to cuts to investment and social spending and progress in revenue mobilization. The deficits were financed mainly by borrowing from the central bank and commercial banks, with occasional accumulation of domestic arrears to suppliers. There are no identified external arrears.

6. Burundi owes most of its external debt to multilateral and regional lenders (Text Table 4). The multilateral creditors are the IMF, World Bank, AfDB, and International Fund for Agricultural Development (IFAD). Regional lenders to the central government include the EU, Arab Bank for the Economic Development of Africa (BADEA), and the OPEC Fund for Development. Bilateral creditors of the central government are China and India (through their Exim Banks), and Saudi Arabia, Kuwait and Abu Dhabi (through their Funds for Development). The central government also has an outstanding debt to Libya (US$ 4.3 million at end-2020 or 0.14 percent of GDP) that is not being serviced owing to legal issues.3 The central bank has an outstanding loan from AFREXIM bank, which was contracted in 2019 (para. 2). Debt to the IMF (US$ 26 million at end-2020) is being serviced by the central bank. Burundi has not accessed private external capital markets. Burundi received debt service relief from Exim Bank of China and the Kuwait Fund (US$ 0.5 million at end-2020) under the G20 Debt Service Suspension Initiative (DSSI), which is taken into account in this analysis.

Text Table 4.

Burundi: External Debt Stock by Creditor, end-2020

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

Debt to the IMF at end-2020 is serviced by the central bank (BRB).

7. Burundi’s outstanding external debt at end-2020 retains a substantial grant element of 33 percent4.

8. Burundi is current on servicing external debt (except the debt to Libya) and government securities. The stock of domestic arrears is unknown. The authorities set up a committee for the securitization of government arrears in March 2018 and domestic arrears accumulated from 2005 to 2017 (about BIF 230 billion or about 4 percent of 2020 GDP) were cleared through cash payments and securitization.

C. Macroeconomic Forecasts

9. Macroeconomic forecasts for Burundi are predicated on recent data shared since 2020. The authorities resumed data sharing in 2020 and open and substantive discussions were held during two recent IMF staff visits (December 2020 and April 2021) and a negotiation mission for a disbursement under the IMF’s Rapid Credit Facility (July 2021). Weaknesses in official data remain.

10. The baseline underpinning the DSA assumes a weak economic recovery in 2021, stifled by the ongoing COVID-19 spread and weather shocks, and gradual strengthening over the medium term. The growth outlook is predicated on a pickup in vaccination, durable political stability, and initial reengagement with the international community, with sustained although still limited external financing flows. GDP growth is projected to recover to 1.6 percent in 2021, predicated on a slowdown of the pandemic in the fourth quarter of 2021. An accelerated surge of COVID-19 cases since early 2021, social distancing measures abroad, and border closures would keep growth in the services sector anemic. Floods and landslides, that occurred in the second quarter, are expected to hamper agricultural production and related activities. The outlook is positive reflecting partly greater availability of COVID-19 vaccines, and the impact of the SDR allocation in alleviating imports rationing, and global growth recovery. In line with its peers in Sub-Saharan Africa (Text Figure 1), Burundi’s growth would pick up to around 5 percent in the medium term supported by stronger services activities, agricultural and manufacturing5 production, and investment6 (several of which are ongoing and close to being finalized or planned under the World Bank and the AfDB current project portfolio) and resulting increases in productive capacity. The sustained investment will support growth and mitigate the effects of the expected fiscal consolidation stemming from the unwinding of COVID-related spending. These areas of growth drivers are consistent with Burundi’s development plan. Growth will also be supported by a more peaceful and stable political environment compared to prior the COVID shock, building on successful elections and an elected government with strong reform mandate. Inflation is projected to be moderate in 2021.

Text Figure 1.
Text Figure 1.

Real GDP Growth in Burundi and in SSA Peer Economies

Citation: IMF Staff Country Reports 2021, 242; 10.5089/9781557755476.002.A002

1 WEO (April 2021) for peer countries and policy note baseline for Burundi.

11. A large external financing gap is projected in 2021 and beyond. The current account deficit is expected to widen in 2021, driven by higher imports owing to (1) larger volume from COVID-related needs and easing of imports restrictions as the SDR allocation supports additional FX availability and (2) worsening terms of trade owing to increases in import prices, especially petroleum prices. Export volumes will recover mildly in 2022 with mining exploitation restarting following the end of contract negotiations and gradually afterwards, as supportive reforms yield results, global demand remains timid, and transport disruptions start easing. The capital and financial account will continue to be supported by sizeable project grants, public sector borrowing and private borrowing (trade credits). Thereafter, imports would further increase owing to vaccine purchases. The baseline assumes vaccination of 56 percent of the population by the first half of 2022. The government would pay for vaccination of 40 percent of the population at a cost of $1.8 million per percentage point of the population. The remaining 16 percent of the population will be vaccinated under the COVAX initiative. With the recent SDR allocation, FX reserves are projected to increase to about 2.5 months of imports in 2021 under the baseline, which is still below adequacy levels.

12. The main changes compared to the 2015 DSA are as follows (Box 1 and Text Table 5):

  • Real sector. Projected real GDP growth has been revised down. The 2015 DSA projected an average annual real GDP growth of 6.1 percent during 2015–34. In the current DSA, growth is projected to increase from an annual average of 3.3 percent during 2020–25 to an annual average of 4.1 percent during 2026–41. This much lower growth rate reflects mainly the weaker initial macroeconomic conditions (owing to the lingering effects of the 2015 crisis and diplomatic isolation), adverse impacts from the Covid-19 pandemic, and the moderately positive impact on growth of policies expected under the current baseline.7

  • Fiscal sector. The path of the primary fiscal balance in the current DSA is projected to be slightly worse than in the 2015 DSA because of the lingering impact of the 2015 political crisis on government policies and donor support. Nonetheless, the expected fiscal adjustment and supporting reforms are expected to raise the primary fiscal balance from an annual average of -1.7 percent of GDP during 2020–25 to an annual average of 1.2 percent of GDP during 2026–41. The primary fiscal deficit is expected to worsen in FY2021/22 mainly because of COVID-related spending, including on vaccines (3.3 percent of GDP). The baseline assumes significant fiscal adjustment starting in FY2022/23 as spending pressures related to COVID-19 subside, revenue collection improve owing to stronger growth, widening of the tax base and administrative measures (better enforcement and computerization), budget support increase, and subsidies remain contained to provide greater room for domestically-financed public investment (Text Table 6).

  • External sector. The path of the non-interest current account balance in the current DSA is slightly less favorable than in the 2015 DSA with a slightly higher deficit. This is mainly due to much higher imports of goods and services compared to the 2015 DSA. The path of export growth was adversely affected by the political crisis in 2015 and more recently by the COVID-19 pandemic and regulatory changes in key exports markets to enforce repatriation of exports proceeds. Export growth is expected to pick up in the medium and long term mainly owing to a good performance of traditional exports (coffee and tea) and mining expansion, especially gold.

Text Table 5.

Burundi: Selected Macroeconomic Indicators, 2014–2041

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Sources Burundi authorities; and IMF staff estimates and projections

Fiscal year values (July-June) starting in 2019 (i.e. 2019 is FY 2018/19).

13. In the near-to-medium term, external financing is assumed to pick up, while domestic borrowing is projected to finance most of the declining fiscal deficit in the long term. Significant external disbursements are expected to finance COVID-related spending and the economic recovery. As the pandemic wanes, fiscal consolidation is expected to reduce financing needs—fiscal deficits would gradually decline and turn into a surplus by FY2035/36—and limit the impact of domestic borrowing on private investment and macroeconomic stability. Multilateral and regional lenders, including the IMF, are projected to account for most external borrowing in 2021 (82.4 percent), with loan maturity varying between 10 and 30 years and grant elements varying between 27.5 percent to 49.4 percent. This share will gradually decline over time as Non-Paris Club bilateral creditors are assumed to increase lending to Burundi, with loan maturities varying from 20 to 30 years and grant elements varying between 29.8 and 49.4 percent.8 However, in the absence of full reengagement with the international community, staff’s baseline projections of external disbursements are conservative and do not reflect the full potential of donor support. As a result, in the long term, domestic sources are projected to finance an increasing portion of the fiscal deficit, from about 54.5 percent of the fiscal deficit in FY2021/22 to 100 percent by FY 2026/27, when net external borrowing becomes nil and later negative as repayments start exceeding disbursements. In the longer term, an improving fiscal balance would reduce financing needs and the need for domestic issuance. Domestic financing is assumed to be in the form of treasury bills and bonds with maturities varying from less than one year to more than seven years and interest rates varying from 3 to 7.5 percent.

Text Table 6.

Burundi: Decomposition of Fiscal Adjustment

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

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

Includes the grant for the IMF debt service falling due from October 16, 2021 to April 13, 2022, which is subject to the availability of resources under the CCRT.

Medium-to-Long Term Macroeconomic Forecasts

Growth is expected to peak at around 5.2 percent in the medium-term as delayed growth-enhancing projects are implemented, before settling at around 4 percent in the long-term. A mild recovery in 2018 and 2019 after several stagnant years has been stalled by the pandemic in 2020. However, assuming virus containment and pickup in vaccination, growth is projected to turn positive in 2021 and increase to around 5.2 percent by 2025 as sectors targeted under the National Development Plan 2018–2027 (NDP) benefit from additional investment, more skilled labor, and favorable business conditions. Staff’s view is in line with the Government’s in terms of sources of growth though staff is more cautious on the pace of expansion given investor wariness over past political and security conditions. The primary sector will continue to provide a stable basis for growth but will be overtaken by the tertiary and secondary sectors as the main drivers of expansion.

After an uptick in inflation in 2020 because of poor harvest impacting food prices and supply disruptions due to the health pandemic, inflation is projected to fall back to its historical levels. Annual inflation is expected to be around 4.2 percent in the medium term. Inflation will continue to be heavily determined by agriculture—food items represent 45 percent of the basket.

The baseline assumes a fiscal consolidation, given the need to rein in the increase of public debt beyond its already very high level and the need to rein in money growth while strengthening the domestic banking system’s ability to provide credit to the private sector. Tax revenue is expected to gradually rise from 16.2 percent of GDP in FY2019/20 to almost 18.5 percent of GDP in the long term, mainly driven by better revenue collection from income taxes and taxes on goods and services, including VAT on imports. Grants are expected to rise from 4.3 percent of GDP in FY2019/20 to 6.5 percent of GDP in the long term, boosted by the resumption of budget support. Current spending is projected to drop significantly from 20.4 percent of GDP in FY2019/20 to about 16.2 percent of GDP in the long term. This reflects substantial efforts, notably to contain subsidies and transfers, on top of the unwinding of COVID-related spending. Capital spending would increase from 7.9 percent of GDP in FY2019/20 to close to 10 percent of GDP in the long term. As a result, the fiscal balance will improve from a deficit of 6.1 percent of GDP in FY2019/20 to a surplus of about 1.3 percent of GDP by 2041. Public debt would peak at 71.9 percent of GDP in 2021 before starting on a gradual descent.

The current account deficit would remain large (above 18 percent of GDP) as the slightly improved exports is offset by large imports and declining transfers. Stronger exports and a large import bill would maintain the trade deficit high, increasing from 19.6 percent of GDP in 2020 to about 24.2 percent of GDP in the long term. The balance in services will slightly worsen partly because of higher outlays on freight. The balance on the income account would remain insignificant. Transfers would decline from 13.7 percent of GDP in 2020 to 9.8 percent of GDP in the long term. As a result, the current account deficit will worsen from 10.4 percent of GDP to 20.4 percent of GDP in the long term. It will be financed mainly with strong project grants, which will increase from 4.5 percent of GDP in 2020 to about 6 percent of GDP in the long term, and public and private sector borrowing, including trade credits.

14. Realism tools highlight the sensitivity of external debt to the current account deficit, which is mainly due to weak exports (Fig. 3). The projected path of external debt in the current DSA is similar to the one envisaged in the 2015 DSA but is slightly worse than the path envisaged in the 2013 DSA. Burundi’s large current account deficits have been financed mainly by project grants, public sector borrowing, and private non-FDI inflows, including trade credits.9 FDI inflows have been modest. Even though the current account deficit is projected to remain large, its financing would rely less on public sector borrowing in the long term, which would allow public external debt to decline in the context of fiscal consolidation.

15. Realism tools also highlight the sensitivity of total public debt to the primary fiscal deficit and GDP growth (Fig. 3). The two most recent DSAs (from 2013 and 2015) projected gradually declining public debt burdens relative to GDP. These projections did not materialize. Instead, the external debt burden grew somewhat, and the total debt burden grew rapidly, driven mainly by higher than expected fiscal deficits and lower than expected growth. Going forward, debt relative to GDP is expected to keep growing to reach its peak at the end of 2021 before starting on a gradual downward path, with contributions from lower fiscal deficits and GDP growth over the next five years being more favorable than in recent years. Debt developments over the past five years reflect the impacts of the political events of 2015 and subsequent withdrawal of donor support. The authorities’ recent steps towards reengagement with the international community suggest positive prospects.

16. Realism tools further suggest that the planned fiscal adjustment creates significant downside risks to growth.

  • Realism of planned fiscal adjustment (Fig. 4 top left chart). The projected fiscal adjustment over the next three years is in the top quartile of fiscal adjustments. The fact that the fiscal adjustment over this period reflects in part the anticipated winding down of the impact of the pandemic, especially on government spending, provides reassurance.

  • Consistency between fiscal adjustment and growth (Fig. 4 top right chart): The tool is not well suited to take account of the impact of the pandemic on growth. The sharp decline in growth in 2020 and subsequent projected V-shaped recovery in 2021 is unrelated to any fiscal adjustment.

  • Consistency between public investment and growth (Fig. 4 bottom charts): The increase in public investment will clearly support projected growth, though with a lower contribution than in the past. Other factors, including increasing private investment will have a positive contribution to projected growth compared to a negative contribution observed in the past.

17. Risks to the baseline are tilted to the upside, though downside risks remain. On the upside, a full reengagement with the international community, which is not reflected in the baseline, would significantly boost external grants and availability of concessional financing, thus facilitating fiscal consolidation and increasing fiscal space for growth-enhancing public investment and reserves coverage. The baseline grant projections are conservative. Grants averaged 17.7 percent of GDP per year during 2010–14, before the 2015 political crisis. Grant projections mainly consist of World Bank and AfDB project grants. Discussions with the two donors suggest that disbursement could be larger than current staff projections, especially for the AfDB (Text Table 7) if project implementation normalizes after the pandemic. Budget support averaged 3 percent of GDP per year during 2010–14. Some budget support (0.5 percent of GDP) is projected starting in 2022 when Burundi normalizes relations with the international community, including the IMF. Disbursement on project loans could also be larger than current staff projections, which account for absorption capacity. Further exchange rate flexibility and other reforms to enhance competitiveness would improve the outlook. Full reengagement and the resulting higher external financing would also ease restrictions on FX allocations and imports rationing, which would alleviate these two significant impediments to growth in Burundi. The upcoming Article IV consultation will send a strong signal to the donor community of Burundi’s reengagement intentions. Key downside risks include a greater or more prolonged domestic spread of the COVID-19, delays in vaccine rollout, and scaring domestic and global effects of the pandemic, further climate shocks, and a deterioration of the political and security situation. The risk stemming from a slow pace of reform could affect not only growth directly, but also donor financing.

D. Country Classification and Determination of Scenario Stress Tests

18. Burundi’s debt-carrying capacity is classified as weak just as in the last (March 2015) DSA. The country’s composite indicator (CI) is 1.95, based on the April 2021 WEO data and 2019 CPIA scores (Text Table 8). Under weak debt carrying capacity, the thresholds applicable to the public and publicly guaranteed external debt are 30 percent for the PV of debt-to-GDP ratio, 140 percent for the PV of debt-to-exports ratio, 10 percent for the debt service-to-exports ratio, and 14 percent for the debt service-to-revenue ratio. The benchmark for the PV of total public debt is 35 percent of GDP.

Text Table 7.

Staff Projections on Disbursements vs. Potential Disbursements, 2021–301

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Source. Authorities and IM F staff projections

Potential disbursements are based on discussions between staff and the authorities and development partners. Staff projections are based on the absorption capacity.

Text Table 8.

Debt Carrying Capacity

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Sources. Burundian authorities, World Bank and IMF staff estimates

19. Stress tests use standard settings, except the contingent liabilities stress test. Both bound tests and tailored tests on commodity prices use the default settings. The contingent liabilities stress test accounts for a recent loan contracted by the central bank that the government guarantees but that will still be serviced by the central bank itself and potential domestic arears accumulated since 2018 (para. 2.

Debt Sustainability

A. External Debt Sustainability: Signals from the Model

20. Burundi’s risk of external debt distress is high. Two indicators breach the respective thresholds under the baseline, suggesting that Burundi is at high risk of external debt distress. The PV of external debt to GDP is relatively low and remains under its threshold under the baseline and shock scenario. While projected to decline over time, the PV of external debt-to-exports ratio exceeds its threshold for 2021. The ratio of external debt service-to-exports exceeds its threshold in 2022 and in 2027 when repayment of the expected RCF loan starts. It remains below, but near the threshold thereafter.

21. The stress tests suggest that Burundi’s external debt sustainability is particularly vulnerable to shocks to exports and non-debt flows, including transfers and FDI.10 A shock to exports or non-debt flows of the standard size would result in much larger and even more protracted breaches of the thresholds for these two ratios than seen in the baseline.

B. Public Debt Sustainability: Signals from the Model

22. Burundi’s overall risk of debt distress is high. The PV of the public debt-to-GDP ratio breaches its threshold under the baseline scenario. The breach is declining but remains above the threshold throughout the projection horizon. The decline in the PV of public debt to GDP below the threshold of 35 percent after 2031 is predicated on sustained growth and fiscal consolidation assumed in the baseline.

23. The stress tests suggest that Burundi’s public debt sustainability is particularly vulnerable to shocks to GDP growth. A standard shock to growth would leave the public debt-to-GDP ratio well above the threshold beyond the end of the projection horizon.

24. Judgment is not applied to override the mechanical risk ratings.

Conclusion: Risk Rating and Vulnerabilities

25. This DSA finds that Burundi is at high risk of external and overall debt distress. This finding results from mechanical risk signals on external and overall public debt burden indicators, and staff sees no reason to override these signals using judgment. The most important vulnerabilities to the external debt stem from shocks to exports and non-debt flows. Overall public debt is most vulnerable to shocks to growth. These vulnerabilities could be addressed through reforms that would boost Burundi’s export and growth performance, as well as through normalization of relations with donors and associated increase in financial support. These measures would also reduce the need for, and facilitate, fiscal adjustment.

26. Staff assesses Burundi’s debt as sustainable based on the authorities’ commitment to re-engagement with the international community, fiscal consolidation, expectations of donor financing, and a positive macroeconomic outlook including robust exports and GDP growth. With these assumptions and given the country’s good track record in servicing its debt, there is a high likelihood that Burundi will be able to meet all its current and future financial obligations. It is important to note that the presence of resilient remittance inflows serves to lower the effective risks associated with the external debt liquidity indicators (Text Figure 2). In addition, the breach of the PV of debt to GDP is mainly driven by domestic debt, which could be retired prior to maturity using donor funding and grants once the authorities reengage with the donor community. Prospects of more ambitious reform agenda, notably in relaxing FX restrictions will also help alleviate key growth bottlenecks and improve the debt to GDP path.

Text Figure 2.
Text Figure 2.

Burundi: Ratios of External Debt Service and PV of External Debt to Exports and to Exports and Remittances (in percent)

Citation: IMF Staff Country Reports 2021, 242; 10.5089/9781557755476.002.A002

Sources: Country authorities; and staff estimates and projections.

27. This assessment is subject to significant risks. Delays in fiscal consolidation, slow implementation pace of structural reforms aimed at boosting exports and growth, lack of up-to-date information on arrears and a prolonged COVID-19 shock would heighten debt vulnerabilities. Burundi’s debt is vulnerable, especially to shocks to exports, non-debt flows, growth, and commodity prices. Stronger GDP growth supported by prospects of stronger donor financing and the new SDR allocation (SDR 147.6 million equivalent to 6.6 percent of GDP) would mitigate debt vulnerabilities.

The Authorities’ Views

28. The authorities concurred that debt is sustainable but viewed staff projections as being overly conservative. They underscored that under the baseline, long-term exports growth does not account for the implementation of the Burundi’s 2018–27 development plan (Plan National de Dẻveloppement) and reforms. They discussed several ongoing reforms that would boost growth and reduce Burundi’s trade deficit, including imports substitution policies to reduce bottlenecks induced by the limited FX availability. They also underscored their good track record in servicing debt and commitment to debt sustainability.

Table 1.

Burundi: External Debt Sustainability Framework, Baseline Scenario, 2018–41

(In percent of GDP, unless otherwise indicated)

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Sources: Country authorities; and staff estimates and projections. 1/ Includes both public and private sector external debt. 2/ Derived as [r – g – ρ(1+g) + Ɛα (1+r)]/(1+g+ρ+gρ) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, ρ = growth rate of GDP deflator in U.S. dollar terms, Ɛ=nominal appreciation of the local currency, and α= share of local currency-denominated external debt in total external debt. 3/ 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. 4/ Current-year interest payments divided by previous period debt stock. 5/ Defined as grants, concessional loans, and debt relief. 6/ 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). 7/ Assumes that PV of private sector debt is equivalent to its face value. 8/ Historical averages are generally derived over the past 10 years, subject to data availability, whereas projections averages are over the first year of projection and the next 10 years.
Table 2.

Burundi: Public Sector Debt Sustainability Framework, Baseline Scenario, 2018–41

(In percent of GDP, unless otherwise indicated)

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Sources: Country authorities; and staff estimates and projections. 1/ Coverage of debt The central government, central bank . Definition of external debt is Residency-based. 2/ The underlying PV of external debt-to-GDP ratio under the public DSA differs from the external DSA with the size of differences depending on exchange rates projections. 3/ Debt service is defined as the sum of interest and amortization of medium and long-term, and short-term debt 4/ 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 and other debt creating/reducing flows. 5/ Defined as a primary deficit minus a change in the public debt-to-GDP ratio ((-): a primary surplus), which would stabilizes the debt ratio only in the year in question. 6/ Historical averages are generally derived over the past 10 years, subject to data availability, whereas projections averages are over the first year of projection and the next 10 years.
Figure 1.
Figure 1.

Burundi: Indicators of Public and Publicly Guaranteed External Debt under Alternatives Scenarios, 2021–31

Citation: IMF Staff Country Reports 2021, 242; 10.5089/9781557755476.002.A002

Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio in or before 2031. The stress test with a one-off breach is also presented (if any), while the one-off breach is deemed away for mechanical signals. When a stress test with a one-off breach happens to be the most exterme shock even after disregarding the one-off breach, only that stress test (with a one-off breach) would be presented.
Figure 2.
Figure 2.

Burundi: Indicators of Public Debt Under Alternative Scenarios, 2021–31

Citation: IMF Staff Country Reports 2021, 242; 10.5089/9781557755476.002.A002

Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio in or before 2031. The stress test with a one-off breach is also presented (if any), while the one-off breach is deemed away for mechanical signals. When a stress test with a one-off breach happens to be the most exterme shock even after disregarding the one-off breach, only that stress test (with a one-off breach) would be presented.
Table 3.

Burundi: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, 2021–2031 (in percent)

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Sources: Country authorities; and staff estimates and projections.

A bold value indicates a breach of the threshold.

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

Includes official and private transfers and FDI.

Table 4.

Burundi: Sensitivity Analysis for Key Indicators of Public Debt, 2021 -2031

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Sources: Country authorities; and staff estimates and projections.

A bold value indicates a breach of the benchmark.

Variables include real GDP growth, GDP deflator and primary deficit in percent of GDP.

Includes official and private transfers and FDI.

Figure 3.
Figure 3.

Burundi: Drivers of Debt Dynamics – Baseline Scenario External Debt

Citation: IMF Staff Country Reports 2021, 242; 10.5089/9781557755476.002.A002

Sources: Country authorities; and staff estimates and projections.1/ Difference between anticipated and actual contributions on debt ratios.2/ Distribution across LICs for which LIC DSAs were produced.3/ Given the relatively low private external debt for average low-income countries, a ppt change in PPG external debt should be largely explained by the drivers of the external debt dynamics equation.
Figure 4.
Figure 4.

Burundi: Realism tools

Citation: IMF Staff Country Reports 2021, 242; 10.5089/9781557755476.002.A002

Sources: Country authorities; and staff estimates and projections.
1

Burundi’s debt-carrying capacity is classified as weak just as in the last (March 2015) DSA. The country’s composite indicator (CI) is 1.95, based on the April 2021 WEO data and 2019 CPIA scores. The March 2015 DSA found the risk of external debt distress as high. While no significant vulnerabilities related to public domestic debt or private external debt were observed in the baseline, in the most extreme shock scenario, the PV of public debt-to-GDP ratio breached its benchmark in the short run highlighting the need for prudent fiscal and debt policies.

2

The authorities are strengthening capacity in the debt unit to improve debt management and tracking of public sector liabilities. In particular, the debt unit has started to gather information on SOEs liabilities, using their financial statements.

3

In line with the DSA guidance note, this is a “de minimus case” (arrears are less than 1 percent of GDP) that does not trigger the rating of “in debt distress”.

4

The grant element of a loan declines over time as the loan is repaid, even when the loan is initially concessional (i.e. with a grant element of 35 percent or above).

5

Stronger manufacturing production will be supported by ongoing imports substitution policies (expansion of cement and fertilizer factories) and food and beverage production increases, financed by special refinancing terms of the BRB to involved commercial banks.

6

Prospects of successful implementation are very strong. Notably, several hydroelectric dam projects are currently in train with European, Chinese and IDP financing, while construction of a solar project financed by the World Bank began this year (estimated combined cost of around $600 million). Three of these projects are on track to be finalized and start production by 2022 and three others will be finalized during 2023–25, two of which involve the World Bank. Power line and road projects are being funded in partnership with the AfDB, valued at around $100m.

7

These include enhanced provision of fertilizers to farmers, mechanization of agriculture, greater transformation of agricultural products, construction of hydroelectric dams and a railway line linking through Tanzania to Rwanda, exploitation of significant untapped natural resources such as cobalt and rare earth metals, accelerated development of human capital, and strengthening of services, including tourism and financial services.

8

Creditors that have projected disbursements with a grant element of less than 35 percent are the IMF (32.2 percent), the OPEC Fund (27.5 percent) and Exim bank India (29.8 percent).

9

The large residuals for external debt in Table 1 and Figure 3 are due to the fact that external debt is only central government external debt. The current account deficit is also financed with private borrowing, including trade credits that are not captured in external debt.

10

The most extreme stress test is defined as the test that yields the highest ratio on or before the tenth year of the projection period.

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Cover IMF Staff Country Reports
Burundi: Request for Disbursement Under the Rapid Credit Facility-Press Release; Staff Report; and Statement by the Executive Director for Burundi
Author:
International Monetary Fund. African Dept.
Volume/Issue:
Volume 2021: Issue 242
Publisher:
International Monetary Fund
ISBN:
9781557755476
ISSN:
1934-7685
Pages:
81
DOI:
https://doi.org/10.5089/9781557755476.002
  • <sup><xref rid="RA002fig01" ref-type="fig">Text Figure 1.</xref></sup>
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    Text Figure 1.

    Real GDP Growth in Burundi and in SSA Peer Economies

  • <sup><xref rid="RA002fig02" ref-type="fig">Text Figure 2.</xref></sup>
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    Text Figure 2.

    Burundi: Ratios of External Debt Service and PV of External Debt to Exports and to Exports and Remittances (in percent)

  • <sup>Figure 1.</sup>
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    Figure 1.

    Burundi: Indicators of Public and Publicly Guaranteed External Debt under Alternatives Scenarios, 2021–31

  • <sup>Figure 2.</sup>
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    Figure 2.

    Burundi: Indicators of Public Debt Under Alternative Scenarios, 2021–31

  • <sup><xref rid="RA002fig05" ref-type="fig">Figure 3.</xref></sup>
    View in gallery
    Figure 3.

    Burundi: Drivers of Debt Dynamics – Baseline Scenario External Debt

  • <sup>Figure 4.</sup>
    View in gallery
    Figure 4.

    Burundi: Realism tools

Text Figure 1.

Real GDP Growth in Burundi and in SSA Peer Economies
Text Figure 2.

Burundi: Ratios of External Debt Service and PV of External Debt to Exports and to Exports and Remittances (in percent)
Figure 1.

Burundi: Indicators of Public and Publicly Guaranteed External Debt under Alternatives Scenarios, 2021–31
Figure 2.

Burundi: Indicators of Public Debt Under Alternative Scenarios, 2021–31
Figure 3.

Burundi: Drivers of Debt Dynamics – Baseline Scenario External Debt
Figure 4.

Burundi: Realism tools