Abstract
The new administration elected to power two years ago at the start of the pandemic, has been steering an economy beset by multiple shocks, including the aftermath of a political and security crisis, the COVID-19 pandemic, and more recently, the spillover effects of the war in Ukraine. The authorities prioritized reengagement with the IMF and international community, securing a much-appreciated SDR allocation, and Catastrophe Containment and Relief Trust and Rapid Credit Facility (RCF) support through 2021, which has helped them weather the storm, thus far, amidst high fiscal and balance of payment pressures. The authorities have also made significant progress in improving security within the region, leading to the recent lifting of political sanctions and paving the way for effective reengagement with multilateral agencies and development partners. Although growth momentum was disrupted by the COVID-19 pandemic, Burundi’s economy has remained resilient and the authorities are committed to reforms needed to bring the pandemic under control, curb rising poverty, and unlock the country’s agricultural and mineral potential, consistent with the objectives of the 2018–27 National Development Plan.
The new administration elected to power two years ago at the start of the pandemic, has been steering an economy beset by multiple shocks, including the aftermath of a political and security crisis, the COVID-19 pandemic, and more recently, the spillover effects of the war in Ukraine. The authorities prioritized reengagement with the IMF and international community, securing a much-appreciated SDR allocation, and Catastrophe Containment and Relief Trust and Rapid Credit Facility (RCF) support through 2021, which has helped them weather the storm, thus far, amidst high fiscal and balance of payment pressures. The authorities have also made significant progress in improving security within the region, leading to the recent lifting of political sanctions and paving the way for effective reengagement with multilateral agencies and development partners. Although growth momentum was disrupted by the COVID-19 pandemic, Burundi’s economy has remained resilient and the authorities are committed to reforms needed to bring the pandemic under control, curb rising poverty, and unlock the country’s agricultural and mineral potential, consistent with the objectives of the 2018–27 National Development Plan.
Introduction
1. Our Burundian authorities appreciate the open engagement with staff during the recent Article IV consultation. They broadly share staff’s assessment. We also thank the mission team for topical Selected Issues papers. While the authorities are more optimistic than staff on the growth path, they agree that the pandemic and spillovers from the war in Ukraine have slowed economic recovery and intensified macroeconomic imbalances. They are aligned with the priority of maintaining macroeconomic stability, and safeguarding external and debt sustainability, as reflected in their continued commitment to domestic resource mobilization and prudent borrowing for growth. Other priorities include tackling the impacts of COVID19, strengthening health services, revitalizing the agricultural sector and youth employability, and bolstering the fight against corruption. They expect their public investment plan under the national development strategy, to boost economic growth, reducing debt vulnerabilities while attracting foreign investment and FX inflows. They hope to expedite the implementation of program budgeting to better align public spending with government objectives.
2. The new administration took advantage of the post-conflict era to advance the country’s reform agenda, reengaging with the international community and working to restore macroeconomic stability following the lifting of sanctions by the United States of America and the European Union. Reforms outlined in the 2018–27 development plan (Plan National de Developpement) seek to promote inclusive growth via export diversification, enhancing infrastructure development, improving access to social safety nets and public services, and strengthening governance, broadly in line with traditional Fund priorities. The authorities have made significant progress in the implementation of guidance and technical assistance recommendations and look forward to Executive Directors’ support in the completion of the Article IV review.
Recent Economic Developments and Outlook
3. Following stagnation in 2020, real GDP is estimated to have recovered to 3.1 percent in 2021 and is projected by staff at 3.3 percent in 2022, driven mainly by a recovery in services due to easing of travel and border restrictions, even though gains are expected across all sectors. Nevertheless, the recovery could be further impacted by spillovers from the war in Ukraine which, among other things, has affected fuel supply and transportation. The projected growth trajectory is still upward, however, with ongoing investment and World Bank and AfDB supported projects anticipated to be finalized during 2022–25. Medium-term growth is projected at 4.6 percent or more, supported by stronger terms of trade, higher agricultural and mining production, and full resumption of service sector activities. Downside risks to the outlook include the possibility of new variants of COVID, prolonged war in Ukraine and financial tightening in advanced economies.
4. After deflation in 2019, inflation has been trending upward since 2020 amidst climate impacts on harvests fueling food prices, subsequent pandemic induced supply chain disruption pressures and rising commodity import prices, including in the wake of the war in Ukraine. Inflation averaged 8.3 percent in 2021 and reached 11.9 percent in in May 2022.
5. While the current account deficit is projected to deteriorate in 2022 compared to 2021 due to worsening terms of trade, it is expected to improve over the medium-term as exports rebound, particularly for coffee. Improved relations with the European Union, United States and international community, and re-engagement with the International Monetary Fund are also expected to facilitate resumption of foreign financial resource inflows. Remittance inflows remain strong. With the help of the general SDR allocation, international reserves, while still below recommended levels, doubled in months of import cover in 2021, relative to 2020.
6. While the vaccination campaign started late, at least six vaccination cites are now up and running. A nationwide vaccination plan was approved this year that will gradually extend vaccination to 102 sites nationwide. COVID-19 risks remain a concern, though the situation stabilized early 2022, after a huge wave linked to the omicron variant in December 2021. Vaccine supply challenges have waned, and with 2.4 million doses of Johnson and Johnson expected, coupled with the authorities’ vaccination campaign, vaccination rates are expected to increase significantly.
Fiscal Policy and Debt Sustainability
7. A key priority to help safeguard fiscal and debt sustainability is domestic resource mobilization. To this end, revenue collection is projected to improve to 19.5 percent of GDP benefitting from improved VAT collections, international trade taxes and project grants following the lifting of sanctions. While higher than expected revenue performance in 2022 benefited from the implementation of new tax measures including taxes on income, profits, and capital gains; taxes on goods and services, international trade and transactions, and strong VAT and non-tax revenue; the authorities are also interested in capacity development support and see digitalization providing significant potential to increase VAT collections through electronic billing and digital payment systems. They also aim to increase mining revenues through ongoing mining sector reform. Efforts will also aim to further widen the tax base by capturing activities in the informal sector and land transactions and ownership. The authorities are also implementing additional revenue measures in the 2022/23 budget including the introduction of a road fee in the fuel price structure, excise tax on cigarettes, and lump sum levies on products such as soap and drinks. They will also clarify the discharge tax concept which would apply to about 25 products with regulated prices. These revenue mobilization efforts are complemented by prudent borrowing for productive investments that will help boost growth and so support debt sustainability.
8. The authorities continue to rationalize spending and to strengthen public financial management measures needed to enhance spending efficiency. They froze hiring in the public sector, except in defense and security, health, and education. Budget laws have also introduced multi-year procurement and payment plans to strengthen investment management. On staff recommendations regarding streamlining tax expenditures by documenting tax expenditures in the budget execution report to assess their efficiency, they also noted that associated tax exemptions are mainly linked to donor and international rules, constraining their room for maneuver. Public debt continues to be assessed as sustainable, and the authorities are committed to placing it on a sustained downward trajectory. In addition to revenue and spending measures underway, they have sought technical assistance for more effective arrears management.
Exchange Rate, Monetary and Financial Sector Policies
9. The amplifying impact on debt ratios of a potential large exchange rate depreciation (in the context of the parallel market premium triggered by the large, sudden drop, in donor support some years back) is an issue receiving careful thought and attention, as the authorities seek to design exchange rate reforms and unification that will not amplify vulnerabilities and instability. The authorities especially appreciate ongoing technical discussions with staff on cross-country experiences of exchange rate unification and reforms, options for post-unification exchange rate regimes and the corresponding monetary policy framework and instruments, associated fiscal and monetary policy coordination, and potential socio-economic implications. The authorities note that exchange rate unification will have to be backed by substantive donor support for it to work.
10. Given rising inflationary pressures, the Central Bank of Burundi recognizes the importance of well-timed recalibration of the monetary policy stance and is exploring this. Accommodative measures that provided liquidity to commercial banks to lend to priority sectors to support the production of coffee, fertilizer, and maize, helped to sustain production in the wake of pandemic. Nevertheless the central bank recognizes the shift in the global environment and stands ready to recalibrate monetary policy to address rising inflation even as it enhances its communication. Liquidity tightening is planned, to signal the winding down of the long-term refinancing window, alongside careful calibration of the exit from other accommodative measures. For supply-side measures, going forward, the authorities expect to help to contain food inflation by boosting agricultural production to increase food supply.
11. The authorities plan to modernize the monetary policy framework and strengthen the interest rate link. Technical preparations to transition to an inflation targeting framework are underway and will complement plans for exchange rate unification. Reforms will also deepen the interbank market, and reintroduce a more efficient monetary policy communication framework, while also building on Fund supported capacity development to strengthen domestic and foreign exchange related liquidity forecasting and macro-modeling.
12. The banking sector remains sound, and well capitalized with ample liquidity, however the authorities recognize the need for caution in the wake of recent large shocks and volatile global conditions. While nonperforming loans (NPLs) have been stable, they are concentrated in certain sectors that were most impacted by COVID-19, and the significant drop in NPLs to 4.1 percent as at end-September 2021, reflects an increasing number of write-offs and loan restructurings. The authorities continue to monitor developments and are strengthening their supervisory capacity, enhancing regulatory and supervisory frameworks and financial stability assessments, to better ensure financial stability. Other reforms underway include enhancing digitalization and payment systems which should enable greater payments efficiency and support financial inclusion.
13. The authorities continue to strengthen the Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) framework to align with international standards. They plan to operationalize a financial intelligence unit and are working to meet the requirement for full membership in the Eastern and Southern Africa Anti-Money Laundering Group (ESAAMLG).
Structural Reforms
14. Measures are underway to improve governance, enhance competitiveness, boost digitalization, and build human and physical capital, while improving the business environment, to better promote private sector participation. In the labor market, reforms seek to address skills mismatches, and create employment opportunities needed to reduce poverty and inequality. Given the macro-criticality of climate change and Burundi’s vulnerability to climate risks such as drought and floods, the authorities are also exploring avenues to build resilience and minimize climate related business and welfare risks for youth and women. Related to this, two new banks are now operational; the Women Development Bank and Youth Bank to boost agriculture.
15. As they work to develop effective governance systems with transparency and accountability, the authorities, in line with their RCF commitments prepared the first COVID-19 spending report covering spending up to August 10, 2021. Bi-annual reports on COVID-19 spending audited by the Court of Auditors are published on the ministry’s website within three months of the end of each semester. The authorities are also conducting an overall audit of COVID-19 related spending and compiling information on beneficial owners of COVID-related contracts.
16. Burundi has received support on statistics, and the authorities continue to work on National Accounts for 2020 and beyond. Migration and rebasing of the National Accounts is planned. The authorities have also initiated steps towards adopting e-GDDS standards, with Fund support. The CPI rebasing project has also benefited from TA support from AFRITAC East.
Conclusion
17. The Burundian authorities continue to pursue reforms they deem essential to stability, recovery and medium-term growth, notwithstanding the very challenging environment. Fund support has played a valuable role in helping them to stabilize the economy in the wake of the pandemic, while also contributing to the development of capacity needed for effective implementation of policies for stability and recovery. The authorities consider Fund support an important complement to their own reform agenda and national economic objectives.