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Burundi: 2006 Article IV Consultation, Third and Fourth Reviews Under the Three-Year Arrangement Under the Poverty Reduction and Growth Facility, Request for Waiver of Performance Criteria, Modification of a Performance Criterion, Extension of the Arrangement, and Additional Interim Assistance Under the Enhanced Initiative for Heavily Indebted Poor Countries—Staff Report; Staff Statement; Public Information Notice and Press Release on the Executive Board Discussion; and Statement by the Executive Director for Burundi

Author(s):
International Monetary Fund
Published Date:
August 2006
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I. Introduction

1. Burundi is emerging from more than a decade of civil conflict that started with the 1993 coup d’état against its first elected government. The Arusha Accord of August 2000 initiated a peace process that was successfully concluded with the installation of a democratically elected government in August 2005. Since 1993 conditions in Burundi have deteriorated significantly: per capita income dropped by about half (to about US$110 in 2005); the percentage of people living below the poverty line nearly doubled, to about 58 percent by 2001; access to safe water and health services has deteriorated; and HIV/AIDS prevalence has risen. There are some 300,000 internally displaced persons and refugees in camps in Tanzania (down from a million at the peak of the fighting) and half a million orphans. Burundi is the ninth least developed country in the world.1

2. Strong progress has been made on the political and security situation that can set the basis for a durable recovery. From the start, the new government has made intense efforts to resolve the conflict with the remaining rebel group, the FNL, and has emphasized good governance and improved social services. In late 2005, the United Nations Security Council extended the mandate of the U.N. Operation in Burundi through July 2006, but plans a phased withdrawal of peacekeeping troops through the end of 2006. Military demobilization, supported by the World Bank’s Multi-Country Demobilization and Reintegration Program (MDRP), progressed well in 2005. Almost 20,000 persons were demobilized after the rebel movements were integrated into the armed forces and the new national police force. Peace talks with the FNL, facilitated by Burundi’s partners in the peace process, were initiated in Tanzania in early June 2006.

3. Recent economic developments and performance under the program are discussed in Section II. The Article IV consultation discussions focused on the lessons from the past decade and the challenges facing Burundi in the medium term, including the constraints and efforts needed to achieve the MDGs (see Section IIIA). Policy discussions on the 2006 program and the medium-term outlook are presented in Sections IIIB and IIIC, respectively. Section IV addresses program monitoring, safeguards, and risks, and the staff appraisal is in Section V.

II. Recent Economic Developments and Performance Under the Program

4. Macroeconomic developments in 2005 were broadly in line with the program, although growth was lower at about 1 percent, largely because of a poor coffee harvest and worsening drought in the north (Table 1). End-period inflation fell markedly in the second half of 2005 to about 1 percent at year-end, well below the program target. This reflected tighter monetary policy and a turnaround in public confidence, as evidenced by an appreciation of the nominal exchange rate. Fiscal performance was significantly better than programmed because revenue performance was stronger than expected. As a result, the primary deficit was reduced to about half the program target.

Table 1.Burundi: Selected Economic and Financial Indicators, 2004–10
2004200520062007200820092010
Act.Rev.

prog.
Prel.Projections
IMF Country

Report No.

05/322
(Annual percentage change, unless otherwise indicated)
National income and prices
Real GDP growth4.85.00.96.16.67.16.76.6
GDP deflator8.315.316.64.83.64.34.34.3
Consumer prices (period average)8.016.313.42.53.34.04.04.0
Consumer prices (end of period)11.810.31.18.74.04.04.04.0
External sector
Exports, f.o.b. (in U.S. dollars)27.544.419.322.519.912.512.813.3
Imports, f.o.b. (in U.S. dollars)16.142.260.231.815.67.17.76.1
Export volume−10.917.1−1.722.117.115.512.212.5
Import volume3.932.146.526.913.56.36.86.0
Terms of trade (deterioration -)28.114.510.9−3.30.6−3.3−0.30.7
Real effective exchange rate (annual average; depreciation -)−2.8−1.19.6
Central government
Revenue8.09.917.15.515.714.414.111.3
Total expenditure and net lending (commitment basis)29.618.98.826.210.49.811.810.4
Noninterest current expenditure (excluding demobilization and elections)9.518.25.851.25.416.415.117.5
(Change in percent of beginning-of-period M2, unless otherwise indicated)
Money and credit
Net foreign assets−4.112.615.7−1.3
Domestic credit39.51.60.622.9
Government35.5−10.59.08.2
Private sector4.713.9−6.714.7
Money and quasi money (M2)16.717.426.520.5
Income velocity (ratio of GDP to M2; end-of-period)3.63.73.43.1
Reserve money (12-month growth rate)37.2−1.132.710.5
Central bank refinancing rate (in percent; end of period)14.514.514.5
Commercial bank lending rate (in percent; medium term; period average)19.519.4
(In percent of GDP, unless otherwise indicated)
Central government
Revenue (excluding grants)20.118.220.019.019.920.420.920.9
Total expenditure and net lending39.839.136.841.841.741.041.240.9
Primary budget balance (excluding foreign-financed projects)−3.5−3.5−1.7−8.9−6.2−6.2−6.2−6.8
Overall balance (commitment basis)
Excluding grants−19.7−20.9−16.8−22.8−21.9−20.7−20.4−20.0
Including grants 1/−4.9−0.2−6.3−0.4−1.30.00.30.1
Saving and Investment 1/
Current account balance 2/−8.1−7.1−10.5−17.5−16.2−14.1−14.6−15.4
Current account balance, excluding official transfers−25.5−34.3−37.9−37.8−36.5−35.5−33.9
Gross investment13.311.910.816.118.620.220.620.9
Government10.38.66.69.610.610.710.911.0
Private3.03.34.26.58.09.59.810.0
Domestic saving−12.2−23.5−21.8−19.2−16.3−14.9−12.9
Government−9.4−10.2−13.2−11.2−9.9−9.2−8.3
Private−2.8−13.3−8.6−8.0−6.4−5.7−4.6
Gross national saving5.24.80.3−1.42.46.26.05.6
Government−3.46.2−3.43.30.51.31.31.4
Private8.6−1.53.6−4.71.94.94.74.1
(In millions of U.S. dollars, unless otherwise indicated)
External sector
Current account, including grants 1/−54.0−56.8−84.0−166.8−169.8−160.9−182.2−209.0
Overall balance of payments 1/11.00.422.24.7−8.010.712.16.2
Gross official reserves (end-of-period)67.2125.3112.7145.0158.9174.3191.3202.5
Gross official reserves (in months of imports of the following year)2.26.42.93.33.43.43.53.6
Debt-service ratio (scheduled; in percent of exports; before HIPC relief) 2/109.262.247.246.532.830.029.929.0
Debt-service ratio (actual; in percent of exports; after HIPC relief) 2/99.853.333.513.43.93.83.64.3
Stock of debt (before HIPC relief)1,384.11,533.01,426.01,457.91,471.31,468.51,456.61,441.2
External payments arrears78.70.052.50.00.00.00.00.0
Memorandum item:
GDP at current market prices (in billions of Burundi francs)7328858619571,0571,1801,3141,461
Sources: Burundi authorities; and Fund staff estimates and projections.

Assumes financing gap covered by grants in 2007-15 and by 50 percent grants thereafter.

The decision point was reached on August 5, 2005, and the HIPC completion point is assumed to be reached mid-2007. As a transitory measure, HIPC debt relief at and after the assumed completion point (mid-2007) are represented in flow terms, but will be shown as a stock operation, along with the MDRI, in the documents for the fifth PRGF review scheduled for December 2006.

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

Assumes financing gap covered by grants in 2007-15 and by 50 percent grants thereafter.

The decision point was reached on August 5, 2005, and the HIPC completion point is assumed to be reached mid-2007. As a transitory measure, HIPC debt relief at and after the assumed completion point (mid-2007) are represented in flow terms, but will be shown as a stock operation, along with the MDRI, in the documents for the fifth PRGF review scheduled for December 2006.

5. However, the external current account deficit (including grants) deteriorated, owing to lower coffee exports and higher imports, including petroleum products. As drought in parts of the north worsened in early 2006, it was necessary to mobilize emergency actions to feed those affected, supported by international relief agencies. However, by the spring the drought appeared to have broken and a more normal harvest is expected in mid-2006.

Real growth

(annual percentage change, 1998–2006)

6. The program remained on track in 2005, although structural reform, especially on privatization and the coffee sector, lagged during the political transition. All the end-June and end-December 2005 quantitative performance criteria (PC) were met except for a temporary accumulation of external arrears in late 2005 (Appendix I, Table 1). The structural performance criterion on installing a computerized financial management information system (IFMIS) in the Ministry of Finance was missed, as were three structural benchmarks, but the measures subject to the PC and two benchmarks were implemented by early 2006 (Appendix I, Table 2).

Money and inflation

(quarterly percentage change, 1998–2006)

7. Fiscal performance in 2005 was satisfactory (MEFP, paragraphs 6-9). Revenue remained buoyant at 20 percent of GDP, significantly above the program target, thanks primarily to administrative reforms. Current expenditures were higher than forecast but because domestically financed project spending was considerably lower, the primary deficit was limited to half the program target. On a commitments basis, the deficit after grants was 6.2 percent of GDP, compared with the target of 0.2 percent of GDP. This reflected delays in disbursement of budget support by the World Bank and others.

Burundi: Central Government Operations, 2004–05

(In percent of GDP)

20042005
Act.Rev. Prog.Prel.
Revenue20.118.220.0
Tax revenue18.316.618.5
Nontax revenue1.81.61.5
Expenditure and net lending39.839.136.8
Of which: current expenditure22.322.323.3
Overall balance (commitment basis)−19.7−20.9−16.8
(after grants)−4.9−0.2−6.3
Of which: primary balance−3.5−3.5−1.7
Change in arrears (reduction -)−8.0−4.3−1.3
Overall balance (cash basis)−27.7−25.2−18.1
Financing (identified)27.925.219.3
Of which:
External19.927.317.9
Domestic9.1−2.41.2
Sources: Burundi authorities; and Fund staff estimates and projections.
Sources: Burundi authorities; and Fund staff estimates and projections.

8. The 2006 budget, adopted in late 2005, envisaged a drop in revenues to 18.9 percent of GDP and spending of 40.8 percent of GDP. The budget incorporated important reforms to remove distortionary taxes, lower import duties, extend the tax base, eliminate discretionary exemptions, and to bolster expenditure management—all of which represent significant progress. However, in early 2006, levies on beer, soft drinks, and sugar, which had funded the war effort, were abolished. Given the resultant revenue loss of 1.0 percent of GDP and the need to program the clearance of domestic arrears, a revised budget became necessary. An external audit of domestic arrears of the budget, financed by the World Bank, was completed in December 2005. It confirmed a stock of about 3 percent of GDP, and a strategy to clear these arrears in 2006 was approved by the council of ministers in early June. A partial integrated financial management system (IFMIS) on expenditures introduced in January 2006, combined with the new system of accounts introduced in 2005, should significantly strengthen expenditure management.

9. The central bank (BRB) tightened monetary policy in 2005 and increased foreign exchange sales to gain greater control over reserve money (MEFP, paragraph 10). Although weekly liquidity auctions introduced in mid-April 2005 enabled the BRB to partially sterilize the impact of foreign exchange reserve accumulation, broad money expansion outpaced nominal GDP growth as the economy became remonetized following a turnaround in public confidence. International reserves rose substantially. Credit to the economy declined by 9 percent, reflecting the political transition, security conditions, and outstanding budget arrears. Credit to the government rose by 9 percent of beginning period broad money, compared to a targeted reduction of 10.5 percent, entirely owing to a delay in disbursement of programmed budget support. In late 2005 and early 2006, the BRB raised reserve requirements. The cost of financial intermediation was reduced as a result of the elimination of the 7 percent tax on banking transactions. The BRB also underwent its second annual external audit and put in place an independent audit committee of the Board of Directors.

Burundi: Selected Economic and Financial Indicators, 2004–05

(In percent of GDP, unless otherwise indicated)

20042005
Act.Rev. Prog.Prel.
(Percentage change)
National income and prices
Real GDP growth4.85.00.9
GDP deflator8.315.316.6
Consumer prices (end of period)11.810.31.1
(In millions of U.S. Dollars)
External sector
Current account, including grants−54.0−56.8−84.4
Gross official reserves (in months of imports of the following year)2.26.42.9
Debt-service ratio (scheduled; in percent of exports; after HIPC relief)109.262.227.1
Stock of debt (before HIPC relief)1,382.31,533.01,515.7
Central government
Primary budget balance (excluding foreign-financed projects)−3.5−3.5−1.7
Overall balance (commitment basis)
Including grants−4.9−0.2−6.3
Saving and Investment
Gross investment13.311.910.8
Gross national saving5.24.80.2
Sources: Burundi authorities; and Fund staff estimates and projections.
Sources: Burundi authorities; and Fund staff estimates and projections.

Monetary indicators

(quarterly, billions of FBu, 2003–05)

10. The situation of the banking system, which remains segmented and underdeveloped, is of concern. Nonperforming loans amounted to 19 percent of assets in 2005, in large measure reflecting government arrears to private operators. Four smaller banks are in difficulty.

11. The external current account deficit, including grants, deteriorated in 2005 to 10.5 percent of GDP, on lower-than-expected exports, as a result of a very poor coffee harvest and higher imports. However, gross official reserves rose to 2.9 months of projected 2006 imports because of higher project and humanitarian aid inflows. With the successful political transition and improvements in the BRB’s foreign exchange auction, the Burundi francs appreciated against the U.S. dollar by 10 percent in 2005, from depreciated levels, and stabilized in early 2006. The differential between the official and parallel rates continued its decline to about 2 percent at end–2005. In real effective terms, the Burundi francs appreciated by 9.2 percent during 2005.

Burundi: Balance of Payments, 2004–05 1/

(In percent of GDP)

20042005
ActualRev. Prog.Actual
Current account−8.1−7.1−10.5
(excluding official transfers)−25.5−28.9−34.3
Trade balance−15.2−16.7−22.7
Exports, f.o.b.7.28.67.1
Of which: coffee4.46.15.1
Imports, f.o.b.−22.4−25.4−29.9
Of which: petroleum products−4.0−5.0−4.8
Capital account7.25.43.3
Financial account1.01.78.3
Direct investment1.50.21.9
Medium- and long-term official loans (net)1.73.54.7
Sources: Burundi authorities; and Fund staff estimates.

Revised according to the Fifth Edition of the Balance of Payments Manual

Sources: Burundi authorities; and Fund staff estimates.

Revised according to the Fifth Edition of the Balance of Payments Manual

External current account deficit

(in percent of GDP, 1998–2006)

12. Burundi has made progress in securing debt relief. The enhanced HIPC Initiative decision point was reached in August 2005 and relief totaling US$7.4 million was received in 2005. Scheduled debt service, after traditional debt relief from Paris Club creditors in 2004 and HIPC debt relief, fell from about 110 percent of exports in 2004 to 33.5 percent in 2005. Burundi has yet to secure debt relief from non-Paris Club bilateral creditors. Arrears that Burundi inadvertently accumulated to the OPEC Fund in late 2005 were cleared early in 2006.

Nominal exchange rate

(monthly average, FBu per U.S. dollar, 1998–2005)

Effective exchange rate

(monthly percentage change, index, increase = appreciation, 1998–2005)

13. Structural reform in 2005 was uneven. Significant progress continued in the monetary, exchange regime, and fiscal administration areas, but reform of the coffee sector slowed in the second half and the privatization program was not launched because the new authorities needed more time to take ownership of the reform strategy (MEFP, paragraphs 11–12). Limited administrative capacity and delays in securing technical assistance also played a role in both cases. In late 2005, the Audit Court published its first audit of the 2004 government accounts.

III. Policy Discussions

14. The Article IV consultation discussions focused on lessons from the past decade and challenges ahead, including achievement of the MDGs. The new authorities were not in a position to engage in a discussion on the effectiveness of past Fund surveillance, but expressed appreciation for Fund policy advice and technical assistance, and for the candor of discussions with Fund staff. They stressed the importance of reinforced Fund technical assistance and requested that a full-time resident representative be posted. Policy discussions for 2006 focused on securing macroeconomic stability and creating an economic environment conducive to private sector activity. Achieving these goals will depend on pursuing prudent fiscal and monetary policies and deepening structural reforms. The authorities will need to strengthen governance and transparency while managing high public expectations for a peace dividend.

A. Lessons and Medium-Term Challenges

15. The past decade of social conflict was very difficult for Burundi during which the economic effects of stalled structural reforms were also increasingly felt. These effects were compounded by a political and economic blockade from 1996–99 by countries in the region after a military coup, which provoked a marked intensification of restrictions, including in the trade and the exchange systems. As a result, economic distortions intensified, public administration weakened, and infrastructure deteriorated. By the turn of the millennium, living standards in Burundi had dropped sharply and the external debt burden had become unsustainable.2

GDP per Capita and External Debt

16. The state has long dominated Burundi’s economy and the formal private sector is very small. Poor performance of public enterprises in the productive sector, exacerbated by weak international commodity prices in the late 1990s, led to large financial losses, external and domestic payments arrears, and decapitalization of the key agricultural sector, which employs a large majority of the population. By 2001/02, the decapitalization of the coffee sector reached the point that sizeable bank credit, financed by directed credits from the central bank and guaranteed by the budget, was needed to finance crop marketing. The budget absorbed the large losses of the coffee sector throughout 2003–04. As a result, fiscal imbalances widened, nonperforming loans accumulated, and the financial system deteriorated.

17. Initial progress was made in addressing these large imbalances and administrative restrictions through programs supported first by the Fund’s emergency post-conflict assistance policy in 2002–03 and subsequently under the PRGF. By end-2005, many of the restrictions on foreign trade, the financial sector, and the exchange system had been unwound. The top import tariff rate was reduced from 100 percent in 2003 to 30 percent in January 2005. In the 2006 budget, the simple average tariff, which had been 35.0 percent in 2001, was further cut from 19.2 percent to 12.6 percent with 99.8 percent of the tariffs falling in four bands (5, 10, 15, and 30) and a few at 0 or 20 percent. The 6 percent import surcharge was eliminated and a 0.5 percent customs fee introduced on the c.i.f. value of imports.

18. The challenges ahead, as reflected in the interim and forthcoming full PRSP, are to launch the economy on a higher growth path, raise spending on social sectors and infrastructure, and achieve the MDGs. The new political environment opens a window of opportunity to secure macroeconomic stability and relaunch structural reforms to make the nascent recovery durable. Stronger public financial management (PFM) will also be necessary. Political stability and improved security in both Burundi and the Great Lakes region will clearly be a condition for sustained economic recovery. While it is unlikely that all the MDGs can be met by 2015, significant progress can be made if Burundi:

  • Adopts a more market-oriented economic policy, supported by appropriate regulation and featuring a well-sequenced privatization strategy, starting with coffee, where privatization of individual washing stations is envisaged.
  • Improves administrative capacity and the quality of public institutions, especially regarding PFM, including the central bank and supervision of the financial sector.
  • Pursues prudent monetary and fiscal policies and contains public expectations of a large peace dividend.
  • Restructures public spending, moving it from the security sector (army and police) to the social sectors to address deep social needs and progress toward the MDGs.
  • Improves infrastructure and makes a concerted effort to improve governance, transparency, and create a business-friendly environment to attract much-needed private investment.
  • Manages aid flows consistent with macroeconomic stability and maximizes their effectiveness in reducing poverty.

19. The authorities were in broad agreement with the conclusions on lessons of the past decade and challenges for the future. They also indicated their commitment to bringing the poorest segments of the population into the economic recovery and improving basic social services to reduce poverty.

B. The Macroeconomic Program for 2006

20. In 2006, real GDP growth is projected to recover to 6 percent with continued vigor in the service sectors and a strong rebound in coffee output (MEFP, paragraph 13). Average inflation is expected to decelerate further to about 3 percent (period average), despite the pass-through of petroleum price increases. To contain inflationary pressures, it will be necessary to further strengthen the BRB’s monetary policy instruments and limit bank financing of the budget. With the clearance of domestic arrears, and the decline in nominal interest rates in early 2006, a further monetization of the economy is expected. Bank credit to the economy is projected to rebound in support of higher growth and investment. The external current account deficit, including official transfers, is expected to deteriorate, on account of a strong increase in foreign-financed projects. Gross international reserves would rise modestly to about 3.3 months of 2007 imports.

Fiscal policy and reform

21. The program provides fiscal space for Burundi to start addressing urgent social needs consistent with macroeconomic stability. Fiscal policy envisages a shift in expenditures from security to social services and poverty reduction, enhanced PFM, and the clearing of government’s domestic arrears (Box 1). Fiscal policy also seeks to support the inflation target by limiting budget recourse to financing from the banking system. Bank credit to the government, net of government paper issued to clear domestic arrears (1.9 percent of GDP), would be limited to about 1 percent of beginning broad money stock.3 A revised 2006 budget will be promulgated before end-June to reflect changes that have emerged since the initial budget (MEFP, paragraphs 14–16 and 19-20). The primary deficit would rise to about 9 percent of GDP, while the deficit (commitment basis, after grants), would decline to less than ½ percent of GDP.

Box 1.Clearance of Domestic Arrears

By the end of 2005, domestic budget arrears totaled 2.7 percent of 2005 GDP (FBu 25.7 billion). The domestic arrears of the public sector had amounted to 5 percent of GDP a year earlier, as verified by an external auditor. In 2005, the budget cleared FBu 3.8 billion of its own arrears; those of the public enterprises (FBu 6 billion) and cross-debts with the petroleum sector will be dealt with separately. The domestic arrears to the public are reflected in large measure in the nonperforming assets of the banking system.

The Council of Ministers approved an arrears clearance strategy on May 26, 2006 to be implemented in mid-2006. All individuals and corporations with arrears claims of up to FBu 100 million will receive a cash payment upon signing a note liquidating their claim (total cash payment is estimated at FBu 7.4 billion). Creditors with arrears greater than FBu 100 million will also receive a certificate recognizing their debt (FBu 18.3 billion). These certificates will be exchangeable for treasury bonds of 3–5 years maturity and may be used in the privatization program, both of which are set to be launched in September/October 2006.

22. A strong set of measures to strengthen revenue administration is being implemented in 2006 (MEFP, paragraph 18). Nevertheless, overall revenue will decline by 1 percentage point of GDP to 19 percent as the war levies are abolished. The government, with Fund and World Bank technical assistance, is undertaking to modernize and strengthen revenue administration, including customs.

23. Expenditure is projected to rise significantly in 2006 to about 41.8 percent of GDP, mainly tracking an increase in pro-poor social spending (Table 2). The increase is in part made possible by external debt relief under the enhanced HIPC Initiative. The wage bill will rise to just under 10 percent of GDP as new teachers are hired4 and there is a much-needed salary increase.5 Spending on security (army and national police) will decline to 30 percent of primary outlays from 37 percent in 2005, as soldiers are demobilized, financed by the MDRP. The program includes spending of 1.2 percent of GDP to allow for food and emergency aid for populations suffering from the drought and to compensate small depositors of a failed bank.

Table 2.Burundi: Central Government Operations, 2004–10
2004200520062007200820092010
Rev. Prog.Prel.OriginalProg.Projections
IMF Country

Report No.

05/322
BudgetBudg. Rev.
(In billions of Burundi francs)
Revenue146.9161.4172.1184.9181.5210.1240.4274.3305.3
Tax revenue133.6147.0158.9174.1165.6192.5219.7249.2277.4
Income tax35.738.041.840.241.250.557.664.972.3
Taxes on goods and services67.675.578.394.584.996.8111.6127.3141.7
Taxes on international trade30.032.938.436.736.641.746.552.558.4
Other tax revenue0.30.70.32.82.83.64.04.55.0
Nontax revenue13.414.413.210.816.017.720.725.127.9
Expenditure and net lending291.2346.3316.7399.4399.7441.1484.3541.7597.9
Current expenditure163.2197.7200.6229.1252.1264.9292.5330.4372.2
Salaries58.675.572.690.194.8104.5117.1129.9144.3
Civilian34.840.141.950.656.965.376.487.7100.4
Military23.825.124.024.121.622.723.825.026.3
New police force (SSR program)0.010.36.715.416.216.616.917.217.6
Goods and services53.664.065.777.481.191.0101.9114.5131.8
Civilian28.127.926.736.838.245.454.866.181.8
Of which: contingent to BCD assets recovery1.5
Military25.526.729.626.328.629.229.830.431.0
New police force (SSR program)0.09.49.514.314.316.417.318.119.0
Transfers and subsidies26.424.530.335.248.840.445.554.663.4
Of which: payment to BCD small depositors2.5
Interest payments (due)24.533.732.026.427.528.928.031.432.7
Domestic14.019.519.415.116.117.415.717.116.5
Foreign10.514.212.611.311.411.512.314.316.2
DDR project7.424.18.741.720.020.213.410.00.0
Elections3.318.324.50.00.00.00.00.00.0
Project expenditure119.9108.284.3130.6129.6158.1178.4201.3225.7
Domestic resources36.230.519.544.843.742.048.656.164.6
Of which: contingent to donors disbursement10.0
External resources83.777.764.885.885.9116.0129.8145.2161.1
Net lending−2.6−2.0−1.4−2.0−2.0−2.00.00.00.0
Overall balance (commitment basis)−144.3−184.8−144.6−214.5−218.2−231.0−243.9−267.4−292.6
(after grants) 1/−35.9−1.8−53.96.3−3.4−14.30.34.41.7
Of which: primary balance−25.4−31.0−14.6−60.6−84.8−65.8−72.7−80.8−98.8
Change in arrears (reduction -)−58.5−38.0−10.8−20.5−27.9−1.5−1.00.00.0
External (interest)−49.0−21.0−10.7−0.5−2.20.00.00.00.0
Domestic−9.5−17.0−0.1−20.0−25.7−1.5−1.00.00.0
Overall balance (cash basis)−202.7−222.8−155.4−235.0−246.0−232.5−244.9−267.4−292.6
(after grants) 1/−94.3−39.8−64.7−14.2−31.3−15.8−0.74.41.7
Financing (identified)212.5222.8165.8227.0246.0156.1153.8171.8183.9
External grants108.4183.0101.1220.9214.7140.3153.2176.2185.5
Program support60.992.740.196.6113.60.00.00.00.0
HIPC relief IMF, WB, ADB, PC0.00.08.035.735.839.841.447.851.7
Project grants36.947.919.846.845.480.398.4118.5133.8
Special programs10.742.433.241.720.020.213.410.00.0
DDR7.424.18.741.720.020.213.410.00.0
Elections3.318.324.50.00.00.00.00.00.0
External borrowing37.458.053.94.14.86.90.1−5.5−3.3
Program loans0.041.429.10.00.00.00.00.00.0
Project loans46.829.845.038.940.535.831.426.827.3
Amortization (due)−32.0−42.2−34.0−40.3−40.3−32.9−34.3−35.3−33.6
Change in amortization arrears−65.4−66.1−14.9−2.5−3.40.00.00.00.0
Debt relief (rescheduling; cancellation)88.095.128.78.08.04.03.03.03.0
Privatization proceeds0.03.00.45.03.66.06.05.04.0
Domestic66.7−21.210.4−3.022.92.9−5.4−3.9−2.4
Banking sector60.5−21.216.4−5.020.92.9−5.4−3.9−2.4
Nonbank sector6.20.0−6.02.02.00.00.00.00.0
Financing gap/errors and omissions−9.80.0−10.48.00.076.591.195.6108.7
(In percent of GDP, unless otherwise indicated)
Revenue20.118.220.018.919.019.920.420.920.9
Tax revenue18.316.618.517.817.318.218.619.019.0
Income tax4.94.34.94.14.34.84.94.95.0
Taxes on goods and services9.28.59.19.78.99.29.59.79.7
Taxes on international trade4.13.74.53.83.83.93.94.04.0
Other tax revenue0.00.10.00.30.30.30.30.30.3
Nontax revenue1.81.61.51.11.71.71.81.91.9
Expenditure and net lending39.839.136.840.841.841.741.041.240.9
Current expenditure22.322.323.323.426.425.124.825.125.5
Salaries8.08.58.49.29.99.99.99.99.9
Civilian4.84.54.95.26.06.26.56.76.9
Military3.32.82.82.52.32.12.01.91.8
New police force (SSR program)0.01.20.81.61.71.61.41.31.2
Goods and services7.37.27.67.98.58.68.68.79.0
Civilian3.83.23.13.84.04.34.65.05.6
Military3.53.03.42.73.02.82.52.32.1
New police force (SSR program)0.01.11.11.51.51.61.51.41.3
Transfers and subsidies3.62.83.53.65.13.83.94.24.3
Interest payments (due)3.43.83.72.72.92.72.42.42.2
Domestic1.92.22.31.51.71.61.31.31.1
Foreign1.41.61.51.21.21.11.01.11.1
DDR project1.02.71.04.32.11.91.10.80.0
Elections0.52.12.80.00.00.00.00.00.0
Project expenditure16.412.29.813.413.515.015.115.315.4
Domestic resources5.03.42.34.64.64.04.14.34.4
External resources11.48.87.58.89.011.011.011.111.0
Net lending−0.4−0.2−0.2−0.2−0.2−0.20.00.00.0
Overall balance (commitment basis)−19.7−20.9−16.8−21.9−22.8−21.9−20.7−20.4−20.0
(after grants) 1/−4.9−0.2−6.30.6−0.4−1.30.00.30.1
Of which: primary balance−3.5−3.5−1.7−6.2−8.9−6.2−6.2−6.2−6.8
Change in arrears (reduction -)−8.0−4.3−1.3−2.1−2.9−0.1−0.10.00.0
External (interest)−6.7−2.4−1.2−0.1−0.20.00.00.00.0
Domestic−1.3−1.90.0−2.0−2.7−0.1−0.10.00.0
Overall balance (cash basis)−27.7−25.2−18.1−24.0−25.7−22.0−20.8−20.4−20.0
(after grants) 1/−12.9−4.5−7.5−1.4−3.3−1.5−0.10.30.1
Financing (identified)29.125.219.323.225.714.813.013.112.6
External grants14.820.711.722.622.413.313.013.412.7
Program support8.310.54.79.911.90.00.00.00.0
HIPC relief IMF, WB, ADB, PC0.00.00.93.73.73.83.53.63.5
Project grants5.05.42.34.84.77.68.39.09.2
Special programs1.54.83.94.32.11.91.10.80.0
DDR1.02.71.04.32.11.91.10.80.0
Elections0.52.12.80.00.00.00.00.00.0
External borrowing5.16.66.30.40.50.60.0−0.4−0.2
Program loans0.04.73.40.00.00.00.00.00.0
Project loans6.43.45.24.04.23.42.72.01.9
Amortization (due)−4.4−4.8−4.0−4.1−4.2−3.1−2.9−2.7−2.3
Change in amortization arrears−8.9−7.5−1.7−0.3−0.40.00.00.00.0
Debt relief (rescheduling; cancellation)12.010.73.30.80.80.40.30.20.2
Privatization proceeds0.00.30.00.50.40.60.50.40.3
Domestic9.1−2.41.2−0.32.40.3−0.5−0.3−0.2
Banking sector8.3−2.41.9−0.52.20.3−0.5−0.3−0.2
Nonbank sector0.90.0−0.70.20.20.00.00.00.0
Financing gap/errors and omissions−1.30.0−1.20.80.07.27.77.37.4
Memorandum items:
Primary spending (in billions of Burundi francs)172.3192.5186.7245.5266.3276.0313.1355.1404.1
Military and Security spending (in billions of Burundi francs)49.471.569.780.180.884.987.890.793.9
Primary expenditure (program definition)23.621.721.725.127.826.126.527.027.7
Military and security expenditure6.78.18.18.28.48.07.46.96.4
In percent of current expenditures30.336.134.835.032.032.030.027.525.2
In percent of primary expenditures28.737.137.432.630.330.828.025.623.2
Social expenditure6.79.36.89.39.09.39.810.2
Poverty reduction expenditures7.39.910.010.110.611.1
(In percent of primary expenditure)33.635.538.238.239.140.0
GDP at current market prices (in billions of Burundi francs)731.5885.0860.8978.0956.61,056.61,180.11,313.71,461.1
Sources: Burundi authorities; and Fund staff estimates and projections.

Assumes 100 percent grant financing of the gaps through 2015; and 50 percent thereafter.

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

Assumes 100 percent grant financing of the gaps through 2015; and 50 percent thereafter.

Central government expenditure

(percent of GDP, 1998–2006)

Central government operations

(percent of GDP, 1998–2006)

24. PFM is being strengthened, from a very low base, with the help of Fund and World Bank technical assistance (MEFP, paragraph 17).6 Implementation of program action plans would strengthen public procurement and the management of government employees. The wage bill will be incorporated into the IFMIS in late 2006.

Monetary policy

25. Monetary policy is crucial to achieving the program’s inflation target; reserve money is the nominal anchor (MEFP, paragraphs 21–22). The central bank will use a judicious mix of monetary instruments, primarily foreign exchange sales and liquidity auctions, to contain liquidity and will introduce treasury bills by September 2006 to further strengthen liquidity management. The velocity of circulation of broad money is expected to decline further, as financial deepening strengthens in response to financial and foreign exchange market reforms (Table 3). Reserve money growth will be significantly reduced to 10 percent, in expectation of a rise in the money multiplier and the renewed commercial bank credit to the private sector (24 percent growth is projected). Continued strong foreign exchange sales by the BRB into the market may put upward pressure on the nominal exchange rate, given the size of external aid inflows, but, on balance, this would be preferable to crowding out private investment.

Table 3.Burundi: Monetary Survey and Central Bank Accounts, 2004–06
200420052006
Act.JuneSeptemberDecemberMar.Jun.Sep.Dec.
Prog.

IMF Country

Report No.

04/41
At Prog.

exchange

rate
Act.Rev.

prog.
At prog.

exchange

rate
Act.Rev.

prog.
At prog.

exchange

rate
Act.Proj.Prel.Projections
IMF Country

Report No.

05/322
IMF Country

Report No.

05/322
(In billions of Burundi francs)
Monetary survey
Net foreign assets38.018.960.062.323.155.753.751.276.969.743.553.653.859.966.4
Central bank20.715.930.031.219.930.329.247.753.848.826.526.737.844.952.4
Deposit money banks17.33.030.031.13.325.424.53.523.121.017.026.916.015.014.0
Net domestic assets210.2189.0229.0226.7200.9225.9227.9184.9220.3227.4256.7204.1289.5277.1284.8
Domestic credit278.3276.3277.4280.2289.9277.1277.1277.1279.5279.5306.5291.9339.7328.8338.2
Net claims on the government106.681.3115.7115.7111.4115.4115.480.8123.0123.0141.3127.7124.1159.7143.9
Central government118.094.3127.6127.6122.6126.4126.492.2136.3136.3154.6138.9137.4173.0157.2
Other government (deposits)−11.4−11.0−11.9−11.9−11.2−10.9−10.9−11.4−13.2−13.2−13.2−11.1−13.2−13.2−13.2
Credit to the economy171.7195.0161.7164.5178.5161.7161.7196.3156.5156.5165.2164.2215.5169.1194.3
Claims on public enterprises6.93.76.16.15.17.67.63.45.25.27.04.87.07.07.0
Claims on private sector164.8191.3155.5158.3173.4154.1154.1192.9151.3151.3158.2159.4208.5162.1187.3
Other items, net (assets +)−68.1−87.3−48.3−53.5−89.0−51.1−49.2−92.3−59.2−52.1−49.8−87.9−50.2−51.8−53.3
M3248.2289.1289.1281.6281.6297.1297.1300.2257.7343.3337.0351.3
Foreign currency deposit45.547.747.742.942.940.740.741.14.441.541.942.4
M2202.7207.9241.3241.3224.0238.7238.7236.1256.4256.4259.1253.3301.7295.0308.9
Currency in circulation57.261.763.563.553.263.463.456.167.967.967.558.977.275.779.0
Local currency deposits145.6146.3177.8177.8170.8175.3175.3180.0188.6188.6191.6194.4224.6219.3230.0
Demand deposits99.994.0106.1106.1113.1103.2103.2119.1105.8105.8107.5112.4126.0123.0129.0
Quasi money45.652.371.771.757.772.172.160.882.782.784.182.098.696.2100.9
Central bank
Net foreign assets20.715.930.031.219.930.329.247.753.848.826.526.737.844.952.4
Foreign assets77.591.397.0100.896.3104.7101.0137.8126.0114.392.194.6121.8128.9146.8
Of which : official reserves74.694.097.7101.998.3123.9112.490.289.6119.9127.0145.0
Foreign liabilities56.875.467.069.676.474.471.890.172.265.565.667.984.084.094.4
Of which : use of Fund resources45.363.352.953.466.565.661.280.266.258.058.059.777.877.888.1
Net domestic assets55.157.657.556.456.156.157.127.346.751.768.068.069.762.858.6
Domestic credit115.5107.2110.5110.5107.4103.9103.981.3105.0105.0119.3119.0121.7116.8114.6
Government (net)108.385.3107.5107.5107.5111.0111.077.1113.7113.7124.0124.9116.0114.0112.0
Central government111.789.0111.3111.3111.0113.8113.880.6118.8118.8129.1128.0121.1119.1117.1
Other government−3.4−3.8−3.8−3.8−3.5−2.8−2.8−3.5−5.0−5.0−5.0−3.1−5.0−5.0−5.0
Nongovernment credit7.121.93.03.0−0.2−7.1−7.14.1−8.8−8.8−4.8−6.05.62.72.5
Private sector1.81.80.60.64.00.60.67.00.50.50.50.00.50.50.5
Commercial banks3.322.80.00.0−10.00.00.0−8.00.00.00.00.00.00.00.0
Nonbank financial institutions2.1−2.72.42.45.82.32.35.12.72.70.00.02.72.72.7
Liquidity auction−5.8−10.0−10.0−12.0−12.0−5.2−6.02.4−0.4−0.6
Other items, net−60.4−49.6−53.0−54.1−51.3−47.8−46.8−54.0−58.2−53.2−51.3−50.9−52.0−54.0−56.0
Reserve money75.873.587.687.675.986.386.374.9100.5100.594.594.8107.4107.6111.0
Currency in circulation57.261.763.563.553.263.463.456.167.967.967.558.977.275.779.0
Commercial bank reserves (includes cash in vault)17.410.022.122.121.121.121.117.230.930.925.234.428.530.130.3
Other nonbank deposits1.21.91.91.91.61.71.71.61.71.71.71.51.71.71.7
Memorandum items:
Gross international reserves
In millions of U.S. dollars67.287.092.489.689.594.894.8125.3112.7112.790.288.1119.9127.0145.0
In months of imports f.o.b.2.24.44.32.34.62.52.56.42.92.92.02.02.72.93.3
M2 growth (12-month percent change)16.715.834.434.421.229.129.117.426.526.513.310.825.023.620.5
M3 growth (12-month percent change)22.334.022.822.819.719.79.1−6.418.819.718.2
Credit to the economy (12-month percent change)4.99.8−4.6−4.6−2.1−8.0−8.014.2−8.9−8.9−1.5−2.031.04.624.1
Reserve money (12-month percent change)37.23.313.913.99.524.524.5−1.132.732.76.97.322.724.710.5
Money multiplier (M3/reserve money)3.33.33.33.33.03.03.22.73.23.23.2
Velocity (GDP/M2; end period)3.63.33.53.53.73.43.43.43.53.03.13.1
Velocity (GDP/M3; end period)2.93.03.03.02.92.92.93.42.62.82.7
Exchange rate (Burundi francs per SDR)1,5861,5751,5751,5891,6131,6131,5031,6501,6501,4461,4491,4751,4491,4491,449
Exchange rate (Burundi francs per U.S. dollar)1,1101,0501,0501,0911,0751,0751,0371,1001,1009981,0001,0181,0001,0001,000
Sources: Bank of the Republic of Burundi (BRB); and Fund staff estimates and projections.
Sources: Bank of the Republic of Burundi (BRB); and Fund staff estimates and projections.

26. The authorities agreed that fortifying financial sector supervision and eliminating weaknesses in BRB internal operations is urgent and the program includes a prior action in this area. In early 2006, a Fund technical assistance team discussed measures to reinforce monetary policy, banking supervision, and BRB internal operations. A Fund resident advisor is helping the authorities on monetary policy reforms and central bank operations. An anti-money laundering (AML/CFT) law has been prepared7 (MEFP, paragraph 28) with Fund technical assistance; and the central bank law will be revised to make the BRB independent (MEFP, paragraph 33).

Exchange regime, trade policy, and external debt

27. Staff and the authorities agreed that liberalizing the exchange regime has been beneficial to the economy and that the managed float exchange rate regime has served Burundi well so far. Removal of administrative restrictions and distortions has all but eliminated the parallel market exchange rate differential, which represents good progress in reducing foreign exchange market segmentation. Efforts are planned to further integrate and deepen the foreign exchange market, supported by Fund technical assistance (MEFP, paragraph 22). The BRB intends to continue to limit its interventions in the foreign exchange market to those needed to achieve its international reserves targets, consistent with the reserve money nominal anchor, and limit short-term exchange rate volatility. In discussing external competitiveness, staff noted that despite its recent appreciation, the real effective exchange rate remained well below (some 30 percent) the level in 2000. It saw external competitiveness as broadly adequate, as recovering export performance illustrates. Furthermore, staff noted, and the authorities agreed, that the main impediments to external competitiveness are structural in nature, and would be best addressed by structural reforms that would improve the business climate and promote privatization. The gains in productivity resulting from these reforms would also help reduce the possible adverse impact on external competitiveness of large-scale aid inflows; indeed some of these inflows would be for productivity-enhancing reforms.

28. In early 2006, a Fund technical assistance mission found few remaining exchange restrictions on current international transactions and felt that little remained to be done for Burundi to be in a position to accept its obligations under Article VIII, Sections 2, 3, and 4 of the Fund’s Articles of Agreement. The authorities agreed with the staff’s assessment and indicated their intention to accept these obligations. Burundi eliminated an exchange restriction on limits on invisibles in May 2006 and expects to eliminate one remaining restriction on ex ante authorization of certain transactions and two remaining multiple currency practices (MCPs) shortly. The exchange restriction and MCPs are subject to approval under IMF Article VIII (Appendix II, Section VIII).

29. The staff noted that a liberalized trade policy could enable Burundi to benefit from globalization. Here the recent significant reduction in import duties and nontariff barriers is encouraging. The authorities agreed that there is a need for sustained efforts to integrate Burundi with Africa and the rest of the world. They intend, with the support of the World Bank, to improve the business climate to attract private investment, domestic and foreign, and institute a one-stop business licensing window. Staff welcomed the authorities’ intention to join the East Africa Community (EAC) and adopt its common external tariff (rates of 0, 10, and 25 percent, with an average rate in line with Burundi’s present tariff).

30. The authorities have been seeking debt relief comparable to the Paris Club agreement from non-Paris Club creditors. They have also sought intensified technical assistance from donors on debt management, an area where progress has been slow. Several multilaterals have confirmed their participation in the enhanced HIPC Initiative. At the HIPC completion point (possibly in mid-2007) external debt service would drop from 109 percent of exports in 2004 to 11.1 percent in 2007. With additional relief under the Multilateral Debt Relief Initiative (MDRI), the Fund will provide upfront debt stock relief on Burundi’s outstanding debt to the Fund at end-2004 of SDR 26.4 million (US$39.5 million).8 The authorities have requested disbursement of additional interim HIPC assistance from the Fund in the amount of SDR 86,500 for July 28, 2006–July 27, 2007.9

Program financing

31. The program for 2006 is fully financed (Tables 4, 5, and 6; MEFP, paragraph 31). The 2006 program depends heavily on external budget grants (12 percent of GDP, not including interim HIPC debt relief). In the past few years, delays in disbursement of external program support have put pressure on the macroeconomic framework, notably bank financing. The authorities have created a committee to reinforce their dialogue with donors.

Table 4.Burundi: Balance of Payments, 2004–10 1/
2004200520062007200820092010
ActualRev. prog.

IMF Country

Report No.

05/322
Prel.Projections
(In millions of U.S. dollars)
Current account−54.0−56.8−84.0−166.8−245.4−249.1−272.9−310.0
(excluding official transfers)−169.4−231.4−274.3−361.5−395.4−417.7−442.7−460.0
Trade balance−101.1−134.0−181.6−244.7−279.9−295.2−313.2−324.6
Exports, f.o.b.47.969.157.170.083.994.4106.5120.7
Of which: coffee29.448.540.550.759.762.366.771.4
Imports, f.o.b.−148.9−203.1−238.7−314.7−363.8−389.6−419.6−445.2
Of which: petroleum products−26.5−40.0−38.2−52.6−59.3−62.4−65.9−69.5
Services (net)−60.6−77.4−89.4−110.4−109.5−117.3−124.0−129.2
Credits15.812.534.044.052.358.665.774.2
Debits−76.4−89.9−123.4−154.4−161.8−175.9−189.8−203.4
Income (net)−18.1−32.5−20.6−25.6−27.2−28.9−31.8−34.4
Of which: interest on public debt (including IMF charges)−9.9−12.6−11.4−12.8−12.2−12.7−14.3−15.7
Current transfers (net)125.9187.1207.6213.9171.2192.2196.1178.1
Private (net)10.512.517.319.221.223.726.428.1
Official (net)115.4174.6190.3194.7150.0168.6169.8150.0
Of which: program grants55.284.137.9103.40.00.00.00.0
Capital account48.159.626.2131.2118.5135.0157.4172.2
Of which : HIPC relief0.016.07.435.739.440.145.348.1
Financial account6.713.566.640.355.341.445.656.7
Direct investment10.01.515.08.020.023.026.530.4
Medium- and long-term official loans (net)11.527.737.70.22.8−2.8−8.1−5.8
Disbursements42.565.869.340.435.430.425.425.4
Project loans42.528.843.140.435.430.425.425.4
Program loans0.037.026.20.00.00.00.00.0
Amortization (excluding IMF)−31.0−38.2−31.6−40.2−32.6−33.2−33.5−31.2
Other investment−14.7−15.613.832.132.521.327.232.1
Errors and omissions10.10.013.40.00.00.00.00.0
Overall balance11.00.422.24.7−71.6−72.6−69.9−81.2
Financing (- increase in assets)−11.0−0.4−22.2−4.7−4.0−15.4−20.7−19.9
Net change in official foreign reserves (- increase)14.9−23.6−31.0−3.6−4.0−15.4−20.7−19.9
Gross official reserves0.1−44.0−45.5−32.3−14.0−15.4−16.9−11.3
Liabilities to IMF, net12.422.017.230.710.20.0−3.8−8.6
Other, net2.4−1.6−2.7−1.9−0.20.00.00.0
Change in arrears (+ increase)−106.0−78.7−22.2−5.60.00.00.00.0
Exceptional financing 2/80.185.931.04.50.00.00.00.0
Financing gap 3/0.075.688.190.7101.0
(In percent of GDP, unless otherwise indicated)
Memorandum items:
Trade balance−15.2−16.7−22.7−25.6−26.8−25.8−25.1−23.9
Current account 3/−8.1−7.1−10.5−17.5−16.2−14.1−14.6−15.4
Of which: excluding current official transfers−25.5−28.9−34.3−37.9−37.8−36.5−35.5−33.9
Gross official reserves
In million of U.S. dollars67.2125.3112.7145.0158.9174.3191.3202.5
In months of following period’s imports, c.i.f.2.26.42.93.33.43.43.53.6
Imports
growth rate16.142.260.231.815.67.17.76.1
in percent of GDP22.425.429.933.034.834.133.732.8
Exports
growth rate27.544.419.322.519.912.512.813.3
in percent of GDP7.28.67.17.38.08.38.58.9
Debt-service ratio (in percent of exports of goods and services)
Scheduled current maturities (including IMF)109.262.247.246.532.830.029.929.0
Actual debt service (including IMF; after HIPC) 4/99.853.333.513.43.93.83.64.3
Exchange rate (Burundi francs per U.S. dollar; period average)1,100.91,105.61,076.8
Nominal GDP (in millions of U.S. dollars)664.5800.4799.4954.61045.41143.21246.51358.7
Sources: Burundi authorities; and Fund staff estimates and projections.

Revised according to the fifth edition of the Balance of Payments Manual.

Before MDRI and Paris Club debt reduction on Cologne terms. Includes the March 2004 Paris Club rescheduling on Naples terms, and assuming rescheduling of current debt service and arrears to non-Paris Club creditors at comparable terms.

Assumes financing gap covered by grants in 2007-15 and by 50 percent grants thereafter.

As a transitory measure, HIPC debt relief at and after the assumed completion point (mid-2007) are presented in flow terms, but will be shown as a stock operation, along with the MDRI, in the document for the fifth PRGF review scheduled for December 2006

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

Revised according to the fifth edition of the Balance of Payments Manual.

Before MDRI and Paris Club debt reduction on Cologne terms. Includes the March 2004 Paris Club rescheduling on Naples terms, and assuming rescheduling of current debt service and arrears to non-Paris Club creditors at comparable terms.

Assumes financing gap covered by grants in 2007-15 and by 50 percent grants thereafter.

As a transitory measure, HIPC debt relief at and after the assumed completion point (mid-2007) are presented in flow terms, but will be shown as a stock operation, along with the MDRI, in the document for the fifth PRGF review scheduled for December 2006

Table 5.Burundi: External Financing Requirements and Sources, 2004–06

(In millions of U.S. dollars)

200420052006
Act.Rev. prog.

IMF Country

Report No.

05/322
Act.Proj.
External resources (identified)221.5260.3362.0433.7
Exports of goods and services63.681.691.1114.0
Income (credits)1.31.43.13.3
Private transfers (net)10.512.517.319.2
Current official transfers (excluding program grants, net)60.290.5152.491.4
Capital transfers (net)48.159.626.2131.2
Of which : Enhanced (interim) HIPC relief0.016.07.435.7
Foreign direct investment10.01.515.08.0
Medium-and long-term official (project) loans42.528.843.140.4
Other investment−14.7−15.613.826.3
Use of resources−407.9−489.3−489.7−573.2
Imports of goods and services−225.4−293.0−362.1−464.0
Income (debits, excluding interest on public debt)−9.5−21.3−12.1−15.6
Debt-service payments (including IMF charges)−175.5−129.4−65.2−58.4
Of which: net accumulation of arrears (+)−106.0−78.7−22.2−5.6
Net change in reserves, excluding IMF (- increase)2.5−45.6−50.4−35.3
Errors and omissions10.10.013.10.0
Financing need176.2229.0114.6139.5
Program loans and grants96.2143.183.5135.0
Of which: IMF PRGF disbursements40.922.019.331.7
Debt relief (under existing mechanisms)80.185.931.14.5
Of which: on current maturities6.07.25.12.0
Residual financing need0.00.00.00.0
Sources: Burundi authorities; and Fund staff estimates and projections.
Sources: Burundi authorities; and Fund staff estimates and projections.
Table 6.Burundi: External Public Debt, Arrears, and Scheduled Debt Service, 2004–07

(In millions of U.S. dollars, unless otherwise indicated)

2004200520062007
ActualPrel.Projections
Existing medium-and long-term debt
outstanding, excluding principal arrears 1/1,384.11,426.01,457.91,471.3
Multilateral1,169.91,206.51,230.01,235.3
Of which: IMF41.083.188.899.0
Bilateral207.6215.7229.6242.2
Paris Club145.1151.8156.6161.3
Non-Paris Club62.563.973.081.0
Other6.63.8−1.8−6.3
External arrears outstanding83.455.50.00.0
Multilateral21.30.00.00.0
Of which: IMF0.00.00.00.0
Bilateral56.752.20.00.0
Paris Club13.80.00.00.0
Non-Paris Club42.952.20.00.0
Other5.43.30.00.0
Scheduled debt service 1/
Interest9.911.412.813.0
Multilateral8.29.310.410.7
Of which: IMF0.30.60.81.0
Bilateral1.72.22.42.3
Paris Club1.40.90.90.9
Non-Paris Club0.31.31.41.3
Other0.10.00.00.0
Principal60.931.640.232.6
Multilateral52.322.328.423.0
Of which: IMF29.90.00.00.0
Bilateral6.04.96.35.1
Paris Club5.64.15.24.2
Non-Paris Club0.40.81.00.8
Other2.64.45.64.5
Memorandum items:
Scheduled debt service (in percent of exports of goods and services)111.447.246.530.2
Actual debt service (in percent of exports of goods and services)99.833.513.43.5
External debt outstanding (in percent of GDP)220.8185.3152.7140.7
Sources: Treasury Directorate, Ministry of Finance of Burundi; and Fund staff estimates and projections.

As a transitory measure, HIPC debt relief at and after the assumed completion point (mid-2007) are presented in flow terms, but will be shown as a stock operation, along with the MDRI, in the document for the fifth PRGF review schedule for December.

Sources: Treasury Directorate, Ministry of Finance of Burundi; and Fund staff estimates and projections.

As a transitory measure, HIPC debt relief at and after the assumed completion point (mid-2007) are presented in flow terms, but will be shown as a stock operation, along with the MDRI, in the document for the fifth PRGF review schedule for December.

Structural reform

32. The authorities agreed that the 2006 program needs to reactivate the privatization agenda, especially for coffee (MEFP, paragraphs 23–26 and Box 2). Their strategy, with the support of the World Bank, is to take a graduated approach. The initial effort focuses on small-scale assets, such as coffee washing stations. Execution of the reform strategy for coffee will be vital to reducing poverty in Burundi, in particular for some 800,000 small rural producers, and to export performance (coffee accounted for some two-thirds of exports in 2004–06). The authorities have put in place structures to manage the reforms, and to minimize the financial risks to the producers and the government during the transition. A strategy for the sale of the washing stations will be established, on the basis of a World Bank-financed technical study, by September 2006. The reforms will be pursued so that producers may operate freely so as to ensure competition at all levels of the coffee sector and to attract much needed investment and private financing. The authorities will ensure that regulation by the state coffee marketing board (OCIBU) does not impede investment.

Box 2.Structural Conditionality

Coverage of structural conditionality under the PRGF-supported program

Structural conditionality in 2005 was directed at deepening reform of the coffee sector, initiating a privatization program, introducing more efficient monetary policy instruments, and making further progress on PFM, including conducting an audit of domestic arrears.

Status of structural conditionality under the 2006 program (Appendix i, table 4)

For 2006, structural conditionality is directed at clearing domestic arrears, further reinforcing PFM and liberalizing coffee and other sectors, completing exchange liberalization, rehabilitating national statistics, making the central bank independent, and launching the privatization strategy.

Structural areas covered by world bank lending and conditionality

Under the proposed economic reform support grant (ERSG), the World Bank is helping Burundi prepare a strategic privatization plan, improve public finances and the operations of the treasury, and reform of the coffee, tea, and cotton sectors. The program includes launching the privatization strategy; furthering expenditure management reforms, especially in procurement; and improving the business environment.

33. Some progress has been made on governance and transparency (MEFP, paragraphs 27-28), but the new institutions (e.g., the Audit Court) are untested, and much remains to be done. With Fund and World Bank technical assistance, weaknesses in PFM are being addressed. The authorities have moved strongly to address issues raised in the Fund’s safeguards assessment of the central bank (MEFP, paragraph 33).

34. The complete PRSP is in the final stages of preparation and is expected to be ready in mid-2006 (MEFP, paragraph 32).10 The authorities have estimated the three-year cost of implementing the PRSP at US$535 million (67 percent of 2005 GDP) and intend to mobilize financing at a donors’ conference planned for the fourth quarter of 2006.

35. The authorities have made good but uneven progress toward achieving enhanced HIPC Initiative completion point triggers (Table 7). However, they have made little progress on improving debt management and producing external debt reports, for which they have requested additional technical support.

Table 7.Burundi: Progress Toward HIPC Completion Point Triggers
TriggerProgress
1. PRSP: Preparation of a full PRSP through a participatory process and its satisfactory implementation for one year, as evidenced by an Annual Progress Report that has been the subject of analysis in a Joint Staff Advisory Note.A full PRSP is in the final stages of preparation.
2. Macroeconomic stability: Maintenance of macroeconomic stability as evidenced by satisfactory performance under the PRGF-supported program.Macroeconomic developments in the past two years have been broadly in line with the program, which has remained on track.
3. Use of budget savings resulting from HIPC-related debt-service relief during the interim period: Use of budgetary savings from debt relief in accordance with the priorities identified at the decision point and in the PRSP duly documented and discussed by a national Independent Oversight Committee on a semiannual basis.Budgetary allocations for priority spending targeting pro-poor activities and projects have increased markedly.
4. Public expenditure management: Establishment of an integrated public expenditure computerized system that provides a budget monitoring and control system, in particular for poverty-related spending, and the production of at least two quarterly budget execution reports based on the new unified budget nomenclature.An integrated computerized expenditure management system was put in place in January 2006 using the new budget nomenclature. Quarterly budget execution reports will be produced from mid-2006.
5. Governance measures and the delivery of services in key sectors: Completion for the education, health, and justice sectors of (i) a budget tracking exercise (budget monitoring) of public spending on the delivery of pro-poor services; (ii) an evaluation by users of the quality of services provided; (iii) an evaluation by providers of constraints to effective delivery of pro-poor services; and (iv) preparation of an action plan to address problems identified.A technical team will be conducting an evaluation of services delivery by September 2006, with World Bank and Belgian technical assistance.
6. Demobilization: Execution of the National DDR Program in line with the pace and final objectives set forth in the Letter of Demobilization Policy to the World Bank, dated 19 February, 2004.The demobilization program is advancing well. Some 20,000 persons were demobilized in 2005 and another 5,000 are expected in 2006.
7. Structural measures: Tendering for sale the state holdings in a majority of coffee washing stations.A study on the strategy for privatization is in process and the launch of tenders is programmed by end-October 2006.
8. Social sectors
Education: Increase in the gross national enrollment rate in primary schools from 74 percent in 2003/04 to 77 percent in 2006; and from 16 percent in 2003/04 to 18 percent in 2006 in secondary schools, subject to the provision that the average increase in provinces with lower than average enrollment rates in 2004 must be higher than the increase in the national rate over the same time period.The elimination of primary school fees in September 2005 resulted in a large increase in first grade enrollment. Primary school enrollment rate rose from an estimated 80 percent in 2003/04 to 85 percent in 2004/05, to close to 100 percent in 2005/06. On the rate for lower secondary education is estimated at 17 percent in 2004/05.
Health: Increase in the national immunization rate for children of less than one year of age from 75 percent in 2004 to 85 percent in 2006, subject to the provision that the average increase in provinces with lower-than-average immunization rates in 2004 must be higher than the increase in the national rate over the same time period.A report by UNICEF indicates that the vaccination rate reached 80 percent in 2005 and would likely rise to 90 percent in 2006.
9. Debt management: Production of monthly external debt reports, including projections for the upcoming three months, for at least six months before the completion point.Little progress

National statistics and technical assistance

36. The authorities are conscious of the serious deficiencies in the national statistical base and the operations and legal basis of the national statistical office (MEFP, paragraphs 29–30). They have requested technical assistance from the Fund and other donors to address the weaknesses. A national statistical development plan drafted in collaboration with the World Bank and AFRISTAT will be implemented in 2006, with donor support. With Fund technical assistance, the balance of payments was converted to version five of the Balance of Payments Manual in early 2006.

37. Burundi has significant technical assistance needs (MEFP, paragraph 34). The authorities stressed the importance of reinforced Fund technical assistance in asking for a full-time resident representative. The authorities expect that the Fund’s new regional technical assistance center (AFRITAC-Centre) opening in Gabon in early 2007 will be of significant help.

C. Medium-Term Outlook and Debt Sustainability Analysis

38. The successful conclusion of the political transition, improving security conditions, and sustained reform momentum prefigures an improved medium-term macroeconomic outlook (Tables 8 and 9). The growth profile is likely to be typical of recovering post-conflict countries, with an initial period of catch-up growth.11 The higher investment and growth profile reflects the momentum of reforms and higher projected aid inflows. Stimulated by economic reforms, the entrance into productive activity of returning refugees and demobilized combatants, and the economic use of land and other property in previously insecure locations, economic growth is projected to rise to 6½–7 percent early in the period (2007–09). Growth would then ease to a sustained rate of 6 percent, with privatization and an improved business environment. Nevertheless, not until 2023 is GDP per capita (in current U.S. dollars) projected to reach the equivalent of US$1 a day. The external current account deficit (excluding current official transfers) would peak at about 38 percent of GDP in 2007 and thereafter decline gradually to 13 percent of GDP by 2026, based on a recovery in production and exports. As privatization takes effect, gross investment, especially from the private sector, would rise over the medium term. Domestic savings would cease to be highly negative and begin providing resources for investment by 2017.

Table 8.Burundi: Balance of Payments, Medium-Term Scenario, and Sensitivity Analysis, 2004–26
200420052006200720082009201020112012201320142015
ActualPrel.Projections
(In millions of U.S.dollars)
Current account 1/−54.0−84.0−166.8−245.4−249.1−272.9−310.0−323.0−346.7−373.3−387.7−398.4
(excluding official transfers)−169.4−274.3−361.5−395.4−417.7−442.7−460.0−463.0−471.7−485.3−490.7−490.4
Trade balance−101.1−181.6−244.7−279.9−295.2−313.2−324.6−324.5−330.2−344.4−353.8−355.9
Exports, f.o.b.47.957.170.083.994.4106.5120.7135.7147.9162.7180.2201.5
Of which: coffee29.440.550.759.762.366.771.476.480.884.988.892.9
Imports, f.o.b.−148.9−238.7−314.7−363.8−389.6−419.6−445.2−460.2−478.1−507.1−533.9−557.4
Of which: non-oil−122.4−200.4−262.1−304.5−327.1−353.7−375.7−388.6−403.6−428.0−450.9−470.1
Services (net)−60.6−89.4−110.4−109.5−117.3−124.0−129.2−132.4−136.2−135.8−133.4−132.2
Income (net)−18.1−20.6−25.6−27.2−28.9−31.8−34.4−35.9−37.0−38.9−39.3−40.1
Of which: interest on public debt (including IMF charges)−9.9−11.4−12.8−12.2−12.7−14.3−15.7−16.7−17.2−17.7−16.9−16.2
Current transfers (net) 1/125.9207.6213.9171.2192.2196.1178.1169.9156.7145.7138.8129.9
Private (net)10.517.319.221.223.726.428.129.931.733.735.837.9
Official (net)115.4190.3194.7150.0168.6169.8150.0140.0125.0112.0103.092.0
Capital account 1/48.126.2131.2118.5135.0157.4172.2183.3195.0208.5217.4227.8
Of which: HIPC relief8.035.739.440.145.348.149.350.352.148.545.4
Financial account6.766.640.355.341.445.656.759.363.568.571.470.3
Direct investment10.015.08.020.023.026.530.435.036.840.646.745.8
Other investment−3.351.632.335.318.419.126.224.326.727.924.724.5
Of which: medium- and long-term official loans (net)11.537.70.22.8−2.8−8.1−5.8−8.9−6.6−5.5−8.8−9.1
Disbursements42.569.340.435.430.425.425.425.926.928.329.731.2
Amortization (excluding IMF)−31.0−31.6−40.2−32.6−33.2−33.5−31.2−34.8−33.6−33.8−38.5−40.3
Errors and omissions10.113.40.00.00.00.00.00.00.00.00.00.0
Overall balance11.022.24.7−71.6−72.6−69.9−81.2−80.4−88.1−96.3−98.9−100.3
Financing (increase in assets -)−11.0−22.2−4.7−4.0−15.4−20.7−19.9−26.6−31.4−32.8−29.8−24.6
Change in central bank net foreign reserves (increase -)14.9−31.0−3.6−4.0−15.4−20.7−19.9−26.6−31.4−32.8−29.8−24.6
IMF, net12.417.230.710.20.0−3.8−8.6−14.7−18.8−19.8−12.3−8.3
Other reserves, net2.5−48.2−34.2−14.2−15.4−17.0−11.3−11.9−12.6−13.0−17.5−16.3
Change in arrears (increase +)−106.0−22.2−5.60.00.00.00.00.00.00.00.00.0
Exceptional financing 2/80.131.04.50.00.00.00.00.00.00.00.00.0
Cancellation41.012.20.00.00.00.00.00.00.00.00.00.0
Rescheduling of debt service and arrears39.118.94.50.00.00.00.00.00.00.00.00.0
Financing gap0.00.00.075.688.190.7101.0107.0119.6129.1128.6124.8
(In percent of GDP, unless otherwise indicated)
Memorandum items:
Trade balance−15.2−22.7−25.6−26.8−25.8−25.1−23.9−22.0−20.6−19.8−18.7−17.3
Current account 3/−8.1−10.5−17.5−16.2−14.1−14.6−15.4−14.6−14.1−14.0−13.7−13.3
(excluding official transfers)−25.5−34.3−37.9−37.8−36.5−35.5−33.9−31.3−29.4−27.8−25.9−23.9
Gross official reserves
In millions of U.S. dollars67.2112.7145.0158.9174.3191.3202.5214.4227.1240.0257.5273.8
In months of imports of the following year, c.i.f.2.22.93.33.43.43.53.63.73.73.73.83.8
Debt service ratio after HIPC in percent of exports 4/33.513.43.93.83.64.37.78.17.36.66.0
Financing gap (in percent of GDP)0.00.00.07.27.77.37.47.27.47.46.86.1
Nominal GDP (in U.S. dollars)664.5799.4954.61,045.41,143.21,246.51,358.71,478.01,606.01,743.41,891.62,051.5
Real GDP growth rate4.80.96.16.67.16.76.66.46.26.16.16.0
Inflation rate (period average; in percent)8.013.42.53.34.04.04.04.04.04.04.04.0
Exports-to-GDP ratio (in percent)7.27.17.38.08.38.58.99.29.29.39.59.8
Imports-to-GDP ratio (in percent)−22.4−29.9−33.0−34.8−34.1−33.7−32.8−31.1−29.8−29.1−28.2−27.2
Sensitivity scenarios(In units indicated)
Higher coffee prices 5/
Current account (excluding official transfers)
In millions of U.S. dollars−169.4−274.3−361.5−380.5−402.1−405.2−392.0−366.6−473.7−487.5−493.0−492.8
In percent of GDP−25.5−34.3−37.9−36.4−35.2−32.5−28.8−24.8−29.5−28.0−26.1−24.0
Financing gap (in millions of U.S. dollars)0.00.00.060.672.653.233.05.4112.4118.8121.3122.4
In percent of GDP0.00.05.86.44.32.40.47.06.86.46.0
Low-growth scenario 6/
Current account (excluding official transfers)
In millions of U.S. dollars−169.4−274.3−361.5−396.0−411.7−430.3−449.9−456.2−467.7−483.5−491.3−493.9
In percent of GDP−25.5−34.3−37.9−38.8−38.0−37.4−36.8−35.0−33.8−32.8−31.4−29.6
Financing gap (in millions of U.S. dollars)0.00.00.076.282.278.390.895.0106.3114.7119.5123.4
In percent of GDP0.00.07.57.66.87.47.37.77.87.67.4
Sources: Burundi authorities; and Fund staff estimates and projections.

Program grants have been reclassified from the capital account to current transfers.

Including the March 2004 Paris Club rescheduling at Naples terms, and assuming rescheduling of current debt service and arrears to non-Paris Club creditors on comparable terms.

Assumes financing gap covered by grants in 2007-15 and by 50 percent grants thereafter.

As a transitory measure, HIPC debt relief at and after the assumed completion point (mid-2007) are presented in flow terms, but will be shown as a stock operation, along with the MDRI, in the document for the fifth PRGF review schedule for December.

International prices are assumed to be 25 percent higher than the World Economic Outlook (WEO) baseline projection for 2007-10.

Growth is assumed to be 4 percent for the 10-year period 2007–17.

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

Program grants have been reclassified from the capital account to current transfers.

Including the March 2004 Paris Club rescheduling at Naples terms, and assuming rescheduling of current debt service and arrears to non-Paris Club creditors on comparable terms.

Assumes financing gap covered by grants in 2007-15 and by 50 percent grants thereafter.

As a transitory measure, HIPC debt relief at and after the assumed completion point (mid-2007) are presented in flow terms, but will be shown as a stock operation, along with the MDRI, in the document for the fifth PRGF review schedule for December.

International prices are assumed to be 25 percent higher than the World Economic Outlook (WEO) baseline projection for 2007-10.

Growth is assumed to be 4 percent for the 10-year period 2007–17.

Table 8.Burundi: Balance of Payments, Medium-Term Scenario, and Sensitivity Analysis, 2004–26 (concluded)
20162017201820192020202120222023202420252026
Projections
(In millions of U.S.dollars)
Current account 1/−424.7−439.0−445.2−462.9−480.0−506.6−528.3−549.3−575.3−597.6−624.9
(excluding official transfers)−507.7−520.0−527.2−542.9−563.0−584.6−604.3−622.3−637.3−649.6−659.9
Trade balance−375.0−389.2−398.9−416.5−438.6−462.7−487.9−512.1−536.9−561.1−584.1
Exports, f.o.b.226.7253.7280.7310.4343.2380.2422.1470.0522.9582.7650.5
Of which: coffee97.2101.7106.4111.3116.4121.8127.4133.3139.5145.9152.7
Imports, f.o.b.−601.7−642.9−679.6−726.9−781.8−842.9−910.0−982.0−1059.8−1143.9−1234.7
Of which: non-oil−508.2−542.8−572.4−612.1−658.2−709.3−765.6−825.8−890.9−961.3−1037.3
Services (net)−131.7−129.8−127.2−125.4−123.5−120.6−116.2−109.5−101.3−90.5−76.7
Income (net)−41.2−43.6−46.3−48.9−51.8−55.2−57.3−61.3−63.3−66.0−71.4
Of which: interest on public debt (including IMF charges)−15.9−16.9−18.0−18.9−20.1−21.9−22.2−24.2−24.3−24.9−28.0
Current transfers (net) 1/123.2123.6127.2127.9133.8131.9133.1133.6126.3120.1107.2
Private (net)40.242.645.247.950.853.957.160.664.368.172.2
Official (net)83.081.082.080.083.078.076.073.062.052.035.0
Capital account 1/243.3259.8277.6296.7317.6342.3365.6392.8420.7450.9479.5
Of which : HIPC relief45.244.944.744.444.446.645.746.846.646.646.6
Financial account85.686.077.880.683.687.091.595.6101.1106.8112.5
Direct investment57.253.552.554.857.060.063.066.169.472.976.6
Other investment28.432.525.325.826.627.028.529.431.633.936.0
Of which: medium- and long-term official loans (net)−5.3−2.2−9.5−9.1−9.1−10.6−10.6−11.2−10.5−9.8−9.2
Disbursements32.834.436.137.939.841.843.946.148.450.853.3
Amortization (excluding IMF)−38.0−36.6−45.6−47.0−48.9−52.4−54.5−57.3−58.9−60.6−62.6
Errors and omissions0.00.00.00.00.00.00.00.00.00.00.0
Overall balance−95.8−93.2−89.7−85.6−78.8−77.3−71.2−61.0−53.6−39.9−32.9
Financing (increase in assets -)−24.8−27.8−25.2−24.9−27.4−30.6−33.6−36.0−38.9−42.1−45.4
Change in central bank net foreign reserves (increase -)−24.8−27.8−25.2−24.9−27.4−30.6−33.6−36.0−38.9−42.1−45.4
IMF, net−5.7−7.10.00.00.00.00.00.00.00.00.0
Other reserves, net−19.1−20.6−25.2−24.9−27.4−30.6−33.6−36.0−38.9−42.1−45.4
Change in arrears (increase +)0.00.00.00.00.00.00.00.00.00.00.0
Exceptional financing 2/0.00.00.00.00.00.00.00.00.00.00.0
Cancellation0.00.00.00.00.00.00.00.00.00.00.0
Rescheduling of debt service and arrears0.00.00.00.00.00.00.00.00.00.00.0
Financing gap120.6121.0114.9110.5106.2107.8104.897.092.581.978.3
(In percent of GDP, unless otherwise indicated)
Memorandum items:
Trade balance−16.9−16.1−15.2−14.7−14.2−13.9−13.5−13.0−12.6−12.2−11.7
Current account 3/−16.4−15.7−14.8−14.4−13.9−13.6−13.1−12.8−12.4−12.1−11.7
(excluding official transfers)−22.8−21.5−20.1−19.1−18.3−17.5−16.7−15.8−15.0−14.1−13.2
Gross official reserves
In millions of U.S. dollars292.9313.5338.7363.6391.0421.6455.2491.2530.1572.2617.6
In months of imports of the following year, c.i.f.3.83.93.93.93.94.04.04.04.04.04.1
Debt service ratio after HIPC in percent of exports 4/4.03.94.24.34.54.54.64.64.44.24.2
Financing gap (in percent of GDP)5.45.04.43.93.53.22.92.52.21.81.6
Nominal GDP (in U.S. dollars)2,224.92,412.92,616.82,838.03,077.93,338.03,620.23,926.14,258.04,618.05,008.3
Real GDP growth rate6.06.06.06.06.06.06.06.06.06.06.0
Inflation rate (period average; in percent)4.04.04.04.04.04.04.04.04.04.04.0
Exports-to-GDP ratio (in percent)10.210.510.710.911.211.411.712.012.312.613.0
Imports-to-GDP ratio (in percent)−27.0−26.6−26.0−25.6−25.4−25.3−25.1−25.0−24.9−24.8−24.7
Sensitivity scenarios(In units indicated)
Higher coffee prices 5/
Current account (excluding official transfers)
In millions of U.S. dollars−510.2−522.6−529.9−545.7−566.0−587.7−607.6−625.7−640.9−653.3−663.8
In percent of GDP−22.9−21.7−20.2−19.2−18.4−17.6−16.8−15.9−15.0−14.1−13.3
Financing gap (in millions of U.S. dollars)122.0120.0116.0114.1109.8100.795.689.382.573.570.2
In percent of GDP5.55.04.44.03.63.02.62.31.91.61.4
Low-growth scenario 6/
Current account (excluding official transfers)
In millions of U.S. dollars−514.2−529.6−540.1−559.1−582.5−607.5−630.9−653.0−672.2−689.0−704.3
In percent of GDP−29.0−28.1−26.8−25.6−24.7−23.9−22.9−21.9−20.9−19.8−18.8
Financing gap (in millions of U.S. dollars)125.8126.8126.0127.3126.0120.1118.6116.2113.4108.7110.2
In percent of GDP7.16.76.25.85.34.74.33.93.53.12.9
Sources: Burundi authorities; and Fund staff estimates and projections.

Program grants have been reclassified from the capital account to current transfers.

Including the March 2004 Paris Club rescheduling at Naples terms, and assuming rescheduling of current debt service and arrears to non-Paris Club creditors on comparable terms.

Assumes financing gap covered by grants in 2007–15 and by 50 percent grants thereafter.

As a transitory measure, HIPC debt relief at and after the assumed completion point (mid-2007) are presented in flow terms, but will be shown as a stock operation, along with the MDRI, in the document for the fifth review scheduled for December 2006.

International prices are assumed to be 25 percent higher than the World Economic Outlook (WEO) baseline projection for 2007–10.

Growth is assumed to be 4 percent for the 10-year period 2007–17.

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

Program grants have been reclassified from the capital account to current transfers.

Including the March 2004 Paris Club rescheduling at Naples terms, and assuming rescheduling of current debt service and arrears to non-Paris Club creditors on comparable terms.

Assumes financing gap covered by grants in 2007–15 and by 50 percent grants thereafter.

As a transitory measure, HIPC debt relief at and after the assumed completion point (mid-2007) are presented in flow terms, but will be shown as a stock operation, along with the MDRI, in the document for the fifth review scheduled for December 2006.

International prices are assumed to be 25 percent higher than the World Economic Outlook (WEO) baseline projection for 2007–10.

Growth is assumed to be 4 percent for the 10-year period 2007–17.

Table 9.Burundi: Long-Term Macroeconomic Assumptions, 2004–26
200420052006200720082009201020112012201320142015
Act.Prel.Projections
(In millions of U.S. dollars)
Real GDP growth (percent change)4.80.96.16.67.16.76.66.46.26.16.16.0
Nominal GDP (millions of U.S. dollars)664.5799.4954.61,045.41,143.21,246.51,358.71,478.01,606.01,743.41,891.62,051.5
Percent change11.720.319.49.59.49.09.08.88.78.68.58.5
Exports of goods and nonfactor services (millions of U.S. dollars)63.691.1114.0136.2153.0172.2194.8218.9238.4261.9289.8323.8
Percent change27.143.225.119.512.312.613.112.38.99.910.711.7
Imports of goods and nonfactor services (millions of U.S. dollars)225.4362.1469.1525.6565.5609.4648.6675.8704.8742.0776.9811.9
Percent change36.860.729.612.17.67.86.44.24.35.34.74.5
Fiscal revenues, excluding grants (millions of U.S. dollars)133.5159.8181.2207.9232.9260.2283.9309.3336.5365.9397.5431.8
Percent change6.219.713.414.812.011.89.18.98.88.78.78.6
GDP per capita (U.S. dollars)90.5106.7124.9134.1143.8153.7164.3175.2186.6198.6211.3224.7
Percent change9.517.917.17.47.26.96.96.66.56.46.46.3
Population (millions)7.37.57.67.87.98.18.38.48.68.89.09.1
Percent change2.02.02.02.02.02.02.02.02.02.02.02.0
GDP deflator (percent change)8.316.64.83.64.34.34.34.34.34.34.34.3
CPI index (percent change)8.013.42.53.34.04.04.04.04.04.04.04.0
(In percent of GDP)
Composition of nominal GDP100.0100.0100.0100.0100.0100.0100.0100.0100.0100.0100.0100.0
Consumption111.0123.1121.1118.6115.9114.4112.5109.9107.9106.3104.3102.3
Government26.126.529.328.427.928.027.726.926.926.725.925.2
Nongovernment84.996.691.890.287.986.584.783.081.079.678.477.1
Gross investment13.310.816.118.620.220.620.921.021.121.321.421.5
Government10.36.69.610.610.710.911.010.810.810.810.710.7
Nongovernment3.04.26.58.09.59.810.010.210.410.510.710.8
Net exports of goods and services−24.3−33.9−37.2−37.2−36.1−35.1−33.4−30.9−29.0−27.5−25.8−23.8
Exports of goods and services9.611.411.913.013.413.814.314.814.815.015.315.8
Imports of goods and services−33.9−45.3−49.1−50.3−49.5−48.9−47.7−45.7−43.9−42.6−41.1−39.6
Of which : aid-related imports of goods and services−10.7−11.4−7.2−11.8−11.8−12.1−12.1−11.1−10.1−9.2−7.9−7.4
External current account balance, including grants 1/−8.1−10.5−17.5−16.2−14.1−14.6−15.4−14.6−14.1−14.0−13.7−13.3
Gross investment13.310.816.118.620.220.620.921.021.121.321.421.5
Gross domestic savings−12.2−23.5−21.8−19.2−16.3−14.9−12.9−10.3−8.2−6.6−4.5−2.4
Gross national savings5.20.3−1.42.46.16.05.66.47.07.37.78.2
Net official external financing12.027.521.013.613.111.58.46.14.33.12.92.4
Gross official external financing25.531.525.216.816.014.812.110.58.77.36.25.2
Grants17.423.820.414.414.713.611.09.57.86.45.44.5
Disbursements8.17.74.82.41.31.21.11.00.90.80.80.7
Amortization−13.5−4.0−4.2−3.1−2.9−3.3−3.7−4.3−4.4−4.2−3.3−2.8
Overall fiscal balance 1/−4.9−6.3−0.4−1.30.00.30.10.40.20.20.30.4
Total revenue and grants 1/34.930.541.440.441.141.641.040.240.039.638.938.0
Revenues, excluding grants20.120.019.019.920.420.920.920.921.021.021.021.0
Total expenditures−39.8−36.8−41.8−41.7−41.0−41.2−40.9−39.9−39.8−39.5−38.5−37.7
Sensitivity scenarios
Higher coffee prices 2/
GDP growth4.80.96.16.67.16.76.66.46.26.16.16.0
GDP (in current U.S. dollars) per capita90.5106.7124.9134.2143.8153.8164.3175.3186.7198.7211.3224.7
Investment-to-GDP ratio13.310.816.118.620.220.620.921.121.321.421.621.7
Gross domestic savings-to-GDP ratio−12.2−23.5−21.8−17.2−14.5−11.4−7.4−3.3−7.9−6.2−4.3−2.2
Low growth 3/
GDP growth4.80.96.14.04.04.04.04.04.04.04.04.0
GDP (in current U.S. dollars) per capita90.5106.7124.9130.8136.3142.0148.0154.3161.0167.8175.0182.5
Investment-to-GDP ratio13.310.816.110.911.311.812.212.412.712.913.213.4
Gross domestic savings-to-GDP ratio−12.2−23.5−21.8−20.3−18.3−17.4−15.9−13.5−11.7−10.2−8.3−6.1
Sources: Burundi authorities; and staff estimates and projections.

Assumes financing gap covered by grants in 2007–15 and by 50 percent grants thereafter.

International prices are assumed to be 25 percent higher than the World Economic Outlook (WEO) baseline projection for 2007–10.

Growth is assumed to be 4 percent for the 10-year period 2007–17.

Sources: Burundi authorities; and staff estimates and projections.

Assumes financing gap covered by grants in 2007–15 and by 50 percent grants thereafter.

International prices are assumed to be 25 percent higher than the World Economic Outlook (WEO) baseline projection for 2007–10.

Growth is assumed to be 4 percent for the 10-year period 2007–17.

Table 9.Burundi: Long-Term Macroeconomic Assumptions, 2004–26 (concluded)
20162017201820192020202120222023202420252026Averages
Projections2006-162016-26
(In millions of U.S. dollars)
Real GDP growth (percent change)6.06.06.06.06.06.06.06.06.06.06.06.46.0
Nominal GDP (millions of U.S. dollars)2,224.92,412.92,616.82,838.03,077.93,338.03,620.23,926.14,258.04,618.05,008.31,522.23,449.0
Percent change8.58.58.58.58.58.58.58.58.58.58.59.88.5
Exports of goods and nonfactor services (millions of U.S. dollars)364.0407.1450.2497.6549.9608.9675.8752.1836.5932.01,040.2224.3646.8
Percent change12.411.810.610.510.510.711.011.311.211.411.613.511.2
Imports of goods and nonfactor services (millions of U.S. dollars)870.8926.1976.31,039.51,111.91,192.21,279.91,373.71,474.81,583.71,701.0672.81,230.0
Percent change7.26.45.46.57.07.27.47.37.47.47.48.57.0
Fiscal revenues, excluding grants (millions of U.S. dollars)469.6510.7555.2603.5655.8712.5774.9842.8916.6996.81,084.1316.1738.4
Percent change8.88.88.78.78.78.78.88.88.88.88.810.38.7
GDP per capita (U.S. dollars)238.9254.0270.0287.1305.3324.6345.1367.0390.2414.9441.1177.8330.7
Percent change6.36.36.36.36.36.36.36.36.36.36.37.66.3
Population (millions)9.39.59.79.910.110.310.510.710.911.111.48.510.3
Percent change2.02.02.02.02.02.02.02.02.02.02.02.02.0
GDP deflator (percent change)4.34.34.34.34.34.34.34.34.34.34.34.34.3
CPI index (percent change)4.04.04.04.04.04.04.04.04.04.04.03.84.0
(In percent of GDP)
Composition of nominal GDP100.0100.0100.0100.0100.0100.0100.0100.0100.0100.0100.0100.0100.0
Consumption101.199.898.497.496.695.895.094.193.392.491.5110.495.9
Government24.824.323.422.922.421.821.421.020.620.219.927.122.1
Nongovernment76.475.575.074.574.274.073.673.272.772.271.683.373.9
Gross investment21.621.721.721.721.721.721.721.721.721.721.720.421.7
Government10.710.710.710.710.710.710.710.710.710.710.710.710.7
Nongovernment10.911.011.011.011.011.011.011.011.011.011.09.711.0
Net exports of goods and services−22.8−21.5−20.1−19.1−18.3−17.5−16.7−15.8−15.0−14.1−13.2−30.8−17.6
Exports of goods and services16.416.917.217.517.918.218.719.219.620.220.814.418.4
Imports of goods and services−39.1−38.4−37.3−36.6−36.1−35.7−35.4−35.0−34.6−34.3−34.0−45.2−36.0
Of which : aid-related imports of goods and services−6.9−6.1−6.0−5.8−5.7−5.5−5.4−5.2−5.0−4.8−4.6−9.8−5.5
External current account balance, including grants 1/−16.4−15.7−14.8−14.4−13.9−13.6−13.1−12.8−12.4−12.1−11.7−14.9−13.7
Gross investment21.621.721.721.721.721.721.721.721.721.721.719.421.7
Gross domestic savings−1.20.21.62.63.44.25.05.86.77.78.5−10.74.0
Gross national savings5.36.06.97.37.88.18.58.99.39.710.05.58.0
Net official external financing2.21.91.91.71.61.21.00.80.40.1−0.38.11.1
Gross official external financing4.44.03.73.33.22.82.52.21.81.41.011.62.8
Grants3.73.43.12.82.72.32.11.91.51.10.710.12.3
Disbursements0.70.60.60.50.50.40.40.40.30.30.31.40.5
Amortization−2.2−2.1−1.7−1.7−1.6−1.6−1.5−1.5−1.4−1.3−1.2−3.5−1.6
Overall fiscal balance 1/0.20.00.30.30.20.30.30.20.20.20.20.00.2
Total revenue and grants 1/37.436.736.035.434.834.233.733.332.832.432.140.034.4
Revenues, excluding grants21.121.221.221.321.321.321.421.521.521.621.620.621.4
Total expenditures−37.2−36.7−35.7−35.1−34.6−34.0−33.5−33.0−32.6−32.2−31.9−39.9−34.2
Sensitivity scenarios
Higher coffee prices 2/
GDP growth6.06.06.06.06.06.06.06.06.06.06.06.46.0
GDP (in current U.S. dollars) per capita238.9254.0270.1287.2305.3324.7345.2367.0390.3414.9441.2177.9330.8
Investment-to-GDP ratio21.821.921.922.021.921.921.921.921.921.821.820.521.9
Gross domestic savings-to-GDP ratio−1.10.31.72.83.64.35.16.06.87.68.5−8.84.2
Low growth 3/
GDP growth4.04.05.06.06.06.06.06.06.06.06.04.25.5
GDP (in current U.S. dollars) per capita190.3198.2208.2220.6233.8247.7262.5278.1294.7312.2330.8155.7252.5
Investment-to-GDP ratio13.714.315.416.417.518.819.820.721.321.521.712.818.3
Gross domestic savings-to-GDP ratio−5.0−3.5−1.8−0.30.81.92.94.15.36.57.7−13.51.7
Sources: Burundi authorities; and staff estimates and projections.

Assumes financing gap covered by grants in 2007–15 and by 50 percent grants thereafter.

International prices are assumed to be 25 percent higher than the World Economic Outlook (WEO) baseline projection for 2007–10.

Growth is assumed to be 4 percent for the 10-year period 2007–17.

Sources: Burundi authorities; and staff estimates and projections.

Assumes financing gap covered by grants in 2007–15 and by 50 percent grants thereafter.

International prices are assumed to be 25 percent higher than the World Economic Outlook (WEO) baseline projection for 2007–10.

Growth is assumed to be 4 percent for the 10-year period 2007–17.

39. From a low base in 2004, exports are projected to drive growth over the long term as traditional sectors recover and new sectors emerge. The inflow of private investment would raise the quality of Burundi’s coffee, which is projected to once again fetch a premium over international prices starting in 2008. Private investment in nontraditional sectors such as horticulture, fresh fruits and vegetables, essential oils, tourism, and minerals (gold, nickel, and tungsten), which is already emerging, would make a significant contribution in the second decade of the period, especially if direct air links to Europe are reestablished and electricity supply problems are addressed. Foreign reserves would be maintained at just over four months of following-year imports. Financing gaps of US$75–130 million through 2016 would begin tailing off to about US$80 million by 2025, amounts that could be covered from 2007 in part by additional debt relief under the MDRI.12

40. Two alternative scenarios examine the impact of lower growth, reflecting stalled reform, and of higher coffee export prices. In the low-growth scenario, starting in 2007, GDP growth would be only 4 percent a year for ten years before returning to the baseline rate. In this scenario, the financial position of the country would weaken considerably and the external current account deficits and financing gaps are much larger in the outer years. Investment would be somewhat lower, while domestic savings would emerge only late in the period. GDP per capita would be 25 percent lower (and less than US$1 a day) in 2026. The second scenario assumes a selling price for coffee that is 25 percent higher than in the baseline from 2007 to 2010. This scenario assumes that coffee sector investment would accelerate revenues. Financing gaps would be significantly reduced early on and investment and domestic savings would be somewhat higher.

41. An updated low-income country debt sustainability analysis (LIC DSA), prepared jointly by Fund and World Bank staff, indicates that Burundi is vulnerable to shocks and remains in the high debt distress category for low-income countries (Appendix VI). The external debt-to-exports ratio after enhanced HIPC assistance is projected to remain above the threshold for 2005–13. The stress tests show that Burundi is vulnerable to adverse developments, including borrowing on nonconcessional terms. The DSA underscores the need for Burundi to implement a strong, sustained reform effort to encourage export diversification and support robust growth in exports and GDP. Prudent debt management will be important, as will external financing on highly concessional terms.

IV. Program Monitoring, Safeguards, and Risks

42. The prior actions for completion of the third and fourth reviews primarily seek to address slippages in implementing structural reforms, including the phasing in of coffee sector reform (MEFP, paragraph 35, and Appendix I, Table 4). To take into account domestic arrears clearance and the introduction of tradable security instruments, the quantitative performance criterion on bank credit to government has been replaced by one on overall domestic financing. The BRB has begun to address the issues identified in the safeguards assessment completed in January 2006. The authorities have requested a nine-month extension to the PRGF arrangement to complete the sixth review (Tables 10 and 11).

Table 10.Burundi: Schedule of PRGF Disbursements and Reviews, 2004–07
DateDisbursement

(In millions of SDRs)
Conditions
Executive Board consideration, January 23, 200426.40 1Executive Board approval; Disbursed.
January 19, 20057.15Completion of first review, based on observance of performance criteria at end-June 2004; Disbursed.
July 27, 20057.15Completion of second review, based on observance of performance criteria at end-December 2004; Disbursed.
June 20067.15Completion of third review, based on observance of performance criteria at end -June 2005.
June 20067.15Completion of fourth review, based on observance of performance criteria at end-December 2005.
December 20067.15Completion of fifth review, based on observance of the structural performance criterion at end-September 2006.
June 2007 27.15Completion of sixth review, based on observance of performance criteria at end-December 2006.

Of which, SDR 19.25 million was for the early repayment of outstanding drawings under the Post-Conflict Emergency Assistance Policy.

An extension of the PRGF arrangement (which expires in January 2007) by nine months until September 2007 has been requested to allow for this disbursement.

Of which, SDR 19.25 million was for the early repayment of outstanding drawings under the Post-Conflict Emergency Assistance Policy.

An extension of the PRGF arrangement (which expires in January 2007) by nine months until September 2007 has been requested to allow for this disbursement.

Table 11.Burundi: Indicators of Fund Credit, 2004–10

(In millions of SDRs, unless otherwise indicated)

2004200520062007200820092010
Act.Projections
Fund credit outstanding (end of period) 1/
In millions of SDRs26.440.762.269.369.366.760.7
In millions of U.S. dollars41.058.288.899.099.095.386.7
In percent of quota34.352.980.790.090.086.678.8
Fund obligations19.50.30.60.70.73.36.7
Fund total charges and interests0.20.30.60.70.70.70.7
Existing drawings0.20.30.60.50.50.50.5
Prospective drawings0.00.00.20.20.20.2
Fund total repayments/repurchases19.30.00.00.00.02.66.0
Existing drawings19.30.00.00.00.02.66.0
Prospective drawings0.00.00.00.00.00.0
Fund credit outstanding in percent of:
Exports of goods and services64.463.977.972.764.755.344.5
Gross official reserves61.051.661.362.356.849.842.8
Fund obligations in percent of:
Exports of goods and services30.60.30.50.50.41.93.4
Gross international reserves29.00.20.40.40.41.73.3
Memorandum items (in millions of U.S. dollars):
Exports of goods and services63.691.1114.0136.2153.0172.2194.8
Gross international reserves67.2112.7145.0158.9174.3191.3202.5
Sources: Burundi authorities; and Fund staff estimates and projections.

Includes the prospective disbursements under the Poverty Reduction and Growth Facility arrangement for a total of SDR 69.3 millions 90 percent of quota).

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

Includes the prospective disbursements under the Poverty Reduction and Growth Facility arrangement for a total of SDR 69.3 millions 90 percent of quota).

43. The program is subject to several risks:

  • Security within the country is fragile. Institutional rehabilitation and economic and social recovery will be needed to promote further progress. The situation in the Great Lakes region is also fragile; there could be grave repercussions for Burundi should the situation deteriorate.
  • Delays in the pace of structural reforms and in improving social services could undermine public confidence in the reform and recovery effort. Progress on achieving a sustained, poverty-reducing recovery of economic activity depends critically on a strong early effort to improve the business environment and to start privatization.
  • Timely and adequate external financial support is critical. Burundi’s program depends heavily on external budget support. Major delays in disbursement of program support would severely stress the budget and the macroeconomic framework.

V. Staff Appraisal

44. Burundi made commendable progress in 2005 in implementing its PRGF-supported program in a difficult post-conflict environment. While structural reforms slowed in the second half of 2005, owing to the political transition, all the end-June and end-December 2005 quantitative performance criteria were met, with one temporary exception. Growth in 2005 was much lower than expected primarily because of the vagaries of rain-fed agriculture. A strong rebound is expected in 2006. Inflation was significantly reduced in 2005 because the central bank was better able to conduct monetary policy and inject official foreign exchange inflows into the exchange market.

45. The successful political transition to a democratically elected government and improved security is encouraging. The recent peace talks with the last remaining rebel movement is a very welcome development. The integration of former rebel movements into the armed forces and army has gone well, as has the demobilization process.

46. The past decade was very difficult for Burundi because of the extended social conflict and the accumulated effects of intensified restrictions and stalled structural reforms. The authorities will need to resolutely implement structural reforms to stimulate private sector activity, notably by launching the privatization program and improving the business climate. To increase spending on the social sectors and infrastructure, as is necessary to achieve the MDGs, Burundi would need to continue to reduce the size of its security forces, and thus spending on security, through demobilization.

47. The pace of structural reform in 2005 was uneven. Progress was strong in the fiscal, monetary, and exchange areas, but there were delays in initiating the deeper reforms in the productive sectors that are fundamental for sustained recovery. While the delays are understandable given the political transition, staff urges the authorities to press ahead with privatization. Recent efforts to reinforce coordination with donors to ensure timely and cohesive technical assistance and financial support should continue.

48. The authorities are to be commended for Burundi’s strong fiscal performance in 2005. The buoyancy of revenues, despite the significant reduction in import duties, confirms that the revenue reforms were appropriate. However, abolishing the levies for funding the war effort was ill-timed coming just after budget approval. Staff encourages the authorities to fully cost all social initiatives and ensure that they are consistent with the budget. The authorities have strengthened expenditure management from a very low base. These efforts must be pursued and extended over the medium term with donor assistance to further strengthen budget execution, financial control, and public procurement. Staff encourages the authorities to carefully manage public expectations of a peace dividend.

49. The BRB has made good progress on firming up monetary policy. Clearing domestic arrears and introducing standardized and negotiable treasury securities in 2006 will strengthen the efficiency and soundness of the financial system. It is important that the BRB follow through with its efforts to bolster banking supervision. The staff commends the BRB for improvements in its internal operations, including its responses to the safeguards assessment, as evidenced by its second annual external audit. Nevertheless, much remains to be done to modernize its operations, including computerization of accounting and better internal auditing. Passing an anti-money laundering law and revising the central bank law to give the BRB independence are further important measures planned for 2006.

50. There has been commendable progress in liberalizing the exchange regime. Burundi maintains exchange restrictions subject to Fund approval under IMF Article VIII, and staff does not recommend their approval. The authorities recently eliminated an exchange restriction and intend to eliminate the remaining restriction and multiple currency practices shortly. The authorities’ intention to accept the obligations of IMF Article VIII, Sections 2, 3, and 4, in 2006 is a significant step forward. The staff supports continuation of the managed-float exchange rate regime, which appears to be serving Burundi well. With Burundi’s prospective joining of the EAC, staff encourages the authorities to work with EAC partners to further tariff reform focused on reducing the highest rates.

51. It will be important for the authorities to pursue discussions to reach agreement with non-Paris Club bilateral and other creditors that have not yet provided debt relief under the enhanced HIPC Initiative.

52. The full PRSP is being finalized. The staff welcomes this development, as well as the progress made on the enhanced HIPC Initiative completion point triggers. While improvement in Burundi’s social conditions has been uneven and reforms are still at an early stage, there has been notable progress. Nonetheless, considerable challenges to meeting the MDGs lie ahead. The authorities, with donor support, will need to pay particular attention to reinforcing the government’s capacity to deliver social services.

53. Staff encourages the authorities to strengthen the statistical system, which has several deficiencies that hinder the monitoring of economic developments.

54. Good governance and transparency practices should be reinforced, including through PFM reforms and the progressive withdrawal of state intervention in the economy.

55. With the implementation of the program, 2006 could be a pivotal year for Burundi’s economic turnaround. It will be crucial for the authorities to maintain the pace of administrative reform and liberalization, while pressing ahead with privatization. Donor coordination and timely and predictable disbursement of program support is important for macroeconomic stability and program implementation.

56. The main risks to the program are regional insecurity, a still fragile domestic peace, and immature democratic institutions. While there are significant risks to the program, given the demonstrated commitment of the authorities to reform and the strength of the program’s reform measures, staff recommends completion of the third and fourth reviews under the PRGF; approval of the authorities’ request for waivers of two performance criteria and modification of another; extension of the PRGF arrangement; and extension of additional interim assistance under the enhanced HIPC Initiative. The staff supports the request for waivers because the nonobservance was temporary and corrective action was taken promptly. For the extension of interim assistance, satisfactory assurances from Burundi’s other creditors are in place.

57. The staff welcomes the authorities’ intention to make public the staff report, the letter of intent, and the MEFP. It recommends that the next Article IV consultation with Burundi be held on the 24-month consultation cycle in accordance with Decision No. 12794-(02/76) of July 2002, as amended by Decision No. 12854-(02/96) of September 12, 2002.

1UNDP, 2005 Human Development Index.
2See “Economic Stability and Growth Prospects: Evidence from Burundi: 1965–2005” and “A Decade of Stalled Structural Reforms” in the accompanying Selected Issues paper for a fuller discussion.
3Government securities issued to clear the domestic arrears in mid-2006 are assumed to end up in the banking system.
4Primary school enrollment has doubled since primary school fees were abolished in September 2005, which overwhelmed facilities and teacher capacity. The World Bank is preparing an education sector project (US$40 million) in cooperation with bilateral donors to support rehabilitation of the education system. On May 1, 2006, health care for expectant mothers and children under 5 years of age was made free.
5The increase of 15 percent in base salaries starting July 1, 2006 is the first since a 10 percent hike in July 2001. In the five years since the last general wage increase, consumer prices have risen by about 35 percent.
6See “Public Expenditure Management Reform in Burundi” for more details on the status of public expenditure management in the accompanying selected issues paper.
7The lack of an AML law is causing increasing difficulty for Burundi banks in their relations with correspondents abroad.
8As a transitional measure, HIPC debt relief at, and after, the assumed completion point (mid-2007) is presented in flow terms, but will be shown as a stock operation, along with the MDRI, in the document for the fifth PRGF review scheduled for December 2006.
9Equivalent to 50.5 percent of PRGF Trust Interest obligations falling due July 28, 2006–December 31, 2006, and 57.4 percent falling due January 1, 2007–July 27, 2007.
10A PRSP Preparation Status Report and Joint Staff Advisory Note were issued to the Executive Board on July 11, 2005 (Country Reports Nos. 05/325 and 05/324, respectively).
11This outlook assumes a stronger recovery of growth and investment than is assumed in the enhanced HIPC Initiative Decision Point Document (Country Report No. 05/329). Higher investment (financed by higher aid inflows), together with sustained structural reform, would drive stronger export and overall growth over the long term. Imports would also grow more strongly and over the long-term decline only moderately in relation to GDP.
12As a transitional measure, HIPC debt relief at and after the assumed completion point (mid-2007) is presented in flow terms. It will be shown as a stock operation, along with the MDRI, in the documents for the fifth PRGF review scheduled for December.
APPENDIX I: Letter of Intent

Bujumbura, June 26, 2006

Mr. Rodrigo de Rato

Managing Director

International Monetary Fund

Washington, D.C. 20431

Dear Mr. de Rato,

1. On behalf of the authorities of the Republic of Burundi, we hereby transmit the attached memorandum on economic and financial policies (MEFP) that sets out the objectives and policies under the program that the authorities intend to implement in 2006. The attached technical memorandum of understanding (TMU) defines the terms and conditions of the implementation of the program.

2. Burundi continues to make progress with reforms aimed at sustaining the economic recovery. In support of these efforts, Burundi benefits from the Fund’s advice and financial support under the Poverty Reduction and Growth Facility (PRGF), approved by the IMF Executive Board in January 2004.

3. The program’s quantitative performance criteria (PCs) for end-June 2005 for the third program review were observed, as were the indicative quantitative targets at end-September 2005 (Table 1). We request a waiver for the nonobservance of the structural PC (end-October 2005) regarding the installation of a computerized financial management information system (IFMIS) of moderate size in the Ministry of Finance (Table 2). The IFMIS became operational on January 1, 2006. Three structural benchmarks were not observed or were observed with a delay. The publication of the Audit Court’s report on the 2004 government accounts (end-September 2005) was observed with a delay on December 6, 2005 and the audit of the inventory of the government’s domestic arrears (end-June 2005) was completed behind schedule on February 20, 2006. The adoption of an action plan defining the new roles of the coffee sector institutions (end-November 2005) was not observed and was re-phased.

4. The quantitative PCs for end-December 2005 for the fourth review, to be completed by end-June 2006, were observed except for the nonaccumulation of external arrears, which were incurred in October and December 2005. The external arrears were cleared in March 2006. We therefore request a waiver for the nonobservance of this criterion.

5. In support of the macroeconomic and financial objectives set for 2006, we hereby request approval of the third and fourth reviews under the PRGF and disbursement of SDR 14.30 million (18.6 percent of quota). We request the disbursement of additional interim HIPC assistance in the amount of SDR 86,500, which will be sufficient to cover 50.5 percent of PRGF Trust Interest obligations falling due between July 28, 2006 and December 31, 2006, and 57.4 percent between January 1, 2007 and July 27, 2007.

6. The objectives and measures in the MEFP for 2006 remain consistent with Burundi’s Interim Poverty Reduction Strategy Paper (I-PRSP—Cadre stratégique intérimaire de croissance économique et de lutte contre la pauvreté) and the forthcoming full PRSP.

7. The economic and financial policies set forth in the MEFP should ensure that the objectives of the 2006 program are met. If needed, the authorities will take any further measures that may be necessary. Burundi will consult with the Managing Director on the adoption of these measures in advance of revisions to the policies contained in the MEFP, in accordance with the Fund’s policies on such consultations.

8. The quarterly quantitative PCs and indicative targets for 2006 are shown in Table 3. We request a modification of the PC on banking system credit to government, reflecting the programmed issuance of tradable treasury securities, which would be set on domestic financing of the budget. The prior actions for the third and fourth reviews, as well as the structural PC and benchmarks for 2006, are shown in Table 4. The fifth review of the three-year PRGF arrangement with the Fund will be based on meeting the targets for end-June 2006.

9. In order to conclude the sixth review of the program we request an extension of the three-year PRGF arrangement by nine months until end-September 2007.

10. The Burundi authorities are keen to make this letter, the attached MEFP, the TMU, as well as the staff report on the 2006 third and fourth reviews under the PRGF arrangement, available to the public. We hereby authorize their publication and posting on the Fund’s website subsequent to Executive Board approval. We will do the same on the official websites of the Burundi government.

11. The authorities will provide the IMF Managing Director with all the information he may request as necessary to monitor program implementation and achieve program objectives on schedule.

Sincerely yours,

/ s // s /
Dieudonné NgowembonaGabriel Ntisezerana
Minister of FinanceGovernor, Bank of the Republic of Burundi
/ s /
Alice Nzomukunda
Second Vice-President, Republic of Burundi

Attachments:

Memorandum of Economic and Financial Policies for 2006

Technical Memorandum of Understanding

ATTACHMENT I: Republic of Burundi Memorandum of Economic and Financial Policies for 2006

I. Introduction

1. This memorandum summarizes progress under the program during 2005 and sets out the authorities’ economic and financial policies for 2006. On the basis of these policies, the authorities request Fund support in the form of fourth and fifth disbursements under the three-year Poverty Reduction and Growth Facility (PRGF) arrangement. The policies and objectives of the new program are consistent with the Interim Poverty Reduction Strategy Paper (I-PRSP), as well as the full PRSP which is being finalized.

II. Background

A. Political Transition Completed

2. Burundi crossed a historical threshold in August 2005 with the election of a new parliament, the investiture of a new President of the Republic, and the formation of a government, all as a result of democratic elections. The security situation in the country has significantly improved. The disarmament, demobilization, and reintegration (DDR) of former combatants and the armed forces was well under way in 2005, with the support of the World Bank-led Multi-Country Demobilization and Reinsertion Program (MDRP). At end-2005, the number of demobilized persons was some 20,000. The United Nations Operation in Burundi (ONUB) and bilateral donors are also supporting the associated security sector reform (SSR) involving the training and equipping of the new national police force.

B. Recent Economic Developments

3. Macroeconomic performance in 2005 has been mixed. Real GDP growth was about 1 percent, reflecting a sharp decline in the coffee harvest compared with 2004 (7,000 as against 38,000 metric tons). The problems in the agricultural sector resulting from the drought in the northern part of the country (food production fell by 1 percent) were nonetheless partly offset by a strong rebound in the secondary and tertiary sectors. Consumer price index (CPI) inflation remained high during the first half of the year, reflecting the effect of the drought in the north and the pressure on prices from the large presence of the international community. Since mid-2005, the Burundi franc (FBu) has appreciated against the U.S. dollar (10 percent) and together with a tighter monetary policy contributed to a marked slowdown in inflation to 1 percent at end-December.

4. Preliminary data suggest that the external current account deficit, after grants, was larger than expected under the program, at about 10.5 percent of GDP, as a result of a drop in coffee exports and, in particular, a strong increase in project-financed imports. In real effective terms the Burundi franc appreciated 9.2 percent in 2005. The differential between the parallel and the official exchange rates stabilized at about 3 percent.

C. Performance Under the Program

5. Performance in 2005 was broadly in line with program targets. All end-June 2005 quantitative performance criteria, after adjustments, were observed, as were the indicative targets for end-September (Table 1). The criteria for end-December 2005 were also observed, except for an accumulation of external arrears to the OPEC Fund in late 2005, which have since been cleared. Program implementation was somewhat delayed in the third quarter due to the political transition. The installation of a computerized financial management information system (IFMIS) of moderate size in the Ministry of Finance (structural performance criterion for end-October 2005) was not observed (Table 2), and the IFMIS became operational on January 1, 2006. Three structural benchmarks in 2005 were not observed or were implemented with a delay.

Table 1.Burundi: Performance Criteria and Indicative Targets for 2005

(In billions of Burundi francs, unless otherwise indicated)

20042005
Dec.Mar. 2/Jun.Sep. 2/Dec.
Act.Prog. 1/Prog. Adj.Act.Prog. 1/Prog. Adj.Act.Rev. Prog.Rev. Prog. Adj.Act.Rev. Prog.Rev. Prog. Adj.Act.
Performance criteria for end-December 2004 and end-June 2005 (indicative targets otherwise)
Net foreign assets of the BRB (floor; in millions of U.S. dollars) 3/18.823.512.445.215.2−22.229.518.1−4.629.543.4−13.648.8
Net domestic assets of the BRB (ceiling) 3/53.843.755.340.857.696.855.856.180.556.827.390.051.7
Net credit from the banking system to the government (ceiling) 3/4/102.282.287.093.581.3115.283.7111.4139.4115.080.8155.7123.0
External payments arrears of the government (ceiling; in millions of U.S. dollars)0.00.00.00.00.00.00.00.00.00.00.00.00.5
Short-term external debt of the government (ceiling; in millions of U.S. dollars) 5/0.00.00.00.00.00.00.00.00.00.00.00.00.0
Nonconcessional external debt contracted or guaranteed by the government or the BRB (ceiling; cumulative; in millions of U.S. dollars) 6/0.00.00.00.00.00.00.00.00.00.00.00.00.0
Indicative targets
Primary balance of the government (ceiling; cumulative from beginning of calendar year) 7/0.0−4.21.9−4.9−0.2−24.9−6.6−31.0−14.6
Government’s wage bill (ceiling; cumulative from beginning of calendar year)58.616.314.732.631.456.949.775.572.61
Adjustors
External nonproject financial assistance (cumulative since January 2004 in millions of U.S. dollars) 7/8/65.1106.395.2135.397.9130.9108.2193.4136.4
Of which:
EU33.343.444.153.644.154.344.168.363.0
World Bank0.014.816.414.816.416.416.451.416.4
AfDB0.013.30.013.30.014.79.825.29.8
France3.83.83.87.63.87.63.87.67.4
Belgium8.38.38.310.98.312.18.312.18.3
Other (UK)0.00.00.09.70.00.00.00.01.0
Debt relief (current maturities)6.07.17.19.89.810.210.214.914.9
Multidonor Trust Fund disbursements (WB)13.715.615.615.615.615.615.615.615.6
Net accumulation of fiscal arrears (cumulative from end-2003)−9.5−12.9−6.1−13.9−8.6−12.5−16.1−26.5−38.7
Net accumulation of fiscal arrears during period−1.03.4−1.0−2.5−1.0−7.5−14.0−22.7
FBu/US$ exchange rate (end-period)1,1001,0501,145.31,0501,090.61,0751,037.31,100998
FBu/US$ exchange rate (average for quarter)1,1031,0501,139.31,110.51,0701,065.91,0501,011
U.S. dollar/euro (end-period)1.301.301.301.211.301.201.301.18
U.S. dollar/SDR (end-period)1.501.511.501.461.501.451.501.43

As per Country Report No. 05/55.

Indicative targets.

The ceiling or the floor will be adjusted to accommodate 100 percent of any deviation from the projected disbursements of external nonproject financial assistance shown in the memorandum item. In case of, respectively, a financing excess (shortfall), the floors on the stock of net foreign assets of the central bank will be adjusted upward (downward), and the ceilings on the stock of net domestic assets of the central bank and on the stock of net credit from the banking system to the government will be asjusted downward (upward).

The ceiling on net credit to the government from the banking system will be adjusted downward for any accumulation of domestic arrears as defined in the Technical Memorandum of Understanding (TMU).

Excluding short-term, import-related trade credits.

With a grant element of less than 50 percent.

As defined in the TMU and revised to reflect a reclassification of spending on the new police force from projects to recurrent expenditures.

Nonproject assistance includes debt relief on current maturities and net cash payments to clear arrears.

As per Country Report No. 05/55.

Indicative targets.

The ceiling or the floor will be adjusted to accommodate 100 percent of any deviation from the projected disbursements of external nonproject financial assistance shown in the memorandum item. In case of, respectively, a financing excess (shortfall), the floors on the stock of net foreign assets of the central bank will be adjusted upward (downward), and the ceilings on the stock of net domestic assets of the central bank and on the stock of net credit from the banking system to the government will be asjusted downward (upward).

The ceiling on net credit to the government from the banking system will be adjusted downward for any accumulation of domestic arrears as defined in the Technical Memorandum of Understanding (TMU).

Excluding short-term, import-related trade credits.

With a grant element of less than 50 percent.

As defined in the TMU and revised to reflect a reclassification of spending on the new police force from projects to recurrent expenditures.

Nonproject assistance includes debt relief on current maturities and net cash payments to clear arrears.

Table 2.Burundi: Structural Performance Criterion and Benchmarks for 2005 for the Third Review Under the PRGF
MeasureTimetable(Month-end deadline)Status
Structural performance criterion
  • Install a computerized financial management information system (IFMIS) of moderate size in the Ministry of Finance, with a link to the BRB, to monitor budget implementation (notably social spending), and produce summary fiscal tables.
October 2005Not met.



System launched January 1, 2006.
Structural benchmarks
  • Begin privatizing coffee sector assets by launching tenders for SOGESTALS, washing stations, and the state share in SODECO.
June 2005Tenders for sale of two washing stations launched in July.



No offers received.
  • Complete audited inventory of domestic arrears.
June 2005Inventory completed May 20, 2005. External audit completed February 20, 2006.
  • Publication of the Audit Court’s audit report of the 2004 government accounts.
September 2005December 6, 2005.
  • Adopt an action plan defining the new roles of the institutions in the coffee sector (including the OCIBU), which should be in place by the beginning of the 2006 crop year (April 2006), consistent with the coffee sector reform strategy.
November 2005Not met.
  • Begin privatization program (with launch of tenders) of state shares in enterprises in the financial, industrial, and other sectors.
December 2005Tenders for sale launched but suspended before closing date. Two firms (ALCOVIT and ONAPHA) were privatized in 2005.

6. Fiscal performance in 2005 was satisfactory and in line with program targets. Revenues (FBu 172.1 billion, or 20 percent of GDP) were much higher than the program target. Current expenditures were consistent with the program, while domestically financed project spending was considerably lower than programmed. Total spending was therefore weaker than expected at about 36.8 percent of GDP. Domestic arrears on 2004 expenditures were cleared and the primary deficit was limited to 1.7 percent of GDP, or about half the program target. On a commitments basis, the overall deficit, after grants, was 6.3 percent of GDP compared with the target of 0.2 percent of GDP, as program grants were delayed.

7. The 2006 Budget was promulgated on December 31, 2005. The later included revenues equivalent to 18.9 percent of GDP and overall spending of 40.8 percent of GDP, with a primary deficit of 6.2 percent of GDP. The 2006 Budget incorporated an important package of reforms, including:

  • the consolidation of extra budgetary funds, except for the road fund and the national solidarity fund;
  • the budgetization of the revenues of the national solidarity fund and introduction of ceilings on its spending;
  • provision for the regularization of civil servants’ salaries;
  • the elimination of the 7 percent transactions tax on banking transactions;
  • the deductibility of the transactions tax paid on investment goods for corporate tax purposes;
  • the revision of the customs tariff schedule to reduce tariffs on primary products, and raise those at 0 percent to 5 percent;
  • the elimination of the service tax on imports (6 percent);
  • the introduction of an administrative fee for customs of 0.5 percent of the c.i.f. value of imports; and
  • the elimination of exemptions on indirect taxes, except for diplomats, government, and NGOs;
  • the strengthening of efforts to apply the income tax to all local employees of international agencies.

8. In addition, on January 24, 2006, a new regulation on import procedures was introduced. On February 7, a revision to the contract with SGS (the pre-import inspection company) was signed giving it management of import declarations (DI) beginning April 3, 2006, as well as delinking the inspection of imports from the exchange control system. At the beginning of January 2006, the transactions tax on petroleum products, which had been suspended in September 2005, was re-introduced. In December 2005, the authorities created a national commission for aid coordination (CNCA) with the aim of improving dialogue and coordination with donors, and in February 2006, a permanent secretariat of the CNCA was created to assure effective aid management.

9. In early 2006, the prices of beer, sugar, and soft drinks were significantly reduced, resulting in a large net revenue loss, primarily for the national solidarity fund (which financed the war effort) of FBu 9 billion for 2006. Strong pressures on expenditures to address the drought and famine in the north of the country, for the reintegration of refugees, and for the large increase in primary school pupils (following the abolition of primary school fees in September 2005) led the authorities to hold a Partners’ Conference for Burundi on February 28, 2006. At the conference, donors made pledges of new financing amounting to about US$70 millions. Therefore a supplementary budget for 2006 will be needed.

10. Regarding monetary policy, the introduction of weekly liquidity auctions since mid-April 2005, enabled the Bank of the Republic of Burundi (BRB) to partially sterilize the impact of the accumulation of foreign exchange reserves on the growth of the money supply (M3). Nevertheless, M3 expanded by 19.7 percent, outpacing nominal GDP growth (17.6 percent), representing a monetization of the economy. International reserves rose by US$46 million in 2005 to reach US$113 million (the equivalent of 3 months of 2006 imports). Credit to the economy declined by 9 percent, reflecting the political transition, security conditions, and outstanding budget arrears. In December 2005, the BRB raised the required reserve ratio on domestic currency deposits from 5 percent to 7 percent, and in January 2006, the BRB introduced a required reserve ratio (7 percent) for foreign currency deposits held by commercial banks. Since late 2005, and especially in early 2006, interest rates fell significantly, in part as a result of the elimination of the 7 percent tax on banking transactions. The BRB also reinforced its contract with its external auditor for the audit of the 2005 accounts, following the recommendations of the IMF’s safeguards assessment report. The independent audit committee (of the Board of Directors) was made operational. The liberalization of the exchange system continued with the raising, and conversion to indicative limits, of the ceilings for invisibles in June 2005.

11. The implementation of structural reforms advanced more slowly than expected in 2005, reflecting a lull in the third quarter as a result of the political transition. The Audit Court reviewed the government’s accounts for 2004 and published its report on December 6, 2005. It also conducted specific audits of the defense and civil service ministries, as well as more in-depth investigations into specific cases. The new bankruptcy and liquidation laws were approved by parliament in November 2005, and were promulgated on March 15, 2006.

12. The reform of the coffee sector continued with a call for bids for two washing stations, but without success. Entry into the sector and commerce at all levels of the coffee sector were liberalized in January 2005. The sector generated an operating surplus of FBu 19 billion in the 2004/05 crop year, for the first time since 1998/99. The surplus was used to pay a premium to coffee producers (FBu 30/kg., equivalent to FBu 6.1 billion) to purchase phytosanitary products, distributed free to producers, fertilizers, and other inputs (FBu 3.5 billion) for sale to producers; and to finance the 2005/06 crop (FBu 8.8 billion). The government guarantee for bank credit to the coffee sector was abolished.

III. The 2006 Program

A. Macroeconomic Objectives

13. The authorities’ strategy for 2006 is based on the reduction of macroeconomic and financial imbalances, notably inflation, and the pursuit of financial and structural reforms needed for durable economic recovery. The economic program targets a recovery of real economic growth of 6 percent, reflecting a rebound in coffee production, and an inflation rate of about 3 percent (period average). The external current account deficit, after grants, would rise to about 17.5 percent of GDP, resulting from a sharp increase in imports of humanitarian aid.

B. Fiscal Policy

14. Fiscal policy for 2006 envisages an increase in social and poverty-reduction spending, improved revenue mobilization, a strengthening in public finance management, and the clearing of the government’s domestic arrears. Fiscal policy also seeks to support the inflation target by limiting its recourse to financing from the banking system. A revised budget for 2006 will be promulgated before end-June to take into account important changes that have emerged since the approval of the initial budget on December 31, 2005. Total revenue would decline to 19 percent of GDP, owing to the abolition of the levies earmarked to the national solidarity fund to finance the war effort, and of excise duties on sugar. The increase in expenditure to FBu 400 billion (41.8 percent of GDP) is due mainly to the large increase in spending on education and that linked to the emergency program for 2006, and was in part made possible by the budgetary savings from external debt relief under the HIPC Initiative. The revised 2006 budget contains contingent spending of 1.2 percent of GDP.

15. Current expenditures will increase to about 26.4 percent of GDP while project spending will rise further to 13.5 percent of GDP, financed mostly by grants, and will give priority to the rehabilitation and reconstruction of social and economic infrastructure, particularly for the education sector. A wage rise for government employees will be limited to a 15 percent increase in base pay with effect from July 1, 2006. The share of security outlays will be trimmed from 34.8 percent of current expenditure in 2005 to 32.0 percent in 2006. The overall deficit, on a commitment basis, after grants, is expected to decline to about 0.5 percent of GDP, partly as a result of the greater share of grants in external financial support. Poverty-related expenditure (as defined in the I-PRSP) is set to increase substantially from about 33.6 percent of primary expenditure in 2005 to about 35.5 percent in 2006. The supplementary budget will set new ceilings for domestic debt sufficient to allow for the issuance of new treasury securities related to the settlement of the government’s domestic arrears.

16. The revised 2006 budget includes two expenditure contingencies totaling FBu 11.5 billion (1.2 percent of GDP) dependent on specific aid disbursements and the recovery of the assets of the failed BCD bank in liquidation. The first contingency involves the urgent need to distribute food aid to those affected by the drought. Expenditures for emergency food aid will be financed by reallocating resources from domestically financed project expenditure. Domestically financed project expenditure will be raised back (up to a maximum of FBU 10 billion) to its original level, subject to disbursement from donors of funds to compensate for the food aid distribution. The second contingency concerns additional spending on goods and services contingent on asset recovery from BCD. Additional spending will be committed from the proceeds of the BCD liquidation once, and only once, recovery for the budget reaches FBu 1 billion, up to a maximum new spending of FBu 1.5 billion.

17. The authorities are committed to further improving transparency and public finance management. Building on the new system of accounts, an interim computerized financial management system (IFMIS) for expenditures from the commitment to payment stage, with a direct link to the central bank, was put in place in the Ministry of Finance with effect from January 1, 2006. This system is designed to reinforce the monitoring of budget execution, including of social outlays, and to produce real-time financial operations reports. The authorities will reinforce the management of the civil service in 2006, with the support of the World Bank (ERSP project), through (i) the putting in place of a central data file and a single identification number for all government employees (teachers, civil service, army, and police); (ii) the physical census of employees; and (iii) the issuance of personal identity cards with photo and signature.

18. The authorities are conscious of the importance of full pass through for domestic petroleum products, which should reflect movements on international markets. The authorities are convinced of the advantages of an automatic retail price adjustment mechanism, which will be put in place by June 2006. This will also protect tax receipts. Action plans in the areas of customs, income tax, the treasury, public accounting, and procurement will be implemented in 2006 to improve revenue and expenditure management. Genuine treasury securities (standardized, tradable, and managed by the BRB) will be introduced in 2006 in support of the clearance strategy for government arrears.

MeasureDeadline
Fiscal policy
  • Abolish the mortgage registration fee of 3 percent.
May 2006; Done
  • Agreement between the Ministry of Finance and the BRB on the creation of genuine treasury securities, standardized, tradable, and managed by the BRB on the account of the government.
May 2006; Done
  • Production of quarterly summary fiscal tables based on the IFMIS beginning with the end-June 2006 outcome with World Bank technical assistance.
September 2006
Reform of the customs administration
  • Approval by the Minister of Finance of the action plan to strengthen and reform the customs administration.
March 2006; Done
  • Creation of a pilot committee in the Ministry of Finance and a working group in the Customs Directorate to adopt, apply, and monitor the action plans.
March 2006; Done
  • Approval of a memorandum of understanding to strengthen cooperation between the tax and customs directorates.
April 2006; Done
  • Submission to parliament of the new customs code, reflecting the IMF’s comments, with the aim of putting it into effect by end-June.
May 2006; Done
  • Set up a unit for submission of detailed customs declarations and manifests by remote data entry.
March 2006; Done
  • Activate a green channel for customs clearance without physical inspection.
June 2006; Done
  • Clear at least 50 percent of import operations through the green channel in the second half of 2006.
Second half of 2006
  • Set up and begin using a sophisticated system for selecting import consignments to be examined, using criteria determined by the import inspection system.
April 2006
  • Operationalize an enhanced ex post monitoring system.
April 2006
  • Establish a working group combining the exemptions unit and the ASYCUDA team.
April 2006
Reform of indirect taxes and tax exemptions
  • Eliminate all exemptions from indirect taxes and maintain time limits on income tax exemptions in the investment code.
June 2006
  • Introduce automatic adjustment mechanism for retail petroleum product prices.
June 2006
Taxes
  • Approval by the Minister of Finance of an action plan to strengthen the tax administration and to prepare for the introduction of the VAT.
April 2006; Done
  • Conduct joint Tax/Customs inspections.
April 2006
Expenditure
  • Limit recruitment, other than 3,300 teachers.
2006
  • Pursue the demobilization program.
2006
  • Implement the recommendations of the commission on civil service staffing.
June 2006; Done
  • Regularization of civil servants’ salaries.
2006
  • Return payroll management to the Ministry of Finance.
January 2007
Reforms of public finance management
  • Implement action plans for the accounting department of the Ministry of Finance with the aim to:
    • use the new government chart of accounts and budget (PBCE);
    • introduce and use in real time the interim IFMIS for expenditures;
    • rationalize government accounts;
    • prepare summary fiscal tables;
    • introduce a cash flow management plan.
2006
  • Complete the accounting of expenditure payment authorizations for 2005 on the new PBCE.
February 2006 Done
  • Begin closing dormant accounts and analyze the multiplicity of government accounts with a view to closing the majority of them and moving toward a single treasury account system.
April 2006
  • Strengthen the financial control of public enterprises by the Ministry of Finance, in particular by implementing action plans aimed at strengthening the management of administrative and portfolio revenue department at the Ministry of Finance and the establishment of clear directives for government representatives on public enterprise boards.
2006
  • Create an internal audit and inspection unit in the Ministry of Finance.
February 2006; Done
  • Submission to parliament of a revised public procurement code.
July 2006
  • Reinforce the management of the civil service in 2006, with the support of the World Bank (ERSP project) through:
    • the putting in place of a central data file and a single identification number for all government employees (teachers, civil service, army and police);
    • the physical census of employees; and
    • the issuance of personal identity cards with photo and signature.
Second half of 2006
  • Integrate the civil service payroll into the IFMIS.
December 2006
Clearance of government’s domestic arrears
  • Adoption by the council of ministers of a strategy for clearing audited arrears (FBu 25.8 billion), in consultation with IMF staff, consistent with the 2006 supplementary budget. The strategy will be implemented beginning in June 2006, and will include settlement in part by cash and in part by certificates eligible in the treasury bond (2–5 years maturity) auctions and the privatization program.
May 2006; Done

19. The DDR and SSR programs continue to be essential, not only for public security, but also for reducing security outlays so as to boost social and poverty reduction spending. In this respect, the government is committed to achieving the objectives defined in its Policy Letter to the World Bank of February 2004, on Demobilization, Reinsertion and Reintegration, and to reducing the size of the army and the national police through the DDR program. The authorities will seek volunteers in the national police force for demobilization. The authorities intend to conduct a census of the security forces by end-June 2006, with the support of international technical assistance. They also intend to seek technical assistance from the international community in 2006 to assess the appropriate size and composition of the new police force, taking into account budget constraints and security imperatives.

20. External debt-service relief under the enhanced HIPC Initiative will allow an increase in pro-poor budgetary spending. The additional expenditures were identified in the 2006 budget in consultation with World Bank and IMF staff and are in line with the priorities identified in the forthcoming full PRSP. The main sectors covered are health, education, infrastructure, agriculture, refugee and displaced person resettlement, economic reintegration of victims of conflict, and judicial reform. The implementation of the IFMIS expenditure management system will assure the monitoring of these expenditures.

C. Monetary and Exchange Policies

21. Monetary policy is based on a medium-term strategy to further liberalize the exchange regime and to effect a sustained reduction in inflation. For 2006, the BRB will focus on slowing monetary growth by containing banking system credit to the government and by strengthening liquidity management (introduction of reserve requirements for foreign exchange deposits and negotiable treasury securities). The BRB will introduce and manage on behalf of the government, a new series of standardized and negotiable treasury securities. In parallel, a set of structural reforms will enhance the efficiency of the financial system (reinforced banking supervision and restructuring weaker banks). These measures will make it possible to revive credit to the private sector, which should increase by about 24 percent in 2006. Broad money (M3) growth would be reduced to about 18 percent (on the assumption of a further monetization of the economy). Gross international reserves of the BRB would increase further to US$145 million by end-2006, or about 3.3 months of 2007 imports.

22. The BRB will continue to enhance the effectiveness of liquidity management. To that end, the Ministry of Finance and the BRB have strengthened their cooperation, particularly on budget cash flow forecasting which will be updated monthly. The BRB also intends to strengthen its foreign reserves management, internal audit and control procedures, and to computerize its accounting system. These efforts will be complemented with measures to enhance transparency and improve governance. The results of the external audit of the BRB’s accounts and all monetary and exchange policy decisions will be posted on its website. The liberalization of the exchange regime and control systems will be continued, with the objective of achieving full convertibility of international current transactions in 2006. The BRB recognizes the need to publicize widely these changes. The BRB will limit its interventions in the exchange market to those necessary to achieve its foreign asset targets and limit short-term volatility of the exchange rate. All these measures will, in time, enable the BRB to focus on an inflation objective and gain the necessary credibility for a flexible exchange regime.

MeasureTimetable
Monetary policy
  • Establish a technical committee including representatives of the Ministry of Finance and the BRB for treasury cash flow and liquidity management.
March 2006; Done
  • Launch auctions of new negotiable treasury securities by the BRB on the account of the government with IMF technical assistance.
September 2006
Exchange regime
  • Introduce a license for money-changers.
September 2006
  • Abolish the DIP (Import and Payment Declaration).
April 2006; Done
  • Introduction of a 2 percent cap on the divergence of bids for foreign exchange in the Central Bank auction.
May 2006; Done
  • Preparation and publication of a single regulation on the exchange regime, which establishes the full convertibility of the currency for current international transactions.
June 2006
  • Move toward an interbank exchange market.
2006
Financial sector
  • Strengthen bank supervision with BRB approval of rehabilitation plans for noncomplying banks.
May 2006; Done
  • World Bank and IMF staff to conduct a joint study of the banking system.
2006

D. Structural Reforms

23. The authorities are committed to strengthening the implementation of the structural reforms needed to ensure economic recovery. Key steps for 2006 include, in particular, the launching of the privatization of state assets in the financial and coffee sectors, and further progress in governance and transparency.

24. The implementation of the reform strategy of the coffee sector, supported by the World Bank and the European Union (EU), remains vital to poverty reduction in Burundi, in particular for some 800,000 small rural producers. The authorities have put in place governmental structures to manage the sector reforms, to minimize the financial risks to the producers and the government during the transition, and to ensure the consistency of the STABEX-financed washing station rehabilitation project with the privatization plan for 2006. Rehabilitated stations will be offered for sale without delay. A strategy for the sale of the washing stations will be established on the basis of the technical study by the World Bank, aimed at ensuring a fully competitive market structure at all levels of the coffee sector. The reforms will be pursued to ensure that producers may operate freely with a view to ensuring competition at all levels of the coffee sector and to attract long-awaited investment and private financing. In regard to the above-mentioned measures, the authorities will make sure that the regulatory powers of OCIBU do not impede investment and that during the transition to a private sector every effort will be made by OCIBU to minimize the costs and delays in marketing. A public information campaign of the reforms will be undertaken.

MeasureTimetable
Coffee sector reform strategy
  • Establish a committee for the coordination and monitoring of the coffee sector reform, with terms of reference, objectives, and operational modalities.
Prior action. Done March 30
  • Monitoring the management of the marketing of coffee by the governmental program monitoring committee, with the aim to minimize delays, costs, financing needs, and financial risks to producers and the government.
From March 2006

Being implemented.
  • Monitor weekly cash flow management, including the stabilization fund of OCIBU for financing the 2006/07 harvest.
2006
  • Measures to ensure the collection of advances still not repaid (FBu 3 billion) by the SOGESTALS on the financing of the 2005/06 harvest.
2006
  • After covering the operating costs of the SOGESTALS, any surplus on coffee harvest earnings will be retained by OCIBU, to clear arrears.
2006
  • Prohibition of SOGESTALS from declaring or paying dividends until their debts and arrears have been paid.
2006
  • Financial audit of the coffee sector with the support of the World Bank.
2006
  • Reform the marketing committee of OCIBU to include representatives of all operators in the coffee sector.
March 2006 Done
  • Abolition of the technical commissions of OCIBU.
March 2006; Done
  • Preparation, with the assistance of the World Bank, of a privatization strategy for the 133 washing stations and the shelling mills.
July 2006
  • Launching of tenders for the sale of washing stations based on the conclusions of the study on the strategy for sale of the washing stations and the shelling mills.
October 2006
  • Adoption by the government, with assistance from the World Bank, of the findings of the study on the regulatory, legal, and institutional framework of the sector. It will then implement the new framework, including restructuring the OCIBU, in time for the 2007/08 harvest.
December 2006

25. The privatization program, delayed by the political transition and conditions of insecurity, will be relaunched in 2006 with World Bank technical assistance in accordance with a transparent procedure for public tenders. The goal is for the government to gradually and completely phase out its involvement in the productive and financial sectors of the economy. The government intends hereby to reinforce the role of the private sector as the engine of economic growth.

26. The authorities have clarified that SOSUMO sugar wholesalers can operate freely with the ministerial order of March 2006, and expect to liberalize the sugar price in 2006. Also, in 2006, the authorities intend to seek technical assistance to study how to liberalize the petroleum sector.

MeasureTimetable
Privatization
  • Strengthen the capacity of the State Privatization Agency (SCEP), with World Bank technical assistance:
    • to undertake financial valuations of enterprise;
    • to assess offers to buy.
June 2006



September 2006
  • Launch tenders for the sale of the assets of OCIBU not directly related to its coffee marketing activities in:
    • residential properties (2);
    • former factories CEDUCA, ICB, and UNICAFE;
    • coffee roasting plant.
September 2006
  • Launch tenders for the sale of APB, OPHAVET, and UCAR.
September 2006
  • Launch tenders for the sale of the public sector (State, BRB, and OCIBU) assets in the companies Bujumbura port (EPB), BCC, and SIP.
September 2006
  • The SCEP will implement the privatization of government assets in the banking sector, in close consultation with the BRB, to avoid further concentration in the sector and to encourage mergers of small banks. The authorities will seek IFC support in this area.
2006

E. Transparency, Good Governance, and Statistics

27. In an effort to enhance transparency and allow the public to better understand and follow the economic reforms, the government and the BRB will publish decrees, laws, decisions, as well as economic reform strategies and, in particular, the Memorandum on Economic and Financial Policies addressed to the IMF Managing Director, on the government, BRB, and REFES websites, which will be kept up to date. The budget and operations of the Official Bulletin of Burundi (BOB) will be strengthened. The Audit Court will continue to strengthen its activities in 2006. The government is convinced of the wisdom and importance of protecting the independence of the magistrates of the Audit Court.

28. A draft Anti-Money Laundering (AML) law has been prepared. It has benefited from comments from IMF technical assistance to ensure consistency of the legal framework and with international best practices. The council of ministers intends to review the text before end-June and submit it to parliament before end-September 2006. The authorities have requested continued TA from the IMF for the application of the AML law.

29. The authorities are aware that the quality of national statistics has been greatly eroded, especially as regards the national accounts, price indices, and social and poverty indicators. The authorities are committed to improving national statistics, in particular, by implementing a rehabilitation plan for the statistical agency ISTEEBU so as to regain the capacity to compile national accounts interrupted since 1998, and to improve the quality of the CPI, which is the only macroeconomic indicator still being produced by ISTEEBU.

30. The authorities equally intend to implement the recommendations of the IMF statistics missions and to include a multi-sector plan for developing statistics in the PRSP. In February 2005, the authorities officially communicated their intention to participate in the IMF’s General Data Dissemination Standards (GDDS) initiative. An IMF Statistics mission prepared an initial set of metadata, which needs to be revised and completed by the authorities with IMF’s technical assistance.

MeasureTimetable
Transparency and good governance
  • Audit of government accounts for 2005 by the Audit Court.
2006
  • Publication on official websites of decisions, ordinances, decrees, laws and reform strategies, including the Memorandum on Economic and Financial Policies, once it is approved by the IMF Executive Board.
Starting March 2006
Legal framework
  • Submit to parliament the Anti-Money Laundering law.
September 2006
  • Launch Investment Climate Assessment (ICA) with support of the World Bank.
July 2006
Statistics
  • Finalize, adopt, and include in the PRSP, the development plan for national statistics, including cost estimates, prepared by the IMF Statistics Mission of March 2006.
April 2006
  • Publication of the development plan for national statistics on the internet sites of relevant government agencies.
May 2006
  • Establish an action plan to implement the measures in the statistics development plan that can be achieved with identified available resources.
April 2006
  • Approval by the council of ministers of a new institutional framework for ISTEEBU and a new code for ISTEEBU employees that will allow them henceforth to produce without interruption the principal macroeconomic indicators.
May 2006
  • Restart the regular production of national accounts and publish a series based on the 1993 national accounts system methodology (SNA93) for the period 1990-2005.
May 2007
  • Update the metadata for participation in the IMF’s GDDS initiative.
July 2006
  • Expand the coverage of the CPI:
    • Revise the list of observation points for consumer prices in Bujumbura;
    • Expand the coverage of the new index to include the provinces for which regular data collection already exists; and
    • Update the weights of the items included in the consumption basket.
September 2006

March 2007

June 2007

F. Program Financing and External Debt Management

31. For 2006, the external nonproject financing need is estimated at US$177 million. This external financing requirement is expected to be covered by disbursements from the IMF under the PRGF (US$32 million); the World Bank (US$60 million) under the ERSG; AfDB and ADF program grants and loans (US$11 million); the EU FED program (US$17 million); bilateral donors (US$16 million); and by traditional debt relief on current maturities (U$5 million) and under the HIPC Initiative (US$36 million).

32. The authorities have written to non-Paris Club creditors seeking debt relief on comparable terms to that obtained from Paris Club bilaterals. The authorities are also conscious of the need to reinforce external debt management capacity and have requested further technical assistance from donors.

G. PRSP Process

33. The participatory process for the preparation of the full PRSP is almost completed. Consultations at the local level with private and public stakeholders at the local level are completed and were followed by sectoral consultations at the national level, launched in November 2005. The full PRSP is expected to be finalized in mid-2006. The cost of the priority programs identified in the full PRSP was estimated at US$535 million, for which some financing remains to be identified.

H. Safeguards and Technical Assistance

34. The BRB is committed to improving its operations consistent with the principles of good governance included in the IMF’s safeguards guidelines. A safeguards assessment was completed in January 2006. The BRB is committed to improving financial reporting procedures and strengthening its system of internal controls. The BRB underwent its first external audit in August 2005. The external auditors made recommendations on the adoption of International Financial Reporting Standards (IFRS) and improvements in BRB operations, which the BRB is actively addressing. More fundamentally, the government is committed to supporting the revision of the BRB law to grant it independence, needed for the sound conduct of monetary policy, while making the BRB fully accountable to Parliament.

MeasureTimetable
  • Transmit to the IMF the report of the internal audit of the BRB on program data, as defined in the TMU for end-June and end-December 2005.
May 2006. Done April 5
  • BRB to continue implementing the reforms recommended by the auditor and put in place procedures to monitor the reforms.
2006
  • Implement the recommendations of the safeguards assessment.
2006
  • Adopt an internal audit methodology geared toward risk management.
May 2006
  • Implement a first annual internal audit plan following its approval by the independent audit committee.
September 2006
  • Submit to parliament the revised BRB charter to strengthen its independence and legal base, consistent with IMF recommendations.
September 2006

35. Burundi has extensive technical assistance needs, and the authorities will continue to work closely with multilateral and bilateral partners to rebuild administrative capacity in priority areas. IMF technical assistance has been provided in 2005 in the areas of tax administration, public expenditure management, monetary and exchange rate policy, banking supervision, and national economic statistics. Further IMF technical assistance is planned in these areas in 2006.

I. Program Monitoring

36. Table 1 summarizes the quantitative performance criteria for the third and fourth reviews (end-June and end-December 2005, respectively) and the actual outcomes. The structural performance criteria and benchmarks under the program for 2005 are presented in Table 2. Table 3 shows the quantitative performance criteria for 2006, and the quantitative indicators for March, June, and September 2006 for program monitoring purposes. Program monitoring has been modified to account for the introduction of tradable security instruments and the arrears clearance exercise, notably by substitution of the PC on bank credit to government with one on overall domestic financing. The prior actions for the third and fourth reviews and structural performance criteria and benchmarks for 2006 are shown in Table 4. The definitions of the program’s performance targets, external assistance adjustors, and underlying assumptions, as well as Burundi’s reporting requirements, are described in the attached TMU. Burundi will avoid incurring overdue financial obligations to the Fund, as well as introducing new exchange restrictions, multiple currency practices, bilateral payments agreements inconsistent with Article VIII of the Fund’s Articles of Agreement, and import restrictions for balance of payments purposes. In addition, the authorities stand ready to adopt any new financial or structural measures, in consultation with Fund staff, which may become necessary to ensure program success.

Table 3.Burundi: Performance Criteria and Indicative Targets for 2006

(In billions of Burundi francs, unless otherwise indicated)

20052006
Dec. Act.Mar. Proj.Jun. 1/ Proj.Sep. 1/ Proj.Dec. 2/ Proj.
Performance targets
Net foreign assets of the BRB (floor; in millions of U.S. dollars) 3/48.926.340.948.055.6
Net domestic assets of the BRB (ceiling) 3/51.768.069.762.858.6
Net domestic financing of the government (ceiling) 3/4/10.418.314.236.722.9
External payments arrears of the government (ceiling; in millions of U.S. dollars)0.50.00.00.00.0
Short-term external debt of the government (ceiling; in millions of U.S. dollars) 5/0.00.00.00.00.0
Nonconcessional external debt contracted or guaranteed by the government or the BRB (ceiling; cumulative; in millions of U.S. dollars) 6/0.00.00.00.00.0
Indicative targets
Primary balance of the government (ceiling; cumulative from beginning of calendar year) 7/−14.6−13.4−32.8−67.1−84.8
Government’s wage bill (ceiling; cumulative from beginning of calendar year)72.619.640.271.194.8
Adjustors
External nonproject financial assistance (in millions of U.S. dollars) 7/8/
Cumulative from January 20060.263.374.9107.8
Of which:
EU0.012.512.517.0
World Bank0.035.035.060.0
AfDB0.00.011.011.0
France0.00.00.03.0
Belgium0.02.42.42.4
UK0.00.00.00.0
Netherlands0.010.010.010.0
Other0.00.00.00.0
Debt relief (current maturities, excluding HIPC)0.23.44.14.5
Net accumulation of fiscal arrears during period
Exchange rates
FBu/US$ (end-period)1,100.01,0181,0001,0001,000
FBu/US$ (period average)1,050.01,0061,0031,0001,000
US$/Euro (end period)1.181.211.211.211.21
US$/SDR (end-period)1.431.441.441.441.44

Indicative targets.

Performance criteria.

The ceiling or the floor will be adjusted to accommodate 100 percent of any deviation from the projected disbursements of external nonproject financial assistance shown in the table. In case of, respectively, a financing excess (shortfall), the floors on the stock of net foreign assets of the central bank will be adjusted upward (downward), and the ceilings on the stock of net domestic assets of the central bank and on the stock of net credit from the banking system to the government will be adjusted downward (upward). External financing will be converted to Burundi francs at the program end-period FBu/U.S. dollar exchange rate.

The ceiling on net domestic financing of the government will be adjusted downward for any accumulation of domestic arrears as defined in the Technical Memorandum of Understanding (TMU).

Excluding short-term, import-related trade credits.

With a grant element of less than 50 percent.

As defined in the TMU and revised to reflect a reclassification of spending on the new police force from projects to recurrent expenditures.

Nonproject assistance includes debt relief on current maturities and net cash payments to clear arrears.

Indicative targets.

Performance criteria.

The ceiling or the floor will be adjusted to accommodate 100 percent of any deviation from the projected disbursements of external nonproject financial assistance shown in the table. In case of, respectively, a financing excess (shortfall), the floors on the stock of net foreign assets of the central bank will be adjusted upward (downward), and the ceilings on the stock of net domestic assets of the central bank and on the stock of net credit from the banking system to the government will be adjusted downward (upward). External financing will be converted to Burundi francs at the program end-period FBu/U.S. dollar exchange rate.

The ceiling on net domestic financing of the government will be adjusted downward for any accumulation of domestic arrears as defined in the Technical Memorandum of Understanding (TMU).

Excluding short-term, import-related trade credits.

With a grant element of less than 50 percent.

As defined in the TMU and revised to reflect a reclassification of spending on the new police force from projects to recurrent expenditures.

Nonproject assistance includes debt relief on current maturities and net cash payments to clear arrears.

Table 4.Burundi: Prior Actions for the Third and Fourth Reviews Under the PRGF and Structural Performance Criterion and Benchmarks for 2006
MeasureTimetable (Month-end deadline)Status
Prior actions
  • Approve the 2006 supplementary budget in accordance with the macroeconomic objectives for 2006, as discussed with IMF staff.
Done; July 7, 2006
  • Adoption by the council of ministers of a plan for clearing the domestic arrears of the budget, setting the amount to be cleared and the clearing modalities agreed with IMF staff.
Done; May 26, 2006
  • Submit to parliament the new customs code, reflecting the comments of the IMF technical mission on customs administration.
Done; June 22, 2006
  • Establish a committee for the coordination and monitoring of the coffee sector reform, with terms of reference, objectives, and operational modalities.
Done; March 30, 2006
  • Abolition the technical commissions of OCIBU.
Done; 15 May 2006
  • Reform the marketing committee of OCIBU to include representatives of all operators in the coffee sector.
Done; 30 March 2006
  • Ministry of Commerce order abolishing the list of SOSUMO sugar wholesalers and establishing the freedom to operate for wholesalers on the basis of a set of technical criteria.
Done; March 21, 2006 by Order 750/270
  • Put into effect the new regulation on import procedures of January 24, 2006.
Done; effective 3 April 2006
  • Transmit to the IMF the report on the internal audit of the BRB on program data, as specified in the TMU, for end-June and end-December 2005.
Done; effective 5 April 2006
  • Adopt action plans for the rehabilitation of noncomplying banks.
Done; effective 12 June 2006
Structural performance criterion
  • Commence tendering of negotiable treasury securities in standard denominations managed by the BRB for the account of the government.
September 2006
Structural benchmarks
  • Adopt and publish the single exchange system regulation.
June 2006
  • Approval by the council of ministers of a new institutional framework for ISTEEBU and a new code for ISTEEBU employees that will allow them henceforth to produce without interruption the principal macroeconomic indicators.
June 2006
  • Adopt officially, and include in the PRSP, the development plan for statistics prepared by the IMF Statistics Mission in March 2006.
June 2006
  • Submit to the National Assembly the revised BRB Charter establishing the independence of the central bank.
September 2006
  • Submit to the National Assembly the draft Anti-Money Laundering bill incorporating the comments of the IMF.
September 2006
  • Launch the coffee sector privatization program by issuing tenders for sale of the washing stations and shelling factories.
October 2006
  • Integrate the payroll in IFMIS.
December 2006

37. The fifth review under the PRGF arrangement is scheduled to be completed by end-December 2006 and will be assessed through the observance of the indicative targets for end-June 2006 and the structural performance criterion. The fifth review will focus on the liquidation of the domestic arrears of the budget, progress in the privatization of state assets, the strengthening of public financial management, and the introduction of reforms at the BRB. The sixth review is scheduled to be completed by end-June 2007.

ATTACHMENT II: Burundi: Technical Memorandum of Understanding

June 26, 2006

1. This technical memorandum of understanding sets out the definitions of program variables to monitor the implementation of the program and the reporting requirements for the government of Burundi and the Bank of the Republic of Burundi (BRB). It defines (i) the quantitative performance criteria, indicative targets, and applicable adjusters; and (ii) the key assumptions on which the economic program for 2006 set out in the memorandum of economic and financial policies (MEFP) of the government of Burundi is based, which is annexed to the letter of June 26, 2006 from the Minister of Finance and the Governor of the BRB to the Managing Director of the International Monetary Fund.

2. The prior actions, the structural performance criteria, and the structural indicators for 2006 are listed in Table 3 of the MEFP.

A. Quantitative Program Targets

Quantitative performance criteria and indicative targets

3. Quantitative performance criteria under the program are set on the end-December 2006 stocks as set out in Table 1 of the MEFP, as follows:

  • net foreign assets of the BRB (floor);
  • net domestic assets of the BRB (ceiling);
  • net domestic financing of the government (ceiling);
  • external payments arrears of the government (ceiling);
  • the outstanding stock of short-term external debt (maturity of less than one year) of the government and the BRB (ceiling); and
  • new nonconcessional medium- and long-term external debt contracted or guaranteed by the government or the BRB (ceiling).

The quarterly targets on the above variables for end-June and September 2006 are indicative.

4. Quantitative indicative targets under the program as set out in Table 1 of the MEFP, are as follows:

  • primary budget balance, excluding externally financed projects (floor); and
  • the government’s wage bill (ceiling).

Definitions and measurement

5. The net foreign assets of the BRB are defined as the difference between (i) foreign exchange assets and gold holdings (valued at market prices); and (ii) foreign exchange liabilities to nonresident entities (including the use of Fund resources, but excluding the counterpart of SDR allocations). These amounts are valued in terms of U.S. dollars based on the end-December 2005 exchange rate. The net foreign assets of the BRB totaled FBu 48.8 billion, equivalent to US$48.9 million, at end-December 2005, broken down as follows:

In billions of

Burundi francs
In millions of

U.S. dollars
Net foreign assets of the BRB48.848.9
Foreign assets114.3114.5
Official reserves112.4112.7
Foreign currency holdings3.63.6
Deposits with correspondents (excluding IMF)107.4107.7
SDR holdings0.30.3
Reserve position with the IMF0.50.5
Gold holdings0.50.5
Other claims1.91.9
Foreign liabilities65.565.6
Liabilities vis-à-vis correspondents (excluding IMF)6.16.2
Counterpart of the use of IMF resources58.058.2
Other liabilities1.31.3

6. The gross official reserves of the BRB are defined as those foreign assets that are liquid and freely available to the central bank. At end-December 2005, gross official reserves stood at US$112.7 million.

7. The net domestic assets of the BRB are defined as the difference between (i) reserve money, comprising currency in circulation, reserves of commercial banks, and other deposits held at the BRB, and (ii) net foreign assets of the BRB. Net domestic assets of the BRB totaled FBu 51.7 billion at end-December 2005, broken down as follows:

In billions of

Burundi francs
Net domestic assets of the BRB51.7
Reserve money100.5
Currency in circulation67.9
Reserves of commercial banks30.9
Other nonbank deposits1.7
Minus: net foreign assets of the BRB48.8

8. Net domestic financing of the government is defined as the sum of the flows from (i) loans, advances, and other credit to the government from the BRB and all of Burundi’s commercial banks; (ii) the change in the outstanding stock of all government securities held by the nonbank public denominated in Burundi francs, including that held by nonresidents; (iii) less government deposits held in the BRB or Burundi’s commercial banks at those institutions. The coverage of government is defined as central government and any other special funds or operations that are part of the budgetary process or have a direct impact on the government’s financial position. Net domestic financing of the government at end December 2005 totaled FBu 135.8 billion, broken down as follows:

In millions of Burundi francs
Total135.8
Net banking credit to the government123.0
Central government136.3
Loans, advances and other credits173.6
BRB154.4
Commercial banks19.3
Deposits37.4
BRB35.6
Commercial banks1.8
Other administrations (net)−13.2
Nonbank financial institutions0.5
Treasury bonds and certificates0.5
Others12.3
Postal accounts2.2
Treasury certificates10.1

9. The stock of external payments arrears for program monitoring purposes is defined as the end-of-period amount of external debt service due and not paid, including contractual and late interest, for which a clearance agreement is not in place or for which arrears are not reschedulable. Arrears for which a clearance framework has been agreed with the creditor or which are subject to rescheduling or restructuring are not considered arrears for program monitoring purposes. Program arrears would include any debt service due under such agreements that have not been paid. The external payments arrears at end-December 2005 are broken down as follows, showing the actual stock under the heading “technical arrears”:

External payments arrearsProgram

definition
Technical

arrears
(In billions of Burundi

francs)
Total052.5
Multilateral09.1
International Development Association00.0
AfDB Group00.0
African Development Bank00.0
African Development Fund00.0
Nigeria Trust Fund00.0
International Monetary Fund00.0
European Union00.0
International Fund for Agricultural Development (IFAD)00.0
Arab Bank for Economic Development in Africa (BADEA)00.0
OPEC Fund08.4
Development Bank of the Great Lakes States (BDEGL)00.7
Bilateral and commercial043.4
Paris Club00.0
French Cooperation Agency (AFD)00.0
Japan (FCEOM)00.0
Russia00.0
Other official bilateral042.9
Abu Dhabi Fund02.5
Kuwait Fund018.4
Saudi Arabia Fund016.6
Libyan Bank05.4
Commercial00.5
AD Consultants00.0
Kreditanstalt für Wiederaufbau AMSAR00.5

10. The domestic arrears of the government amounted to FBu 35.7 billion as of end-2004, of which FBu 4.2 billion was to state enterprises. This total was identified by the Ministry of Finance and audited by an external auditor. In 2005, the budget cleared FBu 3.8 billion of these arrears. The outstanding balance (FBu 25.7 billion) will be cleared by end-June 2006, according to the strategy described as follows. An official decision by the government will establish the total amount of arrears, as well as the modalities for their settlement. All individuals and corporations holding arrears claims will receive a cash payment of FBu 100 million upon signing a note liquidating their claim on these arrears (total cash payment estimated at FBu 7.4 billion). For creditors with validates arrears greater than FBu 100 million, a certificate recognizing these debs will be issued for the nominal value of the remaining arrears (FBu 18.3 billion). These certificates will not earn interest but will be feely exchangeable for treasury bonds of about 3–5 years maturity. These bonds will be auctioned by the BRB, on behalf of the government treasury. These certificates can equally be used (100 percent of their nominal value) in the privatization program, to settle winning offers to buy. The payments arrears of public enterprises, as well as the cross-debts of the petroleum sector, are not included in this settlement process and will be dealt with separately.

11. The program includes a ceiling on new nonconcessional external debts contracted or guaranteed by the government and the BRB, which precludes the contracting of any such debt. This performance criterion applies to the contracting or guaranteeing by the central government, local governments, or the BRB of new nonconcessional external debt (as specified below) with an original maturity of more than one year, including commitments contracted or guaranteed for which value has not been received. The term debt shall be understood as defined in the Executive Board Decision No. 12274-(00/85) adopted August 24, 2000. Debt rescheduling and restructuring are excluded from the criterion. Included are financial leases and other instruments giving rise to external liabilities, contingent or otherwise, on nonconcessional terms. In determining the level of concessionality of these obligations, the definition of concessional borrowing shall apply. Concessional debt is defined as having a grant element of 50 percent or more. For loans with a maturity of at least 15 years, the 10-year average commercial interest reference rates (CIRRs) published by the OECD should be used as the discount rate for assessing the level of concessionality, while the 6-month average CIRRs should be used for loans with shorter maturities. To both the 10-year and the 6-month average CIRRs, the following margins should be added: 0.75 percent for repayment periods of less than 15 years; 1 percent for 15-19 years; 1.15 percent for 20-29 years; and 1.25 percent for 30 years or more. The performance criterion is defined to exclude the use of Fund resources and any Burundi franc-denominated treasury securities held by nonresidents.

12. The stock of short-term external debt, with a maturity of up to, or equal to, one year, owed by the government is to remain at zero under the program. Normal import credits are excluded from this ceiling. Loans with an initial maturity, as recorded in the original loan agreement, of more than one year are considered medium-term or long-term loans. This performance criterion applies not only to debt, as defined in point No. 9 of the Guidelines on Performance Criteria with Respect to Foreign Debt, adopted August 24, 2000, but also to commitments contracted or guaranteed for which value has not been received (including leasing). Excluded from this performance criterion are rescheduling arrangements, borrowing from the Fund, and any Burundi franc-denominated treasury securities held by nonresidents. As of end-December 2005, the stock of short-term debt outstanding was nil, as was nonconcessional medium- and long-term debt contracted during the year.

13. Receipts from privatization during 2005 totaled FBu 0.4 billion. The 2006 program projects receipts on the order of FBu 3.6 billion, and 50 percent of receipts over and above the projected amount will be used to reduce the domestic borrowing requirement. Any privatization receipts over and above this amount will be used to reduce domestic debt.

14. The government’s primary fiscal balance is defined as the difference between total government revenue, excluding grants, on the one hand, and noninterest current government expenditure and domestically financed capital expenditure (including through the use of counterpart funds), on the other hand. The primary fiscal balance for 2005 amounted to FBu -14.6 billion, and the target for 2006 is FBu -84.8 billion, broken down as follows:

20052006
Primary budget balance−14.6−84.8
Total revenue172.1181.5
Minus:
Noninterest current expenditure168.6224.6
Domestically financed capital expenditure19.543.7
Net lending−1.4−2.0

15. The government’s wage bill is defined as total labor remunerations on a commitments basis for civil servants, contractual employees, and military personnel of the government, including all allowances and bonuses. The government’s wage bill for 2005 totaled FBu 72.6 billion, and the target for 2006 is FBu 94.8 billion, broken down as follows:

20052006
Government wage bill72.694.8
Civilian personnel41.956.9
Military personnel24.021.6
National Police Force6.716.2

External financial assistance adjustor

16. The program provides for a symmetrical adjustor for shortfalls or excesses in external financial assistance that is applied to quantitative targets for the net foreign assets and net domestic assets of the BRB, and for net bank credit to the government.

17. External financial assistance (measured in U.S. dollars) is defined to include the following: (i) nonproject loans and grants to the budget (including payments made through the multi-donor trust fund managed by the World Bank for current debt service to multilaterals); (ii) debt relief on current maturities; minus (iii) any cash payments for external arrears clearance operations. Disbursements into blocked accounts by donors for the purpose of clearing arrears will not be included as foreign assistance for program monitoring purposes. The assumptions for 2006 are shown below.

Burundi: External Financing Adjustors of Performance Criteria and Indicative Targets Under the 2006 Program

(In millions of U.S. dollars, cumulated)

2006
Mar. Prog.Jun. Prog.Sep. Prog.Dec. Prog.
External nonproject financial assistance (cumulative)0.263.374.9107.8
Of which:
EU0.012.512.517.0
World Bank0.035.035.060.0
AfDB0.00.011.011.0
France0.00.00.03.0
Belgium0.02.42.42.4
UK0.00.00.00.0
Netherlands0.010.010.010.0
Other0.00.00.00.0
Debt relief (current maturities, excluding HIPC)0.23.44.14.5
Multidonor Trust Fund disbursements (World Bank)0.00.00.00.0
Sources: Burundi authorities; and Fund staff estimates.
Sources: Burundi authorities; and Fund staff estimates.

18. The ceiling or floor targets will be adjusted to accommodate 100 percent of any deviation from the projected cumulative external financial assistance. In case of a financing excess (shortfall), the floor on the stock of net foreign assets of the central bank will be adjusted upward (downward), and the ceilings on the stock of net domestic assets of the central bank and on the stock of net credit from the banking system to the government will be adjusted downward (upward). External financial assistance will be converted to Burundi francs using the program end-period FBu/US$ exchange rate.

Domestic payments arrears adjustor

19. The ceiling on net credit to the government from the banking system will also be adjusted to reflect 100 percent of any deviation from the projected net accumulation of fiscal arrears, as measured by the accumulation of nonexecuted payment orders older than 30 days. In case of an increase (decline) in fiscal arrears, the ceiling on the stock of net credit from the banking system to the government will be adjusted downward (upward).

B. Key Program Assumptions

20. The main program assumptions are drawn from the WEO projections of November 2004 as follows:

2006
2005Q1Q2Q3Q4
Average export prices
Coffee (cents per pound)114.3112.2111.9114.0116.0
Tea (dollars per kg.)204.8197.3203.2215.2203.8
Petroleum (US$ per barrel)53.458.561.562.362.0
End of period
Dollar per SDR exchange rate1.431.431.431.431.43
Dollar per Euro exchange rate1.181.181.181.181.18
Burundi francs per U. S. dollar997.81,000.01,000.01,000.01,000.0
exchange rate

C. Provision of Information to IMF Staff

21. To facilitate the monitoring of program implementation, the Burundi government will prepare a monthly report within five weeks of the end of each month, which will be sent to IMF staff. In addition, the staff of the monitoring committee (technical bureau of the Secrétariat Permanent de Suivi des Réformes Économiques et Sociales—SP/REFES) will forward to the African Department of the IMF, by facsimile or electronic mail, the data required for program monitoring.

These data will include, in particular, on a weekly basis the following:

  • a monitoring table (tableau de bord) containing the most recent weekly and monthly data on the main financial indicators (REFES);
  • a table on the foreign exchange cash flow (BRB Foreign Banking Operations Department);
  • foreign exchange auction market (MED) transactions;
  • the balance sheet of the BRB (weekly statement) (BRB Research Department).

The following data are to be provided on a monthly basis:

  • the monetary survey, including the breakdown of the central bank and of commercial banks (BRB Research Dept.);
  • the financial position of the government vis-à-vis the banking system (BRB Research Department);
  • a detailed breakdown of government revenue (Ministry of Finance);
  • a detailed breakdown of government expenditure on a commitment basis (Ministry of Finance);
  • a detailed breakdown of the government wage bill on a commitment basis (Ministry of Finance);
  • detailed information on government social spending, in particular on the health and education sectors (Ministry of Finance);
  • a detailed breakdown of the servicing of domestic and external public debt, including amounts due and paid, in interest and principal, as well as the breakdown by creditor and any accumulation of arrears on domestic or external debt (Ministry of Finance);
  • a detailed breakdown of the stock of domestic payments arrears and cumulative flows from January 1, 2004; the accumulation of new arrears is defined as the difference between commitments and actual payments (on a cash basis, as reported in the cash statement summary—Reddition des comptes) (Ministry of Finance);
  • the amount of new debts contracted or guaranteed by the government, including detailed information on the terms (such as currency denomination, interest rate, grace period, maturity) (Ministry of Finance);
  • actual disbursements of nonproject financial assistance, including new loans and debt relief granted by Burundi’s external creditors (Plan/Ministry of Finance);
  • an update on the implementation of structural measures planned under the program, as described in the MEFP (REFES).

22. SP/REFES/Ministry of Finance, BRB will also provide the African Department of the IMF with any information that is deemed necessary to ensure effective monitoring of the program.

APPENDIX II: Burundi: Relations with the Fund

(As of May 31, 2006)

I. Membership Status: Joined: September 28, 1963; Article XIV

II. General Resources AccountSDR Million%Quota
Quota77.00100.00
Fund holdings of currency76.6499.53
Reserve Position0.360.47
Holdings Exchange Rate
III. SDR Department:SDR Million%Allocation
Net cumulative allocation13.70100.00
Holdings0.020.14
IV. Outstanding Purchases and Loans:SDR Million%Quota
PRGF Arrangements40.7052.86

V. Latest Financial Arrangements:

TypeApproval

Date
Expiration

Date
Amount Approved

(SDR Million)
Amount Drawn

(SDR Million)
PRGFJan. 23, 2004Jan. 22, 200769.3040.70
ESAFNov. 13, 1991Nov. 12, 199442.7017.21
SAFAug. 8, 1986Aug. 7, 198929.8929.89

VI. Projected Payments to Fund

(SDR million; based on existing use of resources and present holdings of SDRs):

Forthcoming
20062007200820092010
Principal0.000.000.002.646.00
Charges/Interest0.450.700.700.690.66
Total0.450.700.703.336.66

VII. Safeguards Assessments:

Under the Fund’s safeguards assessment policy, the Banque de la République du Burundi (BRB) is subject to a full safeguards assessment with respect to the PRGF arrangement approved on January 23, 2004. The safeguards assessment was completed on January 18, 2006. The assessment identified several vulnerabilities, in particular in the legal and control areas, including the management of foreign reserves, and the internal audit function.

VIII. Exchange Arrangements

Burundi maintains a managed float exchange regime. The U.S. dollar is the intervention currency. On May 31, 2006, the exchange rate was FBu 1,030.26 to the U.S. dollar. In mid-2000, the authorities began reversing the heavy restrictions put in place during the 1996-99 embargo period by introducing a system of weekly foreign exchange auctions. In 2002, the central bank eliminated the positive list of eligible imports, implemented a single, competitive settlement exchange rate for each weekly auction, and reduced the full surrender requirement for coffee, tea, and cotton exports to 70 percent. In 2003, the central bank eliminated most remaining exchange restrictions on current international transactions and delegated authority to the commercial banks to approve standard transactions. In early 2004, the surrender requirement was lowered to 50 percent and eliminated in early 2005. The central bank admitted foreign exchange bureaus to the weekly auctions. Most external payments arrears to bilateral and multilateral creditors were cleared by end-2005.

Burundi availed itself of the transitional arrangements of Article XIV when it joined the Fund in 1962, but no longer maintains exchange restrictions or multiple currency practices under Article XIV. Burundi maintains two multiple currency practices inconsistent with Article VIII, Section 3, arising from or in connection with the current Dutch auction system, and one exchange restriction inconsistent with Article VIII, Section 2(a), resulting from the authorization process that is applied to certain current international transactions. One multiple currency practice results from the fact that no mechanism limits the potential variation of winning bids from differentiating from each other by more than 2 percent. The other multiple currency practice results from the fact that the exchange rate used for government transactions takes place at a rate that may differ by more than 2 percent from market exchange rates. The exchange restriction results from the central bank having discretion to refuse to authorize the sale of foreign exchange for reasons other than in connection with verifying the bona fide nature of the transaction. Burundi also maintains certain restrictions for security reasons, and has notified those restrictions to the Fund pursuant to Decision 144-(52/51). An exchange restriction was eliminated on May 30, 2006 and it is understood that the authorities will eliminate a remaining one on ex ante approval of certain transactions and two multiple currency practices shortly. The authorities have not requested, and staff does not propose, approval of the multiple currency practices.

IX. Article IV Consultation

Burundi is on the 24-month cycle. The 2003 Article IV consultation discussions were conducted in Addis Ababa and Bujumbura during the period October 14-29, 2003. The staff report (Country Report No. 04/41) was discussed by the Executive Board on January 23, 2004, along with the consideration of the request for three-year arrangement under the Poverty Reduction and Growth Facility (PRGF). On that occasion, Executive Directors welcomed the progress made in advancing the peace process since the Arusha Agreement in 2000 and commended the authorities for the strong implementation of their post-conflict economic program in 2003. They noted that Burundi still faced formidable challenges, particularly with regard to reducing the heavy external debt burden, absorbing a large number of refugees and internally displaced persons, and demobilizing combatants. They emphasized the critical importance of coffee sector reform.

X. Technical Assistance

2006 (Mar.)STA mission to prepare the metadata and medium-term action plan
2006 (Mar.)MFD/LEG joint Article VIII mission
2006 (Jan.)LEG AML/CFT legislative drafting mission
2006 (Jan.)Monetary operations/FOREX/banking supervision mission
2005 (Dec.)STA balance of payments statistics (external debt accounting) mission
2005-06MFD resident expert on monetary operations and money markets
2005 (Oct.)FIN safeguard assessment second step mission
2005 (Oct.)FAD public financial management mission
2005 (Oct.)FAD customs administration mission
2005 (Oct.)MFD expert on monetary operations mission
2004-05Extended visits by MFD expert on liquidity management
2004 (Nov.)STA multisector mission
2004 (Nov.)MFD multitopic mission
2004FAD public accounting system, three visits by peripatetic adviser.

XI. Implementation of HIPC Initiative:

Enhanced
I.Commitment of HIPC assistanceFramework
Decision point dateAugust 2005
Assistance committed
By all creditors (US$ million)1/826.00
Of which:
IMF assistance (US$ million)27.84
(SDR equivalent in millions)19.26
Completion point dateFloating
II.Disbursement of IMF assistance (SDR million)
Assistance disbursed to the member0.09
Interim assistance0.09
Completion point balance
Additional disbursement of interest income 2/
Total disbursements0.09

Assistance committed under the original framework is expressed in net present value (NPV) terms at the completion point, and assistance committed under the enhanced framework is expressed in NPV terms at the decision point. Hence these two amounts can not be added.

Under the enhanced framework, an additional disbursement is made at the completion point corresponding to interest income earned on the amount committed at the decision point but not disbursed during the interim period.

Assistance committed under the original framework is expressed in net present value (NPV) terms at the completion point, and assistance committed under the enhanced framework is expressed in NPV terms at the decision point. Hence these two amounts can not be added.

Under the enhanced framework, an additional disbursement is made at the completion point corresponding to interest income earned on the amount committed at the decision point but not disbursed during the interim period.

XII. Resident Representative

Mr. Lars-Holger Engstrom took up the post of Resident Representative in May 2005 in addition to his posting as Resident Representative to Rwanda. An office with an administrative assistant started operating in January 2006 in Bujumbura.

APPENDIX III: Burundi: Relations with the World Bank Group

(As of May 8, 2006)

A. Partnership in Burundi’s Development Strategy

1. Burundi has emerged from a cycle of politico-ethnic conflicts in August 2000 with the signature by most of the parties involved in the conflict of the Arusha peace agreement. The political transition as disposed in the Arusha agreement has now been peacefully completed. A post-transition constitution has been overwhelmingly approved by a national referendum in February 2005. Communal and parliamentary elections were held in June and July. The President was elected by the Parliament on August 19. The post-transition Government took office on September 1, 2005.

2. As Burundi recovers from its long conflict, the post-transition government is implementing the Interim Poverty Reduction Strategy Paper (I-PRSP) that was completed in November 2003 based on broad consultations, except for some provinces where the consultations were limited due to security reasons. The interim PRSP was discussed by the Boards of the World Bank and the IMF in January 2004. The formulation of the full PRSP was launched in May 2004 under the leadership of the Head of State. With the support of the Bank and other donors, the full PRSP is expected to be completed by mid-2006. The preparation of the full PRSP is well advanced with broad and inclusive consultations being completed. Community participatory and inclusive consultations have been completed and provincial reports are available, as well as the synthesis of the overall consultations. Sectoral and thematic consultations were completed in November 2005. A first draft of the PRSP is being finalized and will be discussed with all stakeholders at national, provincial, and communal levels in order to take into account their comments and recommendations. The full PRSP would be approved by the government during the second quarter of 2006.

3. Based on sound macroeconomic policies and progress in reforming the economy, external financial aid has resumed and culminated with Burundi being granted access to debt relief under the enhanced Heavily Indebted Poor Country Initiative (HIPC Initiative) in August 2005, which will reduce debt by over 90 percent in NPV terms, and scheduled debt service by some US$30-40 million per year for the next thirty years. An Interim Strategy Note (ISN) prepared on the basis of the I-PRSP for FY 2006-07 Bank support to Burundi was approved by the Bank Board on May 3, 2005. The government is intensively using the full-PRSP preparation process to improve coordination of development efforts in the country, including donor-supported activities. Although public expenditures are unevenly aligned with poverty reduction priorities, but there are ongoing efforts to improve alignment. The 2006 budget is specifically linked to the priorities identified in the context of the PRSP under preparation and recent progress in developing sector development policies, in particular in health and education. Moreover, pro-poor expenditures have been identified and increased from 33.6 percent of total primary expenditure in 2005 to 35.5 percent in 2006 revised budget law soon to be approved by the Parliament. Also, the military wage bill-to-GDP ratio has been reduced from about 3.5 percent in 2002 (a peak) to about 2.8 percent in 2005 and 2.3 percent in 2006 revised budget law while the civilian wage bill was increased from 3.5 percent in 2000 to 6.0 percent in 2006 budget law.

4. The Fund is supporting this strategy through a PRGF, and IDA through a series of fast-disbursing and investment operations specifically on budget execution transparency and accountability, post-conflict rehabilitation and reintegration, education, health and social policy reforms, privatization, the environment for employment creation (particularly in rural areas), and sustainable infrastructure. In practice, there is a close collaboration in many areas, particularly those related to growth and poverty reduction.

B. IMF-World Bank Collaboration in Specific Areas

5. Common objectives and the development of post-conflict instruments have led to increased collaboration between the Fund and the World Bank in recent years. The Bank and Fund teams have been closely coordinating their assistance strategies and policy advice and assistance to the government’s implementation of the I-PRSP. There is also close coordination and good cooperation in the determination of structural conditionalities, in particular with regard to crucial reforms for the coffee sector. The Bank is leading the policy dialogue on key structural aspects of the reform program. The Fund is leading the policy dialogue on macroeconomic and financial issues, in particular fiscal, monetary and exchange regime policies. Both institutions are providing significant technical assistance in their respective areas. The Fund and the Bank have both contributed to the Diagnostic Study for the Integrated Trade Framework—a review of the policy, regulatory and institutional framework—with the objective of promoting employment-generating trade. Collaboration in 2005 has been intensified in the context of the preparation of Burundi’s full PRSP and the HIPC Decision Point Document jointly prepared by the Bank and Fund staff.

C. World Bank Group Strategy

6. The Bank’s current FY 2006-07 Interim Strategy Note (ISN) underscores I-PRSP challenges and provides support through two core strategic elements which are: (a) improved security, social stability, and service delivery; and (b) debt relief, economic growth, and diversification. Governance and institutional strengthening are cross-cutting issues that need to be addressed throughout the whole program in order to sustain progress. Preliminary estimates put the funding needs of the ISN at US$170 million for the two years in grant form. Additional financing (in the amount of US$30.6 million equivalent) to the ongoing Public Works and Employment Creation project has been already approved on January 5, 2005. The other planned operations are also expected to be implemented throughout the country, with a focus on ensuring a distribution of benefits across all provinces. These include: in FY06 (i) a Post Conflict Transitional Economic Rehabilitation Grant; and in FY07 (ii) an Education Sector project; and (iii) Community Rehabilitation project. For the following years (FY08-09), a Multi-Sector Infrastructure Rehabilitation, a new Health, an Economic Rehabilitation Grant, and possibly a Private Sector Development projects could be foreseen. It is expected that progress will be made during this period toward the preparation of a full PRSP, which will provide the basis for preparation of a Country Assistance Strategy.

7. As a key element in support of the consolidation of the peace process, the government has established a national Demobilization, Reinsertion, and Reintegration Program (DRRP) within the framework of the Multi-Country Demobilization and Reintegration Program (MDRP) for the greater Great Lakes region to support the demobilization and reintegration of ex-combatants in Burundi. The DRRP is supported with an IDA grant (US$33 million) and two grants from the Multi-Donor Trust Fund (MDTF) of the MDRP (US$45.5 million). The demobilization program is proceeding satisfactorily, with 19,739 ex-combatants demobilized to date. All child soldiers have been demobilized. In addition, 10,988 of an estimated 29,427 former militia fighters have been disarmed and received severance payments. The process of disarming and dismantling the militia is proceeding satisfactorily after initial difficulties. Further demobilization activities will help to reduce the size of the National Defense Force in 2006 as per the commitments specified in government’s letter of demobilization policy to limit the size of the integrated armed forces to 25,000 by 2007. The provision of reintegration assistance to demobilized ex-combatants has been proceeding too slowly to date. Efforts are under way to scale up and accelerate the provision of this support.

8. An Economic Rehabilitation Credit (ERC), amounting to US$54 million, of which US$20 million was disbursed during 2002 and US$20 million in April 2003, and a final floating tranche released in January 2005, was intended to support economic recovery through balance of payment support; and the counterpart funds generated from ERC foreign exchange auctions by the Central Bank (BRB) used to finance the government’s specific development programs. This project was closed in end-December 2005. The Bank also manages a trust fund for arrears clearance and debt service to multilateral development banks (particularly the African Development Bank (AfDB)). Besides the strong partnership with the Fund, the Bank is collaborating with a number of donors, including with the European Union. A new Economic Reform Support Grant (ERSG) is currently under preparation and expected to be discussed by the Board early in the third quarter of 2006. The proposed grant aims at supporting the Government in implementing its interim PRSP in four areas: (i) improving public expenditure management and their impact on the poor; (ii) reforming cash crop sectors (coffee, tea, and cotton); (iii) reviving the private sector; and (iv) reforming public enterprises through State divestiture and private/public partnerships.

9. Burundi has a relatively large but young active portfolio, ranging from infrastructure through public sector management to social sectors. The current IDA portfolio consists of ten projects (see table below) for a total commitment of US$329 million and an undisbursed amount of about US$161.22 million, reflecting the Bank’s re-engagement in Burundi after almost a decade of civil strife.

Nonlending activities

8. Bank assistance also emphasizes nonlending activities and advisory services, including those under ongoing operations, plus through trust funds and grants, to improve understanding of the socioeconomic context, rebuild the knowledge base to support the policy dialogue, and design effective poverty reduction strategies. Ongoing advisory services and economic and sector work include: strengthening public expenditure management; providing support to the PRSP process, specifically the consultation and participatory diagnostic processes; and a study on sources of growth; a post-conflict social sector and poverty assessment, and a debt sustainability analysis.

Active Portfolio in Burundi—IDA Financing

(As of May 8, 2006)

(In millions of U.S. dollars, unless otherwise indicated)

Project NameApproval

Fiscal

Year
Closing

Date
Net

Commitment
Of which:

Grants
Un-

disbursed
Disbursed

in Fiscal

Year 06
Health & Population II19956/30/0630.809.503.463.32
BURSAP II (including supplemental)20006/30/0626.2014.000.06.85
Regional Trade Facilitation200106/30/1115.000.005.221.76
Public Works and Employment200112/31/0770.6030.6027.467.98
Creation (including additional)
HIV/AIDS and Orphans200212/31/0636.000.007.578.46
Economic Management Support200407/31/0926.000.0023.221.05
Road Sector Development200412/31/0951.400.0043.405.49
Demobilization and Reintegration200412/31/0833.0033.0020.641.19
Agriculture Rehabilitation and200510/31/1035.0035.0026.524.23
Sustainable Land Management
Agriculture Rehabilitation and Support200510/31/105.005.003.730.90

IFC

9. Burundi is a member of IFC since 1975. In the recent past years, IFC holds a US$1 million equity portion in Verreries du Burundi (glass), which is not sellable owing to the poor performance of this public enterprise. IFC have also been requested to provide to the Burundi private sector a term loan of U.S. dollars 741,000 for two projects in agriculture and fisheries (AEF Florex and AEF V & F Export). With the peaceful end of the transition, prospects for IFC involvement in Burundi are improving. An IFC mission was conducted in January 2005 to discuss two areas of possible IFC intervention: (i) support to the country’s privatization program; and (ii) potential investment in Burundi largest commercial Bank (Banque de Crédit de Bujumbura, BCB).

MIGA

10. Burundi became a member of MIGA in March 1998. Currently, there are no active projects in MIGA’s pipeline for Burundi. However, one contract with Mauritius Telecom for US$0.9 million was signed in the third quarter of FY03. MIGA’s outstanding portfolio consists of one contract of guarantee in the infrastructure sector, with a gross exposure of US$0.9 million, and a net exposure of US$0.8 million. The total estimated amount of foreign direct investment facilitated to-date by MIGA is approximate

Prepared by World Bank staff. Questions may be addressed to: Bruno Boccara, Lead Economist at 473-9074; or Claude Leroi-Themeze, at 458-5726 or Jean-Pascal N. Nganou at 458-8054

APPENDIX IV: Burundi: Relations with the African Development Bank Group

(As of April 30, 2006)

Burundi has been a member of the AfDB Group since its foundation in 1964. The AfDB’s grant and loan operations with the country were interrupted by the outbreak of civil strife in 1993. On July 19, 2004, the AfDB Boards approved general policy guidelines to assist post-conflict countries to clear their arrears and created a facility, the PCCF, initially funded with about SDR 100 million in AfDB funds, to provide financial assistance to qualifying post-conflict countries. The policy guidelines call for a three-way burden-sharing formula among the country, donors, and the PCCF. On October 27, 2004, the AfDB Boards endorsed a specific arrears clearance proposal for Burundi whereby the balance of arrears was settled with the help of donors and the PCCF before the Decision Point under the enhanced HIPC Initiative.

On November 24, 2005, the Boards of Directors of the African Development Bank (ADB) and the African Development Fund (ADF) agreed that Burundi had effectively met the conditions and reached the decision point under the enhanced framework of the Heavily Indebted Poor Countries (HIPC) Initiative. The Bank Group’s share of debt relief will amount to US$149.35 million in present value terms (US$226.01 million in nominal terms), which is equivalent to about 21 percent of the multilateral creditors’ assistance, and about 18 percent of total assistance from all creditors. This amount will save up to 90 percent of Burundi’s debt-service obligations annually until February 2043.

The AfDB staff is prepared to resume lending operations (under its FAD 9 allocation) following the lifting of sanctions in October 2004. On July 7, 2004, the Bank Group approved a grant of SDR 2.13 million to finance training of civil servants and procurement of equipment for institutions in charge of economic management and the civil society. A structural adjustment credit totally SDR 6.72 million, in one tranche, accompanied by a further grant of SDR 1.5 million for institutional support, was approved by the Board on December 2004. A multi-sector project, totaling SDR 9.8 million, was also approved on December 2004. Under its FAD 10 allocation, the Bank Group approved in December 2005 a grant of SDR 12 millions to finance rural water infrastructure rehabilitation and, in March 2006, a SDR 9 million to finance the watershed management project. One more grant is under preparation: SDR 7.3 million to finance economic reforms and governance support program.

African Development Bank Operations in Burundi
Outstanding

loans
Past-due

obligations
(In millions of SDRs)
African Development Bank0.00
African Development Fund147.300
Nigerian Trust Fund0.170
Total147.470
APPENDIX V: Burundi: Statistical Issues

While data provision to the Fund is now broadly adequate for surveillance purposes, shortcomings in the national accounts, government finance, and balance of payments statistics hinder the monitoring of economic developments. A multisector STA mission in November-December 2004 found that staffing shortages, insufficient funding, and lack of equipment hamper the production and dissemination of macroeconomic statistics. The mission also noted poor coordination among institutions responsible for the compilation of statistics.

In February 2005, the authorities indicated their interest in participating in the General Data Dissemination System (GDDS). In March 2006, a STA mission assisted the authorities in preparing metadata and, in collaboration with the World Bank and donors, helped develop a comprehensive medium-term statistical development action plan. The authorities will refer to the action plan in their Poverty Reduction Strategy Paper and, once finalized, will post it on national websites. Burundi is expected to become a GDDS participant in July 2006.

Outstanding statistical issues

Real sector

Serious deficiencies in real sector data handicap analysis and macroeconomic management, with national accounts last compiled for 1998. Source data on agriculture, the most important activity, is extremely weak. Since 1998, Burundi has reported annual national accounts estimates to the Fund with about a three-month lag, but these are derived from a macroeconomic projection model maintained by the Ministry of Finance. The consumer prices index (CPI) is compiled on a monthly basis, with coverage limited to the capital city; weights are based on an outdated 1991 household expenditure survey. There are no producer price indices, and data on employment are out of date.

Government finance

Government finance statistics are compiled by the Banque de la République du Burundi (BRB) using source data from the Ministry of Finance. Computerized ledgers are seldom maintained by ministries, preventing establishment of balances and other accounting controls. Limited accounting information is available on extra-budgetary units. The absence of detailed information on revenue and expenditure reduces the transparency of government accounts. There are also problems in recording arrears on external debt and current expenditure financed by foreign grants, leading to significant discrepancies between the balance of revenue and expenditure and financing estimates. An interim public financial management system was implemented in 2005 and the Ministry of Finance intends to produce the government accounts based on the new system. Government finance statistics transactions data up to the fourth quarter of 2004 have been reported in the International Finance Statistics, with government debt figures reported to the second quarter of 2005. No data have been reported for publication in the Government Finance Statistics Yearbook since 1999.

Monetary accounts

The institutional coverage of monetary statistics is deficient in several respects: data on credit and savings cooperatives are not collected; the sectoral classification of public entities and financial corporations in the BRB’s accounts does not reflect the current methodology for monetary statistics; and other depository corporations report their monthly balance sheets using outdated formats. Partly as a result of insufficient computer equipment and staff constraints at BRB, only a few of the principal recommendations of previous technical assistance missions have been fully implemented. However, the BRB is well advanced in the process of submitting monetary statistics using the new Standardized Report Forms (SRFs). The recent second provisional submissions of SRFs covering 15 months of monetary statistics (January 2005 through March 2006) signal the BRB’s commitment to adopt the Monetary and Financial Statistics Manual methodology.

Balance of payments

Annual balance of payments and international investment position statistics are compiled according to the fourth edition of the Balance of Payments Manual (BPM4) on the basis of limited information. Merchandise trade statistics are derived from customs data, but no adjustments are made for unrecorded international trade flows such as gifts in kind that do not go through the banking system. Another issue is the appropriate treatment for exports of nonmonetary gold recorded in customs statistics since the gold is neither produced locally, nor recorded in imports. Data for services are collected mostly through bank settlement reports, and appear to be insufficient. Income estimates are almost exclusively derived from monthly bank settlement reports. For both services and income, the accuracy of the source data is not routinely assessed against other available data sources.

A December 2005 mission assisted the BRB in (1) improving information collected through bank reports, and (2) preparing and launching surveys for capturing and/or improving data on services, income, current and capital transfers, enterprise investment and external debt. It also assisted the BRB in converting the published data of Burundi’s 2004 balance of payments into a detailed and documented BPM5 presentation. It is now expected that the BRB will soon begin compiling balance of payments statistics according to the fifth edition of the Balance of Payments Manual.

Burundi: Table of Common Indicators Required for Surveillance

(As of May 31, 2006)

Date of latest observationDate receivedFrequency of Data6Frequency of Reporting6Frequency of Publication6
Exchange RatesCurrentCurrentDMM
International Reserve Assets and Reserve Liabilities of the Monetary Authorities1Dec. 2005Feb. 2006MMM
Reserve/Base MoneyMar. 2006May. 2006MMM
Broad MoneyMar. 2006May. 2006MMM
Central Bank Balance SheetMar. 2006May. 2006MMM
Consolidated Balance Sheet of the Banking SystemMar. 2006May. 2006MMM
Interest Rates2Apr. 2006May. 2006MMM
Consumer Price IndexFeb. 2005May. 2006MMM
Revenue, Expenditure, Balance and Composition of Financing3—General Government4NANANANANA
Revenue, Expenditure, Balance and Composition of Financing3—Central GovernmentSep. 2005Nov. 2005QQQ
Stocks of Central Government and Central Government-Guaranteed Debt5NANANANANA
External Current Account Balance2004Nov. 2005AAA
Exports and Imports of Goods and ServicesNov. 05Dec. 05MMM
GDP/GNP1998Sep. 2003AAA
Gross External DebtOct. 2005Dec. 2005MMA

Includes reserve assets pledged or otherwise encumbered, as well as net derivative positions.

Both market-based and officially determined, including discount rates, money market rates, rates on treasury bills, notes and bonds.

Foreign, domestic bank, and domestic nonbank financing.

The general government consists of the central government (budgetary funds, extra budgetary funds, and social security funds), and state and local governments.

Including currency and maturity composition.

Daily (D), weekly (W), monthly (M), quarterly (Q), annually (A), irregular (I); and not available (NA).

Includes reserve assets pledged or otherwise encumbered, as well as net derivative positions.

Both market-based and officially determined, including discount rates, money market rates, rates on treasury bills, notes and bonds.

Foreign, domestic bank, and domestic nonbank financing.

The general government consists of the central government (budgetary funds, extra budgetary funds, and social security funds), and state and local governments.

Including currency and maturity composition.

Daily (D), weekly (W), monthly (M), quarterly (Q), annually (A), irregular (I); and not available (NA).

APPENDIX VI: Burundi: Debt Sustainability Analysis for Low-Income Countries Framework (LIC DSA)

1. This LIC DSA assesses the external and public debt dynamics of Burundi using the forward-looking framework for debt sustainability for low-income countries.1 Burundi remains at high risk of debt distress, even after the full delivery of debt relief under the HIPC Initiative. Assuming additional debt relief under MDRI, the risk of debt distress would ease, but still remain elevated. The LIC DSA updates the analysis presented in the HIPC decision point document for Burundi of July 2005.2 Three key differences underpin the results of this analysis from the previous: (i) the baseline scenario assumes a substantial scaling up of aid inflows, and larger current account deficits and primary fiscal deficits, to be financed mainly with additional grants and concessional loans in the medium term; (ii) real growth would average 6.5 percent in the medium term and 6 percent in the long term, about 1 percent higher than in the decision point baseline, reflecting the combination of higher external financial assistance and investment, and a strong sustained reform effort; (iii) the HIPC completion point is expected to be reached in mid-2007, one year later than the assumption at the decision point.

Baseline scenario

2. The baseline scenario reflects continued growth of real GDP sustained by an increase in export volumes, and financing in the form of grants or highly concessional borrowing (Box 1). The medium-term outlook envisages strong economic growth at 6.5 percent per annum. Growth would be sustained by the consolidation of the peace process, macroeconomic stability, a deepening of structural reforms in the banking sector, public investment in infrastructure, reforms in agricultural export sectors, and strong growth of nontraditional exports. Public investment would average 10.7 percent of GDP in 2006-16, financed through the fiscal space created by aid (grants and concessional loans) inflows, HIPC debt relief and continued strong tax revenue performance. Exports, underpinned by new investment and sustained reforms, are projected to drive growth over the long term assuming significant development of nontraditional sectors. The baseline assumes that prices of the main exports would remain in line with recent market developments and coffee prices would fetch a premium beginning in 2008. Privatization would further enhance productivity and increase production and quality in the coffee and tea sectors. Reforms in the banking sector and limited domestic public borrowing would increase the availability of credit to the private sector, sustaining private investment.

Box 1.Main Assumptions in the Debt Sustainability Analysis

Real GDP growth averages 6.0 percent over 2006–26, underpinned by a peacetime broad-based recovery in agricultural production and other private sector activities.

CPI inflation (end-period) is projected to rise from 1.1 percent in 2005 to 8.7 percent in 2006, and subsequently to stabilize at 4 percent from 2007 and remain at that level through 2026.

Fiscal policy aims at restructuring the government’s spending priorities while maintaining macroeconomic stability. Revenues, excluding grants, are assumed to rise gradually from 20 percent of GDP in 2005 to 21.6 percent of GDP by 2026.

Gross official external financing (grants plus loan disbursements) is expected to decline from 25.2 percent of GDP in 2006 to 16.8 percent in 2007 and then gradually decline over the period 2008-26 to 1.0 percent of GDP in 2026.

Official financing: program financing would be only grants in 2007-15 (excluding the IMF), 50 percent grants and 50 percent loans on IDA or comparable terms during 2016–26. Project loans are assumed to be entirely at concessional rates on IDA or comparable terms. The financing gap would be only partially covered by MDRI assistance.

Export receipts are expected to increase sharply in 2006-07 and then to rise more gradually at 10-12 percent per annum in 2008-26, with coffee quality gradually improving, reflecting the impact of the sector’s reform, and the re-emergence of a premium over world prices after 2008. The composition of exports would gradually shift from coffee and tea to other agricultural products, processed foods, and light manufactures. In volume terms, export growth would average 11.5 percent a year over the projection period. Exports of goods and services would rise from 11.9 percent of GDP in 2006 to 20.8 percent in 2026.

Imports of goods and services are projected to average 50 percent of GDP in 2006–07 and with emergency assistance and reconstruction-related imports winding down to decline to 34 percent of GDP in 2026. In volume terms, imports would rise on average by 5.5 percent a year from 2008 onward, following the 2006-07 period of consolidation.

3. External concessional inflows would finance increased public investment and sustain current account and primary fiscal deficits. Gross external financing would average 12 percent of GDP per annum (about US$175 million) over 2006-16, compared with 13 percent (US$175 million) assumed in the 2005 LIC DSA, with grant financing making up about 90 percent of total external financing. In 2016-26, total external financing would decrease to 3 percent of GDP per annum on average, with the grant share at about 80 percent of the total. Gross investment and national savings would gradually rise to about 22 and 10 percent of GDP, respectively, by 2026. The current account deficit is projected to widen initially and average 15 percent of GDP in 2006–16, and then decline to 12 percent in 2026. The overall fiscal balance is projected to remain close to zero throughout the period.

4. Unless otherwise indicated, all debt ratios in this DSA assume that Burundi will reach the enhanced HIPC completion point in mid-2007, and would then be eligible for relief under the MDRI.

External debt sustainability assessment

5. The results under the baseline scenario indicate that, even after full delivery of HIPC assistance, Burundi faces a considerable risk of debt distress. The NPV of debt-to-exports ratio remains above the indicative threshold for countries with comparable policies and institutions for a considerable period of time, before falling below it in 2013 (Box 2) and decreasing further to 76 percent by 2026. Even though all other external debt burden indicators are below their respective thresholds during the projection period, the NPV of debt-to-exports ratio indicates that even after HIPC relief, and assuming future financing on highly concessional terms, debt distress would remain a concern in the long term.

Box 2:

Summary of Baseline Debt Sustainability Indicators 1/
Indicative

Threshold 2/
200620162026Average

2006-26
NPV of debt to GDP3016.615.319.517.7
NPV of debt to exports100139.393.793.7109.3
NPV of debt to revenue20090.272.072.282.4
Debt service to exports158.34.04.25.1
Debt service to revenue258.26.96.07.4

All debt indicators assume the full delivery of HIPC relief and refer to the NPV of public and publicly guaranteed external debt.

Threshold over which countries with similar evaluations of policies and institutions would have at least a 25 percent chance of having a prolonged incident of debt distress in the coming year. Burundi lies within the bottom quintile of countries ranked by the World Bank’s Country Policy and Institutional Assessment Index (CPIA).

All debt indicators assume the full delivery of HIPC relief and refer to the NPV of public and publicly guaranteed external debt.

Threshold over which countries with similar evaluations of policies and institutions would have at least a 25 percent chance of having a prolonged incident of debt distress in the coming year. Burundi lies within the bottom quintile of countries ranked by the World Bank’s Country Policy and Institutional Assessment Index (CPIA).

6. At end-2005, Burundi’s stock of public and publicly guaranteed (PPG) external debt was US$1,427 million, US$43 million higher than at end-2004. New borrowing includes disbursements under the PRGF arrangement and on already approved credits from IDA and the African Development Fund. Simulating the full delivery of HIPC assistance immediately, the debt would amount to US$101 million at end-2005 in NPV terms, corresponding to 12.6 percent of GDP and 110.9 percent of exports. Reflecting debt relief and strong export performance in 2005, debt burden indicators for 2005 have substantially improved with respect to projected ratios in the 2005 LIC DSA. The ratio of debt service to exports in 2005 was 47.1 percent (Table 1 and Figure 1), reflecting interim relief provided by creditors in 2005. Debt sustainability indicators are projected to worsen considerably in 2006 because of expected new borrowing of US$72 million (US$43 million in NPV terms),3 but to trend down steadily after 2006 until 2010, after which they remain broadly stable. The profiles of the debt and debt-service ratios over the long term are as follows:

Table 1.Burundi: External Debt Sustainability Framework, Baseline Scenario, 2006-26 1/

(In percent of GDP, unless otherwise indicated)

ActualHistorical

Average 6/
Standard

Deviation 6/
Projections
#200420052006200720082009201020112006-11 Average201620262012-26 Average
External debt (nominal) 1/208.3178.5156.534.734.233.232.130.528.735.5
Of which : public and publicly guaranteed (PPG)208.3178.5156.534.734.233.232.130.528.735.5
Change in external debt−18.8−29.8−22.0−121.8−0.5−1.0−1.1−1.64.4−1.2
Identified net debt-creating flows−17.1−26.57.64.99.810.411.110.715.28.8
Noninterest current account deficit6.69.14.23.117.016.013.814.415.214.815.219.012.114.8
Deficit in balance of goods and services24.333.937.237.336.135.133.430.922.813.2
Exports9.611.411.913.013.413.814.314.816.420.8
Imports33.945.349.150.349.548.947.745.739.134.0
Net current transfers (negative = inflow)−17.4−23.8−10.27.3−20.4−21.6−22.5−20.9−18.5−16.4−20.0−3.7−0.7−5.0
Other current account flows (negative = net inflow)−0.3−1.00.20.30.20.20.30.2−0.1−0.4
Net FDI (negative = inflow)−1.5−1.9−0.50.8−0.8−1.9−2.0−2.1−2.2−2.4−1.9−2.6−1.5−2.0
Endogenous debt dynamics 2/−22.3−33.7−8.6−9.2−2.0−1.9−1.8−1.7−1.2−1.8
Contribution from nominal interest rate1.51.40.50.20.20.20.20.20.10.2
Contribution from real GDP growth−9.8−1.6−9.1−9.5−2.2−2.1−2.0−1.9−1.4−2.0
Contribution from price and exchange rate changes−13.9−33.6
Residual (3-4) 3/−1.7−3.3−29.6−126.6−10.4−11.4−12.2−12.3−10.8−10.0
Of which: exceptional financing−16.0−19.8−3.3−115.7−3.3−3.1−3.3−3.4−2.2−0.9
Of which : capital grants−7.4−3.3−8.5−10.7−11.9−12.8−12.8−12.1 #−9.6−5.2
NPV of external debt 4/10.716.617.817.917.817.416.515.319.5
In percent of exports93.6139.3136.9133.9128.5121.3111.493.793.7
NPV of PPG external debt10.716.617.817.917.817.416.515.319.5
In percent of exports93.6139.3136.9133.9128.5121.3111.493.793.7
Debt service-to-exports ratio (in percent)109.247.18.33.93.83.64.37.74.04.2
PPG debt service-to-exports ratio (in percent)109.247.18.33.93.83.64.37.74.04.2
Total gross financing need (billions of U.S. dollars)103.5100.6163.7152.6140.9159.5184.4200.3378.9575.6
Non-interest current account deficit that stabilizes debt ratio25.438.939.0137.814.415.416.316.414.613.3
Key macroeconomic assumptions
Real GDP growth (in percent)4.80.91.62.56.16.67.16.76.66.46.66.06.06.1
GDP deflator in US dollar terms (change in percent)6.519.2−1.911.412.62.72.12.22.22.34.02.32.32.3
Effective interest rate (percent) 5/0.70.81.00.20.30.20.80.60.60.60.50.60.70.7
Growth of exports of G&s (US dollar terms, in percent)27.143.411.838.024.919.512.312.613.212.315.812.411.511.0
Growth of imports of G&S (US dollar terms, in percent)36.860.714.725.129.612.17.67.86.44.211.37.27.46.4
Grant element of new public sector borrowing (in percent)40.045.351.151.151.151.148.355.754.554.0
Memorandum item:
Nominal GDP (billions of US dollars)664.5799.4954.61045.41143.21246.51358.71478.02224.95008.3
Source: Staff simulations.

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

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

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

Source: Staff simulations.

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

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

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

Figure 1.Burundi: Indicators of Public and Publicly Guaranteed External Debt Under Alternative Scenarios, 2006–26

(In percent)

Source: Staff projections and simulations.

Figure.Burundi: Composition of Stock of External Debt at End-December 2005 1/

Nominal Value of debt: US$1, 426.7 million

Sources: Burundi authorities; and staff estimates.

1/ Before HIPC relief

  • The NPV of debt-to-exports indicator remains above the indicative threshold until 2013, and then hovers around the indicative threshold. The NPV of debt-to-exports declines from 139.3 percent at end-2006 to 93.7 percent in 2026.
  • The external debt-service indicator suggests a more modest and manageable debt burden both in the short and medium term. Public external debt service is projected to average about 5.1 percent of exports during 2006-26; the projected trajectory shows an initial decline and then an increase during the years of the repayment of disbursements under the PRGF arrangement. Generally, the relatively low debt-service-to-exports indicator reflects: (i) a stable and relatively high grant element in the debt stock resulting in a relatively low debt service requirement, and (ii) the cumulative effect of high export growth during the period when debt service requirements increase as a result of the end of grace periods. The external debt-service-to-fiscal-revenues ratio (including grants) follows a broadly similar trajectory and is well below the indicative threshold.
  • The ratio of the NPV of debt to GDP is projected to decline to 13.4 percent in 2014, before rising to about 20 percent in 2026. The indicators remain consistently below the country specific threshold.

7. Alternative scenarios indicate that less concessional borrowing substantially increases the risk of debt distress.4 An alternative scenario shows the effect on debt indicators of borrowing at 2 percent higher interest rates during the projection period. Borrowing at less concessional terms would considerably increase the risk of debt distress for Burundi, with the NPV of debt-to-GDP ratios reaching 30 percent by 2026, compared to 19 percent in the baseline, and the NPV of debt-to-exports ratio remaining above the policy-dependent threshold (Table 2 and Figure 1). This scenario highlights the risk of borrowing at less concessional terms after the reduction of the external debt burden as a result of debt relief and the availability of grant financing by IDA and other donors. This would suggest that Burundi should avoid nonconcessional borrowing after HIPC relief. It also points to the need for creditors to align their lending with the borrower’s debt sustainability situation.5

Table 2.Burundi: Sensitivity Analyses for Key Indicators of Public and Publicly Guaranteed External Debt, 2006–26

(In percent)

Projections
20062007200820092010201120162026
NPV of debt-to-GDP ratio
Baseline1718181817171519
A. Alternative Scenarios
A1. Key variables at their historical averages in 2007-26 1/17201815117−16−53
A2. New public sector loans on less favorable terms in 2007-26 2/1719192020192131
B. Bound Tests
B1. Real GDP growth at historical average minus one standard deviation in 2007-081719212120191823
B2. Export value growth at historical average minus one standard deviation in 2007-08 3/1720242423222021
B3. US dollar GDP deflator at historical average minus one standard deviation in 2007-081721252524232127
B4. Net non-debt creating flows at historical average minus one standard deviation in 2007-08 4/1728383736342924
B5. Combination of B1-B4 using one-half standard deviation shocks1732525149474033
B6. One-time 30 percent nominal depreciation relative to the baseline in 2007 5/1725252525232227
NPV of debt-to-exports ratio
Baseline1391371341281211119494
A. Alternative Scenarios
A1. Key variables at their historical averages in 2007–26 1/1391511311077948−96−256
A2. New public sector loans on less favorable terms in 2007–26 2/139144145142136129127149
B. Bound Tests
B1. Real GDP growth at historical average minus one standard deviation in 2007–081391371341281211119494
B2. Export value growth at historical average minus one standard deviation in 2007–08 3/139251442420394363295247
B3. U.S. dollar GDP deflator at historical average minus one standard deviation in 2007–081391371341281211119494
B4. Net non-debt creating flows at historical average minus one standard deviation in 2007–08 4/139213283266248229179115
B5. Combination of B1-B4 using one-half standard deviation shocks139265434409381352275179
B6. One-time 30 percent nominal depreciation relative to the baseline in 2007 5/1391371341281211119494
Debt service ratio
Baseline84444844
A. Alternative Scenarios
A1. Key variables at their historical averages in 2007–26 1/84545117−10
A2. New public sector loans on less favorable terms in 2007–26 2/84445657
B. Bound Tests
B1. Real GDP growth at historical average minus one standard deviation in 2007–0884444844
B2. Export value growth at historical average minus one standard deviation in 2007–08 3/86101012201212
B3. U.S. dollar GDP deflator at historical average minus one standard deviation in 2007–0884444844
B4. Net non-debt-creating flows at historical average minus one standard deviation in 2007–08 4/84556976
B5. Combination of B1-B4 using one-half standard deviation shocks85789141110
B6. One-time 30 percent nominal depreciation relative to the baseline in 2007 5/84444844
Memorandum item:
Grant element assumed on residual financing (i.e., financing required above baseline) 6/5252525252525252
Source: Staff projections and simulations.

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 assum 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.

Source: Staff projections and simulations.

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 assum 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.

8. Stress tests signal the vulnerability of Burundi to adverse developments. Burundi’s debt sustainability indicators experience a considerable deterioration under stress tests assuming lower GDP and export growth (Table 2). For the NPV of debt-to-GDP ratio, there is a sizeable increase relative to the baseline when all the main parameters determining the debt dynamics are assumed to be one-half standard deviation below their respective historical averages during the period 2006-07 (the most extreme test in Figure 1, Panel 1). Significant increases in the NPV of external debt-to-exports and debt service-to-exports ratios are observed when exports are assumed to grow at the historical average minus one standard deviation. In particular, under this stress test (the most extreme test in Figure 1, Panels 2 and 3), the debt-service-to-exports ratio rises above the threshold during 2011–15, before declining slightly below the threshold, signifying a considerable risk to external liquidity in the event of sustained overall macroeconomic underperformance.

Fiscal sustainability analysis

9. The baseline macroeconomic scenario (Table 3 and Figure 2) assumes a strong revenue performance and financing of the reconstruction effort and poverty reduction in the medium to long term primarily with grants. This would allow the public sector borrowing requirement to fall over time, while keeping expenditures consistent both with the government’s poverty reduction strategy and with macroeconomic stability. In particular, it is assumed that revenues as a percentage of GDP rise from 20 percent in 2005 to 22 percent in 2026 and that borrowing decreases from 7.5 percent of GDP in 2006 to 3.4 percent of GDP on average between 2007 and 2026.

Table 3.Burundi: Public Sector Debt Sustainability Framework, Baseline Scenario, 2004–26

(In percent of GDP, unless otherwise indicated)

ActualHistorical Average 5/Standard Deviation 5/EstimateProjections
200420052006200720082009201020112006-11 Average201620262012–26
Public sector debt 1/232.2185.6176.954.451.849.146.343.336.538.6
Of which : foreign-currency denominated209.9165.4156.235.134.633.532.430.829.035.9
Change in public sector debt−15.3−46.6−8.6−122.6−2.6−2.8−2.7−3.03.6−1.5
Identified debt-creating flows−37.7−66.3−21.2−122.1−0.7−1.2−1.1−1.10.3−3.3
Primary deficit1.61.32.22.7−2.55.85.34.24.44.13.63.6−0.42.2
Revenue and grants34.931.741.433.233.334.333.633.432.031.0
Of which: grants14.811.722.413.313.013.412.712.410.99.4
Primary (noninterest) expenditure36.533.138.939.038.738.538.037.535.630.6
Automatic debt dynamics−23.1−49.3−15.4−11.0−2.6−2.2−2.1−1.8−1.0−2.0
Contribution from interest rate/growth differential−14.9−6.9−12.3−11.8−2.6−2.2−2.0−1.7−1.0−1.9
Of which: contribution from average real interest rate−3.5−4.9−1.7−0.81.01.11.01.10.90.4
Of which: contribution from real GDP growth−11.4−2.1−10.6−11.0−3.6−3.3−3.0−2.8−1.9−2.3
Contribution from real exchange rate depreciation−8.2−42.3−3.10.8−0.1−0.1−0.1−0.1
Other identified debt-creating flows−16.1−18.4−3.3−117.0−3.3−3.2−3.3−3.5−2.2−0.9
Privatization receipts (negative)0.00.00.00.00.00.00.00.00.00.0
Recognition of implicit or contingent liabilities0.00.00.00.00.00.00.00.00.00.0
Debt relief (HIPC and other)−16.1−18.4−3.3−117.0−3.3−3.2−3.3−3.5−2.2−0.9
Other (specify, e.g. bank recapitalization)0.00.00.00.00.00.00.00.00.00.0
Residual, including asset changes22.419.712.6−0.5−1.9−1.6−1.6−1.93.31.8
NPV of public sector debt36.130.137.437.335.433.431.529.223.122.4
Of which: foreign-currency denominated13.89.916.618.018.117.917.616.715.519.6
Of which: external13.89.916.618.018.117.917.616.715.519.6
NPV of contingent liabilities (not included in public sector debt)
Gross financing need 2/13.99.00.98.88.06.97.07.35.81.5
NPV of public sector debt-to-revenue ratio (in percent) 3/103.494.990.2112.5106.197.593.887.772.072.2
Of which : external39.531.240.154.454.352.352.350.048.463.4
Debt service-to-revenue ratio (in percent) 3/4/35.324.28.29.17.97.97.99.46.96.0
Primary deficit that stabilizes the debt-to-GDP ratio16.848.06.1128.47.97.07.17.20.01.1
Key macroeconomic and fiscal assumptions
Real GDP growth (in percent)4.80.91.72.66.16.67.16.76.66.46.66.06.06.1
Average nominal interest rate on forex debt (in percent)0.70.80.90.20.30.20.80.60.60.60.50.60.70.7
Average real interest rate on domestic currency debt (in percent)3.0−3.92.35.78.09.37.79.49.911.19.215.530.219.6
Real exchange rate depreciation (in percent, + indicates depreciation)−3.8−20.72.015.7−2.0
Inflation rate (GDP deflator, in percent)8.316.69.55.44.83.64.34.34.34.34.34.34.34.3
Growth of real primary spending (deflated by GDP deflator, in percent)23.2−8.59.617.424.86.96.16.45.05.09.05.14.24.6
Grant element of new external borrowing (in percent)42.942.940.045.351.151.151.151.148.355.754.5
Sources: Country authorities; and Fund 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 including 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.

Sources: Country authorities; and Fund 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 including 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 Fiscal Indicators of Public Debt, 2006–26
Projections
20062007200820092010201120162026
NPV of Debt-to-GDP Ratio
Baseline3737353332292322
A. Alternative scenarios
A1. Real GDP growth and primary balance are at historical averages3737363432302138
A2. Primary balance is unchanged from 2006373428241914−2−7
A3. Permanently lower GDP growth 1/3738363433312734
B. Bound tests
B1. Real GDP growth is at historical average minus one standard diviation in 2007–083741434242403946
B2. Primary balance is at historical average minus one standard deviation in 2007–083737353331292322
B3. Combination of B1-B2 using one half standard deviation shocks3738383532281815
B4. One-time 30 percent real depreciation in 20073794867972664427
B5. 10 percent of GDP increase in other debt-creating flows in 20073742403835332624
NPV of Debt-to-Revenue Ratio 2/
Baseline901131069894887272
A. Alternative scenarios
A1. Real GDP growth and primary balance are at historical averages901111039489815687
A2. Primary balance is unchanged from 20069010185695743−7−22
A3. Permanently lower GDP growth 1/9011310799979183106
B. Bound tests
B1. Real GDP growth is at average minus one standard deviation in 2007–0890119122116117114116143
B2. Primary balance is at historical average minus one standard deviation in 2007–08901111049692867172
B3. Combination of B1-B2 using one half standard deviation shocks901131089690815346
B4. One-time 30 percent real depreciation in 20079028325722921519713788
B5. 10 percent of GDP increase in other debt-creating flows in 200790126119109105998277
Debt Service-to-Revenue Ratio 2/
Baseline89888976
A. Alternative scenarios
A1. Real GDP growth and primary balance are at historical averages898891198
A2. Primary balance is unchanged from 200689888962
A3. Permanently lower GDP growth 1/898881077
B. Bound tests
B1. Real GDP growth is at historical average minus one standard deviation in 2007–08899991189
B2. Primary balance is at historical average minus one standard deviation in 2007–0889888976
B3. Combination of B1-B2 using one half standard deviation shocks898881075
B4. One-time 30 percent real depreciation in 2007898881076
B5. 10 percent of GDP increase in other debt-creating flows in 2007898881076
Sources: Country authorities; and Fund staff estimates and projections.

Assumes that real GDP growth is at baseline minus one standard deviation divided by the square root of 20 (i.e., the length of the projection period).

Revenues are defined inclusive of grants.

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

Assumes that real GDP growth is at baseline minus one standard deviation divided by the square root of 20 (i.e., the length of the projection period).

Revenues are defined inclusive of grants.

Figure 2.Burundi: Fiscal Indicators of Public Debt Under Alternative Scenarios, 2006–26 1/

Source: Staff projections and simulations.

1/ Most extreme stress test is test that yields highest ratio in 2016.

2/ Revenue including grants.

10. Given the relatively strong revenue effort, public debt (external and domestic) burden indicators are projected to remain below their respective indicative thresholds.6 The NPV of debt-to-revenue ratio is projected to drop from 90 percent in 2006 to 72 percent in 2026, and the debt service-to-revenue ratio is projected to decline from 8 percent in 2006 to 6 percent in 2026.

11. As in the external debt sustainability analysis, alternative scenarios and bound tests signal a significant increase in Burundi’s risk of debt distress over the medium term. A lower growth scenario that assumes long-term growth at 5.5 percent, one-half percentage point less than the baseline, indicates that the NPV of debt-to-GDP ratio would exceed the policy-dependent threshold. The scenario highlights the risk of failing to achieve sustained long-term growth. In effect, unless the ambitious scaling-up of investment expenditure translates into the projected rate of GDP growth, the investment would not be affordable or possibly even sustainable given the high level of grant financing assumed in the baseline.

12. Other stress tests highlight the negative impact of temporary shocks on debt burden indicators. In particular, a 30 percent real depreciation represents the most extreme stress test. A one-off increase of debt-creating flows by 10 percent of GDP, and a recession with GDP growth equal to the historical average minus one standard deviation in 2007–08 also signal increased risk of debt distress over the medium term.

Impact of the full delivery of debt relief under the Multilateral Debt Relief Initiative (MDRI)

13. Burundi would be eligible for debt relief under MDRI from the IMF, IDA, and the AfDF after reaching the completion point.7 With the HIPC completion point expected in June 2007, debt relief under HIPC and MDRI would amount to a stock of debt reduction of US$921 million, with debt relief under the HIPC Initiative amounting to US$848 million and debt relief under MDRI estimated at US$73 million.8 Under the HIPC Initiative, Burundi was assessed to be eligible for debt relief equivalent to 91.5 percent of the NPV of debt outstanding at end-2004. The additional effect of MDRI is therefore estimated to be modest, and would represent an average debt service saving of US$2.5 million dollars in 2007-23 or about one percent of exports. 9 A one-year delay in reaching the completion point would imply losing US$2.7 million in additional multilateral debt service relief, beyond HIPC.

Text Table 1.Burundi: Multilateral Debt Relief under MDRI and HIPC at the Completion Point 1/

(In millions of US dollars)

Additional

Impact of

MDRI
HIPCTotal
IMF112839
IDA 2/42636678
AfDF 3/11186197
Total64850914
Source: Staff estimates.

Completion point expected in June 2007.

Expected MDRI implementation date in July 2007.

Expected MDRI implementation date in Jan. 2008

Source: Staff estimates.

Completion point expected in June 2007.

Expected MDRI implementation date in July 2007.

Expected MDRI implementation date in Jan. 2008

14. The additional debt relief under MDRI would moderately reduce the risk of debt distress for Burundi. Under MDRI, IDA and the AfDF would reduce their gross annual allocation by the amount of debt-service relief provided.10 If additional finance by other donors maintained total future borrowing as in the baseline, MDRI would lower the debt burden indicators modestly (Text Table 2). The ratio of the NPV of external debt to exports would be 30 percentage points lower than in the baseline, and would fall below the policy-dependent threshold in 2010, only three years earlier than in the baseline, as well as remain below thereafter. If lower financing from IDA and the AfDF were not compensated by additional resources from other donors, the debt burden indicators would decrease further.

Text Table 2.Burundi: Impact of the full provision of MDRI on the baseline scenario 1/

(In percent)

200620072008200920102011201620212026Average
2006–26
NPV of debt-to-GDP ratio
Before MDRI16.617.817.917.817.416.515.320.319.517.7
After MDRI16.613.113.6