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BURUNDI: First Review Under the Three-Year Arrangement Under the Poverty Reduction and Growth Facility and Request for Waiver of Performance Criteria

Author(s):
International Monetary Fund
Published Date:
February 2005
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I. Introduction

1. In a letter to the Managing Director dated December 20, 2004 and the accompanying Memorandum of Economic and Financial Policies (MEFP) and Technical Memorandum of Understanding (TMU) (Appendix I,), the Minister of Finance and the Governor of the Bank of the Republic of Burundi (BRB) request completion of the first review under the Poverty Reduction and Growth Facility (PRGF) arrangement and waivers for the nonobservance of the end-June 2004 quantitative performance criterion on external arrears and two structural performance criteria. Completion of the first review and disbursement of the second tranche of the arrangement would bring Burundi’s use of Fund resources to 43.6 percent of quota (Table 1). Relations with the Fund, the World Bank, and the African Development Bank are summarized in Appendices II, III, and IV, respectively.

Table 1.Burundi: Projected Payments Obligations to the Fund and Indicators of Fund Credit, 2004-08(In millions of SDRs, except where indicated otherwise)
200420052005200620072008Total
ActualJan.-Mar.Apr.-JuneJuly-Sep.Oct.-Dec.Projected2004-08
Projected payments under existing PRGF disbursements and SDR charges0.070.140.070.140.410.410.410.411.65
PRGF principal repayments0.000.000.000.000.000.000.000.000.00
Interest/charges0.340.070.140.070.140.410.410.410.411.99
SDR periodic charges0.270.070.070.070.070.280.280.280.281.40
PRGF interest repayments0.070.000.070.000.070.130.130.130.130.59
Projected payments under prospective PRGF disbursements0.000.000.050.000.050.140.210.210.62
Principal0.000.000.000.000.000.000.000.000.00
Interest/charges0.000.000.050.000.050.140.210.210.62
Total projected payments
Principal0.000.000.000.000.000.000.000.000.00
Interest/charges0.070.140.120.140.470.550.630.632.27
SDR periodic charges0.070.070.070.070.280.280.280.281.13
PRGF0.000.070.050.070.190.270.340.351.15
Total projected payments
In millions of SDRs0.070.140.120.140.470.550.630.632.27
In percent of exports of goods and service credits0.150.280.260.280.970.980.970.87
In percent of gross international reserves0.090.180.160.180.610.740.820.79
Outstanding IMF credit (end of period)
In millions of SDRs26.4033.5540.7040.7047.8547.8562.1569.3069.30
In millions of U.S.dollars39.6050.3361.0561.0571.7871.7892.60103.26103.26
In percent of quota34.2943.5752.8652.8662.1462.1480.7190.0090.00
In percent of exports of goods and service credits77.4569.4284.2184.2199.0099.00110.40107.6295.71
In percent of gross international reserves48.4543.7653.0953.0962.4162.4183.0490.6487.42
Memorandum items:
Repayments of GRA resources (drawn as emergency post-conflict assistance)19.25
Actual/projected PRGF disbursements26.407.157.150.007.1521.4514.307.150.0069.30
Exports of goods and services credits (in millions of U.S. dollars)51.1372.5072.5072.5072.5072.5083.8895.95107.89
Gross official reserves (in millions of U.S. dollars)81.73115.00115.00115.00115.00115.00111.51113.92118.12
Source: IMF, Finance Department.
Source: IMF, Finance Department.

2. On the occasion of the request for a PRGF arrangement, which coincided with the Board discussion of the 2003 Article IV consultation, Directors commended Burundi for the progress made with the peace process and strong program implementation. They saw continued strengthening of economic and financial management as helping to ensure stability and provide a basis for mobilizing additional external support. Directors welcomed Burundi’s intention to participate in the Enhanced Initiative for Heavily Indebted Poor Countries (HIPC) and considered that the decision point could be reached by the time of the second review under the PRGF. A preliminary HIPC Initiative Document, jointly prepared by the staffs of the Fund and World Bank, accompanies the request for completion of the first review.

II. Recent Developments

A. The Peace Process

3. Burundi has reached a pivotal moment in the political transition process envisaged under the Arusha Peace Agreement of August 2000. Following intensified political negotiations leading up to the end-October 2004 deadline for political transition under the Arusha Agreement, a new draft constitution and national elections were agreed upon. A national referendum on the draft constitution is scheduled for December 22, 2004. Hostilities in most of the country have ceased, but a small remaining hold-out rebel group continues to stage sporadic attacks in the periphery of Bujumbura that prevent the upgrading of the security situation. In May 2004, the United Nations Operations in Burundi (ONUB) assumed peacekeeping operations from the African Union. Key aspects of the political transition, new constitution, and elections are described in Box 1

4. Demobilization, disarmament, and reintegration (DDR) and security sector reform (SSR) operations began in earnest in late 2004. The military integration and DDR/SSR programs are vital components for securing peace and security in Burundi. The operations are supported by the World Bank’s Multi-Country Demobilization and Reinsertion Program (MDRP) for the Great-Lakes region and bilateral donors, in close collaboration with ONUB. Demobilization operations formally began at end-November 2004. As of end-October, some 22,000 former rebel combatants had reported to cantonment centers (Box 2).

Box 1.Key Steps in Burundi’s Peace and Reconciliation Process

  • The Arusha Peace and Reconciliation Agreement was signed by 17 political parties in August 2000. A three-year transitional government was installed in November 2001. After 18 months, a presidential rotation occurred on April 30, 2002, in which Vice-President Domitien Ndayizeye (a Hutu) succeeded Major General Pierre Buyoya (a Tutsi). A cease-fire agreement was signed with several rebel groups in December 2002.
  • In October 2003, a further breakthrough occurred with the signing of a protocol on security and power sharing with the largest rebel group, the CNDD-FDD. In November 2003, a broadened national unity government was installed. The transitional arrangements of the Arusha accord were to have ended on October 31, 2004 with a democratically elected government. In the event, the transition arrangements were extended through mid-2005 on the basis of an agreed draft constitution approved by parliament in October 2004, and a timetable for elections through April 2005. The extension of the transition arrangements was backed by regional heads of state that are supporting the peace process. In early November 2004, the main Tutsi party, UPRONA, which had been in power for much of the period since independence, ended its boycott of the new draft constitution.
  • An independent national electoral commission was created in early September 2004. It has received funding from bilateral donors and technical and financial support from the UNDP.
  • Preconditions for holding elections in early 2005 are the adoption of an electoral code and the constitutional referendum. The demobilization of former combatants and the formation of new defense forces are also viewed as necessary for a successful electoral process.
  • The main provisions of the new constitution are:
    • (i) Direct election of the President, except for the first term, when the National Assembly will elect the President.
    • (ii) The President will appoint two Vice-Presidents representing the two main ethnic groups.
    • (iii) The National Assembly and council of ministers will be composed of Hutus (60 percent) and Tutsis (40 percent).
    • (iv) Representation in the Senate will be split equally between Hutus and Tutsis.

Box 2.Military Integration and the DDR and SSR Programs

The orderly disarmament and reinsertion into society of military personnel and ex-rebel combatants, as well as the creation of an integrated national defense force of appropriate size and composition, and an appropriately trained national police, are prerequisites for political stability, security, and a reduction in military expenditure. The first step in the process is the formal political and ethnic integration of Hutu rebel movements with the predominantly Tutsi-led army. The program is supported by the World Bank’s MDRP.

Military integration and the SSR project aim at the creation of a National Defense Force (NDF) incorporating the existing army and ex-rebel groups. The project assumed 45,000 army personnel and 35,000 ex-rebel combatants. In late 2004, a census of the major groups led to a downward revision of the number for ex-rebel combatants to about 27,000 men. A new national police force is also being created to unify the existing four separate police forces and increase their number from 3,500 to 20,000. The increase in police will come primarily from the demobilized. The MDRP-supported DDR project is estimated to cost US$84 million, and is being supported technically and financially by Belgium, France, the Netherlands, and the UK, in close collaboration with ONUB.

The four-year IDA-backed DDR program provides the framework to reduce the NDF from 80,000 to 25,000 by 2007. In this context, the DDR program supports direct demobilization of 20,000 government militiamen (Guardiens de la paix) and another 10,000 militant combatants (combattants militants) at the outset of the program. UNICEF is also supporting the demobilization and social reintegration of an estimated 8,000 child soldiers, of which some 2,300 had been processed by October 2004.

Burundi: Expenditure Projections for DDR, Military Integration, and National Police Force1/(In millions of U.S. dollars, unless otherwise indicated)
YearMilitary integrationDDRPolice integrationTotalMilitary spendingMilitary perso
RecurrentCapitalRecurrent
(in billions of F Bu)
200345.445,000
20043.07.015.00.015.062.780,000
200514.18.024.724.048.749.466,000
20064.00.018.25.423.636.152,000
20070.00.016.05.421.423.738,000
20080.00.010.59.319.8
Total21.115.084.444.1128.5

Staff estimates based on documentation from the authorities and IDA.

Staff estimates based on documentation from the authorities and IDA.

B. Performance Under the Program

5. Macroeconomic performance has been broadly on track with program objectives, notwithstanding some slippages in fiscal policy. Real economic growth is expected to be slightly above the program target of 5 percent in 2004, as activity has been bolstered by a larger-than-expected recovery of coffee production tempered by a decline in other basic agricultural products. Activity in the nonfarm sectors of the economy has remained buoyant and has benefited from the stepped-up presence of the donor community and peacekeeping troops. Annual inflation edged down through June to about 5% percent but rebounded to about 10 percent in October. Inflation is now projected at about 8.5 percent by end-2004, somewhat above the program target, reflecting higher petroleum prices and higher-than-programmed liquidity creation (Table 2 and Figure 1).

Figure 1.Burundi: Economic and Financial Indicators 1999-2005

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

Table 2.Burundi: Selected Economic and Financial Indicators, 2002-07
200220032004200520062007
Prog.ActualProg.Proj.Proj.Proj.Proj.
(Annual percentage change, unless otherwise indicated
National income and prices
Real GDP growth4.51.1-1.25.15.55.05.05.0
GDP deflator1.710.411.66.78.06.76.05.8
Consumer prices (period average)-1.39.910.76.47.56.65.35.1
Consumer prices (end of period)3.57.510.75.58.55.55.25.0
External sector
Exports, f.o.b. (in U.S. dollars)-20.363.128.6-30.19.439.115.714.3
Imports, f.o.b. (in U.S. dollars)-4.212.529.09.944.96.2-6.92.2
Export volume-19.755.730.3-33.8-18.239.29.47.0
Import volume-3.45.325.79.130.96.5-6.72.0
Terms of trade (deterioration -)-0.1-1.9-3.84.820.90.16.06.7
Real effective exchange rate (annual average; depreciation -)-15.1-18.6-4.3 1/
Central government
Revenue7.56.014.99.84.99.711.911.3
Total expenditure and net lending (commitment basis)1.128.850.110.336.415.0-6.50.5
Noninterest current expenditure0.712.915.93.822.72.013.811.7
(Change in percent of beginning-of-period M2, unless otherwise indicated)
Money and credit
Net foreign assets7.1-4.119.0-1.9-7.72.82.80.9
Domestic credit24.036.914.020.830.611.67.69.5
Government-10.217.29.69.218.9-4.9-2.50.0
Private sector34.015.25.515.313.816.410.49.8
Money and quasi money (M2)27.214.023.118.318.614.916.515.0
Income velocity (ratio of GDP to M2; end of period)4.13.63.73.63.63.53.33.2
Reserve money (12-month growth rate)23.214.310.914.326.97.712.912.4
Central bank refinancing rate (in percent; end of period)15.515.514.514.5 2/
Commercial bank lending rate (in percent; medium term; period average)20.619.620.720.5 1/
(In percent of GDP
Central government
Revenue (excluding grants)20.319.421.119.719.419.019.119.2
Total expenditure and net lending25.929.535.329.542.243.436.433.0
Primary budget balance (excluding foreign-financed projects)2.2-1.5-0.80.0-3.2-1.9-1.9-1.7
Overall balance (commitment basis)
Excluding grants-5.7-10.1-14.2-9.8-22.8-24.3-17.3-13.8
Including grants-1.4-7.3-6.30.3-3.6-4.4-4.0
Savings-investment balances
Current account balance (excluding capital grants)-6.5-8.1-6.1-9.3-20.4-19.0-15.1-14.5
Gross investment5.211.710.411.712.412.812.713.0
Public3.68.78.38.79.49.48.78.7
Private1.63.02.13.03.03.34.04.3
Gross national savings-1.33.64.22.4-7.9-6.2-2.4-1.4
Public-0.2-1.8-1.3-1.4-4.4-2.5-2.4-2.4
Private-1.15.35.53.7-3.5-3.70.00.9
(In millions of U.S. dollars, unless otherwise indicated
External sector
Current account-40.7-48.3-36.5-60.1-135.9-148.0-129.9-133.5
Overall balance of payments-27.1-63.2-11.922.425.4-27.0-28.4-20.5
Gross official reserves (end of period)60.152.968.987.981.7115.0111.5113.9
Gross official reserves (in months of imports, c.i.f.)5.94.65.36.54.35.86.06.0
Net official reserves (in months of imports, c.i.f.)2.23.12.52.21.71.62.02.0
Debt-service ratio (scheduled; in percent of export and service receipts)121.796.8108.3193.9146.062.454.945.8
External payments arrears181.1176.8
Memorandum items:
Exchange rate (Burundi francs per U.S. dollar; average)9311,0741,0831,1201,101 2/
GDP at current market prices (in billions of Burundi francs)584.6647.4644.7722.5734.3822.5915.11,015.9
Sources: Burundi authorities; and Fund staff estimates and projections.

Data through September 2004.

Data through November 15, 2004.

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

Data through September 2004.

Data through November 15, 2004.

6.Performance relative to the program’s quantitative and structural performance criteria was mixed (Appendix ITables 1 and 2, and Box 3). All the program’s end-June quantitative performance criteria, except for that on external arrears, were observed. The beginning of period stock of external arrears ended-up being larger, and clearing operations slower, than expected, and the authorities have requested a waiver for the deviation from the end-June ceiling, as all nonreschedulable external arrears have since been cleared. The indicative ceilings on the government’s wage bill and the primary fiscal deficit were exceeded, however, owing largely to the unanticipated need to include ex-rebel movements in the transitional government. Most of the program’s end-September indicative targets were not met. On the structural front, the authorities have requested waivers for the nonobservance of two performance criteria—establishing an audit court (Cour des Comptes) and introducing domestic liquidity auctions—on which corrective actions have been taken. The two structural benchmarks consisting of extending the transactions tax to domestic goods and concluding an assessment of commercial banks’ compliance with capital requirements were met.

Box 3.Structural Conditionality

Coverage of structural conditionality under the PRGF-supported program

Structural conditionality in 2004 aimed at achieving further progress in key areas, such as the liberalization of the exchange and trade system, the introduction of more efficient monetary policy instruments, including liquidity auctions, and the establishment of an audit court for public finances to improve governance and transparency (MEFP, Tables 2 and 4). For the second review under the 2005 PRGF-supported program, structural conditionality is aimed at further liberalizing the foreign exchange regime.

Status of structural conditionality under the 2004 program

The structural conditionality related to the establishment of an audit court (end-March) and improvements in monetary policy instruments (end-June) was not met, although several elements were completed. The introduction of liquidity auctions has been delayed owing to capacity constraints and the need for additional technical assistance. Fund assistance is being provided to allow for such auctions by Spring 2005. Regarding the audit court, the basic law was passed in March 2004, the Justices were named in June, financing was identified, and the internal regulations and office and equipment needs were put in place in autumn 2004. The court is expected to start operations by April 2005.

Structural areas covered by World Bank lending and conditionality

Under the World Bank’s Economic Recovery Credit (ERC), approved in 2002, structural conditionality focused on the preparation of a strategic privatization plan, as well as an action plan for improving public finances and the operations and audit of the Treasury. Beginning in 2003, the government also linked budget allocations to the priorities identified in the I-PRSP and was required to monitor budget releases to such programs. For the release of the third and final tranche of the ERC (in December 2004), structural conditionality focused on the adoption of a reform strategy for the coffee and tea sectors, an action plan to eliminate gender disparities, a plan to reform public procurement, and the submission to parliament of legislation establishing an Office of Auditor General responsible for auditing the financial operations of public agencies.

7. Fiscal pressures emerged early in 2004, and the primary balance moved into deficit (1.3 percent of GDP) during the first semester, compared with a surplus of 0.5 percent of GDP envisaged in the program (Table 3). 1 The primary deficit deteriorated further to 3.1 percent of GDP by September. Revenues fell below the program’s target—by 1.1 percent of GDP—as the partial pass-through of the sharp increase in world oil prices led to a shortfall in taxes from oil products and profit transfers from the central bank were smaller than expected. These shortfalls were offset in part by buoyant receipts from the income tax, reflecting strengthened tax administration. The overrun in primary spending stemmed from approximately equal overages in outlays needed to sustain the political transition and the peace process, payments of guaranteed coffee sector credit losses, and the domestically financed counterpart to much higher-than-expected project spending. Project spending, financed by concessional external support, doubled program expectations. Domestic arrears equivalent to 1.4 percent of GDP were paid off through end-September, including arrears to oil suppliers (which in turn settled their arrears with banks), but new outstanding payments orders of 1.4 percent of GDP were accumulated. The larger budget deficit, coupled with delays in the disbursement of external budget support, led to higher-than-programmed bank financing (MEFP, paragraph 8).

Table 3.Burundi: Central Government Operations, 2003-05
200320042005
Act.Jan.-Jun.Jan.-Sep.Jan.-Dec.Jan.-Jan.-Jan.-Jan.-
Prog.Act.Prog.Act.Prog.Proj.Mar.Jun.Sep.Dec.
Projections
(In billions of Burundi francs)
Revenue136.073.369.3113.6107.2142.4142.643.381.0118.0156.4
Tax revenue120.562.560.999.996.0128.6128.935.571.0106.5142.0
Income tax32.414.316.620.824.529.132.08.717.526.235.0
Taxes on goods and services58.431.230.349.449.563.965.318.436.755.173.5
Taxes on international trade29.516.913.729.621.835.431.08.216.424.732.9
Other tax revenue0.30.10.30.10.30.20.60.20.30.50.7
Nontax revenue15.510.88.413.611.213.713.77.810.011.514.4
Expenditure and net lending227.396.0141.8144.8231.0213.1310.191.8180.9269.3356.6
Current expenditure144.375.882.4111.2131.3152.2175.144.788.6133.0176.9
Salaries53.828.530.242.044.658.461.816.332.648.965.2
Civilian30.816.018.123.726.533.136.510.020.130.140.1
Military23.012.512.118.418.025.325.36.312.518.825.1
Goods and services47.326.026.437.343.545.854.713.727.341.054.6
Civilian23.412.815.317.822.123.429.77.014.020.927.9
Military24.013.211.119.521.522.425.06.713.420.026.7
Transfers and subsidies15.87.610.010.721.519.127.06.613.319.926.5
Of which: to coffee sector5.41.57.61.57.60.00.00.04.0
Interest payments (due)27.413.715.821.221.729.031.78.215.423.330.6
Domestic13.37.89.611.010.914.317.64.99.814.619.5
Foreign14.15.96.210.110.814.814.13.35.78.711.1
DDR and SSR project /117.612.027.042.055.0
Elections 1/9.310.016.116.116.1
Project expenditure85.020.659.834.8100.462.9110.125.550.379.6110.6
Domestic resources 2/26.57.712.615.321.221.025.06.913.820.627.5
External resources58.412.947.219.579.241.985.118.736.559.083.1
Net lending-2.0-0.4-0.4-1.2-0.7-2.0-2.0-0.5-1.0-1.5-2.0
Overall balance (commitment basis)-91.3-22.8-72.4-31.2-123.8-70.7-167.4-48.5-99.9-151.3-200.2
(after grants)-40.540.1-21.831.6-12.216.72.4 #-18.0-19.3-46.2-29.4
Of which: primary balance 3/-5.43.9-9.59.4-22.90.1-23.80.4-4.9-10.8-15.3
Change in arrears (reduction -)-2.2-37.3-25.9-37.3-39.8-37.3-61.4-9.2-10.2-11.2-23.2
External (interest)4.2-32.8-30.6-32.8-39.7-32.8-49.5-8.2-8.2-8.2-8.2
Domestic-6.4-4.54.7-4.5-0.1-4.5-11.9-1.0-2.0-3.0-15.0
Overall balance (cash basis)-93.5-60.1-98.3-68.5-163.6-108.0-228.8-57.6-110.1-162.4-223.3
(after grants)-42.62.8-47.7-5.7-52.0-20.6-59.1-27.1-29.5-57.3-52.5
(In billions of Burundi francs)
Financing (identified)93.560.1101.168.5166.0108.0228.957.5100.4151.3193.5
External grants50.862.850.662.8111.687.4169.830.580.6105.1141.0
Program support15.162.815.762.850.071.780.14.522.022.028.8
Project grants35.80.035.00.061.615.762.88.621.233.852.7
Special programs (DDR/SSR and elections) 1/26.917.437.449.359.5
External borrowing28.6-8.121.6-5.61.24.920.322.110.829.153.5
Program loans22.416.40.016.40.016.416.310.810.826.653.3
Project loans22.712.912.219.517.626.122.210.115.325.230.5
Amortization (due)-36.9-18.5-17.7-26.4-26.4-38.0-37.7-8.2-17.9-27.7-38.2
Change in amortization arrears-9.0-128.7-59.2-128.7-77.3-128.7-89.2-36.8-46.5-46.5-46.5
Debt relief (rescheduling ; cancellation)29.4109.986.4113.787.3129.1108.646.149.051.554.4
Privatization proceeds2.04.05.0
Domestic14.05.328.811.353.215.738.85.07.013.0-6.0
Banking sector15.25.324.411.347.215.032.94.05.010.0-10.0
Nonbank sector-1.10.04.50.06.00.75.91.02.03.04.0
Financing gap/unaccounted for0.00.0-2.80.0-2.40.00.00.19.711.229.8
(In percent of GDP, unless otherwise indicated)
Memorandum items:
Revenue21.110.19.415.714.619.719.45.39.814.319.0
Total expenditure and net lending35.313.319.320.031.529.542.211.222.032.743.4
Of’ which: current expenditure22.410.511.215.417.921.123.85.410.816.221.5
project expenditure 2/13.22.88.14.813.78.715.03.16.19.713.5
Primary expenditure (prog. definition) 3/21.99.610.714.417.719.723.96.412.417.622.8
Military and security expenditure7.33.63.25.25.46.66.91.63.14.76.3
Social expenditure5.44.97.16.76.9
Health0.60.51.21.01.2
Education4.33.84.95.15.1
Other (youth, women, and refugees)0.60.51.00.60.6
DDR and military integration project /12.41.53.35.16.7
Primary balance 3/-0.80.5-1.31.3-3.10.0-3.20.0-0.6-1.3-1.9
Overall balance
Commitment basis, before grants-14.2-3.1-9.9-4.3-16.9-9.8-22.8-5.9-12.1-18.4-24.3
Commitment basis, after grants-6.35.5-3.04.4-1.72.30.3-2.2-2.3-5.6-3.6
Cash basis, before grants-14.5-8.3-13.4-9.5-22.3-15.0-31.2-7.0-13.4-19.7-27.2
Cash basis, after grants-6.60.4-6.5-0.8-7.1-2.9-8.0-3.3-3.6-7.0-6.4
Financing (net)14.58.313.89.522.615.031.27.012.218.423.5
External7.98.76.98.715.212.123.13.79.812.817.1
Domestic2.20.73.91.67.22.25.30.60.91.6-0.7
Of which: banking sector2.40.73.31.66.42.14.50.50.61.2-1.2
Financing gap-2.1-3.4-4.6-7.2
GDP at current market prices (in
billions of Burundi francs)644.7722.5734.3722.5734.3722.5734.3822.5822.5822.5822.5
Average exchange rate (Burundi francs
per U.S. dollar)1,0831,1081,0991,1151,1001,120
Sources: Burundi authorities; and Fund staff estimates and projections.

Budgetary execution of the military integration (DDR) and national police force (SSR) programs and the 2005 elections are to a considerable extent subject to the availability of external grants.

Includes counterpart funds from earmarked World Bank credits.

Primary expenditure defined as noninterest current expenditure, domestically financed capital expenditure, and net lending; in 2004 -05 it excludes the special programs of military demobilization and elections.

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

Budgetary execution of the military integration (DDR) and national police force (SSR) programs and the 2005 elections are to a considerable extent subject to the availability of external grants.

Includes counterpart funds from earmarked World Bank credits.

Primary expenditure defined as noninterest current expenditure, domestically financed capital expenditure, and net lending; in 2004 -05 it excludes the special programs of military demobilization and elections.

8. A revised budget was signed into law in late September, following discussions with staff. The revised budget targets a primary deficit of close to 3 percent of GDP in 2004, compared with a balanced position envisaged in the program. It provides for the extension of the import service charge to nondiplomatic imports and incorporates a 6 percent wage increase for civil servants (delayed from January). The revised budget also includes the hiring of 2,300 new teachers and 500 medical personnel to address existing shortages and progress toward the social objectives of the Poverty Reduction and Strategy Paper (PRSP).

9. Monetary policy was under pressure in 2004 as a result of the higher financing needs of the government. The larger deficit and delays in external budget support led to higher-than-envisaged net credit to government, which accounted for virtually all of the expansion in NDA of the BRB in the period through end-September (Table 4). The net foreign assets of the BRB dropped and gross official reserves declined to about 2.7 months of imports at end-September. To help contain liquidity growth, from mid-year the BRB tightened its ceilings on noncoffee credit to banks. Reserve money growth, which had risen rapidly in the first half of 2004, was stopped in the third quarter. Broad money growth (12-month change) decelerated to 14.5 percent in September (20 percent under the program), as banks accumulated excess reserves. Credit to the economy increased broadly in line with nominal GDP. Interest rates in the banking system remained broadly stable (see Table 2).

Table 4.Burundi: Monetary Survey and Central Bank Accounts, 2003-05
200320042005
DecemberJuneSeptemberDecemberMarchJuneSept.Dec.
Proj.Act.Prog.Act.Prog.Act.Prog.Rev.Prog.Prog.Prog.Prog.
Prog.
(In billions of Burundi francs)
Monetary survey
Net foreign assets46.845.242.28.234.7-3.438.331.827.518.917.337.6
Central bank39.335.636.512.429.90.634.335.124.715.914.034.1
Deposit money banks7.59.65.8-4.24.9-4.04.0-3.32.83.03.33.5
Net domestic assets130.2128.5146.2171.3159.5188.2161.7174.3173.1189.0195.9199.2
Domestic credit198.0215.0210.0249.6219.4275.9226.6267.9258.5276.6285.7291.7
Net claims on the government34.546.139.671.745.593.549.278.182.281.388.568.6
Central government42.056.447.280.853.2103.657.089.393.394.399.379.3
Other government (deposits)-7.5-10.3-7.7-9.1-7.7-10.1-7.8-11.2-11.1-11.0-10.8-10.7
Credit to the economy163.4168.9170.5177.9174.0182.3177.4189.8176.2195.3197.2223.1
Claims on public enterprises4.27.04.15.34.16.64.04.03.93.73.63.4
Claims on private sector159.3162.0166.4172.6169.9175.7173.4185.8172.4191.6193.7219.7
Other items, net (assets +)-67.8-86.5-63.8-78.3-59.9-87.7-64.9-93.7-85.3-87.6-89.8-92.6
Money and quasi money177.0173.7188.5179.5194.2184.8200.0206.1200.6208.0213.1236.8
Money116.5120.6124.1132.8127.9138.3131.7153.2148.3155.7157.6174.6
Currency in circulation51.544.554.856.456.554.658.258.054.361.757.762.9
Demand deposits65.076.169.376.471.483.773.595.294.094.099.9111.8
Quasi money60.453.164.446.766.346.568.352.952.352.355.562.1
Central bank
Net foreign assets39.335.636.512.429.90.634.335.124.715.914.034.1
Foreign assets79.375.390.284.395.755.4101.189.988.991.389.4120.8
Foreign liabilities40.039.753.771.965.854.866.854.864.175.475.486.7
Of which: use of Fund resources29.331.242.042.755.142.755.142.752.063.363.374.6
Net domestic assets23.419.630.858.840.068.737.435.043.757.657.541.4
Domestic credit62.968.868.6101.072.0117.472.690.791.0107.2109.495.5
Government (net)32.255.639.683.843.3100.346.980.084.185.390.580.5
Central government34.058.741.585.745.3102.649.084.088.089.094.084.0
Other government-1.8-3.1-1.9-1.9-2.0-2.3-2.1-4.0-3.9-3.8-3.5-3.5
Nongovernment credit30.713.229.017.228.717.025.710.76.921.918.915.0
Private sector1.71.61.72.01.72.01.71.71.81.81.91.9
Commercial banks23.510.221.311.220.011.818.06.56.222.820.618.7
Nonbank financial institutions5.51.46.04.07.03.26.02.5-1.1-2.7-3.6-5.6
Other items, net (including revaluation)-39.5-49.2-37.8-42.2-32.0-48.7-35.2-55.7-47.3-49.6-51.8-54.1
Reserve money62.755.267.271.269.869.371.770.168.473.671.575.5
Currency in circulation51.544.554.856.456.554.658.258.054.361.757.762.9
Commercial bank reserves (including cash in vault)10.79.611.713.512.613.712.710.212.210.011.910.8
Other nonbank deposits0.51.20.71.30.71.10.81.91.91.91.91.9
Memorandum items:(Units as indicated)
Gross international reserves (U.S.$, millions)58.550.381.784.687.085.1115.0
M2 growth (12-month percent change)22.023.118.613.020.414.615.118.618.915.815.314.9
Credit to the economy (12-month percent change)15.05.93.58.04.19.15.012.42.59.88.117.5
Reserve money (12-month percent change)25.910.921.633.430.229.414.426.921.83.33.27.7
Money multiplier (M2/reserve money)2.83.12.82.52.82.72.82.92.92.83.03.1
Velocity (GDP/M2; end period)3.63.73.73.63.5
Gross reserves (in months of imports c.if.)4.75.34.93.14.52.74.74.34.24.44.35.8
Exchange rate (Burundi francs per U.S. dollar)1,0901,0931,1201,1031,1351,1031,150
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.

10. During 2004, the Burundi franc remained broadly unchanged vis-a-vis the U.S. dollar, with the differential between the official and parallel exchange rates falling to about 2 percent, the lowest level in a decade (Figure 2). The authorities consider the reduction in the differential as a major accomplishment of their efforts at liberalizing the exchange system, including the reduction in foreign exchange surrender requirements and the admission of foreign exchange bureaus to the BRB’s weekly foreign exchange auctions. However, they agree that further reforms are needed to improve the efficiency of the exchange regime. The real effective exchange rate depreciation slowed considerably in 2004, to about 4.3 percent through September.

Figure 2.Burundi: Exchange Rate Developments

(Monthly averages)

Sources: Burundi authorities; and IMF, Information Notice System.

11. The external current account deficit is projected to widen sharply to 20.4 percent of GDP in 2004, reflecting a surge in imports fueled by NGO project activity, and the sharp rise in world oil prices (Table 5). The export performance was better than expected in 2004, owing to a recovery in coffee production and world market prices. The overall balance of payments surplus is expected to be broadly in line with the program, as foreign assistance has exceeded expectations. Debt-service payments (after rescheduling and excluding repayment to the Fund of the post-conflict drawings) are projected to remain very high in 2004 at the equivalent of 83 percent of exports of goods and services.

Table 5.Burundi: Balance of Payments, 2002-07
200220032004200520062007
Prog.Proj.Proj.Proj.Proj.
(In millions of U.S. dollars)
Current account-40.7-36.5-60.1-135.9-148.0-129.9-133.5
Trade balance-72.7-93.8-107.5-150.2-145.2-121.3-115.3
Exports, f.o.b.31.240.232.743.961.170.780.8
Of which: coffee16.725.515.326.242.850.358.8
Imports, f.o.b.-103.9-134.0-140.2-194.1-206.3-192.0-196.2
Of which: petroleum products-15.9-30.0-21.3-58.7-60.5-61.8-63.5
Services (net)-35.7-27.7-53.1-94.7-93.4-81.7-71.8
Credits7.717.55.87.211.413.215.1
Debits-43.3-45.2-58.9-101.8-104.8-94.9-86.9
Income (net)-14.1-20.1-16.9-21.9-21.6-19.0-18.5
Of which: interest on public debt (including IMF charges)-12.1-13.4-13.8-10.8-10.9-9.7-9.9
Current transfers (net)81.8105.2117.5130.9112.292.172.1
Private (net)5.57.09.07.48.29.210.2
Official (net)76.398.2108.5123.6104.083.062.0
Capital account26.247.078.7145.877.385.090.8
Project grants14.133.014.073.150.055.057.8
Program grants12.114.064.772.727.330.033.0
Financial account2.6-21.63.811.343.716.422.2
Direct investment0.00.00.00.05.010.011.0
Medium- and long-term official loans (net)1.9-7.24.3-0.545.16.611.4
Disbursements34.641.938.135.079.443.045.5
Project loans14.621.023.320.228.823.023.5
Program loans20.020.914.814.850.620.022.0
Amortization (excluding IMF)-32.7-49.1-33.8-35.5-34.4-36.4-34.0
Other capital0.7-14.4-0.511.7-6.3-0.2-0.2
Errors and omissions-15.2-0.90.04.20.00.00.0
Overall balance-27.1-11.922.425.4-27.0-28.4-20.5
Financing (- increase in assets)27.111.9-22.4-25.4-0.94.8-0.8
Change in central bank net foreign reserves (- increase)-5.7-9.86.20.7-0.6-4.7-0.8
IMF, net-10.0-12.520.0-10.4-32.2-21.1-10.6
Other reserves, net4.32.7-13.711.131.616.49.7
Change in arrears (+ increase)32.7-5.4-145.1-125.0-51.20.00.0
Exceptional financing 1/0.027.1116.599.050.99.50.0
Cancellation0.00.00.033.30.00.00.0
Rescheduling of debt service and arrears0.027.1116.565.750.99.50.0
Financing gap0.027.823.621.3
(In percent of GDP, unless otherwise indicated)
Memorandum items:
Trade balance-11.6-15.8-16.7-22.5-18.6-14.1-12.5
Current account-6.5-6.1-9.3-20.4-19.0-15.1-14.5
Of which: excluding current official transfers-18.6-22.6-26.1-38.9-32.3-24.8-21.2
Gross official reserves
In million of U.S. dollars60.168.987.981.7115.0111.5113.9
In months of imports, c.i.f.5.95.36.54.35.86.06.0
Debt-service ratio (in percent of exports of goods and services)
Scheduled current maturities (including IMF)121.7108.3193.9146.062.454.945.8
Actual payments on current maturities (including IMF ; after debt relief)37.567.4134.250.143.645.8
Nominal GDP (in millions of U.S. dollars)628.1595.5645.0667.2780.9857.6923.4
Sources: Burundi authorities; and Fund staff estimates and projections.

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

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

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

12. Burundi has made considerable progress in normalizing relations with international creditors, including through a concessional flow rescheduling from Paris Club creditors (Box 4). The clearance of remaining arrears to multilaterals (the AfDB, the EU/EIB, and the OPEC Fund) was completed in the latter part of2004.2

13. The implementation of structural reforms has lagged somewhat, reflecting the complex political environment and weak administrative capacity (Table 6). The coffee sector continues to face serious difficulties, reflecting large sectoral inefficiencies and weak world market prices. Production rose to about 38,000 tonnes in 2004, but processing constraints have led to delays in exports, higher inventory costs, and deterioration in quality. Cumulative losses since 2000/01 amount to over 2 percent of GDP, resulting in defaults on bank loans that have been covered by the budget under a government guarantee. The authorities recognized the need to liberalize the sector in order to attract much needed private investment and financing, improve quality, and bolster incomes of small producers, as well as to eliminate the fiscal burden. To this end, a comprehensive reform strategy developed with World Bank and EU support was approved by the council of ministers on October 28, 2004 (MEFP, paragraph 11).

Table 6.Burundi: Structural Reform in 2004 and 2005
MeasuresStatus
Security and National Reconciliation
• Cantonment of former rebel combatants.22,000 former combatants reported to 12 cantonment camps as of
end-October 2004.
• Demobilization of army personnel and formerThe first combatants were demobilized in early December 2004 (75
combatants.from government forces and 141 from rebel forces).
• Resettlement of refugees and internally displacedRefugees in UNHCR camps in Tanzania down from 500,000 in
people.2002, to 350,000 in 2003, to 269,000 in September 2004.
Internally displaced people down from 400,000 in 2002, to 270,000
in 2003, to 120,000 in September 2004.
• Preparation of inventory of lands to be made availableFirst half 2005 (originally 2004). Inventory likely to be concluded
to refugees.only following 2005 elections.
Poverty Reduction and Social
• Preparation of full-PRSP.May 2005. Work in process based on national consultations.
• Implementation of tracking mechanism for poverty-December 2005 (with 2006 budget).
related expenditure.
• Assess status of progress toward MillenniumSeptember 2005.
Development Goals (MDGs).
Fiscal Management and Transparency
• Extension of the transactions tax to domesticallyImplemented in January 2004.
produced goods and services.
• Approval of a revised 2004 budget.Revised budget approved in September 2004 providing for higher
expenditures in connection with the peace process and the hiring of
teachers and medical personnel. Customs service charge extended
to all nondiplomatic imports.
• Raising of public social expenditure on social sectors.From 5.4 percent of GDP in 2003; 6.7 percent in 2004; 7.0 percent
in 2005 budget.
• Introduction of single taxpayer identification number.First half 2005 (originally 2004). Procedures in place, but
implementation pending on hiring of data systems expert.
• Adoption of a new budget and government accountsDecember 2004. Apply with the 2005 budget.
code.
• Reinforcement of key administrative capacity in theIn 2005, skilled advisors and experts to be hired with the support of
Ministry of Finance.the World Bank PAGE project.
• Creation of an internal audit service in the Ministry of2005.
Finance.
• Completion of audited inventory of domestic arrears.June 2005.
• Completion of civil service census and cleaning up ofSeptember 2005.
payrolls accordingly.
• Transfer of payroll management to Ministry of Finance.September 2005. Payroll currently managed by the Ministry of the
Civil Service.
Money and Exchange Regime
• Enforcement of commercial bank compliance withBank-by-bank assessment completed in March 2004. Minimum
prudential regulations.capital requirements rose substantially. Two noncompliant banks
subsequently closed and being liquidated.
• Adoption of enhanced money management tools.Structure of BRB refinancing rate revised and tighter criteria for
commercial bank reserves eligibility introduced in June 2004.
• Elimination of parallel market exchange differential.Differential reduced by late 2004 to 2 percent from 30 percent in
2002.
• Liberalization of foreign exchange transactions.Three foreign exchange bureaus established in 2004 and admitted to
central bank foreign exchange auctions.
Reporting and administrative requirements on current account
transactions to be eased further in 2005.
• Mandatory nature of BRB auction reference rate forDecember 2004. Official rate to be based on average market rates.
commercial bank transactions to be abolished.
• BRB to unify its multiple bank-by-bank credit ceilings.January 2005.
• Elimination of remaining export surrenderMarch 2005. Currently, 50 percent of proceeds of coffee, tea, and
requirements.cotton exports have to be surrendered to central bank.
• Introduction market based liquidity auctions.Spring 2005 (originally June 2004). IMF technical assistance in
place.
Sectoral Policies
Coffee
• Financial audit of coffee marketing parastatal (OCIBU).Audit completed in July 2004. Accumulated losses (of F Bu 20
billion) found to be higher than previously reported.
• Coffee sector liberalization.Strategy approved October 28, 2004 (for tea, and cotton). First step
of reforms of the OCIBU auctioning procedures and opening of
sector to private enterprise implemented in December 2004.
Liberalization of sales and marketing from March 2005.
• Launching tenders for sale of state-owned coffeeJune 2005.
processing assets.
• Downsize OCIBU into a regulatory agency.Fall 2005.
Other
• Reduction of number of tariff bands and their levels.Implemented with 2005 budget. Number of bands reduced from
four to three (10, 15, and 30 percent) with highest rate down from
40 percent.
• Establishment of the audit court (Cour des Comptes).April 2005 (originally June 2004). Court members have been
appointed and facilities set up. Low on status of magistrates in
parliament. Operational establishment is pending statutory
legislation and external training.
Initiate audit of 2004 government accounts by May 2005.
• Introduction of new bankruptcy code.New bankruptcy code with Parliament.
• Begin privatization of government assets in the2005.
financial sector.
• Lift trade restrictions and price controls in sugar sector.September 2005.
• Set up one-stop office for setting up new enterprises.November 2005.
• Introduce new investment code.December 2005.

14. The establishment of an audit court, originally scheduled for end-March 2004 (performance criterion), is delayed. While the audit court law was passed in March 2004 and its magistrates were appointed in June, a law to define the magistrates’ legal status is still being considered by parliament. An action plan was approved by the council of ministers on October 28 to render the court operational by April 2005. Financing has been obtained and training and logistics are geared for the court to begin auditing the 2004 government accounts by the spring of 2005 (MEFP, paragraph 10).

Box 4.Paris Club Rescheduling

Paris Club creditors agreed on March 4, 2004 to a restructuring of Burundi’s public external debt, following the approval of a PRGF arrangement in January 2004. The deadline for concluding the bilateral agreements was extended from end-September 2004 to end-March 2005, and by November 2004 agreements had been signed with all but one creditor. The specifics are summarized below:

  • The agreement treats both accumulated arrears as of end-2003 and current maturities falling due in 2004-06 under Naples terms.
  • Pre-cutoff date (June 20, 1999 official development aid (ODA)) debts are rescheduled over 40 years, with 16-year grace period, at interest rates at least as favorable as the original interest rates.
  • Pre-cutoff-date commercial credits are rescheduled over 23 years, with 8-year grace period, at market interest rates, with a present value reduction of 67 percent.
  • 75 percent of interest accruing in 2005-06 on rescheduled amounts was capitalized, with repayment (in equal semi-annual installments) between September 2008 and March 2016.
  • Creditors agreed to top-up the reduction rate to 90 percent (Cologne terms) as soon as Burundi has reached its decision point under the enhanced HIPC Initiative.
  • Burundi committed to seek comparable treatment from other external creditors.

15. Two of the three components of the end-June structural performance criterion on monetary management were implemented. The BRB modified the rules governing the constitution of reserve requirements and the marginal refinancing rate for credit to banks, however, weekly liquidity auctions were not initiated owing to continued operational shortcomings.3 A recent MFD technical mission has made several recommendations to achieve further progress in this area and the BRB is working to enhance its liquidity forecasting capabilities and has adopted a plan to introduce weekly liquidity auctions and a rediscount facility by the spring of 2005. Prudential supervision was strengthened and two noncompliant banks were closed (MEFP, paragraphs 9 and 26).

III. Policy Discussions and the Revised Program for 2004-05

A. Macroeconomic Objectives

16. The authorities’ objectives for the remainder of 2004 and 2005 are to consolidate the progress achieved on economic recovery and financial stability, address macroeconomic slippages, and deepen financial and structural reforms. Discussions on the near-term focused on achieving a balance between containing inflation and increasing public spending to deal with the country’s social priorities; providing adequate scope for private sector activity; and increasing international reserves from current levels.

17. The updated program for 2004-05 aims to sustain growth at about 5 percent a year and reduce inflation to 8.5 percent by end-2004 and 5.5 percent by end-2005. To support these goals while accommodating substantially higher expenditure levels, the overall fiscal deficit (on a cash basis after external grants) will be contained at 8.0 percent of GDP in 2004 and 6.4 percent in 2005, with the primary deficit targeted at 3 percent of GDP and 2 percent, respectively. The fiscal program will give priority to social spending; military and security expenditures (excluding DDR/SSR) will be restrained. The external current account deficit is expected to decline to 19.0 percent in 2005, reflecting much higher coffee exports. International reserves would rise from the equivalent of 4.3 months of imports at end-2004 to 5.8 months at end-2005.

18. The authorities are committed to accelerating the implementation of structural reforms to support the economic recovery, ensure its sustainability, and reduce poverty. Discussions focused on strengthening public financial management and fiscal transparency; improving the delivery of social services; enhancing monetary policy; and further liberalizing the trade and exchange regimes. The government is also pressing ahead with the political transition agenda and the DDR/SSR programs, which will help ensure a stable and secure environment for the development of the economy and improvements in social conditions.

B. Fiscal Policy

19. The revised budget for 2004 aimed to maintain macroeconomic stability while accommodating unforeseen expenditure demands. While the overall deficit before grants would be significantly larger than in the original program—owing to a sharp increase in external grants for projects, DDR/SSR, and the elections—the overall fiscal position (commitment basis, after grants) is projected to be in virtual balance, which represents a large improvement from the previous year. Revenues are cautiously projected at 19.4 percent of GDP in 2004, somewhat lower than originally envisaged, while expenditure would rise markedly owing largely to a sharp increase in project and special program spending.4

20. In view of the slippages in 2004, fiscal policy in 2005 will be geared at avoiding a further significant erosion of revenues and containing expenditure (MEFP, paragraphs 19–21). Total revenue is expected to decline somewhat to about 19 percent of GDP in 2005, reflecting the impact of an import duty reduction (0.3 percent of GDP)5 that will be offset, in part, by measures to contain customs exonerations and reduce tax evasion. Although primary expenditures excluding special programs would be reduced, total expenditures will remain high, owing to large-scale external assistance to accommodate reconstruction and transitory electoral and DDR/SSR costs. Social sector spending is budgeted at 7 percent of GDP in 2005 (6.7 percent in 2004), while military spending would decline by about ½ percentage point of GDP to 6.3 percent of GDP.6 Budget support (grants and loans) from multilaterals is expected to rise sharply in 2005, while bilateral grant assistance would decline. Privatization receipts are projected at about 0.6 percent of GDP in 2005, reflecting the start of a national privatization program.7 A remaining financing gap of about US$28 million is expected to be covered by bilateral grants. This level of concessional financing would allow for a reduction in domestic arrears and the government’s net indebtedness to the banking system. In late December, the government submitted to parliament a draft budget consistent with the abovementioned objectives.

21. The authorities are committed to improving the management of public finances, with technical and financial support from key donors, including the World Bank (MEFP, paragraphs 23-24). The inventory of domestic arrears is an important initial step in the authorities’ objective of normalizing relations with suppliers and lifting the burden of unpaid bills on the private sector, including the banking system. An arrears clearance strategy will be defined in the context of the second program review.

C. Monetary, Financial Sector, and Exchange Rate Policies

22. Pressure on monetary policy resulting from delayed budget support and higher-than-expected government spending is expected to ease in late 2004 with the disbursement of delayed budget support from the EU and the World Bank. Broad money growth is projected to be slightly above the program, at about 19 percent by year’s end. Reserve money growth would decline from a midyear high to about 27 percent by end-2004, owing to the reduction in credit to government and to banks.

23. The program for 2005 aims to lower broad money growth to 15 percent in order to achieve the envisaged decline in inflation. Reserve money growth would decline to below 10 percent owing to a reduction in net credit to government and a significantly lower expansion of coffee credit. Assuming a slight decline in velocity, the fiscal program would allow credit to the private sector to grow somewhat more than nominal GDP.

24. Monetary management will be reinforced in 2005 through the migration from bank-by-bank administrative credit ceilings to a more effective market-determined overall liquidity management system. To this end, in January 2005 the BRB will unify and cut further its credit ceilings (which are still nonbinding) and in the spring of 2005 it will introduce weekly liquidity auctions with technical support from MFD. In addition, treasury bills are to be standardized and made tradable.

25. Overall, Burundi’s financial sector remains generally sound, although some small banks appear vulnerable. Following the strengthening of minimum capital requirements (nearly tripled) in March 2004, the BRB is making further efforts to improve bank supervision and gradually tighten prudential requirements in line with international standards. The BRB is also committed to improving transparency and has signed a multiyear external audit contract.

26. The authorities are committed to pursuing further exchange system liberalization (MEFP, paragraph 28). In support of a move to an interbank exchange market regime, the remaining export surrender requirement (50 percent on coffee, tea, and cotton) will be abolished by March 2005 (performance criterion). With the support of Fund technical assistance, the restrictions and reporting requirements on foreign exchange transactions will be further simplified in 2005.

D. Structural Reforms

27. In addition to the measures in the areas of public financial management, tariff reform, and exchange liberalization, other important reforms include the liberalization of key productive sectors and improvements in governance (MEFP, paragraphs 29-32).

28. The government is putting in place the recently approved reform strategy for the coffee sector, which was prepared with technical support from the EU and the World Bank.8 A first step was taken in December 2004 by allowing private investment at all levels of the supply chain. The restrictions on the export and sale of coffee will be abolished in early 2005 (once existing crop credit is repaid), and government holdings in the coffee processing infrastructure will be offered for sale by June 2005. Subsequently, the state marketing monopoly, OCIBU, will be restructured and converted into a regulatory and support agency. In 2005, the government also intends to liberalize the sugar sector, which remains highly regulated and distorted.

29. A well functioning audit court is essential for improving the transparency and accountability of the public finances. As noted above, the government has undertaken, in conjunction with parliament, several measures to ensure that the court is fully operational by April 2005 (MEFP, paragraph 32). The last major hurdle to the court’s establishment is expected to be overcome in December with the passage of the necessary legislation on the statutes of the magistrates.

E. Program Financing

30. For 2005, the overall external nonproject financing need is estimated at US$190 million (Table 7). This requirement is expected to be covered, to a large extent, by financial assistance from the World Bank (ERC2 credit), the AfDB, the EU, and bilateral donors. In addition, funding has been secured for the constitutional referendum in late 2004 and the national elections in 2005, largely in the form of bilateral grants. A residual gap of US$28 million (3.8 percent of GDP) corresponding to remaining budgetary financing needs associated with the DDR/SSR program, is expected to be closed at a donors meeting tentatively scheduled for the spring of 2005.9 In the circumstances, Burundi should be able to meet, without difficulty, its external nonreschedulable debt-service payments.

Table 7.Burundi: External Financing Requirements and Sources, 2003-06(In millions of U.S. dollars)
2003200420052006
Prog.Proj.Proj.Proj.
External resources (identified)238.6195.5375.9263.6265.3
Exports of goods and services57.638.551.172.583.9
Other private services1.32.71.31.41.5
Private transfers (net)7.09.07.48.29.2
Current official transfers (net)98.2108.5123.6104.083.0
Capital official transfers (net)47.014.0145.850.055.0
Foreign direct investment0.00.00.05.010.0
Medium-and long-term official loans41.923.335.028.823.0
Other capital-14.4-0.511.7-6.3-0.2
Use of resources-237.7-391.5-380.1-452.4-369.5
Imports of goods and services-179.2-199.1-296.0-311.1-286.9
Other private services-8.1-5.9-12.5-12.1-10.8
Debt-service payments (including IMF charges)-40.7-192.7-72.3-96.4-46.1
Of which: net accumulation of arrears (+)-5.4-145.1-125.0-51.20.0
Net change in reserves, excluding IMF (- increase)-9.86.20.7-32.7-25.8
Errors and omissions-0.90.04.20.00.0
Financing need196.0188.8104.3
Program loans and grants79.5110.171.1
Of which: IMF PRGF disbursements45.432.221.1
Debt relief (under existing mechanisms)116.550.99.5
Residual financing need0.027.823.6
Sources: Burundi authorities; and Fund staff estimates and projections.
Sources: Burundi authorities; and Fund staff estimates and projections.

31. Burundi’s external debt service burden remains unsustainably high, even after traditional debt relief. A preliminary debt sustainability analysis prepared by Fund and World Bank staffs indicates an external debt-to-exports ratio, on a present value basis, of above 1,800 percent at end-2003 (after Paris Club Naples flow relief). Thus, substantial relief under the enhanced HIPC Initiative will be needed to restore debt sustainability.

F. Program Monitoring

32. The program’s prior actions, quantitative performance criteria (end-December 2004 and end-June 2005), indicative targets, and structural performance criteria are listed in Table 3 and 4 of the MEFP. In the context of the coffee sector reform, the authorities agreed that any new credit guarantee granted during the transitory period 2005/06 would be consulted with Fund staff. The definitions of the program’s performance targets, external assistance adjustors, and underlying assumptions, as well as Burundi’s reporting requirements, are set out in the TMU (annexed to the MEFP). The nonproject external financing adjustor and the definition of external arrears have been modified (MEFP, Table 4, and TMU).

33. The authorities indicated that nonobservance of the program’s two structural performance criteria was attributable to the complex political environment and weak administrative capacity. They noted that corrective actions for both structural measures were now in process. As noted above, the June 2004 ceiling on the stock of external arrears was exceeded because of an upward revision of the stock estimated at the time the 2004 program was designed and slower-than-expected clearing operations. Nonreschedulable arrears have now all been cleared and negotiations are continuing with non-Paris Club creditors (MEFP, paragraphs 26, 32, and 36).

34. Completion of the second review is scheduled for May 2005, and will be conditional upon the observance of the quantitative performance criteria at end-December 2004 and the end-March 2005 structural performance criterion (Table 8). During the review mission, the staff will discuss priority budgetary expenditures that could be accommodated in the event higher-than-programmed external concessional funding becomes available. Completion of the second review forms the basis for reaching the Decision Point under the enhanced HIPC Initiative. It is important that the full PRSP be prepared in a timely manner and on a fully participatory basis.

Table 8.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 20057.15Completion of first review, based on observance of performance criteria at end-June 2004
May 20057.15Completion of second review, based on observance of performance criteria at end-December 2004
November 20057.15Completion of third review, based on observance of performance criteria at end-June 2005
May 20067.15Completion of fourth review, based on observance of performance criteria at end-December 2005
November 20067.15Completion of fifth review, based on observance of performance criteria at end-June 2006
May 20077.15Completion 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.

Of which, SDR 19.25 million was for the early repayment of outstanding drawings under the post-conflict emergency assistance policy.

IV. Medium-Term Outlook and Capacity to Repay the Fund

35. Burundi’s external position is expected to improve over the medium term with the recovery of economic activity. Over the short term, however, the external current account deficit (excluding official grants) is expected to remain large, reflecting the post-conflict hump in reconstruction activity. Starting in 2006, the deficit would follow a declining path to about 15 percent of GDP by 2010 (Table 9). Financing these deficits would require substantial external grants and loans on highly concessional terms through the medium term.

Table 9.Burundi: Balance of Payments, Medium-Term Scenario and Sensitivity Analysis, 2004-23
2004200520062007200820092010201520202023
Est.Projections
(In millions of U.S.dollars)
Current account-135.9-148.0-129.9-133.5-130.7-132.8-134.2-140.3-148.0-161.0
Trade balance-150.2-145.2-121.3-115.3-112.6-113.7-117.6-137.5-151.7-168.4
Exports, f.o.b.43.961.170.780.890.8100.1108.8164.0249.6307.7
Of which: coffee26.242.850.358.867.174.981.8116.4158.0187.3
Imports, f.o.b.-194.1-206.3-192.0-196.2-203.4-213.7-226.3-301.5-401.3-476.1
Of which: n°ii-oil-135.4-145.8-130.2-132.6-138.1-146.2-154.7-205.4-272.5-322.5
Services (net)-94.7-93.4-81.7-71.8-65.0-59.3-56.2-56.4-66.9-75.4
Income (net)-21.9-21.6-19.0-18.5-18.4-18.3-18.7-20.4-23.3-25.6
Current transfers (net)130.9112.292.172.165.258.458.374.093.9108.3
Private (net)7.48.29.210.211.312.513.116.721.424.7
Official (net)123.6104.083.062.054.046.045.257.372.683.6
Current account excluding official transfers-259.4-251.9-212.9-195.4-184.6-178.8-179.3-197.5-220.5-244.6
Capital account145.877.385.090.896.1101.8108.0113.4124.5133.7
Financial account11.343.716.422.220.418.418.714.217.717.4
0.00.00.00.00.00.00.00.00.00.0
Errors and omissions4.20.00.00.00.00.00.00.00.00.0
Overall balance25.4-27.0-28.4-20.5-14.2-12.6-7.5-12.7-5.7-9.9
Financing (- increase in assets)-25.4-0.94.8-0.8-1.4-2.0-2.4-3.2-4.3-5.1
Financing gap0.027.823.621.315.614.69.916.010.015.0
(In percent of GDP, unless otherwise indicated)
Memorandum items:
Trade balance-22.5-18.6-14.1-12.5-11.3-10.6-10.1-8.1-6.3-5.7
Current account (incl. official transfers)-20.4-19.0-15.1-14.5-13.1-12.4-11.6-8.3-6.2-5.5
Current account (excl. official transfers)-38.9-32.3-24.8-21.2-18.6-16.7-15.5-11.7-9.2-8.3
Gross official reserves
In millions of U.S. dollars82115112114118124131175233277
In months of imports, c.i.f.4.35.86.06.06.06.06.06.06.06.0
Nominal GDP (in U.S. dollars)6677818589239951,0731,1601,6902,3912,933
Real GDP growth rate5.55.05.05.05.05.05.05.05.05.0
Inflation rate (period average; in percent)7.56.65.35.15.04.84.34.04.04.0
Exports-to-GDP ratio (in percent)6.67.88.28.89.19.39.49.710.410.5
Imports-to-GDP ratio (in percent)-29.1-26.4-22.4-21.2-20.4-19.9-19.5-17.8-16.8-16.2
Sensitivity scenarios(In units indicated)
Higher coffee prices 1/
Current account (excl. official transfers)
In millions of U.S. dollars-241.2-200.3-180.7-167.8-160.0-158.9-168.4-181.0-197.8
In percent of GDP-30.9-23.4-19.6-16.9-14.9-13.7-10.0-7.6-6.7
Financing gap (in millions of U.S. dollars)17.111.16.6-1.2-4.1-10.5-13.1-29.5-31.8
In percent of GDP2.21.30.7-0.1-0.4-0.9-0.8-1.2-1.1
Higher non-oil import prices 2/
Current account (excl. official transfers)
In millions of U.S. dollars-259.2-226.7-215.8-212.0-213.4-214.0-232.2-255.2-279.3
In percent of GDP-33.2-26.4-23.4-21.3-19.9-18.5-13.7-10.7-9.5
Financing gap (in millions of U.S. dollars)35.137.441.743.049.344.650.644.749.7
In percent of GDP4.54.44.54.34.63.83.01.91.7
Sources: Burundi authorities; and Fund staff estimates and projections.

International prices are assumed to be 25 percent higher than the World Economic Outlook (WEO) baseline projection throughout the projection period.

Non-fuel import prices are assumed to be 5 percent higher than the WEO projection baseline projection for 2005-09.

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

International prices are assumed to be 25 percent higher than the World Economic Outlook (WEO) baseline projection throughout the projection period.

Non-fuel import prices are assumed to be 5 percent higher than the WEO projection baseline projection for 2005-09.

36. The medium-term external position is vulnerable to fluctuations in the terms of trade, as shown in the sensitivity scenarios presented in Table 9 At the same time, the coffee-price scenario underscores how a stronger-than-envisaged improvement in coffee quality and marketing under the coffee sector reform could translate into higher coffee export earnings. Burundi’s capacity to repay the Fund remains broadly as described in the staff report for Burundi’s request for the PRGF arrangement.

V. Safeguards, Technical Assistance, and Program Risks

37. The Fund’s Finance Department has initiated a safeguards assessment of the BRB. In view of constrained administrative and technical capacity, a two-step approach was adopted. The first stage, which was successfully completed in June 2004, involved an assessment of the areas considered critical to preventing the possibility of misreporting and safeguarding Fund resources, notably, the BRB’s external audit mechanism, financial reporting framework, and the system of internal controls. A second stage, which is expected in 2005, will evaluate the BRB’s legal framework and internal audit mechanism. In line with the staff recommendations under the first stage, the BRB is acting to improve its financial reporting mechanisms and strengthen its system of internal controls. Following the appointment of an audit firm of international reputation, work began in November 2004 on the BRB’s first external audit.

38. 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. Efforts will be undertaken to improve the national statistical base following the recommendations of an IMF multi-sector statistics mission in November/December 2004.

39. The program faces a number of risks, especially with respect to regional tensions and the internal political and security situation. In particular, the political transition could be undermined by failure to proceed expeditiously with military demobilization. In turn, without adequate and timely support for the DDR/SSR process, the fiscal and macroeconomic accounts could be destabilized. Overall, these risks appear contained in view of the commitment of the international community to accompany the peace process and the progress made so far in these sensitive areas.

VI. Staff Appraisal

40. Within a difficult political environment, the Burundi authorities have made a credible start to implement the financial and structural reform program supported by the PRGF arrangement. Macroeconomic developments in 2004 have been broadly on track with program objectives. Real GDP growth will exceed the program target owing to a strong rebound in coffee production, and progress has been made in reducing inflation, notwithstanding the impact of surging world petroleum prices.

41. Performance relative to the program’s quantitative and structural performance criteria, however, has been mixed. Fiscal slippages emerged in 2004 following the surge in petroleum prices and higher spending needs associated with the peace process. The staff is of the view that the relaxation of the fiscal target was appropriate in light of the need to accommodate priority expenditures. Significant transfers to cover continued coffee sector losses underscore the urgency of implementing the coffee reform strategy without delay. Structural reforms lagged somewhat, reflecting limited administrative capacity and the complex political environment, but the pace of implementation has intensified recently. The large increase in highly concessional donor support for project spending was a welcome development.

42. Important progress has been made in pursuing peace and reconciliation. The security situation has remained relatively calm and the political transition has gained momentum. The continued support of the international community is vital to ensuring a successful transition to democracy. The staff stresses the importance of Burundi completing the full PRSP in a timely manner and on a fully participatory basis.

43. Significant progress has also been achieved in setting the groundwork for the multiyear demobilization effort and the creation of a suitably trained national police force. It is important that the costs associated with these programs, which are large in relation to GDP, be contained at approved levels and carefully monitored. Appropriate and timely donor support is vital to ensure that the DDR/SSR effort moves ahead without destabilizing the public finances.

44. The 2005 budget appropriately incorporates a reduction in the primary deficit before grants and targets a further increase in social spending. Every effort should be made to achieve the revenue target of 19 percent of GDP, particularly taking into account the envisaged reduction in trade taxes. Regarding expenditure, it is important that the savings arising from the demobilization program be effectively secured and redirected to urgent social needs.

45. The 2005 budget includes measures to strengthen administrative capacity and public financial management, which remain weak by regional standards. In particular, it is essential to move ahead with the new budget and accounts code, reinforce tax and customs administration, and strengthen the Ministry of Finance’s operations, including wage bill management.

46. Initial steps to strengthen monetary policy were taken in 2004, albeit with delays reflecting administrative shortcomings. Looking ahead, the BRB should strengthen its monetary instruments and implement vigorously the recommendations made by Fund technical assistance missions. In addition, it should remain vigilant in its supervision of the banking sector, building on the improvements made in 2004. Recent steps to address the weaknesses identified in the context of the initial safeguards assessment, notably the initiation of the first external audit, are welcome. The staff is of the view that progress in this area provides a sufficient basis to complete the first review, notwithstanding that only a partial safeguards assessment has been conducted.

47. The reduction in the differential between the official and parallel exchange rates to low levels by the fall of 2004 is an encouraging development. The authorities should proceed decisively with the steps envisaged in early 2005 to further liberalize the exchange and trade systems.

48. On the structural front, rapid implementation of the coffee sector reform program is crucial to sustain the economic recovery and reduce pressures on the public finances. Efforts should also be intensified to open the audit court and begin the privatization of state assets.

49. The staff welcomes the progress made in normalizing relations with external creditors. The clearing of Burundi’s arrears with the AfDB through a cooperative effort with donors, and the restarting of AfDB lending operations, are noteworthy in this respect. Burundi’s external debt burden remains unsustainable after traditional debt relief and will require substantial debt relief under the enhanced HIPC Initiative, as described in the preliminary HIPC document.

50. Burundi still faces enormous challenges, including the need to complete the political transition to democracy, demobilize large numbers of armed combatants, and address widespread deep poverty. In light of the progress achieved in 2004 in stabilizing the macroeconomic situation and pursuing structural reforms, the staff recommends the completion of the first review under the PRGF arrangement and supports the authorities’ request for waivers for the nonobservance of an end-June 2004 quantitative performance criterion and two structural performance criteria, noting that corrective actions have been taken.

APPENDIX I

Bujumbura,

December 20, 2004

NREF: __/__ /04

Mr. Rodrigo de Rato

Managing Director

International Monetary Fund

Washington, D.C. 20431

Dear Mr. de Rato,

1. On behalf of the Government of Burundi and the Bank of the Republic of Burundi (BRB), we hereby transmit the attached Memorandum of Economic and Financial Policies (MEFP) that sets out the objectives and policies under the program that the authorities intend to implement for the remainder of the 2004 and for 2005. The attached Technical Memorandum of Understanding (TMU) defines the terms and conditions of the program.

2. Burundi continues to make progress with national reconciliation and economic recovery. This progress has been aided by the Fund’s advice and support under the Poverty Reduction and Growth Facility (PRGF) approved by the IMF’s Executive Board on January 23, 2004. Nevertheless, we are aware that some slippages have occurred in 2004.

  • The program’s quantitative performance criteria on external arrears at end-June 2004 was not observed as the beginning stock of external arrears was larger, and clearing operations slower, than expected (Table 1). We have, however, made maximum efforts to clear our external arrears and no nonreschedulable arrears remained outstanding at end-September 2004. On this basis, we hereby request a waiver for the nonobservance of this quantitative performance criterion.
  • The program’s two structural performance criteria were not observed (Table 2). We have taken corrective measures to address the delays in structural reform, as described in the attached MEFP (paragraphs 9, 10, 26 and 32). On this basis, we hereby request waivers for the nonobservance of the two missed structural performance criteria.

3. In support of our macroeconomic and financial objectives and policies for 2004 and 2005, we hereby request completion of the first review under the PRGF and disbursement of SDR 7.15 million (9.3 percent of quota).

4. The objectives and policies in the updated MEFP remain consistent with Burundi’s Interim Poverty Reduction Strategy Paper (I-PRSP—Cadre strategique interimaire de croissance economique et de lutte contre lapauvrete). Preparation of the full-PRSP is well under way, with the aim of issuing it by May 2005.

ATTACHMENT I

5. The authorities of Burundi will provide the Managing Director with all the information he may request as necessary to monitor developments and achieve the objectives of the PRGF-supported program in a timely manner.

6. The authorities believe that the economic and financial policies set forth in the attached MEFP are adequate to achieve the objectives of the 2004-05 program, supported by the PRGF, but will take any further measures that may become appropriate for this purpose. 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.

7. The performance criteria and benchmarks for the second review will be based on end-December 2004 and end-March 2005 targets as set out in Tables 3 and 4 of the MEFP. The second review of the three-year PRGF arrangement with the Fund will be completed no later than May 31, 2005.

8. The Burundi authorities are keen to make this letter and the attached MEFP and the TMU, as well as the staff report on the first review under the PRGF arrangement, available to the public, a0nd hereby authorize their publication and posting on the Fund’s website subsequent to Executive Board consideration.

Sincerely yours,

/ s /

Athanase Gahungu

Minister of Finance

/ s /

Salvator Toyi

Governor, Bank of the Republic of Burundi

Annexes: Memorandum of Economic and Financial Policies for 2004-05

Technical Memorandum of Understanding

Burundi: Memorandum of Economic and Financial Policies for 2004-05

I. Introduction

1. This memorandum summarizes progress under the program for 2004, updates the medium-term objectives and policy framework, and sets out revised economic and financial policies through end-2004 and for 2005. On the basis of these policies, the authorities request Fund support in the form of a second disbursement under the three-year Poverty Reduction and Growth Facility (PRGF) arrangement. The policies and objectives of the new program remain consistent with the Interim Poverty Reduction Strategy Paper (I-PRSP).

II. Background

A. Political Transition and the Peace Process

2. Burundi is at an advanced but crucial juncture in its political transition process. As envisaged under the Arusha agreement, national elections were to be held in time for a new government to take over on November 1, 2004. However, protracted negotiations on a new constitution necessitated an extension of the political transitional arrangements. On October 15, 2004 a summit of regional heads of state approved the extension of the transitional political arrangements, as well as a plan for local, communal, parliamentary, and presidential elections between February and April 2005. A draft constitution was agreed in Pretoria in August, and after some delay, has attracted broad political support and parliamentary approval. A national referendum on the constitution will be held in late 2004 or early 2005.

3. Hostilities in most of the country have ceased, but a remaining hold-out rebel group continues to stage sporadic attacks in the periphery of Bujumbura that prevent the upgrading of the security situation. United Nations peacekeeping troops are in place in Burundi. The military integration and demobilization program (DDR), a vital component toward achieving peace and security in Burundi, which is supported by the World Bank-led Multi-Country Demobilization and Reinsertion Program (MDRP) for the Great Lakes region, was declared effective September 10, 2004 and operations are well under way. As of November 2004, most former rebel combatants had reported to cantonment centers.

B. Recent Economic Developments

4. Macroeconomic developments have been broadly on track with program objectives. Real economic growth is expected to be slightly above the program target of 5 percent in 2004, as activity has been bolstered by a larger-than-expected recovery of coffee production tempered by a decline in other basic agricultural products. Inflation has been volatile but generally on a downward trend in 2004, with the three-month moving average hovering about 7-8 percent in the third quarter. Imports are surging (by a projected 35 percent) in 2004, largely on account of humanitarian assistance and nongovernmental organization project activity. World market coffee prices have been recovering from their lows, but the sharp rise in petroleum prices is weighing on the external and fiscal accounts. The Burundi franc has remained broadly stable against the U.S. dollar and, reflecting the improved policy environment, the differential between the parallel and the official rate has narrowed sharply to 2-3 percent from about 15 percent in late 2003.

C. Performance Under the Program

5. Performance relative to the program in the first half of 2004 was mixed. The program’s end-June quantitative performance criteria and the indicative targets for March, adjusted for a shortfall in external budget support, were observed, except for that on external arrears (Table 1). The beginning of period stock of external arrears was larger, and clearing operations slower, than expected. Reflecting unforeseen demands on public expenditure, the program’s indicative targets on the government’s wage bill and primary fiscal balance were both exceeded. The program’s original indicative quantitative targets for September were mostly not met. Unfortunately, the program’s two structural performance criteria—establishing an audit court (Cour de Comptes) and introducing domestic liquidity auctions—were not met (Table 2). However, the two structural benchmarks, on extending the transactions tax to domestically produced goods and on concluding an assessment of commercial banks’ compliance with capital requirements were observed. The latter led to the closure of two noncompliant banks in mid-2004.

Table 1.Burundi: Performance Criteria and Indicative Targets Under the 2004 Program(In billions of Burundi francs, unless otherwise indicated)
20032004
Dec.Mar.Jun.Sep.Dec. 1/
Prog. est. (IMF Country Report No. 04/41)Act.Prog.Adj.Act.Prog.Adj.Act.Prog.Adj.Act.Prog.
Performance criteria for end-June 2004 (indicative targets otherwise)
Floor on the stock of net foreign assets of the central bank (in millions of U.S.
dollars; including IMF assistance drawings) 2/36.132.629.09.824.732.6-11.511.226.35.20.629.8
Ceiling on stock of net domestic assets of the central bank 2/23.419.632.650.129.030.870.858.840.059.168.737.4
Ceiling on the stock of net credit from the banking system to the government 2/34.546.135.953.451.439.688.271.745.568.793.549.2
Ceiling on central government’s outstanding external payments arrears (in
millions of U.S. dollars) 3/167.5176.8145.394.459.094.922.422.4
Ceiling on central government’s outstanding stock of short-term external debt with a
maturity of less than one year (in millions of U.S. dollars) 4/0.00.00.00.00.00.00.00.00.0
Ceiling on new nonconcessional external debt contracted or guaranteed by the
central government or the central bank (cumulative from beginning of calendar
year; in millions of U.S. dollars) 5/6/0.00.00.50.00.50.01.00.01.0
Indicative targets
Floor on the primary balance of the government budget, excluding externally financed
projects (cumulative from beginning of calendar year) 7/-1.9-5.46.5-2.43.9-8.59.4-22.90.1
Ceiling on the government’s wage bill (cumulative from beginning of calendar year)54.953.814.815.028.630.243.544.658.4
Memorandum items for adjuster calculations:
External nonproject financial assistance (cumulative from beginning of calendar
year; in millions of U.S. dollars) 8/40.141.837.211.676.117.377.349.288.8
Quarterly average exchange rate (Burundi francs per U.S. dollar)1,0861,0961,1031,103

Tentative projections to be revised in the context of the first program review.

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 adjusted downward (upward). External financing will be converted in terms of Burundi francs on a quarterly basis, using the average official exchange rate.

Projection for September and December 2004 corresponds to outstanding arrears to the African Development Bank Group (AfDB) that have been deferred in line with understandings reached with AfDB staff in lune 2003.

Excluding short-term, import-related trade credits.

With a grant element of less than 35 percent.

A small nominal amount is allowed under the program on account of working credits from embassy suppliers that at times may show positive net values.

The performance criteria table in IMF Country Report No. 04/41 mistakenly included a financing adjustor to the primary balance.

Nonproject assistance includes debt relief on current maturities, which was mistakenly omitted from Table 3 of Appendix I of IMF Country Report No. 04/41.

Tentative projections to be revised in the context of the first program review.

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 adjusted downward (upward). External financing will be converted in terms of Burundi francs on a quarterly basis, using the average official exchange rate.

Projection for September and December 2004 corresponds to outstanding arrears to the African Development Bank Group (AfDB) that have been deferred in line with understandings reached with AfDB staff in lune 2003.

Excluding short-term, import-related trade credits.

With a grant element of less than 35 percent.

A small nominal amount is allowed under the program on account of working credits from embassy suppliers that at times may show positive net values.

The performance criteria table in IMF Country Report No. 04/41 mistakenly included a financing adjustor to the primary balance.

Nonproject assistance includes debt relief on current maturities, which was mistakenly omitted from Table 3 of Appendix I of IMF Country Report No. 04/41.

Table 2.Burundi: Prior Actions, Structural Performance Criteria, and Structural Benchmarks Under the 2004 Program
MeasuresTimetable (End-month deadline)Status
Prior actions
  • Elimination of all remaining exchange restrictions on current account transactions and bona fide amortization payments
  • Adoption by parliament of a budget law for 2004 in line with program objectives
September 2003

December 2003
Implemented

Implemented
Structural performance criteria
• Establishment of new auditing court (Cour des comptes)March 2004Missed but in process; court law passed in March; justices appointed in June; action plan with identified financing approved by council of ministers in October; magistrates status law was approved by the council of ministers and submitted parliament; court to be fully operational by April 2005 to audit 2004 government accounts
• Adoption of weekly liquidity auctions and introduction of a marginal refinancing window at a penalty rate, and reform of the system of mandatory reserve requirements, with reserves to be held only in the form of deposits with the BRBJune 2004Implemented, except for liquidity auctions. MFD mission (November 2004) to assist BRB introduce liquidity management measure
Structural benchmarks
• Extension of the transactions tax to domestically produced goods and servicesJanuary 2004Implemented
• Assessment that all banks in operation meet the minimum capital requirementMarch 2004Implemented: two noncompliant banks closed

6. The government registered a primary deficit of 1.3 percent of GDP during the first half of the year, compared with a programmed surplus of 0.5 percent, as the government struggled with pressures to relieve rapidly rising petroleum prices and accommodate expenditures to support the peace process. Overall, revenue fell below the program target by some 0.6 percent of GDP, reflecting lower-than-envisaged tax receipts from oil products, owing to partial pass-through of the surge in world prices, as well as a smaller profit transfer from the Central Bank. The impact of the removal of customs duties for goods originating from countries in COMESA has been limited and offset by improved customs operations, through the introduction of the Sydonia customs management system, bonded warehousing, and pre-inspection of imports. Through September, primary spending was some 3 percent of GDP above program, in approximately equal proportions from larger-than-expected outlays needed to sustain the political transition and the peace process, payments of guaranteed coffee sector credit losses, and domestically financed project spending. At end-September, the government had paid off 0.3 percent of GDP of domestic arrears but had accumulated outstanding payment orders equivalent to 1% percent of GDP. During the third quarter, F Bu 7.6 billion (1 percent of GDP) in treasury securities were issued to clear domestic arrears with private suppliers related to petroleum imports, which had been impacting negatively on bank asset quality. F Bu 7.6 billion of guaranteed coffee sector credit losses were also paid. Project spending, financed by highly concessional external support, has increased strongly to well above program levels, with the associated increase in counterpart outlays.

7. Following discussions with Fund staff, a revised 2004 budget was signed into law on September 30, 2004, which targets a primary deficit of close to 3 percent of GDP, compared with a balanced position under the original program. The revised budget broadens the application of the 6 percent import service charge to all nondiplomatic imports and incorporates a 6 percent wage increase for civil servants (delayed from January). It also provides for the hiring of 2,300 new teachers and 500 medical personnel, which are sorely needed.

8. Reserve money growth, which had risen rapidly in the first half of 2004, eased in the third quarter to 29.4 percent over the year ending September. Delays in external budget support led to a further increase in net credit to the government while the central bank’s (BRB) net foreign asset position deteriorated. In the circumstances, banks’ demand for credit from the central bank fell well short of the ceilings, which the BRB lowered significantly from May onwards. As a result, apart from credit to government, the NDA of the BRB was broadly unchanged in the first three quarters of 2004. Broad money growth declined to 14.6 percent in September (20.4 percent in the program). The annual rate of increase in credit to the economy has been steady at about 9 percent in the first three quarters of the year, somewhat above the rate of inflation. Gross official reserves declined to US$51 million, about 2% months of goods and services import cover, at end-September. The authorities consider the reduction in the exchange rate differential between the official and parallel markets to under 3 percent in November 2004 (the lowest level in over a decade), a major accomplishment of their policy efforts. This important development reflects the admission of foreign exchange bureaus as participants in the BRB’s weekly foreign exchange auctions, as well as increased foreign aid inflows and, since September, an import pre-inspection requirement.

9. The BRB has implemented several measures to enhance monetary management in line with its objective of switching from bank-by-bank credit ceilings to indirect monetary control. It has also strengthened prudential supervision and closed down two insolvent financial institutions. As regards the end-June structural performance criterion on monetary policy reform, two components—the introduction of the marginal refinancing window at a penalty rate and the reform of mandatory reserves (now held in the form of remunerated central bank deposits)—were implemented, but weekly liquidity auctions were not launched due to continued operational shortcomings (the nonavailability of reliable liquidity forecasts and key macroeconomic data). A specialized technical assistance team from the IMF visited Bujumbura in November 2004 to assist, inter alia, in such a move.

10. The implementation of structural reforms in other areas has lagged somewhat, reflecting the complex political environment and weak administrative capacity. The establishment of an audit court has been delayed from the end-March target (performance criterion). While the audit court law was passed at end-March 2004, its magistrates were appointed only in June 2004. A law needed to define the magistrates’ legal status was approved by the council of ministers and submitted to parliament. An action plan for the court was approved by the council of ministers on October 28, 2004 to render it operational by April 2005. Financing has been obtained and training and logistical issues are being worked out so that the court can begin to audit the 2004 government accounts by the spring of 2005.

11. The performance of the coffee sector continued to pose grave concerns. The 2003-04 campaign continued to be conditioned by weak, but recovering, world prices and large sectoral inefficiencies. Production rose to around 38,000 tonnes, but processing constraints have led to delays in transformation and exports. An audit of the parastatal coffee agency (OCIBU) was undertaken in June by experts sponsored by the European Union (EU). The results showed that the campaign losses for 2002-03 were higher than previously thought (F Bu 7 billion, compared with F Bu 5 billion). Accumulated losses since 2000-01 in excess of F Bu 15 billion (2 percent of GDP) have translated into defaults on bank loans that trigger a government guarantee. Deep seated reforms are needed to attract much needed private investment and financing, improve quality, bolster incomes of small producers, and eliminate the source of large losses accruing to the budget. A comprehensive reform strategy, elaborated with World Bank and EU support, features the early liberalization of investment, marketing, and export of coffee, as well as the reform and dismantling OCIBU’s marketing monopoly. The strategy was approved by the council of ministers on October 28, 2004. A decree will be issued by end-December to reform OCIBU’s auction mechanism to include representatives of commercial banks, producers, and washing stations and to permit private investment in the sector.

12. Burundi has continued efforts to complete bilateral rescheduling agreements and remains current on its nonreschedulable obligations. Following its first Paris Club rescheduling in March 2004, the authorities recently signed the penultimate bilateral agreement. Discussions are ongoing to secure comparable treatment from other bilateral and commercial creditors. In addition, the clearance of the remaining arrears with multilaterals (the AfDB, the EU/EIB, and the OPEC Fund) has been completed and the AfDB has lifted its sanctions against lending to Burundi.

III. Medium-Term Objectives and Policies

13. The main orientations of the government’s medium-term policies are drawn from the Arusha agreement of August 2000 and the priorities set in the government’s I-PRSP of November 2003, which remain broadly appropriate and attainable. The elaboration of a full-PRSP on the basis of extensive consultations at the local level with private and public stakeholders is well advanced and is expected to be completed by May 2005.

14. The authorities believe that elaboration of a full-PRSP and successful implementation of the PRGF-supported program will serve as catalysts for a further increase in foreign assistance, including debt relief under the enhanced Initiative for Heavily Indebted Poor Countries (HIPC Initiative). Notwithstanding the debt relief obtained from the Paris Club in March, Burundi’s debt burden remains unsustainably high. A preliminary debt sustainability analysis prepared jointly by IMF and World Bank staff indicates an external debt ratio at end-2003, on a present value basis, of almost 2,000 percent of exports. Substantial relief would thus be needed to bring Burundi’s debt burden down to sustainable levels and free resources for much needed social and poverty reduction spending. A preliminary HIPC document will be presented to the IMF and World Bank Executive Boards at the time of the first PRGF review.

IV. The Updated 2004-05 Program

A. Macroeconomic Objectives

15. The strategy for the remainder of 2004 and 2005 seeks to consolidate the progress achieved on economic recovery and financial stabilization, address slippages, and deepen needed financial and structural reforms. Accordingly, the program performance targets for end-December 2004 and for 2005 reflect the latest developments and priorities (Table 3). The updated program aims at maintaining economic growth at about 5 percent in 2004-05 and lowering inflation to 8% percent in 2004 and 5% percent in 2005. The original inflation target for 2004 of 5% percent is out of reach, reflecting much higher world petroleum prices, lower basic food harvest, and higher-than-programmed liquidity creation through midyear. To achieve these objectives, it will be necessary to contain the overall fiscal deficit (on a cash basis and after external grants), in line with the approved revised 2004 budget, at 8.0 percent of GDP in 2004 and 6% in 2005. This overall deficit is consistent with primary deficit targets of 3 percent of GDP in 2004 and 2 percent in 2005. Reflecting increased foreign assistance inflows, the external current account deficit is expected to widen to about 20 percent of GDP in 2004 and to 19 percent in 2005.

Table 3.Burundi: Performance Criteria and Indicative Targets for 2004-05(In billions of Burundi francs, unless otherwise indicated)
20042005
JuneSep.Dec.Mar. 1/JuneSep. 1/Dec. 1/
Act.Act.Rev. Prog.Prog.Prog.Prog.Prog.
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) 2/11.20.631.923.515.213.332.5
Net domestic assets of the BRB (ceiling) 2/58.868.735.043.757.657.541.4
Net credit from the banking system to the government (ceiling) 2/3/71.793.578.182.281.388.568.6
External payments arrears of the government (ceiling; in millions of U.S. dollars)0.00.00.00.00.00.00.0
Of which: arrears to AfDB0.00.00.00.00.00.00.0
Short-term external debt of the government (ceiling; in millions of U.S. dollars) 4/0.00.00.00.00.00.00.0
Nonconcessional external debt contracted or guaranteed by the government or the BRB (ceiling; cumulative; in millions of U.S. dollars) 5/0.00.00.00.00.00.00.0
Indicative targets
Primary balance of the government (ceiling; cumulative from beginning of calendar year) 6/-9.5-23.80.4-4.9-10.8-15.3
Government’s wage bill (ceiling; cumulative from beginning of calendar year)30.261.816.332.648.965.2
Memorandum item:
External nonproject financial assistance (cumulative from beginning of calendar year; in millions of U.S. dollars) 6/7/17.349.193.213.142.161.1114.4

Indicative targets. December 2005 target to be set in the context of the second review.

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 adjusted downward (upward). External financing will be converted in terms of Burundi francs on a quarterly basis, using the average official exchange rate.

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.

Excluding short-term, import-related trade credits.

With a grant element of less than 35 percent.

As defined in the TMU.

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

Indicative targets. December 2005 target to be set in the context of the second review.

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 adjusted downward (upward). External financing will be converted in terms of Burundi francs on a quarterly basis, using the average official exchange rate.

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.

Excluding short-term, import-related trade credits.

With a grant element of less than 35 percent.

As defined in the TMU.

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

16. Taking into account a projected improvement in private investment, together with low private savings, Burundi will remain highly dependent on the availability of large amounts of external resources to achieve the 2005 program growth and inflation objectives. Progress in addressing the overwhelming humanitarian and social needs, the demands of national reconstruction, and the restoration of public security, will require sustained and reinforced external assistance on highly concessional terms. Foreign assistance, in the form of grants, highly concessional loans, and debt relief, are expected to average about US$400 million in 2004-05. Commitments of grants from bilateral donors have been secured to cover for the costs of the referendum in 2004 and the general elections in 2005. Of particular importance at this time is the need to secure funding of the costs associated with vital security programs. These costs will be closely monitored and require timely and appropriate external support to ensure that they do not destabilize the budget and macroeconomic balances.

17. The authorities are committed to accelerating the implementation of structural reforms, needed to support the economic recovery, ensure its sustainability, and reduce poverty. The program aims at the liberalization of key sectors, such as coffee and sugar; a strengthening of government financial management; improvements in the delivery of social services; further liberalization of the trade and exchange regimes; and improvements in governance and transparency.

B. Fiscal Policy

18. The 2004 revised budget aims at a primary deficit of 3 percent of GDP. Revenues are cautiously projected at 19.4 percent of GDP in 2004, somewhat lower than originally programmed, as the better performance of domestic taxes would offset only partially the shortfall in tax receipts from petroleum products and profit transfers from the central bank. Expenditure increases relative to the program involve primarily transfers to cover coffee sector losses, outlays for peace and reconciliation, and the rebuilding of public administration and social services. Apart from the recent issuance of treasury bills to clear domestic arrears with oil suppliers (which in turn settled their own arrears with the banks), there would be no further domestic financing of the government relative to end-June 2004 levels. The overall fiscal balance after grants (on a commitment basis) would be about zero. The budget financing gap for 2004 has been closed.

19. The 2005 budget will be presented to parliament in late December 2004 (prior action). In view of the slippages in 2004, fiscal policy will be geared at avoiding any further erosion of revenues by addressing customs exonerations and evasion, and at containing increases in expenditure. The primary deficit is targeted to decline to 2 percent of GDP, allowing for essential outlays in connection with the political transition and a further increase in social spending to 7 percent of GDP. The overall deficit, on a commitment basis and after grants, will rise to 3% percent of GDP in 2005, reflecting a further increase in project spending and special programs.

20. Overall revenue in 2005 is expected to decline somewhat to about 19 percent of GDP, owing to the impact of an import duty reduction (0.3 percent of GDP). Primary expenditure would be reduced by 1 percentage point of GDP, to about 23 percent of GDP, by lowering transfers to cover coffee sector losses and containing the growth in the wage bill (including the military but excluding the newly created national police force) and expenditures on goods and services to 6 percent and zero, respectively. Budget support from multilaterals is expected to rise strongly to about US$68 million in 2005, while bilateral grant assistance would decline somewhat to about US$11 million. Reflecting the initiation of a national privatization program, receipts from the sale of state assets, especially in the financial and coffee sectors, are projected at about F Bu 5 billion (0.6 percent of GDP). Any resources received over and above this amount will be used to reduce domestic debt. A remaining financing gap of about US$28 million is expected to be covered by bilateral grants. This level of concessional financing would allow for a reduction in domestic arrears and the government’s net indebtedness to the banking system.

21. Project expenditure (F Bu 110 billion, 13% percent of GDP) will continue to be financed mostly from external aid disbursements and will give priority to rehabilitating and rebuilding the social and economic infrastructure. Aggregate poverty-related expenditure (as defined in the I-PRSP) is set to increase from 28 percent of primary expenditure in the 2004 revised budget to 31 percent in 2005. The latter amount does not take into account possible increases from the diversion of resources from debt service to social services subsequent to debt relief under the enhanced HIPC Initiative, from mid-2005.

22. As regards tax policy, the government will lower and simplify import tariffs with a view to reducing smuggling, simplifying administration, and boosting trade. Accordingly, the 2005 budget reduces the maximum tariff rate from 40 percent to 30 percent and folds the 12 percent band into the 10 percent band, for a reduction in the number of bands to three. The net revenue loss is expected at about F Bu 2 billion and would be partially compensated by additional revenues from the full-year effect of the extension (in late 2004) of the customs service tax. The cooperation of the international agencies established in Burundi is being sought to reinforce the application of income tax legislation to Burundians employed by international agencies. The introduction of a value-added tax system, originally envisaged for 2005, has been postponed pending further preparatory work.

23. The authorities are committed to improving the management of the public finances. With technical and financial support from key donors, notably the World Bank’s Economic Management Support Project (PAGE), the EU, and bilateral donors, the Ministry of Finance will seek, in the course of 2005, to create a new internal audit service with appropriately qualified and paid staff; to enhance civil service payroll management, which will be transferred to the Ministry of Finance from the Ministry of the Civil Service by June 2005; to improve expenditure control through the introduction of a new public accounting and budgetary code with effect from the 2005 budget (prior action); and to introduce a single taxpayer identification number (March 2005).

24. The government is committed to normalizing the government’s financial relations with suppliers and establishing the nature and extent of its domestic arrears, which weigh heavily on the private sector, including the banking system. To that end, an inventory of domestic arrears financed through the World Bank PAGE project will be launched before end-2004. Suppliers will be asked to submit their claims and the inventory results will be subject to an external audit before end-June 2005. A strategy for the clearance of arrears will be worked out in the context of the second review under the PRGF arrangement.

C. Monetary and Exchange Policies

25. Pressure on monetary policy resulting from delayed budget support and higher-than-expected government spending is expected to ease in late 2004 with the disbursement of key aid (about US$34 million from the EU and the World Bank). Broad money growth is projected to be broadly in line with the program at about 19 percent by end-2004. Reserve money growth would decline from its midyear high, to about 27 percent by year’s end, owing to the reduction in bank credit to the government and the recent tightening of the BRB’s ceilings on credit to banks. Gross international reserves are expected to rise sharply in late 2004, to about $82 million (4Vi months of imports). For 2005, a reduction in credit to government and much lower coffee credit would result in a sharp decline in the growth of reserve money to less that 10 percent. The increased efficiency of the financial system, resulting from the various reform efforts would lead to a moderate increase in the money multiplier and broad money growth of about 15 percent in 2005. Assuming a further modest decline in velocity, the fiscal program would allow credit to the private sector to grow by about 17 percent, somewhat more than nominal GDP. Assuming the financing gap is closed, gross international reserves would increase further to about 5.8 months of imports by end-2005.

26. In 2005, the BRB intends to maintain a tight monetary stance to support the program’s inflation objective. Critical to this effort will be measures to enhance the efficiency and effectiveness of liquidity management and the rapid phasing out of the government guaranteed coffee credit regime. In this regard, the BRB, supported by IMF technical assistance, will work to enhance its liquidity forecasting capabilities and plans to introduce weekly liquidity auctions and a rediscount facility by the spring of 2005. Further, the BRB and the Ministry of Finance will work to standardize treasury bills and make them tradable. This will enable better liquidity management in the banking system and support a more active monetary policy.

27. Overall, Burundi’s financial sector remains generally sound, although some banks appear vulnerable. Following a strengthening of minimum capital requirements (more than tripled) in March 2004, the BRB is monitoring the orderly liquidation of the two closed banks. In 2005, continued efforts will be made to strengthen bank supervision, and the existing prudential requirements will be tightened gradually toward international standards. The BRB is also committed to improving its own governance and transparency. To this end, it has signed a multiyear external audit contract to begin with the 2004 accounts.

28. The BRB is committed to pursuing exchange system liberalization. To that effect, in late 2004, the BRB abolished the mandatory nature of its auction reference price for commercial transactions. The determination of the official exchange rate was also changed from the weekly auction to the daily average of market rates. The BRB will publish the average daily exchange rates and spreads in the market. The remaining surrender requirement (50 percent on coffee, tea, and cotton exports) will be abolished by March 2005 (performance criterion), which will contribute to a more efficient market for foreign exchange. With the support of IMF technical assistance, the restrictions and reporting requirements on foreign exchange transactions will be further reduced in 2005.

D. Structural Reforms

29. In addition to the reform measures in the areas of public financial management, tariff reform, and exchange liberalization described above, other priorities include the liberalization of key productive sectors and improved governance.

30. Implementation of the recently approved reform strategy for the coffee sector will be key to poverty reduction in Burundi, in particular among the large number of small rural producers. The reform action plan (that also concerns the tea and cotton sectors) is being put rapidly into effect. In late 2004, a decree was signed allowing private investment at all levels of the supply chain. The restrictions on export and sale of coffee at all levels of the chain will be abolished in early 2005, including the obligation to go through the OCIBU auction mechanism. In early 2005, the authorities will host a sectoral colloquium, supported by the World Bank and the EU, to bolster understanding of the reforms. By June 2005, the coffee processing infrastructure owned by government will be offered for sale. The government, with foreign technical assistance, will also begin transforming OCIBU into a regulatory and support agency in 2005. One of the objectives of the coffee sector reform is to rapidly phase out the government’s crop credit guarantee. The authorities will not grant any new coffee crop credit guarantee in the transitional period of 2005/06 without prior consultations with Fund staff.

31. The government also intends to deregulate the sugar sector during 2005 by liberalizing domestic prices, reducing the minimum import valuation, and lifting export and domestic distribution restrictions. These measures are expected to be completed by September 2005 and to result in lower sugar prices, to benefit the poorer segments of the population, and to better prospects for the development of the domestic sugar industry.

32. The audit court is one of the institutions contemplated in the Arusha agreement, and the government undertakes, in conjunction with parliament, to ensure that it starts its operations in full in April 2005. The court’s magistrates, appointed in June 2004, took their oath of office in September, and, following a period of training through April 2005, will start their functions by auditing the 2004 budget accounts as soon as they become available. The last major hurdle to the court’s establishment is expected to be overcome in December 2004 with the passing of the necessary legislation on the statutes of the magistrates.

E. Program Financing and External Debt Management

33. For 2005, the external nonproject financing need is estimated at US$190 million. This external financing requirement is expected to be covered by commitments from the World Bank (two tranches of the ERC2 credit totaling US$30 million); AfDB program grants and loans from the 9th and 10th FAD of about US$21 million; the EU (FED program of about US$14 million); bilateral creditors (US$11 million); and debt relief. The remaining gap of US$28 million is reasonably expected to be covered, including through a possible donors’ meeting in the spring of 2005. Funding for the constitutional referendum in late-2004 and the national elections (a total of about US$23 million) has been secured, largely from bilateral donors. It is expected that Burundi will be in a position to meet its external nonreschedulable debt-service payments and the authorities are determined to pursue prudent debt management policies and to strive to reach a sustainable external debt position.

F. Safeguards, Statistical Issues, 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. In view of constrained administrative and technical capacity, a two-step approach to the safeguards assessment was adopted. The first stage, which has been successfully completed, involved an assessment of the areas considered critical to preventing the possibility of misreporting and safeguarding Fund resources, notably an external audit of the BRB’s accounts, financial reporting mechanisms, and the system of internal controls. The second stage, which is expected in 2005, will evaluate the BRB’s legal framework and internal audit mechanism. In line with the staff recommendations under the first stage, the BRB is acting to improve financial reporting mechanisms and strengthen its system of internal controls. Following the appointment of the Ernst and Young audit firm, work began in November 2004 on its first external audit. The external auditors will also make recommendations on the adoption of International Financial Reporting Standards (IFRS).

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. These include tax and customs administration, civil service reform, monetary and exchange rate policy, and banking supervision. Assistance will also be needed to improve economic statistics, notably as regards the national accounts, the balance of payments, and social/poverty indicators. The authorities are committed to improving the national statistical base and implementing the recommendations of an IMF multi-sector statistics mission, which visited Bujumbura in November-December 2004. The authorities have requested the posting of an IMF resident representative in Bujumbura.

V. Program Monitoring and Request for Waivers

36. The government requests waivers for the nonobservance of the performance criteria on the establishment of the audit court (March 2004), the introduction of liquidity auctions (June 2004), and the end-June 2004 ceiling on external arrears. In support of its request, the authorities note that a complex political environment and weak administrative capacity led to the delays in the nomination of the audit court’s magistrates and the introduction of liquidity auctions. Steps have been taken to address these concerns, and both measures are in process. The end-June 2004 ceiling on the stock of external arrears was exceeded because of an upward revision of the historic stock estimated at the time the 2004 program was designed and slower clearance. Nonreschedulable arrears have now all been cleared and negotiations are continuing with non-Paris Club creditors.

37. Table 3 summarizes the quantitative performance criteria (end-December 2004 and end-June 2005) and quantitative indicators for program monitoring purposes. The prior actions, structural performance criterion and benchmarks under the program for 2004-05 are presented in Table 4. In the context of the coffee sector reform, the authorities aim to rapidly do away with the crop credit guarantee, and any new coffee credit guarantee will not be accorded prior to consultations with Fund staff. The program performance target on credit to government will be adjusted downward for any accumulation of domestic arrears, as defined in the TMU. The definitions of the program’s performance targets, external assistance adjustors, and underlying assumptions, as well as Burundi’s reporting requirements are discussed 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 appropriate to ensure program success.

Table 4.Burundi: Prior Actions for the First Review under the PRGF and Structural Performance Criterion and Benchmarks for 2005
MeasureTimetable (End-month deadline)Status
Prior actions
• Presentation of 2005 budget to parliament consistent with program objectives
• Introduction of the new budget and accounting charter with 2005 budget
• Submission to parliament of law on statute of magistrates of the audit court (cour des comptes)
Structural performance criterion
• Abolish remaining export surrender requirement (50 percent of coffee, tea, and cotton exports)March 2005
Structural benchmarks
• Issue decree for the liberalization of coffee sector marketing and trade at all levels of the production chainMarch 2005
• Begin privatizing coffee sector assets by launching tenders for Sogestals, washing stations, and the state share in SODECOJune 2005
• Initiate audit, by the audit court, of the 2004 government accountsMay 2005
• Complete audited inventory of domestic arrearsJune 2005
• Lift trade restrictions and price controls on sugarSeptember 2005

38. The second review under the PRGF arrangement is scheduled to be completed by May 2005 and will be conditional upon the observance of quantitative performance criteria at end-December 2004, and the structural performance criterion at end-March 2005. The second review will focus on coffee sector reform, public financial management, domestic arrears, monetary and exchange reform, and privatization. Completion of the second review and presentation of a preliminary DSA form the basis for reaching the Decision Point under the Enhanced HIPC Initiative.

ATTACHMENT II

Burundi: Technical Memorandum of Understanding

December 20, 2004

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 and indicative targets and the applicable adjuster; and (ii) the key assumptions used in formulating the economic program for 2004/05 set out in the Memorandum of Economic and Financial Policies (MEFP) of the government of Burundi annexed to the letter of December 20, 2004 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 are listed in Table 4 of MEFP.

A. Quantitative Program Targets

Quantitative performance criteria and indicative targets

3. Quantitative performance criteria under the program are set on the end-December 2004 stocks as set out in Table 3 of the MEFP, as follows:

  • Net foreign assets of the BRB (floor);
  • Net domestic assets of the BRB (ceiling);
  • Net credit from the banking system to the government (ceiling);
  • Central government’s external payments arrears (ceiling);
  • The outstanding stock of short-term external debt (maturity of less than one year) of the central 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 2005 are indicative.

4. Quantitative indicative targets under the program, as set out in Table 3 of the MEFP, are as follows:

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

Definitions and computation

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 end-June 2004 exchange rate. The net foreign assets of the BRB totaled F Bu 12.4 billion, equivalent to US$11.2 million, at end-June 2004, broken down as follows:

In billionsIn millions of
of FbuU.S. dollars
Net foreign assets of the BRB12.411.2
Foreign assets84.376.4
Deposits with correspondents (excluding IMF)81.874.2
SDR holdings0.20.2
Reserve position with the IMF0.60.5
Gold holdings0.40.4
Cash on hand1.31.2
Foreign liabilities71.965.2
Liabilities vis-a-vis correspondents (excluding IMF)27.224.7
Counterpart of the use of IMF resources42.738.7
Other liabilities2.01.8

6. The gross official reserves of the BRB are defined as those foreign assets which are liquid and freely available to the central bank. At end-June 2004, gross official reserves stood at US$58.5 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 F Bu 58.8 billion at end-June 2004, broken down as follows:

Net domestic assets of the BRB58.8
Reserve money71.2
Currency in circulation56.4
Reserves of commercial banks13.5
Other nonbank deposits1.3
Minus: net foreign assets of the BRB12.4

8. Net credit from the banking system to the government is defined as the difference between (i) loans, advances, and other government credits from the BRB and all of Burundi’s commercial banks, and (ii) government deposits held at those institutions. The relevant scope of government is defined as central government and any other special funds or operations that are part of the budgetary process or have an impact on the government’s financial position. Net credit from the banking system to the government totaled F Bu 71.7 billion at end-June 2004, broken down as follows:

Net credit from the banking system to the government71.7
Central government80.8
Loans, advances, and other credits128.3
BRB122.4
Commercial banks5.9
Deposits47.6
BRB36.7
Commercial banks10.8
Other government (net)-9.1

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 which have not been paid. The external payments arrears at end-June 2004 are broken down as follows, showing the actual stock under the heading “technical arrears”:

ProgramTechnical
External payments arrearsdefinitionarrears
Multilateral
African Development Bank08.6
African Development Fund016.2
International Fund for Agricultural Development00.2
Arab Bank for Economic Development in Africa00.0
Arab League00.0
European Union017.4
European Investment Bank0.3
International Development Association00.0
OPEC Fund03.4
Bilateral031.7
French Cooperation Agency (AFD)00.0
Japan (FCEOM)00.0
Russia00.0
Abu Dhabi Fund0
Kuwait Fund0
Saudi Arabia Fund0
Libyan Bank00.1
Other creditors
AD Consultants00.0
Kreditanstalt fur Wiedesaufbau AMSAR00.6

10. 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.

11. The stock of short-term external debt, with a maturity of less than one year, owed by the central 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 and long term. 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 and borrowing from the Fund. The concessional nature of debt will be ascertained on the basis of the commercial interest reference rates (CIRRs), as laid out by the Organization for Economic Cooperation and Development (OECD). A debt is said to be at concessional conditions if, on the date of its initial disbursement, the ratio between the present value of the debt computed on the basis of reference interest rates, on the one hand, and the face value of the debt, on the other hand, is less than 65 percent (equivalent to a grant element of at least 35 percent). As of end-June 2004, the stock of short-term debt outstanding was nil, as was nonconcessional medium- and long-term debt contracted during the first half of the year.

12. A transfer of dividends from the BRB to the central government is projected to take place in March 2005, in the amount of F Bu 6.6 billion. Any transfer from the BRB in excess of this amount will be treated as central bank financing (rather than government revenue) and counted against the program’s credit from the banking sector ceilings.

13. Receipts from privatization during 2005 are projected to reach F Bu 5.0 billion (equivalent to 0.6 percent of GDP). Any privatization receipts over and above the projected amount will be used to reduce domestic debt.

14. The government’s primary budget 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 budget balance for the first six months of 2004 was estimated at F Bu -9.5 billion, broken down as follows:

Primary budget balance-9.5
Total revenue69.3
Minus:
Noninterest current expenditure66.6
Domestically financed capital
expenditure12.6
Net lending-0.4

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 central government, including all allowances and bonuses. The government’s wage bill for the first six months of 2004 totaled F Bu 30.2 billion, broken down as follows:

Government wage bill30.2
Civilian personnel18.1
Military personnel12.1

External financial assistance adjustor

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

17. External financial assistance (measured in terms of 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 2004-05 are shown below.

18. The ceiling or the floor targets will be adjusted to accommodate 100 percent of any deviation from the projected external financial assistance. In case of, respectively, 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 in terms of Burundi francs on a quarterly basis, using the average official exchange rate.

Burundi. Adjustment of Performance Criteria and Indicative Targets Under the 2004/05 Program(in millions of U.S. dollars)
20042005
JuneSep.Dec.MarchJuneSeptDec
ActualActualRev.Prog.Prog.Prog.Prog.
Prog.
External nonproject financial assistance (cumulative from
beginning of calendar year; in millions of U.S. dollars)17.349.193.213.142.161.1114.4
Of which: Debt relief (current maturities)3.03.86.01.13.86.28.9
EU0.023.843.40.010.210.214.1
World Bank (including MDRP)0.00.014.80.00.015.030.0
AfDB0.00.03.210.110.110.120.6
France0.03.83.80.03.83.83.8
Belgium5.75.78.30.02.62.65.2
Other (Gap)0.09.711.329.9
Multidonor Trust Fund disbursements8.612.013.71.91.91.91.9
Sources: Burundi authorities; and Fund staff estimates.
Sources: Burundi authorities; and Fund staff estimates.

19. External financial assistance will be converted in terms of Burundi francs on a quarterly basis, using the average official exchange rate.

Domestic arrears adjustor

20. The ceilings on the net bank credit to government will be adjusted downward for any accumulation of domestic arrears, as measured by the accumulation of nonexecuted payment orders older than 30 days.

B. Key Program Assumptions

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

20042005
Jan.-Jun.Jul.-Dec.Jan.-Mar.Jan.-Jun.Jan.-Sep.Jan.-Dec.
Average export prices Coffee (cents per pound)76.8468.8474.0073.5072.6772.87
Tea (dollars per kg.)190.64194.14195.36195.02196.65198.25
Petroleum (US$ per barrel)33.8843.1745.00.44.2543.5042.75
End of period
Dollar per SDR exchange rate1.481.491.501.501.501.50
Dollar per euro exchange rate1.231.281.301.301.301.30

C. Provision of Information to IMF Staff

22. To facilitate the monitoring of program implementation, the Burundi government will prepare a monthly report within five weeks from the end of each month, which will be sent to IMF staff. In addition, the staff of the monitoring committee (technical bureau of the Secretariat Permanent de Suivi des Reformes Economiques 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;
  • A table on the foreign exchange cash flow;
  • The balance sheet of the BRB (situation hebdomadaire).

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

  • The monetary survey, including breakdown of the central bank and of commercial banks;
  • The financial position of the government vis-a-vis the banking system;
  • A detailed breakdown of government revenue;
  • A detailed breakdown of government expenditure on a commitment basis;
  • A detailed breakdown of the government wage bill on a commitment basis;
  • Detailed information on government social spending, in particular on the health and education sectors;
  • 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 detail by creditor and any accumulation of arrears on domestic or external debt;
  • 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);
  • The amount of new debts contracted or guaranteed by the government, including detailed information on its conditions (such as currency denomination, interest rate, grace period, maturity);
  • Actual disbursements of nonproject financial assistance, including new loans and debt relief granted by Burundi’s external creditors;
  • The weekly balance sheet of the BRB and the outcome of weekly foreign exchange auctions, including the allocated amounts and exchange rate levels, as well as the level of buying and selling exchange rates used by commercial banks and those observed on the parallel market;
  • Indicators and other statistical data to allow an evaluation of macroeconomic developments, such as the consumer price index, indices of manufacturing output, merchandise imports and exports (volume and value), with a breakdown by main categories; and
  • An update on the implementation of structural measures planned under the program, as summarized in Table 3 of the MEFP.

24. The SP/REFES will also provide the African Department of the IMF with any information that is deemed necessary to ensure an effective monitoring of the program.

APPENDIX II

Burundi: Relations with the Fund

(As of November 30, 2004)

I. Membership Status: Joined 09/28/63; Article XIV

II. General Resources Account:

SDR Million% Quota
Quota77.00100.00
Fund holdings of currency76.6499.53
Reserve position in Fund0.360.47

III. SDR Department:

SDR

million
% Allocation
Net cumulative allocation13.70100.00
Holdings0.100.69

IV. Outstanding Purchases and Loans:

SDR million% Quota
PRGF Arrangements26.4034.29

V. Latest Financial Arrangements:

AmountAmount
ApprovalExpirationapproveddrawn
Typedatedate(SDR million)(SDR million)
PRGF1/23/041/22/0769.3026.40
PRGF11/13/9111/12/9442.7017.21
Structural Adjustment
Facility (SAF)8/8/868/7/8929.8929.89

VI. Projected Payments to the Fund (SDR million; based on existing use of resources and present holdings of SDRs):

Forthcoming
2004200520062007
Principal0.000.000.000.00
Charges/interest0.070.410.410.41
Total0.070.410.410.41

VII. Implementation of HIPC Initiative:

Not applicable

VIII. Safeguards Assessments:

Under the Fund’s safeguards assessment policy, the Banque de la Republique du Burundi (BRB) is subject to a full safeguards assessment with respect to the PRGF arrangement approved on January 23, 2004. However, in view of the constrained administrative and technical capacity in Burundi caused by prolonged civil conflict, a two-step approach to completing the safeguards assessment has been adopted. The first step, which was successfully completed on June 22, 2004, involved a targeted assessment of the areas considered critical to preventing the possibility of misreporting and safeguarding IMF resources, i.e., the BRB’s external audit and financial reporting mechanisms and the system of internal controls. The second step, which will comprise a follow-up assessment after the most important safeguards recommendations are in place, will evaluate the BRB’s legal framework and internal audit mechanism and, additionally, review the effectiveness of the measures implemented as a result of the first stage of the assessment.

IX. Exchange Arrangements

Burundi maintains a managed float exchange regime. In July 2000, the authorities began reversing the heavy restrictions put in place during the 1993-96 civil hostilities and embargo period by introducing a system of weekly foreign exchange auctions. In 2002, in the context of a Fund-supported program, the central bank eliminated the positive list of imports eligible for BRB foreign exchange, 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 lifted all remaining exchange restrictions on current transactions and delegated authority to the commercial banks to approve standard transactions. In early 2004, the surrender requirement was lowered further to 50 percent. The central bank admitted foreign exchange bureaus to the weekly auctions. Burundi has accumulated sizeable external payments arrears to various bilateral and multilateral creditors. Burundi avails itself of the transitional arrangements of Article XIV.

X. 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 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. Directors considered that, provided there was continued satisfactory track record of policy implementation, Burundi’s decision point under the Initiative for Heavily Indebted Poor Countries could be reached by the time of the second review under the PRGF.

XI. Technical Assistance

2004 (Nov.)STA multisector mission
2004 (Nov.)MFD multitopic mission
2003 (Oct.)Resident MFD consultant on monetary policy management (jointly with Rwanda)
2003 (April)Two (of four) visits by MFD expert on monetary policy management
2003 (Feb.)Visit by FAD expert on tax administration
2002 (Nov.)MFD mission on liquidity management and foreign exchange operations
2002Participation of MFD experts on Article IV/UFR mission
2001-02:Three FAD visits by a tax administration expert, in preparation for setting up
large taxpayers’ unit
2000STA mission on monetary and banking statistics
2000FAD mission on tax and customs administration
1998MFD mission on foreign exchange auctions

XII. Resident Representative

None.

APPENDIX III

Burundi: Relations with the World Bank Group

(As of end-November 2004)

A. Partnership in Burundi’s Development Strategy

1. As Burundi recovers from its long conflict, the transitional government is developing its strategy for inclusive development. An Interim Poverty Reduction Strategy Paper (I-PRSP) has been completed through participatory methods and has become a core document in the national strategy. The Executive Directors of the World Bank and the Fund conducted a Joint Staff Assessment and endorsed the I-PRSP in January 2004. The government is using the PRSP process to improve coordination of development efforts in the country, including donor-supported activities. Furthermore, the 2003 and 2004 budgets as well as the 2005 budget are being adopted in line with the I-PRSP.

2. The Fund is supporting this strategy through a PRGF, and is taking the lead in addressing fiscal imbalances, and the Fund and the Bank share the lead on the policy dialogue on macroeconomic stability and economic growth. The Bank leads the policy dialogue on post-conflict rehabilitation and reintegration, education, health and social policy reforms, privatization, the environment for employment creation (particularly in rural areas), and sustainable infrastructure.

B. IMF-World Bank Collaboration in Specific Areas

3. Common objectives and the development of post-conflict instruments have led to increased collaboration between the Fund and the Bank in recent years. The Bank and Fund teams have been closely coordinating their assistance strategies and policy advice and the implementation of the I-PRSP. There is also close coordination and good cooperation in the determination of structural conditionalities, in particular as regards crucial reforms for the coffee sector. The Bank is leading the policy dialogue on key structural aspects of the reform program both through dialogue and technical assistance. 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 will be intensified in the context of the preparation of Burundi’s full-PRSP (May 2005) and participation in the enhanced HIPC Initiative, with the decision point expected to be reached by mid-2005.

C. World Bank Group Strategy

4. The Bank’s current (2002-2004) Transitional Support Strategy (TSS) supports the rehabilitation of Burundi’s economy, particularly through economic reforms for sustained economic recovery, growth and poverty reduction. This includes the improvement of public service delivery and basic social services, the deepening of institutional and structural reforms, and the establishment of a track record for early access to debt relief under the Enhanced HIPC Initiative. Support for affected populations during the progress towards sustainable peace, and improving the delivery of essential social services would enhance the reintegration of refugees into productive employment. This would eventually boost economic recovery and growth and help reduce the incidence of poverty. The new TSS for 2004-06, which draws upon this experience, is under preparation, for Board consideration in March 2005. The themes of the new TSS include: (a) security, social stability and service delivery; (b) debt relief, economic growth and diversification; and (c) governance and capacity building for public institutions. It is expected that progress will be made during this period towards the preparation of a full PRSP, which will provide the basis for a Country Assistance Strategy.

5. 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 - (the third tranche will be released by end-December 2004) - is intended to support economic recovery through BOP support which finances eligible private sector imports based on a negative list; and the counterpart funds generated from ERC foreign exchange auctions by the Central Bank (BRB) will be used to finance specific development programs in the national budget. The Bank also manages a trust fund for arrears stabilization and debt service to multilateral development banks (particularly AfDB). Besides the strong partnership with the Fund, the Bank is collaborating with a number of donors, including with the European Union. A new adjustment operation is currently under preparation.

6. The current IDA project portfolio (see table below) consists of 10 projects for a total commitment of US$337 million and an undisbursed amount of about US$230 million. The portfolio also includes a number of grants, which are not included in this table.

Active Portfolio in Burundi—IDA Financing(As of end-November 2004)(In millions of U.S. dollars, unless otherwise indicated)
Project NameApproval Fiscal YearClosing DateNet CommitmentOf which GrantsUn-disbursedDisbursed in Fiscal Year
Health & Population II199512/31/0430.009.5010.703.90
BURSAP II200012/31/0524.2014.0011.506.60
Regional Trade Facilitation200106/30/117.500.001.701.80
Public Works and200112/31/0640.000.0018.706.55
Employment Creation
HIV/AIDS and Orphans200212/31/0636.000.0027.701.90
ERC200312/31/0454.000.0014.7740.00
Economic Management200407/31/0926.000.0025.690.85
Support
Road Sector Development200412/31/0951.400.0051.400.00
Demobilization and200412/31/0833.0033.0033.000.00
Reintegration
Agriculture Rehabilitation and Sustainable Land Management200510/31/1035.0035.0035.000.00

Nonlending activities

7. IDA assistance also emphasizes nonlendingactivitiesandadvisoryservices, 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 to support the overall strategy. New activities will include: a post-conflict social sector assessment, an economic study/poverty assessment, and a Country Procurement Assessment (CPAR).

TSS update

8. The new TSS will cover a 24-month period, spanning FY05, FY06, and early-FY07. IDA financing for those years will be discussed within the context of the new TSS. It is expected that progress will be made during this period towards the preparation of a full Poverty Reduction Strategy Paper, which will provide the basis for a Country Assistance Strategy.

IFC

9. The International Finance Corporation holds a US$1 million equity portion in Verreries du Burundi, which is not sellable owing to the poor performance of this public enterprise.

MIGA

10. The MIGA portfolio in Burundi includes two active applications for a total investment of US$6.5 million.

Prepared by World Bank staff. Questions may be addressed to: Mr. Gerard Byam, Acting Country Director at 458-7237; or Brendan Horton, Lead Economist at 473-5587; or Achille Toto Same at 473-1911.

APPENDIX IV

Burundi: Relations with the African Development Bank Group

(As of October 30, 2004)

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. Total grants and loans disbursed before end-1993 amount to SDR 64.7 million.

Over the last decade, Burundi has accumulated arrears to the AfDB, totaling about US$31 million at end 2003. Payments on current debt service due were resumed during 2003. In June 2003, Burundi reached an understanding with the AfDB on the clearance of arrears and the government paid 20 percent of the outstanding total in the first quarter of 2004. 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 will be settled with the help of donors and the PCCF before the decision point under the enhanced HIPC Initiative, expected in the first half of 2005. In Burundi’s case, the residual arrears will be cleared in equal parts by the PCCF (SDR 8 million) and donors SDR 8 million (the EU; euro 7.6 million, and France euro 2 million), respectively.

The AfDB staff is preparing 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 two tranches, accompanied by a further grant of SDR 1.5 million for institutional support, was sent to the Board for approval in late 2004. A multi-sector project, totaling SDR 9.8 million, is also under preparation for approval in late 2004. Negotiations on the FAD 10 allocation and funding are progressing. It is expected that Burundi and other post-conflict nations would see sizeable increases in their allocations.

Table: AfDB Operations in Burundi
Outstanding loansPast-due obligations
(In millions of SDRs)
African Development Bank2.95.5
African Development Fund145.210.3
Nigerian Trust Fund0.40.4
Total148.516.0
APPENDIX V
Burundi: Millennium Development Goals
19901995200120022015
Target
Goal 1. Eradicate extreme poverty and hunger
Target 1: Halve between 1990 and 2015, the proportion of people whose income
is less than one dollar a day.
1. Population below US$1 a day (percent)1/58.4
2. Poverty gap ratio at US$ 1 a day (percent)
3. Share of income or consumption held by poorest 20 percent (percent)2/7.91/5.1
Target 2: Halve, between 1990 and 2015, the proportion of people suffering hunger
4. Prevalence of child malnutrition (percent of children under 5)45.1
5. Population below minimum level of dietary energy consumption (percent)49.064.070.024.5
Goal 2. Achieve universal primary education
Target 3: Ensure that, by 2015, children will be able to complete a full course
of primary schooling
6. Net primary enrollment ratio (percent of relevant age group)52.029.553.4100.0
7. Percentage of cohort reaching grade 561.864.0100.0
8. Youth literacy rate (percent age 15-24)51.657.965.166.1100.0
Goal 3. Promote gender equality and empower women
Target 4: Eliminate gender disparity in primary and secondary education preferably by 2005 and to
all levels of education by 2015
9. Ratio of girls to boys in primary and secondary education (percent)82.079.4
10. Ratio of young literate females to males (percent ages 15-24)76.786.095.696.9
11. Share of women employed in the nonagricultural sector (percent)
12. Proportion of seats held by women in the national parliament (percent)11.314.419.6
Goal 4. Reduce child mortality
Target 5: reduce by two-thirds between 1990 and 2015, the under-five mortality rate
13. Under-five mortality rate (per 1,000)184.0194.0204.0208.061.3
14. Infant mortality rate (per 1,000 live births)111.0116.0121.0123.0
15. Immunization against measles (percent of children under 12-months)74.080.075.075.0
Goal 5. Improve maternal health
Target 6: Reduce by three-quarters, between 1990 and 2015, the maternal mortality ratio.
16. Maternal mortality ratio (modeled estimate, per 100,000 live births)1,000.0
17. Proportion of births attended by skilled health personnel (% of total)25.2
Goal 6. Combat HIV/AIDS, malaria and other diseases
Target 7: Halt by 2015, and begin to reverse, the spread of HIV/AIDS
18. HIV prevalence among females (percent ages 15-24)11.0
19. Contraceptive prevalence rate (percent of women ages 15-49)
20. Number of children orphaned by HIV/AIDS240,000
Target 8: Halt by 2015, and begin to reverse, the incidence of malaria and other major diseases
21. Prevalence of death associated with malaria
22. Share of population in malaria risk areas using effective prevention and treatment
23. Incidence of tuberculosis (per 100,000 people)406.2
24. Tuberculosis cases detected under DOTS (percent)16.030.0
Goal 7. Ensure environmental sustainability
Target 9: Integrate the principles of sustainable development into policies and programs. Reverse the
loss of environmental resources
25. Forest area (percent of total land area)9.43.7
26. Nationally protected areas (percent of total land area)5.55.75.7
27. GDP per unit of energy use (PPP $ per kg oil equivalent)
28. CO2 emissions (metric tons per capita)0.00.00.0
29. Proportion of population using solid fuels
Target 10: Halve by 2015 proportion of people without access to safe drinking water
30. Access to improved water source (percent of population)69.078.084.5
Target 11: Achieve by 2020 significant improvement for at least 100 million slum dwellers worldwide
31. Access to improved sanitation (percent of population)87.088.0
32. Access to secure tenure (percent of population)
Goal 8. Develop a Global Partnership for Development 3/
Target 16: Develop and implement strategies for productive work for youth.
45. Unemployment rate of population ages 15-24 (total)
Female
Male
Target 17: Provide access to affordable essential drugs
46. Proportion of population with access to affordable essential drugs
Target 18: Make available new technologies, especially information and communications
47. Fixed line and mobile telephones (per 1,000 people)1.52.97.410.6
48. Personal computers (per 1,000 people)0.70.7
Sources: World Bank; and Fund staff estimates.

Survey data for 1998

Survey data for 1992

Targets 12-15 and indicators 33-44 are excluded because they can not be measured on a country specific basis. These are related to official development assistance, market access, and the HIPC initiative.

Sources: World Bank; and Fund staff estimates.

Survey data for 1998

Survey data for 1992

Targets 12-15 and indicators 33-44 are excluded because they can not be measured on a country specific basis. These are related to official development assistance, market access, and the HIPC initiative.

1The primary deficit targeted in the program is on a commitment basis before grants; it excludes spending on interest and special programs, such as elections, DDR/SSR operations, and foreign-financed project spending.
2On October 27, the AfDB Board approved a plan to clear Burundi’s arrears (US$23 million) and restart lending operations. Arrears are to be cleared by the AfDB itself and donors (the EU and France) in equal proportions.
3The level of required reserves was reduced from 8 to 5 percent of bank deposits in domestic currency; cash in vault can no longer be used to constitute required reserves. Reserves must meet the required minimum level averaged over a two-week period (reduced from four weeks). The central bank law was changed to provide for the remuneration of required reserves (initially at a rate of 5 percent).
4The higher primary deficit is partly matched by about 1.1 percent of GDP higher-than-programmed external budget grants.
5The maximum tariff rate will be reduced from 40 percent to 30 percent and the 12 percent tariff will be folded into the 10 percent rate, for a reduction in the number of tariff bands to three.
6Budgeted social spending does not take into account possible increases subsequent to possible debt relief under the enhanced HIPC Initiative from mid-2005. The costs of DDR/SSR operations are not included in military spending. The latter does however include temporary increases in military costs (such as payroll and food) associated with the process of integrating former rebel combatants into the army before they are demobilized.
7Any amounts received above this amount will be used to reduce domestic debt.
8The reform also comprises the tea and cotton sectors.
9The residual financing gap does not take into account the impact of possible debt relief under the enhanced HIPC Initiative.

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