Abstract
Burundi’s economy has continued to grow at a slower pace than envisaged owing to the impact of food and fuel shocks on aggregate demand. The macroeconomic outlook remains broadly positive but subject to risks that emanate from the security situation and the external environment. The foremost risks are a decline in donor support, warranting an abrupt fiscal adjustment, and a worsening in the security situation. These risks are mitigated in part by reforms that have improved revenue mobilization and efforts in nation building.
1. My Burundian authorities have persevered with prudent macroeconomic policies and deepened structural reforms in spite of the challenging external environment. They remain confident that the impacts of the protracted global economic uncertainties on economic growth and balance of payments will be contained and reversed in the medium term as appropriate measures are implemented and external and internal environment improves. However, they concur with staff that the challenging external and internal environment coupled with the country’s narrow export base poses considerable risks to growth going forward.
2. My authorities are appreciative of the Fund’s constructive engagement and support under the ECF. They thank staff for the candid policy dialogue and advice under the program. The support and dialogue have been invaluable in addressing many of the challenges they face. Going forward, they are determined to further strengthen their macroeconomic framework and deepen their structural reform agenda, and achieve key national and regional objectives as set out in the new PRSP II and the EAC integration protocols.
3. The authorities sound macroeconomic framework and commitment to implement their program under the ECF resulted in very strong program performance. All quantitative indicative targets for end-June 2011 and all performance criteria for end-September were met. Additionally, all end-November structural benchmarks related to financial safeguards and to the strengthening of expenditure commitment controls were met. With the noted strong program implementation, my authorities are requesting Directors’ support in concluding the seventh and final review under the ECF. In light of the continued global economic uncertainties and the fact that the economy is now growing at a slower pace, they request Directors’ approval of a new three-year Arrangement under the ECF to support their macroeconomic framework going forward.
Recent economic and policy developments
4. Burundi’s strong economic recovery that is anchored on deepened structural reforms and sound policy framework is being interrupted by the adverse effects of protracted high fuel and food prices and declining donor aid flows. As a result, growth has been weaker in 2011 than earlier forecast. Inflation that had remained in lower single digits by end-2010, spiked to lower double digits in 2011.
5. The fiscal outturn reflects the authorities’ perseverance with prudent spending and the overall expenditure has remained within the program targets. The authorities also made progress in public financial management by improving the expenditure circuit in order to strengthen the planning, execution, and transparency of expenditure. They have also adopted the new organic budget law and its implementation is ongoing while the decree on the General Regulation on Public Budget Management will allow greater transparency in budget execution. Improvement of the government’s cash flow and implementation of the single treasury account coupled with the adoption and implementation of a new public procurement code will further strengthen the effectiveness and transparency of budget execution. On the revenue side the authorities have continued to score substantive gains in raising the level of collections owing to improved administrative capacity of the Burundi Revenue Authority (BRA), and greater centralization of government revenue.
6. My authorities’ monetary policy framework remained prudent in tandem with the fiscal policy stance. The authorities have strengthened the autonomy of the central bank which has raised the interest rates to rein in inflation, and stand ready to further tighten the stance of monetary policy should inflationary pressures persist. Supervision of financial institutions has been improved and the Central Bank continues to implement measures aimed at strengthening its financial safeguards, in accordance with the recommendations of the latest safeguards assessment up-date completed by IMF staff in June 2008.
7. The external balances weakened considerably due to a combination of the deterioration in the terms of trade and poor coffee harvests owing to the cyclical nature of the crop production. Late disbursements by the country’s development partners also contributed to the decline in the current account balances. As a result official reserves fell to 4.4 months of import cover.
Policy framework and reforms going forward
Fiscal policy and reforms
8. The authorities’ fiscal framework will continue to strike an appropriate balance between the twin objectives of supporting economic growth and macroeconomic stability. Current expenditure as a percentage of GDP will be consolidated further, while maintaining the tempo for priority sectors in line with the country’s poverty reduction policy as delineated in the new PRSP II. Spending would thus continue to target basic social services, particularly education, health, and public access to water, electricity and roads, explicitly creating the fiscal space for improving the composition of government expenditure in favor of infrastructure and social expenditure.
9. To moderate the heavy reliance on external aid resources, the authorities are determined to further strengthen the capacity to mobilize domestic resources. To achieve the objective of raising the ratio of tax revenues to GDP from the current 14.4 percent to 16.2 percent in 2012, they intend to expand the tax base, reinforce the operations of the tax and customs authorities, control and rationalize tax expenditures and forcefully implement anti-evasion measures.
10. Mindful of the country’s high risk of debt distress, the authorities will aim at limiting debt-creating domestic financing and enhance mobilization of concessional external financing. However, they recognize the limits of concessional financing especially at the time of protracted global economic uncertainties, and would consult the Fund when the need and opportunity for non-concessional financing arise. The authorities are also committed to strengthen their debt management capacities within the Ministry of Finance with the help of the country’s development partners. They will also create a high-level committee to coordinate public debt management processes and to ensure that it remains within the country’s macroeconomic objectives.
Monetary policy
11. To achieve the objective of anchoring monetary policy on low and stable inflation, the central bank will bolster its open market operations, maintain a flexible exchange rate, rely substantially on foreign exchange sales for sterilization, and improve liquidity forecasting. Monetary policy will also aim at streamlining the current level of credit to the private sector.
Financial sector reforms
12. The central bank will continue strengthening its supervisory and regulatory services to the financial institutions with the view of broadening access to financial services. This effort will build on the central bank’s modernization of the infrastructure and legal framework for the payment systems. The central bank will also continue strengthening its internal control and risk management systems, and align its open market operations to best practices. Moreover, financial market development strategy will be adopted and implemented.
Other structural reforms
13. My Burundian authorities have implemented important measures aimed at improving the investment climate with the view to trigger growth momentum sufficient to create new jobs and generate incomes. These include the modernizing of the investment code, the trade code and the law on managing company bankruptcy, establishing the Investment Promotion Agency and adopting and implementing the Public and Private Partnership framework. In order to improve the “Doing Business” ranking, four indicators have been sharply reformed namely the creation of enterprises, property transfer, protection of investments and payment of taxes. These reforms helped Burundi to improve its ranking from 177th to 169th place according to “Doing Business 2011” and “Doing Business 2012” respectively.
14. In the case of structural reforms, the authorities are pursuing deeper reforms in the coffee sector and the privatization of public enterprises. The authorities will persevere with reforms on the trade front, and deepen the EAC regional integration framework. To benefit from the EAC integration protocols, the authorities will persevere with the reforms in order to strengthen the credibility of their economic policy by targeting to achieve the EAC convergence criteria and improving the business climate through, inter alia, simplifying taxation and regulation.
The New ECF arrangement
15. My Burundian authorities reaffirm that the proposed new program for 2012-14 draws on the success of the previous engagement with the Fund as clearly delineated in the EPA, and it builds on the objectives agreed upon under the PRSP-II, in particular the emphasis on the transformation of the Burundian economy for sustained growth and job creation by alleviating key bottlenecks to growth. In that regard, the authorities further reaffirm their commitment to implement the recommendations of the EPA within the context of the new arrangement, especially the importance of greater exchange rate flexibility to better absorb terms-of-trade shocks, the rebuilding of fiscal buffers, and the safeguarding of debt sustainability.
16. The authorities further reaffirm that the new program under an ECF arrangement will help enhance the country’s capacity to mobilize internal revenues, strengthen public financial and debt management policies, achieve greater exchange rate flexibility, and improve the business climate. It will also help consolidate the quick wins secured under the previous arrangements.
17. The strong implementation of the current ECF notwithstanding, Burundi’s external balances continues to weaken. In this regard, my authorities request a new ECF arrangement that meets their financing needs, and welcome Directors’ support.
Conclusion
18. The authorities’ macroeconomic fundamentals and commitment to sound policies underlies the strength of the Burundian economy despite the challenging external environment. The implementation of the ECF-supported program has remained very strong with the end-June and end-September program performance very impressive. The authorities are aware of the remaining internal challenges and the growing challenges on the external environment. They have, therefore, maintained an appropriate mix of fiscal and monetary policies, as well as deepened structural reforms to support growth and macroeconomic stability. The authorities are confident that going forward, continued engagement with the Fund and the support of the development partners will enable them achieve their development goals.