Public Information Notice No. 06/79

Public Information Notice: IMF Executive Board Concludes 2006 Article IV Consultation with Burundi

July 25, 2006

On July 14, 2006, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Burundi.¹

Background

Burundi is emerging from an extended period of civil conflict following the 1993 coup d'état against its first elected government. The Arusha Accord of August 2000 initiated a peace process, which was successfully concluded with the installation of a democratically elected government in August 2005. Socio-economic conditions have deteriorated significantly since civil conflict erupted: income per capita dropped by one-half (to about US$100) and the percentage of people living below the poverty line has doubled. The present environment provides a window of opportunity to secure macroeconomic stability and to relaunch structural reforms to set the basis for a durable recovery. The new government has intensified efforts to resolve the conflict with the remaining rebel group and has placed a strong emphasis on good governance and improved social services.

Macroeconomic developments in 2005 were broadly in line with the PRGF-supported program, albeit with lower growth of about 1 percent, largely on account of a poor coffee harvest and worsening drought in the north. Inflation fell markedly in the second half of 2005 to about 1 percent (end-period) at year-end, reflecting the tightening of monetary policy and the appreciation of the nominal exchange rate. Fiscal performance was strong: the primary deficit was reduced to about half the program target. While the monetary aggregates continued to be well above program target, their growth eased somewhat in the second half of 2005. The external current account deficit (including grants) deteriorated, owing to lower coffee exports and higher imports.

The program remained on track in 2005, although structural reform, especially on privatization and the coffee sector, lagged in the second half of 2005, reflecting the political transition. All the quantitative performance criteria (PC) at end-June and end-December 2005 were observed except for a temporary accumulation of external arrears in late 2005. The structural performance criterion on the installation of an integrated computerized financial management information system in the Ministry of Finance was missed, as were three structural benchmarks, but the measures subject to the PC and two benchmarks were implemented at end-2005/early 2006.

The Article IV consultation discussions focused on the key lessons from the period of extended social conflict and the accumulated economic effects of stalled structural reforms, and the medium-term challenges, including the efforts needed to progress on the Millennium Development Goals. The key challenges ahead are to launch the economy on a higher growth path, raise spending on social sectors and infrastructure, and reinforce public financial management necessary for macroeconomic stabilization. The successful conclusion of the political transition, improving security conditions, and sustained momentum of reform, has laid the basis of an improved medium-term macroeconomic outlook.

Progress has been made on the governance front but the new institutions are new and much remains to be done to strengthen this capacity. Burundi made progress in securing debt relief in 2005. The enhanced HIPC decision point was reached in August. Scheduled debt service, after traditional and HIPC relief, was reduced to 34 percent of exports from 110 percent in 2004. Burundi has yet to secure debt relief from non-Paris Club creditors.

Policy discussions focused on the need to secure macroeconomic stability and create an economic environment to encourage private sector activity and improve productivity. The program for 2006 projects a recovery of real GDP to 6 percent, reflecting continued vigor in the service sectors and a strong rebound in coffee output. Inflation is expected to decelerate further. The 2006 program provides fiscal space to start addressing urgent social needs, consistent with macroeconomic stability, in part through a shift from security to social spending. The budget includes a strong set of administrative reforms and the clearance of domestic arrears. Monetary policy aims at further strengthening liquidity management with the introduction of treasury securities. Financial sector supervision is being strengthened. The program includes to activation of the privatization agenda, especially for coffee. The managed floating exchange rate regime has served Burundi well so far and little remained to be done for Burundi to be in a position to accept its obligations under Article VIII, Sections, 2, 3, and 4 of the IMF's Articles of Agreement.

Executive Board Assessment

Executive Directors commended the authorities for the progress made in implementing Burundi's PRGF supported program in a difficult post-conflict environment. The fiscal deficit was reduced owing to buoyant revenues, and inflation fell significantly. Following lower-than-expected economic growth in 2005, a strong pick-up in growth, fueled by a rebound in coffee production and strengthening confidence, is expected in 2006. Directors were in particular encouraged by the successful political transition and improved security situation. They encouraged the authorities to move ahead with the resolute implementation of structural reforms, and to refocus spending on the social sectors and infrastructure necessary to achieve the Millennium Development Goals (MDGs).

Directors observed that commendable progress has been made in structural reforms in the fiscal, monetary, and foreign exchange areas. At the same time, deeper reforms in the productive sectors that are fundamental for a sustained recovery have been delayed. Directors urged the authorities to press ahead with structural reforms to stimulate private sector activity and improve the business climate, and to reactivate the privatization agenda, especially for the coffee sector, building on strong efforts to mobilize political and social consensus in support of the reforms.

Directors welcomed the strong fiscal performance in 2005. The buoyancy of revenues, despite the significant reduction in import duties, augurs well for the effectiveness of continued revenue-enhancing efforts. There is also a need to sustain efforts to improve public expenditure management and to reinforce budget execution, financial control, and public procurement practices. Directors underscored the importance of managing carefully the public's expectations of a peace dividend, of fully costing all social initiatives in the budget, and of maintaining prudent fiscal and debt management policies given continued vulnerability to shocks and debt distress risks. It will also be important to further strengthen good governance and transparency, including through public financial management reforms and the progressive withdrawal of state intervention in the economy.

Directors observed that improvements in the Bank of the Republic of Burundi's (BRB) ability to conduct monetary policy and channel official foreign exchange inflows into the exchange market have helped to strengthen inflation control. They called on the authorities to clear domestic arrears and introduce standardized and negotiable treasury securities in 2006. Directors emphasized the need to bolster banking supervision, and looked forward to early passage of laws to combat money laundering and the financing of terrorism, and to reinforce the central bank's independence. They commended the BRB for improvements in its internal operations, including its pro-active response to the safeguards assessment, and encouraged further efforts to modernize its operations and internal auditing.

Directors considered that the managed-float exchange rate regime has served Burundi well, helping to cushion exogenous shocks. They welcomed the progress made in liberalizing the exchange regime, and looked forward to the authorities' acceptance of the obligations of Article VIII, Sections 2, 3, and 4 of the Fund's Articles of Agreement.

Directors urged the authorities to seek debt relief from non-Paris Club creditors that have not yet provided such relief under the enhanced HIPC Initiative on terms comparable to those obtained from Paris Club creditors. They also emphasized that Burundi will need continued access to grant financing.

Directors noted that good but uneven progress has been made in raising Burundi's social conditions, but that the challenges in meeting the MDGs remain significant. Particular attention should be paid in the period ahead to reinforcing, with donor support, the government's capacity to deliver social services. Directors also saw scope for further reducing military expenditures in favor of social spending. Directors welcomed that a full PRSP is being finalized, which should provide the necessary framework for pursuing the authorities' poverty reduction and social development goals, and support progress towards the HIPC completion point.

Directors encouraged the authorities to strengthen the statistical system, to improve the ability to monitor economic developments.

¹ Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities.