Public Information Notice: IMF Concludes Article IV Consultation with Burundi
April 7, 2000
|Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.|
On March 16, 2000, the Executive Board concluded the Article IV consultation with Burundi.1
Following an improvement that started in mid-1998, Burundi's security situation worsened in the last quarter of 1999, as rebel skirmishes multiplied. The Arusha peace negotiations between the warring parties resumed in mid-January 2000, with Mr. Mandela's appointment as mediator following Mr. Nyerere's death.
Burundi faces a very difficult situation, with steadily falling world prices for coffee (Burundi's main source of foreign exchange). It is estimated that in 1999 real GDP contracted by about 1 percent, owing to the reduced supply of inputs resulting from a dearth of foreign exchange and the adverse impact of a drought and population displacement on agricultural activity. On average, inflation fell to an annual rate of 3.5 percent in 1999 from 12.5 percent in 1998, but a sharp acceleration took place in the second half of the year.
As a result of a weak revenue performance without a corresponding adjustment in expenditure, the fiscal primary balance (defined narrowly as the difference between government revenue and noninterest outlays, excluding foreign-financed investment), on a commitment basis, switched from a surplus of 0.8 percent of GDP in 1998 to a deficit estimated at 0.4 percent in 1999. As foreign financing is estimated to have turned into a net outflow of almost 1 percent of GDP, the financing requirements of the government were met largely by an accumulation of external arrears and domestic bank borrowing.
The persistent decline in foreign exchange reserves and the further accumulation of external arrears, estimated at US$84.0 at end-1999, reflected the continued large deterioration in the terms of trade, the absence of corrective measures, and minimal international assistance. The reduction in imports, associated with the rationing of foreign exchange, translated into a narrowing in the trade and external account deficits. By end-1999, Burundi's gross official reserves had fallen to some US$49.6 million, reducing the import coverage from seven months of imports at end-1998 to about four months at end-1999.
Despite a depreciation of the Burundi franc by about 24 percent in domestic currency terms during the year, the differential between the official exchange rate administered by the central bank and the parallel market rate increased to 85 percent in 1999. In November, the authorities introduced a second official market for foreign exchange with a freely determined rate, allowed residents to hold foreign exchange deposits, and legalized foreign exchange bureaus.
Executive Board Assessment
Executive Directors expressed concern about the severe impact on economic development of the drawn-out civil conflict and the flaring up of rebel violence at the end of 1999. They noted in particular the devastation of the economic and social infrastructure, massive displacement of people, and impact on the poor. Directors expressed hope that the Arusha peace talks will rapidly reach a lasting solution for the restoration of social peace and political stability.
Directors noted the deterioration in Burundi's macroeconomic and financial situation during 1999—in particular, the contraction of GDP, the resurgence of strong inflationary pressures, a weakening of the fiscal accounts, and the severe deterioration of the foreign exchange position. They recognized that the major economic adjustments that are needed would have to await the re-establishment of peace and the resumption of international assistance. However, Directors urged the authorities to begin implementing appropriately strong measures without delay to restore macroeconomic stability, especially in the areas of fiscal, monetary, and exchange rate policies.
Directors were of the view that, despite some improvement over 1999, the fiscal deficit under the budget for 2000 was not compatible with the need to reduce inflation and conserve the country's scarce foreign reserves. Accordingly, they strongly encouraged the authorities to curtail the wage bill increase, control strictly other expenditures, adjusting them promptly in case of a revenue shortfall, and improve budget management to introduce more efficiency and transparency. In this connection,
Directors noted the desirability of switching expenditure from the military to the social sectors when the security situation improves. Directors commended the authorities for the courageous actions taken in January to raise retail prices for petroleum products and to increase government revenue. They also stressed the need to reinforce these actions by eliminating customs exemptions and strengthening customs and tax administration.
Directors urged the authorities to strengthen monetary policy and regain control of broad money through the discontinuation of the unlimited refinancing policy, a substantial increase in the refinancing rate, and strict enforcement of reserve requirements for commercial banks. They also stressed the need for tightening supervision of the financial sector and enforcing observance of prudential ratios and provisioning requirements.
Directors noted that, despite regular adjustments during the year, the official exchange rate did not appropriately reflect inflation differentials with Burundi's partner countries and changes in the terms of trade. They observed that the current exchange rate policy had resulted in a major loss in Burundi's competitiveness, adversely affected economic activity, and led to an ever-increasing gap with the parallel market rate. Directors noted with concern the introduction of the second official foreign exchange market, which gives rise to a multiple currency practice, and encouraged the authorities to remove this practice soon by consolidating the two official markets into a single auction system.
Noting the lack of progress on structural reforms, Directors recommended that priority be given to the liberalization of the coffee sector, which could help provide opportunities for growth and poverty reduction in the agricultural sector. Priority should also be given to the rationalization of public enterprise management, which would improve the sector's financial situation and free public resources.
Directors expressed concern about the weaknesses of the statistical database, which limited the ability of both the authorities and the Fund to evaluate economic development and formulate appropriate policies. They called on the authorities to strengthen efforts to collect essential economic and financial statistics and to ensure their consistency, particularly regarding the national accounts, the balance of payments, and external debt. Directors noted that these efforts could be supported by technical assistance, including from the Fund.
Directors encouraged the authorities to work closely with Fund staff to prepare the basis for emergency post-conflict assistance and the resumption of financial support from donors, and some Directors noted that this could pave the way for possible additional support under the Poverty Reduction and Growth Facility.