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Public Information Notice (PIN) No. 04/7
February 10, 2004
International Monetary Fund
700 19th Street, NW
Washington, D.C. 20431 USA

IMF Concludes 2003 Article IV Consultation with Burundi

Public Information Notices (PINs) are issued, (i) at the request of a member country, following the conclusion of the Article IV consultation for countries seeking to make known the views of the IMF to the public. This action is intended to strengthen IMF surveillance over the economic policies of member countries by increasing the transparency of the IMF's assessment of these policies; and (ii) following policy discussions in the Executive Board at the decision of the Board.

On January 23, 2004, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Burundi.1

Background

After nearly four decades of instability and civil strife, Burundi reached a turning point with the signing of a Peace and Reconciliation Agreement in Arusha (Tanzania) in August 2000, and a government of national unity was appointed in November 2001. Although sporadic hostilities continued thereafter, much progress was made during 2001-03 with the support of regional partners and the African Union. Negotiations with rebel factions started in 2002 and cease-fire agreements were signed with three rebel groups in late 2002, representing another milestone in the peace process. Implementation of the cease-fire progressed decisively in 2003 with the gradual deployment of peacekeeping troops under the mandate of the African Union and the signing of a power-sharing agreement in Pretoria (South Africa), in October 2003.

The Pretoria agreement broadens the political spectrum and spells out steps toward the initiation of disarmament, demobilization and restructuring (DDR) of military forces. The DDR operations are being monitored by peacekeeping troops under the aegis of the African Union; financing has been secured under a regional multi-donor project managed by the World Bank, which includes an envelope of US$80 million for its Burundi component. Former rebel groups have established political parties and some of their members have joined the national unity government. Moreover, negotiations are under way to draft an election law, as a preamble to the organization of local, legislative, and presidential elections in the second half of 2004.

Widespread poverty continues to pose major humanitarian problems. An estimated two-thirds of Burundians live in absolute poverty and one out of eight adults is HIV positive. The authorities and regional partners expect that the progress made toward resolving the conflict will prompt the return of Burundi's 350,000 refugees (mostly in camps in Tanzania) and 400,000 internally displaced persons. The government, together with the United Nations High Commission for Refugees (UN-HCR), has taken steps to promote the voluntary repatriation of refugees. A national commission to assist war victims (Commission Nationale de Réhabilitation des Sinistrés—CNRS) was set up in February 2002, but its work has been affected by a lack of funds.

The authorities began addressing economic and financial issues through the implementation of a staff-monitored program (SMP) in the second half of 2001. The program's main objectives were to stabilize the macroeconomic situation, facilitate the mobilization of external assistance, and lay the groundwork for growth and poverty reduction. While implementation of the SMP was hampered by continued instability and a consequent holding back of donor support, economic activity began to recover and inflation decelerated in 2001. Aided by a rebound in agricultural output and reconstruction activity, real GDP grew by an estimated 2.1 percent, and the 12-month of rate inflation fell to less than 4 percent in December 2001. These positive trends continued during the first half of 2002, although the low international coffee prices continued to pose major difficulties for Burundi.

Improving political and social conditions and significant steps toward restoring financial stability provided the basis for Fund support in 2002 under the post-conflict emergency assistance policy. Burundi made a first drawing equivalent to 12.5 percent of quota in October 2002 and a second drawing of the same amount in May 2003.

In 2003, Burundi's GDP contracted by an estimated 1 percent in real terms, owing to the impact of poor weather on the first crops of the season. Activity in nonfarm sectors, which had already underpinned Burundi's broad-based recovery in 2001-02, however, remained strong. Given the 20 percent depreciation of the exchange rate in the third quarter of 2002 and higher food prices resulting from lower agricultural output, inflation rose in mid-2003 from the exceptionally low levels seen in 2002 to 10-14 percent (end-of-period basis) in the third quarter of 2003, but has begun to recede more recently.

The program was broadly on track in 2003, with budget execution in line with projections during the first three quarters of the year. While debt-service payments fell short at end-September, they rose in the last quarter of the year following activation of the World Bank-managed multidonor trust fund for debt service. The strong growth in broad money of between 30 and 35 percent seen earlier slowed to 24 percent in September. Net international reserves were at comfortable levels equivalent to 3½ months of imports at the end of the third quarter of 2003. The Burundi franc was broadly stable vis-à-vis major currencies, and the exchange rate differential between official and parallel markets declined from 15-20 percent to below 15 percent in the last quarter of 2003. The external current account deficit narrowed to 5½ percent of GDP, compared to 6½ percent of GDP in 2002, mainly reflecting a surge in exports from an unusually large coffee crop in 2002/03. The financial performance of the coffee sector in 2003 was disappointing however, and the authorities took steps to improve monitoring and control of the coffee companies' financial operations.

The authorities' economic program for 2004 and the medium term was drawn up on the progress made during the last two years. It is part of a comprehensive approach to overcome the daunting challenges with regard to achieve political stability, sustainable economic growth, and poverty reduction. In their interim poverty reduction strategy paper (I-PRSP), the authorities have identified the country's specific needs and put together a comprehensive policy strategy combining a sound macroeconomic framework with priorities for structural reforms. The hope is that determined implementation of the authorities' economic and financial program will provide the appropriate conditions for a strong resumption of economic growth in 2004 and help mobilize additional external assistance, including budgetary support. In due course, this will open the way for debt relief under the enhanced Initiative for Heavily Indebted Poor Countries.

Executive Board Assessment

Executive Directors welcomed the considerable progress made by Burundi in advancing the peace process since the signing of the Arusha Peace and Reconciliation Agreement in August 2000, including the full deployment of peacekeeping troops under the aegis of the African Union in 2003, and the recent signing of a power-sharing arrangement with the major rebel group.

Directors commended the authorities for the strong implementation of their post-conflict economic program in 2003. They noted that the program had established conditions to resume economic growth and controlled inflation, and that it had succeeded in mobilizing financial support from other multilateral and bilateral sources to enable Burundi to begin rebuilding after prolonged civil conflict. Directors welcomed the authorities' tight control over the budget, prudent monetary policies, which had helped strengthen the international reserves position of the Bank of the Republic of Burundi (BRB), and progress in implementing structural reforms.

Notwithstanding the achievements in restoring order and economic functioning, Directors emphasized that Burundi still faces many formidable challenges. Foremost are reducing the heavy external debt burden, absorbing a vast number of refugees and internally displaced persons, and demobilizing combatants.

Directors commended the authorities on their Interim Poverty Reduction Strategy Paper (I-PRSP) and agreed with the thrust of the Joint Staff Assessment. They considered appropriate the emphasis placed by the government on restoring peaceful conditions as a precondition for improving economic prospects and reducing poverty. Directors emphasized the need for the authorities to develop further the policies described in the I-PRSP as part of a full PRSP to be completed in late 2004 and, in particular, to expand the consultative process and ensure more precision on priorities, scheduling of policy implementation, cost estimates, and tracking of poverty-related expenditures.

In view of the coffee sector's continued losses, Directors emphasized the critical importance of developing a well-considered strategy for improving performance in this sector and reducing budgetary support as well as diversifying the economy and exports away from coffee. They advocated the development of a social safety net for displaced coffee sector workers. Related to this, Directors encouraged a focus on raising agricultural productivity and improving the use of land.

Directors endorsed the 2004 budget's overall fiscal stance and spending priorities, which include raising budget allocations for the social sectors. They noted that lower military spending would allow an increase in social spending, as soon as circumstances permit. They underscored the importance of improving management and transparency of government expenditures, especially to ensure that aid funds are well spent. Directors supported measures intended to strengthen tax revenues through broadening the base of the sales tax and eventually adopting a value-added tax, and improving tax and customs administration. They endorsed Burundi's efforts to meet its obligations to the Common Market of Eastern and Southern Africa.

Directors welcomed the progress made by the BRB in the areas of monetary policy and bank supervision. They encouraged the authorities to adopt indirect monetary policy instruments in 2004, and to pursue a more proactive liquidity management policy by ensuring consistency between foreign exchange sales in the official market and the BRB liquidity objectives. Directors emphasized the importance of the BRB implementing measures to ensure that commercial banks fully comply with prudential requirements and are rigorously supervised.

Directors recognized the progress made in liberalizing the exchange system, noting that current account transactions were now free of restrictions and that the differential between the official and parallel market exchange rates had narrowed considerably. They supported continued liberalization of the exchange regime and the authorities' initiatives to move toward acceptance of Article VIII obligations.

Directors welcomed the steps already taken by the authorities to begin normalizing relations with multilateral creditors. They observed that Burundi faces unsustainably heavy debt-service obligations and would need debt relief under the enhanced HIPC Initiative.

Directors endorsed the authorities' request for technical assistance regarding program monitoring, policy implementation, and statistics. They observed that, in the short run, Fund technical assistance should focus on monetary policy, tax administration, and the compilation of statistics, and supported a rapid increase in the delivery of technical assistance, in light of improved security.


Burundi: Selected Economic and Financial Indicators, 1999-2003


 

1999

2000

2001

2002

2003

         

Proj.


 

(Annual percentage change)

Domestic economy

         

   GDP at constant market prices

-1.0

-0.9

2.1

4.5

-1.0

   Consumer prices (period average)

3.4

24.3

9.3

-1.3

10.3

 

(In millions of U.S. dollars) 1/

External economy

         

   Exports, f.o.b.

55.0

49.1

39.2

31.2

46.8

   Imports, f.o.b.

-97.3

-107.8

-108.4

-103.9

-127.5

   Current account (excluding official transfers)

-75.6

-103.6

-106.5

-117.0

-140.5

    (in percent of GDP)

-9.3

-14.6

-16.1

-18.6

-23.5

   Overall balance

-37.1

-29.0

-41.3

-27.1

26.7

   Gross official reserves

53.4

43.3

23.8

60.1

72.8

    (in months of imports, c.i.f.)

5.8

4.1

2.3

5.9

5.9

   Change in real effective exchange rate (in percent)

-17.0

4.0

-4.9

-15.1

...

 

(In percent of GDP) 1/

Financial variables

         

   Revenue (excluding grants)

16.2

19.2

20.0

20.3

20.1

   Total expenditure and net lending

25.3

24.3

27.2

25.9

30.0

   Primary budget balance 3/

-0.8

2.2

-0.8

2.2

-0.3

   Overall fiscal balance 3/

-9.0

-4.9

-7.2

-5.7

-9.9

   Change in broad money (in percent)

48.5

1.9

16.3

30.3

22.0

   Interest rate (in percent) 4/

10.6

13.1

13.2

14.7

14.9


Sources: Burundi authorities; and IMF staff estimates.

1/ Unless otherwise indicated.

2/ Bilateral trade-weighted period averages; a negative sign signifies a depreciation.

3/ On a commitment basis and excluding grants.

4/ Twelve-month deposit rate.


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.




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