## 1bdiea2022002

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### Evolution of real GDP per capita and growth dynamics (2005–20)
- Economic growth before the global health crisis was mainly driven by services; in 2019 this shifted with agriculture taking the lead.
- Real GDP growth rate increased from less than 2 percent in 2000 to an average of 5 percent between 2004 and 2014.
- GDP growth rate fell sharply in 2015 due to the political and security crisis and withdrawal of donor support; negative GDP growth occurred in 2015 and 2016.
- The economy was recovering from the 2015 crisis when impacted by the COVID-19 crisis.
- Sectoral contributions:
  - Services drove growth prior to COVID-19 but its impulse dwindled over time.
  - From 2005–2009 government expenditure surged; banking and insurance demand renewed.
  - Public services expanded notably in 2010–2014 (education provision).
  - From 2015–2018 government expenditures stalled; by 2019 public services and market services almost flatlined.
  - Secondary sector mixed: extraction and utilities remain very small; manufacturing and construction dominated the sector.
  - Manufacturing and construction expanded strongly during 2005–2009, slowed from 2010 onwards; construction contracted sharply during 2015–2018; manufacturing recovered in 2019 while construction remained a drag.
- Comparison with EAC peers: Burundi has the lowest per capita revenue among Rwanda, Tanzania, Kenya, South Sudan and Uganda. Per capita GDP remained stable but tendentially decreased in the last three years of the projection.

### COVID-19 era structural change and sectoral shifts (2019–21)
- In 2019, 2020 and 2021 growth became mainly driven by agriculture due to above-average harvests and herd restocking.
- Services (hotels, restaurants, transportation) declined sharply due to reduced business flows with trade partners.
- Traditional subsistence agriculture, coffee and tea, forestry, livestock, and fishing experienced instability related to conflicts and displacement.
- Growth decomposition: bulk of growth pickup in the 2000s stems from improvements in capital and Labor stocks and increased life expectancy at birth; negative TFP growth weighed on GDP especially after the political crisis.
- Policy implication: enhancing human and physical capital and improving health conditions will promote private sector development, enhance productivity, and boost economic growth.

### Development plans, agriculture, and trade policy
- Plan National de Développement (PND) 2018–27 objectives include:
  - strengthening food self-sufficiency and export diversification via agro-industrial, commercial, and extractive businesses;
  - development of energy and artisanal sectors;
  - construction and maintenance of growth-support infrastructure;
  - improving access to education, health and social protection;
  - environment protection and territory development;
  - improving financial governance and decentralization;
  - development of regional and international partnerships.
- Agricultural importance and programs:
  - Agricultural sector contributes on average 39.7 percent of GDP and employs 84 percent of the labor force.
  - Plan National d’Investissement Agricole (PNIA, 2016–2020) measures include better-quality seeds, better access to fertilizers at lower costs, improved price transmission, mechanization, professional training, expansion of land utilization, and increased financing including for women.
  - Coffee sector reforms: centralizing coffee sales and nationalizing part of the exports process; BRB extended a loan to the Government in 2020 to boost productive capacity; exported coffee volumes increased in 2021 and beyond.
  - BRB extended a loan to expand production capacity of a fertilizer firm, guaranteed by the Treasury.
- Trade and import substitution:
  - Imports increased over the years, deteriorating the trade balance and increasing FX needs.
  - PND aims to reduce import dependence via modernization/diversification of agriculture, increased electricity supply (new power plants), and support to agrobusiness industries.

### Financial sector, PFM, and procurement reforms
- Banking Act updated: banking activities governed by Law n°1/17 of August 22, 2017.
  - Reform objectives: increase credit provision, improve regulation, leverage digital technology.
  - Credit can be granted only by reporting institutions (banks, microfinance institutions, financial institutions); prohibited for other natural or legal persons to carry out credit transactions.
- Key PFM and fiscal measures (FY2020/21 and FY2021/22):
  - Revenue measures: revision of municipal taxation texts, strengthen mining tax collection, reduce informal sector via local taxation, stricter dividend law application, revision of exemption procedures, accelerate arrears recovery by Burundi Revenue Authority, transfer non-tax revenue collection to OBR, improved customs IT.
  - 2021/2022 measures with high revenue potential: new tax on mobile phone megabits (18 percent of the cost); non-exemption from income tax and VAT on company sales; new anti-pollution tax on imported used vehicles; new road fee; widening rental tax base to land leases; management shifts and new fees for exemption certificates.
  - Expenditure and PFM measures: new “fair wage policy” after June 30, 2021; compensation for 2016 wage disparities totaled 120 billion BIF (1.8 percent of GDP) over 5 years; allocation of BIF 34 billion (0.5 percent of GDP) in FY2021/22 for the new wage policy; hiring freeze from July 1, 2021 (exceptions: defense and security, education, health, revenue administration).
  - Investment appropriations split into commitment and payment appropriations for multi-year projects starting 2021/2022.
  - Road maintenance fund for "Zero Potholes": budget increased from 8.2 billion (0.1 percent of GDP) to around 28 billion BIF (0.4 percent of GDP).
  - Energy priority in FY2021/22 budget: electrification projects; only thirteen percent of the Burundian population has access to electricity.
  - Health sector FY2021/22 funding to adapt health centers for COVID-19 patients.
- Public procurement law (Law No 1/04 of January 29, 2018):
  - Governs award, execution, control and regulation of public contracts above regulatory thresholds; open bidding is the rule; DNCMP provides a priori and a posteriori controls; ARMP regulates and hosts dispute resolution and disciplinary committees.
  - Financial collateral for contract holders varies from 5 to 10 percent of the basic market price and is refunded within one month after warranty expiry or final acceptance.
  - Appeals process: contact contract responsible person, then ARMP dispute committee; ARMP decisions immediately enforceable and judicial appeal generally not suspensive.
  - ARMP prepares a Code of ethics; violations can lead to exclusion and prison sentences.

### Fragility, security, social indicators and human development
- Fragility indicators:
  - Average CPIA score was at 2.9 in 2019 (below the 3.2 threshold).
  - Origins: historical political instability, cycles of violence, dependence on rain-fed agriculture, institutional and governance weaknesses (corruption, abuses of the judicial system, lack of security, criminality).
- Displacement and repatriation:
  - On April 26, 2015 more than 325,600 Burundian refugees fled the country; some 82,100 sought asylum in the local region.
  - UNHCR facilitated return of 102,761 Burundians since voluntary repatriation began in September 2017 (as of November 2020).
- Social and demographic indicators (2020 unless otherwise stated):
  - Rural population: 87 percent of total population in 2020.
  - Population growth: 3.1 percent in 2020.
  - Fertility rate: 5.4 births per woman in 2020.
  - Refugee inflows: 3 percent of the population in 2020.
  - Over 45 percent of the population was under 15 years old in 2020.
  - Average life expectancy: around 61 years.
- Health and sanitation:
  - Infant mortality rate declined from 70 to 42 per 1000 live births between 2010 and 2020.
  - Neonatal mortality rate decreased from 21.8 to 20.9 between 2018 and 2020.
  - Less than 1 hospital bed per 1000 people (WHO recommended ratio: 3 per 1000).
  - Less than one doctor per 10,000 people (WHO recommended ratio: 1 per 1000).
  - As of 2017, only 53 percent of the population had at least limited access to basic sanitation facilities.
  - Access to clean drinking water: in 2017, only 61 percent of the population had such access.
- Education:
  - Gross enrollment rate in pre-primary education increased from 15.4 percent in 2018 to 16.5 percent in 2019; up from 8.1 percent in 2011.
  - Primary education gross enrollment rates have remained well above 100 percent.
  - Secondary education gross enrollment rate slightly declined between 2018 and 2019.
  - Gross enrollment rates in tertiary education have remained low in recent years (around 5 percent or below).
- Social protection and COVID-19 response:
  - Households benefiting from social programs and government social safety net were more resilient; others suffered net income loss.
  - Government measures: free primary education; education support fund; free health care for children under five and women giving birth; social protection to state pensioners and vulnerable people; free care and medication for certain diseases; revitalized social protection frameworks; hospital extensions; school construction and equipment; free textbooks; recruitment of new teachers.
  - COVID-19 responses:
    - National mass screening campaign launched since July 6, 2020.
    - Single common COVID-19 response fund at the Bank of the Republic of Burundi.
    - As of October 8, 2021 inflows to the COVID account totaled BIF 58.9 billion or 0.9 percent of GDP:
      - Government: BIF 15 billion or 0.2 percent of GDP
      - IMF CCRT grants: BIF 39.3 billion or 0.6 percent of GDP
      - Fees collected for COVID tests: BIF 4.6 billion or 0.07 percent of GDP
    - Spending from the account between December 24, 2020 and October 8, 2021 totaled about BIF 25 billion or 0.4 percent of GDP.
- Budget allocations for social sectors (In percent of GDP: 2015 2016 2017 2018/19 2019/20 2020/21 2021/22):
  - Health: 4.9 | 2.0 | 3.0 | 3.1 | 3.0 | 3.6 | 3.3
  - Education: 6.7 | 5.0 | 5.2 | 5.5 | 5.6 | 5.1 | 5.0
  - Water, hygiene and sanitation: 0.8 | 0.1 | 0.3 | 0.2 | 0.2 | 0.2 | 0.2
  - Social protection: 0.5 | 0.2 | 0.3 | 0.3 | 0.3 | 0.3 | 0.3
  - All social sectors: 12.8 | 7.3 | 8.9 | 9.0 | 9.1 | 9.2 | 8.8
  - Share in total spending (in percent): 39.4 | 27.7 | 35.5 | 34.4 | 33.0 | 36.6 | 36.3
  - Total budget spending: 32.4 | 26.5 | 24.9 | 26.3 | 27.5 | 25.2 | 24.2
  - Note: Includes spending from both domestic resources and donor support.

### Governance, justice, climate and environmental issues
- Human rights and justice:
  - Reports of unlawful killings, arbitrary arrests, enforced disappearances and sexual violence cited by international organizations.
  - Government released more than 5,200 prisoners including human rights defenders in March 2021 by presidential decree; increased investigations and prosecutions of suspected trafficking offenses and institutionalized anti-trafficking training.
- Climate, environment and adaptation:
  - Traditional farmer/breeder adaptations: cultivation of tubers (cassava, sweet potatoes), sowing staggering, preservation in granaries, transhumance.
  - Reforestation has struggled; more than 30.000 ha of forest were destructed during waves of crises.
  - Climate-related plans:
    - Plan d'Action National d'Adaptation au changement climatique (PANA): improve seasonal climate forecast, strengthen protected area management, promote drought-resistant forest species.
    - Plan d'Action pour la Gestion Integrée des Ressources en Eau (PAGIRE): promote legal/regulatory reforms and education on water resource management.
    - Stratégie Nationale et Plan d'Action en matière de diversité Biologique (SNPA-DB): raise awareness on biodiversity conservation and integrate into curricula.

### Non-price competitiveness, bottlenecks and priority reforms
- Competitiveness:
  - Burundi ranks low on the four Global Competitiveness Index pillars (Infrastructure, Macroeconomic stability, Product market, Financial system) relative to peers (Rwanda, Tanzania, Sub-Saharan Africa).
- Key bottlenecks:
  - Climate shocks: frequent floods, droughts, irregular rain seasons reduce yields and increase volatility.
  - Energy: access to electricity among the lowest in Sub-Saharan Africa; installed capacity mostly hydropower-based; renewable potential largely untapped.
  - Water: reliance on rain-based agriculture and irregular rain seasons lead to water shortages affecting productivity.
- Policy priorities and recommendations:
  - Enhance human and physical capital through reforms and programs.
  - Improve health conditions to promote private sector development and productivity.
  - Invest in long-term peacebuilding, transparency, social equity, and anti-corruption to ensure political stabilization.
  - Develop the private sector to create sustainable livelihoods.
  - Boost agricultural productivity and climate resilience.
  - Reduce import dependence via agricultural modernization/diversification, increased electricity supply, and support to agrobusiness industries.
  - Strengthen banking regulation and expand credit provision, leveraging digital technology for financial inclusion.

### Parallel foreign exchange market, costs, and exchange rate unification
- Parallel market overview:
  - Parallel market premium increased from 1 percent in end-2014 to about 70 percent in December 2021.
  - Parallel market currently trades at close to a 60 percent premium (document notes “currency currently trades at close to a 60 percent premium”).
  - Parallel FX system: two nominal exchange rates operating simultaneously (official fixed and freely floating parallel rate).
- Practical effects and estimated costs:
  - Parallel markets distort prices, impede efficient resource allocation, create implicit taxes/subsidies, and incentivize rent seeking and misreporting.
  - Example implicit tax on exporters estimated at 3.6 % of GDP (exports in 2019 = $181 million; GDP = $3 billion; parallel market premium ≈ 60%; implicit tax = 181 * 0.6 = $108.6 million = 3.6% of GDP).
  - Parallel markets impair monetary policy effectiveness.
- Four key steps for exchange rate unification:
  1. Recognize channels through which exchange rates affect the economy and assess vulnerability.
  2. Assess the equilibrium exchange rate consistent with macroeconomic and external stability.
  3. Agree a time horizon for transition to the equilibrium.
  4. Implement a robust macroeconomic framework with coordinated fiscal and monetary policies.
- Transmission channels:
  - Trade channel: depreciation raises import prices and CPI, lowers export prices, may boost output via net exports depending on elasticities.
  - Financial channel: problematic if large currency mismatches exist; can tighten financial conditions with depreciation.
  - Uncertainty channel: exchange rate volatility affects foreign investment and macro outcomes.
- Burundi-specific considerations:
  - Financial sector well-capitalized with minimal FX mismatches; trade and uncertainty channels likely dominate.
  - Depreciation likely to raise inflation and output, with possible temporary current account deterioration (“J curve effect”).
- Two principal unification approaches:
  - Instant “Big Bang”: swift transition, easier communication, risk of disruption if currency mismatches and sudden inflation spikes.
  - Gradual unification: allows adjustment time, but risks communication challenges and temporary market deterioration.
- Empirical notes and policy mitigants:
  - Average passthrough of exchange rate movements to prices during unification episodes is 12 percent.
  - Authorities may need monetary tightening when passthrough is high.
  - For prioritized imports previously transacted at official rates, consider phase-in with subsidies/transfers to protect vulnerable segments.
- Recommendations for Burundi:
  - Reduce monetary financing to facilitate transition to an inflation-targeting regime under the EAC framework.
  - Develop a deep government securities market to attract diverse investors and enable longer maturities, supporting monetary policy and yield-curve development.

### Box 1 — Quantifying nominal exchange rate adjustments to correct a real misalignment (framework and illustration)
- Key relations and definitions:
  - e = s + p* − p
  - e_T = s_T + p*_T − p_T
  - m = s_T − s (targeted real exchange rate adjustment)
  - m = e_T − p*_T + p_T − e + p* − p
  - e_T = m + e + T(p − p*)
  - var(e_T) = T^2 * var(p − p*)
- Interpretation:
  - Nominal adjustment components: (a) correct real misalignment m; (b) average inflation differential T(p − p*).
  - Instantaneous adjustment (T = 0): nominal exchange rate adjusts by m only.
  - Longer adjustment horizon increases nominal adjustment if domestic inflation exceeds foreign inflation.
  - Volatility of e_T rises with weak monetary framework and unstable inflation expectations.
- Numerical illustration assumptions and results:
  - Targeted real misalignment: 70 percent.
  - Starting nominal exchange rate: 2000 BIF/USD.
  - Average foreign inflation rate (p*): 2 percent.
  - Terminal nominal exchange rate required:
    - Inflation = 2%: 4027.5 (1 year), 4027.5 (5 years)
    - Inflation = 10%: 4362.9 (1 year), 6008.3 (5 years)
- Speed of adjustment trade-offs:
  - Instantaneous unification: swift, credibility-enhancing, but risks financial sector stress and inflation spikes.
  - Gradual unification: smoother adjustment, but risks prolonged uncertainty and shifting equilibrium.
- Policy framework essentials:
  - Address root causes of parallel markets.
  - Fiscal policy: rely on market borrowing, avoid monetary financing and financial repression, reduce FX restrictions.
  - Monetary policy: focus on price stability with moderate exchange rate management; use reserves judiciously.
  - Develop government securities market to smooth deficit financing and anchor expectations.
- Selected financial sector and monetary operation figures:
  - Banking capital ratios: around 20 percent.
  - Share of non-performing loans: less than 5 percent.
  - Currency mismatches (net open FX positions): negligible.
  - Sectoral shares of private sector credit (2021):
    - Trade: 30.2 percent
    - Housing: 16.7 percent
    - Transport: 11.8 percent
    - Agriculture: 1.4 percent
  - Share of short-term credit (<2 years) in total credit: around 40 percent.
  - BRB operations and indicators:
    - Interbank market provision of liquidity on call for tenders increased by 11.8 percent between December 2019 and August 2020.
    - Marginal lending facility increased by 164.9 percent between January and August 2021.
    - Deposits of commercial banks to the BRB grew by around 14 percent during the first 8 months of 2021 (compared to a decline of -16 percent in the same period in 2020).
    - Liquidity tender rate: from 3.07 percent in 2020–Q4 to 2.5 percent in 2021–Q1.
    - Reserve requirement rate: around 3 percent.
    - Interest rate on outstanding loans: 15.32 percent in 2021–Q1 versus 15.22 percent at end-December 2020.
    - New BRB instrument “advance on bills as collateral”: maturity 5 years (renewable once).

*Source: 1bdiea2022002 — IMF staff chapter content as provided in the supplied PDF excerpt.*

### 1. Evolution of Real GDP per Capita, 2005–20 _______________________________________________ 4

### 1. Evolution of Real GDP per Capita, 2005–20

### Growth dynamics and recent trends
- Economic growth in Burundi was mainly driven by services before the outbreak of the global health crisis.
- In 2019, this trend changed, and agriculture took the lead, although the performance of traditional mainstay of agriculture has been unstable over the years, affected by conflicts.
- Burundi has implemented several growth-enhancing policies over recent years to support economic activities, including during the COVID-19 pandemic.

### Pre-COVID drivers of growth
- Burundi’s economic performance since 2000 has been highly unstable with a tendentially decreasing GDP growth rate.
- In the 2000s, the country started its economic recovery in the aftermath of multiple waves of civil war, genocide, and political instability.
- Real GDP growth rate increased from less than 2 percent in 2000 to an average of 5 percent between 2004 and 2014.
- GDP growth rate fell sharply in 2015 as the result of the economic recession arising from the political and security crisis of 2015 followed by the withdrawal of donor support, and sharp deterioration of living standards.
- The economy was recovering from this political crisis when it was impacted by the COVID-19 crisis.

### Sectoral contributions before and after 2015
- Prior to the COVID-19 crisis, economic growth was mainly driven by services, cushioning weaknesses in other sectors during the years of conflict, though its impulse has been dwindling over time.
- From 2005–2009, government expenditure surged, in part through donor support, while banking and insurance saw renewed demand following the return to political stability.
- Public services continued to drive growth during 2010–2014, with a notable expansion in education provision.
- From 2015–2018, government expenditures began to stall; by 2019, public services and already weak market services almost flatlined.
- The COVID-19 pandemic exacerbated this downward trend.
- The contribution of the secondary sector has been mixed and did not provide the dominant impulse to GDP in any recent historical period.
- With the extraction and utilities industries remaining very small, manufacturing and construction dominated the sector.
- Both manufacturing and construction expanded strongly during the initial return to peacetime from 2005–2009, but slowed down quickly from 2010 onwards, with construction sharply contracting during 2015–2018.
- Manufacturing recovered during 2019, though construction provided a further drag on growth.

### Comparison with peer EAC countries and per capita developments
- The comparison of Burundi’s per capita real GDP with that of peer EAC countries including Rwanda, Tanzania, Kenya, South Soudan and Uganda shows that the country has the lowest per capita revenue.
- Despite recurrent political, social and economic crises Burundi has gone through in past years, its per capita GDP has remained stable although tendentially decreasing in the last three years of the projection as real GDP has contracted in 2015 in the aftermath of the political crisis but also as the population growth rate had not declined.

*Source: 1bdiea2022002 - 1. Evolution of Real GDP per Capita, 2005–20*

### 5. The outbreak  of the COVID-19 crisis has led to a change in the Economic structure of

### 5. The outbreak  of the COVID-19 crisis has led to a change in the Economic structure of

### Economic structure and sectoral shifts
- In 2019, 2020 and 2021, economic growth became mainly driven by agriculture.
- During 2019−2021, agriculture provided the largest contribution to overall growth due to above-average harvests and herd restocking.
- The service sector was impacted by the Global Health Crisis in China, with production of hotels, restaurants, and transportation companies declining sharply due to reduced business flows with trade partners.
- Traditional mainstays (subsistence agriculture, coffee and tea, forestry, livestock, and fishing) have experienced instability over the years, affected by conflicts and population displacement.

### Growth accounting and drivers of growth
- Growth decomposition shows the bulk of Burundi’s growth pickup in the 2000s stems from improvements in the capital and Labor stocks.
- The increase in capital and labor stocks followed broadly improved macroeconomic policies and economic liberalization through the mid-2010s and the significant improvement in life expectancy at birth.
- Negative TFP growth weighed on GDP, in particular in the aftermath of the political crisis leading to negative GDP growth rate in 2015 and 2016.
- Policy implication noted: enhancing human and physical capital with well-conceived reforms and programs, and improving health conditions will promote private sector development, enhance productivity, and boost economic growth.

### Growth-supporting policies and development plans
- Burundi’s 2018–27 development plan (Plan National de Développement, PND) — adopted in 2018 — aims to restore structural balances through:
  - strengthening food self-sufficiency and diversification of exports via promotion of agro-industrial, commercial, and extractive businesses;
  - development of the energy and artisanal sectors;
  - construction and maintenance of growth support infrastructure;
  - improving access to basic social services (education, health and social protection);
  - continuation of environment protection and territory development;
  - improving financial governance and decentralization;
  - development of regional and international partnership.
- Authorities emphasize the primary and tertiary sectors as having high growth potential; reforms in the secondary sector aim to draw more resources from mining and industrial sector.

### Agricultural programs and related measures
- The agricultural sector contributes on average 39.7 percent of GDP, employing 84 percent of the labor force.
- The Plan National d’Investissement Agricole (PNIA, 2016–2020) supports agricultural production and cash crop exports through measures including:
  - production: (i) utilization of better-quality seeds; (ii) better access to fertilizers and at lower costs; (iii) better global-to-local price transmission increasing producer prices; (iv) gradual production mechanization and modernization; (v) professional training; (vi) expansion of land utilization for agricultural production; and (vi) increased financing, including for women.
  - coffee sector reforms: reorganization to support exports, centralizing coffee sales and nationalizing part of the exports process; BRB extended a loan to the Government in 2020 to invest in boosting productive capacity expected to increase production and reduce waste, boosting exported coffee volumes in 2021 and beyond.
  - fertilizers: BRB extended a loan to expand production capacity of a fertilizer firm, guaranteed by the Treasury.

### Import substitution and trade balance
- Burundi’s imports have increased over the years leading to a deteriorating trade balance and increasing FX needs.
- The PND aims to reduce import dependence by boosting domestic production through modernization and diversification of agricultural production, increased electricity supply (new power plants), and support to agrobusiness industries.

### Financial sector reforms
- The Banking Act of 2003 was updated; banking activities are now governed by Law n°1/17 of August 22, 2017.
- Reform objectives include increasing credit provision to the economy, improving banking system regulation, and leveraging digital technology (online and mobile banking).
- Only reporting institutions (banks, microfinance institutions, and financial institutions) can grant credit; it is prohibited for other natural or legal persons to carry out credit transactions.

### Drivers of fragility and security context
- Burundi is considered a fragile state; average CPIA score was at 2.9 in 2019 (below the 3.2 threshold).
- Fragility origins: historical political instability and cycles of violence, dependence on rain-fed agriculture, and institutional and governance weaknesses (corruption, abuses of the judicial system, lack of security, criminality).
- Historical displacement: during civil unrest on April 26, 2015, more than 325,600 Burundian refugees fled the country, and some 82,100 Burundian refugees sought asylum in the local region.
- UNHCR facilitated the return of 102,761 Burundians since the start of the voluntary repatriation process that began in September 2017 (as of November 2020).
- Security incidents included grenade attacks and assaults; government prioritized security, engaged in dialog with opposition groups, and intensified efforts to increase security in Bujumbura and main cities.

### Social conditions, living standards, and public services
- GDP per employed person rose until 2014 and declined sharply after the 2015 political crisis.
- Demographics and social indicators:
  - rural population: 87 percent of total population in 2020;
  - population growth: 3.1 percent in 2020;
  - fertility rate: 5.4 births per woman in 2020;
  - refugee inflows: 3 percent of the population in 2020;
  - over 45 percent of the population was under 15 years old in 2020;
  - average life expectancy: around 61 years.
- Food insecurity and malnutrition are present due to shrinking and overworked household plots.
- Access to clean drinking water: in 2017, only 61 percent of the population had such access.
- Health and education improvements noted:
  - infant mortality rate declined from 70 to 42 per 1000 live births between 2010 and 2020;
  - neonatal mortality rate decreased from 21.8 to 20.9 between 2018 and 2020 (WHO indicators cited);
  - infant mortality (probability dying between birth and age 1 per 1000 live births) decreased from 41.3 percent to [value truncated in source].
- Health system constraints:
  - less than 1 hospital bed per 1000 people (WHO recommended ratio: 3 per 1000);
  - less than one doctor per 10,000 people (WHO recommended ratio: 1 per 1000);
  - as of 2017, only 53 percent of the population had at least limited access to basic sanitation facilities.
- Social protection: households benefitting from social programs and the government's social safety net were more resilient to the COVID-19 shock; other households suffered net income loss.
- Government measures in social sectors include: free primary education; education support fund; free health care for children under five and women giving birth; social protection to state pensioners and vulnerable people; free care and medication for certain diseases; revitalizing institutional, legal and regulatory framework for social protection; hospital extensions; school construction and equipment; free textbooks; recruitment of new teachers.

### Human rights, justice, and recent measures
- Reports of human rights violations: unlawful killings, arbitrary arrests, enforced disappearances and sexual violence cited by international organizations.
- Government actions: more than 5,200 prisoners including human rights defenders were released in March 2021 by presidential decree; increased investigations and prosecutions of suspected trafficking offenses and institutionalized anti-trafficking training for law enforcement, prosecutors, and judicial officials.

### Climate change adaptation and environmental issues
- Traditional farmer/breeder adaptations include: cultivation of tubers (cassava, sweet potatoes), sowing staggering, preservation of harvest in granaries, and transhumance.
- Reforestation efforts have struggled; more than 30.000 ha of forest were destructed during waves of crises.
- Climate-related plans include:
  - "Plan d'Action National d'Adaptation au changement climatique (PANA)" — improve seasonal climate forecast, strengthen management of protected areas and promote drought-resistant forest species.
  - "Plan d'Action pour la Gestion Integrée des Ressources en Eau (PAGIRE)" — promote strategic framework based on legal and regulatory reforms and education on water resource management.
  - "Stratégie Nationale et Plan d'Action en matière de diversité Biologique (SNPA-DB)" — raise population awareness on conservation of biological diversity and sustainable use of biological resources and integrate them into school curricula.

### Non-price competitiveness and bottlenecks
- Overall macroeconomic competitiveness (four pillars from Global Competitiveness Index: Infrastructure, Macroeconomic stability, Product market, Financial system) shows Burundi ranks low relative to peers (Rwanda, Tanzania, Sub-Saharan Africa) and lags on all four indicators.
- Key bottlenecks:
  - Climate shocks: frequent floods, droughts, irregular rain seasons reduce crop yields and intensify crop volatility.
  - Energy: access to electricity is among the lowest in Sub-Saharan Africa; installed capacity mostly hydropower-based; renewable energy potential untapped; energy constraint is a main bottleneck for growth and competitiveness.
  - Water: reliance on rain-based agriculture and irregular rain seasons leading to water shortages with negative effects on productivity across sectors.

### Policy priorities and recommendations highlighted in the text
- Enhance human and physical capital through well-conceived reforms and programs.
- Improve health conditions to promote private sector development, enhance productivity, and boost economic growth.
- Focus on investing in long-term peacebuilding, transparency, social equity, and the fight against corruption to ensure political stabilization.
- Develop the private sector to create opportunities for sustainable and peaceful livelihoods.
- Boost agricultural productivity while making it more resilient to climate shocks and climate change.
- Reduce import dependence via modernization and diversification of agricultural production, increasing electricity supply, and supporting agrobusiness industries.
- Strengthen banking regulation and expand credit provision, leveraging digital technology for financial inclusion.

*Source: IMF staff chapter content as provided in the supplied PDF excerpt.*

### 38.6 percent; and (iii)  under-five mortality rate (probability of dying by age 5 per 1000 live births)

### 1bdiea2022002 - 38.6 percent; and (iii)  under-five mortality rate (probability of dying by age 5 per 1000 live births)

### Health indicators and trends
- 38.6 percent; and (iii) under-five mortality rate (probability of dying by age 5 per 1000 live births)
- Decreased from 59 percent to 54.4 percent.
- Immunization coverages for children have also been high.

### Education enrollment indicators
- Gross enrollment rate in pre-primary education increased from 15.4 percent in 2018 to 16.5 percent in 2019 (the latest year available), and up from 8.1 percent in 2011.
- In primary education, gross enrollment rates have remained well above 100 percent.
- In secondary education, the gross enrollment rate slightly declined between 2018 and 2019.

*Source: https://www.imf.org/-/media/files/publications/cr/2022/english/1bdiea2022002.pdf*

### 48.5 percent to 45.1 percent) but significantly increased from the 2011 level of 26.1 percent. Gross

### THE PARALLEL FOREIGN EXCHANGE MARKET IN BURUNDI AND THE PATH TOWARDS REFORM

### Social sectors, COVID response, and employment initiatives
- Gross enrollment rates in tertiary education have remained low in recent years (around 5 percent or below).
- COVID-19 response:
  - National mass screening campaign launched since July 6, 2020, under the theme "I protect myself, I don't contaminate anyone and once contaminated, I must heal".
  - Single common COVID-19 response fund opened at the Bank of the Republic of Burundi.
  - As of October 8, 2021, inflows to the COVID account totaled BIF 58.9 billion or 0.9 percent of GDP:
    - Government: BIF 15 billion or 0.2 percent of GDP
    - IMF CCRT grants: BIF 39.3 billion or 0.6 percent of GDP
    - Fees collected for COVID tests: BIF 4.6 billion or 0.07 percent of GDP
  - Spending from the account between December 24, 2020, and October 8, 2021, totaled about BIF 25 billion or 0.4 percent of GDP.
- Employment support and projects:
  - Creation of the Investment Bank for Young People (Banque d’Investissements pour les Jeunes).
  - Creation of the Investment and Development Bank for Women (Banque d’Investissement et de Développement pour les Femmes).
  - Creation of the Guarantee and Support Impulse Fund to support cooperatives in young people (Fonds d’Impulsion de Garantie et d’Accompagnement).
  - Donor-supported projects: economic transformation and employment project (World Bank), rural entrepreneurship (IFAD), agro-pastoral entrepreneurship and professional development project for young people (African Development Bank).

### Budget allocations and execution for social sectors
- Budget execution rates have exceeded 90 percent in social sectors.
- Budgeted social spending:
  - Declined from 12.8 percent of GDP in 2015 to 7.3 percent of GDP in 2016 following the 2015 political crisis and withdrawal of donor support.
  - Resumed increase and stabilized around 9 percent of GDP or about a third of total spending since 2017.
- Text Table 1: Burundi: Budget Allocation for Social Sectors (In percent of GDP)
  - Health: 4.9 | 2.0 | 3.0 | 3.1 | 3.0 | 3.6 | 3.3 (2015 2016 2017 2018/19 2019/20 2020/21 2021/22)
  - Education: 6.7 | 5.0 | 5.2 | 5.5 | 5.6 | 5.1 | 5.0
  - Water, hygiene and sanitation: 0.8 | 0.1 | 0.3 | 0.2 | 0.2 | 0.2 | 0.2
  - Social protection: 0.5 | 0.2 | 0.3 | 0.3 | 0.3 | 0.3 | 0.3
  - All social sectors: 12.8 | 7.3 | 8.9 | 9.0 | 9.1 | 9.2 | 8.8
  - Share in total spending (in percent): 39.4 | 27.7 | 35.5 | 34.4 | 33.0 | 36.6 | 36.3
  - Total budget spending: 32.4 | 26.5 | 24.9 | 26.3 | 27.5 | 25.2 | 24.2
- Note: Includes spending from both domestic resources and donor support.

### Recent revenue, expenditure, and public financial management (PFM) measures
- Context: Measures taken within FY2020/21 and FY2021/22 budgets to strengthen fiscal framework and PFM; some measures not yet fully implemented or quantified by authorities. Staff expect improvements to revenue path and containment of spending as a share of GDP; incorporated in staff’s baseline projections.

- Revenue administrative measures (selected):
  - Revision of legal texts relating to municipal taxation and the land domain (real estate expertise, rental and sale of state land).
  - Strengthening collection of taxes on mining sector activities.
  - Decision to reduce the informal sector through local taxation.
  - Strict application of law concerning dividends to be paid to government.
  - Initiation of revision of texts and procedure for granting exemptions.
  - Acceleration of recovery of arrears by the Burundi Revenue Authority.
  - Transfer of collection of non-tax revenue to the Office Burundais des Recettes (OBR).
  - Improvement of revenue collection tools: revised laws and IT infrastructure at the Commissariat des Douanes et Accises.
  - Strengthening mechanisms to fight corruption, fraud and smuggling.
  - Strengthening monitoring of the granting of exemptions.
  - Improvement of mechanisms for broadening the tax base per new Laws on Tax Procedures and VAT.
  - Strengthening mechanisms for verifying and recovering arrears.
  - Strengthening monitoring of VAT reimbursements.

- 2021/2022 budget tax and non-tax measures with high revenue potential:
  - New tax on mobile phone megabits (18 percent of the cost).
  - Non-exemption from income tax and VAT on sales made by companies.
  - New anti-pollution tax on imported used vehicles.
  - New road fee.
  - Widening of the rental tax base to include land leases.
  - Non-tax measures: shift management of proceeds from sale of health insurance cards to OBR; new annual flat-rate road charge; new or increased fees for issuance of exemption certificates and related services; reactivation of a customs agency.

- Expenditure and PFM measures:
  - New “fair wage policy” implemented after June 30, 2021: salaries based on classification and rating of jobs.
    - Compensation for earlier wage disparities granted in 2016 for 5 years with overall budgetary impact of 120 billion BIF (1.8 percent of GDP) over the period.
    - Allocation of BIF 34 billion (0.5 percent of GDP) set aside in FY2021/22 budget for impact of new wage policy.
    - Hiring freeze from July 1, 2021, in all government sectors except defense and security, education, health, and revenue administration.
  - Investment appropriations split into commitment appropriations and payment appropriations for multi-year projects starting 2021/2022 to improve visibility and control.
  - Road maintenance fund created for "Zero Potholes" campaign:
    - Budget allocated to road maintenance increased from 8.2 billion (0.1 percent of GDP) to around 28 billion BIF (0.4 percent of GDP).
    - FY2021/22 budget introduced financing mechanism to supply the fund with fees previously allocated to road maintenance expenditure.
    - Tax exemptions decided for acquisition of new machinery and equipment intended for construction and maintenance of roads as part of campaign.
  - Energy sector: FY2021/22 budget prioritized electrification projects in rural centers, villages, health centers, municipal colleges, trading centers and certain public infrastructures; only thirteen percent of the Burundian population has access to electricity.
  - Health sector: FY2021/22 budget provided funding to adapt existing health centers in all municipalities to standards to receive COVID-19 patients in municipal health care structures.

### Public procurement law: key features
- Law: Law No 1/04 of January 29, 2018, amending law No 1/01 of February 04, 2008, on the public procurement code.
- Purpose, scope, and thresholds:
  - Governs award, execution, control, regulation of public contracts and delegation of public services.
  - Applies to public contracts whose value excluding taxes is equal to or greater than regulatory thresholds defined in implementing texts.
- Public procurement bodies:
  - Contracting Authority award bodies.
  - National Public Procurement Control Directorate (Direction Nationale de Contrôle des Marchés Publics, DNCMP).
  - Public Procurement Regulatory Authority (Autorité de Régulation des Marchés Publics, ARMP).
- DNCMP responsibilities:
  - A priori control of procedures for awarding amounts greater than a regulatory threshold.
  - A posteriori control of procedures for awarding contracts below the threshold.
  - Provides notices of non-objection and necessary authorizations upon request; conducts follow-up missions for execution.
- ARMP responsibilities:
  - Regulates public procurement system; develops and updates standard documents, procedure manuals, evaluation guides, and software packages.
  - Hosts dispute resolution and disciplinary committees; decisions may be subject to legal appeal in courts.
- Procurement procedures and methods:
  - Contracting authorities must draw up annual provisional plans before end-February and publish essential descriptive characteristics by March 31.
  - Open bidding is the rule; contracts awarded to compliant offers evaluated to have the lowest price meeting technical specifications and qualification criteria.
  - Exceptional award by mutual or direct agreement allowed with DNCMP authorization and ARMP notification.
  - Secret contracts allowed for national security reasons; may use over-the-counter or direct agreement procedures.
- Candidates and bidders:
  - Must have legal, technical, and financial capacities and experience in similar contracts.
- Award and execution:
  - Provisional award report drawn per ARMP model; tenderers can request copies within three (3) working days.
  - Notice of final award published within 15 calendar days from contract entry into force.
  - Financial collateral required for contract holders when nature, size, and time require; varies from 5 to 10 percent of the basic market price and refunded within one month after warranty expiry or final acceptance.
  - Contract prices deemed firm unless tender documents allow revision or updating.
  - Acceptance transfers ownership when service confirmed to technical specifications.
- Litigation:
  - Non-contentious or contentious appeals must first contact person responsible for contracts, then ARMP dispute resolution committee.
  - Appeals have a suspensive effect until final decision of the body seized; ARMP decisions immediately enforceable and may be appealed judicially (judicial appeal generally not suspensive).
- Ethics, corruption, and sanctions:
  - ARMP prepares a Code of ethics and professional conduct; violations can lead to sanctions including exclusion from public contracts and prison sentences.
  - ARMP periodically draws up a list of natural and legal persons excluded from participation in public procurement.

### Governance institutions and oversight
- Internal audits: Conducted by internal control department (Inspection Générale) of each public entity covering accounting, administrative, technical, and physical audits.
- External audits:
  - Inspection Générale de l’Etat (IGE): Supervises inspection and control over operation and management of public services, institutions, bodies, and certain private companies/associations (decree n ° 100/09 of January 15, 2010). IGE reports submitted to the President’s Office which decides on publication.
  - Cour des Comptes (CC): Supreme control and audit institution (Law n° 1/002 of March 31, 2004); independent of the executive, reports to national parliament; can examine and certify public accounts, audit resource management, recommend changes, and monitor implementation.
- Anti-corruption institutions:
  - Anti-corruption court (Cour Anti-Corruption, CAC): Designs policies for prevention and repression of corruption and related offenses.
  - Anti-corruption police (Brigade Spéciale Anti-Corruption, BSAC): Combats corruption and organized crimes integrating intelligence, investigations, and prosecutions.

### Parallel foreign exchange market: overview and rationale for reform
- Situation and scale:
  - Burundi’s parallel market premium increased from 1 percent in end-2014 to about 70 percent in December 2021.
  - Parallel market currently trades at close to a 60 percent premium (document notes “currency currently trades at close to a 60 percent premium”).
- Characterization:
  - Parallel FX market system: two nominal exchange rates (official fixed by regulation and freely floating market “parallel” rate) operating simultaneously.
  - Parallel markets typically emerge with substantial volume or price restrictions on official FX transactions.
- Practical effects and costs:
  - Parallel exchange rates in developing countries have rarely provided benefits; tend to increase uncertainty and depress macroeconomic outcomes.
  - Distort prices, impede efficient resource allocation, generate implicit taxes/subsidies, create incentives for rent seeking and misreporting.
  - Example: estimated implicit tax on exporters amounting to 3.6 % of GDP (calculation basis provided: exports in 2019 amounted to $181 million, GDP was $3 billion, and parallel market premium was around 60% on average for the year; implicit tax = 181*0.6 = $108.6 million = 3.6% of GDP).
  - Parallel markets impair monetary policy effectiveness as exchange rate is an important transmission conduit.

### Rationale and steps for exchange rate unification
- Given costs outweigh benefits, unifying the exchange rate is an important near-term objective when parallel premium is significant.
- Four key steps for reform:
  1. Recognize channels through which exchange rates affect the economy and assess vulnerability of economic segments to large exchange rate movements.
  2. Assess the equilibrium exchange rate consistent with macroeconomic and external stability over the medium term.
  3. Agree on a time horizon for transition to the equilibrium.
  4. Implement a robust macroeconomic framework, including coordinated fiscal objectives and monetary policy frameworks to ensure a smooth and sustainable transition.
- Empirical and theoretical considerations:
  - Post-unification exchange rate often ends up very close to the parallel market rate, though not always.
  - Ghei and Kamin (1996) framework: equilibrium exchange rate typically falls between official and parallel market rates; determinants include fraction of exports and imports conducted at the parallel vs. official rate and trade elasticities.
  - IMF’s external sector assessment (ESA) modules provide estimates of the equilibrium exchange rate consistent with macro stability and current account fundamentals.
  - Most approaches estimate the equilibrium real exchange rate; converting to a nominal exchange rate path requires calibration given monetary framework and average inflation target (Box 1 referenced for calibration methodology).

### Channels of transmission and implications for Burundi
- Three main channels identified:
  - Trade channel: depreciation increases import prices and consumer price inflation, decreases export prices, potentially boosting output via net exports; effect depends on trade elasticities.
  - Financial channel: strong when currency mismatches exist (unhedged foreign currency debt) leading to tightening financial conditions with depreciation; can offset trade-channel benefits if mismatches are large.
  - Uncertainty channel: exchange rate volatility and uncertainty affect foreign investment and macro outcomes.
- Burundi-specific considerations:
  - Financial sector is well-capitalized with minimal FX mismatches (figure referenced), implying trade and uncertainty channels likely dominate over the financial channel.
  - Depreciation of the official exchange rate is likely to have a positive impact on both inflation and output, particularly if communication mitigates uncertainty during transition.
  - The current account may experience a temporary deterioration before improving (the “J curve effect”).
  - Corporate sector FX exposures may be present but are not as well documented as the financial sector.

*Prepared by N. Patel (in collaboration with M. M. Ly), J. Bouhga-Hagbe (with inputs from S. J. Koussere), and S. J. Koussere — as presented in the provided chapter.*

### Box 1. Quantifying Nominal Exchange Rate Adjustments to Address a Given Real

### Box 1. Quantifying Nominal Exchange Rate Adjustments to Address a Given Real Misalignment

### Conceptual framework and key equations
- Definitions and relations:
  - e = s + p* − p
  - e_T = s_T + p*_T − p_T
  - m = s_T − s
  - The targeted real exchange rate adjustment (equal to current misalignment) is m.
- Misalignment expressed in nominal and price terms:
  - m = e_T − p*_T + p_T − e + p* − p
- Rearranged expression for the terminal nominal exchange rate T periods ahead:
  - e_T = m + e + T(p − p*)
  - Here p* and p are the average annual foreign and domestic inflation rates over the T year horizon.
- Variance of the equilibrium nominal exchange rate:
  - var(e_T) = T^2 * var(p − p*)

### Interpretation and implications
- The nominal exchange rate adjustment has two components:
  - (a) Correcting the real exchange rate misalignment (m).
  - (b) Average inflation differential over the adjustment period (T(p − p*)).
- Typical implication: for many developing countries the inflation differential is positive, so the equilibrium nominal exchange rate increases with the length of the adjustment window.
- Instantaneous adjustment (T = 0): the nominal exchange rate needs only to adjust by the current misalignment m; the inflation-differential term disappears.
- Longer adjustment horizon (larger T): nominal adjustment must account for both current misalignment and the change in the equilibrium real exchange rate driven by the inflation differential.
- Credibility and volatility:
  - If the monetary framework is weak and unable to generate stable inflation expectations, the volatility of the nominal exchange rate (var(e_T)) increases, which can hamper credibility of unification programs and invite speculative pressures.

### Numerical illustration (specific scenario in the text)
- Assumptions:
  - Targeted real misalignment: 70 percent.
  - Starting nominal exchange rate: 2000 BIF/USD.
  - Average foreign inflation rate (p*): 2 percent.
- Terminal nominal exchange rate required to correct a 70 percent misalignment:
  - For an adjustment horizon of 1 year and 5 years, by domestic inflation target:
    - Inflation = 2%: 4027.5 (1 year), 4027.5 (5 years)
    - Inflation = 10%: 4362.9 (1 year), 6008.3 (5 years)

### Speed of adjustment and managing the transition
- Two principal approaches to exchange rate unification:
  - Instant “Big Bang” unification (instantaneous).
  - Gradual unification over several weeks to months.
- Advantages and risks:
  - Instantaneous unification:
    - Advantages: swift transition to new equilibrium, eliminates parallel market distortions, easier to communicate, can enhance policy credibility.
    - Risks: potentially disruptive if segments of the economy have currency mismatches or rely on implicit subsidies tied to the official rate; financial sector vulnerability; sharp depreciation could trigger a sudden spike in inflation and entrench expectations.
  - Gradual unification:
    - Advantages: allows agents time to adjust smoothly.
    - Risks: communication challenges, shocks during transition can change equilibrium and generate uncertainty, FX market availability may deteriorate while benefits accrue only after full unification.
- Inflationary impact:
  - Empirical observation: passthrough of exchange rate movements to prices during unification episodes is 12 percent on average.
  - Explanation: presence of sizable parallel markets means the price level already reflects the parallel exchange rate, which is often close to the post-unification rate.
  - When passthrough has been high in practice, authorities have used monetary tightening more aggressively to tame inflationary pressures.
- “Free fall” risk:
  - Recent experiences show free fall of the exchange rate post-unification is rare; moderate overshooting can occur but often stabilizes or even reverses (examples cited: Angola and South Sudan).
- Policy mitigants:
  - For prioritized imports that were transacted at the official rate pre-unification and may spike post-unification, consider a phase-in period with subsidies and transfers to protect economically vulnerable segments.

### Importance of a robust and sustainable macroeconomic framework (policy recommendations)
- Core elements for success:
  - Identify and address the root causes of parallel markets.
  - Fiscal policy that relies on market borrowing, avoids monetary financing and financial repression, and reduces broad-based FX restrictions.
  - Monetary policy focused on price stability, with moderate exchange rate management and interventions to reduce excess volatility and preserve financial stability.
  - FX reserves: maintain a sufficient but not excessive stock and use reserves judiciously (rule-based or discretionary) — avoid systemic use to target a given exchange rate level or trend.
- Specific recommendations for Burundi:
  - Continue reducing monetary financing to facilitate transition to an inflation-targeting regime under the EAC framework.
  - Develop a deep government securities market that attracts a diverse range of investors and enables longer maturities:
    - Benefits: smooth market functioning, deficit financing, room for monetary policy to pursue price stabilization, development of a yield curve to anchor expectations and private borrowing costs.

### Related financial sector and monetary operations context (selected figures and indicators from the source)
- Banking sector health and vulnerabilities:
  - Capital ratios: around 20 percent.
  - Share of non-performing loans: less than 5 percent.
  - Currency mismatches (net open FX positions): negligible.
- Financial structure and credit allocation:
  - Sectoral shares of total private sector credit (2021):
    - Trade: 30.2 percent
    - Housing: 16.7 percent
    - Transport: 11.8 percent
    - Agriculture: 1.4 percent
  - Share of short-term credit (less than 2 years) in total credit: around 40 percent.
- BRB monetary operations and interventions (pandemic period highlights):
  - Interbank market provision of liquidity on call for tenders increased by 11.8 percent between December 2019 and August 2020.
  - Marginal lending facility increased by 164.9 percent between January and August 2021.
  - Deposits of commercial banks to the BRB grew by around 14 percent during the first 8 months of 2021 (compared to a decline of -16 percent in the same period in 2020).
- Interest rates and instruments:
  - Liquidity tender rate: from 3.07 percent in 2020–Q4 to 2.5 percent in 2021–Q1.
  - Reserve requirement rate: around 3 percent.
  - Interest rate on outstanding loans: 15.32 percent in 2021–Q1 versus 15.22 percent at end-December 2020.
  - New BRB instrument “advance on bills as collateral”: maturity 5 years (renewable once).

*International Monetary Fund — Box 1. Quantifying Nominal Exchange Rate Adjustments to Address a Given Real Misalignment (from the Burundi report content provided).*

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_Source: https://www.imf.org/-/media/files/publications/cr/2022/english/1bdiea2022002.pdf_