## _cr0555 ## Source details **Canonical URL:** [_cr0555](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2005/_cr0555.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2005/_cr0555.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2005/_cr0555.pdf.json) --- ### Executive summary — overall findings - Within a difficult political environment, authorities have started to implement the financial and structural reform program supported by the PRGF arrangement. - Macroeconomic developments in 2004 broadly on track with program objectives: - Real GDP growth will exceed the program target owing to a strong rebound in coffee production. - Annual inflation edged down through June to about 5½ percent, rebounded to about 10 percent in October and is now projected at about 8.5 percent by end-2004. - Program performance mixed: - Completion of the first review and disbursement of the second tranche would bring Burundi’s use of Fund resources to 43.6 percent of quota. - Fiscal slippages from surge in petroleum prices, higher peace-process spending, and domestically financed counterpart to higher-than-expected project spending. - Significant transfers to cover continued coffee sector losses highlight urgency of coffee reform. - Structural reforms lagged but implementation intensified recently. - Peace and reconciliation progressed; DDR/SSR programs initiated; security relatively calm. - External debt remains unsustainable after traditional relief and will require substantial relief under the enhanced HIPC Initiative. - Staff recommends completion of the first review under the PRGF and supports waivers for: - nonobservance of an end-June quantitative performance criterion on external arrears, - two structural performance criteria. ### Political transition and peace process - Key milestones and timing: - Arusha Peace Agreement signed August 2000; transitional government installed November 2001; presidential rotation April 30, 2002. - Cease-fire signed December 2002; protocol with CNDD-FDD October 2003; broadened national unity government November 2003. - Transitional arrangements extended through mid-2005; draft constitution approved October 2004; national referendum scheduled for December 22, 2004. - Independent national electoral commission created early September 2004. - Security and DDR: - Hostilities ceased in most of country; small hold-out rebel group active near Bujumbura. - ONUB assumed peacekeeping operations in May 2004. - Demobilization operations formally began end-November 2004; as of end-October 2004, some 22,000 former rebel combatants had reported to cantonment centers. ### DDR/SSR design, costs, and targets - Program design and numbers: - Military integration and SSR initially assumed 45,000 army personnel and 35,000 ex-rebel combatants; late-2004 census revised ex-rebel number to about 27,000. - New national police planned to increase from 3,500 to 20,000, with increase primarily from the demobilized. - MDRP-supported DDR project estimated to cost US$84 million. - Four-year IDA-backed DDR program framework to reduce NDF from 80,000 to 25,000 by 2007. - DDR supports direct demobilization of 20,000 government militiamen (Guardiens de la paix) and another 10,000 militant combatants at the outset. - UNICEF supporting demobilization and social reintegration of an estimated 8,000 child soldiers, of which some 2,300 had been processed by October 2004. ### Fiscal developments and revised budget (2004) - Primary balance and fiscal slippage: - Primary balance moved into deficit (1.3 percent of GDP) during first semester (program envisaged surplus of 0.5 percent of GDP). - Primary deficit deteriorated further to 3.1 percent of GDP by September. - Revenues shortfall versus program target by 1.1 percent of GDP due to partial pass-through of higher world oil prices and smaller-than-expected central bank profit transfers; buoyant income tax receipts partly offset. - Project spending (concessional external support) doubled program expectations. - Domestic arrears and financing: - Domestic arrears equivalent to 1.4 percent of GDP were paid off through end-September; new outstanding payment orders of 1.4 percent of GDP accumulated. - Larger budget deficit and delays in external budget support led to higher-than-programmed bank financing. - Revised budget (signed late September) targets: - primary deficit close to 3 percent of GDP in 2004 (vs. balanced position envisaged in program); - extends import service charge to nondiplomatic imports; - incorporates a 6 percent wage increase for civil servants (delayed from January); - hires 2,300 new teachers and 500 medical personnel. ### Monetary policy, banking sector, and exchange rate - Central bank and liquidity measures: - Larger fiscal financing needs drove higher-than-envisaged net credit to government; net foreign assets of BRB dropped. - Gross official reserves declined to about 2.7 months of imports at end-September. - BRB tightened ceilings on noncoffee credit to banks from mid-year to contain liquidity growth. - Reserve money growth stopped in third quarter after rapid first-half rise. - Broad money growth (12-month) decelerated to 14.5 percent in September (20 percent under the program). - Credit to the economy increased broadly in line with nominal GDP; interest rates broadly stable. - Burundi franc broadly unchanged vis-à-vis the U.S. dollar during 2004; differential between official and parallel exchange rates fell to about 2 percent. - Real effective exchange rate depreciation slowed to about 4.3 percent through September. - BRB actions and plans: - modified reserve requirements and marginal refinancing rate for bank credit; - weekly liquidity auctions not initiated due to operational shortcomings; plan to introduce weekly liquidity auctions and a rediscount facility by spring of 2005. - Prudential supervision strengthened; two noncompliant banks were closed. ### External sector and debt - External balances and reserves: - External current account deficit projected to widen sharply to 20.4 percent of GDP in 2004 (surge in imports and rise in world oil prices). - Export performance better than expected in 2004 due to recovery in coffee production and world market prices. - Overall balance of payments surplus expected broadly in line with program as foreign assistance exceeded expectations. - Debt-service payments (after rescheduling and excluding repayment to the Fund of post-conflict drawings) projected at the equivalent of 83 percent of exports of goods and services in 2004. - Paris Club rescheduling (March 4, 2004) key terms: - pre-cutoff-date (June 20, 1999 ODA) debts rescheduled over 40 years, 16-year grace, at interest rates at least as favorable as original; - pre-cutoff-date commercial credits rescheduled over 23 years, 8-year grace, at market interest rates, present value reduction of 67 percent; - 75 percent of interest accruing in 2005-06 on rescheduled amounts capitalized, repayment between September 2008 and March 2016; - creditors agreed to top-up reduction rate to 90 percent (Cologne terms) once Burundi reaches decision point under enhanced HIPC Initiative. - Clearance of remaining arrears to multilaterals (AfDB, EU/EIB, OPEC Fund) completed in latter part of 2004. - AfDB approved plan (October 27) to clear Burundi’s arrears (US$23 million) and restart lending; arrears to be cleared by AfDB and donors (EU and France) in equal proportions. ### Structural reforms and institutional measures - Coffee sector: - Production rose to about 38,000 tonnes in 2004; processing constraints delayed exports, raised inventory costs, and deteriorated quality. - Cumulative losses since 2000/01 amount to over 2 percent of GDP, resulting in defaults on bank loans covered by government guarantees. - Comprehensive reform strategy approved by council of ministers on October 28, 2004. - December 2004 measures: private investment allowed at all levels of supply chain; export and sale restrictions to be abolished in early 2005 (once existing crop credit is repaid); government holdings in coffee processing infrastructure to be offered for sale by June 2005; OCIBU to be restructured and converted into regulatory/support agency. - Audit court (Cour des Comptes): - Basic law passed March 2004; magistrates named June 2004; financing identified; internal regulations and office/equipment needs put in place autumn 2004. - Law defining magistrates’ legal status still with parliament; action plan approved October 28 to start operations by April 2005 and audit 2004 government accounts by spring 2005. - Other measures: - Remaining export surrender requirement (50 percent on coffee, tea, and cotton) to be abolished by March 2005 (performance criterion). - Restrictions and reporting requirements on foreign exchange transactions to be simplified in 2005 with Fund TA. - Transition from bank-by-bank administrative credit ceilings to market-determined overall liquidity management; BRB to unify and cut credit ceilings in January 2005 and introduce weekly liquidity auctions in spring 2005 with MFD support. - Treasury bills to be standardized and made tradable. - Minimum capital requirements nearly tripled in March 2004; BRB committed to further improve supervision; multiyear external audit contract signed. ### 2004–05 program objectives and macroeconomic framework - Near-term objectives: consolidate economic recovery and financial stability, address macro slippages, deepen financial and structural reforms. - Updated program targets: - sustain growth at about 5 percent a year; - reduce inflation to 8.5 percent by end-2004 and 5.5 percent by end-2005. - Fiscal targets: - overall fiscal deficit (cash basis after external grants) contained at 8.0 percent of GDP in 2004 and 6.4 percent in 2005; - primary deficit targeted at 3 percent of GDP in 2004 and 2 percent in 2005. - Program priorities: give priority to social spending; restrain military and security expenditures (excluding DDR/SSR). - External/current account and reserves: - External current account expected to decline to 19.0 percent in 2005 reflecting higher coffee exports. - International reserves projected to rise from 4.3 months of imports at end-2004 to 5.8 months at end-2005. - Revenue and expenditure projections: - Revenues projected at 19.4 percent of GDP in 2004. - Total revenue expected to decline to about 19 percent of GDP in 2005, reflecting impact of an import duty reduction (0.3 percent of GDP). - Social sector spending budgeted at 7 percent of GDP in 2005 (6.7 percent in 2004). - Military spending budgeted to decline by about ½ percentage point of GDP to 6.3 percent of GDP. - Privatization receipts projected at about 0.6 percent of GDP in 2005. - Remaining financing gap of about US$28 million expected to be covered by bilateral grants. ### Program financing, risks, and medium-term needs - Overall external nonproject financing need for 2005 estimated at US$190 million. - Financing expected mainly from World Bank (ERC2 credit), AfDB, EU, and bilateral donors. - Residual gap of US$28 million (3.8 percent of GDP) associated with DDR/SSR expected to be closed at donors meeting tentatively scheduled for spring of 2005. - With envisaged financing, Burundi should be able to meet external nonreschedulable debt-service payments. - Medium-term external current account path: - Short term: large deficits reflecting post-conflict reconstruction. - Starting in 2006, deficit declining to about 15 percent of GDP by 2010 (Table 9). - Financing requires substantial external grants and highly concessional loans through medium term. - Sensitivity to terms of trade; coffee-price scenario could yield higher export earnings if reforms improve quality and marketing. ### Debt sustainability and HIPC - Preliminary debt sustainability analysis indicates external debt-to-exports ratio (present value basis) above 1,800 percent at end-2003 (after Paris Club Naples flow relief). - Substantial relief under the enhanced HIPC Initiative will be needed to restore sustainability. - Completion of second review and presentation of preliminary DSA form basis for reaching Decision Point under enhanced HIPC Initiative (scheduled around mid-2005). ### Program monitoring, conditionality, and safeguards - Prior actions, quantitative performance criteria, indicative targets, and structural performance criteria specified in MEFP and TMU. - TMU defines performance targets, external assistance adjustors, assumptions, and reporting requirements. - Nonobservance of two structural performance criteria (audit court, liquidity auctions) attributed to political environment and weak capacity; corrective actions in process. - End-June 2004 ceiling on external arrears exceeded because of upward revision and slower clearing; all nonreschedulable external arrears have since been cleared. - Safeguards assessment of BRB adopted two-step approach: - First stage (completed June 2004) assessed external audit mechanism, reporting, internal controls. - Second stage expected in 2005 to evaluate legal framework and internal audit. - External audit of BRB initiated November 2004 by appointed firm; IMF welcomes progress as sufficient to complete first review despite partial safeguards assessment. - Reporting requirements: weekly, monthly, and quarterly data submissions specified in TMU (monetary survey, BRB balance sheets, detailed revenue/expenditure, arrears, etc.). ### Staff appraisal — key policy recommendations - Fiscal: - Staff views relaxation of fiscal target appropriate to accommodate priority expenditures. - Achieve revenue target of 19 percent of GDP in 2005, particularly given envisaged reduction in trade taxes. - Savings from demobilization should be secured and redirected to urgent social needs. - Move ahead with new budget and accounts code, reinforce tax and customs administration, and strengthen Ministry of Finance operations, including wage bill management. - Monetary and financial sector: - Strengthen monetary instruments and implement Fund TA recommendations. - Remain vigilant in banking supervision; continue to address safeguards weaknesses. - Structural and trade: - Rapid implementation of coffee sector reform to sustain recovery and reduce fiscal pressures. - Intensify efforts to open audit court and begin privatization of state assets. - Proceed decisively with steps in early 2005 to further liberalize exchange and trade systems. - DDR/SSR and donor support: - Contain costs of DDR/SSR at approved levels and monitor closely. - Timely donor support vital to avoid destabilizing public finances. - External debt: - Progress with clearing arrears to AfDB notable; external debt burden remains unsustainable and will require enhanced HIPC relief. ### Selected key numeric indicators (verbatim extracts) - Primary balance first semester 2004: -1.3 percent of GDP. - Primary deficit by September 2004: -3.1 percent of GDP. - Revenues shortfall vs. program: 1.1 percent of GDP. - Domestic arrears paid through end-September: 1.4 percent of GDP; new outstanding payment orders accumulated: 1.4 percent of GDP. - Gross official reserves: about 2.7 months of imports at end-September 2004; projected 4.3 months at end-2004 rising to 5.8 months at end-2005. - External current account deficit: projected 20.4 percent of GDP in 2004; expected to be 19.0 percent in 2005. - 2005 external nonproject financing need: US$190 million; residual gap US$28 million (3.8 percent of GDP). - MDRP-supported DDR project estimated cost: US$84 million. - Coffee production in 2004: about 38,000 tonnes. - Preliminary external debt-to-exports ratio (PV basis) at end-2003: above 1,800 percent. - PRGF disbursement amounts and schedule: - Total PRGF amount at Executive Board consideration: 26.40 (millions of SDRs). - Scheduled disbursements of SDR 7.15 million each at specified review dates. - PRGF loan terms: annual interest rate 0.5 percent; repayable over 10 years with a 5 ½-year grace period on principal. *Source: _cr0555 — IMF staff report excerpt (Executive Summary, chapter 7, MEFP, TMU, staff appraisal, and supporting tables).* ### Executive Summary ...................................................................................................... ### _cr0555 - Executive Summary ### Executive summary — overall findings - Within a difficult political environment, the Burundian authorities have started to implement the financial and structural reform program supported by the PRGF arrangement. - Macroeconomic developments in 2004 have been broadly on track with program objectives: - Real GDP growth will exceed the program target owing to a strong rebound in coffee production. - Annual inflation edged down through June to about 5½ percent but rebounded to about 10 percent in October and is now projected at about 8.5 percent by end-2004. - Performance against program quantitative and structural performance criteria was mixed: - Completion of the first review and disbursement of the second tranche would bring Burundi’s use of Fund resources to 43.6 percent of quota. - Fiscal slippages emerged following the surge in petroleum pries and higher spending needs associated with the peace process and the domestically financed counterpart to much higher-than-expected project spending. - Significant transfers to cover continued coffee sector losses underscore the urgency of implementing the coffee reform strategy. - Structural reforms lagged somewhat because of limited administrative capacity and a complex political environment, but implementation intensified recently. - Important progress has been made on peace and reconciliation and initiating multiyear demobilization and security (DDR/SSR) programs; the security situation has remained relatively calm and the political transition has gained momentum. - External debt remains unsustainable after traditional relief and will require substantial debt relief under the enhanced HIPC Initiative, as described in the preliminary HIPC document. - Staff recommends completion of the first review under the PRGF arrangement and supports the authorities’ request for waivers for: - the nonobservance of an end-June quantitative performance criterion on external arrears, and - two structural performance criteria. ### Recent developments — political transition and peace process - Political transition milestones: - The Arusha Peace Agreement was signed in August 2000; a three-year transitional government was installed in November 2001 with a presidential rotation on April 30, 2002. - A cease-fire agreement was signed with several rebel groups in December 2002. - In October 2003 a protocol on security and power sharing was signed with the CNDD-FDD; a broadened national unity government was installed in November 2003. - Transitional arrangements were extended through mid-2005 on the basis of a draft constitution approved by parliament in October 2004; a national referendum on the draft constitution is scheduled for December 22, 2004. - An independent national electoral commission was created in early September 2004. - Security and peacekeeping: - Hostilities in most of the country have ceased, but a small hold-out rebel group continues sporadic attacks in the periphery of Bujumbura. - In May 2004, the United Nations Operations in Burundi (ONUB) assumed peacekeeping operations from the African Union. - Preconditions for elections include adoption of an electoral code, the constitutional referendum, demobilization of former combatants, and formation of new defense forces. ### DDR/SSR programs and related financing and targets - DDR/SSR operations began in earnest in late 2004; demobilization operations formally began at end-November 2004. - As of end-October 2004, some 22,000 former rebel combatants had reported to cantonment centers. - Program design and numbers: - Military integration and SSR project initially assumed 45,000 army personnel and 35,000 ex-rebel combatants; a late-2004 census revised the ex-rebel number to about 27,000 men. - A new national police force is planned to increase from 3,500 to 20,000, with the increase coming primarily from the demobilized. - The MDRP-supported DDR project is estimated to cost US$84 million. - The four-year IDA-backed DDR program provides the framework to reduce the NDF from 80,000 to 25,000 by 2007. - DDR program supports direct demobilization of 20,000 government militiamen (Guardiens de la paix) and another 10,000 militant combatants at the outset. - UNICEF is supporting demobilization and social reintegration of an estimated 8,000 child soldiers, of which some 2,300 had been processed by October 2004. ### Performance under the PRGF-supported program - Macroeconomic performance: - Real economic growth is expected to be slightly above the program target of 5 percent in 2004 due to larger-than-expected recovery in coffee production, tempered by declines in other basic agricultural products. - Nonfarm sectors remained buoyant and benefited from stepped-up presence of donors and peacekeeping troops. - Quantitative and structural targets: - All end-June quantitative performance criteria were observed except the ceiling on external arrears; the beginning-of-period stock of external arrears was larger and clearing slower than expected, prompting a waiver request. All nonreschedulable external arrears have since been cleared. - Indicative ceilings on the government’s wage bill and the primary fiscal deficit were exceeded, owing largely to inclusion of ex-rebel movements in the transitional government. - Most end-September indicative targets were not met. - Structural performance: waivers requested for nonobservance of two performance criteria—establishing an audit court (Cour des Comptes) and introducing domestic liquidity auctions—on which corrective actions have been taken. - Two structural benchmarks—extending the transactions tax to domestic goods and concluding an assessment of commercial banks’ compliance with capital requirements—were met. ### Structural conditionality — objectives and status - 2004 structural conditionality aimed to: - liberalize the exchange and trade system; - introduce more efficient monetary policy instruments, including liquidity auctions; and - establish an audit court for public finances to improve governance and transparency. - Status of key measures: - Establishment of an audit court (end-March) and improvements in monetary policy instruments (end-June) were not fully met, although several elements were completed: - The basic law for the audit court was passed in March 2004; Justices were named in June; financing was identified; internal regulations and office and equipment needs were put in place in autumn 2004. The court is expected to start operations by April 2005. - Introduction of liquidity auctions delayed due to capacity constraints and need for additional technical assistance; Fund assistance is being provided to allow for such auctions by Spring 2005. - World Bank-linked conditionality under the Economic Recovery Credit (ERC) included: - preparation of a strategic privatization plan; - an action plan for improving public finances and the operations and audit of the Treasury; - for the final ERC tranche (December 2004), conditionality focused on adoption of a reform strategy for the coffee and tea sectors, an action plan to eliminate gender disparities, a plan to reform public procurement, and submission to parliament of legislation establishing an Office of Auditor General. *Source: _cr0555 - Executive Summary* ### 7. Fiscal pressures emerged early in 2004, and the primary balance moved into deficit ### 7. Fiscal pressures emerged early in 2004, and the primary balance moved into deficit ### Fiscal developments and revised budget - Primary balance moved into deficit (1.3 percent of GDP) during the first semester, compared with a surplus of 0.5 percent of GDP envisaged in the program. - Primary deficit deteriorated further to 3.1 percent of GDP by September. - Revenues fell short of the program’s target by 1.1 percent of GDP due to partial pass-through of higher world oil prices (shortfall in taxes from oil products) and smaller-than-expected profit transfers from the central bank. - Offsetting revenue strengths: buoyant income tax receipts reflecting strengthened tax administration. - Primary spending overruns driven by roughly equal contributions from: - outlays to sustain the political transition and the peace process; - payments of guaranteed coffee sector credit losses; - domestically financed counterpart to much higher-than-expected project spending. - Project spending (financed by concessional external support) doubled program expectations. - Domestic arrears equivalent to 1.4 percent of GDP were paid off through end-September (including arrears to oil suppliers), but new outstanding payment orders of 1.4 percent of GDP were accumulated. - Larger budget deficit and delays in disbursement of external budget support led to higher-than-programmed bank financing. - A revised budget signed into law in late September targets a primary deficit close to 3 percent of GDP in 2004 (compared with a balanced position envisaged in the program) and: - extends the import service charge to nondiplomatic imports; - incorporates a 6 percent wage increase for civil servants (delayed from January); - hires 2,300 new teachers and 500 medical personnel to address shortages and progress toward PRSP social objectives. ### Monetary policy, banking sector, and exchange rate - Larger fiscal financing needs drove higher-than-envisaged net credit to government, accounting for virtually all of the expansion in NDA of the BRB through end-September. - Net foreign assets of the BRB dropped; gross official reserves declined to about 2.7 months of imports at end-September. - To contain liquidity growth, from mid-year the BRB tightened ceilings on noncoffee credit to banks. - Reserve money growth, which rose rapidly in the first half of 2004, was stopped in the third quarter. - Broad money growth (12-month change) decelerated to 14.5 percent in September (20 percent under the program), as banks accumulated excess reserves. - Credit to the economy increased broadly in line with nominal GDP. - Interest rates in the banking system remained broadly stable. - Burundi franc remained broadly unchanged vis-à-vis the U.S. dollar during 2004; differential between official and parallel exchange rates fell to about 2 percent (lowest in a decade). - Real effective exchange rate depreciation slowed to about 4.3 percent through September. - BRB actions and plans: - modified rules governing reserve requirements and marginal refinancing rate for credit to banks; - weekly liquidity auctions not initiated due to operational shortcomings; - working to enhance liquidity forecasting capabilities and adopted plan to introduce weekly liquidity auctions and a rediscount facility by spring of 2005. - Prudential supervision strengthened; two noncompliant banks were closed. ### External sector and debt - External current account deficit projected to widen sharply to 20.4 percent of GDP in 2004, reflecting a surge in imports (NGO project activity) and sharp rise in world oil prices. - Export performance better than expected in 2004 due to recovery in coffee production and world market prices. - Overall balance of payments surplus expected to be broadly in line with the program as foreign assistance exceeded expectations. - Debt-service payments (after rescheduling and excluding repayment to the Fund of the post-conflict drawings) projected to remain very high in 2004 at the equivalent of 83 percent of exports of goods and services. - Paris Club rescheduling (Box 4) highlights: - agreement on March 4, 2004 to restructure Burundi’s public external debt under Naples terms for 2004-06 maturities; - pre-cutoff-date (June 20, 1999 ODA) debts rescheduled over 40 years, with 16-year grace period, at interest rates at least as favorable as original; - pre-cutoff-date commercial credits rescheduled over 23 years, with 8-year grace period, at market interest rates, present value reduction of 67 percent; - 75 percent of interest accruing in 2005-06 on rescheduled amounts capitalized, repayment between September 2008 and March 2016; - creditors agreed to top-up reduction rate to 90 percent (Cologne terms) once Burundi reaches decision point under enhanced HIPC Initiative; - Burundi committed to seek comparable treatment from other external creditors. - Clearance of remaining arrears to multilaterals (AfDB, EU/EIB, OPEC Fund) completed in latter part of 2004. - On October 27, the AfDB Board approved a plan to clear Burundi’s arrears (US$23 million) and restart lending operations; arrears to be cleared by AfDB itself and donors (EU and France) in equal proportions. ### Structural reforms and institutional measures - Structural reform implementation lagged due to complex political environment and weak administrative capacity. - Coffee sector: - production rose to about 38,000 tonnes in 2004; processing constraints delayed exports, raised inventory costs, and deteriorated quality; - cumulative losses since 2000/01 amount to over 2 percent of GDP, resulting in defaults on bank loans that were covered by the budget under government guarantee; - comprehensive reform strategy (with World Bank and EU support) approved by council of ministers on October 28, 2004. - December 2004: private investment allowed at all levels of supply chain; export and sale restrictions to be abolished in early 2005 (once existing crop credit is repaid); government holdings in coffee processing infrastructure to be offered for sale by June 2005; OCIBU to be restructured and converted into regulatory/support agency. - Audit court establishment delayed: - audit court law passed in March 2004; magistrates appointed in June 2004; - law defining magistrates’ legal status still being considered by parliament; - action plan approved October 28 to render court operational by April 2005; - financing obtained; training and logistics geared for court to begin auditing 2004 government accounts by spring 2005. - Other structural measures: - remaining export surrender requirement (50 percent on coffee, tea, and cotton) to be abolished by March 2005 (performance criterion); - restrictions and reporting requirements on foreign exchange transactions to be simplified in 2005 with Fund technical assistance; - migration from bank-by-bank administrative credit ceilings to market-determined overall liquidity management; BRB to unify and cut credit ceilings in January 2005 and introduce weekly liquidity auctions in spring 2005 with MFD support; - treasury bills to be standardized and made tradable. - Financial sector: minimum capital requirements nearly tripled in March 2004; BRB committed to further improve bank supervision, tighten prudential requirements, and improve transparency (multiyear external audit contract signed). ### 2004-05 program objectives and macroeconomic framework - Near-term objectives: consolidate economic recovery and financial stability, address macroeconomic slippages, deepen financial and structural reforms. - Updated program targets: - sustain growth at about 5 percent a year; - reduce inflation to 8.5 percent by end-2004 and 5.5 percent by end-2005. - Fiscal targets (to accommodate higher expenditure levels): - overall fiscal deficit (cash basis after external grants) contained at 8.0 percent of GDP in 2004 and 6.4 percent in 2005; - primary deficit targeted at 3 percent of GDP in 2004 and 2 percent in 2005. - Program priorities: give priority to social spending; restrain military and security expenditures (excluding DDR/SSR). - External current account expected to decline to 19.0 percent in 2005, reflecting much higher coffee exports. - International reserves projected to rise from the equivalent of 4.3 months of imports at end-2004 to 5.8 months at end-2005. - Revenue and expenditure projections: - Revenues cautiously projected at 19.4 percent of GDP in 2004. - Total revenue expected to decline to about 19 percent of GDP in 2005, reflecting impact of an import duty reduction (0.3 percent of GDP). - Social sector spending budgeted at 7 percent of GDP in 2005 (6.7 percent in 2004). - Military spending budgeted to decline by about ½ percentage point of GDP to 6.3 percent of GDP. - Privatization receipts projected at about 0.6 percent of GDP in 2005. - A remaining financing gap of about US$28 million expected to be covered by bilateral grants. - Fiscal management commitments: - inventory of domestic arrears to normalize relations with suppliers and reduce burden on private sector and banks; - arrears clearance strategy to be defined in second program review. ### Program financing and risks - Overall external nonproject financing need for 2005 estimated at US$190 million. - Financing expected mainly from World Bank (ERC2 credit), AfDB, EU, and bilateral donors. - Funding secured for constitutional referendum (late 2004) and national elections (2005), largely as bilateral grants. - Residual gap of US$28 million (3.8 percent of GDP) associated with DDR/SSR program expected to be closed at donors meeting tentatively scheduled for spring of 2005. - With the envisaged financing, Burundi should be able to meet external nonreschedulable debt-service payments without difficulty. *Source: IMF staff report — chapter 7, “Fiscal pressures emerged early in 2004, and the primary balance moved into deficit.”* ### 31. Burundi’s external debt service burden remains unsustainably high, even after ### _cr0555 - 31. Burundi’s external debt service burden remains unsustainably high, even after ### Debt sustainability - A preliminary debt sustainability analysis by Fund and World Bank staffs indicates an external debt-to-exports ratio, on a present value basis, of above 1,800 percent at end-2003 (after Paris Club Naples flow relief). - Substantial relief under the enhanced HIPC Initiative will be needed to restore debt sustainability. - The residual financing gap does not take into account the impact of possible debt relief under the enhanced HIPC Initiative. ### Program monitoring and implementation status - Prior actions, quantitative performance criteria (end-December 2004 and end-June 2005), indicative targets, and structural performance criteria are listed in Tables 3 and 4 of the MEFP. - The TMU (annexed to the MEFP) sets out definitions of performance targets, external assistance adjustors, underlying assumptions, and Burundi’s reporting requirements. - The nonproject external financing adjustor and the definition of external arrears have been modified (MEFP, Table 4, and TMU). - In the context of the coffee sector reform, the authorities agreed that any new credit guarantee granted during the transitory period 2005/06 would be consulted with Fund staff. - Nonobservance of two structural performance criteria was attributed to the complex political environment and weak administrative capacity; corrective actions are in process. - The June 2004 ceiling on the stock of external arrears was exceeded because of an upward revision of the stock and slower-than-expected clearing operations; nonreschedulable arrears have now all been cleared and negotiations are continuing with non-Paris Club creditors (MEFP, paragraphs 26, 32, and 36). - Completion of the second review is scheduled for May 2005 and will be conditional upon observance of quantitative performance criteria at end-December 2004 and the end-March 2005 structural performance criterion (Table 8). - Completion of the second review forms the basis for reaching the Decision Point under the enhanced HIPC Initiative. - The staff will discuss priority budgetary expenditures that could be accommodated if higher-than-programmed external concessional funding becomes available. - It is important that the full PRSP be prepared in a timely manner and on a fully participatory basis. ### Medium-term outlook and capacity to repay the Fund - Over the short term, the external current account deficit (excluding official grants) is expected to remain large, reflecting the post-conflict hump in reconstruction activity. - Starting in 2006, the deficit would follow a declining path to about 15 percent of GDP by 2010 (Table 9). - Financing these deficits would require substantial external grants and loans on highly concessional terms through the medium term. - The medium-term external position is vulnerable to fluctuations in the terms of trade, as shown in the sensitivity scenarios presented in Table 9. - A coffee-price scenario highlights that stronger-than-envisaged improvement in coffee quality and marketing under the coffee sector reform could translate into higher coffee export earnings. - Burundi’s capacity to repay the Fund remains broadly as described in the staff report for Burundi’s request for the PRGF arrangement. ### Safeguards, technical assistance, and program risks - The Fund’s Finance Department initiated a safeguards assessment of the BRB using a two-step approach due to constrained administrative and technical capacity. - First stage: assessment of areas critical to preventing misreporting and safeguarding Fund resources (external audit mechanism, financial reporting framework, system of internal controls); successfully completed in June 2004. - Second stage: expected in 2005 to evaluate the BRB’s legal framework and internal audit mechanism. - In line with first-stage recommendations, the BRB is acting to improve financial reporting mechanisms and strengthen internal controls. - Following the appointment of an audit firm of international reputation, work began in November 2004 on the BRB’s first external audit. - Burundi has extensive technical assistance needs; authorities will continue to work with multilateral and bilateral partners to rebuild administrative capacity in priority areas. - Efforts will be undertaken to improve the national statistical base following recommendations of an IMF multi-sector statistics mission in November/December 2004. - Program risks: - Regional tensions and the internal political and security situation. - Political transition could be undermined by failure to proceed expeditiously with military demobilization. - Without adequate and timely support for the DDR/SSR process, fiscal and macroeconomic accounts could be destabilized. - Overall, these risks appear contained given the commitment of the international community to accompany the peace process and progress made so far. ### Staff appraisal — key findings and policy recommendations - Macroeconomic developments in 2004 have been broadly on track with program objectives; real GDP growth will exceed the program target owing to a strong rebound in coffee production, and progress has been made in reducing inflation despite surging world petroleum prices. - Performance relative to quantitative and structural performance criteria has been mixed. - Fiscal slippages emerged in 2004 following the surge in petroleum prices and higher spending needs associated with the peace process. - The staff views relaxation of the fiscal target as appropriate to accommodate priority expenditures. - Significant transfers to cover continued coffee sector losses underscore the urgency of implementing the coffee reform strategy without delay. - Structural reforms lagged due to limited administrative capacity and the complex political environment, but the pace of implementation has intensified recently. - There was a large increase in highly concessional donor support for project spending. - Progress on peace and reconciliation: - Security situation remained relatively calm and the political transition gained momentum. - Continued international community support is vital; completing the full PRSP in a timely and fully participatory manner is stressed. - DDR/SSR: - Significant progress in groundwork for multiyear demobilization and creation of a trained national police force. - Costs associated with these programs are large in relation to GDP and should be contained at approved levels and carefully monitored. - Appropriate and timely donor support is vital to avoid destabilizing public finances. - 2005 budget and fiscal recommendations: - The 2005 budget incorporates a reduction in the primary deficit before grants and targets a further increase in social spending. - Achieve the revenue target of 19 percent of GDP, particularly given the envisaged reduction in trade taxes. - Savings from the demobilization program should be effectively secured and redirected to urgent social needs. - Move ahead with the new budget and accounts code, reinforce tax and customs administration, and strengthen the Ministry of Finance’s operations, including wage bill management. - Monetary and financial sector recommendations: - Strengthen monetary instruments and implement recommendations made by Fund technical assistance missions. - Remain vigilant in supervision of the banking sector, building on improvements made in 2004. - Recent steps addressing weaknesses from the initial safeguards assessment, notably initiation of the first external audit, are welcome; staff views progress as sufficient to complete the first review despite only a partial safeguards assessment. - Exchange and trade policy: - Reduction in the differential between the official and parallel exchange rates to low levels by fall 2004 is encouraging. - Authorities should proceed decisively with steps envisaged in early 2005 to further liberalize the exchange and trade systems. - Structural priorities: - Rapid implementation of the coffee sector reform program is crucial to sustain the economic recovery and reduce pressures on the public finances. - Intensify efforts to open the audit court and begin privatization of state assets. - Progress with external creditors: - Clearing of Burundi’s arrears with the AfDB through donor cooperation and restarting of AfDB lending operations are noteworthy. - Burundi’s external debt burden remains unsustainable after traditional debt relief and will require substantial debt relief under the enhanced HIPC Initiative, as described in the preliminary HIPC document. *Source: IMF staff report excerpt (MEFP, TMU, and staff appraisal sections provided in the content unit).* ### 50. Burundi still faces enormous challenges, including the need to complete the political ### _cr0555 - 50. Burundi still faces enormous challenges, including the need to complete the political ### Political context and staff recommendation - Burundi faces the need to complete the political transition to democracy, demobilize large numbers of armed combatants, and address widespread deep poverty. - Given progress in 2004 stabilizing the macroeconomic situation and pursuing structural reforms, staff recommends completion of the first review under the PRGF arrangement. - Staff supports the authorities’ request for waivers for the nonobservance of an end-June 2004 quantitative performance criterion and two structural performance criteria, noting corrective actions have been taken. ### Key economic and financial indicators (selected extracts) - Real GDP (annual percent change): 1999–2005 shown in Figure 1 (chart data not transcribed here). - Inflation (annual percent change, period average): 2004 = 6.4; 2005 (proj) = 7.5; 2006 (proj) = 6.6; 2007 (proj) = 5.3. - Reserve money (12-month growth rate): values shown for 1999–2005 (chart data not transcribed here). - International reserves (millions of U.S. dollars): series shown 1999–2005 (chart data not transcribed here). ### IMF/PRGF projected payments and Fund credit indicators (Table 1) - Projected payments under existing PRGF disbursements and SDR charges (In millions of SDRs, selected quarters): - Jan.-Mar. 2004: 0.07 - Apr.-June 2004: 0.14 - Jul.-Sep. 2004: 0.07 - Oct.-Dec. 2004: 0.14 - 2004-08 Total (existing): 1.65 - Interest/charges (selected): Jan.-Mar. 2004 = 0.34; Total projected interest/charges (2004-08) = 1.99 - Total projected payments (In millions of SDRs): Jan.-Mar. 2004 = 0.07; Apr.-June 2004 = 0.14; Jul.-Sep. 2004 = 0.12; Oct.-Dec. 2004 = 0.14; 2004-08 total = 2.27 - In percent of exports of goods and services credits: Jan.-Mar. 2004 = 0.15; Apr.-June 2004 = 0.28; Jul.-Sep. 2004 = 0.26; Oct.-Dec. 2004 = 0.28; 2004-08 total = 0.97 - Outstanding IMF credit (end of period, selected): end-2004 = 47.85 (millions of SDRs); 2007 (proj) = 69.30 (millions of SDRs) - Outstanding IMF credit (in millions of U.S. dollars): end-2004 = 71.78; 2007 (proj) = 103.26 - Outstanding IMF credit (in percent of quota): end-2004 = 62.14; 2007 (proj) = 90.00 - Memorandum: Actual/projected PRGF disbursements total = 69.30 (millions of SDRs) ### Macroeconomic projections and indicators (Table 2, selected series) - Real GDP growth: - 2002 (actual) = 4.5 - 2003 (actual) = 1.1 - 2004 (actual) = -1.2 - 2005 (proj) = 5.1 - 2006 (proj) = 5.5 - 2007 (proj) = 5.0 - GDP deflator (annual percent change): 2003 = 10.4; 2004 = 11.6; 2005 (proj) = 6.7; 2006 (proj) = 8.0; 2007 (proj) = 6.7 - Consumer prices (period average): 2003 = 9.9; 2004 = 10.7; 2005 (proj) = 6.4; 2006 (proj) = 7.5; 2007 (proj) = 6.6 - Exports, f.o.b. (U.S. dollars, annual percent change): 2003 = 63.1; 2004 = 28.6; 2005 (proj) = -30.1; 2006 (proj) = 9.4; 2007 (proj) = 39.1 - Imports, f.o.b. (U.S. dollars, annual percent change): 2003 = 12.5; 2004 = 29.0; 2005 (proj) = 9.9; 2006 (proj) = 44.9; 2007 (proj) = 6.2 - Current account balance (excluding capital grants, in percent of GDP): 2002 = -6.5; 2003 = -8.1; 2004 = -6.1; 2005 (proj) = -9.3; 2006 (proj) = -20.4; 2007 (proj) = -19.0 - Gross official reserves (end of period, U.S. dollars, millions): 2002 = 60.1; 2003 = 52.9; 2004 = 68.9; 2005 (proj) = 87.9; 2006 (proj) = 81.7 ### Central government operations (Table 3, selected numbers in billions of Burundi francs) - Revenue: - 2003 (actual total revenue) = 136.0 - Jan.-Sep. 2004 (actual) = 142.6 - Jan.-Sep. 2005 (proj) = 156.4 - Tax revenue (selected): 2003 actual = 120.5; Jan.-Sep. 2004 actual = 128.9; Jan.-Sep. 2005 proj = 142.0 - Expenditure and net lending: - 2003 actual = 227.3 - Jan.-Sep. 2004 actual = 213.1 - Jan.-Sep. 2005 proj = 356.6 - Current expenditure (selected): 2003 actual = 144.3; Jan.-Sep. 2004 actual = 152.2; Jan.-Sep. 2005 proj = 176.9 - Interest payments (due, selected): 2003 actual = 27.4; Jan.-Sep. 2004 actual = 21.7; Jan.-Sep. 2005 proj = 30.6 - Overall balance (commitment basis, after grants, selected): 2003 actual = -40.5; Jan.-Sep. 2004 actual = 40.1; Jan.-Sep. 2005 proj = -200.2 - Change in arrears (reduction -): 2003 actual = -2.2; Jan.-Sep. 2004 actual = -37.3; Jan.-Sep. 2005 proj = -23.2 ### Financing and external assistance (Table 3 continued, selected) - Financing (identified total, selected): 2003 actual = 93.5; Jan.-Sep. 2004 actual = 68.5; Jan.-Sep. 2005 proj = 193.5 - External grants (selected): 2003 actual = 50.8; Jan.-Sep. 2004 actual = 62.8; Jan.-Sep. 2005 proj = 141.0 - External borrowing (selected): 2003 actual = 28.6; Jan.-Sep. 2004 actual = -8.1; Jan.-Sep. 2005 proj = 53.5 - Debt relief (rescheduling; cancellation) (selected): 2003 actual = 29.4; Jan.-Sep. 2004 actual = 109.9; Jan.-Sep. 2005 proj = 54.4 ### Monetary survey and central bank accounts (Table 4, selected) - Net foreign assets (BRB, selected months): March 2004 act. = 35.6; Dec. 2004 act. = 36.5; Dec. 2005 proj. = 34.1 - Net domestic assets (selected): March 2004 act. = 128.5; Dec. 2004 act. = 171.3; Dec. 2005 proj. = 199.2 - Domestic credit (selected): Dec. 2003 = 198.0; Dec. 2004 = 275.9; Dec. 2005 proj. = 291.7 - Money and quasi money (M2) (selected): Dec. 2003 = 177.0; Dec. 2004 = 194.2; Dec. 2005 proj. = 236.8 - Reserve money (selected): Dec. 2003 = 62.7; Dec. 2004 = 69.8; Dec. 2005 proj. = 75.5 - Gross international reserves (U.S.$, millions) (memorandum): Dec. 2004 = 81.7; Dec. 2005 proj. = 115.0 ### Balance of payments and external sector (Table 5 and Table 7, selected) - Current account (In millions of U.S. dollars): - 2002 = -40.7 - 2003 = -48.3 - 2004 = -36.5 - 2005 (proj) = -60.1 - 2006 (proj) = -135.9 - Trade balance (In millions of U.S. dollars): - 2002 = -72.7 - 2003 = -93.8 - 2004 = -107.5 - 2005 (proj) = -150.2 - Exports, f.o.b. (In millions of U.S. dollars, selected): 2004 = 43.9; 2005 (proj) = 61.1 - Of which: coffee (selected): 2004 = 26.2; 2005 (proj) = 42.8 - Imports, f.o.b. (In millions of U.S. dollars, selected): 2004 = -194.1; 2005 (proj) = -206.3 - Of which: petroleum products (selected): 2004 = -15.9; 2005 (proj) = -30.0 - Capital account (selected): 2004 = 26.2; 2005 (proj) = 47.0 - Financial account (selected): 2004 = 2.6; 2005 (proj) = -21.6 - Financing need and sources (Table 7, 2004): - External resources (identified) = 238.6 - Use of resources = -237.7 - Financing need = 196.0 (program year 2003 baseline reference) - Program loans and grants = 79.5 - Of which: IMF PRGF disbursements = 45.4 - Debt relief (under existing mechanisms) = 116.5 - Residual financing need (2004) = 0.0; residual financing need 2005 = 27.8 ### Structural reforms implemented and planned (Table 6) - Security and reconciliation: - Cantonment: 22,000 former combatants reported to 12 cantonment camps as of end-October 2004. - Demobilization: First demobilizations in early December 2004 (75 from government forces and 141 from rebel forces). - Refugees in UNHCR camps in Tanzania: down from 500,000 in 2002, to 350,000 in 2003, to 269,000 in September 2004. - Internally displaced people: down from 400,000 in 2002, to 270,000 in 2003, to 120,000 in September 2004. - Inventory of lands to be made available to refugees: First half 2005 (originally 2004); likely to be concluded only following 2005 elections. - Poverty reduction and social: - Preparation of full-PRSP: May 2005. Work in process based on national consultations. - Tracking mechanism for poverty-related expenditure: December 2005 (with 2006 budget). - Assess status toward MDGs: September 2005. - Fiscal management and transparency: - Extension of transactions tax to domestically produced goods and services: Implemented in January 2004. - Revised 2004 budget approved in September 2004; customs service charge extended to all nondiplomatic imports. - Public social expenditure: 5.4 percent of GDP in 2003; 6.7 percent in 2004; 7.0 percent in 2005 budget. - Introduction of single taxpayer identification number: First half 2005 (originally 2004); procedures in place, implementation pending hiring of data systems expert. - Adoption of new budget and government accounts code: December 2004; apply with 2005 budget. - Completion of audited inventory of domestic arrears: June 2005. - Completion of civil service census and payroll clean-up: September 2005; transfer of payroll management to Ministry of Finance: September 2005. - Money and exchange regime: - Bank-by-bank assessment completed in March 2004; minimum capital requirements rose; two noncompliant banks closed and being liquidated. - BRB refinancing rate structure revised and tighter reserve eligibility criteria introduced in June 2004. - Parallel market exchange differential reduced to 2 percent by late 2004 from 30 percent in 2002. - Liberalization: Three foreign exchange bureaus established in 2004 and admitted to BRB auctions; further easing of reporting/administrative requirements in 2005. - Mandatory nature of BRB auction reference rate abolished: December 2004. - BRB to unify multiple bank-by-bank credit ceilings: January 2005. - Elimination of remaining export surrender requirements: March 2005 (currently 50 percent surrender for coffee, tea, cotton). - Introduction of market based liquidity auctions: Spring 2005 (originally June 2004); IMF technical assistance in place. - Sectoral policies (coffee and other): - Financial audit of OCIBU completed July 2004: accumulated losses of F Bu 20 billion found higher than previously reported. - Coffee sector liberalization strategy approved October 28, 2004; first reforms implemented in December 2004; liberalization of sales and marketing from March 2005. - Launching tenders for sale of state-owned coffee processing assets: June 2005. - Downsize OCIBU into a regulatory agency: Fall 2005. - Tariff reform implemented with 2005 budget: number of bands reduced from four to three (10, 15, and 30 percent) with highest rate down from 40 percent. - Establish audit court (Cour des Comptes): April 2005 (originally June 2004); operational establishment pending statutory legislation and external training; initiate audit of 2004 government accounts by May 2005. - New bankruptcy code: with Parliament. - Begin privatization of government assets in financial sector: 2005. - Lift trade restrictions and price controls in sugar sector: September 2005. - Set up one-stop office for setting up new enterprises: November 2005. - Introduce new investment code: December 2005. ### PRGF disbursement schedule and reviews (Table 8) - Total PRGF amount at Executive Board consideration, January 23, 2004: 26.40 (millions of SDRs). - Scheduled disbursements (In millions of SDRs): - January 2005: 7.15 — Completion of first review, based on observance of performance criteria at end-June 2004. - May 2005: 7.15 — Completion of second review, based on observance of performance criteria at end-December 2004. - November 2005: 7.15 — Completion of third review, based on observance of performance criteria at end-June 2005. - May 2006: 7.15 — Completion of fourth review, based on observance of performance criteria at end-December 2005. - November 2006: 7.15 — Completion of fifth review, based on observance of performance criteria at end-June 2006. - May 2007: 7.15 — Completion of sixth review, based on observance of performance criteria at end-December 2006. - Note: Of the 26.40 million SDRs, SDR 19.25 million was for the early repayment of outstanding drawings under the post-conflict emergency assistance policy. ### Medium-term balance of payments scenario and sensitivity analysis (Table 9, selected) - Current account (In millions of U.S. dollars, selected years): - 2004 = -135.9 - 2005 = -148.0 - 2006 = -129.9 - 2007 = -133.5 - 2010 = -140.3 - 2015 = -148.0 - Trade balance (In millions of U.S. dollars): 2004 = -150.2; 2005 = -145.2; 2006 = -121.3; 2007 = -115.3 - Exports, f.o.b. (In millions of U.S. dollars): 2004 = 43.9; 2005 = 61.1; 2010 = 108.8; 2015 = 249.6 - Of which coffee (In millions of U.S. dollars): 2004 = 26.2; 2005 = 42.8; 2010 = 81.8; 2015 = 158.0 - Imports, f.o.b. (In millions of U.S. dollars): 2004 = -194.1; 2005 = -206.3; 2010 = -226.3; 2015 = -401.3 - Gross official reserves (In millions of U.S. dollars, projected): 2004 = 82; 2005 = 115; 2010 = 311; 2015 = 752 - Sensitivity scenarios (selected): - Higher coffee prices (international prices assumed 25 percent higher than WEO baseline): - Current account (excl. official transfers, In millions of U.S. dollars): 2004 = -241.2; 2005 = -200.3; 2006 = -180.7; 2007 = -167.8 - Financing gap (In millions of U.S. dollars): 2004 = 17.1; 2005 = 11.1; 2006 = 6.6; 2007 = -1.2 - Higher non-oil import prices (assumed 5 percent higher than WEO baseline for 2005-09): - Current account (excl. official transfers, In millions of U.S. dollars): 2004 = -259.2; 2005 = -226.7; 2006 = -215.8; 2007 = -212.0 - Financing gap (In millions of U.S. dollars): 2004 = 35.1; 2005 = 37.4; 2006 = 41.7; 2007 = 43.0 *Source: IMF staff report and tables (Burundi, 2004–05 projections and associated PRGF documentation).* ### 1. On behalf of the Government of Burundi and the Bank of the Republic of Burundi ### On behalf of the Government of Burundi and the Bank of the Republic of Burundi ### Program request and documentation - Transmittal of the Memorandum of Economic and Financial Policies (MEFP) and Technical Memorandum of Understanding (TMU) setting out objectives and policies for the remainder of 2004 and for 2005. - Request for completion of the first review under the PRGF and disbursement of SDR 7.15 million (9.3 percent of quota). - Authorities request waivers for: - Nonobservance of the end-June 2004 quantitative performance criterion on external arrears (beginning stock larger and clearing operations slower than expected). - Nonobservance of two missed structural performance criteria. - Authorities authorize publication of this letter, the attached MEFP and TMU, and the staff report on the first review on the Fund’s website subsequent to Executive Board consideration. ### Political and security background - National elections were to transfer government on November 1, 2004; extension of transitional arrangements approved October 15, 2004, with local, communal, parliamentary, and presidential elections planned between February and April 2005. - Draft constitution agreed in Pretoria in August; national referendum to be held in late 2004 or early 2005. - Hostilities ceased in most of the country; one hold-out rebel group remains active in periphery of Bujumbura. - UN peacekeeping troops deployed. DDR declared effective September 10, 2004; most former rebel combatants had reported to cantonment centers as of November 2004. ### Recent economic developments and program performance (2004) - Growth and inflation: - Real economic growth expected to be slightly above the program target of 5 percent in 2004. - Three-month moving average inflation about 7-8 percent in the third quarter of 2004. - External and fiscal pressures: - Imports projected to surge by a projected 35 percent in 2004, driven by humanitarian assistance and NGO project activity. - Sharp rise in petroleum prices weighing on external and fiscal accounts. - Exchange rate and forex markets: - Burundi franc broadly stable against the U.S. dollar. - Differential between parallel and official rate narrowed to 2-3 percent from about 15 percent in late 2003; reduction to under 3 percent in November 2004. - Performance criteria, targets, and slippages: - End-June quantitative performance criteria and March indicative targets observed except on external arrears. - Beginning-of-period stock of external arrears larger and clearing slower than expected. - Indicative targets on government wage bill and primary fiscal balance exceeded. - Original September indicative quantitative targets mostly not met. - Two structural performance criteria not met: establishing an audit court (Cour de Comptes) and introducing domestic liquidity auctions. - Two structural benchmarks observed: extending the transactions tax to domestically produced goods; concluding assessment of commercial banks’ compliance with capital requirements (resulted in closure of two noncompliant banks in mid-2004). - Fiscal outturns and arrears: - Government registered a primary deficit of 1.3 percent of GDP during the first half of 2004 vs. a programmed surplus of 0.5 percent of GDP. - Revenue shortfall about 0.6 percent of GDP, reflecting lower-than-envisaged tax receipts from oil products and smaller profit transfer from the Central Bank. - Primary spending through September about 3 percent of GDP above program. - At end-September, government paid off 0.3 percent of GDP of domestic arrears but accumulated outstanding payment orders equivalent to 1½ percent of GDP. - F Bu 7.6 billion (1 percent of GDP) in treasury securities issued to clear domestic arrears related to petroleum imports. - F Bu 7.6 billion of guaranteed coffee sector credit losses were paid. - Monetary and reserve developments: - Reserve money growth eased to 29.4 percent over the year ending September. - Broad money growth declined to 14.6 percent in September (program: 20.4 percent). - Annual rate of increase in credit to the economy about 9 percent in the first three quarters. - Gross official reserves declined to US$51 million, about 2½ months of goods and services import cover at end-September. - Net foreign asset position of the BRB deteriorated; NDA broadly unchanged apart from credit to government. - Central bank and financial sector reforms: - BRB implemented measures toward indirect monetary control; strengthened prudential supervision; closed two insolvent financial institutions. - Two components of end-June structural performance criterion on monetary policy reform implemented: introduction of marginal refinancing window at a penalty rate; reform of mandatory reserves (now held as remunerated central bank deposits). - Weekly liquidity auctions not launched due to operational shortcomings (nonavailability of reliable liquidity forecasts and key macroeconomic data). - IMF technical assistance team visited Bujumbura in November 2004 to assist. ### Structural and sectoral issues - Audit court (Cour de Comptes): - Audit court law passed end-March 2004; magistrates appointed in June 2004. - Law defining magistrates’ legal status approved by council of ministers and submitted to parliament. - Action plan approved October 28, 2004 to render court operational by April 2005; financing obtained; training and logistics being organized to audit 2004 government accounts by spring 2005. - Coffee sector: - 2003-04 production around 38,000 tonnes; processing constraints delayed transformation and exports. - EU-sponsored audit in June found 2002-03 campaign losses of F Bu 7 billion (previously thought F Bu 5 billion). - Accumulated losses since 2000-01 in excess of F Bu 15 billion (2 percent of GDP) leading to defaults on bank loans that trigger government guarantees. - Comprehensive reform strategy approved by council of ministers on October 28, 2004: early liberalization of investment, marketing, and export of coffee; reform and dismantling of OCIBU’s marketing monopoly. - Decree to reform OCIBU’s auction mechanism to include representatives of commercial banks, producers, and washing stations and to permit private investment in the sector to be issued by end-December. ### Debt, external assistance, and HIPC prospects - Bilateral rescheduling: - First Paris Club rescheduling in March 2004; penultimate bilateral agreement recently signed; discussions ongoing with other bilateral and commercial creditors. - Multilaterals: - Clearance of remaining arrears with multilaterals (AfDB, EU/EIB, OPEC Fund) completed; AfDB lifted sanctions against lending to Burundi. - Debt sustainability: - Preliminary debt sustainability analysis indicates external debt ratio at end-2003, on a present value basis, of almost 2,000 percent of exports. - Substantial debt relief required for sustainability and to free resources for social and poverty reduction spending. - Preliminary HIPC document to be presented to IMF and World Bank Executive Boards at the time of the first PRGF review. - Expected foreign assistance: - Foreign assistance (grants, highly concessional loans, debt relief) expected to average about US$400 million in 2004-05. - Commitments of grants secured to cover referendum costs in 2004 and general elections in 2005. - Need to secure funding for security program costs, which will be closely monitored to prevent destabilizing the budget and macro balances. ### Updated 2004-05 macroeconomic objectives and targets - Growth and inflation targets: - Maintain economic growth at about 5 percent in 2004-05. - Lower inflation to 8½ percent in 2004 and to 5½ percent in 2005 (original 2004 target of 5½ percent is out of reach). - Fiscal targets (cash basis after external grants): - Overall fiscal deficit targeted at 8.0 percent of GDP in 2004 and 6½ percent of GDP in 2005. - Primary deficit targets of 3 percent of GDP in 2004 and 2 percent of GDP in 2005. - External current account: - External current account deficit expected to widen to about 20 percent of GDP in 2004 and to 19 percent of GDP in 2005. - Reliance on external resources: - Continued high dependence on large amounts of external resources given projected improvement in private investment and low private savings. - Emphasis on sustained and reinforced external assistance on highly concessional terms to meet humanitarian, reconstruction, and security costs. ### Policy adjustments and measures - Fiscal policy and budget revisions: - Revised 2004 budget signed into law September 30, 2004, targeting a primary deficit close to 3 percent of GDP (vs. balanced under original program). - Revised budget broadens application of the 6 percent import service charge to all nondiplomatic imports and incorporates a 6 percent wage increase for civil servants (delayed from January). - Revised budget provides for hiring of 2,300 new teachers and 500 medical personnel. - Revenue and customs measures: - Limited impact from removal of customs duties for COMESA-origin goods offset by improvements: Sydonia customs management system, bonded warehousing, and pre-inspection of imports. - Since September, an import pre-inspection requirement implemented. - Monetary policy stance: - BRB lowering bank-by-bank credit ceilings from May onwards, implementing marginal refinancing window and reserve reform; aiming to move to indirect monetary control and weekly liquidity auctions once operational shortcomings are resolved. - Structural reform priority areas: - Establish operational audit court by April 2005. - Implement coffee sector reforms, issue decree by end-December to reform OCIBU auction mechanism and permit private investment. - Continue bank supervision and closure of noncompliant institutions. *Annexes: Memorandum of Economic and Financial Policies for 2004-05; Technical Memorandum of Understanding.* ### 17. The authorities are committed to accelerating the implementation of structural ### 17. The authorities are committed to accelerating the implementation of structural ### Structural reform objectives (overview) - Program aims: liberalization of key sectors (coffee and sugar); strengthening of government financial management; improvements in delivery of social services; further liberalization of trade and exchange regimes; improvements in governance and transparency. ### Fiscal Policy (section B) — 2004 and 2005 budgets, targets, and composition - 2004 revised budget aims at a primary deficit of 3 percent of GDP. - Revenues projected at 19.4 percent of GDP in 2004. - Expenditure increases in 2004 primarily reflect transfers to cover coffee sector losses, outlays for peace and reconciliation, and rebuilding public administration and social services. - No further domestic financing of the government relative to end-June 2004 levels, apart from recent treasury bills to clear domestic arrears with oil suppliers. - Overall fiscal balance after grants (on a commitment basis) would be about zero in 2004. - 2005 budget to be presented to parliament in late December 2004 (prior action). - 2005 primary deficit targeted to decline to 2 percent of GDP. - Social spending targeted to increase to 7 percent of GDP in 2005. - Overall deficit (commitment basis, after grants) projected to rise to 3½ percent of GDP in 2005, reflecting higher project spending and special programs. - Overall revenue in 2005 expected at about 19 percent of GDP, owing to an import duty reduction (0.3 percent of GDP). - Primary expenditure in 2005 targeted at about 23 percent of GDP (a reduction of 1 percentage point of GDP). - Targets on specific expenditure items for 2005: - Wage bill (including the military but excluding the newly created national police force) growth to be contained to 6 percent of GDP. - Expenditures on goods and services targeted at zero (percent of GDP). - Budget support and grants in 2005: - Multilateral budget support expected to rise to about US$68 million in 2005. - Bilateral grant assistance expected at about US$11 million in 2005. - Receipts from sale of state assets projected at about F Bu 5 billion (0.6 percent of GDP) in 2005; any resources above this amount earmarked to reduce domestic debt. - Remaining financing gap of about US$28 million expected to be covered by bilateral grants in 2005. - Project expenditure in 2005: F Bu 110 billion, 13½ percent of GDP, financed mostly by external aid disbursements. - Aggregate poverty-related expenditure (I-PRSP definition) set to increase from 28 percent of primary expenditure in the 2004 revised budget to 31 percent in 2005. - Note: the 31 percent does not reflect potential increases from diversion of resources from debt service to social services after debt relief under the enhanced HIPC Initiative, from mid-2005. ### Tax policy and public financial management measures - Tariff reform in 2005 budget: - Maximum tariff rate reduced from 40 percent to 30 percent. - 12 percent band folded into the 10 percent band, reducing number of bands to three. - Net revenue loss expected at about F Bu 2 billion. - Partly offset by full-year effect of extension of customs service tax (extended in late 2004). - Introduction of a value-added tax system originally envisaged for 2005 has been postponed pending further preparatory work. - Measures to reinforce application of income tax legislation to Burundians employed by international agencies are being sought. - Public financial management improvements in 2005 (with donor support, notably World Bank PAGE, the EU, and bilateral donors): - Create a new internal audit service with appropriately qualified and paid staff (in 2005). - Transfer civil service payroll management to the Ministry of Finance from the Ministry of the Civil Service by June 2005. - Introduce a new public accounting and budgetary code with effect from the 2005 budget (prior action). - Introduce a single taxpayer identification number (March 2005). ### Domestic arrears and inventory/audit actions - Government committed to normalizing financial relations with suppliers and establishing the nature and extent of domestic arrears. - Inventory of domestic arrears financed through World Bank PAGE project to be launched before end-2004. - Suppliers to submit claims; inventory results to be subject to an external audit before end-June 2005. - A strategy for clearance of arrears to be worked out in context of the second review under the PRGF arrangement. ### Monetary and Exchange Policies (section C) — 2004–2005 projections and reforms - Aid disbursements easing monetary pressure in late 2004: about US$34 million from the EU and the World Bank. - Broad money growth projected at about 19 percent by end-2004. - Reserve money growth projected to decline to about 27 percent by year’s end (2004). - Gross international reserves expected to rise sharply in late 2004 to about $82 million (4¼ months of imports). - 2005 projections: - Sharp decline in reserve money growth to less than 10 percent (resulting from reduction in credit to government and much lower coffee credit). - Broad money growth about 15 percent in 2005 (driven by increased financial system efficiency). - Credit to private sector to grow by about 17 percent in 2005, somewhat more than nominal GDP (assuming a modest decline in velocity and financing gap closure). - Gross international reserves to increase to about 5.8 months of imports by end-2005 (assuming financing gap closed). - BRB monetary operations and liquidity management reforms planned: - Maintain a tight monetary stance in 2005 to support inflation objective. - Enhance liquidity forecasting capabilities with IMF technical assistance. - Introduce weekly liquidity auctions and a rediscount facility by the spring of 2005. - Standardize treasury bills and make them tradable to improve liquidity management and support active monetary policy. - Financial sector soundness and supervision: - Financial sector generally sound, though some banks are vulnerable. - Minimum capital requirements were more than tripled in March 2004. - BRB monitoring orderly liquidation of two closed banks. - Continued efforts in 2005 to strengthen bank supervision; prudential requirements to be tightened gradually toward international standards. - BRB committed to improving governance and transparency; signed a multiyear external audit contract to begin with the 2004 accounts. - Exchange system liberalization: - In late 2004, BRB abolished mandatory nature of its auction reference price for commercial transactions. - Official exchange rate determination changed from weekly auction to daily average of market rates. - BRB will publish average daily exchange rates and spreads. - Remaining surrender requirement (50 percent on coffee, tea, and cotton exports) to be abolished by March 2005 (performance criterion). - Further reductions in restrictions and reporting requirements on foreign exchange transactions planned in 2005 with IMF technical assistance. ### Structural Reforms (section D) — sectoral liberalization and governance - Coffee sector reform (key actions and timetable): - Implementation of approved reform strategy for coffee sector deemed key to poverty reduction. - Decree signed in late 2004 allowing private investment at all levels of the supply chain. - Restrictions on export and sale of coffee at all levels to be abolished in early 2005, including obligation to go through OCIBU auction mechanism. - Sectoral colloquium to be hosted in early 2005, supported by World Bank and EU. - By June 2005, government-owned coffee processing infrastructure will be offered for sale. - Government, with foreign technical assistance, to begin transforming OCIBU into a regulatory and support agency in 2005. - Objective to rapidly phase out government crop credit guarantee for coffee; authorities will not grant any new coffee crop credit guarantee in transitional period of 2005/06 without prior consultations with Fund staff. - Sugar sector deregulation planned in 2005: - Liberalize domestic prices, reduce minimum import valuation, lift export and domestic distribution restrictions. - Measures expected to be completed by September 2005; expected outcomes include lower sugar prices and better prospects for domestic sugar industry development. - Audit court (Cour des comptes) establishment: - Government and parliament to ensure audit court starts full operations in April 2005. - Magistrates appointed in June 2004, took oath in September 2004; after training through April 2005, will audit 2004 budget accounts as soon as available. - Final legislation on magistrates’ statutes expected to be passed in December 2004. ### Program financing and external debt management (section E) - 2005 external nonproject financing need estimated at US$190 million. - Expected coverage of external financing requirement in 2005: - World Bank: two tranches of the ERC2 credit totaling US$30 million. - AfDB program grants and loans from the 9th and 10th FAD: about US$21 million. - EU (FED program): about US$14 million. - Bilateral creditors: US$11 million. - Debt relief (amount not separately quantified in this text). - Remaining gap of US$28 million expected to be covered, including possibly through a donors’ meeting in spring 2005. - Funding for constitutional referendum in late-2004 and national elections (total about US$23 million) secured largely from bilateral donors. - Authorities expect to meet external nonreschedulable debt-service payments and pursue prudent debt management to reach sustainable external debt position. ### Safeguards, statistical issues, and technical assistance (section F) - BRB safeguards and audit actions: - Two-step safeguards assessment adopted due to constrained capacity. - First stage completed: external audit of BRB’s accounts, financial reporting mechanisms, and system of internal controls. - Second stage expected in 2005 to evaluate BRB’s legal framework and internal audit mechanism. - Following staff recommendations, BRB acting to improve financial reporting mechanisms and internal controls. - Ernst and Young appointed; work began in November 2004 on first external audit. External auditors to make recommendations on adoption of IFRS. - Technical assistance and statistical capacity building needs: - Extensive technical assistance needs in tax and customs administration, civil service reform, monetary and exchange rate policy, and banking supervision. - Assistance needed to improve economic statistics: national accounts, balance of payments, and social/poverty indicators. - Authorities committed to improving national statistical base and implementing recommendations of IMF multi-sector statistics mission (visited Bujumbura in November-December 2004). - Authorities have requested posting of an IMF resident representative in Bujumbura. ### Program monitoring, waivers, and conditionality (section V) - Government requests waivers for nonobservance of performance criteria: - Establishment of the audit court (March 2004). - Introduction of liquidity auctions (June 2004). - End-June 2004 ceiling on external arrears. - Reasons for delays: complex political environment and weak administrative capacity; measures now in process. - End-June 2004 ceiling on stock of external arrears exceeded due to upward revision of historic stock and slower clearance; nonreschedulable arrears have now all been cleared and negotiations continue with non-Paris Club creditors. - Quantitative performance criteria and indicators summarized in Tables (referenced in source) for end-December 2004 and end-June 2005; prior actions, structural performance criterion, and benchmarks for 2004-05 also presented in source tables. - Policy commitments and program safeguards: - In coffee sector reform, authorities aim to eliminate crop credit guarantee and will not grant any new coffee credit guarantee prior to consultations with Fund staff. - Program performance target on credit to government will be adjusted downward for any accumulation of domestic arrears, as defined in the TMU. - Definitions of performance targets, external assistance adjustors, and reporting requirements are set out in the attached TMU (referenced in source). - Burundi will avoid incurring overdue financial obligations to the Fund, introducing new exchange restrictions, multiple currency practices, bilateral payments agreements inconsistent with Article VIII of the Fund’s Articles of Agreement, and import restrictions for balance of payments purposes. - Authorities stand ready to adopt new financial or structural measures, in consultation with Fund staff, as needed to ensure program success. - Second review under the PRGF arrangement: - Scheduled to be completed by May 2005. - Conditional upon observance of quantitative performance criteria at end-December 2004, and structural performance criterion at end-March 2005. - Second review will focus on coffee sector reform, public financial management, domestic arrears, monetary and exchange reform, and privatization. - Completion of second review and presentation of a preliminary DSA form the basis for reaching Decision Point under the Enhanced HIPC Initiative. *IMF staff report text as provided in the source content unit.* ### introduction of a marginal refinancing window at a ### _cr0555 - introduction of a marginal refinancing window at a ### Liquidity management and banking-sector measures - Implemented measures (June 2004), except for liquidity auctions; MFD mission (November 2004) to assist BRB introduce liquidity management measure. - Introduction of a marginal refinancing window at a penalty rate, and reform of the system of mandatory reserve requirements, with reserves to be held only in the form of deposits with the BRB (June 2004). Implemented, except for liquidity auctions. ### Structural reforms, prior actions, and benchmarks - Prior actions implemented: - Extension of the transactions tax to domestically produced goods and services (January 2004). Status: Implemented. - Assessment that all banks in operation meet the minimum capital requirement (March 2004). Status: Implemented: two noncompliant banks closed. - Structural performance criterion: - Abolish remaining export surrender requirement (50 percent of coffee, tea, and cotton exports). Deadline: March 2005. - Structural benchmarks (deadlines and objectives): - Issue decree for the liberalization of coffee sector marketing and trade at all levels of the production chain. Deadline: March 2005. - Begin privatizing coffee sector assets by launching tenders for Sogestals, washing stations, and the state share in SODECO. Deadline: June 2005. - Initiate audit, by the audit court, of the 2004 government accounts. Deadline: May 2005. - Complete audited inventory of domestic arrears. Deadline: June 2005. - Lift trade restrictions and price controls on sugar. Deadline: September 2005. - Prior actions for the first review under the PRGF: - Presentation of 2005 budget to parliament consistent with program objectives. - Introduction of the new budget and accounting charter with 2005 budget. - Submission to parliament of law on statute of magistrates of the audit court (cour des comptes). ### Quantitative performance criteria and indicative targets (as specified) - Quarterly and end-period program variables (Table 3 headline variables): - Net foreign assets of the BRB (floor) - Net domestic assets of the BRB (ceiling) - Net credit from the banking system to the government (ceiling) - Central government’s external payments arrears (ceiling) - Outstanding stock of short-term external debt (maturity of less than one year) of the central government and the BRB (ceiling) - New nonconcessional medium- and long-term external debt contracted or guaranteed by the government or the BRB (ceiling) - Indicative targets: - Primary budget balance, excluding externally financed projects (floor) - Government’s wage bill (ceiling) ### Key end-June 2004 stock positions and breakdowns (preserved exactly) - Net foreign assets of the BRB: 12.4 (in billions of Fbu) = US$11.2 (in millions of U.S. dollars) - Foreign assets: 84.3 (Fbu) = 76.4 (US$) - Deposits with correspondents (excluding IMF): 81.8 (Fbu) = 74.2 (US$) - SDR holdings: 0.2 (Fbu) = 0.2 (US$) - Reserve position with the IMF: 0.6 (Fbu) = 0.5 (US$) - Gold holdings: 0.4 (Fbu) = 0.4 (US$) - Cash on hand: 1.3 (Fbu) = 1.2 (US$) - Foreign liabilities: 71.9 (Fbu) = 65.2 (US$) - Liabilities vis-à-vis correspondents (excluding IMF): 27.2 (Fbu) = 24.7 (US$) - Counterpart of the use of IMF resources: 42.7 (Fbu) = 38.7 (US$) - Other liabilities: 2.0 (Fbu) = 1.8 (US$) - Gross official reserves of the BRB at end-June 2004: US$58.5 million. - Net domestic assets of the BRB at end-June 2004: 58.8 (F Bu), broken down as: - Reserve money: 71.2 - Currency in circulation: 56.4 - Reserves of commercial banks: 13.5 - Other nonbank deposits: 1.3 - Minus: net foreign assets of the BRB: 12.4 - Net credit from the banking system to the government at end-June 2004: 71.7 (F Bu), broken down as: - Central government total: 80.8 - Loans, advances, and other credits: 128.3 - BRB: 122.4 - Commercial banks: 5.9 - Deposits: 47.6 - BRB deposits: 36.7 - Commercial banks deposits: 10.8 - Other government (net): -9.1 ### External payments arrears (definitions and end-June 2004 breakdown) - Program definition: end-of-period amount of external debt service due and not paid, including contractual and late interest, for which a clearance agreement is not in place or for which arrears are not reschedulable. - Technical arrears (end-June 2004) by creditor (selected entries preserved exactly): - African Development Bank: 8.6 - African Development Fund: 16.2 - International Fund for Agricultural Development: 0.2 - European Union: 17.4 - European Investment Bank: 0.3 - OPEC Fund: 3.4 - Bilateral total (technical arrears): 31.7 - Libyan Bank: 0.1 - Kreditanstalt für Wiedesaufbau AMSAR: 0.6 ### Debt and borrowing constraints - Ceiling on new nonconcessional external debt contracted or guaranteed by the government and the BRB: precludes the contracting of any such debt. - Stock of short-term external debt of the central government: to remain at zero under the program; normal import credits excluded. - Concessionality rule: a debt is concessional if, on the date of its initial disbursement, the ratio between the present value of the debt computed on the basis of reference interest rates and the face value of the debt is less than 65 percent (equivalent to a grant element of at least 35 percent). ### Fiscal and privatization projections and definitions - Projected transfer of dividends from the BRB to the central government: March 2005, amount F Bu 6.6 billion. Any excess treated as central bank financing and counted against program ceilings on banking-sector credit. - Receipts from privatization during 2005 projected to reach F Bu 5.0 billion (equivalent to 0.6 percent of GDP). Any privatization receipts over and above the projected amount will be used to reduce domestic debt. - Primary budget balance definition and first-half-2004 outcome: - Defined as: total government revenue, excluding grants, minus noninterest current government expenditure and domestically financed capital expenditure (including through the use of counterpart funds). - Primary budget balance for the first six months of 2004: -9.5 (F Bu), broken down as: - Total revenue: 69.3 - Minus: Noninterest current expenditure: 66.6 - Domestically financed capital expenditure: 12.6 - Net lending: -0.4 - Government’s wage bill definition and first-half-2004 outcome: - Defined as total labor remunerations on a commitments basis for civil servants, contractual employees, and military personnel of the central government, including all allowances and bonuses. - Government wage bill for the first six months of 2004: 30.2 (F Bu), broken down as: - Civilian personnel: 18.1 - Military personnel: 12.1 ### External financial assistance adjustor and assumptions - Symmetrical adjustor provided for shortfalls or excesses in external nonproject financial assistance; applied to quantitative targets on: - Net foreign assets of the BRB - Net domestic assets of the BRB - Net bank credit to the government - External financial assistance defined to include: - (i) nonproject loans and grants to the budget (including payments made through the multi-donor trust fund managed by the World Bank for current debt service to multilaterals); - (ii) debt relief on current maturities; - Minus (iii) any cash payments for external arrears clearance operations. - Adjustment rule: ceiling or floor targets will be adjusted to accommodate 100 percent of any deviation from the projected external financial assistance. In case of a financing excess (shortfall), the floor on the stock of net foreign assets of the central bank will be adjusted upward (downward), and the ceilings on the stock of net domestic assets of the central bank and on the stock of net credit from the banking system to the government will be adjusted downward (upward). External financial assistance will be converted in terms of Burundi francs on a quarterly basis, using the average official exchange rate. - External nonproject financial assistance (cumulative from beginning of calendar year; in millions of U.S. dollars) — selected reported amounts preserved exactly: - 2004 actuals (June, Sep., Dec.): 17.3, 49.1, 93.2 - 2005 program/targets (March, June, Sep., Dec. prog.): 13.1, 42.1, 61.1, 114.4 - Of which: Debt relief (current maturities): 3.0, 3.8, 6.0, 1.1, 3.8, 6.2, 8.9 (series entries aligned with table layout) *Source: Technical Memorandum of Understanding (December 20, 2004) and related MEFP tables included in the source content.* ### 19. External financial assistance will be converted in terms of Burundi francs on a quarterly ### _cr0555 - 19. External financial assistance will be converted in terms of Burundi francs on a quarterly ### External financial assistance conversion - External financial assistance will be converted in terms of Burundi francs on a quarterly basis, using the average official exchange rate. ### Domestic arrears adjustor - The ceilings on the net bank credit to government will be adjusted downward for any accumulation of domestic arrears, as measured by the accumulation of nonexecuted payment orders older than 30 days. ### Key Program Assumptions (from WEO projections of November 2004) - Average export prices: - Coffee (cents per pound): 76.84 68.84 74.00 73.50 72.67 72.87 - Tea (dollars per kg.): 190.64 194.14 195.36 195.02 196.65 198.25 - Petroleum (US$ per barrel): 33.88 43.17 45.00 0.44 4.25 43.50 42.75 - End of period exchange rates: - Dollar per SDR exchange rate: 1.48 1.49 1.50 1.50 1.50 1.50 - Dollar per euro exchange rate: 1.23 1.28 1.30 1.30 1.30 1.30 ### Provision of information to IMF staff — reporting requirements and frequency - Monthly reporting: - The Burundi government will prepare a monthly report within five weeks from the end of each month to be sent to IMF staff. - The monitoring committee (technical bureau of the Secrétariat Permanent de Suivi des Réformes Économiques et Sociales—SP/REFES) will forward required data to the African Department of the IMF by facsimile or electronic mail. - Weekly data to be provided: - A monitoring table (tableau de bord) containing the most recent weekly and monthly data on the main financial indicators; - A table on the foreign exchange cash flow; - The balance sheet of the BRB (situation hebdomadaire). - Monthly data to be provided: - The monetary survey, including breakdown of the central bank and of commercial banks; - The financial position of the government vis-à-vis the banking system; - A detailed breakdown of government revenue; - A detailed breakdown of government expenditure on a commitment basis; - A detailed breakdown of the government wage bill on a commitment basis; - Detailed information on government social spending, in particular on the health and education sectors; - A detailed breakdown of the servicing of domestic and external public debt, including amounts due and paid, in interest and principal, as well as the detail by creditor and any accumulation of arrears on domestic or external debt; - A detailed breakdown of the stock of domestic payments arrears and cumulative flows from January 1, 2004; the accumulation of new arrears is defined as the difference between commitments and actual payments (on a cash basis, as reported in the cash statement summary—Reddition des comptes); - The amount of new debts contracted or guaranteed by the government, including detailed information on its conditions (such as currency denomination, interest rate, grace period, maturity); - Actual disbursements of nonproject financial assistance, including new loans and debt relief granted by Burundi’s external creditors; - The weekly balance sheet of the BRB and the outcome of weekly foreign exchange auctions, including the allocated amounts and exchange rate levels, as well as the level of buying and selling exchange rates used by commercial banks and those observed on the parallel market; - Indicators and other statistical data to allow an evaluation of macroeconomic developments, such as the consumer price index, indices of manufacturing output, merchandise imports and exports (volume and value), with a breakdown by main categories; - An update on the implementation of structural measures planned under the program, as summarized in Table 3 of the MEFP. - Additional provision: - The SP/REFES will also provide the African Department of the IMF with any information that is deemed necessary to ensure an effective monitoring of the program. ### Burundi: Relations with the Fund (as of November 30, 2004) — key data - I. Membership Status: - Joined 09/28/63; Article XIV - II. General Resources Account: - Quota: 77.00 SDR million (100.00 percent of quota) - Fund holdings of currency: 76.64 SDR million (99.53 percent) - Reserve position in Fund: 0.36 SDR million (0.47 percent) - III. SDR Department: - Net cumulative allocation: 13.70 SDR million (100.00 percent) - Holdings: 0.10 SDR million (0.69 percent) - IV. Outstanding Purchases and Loans: - PRGF Arrangements: 26.40 SDR million (34.29 percent of quota) - V. Latest Financial Arrangements: - PRGF approved 1/23/04, expiration 1/22/07, amount approved 69.30 SDR million, amount drawn 26.40 SDR million - PRGF approved 11/13/91, expiration 11/12/94, amount approved 42.70 SDR million, amount drawn 17.21 SDR million - Structural Adjustment Facility (SAF) approved 8/8/86, expiration 8/7/89, amount approved 29.89 SDR million, amount drawn 29.89 SDR million - VI. Projected Payments to the Fund (SDR million; based on existing use of resources and present holdings of SDRs): - Forthcoming 2004 2005 2006 2007 — Principal: 0.00 0.00 0.00 0.00 - Charges/interest: 0.07 0.41 0.41 0.41 - Total: 0.07 0.41 0.41 0.41 ### Safeguards assessments and exchange arrangements - Safeguards assessments: - The Banque de la République du Burundi (BRB) is subject to a full safeguards assessment with respect to the PRGF arrangement approved on January 23, 2004. - A two-step approach was adopted due to constrained administrative and technical capacity: - Step 1 (completed June 22, 2004): targeted assessment of BRB’s external audit and financial reporting mechanisms and the system of internal controls. - Step 2: follow-up assessment to evaluate BRB’s legal framework and internal audit mechanism and review effectiveness of measures implemented from step 1. - Exchange arrangements: - Burundi maintains a managed float exchange regime. - Reforms and measures taken: - July 2000: introduced weekly foreign exchange auctions. - 2002: eliminated positive list of imports eligible for BRB foreign exchange; implemented a single, competitive settlement exchange rate for each weekly auction; reduced full surrender requirement for coffee, tea, and cotton exports to 70 percent. - 2003: lifted all remaining exchange restrictions on current transactions; delegated authority to commercial banks to approve standard transactions. - Early 2004: surrender requirement lowered to 50 percent; central bank admitted foreign exchange bureaus to weekly auctions. - Burundi has accumulated sizeable external payments arrears to various bilateral and multilateral creditors. - Burundi avails itself of the transitional arrangements of Article XIV. ### Article IV consultation and policy assessment - Burundi is on the 24-month cycle. - 2003 Article IV consultation: - Discussions conducted in Addis Ababa and Bujumbura October 14-29, 2003. - Staff report discussed by Executive Board on January 23, 2004 alongside consideration of PRGF three-year arrangement request. - Executive Directors noted progress since the Arusha Agreement in 2000 and commended authorities for strong implementation in 2003. - Challenges noted: reducing heavy external debt burden, absorbing refugees and internally displaced persons, demobilizing combatants. - Emphasis on critical importance of coffee sector reform. - Directors considered that, with continued satisfactory policy implementation, Burundi’s decision point under the Initiative for Heavily Indebted Poor Countries could be reached by the time of the second review under the PRGF. ### Technical assistance (selected missions and timing) - 2004 (Nov.): STA multisector mission - 2004 (Nov.): MFD multitopic mission - 2003 (Oct.): Resident MFD consultant on monetary policy management (jointly with Rwanda) - 2003 (April): Two (of four) visits by MFD expert on monetary policy management - 2003 (Feb.): Visit by FAD expert on tax administration - 2002 (Nov.): MFD mission on liquidity management and foreign exchange operations - 2002: Participation of MFD experts on Article IV/UFR mission - 2001–02: Three FAD visits by a tax administration expert, in preparation for setting up large taxpayers’ unit - 2000: STA mission on monetary and banking statistics - 2000: FAD mission on tax and customs administration - 1998: MFD mission on foreign exchange auctions ### Relations with the World Bank Group (as of end-November 2004) — highlights - Partnership and strategy: - Interim Poverty Reduction Strategy Paper (I-PRSP) completed and endorsed January 2004. - Fund supports I-PRSP through PRGF and leads on fiscal imbalances; Bank leads on post-conflict rehabilitation, education, health, privatization, employment creation environment, and infrastructure. - Collaboration to be intensified in 2005 for full-PRSP (May 2005) and enhanced HIPC Initiative decision point expected by mid-2005. - World Bank Transitional Support Strategy (TSS) 2002-2004 and new TSS for 2004-06 (Board consideration in March 2005) themes: - (a) security, social stability and service delivery; - (b) debt relief, economic growth and diversification; - (c) governance and capacity building for public institutions. - Economic Rehabilitation Credit (ERC): - Amount: US$54 million; US$20 million disbursed during 2002 and US$20 million in April 2003; third tranche to be released by end-December 2004. - ERC supports economic recovery through BOP support and counterpart funds from ERC foreign exchange auctions to finance development programs in the national budget. - Active IDA portfolio (as of end-November 2004) — Net commitments and undisbursed amounts (In millions of U.S. dollars): - Health & Population II (1995, closing 12/31/04): Net Commit-ment 30.00; Of which Grants 9.50; Undisbursed 10.70; Disbursed in Fiscal Year 3.90 - BURSAP II (2000, closing 12/31/05): Net Commit-ment 24.20; Of which Grants 14.00; Undisbursed 11.50; Disbursed in Fiscal Year 6.60 - Regional Trade Facilitation (2001, closing 06/30/11): Net Commit-ment 7.50; Of which Grants 0.00; Undisbursed 1.70; Disbursed in Fiscal Year 1.80 - Public Works and Employment Creation (2001, closing 12/31/06): Net Commit-ment 40.00; Of which Grants 0.00; Undisbursed 18.70; Disbursed in Fiscal Year 6.55 - HIV/AIDS and Orphans (2002, closing 12/31/06): Net Commit-ment 36.00; Of which Grants 0.00; Undisbursed 27.70; Disbursed in Fiscal Year 1.90 - ERC (2003, closing 12/31/04): Net Commit-ment 54.00; Of which Grants 0.00; Undisbursed 14.77; Disbursed in Fiscal Year 40.00 - Economic Management Support (2004, closing 07/31/09): Net Commit-ment 26.00; Of which Grants 0.00; Undisbursed 25.69; Disbursed in Fiscal Year 0.85 - Road Sector Development (2004, closing 12/31/09): Net Commit-ment 51.40; Of which Grants 0.00; Undisbursed 51.40; Disbursed in Fiscal Year 0.00 - Demobilization and Reintegration (2004, closing 12/31/08): Net Commit-ment 33.00; Of which Grants 33.00; Undisbursed 33.00; Disbursed in Fiscal Year 0.00 - Agriculture Rehabilitation and Sustainable Land Management (2005, closing 10/31/10): Net Commit-ment 35.00; Of which Grants 35.00; Undisbursed 35.00; Disbursed in Fiscal Year 0.00 - Nonlending activities and advisory services include public expenditure management, PRSP support, study on sources of growth, post-conflict social sector assessment, economic study/poverty assessment, and a Country Procurement Assessment (CPAR). - IFC and MIGA: - IFC holds a US$1 million equity portion in Verreries du Burundi (not sellable). - MIGA portfolio includes two active applications for a total investment of US$6.5 million. ### Relations with the African Development Bank Group (as of October 30, 2004) — highlights - Membership since 1964; operations interrupted by civil strife in 1993. - Arrears and clearance: - Over the last decade, Burundi accumulated arrears to the AfDB totaling about US$31 million at end 2003. - Payments on current debt service due were resumed during 2003. - In the first quarter of 2004 the government paid 20 percent of the outstanding total. - AfDB Boards approved policy guidelines (July 19, 2004) and created PCCF (initially funded with about SDR 100 million). - AfDB Boards endorsed an arrears clearance proposal for Burundi on October 27, 2004: - Residual arrears to be cleared in equal parts by the PCCF (SDR 8 million) and donors SDR 8 million (the EU; euro 7.6 million, and France euro 2 million). - AfDB operations and approvals in 2004: - Grant of SDR 2.13 million to finance training of civil servants and procurement of equipment for institutions in charge of economic management and civil society. - Structural adjustment credit totaling SDR 6.72 million, in two tranches, with further grant of SDR 1.5 million for institutional support sent to Board for approval in late 2004. - A multi-sector project totaling SDR 9.8 million under preparation for approval in late 2004. - Table: AfDB Operations in Burundi (Outstanding loans / Past-due obligations, in millions of SDRs): - African Development Bank: 2.9 / 5.5 - African Development Fund: 145.2 / 10.3 - Nigerian Trust Fund: 0.4 / 0.4 - Total: 148.5 / 16.0 *Source: IMF country report content provided in the content unit.* ### 1. Population below US$1 a day (percent)...... ### 1. Population below US$1 a day (percent)...... ### Millennium Development Goals indicators (selected) - 1. Population below US$1 a day (percent)......1/ 58.4...... - 2. Poverty gap ratio at US$ 1 a day (percent)............... - 3. Share of income or consumption held by poorest 20 percent (percent)2/ 7.9 ... 1/ 5.1...... - Target 2: Halve, between 1990 and 2015, the proportion of people suffering hunger - 4. Prevalence of child malnutrition (percent of children under 5)......45.1...... - 5. Population below minimum level of dietary energy consumption (percent)49.0 64.0 70.0...24.5 Goal 2. Achieve universal primary education — Target 3: Ensure that, by 2015, children will be able to complete a full course of primary schooling - 6. Net primary enrollment ratio (percent of relevant age group)52.0 29.5 53.4...100.0 - 7. Percentage of cohort reaching grade 561.8...64.0...100.0 - 8. Youth literacy rate (percent age 15-24)51.6 57.9 65.1 66.1 100.0 Goal 3. Promote gender equality and empower women — Target 4: Eliminate gender disparity in primary and secondary education preferably by 2005 and to all levels of education by 2015 - 9. Ratio of girls to boys in primary and secondary education (percent)82.0...79.4...... - 10. Ratio of young literate females to males (percent ages 15-24)76.7 86.0 95.6 96.9... - 11. Share of women employed in the nonagricultural sector (percent)............... - 12. Proportion of seats held by women in the national parliament (percent)...11.3 14.4 19.6... Goal 4. Reduce child mortality — Target 5: reduce by two-thirds between 1990 and 2015, the under-five mortality rate - 13. Under-five mortality rate (per 1,000)184.0 194.0 204.0 208.0 61.3 - 14. Infant mortality rate (per 1,000 live births)111.0 116.0 121.0 123.0... - 15. Immunization against measles (percent of children under 12-months)74.0 80.0 75.0 75.0... Goal 5. Improve maternal health — Target 6: Reduce by three-quarters, between 1990 and 2015, the maternal mortality ratio. - 16. Maternal mortality ratio (modeled estimate, per 100,000 live births)......1,000.0...... - 17. Proportion of births attended by skilled health personnel (% of total)......25.2...... Goal 6. Combat HIV/AIDS, malaria and other diseases — Target 7: Halt by 2015, and begin to reverse, the spread of HIV/AIDS - 18. HIV prevalence among females (percent ages 15-24)......11.0...... - 19. Contraceptive prevalence rate (percent of women ages 15-49)............... - 20. Number of children orphaned by HIV/AIDS......240,000...... Target 8: Halt by 2015, and begin to reverse, the incidence of malaria and other major diseases - 21. Prevalence of death associated with malaria............... - 22. Share of population in malaria risk areas using effective prevention and treatment............... - 23. Incidence of tuberculosis (per 100,000 people)......406.2...... - 24. Tuberculosis cases detected under DOTS (percent)...16.0 30.0...... Goal 7. Ensure environmental sustainability — Target 9: Integrate the principles of sustainable development into policies and programs. Reverse the loss of environmental resources - 25. Forest area (percent of total land area)9.4...3.7...... - 26. Nationally protected areas (percent of total land area)...5.5 5.7 5.7... - 27. GDP per unit of energy use (PPP $ per kg oil equivalent)............... - 28. CO2 emissions (metric tons per capita)0.0 0.0 0.0...... - 29. Proportion of population using solid fuels Target 10: Halve by 2015 proportion of people without access to safe drinking water - 30. Access to improved water source (percent of population)69.0...78.0...84.5 Target 11: Achieve by 2020 significant improvement for at least 100 million slum dwellers worldwide - 31. Access to improved sanitation (percent of population)87.0...88.0...... - 32. Access to secure tenure (percent of population)............... Goal 8. Develop a Global Partnership for Development — Target 16: Develop and implement strategies for productive work for youth. - 45. Unemployment rate of population ages 15-24 (total)............... - Female............... - Male............... Target 17: Provide access to affordable essential drugs - 46. Proportion of population with access to affordable essential drugs............... Target 18: Make available new technologies, especially information and communications - 47. Fixed line and mobile telephones (per 1,000 people)1.5 2.9 7.4 10.6... - 48. Personal computers (per 1,000 people)......0.7 0.7... - Sources: World Bank; and Fund staff estimates. - 1/ Survey data for 1998 - 2/ Survey data for 1992 - 3/ Targets 12-15 and indicators 33-44 are excluded because they can not be measured on a country specific basis. ### Key MDG data points (verbatim numeric values) - Population below US$1 a day: 58.4 - Share of income held by poorest 20 percent: 7.9 and 5.1 (survey years noted) - Child malnutrition (under 5): 45.1 - Access to improved water source: 69.0, 78.0, 84.5 - Fixed line and mobile telephones (per 1,000): 1.5, 2.9, 7.4, 10.6 --- ### IMF Staff Representative — prior actions, structural measures, and macroeconomic developments - Prior actions implemented: - The 2005 budget was approved by parliament and signed by the President on December 31, 2004. - The new budget and accounting charter was approved on December 31, 2004 and entered into effect with the 2005 budget. - The law on the status of magistrates of the audit court was sent to parliament in mid-December 2004. Preparations to initiate the audit of the 2004 government accounts by April 2005 have begun. - Structural measures (selected): - Presidential decree liberalizing private investment at all levels of the coffee supply chain signed into effect on January 14, 2005. - On January 10, 2005, the remaining export surrender requirement (50 percent of exports of coffee, tea, and cotton) was abolished, ahead of the program target (structural performance criterion for end-March 2005). - Macroeconomic developments (selected): - CPI inflation in December 2004 was above target at about 10½ percent (year-on-year). - Exchange rate depreciated some 3½ percent against the U.S. dollar since mid-December 2004 and now appears to have stabilized. - Government revenue performed very strongly in the fourth quarter and may exceed program expectations for 2004 by close to 1 percent of GDP. --- ### Press Release No. 05/9 — IMF completes first review and approves disbursement - The Executive Board completed the first review under Burundi's PRGF arrangement (SDR 69.3 million (about US$105.6 million) originally approved). - Approved disbursement: SDR 7.15 million (about US$10.9 million). - Total disbursements under the PRGF arrangement after this disbursement: SDR 33.55 million (about US$51.1 million). - Arrangement approved on January 23, 2004 to support the program through January 2007. - Waivers granted for nonobservance of performance criteria pertaining to: - External payments arrears, - Establishment of a new auditing court, - Adoption of weekly liquidation auctions. - Quoted summary by Agustín Carstens (Deputy Managing Director and Acting Chair): - Security situation improved; demobilization process has begun. - Macroeconomic developments in 2004 broadly on track, with somewhat higher-than-expected real growth. - Program performance mixed due to fiscal slippages and delays in structural reforms. - Fiscal slippages reflected surge in petroleum prices, higher spending associated with the peace process, and need to cover higher coffee sector losses from budgetary resources. - 2005 budget envisages a reduction in the primary fiscal deficit and a further increase in social spending; savings from reduced military spending to be redirected to urgent social needs. - Based on preliminary debt sustainability analysis, Burundi’s external debt burden at end-2003 is unsustainable after traditional debt relief; likewise expected unsustainable at end-2004. - Burundi likely to qualify for assistance under the Enhanced HIPC Initiative and could reach its HIPC decision point by mid-2005, provided the macroeconomic program remains on track. - PRGF loan terms noted: - Annual interest rate of 0.5 percent, - Repayable over 10 years with a 5 ½-year grace period on principal payments. --- ### Statement by Burundi authorities — political, security, and economic progress (selected) - Political/security progress (selected): - Cantonment of 22,000 former rebel combatants completed by end-October 2004. - War Victims Rehabilitation Commission implemented actions for resettlement and reintegration of more than 300,000 refugees and internally displaced persons. - National Electoral Commission preparing for referendum and national elections to be held by May 2005. - Recent economic developments and program performance: - Economic growth expected to be above the program target of 5 percent in 2004. - Inflation: 10.7 percent in 2003; declined to an average of 7 percent during the first eleven months of 2004 and estimated to remain at this level for the whole of 2004. - Exchange rate spread between official and parallel markets narrowed to 2-3 percent at the end of 2004, from 15 percent in 2003. - Primary fiscal deficit higher than programmed in the first half of the year and at end-September 2004 due to shortfall in revenue from taxes on international trade and higher public expenditure related to the peace process. - Authorities implemented measures to tighten budget control and improve revenue collection, including: - Strengthening the larger-taxpayers unit; - Extending the transaction tax to all domestic transactions; - Introduction of the Sydonia customs management system; - Extension of the import service charge to non-diplomatic imports. - Hiring provided for: 2,300 new teachers and 500 medical personnel. - Relations with external creditors: negotiated first Paris Club rescheduling in March 2004 and completed clearance of remaining multilateral arrears. - Monetary policy: BRB maintained tight stance; introduced marginal refinancing window at a penalty rate; new reserve requirement rules; action plan for weekly liquidity auctions; minimum capital more than tripled for banks, resulting in closure of two insolvent financial institutions. - Exchange system liberalization measures included admission of foreign exchange bureaus to BRB weekly auctions, reduction in foreign exchange surrender requirements, abolition of mandatory nature of BRB’s auction reference price for commercial transactions, and change from weekly auction to daily average market rate for determination of the official exchange rate. - Structural reform implementation has been slower than targeted in some areas due to complex political environment and weak administrative capacity; nonetheless, steps taken include adoption of a new budget and accounting charter in late 2004, appointment of external audit firm for BRB (work begun November 2004), promulgation of the basic law on the Auditing Court, appointment of magistrates in June 2004, internal regulations in October 2004, and submission of the law defining magistrate’s legal status to Parliament in late 2004. An action plan was approved in October 2004 to enable the Court to start auditing the 2004 budget accounts by April. *Source: IMF staff report, press release, and statements as contained in the provided content unit.* ### 2005. The reform strategy for the coffee sector was also approved in October 2004 and its ### _cr0555 - 2005. The reform strategy for the coffee sector was also approved in October 2004 and its ### Medium-term outlook and the program for 2005 - Authorities face challenges: consolidate macroeconomic stability, address post-conflict needs, diversify sources of growth, reduce widespread deep poverty, and make progress towards the Millennium Development Goals (MDGs). - Policy commitments include: increase agricultural productivity, promote rural development opportunities, diversify exports, improve efficiency in social service delivery, extend coverage of essential public infrastructure, speed up structural reform implementation, and develop the private sector. - 2005 program objectives: - sustain economic growth at 5 percent - reduce inflation to 5.5 percent - reduce the primary deficit by 1 percent of GDP from its level of 2004 - strengthen international reserves ### Fiscal policy issues - 2005 budget aims at maintaining macroeconomic stability while securing spending priorities. - Key fiscal projections and targets: - ratio of revenue to GDP expected to remain at 19 percent (as in 2004) - social sector spending to increase to 7 percent of GDP - military spending to decline by about 0.5 percent of GDP - overall primary spending reduced by 1 percent of GDP - Tax and revenue measures: - lowering and simplification of import tariffs to reduce smuggling, simplify tax administration and boost trade - strengthen tax and customs administration to contain customs duty exemptions and reduce tax evasion - extend income tax payments to Burundians employed by international agencies - implement preparatory measures required for the introduction of a VAT system as soon as possible - Public finance management: - improve management with donor support including through the Economic Management Support Credit (PAGE), the European Union, the African Development Bank and bilateral donors - enhance civil service payroll management and improve expenditure control by implementing the newly adopted public accounting and budgetary code ### Monetary and exchange rate policy issues - Monetary policy in 2005 will continue to support the low inflation objective. - Banque de la République du Burundi (BRB) actions: - speed up implementation of preparatory work required to introduce weekly liquidity auctions and move to a more effective market-determined liquidity management system - undertake beginning January 2005 actions to enhance liquidity forecasting capabilities - standardize treasury bills and make them tradable to support a more active monetary policy - Financial sector and supervision: - BRB strengthened minimum capital required for banks during 2004; financial sector remains sound overall - continue to enhance bank supervision, tighten existing prudential requirements and gradually improve towards international standards - improve governance and transparency of BRB operations; multi-year contract signed for external audit last year and the appointed firm will audit the 2004 accounts - pursue exchange liberalization policy to consolidate progress made in 2004 and establish a more efficient market for foreign exchange ### Structural reforms - Authorities committed to step up implementation of structural reform agenda to improve private sector environment and governance. - Coffee sector reform strategy (action plan being implemented with World Bank and European Union support): - reform of the coffee auction system by OCIBU to include representatives of all stakeholders - decree liberalizing investment, marketing and export in the sector adopted by Cabinet - reform strategy includes liberalization of investment, restructuring of the OCIBU into a regulatory and support agency, and privatization of the processing infrastructure - Other sector reforms: - tea and sugar sectors will also be liberalized - Governance measures: - Auditing Court will carry out preparatory work required for auditing the 2004 public accounts ### Enhanced Initiative for Heavily Indebted Poor Countries (HIPC) — Preliminary Document - Burundi has maintained timely debt service to the Fund and the World Bank, but the preliminary Debt Sustainability Analysis prepared by IMF and IDA staffs shows Burundi’s external debt service burden remains unsustainably high. - Authorities implementing the I-PRSP prepared through a consultative process; priorities include: peace and democratic governance, reintegration of conflict victims and disadvantaged groups, private sector and human capital development. - Timeline and requests: - the full PRSP is being finalized for adoption in May this year - authorities request collaborative efforts with development partners to enable Burundi to reach the Decision Point for debt reduction not later than mid-2005, following completion of the second program review - authorities state they have met all eligibility criteria for the enhanced HIPC initiative and are committed to remain on track to reach the HIPC completion point within the required minimum period ### Conclusion - Authorities have made considerable progress in accelerating peace and national reconciliation implementation and remain committed to political transition reforms to establish conditions for economic growth and poverty reduction. - Remaining risks and concerns: - more than half of the population live in extreme poverty; MDGs will not be achieved if economic growth is not accelerated - failure to proceed expeditiously with military demobilisation could destabilize fiscal and macroeconomic situation - Program implementation status and requests: - most performance criteria were observed, the two structural benchmarks were fully met and all prior actions for completion of the first review of the PRGF arrangement have been completed on time - delays in observance of performance criteria on the establishment of the Audit Court, introduction of liquidity auctions, and deviation from the end-June 2004 ceiling on external arrears have been met with important corrective steps; authorities request the Board to grant waivers - repeat request that efforts be made to reach the HIPC Decision Point as soon as possible *Source: _cr0555 - 2005.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2005/_cr0555.pdf_