## _cr11269

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---

### Key issues and context
- Since the Arusha Accord in 2000 Burundi’s economy has begun to recover but remains constrained by weak institutions and governance, small and inefficient markets, poor infrastructure, and scarce capital, skills, and technology.
- Growth has rebounded to pre-conflict levels (still below regional peers) and is vulnerable to exogenous shocks.
- Fund-supported programs catalyzed a massive surge in aid that was absorbed and spent, stimulating domestic demand but leaving the public sector vulnerable to fickle foreign assistance.
- Priorities highlighted:
  - greater exchange rate flexibility to better absorb terms-of-trade shocks,
  - the need to save part of the growth dividends to build fiscal buffers and restore debt sustainability.
- A successor ECF was expected to be requested before the end of 2011 to preserve donor confidence, boost policy credibility and predictability, and build capacities through technical assistance.

### Purpose and scope of the report
- Reviews the Fund’s longer-term engagement in Burundi since 2004.
- Assesses two Fund-supported programs:
  - January 2004 Poverty Reduction and Growth Facility (PRGF, expired January 2008), and
  - July 2008 PRGF (later renamed Extended Credit Facility, ECF, expiring in August 2011).
- Focus areas: design of effective conditionality, coordination with donors, and the role of technical assistance (TA).

### Macroeconomic performance under PRGF/ECF (2004–11)
- General assessment:
  - Significant progress toward greater macroeconomic stability; structural reforms have been slow.
  - Major steps taken to improve monetary and fiscal policy conduct and to gain and retain donors’ confidence.
- Growth and volatility:
  - GDP per capita has bottomed out, trend growth slowly returning toward pre-conflict levels; GDP volatility decreased noticeably since 2005.
  - Key drivers: agriculture (especially coffee), donor-related activities including investment projects, and government spending.
  - Poor coffee harvests in 2005 and 2007 caused growth shortfalls; strong agricultural output and donor-financed investment helped buffer the 2009 food and energy price spike and global crisis.
- Inflation:
  - Trend inflation declined but remained relatively high and volatile due mainly to food and energy prices.
  - Program inflation targets: 4–5 percent under the first PRGF and less than 10 percent under the second program.
- Exchange rate, reserves, and external absorption:
  - Official reserves increased over the period to reach 5 months of imports in 2010 (including the 2010 SDR allocation).
  - Real effective exchange rate exhibited a mild appreciating trend; nominal exchange rate moved sideways since mid-2008 due to de facto shadowing of the US dollar.
  - The combination of larger current account deficits and some real appreciation reflected absorption of aid inflows and reallocation toward non-tradable sectors.
- Debt sustainability:
  - HIPC and MDRI reduced the debt burden considerably.
  - Debt sustainability indicators suggested the risk of debt distress remained elevated, with the present value of total external debt still well above the threshold of 100 percent of exports of goods and services.

### Findings and policy implications (high-level)
- Fund engagement was essential and instrumental in:
  - anchoring stability-oriented macroeconomic policies;
  - catalyzing a rapid increase in external aid flows; and
  - fostering steady—albeit slow—progress on structural reforms and capacity building via TA.
- Case for continued Fund engagement:
  - catalyze and stabilize external support given Burundi’s low income base;
  - lend credibility to authorities’ economic and financial programs;
  - continue TA and policy advice to strengthen institutions and capacities.
- Macroeconomic priorities moving forward:
  - enhance exchange rate flexibility;
  - save part of growth dividends to build fiscal buffers and restore debt sustainability;
  - prioritize and sequence reforms cognizant of limited administrative capacity and political constraints;
  - sustain coordination with donors to mitigate volatility in aid flows.

### Public finances: persistent stress and fiscal challenges of peace
- Fiscal stance and aid absorption:
  - Substantial overall deficit (including grants) persisted, averaging 4.7 percent of GDP over the period.
  - The aid surge was fully spent; lack of consolidation and stagnant revenues indicate the fiscal expansion financed by grants was not saved.
- Expenditure composition and fiscal vulnerabilities:
  - Peace-building and priority social/infrastructure needs increased spending (absorbing former rebels into security forces, demobilization, capital projects, health and education).
  - Civil service size rose by more than 50 percent between 2005 and 2010.
  - Spending on wages and compensations increased by 80 percent in real terms.
  - Financing inflexible expenditure with volatile aid flows made state operations highly vulnerable to aid fluctuations.
- Revenue mobilization and tax administration:
  - Creation in 2009 of the Office Burundais des Recettes (OBR) to boost compliance and transparency; VAT replaced an inefficient transaction tax.
  - Revenues remained stagnant with serial shortfalls versus program forecasts.
  - First indication of a turnaround in revenue collection emerged in 2010 with a significant windfall attributable to increased compliance under OBR’s first full year and reduced tax arrears; deemed premature to conclude a structural break.
- Public financial management and governance:
  - Reforms supported by IMF and World Bank TA achieved clearance of large domestic spending arrears, creation of a court of audit, strengthened workforce management, adoption of a modern budget law, and introduction of a single treasury account.
- Monetary management and financial supervision:
  - Legal backing for central bank autonomy strengthened; monetary framework modernized (abolition of credit ceilings, lower reserve requirements, weekly liquidity auctions, standardized treasury bills).
  - Remaining weaknesses in liquidity management and interference with price stability noted.
  - Exchange-rate liberalization measures narrowed spreads between official and parallel market exchange rates and fostered monetization of transactions.

### HIPC, MDRI, and debt space
- HIPC process:
  - Decision point reached in August 2005; completion point reached in January 2009.
  - HIPC debt relief estimated at US$ 832.6 million in NPV terms at the decision point (about 92 percent of the initial level).
  - Additional relief under MDRI at completion point: about US$ 65 million in NPV.
- Impact:
  - Debt relief created ample space for priority spending; increases in priority spending occurred in 2009–10.
  - DSA indicated Burundi remained at high risk of debt distress: present value of debt-to-exports ratio expected to remain well above the 100 percent threshold throughout the projection period due to a low export base.
  - ECF program performance criteria banned accumulation of external payment arrears, short-term external debt and non-concessional loans (grant element lower than 50 percent).

### Box 2 — Coffee sector reform: structure, effects, and sequencing
- Overview and structure:
  - Coffee cherries are grown by about 800,000 small producers.
  - Five state- and mixed-ownership SOGESTALS manage washing stations; SODECO is the state-owned dry mill; OCIBU is the state marketing monopoly selling to exporters.
- Adverse effects of monopoly structure:
  - Depresses producer prices, discourages private investment, and undermines incentives for quality.
  - Share of high quality coffee in total output decreased from 70 percent to about 10 percent during the 1990s.
- Reform attempts and sequencing:
  - By the HIPC completion point in January 2009, major stakeholders endorsed restructuring.
  - Tendering for sale of state holdings in a majority of washing stations was substantially implemented; privatization of 13 washing stations in 2009 (less than 10 percent of the total) was difficult and signaled investor reluctance.
- Preconditions and policy implications:
  - Successful reform requires improved investment climate: strengthened governance; streamlined tax and regulatory systems; better infrastructure; an effective financial sector.
  - Priorities: strengthen governance and transparency, ensure consistent policy commitments, proceed with infrastructure, tax/regulatory, and financial sector reforms, sequence reforms with attention to social and political sensitivities.

### Structural constraints, business climate, and social indicators
- Structural and financial sector constraints:
  - Severe credit rationing for SMEs due to inadequate borrower information, lack of meaningful collateral, and weak project-preparation capacity.
  - About 4 bank accounts per 1,000 inhabitants in Burundi (Central African Republic 5.6, Uganda 5.8, Cameroon 14.4).
- Business environment rankings:
  - World Bank: 176 out of 183.
  - World Economic Forum: 137 out of 139.
- Social indicators:
  - Multidimensional poverty index decreased from 0.5 in 2005 to 0.42 in 2009.
  - Total primary enrollment rate close to 100 percent (up from 43 percent in 2000 and 63 percent in 2005).
  - Recent policy: free health care for all children under 5 and care for women in childbirth.

### Public spending quality, wage bill, and successor program design
- Public spending and wage bill:
  - Priority to shrink the budgetary footprint of the wage bill.
  - Conditionality design guidance:
    - Avoid broad-based caps that risk undue wage moderation and loss of skilled staff;
    - Avoid constraints on priority sectors that could shift cuts to security personnel;
    - Focus conditionality on marginal spending allocations rather than total spending composition to allow gradualism and visibility.
- Successor program priorities:
  - Balance macroeconomic policy conduct with macro-critical reforms that relax binding constraints to growth.
  - Financial sector development priorities: emergence of an effective interbank market; improved payment system; promote access to credit, especially for SMEs.
  - Implement 2009 FSAP recommendations: comprehensive clearing and settlement infrastructure, improved legal framework for businesses, enhanced accounting standards.
  - Explore conditionality on key sectors (e.g., coffee) in cooperation with other donors, with TA support for EAC integration.

### Debt consolidation strategy, policy mix, and exchange rate role
- Debt sustainability:
  - Ensuring public debt sustainability should remain a key objective; debt relief was insufficient for sustainability.
  - Suggested approach: medium-term consolidation strategy at low social cost; save a reasonable share of own revenue gains to improve the budget balance while preserving shock-absorbing role.
  - Address persistent weaknesses in debt management.
- Policy mix and shock response:
  - Built-in fiscal flexibility remains essential.
  - Better sharing of stabilization burden with monetary policy requires greater exchange rate flexibility.
  - Moving toward greater flexibility requires clearer monetary policy focus on price stability, improved liquidity management, and continued capital account liberalization in the context of EAC integration.

### Conditionality, ownership, capacity, and TA
- Conditionality design:
  - Remain commensurate to capacities and limited to areas where authorities’ commitment is clear.
  - Quantitative performance criteria should remain few and focused on credit and fiscal aggregates.
  - The new review-based conditionality framework provides timing flexibility for difficult measures.
  - In areas with strong vested interests, more binding conditions may be needed if consistent with authorities’ commitments.
- Technical assistance and field presence:
  - TA critical for program implementation: monetary/financial areas (EAC integration), fiscal side (PFM reforms, tax policy, capacity building).
  - Recommendation for permanent field presence in these areas.
  - Need for strong donor coordination to avoid TA overlap and capacity saturation.

### East African Community (EAC) integration: opportunities and requirements
- EAC aggregates cited: population about 127 million; GDP of 73.8 billion dollars (2009); land area of 1.8 million square kilometers.
- Potential benefits: access to a bigger market, lower overseas shipment costs, economies of scale, improved domestic market efficiency, a regional anchor for policy credibility.
- Requirements to reap benefits: enhance macro policy credibility; improve public sector management; encourage financial sector development; invest beyond primary education; simplify tax and regulatory environments; alleviate infrastructure bottlenecks.
- Recent harmonization steps: replacement of a transaction tax with VAT and adoption of the EAC common external tariff following establishment of a common market in July 2010.
- TA needs going forward: monetary policy, financial stability, payment system, financial market development, and harmonization of trade regulation, competition policy, labor laws, energy policies, and central bank independence.

### Central bank: operations, reforms, and transparency (Monitoring of Fund Arrangements, MONA)
- Central bank operations and reforms (selected actions and status):
  - Adoption of weekly liquidity auctions and introduction of a marginal refinancing window at a penalty rate; reform of mandatory reserve requirements so reserves held only as deposits with the BRB. Status: PC; W
  - Submit to the National Assembly the revised BRB Charter establishing central bank independence. Status: SB; W
  - Approval by the council of ministers of the revised BRB charter and submit to parliament. Status: Pa
  - Submission to the National Assembly of the draft Law on the Charter of the BRB together with January 2008 Fund staff recommendations. Status: Pa
- Central bank auditing, transparency, and financial controls:
  - Transmit to the IMF the report on the internal audit of the BRB on program data for end-June and end-December 2005 as specified in the TMU. Status: Pa
  - Launch of the first risk-based internal audit of the BRB. Status: SB; M

*Source: IMF staff report covering Burundi PRGF/ECF arrangements (2004–11).*

### 1. Conditionality per review: Burundi Relative to other PRGF/ECF Supported Programs ....20

### 1. Conditionality per review: Burundi Relative to other PRGF/ECF Supported Programs ....20

### Key issues and context
- Since the Arusha Accord in 2000 Burundi’s economy has begun to recover but remains constrained by weak institutions and governance, small and inefficient markets, poor infrastructure, and scarce capital, skills, and technology.
- Growth has rebounded to pre-conflict levels (still below regional peers) and is vulnerable to exogenous shocks.
- Fund-supported programs catalyzed a massive surge in aid that was absorbed and spent, stimulating domestic demand but leaving the public sector vulnerable to fickle foreign assistance.
- Progress was made on reforms aimed at improving the conduct of monetary and fiscal policies; progress was much slower in other areas, especially the coffee sector (the main source of income for half of the population).
- Priorities for macroeconomic policies include:
  - greater exchange rate flexibility to better absorb terms-of-trade shocks, and
  - the need to save part of the growth dividends to build fiscal buffers and restore debt sustainability.
- A new Fund program would help preserve donor confidence, boost policy credibility and predictability, and build capacities through technical assistance.

### Purpose and scope of the report
- Reviews the Fund’s longer-term engagement in Burundi since 2004.
- Assesses two Fund-supported programs:
  - January 2004 Poverty Reduction and Growth Facility (PRGF, expired January 2008), and
  - July 2008 PRGF (later renamed Extended Credit Facility, ECF, expiring in August 2011).
- A successor ECF is expected to be requested before the end of 2011.
- Focus areas for assessment: the design of effective conditionality, coordination with donors, and the role of technical assistance (TA).

### Country background and constraints
- Burundi is among the poorest countries, with real GDP per capita hovering well below its 1970 level.
- Civil war caused more than 300,000 casualties and about a million refugees; Arusha accord signed in 2000, political transition started in 2003, culminating in 2010 elections.
- Structural constraints: weak institutions and governance; landlocked, small and inefficient markets; poor infrastructure; scarcity of capital, skills, and technology.
- The economy is dominated by agriculture—with coffee and tea as the main cash crops—and is vulnerable to weather-related and terms-of-trade shocks.
- Key headwinds to macroeconomic performance:
  - difficulty in enacting ambitious structural reforms due to distributive conflicts and fractious politics;
  - limited technical and administrative capacities constraining implementation and prioritization;
  - vulnerability to shocks complicating monetary and fiscal policy and discouraging investment;
  - lack of policy space and dependency on fickle foreign aid flows affecting policy continuity and predictability.

### Macroeconomic performance under PRGF/ECF (2004–11)
- General assessment:
  - Significant progress toward greater macroeconomic stability, but structural reforms have been slow.
  - Major steps taken to improve monetary and fiscal policy conduct and to gain and retain donors’ confidence.
  - Institutions remain weak; little progress in liberalizing goods and credit markets, impeding investment and private sector growth.
  - Vulnerability to price shocks complicates monetary policy and, when social impacts must be addressed, fiscal policy.
- Growth and volatility:
  - GDP per capita has bottomed out, with trend growth slowly returning toward pre-conflict levels; GDP volatility has decreased noticeably since 2005.
  - Key drivers of real GDP growth: agriculture (especially coffee), donor-related activities including investment projects, and government spending.
  - Poor coffee harvests in 2005 and 2007 led to significant growth shortfalls; strong agricultural output and donor-financed investment helped buffer the 2009 food and energy price spike and global crisis.
  - Program forecasts often erred on the side of optimism, reflecting unexpected shock persistence.
- Inflation:
  - Trend inflation declined over the period but remains relatively high and volatile due mainly to fickle food and energy prices.
  - Program inflation targets: 4–5 percent under the first PRGF and less than 10 percent under the second program.
  - Controlling inflation challenged by consumption basket dominated by volatile items and by episodes of budget stress that at times required central bank financing.
- Exchange rate, reserves, and external absorption:
  - Current account (including official transfers) deteriorated in the first half of the review period in line with the trade balance, reflecting broadly stagnant coffee exports and rising imports.
  - A sharp increase in coffee export volume and improving terms of trade narrowed the trade gap between 2008 and 2010.
  - Current account benefited from lower external debt service associated with the HIPC and MDRI initiatives.
  - Official reserves increased over the period—often more slowly than programmed—to reach 5 months of imports in 2010 (including the 2010 SDR allocation).
  - Real effective exchange rate exhibited a mild appreciating trend; nominally the exchange rate moved sideways since mid-2008 due to de facto shadowing of the US dollar.
  - The combination of larger current account deficits and some real appreciation is consistent with the absorption of aid inflows and reallocation toward non-tradable sectors such as social services and construction.
  - The moderate increase in reserves suggests absorption was largely complete, underscoring vulnerability to possible reversals.
- Debt sustainability:
  - Debt relief under HIPC and MDRI reduced Burundi’s debt burden considerably.
  - The latest debt sustainability analysis and indicators suggest the risk of debt distress remains elevated, with the present value of total external debt still well above the threshold of 100 percent of exports of goods and services.

### Findings and policy implications
- Flexibility and adaptability in Fund engagement were essential given extreme poverty, fragility, and post-conflict risks.
- The Fund’s role was instrumental in:
  - anchoring stability-oriented macroeconomic policies;
  - catalyzing a rapid increase in external aid flows; and
  - fostering steady—albeit slow—progress on structural reforms and capacity building via TA.
- There is a clear case for continued Fund engagement to:
  - catalyze and stabilize external support given Burundi’s low income base and nascent growth,
  - lend credibility to authorities’ economic and financial programs, and
  - continue to provide TA and policy advice to strengthen institutions and capacities.
- Macroeconomic policy priorities moving forward:
  - enhance exchange rate flexibility to better absorb terms-of-trade shocks,
  - save part of the growth dividends to build fiscal buffers and restore debt sustainability,
  - prioritize and sequence reforms cognizant of limited administrative capacity and political constraints,
  - sustain coordination with donors to mitigate volatility in aid flows and preserve policy continuity.

*Source: IMF staff report covering Burundi PRGF/ECF arrangements (2004–11).*

### 12.      Public finances remained under stress, reflecting the fiscal challenges of peace

### _cr11269 - 12.      Public finances remained under stress, reflecting the fiscal challenges of peace

### Fiscal stance and aid absorption
- Substantial overall deficit (including grants) persisted, averaging 4.7 percent of GDP over the period.
- The aid surge was fully spent: lack of consolidation and stagnant revenues indicate the fiscal expansion financed by grants was not saved.
- Deviations between outturns and programmed deficit targets coincided with discrepancies between aid disbursements and commitments and with growth shortfalls, indicating program flexibility—particularly during the global recession of 2009.
- Expenditure absorbed most of the adjustment to lumpy aid flows because a majority of grants are project-related and domestic financing sources were limited.

### Expenditure composition and fiscal vulnerabilities
- Peace-building and priority social/infrastructure needs required increased spending, including:
  - Absorbing former rebels into lawful security forces and implementing demobilization.
  - Prioritizing capital projects and social sectors (health and education).
- Resulting effects:
  - A rise in military spending tolerated in the short term, to be reversed over time through effective demobilization.
  - Boom in current spending, notably public wage consumption.
  - Between 2005 and 2010, the size of the civil service rose by more than 50 percent.
  - Spending on wages and compensations increased by 80 percent in real terms.
- Financing inherently inflexible expenditure with volatile aid flows made state operations highly vulnerable to aid fluctuations.

### Revenue mobilization and tax administration
- Programs sought to strengthen and modernize revenue administration to reduce aid dependency.
- Reforms culminated in 2009 with creation of an autonomous revenue administration: the Office Burundais des Recettes (OBR).
  - OBR aimed to boost compliance through improved taxpayer services, greater transparency, and enhanced audit capacities.
- Tax reform achievement: replacement of an inefficient transaction tax with VAT.
- Outcomes:
  - Revenues remained stagnant with serial shortfalls versus program forecasts.
  - First indication of a turnaround in revenue collection emerged in 2010, with a significant windfall attributable to increased compliance under OBR’s first full year of operation and a reduction in tax arrears.
  - It was deemed premature to conclude a structural break in revenue collection.

### Public financial management (PFM) and governance
- The second PRGF/ECF arrangement had a very strong focus on PFM, reflecting donor concerns about governance and absorption of scaled-up aid.
- Reforms supported by IMF and World Bank TA achieved:
  - Identification and clearance of large domestic spending arrears.
  - Creation of a court of audit.
  - Strengthened management of the government workforce.
  - Adoption of a modern budget law.
  - Introduction of a single treasury account.

### Monetary management and financial supervision
- Significant progress in monetary management and financial supervision:
  - Additional legal backing for central bank autonomy.
  - Modernization of monetary policy framework: abolition of credit ceilings, streamlining and lowering of reserve requirements, introduction of indirect policy instruments (weekly liquidity auctions), and standardization of treasury bills.
- Remaining weaknesses:
  - Other objectives may have interfered with price stability.
  - Liquidity management suffered from gradual reform of instruments (e.g., interest rate ceilings were lifted in 2009), lack of competition among banks complicating sterilization, and loopholes in intervention strategy (no monthly and weekly targets consistent with quarterly program objectives).
- Supervision strengthened and capital requirements increased.
- Exchange-rate liberalization measures (abolition of surrender requirements for traditional exports, removal of restrictions on current international transactions, licensing of foreign exchange bureaus) narrowed the spread between official and parallel market exchange rates and fostered relatively rapid monetization of transactions.

### Structural reforms and private sector constraints
- Deep, politically difficult structural reforms were needed to unlock growth and reduce poverty, given decades of pervasive and inefficient state intervention.
- Coffee sector reform featured prominently:
  - Coffee is the main source of income for half of the population and Burundi’s main export.
  - Partial progress: ownership of coffee beans transferred to farmers and gradual privatization of coffee washing stations began in 2009, but monopolistic market structure largely remains.
- Other sectors (energy, telecommunications) targeted to alleviate supply bottlenecks and spur private sector development.
- Financial development constraints:
  - Severe credit rationing for small and medium-sized enterprises due to inadequate borrower information, lack of meaningful collateral, and weak project-preparation capacity.
  - With about 4 bank accounts per 1,000 inhabitants, Burundi is below comparable country averages (Central African Republic 5.6, Uganda 5.8, Cameroon 14.4).
- Business environment rankings:
  - World Bank: 176 out of 183.
  - World Economic Forum: 137 out of 139.
  - Main weaknesses: poor institutions, lack of skills, financial underdevelopment, and poor market efficiency.

### Social indicators and poverty
- Key social indicators improved slowly from a low base; Burundi was unlikely to reach any Millennium Development Goal (MDG) by 2015.
- Multidimensional poverty index decreased from 0.5 in 2005 to 0.42 in 2009.
- Education progress: total primary enrollment rate close to 100 percent (up from 43 percent in 2000 and 63 percent in 2005).
- Recent government initiatives: free health care for all children under 5 and care for women in childbirth expected to improve well-being.

### IMF-supported programs: design, assessment and lessons (high-level findings)
- The 2004–08 PRGF arrangement (approved January 2004) aimed to secure macroeconomic stability, build confidence, and encourage structural reforms (monetary stabilization, trade and exchange rate liberalization, financial sector reform, governance and PFM strengthening, private sector involvement, coffee sector reform).
- Program achievements:
  - Established foundations of macroeconomic stability.
  - Mobilized donor resources.
  - Promoted poverty reduction.
  - Generally satisfactory macroeconomic performance with macro-relevant quantitative performance criteria met.
  - Catalyzed donor support and facilitated HIPC process progress.
- Risks and shortcomings:
  - Fiscal flexibility encouraged aid targeting and spending but led to aid dependency and lack of consolidation amid unsustainable debt.
  - Structural reforms were frequently slow; structural performance criteria were often waived or converted into prior actions, indicating capacity and ownership constraints.
  - Bank-Fund disagreements on pace of coffee-sector reform may have weakened ownership.
  - Weak governance incidents in 2006 and 2007 tested confidence and postponed program reviews; remedial actions were supported to preserve program integrity.

### HIPC, debt relief, and fiscal space
- HIPC process initiated in 2004; decision point reached in August 2005; completion point reached in January 2009.
- HIPC debt relief estimated at US$ 832.6 million in NPV terms at the decision point (about 92 percent of the initial level).
- Additional relief under MDRI at completion point: about US$ 65 million in NPV.
- Debt relief created ample space for priority spending; corresponding increases in priority spending occurred in 2009–10.
- Debt sustainability assessment (DSA) indicated Burundi remained at high risk of debt distress: present value of debt-to-exports ratio expected to remain well above the 100 percent threshold throughout the projection period due to a low export base.
- ECF-supported program performance criteria banned accumulation of external payment arrears, short-term external debt and non-concessional loans (grant element lower than 50 percent).

*Source: IMF staff report section titled "12.      Public finances remained under stress, reflecting the fiscal challenges of peace" from the provided document.*

### Box 2. Coffee Sector Reform

### Box 2. Coffee Sector Reform

### Overview
- Coffee cherries are grown by about 800,000 small producers.
- Two collection/processing pathways described:
  - Producers either de-pulp harvested coffee cherries manually (washed coffee) or sell cherries to state-run washing stations (fully washed coffee).
  - Five state- and mixed-ownership management companies SOGESTALS (Sociétés de Gestion des Stations de Lavage) manage the washing stations.
  - The state-owned dry mill company SODECO (Société de Déparchage et de Conditionnement) buys washed and fully washed coffee to produce green-bean coffee.
  - A state marketing monopoly OCIBU (Office des Cultures Industrielles du Burundi) sells green-bean coffee to exporters.

### Effects of the fully monopolistic structure
- Key adverse effects identified:
  - Depresses producer prices.
  - Discourages private investment.
  - Undermines producers’ incentives to aim for high quality coffee.
- Economic rationale for prior state intervention:
  - Directed investment to washing stations in the 1980s to support transition to more fully washed coffee, yielding higher quality green-bean coffee.
  - State marketing monopoly could shelter producers from world price volatility when prices fall sharply (example cited: early 1990s).
- Downsides of a “two-stage” monopoly (state monopsony for producers and state monopoly for exporters):
  - Rent creation and capture by the state or its agents, effectively taxing small farmers’ income.
  - No private incentive to invest; capital scarcity is artificially maintained.
  - Producers lack motivation to move to higher quality because resulting rent is likely captured by the state.
- Observed outcome:
  - The share of high quality coffee in total output decreased continuously during the 1990s from 70 percent to about 10 percent.

### Reform attempts and sequencing
- Political economy and social fragmentation complicate reforms; sequencing, transparency, and consensus building require time.
- By the HIPC completion point in January 2009, all major stakeholders including the authorities at the highest level endorsed restructuring the sector.
- The coffee sector trigger (tendering for sale the state holdings in a majority of coffee washing stations) was substantially implemented, though full compliance took longer and led to a waiver request.
- Privatization progress:
  - Privatization of 13 coffee washing stations in 2009 (less than 10 percent of the total) was difficult and may signal private investors’ reluctance.

### Investment climate and prerequisites for successful reform
- Successful reform hinges crucially on an improved investment climate:
  - Perceived weak governance, inconsistent policies, and dubious commitments create uncertainty that deters private investors.
- Broader confidence- and efficiency-enhancing measures needed include:
  - Strengthened governance.
  - Streamlined tax and regulatory systems.
  - Better infrastructure.
  - An effective financial sector.
- Reform characteristics and risks:
  - Reform is bound to be gradual and to remain at risk of reversal until a critical mass is reached.
  - Fresh delays in launching the second phase of washing stations privatization and vocal opposition of well-organized vested interests indicate ongoing risks.

### Policy implications and priorities
- To make privatization and sector restructuring viable, prioritize measures that improve investor confidence and market functioning:
  - Strengthen governance to reduce rent-seeking and ensure transparency in capture and distribution of quality premia.
  - Ensure consistent policy commitments to reduce investor uncertainty.
  - Proceed with infrastructure, tax/regulatory, and financial sector reforms to lower transaction costs and facilitate private participation.
  - Sequence reforms with attention to social and political sensitivities, building consensus and transparency to enhance ownership and reduce reversal risk.

*Source: Box 2. Coffee Sector Reform, _cr11269 - Box 2. Coffee Sector Reform*

### 30.      Resolute action is needed to improve the quality of public spending. Efforts to

### _cr11269 - 30.      Resolute action is needed to improve the quality of public spending. Efforts to

### Public spending and the wage bill
- Burundi absorbs an exceptionally large share of domestic resources for public sector pay (Figure 5).
- Priority: shrink the budgetary footprint of the wage bill.
- Conditionality design points:
  - Avoid broad-based caps to prevent unwarranted wage moderation and loss of skilled staff.
  - Avoid undue constraints on priority sectors that could shift politically sensitive cuts to security personnel.
  - Overall caps could encourage the development of nonwage compensations.
  - Program conditionality aimed at changing expenditure composition should focus on marginal spending allocations rather than total spending composition to reflect needed gradualism and enhance policy visibility.

### Successor program: macroeconomic focus and growth constraints
- Successor program should balance:
  - Reforms narrowly aimed at improving conduct of macroeconomic policies.
  - Macro-critical reforms that relax binding constraints to growth.
- Financial sector development priorities:
  - Encourage emergence of an effective interbank market.
  - Improve the payment system.
  - Promote access to credit and other banking services, especially for SMEs.
- 2009 FSAP recommendations (as cited):
  - Introduce a comprehensive clearing and settlement infrastructure, especially for small payments.
  - Improve the legal framework for businesses, including bankruptcy law, arbitration, and judiciary efficiency.
  - Enhance accounting standards.
- Fund engagement:
  - Explore conditionality to progress in key sectors (e.g., coffee) in cooperation with other donors, especially the World Bank.
  - Provide TA in areas linked to EAC integration.

### Debt sustainability and consolidation strategy
- Ensuring public debt sustainability should remain a key program objective.
- Debt relief was insufficient to ensure sustainability.
- Opportunity: return of steadier growth combined with enhanced institutional capacities to mobilize revenues.
- Suggested approach:
  - Devise a medium-term consolidation strategy at a low social cost.
  - Save a reasonable share of own revenue gains from growth and improved tax administration to secure steady improvement in the budget balance (including grants) while preserving the budget’s shock-absorbing role.
  - Address persistent weaknesses in debt management for additional gains.
- Objective over time: stronger budget positions to tame concerns about long-term aid dependency.

### Policy mix and shock response; exchange rate role
- External shocks will likely persist over a typical program horizon; a better balanced policy mix is needed.
- Built-in fiscal flexibility remains essential where few have access to credit.
- The burden of stabilization to external shocks could be better shared with monetary policy, requiring greater exchange rate flexibility.
- Considerations on exchange rate policy:
  - De facto US dollar shadowing has advantages for financial and monetary stability.
  - There is scope for letting the exchange rate absorb some terms of trade shocks.
  - Moving towards greater exchange rate flexibility requires:
    - Clearer focus of monetary policy on price stability.
    - Further improvements in liquidity management.
    - Continued liberalization of the capital account in the context of EAC integration.

### Conditionality design, ownership, and capacity
- Conditionality should remain commensurate to capacities and limited to areas where authorities’ commitment is clear.
- Quantitative performance criteria should remain few and focused on credit and fiscal aggregates.
- Structural conditionality considerations:
  - The new framework for review-based conditionality provides flexibility in timing for difficult measures, avoiding artificial test dates.
  - Good ownership implies parsimonious and light conditionality.
  - In areas with strong vested interests (e.g., agriculture), more binding conditions may be required if consistent with authorities’ commitments.
  - The Fund should not hesitate to introduce conditionality in macro-critical areas where other donors lead (e.g., privatization of the coffee industry), provided:
    - Conditionality is supported or encouraged by the leading donor.
    - It concerns fully owned reforms.
  - Capacity constraints require conditions that are achievable and allow for unambiguous action; this may entail a greater number of conditions.

### Technical assistance, field presence, and risk management
- Securing TA deemed critical for program implementation is vital.
  - Monetary and financial areas: EAC integration will require intense and coordinated efforts from the Fund and other donors.
  - Fiscal side: TA should focus on implementation of recent legislative PFM reforms, tax policy changes, and capacity building.
  - There is an overwhelming case for ensuring permanent field presence in both areas.
- Risks to a new program are likely to remain high but are manageable.
  - Experience from two programs under review shows the importance of flexibility when economic or political risks materialize.
  - A practical, problem-solving approach is essential.
  - Implementation risks arise from weak capacities; strong coordination with other donors is important to avoid counterproductive overlaps (notably in TA delivery) and capacity saturation, and to secure adequate prioritization and sequencing of reforms.

### East African Community (EAC) integration: opportunities and requirements (Box 3)
- Burundi joined the East African Community (EAC) in 2007; EAC stages include customs union (2005), common market (2010), planned monetary union (2012), and potential political federation.
- EAC aggregates cited: population about 127 million; GDP of 73.8 billion dollars (2009); land area of 1.8 million square kilometers; broad access to sea through Kenya and Tanzania.
- Potential benefits of regional integration:
  - Access to a bigger market and lower overseas shipment costs, improving attractiveness for foreign investors in sectors such as high-quality coffee and other agricultural goods.
  - Economies of scale and improved domestic market efficiency through greater competition.
  - A regional anchor to foster progress in policy areas, including economic and financial regulations, and promote policy credibility and predictability.
- Risks and requirements:
  - Integration is not a panacea; countries starting from a low base need strong policies and ambitious reforms early to avoid diverging periphery outcomes.
  - Private sector exposure to greater competition requires rapid implementation of measures to boost local business capacity to compete and create jobs.
  - Private sector surveys identify main obstacles: limited access to financing, pervasive corruption, and inadequate public policies (tax, infrastructure, high and volatile inflation, bureaucratic inefficiency).
- To reap full benefits of EAC integration, Burundi will need to:
  - (i) further enhance macroeconomic policy credibility;
  - (ii) improve public sector management by promoting accountability, transparency, and efficiency;
  - (iii) encourage financial sector development;
  - (iv) invest beyond primary education to ease the shortage of skilled labor;
  - (v) simplify the tax and regulatory environments;
  - (vi) alleviate infrastructure bottlenecks.
- Recent policy and legal harmonization steps:
  - Establishment of a common market in July 2010 led Burundi to replace a transaction tax with a modern VAT system and to adopt the EAC’s common external tariff.
  - Going forward, TA is needed in topics such as monetary policy, financial stability, payment system, financial market development, and harmonization of trade regulation, competition policy, labor laws, energy policies, and central bank independence.

*IMF staff report text (excerpts provided).*

### 2. Central bank

### 2. Central bank

### 2.1 Central bank operations and reforms
- Adoption of weekly liquidity auctions and 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.  
  - Status: PC; W
- Submit to the National Assembly the revised BRB Charter establishing the independence of the central bank.  
  - Status: SB; W
- Approval by the council of ministers of the revised BRB charter and submit to parliament.  
  - Status: Pa
- Submission to the National Assembly of the draft Law on the Charter of the BRB together with the January 2008 recommendations by Fund staff on improvement of the law.  
  - Status: Pa

### 2.2 Central bank auditing, transparency, and financial controls
- Transmit to the IMF the report on the internal audit of the BRB on program data, as specified in the TMU, for end-June and end-December 2005.  
  - Status: Pa
- Launch of the first risk-based internal audit of the BRB.  
  - Status: SB; M

*Source: Monitoring of Fund Arrangements (MONA).*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr11269.pdf_