## _cr13288 - IMF staff report (selected findings and policy advice)

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---

### Recent developments and program implementation
- Socio-political context
  - Return of refugees from Tanzania and spillovers from tensions in Eastern Congo increased strains.
  - Series of strikes by public sector workers demanding higher wages.
  - UN-brokered dialogue initiated ahead of the 2015 elections (MEFP ¶2).
- Growth and inflation
  - Real GDP growth projected to reach 4.5 percent in 2013.
  - Cumulative 44 percent deterioration in the terms of trade since 2011.
  - Preliminary trade data through end-May: exports growth of 29 percent (y-o-y) and imports growth of 30 percent (y-o-y) in volume terms.
  - Inflation decelerated from about 25 percent (y-o-y) in March 2012 to 8.2 percent (y-o-y) at end-May 2013.
- Fiscal developments
  - 2012 budget execution: delays in World Bank budget support and higher-than-programmed foreign-financed capital spending widened the deficit and increased domestic financing.
  - Small accumulation of domestic payment arrears equivalent to 0.1 percent of GDP; arrears repaid in Q1 2013.
  - Q1 2013: program went off track after adoption of a new income tax law and granting of tax credits/exemptions resulting in a revenue shortfall of about 1 percent of annual GDP versus program targets.
- Monetary and exchange rate developments
  - Central bank reduced key interest rate by 150 basis points to 12.5 percent in May 2013.
  - Credit to the private sector rose by 11.5 percent (y-o-y).
  - Burundi franc depreciated by 14.4 percent against the US dollar in 2012 and then stabilized.
  - Authorities intervened in early 2013 to smooth exchange rate volatility and removed withdrawal limits on residents’ dollar-denominated accounts.
- Program implementation
  - Most end-December indicative targets met except pro-poor spending and small domestic arrears (repaid Q1 2013).
  - End-March: all performance criteria and indicative targets observed except indicative target on pro-poor expenditure (MEFP, Table I-1).
  - Satisfactory progress on structural reforms (MEFP, Table I-2).

### Outlook and risks
- Macroeconomic outlook
  - Outlook difficult and compounded by downside risks from external economic uncertainties.
  - Lower projected international food and fuel prices expected to improve inflation outlook.
- Donor financing and governance
  - Sectoral conferences planned in 2013 aim to unlock donor pledges of $2.6 billion; donors increasingly link support to governance improvements.
- Fiscal risks
  - Weaker revenue performance after the new income tax law and spending pressures in the run-up to elections may increase recourse to central bank financing.

### Policy discussions — A. Recommitting to revenue mobilization
- Causes and magnitude of slippages
  - New income tax law (late January 2013) narrowed the tax base (MEFP ¶20).
  - Law provides exemptions for most agriculture-related activities, pensions, allowances for transport and housing of 15 percent and 60 percent, respectively of base salary, and an increase in the taxable threshold.
  - Law removed branch tax on nonresident companies, withholding on imports (4 percent) and a minimal turnover tax (1 percent).
  - Introduction of the law and additional exemptions led to a loss in revenue equivalent to about 2.2 percent of GDP relative to the program:
    - about 0.8 percent of GDP loss due to the income tax law;
    - remainder due to forgone withholding and turnover tax on imports, exemptions and underestimation of tax credits linked to the investment code.
- Corrective actions and financing
  - Corrective revenue and expenditure measures in the revised 2013 budget expected to offset about half of projected revenue shortfall; remainder about 0.9 percent of GDP expected to be met through exceptional external financing.
  - Text Table 1 (Fiscal deviations relative to the program in 2013):
    - Estimated Deviations: 93.1 | 2.2
    - Revenue shortfalls: 90.1 | 2.2
    - Expenditure overruns: 3.0 | 0.1
    - Corrective measures: 45.5 | 1.1
      - Revenue: 25.5 | 0.6
      - Expenditure: 20.0 | 0.5
    - Exceptional disbursement (World Bank): 39.0 | 0.9
    - Residual of BIF 8.6 billion (0.2 percent of GDP) corresponds to lower interest payments in 2013 compared to the program.
- 2013 fiscal measures
  - Revised 2013 budget provides revenue and expenditure measures of about 1.1 percent of GDP.
  - Revenue measures: increases in taxes on petroleum products, imported vehicles, tobacco, driving licenses, petroleum products and telecoms; reinstatement of previously suspended taxes on food products.
  - Expenditure cuts: mix of current and capital spending.
  - Remaining gap expected to be filled through World Bank budget support: two disbursements of US$25 million each in 2013 (late disbursement from 2012 and programmed 2013 disbursement).
- Program safeguards and targets
  - Indicative target on revenue collections introduced in the TMU (¶6).
- Medium-term revenue strategies and TA (FAD focus, MEFP ¶29)
  - (i) technical assistance on exemptions;
  - (ii) improving organization and functions of central and local tax offices;
  - (iii) simplifying and modernizing registration and return filing and payment procedures;
  - (iv) enhancing enforcement of tax obligations by extending taxpayer audits, improving collections, and timely resolution of tax disputes.
  - Adoption of decree clarifying responsibilities of the Burundi Revenue Authority (end-March benchmark) and VAT law (June 2013 benchmark) important steps.

### Policy discussions — B. Strengthening Public Financial Management (PFM) reforms
- PFM strategy and donor financing
  - Securing donor financing for the 2012–14 PFM strategy facilitated implementation.
  - Key elements: (i) improve budget execution and expenditure control; (ii) strengthen public accounting via improved quality and timeliness of reporting; (iii) reinforce treasury management; (iv) training of personnel.
  - A long-term PFM advisor installed within the Ministry of Finance.
- Remaining weaknesses and reforms needed
  - Extend expenditure controllers to payroll management to avoid overruns, especially pre-election.
  - Past lapses resulted in extra budgetary spending (about 2 percent of GDP) now being audited by the Court of Auditors (MEFP ¶10 and ¶28).
  - Despite strengthened treasury committee and treasury cash flow plan, delays in budget support or policy slippages frequently result in recourse to central bank financing.
  - Improvements to IFMIS important to facilitate reforms.

### Policy discussions — C. Safeguarding debt sustainability
- Fiscal anchor and debt policy
  - Program fiscal anchor: zero limit on non concessional external public borrowing and a gradually declining path for domestic debt-to-GDP ratio.
- Recent debt developments
  - Declining budget support since 2010 by 50 percent to about 2½ percent of GDP, late donor disbursements, and policy slippages have led to higher-than-programmed domestic debt.
- Policy commitments and recommendations
  - Prudent fiscal stance and recommitment to revenue mobilization essential to avoid unsustainable debt dynamics.
  - Preparation of an overarching debt law with IMF TA to strengthen legal framework (MEFP ¶25).
  - Authorities agreed to review composition of expenditure and rationalize spending in the 2014 budget.
  - Potential 2014 revenue source: sale and renewal of telecoms licenses as part of sector reform with World Bank.
  - Authorities reiterated commitment to improve tax administration and better manage exemptions (MEFP ¶20).

### Debt sustainability analysis (DSA) — main findings and recommendations
- DSA outcome
  - DSA points to a slight deterioration in key indicators relative to 2012 DSA; classification remains “high risk of debt distress”.
  - Causes: revision of macro outlook after adverse shocks (terms of trade), addition of a small number of new loans, and a lower discount rate.
- Baseline scenario
  - PV of debt-to-exports ratio breaches the policy threshold during the medium term while other indicators remain below thresholds.
  - Debt service-to-exports ratio temporarily and marginally breaches the policy threshold.
- Concessionality policy
  - Retain general limit of minimum grant element of 50 percent required under the program (MEFP ¶25); authorities encouraged to ensure 50 percent grant element preserved in future loans.
- Specific project request
  - Authorities request modification of non-concessional borrowing ceiling to finance a key road project sized at US$28 million; road project grant element 49.2 percent (marginally below threshold).
  - Project aligned with PRSP and inclusion in DSA had no material impact.
- Debt management recommendation
  - Staff urges prudent fiscal policy to avoid unsustainable debt dynamics and recourse to central bank financing.
  - Authorities encouraged to pursue adoption of a debt law governing contracting of debt.

### Monetary policy, inflation, and exchange rate guidance
- Monetary policy stance
  - Authorities agreed to gear monetary policy toward stabilizing inflation expectations (MEFP ¶26).
  - After monetary tightening in 2011–2012, the central bank lowered policy rate slightly, permitting credit expansion; caution advised that further easing should be gradual until inflation decline is sustained.
- Exchange rate policy (MEFP ¶27)
  - Exchange rate remains an important tool to adjust to external shocks.
  - Greater exchange rate flexibility helped weather recent shocks.
  - Introduction of an interbank market for foreign exchange improves price discovery but could increase volatility; BRB may need periodic intervention to smooth volatility.
  - Staff underscored need for greater fiscal adjustment to avoid pressure on the exchange rate.

### Financial sector soundness and supervisory progress
- Liquidity and market developments
  - Domestic liquidity improved after 2012 shortages due to repatriation of coffee revenues, donor inflows, and entry of regional banks.
  - Overall liquidity ratios improved, mostly driven by larger banks (Table 8).
  - Participation of regional banks boosted government securities market.
- Central bank safeguards and supervisory measures
  - Measures adopted based on IMF TA:
    - More frequent reporting to central bank on rolled-over loans.
    - Harmonization of NPL definition with international standards.
    - Liquidity ratios calculated on local currency deposits only.
    - Change in legal framework to allow BRB to intervene swiftly in troubled banks.
  - BRB stepped up surveillance of pan-African banks through joint inspections with home-country supervisors (MEFP ¶13).
- Remaining work
  - Further efforts needed to address control weaknesses in fiscal accounts related to government payments and to monitor implementation of recommendations from special audits commissioned by the BRB.

### Program implementation, targets, and structural benchmarks
- Program status
  - Program on track; all benchmarks met except auditing of extra-budgetary spending owing to operational delays (Text Table 2).
- Performance criteria and targets (selected)
  - New continuous performance criterion for nonconcessional external debt contracted or guaranteed proposed for September 2013 and subsequent quarters.
  - Continuous ceilings maintained at zero on (i) short term external debt of the government; and (ii) accumulation of external payments arrears of the government.
  - New continuous indicative target for government fiscal revenue added starting September 2013.
  - End-June and end-December indicative targets proposed for domestic arrears accumulation, reserve money, and pro-poor spending (MEFP, Table I.1).
- Selected structural benchmarks (dates and status preserved)
  - Adopt decree on appointment/legal status of Commissioner of Burundian Revenue Office — March 30, 2013 — Met with delay (July 2013).
  - Submit report on reserve operations to General Council of BRB — March 30, 2013 — Met.
  - Implement monthly cash flow plan — March 30, 2013 — Met.
  - Submit law on VAT to parliament — June 30, 2013 — Met with delay (July 2013).
  - Prepare audit of extra-budgetary arrears and adopt payment plan — June 30, 2013 — Not met. New date proposed March 30, 2014.
  - Submit new law on debt management to parliament — March 30, 2014 (benchmark for review: 5th).
  - Put in place monitoring framework and calendar of regular meetings of coordination committee of Ministry of Finance and BRB — September 30, 2013 (benchmark for review: 4th).
- Institutional strengthening (selected)
  - Rationalized spending chain pilots in Ministries of agriculture, education, and health; nominate 10 expenditure controllers in 10 ministries — Implementation Date: June 30, 2014.
  - Unify database of civil servants with 2008 census data — Implementation Date: September 30, 2014.
  - Interface between OBR and Ministry of Finance — Implementation Date: December 30, 2014.

### Risks to the program
- Political/electoral risk: fiscal slippage risk in run-up to 2015 Presidential elections despite corrective measures.
- External price shocks: tail risk of sharp uptick in international food and oil prices could prompt policy reversal.
- Governance and donor support: failure to make measurable PFM progress could curtail donor support.
- Social pressures: reintegrating repatriated refugees could add to unemployment, increase demand for public services, and increase social conflict over land access.

### Staff appraisal — key judgments and recommendations
- Overall assessment
  - Performance under the ECF uneven; fiscal slippages warranted corrective measures.
- Revenue mobilization
  - Revitalizing revenue mobilization critical given declining budget support and rapidly growing population.
  - Priority actions: rationalize discretionary exemptions and establish sustainable policy on petroleum product pricing.
- Public financial management
  - Strengthen PFM: address weaknesses in expenditure control, budget preparation and execution, and treasury cash flow management.
- Debt management
  - Reinforce debt management given high risk of debt distress; pursue prudent fiscal policy and adopt debt law.
- Monetary and exchange rate policy
  - Monetary policy to continue stabilizing inflation expectations; any easing should be gradual.
  - Greater exchange rate flexibility encouraged.
- Program recommendation
  - Staff recommends completion of the third review under the ECF and setting revised performance criteria and indicative targets for September–December 2013, new targets for March and June 2014, and structural benchmarks for 2014.
  - Staff supports authorities’ request to modify external nonconcessional debt limit to accommodate the road project.

### Selected macroeconomic projections and key numbers (selected exact figures)
- Real GDP growth (annual percent): 4.2, 4.0, 4.0, 4.5, 4.5, 4.7, 4.8, 5.0.
- Consumer prices (period average): 9.7, 17.9, 17.9, 9.5, 9.0, 7.0, 6.5, 6.0.
- Consumer prices (end of period): 14.9, 11.8, 11.8, 9.0, 10.5, 4.6, 6.1, 5.3.
- Nominal GDP per Capita (US Dollars): 255, 270, 263, 293, 294, 315, 332, 354.
- Central government revenue and grants (BIF billion, 2011–2016 sequence): 1,072.0; 1,175.7; 1,136.9; 1,220.2; 1,185.2; 1,300.3; 1,486.6; 1,705.5.
- Tax revenue (BIF billion): 424.1; 492.0; 491.8; 573.0; 494.4; 562.1; 641.8; 724.9.
- Total expenditure (BIF billion): 1,189.5; 1,235.0; 1,269.8; 1,291.8; 1,256.7; 1,417.3; 1,592.8; 1,805.2.
- Net lending (+) / borrowing (-) (BIF billion): -117.4; -59.3; -132.9; -71.5; -71.5; -117.0; -106.1; -99.7.
- Revenue and grants (percent of GDP): 36.1, 33.0, 31.9, 29.5, 28.4, 27.6, 27.9, 28.6.
- Total expenditure (percent of GDP): 40.0, 34.6, 35.6, 31.2, 30.1, 30.1, 29.9, 30.2.
- Private sector credit (annual percent change): 24.1, 6.9, 9.9, 8.2, 15.5, 16.4, 16.1, 14.8.
- Gross official reserves (US$ million): 296; 269; 309; 307; 324; 356; 384; 421.
- Months of imports (reserves cover): 3.3; 3.3; 3.9; 3.6; 3.8; 4.0; 4.0; 4.4.
- Current account (US$ million, 2011–2016 sequence): -322.8; -386.9; -433.4; -422.0; -423.3; -478.2; -516.1; -544.1.
- Public sector debt (percent of GDP, selected): 39.8; 39.9; 38.3; 33.2; 30.5; 29.4; 27.2; 25.4; 23.8; 20.0; 15.0.
- PV of PPG external debt (percent of exports, selected): ...; 258.5; 323.7; 289.4; 274.3; 218.0; 197.5; 173.7; 99.5; 41.1.
- Fund obligations — Principal (SDR million, 2013–2025 sequence): 3.2; 10.6; 12.5; 13.0; 12.0; 12.5; 10.3; 7.6; 5.0; 2.4; 0.5; 0.0; 0.0.
- ECF disbursements and review schedule (SDR million)
  - Jan 27, 2012: 1.0 (1.3 percent of quota) — Executive Board approval.
  - July 15, 2012: 4.0 (5.2 percent of quota) — Completion of first review.
  - Jan 15, 2013: 5.0 (6.5 percent of quota) — Completion of second review.
  - Sept 15, 2013: 5.0 (6.5 percent of quota) — Completion of third review.
  - Jan 15, 2014: 5.0 (6.5 percent of quota) — Completion of fourth review.
  - July 15, 2014: 5.0 (6.5 percent of quota) — Completion of fifth review.
  - Jan 15, 2015: 5.0 (6.5 percent of quota) — Completion of sixth review.
  - Total for the ECF arrangement: 30.0 (39.0 percent of quota).

### Definitions, TMU monitoring, and reporting requirements (selected)
- Net foreign assets of the BRB: difference between gross official reserves (valued at market prices) and other claims, and foreign exchange liabilities to nonresident entities (including use of Fund resources and SDR allocations).
- Net domestic assets of the BRB: reserve money (currency in circulation, reserves of commercial banks, other deposits at BRB) minus net foreign assets of the BRB.
- Net domestic financing of the government: change in outstanding loans/advances/credit to government from BRB and commercial banks + stock of government securities held by nonbank public (BIF) − government deposits in BRB/commercial banks.
- External payment arrears: end-of-period external debt service due and not paid within creditor-defined grace period, for which a clearance agreement is not in place or arrears not reschedulable.
- Ceiling on new nonconcessional external debt: applies to debt contracted in a currency other than the Burundian Franc; covers government, local governments, BRB and REGIDESO, and guaranteed borrowing; excludes reschedulings, IMF borrowings, and BIF-denominated treasury securities held by nonresidents.
- Grant element and concessionality: PV difference expressed as percent of nominal value; discount rates use OECD CIRRs with specified margins by maturity; program limit requires minimum grant element of 50 percent for new loans under the program (MEFP ¶25).
- Reporting: monthly and quarterly data with maximum lags and detailed breakdowns specified in TMU; external financial assistance adjustor up to US$40 million with specified adjustments to floors/ceilings; program exchange rates: end-September 2013 = 1534.5 and end-December 2013 = 1577.2.

*Source: IMF staff report content as provided in the supplied document.*

### 2013. The mission was assisted by Mr. Koffi Yao, the IMF Resident

### _cr13288 - 2013. The mission was assisted by Mr. Koffi Yao, the IMF Resident

### Recent developments and program implementation
- Socio-political context:
  - Return of refugees from Tanzania and spillovers from tensions in Eastern Congo increased strains on the socio-economic environment.
  - Series of strikes by public sector workers demanding higher wages.
  - A UN-brokered dialogue between the government and the opposition in exile was initiated ahead of the 2015 elections (MEFP ¶2).
- Growth and inflation:
  - Real GDP growth is projected to reach 4.5 percent in 2013.
  - Cumulative 44 percent deterioration in the terms of trade since 2011.
  - Preliminary trade data through end-May indicate export growth of 29 percent (y-o-y) and imports growth of 30 percent (y-o-y) in volume terms.
  - Inflation decelerated from about 25 percent (y-o-y) in March 2012 to 8.2 percent (y-o-y) at end-May 2013, in part reflecting a tighter monetary stance.
- Fiscal developments:
  - Budget execution in 2012 reflected delays in World Bank budget support and higher-than-programmed foreign-financed capital spending, leading to a widening of the deficit and greater recourse to domestic financing.
  - Small accumulation of domestic payment arrears equivalent to 0.1 percent of GDP owing to weaknesses in treasury cash flow management and late disbursements in budget support; arrears repaid in Q1 2013.
  - In Q1 2013 the program went off track following adoption of a new income tax law and the granting of tax credits and exemptions that resulted in a revenue shortfall of about 1 percent of annual GDP compared to program targets.
- Monetary and exchange rate developments:
  - Central bank reduced its key interest rate by 150 basis points to 12.5 percent in May 2013.
  - Credit to the private sector rose by 11.5 percent (y-o-y).
  - The Burundi franc depreciated by 14.4 percent against the US dollar in 2012 and then stabilized.
  - Authorities intervened in early 2013 to smooth exchange rate volatility and removed withdrawal limits on residents’ dollar-denominated accounts.
- Program implementation:
  - Most end-December indicative targets were met except for pro-poor spending and the accumulation of small domestic arrears (repaid in Q1 2013).
  - At end-March, all performance criteria and indicative targets were observed except the indicative target on pro-poor expenditure owing to revenue slippages (MEFP, Table I-1).
  - Satisfactory progress on structural reforms (MEFP, Table I-2).

### Outlook and risks
- Macroeconomic outlook:
  - Outlook remains difficult and is compounded by downside risks related to external economic uncertainties.
  - Lower projected international food and fuel prices expected to improve inflation outlook.
- Donor financing and governance:
  - A series of sectoral conferences planned in 2013 aim to unlock donor pledges of $2.6 billion; donors increasingly link support to governance improvements.3
- Fiscal risks:
  - Weaker revenue performance following the new income tax law and spending pressures in the run-up to elections will put renewed pressure on the fiscal position and may increase recourse to central bank financing.

### Policy discussions — A. Recommitting to revenue mobilization
- Cause and magnitude of slippages:
  - New income tax law adopted in late January 2013 narrowed the tax base (MEFP ¶20).
  - The law provides exemptions for most agriculture-related activities, pensions, allowances for transport and housing of 15 percent and 60 percent, respectively of base salary, and an increase in the taxable threshold.
  - Law removed the branch tax on nonresident companies, withholding on imports (4 percent) and a minimal turnover tax (1 percent).
  - Introduction of the law and additional exemptions led to a loss in revenue equivalent to about 2.2 percent of GDP relative to the program: about 0.8 percent of GDP loss due to the income tax law, remainder due to forgone withholding and turnover tax on imports, exemptions and underestimation of tax credits linked to the investment code.
- Corrective actions and financing:
  - Corrective revenue and expenditure measures in the revised 2013 budget expected to offset about half of the projected revenue shortfall; remainder about 0.9 percent of GDP expected to be met through exceptional external financing.
  - Text Table 1: Fiscal deviations relative to the program in 2013 (BIF billions) and (In percent of GDP):
    - Estimated Deviations: 93.1 | 2.2
    - Revenue shortfalls: 90.1 | 2.2
    - Expenditure overruns: 3.0 | 0.1
    - Corrective measures: 45.5 | 1.1
      - Revenue: 25.5 | 0.6
      - Expenditure: 20.0 | 0.5
    - Exceptional disbursement (World Bank): 39.0 | 0.9
    - Residual of BIF 8.6 billion (0.2 percent of GDP) corresponds to lower interest payments in 2013 compared to the program.
- 2013 fiscal measures:
  - Revised 2013 budget provides for revenue and expenditure measures of about 1.1 percent of GDP.
  - Revenue measures include increases in taxes on petroleum products, imported vehicles, tobacco, driving licenses, petroleum products and telecoms; reinstatement of previously suspended taxes on food products.
  - Expenditure cuts consisted of a mix of current and capital spending.
  - Remaining gap expected to be filled through World Bank budget support (two disbursements of US$25 million each in 2013, comprising the late disbursement from 2012 and the programmed disbursement in 2013).4
- Program safeguards and targets:
  - An indicative target on revenue collections was introduced in the TMU (¶6) to guide authorities during program implementation.
- Medium-term revenue strategies and technical assistance:
  - Authorities implementing a three-year strategy with FAD focusing on (MEFP ¶29):
    - (i) technical assistance on exemptions;
    - (ii) improving organization and functions of central and local tax offices structured along well defined functional lines;
    - (iii) simplifying and modernizing registration and return filing and payment procedures;
    - (iv) enhancing enforcement of tax obligations by extending taxpayer audits, improving management of collections, and timely resolution of tax disputes.
  - Adoption of decree clarifying responsibilities of the Burundi Revenue Authority (end-March benchmark) and VAT law (June 2013 benchmark) important steps.

### Policy discussions — B. Strengthening Public Financial Management (PFM) reforms
- PFM strategy and donor financing:
  - Securing donor financing for the 2012–14 PFM strategy facilitated implementation.
  - Key elements: (i) improve budget execution and expenditure control; (ii) strengthen public accounting via improved quality and timeliness of reporting; (iii) reinforce treasury management; (iv) training of personnel.
  - A long-term PFM advisor installed within the Ministry of Finance to monitor and support implementation.
- Remaining weaknesses and reforms needed:
  - Extending expenditure controllers to payroll management is critical to avoid spending overruns, especially pre-election.
  - Past lapses in expenditure control resulted in extra budgetary spending (about 2 percent of GDP) now being audited by the Court of Auditors (MEFP ¶10 and ¶28).
  - Despite strengthened treasury committee and a treasury cash flow plan, delays in budget support or policy slippages frequently result in recourse to central bank financing.
  - Improvements to the Integrated Financial Management and Information System (IFMIS) are important to facilitate reforms.

### Policy discussions — C. Safeguarding debt sustainability
- Fiscal anchor and debt policy:
  - Fiscal anchor under the program: zero limit on non concessional external public borrowing and a gradually declining path for domestic debt-to-GDP ratio.
- Recent debt developments:
  - Declining budget support since 2010 by 50 percent to about 2½ percent of GDP, late donor disbursements, and policy slippages have led to a higher-than-programmed level of domestic debt (Text Figure 2).
  - Text Figure 2 projects domestic debt (percent of GDP) across 2010–2017 showing a declining trend under the program path.
- Policy commitments:
  - Prudent fiscal stance and recommitment to revenue mobilization are essential to avoid unsustainable debt dynamics.
  - Program adheres to the initially envisaged path for net domestic financing to ensure a declining trend in domestic debt over the medium term.
  - Preparation of an overarching debt law with IMF technical assistance to strengthen legal framework governing contracting of debt (MEFP ¶25).
- Additional fiscal adjustment:
  - Further fiscal adjustment needed because part of the financing gap was filled by exceptional World Bank budget support.
  - Authorities agreed to review composition of expenditure and rationalize spending in the 2014 budget to lay foundation for medium-term fiscal adjustment given lower budget support and fiscal revenues.
  - Potential revenue source in 2014: sale and renewal of telecoms licenses as part of sector reform in collaboration with the World Bank.
  - Authorities reiterated commitment to improve tax administration and better manage exemptions (MEFP ¶20).

*Source: IMF staff report content as provided in the supplied document.*

### 11. An update of the debt sustainability analysis (DSA) points to a slight deterioration in

### _cr13288 - 11. An update of the debt sustainability analysis (DSA) points to a slight deterioration in

### Debt sustainability (DSA) — main findings
- Burundi’s DSA shows a slight deterioration in key indicators relative to the 2012 DSA; the country’s classification remains at “high risk of debt distress”.
- Causes of deterioration:
  - Revision of the macroeconomic outlook following recent adverse shocks, mainly due to the terms of trade.
  - Addition of a small number of new loans.
  - A lower discount rate.
- Under the baseline scenario:
  - The present value (PV) of debt-to-exports ratio breaches the policy threshold during the medium term while other indicators remain below the respective policy thresholds.
  - The debt service-to-exports ratio temporarily and marginally breaches the policy threshold.
- Policy stance on concessionality:
  - Burundi’s high risk of debt distress warrants retaining the general limit of a minimum grant element of 50 percent required under the program (MEFP ¶25).
  - Authorities are encouraged to ensure that the 50 percent grant element is preserved in future loans.
- Specific project request:
  - Authorities request modification of the non-concessional borrowing ceiling to finance a key road project sized at US$28 million.
  - The road project has a grant element of 49.2 percent; marginally below the program threshold.
  - The project is aligned with the Poverty Reduction Strategy: addresses infrastructure bottlenecks, seeks to connect Burundi with Rwanda and Tanzania, and enhances transportation through improved access and trade facilitation.
  - The project’s inclusion in the DSA had no material impact.
- Debt management recommendation:
  - Staff urges authorities to pursue prudent fiscal policy to avoid unsustainable debt dynamics and recourse to central bank financing.
  - Authorities encouraged to pursue adoption of a debt law governing contracting of debt.

### Monetary policy and inflation (D. Taming Inflation)
- Policy orientation:
  - Authorities agreed to continue to gear monetary policy toward stabilizing inflation expectations (MEFP ¶26).
- Recent policy actions and effects:
  - Following monetary tightening during 2011–2012, which curbed inflation, the central bank lowered its policy rate slightly, permitting credit to the private sector to expand.
  - Projected decline in international food and fuel prices should contribute to easing inflationary pressures.
- Risks and guidance:
  - Policy slippages and recourse to central bank financing may reverse recent gains.
  - Further changes in the monetary stance to support growth should proceed gradually until the decline in inflation becomes sustained.
- Exchange rate policy (MEFP ¶27):
  - Exchange rate remains an important tool to allow the economy to adjust to external shocks.
  - Greater exchange rate flexibility helped the economy weather recent shocks.
  - Introduction of an interbank market for foreign exchange improves price discovery but could increase exchange rate volatility given uncertain inflows; central bank may need periodic intervention to smooth volatility.
  - Staff underscored that greater fiscal adjustment is required to avoid pressure on the exchange rate, allowing it to move in concert with fundamentals.
- Recommendation:
  - Monetary policy should continue to be geared toward stabilizing inflation expectations; any easing should be gradual.

### Financial sector soundness (E. Safeguarding Financial Sector Soundness)
- Liquidity and market developments:
  - Domestic liquidity conditions improved after severe shortages in 2012.
  - Recent drivers: repatriation of coffee export revenues, donor inflows, and entry of regional banks with access to cross-border financing.
  - Overall liquidity ratios improved, mostly driven by larger banks (Table 8).
  - Participation of regional banks has given renewed impetus to the government securities market.
  - Government’s timely repayment of debt service helped commercial banks channel financing to productive sectors.
- Central bank safeguards and supervisory measures:
  - Measures taken based on IMF technical assistance:
    - More frequent reporting to the central bank on rolled-over loans.
    - Harmonization of the definition of non-performing loans (NPLs) in line with international standards.
    - Calculation of liquidity ratios based on local currency deposits (previously included foreign deposits).
    - Change in legal framework to allow the central bank to swiftly intervene in troubled banks to prevent and contain crises.
  - Central bank stepped up surveillance of pan-African banks through joint inspections with home-country supervisors (MEFP ¶13).
- Progress on safeguards implementation:
  - Recommendations from the safeguards assessment (March-June 2012) are being implemented: regular submission of a report on reserve operations to the central bank’s General Council (end-March benchmark); strengthened coordination between Ministry of Finance and central bank.
  - Further efforts needed to address remaining control weaknesses in fiscal accounts related to government payments and to monitor implementation of recommendations from special audits commissioned by the BRB.

### Program implementation and structural measures (PROGRAM ISSUES)
- Program status:
  - The program is on track. All benchmarks were met except the auditing of extra budgetary spending owing to operational delays involving the Court of Auditors (Text Table 2).
- Performance criteria and targets:
  - Revised performance criteria and indicative targets proposed for September–December 2013; new targets for March 2014 for net foreign assets and net domestic assets of the central bank and net domestic financing of the government, with adjusters for aid volatility.
  - New continuous performance criterion for nonconcessional external debt contracted or guaranteed by the government proposed for September 2013 and subsequent quarters.
  - Other continuous performance criteria maintain zero ceilings on (i) short term external debt of the government; and (ii) accumulation of external payments arrears of the government.
  - New continuous indicative target for government fiscal revenue added starting in September 2013.
  - End-June and end-December indicative targets proposed for domestic arrears accumulation, reserve money, and pro-poor spending (MEFP, Table I.1).
- Structural measures and timelines (selected entries from Text Tables 2 and 3):
  - Adopt a decree on the appointment and legal status of the Commissioner of the Burundian Revenue Office. Implementation Date: March 30, 2013. Status: Met with delay (July 2013).
  - Each quarter, submit a report on reserve operations to the General Council of the BRB. Implementation Date: March 30, 2013. Status: Met.
  - Implement a monthly cash flow plan in line with commitment plans. Implementation Date: March 30, 2013. Status: Met.
  - Submit a law on the VAT to parliament. Implementation Date: June 30, 2013. Status: Met with delay (July 2013).
  - Prepare an audit of arrears on extra-budgetary expenditure (independent auditor) and adopt a payment plan. Implementation Date: June 30, 2013. Status: Not met. New date proposed March 30, 2014. (Context: 17 magistrates from the Court of Auditors nominated and 6 staff from the Ministry of finance assigned to facilitate the audit.)
  - Prepare an expedited customs clearance procedure and establish 3 one-stop border posts. Implementation Date: September 30, 2013. Benchmark for Review: 4th.
  - Submit a new law on debt management to parliament. Implementation Date: March 30, 2014. Benchmark for Review: 5th.
  - Put in place a monitoring framework and calendar of regular meetings of the coordination committee of the Ministry of Finance and the central bank. Implementation Date: September 30, 2013. Benchmark for Review: 4th.
- Institutional strengthening:
  - Put in place a rationalized spending chain with pilots in the Ministries of agriculture, education and health, and nominate 10 expenditure controllers in 10 ministries. Implementation Date: June 30, 2014. Benchmark for Review: 5th.
  - Implement a program to unify the current database of civil servants with that from the 2008 census. Implementation Date: September 30, 2014. Benchmark for Review: 6th.
  - Put in place an interface between the revenue authority (OBR) and the Ministry of Finance. Implementation Date: December 30, 2014. Benchmark for Review: 6th.

### Risks to the program
- Political/electoral risk:
  - Risk of fiscal slippage in the run-up to the 2015 Presidential elections despite broad-based consensus on corrective measures.
- External price shocks:
  - Tail risk of a sharp uptick in international food and oil prices could prompt policy reversal on recent petroleum product price increases and reinstatement of taxes on food products.
- Governance and donor support:
  - Governance issues or failure to make measurable progress in PFM reforms could curtail donor support.
- Social pressures:
  - Reintegrating repatriated refugees could add to unemployment, increase demand for public services, and increase social conflict over access to land.

### Staff appraisal — key judgments and recommendations
- Overall assessment:
  - Performance under the ECF has been uneven; fiscal slippages warranted corrective measures.
- Revenue mobilization:
  - Revitalizing revenue mobilization is critical in the context of declining budget support and a rapidly growing population.
  - Recent efforts are welcome, including adoption of the VAT law.
  - Priority actions: rationalize discretionary exemptions and establish a sustainable policy on pricing petroleum products.
- Public financial management:
  - Efforts to strengthen PFM need to be stepped up; weaknesses in expenditure control, budget preparation and execution, and treasury cash flow management persist.
  - A long-term PFM advisor has been installed to support implementation.
- Debt management:
  - Reinforce debt management given high risk of debt distress; pursue prudent fiscal policy and adopt a debt law.
- Monetary and exchange rate policy:
  - Monetary policy should continue to aim at stabilizing inflation expectations; any easing should be gradual.
  - Greater exchange rate flexibility encouraged to facilitate external adjustment and safeguard foreign reserves.
- Program recommendation:
  - Staff recommends completion of the third review under the ECF and the setting of revised performance criteria and indicative targets for September–December 2013, new targets for March and June 2014, and structural benchmarks for 2014.
  - Staff supports the authorities’ request to modify the external nonconcessional debt limit to accommodate the road project.

*Source: IMF staff and country authorities.*

### introduction of an indicative fiscal revenue target, which are consistent with the program’s

### _cr13288 - introduction of an indicative fiscal revenue target, which are consistent with the program’s

### Macroeconomic outlook and prices
- Real GDP growth projections (annual percentage change): 4.2, 4.0, 4.0, 4.5, 4.5, 4.7, 4.8, 5.0.
- GDP deflator (annual percentage change): 14.3, 15.4, 15.4, 11.1, 11.9, 7.8, 7.9, 6.9.
- Consumer prices (period average): 9.7, 17.9, 17.9, 9.5, 9.0, 7.0, 6.5, 6.0.
- Consumer prices (end of period): 14.9, 11.8, 11.8, 9.0, 10.5, 4.6, 6.1, 5.3.
- Nominal GDP per Capita (US Dollars): 255, 270, 263, 293, 294, 315, 332, 354.

### Fiscal operations — central government (levels, BIF billion)
- Revenue and grants: 1,072.0; 1,175.7; 1,136.9; 1,220.2; 1,185.2; 1,300.3; 1,486.6; 1,705.5 (2011–2016 sequence).
- Tax revenue: 424.1; 492.0; 491.8; 573.0; 494.4; 562.1; 641.8; 724.9.
- Taxes on income, profits, and capital gains: 131.0; 156.2; 155.9; 182.0; 151.3; 170.8; 195.0; 221.1.
- Taxes on goods & services: 248.6; 285.9; 286.2; 336.4; 299.9; 342.0; 390.5; 440.4.
- Grants (total): 615.0; 648.2; 610.2; 605.3; 641.8; 682.9; 782.4; 910.5.
- Total expenditure: 1,189.5; 1,235.0; 1,269.8; 1,291.8; 1,256.7; 1,417.3; 1,592.8; 1,805.2.
- Expense (component): 726.3; 792.3; 792.2; 830.3; 818.5; 880.4; 935.2; 1,053.2.
- Compensation of employees: 258.2; 283.8; 282.2; 300.8; 303.3; 324.0; 360.5; 397.9.
- Net acquisition of nonfinancial assets: 463.2; 442.8; 477.6; 461.5; 438.2; 536.9; 657.6; 752.0.
- Net lending (+) / borrowing (-): -117.4; -59.3; -132.9; -71.5; -71.5; -117.0; -106.1; -99.7.

### Fiscal operations — ratios (percent of GDP)
- Revenue and grants: 36.1, 33.0, 31.9, 29.5, 28.4, 27.6, 27.9, 28.6.
- Tax revenue: 14.3, 14.8, 14.8, 14.9, 13.0, 13.1, 13.2, 13.3.
- Total expenditure: 40.0, 34.6, 35.6, 31.2, 30.1, 30.1, 29.9, 30.2.
- Expense: 24.4, 22.2, 22.2, 20.0, 19.6, 18.7, 17.6, 17.6.
- Compensation of employees: 8.7, 8.0, 7.9, 7.3, 7.3, 6.9, 6.8, 6.7.
- Net acquisition of nonfinancial assets: 15.6, 12.4, 13.4, 11.2, 10.5, 11.4, 12.4, 12.6.
- Net lending (+) / borrowing (-): -4.0, -1.7, -3.7, -1.7, -1.7, -2.5, -2.0, -1.7.

### Monetary and banking indicators
- Net foreign assets (change as percent of beginning period M2): -12.1, -6.5, -5.3, 8.6, 3.1, 6.9, 7.6, 9.5.
- Domestic credit (annual percent change): 30.7, 12.3, 15.3, 10.0, 15.6, 19.5, 19.2, 13.8.
- Private sector credit (annual percent change): 24.1, 6.9, 9.9, 8.2, 15.5, 16.4, 16.1, 14.8.
- Money and quasi-money (M2) growth: 6.1, 7.3, 10.3, 16.0, 16.9, 12.9, 13.0, 12.2.
- Reserve money (12–month growth rate): 0.6, 26.5, 13.7, 17.9, 19.7, 15.5, 12.7, 10.8.
- Capital requirement over weighted assets (solvency ratio, percent): 19.1; 19.7; 21.7; 20.7; 20.0; 19.8; 19.8; 18.9; 19.7; 20.2; 21.1 (selected dec/mar/jun/sept series).
- Nonperforming loans (percent of total gross loans): 13.0; 10.0; 8.8; 7.6; 7.3; 7.7; 8.1; 7.3; 8.0; 8.7; 9.6.
- Provision coverage (percent of NPLs): 88.7; 87.6; 90.5; 90.6; 81.9; 83.3; 76.7; 83.1; 78.0; 77.8; 72.8.

### External sector and balance of payments
- Current account (US$ million): -322.8; -386.9; -433.4; -422.0; -423.3; -478.2; -516.1; -544.1 (2011–2016 sequence).
- Trade balance (US$ million): -647.7; -697.9; -751.5; -653.6; -636.0; -669.7; -702.8; -768.0.
- Exports, f.o.b. (US$ million): 124.0; 129.8; 134.7; 106.5; 106.0; 119.2; 129.3; 135.9.
- Imports, f.o.b. (US$ million): -771.7; -827.7; -886.2; -760.2; -742.0; -788.9; -832.0; -903.9.
- Current transfers (net, US$ million): 443.1; 430.7; 446.0; 372.2; 359.7; 334.3; 333.3; 341.7.
- Official (net) transfers (US$ million): 280.6; 265.6; 322.7; 204.3; 234.0; 206.1; 199.7; 202.5.
- Gross official reserves (US$ million): 296; 269; 309; 307; 324; 356; 384; 421.
- Months of imports: 3.3; 3.3; 3.9; 3.6; 3.8; 4.0; 4.0; 4.4.
- Current account (percent of GDP): -14.8; -16.3; -18.8; -16.0; -16.0; -16.5; -16.5; -15.9.

### Debt sustainability and public external debt indicators
- Public sector debt (percent of GDP): 39.8; 39.9; 38.3; 33.2; 30.5; 29.4; 27.2; 25.4; 23.8; 20.0; 15.0 (selected period sequence).
- PV of public sector debt (percent of GDP, selected): ...; 40.1; 34.6; 31.6; 30.2; 27.8; 26.0; 24.3; 19.9; 14.0.
- PV of PPG external debt (percent of GDP, selected): ...; 24.5; 21.2; 19.3; 18.4; 16.6; 15.0; 13.4; 8.8; 4.5.
- PV of PPG external debt (percent of exports): ...; 258.5; 323.7; 289.4; 274.3; 218.0; 197.5; 173.7; 99.5; 41.1.
- PV of public sector debt-to-revenue and grants ratio (percent): ...; 117.5; 121.8; 117.7; 110.4; 100.4; 92.3; 87.1; 73.0; 52.7.
- Debt service-to-revenue and grants ratio (percent): 141.4; 12.4; 35.2; 27.5; 7.7; 7.8; 10.0; 9.6; 10.0; 10.7; 9.9.
- Debt service-to-revenue ratio (percent): 362.2; 29.1; 76.0; 59.2; 14.9; 15.1; 33.1; 16.8; 16.2; 11.8; 7.1.

### Debt service capacity to the Fund and Fund obligations (SDR million)
- Fund obligations based on existing credit — Principal (SDR million): 3.2; 10.6; 12.5; 13.0; 12.0; 12.5; 10.3; 7.6; 5.0; 2.4; 0.5; 0.0; 0.0 (2013–2025 sequence).
- Total obligations based on existing and prospective credit (SDR million): 3.2; 10.6; 12.7; 13.2; 12.1; 12.6; 11.8; 10.7; 8.0; 5.4; 3.5; 1.5; 0.5.
- Total obligations as percent of exports of goods and services: 2.8; 8.3; 9.2; 7.8; 6.7; 6.4; 5.6; 4.6; 3.2; 2.0; 1.2; 0.5; 0.1.
- Outstanding Fund credit (SDR million): 94.8; 94.2; 86.7; 73.8; 61.8; 49.3; 37.6; 26.9; 19.0; 13.6; 10.1; 8.6; 8.1.

### ECF disbursements and review schedule (SDR million)
- January 27, 2012: 1.0 (1.3 percent of quota) — Executive Board approval.
- July 15, 2012: 4.0 (5.2 percent of quota) — Completion of first review.
- January 15, 2013: 5.0 (6.5 percent of quota) — Completion of second review.
- September 15, 2013: 5.0 (6.5 percent of quota) — Completion of third review.
- January 15, 2014: 5.0 (6.5 percent of quota) — Completion of fourth review.
- July 15, 2014: 5.0 (6.5 percent of quota) — Completion of fifth review.
- January 15, 2015: 5.0 (6.5 percent of quota) — Completion of sixth review.
- Total for the ECF arrangement: 30.0 (39.0 percent of quota).

### Debt stress tests and sensitivity analyses (selected outcomes)
- Baseline PV of debt-to-GDP ratio: 24, 28, 29, 27, 21, 8, 4, ... (table and figure series across 2013–2033 show baseline and alternative scenario trajectories).
- Stress test outcomes highlighted most extreme shocks by scenario: Non-debt flows shock; Exports shock; One-time depreciation shock (used in figures and captions).
- Table 10 sensitivity snapshots (selected cells):
  - PV of debt-to-GDP ratio (baseline 2013–2018, 2019–2033 averages shown): examples include baseline values 32, 42, 89, 274 across different subpanels (detailed cell-level series available in the tables).
  - PV of debt-to-exports ratio (baseline examples): 324, 289, 274, 218, 197, 173, 99, 41 (across projections).
  - Debt service-to-exports and debt service-to-revenue ratios in bound tests and alternative scenarios present higher peaks under B1–B6 and A2 scenarios (specific numeric sequences reported in Table 10).

### Key macroeconomic and financing assumptions used in projections
- Real GDP growth assumptions: 3.8, 4.2, 4.0, 4.1, 0.8, 4.5, 4.7, 4.8, 4.8, 5.0, 5.2, 5.4, 4.9, 5.9, 6.9, 6.2 (series across historical and projection periods).
- Growth of exports of goods & services (US$ terms, percent): 52.3, 25.1, -3.1, 21.5, 25.6, -20.9, 12.0, 8.4, 23.8, 7.4, 8.8, 6.6, 8.6, 10.5, 9.0.
- Grant element of new public sector borrowing (percent): 24.5, 25.5, 26.8, 28.6, 39.9, 39.9, 30.9, 39.9, 39.9, 39.9 (selected projection assumptions).
- Government revenues (excluding grants, percent of GDP): 14.6, 16.6, 15.8, 13.2, 12.7, 13.0, 12.9, 13.0, 12.9, 12.9, 12.9.

### Memorandum and other notable statistics
- GDP at current market prices (BIF billion): 2,971; 3,566; 3,566; 4,138; 4,169; 4,708; 5,321; 5,972 (2011–2016).
- Nominal GDP (US$ million, projections sequence): 2,643.3; 2,897.6; 3,126.4; 3,419.7; 3,678.9; 3,936.0; 4,114.2; 4,357.3; 4,578.8; 4,861.2; 5,145.7; 5,480.7; 5,829.5.
- Coffee price (US cents per lb): 273; 188; 188; 159; 138; 133; 141; 138.
- Oil (US$/barrel): 104; 105; 105; 103; 102; 98; 93; 90.

*Sources: Burundi authorities; IMF staff estimates and projections.*

### 1.      On January 27, 2012, the Executive Board of the International Monetary Fund (IMF)

### _cr13288 - 1.      On January 27, 2012, the Executive Board of the International Monetary Fund (IMF)

### Background and purpose
- On January 27, 2012, the Executive Board of the IMF approved a new three-year arrangement under the Extended Credit Facility (ECF) in favor of the Republic of Burundi to support the medium-term program: strengthen macroeconomic stability, expedite growth, and reduce poverty.
- The government and an IMF mission assessed implementation of the program as part of the third review covering program implementation from October 1, 2012 to March 31, 2013, and the outlook and measures to be implemented in 2013.
- The Memorandum of Economic and Financial Policies (MEFP) supplements the December 2011, July 2012 and January 2013 MEFPs and is consistent with the Poverty Reduction and Growth Strategy Paper (PRSP-II).

### Recent economic developments (through end-2012 / end-March 2013)
- Real GDP growth slowed to 4.0 percent at end-December 2012 versus 4.2 percent in 2011.
- Inflation slowed to 11.8 percent at end-December 2012.
- Overall fiscal deficit (cash basis, including grants) is around 3.7 percent, slightly above the target of 2.7 percent.
- Domestic revenue amounted to FBu 526.7 billion, that is, 14.8 percent of GDP.
- Total expenditure exceeded projections by around one percentage point of GDP owing to goods and services and grant-financed capital project expenditure overruns.
- Pro-poor spending was lower than expected due to shortfall in budget support and delays.
- Monetary policy: BRB refinancing rate indexed to the interest rate of 13-week treasury paper plus 3 percentage points; annual average refinancing rate was 14.5 percent.
- Growth of money supply and credit amounted to around 10.5- and 13.8 percent, respectively.
- Gross official reserves increased to US$309 million at end-2012 (equivalent of 3.9 months of imports of goods and services).
- External current account deficit widened to around 19 percent of GDP in 2012, driven by sharply higher humanitarian aid imports.
- At end-March 2013, all quantitative performance criteria were met except the indicative target on pro-poor spending.

### Fiscal and tax measures (responses to shocks)
- Government introduced a tax exemption on monthly wages below BIF 150,000 (about US$100).
- To address fiscal pressures, measures implemented and included in a revised budget approved by Parliament in July 2013:
  - Reintroduction of VAT on foodstuffs and petroleum products.
  - Elimination of exemptions under all procurement contracts.
  - Substantial decrease in domestically-financed spending.
- Tax measures on alcoholic beverages and telephone communications were introduced in the 2012 revised budget to offset effects of exemptions on foodstuffs.

### Program implementation and performance
- Program implementation at end-March 2013 was satisfactory overall despite shocks.
- All performance criteria and indicative targets were observed except the indicative target on pro-poor expenditure due to spending cuts and delays in disbursement of budget support.
- Government remains committed to preserving fiscal and debt sustainability and to relaunching medium-term economic recovery while maintaining prudent fiscal and monetary policies to anchor inflationary pressures.
- The government requests completion of the third review and the fourth disbursement of SDR 5 million under the ECF.
- The government requests a change in the external non-concessional borrowing limit under the ECF to use a US$28 million loan not yet contracted from the Saudi Fund for Development cofinanced by the OPEC Fund for International Development to finance road infrastructure.
- The government will provide the IMF with necessary information for implementation and monitoring; monitoring arrangements and targets are detailed in the Technical Memorandum of Understanding (TMU).
- Expectation: fifth review based on end-March 2014 performance criteria to be completed by July 31, 2014.

### Public financial management actions and arrears
- Pilot deployment of three expenditure commitment auditors (CEDs) to the ministries of education, health, and agriculture; plan to deploy CEDs to eight other ministries by end-December 2014.
- Need to strengthen CED capacities and reconfigure SIGEFI to account for decentralization of the expenditure chain.
- Government arranged to audit stock of payment arrears estimated at FBu 90 billion resulting from extrabudgetary spending; a plan to settle these arrears is to be drawn up.
- Cash-flow management committee strengthened but hampered by unpredictability of budget grant disbursements.
- Parliament adopted a draft law on the VAT to expand the VAT tax base and reduce the size of the informal sector.

### Financial sector modernization and supervision
- Central bank (BRB) projects under the proposed financial sector development (PSD):
  - Strengthen supervision of banks, non-banking institutions, and microfinance institutions.
  - Modernize payment systems (ACH / RTGS, payment services and central securities depository) and strengthen IT infrastructure.
  - Implement an automated banking system and legal/institutional framework for the payment system.
- Law on the National Payment System went to the Council of Ministers on April 4, 2012; returned for corrections and to be resubmitted to the Ministry of Finance for promulgation.
- Revision of the Banking Law in final stage; will cover mobile banking and microfinance institutions to ensure regulatory consistency.
- Draft regulations on electronic money, payment services, and commercial agents being finalized; enactment following promulgation of revised banking law.
- Draft decree regulating microfinance institutions revised; to be finalized after validation of the revised banking law by BRB management to avoid contradictions.
- Two new banks from Kenya and Tanzania opened branches in Burundi, enhancing EAC financial integration.
- Interbank electronic payment protocol being signed by commercial banks and the Post Office to create a common interbank company to manage the Centre for Electronic Payment Processing.
- Bank supervision: adoption of business continuity planning; reorganization of banking supervision department to include financial stability assessment; risk-based supervision methodology and manual in process of finalization.
- Final migration to IFRS reporting scheduled at end-June 2013; all reporting must respect this deadline; quality control and adjustments based on first three monthly reports.
- Dashboards and consistency tests to be designed in October 2013.
- Joint inspection missions with Central Bank of Kenya and inspection by Central Bank of Nigeria supervisors for systemically relevant pan-African banks.

### Safeguards, audits, and privatization
- BRB hired an international audit firm to:
  - Conduct a special audit of large disbursements processed by the BRB during June 30, 2011–March 31, 2012.
  - Evaluate implementation of the new decree on public expenditures management.
  - Ascertain status of implementation of earlier special audit recommendations from the 2011 Deloitte GPO report.
- Audit findings indicate ongoing control weaknesses: lack of supporting documents for certain transactions and partial implementation of the decree establishing the General Regulation on Government Budget Management.
- Privatization of coffee washing stations: at end-December 2012, 41 washing stations were sold; a new invitation to bid will be issued for the remaining 76 washing stations following adoption by Parliament of the privatization law. Government plans to give the private sector a lead role to revitalize coffee production.

### Private sector development and reforms
- Burundi ranked among the ten best global reformers for two consecutive years, 2012 and 2013, in the World Bank Doing Business report.
  - Moved from 181st in 2011 to 172nd in 2012, and 159th in 2013.
- National private sector development strategy in final stages focusing on:
  - Supporting entrepreneurship.
  - Strengthening legal and regulatory framework.
  - Facilitating integration into regional and global economy.
- Draft law establishing a general regime for public private partnership contracts has been discussed at the Council of Ministers.

### Economic outlook and risks for 2013
- Government committed to pursuing reforms to accelerate growth and reduce poverty as outlined in PRSP-II.
- Key risks to program implementation include wage claims and strikes, and sociopolitical tensions in the subregion (in the DRC), which could cause slippages.

*Document: Letter from the Burundi authorities with attached Memorandum of Economic and Financial Policies (MEFP) and Technical Memorandum of Understanding (TMU).*

### 18. Notwiths tanding these risks, GDP growth is projected to rise slightly to 4.5 percent, up from

### _cr13288 - 18. Notwiths tanding these risks, GDP growth is projected to rise slightly to 4.5 percent, up from

### Growth outlook and external sector
- GDP growth is projected to rise slightly to 4.5 percent, up from 4.0 percent in 2012.
- Upturn in activity expected to be driven essentially by investments in the telecommunications, hotel, and tourism sectors as well as in the manufacturing sector.
- Several investments made in the energy sector with the implementation of the Kabu 16 major projects and the arrival of additional diesel generators at REGIDESO, increasing the country’s electricity supply.
- Agricultural exports are expected to fall off sharply, owing to the cyclical nature of coffee production.
- Inflation is expected to slow to around 9.0 percent in 2013.
- Projections for 2013 show a reduction in the current account deficit to 16 percent of GDP.
  - These projections are driven by the significant drop in imports owing to falling petroleum product prices and lower external aid related imports.
- Official reserves are projected to increase to 3.8 months of imports, reflecting in part a cutback in BRB interventions on the foreign exchange market.

### Fiscal policy: objectives and aggregates
- Aim: support growth by improving the composition of expenditure and mitigate effects of shocks on the most vulnerable.
- In response to weak domestic revenue mobilization at end-March, the government took additional steps to raise revenue and cut government spending.
- Revenue and expenditure are expected to amount to 13.2 percent and 30.1 percent of GDP, respectively.
- The overall fiscal balance deficit (cash basis, including grants) should be contained at 1.7 percent of GDP.
- Pro-poor spending will be maintained without jeopardizing fiscal consolidation, and the wage bill will be brought under control.

### Fiscal revenue and expenditures (exact figures)
- Total fiscal revenue projected to amount to FBu 541.4 billion, that is, 1.9 percentage points of GDP below initial projections.
  - Shortfall attributable to the law governing professional income tax (IPR) that introduced tax exemptions for incomes below the FBu 150.000/month threshold and tax advantages related to transport and housing benefits.
  - VAT exemptions granted to enterprises also contributed to the shortfall.
  - Government measures to attenuate the decline in revenue: reintroduction of VAT on foodstuffs and petroleum products; elimination of exemptions on all government procurement contracts; request to IMF technical assistance for drafting an excise code and for restructuring the system of tax exemptions.
- Total expenditure estimated at FBu 1,257 billion, that is, 30.1 percent of GDP.
  - Government intends to cut domestically-financed capital spending and current expenditure by around 20.5 billion without compromising economic growth.
  - Wage bill relative to GDP is set to dip to 7.3 percent of GDP versus 7.9 percent in 2012.

### Social sector spending priorities
- Health:
  - Continue policy of free health care for children under five years and care for women in childbirth.
  - Building of health centers and hiring of medical personnel to improve quality while containing wage bill.
- Education:
  - Continue free primary schooling program and expand it to include secondary education in line with basic education policy.
  - Plans to increase number of teachers to significantly reduce teacher-student ratio.
- Agriculture:
  - Collaborate with donors to combat high cost of living and eliminate food insecurity.
  - Fertilizer Fund supported by development partners to improve agricultural production.
  - Implement National Agricultural and Livestock Investment Plan with priorities:
    - (i) sustainable growth of food production and food security;
    - (ii) professionalization of producers and promotion of innovation;
    - (iii) development of market segments and agri-business, including livestock and fisheries;
    - (iv) institution-building.

### Debt policy and debt management
- Government committed to maintaining a prudent debt policy to avoid overindebtedness.
  - Intends to seek grant funding or highly concessional loans with a grant element of at least 50 percent, in sufficient volume to cover financing requirements.
- Prepare a quarterly report on debt forecasting.
- Efforts to strengthen debt management capacity in 2013 with emphasis on World Bank DEMPA mission recommendations of August 2012.
- Prepare a legal framework governing debt management.
- Fiscal and monetary policy coordination committee to be created shortly and law on public debt management to be submitted to Parliament by December 30, 2013 at the latest (new structural benchmark).

### Monetary and exchange rate policy
- Monetary policy focus: reducing inflation and stabilizing expectations; remain prudent despite decline in inflation.
  - Central bank to remain vigilant to changes in inflation and improve forecasting ability.
  - If inflation decline is sustained and not a risk to activity, central bank will analyze, in consultation with the IMF, the possibility of gradual easing of monetary policy.
- Foreign exchange policy:
  - Daily reference exchange rate determined by weighted average of foreign currency buying and selling rates set the preceding day by commercial banks.
  - To reduce exchange rate volatility, in March 2013 BRB decided margins on foreign currency buying and selling transactions be contained within a ceiling/floor of 1 percent around the reference rate.
  - Deposit and withdrawal transactions on resident foreign currency accounts are now unrestricted, as are the amounts.
  - On April 12, 2013 BRB launched the delocalized interbank foreign exchange market (MID), replacing the MESD.
    - MID opens on all business days; exchange bureaus may no longer be supplied by commercial banks; banks with excess foreign exchange liquidity required to sell exclusively on the MID.
    - BRB may intervene in the MID through foreign exchange selling or buying auctions depending on market conditions.

### Structural measures and public financial management reforms
- Completed installation of institutional steering mechanism for public financial management strategy; implementation of twelve programs selected through technical groups underway.
- Streamlining the expenditure chain to reduce execution time lags:
  - Achievements: (i) improve expenditure execution rates; (ii) decrease number of participants in process, with five stages replaced by a single stage with the CEDs; (iii) reduce processing time to within five days.
  - Program to strengthen operational capacities of CEDs envisaged with financing from the AfDB.
  - At end-September 2013, 10 CEDs expected to be redeployed.
  - Government intends to continue rollout of CED deconcentration program pragmatically to cover at least 80 percent of expenditures by end-2013 by appointing CEDs to major ministries as a priority.
- Overdue payments: national audit office appointed controllers to identify amounts and establish repayment schedule.

### Tax administration and revenue strategy (next three years)
- Strengthen tax administration in collaboration with the IMF with strategy to:
  - improve the central and operational organization of revenue services through reorganizing central and local structures of tax authorities and optimizing segmentation;
  - improve registration and procedures by expanding and enhancing reliability of taxpayers register and simplifying basic procedures;
  - encourage voluntary filing of income statements by extending coverage of tax control and improving management of recovery and litigation procedures.

### Treasury-central bank coordination and safeguards
- Strengthen coordination between Ministry of Finance and Central Bank via regular meetings between management of the two institutions.
- Create a filing system for supporting documentation attached to payment orders in the government accounting office.

### Poverty Reduction and Growth Strategy Paper (PRSP-II)
- Donor conference in Geneva in October 2012 mobilized pledges amounting to the equivalent of US$2.6 billion.
- Government to organize two sectoral conferences to facilitate disbursement of commitments; first conference held in July 2013, second scheduled for October 2013.
- Government preparing first progress report covering first year of PRSP-II implementation with focus on an inclusive approach.

### Program monitoring, performance criteria, and indicative targets (selected exact figures)
- Semiannual monitoring by IMF Executive Board based on quantitative monitoring indicators and structural benchmarks defined in the Technical Memorandum of Understanding (TMU).
- Semi-annual reviews based on data at end-September 2013 and end-March 2014.
- Table I.1. Performance Criteria and Indicative Targets, 2012–14 (BIF billion, unless otherwise indicated) includes specific targets and outcomes (selected entries reproduced exactly as in source):
  - Net foreign assets of the BRB (floor; US$ million): 11.1 19.1 Met 10.1 -14.9 9.1 Met 23.1 24.3 30.2 Met 30.6 40.6 31.9 17.0 25.4 33.4
  - Net domestic assets of the BRB (ceiling): 235.0 191.6 Met 231.7 231.3 Met 248.4 236.9 Met 261.5 230.0 264.8 225.2 232.3 245.4
  - Net domestic financing of the government (ceiling): 49.0 -61.0 Met 34.6 72.2 66.3 Met 21.4 23.2 9.3 Met 46.8 21.6 42.0 33.3 11.6 26.3
  - External payments arrears of the government (ceiling; US$ million): 0.0 0.0 Met 0.0 0.0 Met 0.0 0.0 0.0 0.0 0.0
  - Nonconcessional external debt contracted or guaranteed by the government or the BRB (ceiling; US$ million, cumulative from beginning of the program): 0.0 0.0 Met 0.0 0.0 Met 0.0 0.0 28.0 28.0 28.0 28.0
- Indicative targets (selected):
  - Gross fiscal revenue (excluding grants, floor, cumulative from beginning of calendar year): 380.2 536.4 148.2 261.2
  - Accumulation of domestic arrears (ceiling; cumulative from beginning of calendar year): 0.0 0.0 Met 0.0 1.6 Not Met 0.0 0.0 0.0 0.0 0.0
  - Reserve money (ceiling): 250.7 219.8 Met 249.0 245.3 Met 284.7 248.2 Met 309.6 291.8 313.7 252.0 274.4 300.1
  - Pro-poor spending (floor; cumulative from beginning of calendar year): 288.3 276.0 Not met 398.0 353.7 Not met 100.7 68.0 Not met 201.4 128.0 190.0 270.0 57.5 148.3

### Structural benchmarks for 2013–14 (selected measures, dates, and status preserved)
- Public financial management:
  - Adopt a decree on the appointment and legal status of the Commissioner of the Burundian Revenue Office. — March 30, 2013 — Met with delay.
  - Prepare an audit of arrears on extra-budgetary expenditure and adopt a payment plan. — June 30, 2013 — Not met.
  - Implement a monthly cash flow plan in line with commitment plans. — New date proposed for end-March 2014.
  - Put in place a rationalized spending chain with pilots in the Ministries of agriculture education and health, and nominate 10 expenditure controllers in ten ministries. — March 30, 2013 — Met.
  - Implement a program to unify the current data base of civil servants with that form the 2008 census. — June 30, 2014 — New measure.
  - Put in place an interface between the revenue authority (OBR) and the Ministry of Finance. — September 30, 2014 — New measure.
- Tax policy:
  - Submit a law on the VAT to parliament. — June 30, 2013 — Met with delay. Law approved on July 24.
- Debt management:
  - Prepare a quarterly report on domestic debt forecasting. — March 30, 2013 — Met with delay.
  - Submit a new law on debt management to parliament. — December 31, 2013. New date March 31, 2014.
- Central bank and Treasury safeguard measures:
  - Each quarter, submit a report on reserve operations to the General Council of the BRB. — March 30, 2013 — Met.
  - Put in place a monitoring framework and calendar of regular meetings of the coordination committee of the Ministry of Finance and the central bank regarding implementation of monetary and fiscal policy and safeguard recommendations. — September 30, 2013 — Technical assistance now planned for November 2013.

### Technical Memorandum of Understanding (TMU) — monitoring definitions
- TMU covers monitoring implementation of the program supported by the Extended Credit Facility (ECF) Arrangement and sets definitions and reporting requirements.
- Quantitative performance criteria listed in the MEFP:
  - net foreign assets of the BRB (floor);
  - net domestic assets of the BRB (ceiling);
  - net domestic financing of the government (ceiling);
  - external payment arrears of the government (ceiling, continuous);
  - stock of short-term external debt (maturity of less than one year) of the government (ceiling, continuous);
  - new nonconcessional external debt contracted or guaranteed by the government or the BRB (ceiling, continuous).
- Quantitative indicative targets:
  - gross fiscal revenue (floor);
  - accumulation of domestic arrears (ceiling);
  - reserve money (ceiling);
  - pro-poor spending (floor).
- Definition excerpt:
  - Net foreign assets of the BRB are defined as the difference between (i) gross official reserves (valued at market prices) and other claims; and (ii) foreign exchange liabilities to nonresident entities (including the use of Fund resources, and liabilities arising from the use of any SDR allocation).
  - The gross official reserves of the BRB are defined as those foreign assets that are liquid and freely available to the BRB.

*Source: IMF staff report text provided in the content unit.*

### 5. The net domestic assets of the BRB are defined as the difference between (i) reserve

### 5. The net domestic assets of the BRB are defined as the difference between (i) reserve

### Definition of net domestic assets of the BRB
- Net domestic assets of the BRB are defined as the difference between:
  - (i) reserve money, comprising currency in circulation, reserves of commercial banks, and other deposits held at the BRB; and
  - (ii) net foreign assets of the BRB.

### Government gross fiscal revenue
- The government’s gross fiscal revenue is defined as the revenue appearing in the TOFE and includes all tax and non-tax revenue in the national budget, before deduction of tax refunds generated during the year, particularly accumulated VAT credits.

### Adjustor for changes in compulsory reserves coefficients
- The ceiling on net domestic assets of the BRB will be adjusted symmetrically for any change in the compulsory reserves coefficient applied to deposits in commercial banks by the amount of the new coefficient minus that stipulated in the program, multiplied by bank deposits subject to compulsory reserves.
- The rate stipulated in the program is currently 3 percent.

### Net domestic financing of the government (definition and coverage)
- Net domestic financing of the government is defined as the change in:
  - (i) outstanding loans, advances, and other credit to the government from the BRB and all of Burundi’s commercial banks;
  - (ii) plus the stock of all government securities held by the nonbank public denominated in Burundi francs, including that held by nonresidents;
  - (iii) less government deposits held in the BRB or in Burundi’s commercial banks.
- The coverage of government is defined as central government and any other special funds or operations that are part of the budgetary process or have a direct impact on the government’s financial position.

### External payment arrears (government)
- The stock of external payment arrears of the government for program monitoring purposes is defined as the end-of-period amount of external debt service due and not paid within the grace period defined by a creditor, including contractual and late interest, for which a clearance agreement is not in place or for which arrears are not reschedulable.
- For arrears to exist, a creditor must claim payment of amounts due and not paid.
- Amounts in dispute are not considered arrears.
- Arrears for which a clearance framework has been agreed with the creditor or which are subject to rescheduling or restructuring are not considered arrears for program monitoring purposes.
- Program arrears would include any debt service due under such agreements that have not been paid.

### Definition of external debt for the program (ceiling on new nonconcessional external debt)
- The program includes a ceiling on new nonconcessional external debt contracted or guaranteed by the government or the BRB.
- For the purpose of this program, external debt is defined as all debt contracted in a currency other than the Burundian Franc.
- This performance criterion applies to the contracting or guaranteeing by the government, local governments, the BRB and REGIDESO of new nonconcessional external debt with an original maturity of one year or more, including commitments contracted or guaranteed for which value has not been received (including leases).
- Coverage of government is central government and any other special funds or operations that are part of the budgetary process or have a direct impact on the government’s financial position.
- Debt contracted by state-owned enterprises is included in the overall ceiling, if guaranteed by the government.

### IMF Executive Board Decision definition of debt (Executive Board Decision No. 12274, Point 9, as revised August 31, 2009 — Decision No. 14416-(09/91))
- Debt is understood to mean a current, i.e., not contingent, liability, created under a contractual arrangement through the provision of value in the form of assets (including currency) or services, which requires the obligor to make one or more payments in the form of assets (including currency) or services, at some future point(s) in time; these payments will discharge the principal and/or interest liabilities incurred under the contract.
- Primary forms of debt include:
  - (i) loans: advances of money to the obligor by the lender including deposits, bonds, debentures, commercial loans and buyers’ credits, and temporary exchanges of assets equivalent to fully collateralized loans (e.g., repurchase agreements and official swap arrangements);
  - (ii) suppliers’ credits: contracts where the supplier permits the obligor to defer payments until sometime after delivery of goods or services;
  - (iii) leases: arrangements under which property is provided for use for specified period(s) with title retained by the lessor; for the guideline, debt is the present value (at inception) of all lease payments expected to be made during the agreement period excluding payments that cover operation, repair or maintenance.
- Arrears, penalties, and judicially awarded damages arising from failure to make payment under a contractual obligation that constitutes debt are debt.
- Failure to make payment on an obligation that is not considered debt under this definition (e.g., payment on delivery) will not give rise to debt.

### Grant element and concessionality
- The grant element of debt is the difference between the present value (PV) of debt and its nominal value, expressed as a percentage of the nominal value of the debt.
- The PV of debt at the time of contracting is calculated by discounting the future stream of payments of debt service due on this debt.
- Calculation of concessionality takes into account maturity, grace period, payment schedule, upfront commissions, and management fees.
- Discount rates for assessing concessionality:
  - For loans with a maturity of at least 15 years: the 10-year average commercial interest reference rates (CIRRs) published by the OECD should be used.
  - For loans with shorter maturities: the 6-month average CIRRs should be used.
- Margins to be added to the 10-year and 6-month average CIRRs:
  - 0.75 percent for repayment periods of less than 15 years;
  - 1 percent for 15–19 years;
  - 1.15 percent for 20–29 years;
  - 1.25 percent for 30 years or more.
- The performance criterion excludes rescheduling arrangements, borrowings from the IMF and any Burundi franc-denominated treasury securities held by nonresidents.

### Short-term external debt ceiling
- The stock of short-term external debt with a maturity of less than one year owed by the government is to remain at zero under the program.
- Coverage of government is central government and any other special funds or operations that are part of the budgetary process or have a direct impact on the government’s financial position.
- Normal import credits are excluded from this ceiling.
- Loans with an initial maturity, as recorded in the original loan agreement, of one year or more are considered medium-term or long-term loans.
- This performance criterion applies to debt as defined in point No. 9 of the Guidelines on Performance Criteria with Respect to Foreign Debt, adopted August 24, 2000, and to commitments contracted or guaranteed for which value has not been received (including leases).
- Exclusions from this performance criterion: rescheduling arrangements, borrowing from the IMF, and any Burundi franc-denominated treasury securities held by nonresidents.
- As of September 2007, the stock of short-term debt outstanding was nil.

### Pro-poor spending (definition)
- Consistent with the PRSP, the authorities’ definition of pro-poor spending is based on three criteria:
  - (i) social character of spending, based on the administrative classification of spending (includes “social services” spending and part of “general services” and “economic services” spending if it has a social character component);
  - (ii) consistency with one of the four PRSP pillars;
  - (iii) pro-poor investment spending, financed by donors.

### Domestic arrears measurement
- The accumulation of domestic arrears is measured by the accumulation of non-executed payment orders older than 60 days.

### External financial assistance adjustor (allowing deviations with caps)
- The program provides for adjusters to allow higher than expected external assistance to be spent (with a cap) and shortfall of external assistance to be financed domestically (with a cap).
- Any financing excess up to US$40 million will be spent on expenditure priorities defined in the PRSP.
  - The floor on the stock of net foreign assets of the BRB will be adjusted upward, and the ceilings on the net domestic assets of the BRB and on net domestic financing to the government will be adjusted downward to accommodate 100 percent of any financing excess above US$40 million.
- The floor on the stock of net foreign assets of the BRB will be adjusted downward, and the ceilings on the net domestic assets of the BRB and on net domestic financing to the government will be adjusted upward to accommodate a financing shortfall up to a maximum of US$40 million.
- External financial assistance will be converted to Burundi francs using the program-specified BIF/US$ exchange rate:
  - The program exchange rate for end-September 2013 is 1534.5 and at end-December 2013 is 1577.2.
- External financial assistance (measured in US$) is 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.
- Donor disbursements into blocked accounts for the purpose of clearing arrears will not be considered foreign assistance for program monitoring purposes.

### Provision of information to IMF staff (reporting requirements and data)
- Monthly progress report to IMF African Department within six weeks of the end of each month, containing weekly data:
  - foreign exchange auction market (MESD) transactions;
  - the balance sheet of the BRB (weekly statement) (BRB Research Department).
- Monthly data, with a maximum lag of six weeks:
  - a monitoring table (tableau de bord) containing the most recent weekly and monthly data on the main financial indicators (REFES);
  - a table on foreign exchange cash flow (BRB Foreign Banking Operations Department);
  - the monetary survey, including the breakdown of the BRB and of commercial banks (BRB Research Department);
  - monthly exchange-rate data (official and parallel markets, end-of-month and monthly average) (BRB Research Department);
  - a detailed breakdown of government revenue (Ministry of Finance);
  - a detailed breakdown of government expenditure on a commitment basis, including pro-poor spending (Ministry of Finance);
  - a detailed breakdown of the servicing of domestic and external public debt, including amounts due and paid, on interest and principal, as well as the breakdown by creditor and any accumulation of arrears on domestic or external debt (Ministry of Finance);
  - a detailed breakdown of the stock of domestic payment arrears for the current fiscal year (Ministry of Finance);
  - the amount of new debts contracted or guaranteed by the government, including detailed information on the terms (such as currency denomination, interest rate, grace period, maturity) (Ministry of Finance);
  - actual disbursements of nonproject financial assistance, including new loans and debt relief granted by Burundi's external creditors (Ministry of Finance);
  - an update on the implementation of structural measures planned under the program (REFES).
- Quarterly data, with a maximum lag of six weeks:
  - progress reports on the BRB’s internal reforms, including each unit’s action plans for the coming month (Reform Monitoring Committee, BRB).
- SP/REFES/Ministry of Finance and BRB will provide the IMF African Department with any information deemed necessary to ensure effective monitoring of the program.

### Safeguards assessment, Article IV, and technical assistance highlights
- Update safeguards assessment of the Banque de la République du Burundi (BRB), completed in July 2012, identified vulnerabilities and concluded that governance arrangements require significant strengthening, namely Board and Audit Committee oversight of foreign exchange reserves and audit mechanisms, and that control weaknesses in fiscal accounts relating to government payments remain to be addressed.
- Recommended actions included:
  - continuing special audits of government transactions;
  - enhancing oversight and accountability measures.
- An international audit firm was recruited to:
  - (i) conduct a special audit of large disbursements on behalf of the government processed by the BRB during June 30, 2011–March 31, 2012;
  - (ii) evaluate implementation of the new decree on public expenditures management;
  - (iii) ascertain status of implementation of earlier special audit recommendations.
- Audit findings indicated ongoing control weaknesses, including lack of supporting documents for certain transactions and partial implementation of the decree establishing the General Regulation on Government Budget Management.
- Audit emphasized the need to:
  - analyze risks in terms of parties involved in payment execution at the Ministry of Finance and the central bank;
  - ensure only transactions with supporting documentation are executed;
  - improve information on the nature of transactions and beneficiaries of transfer orders;
  - require formal and written procedures in dealings with the Ministry of Finance to ensure all accounts go through normal public spending liquidation channels;
  - request institutions receiving periodical transfers to justify past use and provide a utilization program for requested transfers;
  - improve the filing system at the Ministry of Finance.
- The submission of a report on reserves operation to the Board of the BRB was agreed as an additional program measure for 2013.
- Article IV consultation: Burundi is on the 24-month Article IV cycle; the 2012 Article IV consultation was completed by the Executive Board on July 27, 2012 (IMF Country Report No. 12/226).
- Executive Directors commended progress but noted external and internal risks and encouraged a faster pace of fiscal and structural reforms and a prudent approach to macroeconomic management.
- Technical assistance missions listed include multiple FAD, MCM, STA, and AFRITAC missions across 2008–2013 covering PFM, budget policy, bank supervision, foreign exchange operations, liquidity forecasting, consumer price index, tax and customs administration, national accounts, and other topics.

*Second Review under the Extended Credit Facility Arrangement — Informational Annex; August 22, 2013.*

### 1.  Burundi Poverty

### 1.  Burundi Poverty

### IMF Work Program and Missions
- IMF work program entries and timelines:
  - 3rd Review of ECF: July 2013
  - 4th Review of ECF: December 2013
  - 5th review mission and Art IV. Mission: June 2014
  - Main mission: September 2013; Decision meeting: March 2014
  - ERSG-VII (Budget support): June 2013 (Identification); September 2013 (pre-appraisal); October 2013 (appraisal)
  - ERSG-VIII (Budget support): June 2014 (Identification); August 2014 (pre-appraisal); September 2014 (appraisal)
  - Additional missions: September 2013 (Identification); April 2014; May 2012; December 2014; November 2013 (Board); October 2013 (Board)
- Fund requests and inputs:
  - Fund request to Bank
  - Progress report on reform implementation in REGIDESO and in the coffee sector and implementation of PFM and public service reforms
- Joint products and missions agreed:
  - Debt Sustainability Analysis: February 2014
  - Annual progress report on implementation of PRSP-II: Fall 2013

### Relations with the African Development Bank Group (AfDB)
- Membership and arrears clearance:
  - Burundi has been a member of the AfDB Group since 1964.
  - AfDB grant and loan operations were interrupted by civil strife in 1993.
  - On July 19, 2004, AfDB Boards approved policy guidelines and created the PCCF, initially funded with about SDR 100 million in AfDB funds.
  - On October 27, 2004, AfDB Boards endorsed an arrears clearance proposal for Burundi before the decision point for the enhanced HIPC Initiative.
  - On April 21, 2009, AfDB approved AfDB’s share of HIPC debt relief equivalent to USD 150,200,000 in Net Present Value (NPV) terms as of the end of 2004.
  - AfDB also approved Burundi’s qualification for MDRI in an amount of US$ 15.38 million (UA 10.48 million) in nominal terms.
- Country Strategy Paper and priorities:
  - The 2012-2016 Burundi Country Strategy Paper (CSP) was approved in January 2012.
  - CSP aligns with CSLPP-II and Burundi Vision 2025 and emphasizes two pillars: strengthening state institutions and infrastructure improvements.
  - CSP prioritizes selectivity and complementarity, supports private sector development, and promotes growth and inclusive development.
- AfDB portfolio (ongoing operations) overview:
  - Bank ongoing portfolio: eight (8) national operations totaling UA 112.46 million.
  - Road sector accounts for 58.1% of the portfolio; multi-sector (Economic Reform Support and Institutional Capacity Building) accounts for 16%.
  - Seven (7) active multinational operations for UA 128 million, mostly in the road sector (60%).
  - PARE V (Programme d’Appui aux Réformes Economiques) fifth phase: total amount UA 12 million; first disbursement 7 million UA disbursed in 2012; second disbursement planned in fourth quarter of 2013 if a waiver is obtained.
  - Institutional capacity building projects approved in December 2012 amounted to UA 5,8 million.
  - Second phase of Watershed management and support climate resilience Project approved in April 2013 for UA 6.23 million.
  - AfDB analytical studies include microfinance and poverty reduction, and the relationship between growth and employment.

### AfDB Project List (as presented)
- National Public Sector projects (amounts in million UA):
  - Water Infrastructure Rehabilitation/ Expansion: 12.00
  - Employment Creation Project: 10.00
  - Aide d’Urgence pour atténuer l'effet de l'incendie du marché de Bujumbura: 0.33
  - Gitega-Nyangungu-Ngozi phase 1 Project: 24.1
  - Gitega-Nyangungu-Ngozi phase 2 Project: 42.00
  - Economic Reform Support Programme V: 12.00
  - Institutional Capacity Building Project (components i–v): 5.8
  - Project for Watershed management and support climate resilience: 6.23
- Multinational projects (amounts in million UA):
  - Lake Tanganyika Integrated Management Project: 4.96
  - Lake Victoria and Sanitation Programme: 14.1
  - Mugina-Mabanda-Nyanza Lac and Rubavu-Gisiza road project: 27.5
  - Isaka-Kiga/Keza-Musongati Railway project: 1.70
  - Bugesera Multinational Project: 15.02
  - Nyamitanga-Ntendezi-Mwityazo Road: 49.38
  - NELSAP Interconnection Project: 15.15
- Totals:
  - Total (National Public Sector only): 112.46
  - Total (National and Multinational): 240.00

### Statistical Issues (As of August 13, 2013)
- General assessment:
  - Data provision has serious shortcomings that significantly hamper surveillance.
  - Most serious shortcomings affect national accounts and balance of payments statistics.
  - Causes: insufficient funding, staffing shortages, lack of equipment, and coordination difficulties among responsible institutions.
- National Accounts:
  - ISTEEBU implemented a new series of annual national accounts (ANA) in November 2011 with support from Afristat and AfDB.
  - Revisions included improved data sources, base year change from 1996 to 2005, and updated compilation methodologies (based on the 1993 System of National Accounts).
  - Under the new data, nominal national incomes were revised up by an average of 36 percent during 2005–08.
  - Average real growth rate for these years is about 1.5 percentage point higher than earlier estimated.
  - ANA are available for the period 2005-2009. ANA for 2010 are finalized but not yet released; work on year 2011 is on-going.
  - Agricultural data remain weak, creating significant uncertainty for GDP level and growth estimates.
  - ISTEEBU is about to implement a system of provisional ANA with AFRITAC Central support.
- Price Statistics:
  - ISTEEBU produces and disseminates a monthly consumer price index (CPI) for Bujumbura.
  - Reference period for prices and weights is 1991.
  - CPI basket contains 163 products across eight consumer functions.
  - ISTEEBU plans a new CPI based on COMESA methodology; a household consumption survey will begin in September 2013.
- Government Finance Statistics (GFS):
  - Burundi benefited from technical assistance by the World Bank and FAD and from STA training.
  - GFS continue to suffer from weaknesses in coverage, accuracy, consistency, and timeliness.
  - Burundi participates in the GFS module under the Enhanced Data Dissemination Initiative (EDDI) project for Africa (DFID-funded) with technical assistance missions from 2011 through 2015.
- External Sector Statistics:
  - Annual balance of payments and international investment position statistics compiled by the Banque de la République du Burundi (BRB) according to BPM5.
  - Severe coverage and measurement difficulties impart high uncertainty: significant divergences with other sources on imports and exports; donor inflows not appropriately recorded.
  - No balance of payments reconciliation committee exists to cross-check central bank, customs, and national institute of statistics data.
  - International Transaction Reporting System has incomplete coverage; further actions required to improve accuracy and reliability.
- Data Standards and Reporting:
  - Participant in the General Data Dissemination System (GDDS) since August 2011.
  - No data ROSC is available.
  - Summary government finance transactions reported for publication in International Financial Statistics (IFS).
  - Monetary and Financial Statistics based on SRFs are published in IFS.
  - Balance of payments and international investment position data published in IFS and in the Balance of Payments Yearbook.

### Table of Common Indicators Required for Surveillance (As of August 13, 2013)
- Selected indicator rows (Date of latest observation / Date received / Frequency of Data / Frequency of Reporting / Frequency of Publication):
  - Exchange Rates: Current / Current / D / M / M
  - International Reserve Assets and Reserve Liabilities of the Monetary Authorities: Oct. 2012 / Dec. 2012 / M / M / M
  - Reserve/Base Money: April 2013 / July 2013 / M / M / M
  - Broad Money: April 2013 / July 2013 / M / M / M
  - Central Bank Balance Sheet: April 2013 / July 2013 / M / M / M
  - Consolidated Balance Sheet of the Banking System: April 2013 / July 2013 / M / M / M
  - Interest Rates: Oct. 2012 / Dec. 2012 / M / M / M
  - Consumer Price Index: April 2013 / July 2013 / M / M / M
  - Revenue, Expenditure, Balance and Composition of Financing – General Government: NA / NA / NA / NA / NA
  - Revenue, Expenditure, Balance and Composition of Financing – Central Government: February 2013 / June 2013 / M / M / M
  - Stocks of Central Government and Central Government-Guaranteed Debt: December 31, 2013 / June 30, 2013 / A / A / A
  - External Current Account Balance: 2011 / Dec. 2012 / A / A / A
  - Exports and Imports of Goods and Services: April 2013 / July 2013 / M / M / M
  - GDP/GNP: 2012 / July 2013 / A / A / A
  - Gross External Debt: 2011 / Dec. 2012 / M / M / A
  - International Investment Position: 2011 / Dec. 2012 / A / A / A
- Frequency codes:
  - D = Daily; W = Weekly; M = Monthly; Q = Quarterly; A = Annually; I = Irregular; NA = Not available.

### IMF Press Release: Third Review under the ECF (Press Release No. 13/328, September 6, 2013)
- Completion and disbursement:
  - The IMF Executive Board completed the third review of Burundi’s performance under the ECF arrangement and approved a disbursement of an amount equivalent to SDR 5 million (about US$7.5 million).
  - This brings total disbursements under the arrangement to an amount equivalent to SDR 15 million (about US$22.6 million).
  - Burundi’s three-year ECF arrangement was approved on January 27, 2012 with total access equivalent to SDR 30 million (about US$45.3 million).
  - The Board approved a request for modification of performance criteria for end-September and end-December 2013, and the continuous performance criterion on nonconcessional external debt contracted or guaranteed by the government or the Bank of the Republic of Burundi.
- Executive summary statements (Mr. Naoyuki Shinohara, Deputy Managing Director and Acting Chair):
  - Progress has been made under the ECF-supported program amidst challenging socio-political and economic circumstances.
  - Economic growth is expected to pick up, while inflation has been declining aided by moderating international food and fuel prices and tight monetary policy.
  - The medium-term economic outlook remains difficult, with downside risks from uncertainties in the external environment and the influx of refugees from the conflict in Eastern Congo.
  - Strong commitment to program policies and structural reforms remains critical.
  - Revenue slippages were addressed through corrective measures and a revised budget adopted by parliament.
  - Recommitment to revenue mobilization is critical, notably by strengthening tax administration and containing exemptions.
  - Efforts are needed to enhance public financial management reforms.
  - Debt sustainability remains the anchor for medium-term fiscal policy; Burundi continues to be at high risk of debt distress and future borrowing should rely mainly on grants and highly concessional loans.
  - Finalization of a debt law governing contraction of debt is an important step to strengthen public debt management.
  - Monetary policy should continue to focus on stabilizing inflation expectations; potential fiscal deterioration financed by central bank financing could reignite inflation.
  - Maintaining exchange rate flexibility will allow the economy to adjust to external shocks.
- Statement by Mr. Saho, Executive Director for Burundi: September 6, 2013.

*Source: _cr13288 - 1.  Burundi Poverty*

### Introduction

### _cr13288 - Introduction

### Program performance
- The Burundian authorities value the IMF’s continuous engagement and support under the Extended Credit Facility (ECF) arrangement and requested completion of the third review under the ECF arrangement.
- Performance through March 2013 was satisfactory:
  - All performance criteria and indicative targets were achieved, except the indicative target on pro-poor spending due to revenue shortfalls.
- Structural reforms pursued:
  - Measures to enhance domestic revenue mobilization.
  - Strengthening expenditure controls.
  - Measures to mitigate financial sector vulnerabilities.

### Recent economic developments
- Growth and inflation:
  - Real GDP growth declined from 4.2 percent in 2011 to 4.0 percent in 2012.
  - Consumer price inflation decelerated to 11.8 percent at end-2012 from 14.9 percent during the corresponding period of the preceding year.
- External and fiscal metrics:
  - The budget deficit (cash basis, including grants) was 3.7 percent, slightly above the 2012 target of 2.7 percent.
  - The external current account deficit widened to about 19 percent of GDP in 2012.
  - Gross international reserves increased to the equivalent of 3.9 months of import cover from 3.3 months in 2011.
- Causes of underperformance:
  - Decline in investment spending, adverse terms of trade shock, and monetary policy tightening.

### Outlook and policies for 2013 and beyond
- Growth and inflation projections:
  - Real GDP is expected to rise to 4.5 percent in 2013 and 5.0 percent in the medium term.
  - Medium-term inflation envisaged to decline from 11.8 percent in 2012 to 5.3 percent in 2016.
  - Gross international reserves are expected to be maintained at 4.0 months of import coverage in 2013 and over the medium term.
- Policy priorities:
  - Strengthen macroeconomic stability.
  - Attract private investment.
  - Improve infrastructure.
  - Enhance governance and security.
  - Implement a comprehensive growth strategy to sustain higher inclusive growth.

### Fiscal policy
- Revenue developments:
  - Revenues slipped in early 2013 due to unintended negative consequences of implementing the new income tax law and the granting of tax exemptions.
  - The revised 2013 budget approved by Parliament is anchored on a fiscal adjustment of 1.1 percent of GDP in less than six months.
  - Measures to increase revenues include reintroducing VAT on food items and petroleum products; removing exemptions under all procurement contracts; and hiking taxes on imported vehicles, petroleum products, tobacco, telecoms and driving licenses.
  - Commitment to strengthen tax administration and streamline the system of tax exemptions.
- Expenditure measures:
  - Reduce domestic funding of capital spending and nonstatutory recurrent outlays.
  - Scale down the public sector wage bill in the medium and long terms.
  - Strengthen expenditure controls to avoid extra budgetary spending.
- External support:
  - Authorities solicit continued development partner support to sustain poverty reduction and growth-enhancing spending, particularly on health, education, agriculture and infrastructure development.

### Debt management policy
- Debt sustainability:
  - Recent update of debt sustainability analysis indicates that Burundi remains at a high risk of debt distress.
- Policy responses:
  - Preparing a legal framework governing debt management to be submitted to Parliament by the end of the year.
  - Going forward, seek only highly concessional loans and create an enabling environment to attract non-debt creating financial inflows.
  - Strengthen institutional and debt management capacity and prepare quarterly reports on debt forecasting.
  - Commitment to fully implement the debt management strategy.

### Monetary and exchange rate policies
- Monetary policy objectives:
  - Continue to focus on achieving price stability while ensuring private sector access to bank credit.
  - Contain growth in monetary aggregates at low levels to help anchor inflation expectations.
  - Deepen monetary operations and provide policy direction through the benchmark policy rate.
- Exchange rate regime:
  - Maintain the current flexible exchange rate regime.
  - Limit foreign exchange market interventions to smoothing short-term supply/demand volatility.
  - Promote inter-bank foreign market transactions.

### Financial sector policy
- Strategy and reforms:
  - Aim to develop a deeper, more stable financial sector to support private investment, inclusive growth, and development.
  - Focus the reform agenda on improving financial intermediation.
  - Strengthen supervision of banks and non-bank financial institutions.
- Institutional changes:
  - Restructured the banking supervision department to include the financial stability assessment function.
  - Broadened surveillance of foreign banks through joint inspections in collaboration with home-country supervisors.

### Conclusion
- Authorities remain committed to the medium-term fiscal framework and reform agenda to increase and sustain broad-based growth and intensify efforts to reduce poverty.
- Given the large external financing gap and the need for sound macroeconomic policies, the authorities consider IMF and other development partners’ assistance critical to achieving their development goals.

*Source: _cr13288 - Introduction.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr13288.pdf_