## 1. Recent Developments, 2008–14

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---

### Socio-political context
- Parliament efforts to amend the constitution, including facilitating a third term by the incumbent president, have been perceived by the opposition and civil society as a potential breach of the 2000 Arusha Peace agreement.
- Repatriation and reintegration pressures:
  - Some 48,000 refugees repatriated from neighboring countries.
  - Reintegration and relief for those associated with the conflict in Eastern Congo strain public services and add to unemployment pressures.
- Emergent conflicts over land in one of the world’s most densely populated countries (MEFP ¶2).

### Recent macroeconomic developments (2008–14)
- Economic activity and growth:
  - Growth expected at about 4.5 percent in 2013 and 4.7 percent in 2014, underpinned by agriculture, construction, and major infrastructure projects (fiber optics, hydropower, roads).
  - Signs of an uptick in tourist arrivals, though data coverage remains spotty.
- External sector:
  - Exports fell sharply by an estimated 35.5 percent, largely reflecting the decline in coffee exports.
  - Imports rose by about 2.5 percent, in part reflecting the impact of humanitarian aid.
  - Current account deficit increased to an estimated 23 percent of GDP compared to 18.5 percent in 2012.
  - Deficit financed by foreign direct investment, project grants and concessional loans.
- Inflation and monetary conditions:
  - Headline inflation declined from its peak of 25 percent (y-o-y) in March 2012 to about 9 percent (y-o-y) at end-2013.
  - Central bank reduced its policy rate by about 100 basis points since May to 10.7 percent in September.
  - Growth in broad money increased to about 19.5 percent (y-o-y) at end-October.
  - Growth in credit to the private sector remained subdued at about 6 percent (y-o-y).
  - Banking sector: adequately capitalized and profitable although nonperforming loans (NPLs) have picked up (Table 8).
  - Burundi franc remained stable since a sharp depreciation in early 2013.
- Fiscal performance:
  - Revenue collections increased by about 6 percent (y-o-y) at end-2013, outperforming program targets.
  - The 2014 budget adopted in December is broadly in line with the program; overall deficit lower by about 1 percentage point of GDP owing to higher-than-expected revenues in 2013 and containment of spending.
  - Good revenue performance mainly due to an increase in fuel taxes, implemented gradually since June and formalized in a new fuel retail price structure in September 2013.

### Program implementation and reforms
- Program implementation status:
  - Most end-June indicative targets met except pro-poor spending.
  - At end-September, all performance criteria and indicative targets were observed, including the indicative target on pro-poor expenditure (MEFP, Table I-1).
  - Satisfactory progress on structural reforms (MEFP, Table I-2).
- Customs and treasury reforms:
  - Streamlining of customs procedures at three recently established border posts with Rwanda and Tanzania (end-September benchmark) expected to ease transportation bottlenecks and lower costs.
  - Establishment of a coordination committee between the central bank and the ministry of finance to implement treasury and financial safeguards’ recommendations.
- Public Financial Management (PFM) progress:
  - Adoption of a manual for budget execution instituting the rationalized chain of expenditures (CRD).
  - Adoption of a ministerial ordinance officially instituting the CRD.
  - Nomination of commitment controllers in three pilot ministries representing 40 percent of total budget expenditure (agriculture, education, health).
  - Thirteen expenditure controllers, including those in the three pilot ministries, have been nominated and trained.
  - Shortcomings persist in IFMIS connectivity, expenditure control, accounting, budget preparation and execution, and treasury cash flow.
  - Treasury cash flow plan in place; regularized meetings between central bank and ministry of finance; delays in budget support or policy slippages still result in recourse to central bank financing.

### Outlook and risks
- Macroeconomic outlook:
  - Economic activity projected to improve further in 2014.
  - Inflation outlook favorable, absent poor harvests, owing to lower projected international food and fuel prices.
- Key risks:
  - Lower international coffee prices and the narrow export base.
  - Policy reversals of recently adopted measures.
  - Expenditure pressures in the run-up to the 2015 elections.
  - Slippages in implementation of structural reforms could jeopardize the outlook.
- Election-related fiscal risks:
  - Budget support projected to decline from 5 percent of GDP in 2010 to 2 percent of GDP in 2014.
  - Large influx of refugees increases demand for public services and land.
  - Policy-induced fiscal slippages have lowered the medium-term path for revenues relative to original program expectations.

### Box: Impact of Elections on Program Implementation (summary findings)
- Historical pattern:
  - Fiscal policy in Burundi remained prudent during the 2005 and 2010 elections.
  - Total spending was lower than programmed in both 2005 and 2010.
  - Current spending broadly in line with program; capital spending reduced through lower-than-programmed domestically financed projects.
  - Budget support was higher in 2010 relative to 2005.
- Risks for 2015:
  - Reduced budget support and refugee inflows heighten risks to fiscal stance and program implementation.

### Policy discussions and recommendations

- A. Recommitting to Revenue Mobilization
  - Corrective measures adopted in July in response to revenue slippages were instrumental in putting the program back on track (Country Report No. 13/288).
  - Fiscal position risks:
    - Burundi’s fiscal framework remains risky; fiscal position likely to remain structurally weak absent new revenue measures and given heavy reliance on donor support (about 50 percent of the total budget).
  - Recommended revenue measures and administrative actions:
    - Implement TA recommendations on revenue administration to strengthen compliance, reinforce capacity to manage large- and medium-sized taxpayers, and collect tax arrears (MEFP ¶10).
    - Rationalize discretionary exemptions; develop policies governing exemptions based on TA recommendations.
    - Revise the investment code and discuss the basis for a new excise law (benchmark September 2014).
    - Adopt a more sustainable petroleum pricing formula (in line with FAD advice, advocate a system of upper and lower price bands).
  - Contingency measures to build buffers:
    - Sale of telecoms licenses.
    - Collection of arrears from large- and medium-sized taxpayers.
    - Additional donor support.

- B. Strengthening Public Financial Management (PFM) Reforms
  - Continue implementation of the 2012 PFM strategy and expand rollout of the CRD and commitment controllers.
  - Enhance IFMIS connectivity and resources for expenditure controllers.
  - Better align treasury cash flow and commitment plans to mitigate under-execution of pro-poor spending targets.
  - Continue donor coordination on PFM reforms.

- C. Safeguarding Debt Sustainability
  - DSA update using the 5 percent discount rate shows some improvements but assessment of high risk of debt distress remains.
  - Two indicators still breach thresholds in the baseline scenario due to narrow export base.
  - Improvements: PV of external debt-to-GDP and debt-to-government revenue ratios now below relevant thresholds.
  - Policy implications:
    - Burundi has limited borrowing space; future loans should continue to be highly concessional.
    - Authorities have begun producing a quarterly report on domestic and external debt.
    - Fund TA planned in early 2014 to assist in finalizing a draft debt law (end-March 2014 benchmark).
    - AFRITAC regional assistance planned for 2014–15 to enhance debt management capacity and train staff.
    - IFC assisting on legal framework for public-private partnerships (PPP).
  - Key data points:
    - Coffee and tea account for about 80 percent of exports.

- D. Maintaining Price Stability and Facilitating External Adjustment
  - Monetary policy stance:
    - Authorities agreed to gear monetary policy toward stabilizing inflation expectations (MEFP ¶29).
    - After tightening, central bank lowered policy rate slightly to permit private sector credit expansion.
    - If inflationary pressures remain benign, authorities could consider gradually easing monetary policy; if inflation rises, tightening could use deposit auctions, required reserve ratio, and issuance of Treasury bills.
    - Staff caution: monetary easing to support growth should proceed gradually until the decline in inflation is sustained.
  - Exchange rate policy:
    - Authorities committed to a managed float within the East African Community (EAC) integration context.
    - Greater exchange rate flexibility important for adjustment and safeguarding international reserves (MEFP ¶30).
    - Authorities concerned about shallow foreign exchange market and possible volatility from lumpy transactions.
    - Central bank interventions to smooth volatility while promoting interbank FX market development.

- E. Safeguarding Financial Sector Soundness
  - Banking sector remains adequately capitalized and profitable, but NPLs have risen (Table 8).
  - Policy advice emphasizes prudent monetary and regulatory stance to preserve financial stability and support gradual credit expansion.

*Source: IMF Country Report — “Recent Developments and Program Implementation,” Burundi (selection).*

### Domestic liquidity conditions and banking sector developments

### Liquidity and banking sector
- Liquidity conditions improved following repatriation of coffee export revenues, donor inflows, and the entry of regional banks with access to cross-border financing.
- Overall liquidity ratios have 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 has helped commercial banks channel financing to productive sectors.
- The banking sector remains adequately capitalized and profitable, although NPLs have picked up reflecting the adverse impact of recent food and fuel shocks.
- Weaknesses in the legal system concerning creditor rights are a contributing factor to elevated NPLs.
- Note: In 2012, two of the East African Community’s largest banks, Kenya Commercial Bank (KCB) and Tanzania's CRDB opened branches.

### Central bank actions and supervisory enhancements
- Measures taken based on IMF TA recommendations:
  - More frequent reporting to the central bank on rolled-over loans.
  - Harmonization of the definition of NPLs in line with international standards.
  - Calculation of liquidity ratios based on local currency deposits (currently the ratio includes foreign deposits).
- Authorities envisage a change in the legal framework to allow the central bank to swiftly intervene in troubled banks to prevent and contain emerging crises.
- Steps to enhance supervision of the banking sector:
  - Restructured banking supervision department to incorporate the financial stability function.
  - Developed methodology and detailed manual of risk-based supervision; draft circular is being finalized.
  - Stepped up surveillance of pan-African banks through joint inspections with home-country supervisors.
- Migration to the International Financial Reporting System (IFRS) is in process (MEFP ¶13).
- Continued pursuit of safeguard measures (MEFP ¶15).

### Structural vulnerabilities and reforms
- Burundi’s economy is highly vulnerable to shocks due to a narrow export base and dependence on donor support.
- Trade balance structurally skewed towards imports; current account deficits financed through concessional borrowing from multilateral and bilateral creditors.
- Over the medium term, structural reforms to diversify the economy and reduce vulnerability to shocks are crucial for sustained growth and poverty reduction.
- Progress noted:
  - Adoption of a privatization law expected to boost the third round of bids for the 76 remaining coffee washing stations and help boost coffee exports over the medium term.
  - Electricity supply expanded by 15MW to 55MW since 2012, but less than 5percent of the population has access to electricity.
  - Large hydroelectric projects are not expected to come on stream before 2017.
  - Continued improvements in the business environment (including one-stop-shops for starting a business, securing construction permits, and registering property) are critical to attracting foreign direct investment.
- Burundi’s adherence to the EAC’s monetary union protocol is expected to buttress macroeconomic stability through harmonization of monetary and fiscal policies, fostering trade and investment, and enhancing employment opportunities.
- Caveat on Doing Business indicators: should be interpreted with caution due to a limited number of respondents, limited geographical coverage, and standardized assumptions on business constraints and information availability.

### Selected program structural measures (status examples)
- Prepare an expedited customs clearance procedure and establish 3 one-stop border posts — Date: September 30, 2013 — Status: 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 — Date: September 30, 2013 — Status: Met.
- Public financial management benchmarks (selected):
  - Prepare an audit of arrears on extra-budgetary expenditure and adopt a payment plan — Date: March 30, 2014 — Benchmark for Review: 5th — Status: (listed).
  - 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 — 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 — Date: September 30, 2014 — Benchmark for Review: 6th.
  - Put in place an interface between the revenue authority (OBR) and the Ministry of Finance — Date: December 30, 2014 — Benchmark for Review: 6th.
- Tax policy/Revenue administration:
  - Submit a law on excise taxes in line with IMF Technical Assistance — Date: September 30, 2014 — Benchmark for Review: 6th.
- Debt management:
  - Submit a new law on debt management to parliament — Date: March 30, 2014 — Benchmark for Review: 5th.

*Source: IMF staff report (Burundi).*

### Staff appraisal: macroeconomic outlook, risks, and policy advice

### Economic outlook and performance
- The economic recovery continues to gain momentum. Growth picked up on the back of solid agricultural and construction activity, along with improvements in the tourism sector.
- Looking ahead, prospects for growth and inflation in 2014 appear favorable.
- Performance under the ECF arrangement was satisfactory; all program PCs were observed.

### Revenue and public financial management priorities
- Re-commitment to revenue mobilization is critical given declining budget support and recent policy-induced revenue slippages.
- Revenue collection should be stepped up to create additional fiscal space for financing public investments critical to growth and poverty reduction.
- Further efforts needed to strengthen revenue collections, including:
  - Rationalizing discretionary exemptions.
  - Reinforcing tax administration.
  - Adopting a more sustainable petroleum pricing formula to help buttress fiscal revenues over the medium term.
- Improving public financial management is crucial: continued weaknesses in expenditure control, accounting, budget preparation and execution, and treasury cash flow management constrain policy effectiveness and program implementation.
- Continued TA and support from the long-term PFM advisor are critical to successful implementation of reforms.

### Debt policy
- Burundi remains at high risk of debt distress; staff urges continued reliance on concessional loans and grants and prudent fiscal policy to avoid unsustainable debt dynamics and recourse to central bank financing.
- Authorities are encouraged to expedite finalization of a debt law governing the contracting of debt; the public debt law will frame the country’s debt management strategy.

### Monetary and exchange rate policy
- Monetary policy should continue to be geared toward stabilizing inflation expectations. Although inflation has declined significantly, further changes in the monetary stance to support growth should proceed gradually until the decline in inflation becomes sustained.
- Staff encourages the central bank to step up efforts to improve liquidity forecasting, promote the interbank market, and enhance the effectiveness of monetary operations.
- Greater exchange rate flexibility is recommended as an important tool in rebalancing the policy mix.
- Staff encourages development of the interbank foreign exchange market to ensure more effective price discovery and to stand ready to intervene in the event of excessive exchange rate volatility.

### Risks and contingency planning
- Downside risks include an uncertain external environment, influx of refugees, and pre-election year uncertainty.
- Staff encourages authorities to build additional fiscal space to respond to contingencies in the run-up to 2015 elections.
- Strong policy commitments under the program will be needed to safeguard macroeconomic stability during this period.

*Source: IMF staff report (Burundi).*

### ECF arrangement, disbursements, and Fund exposure (highlights)

- Total for the ECF arrangement: 30.00 SDR million (disbursed) and 39.0 percent of quota (conditions table).
- Disbursement schedule excerpts:
  - January 27, 2012: 1.00 SDR million (Executive Board approval).
  - July 15, 2012: 4.00 SDR million (Completion of first review).
  - January 15, 2013: 5.00 SDR million (Completion of second review).
  - September 15, 2013: 5.00 SDR million (Completion of third review).
  - January 15, 2014: 5.00 SDR million (Completion of fourth review).
  - July 15, 2014: 5.00 SDR million (Completion of fifth review).
  - January 15, 2015: 5.00 SDR million (Completion of sixth review).
- Outstanding Fund credit (SDR million) sample series: 94.8, 94.2, 86.7, 73.8, 61.8, 49.3, 37.6, 26.4, 17.5, 11.1, 6.6, 4.1, 3.6.
- Outstanding Fund credit as percent of quota sample series: 123.1, 122.4, 112.7, 95.8, 80.2, 64.0, 48.8, 34.3, 22.7, 14.4, 8.5, 5.3, 4.6.

*Source: IMF staff estimates, projections, and Burundi authorities as presented in the source document.*

### Debt sustainability: DSA findings, scenarios, and policy implications

### Key DSA findings
- Updated LIC DSA indicates Burundi continues to be assessed at a high risk of debt distress.
- Both baseline public and external DSA suggest Burundi’s public sector debt is sustainable given the current size and evolution of the debt stock, but vulnerability to shocks is high due to the narrow export base.
- Discount rate for PV calculations and grant element: 5 percent.
- At end-2012, Burundi’s public and publicly guaranteed external debt stood at US $487 million or 22.3 percent of GDP.
- About 90 percent of Burundi’s outstanding nominal external PPG debt is owed to multilateral creditors.

### Alternative scenarios and stress tests (summary)
- Combined adverse shocks on GDP growth, exports, and FDI flow: debt indicators worsen significantly; four of the debt indicators breach the threshold in the medium term.
- Historical scenario (policies as in last ten years): two indicators breach the threshold; most indicators would double compared to the baseline and not improve in the long run.
- Footnote on combination of shocks: during 2014–15, GDP growth, export growth, USD GDP deflator and non-debt creating flows will be at their historical averages minus one-half standard deviation.
- Export base vulnerability:
  - PV of debt-to-exports ratio remains above the policy threshold of 100 percent in baseline, historical, and stress scenarios.
  - Conditional risk: if coffee production assumptions do not materialize and the country falls back into a fragility trap, debt indicators would significantly worsen.

### Representative indicators and thresholds (as presented)
- Indicative Thresholds (examples):
  - PV of debt to GDP policy threshold: 30 (actual series shown: 13.4, 5.8, 2.7).
  - PV of debt to exports policy threshold: 100 (actual series shown: 248.5, 78.4, 32.0).
  - PV of debt to revenue policy threshold: 200 (actual series shown: 101.9, 44.3, 20.9).
  - Debt service to exports threshold: 15 (actual series shown: 8.3, 5.1, 2.2).
  - Debt service to revenues threshold: 25 (actual series shown: 3.4, 2.9, 1.4).

### Policy implications and recommendations
- Foster a sound macroeconomic environment to promote growth, export diversification, and inflow of foreign direct investment.
- Continue and deepen reforms to avoid returning to past unsustainable policies.
- Prudent fiscal policy to avoid unsustainable borrowing.
- Swift adoption and implementation of DeMPA-based debt management strategy and finalization of a new law on public debt.
- Seek maximum concessionality in external financing; regularly review, monitor, and report all nonconcessional borrowing to ensure transparency and sound governance.

*Prepared by the staffs of the International Monetary Fund and the World Bank, February 18, 2014.*

### Macroeconomic projections and sectoral priorities (2014 outlook excerpts)

- GDP growth:
  - GDP growth is estimated to climb to 4.7 percent in 2014 compared to 4.5 percent in 2013.
  - Recovery drivers: secondary and tertiary sectors; start of construction on the hydroelectric dam (Kabu 16) in 2013; road projects financed by Japanese cooperation and AfDB.
- Inflation and external balances:
  - Inflation expected to decline to 7 percent in 2014.
  - Current account deficit should improve moderately to 21.4 percent of GDP (an improvement of 1.6 percentage points of GDP compared to 2013).
  - Official foreign reserves expected to rise slightly to 3.6 months of imports.
- Fiscal policy and revenue measures:
  - Total government revenue and expenditure expected to reach 27.6 percent and 29 percent of GDP, respectively.
  - Overall fiscal balance (cash basis, including grants) should be contained at 1.6 percent of GDP.
  - Pro-poor expenditure to rise to around 9.5 percent of GDP; wage bill under control.
  - Total budget revenue (excluding grants) estimated at FBu 627.3 billion compared to FBu 558 billion in 2013.
  - Revenue measures include administrative reforms, 10-percent tax on remuneration of political representatives, expansion of TIN, excise tax on beer and wine, one-stop border posts, enactment of VAT law.
  - Government to seek IMF TA to draft an excise code and restructure tax exemption system.
  - To meet unforeseen pre-election requirements, government will seek revenue from renewal of telecommunication licenses and collection of tax arrears.
- Expenditure composition and sector priorities:
  - Total expenditure in 2014 could rise by 3.4 percent to FBu 1,393.3 billion.
  - Wage bill projected at FBu 322.3 billion, or 6.7 percent of GDP.
  - Domestically-financed capital expenditure expected at FBu 93.9 billion, ~2.0 percent of GDP.
  - Zero vehicle fleet (Charroi zéro) policy adopted to reduce government spending on vehicle fleet.
  - Health: continuation of free health care for children under five and care for women in childbirth; priority hiring of medical personnel while stabilizing the wage bill.
  - Education: continue free primary school tuition, extend to higher education, expand school cafeterias, build new classrooms, hire teachers.
  - Agriculture: encourage fertilizer use to increase productivity and contribute to the National Agricultural and Livestock Investment Plan.
- Debt policy:
  - Intend to request funds as grants or highly concessional loans with a grant element of at least 50 percent.
- Monetary and exchange rate policies:
  - Monetary policy guided by pursuit of price stability; BRB to monitor inflation and improve forecasting.
  - If inflationary pressures pose no threat, BRB may weigh gradual easing of monetary policy in consultation with Fund staff.
  - BRB requested IMF TA to build capacity for monetary policy design and instruments.
  - Exchange rate policy: active market-making in the foreign exchange interbank market; reduce frequency and amounts of interventions; central bank committed to pursuing a floating exchange rate regime in the EAC context.
- Structural and PFM measures:
  - Decree on appointment and legal status of the Receiver General of the OBR; OBR allocation to 3 percent of collected revenue.
  - Tax on incoming calls: proceeds to Receiver General of the OBR for clearing into the treasury single account.
  - Modernization of SIGEFI (with AfDB and the Netherlands) to secure expenditure chain and interconnect with salary and revenue IT systems.
- PRSP-II pillars:
  - (i) rule of law, governance, gender equality;
  - (ii) transformation to sustained, job-creating growth;
  - (iii) improvement in accessibility/quality of basic services;
  - (iv) management of land and environment.
- Program monitoring:
  - Semiannual IMF Executive Board reviews based on quantitative performance criteria, indicative targets, and structural benchmarks.
  - Table I.1 highlights (2013 figures, BIF billion unless otherwise indicated): examples of indicators and status ("Met") for net foreign assets, net domestic assets, net domestic financing, external payments arrears, nonconcessional external debt ceilings, gross fiscal revenue (excluding grants), reserve money, pro-poor spending.
  - Table I.2 lists structural benchmarks for 2013-14 with dates and statuses (e.g., adoption of decree on OBR Commissioner — March 30, 2013 — Met with delay).

*Source: Appendix I. Letter of Intent (Burundi), February 6, 2014.*

*Source: IMF Country Report — excerpts from _cr1483_ (Recent Developments, 2008–14; staff report and supporting appendices).*

### 1. Recent Developments, 2008–14 _______________________________________________________________ 16

### 1. Recent Developments, 2008–14

### Socio-political context
- Parliament efforts to amend the constitution, including facilitating a third term by the incumbent president, have been perceived by the opposition and civil society as a potential breach of the 2000 Arusha Peace agreement.
- Repatriation and reintegration pressures:
  - Some 48,000 refugees repatriated from neighboring countries.
  - Reintegration and relief for those associated with the conflict in Eastern Congo strain public services and add to unemployment pressures.
- Emergent conflicts over land in one of the world’s most densely populated countries (MEFP ¶2).

### Recent macroeconomic developments (2008–14)
- Economic activity and growth:
  - Growth expected at about 4.5 percent in 2013 and 4.7 percent in 2014, underpinned by agriculture, construction, and major infrastructure projects (fiber optics, hydropower, roads).
  - Signs of an uptick in tourist arrivals, though data coverage remains spotty.
- External sector:
  - Exports fell sharply by an estimated 35.5 percent, largely reflecting the decline in coffee exports.
  - Imports rose by about 2.5 percent, in part reflecting the impact of humanitarian aid.
  - Current account deficit increased to an estimated 23 percent of GDP compared to 18.5 percent in 2012.
  - Deficit financed by foreign direct investment, project grants and concessional loans.
- Inflation and monetary conditions:
  - Headline inflation declined from its peak of 25 percent (y-o-y) in March 2012 to about 9 percent (y-o-y) at end-2013.
  - Central bank reduced its policy rate by about 100 basis points since May to 10.7 percent in September.
  - Growth in broad money increased to about 19.5 percent (y-o-y) at end-October.
  - Growth in credit to the private sector remained subdued at about 6 percent (y-o-y).
  - Banking sector: adequately capitalized and profitable although nonperforming loans (NPLs) have picked up (Table 8).
  - Burundi franc remained stable since a sharp depreciation in early 2013.
- Fiscal performance:
  - Revenue collections increased by about 6 percent (y-o-y) at end-2013, outperforming program targets.
  - The 2014 budget adopted in December is broadly in line with the program; overall deficit lower by about 1 percentage point of GDP owing to higher-than-expected revenues in 2013 and containment of spending.
  - Good revenue performance mainly due to an increase in fuel taxes, implemented gradually since June and formalized in a new fuel retail price structure in September 2013.

### Program implementation and reforms
- Program implementation status:
  - Most end-June indicative targets met except pro-poor spending.
  - At end-September, all performance criteria and indicative targets were observed, including the indicative target on pro-poor expenditure (MEFP, Table I-1).
  - Satisfactory progress on structural reforms (MEFP, Table I-2).
- Customs and treasury reforms:
  - Streamlining of customs procedures at three recently established border posts with Rwanda and Tanzania (end-September benchmark) expected to ease transportation bottlenecks and lower costs.
  - Establishment of a coordination committee between the central bank and the ministry of finance to implement treasury and financial safeguards’ recommendations.
- Public Financial Management (PFM) progress:
  - Adoption of a manual for budget execution instituting the rationalized chain of expenditures (CRD).
  - Adoption of a ministerial ordinance officially instituting the CRD.
  - Nomination of commitment controllers in three pilot ministries representing 40 percent of total budget expenditure (agriculture, education, health).
  - Thirteen expenditure controllers, including those in the three pilot ministries, have been nominated and trained.
  - Shortcomings persist in IFMIS connectivity, expenditure control, accounting, budget preparation and execution, and treasury cash flow.
  - Treasury cash flow plan in place; regularized meetings between central bank and ministry of finance; delays in budget support or policy slippages still result in recourse to central bank financing.

### Outlook and risks
- Macroeconomic outlook:
  - Economic activity projected to improve further in 2014.
  - Inflation outlook favorable, absent poor harvests, owing to lower projected international food and fuel prices.
- Key risks:
  - Lower international coffee prices and the narrow export base.
  - Policy reversals of recently adopted measures.
  - Expenditure pressures in the run-up to the 2015 elections.
  - Slippages in implementation of structural reforms could jeopardize the outlook.
- Election-related fiscal risks:
  - Budget support projected to decline from 5 percent of GDP in 2010 to 2 percent of GDP in 2014.
  - Large influx of refugees increases demand for public services and land.
  - Policy-induced fiscal slippages have lowered the medium-term path for revenues relative to original program expectations.

### Box: Impact of Elections on Program Implementation (summary findings)
- Historical pattern:
  - Fiscal policy in Burundi remained prudent during the 2005 and 2010 elections.
  - Total spending was lower than programmed in both 2005 and 2010.
  - Current spending broadly in line with program; capital spending reduced through lower-than-programmed domestically financed projects.
  - Budget support was higher in 2010 relative to 2005.
- Risks for 2015:
  - Reduced budget support and refugee inflows heighten risks to fiscal stance and program implementation.

### Policy discussions and recommendations
A. Recommitting to Revenue Mobilization
- Corrective measures adopted in July in response to revenue slippages were instrumental in putting the program back on track (Country Report No. 13/288).
- Fiscal position risks:
  - Burundi’s fiscal framework remains risky; fiscal position likely to remain structurally weak absent new revenue measures and given heavy reliance on donor support (about 50 percent of the total budget).
- Recommended revenue measures and administrative actions:
  - Implement TA recommendations on revenue administration to strengthen compliance, reinforce capacity to manage large- and medium-sized taxpayers, and collect tax arrears (MEFP ¶10).
  - Rationalize discretionary exemptions; develop policies governing exemptions based on TA recommendations.
  - Revise the investment code and discuss the basis for a new excise law (benchmark September 2014).
  - Adopt a more sustainable petroleum pricing formula (in line with FAD advice, advocate a system of upper and lower price bands).
- Contingency measures to build buffers:
  - Sale of telecoms licenses.
  - Collection of arrears from large- and medium-sized taxpayers.
  - Additional donor support.

B. Strengthening Public Financial Management (PFM) Reforms
- Continue implementation of the 2012 PFM strategy and expand rollout of the CRD and commitment controllers.
- Enhance IFMIS connectivity and resources for expenditure controllers.
- Better align treasury cash flow and commitment plans to mitigate under-execution of pro-poor spending targets.
- Continue donor coordination on PFM reforms.

C. Safeguarding Debt Sustainability
- DSA update using the 5 percent discount rate shows some improvements but assessment of high risk of debt distress remains.
- Two indicators still breach thresholds in the baseline scenario due to narrow export base.
- Improvements: PV of external debt-to-GDP and debt-to-government revenue ratios now below relevant thresholds.
- Policy implications:
  - Burundi has limited borrowing space; future loans should continue to be highly concessional.
  - Authorities have begun producing a quarterly report on domestic and external debt.
  - Fund TA planned in early 2014 to assist in finalizing a draft debt law (end-March 2014 benchmark).
  - AFRITAC regional assistance planned for 2014–15 to enhance debt management capacity and train staff.
  - IFC assisting on legal framework for public-private partnerships (PPP).
- Key data points:
  - Coffee and tea account for about 80 percent of exports.

D. Maintaining Price Stability and Facilitating External Adjustment
- Monetary policy stance:
  - Authorities agreed to gear monetary policy toward stabilizing inflation expectations (MEFP ¶29).
  - After tightening, central bank lowered policy rate slightly to permit private sector credit expansion.
  - If inflationary pressures remain benign, authorities could consider gradually easing monetary policy; if inflation rises, tightening could use deposit auctions, required reserve ratio, and issuance of Treasury bills.
  - Staff caution: monetary easing to support growth should proceed gradually until the decline in inflation is sustained.
- Exchange rate policy:
  - Authorities committed to a managed float within the East African Community (EAC) integration context.
  - Greater exchange rate flexibility important for adjustment and safeguarding international reserves (MEFP ¶30).
  - Authorities concerned about shallow foreign exchange market and possible volatility from lumpy transactions.
  - Central bank interventions to smooth volatility while promoting interbank FX market development.

E. Safeguarding Financial Sector Soundness
- Banking sector remains adequately capitalized and profitable, but NPLs have risen (Table 8).
- Policy advice emphasizes prudent monetary and regulatory stance to preserve financial stability and support gradual credit expansion.

*Source: IMF Country Report — “Recent Developments and Program Implementation,” Burundi (selection)._cr1483 - 1. Recent Developments, 2008–14_*

### 13. Domestic liquidity conditions improved following severe shortages in 2012. In recent

### _cr1483 - 13. Domestic liquidity conditions improved following severe shortages in 2012. In recent

### Domestic liquidity and banking sector developments
- Liquidity conditions improved following repatriation of coffee export revenues, donor inflows, and the entry of regional banks with access to cross-border financing.
- Overall liquidity ratios have 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 has helped commercial banks channel financing to productive sectors.
- The banking sector remains adequately capitalized and profitable, although NPLs have picked up reflecting the adverse impact of recent food and fuel shocks.
- Weaknesses in the legal system concerning creditor rights are a contributing factor to elevated NPLs.
- Note: In 2012, two of the East African Community’s largest banks, Kenya Commercial Bank (KCB) and Tanzania's CRDB opened branches.

### Central bank actions and supervisory enhancements
- Measures taken based on IMF TA recommendations:
  - More frequent reporting to the central bank on rolled-over loans.
  - Harmonization of the definition of NPLs in line with international standards.
  - Calculation of liquidity ratios based on local currency deposits (currently the ratio includes foreign deposits).
- Authorities envisage a change in the legal framework to allow the central bank to swiftly intervene in troubled banks to prevent and contain emerging crises.
- Steps to enhance supervision of the banking sector:
  - Restructured banking supervision department to incorporate the financial stability function.
  - Developed methodology and detailed manual of risk-based supervision; draft circular is being finalized.
  - Stepped up surveillance of pan-African banks through joint inspections with home-country supervisors.
- Migration to the International Financial Reporting System (IFRS) is in process (MEFP ¶13).
- Continued pursuit of safeguard measures (MEFP ¶15).

### Other macro-critical reforms and structural context
- Burundi’s economy is highly vulnerable to shocks due to a narrow export base and dependence on donor support.
- Trade balance structurally skewed towards imports; current account deficits financed through concessional borrowing from multilateral and bilateral creditors.
- Over the medium term, structural reforms to diversify the economy and reduce vulnerability to shocks are crucial for sustained growth and poverty reduction.
- Authorities noted that greater program flexibility of the 50 percent grant element under the debt limits policy would allow borrowing to finance electricity and other vital infrastructure projects.
- Progress noted:
  - Adoption of a privatization law expected to boost the third round of bids for the 76 remaining coffee washing stations and help boost coffee exports over the medium term.
  - Electricity supply expanded by 15MW to 55MW since 2012, but less than 5percent of the population has access to electricity.
  - Large hydroelectric projects are not expected to come on stream before 2017.
  - Continued improvements in the business environment (including one-stop-shops for starting a business, securing construction permits, and registering property) are critical to attracting foreign direct investment.
- Burundi’s adherence to the EAC’s monetary union protocol is expected to buttress macroeconomic stability through harmonization of monetary and fiscal policies, fostering trade and investment, and enhancing employment opportunities.
- Caveat on Doing Business indicators: should be interpreted with caution due to a limited number of respondents, limited geographical coverage, and standardized assumptions on business constraints and information availability.

### Program implementation and structural measures (selected)
- Program status:
  - Program is on track; performance criteria and indicative targets at end-September were met.
  - Satisfactory structural reform progress; authorities reiterated commitment to complete planned reforms.
- Debt capacity:
  - Burundi’s capacity to repay the Fund is adequate. Obligations to the Fund based on existing and prospective credit, measured in relation to official reserves or exports of goods and services, do not show solvency or liquidity risks (Table 6).
- Selected structural measures (Text Table 1):
  - Prepare an expedited customs clearance procedure and establish 3 one-stop border posts. — Date: September 30, 2013 — Status: Met — Objective: Reduce fraud and increase customs revenue.
  - 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 recommendations concerning public financial management (including from the special audit of large disbursements on behalf of the government processed by the BRB during June 30, 2011–March 31, 2012). — Date: September 30, 2013 — Status: Met — Objective: Implement a monitoring framework to ensure that the safeguard recommendations are met.
- Selected structural measures (Text Table 2: Fifth and Sixth Reviews):
  - Public financial management:
    - Prepare an audit of arrears on extra-budgetary expenditure (not committed and without payment order) in prior years and adopt a payment plan. — Date: March 30, 2014 — Benchmark for Review: 5th — Objective: Identify and verify the amounts actually due and disputed invoices.
    - 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. — Date: June 30, 2014 — Benchmark for Review: 5th — Objective: Ensure timely and accurate reconciliation between government accounts and the accuracy of revenues collected.
    - Implement a program to unify the current database of civil servants with that from the 2008 census. — Date: September 30, 2014 — Benchmark for Review: 6th — Objective: Reinforce the Ministry of Finance’s management of salaries.
    - Put in place an interface between the revenue authority (OBR) and the Ministry of Finance. — Date: December 30, 2014 — Benchmark for Review: 6th — Objective: Improve budget execution.
  - Tax policy/Revenue administration:
    - Submit a law on excise taxes in line with IMF Technical Assistance. — Date: September 30, 2014 — Benchmark for Review: 6th — Objective: Provide an umbrella legal framework clearly spelling out the purpose and scope of the law.
  - Debt management:
    - Submit a new law on debt management to parliament. — Date: March 30, 2014 — Benchmark for Review: 5th — Objective: Establish a legal framework governing public debt.

### Staff appraisal: macroeconomic outlook, risks, and policy advice
- Economic outlook and performance:
  - The economic recovery continues to gain momentum. Growth picked up on the back of solid agricultural and construction activity, along with improvements in the tourism sector.
  - Looking ahead, prospects for growth and inflation in 2014 appear favorable.
  - Performance under the ECF arrangement was satisfactory; all program PCs were observed.
- Revenue and public financial management priorities:
  - Re-commitment to revenue mobilization is critical given declining budget support and recent policy-induced revenue slippages.
  - Revenue collection should be stepped up to create additional fiscal space for financing public investments critical to growth and poverty reduction.
  - Further efforts needed to strengthen revenue collections, including: rationalizing discretionary exemptions, reinforcing tax administration, and adopting a more sustainable petroleum pricing formula to help buttress fiscal revenues over the medium term.
  - Improving public financial management is crucial: continued weaknesses in expenditure control, accounting, budget preparation and execution, and treasury cash flow management constrain policy effectiveness and program implementation.
  - Continued TA and support from the long-term PFM advisor are critical to successful implementation of reforms.
- Debt policy:
  - Burundi remains at high risk of debt distress; staff urges continued reliance on concessional loans and grants and prudent fiscal policy to avoid unsustainable debt dynamics and recourse to central bank financing.
  - Authorities are encouraged to expedite finalization of a debt law governing the contracting of debt; the public debt law will frame the country’s debt management strategy.
- Monetary and exchange rate policy:
  - Monetary policy should continue to be geared toward stabilizing inflation expectations. Although inflation has declined significantly, further changes in the monetary stance to support growth should proceed gradually until the decline in inflation becomes sustained.
  - Staff encourages the central bank to step up efforts to improve liquidity forecasting, promote the interbank market, and enhance the effectiveness of monetary operations.
  - Greater exchange rate flexibility is recommended as an important tool in rebalancing the policy mix.
  - Staff encourages development of the interbank foreign exchange market to ensure more effective price discovery and to stand ready to intervene in the event of excessive exchange rate volatility.
- Risks and contingency planning:
  - Downside risks include an uncertain external environment, influx of refugees, and pre-election year uncertainty.
  - Staff encourages authorities to build additional fiscal space to respond to contingencies in the run-up to 2015 elections.
  - Strong policy commitments under the program will be needed to safeguard macroeconomic stability during this period.

*Source: IMF staff report (Burundi).*

### 27. Staff supports the completion of the fourth review of the ECF arrangement, based on

### 27. Staff supports the completion of the fourth review of the ECF arrangement, based on satisfactory performance and the authorities’ forward-looking policy commitments.

### Recent economic developments and outlook
- Growth: Real GDP growth (y-o-y) — recent pickup; projections indicate continuing growth (figures shown in Figure 1).
- Inflation:
  - Headline and core inflation are coming down (Figure 1).
  - Consumer prices (period average): 9.7, 17.9, 18.0, 9.0, 7.9, 7.0, 7.0, 6.0, 5.5 (Table 1).
  - Consumer prices (end of period): 14.9, 11.8, 12.0, 10.5, 8.8, 4.6, 5.9, 6.0, 5.0 (Table 1).
- External sector:
  - Current account balance (percent of GDP): -14.7, -16.3, -18.5, -16.0, -23.0, -16.5, -21.3, -21.2, -20.1 (Table 1; Table 5 memoranda).
  - Gross official reserves (US$ million): 296, 269, 309, 324, 326, 356, 355, 391, 426 (Table 1; Table 5).
  - Months of imports: 3.3, 3.3, 3.3, 3.8, 3.5, 4.0, 3.6, 3.7, 3.9 (Table 1; Table 5).
- Real effective exchange rate: appreciated reflecting higher inflation than in trading partners (Figure 1).

### Fiscal developments and public finances
- Revenues and grants:
  - Revenue and grants (percent of GDP): 35.9, 33.0, 31.4, 28.4, 30.0, 27.6, 27.4, 27.5, 27.9 (Table 1; Table 2).
  - Tax and nontax revenue (percent of GDP): 15.3, 14.8, 14.5, 13.0, 13.2, 13.1, 13.2, 13.3, 13.3 (Table 1).
- Expenditure and balance:
  - Total expenditure (percent of GDP): 39.8, 34.6, 35.1, 30.1, 31.9, 30.1, 29.0, 29.4, 29.7 (Table 1).
  - Net lending (+) / borrowing (-) (percent of GDP): -3.9, -1.7, -3.7, -1.7, -1.9, -2.5, -1.6, -1.9, -1.8 (Table 1).
  - Domestic primary deficit (memorandum): -174.3, -132.3, -130.9, -171.7, -140.8, -110.4, -93.1, -93.8, -108.1, -119.1 (Table 2, BIF billion and percent).
- Composition highlights (Table 2):
  - Tax revenue (BIF billion series): 424.1, 492.0, 491.8, 494.4, 518.3, 562.1, 573.4, 580.2, 650.3, 723.1.
  - Grants (BIF billion series): 615.0, 648.2, 610.2, 641.8, 708.4, 682.9, 684.8, 677.8, 757.9, 866.5.
  - Compensation of employees (BIF billion series): 258.2, 283.8, 282.2, 303.3, 297.4, 324.0, 322.3, 322.3, 354.6, 386.7.
- Fiscal narrative from figures: Revenues have stabilized after corrective measures; spending has been contained; debt relief under HIPC has provided some fiscal space; more revenues need to be mobilized to keep up with EAC peers (Figure 3 captions).

### Monetary and financial sector developments
- Monetary aggregates and credit:
  - Net foreign assets (change as percent of M2): -12.1, -6.5, -5.3, 3.1, 4.3, 6.9, 6.1, 8.7, 8.8 (Table 3).
  - Domestic credit (percent change): 30.7, 12.3, 15.2, 15.6, 8.5, 19.5, 17.8, 15.0, 14.0 (Table 3).
  - Credit to the private sector remains subdued in levels and low as share of GDP (Figure 2).
  - Credit to the private sector (percent of GDP): series shown in Figure 2 and Table 3 (private sector growth rates: 24.1, 6.9, 9.9, 15.5, 8.4, 16.4, 14.7).
- Monetary aggregates:
  - Money and quasi-money (M2) annual change: 6.1, 7.3, 10.9, 16.9, 16.7, 12.9, 13.2, 11.7, 10.8 (Table 3).
  - Reserve money (12–month growth rate, memorandum): 0.6, 26.5, 13.7, 19.7, 18.5, 15.5, 15.8, 12.7, 9.5 (Table 3).
- Interest rates and banking soundness:
  - Policy rates have declined as regional shocks abated (Figure 2).
  - Banking system indicators (Table 8): Capital requirement over weighted assets (solvency ratio) series: 19.1, 19.7, 21.7, 20.7, 20.0, 19.8, 19.8, 18.9, 19.7, 20.2, 21.1, 21.8, 19.9. Nonperforming loans (percent of gross loans): 13.0, 10.0, 8.8, 7.6, 7.3, 7.7, 8.1, 7.3, 8.0, 8.7, 9.6, 10.1, 9.9.

### External sector details and balance of payments
- Trade and current account (Table 5):
  - Current account (US$ million): -322.8, -386.9, -433.3, -423.3, -632.2, -478.2, -643.7, -689.5, -707.1 (2011–2016 series with projections).
  - Trade balance (US$ million): -647.7, -697.9, -751.5, -636.0, -820.6, -669.7, -823.1, -861.7, -931.1.
  - Exports f.o.b. (US$ million): 124.0, 129.8, 134.7, 106.0, 86.8, 119.2, 99.9, 109.4, 116.4.
  - Imports f.o.b. (US$ million): -771.7, -827.7, -886.2, -742.0, -907.4, -788.9, -923.0, -971.1, -1,047.5.
  - Current transfers (net) (US$ million): 443.1, 430.7, 446.0, 359.7, 352.2, 334.3, 337.6, 334.5, 341.1.
- Prices and commodity influences:
  - Coffee price (US cents per lb): 273, 188, 188, 138, 134, 133, 124, 134, 131 (Table 5 memorandum).
  - Oil (US$/barrel): 104, 105, 105, 102, 104, 98, 101, 95, 91 (Table 5 memorandum).
- Balance of payments financing:
  - Financial account (US$ million): 151.7, 137.1, 181.2, 235.4, 374.5, 229.3, 392.7, 386.0, 370.3 (Table 5).
  - Overall balance and financing: Overall balance series and change in official reserves series shown in Table 5.

### ECF arrangement, disbursements, and Fund exposure
- ECF disbursements and reviews (Table 7):
  - Total for the ECF arrangement: 30.00 SDR million (disbursed) and 39.0 percent of quota (conditions table).
  - Schedule excerpts:
    - January 27, 2012: 1.00 SDR million (Executive Board approval).
    - July 15, 2012: 4.00 SDR million (Completion of first review, based on observance of performance criteria at end-March 2012).
    - January 15, 2013: 5.00 SDR million (Completion of second review, based on observance of performance criteria at end-September 2012).
    - September 15, 2013: 5.00 SDR million (Completion of third review, based on observance of performance criteria at end-March 2013).
    - January 15, 2014: 5.00 SDR million (Completion of fourth review, based on observance of performance criteria at end-September 2013).
    - July 15, 2014: 5.00 SDR million (Completion of fifth review, based on observance of performance criteria at end-March 2014).
    - January 15, 2015: 5.00 SDR million (Completion of sixth review, based on observance of performance criteria at end-September 2014).
- Fund obligations and capacity to repay (Table 6):
  - Outstanding Fund credit (SDR million): 94.8, 94.2, 86.7, 73.8, 61.8, 49.3, 37.6, 26.4, 17.5, 11.1, 6.6, 4.1, 3.6 (2013–2025 series).
  - Total obligations based on existing and prospective credit (SDR million): 3.2, 10.6, 12.7, 13.2, 12.2, 12.6, 11.9, 11.2, 9.0, 6.4, 4.5, 2.5, 0.5.
  - Percent of exports of goods and services (total obligations): 3.4, 9.9, 11.0, 8.4, 7.2, 6.8, 5.8, 5.0, 3.7, 2.4, 1.5, 0.8, 0.1.
  - Outstanding Fund credit as percent of quota: 123.1, 122.4, 112.7, 95.8, 80.2, 64.0, 48.8, 34.3, 22.7, 14.4, 8.5, 5.3, 4.6.

### Staff assessment and policy implications
- Staff recommendation:
  - Staff supports the completion of the fourth review of the ECF arrangement, based on satisfactory performance and the authorities’ forward-looking policy commitments (opening sentence).
- Policy priorities and signals from data:
  - Continue fiscal consolidation while mobilizing more domestic revenues to align with EAC peers (Figure 3 captions; Tables 1–2).
  - Maintain monetary stability to support falling inflation and rebuild reserves (Figure 1; Table 3; Table 5 memoranda).
  - Strengthen financial sector intermediation to raise credit to the private sector from currently subdued levels (Figure 2; Table 3).
  - Manage external vulnerabilities by rebuilding gross official reserves (gross official reserves projections in Table 6 memorandum) and addressing trade balance pressures driven by imports and commodity price shifts (Table 5).

*Source: IMF staff estimates, projections, and Burundi authorities as presented in the source document.*

### Appendix I. Letter of Intent

### Appendix I. Letter of Intent

### I. Purpose and request
- Letter dated February 6, 2014, from Burundian authorities to the IMF Managing Director requesting:
  - Completion of the fourth review of the ECF arrangement.
  - Setting of new performance and indicative criteria for September 2014.
  - Fifth disbursement of SDR 5 million under the ECF arrangement.
- Authorities authorize publication of this letter, the attached MEFP and TMU, and the IMF staff report on the fourth review, subject to Executive Board approval.
- Expectation of review timetable:
  - Fifth review based on end-March 2014 performance criteria to be completed by the latest July 31, 2014.
  - Sixth review based on September 2014 performance criteria to be completed by the latest January 31, 2015.

### II. Program objectives and commitments
- Program objectives:
  - Consolidate economic and political gains.
  - Promote inclusive economic growth.
  - Contain inflation.
  - Strengthen policies to combat endemic poverty.
- Policy commitments:
  - Preserve sustainability of public finances and debt while boosting growth.
  - Maintain prudent budgetary and monetary policies to anchor inflationary expectations.
  - Consult the IMF in advance of adoption of additional measures or revisions to policies contained in the MEFP.
  - Provide the IMF with necessary information for implementation and monitoring as detailed in the Technical Memorandum of Understanding.

### III. Economic developments and program implementation through end-September 2013 / 2013 outcomes
- Growth and inflation:
  - GDP growth expected to improve from 4 percent in 2012 to 4.5 percent in 2013.
  - Inflation moderating slowly due to rising food and fuel prices and weak agricultural production.
- External sector:
  - Current account (including transfers) deficit reached approximately 23 percent of GDP in 2013 compared to 18.5 percent in 2012.
  - Imports rose by about 2.5 percent; exports fell by more than 35.5 percent (largely due to decline in coffee exports).
  - Gross official reserves equivalent to 3.5 months of imports in 2013.
- Monetary sector and policy:
  - Refinancing rate indexed to 13-week treasury paper plus 3 percentage points.
  - Required reserve ratio maintained at 3 percent.
  - Average refinancing rate for the period was 11.7 percent.
  - Monetary and credit growth in the private sector approximately 17 percent and 9 percent, respectively.
  - Creation of a Monetary Policy Committee publishing quarterly reports and a monetary policy statement.
  - BRB interventions: foreign exchange market interventions; elimination of restrictions on cash withdrawals from foreign exchange accounts; encouraged banks to supply the interbank market with foreign exchange; monitors liquidity and stands ready to intervene.
- Fiscal outcomes and revenue mobilization:
  - Tax revenue expected to reach about FBu 556 billion at end-December 2013, up 3 percent compared to 2012.
  - Overall budget deficit (cash basis, non-HIPC grants included) estimated at 2 percent of GDP at end-December 2013.
  - Tax burden declined to 12.9 percent of GDP.
  - Downward trend of the wage bill: 7 percent of GDP in 2013, down 0.8 percentage points of GDP compared to 2012.
  - Roll-out of payroll software (OPEN PRH) reduced payroll processing times and expunged ghost workers.
- Program implementation and fiscal controls:
  - By end-September 2013, all quantitative performance criteria and all indicative targets were met, including the indicative target on pro-poor expenditures.
  - 74 percent of the budget covered by the rationalized expenditure chain (CEDs deployed to ministries).
  - Outstanding arrears audit underway; estimate of arrears at FBu 90 billion attributable to extrabudgetary spending on vehicle fleet and goods and services for the army, education, and health.
  - Cash-flow management committee strengthened but hampered by unpredictability of budget grant disbursements.
  - Law amending the VAT and the law establishing the tax procedures code enacted.
  - Measures to ease movement of goods with Tanzania and Rwanda via one-stop border posts planned.
- Debt management:
  - Action plan developed following DeMPA; government publishes a quarterly public debt report and portfolio analysis.
  - A modern debt management unit created within the Ministry of Finance and Planning for Economic Development.
  - A third IMF mission expected in April to help finalize the new law on debt.
- Financial sector reforms and supervision:
  - Central Bank projects to modernize the financial sector under the Financial Sector Development Project:
    - Strengthen supervision of banks, non-bank financial institutions, and microfinance institutions.
    - Modernize payment systems (ACH/RTGS, electronic banking, central securities depository) through enhanced IT infrastructure.
    - Implement an automated banking system and legal/institutional framework for the payment system.
  - Draft law on the national payment system submitted to the Council of Ministers on April 4, 2012; returned for corrections and under continued discussion.
  - Guidelines on business continuity management adopted and to be implemented by no later than June 30, 2014.
  - Bank supervision unit restructured to include financial stability; risk-based supervision methodology and manual being finalized.
  - Final migration by commercial banks towards IFRS being completed with quality control of reporting.
  - Joint inspection missions with other central banks for systemically linked pan-African banks conducted.
  - Amended draft banking law incorporates IMF and National Bank of Belgium observations; will cover microfinance, the National Postal Administration, and payment services, with attendant regulations to follow.
  - BRB submits quarterly reserve management reports to its Board and has prepared a schedule of regular meetings with the Ministry of Finance for safeguards implementation.

### IV. Structural reforms and sectoral developments
- Coffee sector:
  - Privatization program for washing stations: 41 sold to domestic and international private investors in two bidding procedures; government commitment to reserve 25 percent of capital for coffee growers.
  - Remaining 76 washing stations to be offered in a new bidding process in 2014 after valuation review.
  - Strategy: increase private sector role to boost production and minimize cyclical effects.
- Business climate and private sector development:
  - Reforms to reduce constraints on business start-ups, issuance of building permits, property transfers, and regional trade.
  - Burundi ranked among the 29 most reform-oriented countries in Doing Business 2014, rising 37 spots from 177th to 140th between 2011 and 2014.

### V. Risks and outlook for 2014
- Downside risks to program implementation and growth:
  - Global economic slowdown, especially in Europe.
  - Return and influx of refugees from neighboring countries.
  - Sociopolitical tensions in the sub-region, particularly the Democratic Republic of the Congo.
- Policy stance for 2014:
  - Government intends to implement measures in 2014 to achieve program objectives consistent with PRSP-II.
  - Authorities recognize need for continued technical and financial support from development partners due to narrow tax base and exposure to external shocks.

*Source: Appendix I. Letter of Intent (Burundi), February 6, 2014.*

### 19.      Despite these risks, GDP growth is estimated to climb to 4.7 percent in 2014 compared to

### _cr1483 - 19.      Despite these risks, GDP growth is estimated to climb to 4.7 percent in 2014 compared to

### Macroeconomic outlook
- GDP growth is estimated to climb to 4.7 percent in 2014 compared to 4.5 percent in 2013.
- Recovery drivers: primarily the secondary and tertiary sectors; start of construction on the hydroelectric dam (Kabu 16) in 2013; road projects financed through Japanese cooperation and the African Development Bank (AfDB).
- Agricultural exports expected to rebound owing to the cyclical nature of coffee production.
- Inflation is expected to decline to 7 percent in 2014.
- Current account deficit in the balance of payments should improve moderately to 21.4 percent of GDP, a decline of more than 4.9 percentage points of GDP compared to the program projection, and an improvement of 1.6 percentage points of GDP compared to 2013, due mainly to a rebound in coffee export revenue.
- Official foreign reserves are expected to rise slightly to 3.6 months of imports, reflecting the BRB’s limited intervention in the foreign exchange market.

### Fiscal policy
- Objective: support growth and improve the composition of expenditure to mitigate shocks on vulnerable populations.
- Total government revenue and expenditure expected to reach 27.6 percent and 29 percent of GDP, respectively.
- Overall fiscal balance deficit (cash basis, including grants) should be contained at 1.6 percent of GDP.
- Pro-poor expenditure will continue its upward trend to around 9.5 percent of GDP; wage bill will be under control.
- Total budget revenue (excluding grants) estimated at FBu 627.3 billion compared to FBu 558 billion in 2013.
- Revenue measures: administrative reforms to broaden the tax base, combat fraud and tax evasion, minimize exemptions; introduction of a 10-percent tax on the remuneration of political representatives; gradual expansion of the TIN including in the informal sector; excise tax on beer and wine; creation of one-stop border posts; enactment of the law on the VAT.
- Government will seek IMF technical assistance to draft an excise code and restructure the tax exemption system.
- To meet unforeseen pre-election requirements, the government will seek revenue from renewal of telecommunication licenses and collection of tax arrears from large- and medium-size businesses; review of the investment code in consultation with IMF, IFC, and World Bank.
- Total expenditure in 2014 could rise by 3.4 percent to FBu 1,393.3 billion (following the 6-percent growth expected in 2013).
- Wage bill projected at FBu 322.3 billion, or 6.7 percent of GDP.
- Domestically-financed capital expenditure expected to increase to FBu 93.9 billion, or approximately 2.0 percent of GDP, as in 2013.
- Zero vehicle fleet (Charroi zéro) policy adopted to reduce government spending on vehicle fleet; priority to cap related costs.
- Health sector: continuation of free health care for children under five and care for women in childbirth; additional infrastructure investments; priority hiring of medical personnel while stabilizing the wage bill; intention to place sufficient appropriations in the government budget to finance the health card program.
- Education sector: continue free primary school tuition, extend to higher education, expand school cafeterias providing free meals, build new classrooms, hire teachers to reduce teacher-student ratio.
- Agriculture: program encouraging fertilizer use by rural producers to increase productivity and contribute to the National Agricultural and Livestock Investment Plan.
- Debt policy: intend to request funds as grants or highly concessional loans with a grant element of at least 50 percent.

### Monetary and exchange rate policies
- Monetary policy guided by pursuit of price stability; BRB will monitor inflation and improve forecasting capacity.
- If inflationary pressures pose no threat, BRB, in consultation with Fund staff, may weigh gradual easing of monetary policy.
- BRB requested IMF technical assistance to build capacity to design and implement monetary policy, including identifying instruments to increase effectiveness of interest rates and other BRB signals.
- Exchange rate policy: BRB to pursue an active market-making policy for the foreign exchange interbank market and continue to reduce frequency and amounts of interventions to maintain official reserves.
- In the context of the East African Community monetary union protocol, the central bank remains committed to pursuing a floating exchange rate regime.
- BRB requested technical assistance from the IMF’s Monetary and Capital Markets Department for financial system monitoring; Fund support includes short-term missions and assignment of a resident advisor on bank supervision to the BRB.

### Structural measures and public financial management
- Issued decree on the appointment and legal status of the Receiver General of the OBR, establishing scope of responsibility and relationships with the senior government accounting officer (new structural benchmark); Commissioner General of the OBR also assumes Receiver General’s functions.
- Government to provide OBR with resources by increasing OBR’s allocation to 3 percent of collected revenue.
- Tax on incoming calls: government opted to clear the share of proceeds accruing to the government budget from the transit account into the account of the Receiver General of the OBR for clearing into the treasury single account.
- Modernization of SIGEFI (with AfDB and the Netherlands, in consultation with World Bank and Fund staff) to secure entire expenditure chain from budget appropriations to payment; SIGEFI to interconnect with salary systems and revenue IT systems to help Treasury establish balances.

### Poverty Reduction and Growth Strategy Paper (PRSP-II)
- PRSP-II structured around four strategic pillars:
  - (i) strengthening of the rule of law, consolidation of good governance, and promotion of gender equality;
  - (ii) transformation of the Burundian economy to achieve sustained, job-creating growth;
  - (iii) improvement in the accessibility and quality of basic services and strengthening of national solidarity;
  - (iv) management of land and the environment in keeping with sustainable development principles.
- Government organized two sectoral conferences in Bujumbura in July and October 2013 following the donor conference in Geneva in October 2012 to mobilize political support and resources.
- Government completed the first report on progress in implementing priority programs recommended by the PRSP-II, outlining main actions taken in 2012 and highlighting challenges.
- Strengthening data collection: ministries instructed to set up statistical departments to update quick result indicators.
- National survey on household living conditions launched in December 2013 comprising five modules, expected to be finished in March 2014, aimed at updating the household basket and achieving national CPI coverage.

### Program monitoring and quantitative targets
- Semiannual reviews by the IMF Executive Board based on quantitative performance criteria, indicative targets, and structural benchmarks set out in tables I.1 and I.2; indicators defined in the Technical Memorandum of Understanding (TMU).
- Half-yearly reviews based on data at end-March and end-September; the fifth program review will be based on performance criteria for end-March 2014.
- Authorities commit to take steps necessary to meet quantitative targets and structural benchmarks.
- Table I.1 highlights (2013 figures, BIF billion unless otherwise indicated):
  - Net foreign assets of the BRB (floor; US$ million) entries include 31.9, 21.1, 50.2, and other quarterly figures with status "Met".
  - Net domestic assets of the BRB (ceiling) entries include 264.8, 254.3, and other quarterly figures with status "Met".
  - Net domestic financing of the government (ceiling) entries include 42.0, 52.7, 28.6, and other quarterly figures with status "Met".
  - External payments arrears of the government (ceiling; US$ million) entries show 0.0 throughout with status "Met".
  - Short-term external debt of the government (ceiling; US$ million) entries show 0.0 throughout with status "Met".
  - Nonconcessional external debt contracted or guaranteed by the government or the BRB (ceiling; US$ million, cumulative from beginning of the program) entries show 28.0 throughout with status "Met".
  - Indicative targets: gross fiscal revenue (excluding grants, floor, cumulative) entries include 380.2, 414.0, and other cumulative values with status "Met".
  - Reserve money (ceiling) entries include 313.7, 275.2, 252.0, 249.5, 257.3, 282.8, 277.8, 283.3 with status "Met".
  - Pro-poor spending (floor; cumulative) entries include 190.0, 196.6, and other cumulative values with status "Met".
- Table I.2 lists structural benchmarks for 2013-14 across public financial management, tax policy, debt management, and central bank/Treasury safeguard measures with specified dates and statuses (e.g., "Met", "Met with delay", "Not met"), including:
  - Adoption of a decree on 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; new date proposed end-March 2014 — Not met.
  - Implement a monthly cash flow plan — March 30, 2013 — Met.
  - Put in place a rationalized spending chain with pilots in Ministries of agriculture, education, and health; nominate 10 expenditure controllers — June 30, 2014 — Status entries provided.
  - Submit a law on the VAT to parliament — June 30, 2013 — Met with delay; law approved on July 24.
  - Other benchmarks include quarterly reporting on reserve operations, submission of a new law on debt management to parliament, and implementation of monitoring frameworks and coordination committees, with dates and status notes as provided.
- Attachment II (TMU) defines quantitative program targets and lists the quantitative performance criteria: 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); and new nonconcessional external debt contracted or guaranteed by the government or the BRB (ceiling, continuous).

*Source: _cr1483 - 19.      Despite these risks, GDP growth is estimated to climb to 4.7 percent in 2014 compared to*

### 3. The quantitative indicative targets for the program, shown in the MEFP, are as follows:

### _cr1483 - 3. The quantitative indicative targets for the program, shown in the MEFP, are as follows:

### Quantitative indicative targets (program)
- gross fiscal revenue (floor)
- accumulation of domestic arrears (ceiling)
- reserve money (ceiling)
- pro-poor spending (floor)

### Definitions and measurement
- Net foreign assets of the BRB:
  - 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).
  - Gross official reserves of the BRB are defined as those foreign assets that are liquid and freely available to the BRB.
- Net domestic assets of the BRB:
  - 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:
  - 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.
- Net domestic financing of the government:
  - 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.
  - Coverage of government: 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.
- Stock of external payment arrears (program monitoring):
  - 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.
  - Amounts in dispute are not considered arrears.
  - Arrears for which a clearance framework has been agreed 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.
- Accumulation of domestic arrears:
  - Measured by the accumulation of non-executed payment orders older than 60 days.
- Pro-poor spending (authorities’ definition, consistent with the PRSP) based on three criteria:
  - (i) social character of spending (administrative classification: includes “social services” and part of “general services” and “economic services” if social character component);
  - (ii) consistency with one of the four PRSP pillars;
  - (iii) pro-poor investment spending, financed by donors.

### Adjustor for changes in compulsory reserves coefficients
- 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.

### Definition of debt (program/performance criterion)
- The program includes a ceiling on new nonconcessional external debt contracted or guaranteed by the government or the BRB.
- External debt (for the program) is defined as all debt contracted in a currency other than the Burundian Franc.
- This performance criterion applies to 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: 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 if guaranteed by the government.
- Reference to Executive Board Decision No. 12274, Point 9, as revised on August 31, 2009 (Decision No. 14416-(09/91)): “debt” means 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, requiring future payments of assets (including currency) or services to discharge principal and/or interest.
  - Principal forms explicitly listed:
    - (i) loans (including deposits, bonds, debentures, commercial loans, buyers’ credits, repurchase agreements, official swap arrangements);
    - (ii) suppliers’ credits (deferred payments after delivery of goods/services);
    - (iii) leases (debt is the present value at inception of all lease payments expected, excluding payments for 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 not considered debt under this definition (e.g., payment on delivery) will not give rise to debt.
- Grant element:
  - Defined as the difference between the present value (PV) of debt and its nominal value, expressed as a percentage of the nominal value.
  - PV at contracting is calculated by discounting future debt-service payments; concessionality takes into account maturity, grace period, payment schedule, upfront commissions, management fees.
  - Discount rate used: 5 percent.
- Short-term external debt stock:
  - 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.
  - Normal import credits are excluded from this ceiling.
  - Loans with initial maturity of one year or more are considered medium-term or long-term.
  - Exclusions: 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.

### External financial assistance adjustor
- Adjusters allow higher-than-expected external assistance to be spent (with a cap) and shortfalls 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.
  - Program exchange rate for end-March 2014 is 1624.55.
- 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 timing)
- Monthly progress report on the program:
  - To be prepared and forwarded to the 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 (maximum lag six weeks):
  - a monitoring table (tableau de bord) with recent weekly and monthly data on main financial indicators (REFES);
  - table on foreign exchange cash flow (BRB Foreign Banking Operations Department);
  - monetary survey, including BRB and commercial banks breakdown (BRB Research Department);
  - monthly exchange-rate data (official and parallel markets, end-of-month and monthly average) (BRB Research Department);
  - detailed breakdown of government revenue (Ministry of Finance);
  - detailed breakdown of government expenditure on a commitment basis, including pro-poor spending (Ministry of Finance);
  - detailed breakdown of servicing of domestic and external public debt, including amounts due and paid, interest and principal, creditor breakdown and any accumulation of arrears (Ministry of Finance);
  - detailed breakdown of the stock of domestic payment arrears for the current fiscal year (Ministry of Finance);
  - amount of new debts contracted or guaranteed by the government, including detailed terms (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);
  - update on implementation of structural measures planned under the program (REFES).
- Quarterly data (maximum lag 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 to provide any additional information deemed necessary to ensure effective monitoring of the program.

### Debt sustainability analysis (LIC DSA) — key findings and assumptions
- Key DSA finding:
  - The updated LIC DSA indicates that Burundi continues to be assessed at a high risk of debt distress.
  - Both baseline public and external DSA suggest Burundi’s public sector debt is sustainable given the current size and evolution of the debt stock.
  - Compared to the 2012 DSA assessment, overall public debt sustainability improves modestly.
  - Debt sustainability remains highly sensitive to shocks, due mainly to the narrow export base.
  - Public DSA projects improvement of overall public sector debt sustainability indicators in the medium and long run; nonetheless large downside risks and vulnerability to shocks require prudent fiscal and debt policies and structural reforms to promote private sector-led growth and export diversification.
- Background numeric and contextual points:
  - Discount rate for PV calculations and grant element: 5 percent.
  - At end-2012, Burundi’s public and publicly guaranteed external debt stood at US $487 million or 22.3 percent of GDP.
  - About 90 percent of Burundi’s outstanding nominal external PPG debt is owed to multilateral creditors, with bilateral creditors accounting for the remainder.
- Text Table 1 (as reported in the source) — Burundi: Stock External Debt, end-2012 (Millions of US dollars)
  - Total Debt 487 100 22.3
  - Multilateral 440 90.4 20.1
  - Bilateral 469.6 2.1
  - Paris club 00.00.0
  - Non-Paris club 469.6 2.1
  - Commercial 00.00.0
- Underlying assumptions and recent macro developments:
  - Trade deficit exceeded initial projections by about 3 percentage points of GDP in 2012 and 5 percentage points in 2013; terms of trade deteriorated by about 38 percent cumulatively in 2012–13.
  - Coffee accounts for about two-thirds of exports; coffee prices declined by about 30 percent during 2012–13.
  - Import coverage of gross international reserves remained broadly unchanged from previous projections.
  - Inflation slightly higher than projections for 2013, mostly owing to domestic supply shocks.
  - Overall budget deficit widened by 1.3 and 0.3 percentage points of GDP compared to the 2012 DSA, mainly owing to lower grants and weaker revenue performance.
  - Medium-term (2013–18) GDP growth revised slightly downward compared to the 2012 DSA; long-term growth broadly unchanged.
  - Coffee prices assumed to increase by 5 percent per year in the medium and long terms; coffee production assumed to expand by 5 percent per year.
  - Financial assistance from donors assumed to decline from about 20 percent of GDP in 2012 to 13 percent in the long run.
- Risks to outlook:
  - Fragile social and security situation; protracted Euro Area debt crisis and decelerating growth in emerging markets; uncertainty in donor support; influx of refugees; socio-political unpredictability in run-up to the 2015 elections.
- External DSA projections and threshold breaches:
  - Under the baseline scenario, the PV of debt-to-exports ratio is projected to stay above the 100 percent policy threshold until around 2020.
  - The debt service-to-exports ratio slightly and temporarily breaches the threshold.
  - PV of debt-to-GDP ratio, PV of debt-to-revenues ratio, and debt service-to-revenue ratio are expected to remain well below indicative policy-dependent thresholds throughout the projection period.
  - The DSA attributes projected improvements to the authorities’ intention to pursue sound macroeconomic and prudent debt policies; reduction of debt burden is a key pillar of the program supported under the IMF’s Extended Credit Facility (ECF).

*Prepared by the staffs of the International Monetary Fund and the World Bank, February 18, 2014.*

### 8.      Alternative scenarios and stress tests highlight the high vulnerability of the debt

### _cr1483 - 8.      Alternative scenarios and stress tests highlight the high vulnerability of the debt

### Summary of alternative scenarios and stress tests
- Under a scenario of combined adverse shocks on GDP growth, exports, and FDI flow, the debt indicators worsen significantly compared to the baseline; four of the debt indicators breach the threshold in the medium term and return broadly close to the baseline in the long run.
- Under a historical scenario that assumes continuation of policies during the last ten years, two indicators breach the threshold; most indicators would double compared to that under the baseline scenario and would not improve even in the long run.
- Footnote on the combination of shocks: "The combination of shocks assumes that, during 2014–15, GDP growth, export growth, USD GDP deflator and non-debt creating flows will be at their historical averages minus one-half standard deviation."
- Footnote on the historical scenario: "The historical scenario assumes that, throughout the projection period, key macroeconomic variables will stay at their respective average during the last ten years. The some economic variables in 2009 were adjusted as Burundi benefited from the Heavily Indebted Poor Countries Initiative and the Multilateral Debt Relief Initiative during that year."

### Export base vulnerability
- All scenarios indicate that Burundi’s narrow export base is the most significant factor contributing to debt sustainability vulnerability.
- The PV of debt-to-exports ratio remains above the policy threshold of 100 percent in the baseline, historical, and stress test scenarios.
- Although the trend declines in the long term, the ratio stays high, particularly under the historical scenario.
- Conditional risk: "In the event the assumption on coffee production does not materialize and the country falls back into a fragility trap, the debt indicators would significantly worsen."

### Public debt outlook and sensitivity to shocks
- Baseline projection: Public debt indicators (external and domestic) are expected to gradually improve under the baseline scenario due primarily to:
  - A decline in the public sector borrowing requirement;
  - Widening of the revenue base; and
  - Gradual decline in government spending in the post reconstruction period.
- The ratios of the PV of public debt to GDP and public debt to revenues remain low due to Burundi’s reliance on grants and highly concessional loans to finance reconstruction and poverty reduction.
- Vulnerability to shocks:
  - Under a shock scenario that combines lower GDP growth and a larger primary deficit, "the PV of debt-to-GDP ratio is projected to enlarge by 6 percentage points (above the baseline scenario) throughout the projection period, and the PV of debt-to-revenue ratio by about 20 percentage points."
  - The scenario assumption: "The scenario assumes that, in 2013-14, GDP growth and primary balance will be at their historical average minus one-half standard deviation."
- Debt service to revenue ratio is not significantly affected by alternative scenarios and shocks because additional borrowing is expected to be on highly concessional terms.
- Recommendation: "A swift adoption and implementation of a strategy based on the recent Debt Management Performance Assessment (DeMPA) would be crucial."

### Key statistics and thresholds (as presented)
- Indicative Thresholds (labels and numbers as shown):
  - PV of debt to GDP: 30 13.4 5.8 2.7
  - PV of debt to exports: 100 248.5 78.4 32.0
  - PV of debt to revenue: 200 101.9 44.3 20.9
  - Debt service to exports: 15 8.3 5.1 2.2
  - Debt service to revenues: 25 3.4 2.9 1.4
- Table caption: "Text Table 2. Burundi: Summary of Baseline External Debt Sustainability Indicators (percent) 2013 2023 2033"

### Conclusion and policy implications
- Assessment: "Based on this LIC-DSA, staffs are of the view that Burundi continues to face a high risk of debt distress."
- Although debt sustainability indicators improved slightly compared to the 2012 DSA, the classification remains unchanged because the PV of debt-to-export ratio remains above the policy threshold under the baseline.
- Policy priorities implied by the analysis:
  - Foster a sound macroeconomic environment to promote growth, export diversification, and inflow of foreign direct investment;
  - Continue and deepen reform measures to avoid returning to past unsustainable policies;
  - Prudent fiscal policy to avoid unsustainable borrowing;
  - Rapid adoption and implementation of DeMPA-based debt management strategy.

*Source: _cr1483 - 8. Alternative scenarios and stress tests highlight the high vulnerability of the debt (IMF).*

### 13.      Based on this high risk classification and on the vulnerabilities shown through the

### _cr1483 - 13.      Based on this high risk classification and on the vulnerabilities shown through the

### Risk assessment and policy recommendations
- Classification: "high risk" of debt distress.
- Recommended macroeconomic and debt policies:
  - Pursue sound macroeconomic and prudent debt policies.
  - Enlarge export base and diversify export markets.
  - Swiftly implement reforms in the coffee sector and unlock export potential in mining, tea, horticulture, and tourism.
  - Continue sound policies; policy reversals are shown to have serious hindering effects on debt sustainability.
  - Seek maximum concessionality in external financing; regularly review, monitor, and report all nonconcessional borrowing to ensure full transparency and sound governance.
  - Finalize the new law on public debt to provide an overarching debt legal framework and help determine objective, strategy, signing authority, and other aspects of debt management.
  - Strengthen debt management practices and expedite implementation of the World Bank DeMPA mission assessment to facilitate a comprehensive medium-term debt strategy.
- Authorities: "The authorities broadly share staffs’ assessment."

### Debt dynamics, projections, and stress-test findings (selected indicators)
- Projection horizon: 2013–2033.
- Figures identify most extreme stress test as the test yielding the highest ratio in 2023. Specific shocks cited:
  - Figure b., c., d.: Non-debt flows shock.
  - Figure e.: Exports shock.
  - Figure f.: One-time depreciation shock.
- Selected baseline and projected indicator levels (from tables and figures):
  - External debt (nominal) trend: 22.5, 23.4, 22.3, 18.5, 17.4, 16.6, 15.3, 13.7, 12.2, 7.5, 4.7 (displayed across years in Table 1).
  - Change in external debt (sample values): 1.3, 0.9, -1.1, -3.8, -1.0, -0.8, -1.3, -1.6, -1.5, -0.6, -0.1.
  - Identified net debt-creating flows (sample values): -0.4, 2.3, 0.5, -0.1, -0.2, -0.4, -0.8, -1.4, -1.5, -2.8, -1.4.
  - Non-interest current account deficit (sample cluster): 12.2 14.6 18.4 7.9 7.8 22.9 21.2 21.0 19.9 17.9 17.2 15.1 16.9 17.1 (as presented across entries).
  - Exports (percent of GDP, selected entries): 8.9, 10.3, 9.3, 5.2, 5.4, 5.5, 6.9, 6.9, 7.0, 7.5, 8.6.
  - Imports (percent of GDP, selected entries): 43.5, 44.3, 46.5, 40.7, 37.6, 36.6, 36.4, 34.4, 33.4, 30.5, 31.9.
  - Net FDI (negative = inflow) sample series: -10.0, -10.6, -16.6, -6.1, 7.3, -22.3, -20.8, -20.8, -20.1, -18.8, -18.1, -17.5, -18.1, -18.4.
  - Endogenous debt dynamics (sample values): -2.6, -1.6, -1.3, -0.7, -0.7, -0.6, -0.6, -0.6, -0.5, -0.4, -0.3.
  - PV of external debt (selected years): 16.9, 14.1, 13.4, 12.7, 11.6, 10.4, 9.2, 5.3, 2.7 (in percent of GDP for projection years shown).
  - PV of PPG external debt in percent of exports (selected years): 180.7, 272.6, 248.5, 233.0, 169.2, 151.2, 132.3, 70.1, 32.0.
  - PV of PPG external debt in percent of government revenues (selected years): 108.1, 107.5, 101.9, 96.4, 88.3, 78.9, 69.9, 40.2, 20.9.
  - Debt service-to-exports ratio (sample entries): 1.3 2.2 5.3 10.1 8.3 8.8 8.9 8.2 8.0 4.9 2.2.
  - PPG debt service-to-revenue ratio (sample series): 0.8, 1.4, 3.2, 4.0, 3.4, 3.6, 4.6, 4.3, 4.2, 2.8, 1.4.
  - Total gross financing need (Millions of U.S. dollars) sample series: 46.8, 91.2, 55.0, 30.2, 27.3, 24.7, 15.9, -11.2, -17.1, -125.5, -137.2.
  - Non-interest current account deficit that stabilizes debt ratio (sample values): 10.9, 13.6, 19.5, 26.7, 22.3, 21.8, 21.3, 19.5, 18.7, 15.7, 17.1.

### Public sector debt sustainability indicators (Table 3 highlights)
- Public sector debt (percent of GDP) trend (selected): 39.7, 39.6, 37.7, 31.5, 29.8, 28.5, 26.8, 25.0, 23.2, 17.7, 12.9.
- Foreign-currency denominated share (percent of GDP, sample): 22.5, 23.4, 22.3, 18.5, 17.4, 16.6, 15.3, 13.7, 12.2, 7.5, 4.7.
- Change in public sector debt (sample): 14.7, -0.1, -1.9, -6.2, -1.7, -1.2, -1.7, -1.9, -1.8, -0.8, -1.1.
- Primary deficit (sample): 2.3, 2.5, 3.0, -3.8, 14.6, 1.3, 0.7, 1.1, 0.9, 0.3, 0.3, 0.8, 0.3, 0.7, 0.4.
- Revenue and grants (percent of GDP sample): 37.3, 38.7, 33.7, 29.7, 27.1, 27.3, 27.7, 27.9, 27.7, 27.0, 26.2.
- Of which: grants (percent of GDP sample): 22.7, 22.2, 18.1, 16.6, 14.0, 14.1, 14.5, 14.7, 14.5, 13.8, 13.1.
- Automatic debt dynamics (sample): -2.5, -0.8, -3.7, -7.0, -2.3, -1.7, -1.7, -1.4, -1.3, -0.9, -0.8.
- PV of public sector debt (percent of GDP, selected years): 32.3, 27.1, 25.7, 24.6, 23.2, 21.7, 20.2, 15.5, 11.0.
- Gross financing need (percent of GDP, sample): 5.7, 11.3, 18.2, 10.9, 6.4, 7.2, 7.9, 9.5, 9.8, 9.9, 9.5.

### Sensitivity analyses and stress scenarios (selected outcomes)
- Table 2 and Table 4 present sensitivity analyses for PV of debt-to-GDP, PV of debt-to-exports, PV of debt-to-revenue, and debt service ratios under alternative scenarios and bound tests for 2013–2033.
- Alternative scenarios include:
  - A1. Key variables at their historical averages in 2013-2033.
  - A2. New public sector loans on less favorable terms in 2013-2033 (terms: interest rate on new borrowing +2 percentage points relative to baseline).
- Bound tests include:
  - B1. Real GDP growth at historical average minus one standard deviation.
  - B2. Export value growth at historical average minus one standard deviation.
  - B3. US dollar GDP deflator at historical average minus one standard deviation.
  - B4. Net non-debt creating flows at historical average minus one standard deviation.
  - B5. Combination of B1–B4 using one-half standard deviation shocks.
  - B6. One-time 30 percent nominal depreciation relative to the baseline in 2014 (depreciation defined as percentage decline in dollar/local currency rate).
- Selected sensitivity outcomes (examples from tables):
  - PV of debt-to-GDP ratio (baseline): 15 14 13 12 11 9 5 3 (values shown across columns for projection years).
  - PV of debt-to-exports ratio (baseline): 28 12 56 23 9 17 4 13 6 7 23 2 (values shown across scenario rows and years in tables).
  - PV of debt-to-revenue ratio (baseline sample): 11 10 5 9 9 9 0 8 1.
  - Debt service-to-exports ratio (baseline sample): 108 99 88 52 (illustrative series across years in Table 2).
  - Memorandum item: Grant element assumed on residual financing: 5 5 5 5 5 5 5 5 5 5 5 5 5 5 (repeated across projection years).

### Key macroeconomic assumptions used in projections
- Real GDP growth (in percent): sample series includes 5.1, 4.2, 4.0, 4.1, 0.9, 4.5, 4.7, 4.8, 5.0, 5.2, 5.4, 4.9, 5.9, 7.0, 6.4 (across different years and averages).
- GDP deflator in US dollar terms (change in percent): 8.8, 3.9, 2.5, 8.4, 8.5, 12.1, 4.9, 3.1, 3.0, 2.9, 3.0, 4.8, 2.5, 2.3, 2.4.
- Effective interest rate (percent): 0.3, 0.6, 0.5, 0.7, 0.2, 0.7, 0.8, 0.9, 1.0, 1.0, 1.1, 0.9, 1.1, 0.8, 1.0.
- Growth of exports of G&S (US dollar terms, in percent): 52.3, 25.1, -3.1, 21.5, 25.6, -35.1, 14.6, 9.5, 36.2, 8.3, 9.9, 7.2, 10.0, 11.4, 10.4.
- Growth of imports of G&S (US dollar terms, in percent): 76.0, 10.2, 12.0, 26.6, 32.2, 2.4, 1.7, 5.2, 7.5, 2.1, 5.4, 4.1, 6.0, 8.4, 8.6.
- Grant element of new public sector borrowing (in percent) (sample projection entries): 40.5, 38.6, 43.9, 47.0, 59.6, 59.6, 48.2, 59.6, 59.6, 59.6.
- Government revenues (excluding grants, in percent of GDP): 14.5, 16.5, 15.6, 13.1, 13.1, 13.2, 13.2, 13.2, 13.2, 13.2, 13.2.
- Aid flows (Millions of US dollars) sample: 490.9, 513.5, 467.9, 474.0, 437.0, 481.4, 530.4, 578.5, 619.3, 878.1, 1995.6.
  - Of which: Grants (Millions of US dollars) sample: 460.9, 487.7, 423.0, 456.3, 422.1, 459.3, 510.4, 561.7, 601.0, 850.9, 1930.6.
  - Of which: Concessional loans (Millions of US dollars) sample: 30.0, 25.8, 44.9, 17.7, 14.9, 22.1, 20.1, 16.8, 18.2, 27.1, 65.0.
- Grant-equivalent financing (in percent of GDP) sample: 17.3, 14.6, 14.7, 15.0, 15.0, 14.8, 14.1, 13.3, 13.8.

### Memoranda and fiscal/nominal items
- Nominal GDP (Millions of US dollars) sample series: 2029.2, 2196.1, 2341.8, 2743.3, 3015.2, 3256.5, 3521.2, 3810.1, 4134.9, 6166.2, 14773.0.
- Nominal dollar GDP growth (sample): 14.3, 8.2, 6.6, 17.1, 9.9, 8.0, 8.1, 8.2, 8.5, 10.0, 8.6, 9.5, 8.9.
- PV of PPG external debt (in Millions of US dollars) sample entries: 368.3, 389.3, 406.7, 416.7, 413.8, 400.5, 384.9, 329.8, 410.2.

### IMF Executive Board decision (Press Release No. 14/77)
- Date: February 28, 2014.
- Decision: Executive Board completed the fourth review under the Extended Credit Facility (ECF) arrangement for Burundi and approved a disbursement equivalent to SDR 5 million (about US$7.7 million).
- Cumulative disbursements under the arrangement after this review: equivalent to SDR 20 million (about US$30.9 million).
- Original ECF arrangement approval date: January 27, 2012 (three-year arrangement).
- Economic performance note: "Burundi’s economic recovery continues to gain momentum in the aftermath of the food and fuel shocks. Growth improved at an estimated 4.5 percent in 2013 and is projected at" (projection continuation appears in source).

*Sources: Burundi authorities; IMF staff estimates and projections; Press Release No. 14/77.*

### 4.7 percent in 2014, underpinned by the agriculture and construction sectors as well as the

### 4.7 percent in 2014, underpinned by the agriculture and construction sectors as well as the

### Growth, sector drivers, and tourism
- Real economic growth projected at 4.7 percent in 2014, underpinned by:
  - agriculture sector
  - construction sector
  - implementation of major infrastructure projects, including fiber optics, hydropower, and roads
- There are signs of an uptick in tourist arrivals.

### Inflation, monetary conditions, and external buffers
- Headline inflation:
  - declined from its peak of 25 percent in March 2012 to about 9 percent at end-2013
  - decline occurred in the context of stable monetary and exchange rate conditions, and notable improvements in commercial banks’ liquidity
- International reserves:
  - fell to about 3.5 months of imports
  - following a 38.2 percent cumulative deterioration in the terms of trade during 2012–13

### Fiscal measures, revenue developments, and expenditures
- Swift corrective measures implemented in July 2013 in response to revenue slippages were instrumental in putting the program back on track.
- Revenue collections:
  - increased by about 6 percent (year-on-year) at end-2013
  - outperformed program targets
  - placed the 2014 budget on a sounder footing
- Expenditures were broadly contained.

### Program performance and structural reforms
- Program performance was satisfactory:
  - All end-September 2013 performance criteria and indicative targets were observed, including the indicative target on pro-poor expenditure.
- Satisfactory progress made in implementation of structural reforms:
  - Streamlining of customs procedures at three recently established border posts with Rwanda and Tanzania expected to ease transportation bottlenecks and lower costs of doing business.
  - Progress made in enhancing treasury and financial safeguards.

### Risks to the macroeconomic outlook
- The macroeconomic outlook remains difficult, and external vulnerabilities persist in the context of lower international coffee prices and the narrow export base.
- Economic activity is projected to improve further in 2014.
- Inflation outlook, absent poor harvests, remains favorable owing to lower projected international food and fuel prices.
- Downside risks that could jeopardize the macroeconomic outlook:
  - Policy reversals of recently adopted measures
  - Expenditure pressures in the run-up to the 2015 elections
  - Slippages in the implementation of structural reforms

*Source: IMF staff report excerpt.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr1483.pdf_