Statement at Donor Meeting

Burundi--Consultative Group Meeting

November 16, 2009

1. It is a pleasure to represent the International Monetary Fund (IMF) at this Consultative Group (CG) meeting. In my remarks I will focus on the economic program that is supported by the IMF Poverty Reduction and Growth Facility (PRGF). In doing so I will present the objectives of the program, discuss Burundi’s macroeconomic performance and outlook, and summarize the main structural reforms made and in progress. But first let me take this opportunity to congratulate the authorities for the determined implementation of their economic program in a very difficult postconflict environment. Since the program began, they have met all quantitative and structural performance criteria, and most structural reforms have progressed well.

I. Objectives of The PRGF-supported Program

2. On July 7, 2008, the Executive Board approved a three-year PRGF arrangement with access of SDR 46.2 million (about US$75 million or 60 percent of quota). The purpose of the arrangement is to consolidate economic stability, further reduce the heavy debt burden, and help the government of Burundi to implement its poverty reduction strategy. The IMF has already supported the government’s efforts to obtain debt relief from the enhanced HIPC Initiative and the Multilateral Debt Relief Initiative (MDRI).

3. The objectives of the PRGF-supported program are the following: (i) return to single-digit inflation; (ii) improve the composition of public spending to the benefit of priority sectors; and (iii) strengthen public financial management (PFM). The program also emphasizes strengthening the central bank’s internal controls and risk management.

II. Macroeconomic Performance and Outlook

A. Macroeconomic Performance

4. Burundi’s economy performed well during 2008, though food and fuel price shocks kept inflation high. Real GDP growth increased to 4½ percent, from 3.6 percent in 2007, mainly because of a good coffee harvest and more donor-financed projects. With international commodity prices higher in the first half of 2008, 12-month inflation peaked at about 30 percent in June before declining to about 26 percent by year-end, which contributed to the 16 percent appreciation of the real effective exchange rate. Higher donor support helped build gross official reserves to about 6½ months of imports.

5. Burundi’s macroeconomic prospects for 2009 are positive, but the global financial crisis still poses some risks. Economic growth is projected to moderate to about 3½ percent in 2009, from 4½ percent in 2008, mainly because of reduced demand for exports and lower private transfers and foreign direct investment. However, weak economic growth and lower international oil and food prices have improved the inflation outlook: 12-month inflation is expected to drop below 10 percent. Supported by the SDR allocations, gross official reserves are expected to increase to about 7 months of imports.

B. Macroeconomic Outlook

6. Provided the security and political situation continues to improve, Burundi’s medium-term economic outlook looks positive. GDP growth is expected to average about 4 percent through 2012, driven by three main factors: (1) continued reduction of major structural distortions, especially in the coffee sector, to boost total factor productivity; (2) a substantial increase in aid-financed investment, largely for infrastructure renovation, which will help relieve major supply bottlenecks; and (3) the impact of accession to the East African Community (EAC), which will help diversify the economy, stimulate competition, and attract more investment. For 2010, there is a need to ensure that the high election spending (about 3 percent of GDP) is mainly financed by external sources, in order to avoid crowding out domestic funding for high priority needs.

7. As a postconflict country Burundi faces significant medium-term fiscal challenges. First, Burundi faces a high risk of debt distress even after the delivery of enhanced HIPC and MDRI debt relief. Against this background, the authorities should (1) continue fiscal consolidation and savings; (2) strengthen debt management capacity; and (3) rely mainly on grants and highly concessional loans to avoid unsustainable debt. It is also critical that the country diversify its export base and sustain positive economic growth.

8. Second, controlling the wage bill is a major fiscal challenge. To avoid fiscal risks, the authorities need to keep the wage bill sustainable. Achieving the medium-term objective of bringing the wage bill below 11 percent while continuing to recruit into the priority sectors, will critically hinge on timely and successful demobilization.

9. Third, improving the costing of social initiatives is also critical for fiscal sustainability. For instance, there is a need to assess the budgetary impact of worthy initiatives such as providing free health care for children under 5 and for women during childbirth and of free schooling at the primary level. Technical assistance for its assessment should be considered.

10. Fourth, making spending more efficient is critical for reducing poverty. Forceful implementation of recent PFM reforms should help here, as well as enhancing governance and accountability for the use of public resources. Public tracking expenditure surveys could help identify leakages and obstacles to effective service delivery.

11. Fifth, better governance of state-owned enterprises (SOEs) is critical for reducing fiscal risks. Transfers to loss-making SOEs and uncontrolled borrowing by SOEs could entail significant risks to the budget. The authorities should seek World Bank technical assistance to undertake a comprehensive reform of SOEs and other subsidized government agencies.

III. Structural Reforms

12. In close collaboration with development partners, the government is pursuing with determination a number of structural reforms, notably in PFM, the monetary and financial sector, and the coffee and oil sectors.

Public financial management

13. The government has made significant progress in improving fiscal management (Table 1). Looking forward, there is a need to further reform the PFM system, including improved coordination between the Ministry of Finance and the central bank that is critical for the implementation of the organic budget law. The authorities should further improve commitment control and cash planning to avoid the recurrence of domestic arrears.

Monetary and financial sector reform

14. With regard to monetary operations, the central bank charter has been promulgated; it enshrines the bank’s independence. Liquidity management auctions have been reformed with the removal of the ceiling on interest rates. The foreign exchange reserves management policy has been revamped.

15. The central bank continues to strengthen its internal controls and risk management, in line with the recommendations made in the recent IMF safeguards assessment report. Looking forward the central bank should improve banking supervision capacity and further enhance its internal controls.

Coffee sector reform

16. The coffee sector is of great macroeconomic importance. It is the principal source of income for nearly 800,000 Burundi households, and coffee accounts for about two-thirds of total exports. In collaboration with the World Bank, the government in December 2008 adopted a plan for the state to withdraw from the coffee sector; it also set up the Burundi Coffee Sector Regulatory Authority. Bidding for the coffee washing stations has advanced, giving added impetus to reform of the sector.

Oil sector reform

17. The government in May 2009 adopted a decree setting out the terms for monthly adjustment of retail prices for petroleum products on the basis of a World Bank study discussed with all participants in the sector. The government has also benefited from technical assistance from the IMF's Fiscal Affairs Department on fiscal and public spending policies to better protect the poor from the impact of the price adjustment mechanism.
IV. Concluding Remarks

In closing, I would like to commend the authorities for Burundi’s good performance under the PRGF-supported program in a very difficult postconflict environment. I would also like to encourage them to consolidate their progress in governance and deepen structural reforms, so as to improve Burundi’s competitiveness and medium-term growth prospects. Because Burundi is a postconflict country, the risks remain significant, but so far the authorities have demonstrated their ability to manage the economic and social pressures. In close collaboration with the World Bank and other development partners, the IMF stands ready to help Burundi address its remaining economic and fiscal challenges. An IMF mission is planned for November 9–20 to review program implementation and discuss the program targets for 2010. I wish the authorities well in their efforts to strengthen growth and reduce poverty.

Table 1. Burundi: Public Financial Management Measures, 2006–09