Public Information Notice No. 08/90

Public Information Notice: IMF Executive Board Concludes 2008 Article IV Consultation with Burundi

July 25, 2008

On July 7, 2008, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Burundi.¹

Background

Burundi is emerging slowly from more than a decade of civil conflict. GDP per capita is about US$139 and only 18 percent of the population is food secure.² While some progress has been made toward the Millennium Development Goals (MDGs), it will remain a significant challenge to achieve any of the targets by 2015.

Economic growth slowed down, while inflation increased in 2007. Real GDP growth decelerated to 3.6 percent, from about 5 percent in 2006, mainly because of a poor coffee harvest. About 80 percent of the population rely on agriculture for income and employment. By the end of 2007, inflation had increased to 14.7 percent (year-on-year), from 9.3 percent in 2006, owing to higher international commodity prices. In the first four months of 2008, domestic prices of fuel and basic staples rose on average by 23 percent, pushing the consumer price index up by 11.7 percentage points over the period from January to April 2008. Excluding food and oil, the increase in the consumer price index was about 3.5 percent.

The overall fiscal balance (on a commitment basis and after grants) turned to a surplus of 1 percent of GDP from a deficit of 1.8 percent in 2006. While total revenue and expenditure changed marginally, grants disbursements increased markedly. Broad money growth decelerated to 10.1 percent in 2007, against 16.4 percent in 2006, partly reflecting an improved fiscal position.

External developments were dominated by a decline in exports and a sharp rise in grants. Total exports (in US dollar terms) declined because of a poor coffee harvest. Total grants are estimated to have risen by about 64 percent to US$163 million, fuelling higher imports. Overall, the current account deficit (including current official transfers) widened to 16 percent from 14.5 percent in 2006. As the funds stemming from the surge in aid were not fully absorbed, gross international reserves rose to 3.9 months of imports from 3.3 months in 2006. The real effective exchange rate depreciated by 8.6 percent during 2007.

Executive Board Assessment

Executive Directors agreed with the thrust of the staff appraisal. They commended the authorities for the progress they have made in implementing Burundi's first PRGF-supported program in a difficult post-conflict environment. While structural reforms have been slow, most monetary and fiscal reforms have progressed well. Directors were encouraged by the cease-fire agreement recently signed, and noted that, with continued improvements in the security situation, Burundi's medium-term economic outlook is positive. They stressed that effective donor coordination and predictable disbursement of financial support, as well as timely technical assistance, will be important to support these efforts.

Directors agreed that solid policy implementation will be key to meeting Burundi's principal economic challenges over the medium term. Ensuring fiscal sustainability in the face of a heavy debt burden will depend on broadening the revenue base and improving the composition of spending, while financing the budget through grants and highly concessional external resources. Improvements in governance, including through strengthened public financial management, will be critical for sustaining donor support. It will be important to carefully manage public expectations of a peace dividend and to fully cost all social initiatives in the budget. With support from the international community, the government should give high priority to enhancing its capacity to deliver social services.

Against the background of the recent acceleration of inflation deriving from rising international food and oil prices, Directors encouraged the monetary authorities to act to anchor inflation expectations and contain second-round effects of food and oil price shocks. They also stressed the need to use available monetary and exchange rate instruments to mop up liquidity. Directors encouraged the authorities to continue their efforts to strengthen the financial sector by improving banking supervision, addressing weaknesses in the banking system, and enhancing central bank internal controls and risk management systems.

Directors agreed that the managed-float exchange rate regime has served Burundi well, and helped to cushion exogenous shocks. They noted staff's assessment that the exchange rate is broadly in line with its equilibrium rate.

Directors stressed that structural factors continue to be an obstacle to Burundi's competitiveness and growth. They saw the need to accelerate structural reforms, especially in the coffee sector, and expedite adoption of the new investment code. Directors also welcomed Burundi's membership in the East African Community, which should spur structural reforms to improve the business environment.

Directors welcomed the priority the authorities are giving to food security. A concerted emergency response strategy is needed to ensure that the poor do not suffer from the expected drought as food and oil prices soar.

Directors encouraged the authorities to improve the statistical system. High priority should be given to national accounts statistics, where the weaknesses are extensive. Directors noted that the recent promulgation of a new statistics law would help build up statistical institutions and processes.

¹ Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities.

² According to the World Food Program, 82 percent of households survives on between 1,400 and 1,900 kilo-calories per day, against the World Health Organization's recommended 2,100 kilo-calories required to live a normal and healthy life.