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Public Information Notice (PIN) No. 10/125M
September 7, 2010 -- Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.
On July 23, 2010, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Burundi.1
Burundi is emerging from more than a decade of civil conflict. The power-sharing agreement signed in December 2008 by the government and the last rebel group (FNL), paved the way for national elections, which run from May 24 to September 8, 2010. Gross Domestic Product (GDP) per capita is about US$140, and more than two-thirds of the population lives below the poverty line. Although the country is making some progress toward the Millennium Development Goals (MDGs), it is unlikely that any of the targets will be achieved by 2015.
Economic growth moderated to 3.5 percent in 2009, from 4.5 percent in 2008, mainly because of lower private transfers and foreign direct investment. Because of lower international oil and food prices, headline inflation (end of period) declined from about 26 percent in 2008 to about 4.5 percent in 2009, well within the single-digit level targeted under the program.
Fiscal performance in 2009 was broadly satisfactory. Despite the global financial crisis, total revenue was 0.6 percent of GDP higher than programmed, reflecting improved collections of income and indirect taxes. Total spending was contained below the programmed level, as externally-financed spending was lower than planned. The wage bill was also kept within the envisaged budgetary envelope. Overall, the fiscal deficit (excluding grants) was lower than expected. Adjusted for the shortfall in external nonproject financial assistance, domestic financing of the budget was well within the program target.
Despite the food and oil shock and the global financial crisis, the external position was supported by the Heavily Indebted Poor Countries (HIPC) and Multilateral Debt Relief Initiatives (MDRI)_and the Special Drawing Rights (SDR) allocation. Notwithstanding the negative impact of the food and oil crisis on the trade balance, the external current account deficit improved in 2008 because of high donor support to mitigate the effects of the shock. In contrast, in 2009 the external current account deficit worsened, even as the terms of trade improved, because of lower donor support. Overall, the balance of payments position was supported by HIPC and MDRI debt relief and the SDR allocation. Gross reserves remained at a comfortable level of 6.5 months of import cover.
Executive Board Assessment
Executive Directors commended the authorities for the satisfactory implementation of their ECF-supported program against the backdrop of the global financial crisis and a difficult post-conflict environment. While Burundi’s economic outlook is positive, risks remain, and it will be important to make decisive progress on structural reforms to accelerate growth and reduce poverty, while continuing efforts to improve security conditions.
Directors agreed that debt sustainability should anchor medium-term fiscal policy. Given the high risk of debt distress and low capacity, they concurred that the budget should be financed through grants and highly concessional financing. Improvements in governance, including strengthened public financial management, will be important for sustaining donor support. Directors called for caution to ensure that expectations of a peace dividend do not give rise to public sector wage increases. They noted that achieving the medium-term target for the wage bill while continuing to recruit in priority sectors hinges on reducing the size of the security forces. Directors supported the authorities’ intentions to further align spending with the priority sectors outlined in the Poverty Reduction Strategy Paper (PRSP), and to enhance their capacity to deliver social services. On the revenue side, Directors encouraged the authorities to pursue their efforts to broaden the revenue base and improve tax and customs administration, including by making the revenue authority operational.
Directors considered the authorities’ monetary policy to be appropriately aimed at price stability while allowing scope for economic growth. They emphasized the need for close coordination of monetary and fiscal policies, as well as efforts to enhance the effectiveness of monetary policy instruments.
Directors noted the staff’s assessment that the exchange rate appears to be broadly in line with fundamentals. They recommended greater exchange rate flexibility to help the economy adjust to external shocks, and stressed the importance of structural reforms to improve Burundi’s competitiveness. Directors welcomed the authorities’ plans to refocus capital spending on key infrastructure to relieve major bottlenecks. They encouraged the authorities to improve the business and investment climate, continue to reform the coffee sector, and accelerate integration into the East African Community.
Directors welcomed the authorities’ plan to use the Financial Sector Assessment Program recommendations to guide reforms in the financial sector. Efforts should be stepped up to improve banking supervision, modernize the payment system, and address weaknesses in the banking system, notably concentration risk.
Directors encouraged the authorities to improve statistics in collaboration with Techncial Assistance partners, particularly in the areas of the national accounts and the balance of payments.