Burundi and the IMF

Press Release: IMF Completes First Review Under Burundi's PRGF Arrangement and Approves US$10.9 Million Disbursement

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BurundiLetter of Intent, Memorandum of Economic and Financial Policies, and Technical Memorandum of Understanding

Bujumbura, December 20, 2004

The following item is a Letter of Intent of the government of Burundi, which describes the policies that Burundi intends to implement in the context of its request for financial support from the IMF. The document, which is the property of Burundi, is being made available on the IMF website by agreement with the member as a service to users of the IMF website.

Mr. Rodrigo de Rato
Managing Director
International Monetary Fund
Washington, D.C. 20431

Dear Mr. de Rato,

1. On behalf of the Government of Burundi and the Bank of the Republic of Burundi (BRB), we hereby transmit the attached Memorandum of Economic and Financial Policies (MEFP) that sets out the objectives and policies under the program that the authorities intend to implement for the remainder of the 2004 and for 2005. The attached Technical Memorandum of Understanding (TMU) defines the terms and conditions of the program.

2. Burundi continues to make progress with national reconciliation and economic recovery. This progress has been aided by the Fund’s advice and support under the Poverty Reduction and Growth Facility (PRGF) approved by the IMF’s Executive Board on January 23, 2004. Nevertheless, we are aware that some slippages have occurred in 2004.

  • The program’s quantitative performance criteria on external arrears at end-June 2004 was not observed as the beginning stock of external arrears was larger, and clearing operations slower, than expected (Table 1). We have, however, made maximum efforts to clear our external arrears and no nonreschedulable arrears remained outstanding at end-September 2004. On this basis, we hereby request a waiver for the nonobservance of this quantitative performance criterion.
  • The program’s two structural performance criteria were not observed (Table 2). We have taken corrective measures to address the delays in structural reform, as described in the attached MEFP (paragraphs 9, 10, 26 and 32). On this basis, we hereby request waivers for the nonobservance of the two missed structural performance criteria.

3. In support of our macroeconomic and financial objectives and policies for 2004 and 2005, we hereby request completion of the first review under the PRGF and disbursement of SDR 7.15 million (9.3 percent of quota).

4. The objectives and policies in the updated MEFP remain consistent with Burundi’s Interim Poverty Reduction Strategy Paper (I-PRSP—Cadre stratégique intérimaire de croissance économique et de lutte contre la pauvreté). Preparation of the full-PRSP is well under way, with the aim of issuing it by May 2005.

5. The authorities of Burundi will provide the Managing Director with all the information he may request as necessary to monitor developments and achieve the objectives of the PRGF-supported program in a timely manner.

6. The authorities believe that the economic and financial policies set forth in the attached MEFP are adequate to achieve the objectives of the 2004-05 program, supported by the PRGF, but will take any further measures that may become appropriate for this purpose. Burundi will consult with the Managing Director on the adoption of these measures in advance of revisions to the policies contained in the MEFP, in accordance with the Fund’s policies on such consultations.

7. The performance criteria and benchmarks for the second review will be based on end-December 2004 and end-March 2005 targets as set out in Tables 3 and 4 of the MEFP. The second review of the three-year PRGF arrangement with the Fund will be completed no later than May 31, 2005.

8. The Burundi authorities are keen to make this letter and the attached MEFP and the TMU, as well as the staff report on the first review under the PRGF arrangement, available to the public, and hereby authorize their publication and posting on the Fund’s website subsequent to Executive Board consideration.

Sincerely yours,
/s/

Athanase Gahungu
Minister of Finance

/s/

Salvator Toyi
Governor,
Bank of the Republic of Burundi


Memorandum of Economic and Financial Policies

I. Introduction

1. This memorandum summarizes progress under the program for 2004, updates the medium-term objectives and policy framework, and sets out revised economic and financial policies through end-2004 and for 2005. On the basis of these policies, the authorities request Fund support in the form of a second disbursement under the three-year Poverty Reduction and Growth Facility (PRGF) arrangement. The policies and objectives of the new program remain consistent with the Interim Poverty Reduction Strategy Paper (I-PRSP).

2. After three years of implementation (1999–2002), this program has made it possible to stabilize tax revenues, rationalize budgetary outlays, and increase social spending. Consequently, the government believes it essential to continue its partnership with the IMF under a staff-monitored program (SMP) covering the period January-December 2004.

II. Background

A. Political Transition and the Peace Process

2. Burundi is at an advanced but crucial juncture in its political transition process. As envisaged under the Arusha agreement, national elections were to be held in time for a new government to take over on November 1, 2004. However, protracted negotiations on a new constitution necessitated an extension of the political transitional arrangements. On October 15, 2004 a summit of regional heads of state approved the extension of the transitional political arrangements, as well as a plan for local, communal, parliamentary, and presidential elections between February and April 2005. A draft constitution was agreed in Pretoria in August, and after some delay, has attracted broad political support and parliamentary approval. A national referendum on the constitution will be held in late 2004 or early 2005.

3. Hostilities in most of the country have ceased, but a remaining hold-out rebel group continues to stage sporadic attacks in the periphery of Bujumbura that prevent the upgrading of the security situation. United Nations peacekeeping troops are in place in Burundi. The military integration and demobilization program (DDR), a vital component toward achieving peace and security in Burundi, which is supported by the World Bank-led Multi-Country Demobilization and Reinsertion Program (MDRP) for the Great Lakes region, was declared effective September 10, 2004 and operations are well under way. As of November 2004, most former rebel combatants had reported to cantonment centers.

B. Recent Economic Developments

4. Macroeconomic developments have been broadly on track with program objectives. Real economic growth is expected to be slightly above the program target of 5 percent in 2004, as activity has been bolstered by a larger-than-expected recovery of coffee production tempered by a decline in other basic agricultural products. Inflation has been volatile but generally on a downward trend in 2004, with the three-month moving average hovering about 7-8 percent in the third quarter. Imports are surging (by a projected 35 percent) in 2004, largely on account of humanitarian assistance and nongovernmental organization project activity. World market coffee prices have been recovering from their lows, but the sharp rise in petroleum prices is weighing on the external and fiscal accounts. The Burundi franc has remained broadly stable against the U.S. dollar and, reflecting the improved policy environment, the differential between the parallel and the official rate has narrowed sharply to 2-3 percent from about 15 percent in late 2003.

C. Performance Under the Program

5. Performance relative to the program in the first half of 2004 was mixed. The program’s end-June quantitative performance criteria and the indicative targets for March, adjusted for a shortfall in external budget support, were observed, except for that on external arrears (Table 1). The beginning of period stock of external arrears was larger, and clearing operations slower, than expected. Reflecting unforeseen demands on public expenditure, the program’s indicative targets on the government’s wage bill and primary fiscal balance were both exceeded. The program’s original indicative quantitative targets for September were mostly not met. Unfortunately, the program’s two structural performance criteria—establishing an audit court (Cour de Comptes) and introducing domestic liquidity auctions—were not met (Table 2). However, the two structural benchmarks, on extending the transactions tax to domestically produced goods and on concluding an assessment of commercial banks’ compliance with capital requirements were observed. The latter led to the closure of two noncompliant banks in mid-2004.

6. The government registered a primary deficit of 1.3 percent of GDP during the first half of the year, compared with a programmed surplus of 0.5 percent, as the government struggled with pressures to relieve rapidly rising petroleum prices and accommodate expenditures to support the peace process. Overall, revenue fell below the program target by some 0.6 percent of GDP, reflecting lower-than-envisaged tax receipts from oil products, owing to partial pass-through of the surge in world prices, as well as a smaller profit transfer from the Central Bank. The impact of the removal of customs duties for goods originating from countries in COMESA has been limited and offset by improved customs operations, through the introduction of the Sydonia customs management system, bonded warehousing, and pre-inspection of imports. Through September, primary spending was some 3 percent of GDP above program, in approximately equal proportions from larger-than-expected outlays needed to sustain the political transition and the peace process, payments of guaranteed coffee sector credit losses, and domestically financed project spending. At end-September, the government had paid off 0.3 percent of GDP of domestic arrears but had accumulated outstanding payment orders equivalent to 1½ percent of GDP. During the third quarter, F Bu 7.6 billion (1 percent of GDP) in treasury securities were issued to clear domestic arrears with private suppliers related to petroleum imports, which had been impacting negatively on bank asset quality. F Bu 7.6 billion of guaranteed coffee sector credit losses were also paid. Project spending, financed by highly concessional external support, has increased strongly to well above program levels, with the associated increase in counterpart outlays.

7. Following discussions with Fund staff, a revised 2004 budget was signed into law on September 30, 2004, which targets a primary deficit of close to 3 percent of GDP, compared with a balanced position under the original program. The revised budget broadens the application of the 6 percent import service charge to all nondiplomatic imports and incorporates a 6 percent wage increase for civil servants (delayed from January). It also provides for the hiring of 2,300 new teachers and 500 medical personnel, which are sorely needed.

8. Reserve money growth, which had risen rapidly in the first half of 2004, eased in the third quarter to 29.4 percent over the year ending September. Delays in external budget support led to a further increase in net credit to the government while the central bank’s (BRB) net foreign asset position deteriorated. In the circumstances, banks’ demand for credit from the central bank fell well short of the ceilings, which the BRB lowered significantly from May onwards. As a result, apart from credit to government, the NDA of the BRB was broadly unchanged in the first three quarters of 2004. Broad money growth declined to 14.6 percent in September (20.4 percent in the program). The annual rate of increase in credit to the economy has been steady at about 9 percent in the first three quarters of the year, somewhat above the rate of inflation. Gross official reserves declined to US$51 million, about 2½ months of goods and services import cover, at end-September. The authorities consider the reduction in the exchange rate differential between the official and parallel markets to under 3 percent in November 2004 (the lowest level in over a decade), a major accomplishment of their policy efforts. This important development reflects the admission of foreign exchange bureaus as participants in the BRB’s weekly foreign exchange auctions, as well as increased foreign aid inflows and, since September, an import pre-inspection requirement.

9. The BRB has implemented several measures to enhance monetary management in line with its objective of switching from bank-by-bank credit ceilings to indirect monetary control. It has also strengthened prudential supervision and closed down two insolvent financial institutions. As regards the end-June structural performance criterion on monetary policy reform, two components—the introduction of the marginal refinancing window at a penalty rate and the reform of mandatory reserves (now held in the form of remunerated central bank deposits)—were implemented, but weekly liquidity auctions were not launched due to continued operational shortcomings (the nonavailability of reliable liquidity forecasts and key macroeconomic data). A specialized technical assistance team from the IMF visited Bujumbura in November 2004 to assist, inter alia, in such a move.

10. The implementation of structural reforms in other areas has lagged somewhat, reflecting the complex political environment and weak administrative capacity. The establishment of an audit court has been delayed from the end-March target (performance criterion). While the audit court law was passed at end-March 2004, its magistrates were appointed only in June 2004. A law needed to define the magistrates’ legal status was approved by the council of ministers and submitted to parliament. An action plan for the court was approved by the council of ministers on October 28, 2004 to render it operational by April 2005. Financing has been obtained and training and logistical issues are being worked out so that the court can begin to audit the 2004 government accounts by the spring of 2005.

11. The performance of the coffee sector continued to pose grave concerns. The 2003-04 campaign continued to be conditioned by weak, but recovering, world prices and large sectoral inefficiencies. Production rose to around 38,000 tonnes, but processing constraints have led to delays in transformation and exports. An audit of the parastatal coffee agency (OCIBU) was undertaken in June by experts sponsored by the European Union (EU). The results showed that the campaign losses for 2002-03 were higher than previously thought (F Bu 7 billion, compared with F Bu 5 billion). Accumulated losses since 2000-01 in excess of F Bu 15 billion (2 percent of GDP) have translated into defaults on bank loans that trigger a government guarantee. Deep seated reforms are needed to attract much needed private investment and financing, improve quality, bolster incomes of small producers, and eliminate the source of large losses accruing to the budget. A comprehensive reform strategy, elaborated with World Bank and EU support, features the early liberalization of investment, marketing, and export of coffee, as well as the reform and dismantling OCIBU’s marketing monopoly. The strategy was approved by the council of ministers on October 28, 2004. A decree will be issued by end-December to reform OCIBU’s auction mechanism to include representatives of commercial banks, producers, and washing stations and to permit private investment in the sector.

12. Burundi has continued efforts to complete bilateral rescheduling agreements and remains current on its nonreschedulable obligations. Following its first Paris Club rescheduling in March 2004, the authorities recently signed the penultimate bilateral agreement. Discussions are ongoing to secure comparable treatment from other bilateral and commercial creditors. In addition, the clearance of the remaining arrears with multilaterals (the AfDB, the EU/EIB, and the OPEC Fund) has been completed and the AfDB has lifted its sanctions against lending to Burundi.

III. Medium-Term Objectives and Policies

13. The main orientations of the government’s medium-term policies are drawn from the Arusha agreement of August 2000 and the priorities set in the government’s I-PRSP of November 2003, which remain broadly appropriate and attainable. The elaboration of a full-PRSP on the basis of extensive consultations at the local level with private and public stakeholders is well advanced and is expected to be completed by May 2005.

14. The authorities believe that elaboration of a full-PRSP and successful implementation of the PRGF-supported program will serve as catalysts for a further increase in foreign assistance, including debt relief under the enhanced Initiative for Heavily Indebted Poor Countries (HIPC Initiative). Notwithstanding the debt relief obtained from the Paris Club in March, Burundi’s debt burden remains unsustainably high. A preliminary debt sustainability analysis prepared jointly by IMF and World Bank staff indicates an external debt ratio at end-2003, on a present value basis, of almost 2,000 percent of exports. Substantial relief would thus be needed to bring Burundi’s debt burden down to sustainable levels and free resources for much needed social and poverty reduction spending. A preliminary HIPC document will be presented to the IMF and World Bank Executive Boards at the time of the first PRGF review.

IV. The Updated 2004-05 Program

A. Macroeconomic Objectives

15. The strategy for the remainder of 2004 and 2005 seeks to consolidate the progress achieved on economic recovery and financial stabilization, address slippages, and deepen needed financial and structural reforms. Accordingly, the program performance targets for end-December 2004 and for 2005 reflect the latest developments and priorities (Table 3). The updated program aims at maintaining economic growth at about 5 percent in 2004-05 and lowering inflation to 8½ percent in 2004 and 5½ percent in 2005. The original inflation target for 2004 of 5½ percent is out of reach, reflecting much higher world petroleum prices, lower basic food harvest, and higher-than-programmed liquidity creation through midyear. To achieve these objectives, it will be necessary to contain the overall fiscal deficit (on a cash basis and after external grants), in line with the approved revised 2004 budget, at 8.0 percent of GDP in 2004 and 6½ in 2005. This overall deficit is consistent with primary deficit targets of 3 percent of GDP in 2004 and 2 percent in 2005. Reflecting increased foreign assistance inflows, the external current account deficit is expected to widen to about 20 percent of GDP in 2004 and to 19 percent in 2005.

16. Taking into account a projected improvement in private investment, together with low private savings, Burundi will remain highly dependent on the availability of large amounts of external resources to achieve the 2005 program growth and inflation objectives. Progress in addressing the overwhelming humanitarian and social needs, the demands of national reconstruction, and the restoration of public security, will require sustained and reinforced external assistance on highly concessional terms. Foreign assistance, in the form of grants, highly concessional loans, and debt relief, are expected to average about US$400 million in 2004-05. Commitments of grants from bilateral donors have been secured to cover for the costs of the referendum in 2004 and the general elections in 2005. Of particular importance at this time is the need to secure funding of the costs associated with vital security programs. These costs will be closely monitored and require timely and appropriate external support to ensure that they do not destabilize the budget and macroeconomic balances.

17. The authorities are committed to accelerating the implementation of structural reforms, needed to support the economic recovery, ensure its sustainability, and reduce poverty. The program aims at the liberalization of key sectors, such as coffee and sugar; a strengthening of government financial management; improvements in the delivery of social services; further liberalization of the trade and exchange regimes; and improvements in governance and transparency.

B. Fiscal Policy

18. The 2004 revised budget aims at a primary deficit of 3 percent of GDP. Revenues are cautiously projected at 19.4 percent of GDP in 2004, somewhat lower than originally programmed, as the better performance of domestic taxes would offset only partially the shortfall in tax receipts from petroleum products and profit transfers from the central bank. Expenditure increases relative to the program involve primarily transfers to cover coffee sector losses, outlays for peace and reconciliation, and the rebuilding of public administration and social services. Apart from the recent issuance of treasury bills to clear domestic arrears with oil suppliers (which in turn settled their own arrears with the banks), there would be no further domestic financing of the government relative to end-June 2004 levels. The overall fiscal balance after grants (on a commitment basis) would be about zero. The budget financing gap for 2004 has been closed.

19. The 2005 budget will be presented to parliament in late December 2004 (prior action). In view of the slippages in 2004, fiscal policy will be geared at avoiding any further erosion of revenues by addressing customs exonerations and evasion, and at containing increases in expenditure. The primary deficit is targeted to decline to 2 percent of GDP, allowing for essential outlays in connection with the political transition and a further increase in social spending to 7 percent of GDP. The overall deficit, on a commitment basis and after grants, will rise to 3½ percent of GDP in 2005, reflecting a further increase in project spending and special programs.

20. Overall revenue in 2005 is expected to decline somewhat to about 19 percent of GDP, owing to the impact of an import duty reduction (0.3 percent of GDP). Primary expenditure would be reduced by 1 percentage point of GDP, to about 23 percent of GDP, by lowering transfers to cover coffee sector losses and containing the growth in the wage bill (including the military but excluding the newly created national police force) and expenditures on goods and services to 6 percent and zero, respectively. Budget support from multilaterals is expected to rise strongly to about US$68 million in 2005, while bilateral grant assistance would decline somewhat to about US$11 million. Reflecting the initiation of a national privatization program, receipts from the sale of state assets, especially in the financial and coffee sectors, are projected at about F Bu 5 billion (0.6 percent of GDP). Any resources received over and above this amount will be used to reduce domestic debt. A remaining financing gap of about US$28 million is expected to be covered by bilateral grants. This level of concessional financing would allow for a reduction in domestic arrears and the government’s net indebtedness to the banking system.

21. Project expenditure (F Bu 110 billion, 13½ percent of GDP) will continue to be financed mostly from external aid disbursements and will give priority to rehabilitating and rebuilding the social and economic infrastructure. Aggregate poverty-related expenditure (as defined in the I-PRSP) is set to increase from 28 percent of primary expenditure in the 2004 revised budget to 31 percent in 2005. The latter amount does not take into account possible increases from the diversion of resources from debt service to social services subsequent to debt relief under the enhanced HIPC Initiative, from mid-2005.

22. As regards tax policy, the government will lower and simplify import tariffs with a view to reducing smuggling, simplifying administration, and boosting trade. Accordingly, the 2005 budget reduces the maximum tariff rate from 40 percent to 30 percent and folds the 12 percent band into the 10 percent band, for a reduction in the number of bands to three. The net revenue loss is expected at about F Bu 2 billion and would be partially compensated by additional revenues from the full-year effect of the extension (in late 2004) of the customs service tax. The cooperation of the international agencies established in Burundi is being sought to reinforce the application of income tax legislation to Burundians employed by international agencies. The introduction of a value-added tax system, originally envisaged for 2005, has been postponed pending further preparatory work.

23. The authorities are committed to improving the management of the public finances. With technical and financial support from key donors, notably the World Bank’s Economic Management Support Project (PAGE), the EU, and bilateral donors, the Ministry of Finance will seek, in the course of 2005, to create a new internal audit service with appropriately qualified and paid staff; to enhance civil service payroll management, which will be transferred to the Ministry of Finance from the Ministry of the Civil Service by June 2005; to improve expenditure control through the introduction of a new public accounting and budgetary code with effect from the 2005 budget (prior action); and to introduce a single taxpayer identification number (March 2005).

24. The government is committed to normalizing the government’s financial relations with suppliers and establishing the nature and extent of its domestic arrears, which weigh heavily on the private sector, including the banking system. To that end, an inventory of domestic arrears financed through the World Bank PAGE project will be launched before end-2004. Suppliers will be asked to submit their claims and the inventory results will be subject to an external audit before end-June 2005. A strategy for the clearance of arrears will be worked out in the context of the second review under the PRGF arrangement.

C. Monetary and Exchange Policies

25. Pressure on monetary policy resulting from delayed budget support and higher-than-expected government spending is expected to ease in late 2004 with the disbursement of key aid (about US$34 million from the EU and the World Bank). Broad money growth is projected to be broadly in line with the program at about 19 percent by end-2004. Reserve money growth would decline from its midyear high, to about 27 percent by year’s end, owing to the reduction in bank credit to the government and the recent tightening of the BRB’s ceilings on credit to banks. Gross international reserves are expected to rise sharply in late 2004, to about $82 million (4¼ months of imports). For 2005, a reduction in credit to government and much lower coffee credit would result in a sharp decline in the growth of reserve money to less that 10 percent. The increased efficiency of the financial system, resulting from the various reform efforts would lead to a moderate increase in the money multiplier and broad money growth of about 15 percent in 2005. Assuming a further modest decline in velocity, the fiscal program would allow credit to the private sector to grow by about 17 percent, somewhat more than nominal GDP. Assuming the financing gap is closed, gross international reserves would increase further to about 5.8 months of imports by end-2005.

26. In 2005, the BRB intends to maintain a tight monetary stance to support the program’s inflation objective. Critical to this effort will be measures to enhance the efficiency and effectiveness of liquidity management and the rapid phasing out of the government guaranteed coffee credit regime. In this regard, the BRB, supported by IMF technical assistance, will work to enhance its liquidity forecasting capabilities and plans to introduce weekly liquidity auctions and a rediscount facility by the spring of 2005. Further, the BRB and the Ministry of Finance will work to standardize treasury bills and make them tradable. This will enable better liquidity management in the banking system and support a more active monetary policy.

27. Overall, Burundi’s financial sector remains generally sound, although some banks appear vulnerable. Following a strengthening of minimum capital requirements (more than tripled) in March 2004, the BRB is monitoring the orderly liquidation of the two closed banks. In 2005, continued efforts will be made to strengthen bank supervision, and the existing prudential requirements will be tightened gradually toward international standards. The BRB is also committed to improving its own governance and transparency. To this end, it has signed a multiyear external audit contract to begin with the 2004 accounts.

28. The BRB is committed to pursuing exchange system liberalization. To that effect, in late 2004, the BRB abolished the mandatory nature of its auction reference price for commercial transactions. The determination of the official exchange rate was also changed from the weekly auction to the daily average of market rates. The BRB will publish the average daily exchange rates and spreads in the market. The remaining surrender requirement (50 percent on coffee, tea, and cotton exports) will be abolished by March 2005 (performance criterion), which will contribute to a more efficient market for foreign exchange. With the support of IMF technical assistance, the restrictions and reporting requirements on foreign exchange transactions will be further reduced in 2005.

D. Structural Reforms

29. In addition to the reform measures in the areas of public financial management, tariff reform, and exchange liberalization described above, other priorities include the liberalization of key productive sectors and improved governance.

30. Implementation of the recently approved reform strategy for the coffee sector will be key to poverty reduction in Burundi, in particular among the large number of small rural producers. The reform action plan (that also concerns the tea and cotton sectors) is being put rapidly into effect. In late-November 2004, a decree was signed allowing private investment at all levels of the supply chain. The restrictions on export and sale of coffee at all levels of the chain will be abolished in early 2005, including the obligation to go through the OCIBU auction mechanism. In early 2005, the authorities will host a sectoral colloquium, supported by the World Bank and the EU, to bolster understanding of the reforms. By June 2005, the coffee processing infrastructure owned by government will be offered for sale. The government, with foreign technical assistance, will also begin transforming OCIBU into a regulatory and support agency in 2005. One of the objectives of the coffee sector reform is to rapidly phase out the government's crop credit guarantee. The authorities will not grant any new coffee crop credit guarantee in the transitional period of 2005/06 without prior consultations with Fund staff.

31. The government also intends to deregulate the sugar sector during 2005 by liberalizing domestic prices, reducing the minimum import valuation, and lifting export and domestic distribution restrictions. These measures are expected to be completed by September 2005 and to result in lower sugar prices, to benefit the poorer segments of the population, and to better prospects for the development of the domestic sugar industry.

32. The audit court is one of the institutions contemplated in the Arusha agreement, and the government undertakes, in conjunction with parliament, to ensure that it starts its operations in full in April 2005. The court’s magistrates, appointed in June 2004, took their oath of office in September, and, following a period of training through April 2005, will start their functions by auditing the 2004 budget accounts as soon as they become available. The last major hurdle to the court’s establishment is expected to be overcome in December 2004 with the passing of the necessary legislation on the statutes of the magistrates.

E. Program Financing and External Debt Management

33. For 2005, the external nonproject financing need is estimated at US$190 million. This external financing requirement is expected to be covered by commitments from the World Bank (two tranches of the ERC2 credit totaling US$30 million); AfDB program grants and loans from the 9th and 10th FAD of about US$21 million; the EU (FED program of about US$14 million); bilateral creditors (US$11 million); and debt relief. The remaining gap of US$28 million is reasonably expected to be covered, including through a possible donors’ meeting in the spring of 2005. Funding for the constitutional referendum in late-2004 and the national elections (a total of about US$23 million) has been secured, largely from bilateral donors. It is expected that Burundi will be in a position to meet its external nonreschedulable debt-service payments and the authorities are determined to pursue prudent debt management policies and to strive to reach a sustainable external debt position.

F. Safeguards, Statistical Issues, and Technical Assistance

34. The BRB is committed to improving its operations consistent with the principles of good governance included in the IMF’s safeguards guidelines. In view of constrained administrative and technical capacity, a two-step approach to the safeguards assessment was adopted. The first stage, which has been successfully completed, involved an assessment of the areas considered critical to preventing the possibility of misreporting and safeguarding Fund resources, notably an external audit of the BRB’s accounts, financial reporting mechanisms, and the system of internal controls. The second stage, which is expected in 2005, will evaluate the BRB’s legal framework and internal audit mechanism. In line with the staff recommendations under the first stage, the BRB is acting to improve financial reporting mechanisms and strengthen its system of internal controls. Following the appointment of the Ernst and Young audit firm, work began in November 2004 on its first external audit. The external auditors will also make recommendations on the adoption of International Financial Reporting Standards (IFRS).

35. Burundi has extensive technical assistance needs, and the authorities will continue to work closely with multilateral and bilateral partners to rebuild administrative capacity in priority areas. These include tax and customs administration, civil service reform, monetary and exchange rate policy, and banking supervision. Assistance will also be needed to improve economic statistics, notably as regards the national accounts, the balance of payments, and social/poverty indicators. The authorities are committed to improving the national statistical base and implementing the recommendations of an IMF multi-sector statistics mission, which visited Bujumbura in November-December 2004. The authorities have requested the posting of an IMF resident representative in Bujumbura.

V. Program Monitoring and Request for Waivers

36. The government requests waivers for the nonobservance of the performance criteria on the establishment of the audit court (March 2004), the introduction of liquidity auctions (June 2004), and the end-June 2004 ceiling on external arrears. In support of its request, the authorities note that a complex political environment and weak administrative capacity led to the delays in the nomination of the audit court’s magistrates and the introduction of liquidity auctions. Steps have been taken to address these concerns, and both measures are in process. The end-June 2004 ceiling on the stock of external arrears was exceeded because of an upward revision of the historic stock estimated at the time the 2004 program was designed and slower clearance. Nonreschedulable arrears have now all been cleared and negotiations are continuing with non-Paris Club creditors.

37. Table 3 summarizes the quantitative performance criteria (end-December 2004 and end-June 2005) and quantitative indicators for program monitoring purposes. The prior actions, structural performance criterion and benchmarks under the program for 2004-05 are presented in Table 4. In the context of the coffee sector reform, the authorities aim to rapidly do away with the crop credit guarantee, and any new coffee credit guarantee will not be accorded prior to consultations with Fund staff. The program performance target on credit to government will be adjusted downward for any accumulation of domestic arrears, as defined in the TMU. The definitions of the program’s performance targets, external assistance adjustors, and underlying assumptions, as well as Burundi’s reporting requirements are discussed in the attached TMU. Burundi will avoid incurring overdue financial obligations to the Fund, as well as introducing new exchange restrictions, multiple currency practices, bilateral payments agreements inconsistent with Article VIII of the Fund’s Articles of Agreement, and import restrictions for balance of payments purposes. In addition, the authorities stand ready to adopt any new financial or structural measures, in consultation with Fund staff, which may become appropriate to ensure program success.

38. The second review under the PRGF arrangement is scheduled to be completed by May 2005 and will be conditional upon the observance of quantitative performance criteria at end-December 2004, and the structural performance criterion at end-March 2005. The second review will focus on coffee sector reform, public financial management, domestic arrears, monetary and exchange reform, and privatization. Completion of the second review and presentation of a preliminary DSA form the basis for reaching the Decision Point under the Enhanced HIPC Initiative.

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Table 2. Burundi: Prior Actions, Structural Performance Criteria,
and Structural Benchmarks Under the 2004 Program

Measures
Timetable
(End-month deadline)
Status

Prior actions
  • Elimination of all remaining exchange restrictions on current account transactions and bona fide amortization payments
September 2003 Implemented
  • Adoption by parliament of a budget law for 2004 in line with program objectives
December 2003 Implemented
Structural performance criteria
  • Establishment of new auditing court (Cour des comptes)
March 2004 Missed but in process; Court law passed in March; Justices appointed in June; Action plan with identified financing approved by council of ministers in October; Magistrates status law is being considered by the council of ministers and parliament; Court to be fully operational by April 2005 to audit 2004 government accounts
  • Adoption of weekly liquidity auctions and introduction of a marginal refinancing window at a penalty rate, and reform of the system of mandatory reserve requirements, with reserves to be held only in the form of deposits with the BRB
June 2004

Implemented, except for liquidity auctions.

MFD mission (November 2004) to assist BRB introduce liquidity management measure

Structural benchmarks
  • Extension of the transactions tax to domestically produced goods and services
January 2004 Implemented
  • Assessment that all banks in operation meet the minimum capital requirement
March 2004 Implemented: two non-compliant banks closed

Table 4. Burundi: Prior Actions for the First Review under the PRGF and Structural
Criterion and Benchmarks for 2005

Measures
Timetable
(End-month deadline)
Status

Prior actions
  • Presentation of 2005 budget to parliament consistent with program objectives

   
  • Introduction of the new budget and accounting charter with 2005 budget

   
  • Submission to parliament of law on statute of magistrates of the audit court (cour des comptes)

   
Structural performance criterion
  • Abolish remaining export surrender requirement (50 percent of coffee, tea, and cotton exports)

March 2005  
Structural benchmarks
  • Issue decree for the liberalization of coffee sector marketing and trade at all levels of the production chain

March 2005  
  • Begin privatizing coffee sector assets by launching tenders for Sogestals, washing stations, and the state share in SODECO

June 2005

 
  • Initiate audit, by the audit court, of the 2004 government accounts

May 2005

 
  • Complete audited inventory of domestic arrears

June 2005

 
  • Lift trade restrictions and price controls on sugar

September 2005

 

Technical Memorandum of Understanding

1. This Technical Memorandum of Understanding sets out the definitions of program variables to monitor the implementation of the program and the reporting requirements for the government of Burundi and the Bank of the Republic of Burundi (BRB). It defines (i) the quantitative performance criteria and indicative targets and the applicable adjuster; and (ii) the key assumptions used in formulating the economic program for 2004/05 set out in the Memorandum of Economic and Financial Policies (MEFP) of the government of Burundi annexed to the letter of December 21 2004 from the Minister of Finance and the Governor of the BRB to the Managing Director of the International Monetary Fund.

2. The prior actions, the structural performance criteria, and the structural indicators are listed in Table 4 of MEFP.

A. Quantitative Program Targets

Quantitative performance criteria and indicative targets

3. Quantitative performance criteria under the program are set on the end-December 2004 stocks as set out in Table 3 of the MEFP, as follows:

  • Net foreign assets of the BRB (floor);

  • Net domestic assets of the BRB (ceiling);

  • Net credit from the banking system to the government (ceiling);

  • Central government's external payments arrears (ceiling);

  • The outstanding stock of short-term external debt (maturity of less than one year) of the central government and the BRB (ceiling); and

  • New nonconcessional medium- and long-term external debt contracted or guaranteed by the government or the BRB (ceiling).

The quarterly targets on the above variables for 2005 are indicative.

4. Quantitative indicative targets under the program, as set out in Table 3 of the MEFP, are as follows:

  • Primary budget balance, excluding externally financed projects (floor); and

  • The government's wage bill (ceiling).

Definitions and computation

5. The net foreign assets of the BRB are defined as the difference between (i) foreign exchange assets and gold holdings (valued at market prices), and (ii) foreign exchange liabilities to nonresident entities (including the use of Fund resources, but excluding the counterpart of SDR allocations). These amounts are valued in terms of U.S. dollars based on end-June 2004 exchange rate. The net foreign assets of the BRB totaled F Bu 12.4 billion, equivalent to US$11.2 million, at end-June 2004, broken down as follows:


In billions of Fbu In millions of U.S. dollars

Net foreign assets of the BRB
12.4
11.2
   Foreign assets
84.3
76.4
      Deposits with correspondents (excluding IMF)
81.8
74.2
      SDR holdings
0.2
0.2
      Reserve position with the IMF
0.6
0.5
      Gold holdings
0.4
0.4
      Cash on hand
1.3
1.2
   Foreign liabilities
71.9
65.2
      Liabilities vis-à-vis correspondents (excluding IMF)
27.2
24.7
      Counterpart of the use of IMF resources
42.7
38.7
      Other liabilities
2.0
1.8

6. The gross official reserves of the BRB are defined as those foreign assets which are liquid and freely available to the central bank. At end-June 2004, gross official reserves stood at US$58.5 million.

7. The net domestic assets of the BRB are defined as the difference between (i) reserve money, comprising currency in circulation, reserves of commercial banks, and other deposits held at the BRB, and (ii) net foreign assets of the BRB. Net domestic assets of the BRB totaled F Bu 58.8 billion at end-June 2004, broken down as follows:


Net domestic assets of the BRB
58.8
   Reserve money
71.2
      Currency in circulation
56.4
      Reserves of commercial banks
13.5
      Other nonbank deposits
1.3
   Minus: net foreign assets of the BRB
12.4

8. Net credit from the banking system to the government is defined as the difference between (i) loans, advances, and other government credits from the BRB and all of Burundi's commercial banks, and (ii) government deposits held at those institutions. The relevant scope of government is defined as central government and any other special funds or operations that are part of the budgetary process or have an impact on the government's financial position. Net credit from the banking system to the government totaled F Bu 71.7 billion at end-June 2004, broken down as follows:


Net credit from the banking system to the government
71.7
Central government
80.8
   Loans, advances, and other credits
128.3
      BRB
122.4
      Commercial banks
5.9
   Deposits
47.6
      BRB
36.7
      Commercial banks
10.8
Other government (net)
-9.1

9. The stock of external payments arrears for program monitoring purposes is defined as the end-of-period amount of external debt service due and not paid, including contractual and late interest, for which a clearance agreement is not in place or for which arrears are not reschedulable. Arrears for which a clearance framework has been agreed with the creditor or which are subject to rescheduling or restructuring are not considered arrears for program monitoring purposes. Program arrears would include any debt service due under such agreements which have not been paid. The external payments arrears at end-June 2004 are broken down as follows, showing the actual stock under the heading "technical arrears":


External payments arrears Program definition Technical arrears

Multilateral
   African Development Bank
0
8.6
   African Development Fund
0
16.2
   International Fund for Agricultural Development
0
0.2
   Arab Bank for Economic Development in Africa
0
0.0
   Arab League
0
0.0
   European Union
0
17.4
   European Investment Bank
0.3
   International Development Association
0
0.0
   OPEC Fund
0
3.4
Bilateral
0
31.7
   French Cooperation Agency (AFD)
0
0.0
   Japan (FCEOM)
0
0.0
   Russia
0
0.0
   Abu Dhabi Fund
0
   Kuwait Fund
0
   Saudi Arabia Fund
0
   Libyan Bank
0
0.1
Other creditors
   AD Consultants
0
0.0
   Kreditanstalt für Wiedesaufbau AMSAR
0
0.6

10. The program includes a ceiling on new nonconcessional external debts contracted or guaranteed by the government and the BRB, which precludes the contracting of any such debt.

11. The stock of short-term external debt, with a maturity of less than one year, owed by the central government is to remain at zero under the program. Normal import credits are excluded from this ceiling. Loans with an initial maturity, as recorded in the original loan agreement, of more than one year are considered medium term and long term. This performance criterion applies not only to debt, as defined in point No. 9 of the Guidelines on Performance Criteria with Respect to Foreign Debt, adopted August 24, 2000, but also to commitments contracted or guaranteed for which value has not been received (including leasing). Excluded from this performance criterion are rescheduling arrangements and borrowing from the Fund. The concessional nature of debt will be ascertained on the basis of the commercial interest reference rates (CIRRs), as laid out by the Organization for Economic Cooperation and Development (OECD). A debt is said to be at concessional conditions if, on the date of its initial disbursement, the ratio between the present value of the debt computed on the basis of reference interest rates, on the one hand, and the face value of the debt, on the other hand, is less than 65 percent (equivalent to a grant element of at least 35 percent). As of end-June 2004, the stock of short-term debt outstanding was nil, as was nonconcessional medium- and long-term debt contracted during the first half of the year.

12. A transfer of dividends from the BRB to the central government is projected to take place in March 2005, in the amount of F Bu 6.6 billion. Any transfer from the BRB in excess of this amount will be treated as central bank financing (rather than government revenue) and counted against the program's credit from the banking sector ceilings.

13. Receipts from privatization during 2005 are projected to reach F Bu 5.0 billion (equivalent to 0.6 percent of GDP). Any privatization receipts over and above the projected amount will be used to reduce domestic debt.

14. The government's primary budget balance is defined as the difference between total government revenue, excluding grants, on the one hand, and noninterest current government expenditure and domestically financed capital expenditure (including through the use of counterpart funds), on the other hand. The primary budget balance for the first six months of 2004 was estimated at F Bu -9.5 billion, broken down as follows:


Primary budget balance
-9.5
   Total revenue
69.3
      Minus:
         Noninterest current expenditure
66.6
         Domestically financed capital expenditure
12.6
         Net lending
-0.4

15. The government's wage bill is defined as total labor remunerations on a commitments basis for civil servants, contractual employees, and military personnel of the central government, including all allowances and bonuses. The government's wage bill for the first six months of 2004 totaled F Bu 30.2 billion, broken down as follows:


Government wage bill
30.2
   Civilian personnel
18.1
   Military personnel
12.1

External financial assistance adjustor

16. The program provides for a symmetrical adjustor for shortfalls or excesses in external nonproject financial assistance that is applied to quantitative targets on the net foreign assets and the net domestic assets of the BRB, and on net bank credit to the government.

17. External financial assistance (measured in terms of U.S. dollars) is defined to include the following: (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. Disbursements into blocked accounts by donors for the purpose of clearing arrears will not be included as foreign assistance for program monitoring purposes. The assumptions for 2004-05 are shown below.

18. The ceiling or the floor targets will be adjusted to accommodate 100 percent of any deviation from the projected external financial assistance. In case of, respectively, a financing excess (shortfall), the floor on the stock of net foreign assets of the central bank will be adjusted upward (downward), and the ceilings on the stock of net domestic assets of the central bank and on the stock of net credit from the banking system to the government will be adjusted downward (upward). External financial assistance will be converted in terms of Burundi francs on a quarterly basis, using the average official exchange rate.

Burundi. Adjustment of Performance Criteria and Indicative Targets Under the 2004/05 Program
(in millions of U.S. dollars)

 
2004

2005

June

Sept

Dec

March

June

Sept

Dec

Actual
Actual
Rev. Prog.
Prog.
Prog.
Prog.
Prog.

External nonproject financial assistance
   (cumulative from beginning of calendar
   year; in millions of U.S. dollars)
17.3
49.1
93.2
13.1
42.1
61.1
114.4
   Of which: Debt relief (current maturities)
3.0
3.8
6.0
1.1
3.8
6.2
8.9
      EU
0.0
23.8
43.4
0.0
10.2
10.2
14.1
      World Bank (including MDRP)
0.0
0.0
14.8
0.0
0.0
15.0
30.0
      AfDB
0.0
0.0
3.2
10.1
10.1
10.1
20.6
      France
0.0
3.8
3.8
0.0
3.8
3.8
3.8
      Belgium
5.7
5.7
8.3
0.0
2.6
2.6
5.2
      Other (Gap)
0.0
9.7
11.3
29.9
      Multidonor Trust Fund disbursements
8.6
12.0
13.7
1.9
1.9
1.9
1.9

Sources: Burundi authoritiesl and Fund staff estimates.

19. External financial assistance will be converted in terms of Burundi francs on a quarterly basis, using the average official exchange rate.

Domestic arrears adjustor

20. The ceilings on the net bank credit to government will be adjusted downward for any accumulation of domestic arrears, as measured by the accumulation of nonexecuted payment orders older than 30 days.

B. Key Program Assumptions

21. The main program assumptions are drawn from the WEO projections of November 2004 as follows:


 
2004

2005

Jan.-Jun.
Jul.-Dec.
Jan.-Mar.
Jan.-Jun.
Jan.-Sep.
Jan.-Dec.

Average export prices
Coffee (cents per pound)
76.84
68.84
74.00
73.50
72.67
72.87
Tea (dollars per kg.)
190.64
194.14
195.36
195.02
196.65
198.25
Petroleum (US$ per barrel)
33.88
43.17
45.00
44.25
43.50
42.75
End of period
Dollar per SDR exchange rate
1.48
1.49
1.50
1.50
1.50
1.50
Dollar per euro exchange rate
1.23
1.28
1.30
1.30
1.30
1.30

C. Provision of Information to IMF Staff

22. To facilitate the monitoring of program implementation, the Burundi government will prepare a monthly report within five weeks from the end of each month, which will be sent to IMF staff. In addition, the staff of the monitoring committee (technical bureau of the Secrétariat Permanent de Suivi des Réformes Économiques et Sociales-SP/REFES) will forward to the African Department of the IMF, by facsimile or electronic mail, the data required for program monitoring. These data will include, in particular, on a weekly basis the following:

  • A monitoring table (tableau de bord) containing the most recent weekly and monthly data on the main financial indicators;

  • A table on the foreign exchange cash flow;

  • The balance sheet of the BRB (situation hebdomadaire).

23. The following data are to be provided on a monthly basis:

  • The monetary survey, including breakdown of the central bank and of commercial banks;

  • The financial position of the government vis-à-vis the banking system;

  • A detailed breakdown of government revenue;

  • A detailed breakdown of government expenditure on a commitment basis;

  • A detailed breakdown of the government wage bill on a commitment basis;

  • Detailed information on government social spending, in particular on the health and education sectors;

  • A detailed breakdown of the servicing of domestic and external public debt, including amounts due and paid, in interest and principal, as well as the detail by creditor and any accumulation of arrears on domestic or external debt;

  • A detailed breakdown of the stock of domestic payments arrears and cumulative flows from January 1, 2004; the accumulation of new arrears is defined as the difference between commitments and actual payments (on a cash basis, as reported in the cash statement summary—Reddition des comptes);

  • The amount of new debts contracted or guaranteed by the government, including detailed information on its conditions (such as currency denomination, interest rate, grace period, maturity);

  • Actual disbursements of nonproject financial assistance, including new loans and debt relief granted by Burundi's external creditors;

  • The weekly balance sheet of the BRB and the outcome of weekly foreign exchange auctions, including the allocated amounts and exchange rate levels, as well as the level of buying and selling exchange rates used by commercial banks and those observed on the parallel market;

  • Indicators and other statistical data to allow an evaluation of macroeconomic developments, such as the consumer price index, indices of manufacturing output, merchandise imports and exports (volume and value), with a breakdown by main categories; and

  • An update on the implementation of structural measures planned under the program, as summarized in Table 3 of the MEFP.

24. The SP/REFES will also provide the African Department of the IMF with any information that is deemed necessary to ensure an effective monitoring of the program.