Public Information Notice No. 02/123

Public Information Notice: IMF Concludes 2002 Article IV Consultation with Burundi

October 30, 2002

On October 9, 2002, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Burundi.¹

Background

By 2000, following nearly a decade of civil strife, more than 250,000 Burundians had lost their lives and about 1 million had been displaced; meanwhile, real GDP had contracted by almost 30 percent since the early 1990s. A Peace and Reconciliation Agreement was signed in Arusha, Tanzania, in August 2000, and a government of national unity was appointed in November 2001. While rebel activity has continued in recent years, cease-fire negotiations with all rebel factions started in August 2002.

The authorities began addressing economic and financial issues through the implementation of a staff-monitored program (SMP) in the second half of 2001. The program's main objectives were to stabilize the macroeconomic situation, facilitate the mobilization of external assistance, and lay the groundwork for growth and poverty reduction. However, implementation of the SMP was hampered by continued instability and a consequent holding back of donor support.

Economic activity began to recover and inflation decelerated in 2001. Aided by a rebound in agricultural output and reconstruction activity, real GDP grew by an estimated 2.1 percent, and the 12-month of rate inflation fell to less than 4 percent in December. These positive trends continued during the first half of 2002, but the lowest world coffee prices in a decade have posed major difficulties for Burundi. Larger losses of the coffee parastatal (OCIBU) in 2001/02, equivalent to about 1 percent of GDP, have been covered by budget subsidies; such losses would have doubled in tandem with production in 2002/03 in the absence of new measures.

Fiscal performance weakened in the latter part of 2001, mainly reflecting expenditure overruns, and the overall budget deficit increased to 5.2 percent of GDP. Confronted with lower-than-expected donor support, the government resorted to domestic bank financing and ran up external debt service arrears, amounting to US$116 million at end-2001. The external current account deficit also worsened (to 16.2 percent of GDP) and gross official foreign exchange reserves fell to less than ten weeks of imports of goods and services at end-2001. In the face of dwindling foreign exchange reserves, the Bank of the Republic of Burundi (BRB) resorted to restrictions, including a narrowing of the list of imports eligible for foreign exchange on the official auctions market and limits on bid rates, and conducted its auctions less regularly. Such restrictions helped contain the depreciation of the Burundi franc, but the discount (in foreign currency terms) on the parallel market remained in excess of 20 percent.

The authorities' program for 2002-03 was drawn up in the light of the broader framework of the Arusha agreement. In particular, it takes into account the key steps envisaged under the peace process, the mobilization of humanitarian assistance and the repatriation of refugees, the rebuilding of infrastructure and institutional capacity, and the promotion of equitable growth through market-based economic reform. In the short run, the authorities' priority is to restore a measure of financial stability, in particular through stricter budget implementation, tighter monetary conditions, and more flexible exchange rate management. In turn, a better coordination of fiscal, monetary, and exchange rate policies, coupled with emergency measures to reduce the deficit of the coffee sector, is expected to enhance competitiveness and improve resource allocation. The authorities hope that progress in the implementation of their economic and financial program will help them mobilize external assistance, including budgetary support; this assistance would facilitate the funding of priority programs that are crucial for the consolidation of peace, as well as the replenishment of the BRB's foreign currency reserves.

Executive Board Assessment

Executive Directors noted that Burundi had faced unusually difficult circumstances since the mid-1990s, as the severe impact on the economy of the drawn-out conflict had been compounded by a sharp fall in the terms of trade. Against this background, Directors welcomed the progress made toward normalizing the situation since the signing of the Arusha Peace and Reconciliation Agreement in August 2000. These developments provided a basis for cautious optimism that a broad-based settlement would be reached soon, allowing for a full recovery of the economy.

Directors commended the Burundi authorities for having introduced measures designed to restore economic and financial stability and mobilize the support of the international community. They agreed that improved economic management and the launch of the much-needed rehabilitation and reconstruction of basic infrastructure, with substantial external assistance, would help consolidate the progress made under the Arusha agreement. Measures to achieve macroeconomic stability were clearly essential in this respect, especially to strengthen the fiscal position, reform the foreign exchange auction market, and restore the competitiveness of coffee exports. However, Directors noted that progress toward high sustainable growth and poverty reduction would require the elaboration of a comprehensive medium-term macroeconomic program and structural policy framework.

Directors considered that the authorities' fiscal consolidation objectives for 2002-03 struck an appropriate balance between the requirements of emergency needs and reconstruction, on the one hand, and the objective of reducing internal and external imbalances, on the other. They welcomed the authorities' decision to strengthen tax and customs administration, as well as their efforts at containing the growth of current expenditure, and called for further improvements in public expenditure management. Directors emphasized the importance of reducing military outlays as soon as circumstances permit, thereby facilitating an increase in spending on high-priority sectors.

Directors welcomed the adoption of a more flexible approach to monetary and exchange rate management. They noted that the holding of more regular auctions would help improve the allocation of foreign exchange, and urged the authorities to phase out exchange restrictions as soon as possible. This, together with sufficiently tight liquidity conditions, should allow a convergence between the official and parallel market exchange rates. Directors also stressed the importance of improving monetary control to ensure a pace of broad money growth that is consistent with price stability and the economic recovery needs.

Directors agreed on the priority assigned to ensuring the profitability of coffee and tea exports, which continue to account for the bulk of Burundi's foreign exchange earnings. The measures taken by the coffee marketing board to reduce processing margins were steps in the right direction, but Directors took the view that these steps would need to be followed by reforms of the entire subsector, including through deregulation and privatization. Directors noted the importance of proceeding with other structural reforms, especially the setting up of the auditing court, which would improve accountability in the management of public finances. They also encouraged the authorities to take measures to foster private sector development and economic diversification once normal conditions and business confidence have been restored.

Directors commended the authorities for maintaining core statistics that are deemed adequate for Fund surveillance. However, they noted the need for improving the quality and timeliness of data, and supported the provision of technical assistance in this area. The authorities were also encouraged to mobilize technical assistance in the areas of tax administration, expenditure control, monetary and exchange rate management, and bank supervision.

While welcoming Burundi's support for the global fight against terrorist financing, Directors encouraged the authorities to take steps to combat money laundering and to implement all relevant United Nations regulations.

Directors expressed the view that Burundi's political and economic situation remained fragile, despite the progress made during the last two years. They hoped the authorities would seize the opportunity, with the help from external assistance, to consolidate the prospects for lasting peace and economic development in Burundi.