Press Release No. 04/13

Press Release: IMF Approves a Three-Year US$104 Million Arrangement Under the Poverty Reduction and Growth Facility for Burundi

January 23, 2004

The Executive Board of the International Monetary Fund (IMF) today approved a three-year SDR 69.3 million (about US$104 million) arrangement under the Poverty Reduction and Growth Facility (PRGF) for Burundi to support the country's economic reform program through January 2007. This enables Burundi to draw an amount equivalent to SDR 26.40 million (about US$40 million) immediately under the PRGF arrangement. Of this total, SDR 19.25 million (US$29 million) will be used to repay early nonconcessional drawings outstanding under the post-conflict emergency assistance policy.

Following the Executive Board's discussion of the request by Burundi, Agustín Carstens, Deputy Managing Director and Acting Chairman, stated:

"Burundi has made considerable progress in advancing the peace process since the signing of the Arusha Peace and Reconciliation Agreement in August 2000. The authorities' strong implementation of the post-conflict program during 2002-03 contributed to improved economic conditions and achieved the objectives of controlling inflation and mobilizing financial support from other multilateral and bilateral sources. Moreover, the recent issuance of Burundi's Interim Poverty Reduction Strategy Paper (I-PRSP) represents a major step forward in the development of the government's economic strategy for the coming years.

"Looking ahead, Burundi faces the task of strengthening the peace process, resuming economic growth and reducing a heavy debt burden, reducing widespread poverty, resettling a vast number of refugees and internally displaced persons, and demobilizing combatants. The authorities are determined to address these challenges as part of a comprehensive economic and financial program supported by a three-year arrangement under the Poverty Reduction and Growth Facility.

"The immediate objectives of the 2004 program are to ensure appropriate conditions for a strong resumption of growth with low inflation through prudent fiscal and monetary policies, and to mobilize additional external support. The 2004 budget increases spending on the social sectors, although a further reallocation of spending to productive areas of the budget and careful management of expenditures are necessary. The authorities intend to take the necessary steps to make a newly established auditing court fully operational, and will broaden the base of taxes and improve tax and customs administration. The authorities intend to enhance monetary management through the adoption of indirect instruments of monetary control, and to continue liberalizing the foreign exchange system.

"The authorities aim to undertake measures to improve the performance of the coffee sector, with external assistance, and diversify the sources of economic growth, while ensuring that displaced workers are protected. Continued improvement in security is essential to facilitate the implementation of other important reforms, including privatization.

"The positive outcome of the donors' forum convened in Belgium in January 2004 has further improved the prospects for implementing various programs, including reconstruction, assistance to refugees and internally displaced persons, and institution building. The authorities intend to use this foreign aid to ensure adherence to the program's targets regarding the level of international reserves and reduction of external debt payment arrears.

"As part of their PRGF-supported program, the authorities will begin addressing their large external debt-servicing burden. It is expected that Burundi will qualify for debt relief under the enhanced Heavily Indebted Poor Countries (HIPC) Initiative," Mr. Carstens stated.

Recent Economic Developments

After nearly four decades of instability and civil strife, Burundi reached a turning point with the signing of a Peace and Reconciliation Agreement in Arusha, Tanzania in August 2000, and a government of national unity was appointed in November 2001. Although sporadic hostilities continued thereafter, much progress was made during 200l-03 with the support of regional partners and the African Union.

Improving political and social conditions and significant steps toward restoring financial stability provided the basis for Fund support in 2002 under the post-conflict emergency assistance policy. In 2003, Burundi's GDP contracted by an estimated 1 percent in real terms, owing to the impact of poor weather on the first crops of the season. Activity in nonfarm sectors, which had already underpinned Burundi's broad-based recovery in 2001-02, however, remained strong. Given the 20 percent depreciation of the exchange rate in the third quarter of 2002 and higher food prices resulting from lower agricultural output, inflation rose in mid-2003 from the exceptionally low levels seen in 2002 to 10-14 percent (end-of-period basis) in the third quarter of 2003, but has begun to recede more recently.

The program was broadly on track in 2003, with budget execution in line with projections during the first three quarters of the year. While debt-service payments fell short at end-September, they rose in the last quarter of the year following activation of the World Bank-managed multidonor trust fund for debt service. The strong growth in broad money of between 30 and 35 percent seen earlier slowed to 24 percent in September. Net international reserves were at comfortable levels equivalent to 3 months of imports at the end of the third quarter of 2003. The Burundi franc was broadly stable vis-vis major currencies, and the exchange rate differential between the official and parallel markets declined from 15-20 percent to below 15 percent in the last quarter of 2003. The external current account deficit narrowed to 5 percent of GDP, compared to 6 percent of GDP in 2002, mainly reflecting a surge in exports from an unusually large coffee crop in 2002/03. The financial performance of the coffee sector in 2003 was disappointing however, and the authorities took steps to improve monitoring and control of the coffee sector's financial operations.

Program Summary

The authorities' economic program for 2004 and for the medium term was drawn up on the progress made during the last two years. It is part of a comprehensive approach to overcome the daunting challenges with regard to achieving political stability, sustainable economic growth, and poverty reduction. In their Interim Poverty Reduction Strategy Paper, the authorities have identified the country's specific needs and put together a comprehensive policy strategy combining a sound macroeconomic framework with priorities for structural reforms. The hope is that determined implementation of the authorities' economic and financial program will provide the appropriate conditions for a strong resumption of economic growth in 2004 and help mobilize additional external assistance, including budgetary support. In due course, this will open the way for debt relief under the enhanced Initiative for Heavily Indebted Poor Countries.

In particular, the government intends to (a) increase real growth to about 5 percent per year; (b) raise public spending on the social sectors from 6 percent of GDP in 2003 to 7 percent in 2004 and 10 percent by 2006; (c) lower inflation to about 4-5 percent annually; (d) maintain gross official foreign reserves at six months of imports of goods and services; (e) limit the deficit of the external current account to levels that can be financed by grants and loans on highly concessional terms; and (f) reduce the debt stock and debt-servicing ratios substantially. The government will also endeavor to step up implementation of its structural reform agenda, especially with a view to fostering an enabling environment for private sector activity. This includes measures to improve governance, facilitate private sector development, and strengthen the monitoring and accounting of public finances.