Figure 1: Real GDP growth (E)

Figures for 2010 are estimates; for 2011 and later are projections.

Figures for 2010 are estimates; for 2011 and later are projections.

Fiscal Policy

Both revenue and expenditure in 2010 stood at levels similar to those in 2009. Revenue was 30.5% of GDP (31% in 2009), while expenditures increased slightly to 33.7% of GDP (33% in 2009). In fact, the levels of revenue and expenditures in 2010 reflected a declining trend that started in 2008 from the high values recorded in 2007. Whereas domestic resources increased slightly from 17.2% of GDP in 2007 to 18.5% in 2010, grants were halved from 20.4% of GDP to 10.4% over the same period. The negative effect of the crisis on traditional donors and poor management of public resources, including aid, are two of the key factors explaining the drop in grants. The overall deficit increased from 2% of GDP in 2009 to 3.2% of GDP in 2010.

For 2011 and 2012, total revenue will not change substantially. Even if the government increases tax collection as a result of the fiscal reforms introduced in 2010, grants will most probably continue to decline. In early 2011, some donors withheld resources in reaction to major cases of misappropriation of public funds by high-ranking government officials. In addition, some donors have announced aid cuts due to their own financial problems resulting from the international crisis. Burundi needs to reduce its dependence on external aid by mobilising more domestic resources and using them efficiently. External assistance is often not disbursed until late in the year or even in the following year, which compromises the implementation of the budget and development projects. In this regard, the government reformed its tax administration in 2010 by establishing the Office burundais des recettes (Burundi Revenue Authority – OBR), an autonomous institution that is expected to be more efficient than the old revenue service housed in the Ministry of Finance. If OBR is to be effective, however, it will need to improve its technical capacity, devise ways of stemming corruption and pervasive tax evasion, and bring at least part of the large informal sector into the tax net.

Expenditure in 2011 is projected to be at the same level as in 2010, while in 2012 it should increase marginally because of the rising trend in wages and salaries as the government honours its pledge to increase civil servants’ wages. In view of the country’s reliance on donor support, however, these projections are dependent on the amount of external inflows. If the latter decline, as early indications suggest they will, then spending will decline as well. For example, the preparation of the 2011 budget was delayed by several months because many donors could not commit to maintaining aid at the levels they had been allocating to the country.

Burundi reached an important milestone in January 2009 when it reached the completion point of the Heavily Indebted Poor Countries initiative. The resulting debt cancellation amounted to 833 million US dollars (USD), accounting for most of the country’s external debt. Burundi now has a sustainable level of indebtedness. Interest on external debt was only 1.2% of GDP in 2010, and this ratio is expected to decline to 0.8% and 0.7% of GDP in 2011 and 2012 respectively. To avoid re-accumulating unsustainable levels of debt, Burundi has decided to accept only grants and highly concessional loans in the future and has made it illegal to contract short-term public debt.

Table 4: Public finances (percentage of GDP)

Figures for 2010 are estimates; for 2011 and later are projections.

Burundi is a member of the East African Community’s customs union, but since this has not yet evolved into a monetary union, the country has its own monetary policy. The main objective of this policy is price stability, with a target of keeping inflation to single digits, but this has been a challenge. Over the last ten years, the country has recorded double-digit inflation rates five times, including in 2008 and 2009. Inflation in 2010 was 7.1%, which was higher than the East African Community’s target rate of 5%.

Controlling the money supply and stabilising the exchange rate of the Burundi franc have been the main instruments used by the central bank to keep inflation in check. However, the money supply has been growing much faster than the economy. In 2008 and 2009, it increased by 34% and 20% respectively, with corresponding inflation rates of 24.5% and 10.5%. Money supply also increased faster than GDP in 2010. Credit to the government increased by 17.2% in 2009, as against 10.2% for credit to the economy, which partly explains the large increase in money supply. Increases in government domestic borrowing have often been due to the difference between expected and actual aid levels, as well as to the delays in donors’ aid disbursements. In 2009, actual budgetary aid totalled only 74% of the expected amount, and 97% of it was disbursed by donors in December 2009 and in 2010.

As a result, monetary policy has not been able to control the money supply, which is one source of high inflation. In contrast, the exchange rate has been stabilised at BIF 1 230 for USD 1. This stability is due to reforms in exchange rate policy over the years and a high level of international reserves.

Inflation is also determined by movements in prices, particularly those of agricultural food products. Food items make up 51.9% of the consumer price index (CPI), and rain-fed agriculture provides almost all the food consumed in Burundi. The strong inflation of 2008, for example, resulted not only from high money supply but also from food price inflation, with prices jumping by 32.7% following a drought that reduced food production. The single-digit inflation rate in 2010 can be attributed to a low increase in domestic prices. The food price index declined between May and July 2010 following good harvests in the second farming season. Between July 2009 and July 2010, food price inflation was 7.3%, as against 13% for non-food inflation. Core inflation rose by 20%, driven by increases in housing and household energy consumption prices.

Interest rates do not seem to be a strong channel for the transmission of monetary policy, not only because the government has been an important consumer of central bank credit but also because of credit rationing and the concentration of banking activity on a narrow group of economic agents. Less than 2% of Burundi’s population has a bank account. The policy interest rate was set at 9.6% in July 2010, a level only slightly below the rate of 10% applied in July 2009. This seems to have had no effect on lending and deposit interest rates, which have been declining over the last five years: the lending rate has fallen by 22% over the period, from 20.6% in 2005 to 16.5% in 2009 and 16% in 2010, while the deposit rate has declined slightly faster, from 9.6% in 2005 to 7.6% in 2009 and 7.1% in 2010, for an overall decline of 26%. With the inflation rate at 7.1%, the real lending rate was 8.9% in 2010. The decline in interest rates is associated with increased competition in the banking industry, particularly the recent entry of regional banks. As the domestic banking sector is obsolete, the entry of more efficient banks could lead to even lower lending rates over the medium term, benefiting the economy as a whole.

 

The decline in nominal lending rates had only a marginal effect on credit markets because the interest rate is weakly related to credit demand. The low level of credit extended is due more to the challenging business environment, which reduces investment and hence the demand for credit. In 2011 and 2012, if the structural measures under way to improve the business environment bear fruit and if interest rates continue to decline, the private sector will benefit from increased lending. Indeed, if the rates of inflation are as forecast, real interest rates will remain positive even if nominal lending rates decline further.

Burundi has been characterised by a chronic trade deficit over the years. The dependence of the export sector on a single commodity, coffee, has made the economy vulnerable to upswings in coffee prices on the international market. Even when prices are high, however, Burundi does not benefit much because it exports small quantities. In 2009, for example, only 16 000 tonnes were exported. In 2010, which is considered a good year in terms of coffee production, 23 000 tonnes were exported. The trade balance has therefore been dominated by imports. In 2010, imports and exports represented 24.1 % and 4.7% of GDP respectively. The exports/GDP ratio has remained consistently low over the years, indicating that unlike many African countries, Burundi has not been able to generate export-led growth.

In 2011 and 2012, exports and imports are expected to remain at much the same levels as in 2010, which implies that the trade balance will not change substantially. Even if the volume of coffee exports increases as a result of the reforms under way in the coffee sector – the doubling of producer prices in just two years and the privatisation of coffee processing are expected to boost both output and better quality – international prices are not expected to remain at their 2010 level. As a result, the country will need to sell more coffee to maintain the same level of export revenue, which is unlikely given that coffee plants take three to four years to mature. In the short term, investing in the production of speciality coffees through better processing of coffee beans before they are exported could generate higher revenue, since speciality coffees sell for higher than average prices. More attention should also be given to tea, which has consistently increased its share in export revenue over the last few years.

The high trade and services deficits were to some degree counterbalanced by high transfers (27.5% of GDP), which helped to reduce the current account deficit from 15.5% of GDP in 2009 to 9.4% in 2010. The components of the current account should not change substantially in 2011-12, which implies that the current account deficit will also be relatively stable. Should Burundi’s economic partners reduce their aid, however, the current account deficit could increase. In the short and medium terms, the country has little possibility of increasing its exports in any significant way. Therefore, if aid transfers diminish, Burundi will have no choice but to reduce its import bill in order to keep the current account deficit at a manageable level. The central bank could use the exchange rate as the instrument for reducing imports, but this would exert upward pressure on prices.

Table 5: Current account (percentage of GDP)

Figures for 2010 are estimates; for 2011 and later are projections.

Burundi has a small and weak private sector, mainly because of a difficult business climate that discourages investment. According to the latest edition of Doing Business, Burundi ranked 180th out of 183 countries surveyed in 2010 – a clear indication of the challenges facing the development of the private sector. According to Burundi’s Federal Chamber of Commerce, the most pressing barriers to the development of the private sector fall into three groups.

First, there is a financial constraint, particularly a lack of the medium- and long-term loans that are essential to building a vibrant private sector. Commercial banking is dominated by three banks, whose activities are mostly limited to urban centres and large enterprises. The country has no stock market. With less than 2% of the population having a bank account, Burundi has one of the lowest levels of bank penetration in the world. There are important structural constraints that prevent banks from contributing to the country’s long-term growth and development. These include the small size of banks and credit allocation that favours short-term activities with the highest returns, leaving the most important economic sectors out of the credit market. Over the 2003-08 period, two-thirds of total credit was allocated to commerce, 2% to industry and only 0.75% to agriculture, the most important sector of the economy.

Recent developments are expected to improve the financial sector. First, the opening of the economy to foreign banks is going to increase competition while at the same time introducing new products and new technologies. This has already started with the recent introduction of automated telling machines and of telephone and Internet banking. Second, the central bank has been raising the minimum capital requirement of all commercial banks in order to reduce their vulnerability. This requirement has been gradually raised from BIF 300 million ten years ago to BIF 10 billion as of 31 December 2010. With respect to long-term funding, discussions are under way on the creation of a credit guarantee fund that will help investors to mobilise long-term funding. The state and its institutions are expected to participate alongside the private sector in financing this fund.

The second obstacle to private sector development in Burundi is the weakness of the justice system. The private sector needs a predictable and relatively fast justice system that investors can turn to in case of business disputes. As the country’s general justice system cannot be relied on in the short term, it has been decided to revive the Centre burundais d’arbitrage et de conciliation, an arbitration authority specifically designed to adjudicate business disputes.

The third key problem concerns access to factors of production. Burundi suffers from a chronic lack of skilled labour that has been worsened by the massive departure of trained professionals as a result of the country’s political instability over the last two decades. Moreover, land is very expensive, while electricity and transport are not only expensive but also highly unreliable, which further increases production costs. It will be difficult to address these constraints in the short term.

The realisation that Burundi had one of the worst business environments in the world shocked many Burundians, prompting the political leadership at the highest level to act. The second vice-president has established several groups and committees to come up with detailed plans for improving the business environment. For the first three months, the focus was on three of the nine Doing Business indicators, namely starting a business, registering property and protecting investors; the other six indicators will be covered in the following months. In close collaboration with the International Finance Corporation, which produces these indicators, the three groups involved have been busy crafting strategies that will allow Burundi to make visible improvements in the business climate rankings before the next edition of the Doing Business report.

The Burundi Investment Promotion Authority was established in October 2009 to analyse all investment requests and issue investment authorisations to both local and foreign investors. The objective was to streamline the investment analysis process, as the old system was too inefficient and too bureaucratic. One year after its establishment, the new agency had issued investment authorisations for 60 projects totalling BIF 203 billion – an unprecedented level of activity. The main investments were in food industries and in information and communication technology (ICT). According to the Authority, investments could double in 2011-12 if economic and political conditions improve. The most promising sectors are energy production, mining, tourism and food processing. China and Qatar are among the potential investors that have expressed interest in investing in tourism, fishing, mining and industrial farming.

The government initiated several reforms to make the civil service more efficient. One important step was to undertake a census of the civil service. Moreover, for the first time in its history, the Ministry of Public Service and Social Security has acquired human resource management software, which is an integral part of the modernisation process. The ministry is also putting in place a National Pension and Occupational Risk Authority (ONPR) with an initial endowment of BIF 2 billion. ONPR’s key objective is to overhaul the country’s pension and social protection system, which dates back to the colonial period. The ministry also has a plan to strengthen provincial civil service offices in order to improve service to its clients in under-served regions.

Agriculture development has been included in government development priorities alongside social sectors. This step was overdue. Although 95% of the poor live in rural areas and agriculture provides 44% of GDP and 95% of export revenue, agriculture had long been one of the sectors receiving the lowest budgetary allocations and the lowest amount of aid. In 2006, the share of agriculture in executed budget expenditures was 1.5% but this share increased to 5.3% in 2010. Moreover, the share of productive sectors (mainly agriculture) in foreign aid allocations increased from 6.9% in 2007 to 11% in 2009. Budget allocations to agriculture will continue to rise, with a target of reaching a budget share of 13% by 2012. As the country stabilises its political environment, resources allocated to non-productive uses, such as security-related expenditures, are to be redirected to agriculture and social sectors.

One challenge facing the agriculture sector is the scarcity of cultivated land, due to population pressure. The average plot farmed by a household covers less than one hectare, forcing farmers to practise intensive methods of production. Even marginal land and protected areas such as natural parks and forests are being encroached on for farming purposes, with devastating effects on the environment. Land has become so scarce that disputes over ownership are overwhelming the legal system. It is estimated that up to 70% of court cases, particularly in the lower courts, are related to disputes over land ownership.

Privatisation of the coffee sector was a key measure to rationalise the production and marketing of coffee, a strategic commodity. It was undertaken in the expectation that stakeholders in the sector would have better incentives to produce more and improve the quality of the product. Moreover, as a result of increasing competition in the sector and the elimination of some intermediaries between producers and consumers in export markets, producer prices were expected to increase and to converge with those found elsewhere in the region. In fact, owing to these reforms and high international prices in 2010, producer prices increased by 150% between 2008 and 2010. It is not yet clear, however, whether the reforms have induced producers to plant new trees, which would increase overall production once they reach maturity in three to four years.

With respect to education, although the net enrolment ratio reached 90% in 2009, only 46% of pupils starting grade 1 reached the last grade of primary school. Enrolments in secondary and tertiary education are much lower. HIV/AIDS infection accelerated during the war as a result of population displacements, army and rebel movements, and promiscuity in displacement camps. About 3.5% of pregnant women were infected in 2007. HIV/AIDS is more prevalent in urban than in rural areas, with prevalence rates of 4.6% and 2.8% respectively in 2008. As only a small fraction of Burundians live in urban areas, however, there are many more persons infected with HIV/AIDS in rural areas. These rates would have been higher without the efforts of the government and non-government organisations to contain the spread of HIV/AIDS and assist those infected in gaining access to drugs. Other health indicators, such as under-5 mortality rates, maternal health and the prevalence of malaria and other diseases, show no substantial improvement.

When the current president came to power in 2005, he declared that primary education would be provided free of charge. As a result, in 2006, the net enrolment ratio in primary education jumped to 72.4% from 60% in 2005. Free education particularly helped poor families that had previously been unable to send their children to school. However, the policy had not been well prepared in terms of increasing the capacity of the education system to cope with the new influx of pupils. Between 2005 and 2006, the number of pupils per teacher increased from 49 to 55 and the number of pupils per classroom from 76 to 86, and the quality of education declined. To address the situation, the government increased its education budget and allocated one-third of external aid to the construction of new schools, renovation of old ones and acquisition of books and furniture. Local communities also participated in the construction of both primary and secondary schools. By the 2009/10 school year, the ratio of girls to boys was 0.99. At the secondary level, progress has been limited, particularly for poor families. At the tertiary level, the number of universities reached 21, of which 15 are private. The number of university students increased from 15 000 in 2006 to 24 000 in 2009, but the quality of provision fell as the demand for education increased. The government is currently working on legal instruments that will establish a quality control process in the education sector.

In the health sector, the government announced in 2005 that children under 5 years of age and pregnant women would have access to health services at no charge. This measure increased the proportion of children and pregnant mothers accessing medical services from about 28% in 2006 to 69% in 2009. In order to achieve these results, the government raised the budget share of the health sector from about 3% of the total budget in 2005 to 11.6% in 2010. A large proportion of foreign aid has also been allocated to health. Since 2006, these resources have made it possible for the government and the private sector to build 75 new health centres and renovate 53 more, in addition to building several hospitals across the country. Currently, Burundi has 56 hospitals and 685 health centres. One key challenge is to provide the necessary medical equipment to all these facilities and hire enough qualified personnel.

Finally, unemployment remains a major challenge. Although there are no reliable statistics on unemployment, it is clear that economic growth rates over the last few years have not been high enough to create opportunities for the increasing number of job-seekers emerging from the expanding education system and for people living in rural areas. Moreover, unemployment has been worsened by the mismatch between the education system and the needs of the economy. For example, there is considerable demand for more doctors and health professionals to work in the new hospitals and health centres, but the education system has not been producing them in large enough numbers. Instead of producing university graduates who remain unemployed, it would probably pay to create more technical schools at the secondary level with a curriculum better matched to the needs of the economy. If the security situation improves, it is expected that higher investment levels will create more job opportunities, particularly in urban centres, while the recent attention given to agricultural development will generate such opportunities in rural areas.