AFRICAN DEVELOPMENT BANK GROUP

PROJECT : ECONOMIC AND GOVERNANCE REFORM SUPPORT PROGRAMME PHASE I (PARGE - I)

COUNTRY : BURUNDI

APPRAISAL REPORT

Date: November 2014

Appraisal Team

Team Leader : Léandre BASSOLÉ, Senior Macroeconomist OSGE.2

Project Team: F. NKULIKIYIMFURA, Lead Governance Specialist OSGE.2 J. TOKINDANG, Principal Country Economist BIFO A. UMUBYEYI, Macroeconomist OSGE.2 P. NGWALA, Social Protection Specialist ORTS 1 M. DIALLO, Senior Procurement Specialist ORPF.1 M. DIOMANDE, Senior Financial Management Specialist ORPF.2 Sector Director: Isaac LOBE NDOUMBE OSGE Country Director: Gabriel NEGATU EARC Director, ORTS Sibry TAPSOBA ORTS Resident Representative Abou BA BIFO Division Manager: Jacob Diko MUKETE OSGE.2

Peer

Reviewers

Achraf TARSIM, Senior Economist (OSGE.1), Carlos MOLLINEDO, Lead Strategy Officer (COSP), Richard Antonin DOFFONSOU, Principal Country Economist (CMFO), Olivier MANLAN, Principal Country Economist (ORWA), Anton LEIS GARCIA, Senior Private Sector Development Specialist (OSGE.2), Julien BANDIAKY, Senior Economist (OSGE.1)

AFRICAN DEVELOPMENT BANK GROUP

BURUNDI

ECONOMIC AND GOVERNANCE REFORM SUPPORT PROGRAMME PHASE I

(PARGE - I)

OSGE DEPARTMENT

December 2014

Translated document

TABLE OF CONTENTS

ABBREVIATIONS AND ACRONYM

ABBREVIATIONS AND ACRONYMS ................................................................................................................ ii

GRANT INFORMATIONS ................................................................................................................................... iii

PROGRAMME SUMMARY ..................................................................................................................................iv

I. INTRODUCTION: PROPOSITION ............................................................................................................... 1

II. COUNTRY CONTEXT .................................................................................................................................. 2 2.1. Political Situation and Governance Context……………………………………………2 2.2. Recent Economic Developments and Macroeconomic and Budgetary Analysis…….. 3 2.3. Competitiveness of the Economy………………………………………………………4 2.4. Public Finance Management……………………………………………………………5 2.5. Inclusive Growth, Poverty Situation and Social Context………………………………6.

III. GOVERNMENT’S DEVELOPMENT PROGRAMME ................................................................................. 7 3.1. Government’s Global Development Strategy and Medium-term Reform Priorities…...7 3.2. Weaknesses and Challenges in Implementing the National Development Programme..7 3.3. Consultation and Participation Processes………………………………………………8

IV. BANK SUPPORT TO THE GOVERNMENT'S STRATEGY ....................................................................... 9 4.1. Linkage with the Bank's Strategy ............................................................................................. 9 4.2. Compliance with Eligibility Criteria………………………………………………….9 4.3. Collaboration and Coordination with Other Partners ............................................................. 10 4.4. Linkage with Other Bank Operations ..................................................................................... 10 4.5. Analytical Work Underlying this Operation ........................................................................... 11

V. THE PROPOSED PROGRAMME................................................................................................................ 12 5.1 Programme Goal and Objective ..................................................................................................................... 12 5.2 Application of Good Practice Principles on Conditionality ................................................... 17 5.3 Financing Needs and Arrangements ....................................................................................... 17 5.4 Application of Bank Group Policy on the Accumulation of Non-concessional Debt ............ 17 5.5 Application of Good Practice Principles on Conditionality………………………….17 5.6 Financing Needs and Arrangements………………………………………………….17 5.7 Application of Bank Group Policy on the Accumulation of Non-concessional Debt 17

VI. IMPLEMENTATION, MONITORING AND EVALUATION .................................................................... 17 6.1. Project Beneficiaries ............................................................................................................... 17 6.2. Impact on Gender Issues, the Poor and Vulnerable Groups ................................................... 18 6.3. Impact on the Environment and Climate Change ................................................................... 18 6.4. Implementation, Monitoring and Evaluation .......................................................................... 18 6.5 Financial Management and Disbursement…………………………………………..18

VII. LEGAL INSTRUMENTS AND AUTHORITY ............................................................................................ 19 7.1. Legal Documents .................................................................................................................... 19 7.2. Conditions Precedent to Bank Group Intervention ................................................................. 19 7.3. Compliance with Bank Group Policies................................................................................... 20

VIII. RISKS MANAGEMENT .............................................................................................................................. 20

IX. RECOMMENDATION ................................................................................................................................. 20

LIST of TABLES

Table 1 Key Macroeconomic Indicators 2010 – 2017 Table 2 Linkage between the PRSP, the CSP and PARGE Table 3 Lessons from Previous Bank Operations in the Country Table 4 Progress Achieved under the Previous Bank Support Table 5 PARGE Precedent Measures and Triggers Table 6 Financing Needs

Table 7 Risks and Mitigation

LIST OF FIGURES AND FRAMEWORK

Figure 1 Revenue/Expenditure Ratio 2009-2013

LIST OF ANNEXES

Annex 1 : Government’s Letter of Economic Policy Annex 2 : PARGE Reform Matrix Annex 3 : Outcomes Achieved under Previous Budget Support Operations, PARE I to V Annex 4 : Note on Relations with the IMF Annex 5 : Administrative Map of Burundi

LIST OF TECHNICAL ANNEXES

Technical Annex 1 Compliance with PSO admissibility criteria Technical Annex 2 Summary of Country Risk Fiduciary Assessment (CFRA) Technical Annex 3 Fiduciary risk management framework envisaged for the Bank’s Programme Support

Operations (PSO) (Pillar 3: Procurement). Technical Annex 4 Progress in the implementation of MDGs Technical Annex 5 Review of public expenditure and financial accountability (PEFA 2012) Technical Annex 6 Key achievements of the strategy for strengthening Public Finance Management 2

(SGFP2) Technical Annex 7 Summary note of the fragility of Burundi

i

CURRECY EQUIVALENTS November 2014

Currency = Burundian Franc (BIF) UA 1 = BIF 2 385.40 EUR 1 = BIF 2 129.35 USD 1 = BIF 1 541.55

FISCAL YEAR

1 January – 31 December

WEIGHTS AND MEASURES

1 tonne = 2 204 pounds (lbs.) 1 kilogramme (kg) = 2.200 lbs. 1 metre (m) = 3.28 feet (ft.) 1 millimetre (mm) = 0.03937 in (“) 1 kilometre (km) = 0.62 mile 1 hectare (ha) = 2.471 acres

ii

ABBREVIATIONS AND ACRONYMS

ADF African Development Fund API Burundian Agency for the Promotion of Investments ARMP Public Procurement Regulatory Agency BBIN Burundi Business Incubator BIF Burundian Franc BIFO Burundi Field Office BNUB United Nations Office in Burundi BRB Bank of the Republic of Burundi CED Commitments and Expenditure Controller CFCIB Federal Chamber of Commerce and Industry of Burundi CFRA Country Fiduciary Risk Assessment CGMP General Committee on Public Procurement CMP Public Procurement Code CNCA National Aid Coordination Committee CPIA Country Policy and Institutional Assessment CSLP Growth and Poverty Reduction Strategy Framework CSP Country Strategy Paper DAF Administrative and Financial Director DNCNP National Directorate for Public Procurement Control DSA Debt Sustainability Analysis EAC East African Community ECF Extended Credit Facility ESRP Economic Reform Support Programme EU European Union FDI Foreign Direct Investment GAP Governance Action Plan GDP Gross Domestic Product GNP Gross National Product GoB Government of Burundi HDI Human Development Index HIPCI Heavily Indebted Poor Country Initiative ILO International Labour Organization IMF International Monetary Fund MDGs Millennium Development Goals MFPDE Ministry of Finance and Economic Development Planning

OBR Office burundais des recettes (Burundi Revenue Authority) ODA Official Development Assistance PARGE Economic Governance Reform Support Programme PEFA Public Expenditure and Financial Accountability PFM Public Finance Management PNE National Employment Programme PPP Potentially Problematic Project PPP Public-Private Partnership PRECA Public Administration Capacity Building Programme PSO Programme Support Operations SIGEFI Integrated Financial Management System SNDP National Private Sector Development Strategy TA Technical Annex TFP Technical and Financial Partners TOFE Table of Financial and Economic Operations TSF Transition Support Facility UA Unit of Account UNDP United Nations Development Programme VAT Value Added Tax WB World Bank

iii

GRANT INFORMATIONS

Client Information

BENEFICIARY : Republic of Burundi SECTOR : Economic and Financial Governance EXECUTING AGENCY : Ministry of Finance and Economic Development Planning

(MFPDE) AMOUNT : UA 7 million

2014 Financing Plan for 2014-2015 Budget Support

Source Total Amount

2014 - 2015 Amount (2014)

Amount (2015) – commitment

TSF Grant (ex FSF) Pillar I UA 11.08 million UA 7 million UA 4.08 million European Union (Grant) EUR 26.7 million EUR 15 million EUR 11.7 million World Bank (Grant) USD 50 million USD 25 million USD 25 million

Timeframe – Key Milestones (expected)

Activities Dates Appraisal October 2014 Negotiation November 2014 Approval December 2014 Effectiveness December 2014 Disbursement Phase I December 2014 Supervision March 2015 Appraisal PARGE II July 2015 Disbursement Phase II October 2015 Supervision December2015 Completion Report January 2016

iv

PROGRAMME SUMMARY

Programme Overview

Programme Name: Economic and Governance Reform Support Programme Phase I (PARGE-I) General Schedule: December 2014 – June 2015. Financing: UA 7 million (Financed by Pillar I of the Transition Support Facility– TSF Pillar I, former FSF) Operational Instrument: General Budget Support Sector: Economic Governance

Programme Outcomes

The PARGE-I is the first phase of a series of two programme-based budget support operations. It aims primarily to consolidate the achievements of previous operations and contribute to economic growth by strengthening economic governance and promoting private sector development. The first component, which focuses on strengthening fiscal management, will: (i) improve the mobilization and predictability of public resources; and (ii) improve budget preparation, control and execution. As for the second component, it will promote the private sector development by enhancing the latter's role as a driver of growth.

Alignment with Bank Priorities

PARGE I is aligned with Pillar I of the Country Strategy Paper (CSP) 2012-2016, confirmed at the mid-term review in June 2014. It is also aligned with the priorities of the Bank's Ten-Year Strategy 2013-2022, particularly private sector development and governance. Furthermore, it is consistent with the Bank's Strategy for "Addressing Fragility and Building Resilience in Africa", notably with its first area of focus: "Strengthening state capacity and establishing effective institutions." This area of focus aims to support States in revenue mobilization and fiscal management as well as in the promotion of the private sector with a view to facilitating job creation. Lastly, it is aligned with the two pillars of the Governance Action Plan (GAP II 2014-2018) relating to public management and improvement of the business environment, as well as with the Bank's Private Sector Development Strategy 2013-2017 for the improvement of the investment and business climate, and the development of enterprises and access to financing.

Needs Assessment and

Rationale

The major challenge facing the authorities is that of creating conditions for the gradual emergence from fragility, particularly by promoting a shift towards a diversified private sector-driven economy. Although there have been significant improvements on the political front in recent years, the dividends of peace need to be further consolidated to ensure greater extension of the benefits of economic growth, including access to health care, education, water and sanitation. Other major challenges include, in particular: (i) improving the efficiency of public finance management; (ii) accelerating private sector development; and (iii) strengthening institutional capacity. PARGE-I, which is intended to complement the interventions of other development partners, will help to support the efforts of the Burundian authorities to tackle these challenges.

Harmonisation

A partnership framework for budget support harmonisation is being set up with the World Bank (WB) and the European Union (EU). This operation was designed in close collaboration with technical and financial partners (TFPs) to enhance the synergy of interventions. Thus, the reforms carried out under PARGE-I are consistent with those supported by the World Bank and the EU in their respective programmes. Moreover, the Burundi Field Office (BIFO) offers the Bank an entry point that allows it to scale up its role in the dialogue with the Government and other TFPs. Discussions are underway between TFPs for the preparation of a common matrix of reforms.

Bank Value Added

PARGE-I takes into account the Bank's experience in providing budget support for countries in transition, which allows the Bank to promote dialogue on sensitive issues, including the enhancement of budget management to improve public investment financing. The Bank's value added lies in the fact that it provides budget support, sustained by institutional capacity building projects. This value added is enhanced by BIFO, which maintains continuous and constructive dialogue with Burundian authorities on the country's main development challenges.

Contribution to gender equality

women’s

empowerment

Increased domestic revenue mobilization will boost the share of priority sector expenditure in the budget, leading to increased public actions to foster inclusion and social equity. Furthermore, supporting entrepreneurship by facilitating access to financing will enable women to develop income-generating activities, thereby contributing to their empowerment and the reduction of gender inequalities in Burundi.

Dialogue on policies and

related technical assistance

During the implementation of PARGE-I and II, dialogue with the Government will focus mainly on the following areas: (i) public resource mobilization; (ii) budget preparation and execution; (iii) promotion of entrepreneurship; and private sector access to financing. The dialogue will be underpinned by the analytical work that will be produced through the Bank's two institutional support projects (public finance management and private sector development) that are currently underway.

v

Results-based Logical Framework

Country and Programme Name: Economic and Governance Reform Support Programme Phase I (PARGE I) Programme Goal: Contribute to strong and sustained economic growth by strengthening economic governance and promoting private sector development.

RESULTATS CHAIN

PERFORMANCE INDICATORS

MEANS OF VERIFICATION

RISKS/ MITIGATING MEASURES

Indicators (including the CSI)

Baseline Situation

Target

IMP

AC

T

Strong and sustained economic growth through the revitalization of the private sector and enhancement of economic governance

Nominal GDP per capita (USD)

305 (2013) 340 (2016)

AfDB, MFPDE, IMF

Human Development Index (HDI)

0.389 (2013) 0.393 (2016)

OU

TC

OM

ES

Outcome 1 – Economic governance is enhanced

Fiscal revenue (% GDP) 12.4 (2013) 12.4% (2014) 13.5% (2015)

AfDB, MFPDE, IMF, API Doing Business Report /UNDP

Political risk (outcome-related): the current political situation, marked by tensions and lack of dialogue between political actors could create political and social instability in 2015, the election year. Mitigation: The willingness of the international community to support the Government in implementing the consultation road map initiated as part of the inter-Burundian dialogue in 2013. There is also a plan to set up an Election Observation Mission after the departure of BNUB at end-2014. Risk: Vulnerability of Burundi's economy to external shocks: including escalating world oil prices and vagaries of the weather could be a major constraint to the timely implementation of reforms. Mitigation: This risk may be mitigated by the TPF support for reforms and economic diversification. Risk: Lack of institutional and technical capacity required for reform implementation. Mitigation: The technical and financial assistance provided by development partners to build institutional capacity and implement the PRSP II will mitigate this risk. The on-going institutional support projects and the one in

Pro-poor expenditure (BIF billion)

270.8 (2013) 300(2014) 350 (2015)

Outcome 2. - The private sector is better developed

Number of enterprises established annually (number by women)

2030/154 (2013)

2030/170 (2014) 2040/180 (2015)

Credit to the private sector (% GDP)

11.5% (2013) 12% (2014) 12.5%(2015)

OU

TP

UT

S

COMPONENT I – ENHANCE BUDGETARY MANAGEMENT

I.1 - Improve the mobilization and predictability of public resources

Operationalization of the internal tax collection service and the OBR taxpayer registration and numbering process

Not operational in 2013

Service operational from 2014

Progress reports of the services concerned - first half of 2014 (end-November 2014), second half of 2014 and first half of 2015 (end-August 2015)

Adoption of the Excise Duty Bill by the Council of Ministers and transmission to Parliament

Bill prepared in 2014

Bill adopted in 2015 by the CM: Bill transmitted to the CM (end-November 2014 ) and transmitted to Parliament (end-August 2015)

Transmission Note from the Ministry of Finance covering the Bill to the CM/ Record of transmission to Parliament

Develop and operationalize a tax revenue forecasting model No model in

2013

Model developed and operational in 2015.

Report of the Tax Policy Directorate on the operationalization of the model (end-August 2015)

Adoption by the CM and transmission to Parliament of the Finance Bill for 2015, including measures to reduce tax exemptions and credits (as formulated in the Supplementary Finance Bill 2014)

Bill under preparation

Bill adopted by the CM and transmitted to Parliament in 2014.

Record of the transmission of the Bill to Parliament (end-November 2014).

I.2 – Improve budget control and execution

Appointment of Expenditure Commitment Controllers (CEDs) in all line ministries (number of women).

13 CEDs appointed in 2013 and 2014.

The remaining 10 CEDs are appointed in 2015 (7 women).

Ministerial order appointing the 15 CEDs (end-August 2015)

Ministerial order appointing the 15 CEDs (end-August 2015).

Bill prepared in 2014

Bill adopted by the CM and transmitted to Parliament in 2014.

Record of transmission of the Bill to Parliament (end-November 2014).

Adoption by the CM of the decree on DAFs and appointment of DAFs and DAF in ministries

Decree prepared in 2014

Decree adopted by the CM and appointment of 6 DAFs (3 women) in 2015

Record of the CM on the adoption of decree (end-August 2015)

Carry out external audit of public procurement in accordance with the Public Procurement Code and publish the results on the ARMP website. The audit should cover the years 2011 and 2012 and involve a minimum of 25% of the contracts awarded annually (in terms of number).

Absence of public procurement audit in 2013.

Audit reports produced and published in 2014.

Copy of audit reports; reports available on the ARMP website - screenshot (end-November 2015).

vi

Preparation and adoption by ministerial order of a nomenclature of supporting documents for expenditure.

No nomenclature in 2013.

Nomenclature prepared in 2014 and adopted in 2015.

Report on the nomenclature (end- November 2014) and the adoption order (end-August 2015).

the pipeline will provide considerable technical support to the entities responsible for implementing various PARGE reforms. Fiduciary risk Non-existence at the Public Treasury Directorate of the necessary instruments (nomenclature of supporting documents, accounting procedures manual, etc.), a situation which could result in fiduciary risk. Mitigation: The risk will be mitigated by strengthening public finance management and implementing the good governance and anti- corruption strategy.

COMPONENT II – PROMOTE PRIVATE SECTOR DEVELOPMENT

II.1. Support the promotion of entrepreneurship

Operationalization of the CFCIB Business Space.

Space non-existent in 2014.

Space created and operational in 2015.

Progress report for the first half of the year (end-August 2015)

Preparation and adoption of the draft decree establishing a Business Support, Guarantee and Assistance Fund (FIGA) / Operationalization of FIGA

Draft decree under preparation in 2014

Draft decree prepared (2014) and adopted relating to the establishment of FIGA in 2015 / FIGA operational in 2015

Minutes showing adoption of the decree establishing FIGA (end-August 2015) / FIGA progress report (end-August 2015)

Adoption by the CM of the bill amending the Investment Code / /Implement the provisions of the new Code.

Code revised in 2014

New Code adopted by the CM and transmitted to Parliament before end-November 2014 / Provisions of the new Code are implemented in 2015.

Minutes of the CM showing adoption of the bill in Parliament and transmission (end-November 2014) / Report of the Ministry of Finance on the implementation of the Code (end-August 2015).

II.2. Improve access to financing

Adoption by the CM of an action plan relating to setting up of a PPP Unit

Preparation of a plan begun in 2014

Action Plan relating to the setting up of the PPP Unit adopted by the CM in 2014.

Minutes of the CM showing adoption of the action plan (end-August 2015).

Adoption by the CM and transmission to Parliament of the Banking Bill.

Bill under preparation in 2014.

Bill adopted by the CM and transmitted to Parliament in 2015.

Minutes showing transmission of the Bill to Parliament (end-August 2015)

AfDB Financing (in UA million): TSF = UA 7 million; WB: USD 25 million for 2014; EU: EUR 15 million for 2014

1

I. INTRODUCTION: PROPOSITION 1.1. Management hereby submits the following proposal and recommendation for the award of a UA 7 million grant from the Pillar I window of the Transition Support Facility (TSF) to the Republic of Burundi to finance the first phase of the Economic and Governance Reform Support Programme (PARGE-I). Burundi fulfils the TSF eligibility requirements, taking into account its situation of fragility1. PARGE-I is the first phase in a series of two operations making up a programme-based budget support, covering the financial years 2014 and 2015, with an overall indicative funding amount of UA 11.08 million. PARGE-I presents the multiannual framework of the programme and provides a list of reform measures considered as indicative triggers for the second phase (PARGE II). The programme-based approach helps to improve the predictability of aid and to facilitate alignment with the country’s development policies, thus creating the conditions for a gradual ending of the

situation of fragility. PARGE-I is perfectly consistent with the Poverty Reduction Strategy Framework (PRSFII 2012-2015) and the "Burundi Vision 2025". The programme design incorporated the principles of good practice on conditionality and TSF operational guidelines. 1.2. The programme is a continuation of previous budget support operations (PARE I to V) started since 2004 whose results have contributed not only to a better implementation of the PRSP-I and II, but also specifically to strengthening the national system of public finance management and private sector development. Indeed, these operations have created conditions for inclusive and sustainable growth, allowing a gradual ending of the situation of fragility. Notwithstanding these significant results achieved through the continuous support of development partners, Burundi still faces a challenge of weak domestic resource mobilization resulting in not only a high level of dependence on external assistance, but also a less dynamic private sector. This explains the commitment of the Burundian Government to pursue tax reforms in order to create the conditions for effective mobilization of domestic resources to cope with the drop in budgetary aid. 1.3. PARGE plans to consolidate the achievements of previous operations by contributing to the creation of conditions for better fiscal management and promotion of private sector development. Therefore, PARGE-I aims to support the Government (GoB) in implementing PRSP-II from 2012 to 2015, through its operational objectives which include: (i) improving the mobilization, predictability of public resources and budget control and execution; and (ii) lending support to the promotion of entrepreneurship and access to finance for the private sector. 1.4. However, it should be noted that the current political situation in Burundi, ahead of the 2015 elections, is a source of concern, in light of the achievements of the democratic process initiated in 2000 with the Arusha Accords. The tension observed among various political actors results mainly from the lack of consensus on key issues such as the Government’s intention to revise the constitution, the constraints imposed on the activities of political parties and individual freedoms, and the method of resolving land disputes. It is obvious that such a situation increases the lack of dialogue between the parties involved, thus promoting renewed violence across the country. The prospect of the 2015 elections exposes the country to huge risks that are a major concern for Burundi’s development partners. They

have been urging the Government and the opposition to resume dialogue in order to restore the conditions for a peaceful political climate (a more thorough analysis of the factors of fragility appears in Technical Annex 7 of this report).

1 The assessment of Burundi’s fragility, based on TSF eligibility criteria, was conducted as part of the mid-term review of the CSP (2012-

2016) and the Bank’s Board approved the report in June 2014.

2

1.5. Faced with this situation, Burundi needs strong and concerted support from its development partners. In this respect, as a privileged partner of the country, the Bank will have to play a leading role. This programme, whose main objective is to consolidate the conditions for inclusive growth, will contribute to sustainably reducing unemployment and poverty. Therefore, the expected impact of PARGE will be even more considerable since these two factors are among the key challenges that Burundi faces if it is to come out of the vicious circle of fragility (see Technical Annex 7 – on fragility). It is for this reason that PARGE is important as an instrument of dialogue between the Bank and the country. II. COUNTRY CONTEXT 2.1. Political Situation and Governance Context 2.1.1. With the approach of the 2015 elections, the current political situation in Burundi is a factor aggravating the fragility, involving a major risk for the implementation of the programme. Although Burundi has made significant progress in establishing democratic institutions since the first elections held in 2005, the fact is that the political climate remains tense between the main political parties, due mainly to the lack of consensus on major laws (press law, constitutional review2, Truth and Reconciliation Commission, Special Court on land and other assets, etc.), and the persistence of impunity and political violence. Moreover, the decision to withdraw the United Nations Office in Burundi (BNUB)3, following the Government's request, also raised concerns about the conduct of the 2015 elections, given the important role the mission plays in consolidating peace and security in the country. It should also be noted that BNUB was the catalyst for the coordination of international community efforts for the organization of inter-Burundian workshops in 2013 that led to the adoption by the stakeholders of a roadmap that will allow the organization of free, transparent and peaceful elections in 2015. In addition, Members of Parliament unanimously adopted the new Electoral Code in April 2014, followed by the signature thereof in June 2014, and the General Principles of Sound Conduct for Elections by all stakeholders. 2.1.2. However, the deterioration in the political climate since the beginning of 2014 could undermine the social cohesion and peace building efforts. The deterioration results from the activities of young people affiliated to the ruling party (the "Imbonerakure"), who usually replace the security forces to intimidate opponents. 2.1.3. Burundi has made significant progress to emerge from the crisis and rebuild its economy, but many challenges remain, including social inclusion. The prolonged socio-political crisis of the 90s led to the destruction of economic production capacity and basic social infrastructure, resulting in a sharp deterioration in the living conditions of households. The fragility factors include notably: (i) the difficulty of sustainably consolidating political stability, due to the low degree of social inclusion, resulting from the negative effects of cyclical conflicts experienced by the country; (ii) weak institutional capacity in all sectors; (iii) the high population growth rate contributing to high unemployment, particularly among young people; (iv) land disputes (over 80% of trials), made more acute by the return of refugees, generating grievances and feelings of exclusion; and (v) environmental risks associated with the over-exploitation of land and climate change.

2 It should be mentioned that the current Constitution is based on the Arusha Peace Accords. The revision of the Constitution could lead

to the amendment of the provisions on power sharing, which are the basis of the democratic and social cohesion process laid down in the accords; there is a possible implication for renewed violence and conflicts.

3 There are plans to establish an Election Observation Mission (EOM) following the departure of the BNUB in December 2014. The EOM will monitor the conduct of the 2015 election, and its reports will be submitted to the Security Council before, during and after the elections.

3

2.1.4. With regard to governance, the country’s performance is on the whole mixed. At the

level of political governance, the "Mo Ibrahim" 2013 index for Burundi had a score of 44.3 out of 100 in 2012 against 43.8 in 2013, and the country slipped from the 37th position to the 40th out of 52 countries because of the weaknesses observed in the rule of law and sustainable economic opportunities. In terms of economic governance, the situation is not much better, considering the efforts made by the Government to combat economic mismanagement. Indeed, corruption remains a major concern, although according to the Transparency International report, Burundi has improved its ranking in the corruption perception index, moving from the 165th position in 2012 to 157th in 2013. The Country Policy and Institutional Assessment (CPIA) conducted by the Bank shows that there has been progress over the last five years, with an overall score that rose from 2.9 in 2009 to 3.5 in 2013. However, out of the four dimensions selected in the CPIA, that relating to "Governance" has experienced a slight increase, from 2.9 in 2009 to 3.28 in 2013, due to the criteria of "quality of public administration" and "transparency/accountability" that have not changed significantly. 2.2. Recent Economic Developments and Macroeconomic and Budgetary Analysis Recent Trends 2.2.1 Despite the negative effects of external shocks, Burundi's economy has recorded an average growth of around 4% since 2010. In fact, during the period 2010-2013, a series of external shocks affected the economy (rise in international prices of fuel and food, etc.), which resulted in significant inflationary pressures. However, the overall inflation, year on year, fell from a peak of about 25% in March 2012 to 5.6% at the end of September 2014, due in part to the tightening of monetary policy. Real GDP growth is estimated at 4.7% in 2014, compared to 4.5% in 2013, propelled mainly by agriculture (particularly a rebound in coffee production) and the construction of major infrastructure projects. Table 1: Main Macroeconomic Indicators 2010 - 2017 2010 2011 2012 2013 2014 2015 2016 2017 Real GDP growth (%) 3.8 4.2 4 4.5 4.7 4.8 5 5.2 Growth rate per capita (%) 0.4 0.9 0.8 1.3 1.5 1.7 1.8 Inflation, CPI (end of period in %) 12.2 14.9 14.7 7.9 7 6.1 5.6 5.4 Tax revenue (% GDP) 13.7 14.3 13.6 12.4 12 13.2 13.4 13.4 Total revenue, including grants (% GDP) 37.3 36.1 31.4 29.7 28.3 28.3 29 29.2 Total expenditure (% PIB) 41 40 35.1 31.4 29.9 30.5 31 31.1 Budget balance (cash basis, % GDP) -3.6 -4 -2.7 -1.7 -2.5 -2.1 -2 -1.9 Gross reserves (in months of imports) 4.1 3.4 3.3 3.4 3.6 3.7 3.9 4.1 External debt (% of GDP) 2 24 21 19 18 17 16 14 Domestic debt (% of GDP) 17.2 16.1 14.4 13.1 12.4 12 11.7 11.4 Current account balance (% of GDP) -12.3 -14.8 -18.5 -20.5 -17.2 -17.6 -17.9 -16.7 Source: Government of Burundi, IMF projections, IMF Report 12/226 & 14/293

2.2.2 Concerning the budget, Burundi is facing constraints due to low domestic resource mobilization and a decline in foreign aid from 5% of GDP in 2010 to 2% of GDP at the end of 2013. This decline, coupled with falling tax revenue (12.4% of GDP in 2013 against 14.2% in 2011) has led the Government to make efforts to control public spending. The latter decreased from 40% of GDP in 2011 to 35.1% in 2012 and 31.4% in 2013, reflected in a stabilization of the budget deficit to less than 2% of GDP in 2013 compared to 2.7% in 2012. The external current account deficit (including transfers) deteriorated during the last four years (20.5% of GDP in 2013 against 12.3% in 2010). Gross official reserves were slightly reduced to the equivalent of 3.5 months of imports in 2013, following a combined deterioration of 38.2% in the terms of trade.

4

2.2.3 The risk of debt distress remains high due to the lack of diversification of exports (coffee and tea account for about 80% of exports)4. Therefore, fiscal management must continue to rely on grants and highly concessional external financing. Hence, it is essential to strengthen debt management for the debt to remain viable, through the adoption of a new law on debt that would offer a comprehensive legal framework governing public debt. The ratio of updated value of the debt on exports rose sharply in 2013 and stood at 248.5% against 187% in 2012, and is expected to gradually decline, although it will remain above the acceptable threshold of 100% up to about 2020. Prospects 2.2.4 Despite uncertainties in the global economy, coupled with the return of refugees from Tanzania, GDP growth, according to IMF estimates, is expected to improve in the medium term (4.8% between 2014 and 2016 with a level of 4.8% in 2015) due to the strong performance of the agricultural and construction sectors, especially the implementation of major hydro-electric projects. The agricultural exports sector is expected to experience a rebound due to the cyclical nature of coffee production, barring the occurrence of crop failure. Inflation (at end of period) should decline to 7% and 6.1% in 2014 and 2015, respectively, as a result of the projected decline in world food and energy prices. Deeper integration within the East African Community (EAC) should encourage investment in tourism, wholesale and retail sectors, as well as in finance and telecommunications. The current account deficit could decrease and stabilize at an average of about 17% of GDP from 2014 to 2017 as a result of the boost in exports and moderate growth in imports. Budget management in 2014 was faced with a decline in tax revenue associated with the alignment of the country's corporate tax rates with those of the EAC zone. To address this situation, the Government took a number of measures in the 2014 Supplementary Finance Bill. These include: (i) dividends, the reintroduction of a minimum turnover tax of 1%; (ii) telecommunications tax and the deduction of taxes at source on imports, petroleum products and beverages; and (iii) elimination of VAT exemptions for imports. Thus, revenue (including grants) and total public expenditure in 2014 should reach 27.4% and 29% of GDP, in that order. Therefore, the overall fiscal balance deficit (cash basis, including grants) is expected to average about 2.2% for the period 2014-2016. For their part, official foreign exchange reserves should inch up slightly to stand at 3.7 months of imports over the 2014-2016 period, notably reflecting the limitation of BRB interventions in the foreign exchange market. 2.3. Competitiveness of the Economy 2.3.1. Burundi recorded a poor performance compared to other countries in the sub-region, with a competitiveness index of 2.6 in 2013, compared with 2.8 in 2012 and 2.9 in 2010. As far as competitiveness and innovation are concerned, the country lost two spots in one year in the World Economic Forum's global competitiveness ranking for the 2013 period, placing 146th out of 148 countries. The country's small and poorly developed private sector is a drag on competitiveness, on account of the high cost of production factors (energy, transport and telecommunications), also attributable to the country's landlocked situation and the low qualification of its workforce. The Burundian private sector is heavily dominated by informal activities. It comprises about 3 250 formal sector enterprises, with more than 80% of them located at in Bujumbura, the capital city, and employing less than 2% of the workforce. Burundi's business environment is being improved, notably through the modernization of the legal framework (Bankruptcy Law, the Company Code, the Investment Code, the Privatization Law and the Concordat) and by easing the administrative formalities. At the macroeconomic level, the Burundian economy is highly vulnerable to external shocks due to

4 Report on the analysis of debt viability conducted on 18 February 2014 (No.cr1483f).

5

its limited export base and high reliance on external aid. The competitiveness of the economy is also affected by the foreign exchange rate, which is overvalued by about 8%, according to the International Monetary Fund (IMF). Thus, a degree of foreign exchange flexibility would help to strengthen the external competitiveness of the Burundian economy and shield foreign reserves from the high risks of external shocks. 2.3.2. Despite the positive development of the business climate, the level of foreign direct investment (FDI) has increased substantially since 2011, estimated at less than 5% of GDP in 2013, due to transport costs, limited access to electricity5 and financial services. Growth in private sector credit declined (% of variation in money supply) over the 2011-2013 period, falling from 24.1% in 2011 to 8.4% in 20136. This primarily reflects the difficulty of accessing financing/capital in Burundi. According to the ranking of the 2009 Capital Access Index7, which measures the access of businesses to financing (from the bank and other sources), Burundi is ranked 122nd out of 122 countries. Regarding the main obstacles to business development in Burundi, the report on global competitiveness stresses that access to finance was the biggest problem in 2012 and 2013, accounting respectively for 19.8% and 24.8% of the problems identified. 2.3.3. Economic diversification and growth stimulation call for greater development of the agricultural export potential. Indeed, with a rainfall pattern that allows for two crop seasons per year, sustains significant water resources, high soil fertility and ideal agro-ecological conditions, Burundi produces high quality coffee. Similarly, non-traditional export crops such as horticultural and fruit products, essential oils, medicinal plants, avocado and macadamia are other opportunities for the country. In addition, the mining sector offers real opportunities in the medium term. Indeed, Burundi has the second largest reserves of Coltan in the region and 6% of the world's nickel reserves. 2.4. Public Finance Management 2.4.1 Since the accession of Burundi to the EAC Customs Union in 2009, the modernization of the tax system and the ensuing establishment of the Burundi Revenue Authority (OBR) in July 2009 as well as the adoption of several pieces of legislation, including the value-added tax (VAT) law, have helped to strengthen the legal framework for the mobilization of tax revenue. These provisions boosted tax revenue by about 2 percentage points between 2009 (12.6% of GDP) and 2011 (14.3% of GDP), with the GDP averaging 13.5% over the 2009-2012 period (see Figure 1). Thus, the initiated reforms allowed for the coverage of a greater share of domestically-financed spending between 2009 and 2013. 2.4.2 However, the adoption, in January 2013, of the new Income Tax Law, which exempts income below BIF 150 000 (about USD 100) and the amendment of the value added tax (July 2013), which grants exemptions to business, have caused a sharp drop in tax revenue of about 1.4 percentage points, compared with the forecasts of the 2013 Finance Law that

5 Only 5% of the population have access to energy, one of the lowest access rates in Sub-Saharan Africa (IMF, Report No.14/293) 6 Credit to the economy dropped by more than two percentage points between 2011 and 2013, I, from 18.2% of GDP to 16.3% in 2013

7 Milken Institute Capital Access Index 2009

157,8 160,5

145,6

132,1 133,2

12,6

13,7

14,3

13,6

12,4

11

11,5

12

12,5

13

13,5

14

14,5

0

20

40

60

80

100

120

140

160

180

2009 2010 2011 2012 2013

Expenditure as % of total revenue (left-hand scale)

Fiscal revenue as GDP % (right-hand scale)

6

estimated the revenue level at 13.8% of GDP. Faced with this shortfall in public resources, the Government has adopted a number of important measures, namely: (i) increase in taxes on petroleum products, imported vehicles and telecommunications; (ii) collection of value added tax on foodstuffs; (iii) elimination of exemptions for all public procurement; (iv) re-introduction of a minimum turnover tax of 1%; and (iv) development of an expedited customs clearance procedure and establishment of three single window customs clearance facilities at border crossings, aimed at reducing fraud. Although considerable efforts are still needed to reduce exemptions and broaden the tax base, these strides provide a solid basis for modernizing the tax system and its administration for better revenue mobilization. 2.4.3 The monitoring and the evaluation mechanism for SGFP 2 adopted the 31 indicators of PEFA (Public Expenditure and Financial Accountability) as a results-based framework. Thus, self-evaluation conducted annually, while external evaluation is conducted every three years. It is worth noting that only nine PEFA 2012 indicators out of 31 are satisfactory (Technical Annex 5). PEFA 2012 evaluation highlights a number of weaknesses, particularly in the preparation and execution of the budget, revenue mobilization, cash flow management, and accounting and financial reporting. 2.4.4 The Country Policy and Institutional Assessment (CPIA) showed that the Burundi made strides in the overall score, which rose from 2.9 in 2009 to 3.4 in 2012 and 3.5 in 20138. In addition, since 2010, Burundi has made progress in budget information access. This concerns especially: (i) access to Parliament for public and private media contributing to the broadcast of debates; (ii) Court of Auditors' reports are available to the public; (ii) budget execution reports are produced quarterly and the Government Financial Operations Table (TOFE) is published on the website of the Ministry of Finance; and (iv) the citizen budget which relates to information released under the caption "Where are the taxes that I pay?" is made available in French and Kirundi (the local language), specifying sector-based allocations for 2014. 2.5. Inclusive Growth, Poverty Situation and Social Context 2.5.1 Burundi is facing significant social challenges, many of which are within the context of the long socio-political history that the country has experienced. In fact, despite the relatively successful post-conflict transition that took place in 2000, social divisions persist. Similarly, the numerous land disputes are among the most urgent problems9 the country needs to tackle10. Against this backdrop, it has not been easy to curb poverty which, on the contrary, has become more widespread.11 GDP per capita, estimated at USD 293 in 2013, has not really changed, compared with the level prior to the 1993 crisis, which stood at USD 286. However, the Human Development Index (HDI) has evolved positively according to the 2013 UNDP report. The country has, indeed, moved up seven spots, ranking 178th out of 187 countries, with a score of 0.355. This performance is mainly due to progress in the education and health sectors, especially with the introduction the free education policy at the primary school level and free medical care for children under 5 and pregnant women. However, the evaluation of the Millennium Development Goals (MDGs) conducted in 2013, shows that none of the indicators will be achieved by 2015 (Annex 6). For the third consecutive time, the 2013

8 This improvement is due mainly to the implementation of a stringent fiscal policy, progress in the regional integration and trade policy,

as well as the enhancement of the business environment and human resource regulation. Nevertheless, the results of certain CPIA aspects, including those relating to the quality of public administration; transparency/accountability and corruption in the public sector; property ownership rights and governance based on the rule of law and social protection have not been satisfactory.

9 More than 700 000 Burundians were living as refugees in neighbouring countries (mainly Tanzania) during the period of the country's turbulent history (1972 to date). Most of the refugees returned to Burundi after the peace process, whereas in 2010 approximately 200 000 still remained outside the country, mainly in Tanzania.

10 The Belgian cooperation provides technical support to the authorities on land issues. 11 More than two-thirds (67%) of the total population live below the poverty line, according to the latest survey of 2006, with levels being

higher in rural areas (69%) than in urban areas (34%).

7

World Development Report on Gender Equality acknowledged the Government's efforts by praising the significant results achieved in reducing the gender gap. Burundi's performance is the best among low-income countries (LICs) and better than that of some developed countries such as the United States, Australia and France. Overall, the country scored 0.74 out of 1 in 2013, and ranked 22nd out of the 135 countries assessed (compared with 24th in 2012). 2.5.2 In order to improve the living conditions of the population, the authorities have taken a number of initiatives, including the allocation of HIPC and budget support resources for the financing of pro-poor programmes - such as free health care for children under 5 and pregnant women, free primary education, assistance to the needy and returnees, for which there were substantial allocations, as well as agriculture and economic infrastructure. 2.5.3 The high unemployment levels, especially among young people (50% for youth under 30 years) could lead to a social crisis. According to the International Labour Organization (ILO), Burundi is among the 15 countries with the highest unemployment rate in the world. The labour market has a limited absorption capacity, given the large numbers of young people entering the market every year and the low private sector development level. This situation is compounded by the mismatch between skills and labour market needs. To effectively combat the unemployment phenomenon, the authorities have developed a National Employment Policy (NEP), with the support of TFPs, including the Bank. III. GOVERNMENT’S DEVELOPMENT PROGRAMME 3.1. Government’s Global Development Strategy and Medium-term Reform

Priorities 3.1.1. The global development framework and the long-term social and economic development goals are stipulated in the "Burundi Vision 2025", adopted in October 2010. This vision is accompanied by a medium-term planning instrument, PRSP-II (2012-2016), whose second generation was adopted in February 2012. The four strategic priorities identified following extensive consultation between the Government, civil society and development partners, are: (1) strengthening the rule of law, enhancing good governance and promoting gender equality; (2) transforming the economy for sustained growth and job creation; (3) improving accessibility levels and the quality of basic services as well as strengthening national solidarity; and (4) managing space and the environment in harmony with development. 3.1.2. PRSP II gives the highest priority to sustained growth and job-creation, which necessarily involves streamlining the macroeconomic framework, enhancing the productivity of growth sectors, notably agriculture, economic infrastructure, promotion of the private sector and youth employment. It now includes gender issues as an important policy and development lever. The PRSP II also identifies the preservation of the environment and climate change as major priorities, and attempts to extend and deepen the relationship between the fight against poverty and the preservation of the environment. On civil society and the private sector, the PRSP II affirms the need for an active partnership for implementing the new strategy, particularly in the fight against corruption and strengthening transparency in the management of public affairs. 3.2. Weaknesses and Challenges in Implementing the National Development

Programme The major challenge facing the authorities is to ensure gradual exit from fragility, notably by encouraging a transition to a diversified economy, based on the private sector and that

8

generates sustained growth. Although significant progress has been made on the political front in recent years, the dividends of peace must be further strengthened to extend the benefits of economic growth. The immediate benefits in terms of improved well-being, notably access to health care, education, water and sanitation will generate support for reforms and promote the nation-building process. Burundi faces many challenges notably: (i) the need to enhance efficiency in budget management. Since 2010, official development assistance (ODA) accounts for nearly 40% of the Gross National Product (GNP) and 50% of the state budget. This poses the problem of aid predictability especially for budget support which declined over the last three years, dropping from 5% of GDP in 2011 to 2% in 2013. In addition, the low level of domestic revenue creates budgetary pressures and a high dependence on budget support to finance development programmes of PRSP II; (ii) speeding up the development of the private sector. The emergence of a structured and efficient private sector is also a major challenge facing the Burundian authorities. This sector remains underdeveloped and competitiveness suffers as a result of high cost of production factors (energy, transport, telecommunications) and low-skilled labour force; (iii) strengthening institutional capacity. The intensification of reforms to support the strengthening of public finance management to support the effective implementation of PRSP II remains a major challenge in the short and medium term. Achieving this goal should, inter alia, focus on policies to improve budget preparation and execution as well as to support efforts for public resource mobilization and predictability, in order to reduce the country's dependence on foreign aid and create the fiscal space that will help to increase priority public investment and pro-poor spending; (iv) strong demographic pressure around 2.4% per year. The country is increasingly vulnerable to environmental degradation resulting from population density (about 390 inhabitants per km², one of the highest in Africa) associated with traditional farming methods of land conflicts. This entails a sharp decrease in average farm size per household, from 1.04 ha in 1973 to about 0.50 ha in 2012. 3.3. Consultation and Participation Processes 3.3.1. The authorities conducted extensive consultations with all stakeholders to ensure broad-based ownership and internalization of PRSP II. The consultations were held at the municipal and sector level, supplemented by a special consultation focused on the private sector and civil society. Thematic forums were also held to discuss cross-cutting issues (capacity building, gender, demographics, the environment and youth affairs). Key institutions were consulted, notably the Parliament, the Economic and Social Council, central government officials, local and regional authorities, local development committees, civil society, the private sector, academia and think tanks, the media, trade unions, vulnerable groups and donors. The PRSP II consultation and drafting process was guided each month by the Monitoring and Evaluation Group of the Partners Coordination Group, which ensured good communication between all stakeholders, including the population. 3.3.2. Furthermore, in a bid to strengthen the synergy between donors in the implementation of PRSP II, the Government organized a round table with civil society and private sector involvement in October 2012. In 2013, two sector-based conferences were organized to ensure follow-up of commitments made by TFPs at the round table. PRSP II implementation status reports, prepared in a participatory manner, with the involvement of civil society and local communities, were published in 2013 and 2014.

9

IV. BANK SUPPORT TO THE GOVERNMENT'S STRATEGY 4.1. Linkage with the Bank's Strategy 4.1.1. Approved by the Bank's Boards of Directors in January 2012, the CSP (2012-16) is consistent with the priorities of PRSP II, which is the reference framework for intervention by development partners. The CSP is designed to support Burundi's efforts for a gradual exit from fragility by fostering transition to a diversified economy integrated into the regional economy, with modern infrastructure that would lay the foundations for sustainable and inclusive growth. The CSP mid-term review, conducted in December 2013, concluded that the two pillars should be maintained for the remaining period 2014-16, namely: (i) "Strengthening State Institutions” and (ii) "Infrastructure Improvements". The choice of these pillars is in keeping with the Bank's comparative advantage in the infrastructure sector, as well as in the areas of support for structural reforms and capacity building. PARGE-I is aligned with the first pillar of the CSP 2012-2016 and was provided for in the CSP mid-term review report. 4.1.2. PARGE-I is also in line with the Bank's Ten Year Strategy 2013-2022, in particular with respect to private sector development and governance, since it aims to contribute to the establishment of conditions for inclusive economic growth through the improvement of domestic resource mobilization and private sector revitalization. PARGE-I is consistent with the Bank's "Strategy to Address Fragility and Build Resilience in Africa" especially as regards its first focus area, namely "Strengthening State Capacity and Supporting Effective Institutions", which seeks to support States in the area of revenue mobilization and public finance management as well as private sector promotion with a view to facilitating job creation. Lastly, it is aligned with the two pillars of the Governance Action Plan 2014 – 2018 (GAP II) related to public management and business climate improvement, and the two pillars of the Bank's Private Sector Development Policy 2013-2017, related to improving the investment and business climate, and promoting business development and access to financing. Table 2 below presents the linkage between PRSPS, CSP and the PARGE-I.

Table 2: Linkage between PRSP II, CSP and PARGE-I PRSP II CSP Operations Planned

(Focus area 2) - Transformation of the economy for sustained and job-creating growth

Strengthening governance (Pillar I)

Support for public finance reforms and private sector development

PARGE -I and II

Institutional capacity building

- Public Finance Management Support Project (on-going) - Private Sector Development Support Project (on-going)

4.2. Compliance with Eligibility Criteria 4.2.1. Burundi fulfils eligibility criteria for budget support operations defined by the Bank's policy on Programme-Based Operations adopted in March 2012 (ADF/BD/WP/2011/38). The detailed analysis of these criteria is presented in TA 1. It should be noted that with regard to Government's commitment to reduce poverty, the Government organized the Donor Round Table in Geneva in October 2012 and a series of sector conferences in Bujumbura in 2013, towards financing the PRSP II action plan. A PRSP II coordination and monitoring mechanism is in place, coordinated by the National Aid Coordination Committee (CNCA). Regarding macroeconomic stability, in January 2012, the Government and the IMF concluded an Economic and Financial Reform Programme, supported by an Extended Credit Facility (ECF). The first five reviews by the IMF in 2012, 2013 and 2014, reported satisfactory progress in the programme's implementation, despite a difficult international environment. Burundi's debt overhang risk justifies the maintenance of a 50 % grant

10

component, which is the minimum required under ECF. Regarding political stability, progress has been recorded in consolidating democracy, peace and national reconciliation since the last elections in 2010 (§ 2.1). The consolidation of security features among the country's priorities under PRSP II. However, in the build-up to the 2015 elections, the political situation is a source of concern, particularly due to the lack of consensus on key issues, including the proposed constitutional amendment and the conditions of operation of political parties. With regard to the Fiduciary Review, significant risks were identified by various studies conducted recently (PEFA in 2012 and Public Expenditure Review in 2013). The implementation of SGFP II, which is a significant challenge, has allowed for significant progress especially with regard to improvement of public procurement control and management systems. The Bank conducted a fiduciary risk assessment which was deemed moderate. Fiduciary risk mitigation measures have been identified (see TA 2). Lastly, harmonization efforts have been maintained between the Bank and other TFPs, especially the IMF, WB, EU, UNDP and Belgian Cooperation in their capacity as Burundi's main budget support donors. 4.3. Collaboration and Coordination with Other Partners 4.3.1. The Bank is a member of the Partners Coordination Group, which is the formal framework for dialogue between TFPs12 and the Government. A partnership framework to harmonize budget support is in place with the World Bank (WB) and the European Union (EU). This operation was designed in close collaboration with TFPs to strengthen the harmonization of interventions. Thus, PARGE-I reforms are particularly in synergy with the reform supported by the WB and the EU in their respective programmes. In addition, with the presence of BIFO, the Bank has a gateway allowing it to considerably enhance its role in the dialogue with Government and other TFPs. 4.3.2. Discussions are ongoing among TFPs to prepare a common matrix of reforms. The preparation of this operation has been the subject of exchanges with the direct beneficiary structures namely, departments of the Ministry of Finance and the Ministry of Trade, the Burundi Revenue Authority (OBR), the Investment Promotion Agency (API), the Federal Chamber of Commerce and Industry (CFCIB), the Burundi Association of Women Entrepreneurs, the Association of Bank Professionals and Civil Society. These various stakeholders will participate in the programme's implementation. In addition, the authorities, with the support of partners involved in public finance reform, particularly the Bank, the World Bank, the International Monetary Fund, the Kingdom of Belgium, the Kingdom of the Netherlands and the European Union, plan to launch the public finance management system assessment process in November 2014 using the PEFA 2014 methodology. 4.4. Linkage with Other Bank Operations 4.4.1. As at 30 September 2014, the Bank's active portfolio in Burundi comprised 26 projects, including eighteen (18) national projects, nine (8) regional operations and no private sector project. The total amount of commitments stands at UA 291 million, including UA 144.21 million for national projects. The sector breakdown of the portfolio is in line with the priority thrusts of the country strategy (CSP 2012-16): infrastructure (transport and energy) accounts for 75%, followed by agriculture/rural development/natural resource management (10%), multi-sector (6%), water and sanitation (5%), and social (4%). The 2013 portfolio review judged portfolio performance satisfactory overall, with a general average of 2.46 on a scale of 0 to 3, and reflects a slight improvement since 2009 (score of 2.01). In general, Fund-financed operations, which have been completed, were relatively well implemented. 12 The World Bank (WB), the African Development Bank (ADB ), the IMF, the European Union (EU ), the United Nations System, United

States , United Kingdom, France , Netherlands, Belgium , Luxembourg, Switzerland , Norway, Sweden, Japan and Canada.

11

Table 3 Lessons from Previous Bank Operations in the Country

4.4.2. This new operation will improve the effectiveness of other ongoing Bank projects, as it will secure budgetary flexibility to finance infrastructure projects (transport, energy) by way of counterpart contribution. In addition, plans have been made to prepare an institutional support operation that will boost on-going activities under the Administration Capacity Building Programme (PRECA), particularly in the area of public finance management and private sector development. These two operations are financed from Window III of the TSF, approved in November 2012. Some of the reforms supported by PARGE-I enjoyed the technical and financial support of these two projects under implementation, in particular the development of a nomenclature of expenditure supporting documents. 4.4.3. The preparation of PARGE-I took into account the three key achievements of previous budget support operations - PARE I-V (Table 3). The significant progress made in implementing these operations, summarized in Annex 3, which is satisfactory overall, justifies the need to continue to support the GOB's reform efforts, in agreement with other TFPs (EU Report, June 2014, "Independent Evaluation of Budget Support to Burundi (2005 - 2013)". 4.4.4. The key achievements of the various programmes (Annex 3) include mainly: (i) improvement of the legal public finance management framework (new Organic Law on public finance, adoption of the General Regulations on public budgetary management, etc.); (ii) strengthening of budgetary execution control (preparation of expenditure execution and commitment control manuals, effective operationalization of the streamlined expenditure chain, and preparation of the Audited Budgets since 2008); and (iii) improvement of the national procurement system (adoption of decrees relating to structures provided for under the 2008 Public Procurement Code, technical reinforcement of these structures, systematic publication of public contract awards on the website of the Ministry of Finance). Concerning the sector's development, the Bank supported the preparation of a national sector development strategy and the strengthening of the legal framework for managing public-private partnerships through the adoption of the PPP Law. 4.5. Analytical Work Underlying this Operation 4.5.1. Several studies conducted by the Government, the Bank and other TFPs underpinned the design of this programme. In the area of public finance management: (i) strategy for strengthening public finance management (December 2012); (ii) public expenditure review (December 2013); (iii) PEFA (2012); (iv) the study on domestic revenue mobilization conducted by the Bank (2012); (v) IMF reports on the implementation of the ECF

Key Lessons Reflected in PARGE-I Budget support operations must be carried out alongside institutional support projects targeting the same priority areas.

Institutional support projects in the area of public finance management and development of the sector, whose activities started in September 2013, target the same priority areas as PARGE-I.

Budget support operations in fragile States are vital dialogue instruments which help to actively guide reforms in areas considered as priority for poverty reduction and the creation of strong and inclusive growth.

PARGE-I is part of this approach as it supports Government's effort to strengthen public finance management and boost the private sector, which are indispensable for creating growth that is sustainable and favourable to the entire Burundian population.

The objectives of PARE I to V were relatively ambitious and their design did not adequately take into account the reform implementation timeframes.

The objectives of PARGE-I are more targeted, and factor in the Burundian administration's institutional capacity, in particular that of the Reforms Monitoring Unit which will oversee the implementation of reforms.

Disbursement conditions should be realistic and take into account the country's capacity.

Meetings with technical departments, particularly during mission preparation, helped to ascertain the feasibility of measures proposed in PARGE-I. The design of PARGE-I follows a programme-based approach (2 operations, each with a single tranche), which is adequate and allows for some flexibility in the reform measures precedent to disbursement, and facilitates policy dialogue.

12

programme; (vi) PARE I-V completion reports. Regarding private sector development, the programme was based on: (a) the National Private Sector Development Strategy, 2014 - 2020; (b) Doing Business reports; and (c) the Gender Profile prepared by the Bank in 2011. Furthermore, several other studies and surveys also informed the programme's design, especially the study on changes in the Burundian economy financed by the Bank and the OPEV report on the Bank's budget support for the period 1999-2009. The main findings of these studies highlight the need to: (1) continue to strengthen public finance management; (2) create budgetary flexibility through better budget preparation and execution, and increased domestic resource mobilization through the continued implementation of planned fiscal reforms in order to broaden the tax base and eliminate excessively costly exemptions; (3) improve the quality and reliability of budgetary data; and (4) provide constant support to private sector development through entrepreneurship promotion and business climate improvement. V. THE PROPOSED PROGRAMME 5.1 Programme Goal and Objective 5.1.1. Despite the progress recorded as outlined in paragraph 4.4.4, it follows from recent studies13 that the basic functions of public finance management are not yet satisfactory. Hence the need to continue and deepen reforms. The main focus is to build the public revenue mobilization and forecasting capacity as well as the level of budgetary preparation, execution and control. The same is true for the private sector, which has not experienced any sustained growth allowing it to meet the demand for jobs. The latter consists essentially of small- and medium-sized enterprises which, in most cases, operate in the informal sector. Thus, further structural reforms included in the National Private Sector Development Strategy, remain necessary to stimulate and further boost its development through continuous promotion of entrepreneurship and support for access to various sources of financing for productive activities. To this end, efforts must be maintained to meet the challenges and consolidate the achievements of the reforms already carried out under previous PARE phases. PARGE-I will focus on the constraints that primarily affect the basic functions of the public finance management system and private sector development. Accordingly, PARGE-I, just like PARE-V, will contribute to the achievement of PRSP II objectives, especially under focus area 2 relating to transformation of the country's economy for a sustained and job-creating growth. 5.1.2. The programme's overall objective is to contribute to a robust and sustained economic growth through the strengthening of economic and financial governance, and the enhancement of private sector development. 5.2 Programme Components 5.2.1 PARGE-I has two main components namely: (i) strengthening budgetary management; and (ii) enhancing private sector development. The programme is designed as a programme-based operation over 2 years14, which will help to improve the predictability of aid and facilitate alignment with the country's development policies, creating conditions for Burundi's gradual exit from its situation of fragility.

13 These studies include: PEFA 2012 Strategy for strengthening public finance management (Ministry of Finance , 2012) , Fifth ECF

Review ( IMF report no.14 / 293 , July 2014 ) , Modernization of tax policy ( Trade Mark East Africa , January 2014), Public Expenditure Review (World Bank, December 2013), Excise duties and expenditure (IMF technical assistance, January 2014), Strategy for the re-organisation and modernisation of the Domestic Taxes Commission of the OBR (IMF, technical assistance, July 2013), etc.

14 It is a series of one-year operations within a multi-year framework. See paragraph 7.5.1 of the budget support policy (ADF/BD/WP/2011/38/Rev.3/Approval)

13

Component I - Strengthen Budgetary Management 5.2.2 This component aims to support the Government's reform implementation efforts by: (i) improving public resource mobilization and predictability; and (ii) improving budgetary execution control. a) Context and Recent Government Actions 5.2.3 During the past five years, Burundian authorities have made significant progress in modernizing the legal and institutional framework of the country's public finance management (PFM) system. The 2008 Organic Law on Public Finance (LOFP) and its main implementing instruments (General Public Budget Management Regulations in 2011, Order relating to the State budget nomenclature in 2010, etc.) outlined the framework and marked the beginning of the PFM modernization process. This major reform is in line with international best practices, including a multi-year budget planning, programme-based budgeting and risk-based budget execution controls and accrual accounting. 5.2.4 Major reforms guaranteeing the fundamentals of budget preparation and execution procedures have also been implemented, with the adoption, in December 2012, of the second-generation public finance management strategy (SGFP2). These include in particular: (i) the improvement of public resource mobilization and predictability; (ii) strengthening of the budget preparation and execution process; and (iii) continuation of the budgetary devolution process. To this end, budget preparation is now performed in a unified framework within the Ministry of Finance15, which process is initiated by the signing of budget guidelines. Since 2012, budget presentation is based on the new State budget nomenclature and the authorities are endeavouring to respect the major budget preparation deadlines as laid down in the Decree on fiscal governance. 5.2.5 With regard to budgetary control, with the support of TFPs, major reforms likely to strengthen PFM are on-going, including: (i) streamlining the expenditure chain within the pilot ministries, in charge of Agriculture, Education and Health as well as the appointment of 13 expenditure controllers in 13 priority ministries; and (ii) strengthening of the treasury management institutional framework through the opening of a single treasury account in the Central Bank. In addition, in a bid to preserve debt sustainability, the Government has moved to strengthen public debt management. The measures taken include the restructuring of the Directorate of Debt into a modern unit with the delegation of back-, middle- and front-office duties, review of the tasks of the Directorate of Debt with the assignment of such analytical work as the conduct of debt sustainability analyses, and quarterly publication of debt reports. Despite this significant progress, there is as yet no Law to govern the public debt legal framework. 5.2.6 In the short term, the Government plans to set up a new public finance management information system in 2015. In this framework, MFPDE has embarked on a project to design, install and configure an integrated public finance management and monitoring software package entirely attuned to the new procedures laid down in the Organic Law and its main implementing instruments. In addition, based on the findings of the on-going PEFA assessment, the Government intends to adopt a third phase of the public finance management strategy. This new strategy will help to consolidate and deepen the reforms, and lay the groundwork for implementing programme-based budgeting which will build on the Medium Term Expenditure Framework, prepared with WB support. 15 This institutional change is the result of the decree-sanctioned merging on 7 November 2011 of the former Ministries of Finance and

Plan, which were respectively in charge of the operating budget and investment budget.

14

b) Reforms Planned Under the Programme 5.2.7 To support the Government in its efforts to improve the mobilization and predictability of public resources, PARGE-I will support the following reforms: (i) operationalization of the OBR's domestic tax recovery service and OBR's taxpayer registration process; (ii) preparation of a new Excise Duty Bill; (iii) development and operationalization of a fiscal revenue forecasting model at the Fiscal Policy Directorate; and (iv) establishment of measures to reduce exemptions and tax credits. 5.2.8 PARGE-I also plans to support the Government to strengthen budgetary execution control, through the following reform measures: (i) preparation of a new Public Debt Law; (ii) preparation and adoption of a nomenclature of expenditure supporting documents; (iii) preparation of instruments relating to the establishment of Directors of Administration and Finance (DAF) and their appointment in the pilot ministries; and (iv) conduct of the external audit of public procurement in keeping with the provisions of the Public Procurement Code and its publication on the ARMP website. This audit will concern 2011 and 2012. Furthermore, the Bank will ensure the effective appointment of Expenditure Commitment Controllers (CED) in all sector ministries. c) Expected Outcomes 5.2.9 The reform measures supported by PARGE-I, particularly in terms of resource mobilization, will strengthen the budgetary position, through increased domestic tax revenue expected to rise from 12.4% in 2013 to 13.5% of GDP in 2015. Moreover, emphasis on budget execution control is likely to increase the effectiveness of expenditure, thus resulting in increased allocations and implementation rate of resources allocated to fight poverty16. In relation to the expected outcomes, pro-poor spending will rise from BIF 270.8 billion in 2013 to BIF 303.6 billion in 2015. Component II - Enhancing Private Sector Development. 5.2.10 Related Government efforts are part of the effective implementation of the new National Private Sector Development Strategy (SNDP 2014-2020), the main thrusts of which are: (i) improvement of national infrastructure, better access to financing and information, and development of human capital; (ii) simplification of administrative formalities, incentive and transparent taxation, an operational dispute settlement system, an adequate dialogue framework and appropriate labour legislation; (iii) trade facilitation; (iv) State disengagement from the productive sector through continuation of the privatization process in favour of the private sector which is expected to effectively become the engine of growth. Context and Recent Government Actions 5.2.11 Private sector development and entrepreneurship in Burundi evolve within a constraining context: lack of a proper legislative and regulatory framework, very high cost of factors of production (transport, energy, communication, etc.). Faced with this situation, the Government has begun establishing a simplified institutional framework for business creation and development with special focus on improving business support services. Thus, in recent years, the country has made significant effort to develop private initiative, especially by

16 The definition of pro-poor spending adopted by the Burundian authorities is based on three criteria: (i) the social nature of the

expenditure, according to the administrative classification of expenditure (which includes "social services" expenditure and part of the "general services" and "economic services" expenditure if the latter is social in nature), (ii) consistency with one of the four pillars of the PRSP and (iii) donor-financed pro-poor investment spending.

15

setting up institutional tools such as the Burundi Agency for Investment Promotion, the OBR and an Investment Code. Other initiatives are also underway, for instance the integrated framework, the proposed financial sector development project, the Burundi Business Incubator (BBIN) and the capacity building project related to the Lake Tanganyika Basin Project.

5.2.12 Since 2010, this mechanism has helped to significantly improve the business climate. Government’s efforts have, in particular, led to: (i) the creation and operationalization of three

one-stop shops for business creation; transfer of ownership and granting of building permits; (ii) the passing of the Public-Private Partnership Bill (PPP) in October 2014, which was supported by the previous PARE-V operation; and (iii) the harmonization of certain texts with those of the East African Community (EAC) and their translation into English to facilitate their understanding by foreign investors.

a) Reforms Envisaged in the Programme

5.2.13 To support Government efforts, PARGE-I aims to contribute to the development of entrepreneurship and improvement of access to financing for better private sector contribution to the country’s economic and social development. With regard to entrepreneurship development support, PARGE-I will back the following reforms: (i) operationalization of the business section in Burundi’s Federal Chamber of Commerce and Industry (CFCIB); (ii)

establishment of a Business Support, Guarantee and Assistance Fund (FIGA) and its operationalization; and (iii) preparation of a revised Investment Code and implementation of its provisions. Regarding access to financing for businesses, the programme aims to support the following reforms: (i) establishment of a PPP Unit following the adoption of the PPP Law in 2014 (action plan is supported technically and financially by the AfDB Private Sector Development Institutional Support Project); and (ii) preparation of a new banking law. The implementation of these reforms will help to develop the competitiveness of the Burundian economy. b) Expected Outcomes 5.2.14 Through PARGE-I, the Burundian private sector will be further developed. Thus, the programme will contribute to the achievement of the objectives of the Agency for Investment Promotion (API) that aims to increase the number of businesses created annually from 2030 in 2013 to 240 in 2015. With regard to the availability of private sector financing, PARGE-I will also help to strengthen the sector’s access rate to credit, which is expected to increase from

11.5% of GDP in 2013 to 12.5% in 2015. Similarly, PARGE-I’s support to SNDP

implementation, with one of its pillars being to promote income-generating activities, should further benefit women and thereby enhance their empowerment. Furthermore, it is worth noting that the private sector’s revitalization is an important instrument for creating jobs and fighting unemployment – a major fragility factor in Burundi.

5.3 Policy Dialogue

During the PARGE I and II implementation period, dialogue with the Government will focus on: (i) mobilization and predictability of public resources; (ii) budget preparation, execution and control; and (iii) entrepreneurship promotion and access to financing for the private sector. This dialogue will be supported by analytical work that will be carried out through two Bank technical assistance projects currently underway, namely; the proposed Public Finance Management Capacity Building Project and the Private Sector Development Support Project. The analytical work will include: (i) a nomenclature of expenditure supporting documents; (ii) a macro-economic tax revenue forecasting model; and (iii) an action plan for the creation of a PPP Unit. This work is carried out in collaboration with development partners, especially the World Bank, EU and IMF.

16

5.4 Grant Conditions

5.4.1 PARGE-I is the first phase of a series of two programme-based budget support operations. This first phase is subject to measures precedent to Board presentation. In the preparation of Phase II, PARGE-II is subject to a series of triggers that will be appraised in July 2015.

Pre-conditions and Triggers 5.4.2 The implementation of Phase I of this series of two operations is satisfactory, given that all preconditions were met by the authorities in November 2014. These results demonstrate Government's commitment in pursuing major reforms, especially with regard to public finance management and private sector development promotion. The indicative list of triggers for PARGE Phase II and precedent measures are presented in Table 4 below.

Table 4: PARGE I Preliminary Measures and PARGE II Triggers PARGE I Preliminary Actions PARGE II Indicative Triggers Preliminary Condition - Maintain a stable macroeconomic framework as evidenced by IMF reports or appraisals. Component I – Strengthen budget management Action 1: Operationalization of the OBR internal revenue recovery services and the registration process, and registration of taxpayers; Status: Completed; Required factual element: Activity report of the first half of 2014 of services concerned.

Trigger 1: Operationalization of the OBR internal revenue recovery services and the registration process, and taxpayers’ registration;

Required factual element: Progress report of the first half of 2015 on services concerned.

Action 2: Transmission of the Excise Duty Bill to the Council of Ministers (CM) in accordance with recommendations of IMF technical assistance; Status: Completed; Required factual element: Letter from the Ministry of Finance transmitting the Bill to the Council of Ministers

Trigger 2: CM adoption and transmission of the Excise Duty Bill in accordance with the recommendations of IMF technical assistance. Development and operationalization of a tax revenue forecasting model; Required factual element: Minutes of the Council of Ministers adopting the bill and transmission letter from the Government to Parliament

Action 3: CM adoption and transmission of the 2015 Finance Bill including measures on reducing exemptions and tax credit (as formulated in the Supplementary 2014 Finance Bill); Status: Completed; Required factual element: Minutes of the Council of Ministers adopting the bill and transmission letter from the Government to Parliament

Trigger 3: Development and operationalization of a tax revenue forecasting model; Required factual elements: Letter from the Ministry of Finance forwarding a report on the operationalization of the tax revenue forecasting model

Action 4: CM adoption and transmission of the Public Debt Bill to Parliament; Status: Completed; Required factual element: Minutes of the Council of Ministers meeting adopting the bill and transmission letter from the Government to Parliament

Trigger 4: Ministerial Order appointing CEDs in all line ministries; Required factual elements: Letter from the Ministry forwarding a copy of the Ministerial Order appointing CEDs in all line ministries

Action 5: Conduct external audit of public procurement in accordance with the Procurement Code and publish the results on the MFPED website (or on the ARMP website when it becomes operational). The audit should cover 2011 and 2012. The extent of the audit must be a minimum of 25% of the contract (in number) awarded annually; Status: Completed; Required factual element: Letter from the Ministry of Finance forwarding a copy of the audit report attesting to the publication of results; Copies of completed audits; Copies of screen captures of the website where the audits were published;

Trigger 5: CM adoption of Decree on Directors of Administration and Finance (DAFs) of Ministries; Required factual elements: CM minutes on the adoption of the Degree on DAFs

Action 6: Preparing a nomenclature of expenditure supporting documents (RGGBP, Article 69); Status: Completed; Required factual element: Letter from the Ministry of Finance forwarding a copy of the report on the nomenclature of expenditure-related supporting documents.

Trigger 6: Adoption by Ministerial Order of the nomenclature of expenditure supporting documents (RGGBP, Article 69); Required factual elements: Letter from the Ministry of Finance forwarding a copy of the Ministerial Order on the adoption of the nomenclature;

Component II – Private Sector Development Promotion Action 7: CM adoption and transmission of the bill amending the Investment Code to the parliament; Status: Completed; Required factual element: CM minutes adopting the bill amending the Investment Code and transmission letter from the Government to Parliament

Trigger 7: Operationalization of the CFCIB business section; Required factual elements: Letter from the Minister of Finance forwarding a copy of the 2015 first half Activity Report of the CFCIB business section.

Trigger 8: Implement provisions of the new investment code; Required factual elements: Letter from the Minister of Finance forwarding a copy of the Investment Code implementation report

Trigger 9: Adoption of an action plan on the implementation of a PPP Unit; Required factual elements: Letter from the Minister of Finance and report on the adoption of the action plan

Trigger 11: CM adoption and transmission of the Banking Bill to Parliament. Required factual elements: CM minutes adopting the bill and transmission letter from the Government to Parliament

17

5.5 Application of Good Practice Principles on Conditionality

In accordance with the Bank's policy on Programme Based Operations (PBO) (ADF/BD/WP/2011/38/Rev.3/ Approval of 29 February 2012), the programme design took into consideration good practice principles on conditionalities, especially regarding the ownership of reforms by the country. In this context, PARGE-I is also aligned with the country’s national strategies and policies. Its design also took into consideration lessons from

previous projects relating to feasibility, and reduced and targeted number of reforms. The measures retained in the programme were the subject of preliminary discussions with Burundian authorities and TFPs working in the area of reforms.

5.6 Financing Needs and Arrangements This programme-based budget support operation is an integral part of external financing sources that will help to close the budget deficit over the 2014-2015 period (Table 6). During the programme implementation period, the budget deficit (cash basis, excluding grants) stands at 17.9% of GDP and 17.8% of GDP, respectively, in 2014 and 2015. To make up for this shortfall, there is domestic financing, which stands at 0.9% of GDP in 2014 and 2015 and external financing amounting to 17% and 16.5% of GDP in 2014 and 2015, respectively. With regard to external financing, 14.7% of GDP comes from external grants with 2.6% of GDP in the form of budget support.

5.7 Application of Bank Group Policy on the Accumulation of Non-concessional Debt The Bank policy on concessional debts has been applied in PARGE I. An update of the Debt Sustainability Analysis (DSA) in January 2014 by the IMF and the World Bank contains some improvements and confirms that Burundi still runs a high debt distress risk. The DSA suggests that Burundi has a limited loan margin and that loans must remain highly concessional. Thus, the GOB cannot contract any non-concessional debt during PARGE I and II.

VI. IMPLEMENTATION, MONITORING AND EVALUATION

6.1. Project Beneficiaries

The ultimate project beneficiary is the Burundian people, especially poor and vulnerable groups. Strengthening public finance management ensures an increase in the provision of basic social services as well as easing access to these services. Support for private sector development will ensure the emergence of a group of dynamic entrepreneurs helping to build the foundation for sustained growth. Other beneficiaries are the Government (Ministry of Finance, API, Partner Structures), the Burundi Federal Chamber of Commerce and Industry (CFCIB) and the Burundi Women Entrepreneur Association for which reforms will help to strengthen their technical and operational capacity to deliver quality public services.

Table 5: Financing Needs

2014 2015

(% of PIB) Total revenue and grants 28.3 28.3 Total revenue excluding grants 13.6 14.3 14.7 14.1 Total expenses 29.9 30.5 Overall balance excluding grants -16.3 -16.2 Overall balance including grants -1.6 -2.2 Arrears variation 1.6 1.6 A- Deficit cash basis (excluding grants) -17.9 17.8 B- Total financing 17.9 17.4 Net internal financing 0.9 0.9 Net external financing 17.0 16.5 External grants 14.7 14.1 Including programme support 2.6 2.0 Other external financing 2.3 2.4 C-Residual financing gap C= (B-A) 0.0 0.4 GDP at constant prices (BIF billion) 4785 5344 Source: Burundian Authorities and FMI Report 14/293

18

6.2. Impact on Gender Issues, the Poor and Vulnerable Groups

Increased domestic revenue mobilization will promote greater expenditure in priority sectors in the budget, which should result in more public actions in favour of inclusion and social equity. Thus, an increase in pro-poor spending from BIF 196 billion in 2013 to BIF 270 billion in 2015 is expected to benefit, first and foremost, vulnerable segments of the population such as women and children. Indeed, through its financing to the state budget, the project will support the continued implementation of policies relating to free education, free maternal care and free health care for children under five. Furthermore, support for entrepreneurship with the facilitation of access to financing will enable women to develop income-generating activities, thus contributing to their empowerment and a reduction in gender inequalities in Burundi.

6.3. Impact on the Environment and Climate Change

The programme is classified as Category III (confirmed as of 18/03/2014) and will not have an impact on the physical environment.

6.4. Implementation, Monitoring and Evaluation

6.4.1. PARGE-I will be implemented through the Partnership Framework comprising: (i) a Steering Committee chaired by the Minister of Finance and Economic Development Planning (MFPED); (ii) a Technical Committee; and (iii) an MFPDE reforms support unit, whose performance is deemed satisfactory. The Unit will be responsible for PARGE-I monitoring and evaluation. The Bank will provide technical support to GOB in implementing PARGE-I and II reforms through the two on-going institutional support projects in the area of public finance management and private sector development.

6.4.2. The agreed measures matrix will be the PARGE I and II monitoring and evaluation common framework. There are plans for joint missions and a completion report will be prepared at the end of the programme. With the presence of BIFO, the Bank will enhance reform implementation monitoring. The programme design has benefited from extensive consultations involving several stakeholders, including the Government, the private sector and TFPs. During these consultations, the importance of strengthening public finance management and private sector development was underscored.

Financial Management and Disbursement

Country Fiduciary Risk Assessment (CFRA)

6.4.3 The financial management arrangements for the use of PARGE I resources are specified in Technical Annex 2. It emerges from the Bank’s appraisal that financial

management is moderately satisfactory for several reasons, including: (i) lack of a nomenclature of supporting documents at the Public Treasury Directorate and an accounting procedures manual; (ii) improper setting up of the SIGEFI IT system; and (iii) lack of a fixed assets inventory. An action plan on measures to be implemented to technically support the unit in charge of monitoring proposed reforms is provided in Technical Annex 2. The Bank’s

on-going institutional support projects support the technical implementation of important reform components that will strengthen the fiduciary system.

6.4.4. The external audit on the use of funds will be conducted within the framework of the Court of Auditors’ external audit and through a review of budget execution reports and

audited budgets for the 2014, 2015 and 2016 financial years. Resources will be used according to national public finance regulations. Grant resources will be disbursed to the public treasury in a dedicated account at the Bank of the Republic of Burundi (BRB). In

19

addition, a financial flow audit will be conducted annually by an independent auditing firm in accordance with the terms of reference on which the Bank will issue a non-objection notice. Financial Management and Disbursement Mechanisms 6.4.5. Being the first phase of this series of operations, PARGE I comprises a single-tranche disbursement of UA 7 million. This 2014 tranche is subject to conditions precedent to Board presentation and the PARGE-I appraisal report provides a list of important reforms (Indicative Triggers in Table 4), whose positive assessment of the implementation of the reforms will trigger the preparation of PARGE II and the 2015 disbursement. This programme-based approach will help to maintain on-going dialogue with the authorities on priority reforms and make adjustments, thereby ensuring budget support predictability in a context of fragility. The use of PARGE-I resources will be made within the public expenditure circuit and in accordance with national public finance regulations. MFPED will be in charge of administrative, financial and accounting management of PARGE-I resources. A special account will be opened with the Bank of the Republic of Burundi (BRB) and will be used to receive grant resources. The authorities will, at the time of making a payment request, show that the balance of the account in which ADF resources will be paid is zero. These resources will be transferred from the BRB to the general purpose account of the Treasury. The BRB will not charge any fee for this operation, in line with the agreement signed between the BRB and MFPED, and the exchange rate at the time of the transfer from the BRB to the general purpose account of the Treasury will be applied. The MFPED must send a written acknowledgement of the transfer. Procurement 6.4.6 The operation will be in the form of general budget support. Therefore, its implementation does not raise direct issues regarding the procurement of goods and services. A review of the national public procurement system whose public procurement legislative and regulatory framework includes Law No. 1/01 of 4 February 2008 on the Public Procurement Code (CMP), Decrees on the creation, organization and functioning of the ARMP, DNCMP and CGMP, as well as Orders on contract thresholds, monitoring and publication, was conducted during the PARGE-I appraisal. The review concluded that the legal and institutional framework is broadly operational, and that procurement is carried out in accordance with the provisions of the new CMP. Technical Annex 3 provides a detailed assessment of the fiduciary risk relating to procurement. VII. LEGAL INSTRUMENTS AND AUTHORITY 7.1. Legal Documents The legal framework for PARGE I will be the UA 7 million Protocol Agreement between the Republic of Burundi, the African Development Bank and the African Development Fund (ADF). 7.2. Conditions Precedent to Bank Group Intervention 7.2.1 Conditions Precedent to Effectiveness: Prior to presentation of the grant proposal to the Board of Directors of the Bank and the Fund, the Burundian Government will provide evidence of fulfilling PARGE I preconditions as stipulated in Table 4. Grant effectiveness is subject to the signing of a Protocol Agreement between the Bank, the Fund and the Republic of Burundi.

20

7.2.2 Conditions precedent to the disbursement of resources under phase 1 of the programme-based PARGE I operation in 2014. In addition to conditions for effectiveness specified in 7.2.1 above, the disbursement of the UA 7 million grant resources is subject to the following precedent conditions: Proof of opening a special account with the Bank of the Republic of Burundi to receive grant resources. 7.2.3 A simplified appraisal report will be prepared for PARGE Phase II in 2015 and presented to the Board for approval. This report will include all relevant preconditions prior to Board presentation. A separate Protocol Agreement will be prepared for PARGE Phase II. 7.3. Compliance with Bank Group Policies 7.3.1. PARGE I complies with Bank Group policies and guidelines on programme-based support operations. No exception has been requested regarding these guidelines during this operation. VIII. RISKS MANAGEMENT

Table 7: Risks and Mitigation Measures Risks Mitigation Measures Politics: The current political situation, marked by tensions and the lack of dialogue between political actors, could create political and social instability in 2015 which is the election year. Level: High.

The willingness of the international community to support the Government in implementing the consultation road map initiated within the framework of dialogue between Burundians in 2013 (unanimous adoption by parliamentarians of the Electoral Code in April 2014, signed in June 2014, under the auspices of the United Nations Operations in Burundi (ONUB), General Principles of Good Conduct for the 2015 elections by all Burundian political parties and players). The Election Observation Mission (EOM) will be set up after the departure of ONUB in December 2014 to monitor the elections in 2015. The EOM report will be submitted to the Security Council before, during and after the elections.

Risk: the vulnerability of Burundi's economy to external shocks, including rising global oil prices as well as climatic hazards could be a major constraint on the implementation of reforms on schedule. Level: Low

The Bank, the IMF, the World Bank, the EU and other development partners support the Government in implementing a prudent macro-economic policy and policies to diversify the Burundian economy. Emphasis is also placed on proper management of the public debt and an increase in international reserves, with a flexible exchange rate contributing to better external competitiveness.

Capacity: Institutional and technical capacity inadequate for reform implementation. Level: Low

All the technical and financial assistance provided by development partners to build institutional capacity and implement the CSLP II may mitigate this risk. On-going institutional support programmes provide important technical support to various structures responsible for implementing various PARGE I reforms.

Fiduciary Risk. It emerges from the Bank’s appraisal that public finance

management is moderately satisfactory for several reasons, including: (i) lack of a nomenclature of supporting documents at the Public Treasury Directorate and an accounting procedures manual; (ii) the improper setting up of the SIGEFI IT system; and (iii) lack of a fixed assets inventory. Level: Low

The strengthening of public finance management and implementation of the good governance and anti-corruption strategy will help in mitigating the fiduciary risk.

IX. RECOMMENDATION In light of the foregoing, Management recommends that the Boards approve: (i) the proposed programme-based support operation, spread over two years (2014-2015); and (ii) UA 7 million from Pillar 1 resources of the Transition Support Facility designed to finance Phase I of the Governance and Economic Reform Support Programme (PARGE I) for the purpose and in accordance with the conditions set out in this report.

I

Annex 1: Government Letter of Economic Development Policy REPUBLIC OF BURUNDI Bujumbura, 19/11/2014 MINISTRY OF FINANCE, PLANNING AND ECONOMIC DEVELOPMENT OFFICE OF THE MINISTER Ref.: 540.11/4643/H.F./2014 TO: Mr Donald KABERUKA President of the African Development Bank Group (AfDB) ABIDJAN – COTE D’IVOIRE Subject: Letter of Development Policy for the Economic and Governance Reform Support Programme (PARGE) Mr. President, We have the honour to forward annexed to this correspondence, the Letter of Development Policy (LDP) agreed within the context of the new budget support programme (Economic and Governance Reform Support Programme) between the Government of Burundi and the African Development Bank (AfDB), as part of financing from Pillar I resources of the Transition Support Facility (TSF). The Government of Burundi successfully implemented the 2010-2014 programme backed by the Economic Reform Support Programme (PARE IV and V). During the period, significant results were recorded in the area of economic reforms and implementation of the Poverty Reduction Strategic Framework (PRSF I and II), especially in connection with the thrust on human development. Reform measures supported by these programmes were satisfactorily executed, thanks to the support of development partners, including AfDB. The key priorities of the new Government programme are mainly focused on PRSF II implementation, public finance consolidation and private sector development. This Letter of Development Policy recalls Government’s objectives and the policies that it plans to pursue

within the PARGE framework and beyond, to strengthen poverty control action for the well-being of the Burundian people. The policies and reform measures described in the Letter of Development Policy are in line with Vision Burundi 2025, which lays emphasis on sustainable and balanced management, while seeking to guarantee the irreversibility of progress already made under the different Poverty Reduction Strategic Frameworks and Public Finance Management Strategies. PARGE’s implementation coincides with the period during which the risks of instability relate to internal and regional security, maintenance of peace and political stability in the context of refugee repatriation, strong population growth and land pressure, as well as organisation of the next year’s elections and external shocks. To face these challenges, PARGE’s priorities

focus on strengthening effective public finance management aimed at reforms to improve the mobilisation and predictability of public resources, enhance budget preparation and execution, support private sector development through actions to promote entrepreneurship and improve access to financing for the private sector.

II

This Development Policy is initiated at a time when PARE-V’s implementation is winding

down, with satisfactory outcomes. It is also coming at a time when the Government has initiated dialogue with its development partners with a view to mobilising budgetary support financing for the coming years. It is within this context that the authorities have again solicited AfDB’s support to contribute to the implementation of the Economic and

Governance Reform Support Programme (PARGE) over the 2014-2015 period for an amount equivalent to 11.08 million Units of Account. The Government of Burundi is ready to consider all additional measures that AfDB will deem necessary to ensure the success of this programme and to respond favourably to all requests for information that it may deem necessary to ensure the smooth implementation of the Programme. The Burundian authorities would like the Letter of Development Policy and the related accompanying document on the PARGE programme to be rendered public. Consequently, they authorise their publication and posting on the website of the African Development Bank once the Board’s approval would have been obtained. The Government of Burundi will also

post these documents on its official websites.

Kindly accept, Mr. President, the assurance of my highest consideration.

MINISTER OF FINANCE, PLANNING AND ECONOMIC DEVELOPMENT

Hon. Tabu Abdallah MANIRAKIZA

(signed and stamped)

cc.: for information

- Mr AfDB Resident Representative in Bujumbura

III

REPUBLIC OF BURUNDI

MINISTRY OF FINANCE, PLANNING AND ECONOMIC DEVELOPMENT

Letter of Development Policy

For the AfDB Economic and Governance Reform Support Programme (PARGE)

I. GENERAL INTRODUCTION. 1. In support of its Economic Governance Reform Programme for 2014 and 2015, the

Government sought the backing of the African Development Bank (AfDB). In line with the thrusts of the Poverty Reduction Strategic Framework (PRSF II), this programme aims to contribute to reduce the country’s fragility especially by promoting economic governance

capable of strengthening the conditions for strong and sustained economic growth, propelled by a more dynamic private sector. 2. This Policy Letter summarizes the social context and the recent trend of the national

economy, as well as the country’s development prospects. It describes policies that the Government plans to pursue in areas related to: (i) PRSF implementation; (ii) strengthening public finance management; and (iii) private sector development.

3. The national long-term development policy is enshrined in Vision Burundi 2025, the

priority thrusts of which are: (i) good governance and building of State capacity; (ii) human capital development; (iii) inclusive growth and poverty control; (iv) regional integration; (v) demographic control; (vi) social cohesion; (vii) physical development and urbanisation; and (viii) partnership. This Vision is broken down into medium-term strategies through different phases of the PRSF, which aims to: (i) improve governance and security; (ii) promote sustainable and equitable economic growth; (iii) develop human capital; and (iv) control HIV/AIDS. Officially launched in February 2012, the PRSF is in its third year of implementation.

4. Considered as the reference framework for development partner interventions, PRSF

II takes into account the persisting economic fragility following the long period of conflict, and the need to promote more sustained growth to improve the living conditions of the mostly rural-dwelling Burundian people. The strategy’s three-year implementation period will certainly coincide with the holding of new presidential elections scheduled for 2015.

5. The CLSP II implementation performance over the first two years shows that

undeniable progress has been made on each of the strategic thrusts, despite major constraints, including financial resources that are below expectations, the low contribution of the private sector, the electricity coverage that continues to be a cause for concern, the delay in meeting the convergence criteria within the context of regional integration, the inadequate human capital, climate change and the persisting commercial balance deficit.

IV

6. The Government is aware of the multiple challenges facing the Burundian economy. It is also confident that great opportunities exist that Burundi should seize to improve the economic environment, strengthen public finance management, modernise the production tool and enhance its positioning in the international market. Currently, characterised by a barely diversified productive structure, the Burundian economy remains dominated by a low-productivity agricultural sector particularly vulnerable to shocks from climatic conditions and terms of trade. Agriculture represents approximately 40% of GDP, with a hardly diversified productive base and on-farm consumed food production that does not fully guarantee the country’s food security.

The main export products such as coffee and tea account for more than 75% of exports, thus weakening the country’s external position.

7. The Government believes that, assuming a substantial contribution were to come from the country’s development partners especially in the areas of agriculture and

livestock, energy and mining, transport (infrastructure), tourism and private sector development, the growth rate could reach 6.5% over the 2015-2017 period. The successful implementation of PRSF II through the following strategic thrusts: (i) strengthen the rule of law, consolidate good governance and promote gender equality; (ii) transform the economy for sustained, employment-generating growth; (iii) improve access to and quality of basic services to consolidate national solidarity; and (iv) manage space and the environment for sustainable development, could help to put the country on the path to strong and shared growth. The Government is grateful for the support of the community of technical and financial partners, especially AfDB whose assistance has contributed strongly to strengthening the public finance management framework and the financing of priority actions in various sectors. Hence, with a view to increasing resource mobilisation and aid effectiveness, the Government organized a round table and two sector conferences as follow-up.

8. This Letter of Development Policy reflects Government’s reform programme for

2014 and 2015. It also presents performance indicators on the basis of which to assess the quality of programme implementation. Aware of the difficulties inherent in economic reforms and drawing from past experience, the Burundian authorities will continue to judiciously involve all actors for necessary ownership of all reforms with socio-economic implications, with a view to maximising their success.

II. RECENT ECONOMIC DEVELOPMENTS

9. Real GDP rose by 4% and 4.5% in 2012 and 2013, respectively. This growth was driven by the secondary (16% of GDP) and tertiary sectors (45% of GDP); in contrast, the primary sector regressed. Despite a 5.5% projection in light of the relatively ambitious objectives of PRSF II, a recent analysis by the International Monetary Fund (IMF) suggests a 4.7% growth in 2014, thanks to a rebound in coffee production and the initiation of major infrastructure works (optical fibre, hydro-electricity and roads).

10. In recent times, the Government has pursued efforts to strengthen public expenditure quality by increasing the share of the budget allocated to education, health and socio-economic infrastructure. However, to put the economy on the path to high and sustainable growth, and significantly reduce poverty, the Government is determined to address challenges already identified, among which: (i) improvement of the

V

business climate; (ii) investment in human capital development; (iii) correction of the production support infrastructure deficit; (iv) increase in agricultural productivity; and (v) diversification of agricultural production and the structure of the economy.

11. The sound management of the macro-economic framework resulted in a fall in inflation which stood at 7.9% in 2013 after having exceeded 20% in March 2012. This trend was confirmed during the early months of 2014 following moves by the authorities to stem monetary growth by controlling the public deficit. This prudent policy was accompanied with a decline in oil product import prices in recent months. The objective is to maintain inflation at one digit.

12. The Government is convinced that through better promotion and protection of human rights, it is possible to attain sustainable and harmonious development. Hence, efforts must be made to ensure effective enjoyment of human rights.

13. To attain the objective of 6.5% growth over the 2015-2017 period, the Government will strive to fully exploit all opportunities offered by the national economy. To achieve strong and sustainable growth capable of significantly reducing poverty, the Government will take on major challenges identified in the sector strategies and in PRSF II. Key reforms – launched within the context of support by the Government’s

technical and financial partners (especially the African Development Bank, the World Bank, the European Commission and certain bilateral agencies) – helped to lay the groundwork for: (i) significantly improving the business climate, which remains hardly encouraging; (ii) strengthening budgetary and fiscal transparency; (iii) promoting innovation and sustainably increasing investments in growth-bearing sectors; (iv) reducing the productive infrastructure deficit, for instance in energy; (v) growth in agricultural production and productivity; and (vi) good governance and corruption control (SNBBRC).

14. The overall budget deficit in 2013 is estimated at 1.7%, i.e. a level close to Government’s objective. The budgetary pressure has dropped to stand at 12.4% of

GDP, principally due to the pursuit of efforts to eliminate excise duty on oil products during the first half of 2013. During the first quarter of 2014, the effects of measures to harmonise the Burundian fiscal regime with those of member countries of the East African Community were amplified by the declaration of loss of more than fifty largest taxpayers (following abolition of the minimum tax) and weaknesses in tax administration, leading to a decline equivalent to 0.4 percent of GDP. Annualised, this deterioration would lead to a fall in the fiscal effort and, consequently, an increase in the domestic financing need of one (1) per cent of GDP, further eroding the gains accumulated by the OBR in the past three years. Furthermore, in line with PRSF and MDG goals, the authorities have constantly increased resources to fight poverty. The budget deficit would deteriorate in the short term following the construction of large hydro-electric stations and the anticipated fall in budget support. The deficit is also financed with BRB advances, treasury bills and bonds, reimbursement of the domestic debt as part of internal financing as well as drawdown on direct debts as part of external financing.

15. The external position remains fragile, following the strong deterioration of the external current account deficit (including transfers) which stands at 20.5% of GDP, compared to 18.5% in 2012, despite a mitigation of the impact of the deteriorating terms of trade. Although imports fell by nearly -0.2%, the sharp decline in exports (about 32%) which largely reflects the drop in coffee export, explains the weakening

VI

of the external position. Official exchange reserves increased slightly to attain 3.4 months of export at end-2013.

16. In 2013 and the first quarter of 2014, the improvement of the liquidity situation led to

a softening of the monetary policy. Hence, BRB was able to reduce its intervention rate by 200 basis points, bringing it down to 10.5% in March 2014. The fall in inflation contributed to rendering real interest rates positive. The growth in money supply slowed to stand at 9.2% on annual average end-2014, while credit to the private sector declined less sharply to stand at 2.2%. The Monetary Policy Committee published its first semester 2014 report, accompanied with a Monetary Policy Declaration announcing to the public the future intentions of the monetary authorities. This innovation strengthens the transparency and credibility of the monetary policy. Following the BRB’s intervention to stem the volatility of the

Burundian Franc, the currently remained relatively stable. 17. Inflationary pressure, rising food and oil product prices are risk factors that could

inhibit Burundi’s growth, destabilise external accounts and public finance, and

provoke major social unrest. In this regard, the Government has taken a number of measures to continue to reduce the pressure on world food and oil prices in 2014, and contribute to maintaining inflation under control.

III. THE ECONOMIC AND GOVERNANCE REFORM SUPPORT PROGRAMME

(PARGE) 18. Government’s determination to meet its development objectives as defined in the

PRSF has led it to initiate a vast economic governance reform programme with the following two key components: (i) strengthen public finance management aimed at reforms to improve the mobilisation and predictability of public resources, as well as improve budget preparation and execution; and (ii) support private sector development through necessary reforms to promote entrepreneurship and improve private sector access to financing.

19. The strengthening of public finance management continued with the implementation

of the second generation public finance management strategy (SGFP 2), with improved public resource mobilisation and predictability as one of the key objectives. This objective is primordial to public finance reform. Initially, the reforms focused on means of improving fiscal policy and administration in terms of maximising revenue and the effectiveness of collection and recovery. The building of fiscal policy capacity remains a challenge that the Government wishes to overcome, with the support of its technical and financial partners. The Burundi Revenue Authority (OBR) has continued its efforts to mobilize internal revenue: the revenue collected increased by 6.2% between 2012 (FBI 526 billion) and 2013 (FBI 561 billion). The revenue for 2014 and 2015 will stand at FBI 649 billion and FBI 764 billion, respectively, i.e. 13.6% and 14.3% of GDP.

20. In general, the revenue trend demonstrates an increasingly higher contribution of

internal revenue, which is an indication of lesser dependence on international trade and a gradual fiscal transition within the context of commercial opening and regional integration (EAC). The proportion of internal tax to total revenue rose from 57.7% to

VII

64% between 2012 and 2013. Furthermore, the OBR’s performance in mobilising

national financial resources contributed to efforts made to provide the country with greater financial autonomy in terms of the coverage ratio of public expenditure financed with internal resources. Concerning revenue projection, the Burundi Revenue Authority (OBR) worked with banks involved in State revenue collection in 2013 to improve their transit account management and accelerate the account harmonisation process from a weekly to a daily process, with a view to improving the fluidity of revenue transfer to the treasury account.

21. The budget preparation and execution process, which is the second priority

focus area of SGFP 2, is constantly improving. Following the merger of ministries in charge of finance and planning, the establishment of new structures was completed. Since then, the budget is being prepared within a unified framework. The introduction of the Medium-Term Expenditure Framework is now a reality in Burundi. The decree on budgetary governance adopted in July 2012 made the establishment of the MTEF obligatory. MTEF 2014-2016 as well as the framework for 2015-2017 served as the basis for the preparation of the 2014 and 2015 budget, were adopted in Council of Ministers, and submitted to Parliament for information, within the context of the debate on budgetary orientation. In addition to this good practice which gives the State budget greater credibility, the 2015-2017 sector MTEFs of the large spending ministries (Ministries of Health, Education and Agriculture) were finalised in August 2014.

22. Budget devolution, which is the third focus area of the strategy, is also well on

track. The authorities have made significant progress in the gradual devolution of budgetary commitment and a priori expenditure control following the appointment of 13 Expenditure Commitment Controllers (CEDs), in line with the application of the rationalized expenditure chain (CRD) principles. Within the CRD framework, CEDs are responsible for controlling the budget commitment, legal and liquidation stages that must be initiated directly by credit managers who bear greater responsibility for budget execution in their respective ministries. 80% of the State budget is covered by financial control and the Government plans full coverage by end-2014. To streamline expenditure execution and prior to putting programme budgets in place, the Government – based on budget management capacity audits being conducted by the Court of Accounts – plans to devolve sequencing in pilot ministries in 2015.

23. Within the context of implementing SGFP 2, budget management structures will be

standardised and strengthened. To complete reforms that guarantee the bases of public finance management and initiate the modernisation reforms with a greater chance of success, the Government plans to strengthen the organisation of said reforms by adopting a decree on the standard organisation of directorates of administration and finance in ministries and other institutions.

24. The same goes for the new public finance management information system that will

be deployed in 2015. The Ministry of Finance and Economic Development Planning has undertaken a project to design, install and configure an integrated public finance management and monitoring software package. When completed, the new integrated finance management information system will replace the current SIGEFI which, although providing a minimum status of output, shows a number of weaknesses

VIII

related mostly to security and functionalities that are not fully aligned on new procedures set forth under the Organic Law of 2008 and its key enforcement texts. The software package contains five programmes.

25. Based on PEFA outcomes assessment to be completed during the first quarter of

2015, the Government plans to adopt a new Ten-Year Public Finance Management Consolidation Strategy to consolidate the bases and initiate the introduction of programme budgets, with a view to obtaining more results as it implements its development strategy, of which the State budget is the principal operationalization framework.

26. The promotion of the private sector, which is the growth locomotive, has taken

off significantly thanks to improvement of the business climate in Burundi. The country moved from 177th position in 2011 to 140th position in 2014. According to the Doing Business 2014 report, 10 economies including Burundi’s out of 189, have recorded the most spectacular progress compared to last year as regards improvement of the business climate. The same report indicates that thanks to improvements on the “registering property” indicator, Burundi is among the three African economies to have recorded the greatest improvement in various areas measured by Doing Business (starting a business, dealing with construction permits, getting electricity, registering property, getting credit, protecting investors, paying taxes, trading across borders, enforcing contracts, resolving insolvency). Currently, starting a business takes one day, dealing with construction permits has fallen from 102 to 51 days, and the timeframe for registering property from 64 to 12 days. In addition, other progress has been, for instance reduction in the procedures and documents required to trade across borders, reduction of income tax (30 instead of 35%), etc.

27. Despite recent efforts to improve the business climate, the Burundian Government is

aware that the private sector faces a number of constraints that hamper its growth, investments and the productivity level. The main obstacles are geography (land-locked country), limited supply of electricity and transport cost. To address constraints that continue to hamper private investors, the Government intends to set up a special economic zone, the project of which is being studied. Regional integration, especially within the East African Community, offers growth opportunities particularly in tourism, mining and financial service sectors.

28. To address the unemployment problem, a national employment policy has been put

in place with the support of our partners, including the Bank. In 2013, thematic studies to diagnose the employment situation were validated by the multi-sector technical committee in charge of monitoring the national employment policy. Meetings on employment were organised. A project to create employment for rural youths in pilot provinces (Ngozi, Bubanza) were initiated. A labour force survey (enterprises, formal and informal sector) was also conducted.

29. Support for the promotion of entrepreneurship and improvement of access to

financing must be scaled up. Burundian entrepreneurship is evolving in a rapidly changing environment. Generally, procedures for setting up and developing business have been simplified and close attention to business support services has emerged in the country. Hence in recent years, the country has made considerable efforts to

IX

develop private initiative particularly by putting institutional tools in place, for instance the Burundi Investment Promotion Agency, the Burundi Revenue Authority, in addition to the Investment Code at the legal level. Other initiatives are on-going, including the integrated framework, the Financial Sector Development Project, the Burundi Business Incubator (BBIN), and the project to build capacity within the context of the Lake Tanganyika Basin Project.

30. These multiple multi-form actions flow from the Private Sector Development

Strategy, which particularly aims at: (1) supporting the private sector by improving national infrastructure, giving better access to financing and information, and developing human capital; (2) simplified administrative formalities, transparent and incentive-based taxation, an operational dispute settlement system, an operational dialogue framework and a suitable labour legislation; (3) trade facilitation, effective commercial negotiations, improved international infrastructure and support for export activities; (4) continuous improvement of Burundi’s Doing Business classification; and (5) increased State disengagement from the productive sector by continuing privatisation for the benefit of the private sector, which should effectively become the engine of growth.

31. Adequate access to financing is sine qua non to the development of private

entrepreneurship. One of the key objectives of Government policies and reforms consists in improving the conditions for developing the financial sector and access to financing, especially for small- and medium-sized enterprises. In Burundi, the main sources of financing for businesses comprise personal and/or family resources, credit from banks and other financial institutions as well as subsidies and/or grants, particularly through donor projects and international NGOs. Access to financing is considered among the biggest constraints to private sector development. However, there has been a steady support from the financial sector in recent years, and a certain stability by banks and micro-finance institutions (MFI). Bank assets increased by 134% between 2004 and 2009, and credit by 111%, including credit to the private sector. Bank deposits also rose by 138% over the same period. Banks account for 79% of the total assets of financial institutions. MFIs generally obtain re-financing from commercial banks, the National Bank for Economic Development and the Rural Microcredit Fund. Concretely, the National Financial Sector Development Strategy adopted by the Government aims to obtain the following results: (1) computerise the BRB; (2) increase the banking penetration rate; (3) more effective and rapid compensation; (4) compliance with prudential norms; (5) better sector supervision, especially of MFIs; (6) reduction of the information asymmetry on borrowers; (7) gradual reduction of BRB advances to the State; (8) better coordination of monetary and budgetary policies; and (9) enhanced legal and judiciary framework for acceptance and realisation of collaterals.

IV. PARGE’s Challenges 32. PARGE I implementation coincides with the period during which the risks of

instability concern internal and regional security, maintenance of peace and political stability in the context of refugee repatriation, strong population growth and land pressure, organisation of the next elections in 2015 and external shocks. The slow-down in world economic activity, particularly in Europe, Burundi’s strategic partner,

X

would have potentially negative effects on public financial aid flows from European countries and put the country’s financial viability to the test. However, the

Government, in consultation with its development partners, organised a donors’

roundtable in Geneva in October 2012. The financial commitments made by our development partners is encouraging, given the downturn in the global economy. Announcements made during the donors’ roundtable and the sector conferences

confirmed donors’ commitment to strengthen their support to efforts by the Government to gradually eradicate poverty and lay the foundation for sustainable growth. Concretely, the Government is finalising a report on the progress made during the second year of PRSF II implementation, with continuous emphasis on the inclusive approach.

V. ACTIONS PRECEDENT TO PARGE 33. The actions precedent to PARGE 2014 include:

A. Operationalization of the OBR’s internal tax recovery department During the first half of 2014, OBR collected FBI 300.19 billion compared to FBI 270.39 billion for the same period the previous year, i.e. an increase of FBI 29.8 billion. (Supporting document: Activity reports of the OBR internal tax recovery department for the first and second quarters of 2014)

B. Operationalization of the taxpayer registration and numbering process OBR continued with the taxpayer census. From 1 January to end September 2014, 7 326 taxpayers were registered and assigned numbers in the public and informal sectors. (Supporting document: activity reports of the first and second quarters of 2014 of the OBR taxpayer registration and numbering department)

C. Transmission of the Excise Duty Bill to the Council of Ministers in accordance

with the recommendations of IMF technical assistance Transmission of the Excise Duty Bill to the Council of Ministers in accordance with the recommendations of IMF technical assistance is scheduled for end October 2014. (Supporting document: final draft of the Excise Duty Bill) D. Adoption in Council of Ministers and transmission of the 2015 Finance Bill,

including measures to reduce exemptions and tax credit as contained in the 2014 Supplementary Finance Bill.

Articles 45 and 46 of Decree 1/23 of 02 August fixing the General Revised State Budget of the Republic of Burundi (FY 2014) abolishing import VAT and tax credit. Provision has been made to continue with these measures in the 2015 Finance Bill. (Supporting document: letter forwarding the 2015 Finance Bill to Parliament, comprising the continuation of measures set out under Articles 45 and 46 of Decree 1/23 of 2 August 2014 fixing the General Revised State Budget (FY 2014) abolishing import VAT and tax credit).

XI

E. Adoption in Council of Ministers and transmission to Parliament of the Public Debt Bill

The Public Debt Bill was adopted in Council of Ministers on 23 October 2014 and will unfailingly be forwarded to Parliament. (Supporting document: letter forwarding the Public Debt Bill to Parliament).

F. Conduct an external audit of public procurements and publish the results on the

website of the Ministry of Finance (or the ARMP website when it becomes operational). The audit should be for 2011 and 2012. The audit scope should cover at least 25% of yearly procurements.

The provisional reports of public procurement audits for 2011 and 2012 for 23 audited institutions have already been published on the Public Procurement Regulatory Authority (ARMP) website (www.armp.bi).

G. Prepare a nomenclature of expenditure supporting documents (RGGBP Article

69) The report on the preparation of a nomenclature of expenditure justifying documents is available. (Supporting document: report on the nomenclature of expenditure justifying documents). H. Prepare the bill establishing a Business Support, Guarantee and Assistance

Fund (FIGA) The Government has undertaken to set up a Business Support, Guarantee and Assistance Fund (FIGA). (Supporting document: Bill establishing the Business Support, Guarantee and Assistance Fund – FIGA).

I. Adoption by the Council of Ministers and transmission to Parliament of the Bill

amending the Investment Code A committee comprising API, OBR and Ministry of Finance officials was set up under the coordination of the Second Vice-Presidency to finalise the Bill amending the Investment Code. The Bill has been finalised and is available. The Bill was forwarded to the Government General Secretariat to schedule its adoption in Council of Ministers. (Supporting document: minutes of the Council of Ministers concerning the adoption of the Bill amending the Investment Code and the transmittal letter to Parliament).

J. Operationalization of the Single Customs Territory The Single Customs Territory is already operational. The pilot phase on the central corridor is operational since 2 June 2014 and the pilot phase on intra-regional trade is operational since 7 July 2014. (Supporting document: report of the OBR Customs Department on operationalization of the Single Customs Territory).

XII

VI. OTHER MEASURES ENVISAGED WITHIN THE PARGE FRAMEWORK FOR 2015

34. In 2015, a series of reform measures is proposed in agreement with AfDB. These

include:

- Operationalization of OBR’s internal tax recovery department - Operationalization of the taxpayer registration and numbering process - Transmission of the Excise Tax Bill to the Council of Ministers in accordance

with the recommendations of IMF technical assistance - Development and operationalization of a tax revenue projection model - Ministerial decree appointing Expenditure Commitment Controllers (CEDs) in

sector ministries so far without CEDs - Adoption of the decree on DAFs in Council of Ministers - Adoption by ministerial decree of the nomenclature of expenditure justifying

documents - Operationalization of FIGA - Introduction of provisions of the new Investment Code - Operationalization of the Single Tax Territory - Adoption of an action plan to establish a Public-Private Partnership (PPP) Unit.

VII. CONCLUSION 35. These are some of the measures that have dominated and continue to dominate

Government’s action in 2014 and 2015. To strengthen collaboration with the African

Development Bank and facilitate exchange of views between the two parties, the Government undertakes to provide timely evidence as agreed within the PARGE framework.

36. The policies and measures contained in the Letter of Development Policy will contribute to strengthen efforts undertaken in connection with public finance management and improve the business climate, including in other areas, with a view to accelerating economic growth and ensuring the irreversibility of the progress made. However, the Government is ready to examine all additional measures that AfDB may deem necessary to ensure the success of the programme. Lastly, to facilitate the monitoring of the progress made in implementing the policies and measures contained in the programme, the Government is ready to respond positively to all request for information from AfDB and ADF.

XIII

Annex 2

BURUNDI – Economic and Governance Reform Support Programme

Matrix of Programme Reforms

Objectives 2014 Measures 2015 Measures Target Output

indicators

Target Impact

Indicators

Data sources

Component I – Strengthening of Public Finances

Improved public resources mobilization and forecasting

Operationalization of OBR internal tax collection service

Operationalization of OBR internal tax collection services

Activity report on internal tax collection service First semester 2014 (before end- November 2014) and first semester 2015 (before end- July 2015)

Fiscal receipts, baseline

(2013) 12.4% of GDP, target (2014) 12%,

(2015) 13.2% of GDP

ADB, IMF,

Ministry of Finance

Report

Operationalization of taxpayer registration process

Operationalization of taxpayer registration process

Activity report of taxpayer registration service first semester 2014 (before end- November 2014) and first semester 2015 (before end July 2015)

Transmission to CM of bill on excise rates, in accordance with the IMF technical assistance recommendations

Adoption by CM and transmission to Parliament of bill on excise rates, in accordance with IMF technical assistance recommendations

Bill finalized before end-November 2014

Transmission to Parliament before end-July 2015

Drafting and operationalization of a model for tax receipt forecasts

Forecast model available before end-July 2015

Adoption by CM and transmission of draft Organic Budget Law, including measures for reduction of tax credits and exemptions (as stated in the LOF R 2014)

Record of transmission to parliament of LOF R before end- November 2014

Improved budget preparation and implementation

Ministerial Ordinance on appointment of CEDs (Expenditure Commitment Controllers) in all sector ministries

Remaining CEDs appointed end-July 2015.

Pro-poor expenditure,

baseline (2013) – BIF 196.6 billion, target (2014) – 225 billion, (2015) –270

billion

AfDB, IMF,

Ministry of Finance

Report

Adoption by CM and transmission to Parliament of Bill on Public Debt

Transmission to Parliament of bill before end- November 2014

Adoption of MC decree on DAF Decree adopted

XIV

Objectives 2014 Measures 2015 Measures Target Output

indicators

Target Impact

Indicators

Data sources

End-July 2015

Conduct external audit on public procurement in accordance with provisions of Public Procurement Code and publish results on website of Ministry of Finance (or ARMP, when it becomes operational). The audit should concern the years 2011 and 2012, and its scope should represent a minimum of 25% of contracts (in number) awarded annually.

Disbursement Condition** :

Transmit to Bank public procurement audit reports for 2011 and 2012. The audits should concern a minimum of 25% of contracts awarded yearly (in number and according to ARMP Statistics) and a copy of the web site screen or the audits should be published.

before end-November 2014

Draw up nomenclature of expenditure supporting documents (General regulation on public budget management -Règlement Général de Gestion des Budgets Publics –RGGBP), Article 69

Adoption by ministerial decree of nomenclature of expenditure supporting documents (RGGBP Article 69)

Report on nomenclature of expenditure supporting documents end-November 2014

Adoption of new nomenclature end-July 2015

Component II – Promotion of private sector development

Support to Promotion entrepreneurship

Formulation of draft decree setting up the Business Support, Guarantee and Assistance Fund (fonds d’impulsion, de garantie

et d’accompagnement des

entreprises -FIGA)

FIGA operationalization Draft decree on establishment of FIGA

End- November 2014

FIGA first semester 2015 activity report end-July 2015

Number of enterprises

established (% by women) –

baseline (2012) –

1347, target (2014) –

1400, (2015) – 1425

Ministry of Finance transmission Report

Operationalization in respect of CFCIB

Activity Report End-July 2015

Adoption by CM and transmission to Parliament of bill amending Investment Code

Implement provisions of new investment code

CM record concerning adoption of bill and transmission to Parliament end-November 2014

Report on implementation of Code before end-July 2015

Improved access to private sector

Operationalization of Single Operationalization of the Single Single Customs Territory is

Credit to private sector,

AfDB, IMF,

XV

Objectives 2014 Measures 2015 Measures Target Output

indicators

Target Impact

Indicators

Data sources

financing and promotion

Customs Territory. Customs Territory. operational before end-November 2014

baseline (2012) 11.5%, target (2014) – 12% (2015) – 12.5% of GDP

Ministry of Finance Report

Adoption of Action Plan for setting up PPP Unit

Plan of Action adopted before end- July 2015

Adoption of draft banking law by CM and transmission to Parliament

Adoption by CM and transmission to Parliament

End-July 2015

XVI

Annex 3

Results Obtained under Previous Budget Support Operations (PARE I-V)

PARE I-IV (2006- 2013) I. Improve the Legal Framework for Public Finance Management and Macroeconomic Stability

The PARE I to PARE V programmes previously implemented have contributed to remedying weaknesses in the finance management framework dating from 1964. The results obtained mainly concern: (i) adoption by Parliament of the new Organic Law on Public Finance (LOFP) and its implementation in 2009, (ii) formulation of Draft general regulations on public accounting (iii) complete record of loans and grants, plus an analysis of the integration of aid in the Finance Bill. CNCA sends a donor disbursement forecast report to MFPDE for use in the preparation of the Finance Bill (iv) adoption by the Parliament of the Finance Bill, including informative annexes (such as: Macro-economic assumptions used in the formulation of Finance Bill; budget deficit in accordance with GFS; deficit financing; Status of implementation of the previous year’s budget; debt stock; previous year’s budget

and financial statements for beginning of on-going year). Adoption of General Regulation on Public Budget Management (Règlement Général de Gestion des Budgets Publics -RGGBP) in Council of Ministers and adoption of laws favouring mobilisation of internal revenue to mitigate the decrease in external aid, notably the VAT law, the law on direct taxation, the law on fiscal procedures. As a result, in 2012 the resources mobilized increased by 0.6% of GDP.

II. Strengthen Budget Implementation The previous operations have contributed to strengthening transparency in budget management, improving the quality of public expenditure, ensuring sound management of public resources and combatting financial and economic malpractice. In the same vein, the revised texts concerning the establishment of the Court of Accounts, the status of its magistrates and the list of its new members have been adopted. The internal control services (IGE and SICI) and the Court of Accounts have been provided the human and operating resources to enable them conduct their missions and an audit manual has been drawn up in accordance with the ISPPIA standards. To strengthen budgetary control, MFPDE transfers the Finance Bill and the expenditure accounts to the Court of Accounts not more than six months following the end of the financial year, and transmits the Audited Budget to the Court of Accounts and Parliament for discussion. The IGE (General State Inspectorate) transmits the diagnostic reports from the sector inspectorates to the Minister of Good Governance and Privatization, and begins strengthening the capacity of the said inspectorates. Also noted is the operationalization of the incorporation in the Finance Bill of the timeframes for its transmission to the Court of Accounts and implementation of the recommendations of the study for streamlining and rationalising the expenditure chain. To harmonize procedures and strengthen internal expenditure control, a nomenclature of expenditure supporting documents has been adopted and is contained in the budget implementation manual. With the aim of formalizing and ensuring the effectiveness of procedures, staff of the Court of Accounts responsible for ministerial expenditure control have received training and reports containing the recommendations on budget implementation are systematically published on the Ministry of Finance website. The recommendations made by IGE are implemented by the Division that follows up audit recommendations. To improve internal and external control, the CM has adopted the manual for rationalization of public expenditure and the text concerning expenditure commitment control (CED). To carry out internal quality control, the inspectors responsible for conducting ministerial inspection have also received training. The inspectors trained are required to submit their annual plans to the IGE.

III. Improve the National Public Procurement System The above operations have contributed to the implementation of the decrees and laws aimed at strengthening the public procurement system. The bodies envisaged under the Public Procurement Code, such as the Public Procurement Regulatory Authority (ARMP), the National Public Procurement Control Directorate (Direction nationale du contrôle des marchés publics -DNCMP) and the Public Procurement Management Unit (Cellule de gestion des marchés publics -CGPM) (2008); have been set up and their staff strengthened. The operations manual setting out the practical modalities for the functioning of these new public procurement bodies (ARMP, DNMP and CGMP) is being prepared, and the facilitation of familiarization with the public procurement procedures manual is underway The general public procurement action plan has been adopted and operationalized. The plan was prepared in collaboration with stakeholders, including the private sector. The public procurement reform implementation action plan has been adopted by ministerial decree and persons responsible for its implementation have received training. The utilization of the Public Procurement Code has been assessed by the National Control Directorate and contracts requiring a priori control have been evaluated ex post, with recommendations forwarded to ARMP. Furthermore, to promote transparent and efficient public procurement and open up competition to all categories of enterprises, a new Public Procurement Code has been adopted. Public contracts are systematically published on the Ministry of Finance website. Resource allocation to ARMP is gradually being increased, to afford it financial independence.

XVII

IV. Promote Private Sector Development and Support Employment Regarding private sector development, PARE I and PARE IV contributed to the advancement of small- and medium-sized enterprises. The measures realized have supported the strengthening of the legal framework, to provide more attractive conditions for investment and business in the country. The national private sector strategy has been operational since July 2013. It proposes reforms to stimulate economic growth and job creation through national and international investments in an incentive-driven business environment. A law on PPP was adopted and is expected to increase the attraction of private investment in public projects and thereby enable the Government to control public expenditure. Regular meetings are envisaged to support a framework for public-private dialogue, and the Investment Promotion Agency has been enabled to increase its staffing, with a view to implementing the necessary reforms and attracting more private investors. Moreover, to promote jobs and entrepreneurship and mitigate the mismatch between demand and supply on the job market, the Government has taken appropriate measures, including: (i) adoption of the education and training sector development plan; (ii) adoption of the law on higher education which introduces the Bachelor’s – Master – Doctorate system; (iii) establishment of a regulation body by the National Higher Education Board; and (iv) transmission to the National Employment Policy to the Sector Technical Committee.

XVIII

Annex 4

NOTE ON RELATIONS WITH IMF

Burundi: Statement at end of mission for the 2014 Article IV consultations and the fifth review under the Extended Credit Facility.

Press Release n° 14/280 of 12 June 2014

A mission from the International Monetary Fund (IMF), led by Mr. Oral Williams, visited Bujumbura from June 2–13, 2014 for discussions as part of the IMF’s Article IV

consultations and the fifth review of the government’s economic and financial program

supported by the IMF under the Extended Credit Facility (ECF).

The mission met with the Second Vice-President, Gervais Rufyikiri; the President of the Senate, Gabriel Ntisezerana; the Minister of Finance, Tabu Abdallah Manirakiza; the Governor of the Central Bank, Jean Ciza; and other senior government officials. The mission also had constructive discussions with members of the donor community, private sector, and civil society.

At the end of the mission, Mr. Williams issued the following statement:

“Economic growth is expected to improve slightly to 4.7 percent in 2014 supported by

agriculture, particularly a rebound in coffee production, and construction activity linked to the implementation of major infrastructure projects, including fibre optics, hydropower, and roads. Heavy floods that occurred earlier this year damaged major transport routes, and could contribute to an uptick in inflation which decelerated to 4.7 percent (year-on-year) in April. Looking ahead, the inflation outlook in 2014 remains favourable, owing to lower projected international food and fuel prices.

“Implementation of the program has been challenging owing to revenue losses associated

with the reduction in the corporate tax rate in line with harmonization efforts within the East African Community and the elimination of the 1 percent minimum tax on loss-making companies. The mission discussed compensatory measures to offset the revenue shortfalls, which posed substantial risks to macroeconomic stability and the preservation of pro-poor spending. The mission encouraged the authorities to adopt swift corrective measures to stabilize the situation ahead of the 2015 presidential elections and to allow the exchange rate to respond to underlying macroeconomic conditions to protect external stability and to foster competiveness.

“The mission reached understandings ad referendum with the authorities to address these challenges with the aim of allowing the IMF’s Executive Board to consider the Article IV

consultation and fifth review of the ECF around mid-July. The mission would like to thank the authorities for their warm hospitality and constructive cooperation.”

XIX

Annex 5

Administrative Map of Burundi