Document of The World Bank

FOR OFFICIAL USE ONLY

Report No. 70931-BI

INTERNATIONAL DEVELOPMENT ASSOCIATION

PROGRAM DOCUMENT

FOR A

PROPOSED GRANT

IN THE AMOUNT OF SDR 16.5 MILLION (US$25 MILLION EQUIVALENT)

TO

THE REPUBLIC OF BURUNDI

FOR A

SIXTH ECONOMIC REFORM SUPPORT GRANT (ERSG VI)

September 24, 2012

Poverty Reduction and Economic Management 5 Country Management Unit AFCE1 Africa Region

This document is being made publicly available prior to Board consideration. This does not imply a presumed outcome. This document may be updated following Board consideration and the updated document will be made publicly available in accordance with the Bank’s policy on Access to Information.

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REPUBLIC OF BURUNDI

Government Fiscal Year January 1–December 31

Currency Equivalents Exchange Rate Effective as of August 31, 2012

Currency Unit Burundi Franc

US$1.00 FBU 1445.94

Weights and Measures Metric System

ABBREVIATION AND ACRONYMS

ADC Democratic Alliance for Change (Alliance Démocratique pour le Changement) AfDB African Development Bank AMISOM African Union Mission in Somalia API Investment Promotion Agency (Agence de Promotion de l’Investissement) ARFIC Coffee Regulatory Authority (Autorité de Régulation de la Filière Café) ATMs Automated Teller Machines BRB Central Bank of Burundi (Banque de La République du Burundi) CAS Country Assistance Strategy CASA Conflict -Affected States in Africa CEM Country Economic Memorandum CIP Interministerial Privatization Committee (Comité Interministériel de Privatisation) CNAC National Confederation of Coffee Growers’ Associations (Confédération Nationale des

Associations de Caféiculteurs) CNDD

National Council for the Defense of Democracy (Comité National pour la Défense de la Démocratie)

CNTB National Lands Commission (Commission Nationale des Terres et Autres Biens) CP (HIPC) Completion Point CNIDH National Independent Human Rights Commission (Commission National Independante

des Droits de l’Homme) CSOs Civil Society Organizations CWIQ Core Welfare Indicators Questionnaire DeMPA Debt Management Performance Assessment DP Development Partner DPO Development Policy Operation DRC Democratic Republic of Congo DTIS Diagnostic Trade Integration Study EAC East African Community EC European Commission ECF Extended Credit Facility EERC Emergency Economic Recovery Credit EITI Extractive Industries Transparency Initiative EMSP Economic Management Support Project ERC Economic Rehabilitation Credit ERSG Economic Reform Support Grant EU European Union FAO Food and Agriculture Organization FBU Burundi Franc (Franc burundais) FDD Forces for the Defense of Democracy (Forces pour la Defense de la Démocratie)

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FDI Foreign Direct Investment FNL National Liberation Front (Front National pour la Libération) FPSDP Finance and Private Sector Development Project FIAS Foreign Investment Advisory Service GDP Gross Domestic Product GoB Government of Burundi HIPC Heavily Indebted Poor Countries (Initiative) ICA Investment Climate Assessment ICAS Investment Climate Advisory Services IDA International Development Association IDPs Internally Displaced Persons IFRS International Financial Reporting Standards (Normes Comptables du Secteur Privé) IGE State General Inspectorate (Inspection Générale de l’Etat) IMF International Monetary Fund JSAN Joint Staff Advisory Note LDP Letter of Development Policy MCM Monetary and Capital Markets MDG Millennium Development Goal MDRI Multilateral Debt Relief Initiative MOCIT Ministry of Commerce, Industry and Tourism MFEDP Ministry of Finance and Economic Development Planning MFI Microfinance Institutions MFP

Ministry of Public Adminitration, Labor and Social Security (Ministère de la Fonction Publique, du Travail, et de la Sécurité Sociale)

MTEF Medium-Term Expenditure Framework MTFF Medium-Term Fiscal Framework NIF Tax Identification Number (Numéro d’Identification Fiscale) NGO Non Governmental Organization NPLs Non Performing Loans NPV Net Present Value NTB Non Tariff Barriers OBR Burundi Revenue Authority (Office Burundais des Recettes) OCIBU Burundi Coffee Board (Office de Café du Burundi) OECD/DAC Organization for Economic Cooperation and Development/Development Assistance

Committee ONATEL National Office of Telecommunication (Office National des Télécommunications) OTBu Authorizing Treasurer of Burundi (Ordonnateur Trésorier du Burundi) OTB Burundi Tea Board (Office du Thé du Burundi) OTRACO Public Transport Board (Office du Transport en Commun) PAGE Economic Management Support Project (Projet d’Appui à la Gestion Economique) PEMFAR Public Expenditure Management and Financial Accountability Review PE Public Enterprise PER Public Expenditure Review PETS Public Expenditure Tracking Survey PFM Public Finance Management PPP Public Private Partnership PRGF Poverty Reduction and Growth Facility PRSP Poverty Reduction Strategy Paper PSD Private Sector Development REFES Permanent Secretariat for Monitoring of Economic and Social Reforms (Secrétariat

Permanent des Réformes Economiques et Sociales) REGIDESO National Water and Electricity Authority (Régie des Eaux) RSEA Rapid Strategic Environmental Assessment RTFP Regional Trade Facilitation Project SCEP Service in charge of Public Entreprises (Service Chargé des Entreprises Publiques) SDR Special Drawing Rights

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SDRI Imbo Regional Development Agency (Société Régionale de Développement de l’Imbo) SIGEFI Financial Management Information System (Système d’Information de Gestion

Financière) SIP Public Mortgage Corporation (Société Immobilière Publique) SME Small and Medium Enterprises SODECO Coffee Milling and Processing Company (Société de Déparchage et Conditionnement) SOGESTAL Coffee Washing Stations Management Corporation (Société de Gestion des Stations de

Lavage de Café) SOSUMO Moso Sugar Company (Société Sucrière de MOSO) SSA Sub-Saharan Africa TF Trust Fund UN United Nations UNDP United Nations Development Programme UNEP United Nations Environment Programme UNOB United Nations Operation in Burundi UPRONA Union for National Progress (Union pour le Progrès National) USAID United States Agency for International Development VAT Value Added Tax WBI World Bank Institute WFP World Food Program WHO World Health Organization

Vice President: : Makhtar Diop Country Director: : Philippe Dongier Country Manager: : Rachidi Radji

Sector Director: : Marcelo Giugale Sector Manager: : Albert Zeufack

Task Team Leaders: : Jean-Pascal N. Nganou Aurélien Kruse

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REPUBLIC OF BURUNDI

SIXTH ECONOMIC REFORM SUPPORT GRANT (ERSG VI)

TABLE OF CONTENTS

GRANT AND PROGRAM SUMMARY .................................................................................................. VI

I. INTRODUCTION ..............................................................................................................................1

II. COUNTRY CONTEXT .....................................................................................................................3

A. Political and Security Context ..................................................................................... 3 B. Poverty Outlook and Social Development .................................................................. 5

III. RECENT ECONOMIC DEVELOPMENTS ....................................................................................7

A. Recent Economic Performance ................................................................................... 7 B. Food and Fuel Prices Crisis ...................................................................................... 11 C. Medium Term Macroeconomic Outlook .................................................................. 12

IV. GOVERNMENT PROGRAM AND PARTICIPATORY PROCESSES ..................................... 16

V. BANK SUPPORT TO THE GOVERNMENT’S PROGRAM AND LESSONS LEARNED ... 17

A. Linkages to the CAS program and Africa Strategy................................................... 17 B. Linkages to Previous Operations and Lessons Learned ............................................ 18 C. Collaboration with Other Donors and the IMF ......................................................... 18 D. Analytical Underpinnings ......................................................................................... 19

VI. THE PROPOSED OPERATION (ERSG VI) ................................................................................ 22

A. Rationale for the Grant .............................................................................................. 22 B. Policy Areas .............................................................................................................. 25

VII. GRANT FEATURES ........................................................................................................................ 39

A. Poverty and Social Impacts ....................................................................................... 39 B. Implementation, Monitoring and Evaluation ............................................................ 41 C. Fiduciary Aspects ...................................................................................................... 43 D. Disbursement and Auditing....................................................................................... 43 E. Environmental Aspects ............................................................................................. 44 F. Risks and Risk Mitigation ......................................................................................... 45

LIST OF ANNEXES

Annex 1: Burundi ERSG VI - Good Practice Principles on Conditionality ................................. 48 Annex 2: Burundi ERSG VI – LIC Debt Sustainability Assessment (December 2011) .............. 49 Annex 3: Burundi ERSG VI – Lessons Learned from other IDA operations ............................... 52 Annex 4: Burundi ERSG VI - Letter of Development Policy (LDP) ........................................... 55 Annex 5: Burundi ERSG VI - Prospects for Achieving the MDGs by 2015 ................................ 84 Annex 6: Burundi ERSG VI – Fund Relations Note .................................................................... 86 Annex 7: Burundi ERSG VI-VIII- Policy Matrix: Objectives, Prior Actions, and Triggers (2012-

2015) ....................................................................................................................... 89 Annex 8: Burundi at a Glance ....................................................................................................... 95 Annex 9: Country Map ................................................................................................................. 97

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LIST OF BOXES

Box 1: Strengthening PFM in post-conflict countries – what has worked.................................... 28 Box 2: Continuing reforms of the coffee sector ............................................................................ 34 Box 3: Avoiding the resource curse, to achieve equitable, sustainable growth ............................ 36 Box 4: Provision of Program-Related Information to the Bank ................................................... 42

LIST OF FIGURE

Figure 1: Selected Macroeconomic Aggregates, 2001-2011 ........................................................ 10

LIST OF TABLES

Table 1: Economic Trends, 2006-2011 ......................................................................................... 11 Table 2: Change in the domestic price of food products .............................................................. 11 Table 3: Economic Outlook - Main Economic Indicators, 2012-2015 ......................................... 13 Table 4: Structure of Public Finance and Financing Sources, 2012-2015 (Percent of GDP) ....... 14 Table 5: Comparison of the PRSP I and II pillars ......................................................................... 16 Table 6: Analytical Underpinning – Key Recommendations ....................................................... 19 Table 7: Summary of Agreed Prior Actions for ERSG VI ........................................................... 23 Table 8: Proposed Indicative Triggers and Areas for future policy dialogue for ERSG VII and

ERSG VIII .............................................................................................................. 24 Table 9: Indicators for PFM Reforms (ERSG VI-VIII Series) ..................................................... 31 Table 10: Indicators for Reforms in PSD (ERSG VI-VIII Series) ................................................ 37 Table 11: Indicators for Social protection measures (ERSG VI-VIII Series) ............................... 39

The Burundi ERSG VI was prepared by a IDA team consisting of : Jean-Pascal N. Nganou (TTL, Sr. Country Economist, AFTP5), Aurélien Kruse (Co-TTL, Economist, AFTP2), Jacques Morisset (Lead Economist/Sector Leader, AFTP5), Bella Diallo (Sr. Financial Management Specialist, AFTFM), Nneoma Nwogu (Counsel, LEGAF), Aissatou Diallo (Sr. Financial Officer, CTRLA), Aurélien Beko (Poverty Economist, AFTP5), Rasit Pertev (Sr. Agriculture Specialist, AFTSD), Javier Suarez (Senior PSD Specialist, AFTFE), Laurent Corthay (Regional Investment Climate Coordinator, ICC), Eric Mabushi (CASA Coordinator, IFC), Kabemba Lusinde (Consultant, IFC), Andrew Osei Asibey (Sr. Monitoring and Evaluation Specialist, AFTDE), Sulaiman Wasty (Consultant, AFTP5), Robert Blake (Consultant, AFTP2), Ferdinand Bararuzunza (Economist, AFTP5), Aurore Simbananiye (Team Assistant, AFMBI), Maude Valembrun ( Language Program Assistant, AFTP5), Lydie Ahodehou (Program Assistant, AFTP5), and Senait Yifru (Program Assistant, AFTP2). Useful comments were received from peer reviewers Raju Singh (Lead Economist, AFTP3), Pedro Aritzi (Sr. PFM Specialist, LCSPS), Barbara Cunha (Economist, LCSPE), and Zenaib Partow (Sr. Economist, PRMED). The team also benefitted from the overall advice of Humberto Lopez (Sector Manager, AFTP2), Albert Zeufack (Sector Manager, AFTP5), Rachidi Radji (Country Manager, AFMBI), Philippe Dongier (Country Director, AFCE1) and Mercy Tembon (Country Manager, AFMBF).

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REPUBLIC OF BURUNDI

SIXTH ECONOMIC REFORM SUPPORT GRANT (ERSG VI)

GRANT AND PROGRAM SUMMARY

Borrower Republic of Burundi Implementing Agency Ministry of Finance and Economic Development Planning Financing Data IDA Grant

Terms: IDA standard grant Amount: SDR 16.5 million (US$25 million equivalent).

Operation type First in a series of three programmatic Development Policy Operations. Main Policy Areas (i) Public financial management (PFM) and budget transparency strengthening

through: (a) improving the budget process; (b) enhancing transparency of spending and procurement; and (c) streamlining the management of the civil service;

(ii) Private sector development (PSD) and economic diversification promotion through: (a) improving the legal and regulatory framework for private sector investment; (b) improving agriculture productivity and restructuring the export and services sectors; and (c) promoting the development of the mining sector;

(iii) Social protection strengthening through: (a) developing safety nets systems and institutions; and (b) improving targeting for social services delivery.

Key outcome indicators I. Public Financial Management and Budget Transparency (i) Gap (amount) between budget ceilings in the MTEF and approved budget; (ii) Gap (months) between effective budget presentation to Parliament and legal

delay; (iii) PEFA indicator PI19-iii on public access to public procurement information; (iv) Share of public procurement contracts (value) awarded on a sole source basis in

the previous year (not to exceed more than 10 percent); (v) Number of joint IGE-Ministerial inspection units' investigations conducted

yearly; (vi) Share of communes where budget information tables are available; (vii) Share of civil servants (%) whose profiles have been updated in the payroll and

HR management system (excluding security forces).

II. Private Sector Development promotion and diversification (viii) Number of days to register a business at the new "Guichet Unique" (one stop

shop); (ix) Number of days to obtain a construction permit at the new "Guichet Unique" (one

stop shop); (x) Estimated value of tax exemptions as a share of total tax revenues; (xi) Number of publicly-owned coffee washing stations sold; (xii) Percentage of budget allocated to the construction/maintenance of feeder roads

and small scale irrigation; (xiii) Number of state tea processing factories sold; (xiv) Number of benchmarks met for EITI membership.

III. Social Protection

(xv) Percentage of the extremely poor households covered by at least one of the main safety nets programs;

(xvi) Poverty rate data and a detailed poverty map available based on a new household consumption survey.

Program Development Objective(s) and Contribution

The program aims to: (i) promote greater efficiency and transparency in public spending; (ii) improve conditions for private investment and promote greater private

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to CAS participation and market access in the export and service sectors; and (iii) decrease the vulnerability of households to shocks through an improved social protection system. The proposed operation’s overarching objective is to protect and consolidate Burundi’s transition from a post-conflict to a more stable economy. It is aligned with the new Bank Country Assistance Strategy (CAS) presented jointly with this operation, whose main pillars (Competitiveness and Resilience) and foundation (Governance) are themselves aligned with Burundi’s second PRSP.

Risks and Risks mitigation

The main risks to the program, along with identified mitigation measures, include:

(i) Ongoing political risk, such as the possibility of renewed instability and insecurity that could weaken government focus on and commitment to the reform program. Mitigation measures include (a) program design emphasis on continuity and incremental complexity in the proposed reforms, (b) concrete measures / activities to cement buy-in from key national stakeholders. While renewed tensions could compromise growth objectives, in turn increased private sector participation and economic growth would provide added incentives for maintaining stability;

(ii) External risks, such as a weak performance in the agricultural sector (owing to adverse weather) and / or increased volatility in the external environment, could compromise adherence to the overall macroeconomic framework and deepen poverty and vulnerability. Mitigation measures include close and regular macro-monitoring by IDA, IMF, and other DPs, to anticipate shocks and identify remedial actions. The program itself will foster Burundi’s resilience to external shocks at the macro level, by promoting economic diversification as well as more coherent safety net programs for the most vulnerable households. Furthermore, ongoing global financial instability, notably in Europe, could result in a decline in donor assistance. The Bank’s program will help Burundi maintain external assistance and proceed to quality adjustments by supporting continued reforms in public financial management, the public wage bill, accelerated export earnings, and improving the business climate through transparency and anti-corruption measures.

(iii) Capacity constraints in GoB could delay reforms and / or overwhelm government. These are mitigated by (a) a deliberate narrow focus on a limited set of reforms congruent with the GoB’s own and the Bank’s overall strategies (PRSP II/CAS), (b) leveraging technical support from ongoing IDA projects; and (c) close donor coordination within the “Burundi Partnership Framework” (Cadre de Partenariat). (iv) Political economy and governance bottlenecks, if un-addressed, could compromise overall donor support to the country. The proposed program mitigates this risk by focusing GoB attention precisely on reforms that will help build its track record in key governance areas including PFM. In addition, parallel Bank technical assistance (TA) supports implementation of the government’s recently adopted National Governance Strategy.

Operation ID Number P127080

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PROGRAM DOCUMENT FOR A PROPOSED SIXTH ECONOMIC REFORM SUPPORT GRANT (ERSG VI)

TO THE REPUBLIC OF BURUNDI

I. INTRODUCTION

1. The proposed Sixth Economic Reform Support Grant (ERSG VI) is designed to leverage the Government of Burundi’s (GoB) overarching objective of transforming its economic development trajectory from a fragile post-conflict equilibrium to a resilient growth-focused path. It is the first in a new programmatic series of three operations. Building on the earlier programmatic series (ERSG II-III and ERSG IV-V) as well as on the Economic Rehabilitation Credit (ERC, 2002), and ERSG I (2006), the new series focuses on improved public financial management and policy, economic diversification and private sector promotion, and resilience to shocks as well as social protection.

2. The proposed program is aligned with the main pillars of Burundi’s second Poverty Reduction and Growth Strategy (PRSP II). Specifically, it addresses three of the strategy’s four pillars: Pillar I on “Reinforcing the rule of law, good governance and gender equality”; Pillar II on “Transforming Burundi’s economy toward sustained and job-creating growth”; and Pillar III on “Improving access to quality basic social services and strengthening the social protection framework”. Its three core areas of intervention are in concordance with the proposed CAS pillars and foundation: (i) competitiveness (Pillar 1) for building broad-based and sustainable growth and reducing poverty; (ii) resilience (Pillar 2) for improving access and quality in the social services, and helping consolidate social stability; and (iii) strengthening governance (Foundation).

3. ERSG VI builds on the preceding series, while also adding new focus on social protection. In line with ERSG II-V, the proposed program focuses on key dimensions of institution building and good governance, while also addressing major constraints to private investment and growth. In addition, the new series includes measures to help the GoB to manage external shocks (which have kept Burundi on the brink of crisis during the period 2007-2011) and mitigate their impact on the most vulnerable groups. Boosting private sector development and liberalizing the economy (with shared benefits including employment growth) are priorities for the government, which is implementing reforms in the productive sectors and activities to improve the governance environment. In turn, greater resiliency to shocks is also high on the GoB’s agenda as social and economic stability is a key precondition for private investment to take-off and for institutional building to take hold.

4. Public financial management reforms have been a feature of previous operations, back-stopped by robust analytical work. The 2008 Public Expenditure Management and Financial Accountability Review (PEMFAR) served as a basis for the GoB’s Public Financial Management (PFM) Action Plan for 2009-2011. The World Bank has also supported the GoB’s reform agenda with technical assistance and capacity building via its Economic Management Support Project (EMSP). The GoB has made substantial progress in these areas but starting from a very low base and more needs to be done. The consolidation of public financial reforms as well as sound fiscal and financial management, are central to the government’s twin objectives of maintaining social cohesion and promoting economic growth. In a difficult overall environment,

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maintaining fiscal balance will determine to a large extent the sustainability of the macroeconomic environment.

5. ESRG VI extends the ongoing process of liberalization and private participation, initiated by GoB in 2007. It targets the modernization and quality upgrading of coffee, tea, and sugar production, with the aim of improving competition and increasing productivity (to open up new export markets) while also improving the livelihoods of Burundian farmers. Given the major export potential of mining (nickel, gold, and coltan), ESRG VI will also help Burundi to open-up exploration and extraction within the framework of the EITI, and to better protect government and investors’ rights. More generally, the program seeks improvements in the business climate by removing major bottlenecks to business creation and development (namely the high transactions costs currently associated with the most basic procedures such as company registration, land titling and construction permits). Parallel support, on the investment climate front is provided by the Financial and Private Sector Development Project (FPSDP), and the newly established Conflict Affected States in Africa (CASA) facility of the International Finance Corporation (IFC), in partnership with the Investment Climate Advisory Services (ICAS).

6. Given Burundi’s vulnerability to external shocks, both climatic and economic, the proposed programmatic series will support GoB’s mitigation efforts. These are centered on promoting greater agricultural productivity and diversification and developing better safety nets for the vulnerable. In this last area, the program builds on the positive track record of the recent Bank’s education and health interventions and supports the GoB’s efforts to develop more coherent and better targeted social protection systems.

7. The proposed program aims to strike a balance between many challenging targets and the GoB’s limited implementation capacity, in order to achieve realistic outcomes. Most policy actions will support areas where the GoB has demonstrated strong buy-in and results while also addressing areas of continued weakness. New policy targets, to be introduced incrementally, include the establishment of legal and institutional frameworks (especially for the private sector -mining in particular- and social protection) and the development of the knowledge base required for designing and implementing further reforms (ESRG VII and VIII). The new proposed ERSG series applies a sequencing approach to account for limited institutional and technical capacity in the country and to build momentum as well as ownership among key local stakeholders.

8. ERSG VI is a single tranche operation in the amount of SDR 16.5 million (US$25 million equivalent). The policy matrix (Annex 8) sets out the prior actions for the first operation as well as indicative triggers for two planned follow-up operations (ERSG VII-VIII). The progressive alignment of the ERSG series with the budget cycle is expected to culminate with ESRG VIII tranche release in Q1 of FY15, coinciding with Burundi’s alignment to the East African Community (EAC) budget calendar.

9. The implementation context of the ERSG series is fragile but there are substantial potential pay-offs to continued engagement. First, the fiscal environment continues to be tight: Burundi remains largely dependent on external financing and donor support remains essential to finance the budget. Second, external shocks such as the food and fuel prices increase could add additional pressure on the budget and affect negatively Burundi’s poorest households. Third,

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there continues to be significant risks associated with possible political instability. Those risks are counter-balanced by mitigating measures and to a large extent the operation will help alleviate them directly. The World Bank budget support will provide a fiscal cushion while leveraging policy actions that will increase the quality of spending (and of fiscal adjustment) and allow the GoB to reaffirm its continued commitment to improved governance. It is also expected to enhance the resiliency of the economy to shocks through trade liberalization and diversification. It will promote the development of more coherent and better targeted (therefore less onerous) social policy tools and systems. Since country systems need to be strengthened and fiduciary risks commensurately high, the proposed series prioritizes fiscal and financial management reforms. Section VII outlines the mitigation measures proposed to reduce these risks.

10. While Burundi has made substantial progress toward reconciliation and normalization, donor assistance –including the proposed DPO series– has a crucial role to play to: (i) provide the needed financing of essential programs in terms of economic promotion and social protection; (ii) support the reform momentum and empower reformers in government; and (iii) allow the growth engine to pick-up with increased private sector participation, job creation and diversification.

II. COUNTRY CONTEXT

A. Political and Security Context

11. Since the Arusha Agreement of 2000, Burundi has made significant progress towards political stabilization, while also sustaining major setbacks. Positive developments have included (i) the formation of a transitional government in 2002, (ii) the adoption of a new constitution in February 2005, (iii) presidential and parliamentary elections in August 2005, culminating in (iv) a cease-fire agreement with the last hold-out rebel movement1 in 2006 and the effective cessation of hostilities. In parallel, with the strong support from development partners, Burundi embarked on an ambitious program of disarmament, demobilization, and social and economic re-integration of ex-combatants, which is due to end in 2014. The program has met its objective with significant success. Finally, the Truth and Reconciliation Commission (TRC) and the special tribunal, called for by the Arusha Accord, are expected to help promote national reconciliation and healing.

12. The second presidential and local elections, held from May 2010 to September 2010, reflected both progressive normalization and continuing fragility. International observers found that the elections conformed to international standards, despite minor irregularities in the election of local councils. However, opposition parties, alleging fraud and vote-rigging, formed a coalition to boycott the presidential election. Consequently, the incumbent president ran unopposed to win the election with 92 percent of the votes cast. Subsequently, three political parties, including the ruling party (CNDD-FDD), the Union pour le Progrès National (UPRONA) and the Front pour la démocracie au Burundi (Frodebu-Nyakuri), decided to participate in the legislative elections, gaining representation in the Parliament.

1 The Front National pour la Libération-Parti pour la Libération du Peuple Hutu (FNL-PALIPEHUTU)

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13. The reconciliation process has been consolidated by progressive institution-building. Important new institutions have been created to settle disputes and restore enduring peace. The Ombudsman’s Office (OO) is now fully operational. The creation of a National Independent Human Rights Commission (CNIDH) in 2011, with seven independent Commissioners drawn from civil society and religious institutions, was a positive step although it was poorly funded.2 After years of delay, measures were put in place to prepare the establishment of a Truth and Reconciliation Commission that will cover grave crimes in Burundi since 1962. The government appointed a technical committee in July 2011 to create a framework for a TRC and a special tribunal to investigate past war crimes, and in October 2011 the committee submitted its report to the President. The final decision by the government to establish the two institutions of transitional justice is still pending. To generate broader stakeholder buy-in, the government has introduced a weekly media debate on public policies with the participation of all the political parties represented in Parliament. A draft law defining the statute of the opposition was recently adopted by the Council of Ministers. This notwithstanding, opposition political parties and CSOs continue to criticize the government, accusing it of both abuses and lack of transparency.

14. External shocks and economic stresses could weaken the social fabric. In early 2012, significant increases in electricity and water tariffs (as part of a Bank supported program to strengthen the financial position of the public utility) and fuel prices (due to higher world prices) resulted in CSOs criticisms of the reform and union-led strikes and demonstrations. While limited to urban minorities, these social movements have anchored general discontent and drawn-down the government’s political capital to undertake reforms – partly in response to such pressure the authorities temporarily lifted taxes on basic food staples. Moreover, they underline the country’s vulnerability to shocks, which can transform social fragility into political unrest.

15. Security has improved but remains fragile. Controversies over the 2010 election results sparked violence that led to loss of life. The self-imposed exile of FNL president and former rebel leader along with other opposition leaders in a consortium of opposition parties, known as the Democratic Alliance for Change (ADC), has continued to foster a climate of uncertainty resulting in sporadic attacks on the population. More recently, the National Liberation Forces, the rest of opposition parties and civil society have all condemned the recent declaration by the FNL's ex- commander, calling for a return to war to fight the regime of President Pierre Nkurunziza. At the same time there have been substantial improvements over the past decade, notably thanks to the relatively well performing demobilization program: the army has largely retreated back to its barracks, roadblocks and checkpoints were disassembled and night curfews were lifted. The army is now seen as one of the main stabilizing institutions. A reform of the police is also underway, with the aim of making it more professional, in order to improve the people's trust in the institution. In this regard, police is putting in place a mechanism for complaints and denunciations. With most local conflicts linked to land, the GoB set up a 50 members National Land Commission (CNTB) to settle land litigations related to returning refugees and internally displaced persons (IDPs), to draw up an inventory of public land and give land to the landless.

2 CNIDH began working in June 2011 and issued its first public statement on an alleged extrajudicial execution by the police.

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16. The GoB’s emphasis on access to social services is also a key ingredient to maintain social peace. President Nkurunziza followed through on his promise to grant free health care to children under five and pregnant women (since 2006) as well as to offer free primary education (since 2005). These initiatives have not only led to significant improvements in outcomes, demonstrating the peace dividends of stability, but also highlighting the GoB’s willingness to tackle the most pressing domestic issues facing the population. Moreover, the introduction of weekend community works has contributed to the country’s reconstruction efforts and social cohesion.

17. The overall governance environment remains poor but the GoB has prioritized the fight against corruption, passed laws and created structures to tackle it. Burundi is still ranked as one of the most corrupt countries in the world by most international indicators. According to some accounts corruption is largely fueled by the political elite, causing resentment and damaging relations with donors who expected faster progress. This overall negative perception reflects continued political governance bottlenecks but masks substantial progress over recent years in the area of economic governance, public financial management and social accountability. However, the 2012 East African Bribery report of Transparency International shows that Burundi made significant improvements on their ranking within EAC on bribery levels, corruption perceptions and reporting.3

B. Poverty Outlook and Social Development

18. Years of conflict resulted in displaced rural populations and the destruction of key economic and social infrastructure. As a result, Burundi is one of the poorest countries in the world with about 2/3 of its population living in poverty.4 Poverty is widespread, but higher in rural areas, where the poverty rate is twice that of urban areas. Up to 60 percent of this population suffers from food insecurity, particularly in the season between crops.5 Poverty varies widely across regions (from a “low” of 29.7 percent in Bujumbura to a “high” of 82 percent in the province of Kirundo) as well as significantly across the urban-rural divide (with urban households typically better educated and less likely to be poor or under-employed).

19. While there is no recent estimate of the poverty level6, there have been tangible improvements in some social sector outcomes. Burundi still ranks at the bottom of UNDP’s Human Development Index (185th out of 187 countries in 2011) but education and health outcomes have been improving over the past few years. As a result, life expectancy rose from 43 years in 2000 to 50.4 years in 2011.

20. The free primary education policy (introduced in 2005) has resulted in a significant increase in enrollment. Primary gross enrollment rates improved significantly from 80 percent

3 According to the report, Rwanda remains the least bribery-prone country in the EAC region followed by Burundi. 4 According to World Development Indicators data, the percentage of the population living below the national poverty line in 1990 was 36.4. This figure roughly doubled by 1998 to 68 percent and remained at 67 percent in 2006 (based on the latest household survey available). 5 In rural Burundi, food insecurity affects about 30 percent of the population in harvest periods, and up to 60 percent during lean periods. 6 The next household survey will be available in end-2013 and will allow to update poverty figures.

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in 2003-04 to 156.3 percent in 2010, although important shortcomings remain in terms of achievement and quality. The completion rate is only 56 percent making it unlikely that Burundi will reach the second MDG target (primary completion rate of 100 percent). Enrollments in secondary and tertiary education are much lower (24.8 percent and 3.2 percent, respectively). Consequently, only 40.5 percent of the population is literate, with significant gender disparities7. The government is committed to improving access and quality further. In 2010, it introduced its “basic education” policy, which extends the duration of compulsory primary schooling from 6 to 9 years. The government is also updating the 2009-2016 Sector Development Plan for Education and Training (PSDEF), with the support of donors, which will need to identify significant additional funding and address enduring bottlenecks such as lack of qualified teachers, teaching materials and adequate infrastructure.

21. In the health sector there have also been recent encouraging results. Thanks to better immunization coverage (83-90 percent) and free health services for under-five children and pregnant women, maternal mortality (499 per 100 thousand live births in 2010) and under-five mortality (96 per 1,000 live births in 2010 from 167 per 1,000 in 2005) have declined significantly. The incidence of malaria rose from 26 percent in 2005 to 34 percent in 2010, but the distribution of insecticide-treated mosquito nets (now used by 44 percent of households) is expected to have positive effects. Limiting the spread of HIV/AIDS continues to be a priority of the government (the prevalence rate in the general population was 3.3 percent in 2009). From 2005 to 2010, the rate of deliveries assisted by qualified staff increased from 34 percent to 60 percent. Yet, with the slow increase in contraceptive use (11.4 percent in 2008, 14 percent in 2009, and 18 percent in 2010), reaching universal access to reproductive health by 2015 is highly unlikely. Further improvements are constrained by the lack of essential medicines, scarcity of qualified staff and limited financing. Further improvements in equity of access and quality of care will require: (i) improving existing infrastructure to provide adequate health care to the whole population; (ii) strengthening the performance-based financing (RBF) and free care policies by ensuring the financial sustainability of the system; and (iii) providing better health insurance to the rural and poor population through community mutual associations for health and the promotion of the health insurance.

22. Access to safe drinking water is improving, albeit with insufficient speed. Access to safe drinking water in urban areas increased marginally from 80 percent of households in 2005 to 85 percent in 2010. Most of the water is collected from Lake Tanganyika, which is increasingly polluted and could require costly treatment, impacting on water tariffs. In rural areas, access to safe drinking water still lags though there have been improvements – access rose from 63 percent of the population in 2005 to 74 percent in 2010,8 with almost all water points in working conditions. However, women and children still spend an average of 2 hours a day to fetch water, impacting negatively on school attendance and performance as well as women’s access to economic opportunities.

23. Extremely high rates of population growth will put a major strain on the delivery of social service and access to basic infrastructure in the coming years. The current population of Burundi is estimated at 8.3 million, having almost quadrupled from 2.5 million in 1950. The

7 35 and 47 percent for women and men respectively 8 There are comparability issues to bear in mind while interpreting these data.

7

population is very young, with a high proportion of girls and women in their peak child-bearing years. Current projections are for the population to increase at a rate of 3.4 percent a year, doubling by 2050. An increasingly significant fraction of the population is migrating toward urban centers. This trend can help promote economic activities through economies of scale and agglomeration effects, but it will also add pressures on social and physical urban infrastructures.

III. RECENT ECONOMIC DEVELOPMENTS

A. Recent Economic Performance

24. The GoB has managed to maintain sound economic policies despite slower than expected growth and external shocks. The GoB’s prudent stewardship of the economy justifies budget support, particularly in the light of externally driven fiscal stress and of the expected impact of the supported reforms on growth and resilience.

25. Economic growth has been lower than anticipated in the arguably optimistic first PRSP. Between 2009 and 2011, GDP growth averaged 4 percent (in contrast to the projected 7 percent). Burundi’s growth performance has been modest compared to that of other EAC and post-conflict countries. This discrepancy is mostly explained by stagnation in the agriculture sector, which has experienced slow modernization (low technology) and underinvestment during years of conflict. The lack of basic infrastructure (including feeder roads and small scale irrigation) and poor organization of farmers also explain the country’s modest performance in agriculture. Those structural weaknesses have been compounded by domestic and international shocks, including several episodes of drought in the northern part of the country and large variations in international food prices. Low and volatile agricultural output has had a direct and significant effect on overall economic growth given the relative importance of the agriculture sector in Burundi’s economy (accounting for over 32 percent of GDP and employing more than 90 percent of the total work force).

26. The private sector’s contribution to growth remains limited but there are positive developments. Domestic private investment increased from 7.6 percent of GDP in 2005-08 to 10.1 percent of GDP in 2010-11, reflecting a renewed impetus in tourism and agriculture. Foreign direct investment (FDI) remains low (less than one percent of GDP) with a moderate improvement from to US$0.8 million in 2010 to US$3.4 million in 2011. However, prospects are trending up with renewed interest of foreign investors in banking, telecommunications, tourism and mining.

27. Burundi managed to mitigate the impact of the 2008 financial crisis but economic activity suffered in the following year. In 2008, despite increases in food and fuel prices and energy shortages, real GDP grew by 5 percent thanks to improved agricultural performance, expansion of manufacturing and emergency donor financing to support the GoB’s counter-cyclical fiscal policy. Yet, in 2009, growth slowed to 3.5 percent, mainly on account of lower-than-expected private transfers and foreign direct investment as well as continued energy shortages. Economic activity rebounded modestly thereafter growing at 3.8 and 4.2 percent in 2010 and 2011 respectively as the effects of the global crisis subsided but with uncertainty continuing to discourage private investment.

8

28. The country and the population remain vulnerable to upswings in world commodity prices which translate into domestic inflation. In the wake of the 2008 international food and fuel price crisis, inflation rose to 24.5 percent before decreasing to 10.6 percent in 2009 and 6.4 percent in 2010. It rose again to 9.7 percent (on average) in 2011, with a peak of 25 percent in end-March 2012. Inflation is projected to reach 14.7 percent in 2012 as a result of higher cereal prices on international markets.

29. The GoB has maintained a prudent monetary and fiscal stance in a difficult environment. Prudent monetary policy, in response to rising inflation, has taken a toll on the credit to the economy although it has continued to recover albeit at slow pace. It rose from 5 percent growth in 2007 to about 28 percent on average during 2009-2011. The provision of credit has been instrumental to the reconstruction and recovery process, particularly for commerce and industry (52 percent and 26 percent of total credit to the private sector, respectively). Meanwhile, prudential indicators suggest that the banking sector has remained relatively sound. Capital adequacy ratios at 20 percent are aligned with those in other EAC countries, while non-performing loans (NPLs) declined by several percentage points to 7.7 percent in 2011.9 The managed floating exchange rate regime has served Burundi well so far (the Burundian franc depreciated by 7.5 percent between November 2011 and April 2012 in the face of the food and fuel shocks) but the authorities need to move to more flexibility, backed by reforms in liquidity and foreign exchange markets, to reduce the country’s current account deficit. The IMF’s Monetary and Capital Markets (MCM) technical assistance is expected to deliver improvements in the areas of Treasury bill and foreign exchange auctions, and coordination between the Treasury and the Central Bank to strengthen liquidity management.

30. Despite slippages in 2009, the authorities generally pursued prudent fiscal policies and managed to contain the fiscal deficit. Tight expenditure management, improved domestic revenue mobilization and foreign aid inflows helped to maintain the fiscal deficit (on a cash basis before HIPC grants) at an average of 3.8 percent of GDP in 2010-11, down from 5 percent of GDP in 2009. Domestic revenue reached 15.4 percent of GDP in 2011 (up from 14.6 percent in 2010 and 13.6 percent in 2009), reflecting improved collection of income and other taxes. Total expenditure declined from 41.0 percent of GDP in 2010 to 40.0 percent in 2011. The financing gap has been filled by aid, accounting for 2/3 of the budget and financing most public investment. The high dependence on external financing has to be expected in a post-conflict country but it also highlights the importance of donors support in good and bad times.

31. A narrow export base and high dependency on oil and capital goods imports account for Burundi’s chronic current account deficits. In 2009, the current account deficit (including official transfers) reached 11.5 percent of GDP mainly due to declining donor assistance (over 60 percent of net current transfers). Thanks to higher exports and official transfers, the external current account deficit declined to 9.4 percent of GDP in 2010. It increased to 12.3 percent of GDP in 2011 due to higher petroleum imports and declining official transfers.

9 Given that NPLs are in single digits suggest that the quality of the portfolios have improved but a more detailed analysis on the sector composition of NPLs would provide a better picture, essential for tracking individual sector impact, should they begin to be affected by negative shocks/conditions.

9

32. Gross official reserves (in months of imports) remain tributary to swings in import prices and donor assistance. Burundi’s foreign exchange position fluctuated widely in the last decade (starting with a low level of US$24 million in 2001), depending on export performance, import costs and aid flows. External assistance is provided mainly by the African Development Bank (AfDB), the European Commission (EC), IDA, and bilateral donors such as Belgium, France, Netherlands, Norway, and the United States. Increased donor funding (HIPC and MDRI relief, and IMF’s SDR allocation, in particular for 2009) – reflecting macroeconomic stability gains - resulted in a build-up of foreign reserves. Gross international reserves increased from US$323 million (4.9 months of imports) at end-2009 to US$332 million in 2010 (4.4 months of imports). However, they further decreased to US$296 million in 2011 (4.0 months of imports), under the twin effect of higher petroleum prices and declining donors support.

33. Burundi’s external debt situation has improved thanks to debt relief. Burundi reached the Highly Indebted Poor Countries (HIPC) Completion Point (CP) in January 2009 and consequently benefitted from debt relief under the HIPC Initiative and the Multilateral Debt Relief Initiative (MDRI). The country became eligible for US$833 million (net present value) in debt relief, including US$425 million from IDA and US$28 million from the IMF under the HIPC Initiative, reducing its public and publicly-guaranteed debt by more than 90 percent in net-present-value terms, and scheduled debt service by some US$30-40 million per year for the next 30 years. MDRI relief cancelled an additional amount of over US$120 million in nominal terms of debt outstanding to IDA, the IMF and the African Development Bank (AfDB).

34. According to a 2011 joint World Bank-IMF Debt Sustainability Analysis10, Burundi remains at high risk of debt distress. External public debt burden indicators are expected to remain high over the medium term even after HIPC relief and MDRI assistance (Annex 2). This fragility is explained by the country’s narrow export base and low capacity of government institutions including for debt management. While Burundi is currently able to service its public and publicly guaranteed debt, this could be eroded in the case of slower GDP growth. Therefore, to mitigate risks to debt sustainability, Burundi should continue to adopt prudent borrowing policies and accelerate the structural reforms required for private sector led growth, particularly in infrastructure and export diversification. Recognizing their continued weaknesses in debt management, the authorities requested a Debt Management Performance Assessment (DeMPA) mission in April 2012. The debt management reform plan, derived from the DeMPA, will help to increase the capacity of debt management by strengthening the debt management framework and improving analytical capacity of the debt management office.

10 LIC DSA, December 2011

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Figure 1: Selected Macroeconomic Aggregates, 2001-2011

Growth recovered from the global crisis but remained relatively low.

Inflation decreased in 2010 but increased again in 2011due to higher international food and fuel prices.

Despite expenditure pressures, fiscal deficit has remained under control.

Higher current account deficit due to deteriorating trade balance and reduced official transfers.

Source: IMF

0

1

2

3

4

5

6

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Real GDP growth (percent)

-5

0

5

10

15

20

25

30 Inflation (percent)

-30

-25

-20

-15

-10

-5

0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Fiscal deficit (percent of GDP)

Overall fiscal balance (Excluding grants, % of GDP)

Overall fiscal balance (after grants, Excl. HIPC, % of GDP)

-40

-30

-20

-10

0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Balance of Payments (percent of GDP)

Current account (incl. official transfers)

Current account (excl. official transfers)

Trade balance

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Table 1: Economic Trends, 2006-2011

2006 2007 2008 2009 2010 2011

Population (million) 7.5 7.7 7.9 8.2 8.4 8.6

Population growth (%) 3.8 3.1 3.0 2.9 2.6 2.3

GDP (current prices, US$ billion) 1.7 1.6 2.0 2.2 2.4 2.6

GNI per capita (Atlas method, current prices, US$) 100 120 140 150 170 n/a

Real GDP growth (%) 5.4 4.8 5.0 3.5 3.8 4.2

Inflation (average CPI, %) 2.8 8.4 24.5 10.6 6.4 9.7

Real effective exchange rate (% change) -2.5 -7.5 15.4 0.4 1.8 0.7

Terms of trade (% change) -2.9 -23.4 3.4 19.6 51.7 -8.9

Gross investment (% of GDP) 14.1 18.2 18.7 18.8 18.0 18.4

Gross national savings (% of GDP) 3.4 -0.1 9.3 9.0 9.6 7.7

Overall fiscal balance (excl. grants, % of GDP)a -14.4 -26.2 -27.6 -23.5 -26.4 -24.6

Overall fiscal balance (after grants, excl. HIPC, % of GDP)1

-4.0 -2.6 -2.7 -5.0 -3.6 -4.0

Current account balance (incl. official transfers, % of GDP)

-22.4 -6.1 -1.8 -11.5 -9.4 -12.3

Overall balance of payment (% of GDP) 1.0 2.4 5.5 3.0 0.7 -1.6

Gross international reserves (months of imports) 3.4 3.5 4.3 4.9 4.4 4.0

Export growth (f.o.b; US$ % change) 2.4 1.1 18.4 -1.8 48.0 22.5

Share of coffee in exports (%) 67.4 65.5 57.8 57.9 68.9 60.4

Debt service to exports ratio (%) 10.7 5.4 7.7 1.7 1.4 3.3

External debt stock (% of GDP) 116.0 115.1 97.5 20.7 22.5 23.0

Source: Burundi authorities; World Bank; IMF. 1/ Cash basis.

B. Food and Fuel Prices Crisis

35. Burundi has been severely hit by recent food and fuel price increases. In 2008, the IMF listed Burundi among the world’s eighteen countries most vulnerable to balance of payments shocks caused by food and oil price increases. Burundi is a net importer of food and oil products, and its landlocked position raises import costs and sensitivity to oil prices significantly. Together, food and fuel imports amount to some 43 percent of total imports and so have contributed to the deterioration of the trade and current balances over the past few years.

36. Adverse domestic and international shocks compounded pressure on food prices. Cereal production declined sharply in 2011 due to heavy rains that affected negatively crop

Table 2: Change in the domestic price of food products ($USD per ton), Sept. 2011-Jan. 2012

Source: National Statistical Institute (ISTEEBU)

September 2011 January 2012 Price change (%) Ngozi Bujumbura Ngozi Bujumbura Ngozi Bujumbura Wheat flour 1000 1356.7 1200 1600 20 21

Imported rice 1200 1503.3 - 33 33

Local rice

1246.7 350 192.3

22

Dry maize (grains) 600 585.8 600 1000

15

Fresh cassava 500 810 1646 2000 -30 15

Green Banana 145.4 425.9 1525.1 672 32 24

Dry beans (mixed) 700 785.9 929.3 527.2 -14 2

Dry beans (yellow) 1100 1150 800.1 1125.2 -9 -2

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yields11. The domestic food price index rose by 21 percent (in March 2012) due to lower domestic production and difficulties in bridging the deficit through imports from the sub-region. The price of rice and green bananas increased by 22-33 percent and 24-33 percent, respectively, depending on the region between September 2011 and January 2012. Inflation at end-2011 reached 14.9 percent against the original target of 9 percent, and is now projected at 14.7 percent at end 2012. Recent developments on international cereal markets are likely to affect negatively import dependent countries such as Burundi, since latest projections indicate a further increase in most cereal prices on world markets.12

37. Surging food prices will have a negative impact on the Burundian economy and exacerbate food insecurity, but the GoB has limited options to respond. In the recent past, the authorities have moved quickly to mitigate the impact of price hikes through a balanced set of measures. These include: (i) shielding consumer through suspending import duties on staple foods products (dry cassava, cassava flour, maize grains, maze flour, wheat flour, potatoes, beans, rice, onions, fish, ground nuts and palm oil); and (ii) compensating for the fiscal loss (0.3 percent of GDP) by tightening tax administration (eliminating loopholes) and by increasing taxes and duties on "luxury" goods such as alcohol, tobacco, telecoms and used cars. While blanket tax exemptions are clearly second-best solutions, the GoB had a limited set of options given: (i) high political pressures to react to shocks; (ii) the absence of any recent data to identify (and therefore target) poor and vulnerable households; and (iii) the lack of a robust social protection arsenal that could be readily mobilized. Nonetheless, the exemptions have had a tangible, albeit delayed, pass-through effect on domestic prices and set a ceiling by lowering import costs.13 Given the likely recurrence of such shocks, developing more sophisticated responses is clearly a priority, which this operation will support. Moreover, to support the government efforts for improved food security, the Global Agricultural and Food Security Program (GAFSP), a facility created with G20,14 recently approved a US$30 million grant to Burundi

C. Medium Term Macroeconomic Outlook

38. The medium term macroeconomic outlook (2012-2015) is consistent with the framework of the IMF’s ECF program. The first review of the IMF’s ECF program and the Article IV consultations, which were reviewed and concluded in July 2012, confirmed that Burundi’s performance has been satisfactory, and that its economic outlook is broadly positive. However, it also highlights the policy challenge of preserving macroeconomic stability, while

11 Agricultural production, in terms of cereal equivalent, was down 11 percent in 2010 (mainly on account of declining maize production). The cereal deficit is projected to reach 133,000 tons (FAO) in 2012. 12 The US Department of Agriculture (USDA) has recently slashed its forecasts for corn production and predicted sharp price rises, due to a drought and heat wave destroying much of the country's crop. The latest forecasts from the USDA suggest that maize production in 2012-13 will be 10.8 billion bushels, some 2.2 billion bushels less than it predicted last month and the lowest since 2006-07. FAO has warned that this could have serious consequences for the overall international food supply, in particular Sub-Sahara Africa. 13Domestic cereal prices in Burundi depend more on the domestic situation and developments on regional markets in Eastern Africa (Tanzania, Kenya, DRC, Uganda, and Rwanda) than on global markets. It takes about 6-10 months or even longer until changes in international prices of agricultural commodities are passed through onto domestic food prices. 14 The Group of Twenty (G20) includes Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russian Federation, Saudi Arabia, South Africa, Republic of Korea, Turkey, United Kingdom, United States of America and the European Union.

13

cushioning the most vulnerable households from the impact of rising commodity prices on the cost of living.

39. The medium term macroeconomic policy framework for 2012-2015 provides an adequate basis for budget support. GDP growth in 2012 was revised downward to 4.2 percent (from 4.8 percent initially projected), but it is expected to increase gradually to an average of 5.3 percent in 2014-15, reflecting steady reforms and prudent macroeconomic management. Continued tight monetary policy by the Central Bank should help contain inflation, which is projected to decrease from a peak of 19.6 percent in 2012 (on account of high international food and oil prices) to below 10 percent in 2013 and beyond. The authorities will continue to promote greater exchange rate flexibility, which will help the economy adjust to food and fuel shocks and enhance external competitiveness. Fiscal management is expected to remain prudent with gradually increasing government revenues and declining public expenditure (on account of lower external financing) as a share of GDP. The current account deficit is expected to decline to 11.1 percent of GDP in 2012-2015 from an estimated 12.3 percent in 2011. Export earnings should gradually improve in 2012-15 (growing at about 2.9 percent on average per year), as a result of reforms in the coffee sector and economic diversification. Meanwhile, import growth should slow down to about 1.4 percent on average for 2012-2015 (following the peak of 3.7 percent in 2011). In the medium term, external financing will continue to be largely in form of grants and highly concessionary loans.

Table 3: Economic Outlook - Main Economic Indicators, 2012-2015

Actual Prel. Projections Projections Average

2010 2011 2012 2013 2014 2015 2012-15

(annual percent change) Real GDP growth 3.8 4.2 4.2 4.5 5.1 5.5 4.8

Consumer prices (period average)

6.4 9.7 19.6 6.4 7.4 6.3 9.9

Exports, f.o.b (change in US$ value)

48.0 22.5 3.1 0.2 -1.0 9.3 2.9

Imports, f.o.b (change in US$ value)

105.3 3.7 -2.9 3.5 1.2 3.7 1.4

(percent of GDP) Current account deficit (incl. grants)

-9.4 -12.3 -11.6 -11.0 -10.8 -11.1 -11.0

Revenue (excl. grants) 14.6 15.4 15.1 15.5 15.6 15.6 15.6 Total expenditure and net lending

41.0 40.0 33.6 34.9 34.8 32.5 34.1

Overall balance (excl. grants)a

-26.4 -24.6 -18.5 -19.4 -19.2 -16.9 -18.5

Overall balance (incl. grants)

a b -3.6 -4.0 -2.7 -4.6 -4.9 -3.9 -4.5

Gross international reserves c 4.9 4.4 4.0 3.8 4.2 3.9 4.0

Source: IMF. Notes: acash basis, b excluding HIPC, c in months of imports.

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Table 4: Structure of Public Finance and Financing Sources, 2012-2015 (Percent of GDP)

Actual Prel. Projections Average

2010 2011 2012 2013 2014 2015 2012-15

Domestic revenue 14.6 15.4 15.1 15.6 15.6 15.6 15.5 Tax revenue 13.7 14.3 14.1 14.5 14.5 14.5 14.4 Non-tax revenue 0.9 1.1 1.0 1.1 1.1 1.1 1.1

Total Expenditure and net lending 41.0 40.0 33.6 34.9 34.8 32.5 34.0 Current expenditure 18.1 18.3 16.7 15.7 15.3 15.1 15.7 Wages and salaries 8.6 8.7 8.1 7.7 7.5 7.4 7.7

Other current expenditure a 9.5 9.6 8.6 8.0 7.8 7.7 8.0 Externally-financed other expenses b 9.3 5.8 3.9 4.1 4.1 2.9 3.8 Net acquisition of non financial assets c 12.0 15.6 12.7 15.2 15.4 14.5 14.5

Overall balance, cash basis

Excluding grants -26.4 -24.6 -18.5 -19.3 -19.2 -16.9 -18.5

After grants, excluding HIPC -3.7 -3.9 -2.8 -4.5 -4.9 -3.9 -4.0

Financing 26.0 24.1 18.1 17.9 17.3 14.9 17.1

Foreign grants 22.7 20.7 15.7 14.8 14.3 13.0 14.5 External borrowing 1.7 1.0 1.4 2.2 2.1 1.0 1.7 Privatization proceeds 0.0 0.0 0.2 0.0 0.0 0.0 0.1 Domestic financing 1.6 2.4 1.0 0.9 0.9 0.9 0.9

Financing gap/Errors and omissions 0.0 0.0 0.0 1.4 1.9 2.0 1.3 Source: IMF. Note: a. Other current expenditure includes regularization of compensation arrears, which is expected to end in

2011, purchases/use of goods & services, subsidies and social benefits, interest and other domestically-financed expenses. b. Externally financed other expenses include spending on elections (in 2010), demobilization, technical assistance, and temporary

social safety net programs. The decline in 2011 is due to the withdrawal of one-off spending (elections, crisis related spending on social programs).

c. Formally defined as capital and net lending.

40. Over the medium-term, Burundi’s growth performance should improve, thanks to enhanced agricultural productivity and a more dynamic services sector.15 The overall growth rate is projected to rise from 3.8 percent in 2010 to 4.2 percent in 2011 and to an average of 4.8 percent over the period 2012-2015. This scenario assumes productivity improvements in the agriculture sector (including coffee) and the secondary sector (mostly agro-industry, mining and energy, and construction). In addition, renewed growth in the services sector, including banking, telecommunications and tourism, fueled by new opportunities within the East Africa Community (EAC) should also pay-off. The 2010 Country Economic Memorandum (CEM) argued that economic growth could reach up to 8 percent per annum, if Burundi managed to (i) maintain social and political stability, (ii) follow prudent macroeconomic and public sector policies, (iii) adopt structural reforms to create an enabling business environment for the private sector, and (iv) implement core infrastructure programs, with access to Public Private Partnership (PPP) and IBRD financing.

41. Burundi will remain dependent on external assistance, both in the form of budget support and project grants, to meet its financing requirements over 2012-15. Aid pledges (mostly grants) are projected to amount to (at least) 14 percent of GDP in the next three years down from 20 percent in 2010. In recent years, budget support (excluding special programs)

15 Expected improvement in agriculture productivity is expected to result from efforts by the authorities supported by donors, which have been ongoing for the past three years and include small scale irrigation investments, the promotion of producer associations and increased private sector participation.

15

accounted for about 28 percent of total assistance to Burundi.16 A donors meeting planned in October 2012 is expected to mobilize further support for PRSP priorities.

42. While overall prospects are good, there are significant uncertainties –most outside of the GoB’s control-, which could cloud the medium term macroeconomic outlook. If international food and fuel prices rise again, economic growth will be affected and inflationary pressures may flare-up again. Aid inflows could also fall short of expectations, particularly if Development Partners perceive the GoB’s commitment to governance reforms (particularly political governance) to be dwindling or if economic conditions in donor countries worsen. If the government feels compelled to respond to crises with fiscal stimulus (as it did most recently), while facing lower external financing, it could be forced to make difficult adjustments such as cutting allocations for key social programs including school feeding and free health care for vulnerable populations. The ongoing European debt crisis could have ripple effects on Burundi, since Europe remains its main trade partner and the destination for 60 percent of its exports. Lastly, lower than projected foreign direct investment would exacerbate pressure on the balance of payments and negatively affect prospects for privatization of the tourism industry and coffee sector.

43. The Burundian authorities are working to reduce the vulnerability of the economy to such potential shocks through a combination of near and longer terms actions:

a. To mitigate the effects of a new food and fuel crisis on the poor, the authorities have already implemented temporary measures, including reduced taxes and import tariffs on essential goods, supply-side measures, and new safety nets. However, in the longer run, the fiscal cost of these measures could jeopardize macroeconomic stability if uncompensated by aid and reduced non-core spending, and unless existing social protection programs are not rationalized and their targeting improved;

b. To improve the efficiency of public expenditures, GoB has implemented the MTEF reform process in order to “ring-fence” poverty reduction spending, as well as to align non-priority expenditures with available domestic and external resources. To ensure efficient management and continued external support by development partners, the authorities will continue implementing the financial sector strategy and the recently adopted National Governance Strategy;

c. To diversify the economy, the GoB is implementing a package of reforms to reduce key constraints to investment and private sector development, as well as remove infrastructure bottlenecks and foster deeper regional integration;

d. Given the recurrent nature of shocks, and following the example of other countries (e.g., Seychelles), the GoB is considering to create a Crisis Response Committee tasked with developing a comprehensive national strategy to address external vulnerabilities, notably to climate and price shocks. The committee would be a key stakeholder in the development of a comprehensive safety nets strategy following the social protection policy recently adopted by the government. Burundi has already begun to monitor climate threats as the result of 2011 United Nations Environment Programme (UNEP) proposals.

16 When special programs are considered, budget support accounts for about 50 percent of total assistance to Burundi. Starting from 2012 Norway will no more provide budget support.

16

IV. GOVERNMENT PROGRAM AND PARTICIPATORY PROCESSES

44. The Government’s priorities are set-out in the second Poverty Reduction Strategy Paper (PRSP II) adopted on January 24, 2012. The new strategy builds on the first PRSP (PRSP I), while introducing new pillars on sustainable spatial and environmental management (Table 5). The Joint Staff Advisory Note (JSAN), reviewing this document, was discussed by the Board of the IMF on July 27, 2012 and by the World Bank’s Board on August 28, 2012. The JSAN reports that the strategy is both comprehensive and ambitious, but needs further prioritization. It aims at: (i) transforming the economy for rapid job-creating growth and food security; (ii) making growth more inclusive and sensitive to vulnerable groups; (iii) realizing the potential of the population with a thriving private sector by increasing trade with neighbors; and (iv) developing institutions to improve governance and the quality of services.

Table 5: Comparison of the PRSP I and II pillars

PRSP I Pillars PRSP II Pillars Governance and security Rule of law, governance and gender equality Equitable and sustained growth Equitable and sustained growth for job creation

Developing human capital Access to quality services and national solidarity Controlling HIV/AIDS Sustainable spatial and environmental management 45. The second Poverty Reduction Strategy Paper (PRSP II) seeks to solidify the gains from improved stability by identifying governance and rule of law as a core priority. The envisioned approach is broken down into: (i) strengthening the legal and judiciary system, (ii) tackling corruption and institutional performance, (iii) improving public financial management, and (iv) promoting gender equality.

46. Promoting growth remains a priority of the PRSP II, with added emphasis on job creation. Without growth, the goals of providing basic social services and protection for the weak and vulnerable are not sustainable beyond the medium term. To promote growth, the GoB’s strategy relies essentially on (i) developing priority sectors including agriculture (with an emphasis on export crops and agribusiness), mining and tourism; (ii) tackling underlying bottlenecks, particularly energy, transport and ICT; and (iii) deepening regional integration. The overarching theme is the promotion of private sector participation in the economy to support job creation.

47. The focus on increasing access to essential social services remains central, together with new attention to social protection and vulnerability mitigation. The GoB’s strategy includes (i) increasing the capacity of the education system to accommodate higher secondary and tertiary intake and enhancing quality at all levels, (ii) strengthening performance in health service delivery and access to water, as well as (iii) controlling population growth, and (iv) consolidating progress on HIV/AIDS prevention. PRSP II also targets social protection with short term actions (through community-based interventions and livelihoods promotion in rural and informal environments) and longer term initiatives (formal social insurance and protection institutions and access).

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48. The last objective of the PRSP is to enhance spatial and environmental management. This new pillar covers (i) urban management and planning and land management/titling, (ii) environmental protection and climate change mitigation, (iii) water resources management, and (iv) mainstreaming the environment dimension in sector programs.

49. Similar to the first PRSP, the new strategy was developed following a structured participatory process. Consultations were conducted (i) at the community level in all seventeen provinces involving delegates of provincial and communal community development committees, as well as representatives from youth, women, and marginalized groups; (ii) with private sector and civil society groups; (iii) with sector working groups building on the inputs of the sector groups established under the development partners’ coordination group. Additionally, Parliament and the Economic and Social Council also provided formal feedback and recommendations on the draft strategy.

V. BANK SUPPORT TO THE GOVERNMENT’S PROGRAM AND LESSONS LEARNED

A. Linkages to the CAS program and Africa Strategy

50. The proposed operation is aligned with the main objectives of the previous Country Assistance Strategy (CAS) for FY09-12, and is consistent with the new CAS for FY13-16 that is being proposed in parallel with this operation. The proposed program supports: (i) Pillar I of the new CAS (Competitiveness) by promoting improvements in the business environment and greater participation of the private sector in strategic export-oriented and employment-creating activities; (ii) Pillar II (Resilience) by supporting the development of comprehensive social protection strategies and systems as well as measures to enhance productivity and diversification in agriculture; (iii) governance, which is the foundation of the CAS, through measures aimed at improving the realism and transparency of public financial management, including the budget process and public procurement, and social accountability.

51. The Bank’s Strategy for Africa, mentions Burundi as a country extremely vulnerable to external shocks. The proposed operation addresses this vulnerability through the combination of the following set of measures. First, it seeks to strengthen Burundi’s export generating activities in coffee, tea, sugar, and mining, through promoting state divestiture or greater private sector role in productive and commercial activities. Second, it supports the promotion of broad based growth and economic diversification by focusing on key supporting activities (including tourism) and promoting a more transparent and investor friendly regulatory framework in mining. Third, it targets vulnerability directly through supporting the development of a comprehensive social protection strategy and improved efficiency of public investment for agricultural productivity (since a vast majority of vulnerable households are food insecure and rural).

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B. Linkages to Previous Operations and Lessons Learned

52. The proposed operation builds directly on the seven previous development policy operations and lessons learned from similar operations in fragile countries.17 The previous operations were rated satisfactory or moderately satisfactory on outcome and government performance. Main lessons learned are summarized in Annex 3, while specific lessons derived from the last programmatic series (ERSG IV-V) include the following:

• Define objectives commensurate with local capacity: Prior actions and triggers in the last ERSG series were well specified and phased but unequal gains were made toward achieving the envisaged development objectives. This uneven performance was linked to a large extent to capacity constraints in the government agencies and departments in charge of implementing the supported reforms.

• Provide for close monitoring and maintain flexibility: At the current juncture of Burundi's socioeconomic development and recovery efforts, continued budget support will be necessary for several years to enable the GoB to strengthen and consolidate PFM, PSD, and export promotion reforms. Progress must be monitored closely, with each phase of the programmatic series implemented incrementally, allowing flexibility and mid-course corrections.

• Adjust expectations to reality and the socio-economic context: Experience suggests that it is unrealistic to expect rapid change to economic and social conditions in small, poor and fragile countries. It is therefore imperative to be cautious on the extent and pace with which, (a) economic transformation can take place; (b) policy inputs translate into outcomes; and (c) behavioral patterns of bureaucratic inertia can be altered. Therefore development goals must be well-targeted, with modest expectations reflecting the realities of national capacity and the need for DP commitment over the long term.

• In fragile states, sustained engagement including through budget support, is essential to close the fiscal gap and sustain the policy dialogue and domestic reform efforts. Burundi remains at a crossroad: it may continue on the path of economic consolidation and political stabilization but may also return to fragility. While the trajectory will ultimately depend on GoB actions, donor support will be vital as well, notably given its important contribution to public finances. Withdrawing or curtailing of budget support at this juncture would lead to a costly hiatus in the engagement and dialogue and significantly compromise the GoB’s ability to maintain the current positive momentum.

C. Collaboration with Other Donors and the IMF

53. The proposed policy reforms are supported by development partners operating in Burundi. These include the African Development Bank, the European Commission, USAID, 17 The Emergency Economic Recovery Credit (EERC) in 2000, the Economic Recovery Credit (ERC) in 2002, the first Economic Reform Support Grant (ERSG I) in 2006 and the second and third (ERSG II and III) in 2008 and 2009, ERSG IV and V in 2010 and 2011.

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Belgium, France and Canada. The Bank team, as in the past, will continue to work closely with the IMF and the donor community, through joint missions (whenever possible) and its participation in the Cadre de Partenariat (Partnership Framework) bringing together all institutions providing budget support. Although there is no co-financing anticipated for the proposed operation, it will benefit from complementary technical assistance provided through parallel Bank-funded projects and programs supported by partners.18 On the Bank’s side, private sector promotion is at the core of the EMSP/Financial and Private Sector Development project. The development of agriculture is supported by the Agro-pastoral Modernization project. Other partners such as EU, AfDB, USAID, and Belgium, are also involved in the areas of PFM, investment climate, education, health, social protection, and agriculture. The Bank team will continue its close collaboration with the IMF, including in the monitoring of the Fund’s ECF program and Article IV consultations missions.

D. Analytical Underpinnings

54. The design of the proposed operation reflects a wealth of prior analytical work (Table 6 summarized their key recommendations and links to the ERSG series). These studies include: (i) the 2008 PEMFAR report;19 (ii) the 2009 and 2012 PEFA reports; (iii) the 2004 Diagnostic Trade Integration Study (DTIS) and 2012 DTIS Update; (iv) the 2007 report on Sources of Rural Growth; (v) the 2008 Investment Climate Assessment (ICA); (vi) the 2008 EMSP-financed study on options for the divestiture of assets in the coffee sector; (vii) the 2009 report on the legal and institutional framework for privatization; (viii) the 2009 study on the options for pay reform, which is being updated; (vii) the 2010 Country Economic Memorandum; (ix) the 2010 Public Expenditure Review of public investment efficiency; (x) the 2011 Rapid Strategic Environment Assessment (RSEA) of the coffee sector reform in Burundi; and (xi) the 2011-12 Burundi policy notes series that focused on fiscal challenges, security and growth issues.

Table 6: Analytical Underpinning – Key Recommendations

Analytical Reports Findings / Recommendations Links to ERSG Series

Public Financial Management • PEMFAR (2008) • PEFA (2009; 2012) • Policy Note Series

(2011-12)

The government should progressively begin the introduction of a medium-term expenditure framework for broad categories of expenditure (PEMFAR). The absence of an MTEF prohibits the optimization of actions in the medium term and timely planning of resource availability. (PEFA). The government should also: (i) use the MTEF instrument to identify and reduce low efficiency expenditures; and (ii) create a central development committee within the Ministry of Finance and Economic Development Planning (MFEDP) to track

Expansion of MTEF process beyond the pilot sectors (including a list of priority expenditures to be protected in case of drastic budget cuts) to improve budget planning and credibility. This lays the foundation for program budgeting called for in the Budget Framework Law (Loi Organique) under implementation. [Prior Action #1]

18 The Netherlands and Norway co-financed the ERSG I and II grants, as well as ERSG III-IV. Norway provided co-financing to ERSG V, and Belgium co-financed the second tranche of the ERSG I. 19 A World Bank study currently under preparation will update and revise the PEMFAR findings, based on recent payroll and staffing data and the recommendations of the 2009 study on pay reform options.

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Analytical Reports Findings / Recommendations Links to ERSG Series

project quality and coherence with strategic planning tools and improve project selection. (Policy Note Series).

• Policy Notes Series (2011-12)

In the short to medium term, the authorities should: (i) accelerate PFM reforms (fiduciary controls) to improve the transparency in the management of public expenditure and avoid the misappropriation of resources

Introduction of a decree establishing the rules for the implementation of the national public budget and control along the lines of the Loi Organique. [Prior Action #2]

• PEMFAR (2008) • Study on the

options for pay reform (2009/2010)

• Policy Note Series (2011-12)

Key actions to improve public wage bill management include: (a) the MFEDP and Ministry of Public Adminitration, Labor and Social Security (MFP) to work more closely together on salary and staffing issues; (b) the establishment of clear staffing targets for line ministries that are in line with a lower wage bill; (c) MFP to monitor implementation of agreed staffing ceilings; and (d) setting up a human resources management information system

Streamlined procedures for payroll management. [Prior Action #4]

• Policy Notes Series (2011-12)

The authorities should: (i) finalize and adopt the National Governance Strategy and its action plan; and (ii) strengthen transparency in public financial management by improving access to information relative to public finance. In this regard, voted national budget bills and quarterly budget execution reports should be released on a government website (e.g. Internet site of the Ministry of Finance and Economic Development Planning).

Public disclosure of public procurement information. [Prior Action # 3]

Private Sector Development • CEM (2010) • ICA (2008) • Policy Note Series

(2011-12)

Improve the regulatory environment to attract domestic and foreign investment. Critical components include: implementing the investment code, finalizing the revision of the tax code and the establishing an export and investment promotion agency. (CEM) Other actions include: (i) reforming business regulations to reduce cost and time necessary to create a business or complete other procedures; (ii) improving access of rural areas to finance, through improved supervision of microfinance institutions (MFI) and development of new MFI products; (iii) accelerating ongoing efforts to modernize payment systems (e.g., Automated Teller Machines (ATMs) and electronic interbank transactions). (Policy Note Series)

Previous operations focused on the implementation of the new investment code, including the operationalization of the investment promotion agency. Following recent progress in Doing Business indicators, especially on investor protection aspects, the proposed program will focus on the launch of a “One Stop Shop”, to reduce processing time and cost for business start up and construction permits. [Prior Action #5]

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Analytical Reports Findings / Recommendations Links to ERSG Series

• CEM (2010) • Policy Note Series

(2011-12)

Adopt a mining code aimed at attracting large-scale mining investments (Policy Note Series) A number of international companies have expressed interest in investing in commercial exploration of mineral resources. If these reform and exploration efforts prove successful, one or more mineral deposits could be developed on an industrial scale. (CEM)

Adoption of a new mining code [Indicative trigger #8 – ERSG VII]

• CEM (2010) • Sources of Rural

Growth (2007) • Policy Note Series

(2011-12) • Rapid Strategic

Environmental Assessment (RSEA) of Coffee Sector Reform in Burundi (2011)

Complete implementation of the ongoing privatization agenda. Next steps include the setting up of an efficient regulatory agency and the development and strengthening of producer organizations. In the short- to medium-term, the authorities should: (i) strengthen the capacity of INTERCAFE to help Burundian coffee growers to organize into competent producer associations and to improve Burundian coffee marketing in international markets; (ii) encourage new owners of washing stations to improve access to finance for coffee harvests, and introduce modern processing practices through improved input distribution and training; (iii) provide basic infrastructure (irrigation, rural roads for market access), improving inputs, and supporting agricultural research; (iv) adopt a reform strategy for the tea sector (liberalization, creation of appropriate institutions and revitalization of the sector) inspired by the coffee sector reform; and (v) initiate a discussion on the feasibility of the creation of a regulatory agency for agricultural commodities following the eventual privatization of state assets in tea and sugar sectors. (Policy Note Series) The proposed key short-term actions are (i) the implementation of a training program on shade-grown coffee and integrated pest management; (ii) issuance of regulations making the preparation of municipal land-use plans mandatory; (iii) issuance of environmentally sound criteria, standards, and regulations for the coffee washing stations; (iv) development of studies about the potential for recycling water in the coffee washing stations economically; (v) development of a coffee certification program; and, (vi) development of a market study on the potential of coffee to access niche markets and on diversification strategies such as receiving payments for carbon and environmental services. (Rapid Strategic Environmental Assessment - RSEA, 2011)

The program supports ongoing privatization efforts in the coffee sector and proposes to expand a similar approach to the tea and sugar sectors with indicative triggers for follow-up operations. [Prior Action #6]

The program also supports efforts to improve agriculture productivity through public investment in small scale irrigation and feeder roads. [Indicative trigger # 6 ERSG VII] The issuance of legislations for mandatory land plans is also supported by the program [Indicative trigger #6 ERSG VIII]

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Analytical Reports Findings / Recommendations Links to ERSG Series

Social Protection • Policy Note Series

(2011-12) The government should consider supplementary pro-growth policies including complementary safety nets, friendlier labor legislation, and rural infrastructure development policies.

The program supports efforts by the authorities to develop a comprehensive safety nets program and improve targeting of social service delivery through poverty maps and PETS. [Indicative triggers #9-10 ERSG VII]

VI. THE PROPOSED OPERATION (ERSG VI)

A. Rationale for the Grant

55. The Sixth Economic Reform Support Grant (ERSG VI) is the first in a proposed series of three programmatic operations supporting a medium-term program of actions (see policy matrix in Annex 8). The new series will reinforce progress achieved over the course of the first and second ERSG series (II-III and IV-V) and promote reforms in new priority areas, including vulnerability mitigation and agriculture diversification. The series is expected to help the authorities in their efforts to: (i) promote greater efficiency and transparency of public financial management (PFM and budget transparency component); (ii) improve conditions for private investment and economic diversification (PSD promotion and diversification component); and (iii) strengthen social protection through safety nets reforms and improved targeting of social program delivery (social protection component). These three policy pillars are not only consistent with the government’s PRSP II but they are also closely aligned with the Bank’s CAS and the Africa Region’s Strategy.

56. Public financial management reforms are complex, requiring sustained effort over time to allow ownership within public administration and bring structural change. Therefore, the ERSG VI-VIII series will consolidate measures initiated under the earlier ERSG series, while extending them in scope and depth. The PFM and budget transparency component of ERSG VI has three main sub-components: (a) strengthening strategic and budget planning processes to improve the quality of public spending; (b) reinforcing transparency of PFM (including procurement and controls); and (c) streamlining management of the public wage bill.

57. Creating a basis for strong private sector led growth requires robust legal and regulatory reforms, and specific actions to stimulate growth in under-performing sectors such as the export crop sector. As in ERSG II-III and ERSG IV-V, the PSD promotion and diversification component of ERSG VI contains three main sub-components: (a) improving the legal and regulatory framework for the promotion of private sector investment; (b) increasing agriculture productivity and promoting economic diversification through restructuring of export and services sectors; and (c) promoting the development of the mining sector.

58. Given the high vulnerability of Burundian households to economic shocks, social protection related reforms feature among the GoB’s top priorities. Strengthening the national safety nets system is a core new dimension of Burundi’s second PRSP, which is reflected in the design of the proposed programmatic series. Subcomponents include: (i) strengthening safety nets systems; and (ii) improving targeting for social service delivery.

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59. The proposed series adopts an incremental approach both in terms of depth and scope of the proposed reform program. It places heavy initial emphasis (in the first operation) on public financial management reforms. This is justified on several grounds: first, efficient fiscal policy and management is critical in a context of enduring fiscal stress to increase the quality of public spending; second, it is an integral part of the government’s effort to improve governance and the use of public resources; and third, it has been a core area of Bank engagement with significant GoB buy-in and momentum. Support to the second and third policy areas will increase gradually in ERSG VII and VIII, to give time to the authorities to carry-out all relevant background analytical work (with donor support) and make sure that consensus is reached in the areas of private sector promotion and social protection among key stakeholders. Such a gradual approach is anchored in lessons from experience, which have emphasized the need to ensure full ownership and adjust reform speed to local capacity and readiness. The proposed series of operations does not include prior actions for ERSG VI under priority area 3 (social protection) but lays out indicative triggers for follow-on operations. This is in recognition of both (i) the importance of initiating immediately a policy dialogue on social protection and maintaining the GoB’s focus of this critical area, and at the same time, (ii) the need for much analytical work to be carried-out (both by the Bank and the GoB) before substantive policy actions can be taken and committed to on a factual basis.

60. Table 7 provides a summary of proposed and agreed prior actions for ERSG VI. These actions have been discussed with the authorities during the preparation missions for the proposed operation in April 2012 and June 2012 as well as during appraisal in September 2012. Details on each prior action are provided in the “policy areas” section below.

Table 7: Summary of Agreed Prior Actions for ERSG VI

Prior Actions and Status PRIORITY 1: STRENGTHENING PUBLIC FINANCIAL MANAGEMENT AND BUDGET

TRANSPARENCY Objective 1.1: Strengthening strategic and budget planning to improve the quality of public spending 1

The Recipient has adopted and submitted to Parliament, for informational purposes only, the 2013-15 Medium Term Expenditure Framework (MTEF) and the budget framework letter consistent with the MTEF for the preparation of its 2013 budget law. Status: Completed.

2 The Recipient has issued a decree outlining the conditions for fiscal policy formulation and budget preparation and the rules for budget discipline and transparency. Status: Completed.

Objective 1.2: Reinforcing transparency and efficiency of PFM, procurement and controls and stimulating the demand for good governance

3 The Recipient has published, on the website of its ministry in charge of finance, current public procurement decisions by the National Directorate for Public Procurement (DNMP) (listing the selected firms, contract amounts and the method of procurement) and the 2011 DNMP Activity Report, with the exception of contracts, which pursuant to the Recipient’s law, are of a secret nature or contracts with a value below the thresholds requiring DNMP review. Status: Completed.

Objective 1.3: Streamlining public wage bill and HR management 4 The Recipient has established, through a joint ministerial ordinance by the ministry in charge of finance and

ministry in charge of public administration labor and social security, a center for government payroll processing and career management and has appointed a director for the said center. Status: Completed.

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Prior Actions and Status

PRIORITY 2: PROMOTING PRIVATE SECTOR INVESTMENT AND ECONOMIC DIVERSIFICATION

Objective 2.1: Improving the legal and regulatory framework for the promotion of private sector investment 5 The Recipient has established and has rendered operational a guichet unique (one-stop shop) for the

registration of business entities. Status: Completed.

Objective 2.2: Improving agriculture productivity and promoting economic diversification through restructuring of export and services sectors

6 The Recipient’s Inter-ministerial Committee for Privatization has authorized the SCEP to launch the third phase for the sale of 76 state-owned washing stations in the coffee sector. Status: Completed.

Objective 2.3 Promoting the development of the mining sector No prior action under ERSG VI. PRIORITY 3: STRENGTHENING SOCIAL PROTECTION TO REDUCE VULNERABILITIES

Objective 3.1: Strengthening safety nets systems No prior action under ERSG VI. Objective 3.2: Improving targeting of social service delivery No prior action under ERSG VI.

61. The current operation lays the groundwork for continued reforms in the targeted priority areas to be supported through the programmatic series. The Bank and the authorities have also identified a list of triggers for the next operations in this programmatic series. Those triggers remain indicative and may be amended over time.

Table 8: Proposed Indicative Triggers and Areas for future policy dialogue for ERSG VII and ERSG VIII

ERSG VII ERSG VIII PRIORITY 1: STRENGTHENING PFM AND BUDGET TRANSPARENCY

Objective 1.1: Strengthening strategic and budget planning to improve the quality of public spending 1

The Recipient has transmitted the MTFF and MTEF to Parliament and organized pre-budget debates in line with the Loi Organique and the Decree on Budget Governance.

The Recipient has submitted the 2015 draft budget law to Parliament before November 2014.

Objective 1.2: Reinforcing transparency and efficiency of PFM, procurement and controls and stimulating the demand for good governance

2 The Recipient has hired an independent and reputable firm to undertake a comprehensive audit of the public procurement system.

The Recipient’s General Inspectorate of State (IGE) has conducted training for ministerial inspection units and implemented a joint audit work-plan.

3 The Recipient has prepared summary tables in easy-to-understand language ( French/Kirundi) and format, including key sector budget information, disseminated them widely in the media and posted them in public places at the communal level to enable citizens to obtain information on sector budget allocations (schools and health centers) in their communes.

No proposed trigger

Objective 1.3: Improving the public wage bill and HR management 4 The Recipient has validated the civil servant

database following the process of updating information on staff turnover since April 2007.

The Recipient has conducted an audit of the payroll and human resource (HR) management system and of the SIGEFI and developed an action plan for implementing

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ERSG VII ERSG VIII recommendations.

PRIORITY 2: PRIVATE SECTOR INVESTMENT PROMOTION AND ECONOMIC DIVERSIFICATION

Objective 2.1: Improving the legal and regulatory framework for the promotion of private sector investment 5 The Recipient has established and rendered

operational a Guichet Unique (one stop shop) for construction permits.

The Recipient has made publicly available the full itemized list of tax exemptions granted over the past year and the budget document clearly specifies the estimated amount of tax exemptions as a share of tax revenues.

Objective 2.2: Improving agriculture productivity and promoting economic diversification through restructuring of export and services sectors

6 The Recipient has increased, relative to the previous year, the budget allocation for feeder roads and irrigation in line with the MTEF allocations.

The Recipient has issued regulations related to the mandatory preparation of municipal land-use plans.

7 The Recipient has adopted a strategy for the reform of the tea sector clarifying the role and responsibilities of the regulatory agency of the sector.

The Recipient has adopted a strategy for the privatization of state-owned assets in the sugar production company SOSUMO.

Objective 2.3: Promoting the development of the mining sector 8 The Recipient’s Council of Ministers has adopted

and submitted to Parliament a Mining Code consistent with best international practices.

The Recipient has created an EITI Commission and provided adequate resources with the task to implement a detailed action plan leading to EITI membership.

PRIORITY 3: STRENGTHENING SOCIAL PROTECTION TO REDUCE VULNERABILITIES Objective 3.1: Strengthening safety nets systems 9

The recipient has appointed a Task Force to oversee the development of a comprehensive social protection strategy and action plan for implementation. The Task Force has undertaken and validated a social safety nets assessment.

The Recipient’s Council of Ministers has: (i) adopted an updated social protection strategy; and (ii) begun implementing the strategy and allocated the required funding (with private sector participation).

Objective 3.2: Improving targeting of social service delivery 10 The Recipient has finalized a Household

Expenditure Survey and developed a National Poverty Map.

The Recipient has carried out and publicly disclosed the results of a PETS survey (including beneficiaries’ assessment) in social sectors.

B. Policy Areas

62. The following section describes in detail the policy reforms envisaged in each sector and sub-sector of the new ERSG series. It explains the rationale for the set of selected prior actions, discusses indicative triggers for the next two operations, and describes proposed indicators for monitoring progress over time.

1. Strengthening PFM and budget transparency

63. Burundi has made significant progress toward sound public financial management systems and practices. The basic legal framework for public finance (Loi Organique) was overhauled in 2008 and the Ministry of Finance and Economic Development Planning has used the new law to improve the efficiency and transparency of public financial management. The structure of approved budgets has improved and better reflects the PRSP objectives. Since 2006, more than 70 percent of HIPC resources have been allocated to social sectors (education and health). However, other domestically-financed priority spending sectors (e.g., infrastructure)

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continue to be underfunded. An important success of PFM reforms undertaken by the government has been the creation in 2010 of the Burundi revenue Authority (OBR) and the introduction of the single treasury account.

64. Budget execution has been mixed over the past several years, but has begun to improve as reforms start to take root within public administration. Rates of budget execution in priority sectors were very low in 2006 but increased significantly in recent years, following the improvement in the institutional framework and training programs for staff in ministries (specifically for implementing the new Procurement Code).20 While training on procurement should continue, the government must also strengthen the units responsible for preparing investment projects and selecting the most cost-effective ones. Participants to the Cabinet Seminar of March 2011 endorsed two recommendations of the recent PER (2011), namely: (i) more systematic use of cost-benefit analysis for the preparation of investment projects; and (ii) mandatory project monitoring and evaluation reports. To better control execution, rules on commitments have been tightened and exceptional public spending procedures (Paiements sans ordonnancements préalables), which were widely used in the past, have been brought under control. Finally, most of the existing extra-budgetary accounts (including one from the presidency) have been closed or integrated into budget documents. This is the case for the proceeds (about US$20 million) received by Burundi for its participation in the peacekeeping mission in Somalia (AMISOM).

65. Efforts to improve oversight institutions are also beginning to have an impact. The strengthened Cour des Comptes has begun to play a major role in auditing executed budgets and reviewing critical public finance issues. Its special audit of off-budget accounts, performed at the request of Parliament, was instrumental in the closure of eight of the nine off-budget accounts and integration of corresponding transactions in the 2009 budget. The capacity of Cour des comptes was also reinforced with the appointment of thirty-four new magistrates in April 2011 for six-year mandates.

66. The proposed operations will aim at strengthening fiscal policy and management further still on three parallel fronts. First, it will strengthen the government planning capacity; second, it will improve budget execution with a focus on improved procurement procedures; and third it will reinforce the management of the wage bill.

a. Strengthening strategic and budget planning to improve the quality of public spending

67. Following the adoption of a central MTEF21 and the institutionalization of the MTEF process under ERSG IV-V, the gradual extension of medium-term expenditure frameworks is expected to consolidate further the link between strategic policy objectives and budget allocations. This will be done through three main measures: (i) improving the 20 Improvement on budget execution in Burundi corroborates a recent finding of comparative analysis of PFM systems in post-conflict settings (Box 1). 21 A central MTEF (in contrast to sector MTEF) is a tool developed by central ministries such as the Ministry of Finance and the Ministry of Planning (now combined into a single ministry: Ministry of Finance and Economic Development Planning), which indicates the global envelop of resources expected based on macroeconomic projections and provides expenditures ceiling for each institutions financed through the budget.

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reliability of macroeconomic and revenue projections in order to set credible spending caps, (ii) validation by the Council of Ministers of multi-year inter-sector allocations reflecting the objectives of the PRSP, and (iii) empowering line ministries to propose intra-sector allocations based on their own strategies and priorities. With the help of donors, the government prepared sector MTEFs in health, education, and agriculture. The development of three-year rolling MTEFs in key sectors will address longstanding weaknesses in the link between recurrent and investment spending, and will improve the prioritization of intra-sector expenditures. Unlike in other post-conflict countries where progress was limited, Burundi has in fact significantly improved its budget planning through the development of the MTEF. From 2009 to 2012, its PEFA score improved from “D” to “B”. The recent reorganization of the Ministry of Finance, Economic Development and Planning (which includes Finance and Planning), is expected to further improve the institutionalization of the MTEF process. The proposed programmatic series seeks to consolidate the progress achieved toward program budgeting as planned in the Budget Framework Law (Loi Organique des Finances Publiques). 68. Following the institutionalization of the MTEF process in 2010, all ministries have prepared sector MTEFs, as part of the preparation of the second PRSP and its Priority Action Plan (PAP).22 A proposed prior action for ERSG VI is the adoption by the Council of Ministers and transmission, for informational purposes only, to Parliament of the central MTEF for the period 2013-15, along with the budget framework letter (lettre de cadrage) for the 2013 budget. This action differs from the prior action supported in ERSG V as it requires the transmission to Parliament of the lettre de cadrage and associated MTEF. This process is important not only as it promotes access to information but also as it lays the foundation for the practice of pre-budget debates in the Parliament, which will be supported by the subsequent operations. To promote the timely engagement of a broader range of institutions in the budget / planning process and therefore increase transparency of fiscal choices, a proposed indicative trigger for ERSG VII is the organization of pre-budget debates in the Parliament following the transmission of the medium term fiscal frameworks (the MTFF and MTEF) to Parliament before the review of the draft budget law. The institution of pre-budget debates is in line with the Budget Framework Law23 (Loi Organique) and the presidential decree on budget governance.24 Moreover, this process is expected to reinforce the Parliament’s ability to control the government’s budget strategy and its main orientations.

22 The second PRSP, recently completed, provided an opportunity to refine sectoral strategies, to place these strategies within a medium term framework, and to define targeted outcomes for service delivery. 23 No. 1/35 of December 4, 2008. 24 No. 100/205 of July 24, 2012.

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Box 1: Strengthening PFM in post-conflict countries – what has worked

A 2012 study - joint product by the World Bank's PREM Public Sector Governance Unit, the Bank’s Global Center for Conflict, Security, and Development and the UK’s Overseas Development Institute (ODI) -- captures the experiences, successes, and challenges with PFM reforms in eight post-conflict countries. The review maps PFM reform over a period of 7 to 10 years and achievements to date. The cases include Afghanistan, Cambodia, the Democratic Republic of Congo, Kosovo, Liberia, Sierra Leone, Tajikistan, and West Bank and Gaza. The key findings are that:

PFM reforms are feasible even in challenging post-conflict environments with initially very low skills levels and capacity, even when security concerns remained. Four out of eight countries made substantial progress and a further two made fair progress in strengthening their PFM systems.

• Seeking major debt relief was a key motivating factor for governments. By contrast, having a higher level of domestic revenue did not translate into greater efforts to undertake PFM reforms across the cases and time periods reviewed.

• In most countries, greatest progress was achieved on budget execution - progress on budget planning and accountability was more limited.

• Post-conflict situations can offer a window of opportunity for reforms. In several cases Financial Management Information Systems (FMISs) were successfully introduced. In contrast, success with advanced reforms such as program budgeting were typically less successful.

• Budget accountability reforms are highly dependent on political commitment. Given its importance for developing state legitimacy, accountability is a high priority and demand for good governance initiatives can ensure citizen support (as in the case of the Uganda PETS 2001).

• Countries improving their PFM systems have seen a higher share of external aid passing through country budgets – as opposed to direct donor management.

Burundi’s experiences reflect these findings with some differences. It has made good progress on budget execution, built a FMIS (now encompassing public administration staff, allocations and expenditures) and has introduced a system of cash management. Moreover, unlike the examples studied, Burundi has made significant progress on budget planning with the development of MTEF. The donor community has responded to these efforts and more financial aid is being integrated into the budget.

69. The efficient allocation of expenditures to priority sectors also depends on the use of a sound budget classification consistent with international guidelines (2001 Government Finance Statistics Manual). The World Bank has continuously supported this measure, notably to improve the tracking of pro-poor spending. A ministerial regulation of August 10, 2010 adopted a new budget classification, which unifies budget and accounting classifications, simplifies the structure of the budget, and plans to introduce (as of 2014) a program classification that will better reflect the Government’s policy objectives and how these policies will be implemented.

70. An additional area for policy dialogue will be the budget preparation timetable. While this was already addressed under ERSG II and III, a number of constraints and circumstances (the food crisis in 2008, the international financial and economic crisis in 2009, and presidential and legislative elections in 2010) resulted in continued delays and preventing both Parliament and the Cour des comptes to fully fulfilling their constitutional mandate. The 2011 and 2012 draft budget laws were received only in December, more than two months after the legal deadline and just before the beginning of the next fiscal year. Submission of the 2015 draft budget law to Parliament before November 2014 is therefore a proposed indicative trigger for ERSG VIII and parallel TA will be provided to assist the authorities in tackling persistent bottlenecks.

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b. Reinforcing transparency and efficiency of public financial management, procurement and controls and stimulating the demand for good governance

71. Improving public access to financial information and effective control mechanisms are key dimensions of good governance and conditions for more effective spending. Moreover, this is particularly important in the Burundian context, both to promote greater national cohesion and to demonstrate to the donor community that the government is fully committed to continue and intensify the fight against corruption. 72. In the context of implementing the Budget Framework Law, streamlining the public expenditure chain is key. A presidential decree on budget execution, accounting and control, issued in October 2011, introduced major changes in public spending procedures. It provided for the elimination of redundant Central Bank (BRB) controls, the progressive devolution of budget authority to line ministries, and the strengthening of internal control, through stronger oversight of commitments and strict separation between the budget and accounting functions and the suppression of the Ordonnateur Tresorier du Burundi (OTBU). It also introduced elements of accrual accounting and reinforced cash management. To complement this decree, a second presidential decree on budget governance was issued (prior action for ERSG VI) to outline the framework for fiscal policy formulation and budget preparation as well as the rules for budget discipline and transparency, including the introduction of pre-budget debates.

73. A culture of access to information will progressively improve the transparency of public financial management. During the Cabinet Seminar of March 2011, participants recognized the need for a law on access to information on public spending. As a first step, ERSG V supported the publication of budget documents on the website of the Ministry of Finance. While the number of internet users remains limited in Burundi, civil society groups were able to access budgetary information for the first time and the move also signaled the GoB’s commitment to increase transparency.25 To leverage this positive momentum, the proposed programmatic series supports (prior action for ERSG VI) the publication of comprehensive public procurement awards information (awarded firms, contract amounts and mode of selection) and the 2011 annual activity report of the National Directorate of Public Procurement (DNMP) on the website of the Ministry of Finance, with the exception of contracts of a secret nature (pursuant to the law) and contracts whose amount is below the thresholds requiring the review of the DNMP. Moreover, the GoB will hire an independent firm to assist it in undertaking a comprehensive audit of the procurement system (indicative trigger for ERSG VII). In order to further promote demand for good governance at the local level and ensure that budgetary allocations actually materialize at the service delivery level, the program will support the publication of annotated summary tables in easy-to-understand language and format, which include key sector budget information, wide dissemination in the media and posting in public places (in French and Kirundi), thus enabling citizens to obtain information on sector budget allocations (schools and health centers) in their communes (indicative trigger for ERSG VII). In parallel the GoB will explore ways to stimulate demand for good governance by assisting CSOs and other institutions such as the Ombudsman and the media to develop capacity for data

25 Since 2010, the GoB has continuously published voted budgets and quarterly execution reports of budget on the website of the Ministry of Finance (http://www.finances.gov.bi/fr/).

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analysis and information processing aimed at the citizenry. The planned PETS study (see below) would be a perfect candidate for testing these new outreach systems.

74. External and internal oversight institutions have been strengthened, but little has been done to coordinate their programs, eliminate unnecessary duplication and focus their activities on priority objectives. For instance, the Inspection Générale de l’Etat (IGE - State General Inspectorate) could usefully be empowered to initiate a dialogue with existing internal oversight departments and institutions, with a view to develop consistent, risk-based audit work plans. The State General Inspectorate Decree No. 548/061 of January 25, 2010, created within the IGE a new "division for the management and coordination of sectoral inspections." Staff has been appointed and a work program for the division is under preparation. A proposed indicative trigger for ERSG VIII is that the IGE conducts training for ministerial inspection units and implements a joint audit work-plan.

c. Improving the Management of the Public Wage Bill

75. The rapid growth of the public wage bill remains an important PFM issue, in a context of limited fiscal space. The share of the government wage bill in current expenditures increased steadily over the past decade, from an average of about 37 percent of total recurrent spending in 2001-04 to an average of about 45 percent over the past two years. At about 8.7 percent of GDP in 2011, Burundi wage bill is higher than in most other low income countries (around 6-7 percent).26 To ensure that the wage bill does not critically affect the GoB’s ability to carry-out other priority expenditures and that the civil service effectively delivers useful services, an effective human resource management strategy is needed. It should include provisions for: (i) hiring, retaining and training personnel with key technical skills, such as doctors and nurses whose current salaries are relatively low; (ii) substantial restructuring of the civil service to reduce the wage bill, while improving service delivery; (iii) institutional arrangements to effectively manage payroll and careers; and (iv) improving recruitment and HR planning in line with sector strategies and priorities.

76. Some reforms have been initiated, which must be deepened. First, ERSG IV supported the roll-out of software for human resource management interfaced with SIGEFI. The software has been operational since January 2011 and has already produced significant savings. However, lack of clarity over the most appropriate lead government agency (between Public Administration and Finance ministries) for managing it has hampered its effectiveness. This is why the proposed operation supports the creation of a Center for payroll processing and career management (prior action for ERSG VI) to manage the system with buy-in from both ministries. Secondly, it is important that the authorities validate the census of public employees27 and use the information to update the computerized database (indicative trigger for ERSG VII). Once the database will have been updated and its management handed over to the new Center, the payroll and human resources management system would be audited and an action plan developed based on its recommendations for implementation (indicative trigger for ERSG VIII).

26 See: “Burundi: Options for Reforming Staffing, Pay and the Management of Staff and the Wage Bill”, January 2009. A report prepared through the Economic Management Support Project (EMSP) with financial support from the Japanese Policy and Human Resources Development (PHRD) grant. 27 This update was postponed because of delays in mobilizing the necessary funds

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Table 9: Indicators for PFM Reforms (ERSG VI-VIII Series)

Objective Indicator 1. Reinforcing transparency and

efficiency of PFM, procurement and controls and stimulating the demand for good governance

(i) Gap (amount) between budget ceilings in the MTEF and approved budget;

(ii) Gap (months) between effective budget presentation to Parliament and legal delay;

2. Strengthening strategic and budget planning to improve the quality of public spending

(iii) PEFA indicator PI19-iii on public access to public procurement information;

(iv) Share of public procurement contracts (value) awarded on a sole source basis in the previous year (not to exceed more than 5 %);

(v) Number of joint IGE-Ministerial inspection units' investigations conducted yearly;

(vi) Share of communes where budget information tables are available;

3. Streamlining public wage bill and HR management

(vii) Share of civil servants (%) whose profiles have been updated in the payroll and HR management system (excluding security forces).

2. Private Sector Development promotion and economic diversification

77. Burundi is still at the early stages of the investment climate reform process, but has made steady progress. While many key laws governing private sector activity have been recently modernized, appropriate implementing regulations still need to be adopted to ensure full and predictable implementation of the legal framework. Although Burundi was starting from a very low basis on Doing Business, it was listed among the top 10 investment climate reformers in the 2011 report28 (its ranks improved from 177th to 169th). These recent improvements demonstrate the government’s commitment to promote private sector development and to foster concerted partnership with representatives of the private sector operating in Burundi, but much remains to be done. Historically, private investment promotion has been limited, and there was a very weak dialogue between public and private actors. Decision makers in the public sector are typically ill-informed of the constraints faced by private operators and lack a clear understanding of how their decisions will impact their activities. Likewise, private operators are not always kept in the loop of GoB initiatives in their favor (such as the recent Investment Code), due to limited dissemination and communication efforts. A general lack of mutual accountability between the public and private sectors has also resulted in weak policy implementation of existing rules and laws. Lastly, many of the private, para-public or public enterprises and institutions, including, but not limited to, the Ministry of Commerce, Industry, and Tourism (MoCIT), the National Bureau of Standards, the BRB, the Chamber of Commerce, and the Association of Accountants have limited technical and financial capacity and are unable to provide policy leadership and create the enabling environment for businesses to grow and be competitive domestically, regionally, and internationally.

78. Strategic reforms in the coffee sector have suffered from delays and reversals, limiting productivity gains in this key sector of Burundi’s economy. In 2009, the government launched bids for the privatization of 117 washing stations, which resulted in the sale of 13 stations to an international company. In the context of the 2010 elections, the government

28 Significant improvements in the “protecting investors” indicator largely explain the change in Burundi ranking.

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postponed the second phase of the bidding process (for the remaining washing stations) until after the coffee harvest (after August 2010). Subsequently, the Inter-Ministerial Privatization Committee (CIP) approved the launching of the second phase but the Coffee Reform Committee called for a prior evaluation of the first phase. The evaluation was carried out by experienced national independent consultants and its recommendations were reflected in the bidding documents. The second phase was completed in December 2011 with 28 additional coffee washing stations sold to local investors and one dry mill factory acquired by a foreign investor.

79. The development of the private sector will require actions on many fronts, which are covered in the design of the proposed operation. The reforms targeted through the ERSG VI-VIII series include: (a) improvements in the legal and regulatory framework; (b) liberalization and restructuring of export and services sectors as well as measures to improve agricultural productivity; and (c) an overhaul of the framework for mining sector development. Full implementation of the measures proposed under this new programmatic series should lead to measurable improvements in the business environment, greater private sector participation in the economy and economic diversification as captured by the indicators summarized in Table 9 below.

a. Improving the legal and regulatory framework for the promotion of private sector investment

80. Reducing the time and cost of business start-up and construction permits. About 40 percent of firms in the 2007 Investment Climate Assessment (ICA) reported difficulties in obtaining licenses to operate, and 57 percent of firms reported having to “make unofficial payments to get things done.” Under previous ERSG operations and associated TA (EMSP/FPSD), the government began to address these grievances by enacting a series of legislation including: (i) competition law, (ii) commercial code, (iii) companies act, (iv) privatization law, and (iv) the investment code. In spite of recent improvements, Burundi continues to rank at the bottom of the Doing Business Index, including in terms of the time and cost to start a new business. A priority for the government is now to establish and operate a “one stop shop” for business start-up aimed at reducing processing time and costs. IFC/ICAS as well as the Bank’s Financial and PSD projects are supporting the authorities with financial and technical assistance in setting up these one stop shops currently located in a building of the Burundi Revenue Authority (OBR). This is an agreed prior action for ERSG VI. Moreover, the creation of one stop shop for construction permits to reduce processing time and costs is also proposed as an indicative trigger for ERSG VII.

81. Streamlining fiscal incentives related to new investments. A recent (draft) analysis prepared by IFC/FIAS based on an investor motivation survey suggests that the fiscal incentive scheme is very generous and leads to substantial unrealized government revenue. The study also found that the effectiveness and costs of the incentives regime were not evaluated systematically. In addition, more than 75 percent of investors do not consider fiscal incentives as a major factor in their decision to invest in Burundi. Equally important is that the use of current exemptions is not always transparent, and opens space for abuse and distorts the competitive environment. On this basis, a revision of the fiscal incentives scheme to invest appears to be a priority for both government revenue and the business environment. The disclosure to the public of the full itemized list of tax exemptions granted over the past year and the inclusion in the budget

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document of the estimated value of tax exemptions as a share of tax revenue are therefore proposed as an indicative trigger for ERSG VIII.

b. Improving agricultural productivity and promoting economic diversification through restructuring of export and services sectors

82. Agriculture productivity and economic diversification. Agriculture is the main source of employment, on which more than 80 percent of the population depends. The government’s strategy seeks to raise agricultural productivity, the lowest in the EAC, through strengthening research and extension services centered on coffee and tea (new processing technology and the regeneration of root stock) and identifying new value chains (such as bananas, fish products) through feasibility studies. Key elements in the strategy include:

(i) accelerating the privatization of state assets in the coffee sector (washing, processing and packaging), which is already under way, and expanding services (such as the distribution of inputs -seeds, root stock, fertilizer- and the sale and maintenance of production tools - machinery and pumps), facilitated by improvement of the feeder road network. This is expected to have a demonstration effect on other crops, including the tea and sugar sectors;

(ii) assisting in the organization of farmer associations by strengthening the capacity of INTERCAFE29, which plays an important role for propagating new knowledge and practices and for maximizing farmer purchasing power through cooperative arrangements; and

(iii) encouraging the new owners of washing stations to help finance harvests, improve input distribution, promote the rehabilitation of ageing coffee plants, and introduce modern processing techniques.30

83. Burundi has great export potential in terms of Arabica coffee and initiatives are under way to improve production. As part of a South-South Exchange Program, Burundi coffee growers have visited shade growth coffee in Ethiopia in the context of the preparation of the proposed Burundi Watershed Sustainable Coffee GEF Project. A major international coffee house has sampled Burundi coffee and found that it meets the highest standards for espresso grind and is sponsoring the training of Burundians in advanced coffee processing. The authorities have planned to launch the third phase of privatization for the remaining state-owned coffee washing stations before the end of 2012. As part of this process, the formal authorization by the CIP to SCEP to prepare the launching of the third phase for the sale of the 76 coffee washing stations remaining to be privatized is an agreed prior action for ERSG VI. To leverage greater private sector involvement in the coffee sector, the GoB will need to target public investment at productivity-enhancing projects such as feeder-roads and irrigation schemes (indicative trigger for ERSG VII). Finally, according to the 2011 R-SEA, the use of marginal lands on steep slopes for annual crops can cause soil erosion in high rainfall areas and deposition on fertile lowlands in

29 In May 2011, the Council of Ministers adopted a draft law on the organic framework for pre-cooperative groups. The new legislation, which was adopted by Parliament in December 2011, provides for a transitional period of three years to allow a pre-cooperative to migrate to the status of a cooperative as defined by the law. 30 A discussion should start on the reorganization of the regulatory arena of the export crops sector. More specifically, with the privatization of other agricultural sectors envisaged, the authorities need to decide on the feasibility of the creation of a regulatory agency for each commodity or to transform, for instance, ARFIC into a mega-regulatory agency of the agricultural sector.

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the absence of protective measures, leading to land degradation and thereby affecting the productivity of the agriculture sector. The issuance of regulations related to the mandatory preparation of municipal land-use plans with criteria, standards, and guidelines related to sustainable production (slope farming, presence of trees, farming close to river banks, and so forth) is therefore proposed as indicative trigger for ERSG VIII.

Box 2: Continuing reforms of the coffee sector

84. Reform of the tea sector has been purposefully “lagged” to follow those in the coffee sector. This sequencing approach was decided by the GoB, and supported by donors, in 2008. According to Burundi Tea Board (OTB), liberalization of the sector has effectively begun with the recent establishment of two privately-owned tea processing plants and the reactivation of the tea reform committee (although it has not met regularly). To support this effort, the adoption by the Council of Ministers of a reform strategy for the tea sector is proposed as an indicative trigger for ERSG VII.

85. Supporting divestiture of the state from the sugar sector. SOSUMO, the state-owned sugar producer, has 3,000 ha of plantations and its own sugar mill. Its production is not sufficient to fully satisfy the local demand yet SOSUMO regularly exports to the neighboring countries indicating significant expansion potential. Indeed, SOSUMO is the only producer in the large

Reforms began in 1992, but were interrupted by the civil war. They were resumed in 2005, set back in 2007 and accelerated in 2008. The government still owns most of the sector’s assets (120 washing stations and two large dry mill factories), which are operated by local enterprises (Sociétés de Gestion de Stations de Lavage (SOGESTAL) and Société de Deparcharge et de Conditionnement (SODECO)) under a lease agreement with the government that was amended in 2009.

Coffee accounts for more than 60 percent of Burundi’s export earnings and is the main source of cash income for more than 600,000 rural families that are among the poorest in the country. The Burundian coffee sector is increasingly inefficient and suffers from low and declining productivity due to: ageing plantations, high intermediary costs, and an inadequate incentive framework. Yields are approximately half those in neighboring countries (250/250 grams per tree, versus 450/500 grams in Kenya). Production follows a cyclical pattern and declines significantly from year to year.

The country’s ecological conditions are favorable to the production of high quality coffee that could sell at premium prices on specialty markets. Despite a market structure that allows direct contracting with international coffee buyers, most of the production is sold on the commodity market at relatively low prices due to an ill-adapted processing strategy that does not foster specialty coffee. As a result, fully-washed coffee, which commands premium prices, accounts for only 60 percent of the production versus more than 75 percent when the washing stations were built in the 1990s. Declining and volatile production also affects buyers’ perceptions on the reliability of Burundi as a supplier. Inefficient intermediation under the present ownership structure and marketing rules further increases costs and reduces returns to farmers, which are among the lowest in the sub-region.

The ultimate objective of coffee sector reform strategy supported by the Bank and other donors is to: improve the competitiveness of the chain, to align the long term interests of the private sector and smallholders operating in the vicinity of the washing stations, and to provide added value by adequately financing the sector, modernizing washing stations and other factories and promoting high quality products in a growing world market of coffee specialty.

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sub-regional area. SOSUMO has commissioned technical work and a comprehensive feasibility study to modernize its plant and expand production from 22,000 tons/year to 35,000 tons/year. To finance this project and increase competitiveness, the company, which is still 99 percent state-owned, has recommended a full-fledged privatization. Following the favorable recent government decision and preliminary positive feedback from potential investors, it seems likely that the privatization process will now go ahead with support from the Bank-financed Financial and Private Sector Development Project. The adoption by the Council of Ministers of a restructuring/privatization strategy of SOSUMO is a proposed indicative trigger for ERSG VII.

c. Promoting the development of the mining sector

86. The mining sector represents a unique opportunity to further diversify the Burundian economy. Gold used to be one of Burundi’s main export products, accounting for 30 percent of export earnings in the early 1990s. Since then, the civil conflict hampered the development of the mining sector, preventing technology and infrastructure transfers in this highly capital intensive sector. Burundi possesses large mineral deposits, such as nickel (5 percent of international known reserves), coltan (5th world reserve), and cobalt, which until now have not been exploited commercially. International experience reveals that resource rich countries can avoid the resource curse by focusing on putting in place the appropriate institutions, policies, and laws needed to ensure that the proceeds of these resources benefit all of their citizens (Box 3). This is the approach followed under the proposed programmatic series.

87. As a starting point, Burundi will need to improve the regulatory and institutional environment. The Mining Code31 currently in force dates back to the mid 1970s and is no longer consistent with international practices. A new draft law has been prepared with the assistance of international expertise in mining law. The draft code has been reviewed by the Bank, IFC and the IMF and is deemed to respect best practices. Adoption of the code will help accelerate the EITI membership process under which a modern code would be required for full membership (a process which can take up to three years as was the case for Togo). The code is currently under review by the Ministry in charge of Mining following comments and suggestions provided by the Ministry in charge of Finance and OBR with regard to the fiscal aspects of the draft code. The adoption of a new mining code by the Council of Ministers and its submission to Parliament is an indicative trigger for ERSG VII. To actively promote the development of the sector GoB stewardship will be needed. The creation of an EITI commission with the mandate to implement an action plan toward membership is proposed as an indicative trigger for ERSG VIII.

31 Code Minier et Pétrolier de la République du Burundi (Decree-Law No 1/138 of July 17, 1976).

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Box 3: Avoiding the resource curse, to achieve equitable, sustainable growth

On average, resource-rich countries have tended to grow more slowly than others. Examples in SSA are Guinea, Sierra Leone, Mauritania and Niger. The “resource curse” is well-documented in the economic literature, characterized by: failure to plan for the long term, re-investing revenues to produce sustainable growth; the impact of volatile prices, resulting in a stop/start economy; corruption and imprudent borrowing at high rates – the result of weak governments becoming flush with wealth; slow job growth outside the civil service because of a stunted private sector and the absence of the infrastructure (energy, roads and rail); lagging investment in education and training, leading to shortages of the skills required for diversified growth; and finally, over-valued currencies, making non-resource exports less competitive. Often, countries have got off to a bad start, signing inequitable contracts which fail to capture windfall profits from world-wide price spikes – contracts which lack transparency and accountability relative to production costs and revenues, in part to disguise private rents for well-placed business people and civil servants in the know.

Yet, following in the steps of Canada and Norway which have nurtured and grown their natural resource revenues, other countries have begun to work their way around these risks (notably Botswana in SSA). The counter measures – or guiding principles - are known: the political courage to re-negotiate bad contracts (Australia, Bolivia and Venezuela); commitment to use revenues to promote development (economic infrastructure, development of a strong private sector, training for the skills required by technological change); formulation of robust, transparent and equitable contracts (based on IFC/IMF models) in line with the prescriptions of the EITI; and tight controls on investment to maximize long term economic and social returns, with external controls and high quality advice (sovereign wealth funds such as Norway and Qatar). Finally, a less obvious but powerful control over the use of revenues is embodied in the citizen’s right to know, the product of Demand for Good Governance (DFGG).

EAC countries (Burundi, Tanzania and Uganda) are poised to reap revenues from the extractive industries. Patient negotiation, aided by shared expertise and regional regulations, can help member countries optimize the allocation of revenues, leading to diversified growth for the community as a whole. Clusters of future mining-related jobs include: intermediate processing - e.g. bauxite ore into alumina powder and iron ore into pellets, rail track and road maintenance, telecommunications and IT, metal fabrication, mining equipment and transport mechanical maintenance, hotel and food services, local produce growers and finally health services, with the parallel opportunity for making artisanal mining more productive, more safe and healthier. In West Africa, Ghana, assisted by the Bank, is implementing these guiding principles. As Joseph Stiglitz recently observed in a Uganda seminar, “companies will tell Ghana, Uganda, Tanzania, and Mozambique to act quickly, but there is good reason for them to move more deliberately. The resources will not disappear, and commodity prices have been rising. In the meantime, these countries can put in place the institutions, policies, and laws needed to ensure that the resources benefit all of their citizens.”

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Table 10: Indicators for Reforms in PSD (ERSG VI-VIII Series)

Objective Indicator 1. Improving the legal and

regulatory framework for the promotion of private sector investment

(i) Number of days to register a business at the new “Guichet Unique” (one stop shop);

(ii) Number of days to obtain a construction permit at the new “Guichet Unique” (one stop shop);

(iii) Estimated value of tax exemptions as a share of total tax revenues; 2. Improving agriculture

productivity and promoting economic diversification through restructuring of export and services sectors

(iv) Number of publicly-owned coffee washing stations sold; (v) Percentage of budget allocated to the construction/maintenance of

feeder roads and small scale irrigation; (vi) Number of state tea processing factories sold;

3. Promoting the development of the mining sector

(vii) Number of benchmarks met for EITI membership.

3. Strengthening social protection through safety nets reforms

88. Burundi is characterized by extreme vulnerability to shocks - trade, climate and conflict. As a result, about 60 percent of the population is confronted to food insecurity, leading to suboptimal coping strategies by households and under-investment in human and productive capital. After 13 years of conflict, the urgency of addressing the pressing social and economic needs of the population led the Bank and other development partners to support government’s efforts to implement a variety of social protection programs, including cash for work programs (rural roads, small irrigation works), school feeding, and health care access for pregnant women and children under 5. In addition, many international and national NGOs have launched their own initiatives to help the most vulnerable groups, such as facilitating school access and providing training and psycho-social counseling for disabled and those impacted by conflict.32 Since 2008, the authorities have also taken temporary measures to mitigate the impact of the increasingly volatile international food and fuel prices by removing taxes and tariffs on basic goods consumed by poor households and by expanding their social safety net programs.

89. The GoB has recognized that it needs to do more and better to protect its vulnerable population. Beyond food security, the new PRSP focuses on: (i) the social and economic re-insertion of displaced persons (35,000 persons still live in Tanzanian camps); (ii) women and youth unemployment, particularly in the rapidly growing municipalities (following the example of Ghana’s National Youth Employment Program); (iii) assistance to women who seek to create small enterprise; (iv) enrollment of girls at the secondary school level through scholarships (e.g., Lesotho and Ghana); (v) training and placement of the disabled; (vi) HIV/AIDS prevention, together with programs to educate youth about survival skills regarding STDs, substance abuse, illegal association and education/training counseling (youth survival programs in Latin American Countries); (vii) functional literacy programs for productive adults; and (viii) assistance to marginalized groups such as the Batwa. In addition, while the duty exemptions on staple food

32In May 2012, to cope with the impact of rising inflation on households' welfare, the GoB suspended for a period of six months, taxes (import taxes and VAT) on basic food commodities (imported and local) consumed by the poor. The measure is estimated to have caused fiscal revenue losses of about US$8-10 million.

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items were broadly positive (with clear albeit delayed pass-through to domestic prices), this has been a costly policy. In the future the ability to better target social protection interventions will be critical both from equity and efficiency points of view.

90. The GoB is developing a national strategy for mainstreaming social protection in all the sectors mentioned above. The current efforts are short-term responses to urgency, which are largely uncoordinated (with no lead agency), poorly targeted and possibly redundant.33 Given the growing needs and the multiplicity of programs, there is some urgency to create the institutional capacity to develop and implement social protection policies and to back-stop them with technical and analytical support to design cost-effective programs based on best practice (for impact assessment, beneficiary evaluation and the development of local oversight mechanisms).

91. The ERSG series places social protection at the center of the policy dialogue. The goal is to maintain momentum and begin creating institutional leadership in an area that requires cross-sector involvement, and to support the GoB’s medium and long term efforts to design and implement a coherent social protection framework in a fragile country. It will also be a key element of the Bank Group response under Pillar II (Resilience) of the CAS.

92. The proposed assistance for social protection is incremental. There is no prior action under ERSG VI, simply because much prior analytical work and consensus building still need to be carried out before policy interventions can be credibly contemplated. The government recently adopted a social protection policy prepared with ILO support. However, this strategy is not comprehensive and does not include a clear action plan. A key first step will be to carry out a comprehensive social safety nets assessment undertaken by a Task Force whose appointment is a proposed indicative trigger for ERSG VII. This Task Force will also oversee the development of a comprehensive social protection strategy and action plan for implementation. Moreover, the Task Force would have the critical task of coordinating (and providing TA to) departments and agencies responsible for social protection service delivery, as well as local government and CSO providers. Another proposed indicative trigger for ERSG VII, and main mission of the Task Force (jointly with the statistical office), is the completion of a Household Expenditure survey and National Poverty Map, which will provide invaluable information for social protection targeting. The adoption of a comprehensive (updated) strategy of safety nets (with an action plan) and allocation of required financing is a proposed indicative trigger for ERSG VIII. Another proposed indicative trigger for ERSG VIII would be the carrying out and publicly disclosing of the results of a public expenditure tracking survey (PETS), including beneficiary assessments of service delivery in social sectors to better monitor poverty-reducing expenditures.

33 The draft 2013 budget will make provisions for feeder roads and irrigation works and to the financing of existing safety net programs (school feeding and free health care programs), especially important for household headed by women. A safety nets program for youth and women’s employment in rural infrastructure is envisaged (examples of Ghana and Vietnam).

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Table 11: Indicators for Social protection measures (ERSG VI-VIII Series) Objective Indicator

1. Strengthening safety nets systems

(i) Percentage of the extremely poor households covered by at least one of the main safety nets programs.

2. Improving targeting of social service delivery

(ii) Poverty rate data and a detailed poverty map available based on a new household consumption survey

VII. GRANT FEATURES

A. Poverty and Social Impacts

93. The proposed ERSG series supports the GoB’s development and poverty reduction program. Improvements in the management of scarce public resources will free up space to finance PRSP priorities and measures targeted at (i) expanding access to essential social services (ii) creating employment, especially for the youth, and (iii) mitigating the impact of price and climatic shocks on the livelihood of vulnerable/rural households. These three areas are critical to sustainable and shared growth, as evidenced in the 2010 CEM, since they will not only optimize the use of fiscal policy but also simulate private sector growth.

94. Measures supported by this operation could have a significant positive distributional impact. Poorest households should be favored through the expected improvements in public spending, which should extend access to better social services and infrastructure to a broader range of the population. The emphasis given to social protection should also lead to improved living conditions for the most vulnerable groups. Lastly, the improvements in the business environment should encourage the creation of new enterprises (as well as foreign investment), which in turn would generate additional jobs and help absorb a fast growing young population on the labor market as well as demobilized military and police forces.

95. The focus on agriculture should help generate productivity gains that will translate into higher revenues for most rural households. Privatization of public enterprises and coffee washing stations will transfer assets from the public sector to the private sector. A growing private sector in agriculture and rural development will create additional jobs for skilled workers in the areas of technical services (extension and research , maintenance and repair of equipment, equipment leasing and financing), as well as in rural infrastructure – feeder roads, irrigation works, fish ponds and environmental protection (flood control, anti-erosion measures). The private sector is expected to bring some level of modernization to the agriculture and rural development, which will require a skilled labor force. Agricultural services will also create employment for un-skilled workers – in transport (delivery of key inputs: seeds, root stock, fertilizer) and product transformation, packaging, and phyto-sanitary treatment of crops and harvest. New formal employment in these areas will bring cash into a subsistence economy. Another transformative aspect is the organization of farmer groups to facilitate the transfer of new technology and the development of cooperative purchasing of inputs and services – an important dimension of coffee and cocoa modernization in Cote d’Ivoire and Ghana (supported by successive DPOs).

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96. The liberalization of the coffee sub-sector (to be followed by tea and sugar) will not only improve overall productivity and efficiency but also result in tangible gains for coffee farmers. Prior to the launch of phase I of privatization –in the context of the first ERSG- a detailed PSIA was carried-out in 2004 to assess the likely distributional impact of liberalization / privatization. Its findings, which were widely disseminated and discussed, concluded that (i) perpetuation of the status quo would have a clear detrimental impact on all actors in the chain, given the disastrous financial and technical position of the sector, and (ii) the liberalization of the sector would increase incomes of Burundian coffee farmers by allowing them to retain a higher share of international prices. Preliminary post-reform evidence suggests that liberalization of the sector has translated into higher incomes for coffee growers (55 percent of international price post reform compared to 50 percent before) because of greater competition and transparency. Moreover, coffee growers who have been selling their production to the private operator Webcor have benefited from upfront payments on the basis of prevailing world prices (as opposed to the combination of ex-ante advances and ex-post bonuses provided by the State-owned SOGESTALS). Lately, specific resistance has been encountered and will probably continue from the National Confederation of Coffee Growers (CNAC). The CNAC represents around 10 percent of coffee farmers and was receiving an allocation of around 5 percent of the price of each kilogram of coffee sold for their operations before the reform. This rent disappeared with the reform, explaining to a large extent the organization’s discontent.

97. To ensure as broad as possible a consensus on coffee sector reform, the Bank will continue to closely monitor the impact of supported reforms. A new PSIA will be carried out to better assess ex post the distributional impacts of the reforms (specifically on the rural poor). Such assessment will allow the GoB to make adjustments it sees fit to its privatization strategy (a national priority) and take any needed corrective actions (such as through social protection programs and/or improved sector regulation). The supported Household Survey and Poverty map will provide a critical factual basis to identify potential losers from the reform and design remedial actions and policies (such as through safety nets). The Bank will also continue its comprehensive engagement to support Burundi’s rural poor including through actions to increase local participation in the coffee industry (including farmers organizations), to support farmers’ cooperatives through the agro-pastoral project and through the social protection agenda

98. Resistance to reform is expected as vested interests will be challenged. Resistance is expected with respect to measures to (i) promote state disengagement from productive and commercial activities, (ii) enhance transparency and accountability in public procurement and the regulatory framework for mining, and (iii) improve efficiency and transparency of payroll management. This being said, the proposed program fully leverages ongoing government initiatives that are nationally owned in all these areas and will generate tangible benefits for (i) reformers in government, and (ii) the general public. The Bank plans to provide a technical assistance to support government’s efforts to transform Burundi’s mining sector and strengthen the country’s diversification agenda.34

34 During the appraisal mission, the authorities indicated the importance and the need of a technical assistance for the transformation of the mining sector. Initially, the TA will look at the transformation aspects embedded in the draft mining code.

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B. Implementation, Monitoring and Evaluation

99. Monitoring and evaluation arrangements for this operation will continue to rely on government systems while introducing the control of DFGG. The aim is to strengthen government capacity and institutions, with particular attention to the regularity and quality of the M&E process and its outcomes. Sector or issue specific technical units, working on specific dimensions of the reform program (including prior actions and triggers) will provide information to the Technical Coordinating Unit, which includes a representative from the Permanent Secretariat for Economic and Social Reforms (Secrétariat Permanent pour le Suivi des Réformes Economiques et Sociales). The Secretariat is the technical committee tasked with monitoring progress in implementing the PRSP as well as the overall reforms agenda of the government; it provides regular progress reports to national policy makers (such as the second Vice Presidency and the Inter-Ministerial Committee for the follow-up of the reforms), and ensures coherence and synergies.

100. DFGG refers to the ability and extent of citizens, civil society organizations, and other non-state actors to hold the state accountable and to make it responsive to their needs. In doing so, DFGG enhances the capacity of the state to become transparent, participatory, and accountable in order to respond to these demands. DFGG “demand-side” activities support good governance by enhancing and building capacities of state and non-state institutions and supporting projects, programs and partnerships that promote, facilitate, mediate, respond to and monitor good governance. The state (supply-side) and non-state actors (demand-side) work together. Thus, civil society organizations, can promote access to information, participation, and monitoring mechanisms for DFGG. While, in the same way, a state run institution can disseminate information about government spending and programs, and engage citizens and provide feedback to the government, which is also clearly promoting the demand-side of DFGG. Similarly, ad hoc institutions such as the Office of the Ombudsman also function as arbitrators of the demand-side for DFGG.

101. Under the proposed CAS, a robust M&E system would be developed to serve both government and citizens, reflecting ongoing world-wide initiatives to build good governance. As in the first CAS, the government responsibility for monitoring and evaluating the CAS would rest with the PRSP oversight commission. The commission would be strengthened by technical assistance and training in the areas of M&E systems – technical design, statistical analysis, mechanisms for reporting, for public education and for citizen consultation and participation. The network of correspondent sector ministry M&E units would receive similar support. On the demand side, key institutions would be selected and strengthened in their role of defending citizen rights, informing and educating the public about government and ministry/agency performance, and supporting civil institutions and agencies to provide oversight of government policies, programs and projects, with representation of the political parties, the trade unions and special interest groups (inter alia, women, youth, the displaced and the disabled). The National Commission for Social Protection would be a major actor, helping build and streamline social and economic responses to emerging needs.

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102. The Coordinating Technical Unit in turn reports to the Policy Committee. This Policy Committee (appointed by the Second Vice-President and chaired by the Minister in charge of Finance) includes representation from relevant ministries and the second Vice-Presidency. It already supervised the implementation of the economic reforms program under the first and second ERSG programmatic series (II-III; IV-V). It will also monitor progress on the ERSG VI-VIII program.

103. The operation benefits from the consultation mechanism established for the PRSP, among others. The Cellule des Réformes in the Ministry of Finance and Economic Development Planning works closely with the Permanent Secretariat for Economic and Social Reforms in the PRSP secretariat. Both were actively involved in design and preparation of the operation. The team will continue to work with them as well as with the chamber of commerce on private sector issues.

104. The M&E structure takes into account the scope of the proposed reform in each sector or area in defining the nature and complexity of the national intervention. The existing technical units at the MFEDP, Ministry in charge of Public Administration (MFP), Ministry of Good Governance and Privatization (MOGG), and the Ministry of Commerce, Industry and Tourism (MoCIT) remain primary interlocutors for the development and follow up of reform program in PFM and PSD. The technical committee for business environment at the MoCIT is complemented by representatives from private sector (Chamber of Commerce) and other relevant ministries and agencies (such as MFEDP, MOGG, API, Tribunal of Commerce, and OBR) to ensure inter-ministerial coordination and development of a unified vision for the PSD reforms and their expected outcome. For reforms in the coffee, sugar and tea sectors, public enterprises, mining sectors, and social protection the contact for technical monitoring and evaluation is directly with the related institutions.

105. On the side of Development Partners, the Cadre de Partenariat provides a forum to align the reform program with complementary interventions and joint monitoring. The authorities will prepare and share with the Bank a bi-monthly progress report on the program, within two weeks of the end of the period. The following box summarizes the type of information to be included in the monitoring report.

Box 4: Provision of Program-Related Information to the Bank

1. Statistics on yearly enterprise creation and time from beginning to end of the process (One stop shop);

2. Yearly data on tax expenditures and revenues (Ministry of Finance);

3. Budget documents including the Medium Term Expenditure and Fiscal frameworks, adopted budgets and budget outturn (Ministry of Finance);

4. Detailed information on all public procurement contracts (National Directorate for Public Procurement);

5. Detailed budget data on transfers to social service facilities (education and health) by geographic location (Ministry of Finance);

6. Updated statistics on civil service staffing and wage bill (Payroll Management Unit)

7. Itemized budget data on budgeted investment in rural/agricultural infrastructure (fertilizers, irrigation) with outturn data (Ministry of Finance);

8. Itemized data on import tax exemptions by type and volume (Ministry of Finance);

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9. Information relative to Burundi’s EITI membership;

10. MFEDP and REFES will provide any additional information deemed necessary to ensure effective monitoring of the program.

C. Fiduciary Aspects

106. Burundi’s financial management systems remain weak, but risks are mitigated by strong GoB commitment to improve and the operation’s focus on core PFM areas. There are gaps in budget formulation and execution, financial reporting, procurement, and oversight. There is also typically a weak linkage between agreed policies, budget planning, and execution. In Burundi, these typical weaknesses have been compounded by loss of institutional memory and human capital during conflict years. At the same time, previous budget support operations have already supported improvements in Burundi’s PFM systems, including transparency and accountability and continued GoB buy-in into the program is a positive sign that it is serious in pursuing further reforms. Improvements in this area continue to be the objective of the proposed ERSG VI.

107. The Central Bank’s capacity to ensure transparent management of funds is limited, requiring the use of a dedicated account. A safeguards assessment of the Burundi Central Bank (Banque de la République du Burundi, BRB) was performed in 2006 and updated in June 2008 and December 2010. The updates noted improvements (e.g., external audits have been completed on a more timely basis and audited financial statements comply with International Financial Reporting Standards (IFRS) and are published). However, they also identified significant remaining control weaknesses and recommended more robust controls over domestic disbursements to the government and its creditors, including contracting an external auditor to review such controls. Other recommendations included a continuation of semi-annual audits of disbursements to the government, and establishing guidelines for investment operations. The Governor of the Central Bank and the authorities have committed to implementing these recommendations. In June 2011, the authorities recruited an international auditor to: (i) monitor the full implementation of all the recommendations formulated in Deloitte's 2010 special audit reports (consistent with the 2010 agreed-upon action plan between Burundi's central bank and the Ministry of Finance and Economic development Planning); and (ii) verify on a test basis the controls on significant domestic disbursements and transfers executed by the central bank on behalf of the government or its creditors during the first half of 2011. All of these recommendations are closely monitored under the IMF’s ECF program. Until the recommendations contained in the action plan are demonstrably implemented, this operation will require the use of dedicated account at the BRB.

D. Disbursement and Auditing

108. A single-tranche of SDR 16.5 million (US$25 million equivalent) will be disbursed upon effectiveness. The proposed grant will follow the Bank’s disbursement procedures for development policy operations. Grant proceeds will be disbursed against satisfactory implementation of the development policy program.

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109. Funds will be deposited in the dedicated account following IDA’s assessment of the Recipient’s performance in terms of program implementation and macroeconomic policy framework. Once the IDA grant is approved and becomes effective, and provided the Association is satisfied with the program being carried out by the Recipient and with the appropriateness of the Recipient's macroeconomic policy framework, the proceeds of the grant will be deposited at the request of the Recipient by IDA in a dedicated account at the Central Bank designated by the Recipient and forming part of the official foreign exchange reserves of Burundi. Within a week, the Central Bank will credit the local currency (Burundi Franc) equivalent of the grant proceeds to the government Treasury account. The BRB will not impose any charges or commissions on the government for these transactions. The conversion from United States Dollar to Burundi franc will be based on the prevailing exchange rate on the date that the funds are credited to the Treasury Account. The government will be required to provide confirmation to IDA that an amount equivalent to the grant proceeds from the IDA has been credited to the Treasury Account, with an indication of the exchange rate applied and the date of the transfer. The Government of Burundi will provide a written confirmation to IDA within thirty days of disbursements. The confirmation will include the local currency amount credited to account that is used to finance budgeted expenditures, the exchange rate applied and the date of the transfer. If the proceeds of the grant are used for “excluded expenditures” as defined in the Financing Agreement, IDA will require, the Recipient to refund an amount equal to the amount of said payment to IDA promptly upon notice from IDA. Amounts refunded to the Association upon such request shall be cancelled. The administration of this grant will be the responsibility of the Ministry of Finance and Economic Development Planning. IDA reserves the right to request an audit of the dedicated foreign currency account.

E. Environmental Aspects

110. The prior actions of the proposed ERSG program are unlikely to cause significant effects on Burundi's environment, forests and other natural resources. ERSG VI-VIII will provide general budget support to the government of Burundi. Policy actions aimed at improving public financial management procedures and private sector development are, in themselves, not likely to have any significant effects on the country’s environment, forests, or natural resources. Policies aimed at supporting agricultural-productivity enhancing expenditures are likely to reduce the pressure on land. Moreover the new mining code (to replace the current 1974 code) includes much more stringent environmental regulations and safeguards. Given limited implementation capacity, a technical assistance envisaged in the new CAS will support the authorities in the implementation of the mining code including EITI membership and monitoring mining environmental regulations.

111. The coffee/tea sector reform components of the program will target productivity and efficiency gains. Following a review of the conclusions and recommendations of a divestiture study, the coffee sector reform strategy aims to increase coffee output, improving quality, and increasing the share of producers in border prices. The increase in output is expected to come—at least initially—from improvements in productivity of existing coffee growing areas, which fell to extremely low levels over the past 15 years and more efficient use of available land, not through forest clearing and extending production into marginal lands and commons. Improvement in the quality and price of Burundi’s coffee is expected to come from more effective use of existing washing stations and from a better marketing strategy. Ideally the

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reform program will help restore the production of Burundi’s coffee to the level already reached before the crisis of the 1990s. No significant environmental impact is foreseen as a result of increased coffee output initially. A detailed and comprehensive analysis of potential environmental impacts and mitigation options recently undertaken through a “strategic environmental assessment” (RSEA) of the coffee sector in Burundi confirmed the limited environment impact of coffee reform. A similar exercise for other export crops is also envisaged in the near future.

F. Risks and Risk Mitigation

112. Despite strong GoB ownership of the program, risks remain in a context of enduring institutional, political and economic fragility. Non-negligible risks stemming from these weaknesses are mitigated by:35 (i) the design of the proposed operation focused on limited and feasible actions aligned with the GoB’s own strategy; (ii) the strength of the government’s ownership and commitment demonstrated over the past series; (iii) active and continuous policy dialogue between the Bank and the government; and (iv) close collaboration with other donors with linkages to provide complementary technical and financial assistance.

113. Political risks remain high despite improvements over the past years. Risks of renewed political instability or resurgent violence that could derail government focus or steadfastness are mitigated by: (i) the program’s alignment on PRSP priorities, that benefit from wide popular support; (ii) direct efforts to cement political buy-in in GoB, such as the March 2011 high-level Cabinet Seminar which focused on unleashing economic growth, fiscal space creation and improved governance; (iii) active dialogue with civil society and the private sector to ensure demand side pressure for reforms.

114. Macroeconomic risk and fiscal pressures could limit the GoB’s willingness to prioritize spending in growth promoting and vulnerability reducing areas and compromise the soundness of the overall macroeconomic framework. The success of the proposed reform program is contingent on Burundi’s ability to continue to maintain macroeconomic stability, in conformity with its program with the IMF. The weak performance of the agricultural sector (generally exacerbated by external shocks) has affected economic growth and overall macroeconomic performance. The narrow export base and low revenue mobilization capacity exacerbate debt distress risks for both the short and longer terms. Further, many of the public enterprises are in poor financial shape and can have serious impact on the government budget in terms of direct and contingent liabilities. Moreover, if donor grants diminish substantially, there is a slight risk that the financing gap in the following years may be larger than initially projected. To mitigate these risks IDA, IMF, and other development partners will work closely with the government to help monitor macroeconomic developments and take corrective actions in a timely manner. The government will need to ensure more grant funding and concessional

35 As a result of the risks identified, the Bank faces reputational risks in supporting programs in post-conflict countries, especially as regards political instability that leads to substantial delays in reform implementation and governance issues. However, it should be noted that in the context of Burundi, the cost of the Bank not getting involved will be higher than these reputational risks. To mitigate these risks, the team will work closely with the authorities to ensure that: (i) simplified and realistic measures are included in the program; (ii) governance measures are implemented, especially in public finance management; and (iii) the locomotives of growth are started at the earliest.

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borrowing, and foster continued economic and export growth to avoid debt distress. In the medium term, diversification of the economy—a main objective of the authorities and the proposed ERSG program—through improvements in the business environment and reforms in the mining sector will mitigate the vulnerability of the economy to these shocks.

115. Exogenous risks (climatic shocks and international markets). Burundi is vulnerable to climatic shocks (almost a quarter of its GDP and 90 percent of its labor force are agriculture based) and is exposed to variations in international markets. These risks could compromise adherence to the overall macroeconomic framework and deepen poverty and vulnerability. With the recent decline in maize production in the US, countries in the sub-Saharan Africa are likely to be impacted. Mitigation measures include close and regular macro-monitoring by IDA, IMF, and other DPs, to identify shocks and remedial actions. The program itself will foster Burundi’s resilience to external shocks at the macro level, by promoting economic diversification and safety net programs for the most vulnerable households. Moreover, IDA’s ongoing agro-pastoral project aims to improve the resiliency of the agriculture sector to external shocks through technology acquisition, small scale irrigation and improved market access. Furthermore, ongoing global financial instability, notably in Europe, could result in steep decline of donor assistance. Burundi is extremely vulnerable to reduced aid inflows, as grants represented 22.7 percent of GDP in 2010 and nearly 60 percent of total government resources, as the Government garnered international support for political and economic reforms. Grants as a percentage of GDP are expected to decline, to 20.7 percent, in 2012, while room for increasing fiscal space through taxation is limited. The Bank’s program will help Burundi maintain external assistance by supporting continued reforms in public financial management, the public wage bill, accelerated export earnings, and improving the business climate through transparency and anti-corruption measures.

116. Institutional capacity weaknesses could delay key reforms and affect program performance. Lack of technical capacity could lead to delays in the implementation of reforms. The risk of weak technical capacity is mitigated by (i) concentrating on a limited number of themes/areas; (ii) leveraging technical support from ongoing IDA projects (i.e. Economic Management Support Project and Financial Sector Development Project); (iii) working with other donors to better target the focus of technical assistance.

117. Fiduciary and economic governance risk. As the recent PEMFAR and the PEFA revealed, economic governance remains a challenge and a source of continued risk. Recent reforms in Procurement and PFM, supported in part by the ERSG program, have helped to mitigate this risk. The recent adoption of a national governance strategy, following the Governance and Anti-Corruption (GAC) survey and the 2008 PEMFAR, demonstrate government commitment to improve governance.

118. Most of the above risks are interconnected. For example, a deterioration in governance could reduce aid inflows that will in turn increase the country’s financing gap and create significant trade-offs in terms of macroeconomic management. Similarly, an exogenous shock (e.g. higher food prices) will create social and political pressures that may force the Government’s interventions through additional safety nets or alternative measures. Those are likely to have significant fiscal costs, that will have to be financed by additional external assistance or, if not available, by cutting public expenditures. The last option would be to

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increase the fiscal deficit with the danger to destabilize the macroeconomic environment and create higher inflation. The key message is that Burundi remains a fragile country, exposed to a variety of domestic and external shocks that may feed each other, and so will require sustained support both in the short to longer horizons. Nonetheless, this support has to be anchored on a strong program –such as the new PRSP, to avoid possible deviations to basic principles of good governance and macroeconomic management.

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Annex 1: Burundi ERSG VI - Good Practice Principles on Conditionality

Principle 1: Reinforce country ownership The Government of Burundi is strongly committed to the reforms supported under the operation. The grant supports the government’s PRSP, which was developed in a participatory manner involving consultation of a wide range of stakeholders and including 17 provinces and sectors. The process was led by the Permanent Secretariat for Monitoring Economic and Social Reforms, with the support of international partners and local non-governmental organization (NGOs), quantitative and qualitative surveys were undertaken in all the provinces and more than 145 grassroots civil society groups were consulted. The Bank has actively supported the government in this process. The new PRSP, under preparation, is following the same participatory process. Principle 2: Agree up front with the government and other financial partners on a coordinated accountability framework The government and the budget support donors have agreed on a common framework “Cadre de Partenariat” and the government is implementing a PFM action plan based on the PEMFAR (2008) and the PEFA (2009) around which donors can consolidate their support. Principle 3: Customize the accountability framework and modalities of Bank support to country circumstances The ERSG series is fully aligned with the PRSP and has been developed through extensive consultations with the government, the private sector, and development partners. The ERSG series should be seen as the overall umbrella for the Bank’s support and policy dialogue, which is complemented by specific projects providing focused investment assistance. Budget support is seen as necessary instrument to address the budgetary needs of Burundi while strengthening the government’s systems. The series is designed to give the necessary space to develop critical, but sensitive, reforms in coffee and public enterprise reform as well as reviewing progress made in the energy sector reform. This approach is fully consistent with the government objectives, and in some areas broadens the setting of the policy dialogue to multiple stakeholders, beyond government policy declarations. Principle 4: Choose only actions critical for achieving results as conditions for disbursement The ERSG series focuses on a few selected prior actions and triggers that are based on the PRSP. The prior actions and indicative triggers were chosen based on extensive discussions with the authorities and the private sector to identify the actions that would be critical steps for implementing the government’s program within a realistic timeframe. They would provide meaningful outcomes and help loosen major constraints or facilitate further reforms. Principle 5: Conduct transparent progress reviews conducive to predictable and performance-based financial support A full and close supervision of the program progress review will take place in line with the agreed Partnership Framework between the Government of Burundi and the budget support donors.

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Annex 2: Burundi ERSG VI – LIC Debt Sustainability Assessment (December 2011)

1. Burundi’s stock of external public and publicly guaranteed (PPG) debt has declined significantly since 2008. This reflects debt relief under the enhanced Highly Indebted Poor Countries (HIPC) Initiative and the Multilateral Debt Relief Initiative (MDRI). Nominal external PPG debt amounted to US$455 million or 22 percent of GDP in 2010 while the PV of debt-to-exports ratio stood at 150.8 percent.36 About 90 percent of Burundi’s outstanding nominal external PPG debt was owed to multilateral creditors, with bilateral creditors accounting for the remainder. Efforts to secure HIPC Initiative debt relief from all creditors are continuing.37

2. Burundi is a weak policy performer for the purpose of determining the debt burden thresholds under the Debt Sustainability Framework (DSF). Burundi’s rating on the World Bank’s Country Policy and Institutional Assessment (CPIA) averaged 3.07 (on a scale of 1 to 6) during 2008–10, making it a weak policy performer.

3. Under the baseline scenario, there is a breach of the PV of debt-to-exports indicative threshold. The PV of debt-to-exports ratio will remain above the 100 percent threshold over the medium-term, mostly due to its narrow export base, and decline below its threshold toward the end of the projection period. In contrast, the PV of debt-to-GDP, the PV of debt-to-revenues, the debt service to exports ratio, and the debt service to revenue ratios are expected to remain well below the indicative policy dependent thresholds throughout the projection period (Text Table 2).

4. Alternative scenarios and stress tests suggest that almost all other debt indicators will exceed their indicative debt burden thresholds. The threshold for the PV of debt-to-GDP ratio will be breached under the lower non–debt-creating flows and combination stress tests by a modest amount over a protracted period. The threshold for the PV of debt-to-revenues ratio will be breached marginally under a combination stress test for one year only. The indicative threshold for the debt service to exports ratio will be breached by a small margin under the combination stress test for four years.

36 This concerns General government (on a gross basis). As noted in the Technical Memorandum of Understanding, debt contracted by state-owned enterprises (SOEs) with a government guarantee is included in debt limits and therefore in the Debt Sustainability Assessment (DSA). 37 Among multilateral creditors, agreements have been signed with the Arab Bank for Economic Development in Africa (BADEA), the EU, and the OPEC Fund for International Development (OFID), while negotiations are ongoing with the International Fund for Agriculture Development (IFAD). Among non-Paris Club creditors, agreements have been signed with Kuwait, Libya, Saudi Arabia and the United Arab Emirates (UAE). The People’s Republic of China cancelled all of its claims during the interim period. The terms of some of the signed agreements were less favorable than those envisaged under the HIPC Initiative.

2010 DSA Act.

2010 DSA Act.

National income and pricesReal GDP growth 3.5 3.5 3.9 3.8Consumer prices (end of period) 4.6 4.6 8.0 4.1

External sector

General governmentRevenue (excluding grants) 13.6 13.6 13.5 14.6Total expenditure and net lending 28.8 32.2 36.5 37.3

Overall balance Cash basis, after non-HIPC grants) -3.8 -3.8 -3.7 -3.3

External sector

Current account balance -10.6 -11.5 -6.6 -9.9Gross official reserves

End of period (US$ million) 323.0 323.0 310.7 332.0In months of imports of the following year 6.5 5.0 6.0 4.8

Sources: Burundian authorities and Fund staff estimates.

(Annual percentage change)

Text Table 2. Burundi: Macroeconomic Assumptions and Outcomes, 2009-10

2009 2010

(Percent of GDP, unless otherwise indicated)

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Finally, the indicative threshold for the debt service to revenues ratio is the only one that is not breached under any alternative scenario and stress test.

5. Alternative scenarios and stress tests suggest that the narrow export base is the most significant factor of vulnerability to Burundi’s debt sustainability. The indicative threshold for the debt service to exports ratio will be breached by a small margin in the medium-term under the combination stress test (Table 2, scenario B5, of the DSA). A similar breach occurs under the historical exports stress test (Table 2, scenario B2, of the DSA). Finally, the indicative threshold for the PV of debt to GDP, PV of debt to revenue, and debt service to revenue ratios are not breached under any alternative scenario and stress test.

6. Alternative scenarios and stress tests highlight the risk of further deterioration in the PV of debt-to-exports ratio. The most severe breach of the indicative threshold for the PV of debt-to-exports ratio occurs under a decline in export value growth (Table 2, test B2, of the DSA). Under these circumstances, the PV of debt-to-exports ratio at the end of the projection period is higher by about 78 percentage points compared to the baseline scenario. This result underscores the importance of improvements in the business environment to encourage investment flows, and export diversification to reduce vulnerability to shocks. The alternative scenario based on new borrowing at higher interest rates (Table 2, scenario A2, of the DSA) shows that there is a protracted deterioration in Burundi’s PV of debt-to-exports ratio compared to the baseline scenario. This result underscores the need for continued reliance on grants and highly concessional financing. Finally, the historical scenario (Table 2, scenario A1, of the DSA) suggests a sizable and protracted deterioration of the PV of debt-to-exports ratio. While important, the results of the historical scenario should be interpreted with caution, given Burundi’s history of conflict.

7. Public debt indicators are expected to gradually improve under the baseline scenario. The improvement is due primarily to a decline in the public sector borrowing requirement, reflecting the widening of the revenue base and the gradual decline in government spending in the post reconstruction period. The ratios of the PV of public debt to GDP and public debt to revenues remain low, reflecting Burundi’s reliance on grants and highly concessional loans to finance reconstruction and poverty reduction.

8. The alternative scenarios and stress tests show that public debt indicators can worsen rapidly, especially in the absence of fiscal consolidation, and lower economic growth. Under the scenario of lower GDP growth (Table 4, scenario A3, of the DSA), the PV of-debt-to revenues ratio at the end of the projection period will worsen substantially compared to the baseline scenario. This result highlights the need for fiscal prudence and avoidance of past unsustainable borrowing policies. Preparation of a medium-term debt strategy will be essential for anchoring fiscal policy.38 The debt service to revenue ratio is not significantly affected by alternative scenarios and shocks because additional borrowing is expected to be on highly concessional terms.

9. Burundi will continue to face a high risk of debt distress. The PV of external debt-to-exports ratio will exceed the country-specific debt burden threshold in the medium-term and is

38 The caveat concerning the suitability of the historical scenario in a country marred by conflict applies.

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expected to be just below its threshold towards the end of the projection period. In addition, under alternative scenarios (including low growth and higher interest rate new borrowing) and stress tests two debt indicators exceed the country-specific debt burden thresholds. To mitigate risks to debt sustainability, staffs encourage the authorities to continue to rely on grants and highly concessional loans to meet financing needs, and further strengthen debt management. In addition, staffs advise the authorities to intensify structural reforms in order to diversify the export base, address existing infrastructure bottlenecks that hinder growth, and encourage private sector development by improving the business environment. Finally, staffs urge the authorities to continue efforts to improve tax administration and widen the tax base to reduce reliance on foreign financing.

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Annex 3: Burundi ERSG VI – Lessons Learned from other IDA operations

The lessons of these operations can be summarized as follows:

• Bank-financed Development Policy Operations had a major influence on government policies. Specifically: (i) they helped stabilize the economy and improve public financial management systems; and (ii) they encouraged the government to give high priority to pro-poor public spending in key economic and social sectors.

• Selectivity and donor coordination is important in the selection of prior actions and triggers. The design of some DPOs (notably ERC and ERSG I) was too complex39 and beyond the capacity of weak public institutions in a post-conflict situation. This was exacerbated by the need for the government to implement policy reforms supported by other donors, which, according to government officials, served the same objectives as the Bank’s program, but whose conditions and timetables were not always fully consistent with specific aspects of Bank operations.

• ERC and ERSG I addressed politically sensitive privatization and export crop restructuring issues, which should have been better prepared, both technically and politically. This preparation should have included not only detailed diagnostic studies, but also extensive consultations with all stakeholders, including farmers’ organizations and potential domestic and foreign investors. The Economic Management Support Project (EMSP), approved by the Board in 2004 and restructured in 2007, eventually financed these studies and extensive consultations with stakeholders were organized in 2008.

• ERSG II and III adopted a programmatic approach to reform, thus helping to ensure the continuity of reforms in an otherwise unpredictable post-conflict policy environment. By approaching complex reforms, such as that in the coffee sector, in a gradual programmatic manner, the government was able to build buy-in and make progress on more politically sensitive reforms.

• It is more effective to continue reforms in which the government has already taken ownership, than to begin reforms in new domains. ERSG II and III built off reforms, where a strong dialogue had already been established with the authorities under earlier operations (ERC and ERSG I), or where the government advised they hoped to make progress.

The design of the proposed programmatic series also benefits from lessons learned from, and synergies with, other ongoing and forthcoming IDA funded operations.

• The relative success of the public financial management components of the Bank’s program is largely due to the achievement of IDA’s EMSP. The project provided financial technical assistance support for the design of major PFM reforms, including preparation of new codes (e.g., organic law of finance, and procurement code), census of the public service workforce, implementation of PFM-related capacity-building programs, and introduction of PFM information systems. It also supported the design and implementation of the preferred strategic option for the reform of the coffee filière and the privatization of processing facilities in the sector. Most of the business environment

39 ERSG I had two tranches, 12 prior actions and nine triggers.

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legislations so far enacted (e.g., Commerce Code, Company Code, and Investment Code) were supported through EMSP, with complementary support from the IFC. The preparation of business environment-related implementation texts are expected to be undertaken with support from the Financial and Private Sector Development Project currently managed by the project implementation unit (PIU) of EMSP.

• With respect to the involvement of beneficiaries in the assessment of public services, the proposed operation series draws lessons from two existing projects: (i) The Burundi Community and Social Development Project (PRADECS), which supports the newly designed policies of the various sectoral ministries to reach out to the rural poor by putting them at the center of the daily management of the basic social infrastructure that benefit them; and (ii) the Health Sector Development Support project, which is currently experimenting in performance based financing. Lessons learned from their preliminary experience should help to enrich the analytical base for looking at the quality of service delivery and the effective use of beneficiary assessment and performance based budgeting in future operations.

• There are strong synergies between the reforms supported in the proposed programmatic series and the activities of the Agro-Pastoral Productivity and Markets Development Project recently approved by the Board (May 2010). The program document for this project recognizes that, “ongoing and projected reforms in the coffee and tea sectors, as well as the development of small entrepreneurs in the horticulture subsector are vital to increasing the contribution of export crops to growth. This will depend critically on increased productivity, as well as on improvement of the investment climate and access to rural finance.” The new agricultural operation will help to spur growth in the rural sector through support to agricultural productivity and improved access to markets.

• The Multi-Sectoral Water and Electricity Infrastructure Project and the Emergency Energy Project (grant of IDA’s Crisis Response Window) focus on urgent investments to rehabilitate the energy and water sector. While this project also supports the strengthening of the capacities of the public utilities company, later operations in the programmatic series will attempt to reinforce these efforts by supporting much needed reforms of the sector.

• The Financial and Private Sector Development Project (FPSDP), already managed within the same project implementation unit as ESMP, will support targeted reforms in privatization and public-private dialogue. The project also supports follow-on activities which started under EMSP. These include, among others, technical assistance to improve performance and corporate governance of PEs by reinforcing SCEP’s overall capability and monitoring of PEs, and supporting ongoing privatization efforts, and promoting public-private dialogue by strengthening the institutional framework of private, parastatal, and public enterprises that are pivotal to private sector development and regional integration (i.e., the Arbitration Center, the Chamber of Commerce, the Association of Women, etc.).

• The IFC also supports a complementary set of advisory services. In the past several years the IFC has taken a key role in supporting the business environment through investments and advisory services to government and businesses. In the financial sector,

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the IFC Financial Advisor Service is currently scoping potential interventions, including agribusiness and SMEs. It is also expected that the IFC Investment Climate Team, in cooperation with the IFC Conflict Affected States in Africa (CASA) program, will help the authorities to undertake a range of reforms including: (i) Doing Business; (ii) business taxation; (iii) public-private dialogue; (iv) support to the implementation of the EAC Common Market Protocol; and (v) reform communication.

• Finally, the Emergency Demobilization and Transitional Reintegration Project (and its predecessor operation the Burundi Emergency Demobilization, Reinsertion and Reintegration Program), support the ongoing reforms by helping the authorities to resolve some of pressing issues related to the transition to peace. The demobilization process of ex-combatants is complementary to the ongoing reforms in PFM as demobilization has created some fiscal space for other priority and social expenditures (see PEMFAR 2008 for more details). Further, by providing support to demobilized ex-combatants, this project helps alleviate some of the short term political and social pressures the authorities face working in a fragile state, so that they are able to take on forward looking reform efforts.

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Annex 4: Burundi ERSG VI - Letter of Development Policy (LDP)

REPUBLIQUE DU BURUNDI

MINISTERE DES FINANCES ET DE LA PLANIFICATION DU DEVELOPPEMENT ECONOMIQUE CABINET DU MINISTRE

N/Ref. : 540/.~~4.~1 2012

Objet : Lettre de Politique de Developpement pour le Sixif~me Don d'Appui a Ia Retorme Economique (DARE VI).

Monsieur le President,

Bujumbura,le ,1:J! !J /2012

A Monsieur Jim Kim President de Ia Banque Mondiale 1818 H Street, NW Washington, D.C.20433.

Nous avons l'honneur de vous transmettre ci-joint Ia Lettre de Politique de Developpement (LPD) convenue dans le cadre du nouveau programme d'appui budgetaire entre le Burundi et !'Association lnternationale de Developpement (IDA} au titre du 68me Don d'Appui a Ia Reforme Economique (DARE VI}.

Le Gouvernement du Burundi a mis en ceuvre avec succes le programme 2011-2012 appuye par Ia Sixieme operation de Don d' Appui a Ia Reforme Economique (DARE VI). Durant cette periode, des resultats appreciables ont ete enregistres dans Ia gestion transparente et efficace des finances publiques, !'amelioration du climat des affaires en vue de stimuler le developpement du secteur prive ainsi que Ia promotion de !'expansion des secteurs a haul potentiel de croissance et Ia diversification des exportations du pays notamment dans les secteurs agricoles et miniers.

Au niveau politique, les institutions issues des elections de 2010 travaillent d'arrache-pied pour asseoir Ia paix sociale dans tout le pays. Un cadre de dialogue permanent des partis politiques a ete institue pour permettre aux partis politiques de discuter de Ia vie du pays en general et des questions politiques en particulier. D'autres initiatives importantes pour Ia stabilisation politique telles que Ia creation d'institutions nationales sur les droits de l'homme et de Justice transitionnelle ont ete prises en 2011. Un projet de loi portant statui de !'Opposition politique a ete adopte par le Conseil des Ministres et se trouve sur Ia table du Parlement pour adoption. Le 11 fevrier 2011, !'Ombudsman a commence a fonctionner officiellement (Ia loi portant organisation et fonctionnement de !'Ombudsman a ete promulguee le 25 janvier 2010). Bref, le Gouvernement poursuivra les efforts entrepris pour assurer le bon fonctionnement du systeme democratique, consolider Ia bonne gouvernance, et promouvoir le dialogue politique et social.

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2

Les grandes priorites du Gouvernement restent Ia consolidation des acquis economiques et sociaux du CSLP 1, et Ia mise en ceuvre du CSLP2 qui remettra le pays sur Ia voie de Ia croissance, en privilegiant les axes strategiques suivants : (i)Renforcer I'Etat de Droit, consolider Ia Bonne Gouvernance et promouvoir l'egalite du genre ; (ii) Transformer l'economie par une croissance soutenue creatrice d'emplois a travers notamment l'investissement dans le secteur de l'energie electrique ; (iii) Ameliorer l'acces aux services de base de qualite afin de renforcer Ia solidarite nationale et (iv) Bien gerer l'espace et l'environnement pour un developpement durable.

Toutefois, les defis de Ia recherche de cette croissance forte et partagee restent immenses et Ia crise energetique a empire Ia situation. La mobilisation des moyens financiers consequents reste Ia cle de reussite pour faire face aces defis.

C'est dans ce cadre, que le Gouvernement du Burundi sollicite un nouvel appui de I'IDA pour faciliter Ia realisation d'un programme de retormes economiques sur Ia periode du 1er juillet 2012 au 30 juin 2013 dans le cadre du DARE VI pour un montant equivalent a 16,5 millions de droits de tirages speciaux(DTS), soil 25 millions de dollars E.U.

Les priorites mises en avant dans le cadre du DARE VI concernent Ia gestion transparente et efficace des finances publiques, !'amelioration du climat des affaires et developpement du secteur prive.

Cette Lettre de Politique de Developpement expose aussi Ia strategie de reformes economiques a moyen terme que le Gouvernement s'engage a realiser dans le cadre du don et au-dela, afin de renforcer les actions de lutte contre Ia pauvrete avec l'appui des autres partenaires au developpement du Burundi.

Les politiques et mesures indiquees dans Ia lettre de politique de developpement contribueront a renforcer les efforts entrepris en matiere de gestion des finances publiques et a ameliorer le climat des affaires, en vue d'accelerer Ia croissance economique et d'assurer l'irreversibilite des progres atteins.

Toutefois, le Gouvernement reste pre! a adopter toute mesure additionnelle que I'IDA jugerait necessaire pour assurer le succes du programme.

Enfin, dans le but de faciliter le suivi des progres accomplis dans Ia mise en ceuvre des politiques et mesures contenues dans ce programme, le Gouvernement reste pret a repondre favorablement a toute demande d'informations de Ia part de I'IDA.

Les autorites burundaises souhaitent que Ia Lettre de Politique de Developpement et le document de programme qui l'accompagne soient rend us publics. Elles autorisent par consequent leur publication et leur affichage sur le site de Ia Banque Mondiale, une fois que ces documents son! transmis au Conseil d'Administration. Le Gouvernement fera autant sur ses sites officiels.

Veuillez agreer, Monsieur le President, I' expression de notre haute consideration.

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REPUBLIQUE DU BURUNDI

SIXIEME DON D'APPUI BUDGETAIRE A LA REFORME ECONOMIQUE (DARE VI)

LETTRE DE POLITIQUE DE DEVELOPPEMENT

Septembre 2012

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I Introduction

1. Le Gouvernement sollicite l’appui de l’IDA pour compléter le financement de son programme de politique économique de 2012. Le but de ce programme est de poursuivre les efforts entrepris dans le cadre du premier CSLP et de mettre en œuvre les objectifs du deuxième CSLP pour consolider les fondamentaux de l’économie burundaise. Ses objectifs peuvent être résumés de la façon suivante : (i) maintenir l’inflation à un taux d’un seul chiffre; (ii) améliorer la composition des dépenses publiques au profit des secteurs porteurs de croissance économique, tout en préservant non seulement les dépenses pro-pauvres mais aussi la viabilité budgétaire; (iii) renforcer la gestion des finances publiques (GFP) et la bonne gouvernance; et (iv) renforcer les systèmes de contrôle interne de la banque centrale. Une utilisation stratégique de ces instruments de politique économique permettra au Gouvernement de poursuivre et consolider la stabilisation macroéconomique qui conditionne le succès des réformes : à la fois des réformes structurelles globales et l’appui au secteur privé qui a été intensifié dès 2011 en vue de promouvoir une croissance forte, soutenue, et créatrice d’emplois.

2. Pour le Burundi, l’exercice 2012 coïncide avec la mise en œuvre du CSLP 2 qui opérationnalise la Vision « Burundi 2025 ». Cette vision est un instrument de planification à long terme, qui va guider les politiques et les stratégies de développement durable, afin de satisfaire les besoins des générations présentes sans compromettre les chances des futures générations. Sans les tensions budgétaires et financières résultant de la hausse des prix alimentaires et énergétiques de 2010, aggravée au début de 2012, le programme de développement du Gouvernement aurait été fondé sur des bases plus solides. En vue d’atténuer l’incidence de cette crise sur les populations les plus vulnérables, le Gouvernement a procédé à des allégements fiscaux sur les produits pétroliers et les denrées alimentaires dont les effets sur les finances publiques ont été en partie compensés par le relèvement de la fiscalité sur les boissons alcoolisées, les communications téléphoniques, les voitures usagées et par une forte réduction des dépenses financées sur ressources propres. Toutes ces modifications ont fait l’objet d’un collectif budgétaire adopté par le Parlement. 3. Le bilan de la mise en œuvre du CSLP 1, montre que l’économie du Burundi a progressivement acquis la capacité de résister aux chocs externes et de préserver la dynamique des progrès réalisés depuis 2007 dans chacun des quatre domaines socio-économiques du programme. Aujourd’hui, le Gouvernement veut non seulement consolider les acquis économiques et sociaux du CSLP 1, mais encore changer les mentalités et transformer les bases de l’économie burundaise en vue d’atteindre un taux de croissance supérieur à 5% à partir de l’année 2013. Toutefois, les chocs causés par les fluctuations des prix internationaux des produits pétroliers et des denrées alimentaires et l’imprévisibilité des décaissements des bailleurs de fonds ont pour effet d’accroître l’incertitude des perspectives économiques à court et à moyen terme. En conséquence, le cadre macroéconomique pour 2012 a été révisé comme suit: (i) la croissance économique devrait être inférieure à nos prévisions initiales et se situer à environ 4,2%; (ii) à fin 2012 le taux d’inflation devrait diminuer et atteindre 14,7% grâce à une politique monétaire plus restrictive, à l’augmentation de la production alimentaire et à une baisse des cours internationaux des produits pétroliers et des denrées alimentaires; (iii) les réserves officielles devraient se stabiliser autour de 3,5 mois d’importations. En outre, compte tenu de l’incidence des chocs extérieurs sur le budget, le Gouvernement poursuivra les efforts entrepris pour consolider la situation des finances publiques. Il prendra des mesures visant à élargir l’assiette fiscale et mettra en œuvre une politique budgétaire permettant la maîtrise des dépenses. 4. Depuis 2010, les crises alimentaires et énergétiques menacent à nouveau l’équilibre budgétaire et financier. Sur la base des résultats (d’ailleurs positifs) de la gestion des crises en 2008, le Gouvernement estime qu’il devra mobiliser environ 22 milliards de francs burundais (BIF) pour atténuer l’impact des nouvelles crises sur les réformes structurelles, la croissance économique et les conditions de vie en milieu rural (où vit 90% de la population). Afin de ne pas compromettre le rétablissement des équilibres

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financiers entamé depuis 2009, des appuis importants seront nécessaires pour aider le gouvernement à combattre la crise dont les effets sont déjà visibles, notamment sur la position extérieure du pays.40 5. Malgré la forte augmentation des besoins de financement créée par deux chocs exogènes, le Gouvernement est fermement résolu à poursuivre les efforts entrepris pour : (i) promouvoir la transparence des systèmes de gestion des finances publiques ; (ii) améliorer le climat des affaires et développer le secteur privé ; (iii) assurer le maintien des filets de sécurité (créés depuis la crise de 2008) et alléger la pression fiscale sur les denrées alimentaires et les carburants en faveur des ménages les plus pauvres. 6. Le Gouvernement sait qu’il doit relever de nombreux défis pour assurer l’émergence économique du pays à moyen terme. Malgré les progrès réalisés lors de la mise en œuvre du premier CSLP, beaucoup reste à faire. Le CSLP 2 identifie six principaux défis: (i) la maîtrise de la démographie (ii) l’intensification des systèmes de culture, (iii) l’efficacité de la dépense publique, (iii) le développement du secteur privé, (iv) l’énergie, et (vi) le renforcement des capacités.

(i) la maîtrise de la démographie

Les défis démographiques (mis en relief par le Recensement Général de la Population et de l’Habitat de 2008) concernent : (i) la forte pression démographique (310 habitants/km2) ; (ii) l’extrême jeunesse de la population (la moitié de cette population a moins de 17 ans); (iii) le niveau de la fécondité (en moyenne 6.4 enfants par femme depuis plus d’une quarantaine d’années); (iv) le taux de mortalité très élevé, conséquence de la détérioration des conditions de vie du fait de la crise et de la pauvreté ; (v) l’accroissement rapide de la population (2,4% par an en moyenne de 1990 à 2008) qui est incompatible avec les systèmes de production existants et les ressources économiques et environnementales du pays ; et (vi) le faible niveau d’urbanisation (seul un burundais sur dix vit en milieu urbain).

(ii) L’intensification des systèmes de cultures

L’intensification des systèmes de cultures est essentielle pour assurer la sécurité alimentaire malgré la forte croissance démographique, et pour réduire la pauvreté en milieu rural. La production vivrière a très peu augmenté depuis 2006. Le défi est donc de diversifier la production pour assurer la sécurité alimentaire et une bonne nutrition, de promouvoir des produits de qualité, de redynamiser la recherche et la vulgarisation agricole, de promouvoir l’utilisation d’intrants, d’améliorer les systèmes d’irrigation et de réorienter une plus grande partie des ressources publiques vers le secteur agricole.

(iii) L’efficacité de la dépense publique

Bien qu’elle représente près de 45% du PIB en 2010, la dépense publique n’a pas été en mesure de dynamiser l’activité économique et de réduire la pauvreté monétaire. La faiblesse relative des dépenses en capital destinées aux secteurs de croissance comme l’énergie, le manque de prévisibilité des appuis extérieurs qui sont souvent fragmentés, et les problèmes de gouvernance liés à de faibles capacités institutionnelles (détermination et exécution des programmes prioritaires) sont les facteurs qui expliquent la performance inadéquate de la dépense publique. Pour que la dépense publique soit véritablement au service de la croissance économique et de la lutte contre la pauvreté, il faut que le gouvernement – de concert avec les bailleurs de fonds – renforce les méthodes de planification, d’exécution, de suivi et d’évaluation de ses dépenses. Cette démarche s’appuiera sur des outils efficaces (stratégies sectorielles et CDMT) et sur un système statistique fiable capable de mesurer la pauvreté et l’inégalité avec régularité. Un aspect particulier du problème de l’efficacité de la dépense publique est la maîtrise de la masse salariale dont la part du PIB a dangereusement augmenté, atteignant 11.8% en 2011. En outre la qualité de

40 Les effets les plus visibles sont: a) l’augmentation de la facture pétrolière et du coût des produits alimentaires; b) le ralentissement de la croissance économique ; et c) la hausse des dépenses publiques et notamment des dépenses pro-pauvres.

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la dépense publique nécessite une gestion rigoureuse du recrutement, de la promotion et de la notation des fonctionnaires.

(iv) Le développement du secteur privé

Jusqu’à présent, c’est surtout le secteur public qui a animé l’économie burundaise. Le pays a maintenant besoin d’un secteur privé fort et dynamique pour stimuler une croissance soutenue. Le développement du secteur privé n’est envisageable que si le climat des affaires s’améliore de façon notable. D’importants obstacles doivent encore être surmontés, notamment le manque d’infrastructures, les problèmes d’accès aux financements, la rigidité des réglementations, la lourdeur des procédures et l’absence de services de conseil et d’appui.

(v) L’énergie

Le déficit énergétique, la faiblesse de la production d’électricité et le manque de fiabilité de cette production sont des obstacles majeurs à la croissance. Les problèmes énergétiques du pays freinent le développement de l’industrie et des services et les investissements étrangers. L’énergie est donc un enjeu vital pour la réussite du CSLP 2. Le développement du secteur énergie nécessite la mobilisation de ressources considérables au niveau des budgets nationaux, de l’aide internationale et des investisseurs privés. La promotion des interconnections sous régionales sont une alternative a grand potentiel que le Gouvernement compte exploiter au maximum pour alléger la contrainte énergique.

(vi) Le renforcement des capacités

L’administration publique burundaise se trouve confrontée à de multiples défis dont les principaux sont : (i) la qualité des ressources humaines (leadership, capacités techniques et de gestion) et la performance et la stabilité des agents publics; (ii) la performance institutionnelle qui implique une modernisation/rationalisation des structures, des missions et des mandats ; et (iii) la réglementation et l’environnement institutionnel peu incitatif, qui a déclenché une fuite substantielle et continue des compétences vers les pays voisins, l'Europe et le reste du monde. Face à ces défis, le Burundi a déjà pris l’engagement de faire du renforcement des capacités un outil de développement et lui accorde une place importante dans la Vision 2025, notamment dans son premier pilier « Bonne Gouvernance et Renforcement des Capacités de l’Etat ». L’investissement dans le renforcement des capacités est essentiel pour que les institutions et organisations étatiques et non étatiques soient performantes en termes d’efficacité et d’efficience, fortes et stables, innovatrices, et capables de résister aux chocs en s’adaptant aux changements internes et externes. Dans cette perspective, le Gouvernement a déjà eu recours au Bureau du PNUD pour un appui dans l’élaboration de la lettre de politique de renforcement des Capacités. Cette dernière a été finalisée et sera prochainement transmise au Conseil des Ministres.

7. Un appui important et coordonné des bailleurs de fonds est nécessaire pour soutenir les efforts du Gouvernement dans la mise en œuvre de son programme. Le Burundi a donc besoin d'un cadre de référence pour une politique commune des bailleurs de fonds. La nouvelle politique de l’aide, adoptée en 2011, a obtenu l’adhésion des partenaires techniques et financiers (PTFs) qui ont participé activement à l’élaboration du CSLP 2 dans les ateliers techniques et les groupes sectoriels du Groupe de Coordination des Partenaires (GCP). C’est dans ce cadre que la présente lettre de politique de développement (LPD) définit le programme de réformes du Gouvernement pour 2012 pour lequel l’appui de l’IDA est sollicité. En outre, la lettre identifie des indicateurs de performance qui permettront d’évaluer la qualité de la mise en œuvre. C’est dans un souci d’efficacité que les autorités ont tenu à impliquer tous les acteurs dans la conception des réformes dont la mise en œuvre fera l’objet de communications régulières au cours de l’année 2012.

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II Développements Récents et Programme de Politique

8. Malgré les crises récentes, le Burundi espère que sa performance économique restera favorable au cours des prochaines années. Le taux de croissance annuel du PIB a atteint 4,2% au cours de la période 2006-2009. Ce résultat est encourageant, même s’il est inférieur à l’objectif visé dans le CSLP 1, qui aurait permis d’atteindre certains des objectifs des OMD. Une relance économique est probable car l’économie burundaise a acquis une capacité de résistance aux chocs qui l’ont secouée au cours des dernières années. En 2008, malgré la sévérité des crises alimentaire et énergétique de l’époque, le taux de croissance atteignait 4,5%. En 2009, le taux de croissance a chuté à 3,5% à cause des effets (différés) des crises de l’année précédente et de la nouvelle crise économique et financière mondiale. Mais grâce aux réformes structurelles en faveur du développement des secteurs porteurs de croissance, au fonctionnement effectif de l’Office Burundais des Recettes (OBR) et aux appuis budgétaires de ses partenaires, le Gouvernement a pu rétablir une croissance économique de 3,9% en 2010 et 4.2% en 2011 et 2012. Il compte poursuivre les progrès accomplis et atteindre un taux de croissance d’au moins 5% dès 2013. 9. Comme la sécurité a été rétablie sur toute l’étendue du territoire, le Gouvernement reste convaincu que si les partenaires du pays augmentent leurs appuis (notamment dans les domaines de l’agriculture et de l’élevage, de l’énergie et des mines, du transport, du tourisme et du développement du secteur privé), le taux de croissance pourrait atteindre 6,9% pour la période 2013-2015. La mise en œuvre du CSLP 2 mettra le pays sur la voie d’une croissance forte et partagée en privilégiant les axes stratégiques suivants : (i) renforcer l’Etat de droit, consolider la bonne gouvernance et promouvoir l’égalité du genre ; (ii) transformer l’économie pour une croissance soutenue et créatrice d’emplois ; (iii) améliorer l’accès aux services de base et la qualité de ces services pour renforcer la solidarité nationale ; et (iv) gérer l’espace et l’environnement pour un développement durable. 10. Pour atteindre cet objectif, le Gouvernement s’efforcera d’exploiter pleinement toutes les opportunités de l’économie nationale. Pour réaliser une croissance forte et durable capable de réduire la pauvreté de façon significative, le Gouvernement s’attaquera aux grands défis identifiés dans les stratégies sectorielles et dans le CSLP 2. D’importantes réformes – lancées dans le cadre des précédents DARE et avec l’appui d’autres bailleurs de fonds (notamment la Commission Européenne et certains bilatéraux) – ont permis de créer les bases solides : (i) d’une amélioration sensible du climat des affaires, qui reste encore peu incitatif, et d’un renforcement de la transparence budgétaire et fiscale ; (ii) de la promotion de l’innovation et de l’augmentation soutenue des investissements dans les secteurs porteurs de croissance, y compris le capital humain ; (iii) d’une réduction du déficit en infrastructures productives telles que l’énergie ; (iv) d’une croissance de la production et de la productivité agricole, qui est restée insuffisante pour créer des emplois dans le monde rural, tractée par des efforts continus de diversification des produits et d’amélioration des systèmes de commercialisation ; et (v) d’une bonne gouvernance grâce à la mise en œuvre accélérée du plan d’action de la Stratégie National de Bonne Gouvernance et Lutte contre la Corruption (SNBBLC). Ce sont les mêmes principes qui inspireront la sélection des programmes et activités permettant d’atteindre les objectifs rappelés au paragraphe 1.

11. Le Gouvernement sait qu’une croissance économique forte passera par une promotion agressive de l’industrie et des services marchands. L’agriculture, qui domine l’économie burundaise (en moyenne 46% du PIB) continuera de jouer un rôle moteur dans la croissance des services (en moyenne 37% du PIB en 2004-2009) et de l'industrie (en moyenne 17%). Ce rôle prépondérant s’explique par la forte contribution du secteur agricole aux recettes d’exportation (plus de 60% de 2006 à 2009) et le fait qu’il occupe la grande majorité de la force de travail du Burundi (plus de 90% de la population active travaille dans l’agriculture). Une profonde transformation de l’économie burundaise, créatrice d’emplois et de revenus salariaux et fiscaux, nécessitera une promotion agressive des services et de l’industrie (donc du secteur privé), dont les parts du PIB devront donc fortement augmenter. En accord avec ses partenaires, le Gouvernement a défini un programme de réformes prioritaires pour 2012. Ce programme est centré sur trois principaux objectifs stratégiques, à savoir : (1) améliorer le climat des affaires et promouvoir le secteur privé; (2) consolider les résultats obtenus sur le plan de la transparence des

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systèmes de gestion des finances publiques ; (3) accroître la résilience de l’économie aux chocs extérieurs. Conscient des menaces auxquelles fait face l’agriculture burundaise, le Gouvernement, avec l’appui de ses partenaires, est prêt à faire de grands efforts pour stimuler la production et promouvoir la productivité du secteur agricole.

12. La promotion du secteur privé au Burundi a progressé grâce aux multiples mesures prises par le Gouvernement pour faire du secteur privé le pivot du développement économique et social du Burundi. Le rapport du « Doing Business » a classé le Burundi parmi les 10 premières économies mondiales qui ont exécuté des réformes en très peu de temps. Depuis 2010, le Gouvernement s’est attelé à la promotion des secteurs porteurs de croissance grâce à l’amélioration de la productivité de l’agriculture et de l’élevage, à l’exploitation rationnelle des mines, à la promotion de l’industrie et de l’artisanat et à la promotion du tourisme et du commerce. 13. De nouveaux investissements agricoles ont été réalisés en vue d’atténuer l’impact des fluctuations cycliques de la production (notamment dans le secteur du café), des aléas climatiques, de certaines dégénérescences variétales et des pénuries de semences et produits phytosanitaires de qualité. 14. En plus de ces appuis indirects aux activités privées, les autorités ont donné des signaux forts qui démontrent leur volonté d’améliorer le classement du Burundi selon l’indicateur du « Doing Business » pour 2012. Grâce au Comité Décisionnel créé à cet effet, on note aujourd’hui une réduction sensible des délais nécessaires pour obtenir un permis de construire, effectuer un transfert de propriété, et créer une entreprise. Assainir la situation financière de la REGIDESO, lancer la troisième phase de la vente des stations de lavage du café, et préparer la restructuration des entreprises publiques sont des mesures prioritaires dont le Gouvernement poursuivra la mise en œuvre dans le cadre de la série programmatique des futurs DARE. Dans chacun de ces domaines, des progrès importants ont été réalisés, notamment l’installation de compteurs électriques avec prépaiement pour plus de 25% des abonnés, l’évaluation de la deuxième phase de la vente des stations de lavage, et enfin l’adoption par le Conseil des Ministres, la soumission au Parlement et la promulgation d’une loi révisée sur les privatisations. 15. Le rétablissement de la sécurité sur l’ensemble du territoire national constitue un progrès considérable. Une étape décisive a été la transformation du dernier mouvement armé en parti politique. Les élections générales de mai et septembre 2010 – qui ont réélu le Président sortant, Mr Pierre Nkurunziza – confirment le choix du processus démocratique, comme unique moyen de surmonter les divergences et de régler les problèmes politiques et sociaux du Burundi. Malgré le coût de ces élections, partiellement financées par les partenaires du pays, les autorités gouvernementales ont su maintenir le cap des réformes et éviter la surchauffe qui aurait pu résulter de la mise en œuvre de multiples promesses électorales. Pour consolider le processus de reconstruction politique, condition d’une croissance forte et durable, un forum des partis politiques a été créé en 2010 pour un dialogue continu sur les questions concernant le bien-être de la population. D’autres initiatives importantes pour la stabilisation politique, telles que la création d’institutions nationales sur les droits de l’homme et la justice transitionnelle, ont aussi été prises en 2011. Le 11 février 2011, le bureau de l’Ombudsman a commencé à fonctionner officiellement (la loi portant organisation et fonctionnement de l’Ombudsman a été promulguée le 25 janvier 2010). Une commission ad hoc a été chargée d’examiner des cas d’exécution extrajudiciaire et de torture. Bref, le Gouvernement poursuivra les efforts entrepris pour assurer le bon fonctionnement du système démocratique, consolider la bonne gouvernance, et promouvoir le dialogue politique et social. 16. La persistance de la hausse des prix internationaux du carburant et des denrées alimentaires a accru l’inflation. La pression inflationniste s’est accentuée, et le taux d’inflation a augmenté de 15 pourcent en décembre 2011 à 24 pour cent à fin mars 2012. Cette forte hausse de l’indice des prix à la consommation s’explique également par une chute de la production agricole de l’ordre de 30 pour cent au cours du premier trimestre 2012. De plus, le Gouvernement a relevé les tarifs de l’électricité et de l’eau qui ont également contribué à la hausse des prix à la consommation. Compte tenu des mesures prises par le Gouvernement pour lutter contre l’inflation et grâce à la mise en œuvre des mesures et des instruments de politiques définis en accord avec le Fonds Monétaire International (FMI) dans le cadre de

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la Facilité Elargie de Crédit (FEC), il est probable que la hausse des prix à la consommation ne sera inférieure à 10% qu’à partir de 2013. Déjà, pendant la crise de 2008, le taux d’inflation, qui, en glissement annuel, avait atteint 26% en 2008, a pu être réduit à 4,6% en 2009, et à 6,5% en 2010. Pour suivre les progrès vers l’accomplissement de cet objectif, l’indicateur de référence sera l’indice des prix à la consommation (IPC) calculé par l’ISTEEBU sur la base de l’évolution des prix d'un panier de biens de consommation sur le marché central de Bujumbura (en attendant l’actualisation de ce panier grâce à une enquête budget-consommation prévue très prochainement). 17. Le déficit budgétaire global de 2011 est estimé à 2,5%, soit un niveau proche de l’objectif du Gouvernement. Il est au même niveau qu’au cours de la période 2007-2008, après une forte dégradation en 2009 (5%) et un redressement initié en 2010. La baisse du déficit est la conséquence d’une bonne gestion des dépenses publiques, qui privilégie les dépenses pro-pauvres, de l’opérationnalisation de l’OBR dont les recettes sont estimées à 15% du PIB, et d’une meilleure coordination des politiques monétaire et budgétaire grâce à la production régulière de plans de trésorerie (Comité de Gestion de la Trésorerie) conformes aux plans d’engagement, et à la rationalisation des comptes de l’Etat (fermeture des derniers comptes hors budgets depuis fin décembre 2010). En outre, conformément aux objectifs du CSLP et des OMD, les autorités augmentent constamment les dépenses de lutte contre la pauvreté. 18. Selon la dernière revue du FMI, le budget 2012 est conforme aux objectifs macroéconomiques convenus. Le cadre macroéconomique a été révisé pour tenir compte des effets de la crise énergétique et alimentaire sur les dépenses et les financements publics et sur la position extérieure du Burundi. En outre, soucieux d’accélérer la progression vers les OMDs, le Gouvernement a privilégié les dépenses publiques porteuses de croissance et visant à réduire la pauvreté. Il a aussi pris des mesures d’abattement fiscal visant à réduire les tensions sociales. Grâce à ces mesures, l’impact de la crise sur les conditions de vie des ménages les plus pauvres sera moins grave. Enfin, la position extérieure devrait continuer de s’améliorer grâce aux mesures de libéralisation et de diversification des exportations. Dès 2012, le Gouvernement envisage de privatiser les 76 stations de lavage qui restent sur les 104 prévues depuis 2011. L’extension des mesures de privatisation du secteur café encouragera de nouveaux investissements qui permettront le rajeunissement des plantations, donc arrêteront progressivement le déclin et la cyclicité de la production. Le Gouvernement va donc continuer d’appuyer les secteurs café et thé : (i) en encadrant les associations de producteurs ; (ii) en investissant dans l’irrigation et la distribution de produits phytosanitaires ; et (iii) en adaptant la loi sur les privatisations en fonction des meilleures pratiques internationales. 19. Malgré les contraintes financières résultant de la crise mondiale, le Gouvernement va conserver le filet de sécurité mis en place en faveur des populations pauvres et vulnérables. Depuis 2008, le Gouvernement a pris un certain nombre de mesures d’aide aux populations vulnérables afin de protéger leurs conditions de vie déjà précarisées par les crises successives récentes. Les réductions tarifaires temporaires et ciblées pour les importations de produits alimentaires et pétroliers consommés par les pauvres ont été combinées avec des filets de sécurité sociale (i.e., suppléments nutritionnels, mesures urgentes de sécurité alimentaire, cantines scolaires, transferts de kits aux agriculteurs, microcrédits agricoles pour les ruraux, assistance aux refugiés et déplacés, etc.). Enfin, pour accroître la production agricole, le Gouvernement a organisé l’approvisionnement des paysans en semences et engrais, lancé la réhabilitation du système d’irrigation de la plaine de l’Imbo, et entrepris la réhabilitation des infrastructures de base. Le Gouvernement souhaite poursuivre ces programmes pendant les prochaines années afin d’améliorer la condition des plus pauvres. III Les Principales Réalisations des DARE II, III, IV et V

20. Les réformes menées par le Gouvernement démontrent sa volonté d’atteindre les objectifs de développement du CSLP. Le programme de réformes est articulé autour des objectifs suivants : (i) consolider la stabilité macroéconomique ; (ii) des réformes structurelles visant à améliorer le système de gestion des finances publiques, la politique monétaire et la politique de change ; et (iii) renforcer l’efficacité du système productif, notamment par la privatisation des entreprises publiques et la

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restructuration du secteur des exportations (café, thé, coton). Sur chacun de ces axes, la série des DARE, en combinaison avec les programmes d’autres bailleurs, a permis des avancées significatives qu’il convient de rappeler. 21. La mise en œuvre de réformes globales de la gestion des finances publiques a produit des résultats substantiels. Le Parlement a adopté une nouvelle Loi Organique des Finances Publiques et une nouvelle Loi sur les Marchés Publics. Ces deux lois intègrent les principes modernes de gestion et de transparence et spécifient les concepts, principes et responsabilités régissant l’action des agents publics. Un décret sur le cadre de la préparation budgétaire a été adopté et est appliqué. Pour améliorer la qualité des dépenses publiques, une enquête PETS a été réalisée en 2007 et a donné lieu à l’adoption de plans d’action en 2009 ; l’introduction d’un CDMT central dans le processus de préparation budgétaire a été réalisée ; elle garantit la cohérence entre les plans budgétaires et les objectifs du CSLP. Par ailleurs, les comptes extrabudgétaires ont été éliminés et des plafonds d’engagement ont été fixés (de concert avec les ministères sectoriels) pour éliminer les arriérés de paiement et progresser vers l’unité de la trésorerie. 22. En complément de ces réformes lancées dans le cadre de la première série des DARE, une Loi instituant la Taxe sur la Valeur Ajoutée a été promulguée le 17 Février 2009 et l’élimination de toutes les exonérations sur la fiscalité indirecte a été décidée et incorporée dans le nouveau code des impôts. Le Gouvernement a achevé le recensement des fonctionnaires civils de l’Etat, de la police et des forces armées. La base de données mise en place à cet effet sera prochainement actualisée pour que des cartes magnétiques d’identification personnelle soient distribuées à tous les fonctionnaires. 23. Un logiciel de la paie, interfacé avec le SIGEFI, a été installé. Une Stratégie de Gestion des Finances Publiques (SGFP) a été adoptée en mai 2009 par le Conseil des Ministres. Le suivi de sa mise en œuvre – jusqu’en 2012 – est fait régulièrement grâce à des rapports trimestriels validés par le Comité de Pilotage des Réformes des Finances Publiques. Conscient des avantages qu’apporte le Cadre PEFA pour mesurer la Performance de la gestion des finances publiques, le Gouvernement, en collaboration avec l’Union Européenne et le Royaume de Belgique, a demandé l’évaluation de la gestion des finances publiques du Burundi. Au terme de la SGFP, le Gouvernement a mené une évaluation interne complétée par cette évaluation externe; les deux évaluations ont montré que des progrès considérables ont été réalisés dans la gestion des finances publiques. Toutefois, des faiblesses et des insuffisances ont été notées. Il convient donc de poursuivre et d’approfondir les réformes de la GFP. D’où l’élaboration d’une deuxième stratégie de gestion des finances publiques (SGFP2), accompagnée par un plan d’action triennal 2012–14. Un projet de décret portant Règlement Général de la Gestion des Budgets Publics a été adopté par le Conseil des Ministres et signé par le Président de la République. Une nouvelle nomenclature de classification budgétaire et comptable, harmonisée avec le Plan Comptable de l’Etat de 2008, a été adoptée par Ordonnance Ministérielle 540 /1210 du 10 Août 2010. Une formation sur l’application de cette nouvelle nomenclature a été organisée en juillet 2012 grâce au financement de la CTB. Les bénéficiaires de cette formation étaient des fonctionnaires impliqués dans la préparation et l’exécution des budgets de l’Assemblée Nationale, du Sénat, de la Cour des Comptes et de tous les Ministères. La présentation du budget 2013 sera basée sur cette nouvelle nomenclature. Une convention entre l’Etat et la B.R.B., clarifiant le rôle du caissier de l’Etat, a été signée en Février 2010. Un projet de décret présidentiel portant sur la Gouvernance Budgétaire a été élaboré avec l’appui d’un expert du F.M.I et signé en juillet 2012. Il traite notamment des questions relatives aux modalités d’application du principe de légalité des recettes et des dépenses, définit les objectifs et la formulation des politiques économiques et budgétaires (cadrage macroéconomique, cohérence entre politique économique et politique budgétaire, respect des critères de l’EAC, soutenabilité de la dette, CDMT, et budgets-programmes). Il traite également des règles relatives aux Lois de Finances, notamment leur structure et l’amélioration des procédures budgétaires tant au niveau du Gouvernement que du Parlement. La mise en œuvre des 19 programmes de la SGFP par des groupes techniques multisectoriels et par la Cellule d’Appui au Cadre de Partenariat est actuellement une réalité. La deuxième stratégie mettra en œuvre 12 programmes au lieu des 19 de la première stratégie.

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24. Des progrès appréciables ont également été réalisés dans la mise en œuvre de mesures visant à faciliter les activités du secteur privé. Un nouveau Code des Investissements conforme aux meilleures pratiques internationales a été promulgué en septembre 2008, et devrait contribuer à l’amélioration du climat des affaires, après harmonisation avec le nouveau Code des Impôts. Le Conseil des Ministres a adopté des projets de Codes du Commerce et des Sociétés Privées et Publiques conformes aux normes internationales. Leur formulation a suivi un processus très participatif. Le décret portant création du cadre de dialogue public-privé a été signé par le Président de la République en juin 2008 et le Tribunal de Commerce a réduit de plus de 10% le nombre des litiges passant plus de 60 jours en délibéré. La nouvelle législation rend plus rapide et moins coûteuse la création d’entreprises. Elle améliore la transparence et la responsabilisation, augmente la confiance des investisseurs et établit des procédures de forclusion. L’Agence Burundaise de Promotion des Investissements (API) est pleinement fonctionnelle depuis 2010. La gestion du secteur financier a également progressé avec l’adoption d’une stratégie de réforme du secteur. En outre, le Parlement a adopté une nouvelle Loi portant statuts de la Banque Centrale de la République du Burundi (BRB) qui renforce l’indépendance et la gouvernance de l’institution. La BRB a en outre mis en œuvre d’importantes mesures visant à renforcer ses contrôles internes et son système de gestion des risques en application des recommandations du rapport du FMI sur l’évaluation des clauses de sauvegarde financière. Toutes ces actions renforcent les mesures soutenues par les DARE.

25. Des avancées significatives ont été réalisées dans la réforme de la filière café. Après l’adoption par le Conseil des Ministres d’une stratégie de désengagement de l’Etat en 2008, un décret présidentiel a mis en place l’Agence de Régulation de la filière café (ARFIC), lançant ainsi le processus de cession des actifs de l’Etat dans le secteur. Bien avant cela, le Gouvernement avait adopté un nouveau règlement des ventes qui ouvrait les exportations de café aux opérateurs locaux et internationaux. L’application de ce règlement s’est traduite par l’entrée effective de nouveaux exportateurs sur un marché devenu compétitif et transparent. En plus de la création de l’ARFIC, le DARE III a soutenu : (i) des campagnes nationales de sensibilisation sur les avantages de la privatisation des actifs du secteur café ; (ii) le lancement d’un appel d’offre international pour la vente de ces actifs ; et (iii) l’abrogation de la convention de 30 ans qui liait les SOGESTALS à l’OCIBU. L’opération a permis de vendre 13 stations de lavage à un groupe international réputé. Dans le cadre du DARE V, 28 stations de lavage et une usine de deparchage ont été cédées à des operateurs économiques nationaux et à un investisseur étranger respectivement. IV Les défis du DARE VI

26. La mise en œuvre du DARE VI coïncide avec celle du CSLP 2 qui ambitionne la réalisation d’une croissance forte et soutenue, basée sur une transformation profonde de l’économie, dont le financement proviendrait de la mobilisation de ressources intérieures et de dons. Le contexte international peu favorable risque de réduire les appuis extérieurs attendus. Le Gouvernement, en concertation avec ses partenaires au développement, est en train de préparer une conférence des partenaires qui est prévue pour la fin du mois d’octobre 2012 à Genève. 27. Le DARE VI complétera les réformes lancées par les précédents DARE sans s’écarter du programme du Gouvernement. Comme dans le DARE V, la recherche de synergies est un critère que le Gouvernement a privilégié dans la définition des actions préalables du DARE VI. Le CSLP 2 sera la stratégie de référence des politiques que le DARE VI appuiera. V Les Actions Préalables du DARE VI

V.1. Renforcement de la gestion des Finances Publiques et de la Transparence Budgétaire

28. Dans ce domaine, quatre mesures sont prévues et ont été adoptées : (i) l’approbation par le Parlement d’un Cadre des Dépenses à Moyen Terme (CDMT) pour 2013-2015 et de la lettre de cadrage budgétaire pour l’exercice 2013; (ii) un décret sur la gouvernance budgétaire dont l’objectif sera de redéfinir les procédures d’élaboration, de soumission et de vote du Budget, ainsi que les modalités de son

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exécution et de son contrôle; (iii) la publication des décisions relatives à la passation de marchés publics; et (iv) la création par ordonnance ministérielle conjointe (Finances et Fonction Publique) d’un centre de traitement informatique pour la gestion de la solde et des carrières. 29. Adoption de la lettre de cadrage du budget général de 2013. De même qu’un CDMT central 2012-2014 a servi de base pour la préparation de la lettre de cadrage du budget 2012, la lettre de cadrage du projet de Loi de Finances 2013 a été élaborée à partir du CDMT 2013-2015. 30. Signature du décret sur la gouvernance budgétaire. Nouvelle « constitution financière » du Burundi, la loi organique sur les finances publiques (LOFP) promulguée en décembre 2008 prévoit l’adoption d’un certain nombre de textes d’application. Le projet de décret sur la gouvernance budgétaire – préparé avec l’appui du FAD – est l’un des principaux textes d’application de la LOFP. Il traite des questions de politique budgétaire, des procédures de préparation et d’adoption du budget, de l’exécution et des contrôles, ainsi que de la discipline et transparence budgétaires. 31. Création par ordonnance ministérielle conjointe d’un centre de traitement informatique pour la gestion de la solde et la gestion des carrières. Le développement et la mise en exploitation du nouveau progiciel de gestion des carrières et de la solde constituent un progrès majeur. En effet, avec l’appui des partenaires techniques et financiers, un progiciel (OPENRH) a été acquis et adapté. Depuis janvier 2011, il assure la gestion des carrières (qui relève de la fonction publique) et la gestion de la solde (qui relève des finances). Son exploitation sera assurée par un centre de traitement informatique, logé à la fonction publique. Une ordonnance ministérielle conjointe a été signée par les ministères des finances et de l’administration publique. 32. Publication des décisions sur la passation des marchés publics. En vue d’améliorer la transparence dans le domaine des marchés publics, le Gouvernement s’est engagé dans la révision du Code des Marchés Publics et de ses textes d’application. Les décisions sur la passation des marchés publics sont publiées sur le site web du ministère des Finances.

V.2. Amélioration du Climat des Affaires et Développement du Secteur Privé

33. Dans ce domaine, deux mesures sont prévues : (i) l’opération d’un guichet unique pour les nouvelles entreprises afin de réduire les délais et les coûts de la transaction ; (ii) le gouvernement autorise la préparation d’un appel d’offres pour la vente des 76 stations de lavage restantes. 34. Opération d’un guichet unique pour les nouvelles entreprises afin de réduire les délais et les coûts de la transaction. Avec le retour à la stabilité, le gouvernement du Burundi s’est engagé dans un programme de réformes visant à améliorer le climat des affaires et à favoriser la relance de la croissance économique. Des réformes récentes ont simplifié les procédures pour la création d'entreprise. Le guichet unique a ouvert ses portes et permet de créer une entreprise en regroupant les agences et institutions clefs au sein d’une structure unique. 35. Le lancement de la troisième phase de la vente de 76 stations de lavage. Le comité interministériel de la privatisation a donné son accord pour que le SCEP prépare le lancement de cette troisième phase de la vente des 76 stations de lavage. Le gouvernement a obtenu l’accord du Parlement sur la base d’une liste d’entreprises à privatiser comprenant les stations de lavage. VI. Autres Mesures Envisagées dans le cadre de futures opérations (notamment DARE VII). VI.1 Gestion des Finances Publiques et Transparence Budgétaire 36. Dans ce domaine, le gouvernement envisage notamment : (i) d’impliquer la Cour des Comptes et le Conseil Economique et Social dans la préparation des budgets ; (ii) d’afficher des tableaux donnant des informations aux habitants des communes sur les allocations budgétaires concernant leurs communes

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dans des secteurs clés (écoles et santé) ; (iii) de procéder à un audit du système de passation des marchés publics ; et (iv) de valider les bases de données concernant les effectifs de la fonction publique sur la base d’une mise à jour des rotations de personnel depuis le recensement. VI.2 Promotion de l’Investissement Privé et Diversification Economique 37. Dans ce domaine, le gouvernement envisage surtout : (i) d’étendre la procédure du guichet unique aux permis de construction ; (ii) d’accroître (dans le budget 2013) les fonds affectés aux routes rurales et aux systèmes d’irrigation ; (iii) d’adopter une stratégie pour la privatisation de la filière thé ; et (iv) d’adopter un Code Minier conforme aux meilleures pratiques internationales. VI.3. Renforcement des Filets de Sécurité et Protection des Populations Vulnérables 38. Dans ce domaine, le gouvernement envisage : (i) d’entreprendre une évaluation des filets de sécurité existants en vue de coordonner les programmes et de renforcer les appuis apportés aux populations les plus pauvres et les plus vulnérables ; et (ii) de finaliser une enquête sur la consommation des ménages et de mettre au point une carte de la pauvreté. VII. Conclusion 39. Telles sont donc quelques unes des mesures qui ont dominé l’action du Gouvernement, notamment au cours de l’année 2012. Ce programme, qui a été discuté avec les experts de la Banque Mondiale, a été suivi de façon rigoureuse par les autorités. Pour renforcer sa collaboration avec la Banque Mondiale et faciliter les échanges de vues entre les deux parties, le Gouvernement s’engage à fournir dans les délais prévus les informations suivantes :

• Un tableau sur l’exécution du budget 2012 (classification administrative et économique), tous les trimestres.

• Un tableau comparant l’exécution des budgets 2010 et 2011 des secteurs prioritaires (santé, éducation, agriculture, infrastructures, protection sociale) et des dépenses pro-pauvres (selon la méthodologie révisée en 2008), tous les trimestres.

• Le total des dépenses sans engagement préalable en 2012, tous les trimestres. • Le total des dépenses sur comptes hors budget (sauf le Fonds National Routier) en 2012; • Pendant l’exécution du programme, un tableau comportant : a) les délais moyens, maximaux et

minimaux entre : (i) l’engagement juridique ; (ii) l’engagement comptable ; (iii) la réception des factures ; (iv) la liquidation ; (v) l’ordre de paiement ; et (vi) le paiement par le ministère ; et b) le montant total des arriérés par Ministère (toute facture non payée 60 jours après l’échéance), tous les trimestres.

• Une évaluation des arriérés de paiement du Gouvernement à la REGIDESO, tous les trimestres.

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ANNEXE 1 : Liste des Actions Préalables

Actions préalables proposées PRIORITE 1: PRIORITE 1: Renforcer la Gestion des Finances Publiques et la Transparence Budgétaire

Objectif 1.1: Renforcer la Planification Stratégique et Budgétaire pour Améliorer la Qualité de la Dépense Publique

1

Le bénéficiaire a adopté et soumis au Parlement, à titre informatif seulement, un Cadre des Dépenses à Moyen Terme (CDMT) 2013-15 et une lettre de cadrage budgétaire cohérent avec le CDMT ayant servi pendant la préparation de sa loi des finances 2013. Etat d’avancement: Réalisé.

2 Le Bénéficiaire a publié un décret portant définition des conditions requises pour la formulation de la politique fiscale et pour la préparation du budget ainsi que les règles de discipline budgétaire et de transparence. Etat d’avancement: Réalisé.

Objectif 1.2: Renforcer la Transparence et l’Efficacité de la Gestion des Finances Publiques, des Marchés Publics et les Contrôles, et Stimuler la Demande de Bonne Gouvernance

3 Le Bénéficiaire a publié, sur le site web du Ministère ayant dans ses attributions les Finances, les décisions de la Direction Nationale de contrôle des Marchés Publics (DNMP) relatives aux marchés publics (la liste des entreprises, les montants des contrats attribués et le mode de passation de marché) ainsi que le rapport d'activité de la DNMP pour 2011, (à l'exception des contrats à caractère confidentiel, conformément à la loi ou dont le montant est inférieur aux seuils nécessitant un examen par la DNMP). Etat d’avancement: Réalisé.

Objectif 1.3: Simplifier la Gestion de la Paie et les Ressources Humaines 4 Le Bénéficiaire a établi, par une ordonnance ministérielle conjointe du Ministère ayant dans ses

attributions les finances et du Ministère ayant dans ses attributions l'administration de la fonction publique, un centre de traitement pour la paie du gouvernement et la gestion de carrière et a nommé le directeur du centre. Etat d’avancement: Réalisé.

PRIORITE 2: Promouvoir l’Investissement du Secteur Prive et la Diversification Economique Objectif 2.1: Améliorer le Cadre Légal et Réglementaire pour la Promotion de l’Investissement du Secteur

Privé 5 Le bénéficiaire a mis en place et a rendu opérationnel le guichet unique pour la création d'entreprises.

Etat d’avancement: Réalisé. Objectif 2.2: Améliorer la Productivité Agricole et Promouvoir la Diversification Economique à travers la

Restructuration des Exportations et des Services 6 Le Comité Interministériel de Privatisation du Bénéficiaire a autorisé le Service Chargé des Entreprises

Publiques (SCEP) a lancé la troisième phase de la vente des 76 stations de lavage de café. Etat d’avancement: Réalisé.

Objectif 2.3 Promouvoir le Développement du Secteur Minier Pas d’actions préalables prévues dans le cadre du DARE VI. PRIORITE 3: Renforcer la Protection Sociale pour Réduire les Vulnérabilités

Objectif 3.1: Renforcer le Système de Filets de Sécurité Pas d’actions préalables prévues dans le cadre du DARE VI. Objectif 3.2: Améliorer le Ciblage et la Prestation des Services Sociaux Pas d’actions préalables prévues dans le cadre du DARE VI.

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REPUBLIC OF BURUNDI Bujumbura, September 19, 2012 MINISTRY OF FINANCE AND ECONOMIC DEVELOPMENT PLANNING OFFICE OF THE MINISTER Reference: 540/2518/2012 TO: Mr. Jim Kim President of the World Bank 1818 H Street NW Washington DC 20433 Subject: Development Policy Letter for the Sixth Economic Reform Support Grant (ERSG VI) Mr. President We are honored to send you the Letter of Development Policy (LDP) agreed by the Republic of Burundi and the International Development Association (IDA) in the context of a new budget support program involving a Sixth Economic Reform Support Grant (ERSG VI). The Government of Burundi implemented successfully its 2011-2012 program supported by the Sixth Economic Reform Support Grant (ERSG VI). During that period significant progress was made towards more transparent and efficient public finance management, improvement in the business climate to stimulate private sector development, expansion of sectors with high growth potential and diversification of exports, notably in the agricultural and mining sectors. On the political side, the institutions established following the 2010 elections work hard to promote social peace over the totality of the country’s territory. A permanent dialogue framework for political parties has been created to enable the parties to discuss political and other issues concerning the life of the country. In 2011, the government took a number of important initiatives to promote political stability, including the creation of national human rights and transitional justice institutions. A draft bill on the organization of the political opposition parties has been approved by the Council of Ministers and submitted to the Parliament. On February 11, 2011 the Ombudsman’s office started its operation officially (the law concerning the creation and operation of the Ombudsman was promulgated on January 26, 2010). The government will pursue ongoing efforts to ensure a sound implementation of the democratic system, improve governance and promote political and social dialogue. The main priorities of the government remain the consolidation of the results already obtained during the first PRSP and implementation of the second PRSP, which will put the country’s economy on a growth path, will give priority to the following strategic objectives: (i) strengthen the rule of law, support good governance and promote gender equality; (ii) transform Burundi’s economy to achieve sustained growth and create jobs, notably through investment in the electric power system; (iii) improve access to, and the quality of, basic services to strengthen national solidarity; and (iv) good management of available space and environment in support of sustainable development.

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Nevertheless promoting a strong and shared growth is a major challenge and the recent electric power crisis did worsen the country’s economic situation. Mobilizing large sources of financing is essential to achieve success. In this context, the Government of Burundi requests the support of IDA to facilitate implementation of its economic reform program for the July 1, 2012/June 30 2013 period through an ERSG VI grant amounting to SDR16.5 million (US$25 million equivalent). The main priorities of ERSG VI are: transparent and efficient public finance management, improving the business climate and promoting private sector development. This Letter of Development Policy also outlines the medium-term economic reform strategy, which the government is committed to implement during the grant period and beyond, in order to intensify measures aimed at fighting against poverty in cooperation with the other development partners of Burundi. The policies and measures described in the Letter of Development Policy will consolidate efforts already made to strengthen public finance management and improve the business climate, in order to accelerate economic growth and make future progress irreversible. Nevertheless, the government is ready to adopt additional measures that IDA would find necessary to ensure the success of the program. Finally, to better monitor results achieved in implementing the policies and measures included in the program, the government will respond positively to IDA’s enquiries and will provide the data requested. The Government of Burundi expresses the wish that the Letter of Development Policy and the corresponding Program Document should be published. It therefore authorizes their publication on the World Bank website when these documents have been submitted to the Board of Executive Directors. The Government of Burundi will do the same on its own website. With the expression of our high consideration

The Minister of Finance and Economic Development Planning Hon. Tabu Abdallah MANIRAKIZA

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Burundi – DARE VI – Development Policy Letter – Translation - September 2012

REPUBLIC OF BURUNDI

SIXTH ECONOMIC REFORM SUPPORT GRANT (ERSG VI)

LETTER OF DEVELOPMENT POLICY

September 2012

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Introduction

1. The government requests IDA support to complete the financing of its economic policy program for 2012. The government plans to continue ongoing efforts initiated in the context of the first PRSP and will implement reforms envisaged in the second PRSP with a view to strengthening the country’s economic performance. The main objectives of the program can be summarized as follows: (i) keep the rate of inflation below 10 percent; (ii) improve the structure of public expenditures by increasing the share of growth-oriented economic sectors while protecting pro-poor public expenditures and ensuring the viability of the country’s fiscal performance; (iii) strengthen public finance management and improve governance; and (iv) strengthen internal control mechanisms within the central bank. The strategic use of these economic policy instruments will enable the government to further stabilize the country’s macroeconomic position, a pre-condition for the success of the reform process, both global structural reforms and more specific reforms geared towards private sector development (which were intensified in 2011 to accelerate economic growth and improve employment). 2. The 2012 fiscal year is the year during which the government will begin to implement the second PRSP, thus giving an operational content to the objectives of the “2025 Vision.” The Vision is a long-term planning instrument that will dominate future strategies of sustainable development, which should meet the needs of present and future generations. Increases in international prices of food and energy (that started in 2010 and worsened at the beginning of 2012) have created budgetary and financial management constraints that weakened implementation of the country’s economic development program. To mitigate the impact of these price increases on the most vulnerable segments of the population, the government reduced taxes on petroleum and food products. These measures were partly offset by increased taxes on alcoholic beverages, telephone communications, used cars, and by a sharp reduction in domestically-financed public spending. All these measures are included in a revised budget adopted by the Parliament. 3. An evaluation of the first PRSP has shown that the Burundian economy has become more resilient to external shocks and that substantial progress was achieved since 2007 in the four main economic and social components of the program. Now, the goal of the government is not only to consolidate economic and social results achieved during implementation of the first PRSP, but also to change the mindsets and reform the basic structure of the Burundian economy in order to reach at least 5 percent growth rate as of 2013. Nevertheless, external shocks due to high petroleum and food prices, and financing problems resulting from the unpredictability of donor fund disbursements, led the government to revise its macroeconomic projections for 2012 as follows: (i) the rate of economic growth should not exceed 4.2 percent (below initial forecast of 4.5 percent); (ii) the rate of inflation should decline to 14.7 percent by the end of 2012, thanks to restrictive monetary policies, increased food production, and lower international petroleum and food prices; (iii) net official reserves should be stabilized around 3.5 months of imports. In addition, considering the impact of external shocks on the budget, the government will continue ongoing efforts to strengthen public finance management and will implement measures aimed at broadening the tax base and controlling the growth of public expenditures.

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4. 2010 marked the beginning of another food and energy crisis which threatens again the fiscal equilibrium. Based on the successful management of the 2008 crisis, the government estimates at 22 billions of Burundi francs the funds required to mitigate the negative impact of the new crisis on structural reforms, overall economic growth and living conditions in rural areas (which include 90 percent of the country’s population). Strong support should be given to the government’s program to ensure the success of reforms initiated in 2009 to restore fiscal equilibrium, and to mitigate the negative impact of the crisis, which already affects the external position of the country.41 5. Despite a massive increase in the financing gap created by external factors, the government is determined to pursue ongoing efforts and consolidate results achieved. His goal is to: (i) promote transparency in public finance management; (ii) improve the business climate and stimulate private sector development; and (iii) strengthen the safety net measures initiated during the 2008 crisis, and reduce taxes on petroleum and food products consumed by the poorest households. 6. The government recognizes that creating the conditions necessary for rapid and sustainable economic growth is a major challenge. Despite progress achieved in implementing the first PRSP, much more needs to be done. The second PRSP identifies six main challenges: (i) controlling population growth; (ii) intensifying cultivation systems; (iii) more efficient public spending; (iv) private sector development; (v) energy; and (vi) strengthening capacities.

(i) Controlling population growth In this area, the general population census of 2008 (RGPH) has identified the following constraints: (i) high population density (310/km2); (ii) a very young population (half is less than 17-year old); (iii) high fertility rates (averaging 6.4 births per woman over the last forty years); (iv) a very high mortality rate caused by deteriorating living conditions resulting from the ongoing crisis and the rate of poverty; (v) accelerated population growth rate (averaging 2.4 percent annually during the 1990-2008 period) which is not compatible with the country’s present production systems, and economic and environmental potential; and (vi) the low rate of urban development (only one tenth of the population lives in urban areas).

(ii) Intensifying cultivation systems More intensive cultivation systems are essential to ensure food security (despite high population growth rates) and reduce poverty in rural areas. The growth of food crop production since 2006 was very modest. The challenge for the future is to diversify output, promote the development of high quality products, give a new impetus to agricultural research and extension services, promote the use of agricultural inputs, improve irrigation systems and allocate more public resources to the agricultural sector.

(iii) Efficient public spending Public spending, which accounted for 45 percent of GDP in 2010, has been unable to stimulate economic activity and reduce monetary poverty. The low share of capital expenditures, the high

41 The most obvious consequences of the crisis are: a) the increased cost of petroleum and food imports; b) slower economic growth; and c) increased public expenditures, notably pro-poor public spending.

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priority accorded to security and social sector services, inefficient public finance management and unpredictability of donor funding that is often very fragmented, and governance weaknesses due to weak institutional capacities (prioritization and implementation of programs) have contributed to the poor performance of public expenditures. Public spending will have a strong positive impact on economic growth and poverty if the government – in cooperation with donors – strengthens public expenditures planning, execution, monitoring and evaluation. Achieving this objective will require efficient planning instruments (sector strategies MTEFs, and logical framework), and a reliable statistical system enabling regular measurement of poverty and inequality during the PRSP 2. Controlling the growth of personnel expenditures is essential to improve the efficiency of public spending. The wage bill went up to a dangerously high level of 11.8 percent of GDP in 2011. In addition, the quality of public spending depends on efficient management of recruitment, promotion and evaluation of civil servants.

(iv) Private sector development Burundi’s economic performance, which so far largely relied on public sector spending and activity, now needs a strong and dynamic private sector, capable of stimulating sustained growth. Private sector development will depend on substantial improvements in the business climate. This means removing a number of constraints including the lack of infrastructure, inadequate access to financing, rigid regulations, cumbersome procedures and the lack of advisory and support services.

(v) Energy Inadequate energy and electricity supply and the erratic performance of the power generation system are major obstacles to strong economic growth. Inadequate energy supply slows down the growth of the manufacturing and service sectors and foreign investment. Increased and improved energy production is essential for the success of the second PRSP. The development of the energy sector requires massive financial contributions from the government, donors and private investors. Regional interconnections are viable alternative solutions with large potential, which the government intends to exploit at maximum in order to loosen energy constraint.

(vi) Capacity building The Burundian civil service needs to overcome many constraints, including: (i) lack of adequate human resources (leadership, technical and managerial capacities) and the poor performance and instability of civil service staff; (ii) institutional problems (the structure, mission and terms of reference of existing institutions need to be modernized and rationalized); and (iii) current regulations and institutional framework, which triggered a substantial brain drain towards neighboring countries, Europe and other regions. The government has already decided to make capacity building an important development instrument. This objective has been given a high priority in the 2025 Vision, notably the first pillar: “Good governance and strengthening public sector capacities.” Consequently, the government must invest in the development of capacity in public and other institutions to improve their performance and make them efficient, stable and capable of innovation; these institutions must also be capable of resisting to shocks and adapting to internal and external changes. In this context, the government requested assistance from the UNDP Office for the elaboration of a letter on capacity building policies, which has been finalized and should soon be submitted to the Council of Ministers.

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7. A high and of well coordinated level of donor assistance is necessary to help the government implement its development program. Burundi needs an adequate policy framework which will serve as a reference for future donor programs. The new aid policies adopted in 2011 have been approved by the country’s technical and financial partners which were involved in the elaboration of the second PRSP through participation in technical workshops and sector groups (in the context of the Partners Coordination Group). The present development policy letter, which describes the reform program for which IDA assistance is requested, is in line with the agreed policy framework. It also identifies performance indicators that will facilitate an evaluation of program implementation. To make the process more efficient, the government involved all the actors in the design of reform measures whose implementation will be systematically reported.

I. Recent Developments and Policy Reform Program 8. The Burundi hopes that its economic performance will remain satisfactory over the next few years despite the negative impact of recent crises. The rate of growth of GDP reached 4.2 percent in 2006-2009. This is an encouraging result even though the rate of growth was lower than projected growth in the first PRSP, which would have enabled the country to reach some of its MDG goals. Now Burundi’s economic recovery should be stronger since the country has become more capable of absorbing the same types of shocks that affected economic performance over the past few years. Already in 2008, the rate of growth of GDP reached 4.5 percent despite severe food and energy crises. In 2009, the delayed impact of negative external factors in 2008 and of the new world economic and financial crisis reduced GDP growth to 3.5 percent. However structural reforms in support of private sector development, the operation of Burundi’s Revenue Authority and substantial budget support provided by donors stimulated growth: 3.9 percent in 2010 and 4.2 percent in 2011 and 2012. The government will pursue ongoing efforts and is confident that it will be able to further increase economic growth to at least 5 percent as of 2013. 9. Since security has been restored on the totality of the country’s territory, the government believes that if the donor community increases its assistance (notably in the agricultural and livestock sectors, in energy and mining, transport infrastructure, tourism and private sector development), the rate of growth of GDP could reach 6.9 percent in 2013-2015. Implementation of the PRSP will pave the way towards accelerated and shared growth by giving priority to the following strategic objectives: (i) strengthen the rule of law, promote good governance and gender equality; (ii) change the economic structure to promote continued growth and create jobs; (iii) improve access to and quality of basic services to strengthen national solidarity; and (iv) better manage space and environment in support of sustained development. 10. To achieve these objectives, the government will take advantage of all available economic opportunities. A strong and sustainable economic growth, capable of reducing poverty, will depend on major efforts to address the challenges identified in sectoral strategies and in the second PRSP. In the context of previous ERSGs, and with the support of other donors (notably the European Union and a number of bilateral donors), the government launched critical reforms that have paved the way for: (i) significant improvements in the business climate, governance and fiscal transparency; (ii) innovation and massive investments in growth sectors and human capital; (iii) improvements in economic infrastructure, notably energy; and (iv) increased agricultural production and productivity and job creation through economic diversification and improved access to markets. The same policy framework will continue to

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dominate the selection of programs that will help achieve the objectives described in paragraph 1. 11. The government recognizes that stimulating growth will require vigorous efforts to promote the development of industry and services. The agricultural sector, which dominates the Burundian economy (about 46 percent of GDP), will continue to play a major role in stimulating the growth of manufacturing (about 17 percent of GDP in 2004-2009) and the service sectors (about 37 percent of GDP). The dominant role of agriculture is due to the contribution of the sector to export earnings (more than 60 percent in 2006-2009) and employment (more than 90 percent of the country’s labor force). Major economic changes, which will create jobs, generate income and tax revenue, will depend on aggressive measures aimed at promoting the manufacturing and service sectors (and the private sector) and increasing their share of GDP. The government – in cooperation with its partners – has defined a reform program for 2012, focused on three strategic objectives: (1) improving the business climate and promoting private sector development; (2) improving the transparency of public finance management; (3) making the Burundian economy more resilient to external shocks. Nevertheless, as many negative factors may threaten the development of the agricultural sector, the government will make considerable efforts to stimulate agricultural production and productivity. 12. Significant progress has been made towards the development of the private sector which has been placed at the center of the country’s economic and social strategies. For the Doing Business Report, Burundi is among the ten countries that were able to accelerate the reform process. Since 2010, the government undertook to promote growth generating sectors by improving productivity in the agriculture and livestock sectors, developing the potential of the mining sector, promoting manufacturing and handicrafts, tourism and trade. 13. New investments were made in agriculture to mitigate the impact of cyclical fluctuations (notably in the coffee sector), climate change, varietal degradation and lack of quality seeds and other inputs. 14. In addition to these actions that support private sector activities, the government took strong measures aimed at signaling its determination to improve the ranking of Burundi in the Doing Business Indicator for 2012. Thanks to the creation of an ad hoc Decision Committee, significant progress was made towards reducing the time required to obtain construction permits, execute property transfers and create new enterprises. Improving the financial viability of REGIDESO, launching the second phase of the sale of coffee washing stations, and restructuring public enterprises also are among the priority measures that the government will continue to implement in the context of the future ERSGs. In each of these areas substantial progress has already been made; more than 25 percent of REGIDESO customers have been enlisted in pre-payment mechanisms, the second phase of the sale of washing stations has been evaluated and a revised bill on the privatization of public enterprises has been approved by the Council of Ministers and submitted to the Parliament. 15. Restoring peace and security also is an area in which considerable progress has been made. A critical result has been the conversion of the last rebel movement into a political party. Elections in May and September 2010 – which re-elected President Pierre Nkurunziza – showed that the country has chosen the democratic process as the only acceptable method to settle political and social issues. Despite the cost of these elections – partly financed by the country’s partners – the government continued to implement its reform program and was able to control

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inflationary pressures resulting from implementation of a variety of electoral promises. In 2010, in order to consolidate the political reconstruction process, which is essential to promote strong and sustainable economic growth, the government created a Forum of political parties for a permanent dialogue on issues concerning the population’s welfare. Other important measures were also taken in 2011 to help stabilize the political situation, including the creation of national human rights institutions and the initiation of a “transitional justice system”. The Ombudsman’s office started its activity on February 11, 2012 (the law creating the office and defining its role was promulgated on January 25, 2010). A special commission was created to investigate cases of torture and extra-judicial executions. In brief, the government plans to pursue ongoing efforts to support the democratic process, improve governance and promote an effective economic and social dialogue. 16. Recent increases in international food and petroleum prices created additional inflationary pressures. The rate of inflation went up from 15 percent by the end of December 2011 to 24 percent by the end of March 2012. Price increases are also due to a sharp drop in agricultural production (minus 30 percent during the first quarter of 2012). In addition, the government revised electricity and water tariffs and this also influenced consumer prices. Thanks to measures taken by the government to fight inflation, including implementation of appropriate policy instruments and reforms agreed with the IMF in the context of the Extended Credit Facility, the increase in consumer prices should decline to less than 10 percent in 2013. In effect, in 2008, the annual rate of inflation which had reached 26 percent by the end of the year declined to 4.6 percent in 2009 and 6.5 percent in 2010. To monitor the rate of inflation, the government will use the consumer price index (IPC) that ISTEEBU calculates on the basis of a basket of consumer goods sold on Bujumbura’s central market, pending the results of a forthcoming household consumption survey to update the basket of goods used by ISTEEBU. 17. The overall budget deficit for 2011 is estimated at 2.5 percent, very close to the government objective. Following a major degradation of the fiscal situation in 2009 (with a budget deficit of 5 percent) and recovery measures in 2010, the budget deficit is again at the level already reached in 2007-2008. The decline in the deficit is due to sound public expenditure management – which gives priority to pro-poor expenditures – to the operations of Burundi’s Revenue Authority (OBR receipts are estimated at 15 percent of GDP), improved coordination of budget and monetary policies (periodic preparation by the Treasury Management Committee of cash management plans consistent with the commitment plans), and through more rational accounting procedures (closure of the last off-budget accounts by the end of December 2010). In addition, the government keeps increasing poverty reduction expenditures, in line with PRSP and MDG objectives. 18. The most recent IMF review concluded that the 2012 budget was in line with agreed macroeconomic objectives. The macroeconomic framework has been revised to take into account the impact of the food and energy crisis on public expenditures, sources of finance and on Burundi’s external position. To accelerate progress towards the MDGs and reduce social tensions, the government gave priority to growth generating sectors and poverty reducing expenditures and reduced substantially some taxes. These measures will cushion the impact of the crisis on poor households. The country’s external position should improve thanks to liberalization measures and diversification of exports. In 2012, the government plans to privatize 76 of the 104 coffee washing stations that were expected to be privatized since 2011. Expanding the coffee sector privatization process will induce new investments that will help rehabilitate ageing plantations and stop the decline and the cyclical variations in coffee output. The

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government will continue to assist the coffee and tea sectors by: (i) providing technical support to producer associations; (ii) investing in irrigation and agricultural inputs; and (iii) improving the privatization law in line with the best international practices. 19. The safety net that protects the poorest and most vulnerable segments of the population will be maintained despite the financial constraints resulting from the international crisis. Since 2008, the government took a number of measures aimed at helping the most vulnerable groups and protecting them against the negative impact of the recent crises. In addition to temporary, well-targeted tariff reductions on imports of food and petroleum products consumed by poor households, social safety net measures have been adopted (food supplements, emergency food security measures, school feeding programs, distribution of kits to farmers, micro-credits for the rural population, assistance to refugees and displaced persons, etc.). To increase agricultural production, the government distributed seeds and fertilizers to farmers, and undertook to rehabilitate the Imbo plain irrigation system, and other basic infrastructure facilities. To help the poor, the government will continue to implement these programs over the next few years.

II. Main Achievements of ERSG II, III, IV and V 20. The reforms undertaken by the government show its determination to achieve the development objectives of the PRSP. The reform program is structured around the following objectives: (i) strengthening the economic stabilization process; (ii) structural reforms aimed at improving public finance management and monetary and exchange rate policies; and (iii) increasing efficiency and productivity notably through privatizing public enterprises and restructuring the export sector (coffee, tea and cotton). In each of these areas, the ERSG series – together with programs supported by other donors – led to significant progress that should be highlighted. 21. Implementation of overall public finance management reforms produced substantial results. The Parliament adopted a new Public Finance Framework Law (Loi Organique) and a new Procurement Code. These two laws are in line with modern public finance management and transparency systems and define clearly the concepts and principles governing the role of government employees and their responsibilities. A decree on the budget preparation process has been approved and is implemented. To improve the quality of public spending, a Public Expenditure Tracking Survey (PETS) was carried out in 2007 and led to the adoption of action plans in 2009. Introducing the central MTEF system in the budget preparation process ensures the coherence of budget plans with PRSP objectives. Off-budget accounts have been closed and commitment ceilings have been established (in cooperation with sector ministries) to eliminate arrears and unify cash accounting. 22. In addition to reforms initiated in the context of the first ERSG series, a law creating the added value tax was promulgated on February 17, 2009 and all indirect tax exemptions have been eliminated (as provided in the new tax code). The government completed a census of civil service staff, including police and defense personnel. The data base created in this context will soon be updated thus allowing for the distribution of digital ID cards to all the civil servants. 23. A payroll software has been interfaced with SIGEFI. In May 2009 the Council of Ministers adopted a Public Finance Management Strategy (SGFP). Its implementation (until 2012) is monitored through quarterly reports validated by the Steering Committee for Public

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Finance reforms. Recognizing the potential benefits of the PEFA public finance performance evaluation framework, the government, in cooperation with the European Union and the Belgian government, commissioned an evaluation of Burundi’s public finance management .performance. By the end of the SGFP, the government launched an internal evaluation which has been supplemented by the external evaluation (PEFA). Both evaluations have shown that the country made considerable progress in public finance management. However, remaining weaknesses justify additional public finance management reforms. A new Public Finance Management Strategy (SGFP 2) and a new three-year action plan 2012-2014 have been prepared. A draft decree regulating budget management has been approved by the Council of Ministers. A new budget and accounting classification consistent with the State Accounting Plan of 2008 has been adopted by a Ministerial ordnance 540/1210 of August 10, 2010. A training program on the new classification was organized in July 2012 thanks to CTB financing. The training program was for the staff involved in budget preparation for the National Assembly, the Senate, the Court of Accounts and the ministries. The presentation of the 2013 budget will be based on the new classification. A convention between the government and the central bank that clarifies the functions of the BRB as the government cashier was signed in February 2010. A draft presidential decree on budget governance has been prepared, with the help of an IMF expert, and signed in July 2012. It addresses a variety of budget issues, including implementation of the principle of legality of revenue and expenditures, definition of economic and budget policy objectives (macroeconomic framework, budget policies consistent with macroeconomic objectives, implementation of EAC convergence criteria, debt sustainability, MTEFs and program-budgets). The decree also addresses rules governing Budget Laws, notably their structure and ways and means of improving budget procedures. The 19 programs included in the Public Finance Management Strategy are effectively implemented with the help of multi-sector technical groups and the Partnership Framework Support Unit. In the context of the second strategy, only 12 programs – instead of 19 – will be implemented. 24. Implementation of measures aimed at stimulating private sector activity has also made significant progress. A new Investment Code in line with the best international practices was promulgated in September 2008. It should help improve the business climate, when the provisions of the Investment and Tax Codes have been harmonized. The Council of Ministers adopted a draft Commerce Code and a draft Code on public and private companies that are consistent with international norms and were prepared on the basis of a participative process. A decree creating the Public/Private Sector Dialogue Framework was signed by the President in June 2008 and the Tribunal of Commerce reduced by more than 10 percent the number of cases that have not been adjudicated within 60 days. The new law reduces the cost and the time necessary for the creation of enterprises. It improves transparency and accountability, gives more confidence to investors and introduces foreclosure procedures. The Investment Promotion Agency has been operating since 2010. The financial sector performance improved with the adoption of a financial sector reform strategy. The Parliament has adopted new statutes for the central bank, which strengthen the bank’s independence and governance. The central bank also adopted important measures aimed at improving its internal control mechanisms and risk management practices in line with the recommendations of an IMF report on financial safeguards. All these actions increase the effectiveness of measures supported by the ERSG series. 25. Significant progress has also been made towards reforming the coffee sector. The adoption by the Council of Ministers of a coffee sector disengagement strategy in 2008, was followed by a presidential decree creating the Coffee Sector Regulation Agency (ARFIC) thus

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launching the privatization process. Earlier, the government had adopted new regulations opening coffee exports to local and international operators. Implementation of the new regulations induced new operators to enter a market that was becoming more transparent and more competitive. In addition to the creation of the regulation agency, ERSG III supported: (i) national communication campaigns aimed at showing the merits of the coffee sector privatization process; (ii) an international bidding procedure for the sale of government assets in the coffee sector; and (iii) cancellation of the convention between SOGESTALs and OCIBU. The result of the procedure was the sale of 13 washing stations to a reputable international group. In the context of ERSG V 28 washing stations and one coffee milling plant were ceded to national private operators and foreign investor, respectively.

III. The ERSG VI challenges. 26. Implementation of ERSG VI will coincide with that of the second PRSP, which aims at promoting strong and sustainable growth through major economic transformation and structural reforms financed by internal resources and external grants. Unfortunately the international environment may be an obstacle to the mobilization of additional external financial support. The government – in cooperation with its development partners – is preparing a donor meeting scheduled for the end of October 2012 in Geneva. 27. The ERSG VI program will be in line with the ongoing government policies and will supplement and deepen the reforms undertaken in the context of the previous ERSG series. As during the ERSG V period, the government has been looking for synergies in the selection of prior actions for ERSG VI. The second PRSP will therefore be the reference strategic framework for the design of policies and reforms to be supported by ERSG VI. V. The Prior Actions of ERSG VI

V.1. Strengthening Public Financial Management and Budgetary Transparency 28. In this area four measures are particularly relevant: (i) submission to the Parliament of the 2013-2015 MTEF, together with the budget framework letter for 2013; (ii) preparation of a decree on budget governance with a view to reshaping budget preparation, approval, execution and monitoring procedures; (iii) publication of public procurement decisions ; and (iv) creation by ministerial ordnance (co-signed by Finance and Public Administration) of a center for payroll processing and career management. 29. Adoption of the budget framework letter (lettre de cadrage) for the 2013 budget. The central 2012-2014 MTEF was used as a basis for preparing the budget framework letter for the draft 2012 budget. Similarly, a budget framework letter for the 2013 budget was prepared on the basis of the 2013-2015 MTEF. It has not been finalized as the government had to prepare a revised budget for 2012 because of a shortage of government revenue by the end of the first semester. 30. Signing of decree on budget governance. The Public Finance Framework Law (Loi Organique) is the new “public financial constitution” of Burundi. Promulgated in December 2008, it requires the adoption of a number of implementation documents. The decree on budget governance, which was prepared with the FAD technical assistance, is one of the main

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implementation documents. It deals with budget policy issues, budget preparation and approval procedures, budget execution and controls, and fiscal discipline and transparency. 31. Publication of procurement decisions. To improve transparency in procurement procedures, the government undertook to revise the public procurement code and related implementation documents. Currently procurement decisions are published on the web site of the Finance ministry. 32. Creation by co-signed ministerial ordinance of a center for payroll processing and career management. The development and operation of a payroll and career management software represents a major progress. With help from its partners, the government acquired and adapted a program called OPENRH, which since January 2011 runs the payment of civil servants’ salaries (Ministry in charge of Finance) and the management of civil servants’ careers (Ministry in charge of Public Administration). A computerized treatment center under the joint leadership of the ministries in charge of Finance and Public Administration has been created to manage the program. A joint ministerial ordinance was signed by the minister in charge of Finance and minister in charge of Public Administration.

V.2. Improving the business climate and promoting private sector development 33. Two measures have already been taken to achieve that objective: (i) creation and operation of a One Stop system (guichet unique) for new enterprises to reduce processing costs and time; and (ii) the Interministerial Privatization Committee has given the go ahead for launching the third phase of the sale of the 76 coffee washing stations. 34. A One Stop system for new enterprises to reduce processing time and costs. Since stability has been restored, the Burundi government undertook reforms aimed at improving the business climate and stimulating economic recovery. Recent measures simplified procedures for the creation of new enterprises. The One Stop Shop system was put in place to facilitate the businesses’ registration through regrouping key agencies/institutions involved in business creation at a single location. 35. Launching the third phase of the sale of 76 washing stations. The Interministerial Committee for privatization has authorized SCEP to launch the third phase of the sale of 76 washing stations. The government will obtain the agreement of the Parliament on a list of enterprises to be privatized, including the coffee washing stations. VI. Other Measures Envisaged in the context of Future operations (notably ERSG VII) VI.1. Public Finance Management and Budget Transparency 36. In this area, the government envisages: (i) to involve the Court of Accounts and the Economic and Social Council in budget preparation; (ii) to establish Look-Up Tables at the communal level to inform the population on sectoral budget allocations in the communes in key sectors (schools and health); (iii) to organize a comprehensive audit of the procurement system; and (iv) to validate the data base on civil service staff following an updating of staff rotations since the census.

82

VI.2. Promotion of Private Sector Development and Economic Diversification 37. In this area, the government envisages: (i) to extend the One Stop system to construction permits; (ii) to increase in the 2013 budget allocations to rural roads and irrigation systems; (iii) to adopt a strategy for the privatization of the tea sector; and (iv) to adopt a Mining Code consistent with the best international practices. VI.3. Strengthening the Safety Nets and protect Vulnerable Populations 38. In this area, the government envisages: (i) to undertake an evaluation of existing safety nets in order to coordinate programs and strengthen support provided to the poorest and most vulnerable segments of the population; and (ii) to finalize a household consumption survey and develop a map of poverty. VII. Conclusion 39. These are some of the measures that will dominate the government program during 2012. This program was discussed with World Bank staff and will be closely monitored by the government. To strengthen its cooperation with the World Bank and facilitate exchange of views between the parties, the government will provide, on a timely basis, the following information:

• 2012 budget execution tables (administrative and economic classification) on a quarterly basis.

• A table comparing budget execution of priority sectors in 2010 and 2011 (health, education, agriculture, infrastructure, and social protection) and pro-poor expenditures (based on the revised 2008 methodology) also on a quarterly basis.

• The total of payments made outside prior commitment in 2012 (paiement sans engagement préalable), every quarter.

• The total of payments on off-budget accounts (except the National Road Fund) in 2012. • During program execution, a table indicating: a) average, maximal and minimum time

elapsed between: (i) legal commitment; (ii) accounting commitment; (iii) reception of bills; (iv) liquidation; (v) payment order; and (vi) payment by the Ministry; and b) total amount of arrears by Ministry (any bill that has not been paid within 60 days following the due date), every quarter.

• An estimate of government arrears on payments to REGIDESO every quarter.

83

ANNEX 1: Prior Actions Proposed Prior actions PRIORITY 1: STRENGTHENING PUBLIC FINANCIAL MANAGEMENT

AND BUDGET TRANSPARENCY Objective 1.1: Strengthening strategic and budget planning to improve the

quality of public spending 1

The Recipient has adopted and submitted to Parliament, for informational purposes only, the 2013-15 Medium Term Expenditure Framework (MTEF) and the budget framework letter consistent with the MTEF for the preparation of its 2013 budget law. Status: Completed.

2 The Recipient has issued a decree outlining the conditions for fiscal policy formulation and budget preparation and the rules for budget discipline and transparency. Status: Completed.

Objective 1.2:Reinforcing transparency and efficiency of PFM, procurement and controls and stimulating the demand for good governance

3 The Recipient has published, on the website of its ministry in charge of finance, current public procurement decisions by the National Directorate for Public Procurement (DNMP) (listing the selected firms, contract amounts and the method of procurement) and the 2011 DNMP Activity Report, with the exception of contracts, which pursuant to the Recipient’s law, are of a secret nature or contracts with a value below the thresholds requiring DNMP review. Status: Completed.

Objective 1.3: Streamlining public wage bill and HR management 4 The Recipient has established, through a joint ministerial ordinance by the ministry

in charge of finance and ministry in charge of public administration labor and social security, a center for government payroll processing and career management and has appointed a director for the said center. Status: Completed.

PRIORITY 2: PROMOTING PRIVATE SECTOR INVESTMENT AND ECONOMIC DIVERSIFICATION

Objective 2.1: Improving the legal and regulatory framework for the promotion of private sector investment

5 The Recipient has established and has rendered operational a guichet unique (one-stop shop) for the registration of business entities. Status: Completed.

Objective 2.2: Improving agriculture productivity and promoting economic diversification through restructuring of export and services sectors

6 The Recipient’s Inter-ministerial Committee for Privatization has authorized the SCEP to launch the third phase for the sale of 76 state-owned washing stations in the coffee sector. Status: Completed.

Objective 2.3 Promoting the development of the mining sector No prior action under ERSG VI. PRIORITY 3: STRENGTHENING SOCIAL PROTECTION TO REDUCE

VULNERABILITIES Objective 3.1: Strengthening safety nets systems No prior action under ERSG VI.

Objective 3.2: Improving targeting of social service delivery No prior action under ERSG VI.

84

Annex 5: Burundi ERSG VI - Prospects for Achieving the MDGs by 2015

Goal 1: Eradicate extreme poverty and hunger Unlikely. Burundi remains the third poorest country in the world- some 67 percent of the population is poor. Poverty in Burundi is overwhelmingly rural (70 percent), at its worst in the North (70-80 percent), with Burundi amongst the 18 most vulnerable countries with regard to food security (2008). Factors contributing to poverty include: low agricultural productivity, unemployment and underemployment, with few income opportunities outside agriculture (with food production limited to family consumption); shrinking and inequitable access to land (owned 70 percent by men). Groups especially vulnerable to poverty include those displaced by strife and households headed by single women who are often forced into food “coping” strategies, which impact negatively on child nutrition and schooling. Malnutrition is responsible for more than 130 child deaths daily, making it the greatest contributor to under-five deaths. The risk is a high inter-generational negative impact on health and mental development. Goal 2: Achieve universal primary education Unlikely. There has also been good progress toward attainment of universal primary enrolment but quality is poor. With the abolition of school fees, gross primary school enrolment rate increased to 130 percent in 2010, up from 82 percent (2005). The ratio of girls-to-boys is almost 100 percent. However, Burundi remains off-track regarding the MDG of 100 percent completion of the primary cycle. It stands at just 48 percent due to drop-outs. The rapid growth of enrollments has stressed the delivery system. High class sizes combined with low teaching skills and resources have undermined the quality of instruction. Goal 3: Promote gender equality and empower women Unlikely. A ‘positive” is the ratio of girls-to-boys, almost 100 percent, in basic education. In terms of women’s empowerment progress remains limited. The majority of the Burundian labor force (84%) is in the agriculture sector and women make up 56% of that group. The current stagnation of the agricultural sector, due to low productivity, impacts negatively on the income and status of women. Compared to men, they can less afford inputs for modernize their plots farming, since they lack land tenure and cannot inherit, limiting their access to credit. Women working the land are handicapped by traditional rights and customs. Family land cannot be inherited by daughters nor can houses. Thus, women lack the collateral required to access credit. At the enterprise level, women owners are more subject to credit constraints than men. Burundi scores lowest among peer counties in “ease of getting credit” (Doing Business Database). With regard to political power and decision-making, the representation of women in government has improved significantly since the 2010 election. Forty five percent of the Cabinet are women as are 30 percent of senior posts in government. Goal 4: Reduce child mortality Unlikely. At 96 per 1000 live births, child mortality is still far from the MDG. However, the rate has fallen, from the extraordinarily high 167 per 1000 in 2005. Goal 5: Improve maternal health Unlikely. The 499 deaths (2010) per 100,000 live births is significantly reduced from the 866 per 100,000 in 2008. Some progress has been made. Currently, around 60 percent of deliveries take place at home (48 percent for poor women and 82 percent for rich women), while skilled personnel assist 52 and 85 percent, respectively, of the same groups, underlining the continuing severe inequity in access to neo- and post-natal care. Maternal mortality reflects the overall high female mortality, above the regional average and among the highest in the World, even though Burundi is not as challenged by HIV/AIDS as many other countries in the region. In 2005 the rate was 415 per 1000 female adults and in 2010 the rate was 389; the same year the Sub-Saharan regional average was 349 per 1000 adult females. The high female mortality rate is likely due to the combined impact of other factors, such as malaria and poor health due to poverty and food insecurity – and due to continuing low access to services and medicine. The high total fertility rate (TFR) of 6.4 children per woman continues to be pre-occupying, given the risks to women and the negative impact of population on the sustainability of services. Goal 6: Combat HIV/AIDS, malaria, and other diseases

85

Unlikely. However, there has been good progress toward reducing HIV prevalence rate. The rate had fallen to 1.4 percent (2010), down from 2.97 percent in 2007. Continued focus is needed to ensure that the infection rate continues to decline.

86

Annex 6: Burundi ERSG VI – Fund Relations Note

IMF Executive Board Concludes 2012 Article IV Consultation with Burundi Public Information Notice (PIN) No. 12/95 August 2, 2012 On July 27, 2012, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Burundi.1 Background Real GDP growth is estimated to have increased to 4.2 percent in 2011. After decelerating to 15 percent (y-o-y) toward end-2011, headline inflation rose sharply in March 2012 to 24.5 percent (y-o-y) owing to a rise in rents, utility tariffs, and higher food prices. It has since eased slightly to 22.7 percent in May 2012. Growth in broad money decelerated to about 4.7 percent (y-o-y) in April 2012 following tighter monetary conditions as policy rates rose by 350 basis points to 14 percent in May 2012. Credit to the private sector after peaking at 40 percent at end-2011 slowed to 28 percent (y-o-y) at end-April 2012 in the face of tighter liquidity conditions. Banks were able to sustain credit growth despite a decline in deposits, in part through a drawdown in excess reserves. While revenues and expenditure were broadly in line with the program, the deficit in 2011 was higher than expected due to the late disbursement of the World Bank budget support operation. Revenues through end-May 2012 were lower than expected by (0.5 percent of GDP), owing to a fall in collections of excise taxes and the granting of exemptions. To limit the impact of inflation on the poor, the government eliminated taxes on food products on May 1 until end-2012. Executive Board Assessment Executive Directors commended the Burundian authorities for progress in implementing their Fund-supported economic program in a difficult post-conflict environment. However, Directors considered that the external and internal risks weighing on the outlook called for a faster pace of fiscal and structural reforms, and encouraged the authorities to persist in their prudent approach to macroeconomic management. Directors agreed that continued progress in implementing revenue reforms is essential in light of recent fiscal slippages and the decline in donor assistance. In particular, they encouraged the authorities to widen the tax base, strengthen revenue administration, and overhaul the fuel pricing mechanism. Directors commended the authorities for taking sizable corrective fiscal measures to keep the program on track but stressed the need to better align spending priorities in view of resource constraints. Directors emphasized the importance of pursuing public financial management reforms in order to foster greater transparency and accountability, and to strengthen institutional capacity. They also noted that, despite improvements in the budget framework, significant gaps remain in debt management and Burundi remains vulnerable to debt distress. In this context, continued reliance on grants and highly concessional loans remains a priority. Directors considered that additional monetary policy tightening will be warranted if inflationary pressures do not subside in the period ahead. They called for further monitoring of risks to the financial sector stemming from rising interest rates and an unfavorable external environment. Directors acknowledged that greater exchange rate flexibility has helped the economy adjust to external shocks. They underscored the need to further enhance Burundi’s competitiveness by strengthening the business climate, improving the electricity supply, and reducing transportation costs. Directors concurred that Burundi’s statistical base still suffers from shortcomings that hamper

87

policy design and evaluation. In particular, they encouraged the authorities to improve capacity in the preparation of national accounts, balance of payments data, and consumer price indices. Burundi: Selected Economic and Financial Indicators, 2010–15

2010 2011 2012 2013 2014 2015

Prel. Proj.

(Annual percentage change)

National income and prices

Real GDP growth 3.8 4.2 4.2 4.5 5.1 5.5

GDP deflator 12.3 14.3 15.2 11.1 7.2 5.8

Consumer prices (period average) 6.4 9.7 19.6 6.4 7.4 6.3

Consumer prices (end of period) 4.1 14.9 14.7 8.4 6.1 6.4

External sector

Exports, f.o.b. (US$) 48.0 22.5 3.1 0.2 -1.0 9.3

Imports, f.o.b. (US$) 105.3 3.7 -2.9 3.5 1.2 3.7

Export volume 16.4 0.4 30.4 5.4 -3.9 14.8

Import volume 145.1 -22.6 0.8 7.9 2.8 4.6

Terms of trade (deterioration = –) 51.7 -8.9 -17.9 -1.0 4.6 -4.0

(Change in percent of beginning of period M2,

unless otherwise indicated)

Money and credit

Net foreign assets -5.4 -12.1 -0.6 6.1 -0.8 7.6

Domestic credit 25.1 30.7 28.6 14.6 23.3 11.4

Government 7.4 8.0 5.4 2.6 2.2 2.2

Private sector 17.0 24.1 23.3 12.5 21.1 9.1

Money and quasi-money (M2) 19.4 6.1 18.4 16.1 12.7 11.6

Reserve money (12–month growth rate) 5.7 0.6 28.1 9.3 16.4 13.3

(Percent of GDP)

General government

Revenue and grants 37.3 36.1 30.8 30.4 29.9 28.6

Tax and nontax revenue 14.6 15.4 15.1 15.5 15.6 15.6

Total expenditure 41.0 40.0 33.6 34.9 34.8 32.5

Net lending (+) / borrowing (-) -3.6 -4.0 -2.7 -4.6 -4.9 -3.9

88

External sector

Current account balance -9.4 -12.3 -11.6 -11.0 -10.8 -11.1

Overall balance of payments 0.7 -1.6 -0.3 -0.3 -2.2 -0.9

(Percent of GDP)

Savings-investment balance -9.4 -12.3 -11.6 -11.0 -10.8 -11.1

Private -5.8 -8.3 -8.8 -6.5 -5.9 -7.2

Public -3.6 -4.0 -2.7 -4.6 -4.9 -3.9

External sector

Gross official reserves (US$ million) 332 296 288 319 308 342

Months of imports 4.4 4.0 3.8 4.2 3.9 4.7

Debt-service to exports ratio (percent) 1.4 3.3 3.8 7.2 10.6 13.1

Memorandum item:

Nominal Exchange rate (BIF/USD) 1231 1261 … … … …

GDP at current market prices (BIF billion)

2495 2971 3566 4138 4663 5203

Nominal GDP per Capita (US Dollars) 242 255 289 311 332 349

Sources: Burundi authorities; IMF staff estimates and projections.

1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm. IMF EXTERNAL RELATIONS DEPARTMENT Public Affairs

Media Relations

E-mail: publicaffairs@imf.org E-mail: media@imf.org

Fax: 202-623-6278 Phone: 202-623-7100

89

Annex 7: Burundi ERSG VI-VIII- Policy Matrix: Objectives, Prior Actions, and Triggers (2012-2015)

Medium Term

Objectives

POLICY ACTIONS Target and actual Outcomes Observation Responsible

Entity

ERSG VI Prior Actions (2012)

ERSG VII Triggers (2013)

ERSG VIII Triggers (2014)

Indicators Baseline (Year)

2013 2014 2015

PRIORITY 1: STRENGTHENNING PFM AND BUDGET TRANSPARENCY

Objective 1.1 Strengthening strategic and budget planning to improve the quality of public spending

The Recipient has adopted and submitted to Parliament, for informational purposes only, the 2013-15 Medium Term Expenditure Framework (MTEF) and the budget framework letter consistent with the MTEF for the preparation of its 2013 budget law.

The Recipient has transmitted the MTFF and MTEF to Parliament and organized pre-budget debates in line with the Loi Organique and the Decree on Budget Governance.

The Recipient has submitted the 2015 draft budget law to Parliament before November 2014.

Gap (amount) between budget ceilings in the MTEF and approved budget.

BIF 6.7 billions

(December 2011)

BIF 5.5 billions

BIF 4.5 billions

BIF 3.5 billions

Expense MTEF expenditure is BIF 1032.7 billion and voted expenditure is BIF 1026 billion.

MOF

The Recipient has issued a decree outlining the conditions for fiscal policy formulation and budget preparation and the rules for budget discipline and transparency.

Gap (months) between effective budget presentation to Parliament and the legal delay.

Delay of two months

(2012)

Delay of 1 month

Delay of 1 month

Delay of 0 month

The budget has to be legally presented to Parliament every year on October 01. (it was sent on December 02 in 2011).

MOF

Objective 1.2 Reinforcing transparency and efficiency of PFM, procurement and controls and stimulating the demand for good governance

90

Medium Term

Objectives

POLICY ACTIONS Target and actual Outcomes Observation Responsible

Entity

ERSG VI Prior Actions (2012)

ERSG VII Triggers (2013)

ERSG VIII Triggers (2014)

Indicators Baseline (Year)

2013 2014 2015

The Recipient has published, on the website of its ministry in charge of finance, current public procurement decisions by the National Directorate for Public Procurement (DNMP) (listing the selected firms, contract amounts and the method of procurement) and the 2011 DNMP Activity Report, with the exception of contracts, which pursuant to the Recipient’s law, are of a secret nature or contracts with a value below the thresholds requiring DNMP review.

The Recipient has hired an independent and reputable firm to undertake a comprehensive audit of the public procurement system.

PEFA indicator PI19-iii on public access to public procurement information.

Share of public procurement contracts (value) awarded on a sole source basis in the previous year.

D

(March 2012)

5% in 2011

…

(no new PEFA)

Not to exceed the 10% required by the Law

…

(no new PEFA)

Not to exceed the 10% required by the Law

B

(New PEFA)

Not to exceed the 10% required by the Law

According to Procurement code the value of sole source contracts should not exceed 10% of total public procurement

MOF, DNMP

MOF, DNMP

The Recipient’s General Inspectorate of State (IGE) has conducted training for ministerial inspection units and implemented a joint audit work plan.

Number of joint IGE-Ministerial inspection units’ investigations conducted yearly.

0

(March 2012)

1 2 3 IGE

The Recipient has prepared summary tables in easy-to-understand language (French/Kirundi) and format,

Share of communes where budget information tables are available.

26.5%

(March 2012)

35% 42% 50% Thirty one (31) out of 117 ommunes submitted their budget

Ministry of Communal Development and Decentralization

91

Medium Term

Objectives

POLICY ACTIONS Target and actual Outcomes Observation Responsible

Entity

ERSG VI Prior Actions (2012)

ERSG VII Triggers (2013)

ERSG VIII Triggers (2014)

Indicators Baseline (Year)

2013 2014 2015

including key sector budget information, disseminated them widely in the media and posted them in public places at the communal level to enable citizens to obtain information on sector budget allocations (schools and health centers) in their communes.

execution documents till March 31, 2012.

Objective 1.3 Streamlining public wage bill and HR management

The Recipient has established, through a joint ministerial ordinance by the ministry in charge of finance and ministry in charge of public administration labor and social security, a center for government payroll processing and career management and has appointed a director for the said center.

The Recipient has validated the civil servant database following the process of updating information on staff turnover since April 2007.

The Recipient has conducted an audit of the payroll and human resource (HR) management system and of the SIGEFI and developed an action plan for implementing recommendations.

Share of civil servants whose profiles have been updated in the payroll and HR management system (excluding security forces)

46

56

66

76

Payroll and HR Management Center / MOF

PRIORITY 2: PROMOTING PRIVATE SECTOR INVESTMENT AND ECONOMIC DIVERSIFICATION

Objective 2.1 Improving the legal and regulatory framework for the promotion of private sector investment

The Recipient has established and has rendered operational a guichet unique (one-stop shop) for the registration of business entities.

Number of days to register a business at the new “Guichet Unique” (one stop shop);

11

Dec 2011

9

7

5

API, BRA / Doing Business

92

Medium Term

Objectives

POLICY ACTIONS Target and actual Outcomes Observation Responsible

Entity

ERSG VI Prior Actions (2012)

ERSG VII Triggers (2013)

ERSG VIII Triggers (2014)

Indicators Baseline (Year)

2013 2014 2015

The Recipient has established and rendered operational a Guichet Unique (one stop shop) for construction permits.

Number of days to obtain a construction permit at the new “Guichet Unique” (one stop shop).

82

Dec 2011

… 57 32 API, BRA/ Doing Business

The Recipient has made publicly available the full itemized list of tax exemptions granted over the past year and the budget document clearly specifies the estimated amount of tax exemptions as a share of tax revenues.

Estimated value of tax exemptions as a share of total tax revenues.

21.23%

(December 2011)

To be revised after a comprehensive assessment of tax exemptions.

To be revised after a comprehensive assessment of tax exemptions.

To be revised after a comprehensive assessment of tax exemptions.

Although tax exemptions were capped at about BIF 20 billion in the 2011 budget, BIF 100 billion exemptions were actually granted. National revenue was estimated at BIF 471 billion in 2011.

MOF

Objective 2.2 Improving agriculture productivity and promoting economic diversification through restructuring of export and services sectors

The Recipient’s Inter-ministerial Committee for Privatization has authorized the SCEP to launch the third phase for the sale of 76 state-owned washing stations in the coffee sector.

Number of publicly-owned coffee washing stations sold.

0 25 25 26 ARFIC, PSD Project

The Recipient has increased, relative to the previous year, the budget allocation for feeder roads and irrigation, in line with the

The Recipient has issued regulations related to the mandatory preparation of municipal land-use plans.

Percentage of budget allocated to the construction/maintenance of feeder roads and small scale irrigation.

2.2% in 2012

3.2% 4.2% 5% MOF

93

Medium Term

Objectives

POLICY ACTIONS Target and actual Outcomes Observation Responsible

Entity

ERSG VI Prior Actions (2012)

ERSG VII Triggers (2013)

ERSG VIII Triggers (2014)

Indicators Baseline (Year)

2013 2014 2015

MTEF allocation.

The Recipient has adopted a strategy for the reform of the tea sector clarifying the role and responsibilities of the regulatory agency of the sector.

The Recipient has adopted a strategy for the privatization of state-owned assets in the sugar production company SOSUMO

Number of state tea processing factories sold.

0

(April 2012)

… 1 1 There are 4 state tea processing factory that could possibly be privatized

API, SCEP, PSD project

Objective 2.3 Promoting the development of the mining sector

The Recipient’s Council of Ministers has adopted and submitted to Parliament a Mining Code consistent with best international practices.

Number of benchmarks met for EITI membership

0

(December 2011)

… … 9

Ministry of Mining, Ministry

of Commerce, EITI

Commission

The Recipient has created an EITI Commission and provided adequate resources with the task to implement a detailed action plan leading to EITI membership.

PRIORITY 3: STRENGTHENING SOCIAL PROTECTION TO REDUCE VULNERABILITIES

Objective 3.1 Strengthening safety nets systems

The recipient has appointed a Task Force to oversee the development of a comprehensive social protection strategy and action plan for

The Recipient’s Council of Ministers has adopted the updated social protection strategy.

The Recipient has begun implementing the strategy and

Percentage of the extremely poor households covered by at least one of the main safety nets programs;

Unknown X baseline (to be established as part of the strategy formulation process)

+ 5pp +10pp Task Force

94

Medium Term

Objectives

POLICY ACTIONS Target and actual Outcomes Observation Responsible

Entity

ERSG VI Prior Actions (2012)

ERSG VII Triggers (2013)

ERSG VIII Triggers (2014)

Indicators Baseline (Year)

2013 2014 2015

implementation.

The Task Force has undertaken and validated a social safety nets assessment.

allocated the required funding (with private sector participation).

Objective 3.2 Improving targeting of social service delivery

The Recipient has finalized a Household Expenditure Survey and developed a National Poverty Map.

The Recipient has carried out and publicly disclosed the results of a PETS survey (including beneficiaries’ assessment) in social sectors

Poverty rate data and a detailed poverty map available based on a new household consumption survey.

2006 CWIQ Survey

(Poverty rate: 67%)

New Survey completed

New Poverty number available

New poverty map available

Task Force

95

Annex 8: Burundi at a Glance

Bun1ndi at a glance 2125111

Sub-POVERTY and SOCIAL Saharan Low~

Oovetopment diamond· Burundi Africa Income

2009 Pooutotioo, mid-year (mBiioM) 8 .3 840 846 Life expect3ncy GNt per capito (Atlas method, US$1 150 1,126 512 GNI (Atlas m~lhod, US$ bHI/on$) 1.2 946 433

Avorage annual growth, 2003·09

Popytatton (%) 3.0 2.5 2.2 GNI Gross LRbor loroe m1 4.5 2.9 2.6 per primary

Most rocont estlrnoto (lates t year avaltablo, 2003.09) capita enrollment

Poverty (% of population belOW national povtttty lure) Url>8n population (% of toltl f pofW/otion) 11 37 29 Lifo oxpoctancy at birth (yoo"') 50 52 57 lnfanl mor1abty (p tJr 1.000 lrve birlh:s) 101 81 76 Chll<l malnutrition(% Of children tinder 51 25 28 Access 10 irnprovod water source Access 10 an Improved wotor source (% of population) 72 60 64 LIIOra<.'Y i% Of popul81ion 8{/IJ 15+) 66 82 66 Gross prima!V enrollment (% Of schOOI-&Qe fX>PIIW ionl 136 100 104

--Burundi Lmv·.in<:om& fJmup Male 139 105 107 Femai£J 132 95 tOO

KEY ECONOMIC RATIOS and LONG-TERM TRENDS

1989 1999 2008 2009 Economic ratJos• GOP (US$ b/Qions) 1 1 0.81 1.2 1 .3 Gros• capltat lonn•llon/GOP 16.5 5.9

Trade EXJ)()fts of Q<>Ods ond scrvlooS/GOP 9.7 7.G Gross domestic savin~s/GOP 3.3 -2.5

~+ Gross national savinlls/GOP ·0.1

C<orrent account batonee/GOP -6.1 -5.9 -5.9 Domestic Capltat Interest payments/GOP 1.5 1.0 0.7 0.3 savings

Total debt/GOP 79.8 140.4 123.5 39.1 T orat debt servlce/exoorts 36.4 46.1 2 1.7 Prosont value of dobi/GDP 11.7 Present value of debt/exports

lndobtedt\OSS 1980~09 1000..00 2008 2000 2009 .. 13

(8V9t8g& tft lnutJf nrowth) GOP ·2.7 2.8 4.5 3.5 --Dwundl -- tow..nQOfi10 (II'O«(J GOP oor capt to -4.0 0.0 1 .4 0.6 ExporttJ of SJOod8 and services 1.5

STRUCTURE of tho ECONOMY 1989 1999

(%ol GOP) AQiiculture 53.7 43.7 Industry 19.7 17.9

M.anufacturino 13.3 8.2 Ssrvioos 26.7 38.5

Househo~ final consumption expenditure 86.6 84.3

2008 2009 Growth of et'lplt:toll\nd GOP (%)

·~ . • 0 ~ --·--· ·.2 ~060107 0&09

General gov't final consumption GlCPenditure 10.2 18.2 Imports of poods ond corvieos, 22.9 16.0

1989-99 1999.09 2008 2009 (av<Jr(Jflo annuul yrowtll) AQriculture ·1 .5 ·1.8 Industry -3.8 -6.2

Manuracturins:t -7.4 Services -2.5 10.4

Household final eonsl.lmotion expenditure -3.5 General s;:~ov't final cor'tsumpUorl e~penditure •1.1 Gross capital formation 0 .4 ImPOrts of aoods and serviees 0.7

Note: 2009 data arc preliminary ostimates. Thi-S t·at>le was ptodueed from th& DevelOpment Economics LOB database. • The diamonds show foor key Indicators In tho country (in bold) compared with Its income-·Qroup av~o. U data ore ml.sslnQ, the diamond will

bo lnoompteco.

96

Burundi

PRICES and GOVERNMENT FINANCE 1989 1999 2008 2009 Inflation W•>

Domestic prices (%change) JO

~ 25

Consumer prices 11 .7 3.4 5.0 20 Implicit GOP deflator 14.8 15.0 25.1 13.6 15

Government finance 10

5 (% of GOP, includes current grants) Current revenue 21.1 16.2 0< 05 08 07 . 08 09 Current budget balance 6.2 -2.6 --GOPdeftator - CP1 Overall surplus/deficit -4.3 -6.6

TRADE 1989 1999 2008 2009 Export and Import levels (US$ mill.)

(US$ millions) T olal exports (fob) 93 55 250

Coffee 75 42 Tea 6 12 200

Manufactures 4 1 150

Total imports (cif) 184 111 100 Food 10 11 Fuel and energy 20 18 so

Capital Qoods 65 33

Export price index (2000=100) 155 116 03 0< 05 06 07 08 09

Import price index (2000=100) 75 63 .. ,,, .... ......... Terms of trade (2000=100) 205 167

BALANCE of PAYMENTS 1989 1999 2008 2009 Current account balance to GOP (0/o)

(US$ millions) Exports of goods and services 109 61 Imports of goods and services 256 129 Resource balance -147 -68 -3

Net income -18 -11 -34 .. Net current transfers 31

Current account balance -68 -46 -68 -· Financing items (net) 118 19 -12 Changes in net reserves -50 29

Memo: Reserves including gold (US$ millions) Conversion rate (DEC, focaVUS$) 158.7 563.6 1,185.7 1,230.2

EXTERNAL DEBT and RESOURCE FLOWS 1989 1999 2008 2009 Composition of 2009 debt (US$ mill.)

(US$ millions) Total debt outstanding and disbursed 669 1,135 1.443 516

IBRD 0 0 0 0 G:7 IDA 326 599 6 19 147

Total debt servtce 43 29 19 19 IBRD 0 0 0 0 IDA 3 12 4

Composition of net resource flows Official grants 74 60 442 1.441 Official creditors 91 7 14 15 Private creditors -6 0 0 0 ForeiQn direct investment (net inflows) 1 0 4 10 Portfolio equity (net inflows) 0 0 0 0

Wortd Bank pr<>!lram Commitments 53 12 0 0 Disbursements 45 15 14 9 A-lBRO E- Bilateral

Principal repayments 6 0 0 B-IDA D - Other multilateral F- Private

Net flows 44 6 14 9 C - IMF G-ShorHerm

Interest payments 2 4 4 1 Net transfers 42 3 10 6

Note: This table was produced from the Development Economics LOB database. 2125/11

Mt. HehaMt. Heha(2,670 m)(2,670 m)

Most distantMost distantheadwater ofheadwater ofthe Nile Riverthe Nile River

C I B I T O K EC I B I T O K EN G O Z IN G O Z I

K AK AYYA N Z AA N Z A

B U B A N Z AB U B A N Z A K A R U Z IK A R U Z I

K I R U N D OK I R U N D O

M U Y I N G AM U Y I N G A

C A N K U Z OC A N K U Z O

R U Y I G IR U Y I G IG I T E G AG I T E G A

M WM WA R OA R O

R U TR U TA N AA N AB U R U R IB U R U R I

M A K A M B AM A K A M B A

MM UU RR AA MM VV YYAA

BB UUJJ UU

MM

BB UURR AA

Nyanza-LacNyanza-Lac

RumongeRumonge

MabandaMabanda

MatanaMatana

BukirasaziBukirasazi

MutangaroMutangaro

RusibaRusiba

MusadaMusadaBuhigaBuhiga

BururiBururi

MwaroMwaro

GitegaGitega

MuramvyaMuramvya

BubanzaBubanza

KayanzaKayanzaNgoziNgozi

CibitokeCibitoke

RuyigaRuyiga

CankuzoCankuzo

KaruziKaruzi

MuyingaMuyinga

KirundoKirundo

RutanaRutana

MakambaMakamba

BUJUMBURABUJUMBURA

C I B I T O K EN G O Z I

K AYA N Z A

B U B A N Z A K A R U Z I

K I R U N D O

M U Y I N G A

C A N K U Z O

R U Y I G IG I T E G A

M WA R O

R U TA N AB U R U R I

M A K A M B A

M U R A M V YA

B UJ U

M

B UR A

Nyanza-Lac

Rumonge

Mabanda

Matana

Bukirasazi

Mutangaro

Rusiba

MusadaBuhiga

Bururi

Mwaro

Gitega

Muramvya

Bubanza

KayanzaNgozi

Cibitoke

Ruyiga

Cankuzo

Karuzi

Muyinga

Kirundo

Rutana

Makamba

BUJUMBURA

DEM. REP.OF CONGO

RWANDA

TANZANIA

Kanyaru

Rusiz

i

Rum

pung

u

Kagera

Ruvuv

u

Ruvuvu

Ruvuv

u

Luvi

ronz

a

Mwerusi

Muragarazi

LakeTanganyika

LakeKivu

LakeCohoha

LakeRweru

To Kasulu

To Uvira

To Kibondo

To Kakonko

To Nyakanura

To Rulenge

To Kigali

To Gitarama

To Butare

To Cyangugu

Mt. Heha(2,670 m)

Most distantheadwater ofthe Nile River

29°E

29°E

30°E

30°E

31°E

31°E

4°S 4°S

3°S 3°S

BURUNDI

This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, denominations and any other informationshown on this map do not imply, on the part of The World BankGroup, any judgment on the legal status of any territory, or anyendorsement or acceptance of such boundaries.

0 10 20 30

0 10 20 30 Miles

40 Kilometers

IBRD 33380

SEPTEMBER 2004

BURUNDI

SELECTED CITIES AND TOWNS

PROVINCE CAPITALS

NATIONAL CAPITAL

RIVERS

MAIN ROADS

PROVINCE BOUNDARIES

INTERNATIONAL BOUNDARIES