Documentof The World Bank FOR OFFICIAL USEONLY Report No 44245-BI INTERNATIONALDEVELOPMENT ASSOCIATION PROGRAMDOCUMENT FORA PROPOSEDGRANT INTHEAMOUNT OFSDR 18.5MILLION (US$30 MILLIONEQUIVALENT) TO THE REPUBLICOF BURUNDI FOR A SECOND ECONOMICREFORM SUPPORT GRANT (ERSG 11) June 30,2008 Poverty Reduction and Economic Management3 Country DepartmentAFCC1 Africa Region This document has a restricteddistributionand may be used by recipients only in the performanceof their official duties. Its contents may not otherwisebe disclosedwithout World Bank authorization. REPUBLIC OF BURUNDI Government FiscalYear January 1-December 31 Currency Equivalents Exchange Rate Effective as o f June 05, 2008 CurrencyUnit BurundiFranc US$l.oo 1174.40FBu Weights and Measures Metric System ABBREVIATION AND ACRONYMS AfDB African DevelopmentBank APR PRSP Annual Progress Report BINUB United Nations IntegratedOffice inBurundi BRB CentralBank o f Burundi(Banque de L a RCpublique du Burundi) CAS Country Assistance Strategy CNDD-FDD National Council for the DefenseofDemocracy-Forces for the Defense o f Democracy CFAA Country Financial Accountability Assessment COMESA Common Market o f Eastern and Southern Africa COTEBU Complex Textile de Bujumbura (Textile Industries) DBC Directorate o fBudget and Control D C Directorate o fAccounting DGP PlanningDirectorate DFID Department for InternationalDevelopment (UK) DRC Democratic Republic o f the Congo EAC East African Community EICV Enqdte IntCgrale des Conditions de Vie EMSP Economic Management Support Project ERSG Economic Reform Support Grant EU European Union FBu BurundiFranc GDP Gross Domestic Product GER Gross Enrollment Ratio GOB Government o f Burundi HIPC Heavily Indebted Poor Countries (Initiative) HIV/AIDS Human Immunodeficiency Virus/Acquired Immune Deficiency Syndrome ICA Investment Climate Assessment IDA InternationalDevelopment Association IMF InternationalMonetary Fund JSAN Joint Staff Advisory Note LDP Letter o f Development Policy FOROFFICIAL USE ONLY MDG Millennium Development Goal MDRI Multilateral Debt ReliefInitiative MEFCD Ministryof Economy, Finance and Coordination for Development MTEF Medium-Term Expenditure Framework WAD New Partnership for Africa's Development NGO Non Governmental Organization NPV Net Present Value OCIBU Office du Cafe de Burundi (Office o f Coffee o f Burundi) ONATEL Office National des TClCcommunications (National Office o f Telecommunications) OTB Office duThC duBurundi(Office o f Tea of Burundi) PAGE Projet D'appui a la GestionEconomique (Economic Management Support Project) PEMFAR Public Expenditure Management and Financial Accountability Review PE Public Enterprise PER Public ExpenditureReview PFM Public FinancialManagement PRGF Poverty Reduction and Growth Facility PRSP Poverty Reduction Strategy Paper PSD Private Sector Development REFES Technical Committee for Monitoring o f Economic Reforms. REGIDESO RCgiedes Eaux (national water and electricity enterprise) RTFP Regional Trade Facilitation Project SDR Special DrawingRights SDRI SociCtC RCgionale de DCvCloppement de 1'Imbo (Imbo regional development company) SOSUMO SocittC Sucrikre de MOSO (sugar processing enterprise) SSA Sub-Saharan Africa TDPM Teacher Development and Management Policy UN United Nations UNDP United Nations DevelopmentProgram UNOB UNpeacekeepingoperation USAID UnitedStates Agency for InternationalDevelopment VAT Value Added Tax VERRUNDI La VCrrerie de Burundi(Glass Makingo fBurundi) W H O World Health Organization Vice President Country Director Sector Manager Leader Economist HinhT. Dinh Task Team Leader This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not be otherwise disclosed without World Bank authorization. REPUBLIC OF BURUNDI SECOND ECONOMICREFORM SUPPORT GRANT(ERSG11) TABLEOFCONTENTS I INTRODUCTION . ............................................................................................................................................ 1 I1 . COUNTRY CONTEXT ................................................................................................................................... 4 Historical and Political Context.......................................................................................................... 4 Recent Economic Development inBurundi....................................................................................... 5 Poverty Outlook and Social Development.......................................................................................... 8 Governance ......................................................................................................................................... 9 Macroeconomic Outlook and Debt Sustainability........................................................................... -10 I11 . STATUS OFREFORMSINITIATED UNDER 2006 ERSG(ERSGI) .................................................... 15 IV. THE GOVERNMENT'SPROGRAM .......................................................................................................... 16 Bank Support to the Government's Strategy .................................................................................... 17 Linkto CAS...................................................................................................................................... 18 Collaboration with the IMFand other Donors ................................................................................. 18 Lessons Learned............................................................................................................................... 19 Analytical Underpinnings................................................................................................................. 20 V. THE PROPOSEDERSG11 ........................................................................................................................... 21 Operation Description....................................................................................................................... 21 Policy Areas...................................................................................................................................... 23 Public Finance Management............................................................................................................. 26 Private Sector Development............................................................................................................. 31 VI. OPERATIONIMPLEMENTATION ........................................................................................................... 43 Poverty and Social Impacts.............................................................................................................. -43 Implementation. Monitoring and Evaluation................................................................................... -44 Fiduciary Aspects ............................................................................................................................. 47 Disbursement and Auditing.............................................................................................................. 48 Environmental Aspects ..................................................................................................................... 49 Risksand RiskMitigation ................................................................................................................ 50 LISTOFTABLES Table 1: Economic Trends. 1999-2006........................................................................................................ 6 Table 2: Sectoral Allocation o f Public Spending as Share o f GDP, 2001-2006.......................................... 7 Table 3: Main Economic Indicators ........................................................................................................... 12 Table 4: Government Finances and Financing Sources 2005-2011........................................................... 13 Table 5: Summary o f Debt Sustainability .................................................................................................. 14 Table 6: Prior Actions for ERSG I1and Indicative Triggers for ERSG III ................................................ 24 Table 7: Financial Ratios o f some SPES(2005) ...................................................................................... 112 Table 8: Options for State Divestiture ..................................................................................................... 120 ... 111 LIST OF BOXES Box 1: Good Practice Principles on Conditionality.................................................................................. .23 Box 2: Burundi'sProspects for Achieving the Millennium Development Goals by 2015 ...................... 103 LIST OF FIGURES Figure 1: National Institutional structure to develop and follow the reforms o f ERSG II....................... .46 LIST OF ANNEXES ANNEX 1: BURUNDIERSG11- Letter o fDevelopmentPolicy.......................................................... .53 ANNEX 2: BURUNDIERSGI1- Policy Matrix: Objectives, Prior Actions andIndicativeTriggers (2008-2009) ......................................................................................................................... 93 ANNEX 3: BURUNDIERSG I1- Poverty Outlook and Social Development..................................... .lo2 ANNEX 4: BURUNDIERSG I1- Status o fReforms InitiatedUnder 2006 ERSG (ERSG I) 104 .............. ANNEX 5: BURUNDIERSG I1- Summary ofthe Public ExpenditureManagement (PEM) from the PEMFAR .......................................................................................................................... ,107 ANNEX 6: BURUNDIERSG I1- Summary o f..................................................................................... 109 ANNEX 7: BURUNDIERSG I1- The Agricultural Sources of Growth............................................... 113 ANNEX 8: BURUNDIERSG I1- The Coffee Subsector - Summary o fRecent Analytical Work......-118 ANNEX 9: BURUNDIERSG I1 The Tea Subsector........................................................................... - 121 ANNEX 10: BURUNDIERSG 11-IMF Staffs Assessment ofRecent Economic Performance .........,123 ANNEX 11: BURUNDIERSG I1 Country At A Glance ..................................................................... - ,125 The Burundi ERSG 11was prepared by a IDA team consisting o f Dorsati Madani (Sr. Economist and TTL, AFTP3), Jean-Pascal Nganou (Country Economist, co-TTL, AFTP3), David Tchuinou (Sr. Economist, AFTP3), Eric Mabushi (Economist, AFTP3), Hannah Nielsen (Young Professional, AFTP3), Carolina Monsalve (Young Professional, AFTP3), Sameena Dost (Sr. Counsel, LEGAF), Ilhem Baghdadli (Economist, AFTAR), Bleoue Nicaise Ehoue, (Senior Economist, AFTAR), Babacar Faye (Legal Advisor, IFC), Amadou Dem (economist,FPD),Elke Kreuzwieser (Consultant, PSD), Africa Olojoba (Sr. Env. Specialist, AFTEN), Joseph Kizito and Renaud Seligman (Sr. Financial Management Specialists), Victoria Gyllerup (QK results and learning), Wolfgang Chadab (Sr. Finance Officer, LOAFC), Aissatou Diallo (Finance Officer, LOAFC), Aurore Simbananiye (Team Assistant, AFMBI), Mariama Daifour BB (Program Assistant, AFTP3), Maude Jean-Baptiste, Paula J. White (Language Program Assistant, AFTP3). Karen Brooks (Sector Manager, AFTAR) and Stephen Mink (Lead Economist, AFTAR) provided guidance on the coffee and tea sector issues. Alassane Sow (Country Manager, AFMBI) provided important support and guidance on the dialogue with the Government. Hinh Dinh (Lead Economist, AFTP3), Yvonne Tsikata (former Sector Manager, AFTP3) and Jan Walliser (Sector Manager, AFTP3) provided valuable advice to the team. iv GRANT AND PROGRAMSUMMARY BURUNDI ECONOMICREFORM SUPPORT GRANTI1(ERSG 11) Borrower Republic o f Burundi Implementing Agency MINISTRY o f ECONOMY, FINANCE and COORDINATIONfor DEVELOPMENT Amount SDR 18.5 million(US$30 millionequivalent) Terms Grant amount o f SDR 18.5 million(US$30 million equivalent) Trenching Single tranche to be disbursed upon effectiveness Description The proposed Economic Reform Support Grant I1(ERSG 11) i s the first ina series of two grants designed to assist the Government o f Burundi in implementing the country's poverty reduction strategy in order to transition from a post conflict economy with a focus on maintaining peace and stability to one geared towards designing and implementing policies to accelerate growth and human development. The proposed Economic Reform Support Grant I1 (ERSG 11) will continue supporting the Government in (i) reforming the public finance management system to improve fiscal transparency and accountability; (ii) reforming the business legal and institutional environment to foster private-sector-led growth; and (iii) supporting reforms inthe coffee sector. Benefits This grant will support GOBto implement key policy actions inline with their PRSP targets to improve governance and foster private-sector driven economic growth. In particular, the grant is expected to translate into: (i)more transparent and accountable budget implementation through improved budget preparation, execution and control; (ii) improved legal and institutional business environment; and (iii) renewed impetus inthe coffee sector reforms. Risks The expected outcomes o f the proposed ERSG I1are subject to a number o f risks. First, The post-conflict nature o f the country leaves it highly vulnerable to political instability, affecting prospects for economic growth. Second, weak institutional capacity may slow reform progress. Further delays in implementation o f the structural reforms, including the coffee sector and the public enterprise sector would adversely affect private sector development and growth prospects o f the country. Third, the variability in the performance and the dominant role o f the agricultural sector in economic growth and poverty alleviation can affect the ability o f the authorities to manage the transition from a post-conflict to a development economy. Fourth, Burundii s highly dependent on aid inflows and any difficulty inmaintaining donor support or delays inmobilizing such support can derail fiscal performance and hamper the efforts o f the authorities to manage budgetary and economic stability. The fiscal risks o f public enterprises for the central budget will need to be monitored during the life o f this grant. Fifth, there is a high risk o f debt distress, even after HIPC completion point and MDRI assistance mainly due to the low export base o f the country. Sixth, recent increases in the prices o f food and oil are expected to affect the national budget and the living standard o f the poor in Burundidue to the increased costs o f transportation and imported foods. Seven, as a landlocked country, Burundi faces increased risks associated with its dependence on neighboring countries for its trade routes, which only regional peace-building and economic integration will mitigate. Operation ID Number P102508 V PROGRAMDOCUMENTFORA PROPOSED ECONOMICREFORMSUPPORT GRANT I1(ERSG11) TO BURUNDI I. INTRODUCTION 1. Burundi emerged from a thirteen-year civil war, following the signing of a comprehensive peace and reconciliation agreement by 39 political parties in Arusha (Tanzania) in August 2000 which marked a significant political turning point. After the establishment o f a transitional Government in 2002, a new constitution, intended to provide appropriate ethnic checks and balances, was approved in February 2005. Presidential and parliamentary elections were held in August 2005 and the new Government took office in September o f the same year. In September 2006, a cease-fire accord was reached with the last hold-out rebel movement, the FNL-PALIPEHUTU faction. Peace i s still inthe process o f consolidation as the Government i s innegotiations with FNL-PALIPEHUTU.The political situationremains fragile; inearly 2007 following the changes in the leadership o f the main political party (CNDD-FDD) a political deadlock ensued that lasted several months and frozen political activities. In October 2007, the political deadlock was broken with the nomination o f a more representative Government and the Parliament resumed its legislative role. However, early 2008 witnessed further political infighting, leading to a new political deadlock at the Parliament. Furthermore, armed skirmishes with the FNL-PALIPEHUTU flared again in mid-April 2008, ahead o f a new round o f negotiations in May in Bujumbura. The leadership o f the FNL-PALIPEHUTU returned to the capital in early June 2008 to finalize the negotiations and a new cease-fire was signed. 2. Recent economic developments have created positive prospects for Burundi.The economy has gradually recovered from the shocks experienced during 1993-2003 such as political turmoil, embargos, deteriorating terms o f trade, and severe drought. Annual real GDP growth i s estimated to have risen to 5.1 percent in2006 from an annual average o f - 1.8 percent during the decade o f economic and political turbulence. Since January 2004, the authorities have implemented an economic reform program supported by the World Bank and the IMF. As a result, within a difficult political, social and economic environment, the Government has made good initial progress interms o f macroeconomic stabilization, implementation o f financial and structural reforms, and restoration o f social services. In September 2005, Burundireached the HIPC decision point and was granted access to interim debt relief, which will reduce debt over 90 percent in NPV terms, and scheduled debt service, by some US$30-40 million per year for the next thirty years. The authorities have made progress in fulfilling the HIPC conditions, and the country i s expected to reach the HIPC Completion Point in early 2009. But Burundiwill continue to require significant external support, as domestic savings, even augmented by those resulting from the HIPC initiative, will be far below the level neededto make substantial progress in accelerating growth, raising living standards, reducing poverty and making progress towards the MDGs. 1 3. In September 2006, the Government approved its first full Poverty Reduction Strategy Paper (PRSP) which was presentedto IDA and IMF Boards inMarch2007. The Government program, set out in the PRSP, intends to redirect the economy away from a post-conflict focus, towards economic growth and development. The PRSP aims to strengthen political stability, consolidate peace, and reduce poverty through accelerated, sustainable, and equitable growth. The principal strategic axes o f the PRSP are: (i) improving governance and security; (ii) promoting sustainable and equitable economic growth; (iii) developing humancapital; and (iv) combating HIV/AIDS. 4. The proposed Economic Reform Support Grant I1(ERSG11) i s the first ina series o f two grants designed to assist the Government o f Burundito continue implementingthe country's poverty reduction strategy in order to transition from a post conflict economic environment to one that i s focused on economic development driven by private sector growth. The ERSG series builds on the Emergency Economic Recovery Credit (EERC, 2000), the Economic Rehabilitation Credit (ERC, 2002), and especially the Economic Reform Support Grant (ERSG, 2006). The 2006 stand alone ERSG aimed at supporting the Government in implementingthe interim PRSP in three areas: (i) improving public expenditure management and the impact on the poor; (ii) reviving agriculture export crop sectors (coffee, tea, and cotton) and ensure better revenue distribution sectors among actors; and (iii)reviving the private sector by improving business climate, accelerating State divestiture, and settling the Government domestic arrears to the private sector. 5. The proposed ERSG I1grant will support the Government to continue: (i) reforms inthe public finance management system to improve accountability and transparency in public spending; (ii) reforms the business legal and institutional environment to foster private-sector-led growth; and (iii) reforms in the coffee subsector. It proposes to: (i) consolidate reforms already underway (inpublic finance management as identifiedinthe recent joint PEMFAR) and to (ii)reenergize the reform process in private sector development (the legal and regulatory framework for the general business environment, and the coffee reform process). In addition it aims at continuing diagnostic works and support development o f a strategic approach in areas where action i s needed but knowledge i s too limited (public enterprise reform). 6. The program structure aims at keeping a balance between the need for essential reforms and the simplicity dictated by the weak institutions and national implementation capacity, with a bias towards deepeningthe reform process in areas already supported by the 2006 ERSG. Overall, the program continues supporting the establishment o f new legal and institutional frameworks to implement essential reforms. It was also designed with the view to help the Government in securing sustained financial resources through: (i) economic growth; (ii) external financial assistance; and (iii) relief. debt 7. The ERSG I1 grant would be disbursed in a single SDR 18.5 million (US$30 million equivalent) tranche, which would be released upon effectiveness in 2008, providing that macroeconomic performance continues to be satisfactory. A set of indicative triggers are suggested for the ERSG 111(FY10). The progress in the overall 2 reform program will be tracked over the life o f the ERSG grant series through these prior actions, indicative triggers, and other related measures inthe policymatrix. 8. The ERSG grant series are highrisk operations, necessary to support a politically fragile and institutionally weak country with a high dependence on budget support to transition out o f a post-conflict economic environment to one that i s focused on designing and implementing policies to accelerate growth and human development. The risks are balanced by the potential rewards o f macroeconomic stabilization through external funding o f the budget and the support o f core policy reforms. Furthermore, while the risks are high, the fiduciary section o f this document outlines the measures that will be taken to mitigate the risks attached to these operations. 9. The design o f the ERSG series as a two-operation programmatic series i s one major way o f mitigating the risks associated with these budget support operations while aligning the tranche releases to the country's budget cycle. The continuity o f the policy dialogue and reform agenda set out inERSG grant series, together with the accompanying technical assistance and capacity building from Economic Management Support Project (EMSP), and in partnership with IFC PEP-AFRICA program, will contribute to strengtheninstitutional capacity and to support reform that is expected to help the country transition to an economy focused on development objectives. The alignment o f ERSG series with the budget cycle should be complete by the effectiveness o f the second grant (ERSG ID), expected in August 2009. This tranche release will coincide with the new budget cycle expected to be adopted by the Authorities (July 2009 to June 2010) as part o f their recent membership inthe East African Community. 10. Thus, at the conclusion o f the proposed ERSG series, one would expect to see tangible progress with respect to each component o f the proposed reform program including: (i) measurable improvement in public finance management; (ii) measurable improvements in the environment for private sector activities; and (iii) progress in the execution o f the coffee sector reform program. 3 11. COUNTRY CONTEXT HISTORICAL POLITICALCONTEXT AND 11. Burundi has a history of conflict since its independence in 1962 and the latest conflict, which started in 1993, exacted a heavy toll on the population, the social fabric and the economy. 300,000 people have lost their lives and about 1.2 million (16 percent o f the population) had been internally displaced and became refugees. The war has had a devastating impact on Burundi's economy compounded by an economic embargo by neighboring countries, and several episodes o f drought. As a result, GDP per capita fell by almost 40 percent, from US$180 in 1993 to US$109 in2006. 12. With the signature o f the Arusha Agreement in August 2000, Burundi emerged from this latest episode o f political and civil tensions and obtained a new window o f opportunity for peace and stability. Between 2000 and 2005 the country made a successful transition to a multi-party system and in August 2005 Pierre Nkurunziza was chosen as the new President. The peace agreements signed during this period allocated the new signatories with ministerial and other power positions in the army, the central, provincial, and district Governments roughly in accordance with the relative political weight o fthe respective groups. 13. 2007 and early 2008 have been politically difficult for the country, leading to some deterioration in the security situation, but the second half o f 2008 holds some promise for improvement. In early 2007, following the removal o f the old leadership o f the ruling party (CNDD-FDD), the political tensions increased as the Government lost its parliamentary majority, leading to a political deadlock. The security situation deteriorated somewhat following the last rebel group's (FNL) withdrawal from the peace negotiations in July 2007. Nonetheless, an agreement with the major opposition political parties was reached inNovember 2007, resolving the political deadlock. The Cabinet was reshuffled to bring in representatives o f the two major opposition parties. The Parliament, whose activity had been blocked by the political impasse, resumedits activity. 2008 started with a political crisis related to the dismissal o f the first Vice President due to political discord within her ownparty leading the parliament to another political deadlock. Also, the FNL- PALIPEHUTU, which had declared it willingness to restart peace negotiations, broke the cease-fire in April 2008, leading to repeated armed skirmishes with government troops and some 100 deaths. Inearly May 2007, FNL-PALIPEHUTU leadership again declared their willingness to reach a negotiated peace and returned to Burundi to restart peace negotiations in early June 2008. A new cease-fire has been signed; increasing the hope that the consolidation o f the peace process will advance during 2008 and permitting further demobilization andreintegrationo fthe ex-combatants into civilian life. 14. Despite the recent disturbances, prospects remain positive for the integration o f all armed factions into new security and defense forces, and demobilization and reintegration o f former combatants that will not be enlisted in these forces. The national Demobilization, Reinsertion and Reintegration program (DRR), launched in 2004, has benefited from the support o f the Bank and Multi-country Demobilization and 4 Reintegration Program for the greater Great Lakes (MDRP). The presence o f the UN peacekeeping operation (UNOB) played a major role infacilitating the implementation o f the DRR program and the accompanying security sector reform program'. The peace process has attracted considerable attention. InJune 2006, the UN's new Peace building Commission (PBC) decided to create a country-specific group for Burundi, one o f only two countries benefiting from this status. 15. The general progress towards the consolidation o f peace notwithstanding, the underlying economic forces leading to recurrent conflicts will need to be addressed through economic and legal reforms, as well as economic diversification and growth to achieve lasting peace and stability. Burundi i s a small country with a high population density. While the country i s agriculturally rich, there i s strong competition for resources, especially for land in rural areas where 90 percent o f the population lives. This i s exacerbated by a growing population and at times ethnic differences. Furthermore, the peace era i s seeing the return o f large numbers o f internal and external rehgees to land that has been cultivated by others in their absence. This i s leading to tensions about resource ownership and use and affects earningpotential o fpast and present users. RECENT ECONOMIC DEVELOPMENTBURUNDI IN 16. Burundi's economic performance improved noticeably between 2001 and 2006 relative to the previous decade. Nevertheless, Burundi faces a number o f significant challenges, including the need for a more diversified agricultural and economic base and higher agricultural productivity, as well as investment in human resources in order to increase economic growth andreduce poverty. 17. As o f 2006, the structure o f the economy still points to the dominance of agriculture (48.4 percent o f GDP), followed by services (35.2 percent o f GDP) and industry (16.4 percent o f GDP). Agriculture remained the dominant sector both interms o f its contribution to GDP and size o f employment despite a decline in agriculture's contribution to GDP due to poor productivity, an effect o f weather and periodic civil strife. Foodproduction and livestock contribute 91 percent of the agriculture production. On the other hand, agricultural exports, especially coffee, earn more than 70 percent o f the export revenues. The service sector contribution has steadily increased over the recent past largely due to a rise inpublic services and to a much lesser extent the transport and trade sub-sectors. The industrial sector slight increase i s mainly attributable to constructions. 18. The consolidation o fthe peaceprocess has helpedstart reconstruction, and created positive prospects for the country, but the country has not experienced the typical post- conflict bounce in GDP growth. Since 2000, the country has progressively recovered from the negative growth (average -1.8%) o f the decade o f political and economic 'The successor program to UNOB, the United Nations Integrated Office inBurundi(BINUB) was mandatedto facilitate the implementation o f the ceasefire agreement with the FNL-PALIPEHUTU, particularly the implementation o f the modalities o f the agreement, assistance insecurity sector reform and support of the reintegration o f ex-combatants 5 turbulence to a positive growth rate with 5.1% in 2006 (see table below) Economic growth i s largely determinedby the widely fluctuating agricultural sector, mainly coffee. While in2004 real GDP growth reached 4.8 percent, a severe drought in2005 led to 0.9 percent growth, bouncing back to a strong 5.1 percent in 2006. A decline in real economic growth to 3.6 percent i s estimated for 2007, despite increased donor-financed capital expenditure, reflecting a poor agricultural harvest. Table 1: Economic Trends, 1999-2006 1999-2000 2001-2003 2004 2005 2006 Population(million) 6,7 7.1 7,3 7.5 7.6 Populationgrowth(percent) 1.9 1.9 1.9 1.9 2.0 GDP (currentprices,US$billion) 0.8 0.6 0.7 0.8 0.9 GNIpercapita(Atlasmethod,currentprices,US$) 115.0 93.0 90.0 100.0 100.0 RealGDPgrowth(percent) -0.9 1.8 4.8 0.9 5.1 Inflation(average CPI, percent) 13.8 6.2 8.0 13.4 2.8 Realeffectiveexchangerate(percentagechange) 4.1 -13.0 -0.9 17.1 -2.7 Terms oftrade (percentagechange) -10.8 -6.6 28.1 10.9 -4.9 Gross investment (percentofGDP) 6.2 7.2 13.3 10.7 16.3 Grossnationalsavings (percentofGDP) -1.8 1.9 5.2 1.2 1.7 Fiscalbalance(primary,percent ofGDP) 0.7 0.2 -3.5 -1.7 -7.5 Current account balance(percentofGDP) -8.0 -5.3 -8.1 -1.2 -14.5 Overallbalanceofpayments(percentof GDP) -3.8 -3.9 1.7 2.8 -1.1 Grossinternationalreserves(months ofimports) 4.3 4.0 3.6 4.2 3-6 Exportgrowth(volume,percent) -5.2 5.6 -10.9 -1.7 -7.6 Share ofcoffee in exports (percent) 72.8 55.4 61.4 69.5 67.7 Debtservice to exports ratio(percent) 84.4 106,7 109.2 46.7 54.4 Source: IMF, WorldBank 19. Fiscal performance in 2005-06 was satisfactory, but mixed in 2007. The 2007 Budget Law was to continue to reorient expenditures toward poverty reduction and demobilization while containing the budget deficit (excluding grants). The 2007 outlook was affected by a slower than expected demobilization and the payment o fUS$17 million (1.6 percent o f GDP) made to Interpetrol outside the proper budget procedures. The breakdown o f the peace talks with the last rebel group (FNL) slowed the demobilization process, contributing to larger than expected wage bill, which amounted to close to 10.8 percent o f GDP in 20072. The Government took mitigating measures, increasing some taxes, cutting expenditures and postponing increases in benefits payments to the civil service to 2008. The budget deficit (excluding grants) i s expected to reach 20.1 percent o f GDP in2007 (compared to 19.3 percent o f GDP in2006), as a result of a decline intotal revenue to 18.7 percent o f GDP and an increase o f public spending from 38.2 percent o f GDP in 2006 to 38.7 percent in 2007. Nonetheless, the overall fiscal position improved 2The wage bill includes pay for the army and the police forces, which are necessary for a post-conflict country, 6 from -1.8 percent o f GDP in2006 to 0.8 percent o f GDP in2007 due to a slight increase inexternal grants. 20. The Government expenditure pattern highlights a rapid increase, focused on capital expenditure. Total expenditure rose from 27.2 percent o f GDP in 2001 to 38.2 percent in 2006. This i s considerably higher than many Sub-Saharan African countries. The increase is largely due to the fact that capital expenditure has doubled from 6.4 percent o f GDP in 2001 to 14.8 percent in 2006 (including special programs for demobilization and reintegration o f ex-combatants) due to foreign grants. In the meantime, while recurrent expenditure accounts for 60 percent o f total expenditure, it has risen only slightly over the last six years. One of its main components has beenthe wage bill, which rose to nearly 10percent o fGDP in2006, reflecting the hiringofnewteachers in2005 anda 15percent salary increase in2006, the first since 2001. 21. Despite continued increases in overall security sector expenditure, the Government's public expenditure allocation to priority sectors has significantly improved inthe past few years, reflecting, inpart, the PRSP priorities outlined inthe InterimPRSP o f November 2003 and the new PRSP o f September 2006. The reduction in the share o f militaryexpenditure in2001-2006 has been more than offset by the increase inthe police force. Giventhe post-conflict nature of the country and the need to ensure the security o f the population, higher security expenditures are to be expected in the medium term. Nonetheless, the availability o f HIPC funds in 2006 and increased donor support helped increase the share of economic and social priority sectors from 28.6 percent o f total public expenditures in2001 to 34.1 percent in2005 and 38.2 percent in2006 (5.2 percent o f GDP in 2001 to 9.3 percent o f GDP in 2006). As with the 2006 budget, the 2007 Budget Law allocated an increasing share o f resources to health, education, agriculture and infrastructure (62 percent, 32 percent, 98 percent and 105 percent, respectively compared to the executed 2006 b~dget)~. reduction in security sector expenditures i s A needed in the medium-tern to provide fiscal space for further increases in social sector expenditures. Table 2: Sectoral Allocation of Public Spending as Share of GDP, 2001-2006 2001 2002 2003 2004 2005 2006 2007(A) General Public Services 4.3 4.4 4.8 5.0 4.7 6.6 7.6 Security Sector 6.6 7.0 6.6 6.3 7.1 8.0 8.4 Defense 6.2 6.6 6.2 5.8 5.0 5.1 5.1 Interior and Public Security 0.5 0.4 0.4 0.4 2.1 2.9 3.3 Priority sectors 5.2 5.2 5.6 5.9 6.3 9.3 12.0 Education 3.8 3.8 4.3 4.5 5.0 7.1 8.3 Health 0.7 0.7 0.6 0.7 0.6 1.1 1.7 Agriculture 0.3 0.3 0.3 0.3 0.3 0.3 0.6 Infrastructure 0.4 0.4 0.3 0.5 0.4 0.8 1.4 Other expenditure 0.4 0.4 0.4 0.5 0.4 0.5 0.6 Source: Burundi PEMFAR Report No. 42160 BI based on data from MEFDC, IMF; (A) data for 2007 are based on the original budget for 2007 since execution figures were not yet available. BURUNDIPEMFAR, 2008. 7 22. At this stage o f Burundi's transition from a post-conflict environment to one focused on economic development, aid flow, especially budget support from multilateral and bilateral donors, has proven vital to the sustainability o f the national budget and the stability o f the economy. Budgetsupport from international partners covered about halfof the overall budget deficit o f 19.3 percent o f GDP in2006, and is expected to cover almost half o f the estimated deficit o f 20.1 percent o f GDP in2007. 23. Burundi has consistently run large current account deficits, reflecting the country's narrow range o f exports, which still consist almost entirely o f tea and coffee, and its dependence on the import of capital goods and fbel. The current account deficit (including grants) increased from 14.5 percent of GDP in 2006, to an estimated 16.0 percent in2007, reflecting a decrease inexports coupledwith an increase inimports. 24. Monetary policy has remainedprudent. Inflation (CPI), which topped 13.4 percent in2005, dropped to 2.8 percent in2006 due to tighter monetary policy. It is projectedto rise to 8.3 percent in2007. The projected rise ininflation can be attributed to increases in food and petrol prices. Monetary aggregates have increased ina sustainable manner, with M3 increasing by 18.3 in 2006 and an estimated 15.8 percent in 2007. Credit to the economy continued to recover, increasing sharply in 2006 from 25.1 percent to an estimated 10.4 percent in 2007, driven by bank financing o f the coffee crop and o f business development. POVERTY OUTLOOK AND SOCIAL DEVELOPMENT 25. For many years conflict displaced a large portion o f the rural population and destroyed important economic and social infrastructure. As a result, poverty i s particularly widespread in rural areas, which account for over 90 percent o f the population. 63 percent o f the population suffers from food insecurity. Surveys estimate that poverty incidence stood at 66.9 percent in 2006, a noted drop from 81 percent in 1998 yet far from the 2015 MDGtarget o f 30 percent. Rural poverty is estimated at twice the rate o f urban areas. Regional differences are particularly acute, with poverty rates fluctuating from a low o f 28.7 percent in Bujumbura to a high o f 82.3 percent in the province o f Kirundo. The intensity o f poverty also varies among groups. Households living in urban areas whose head or spouse has a better education and who benefit from better employment are less likely to be poor or feel poor. 26. Available social indicators show progress, but Burundi still ranks 169thout o f 177 countries in the UNDP's Human Development Index in 2006 and the odds o f Burundi reaching most o f the Millennium Development Goals (MDGs) by 2015 are slim. Life expectancy rose from 42.8 years in 2000 to 44.6 years in 2005. Vaccination rates have improved. The Government has attempted to increase services coverage by announcing in May 2006 that health services to children under five and women during delivery are free. However, the lack o f essential medicine and qualified staff i s affecting service delivery severely. The spread o f HN/AIDs i s taking a heavy toll with the prevalence rate in the general population of 4.8 percent in 2007. Only 60 percent o f the urban population and 40 percent o f the rural population benefit from safe water. In education, progress has 8 been made, but further progress i s critical to the future growth o f the country. Currently, less than half o f the population i s literate (only 43 percent o f adults are literate (53 percent males versus 32 percent o f females) and education at all levels suffers from a lack o f qualified teachers, teaching material and adequate infrastructure. Disparities in education outcomes among gender and regions are large. Since the "free school" policy was introduced in September 2005, primary education enrollment has significantly improved from 80 percent in 2003-04 to about 100 percent in 2005-06 (matching the MDG target o f 100 percent by 2015). However, quality is low and completion rate is only 37 percent. The accompanying CAS document and the annex o f this document provide more details regardingthe social sectors and the outlook for reaching the MDGs. 27. The Government o f Burundi i s trying to rebuild the social services (a strategic axis in the PRSP) with the assistance o f HIPC funds and the international community. The Government has sectoral strategies and i s undertaking budget tracking exercises and user and provider evaluations to identify the problems and develop an action plan to address them. Also, public spending inthe social sectors has increased. For instance, the share o f education rose from an average o f 3.3 percent o f the GDP in recent years to 4.6 percent in2005 to more than 6 percent o f GDP in2006 (the SSA average i s 3.9 percent o f GDP). Budget allocation for health has also increased, though public expenditure as share o f total government expenditure i s still one o f the lowest in SSA and actual expenditure has been affected by disbursement bottlenecks and low execution capacity o f the health ministry. According to the revised2006 budget, 47 percent o fthe US$39.5 million HIPC funds (recurrent and investment) were allocated to education and 35 percent to public health and HIV-AIDS. Due to procurement and capacity issues, HIPC expenditures in 2006 were only about US$15 million, representing an execution rate o f 38 percent. GOVERNANCE 28. The Government faces important challenges injudicial and financial governance, which it i s addressing. 29. Inthejustice system these challenges include: (i) indispensation ofjustice delays and(commercial) disputeresolution, as shown by a backlogs and a legal systemunsuited to a market economy; (ii)lack o f technical and human capacity to deliver expedited dispute resolution; (iii)corruption. The Government i s drafting new investment and commercial codes with the assistance o f the EMSP and IFC PEP-Africa. It has increased the salaries o f thejudges and magistrates as an incentive against corruption. Finally, it has established an Arbitration Center. 30. The Government has acted swiftly to redress two recent financial governance incidents, showing a serious commitment to address governance issues. The first incident was the inappropriate sale o f the presidential plane in 2006, which was addressed by an external audit and the adoption o f a related action plan inSeptember 2007. As part o f the action plan, the government developed and presented a draft law on the sale o f public goods to the Parliament in May 2008. It also created a Parliamentary commission to further investigate the case in September 2007. The report o f the commission i s expected 9 by end-June 2008. However, the judicial process has not advanced in bringing responsible parties to justice. 31. The second Government incident relates to the payment o f US$17 million made outside the budgetprocess to a petroleum trading company (Interpetrol) inApril and May 2007. The Government acted quickly to condemn this action and launched a preliminary internal audit which was published. The authorities have agreed also to a governance action plan that includes pursuing responsible individuals and reforming the public finance management system quickly to avoid a recurrence o f such incident^.^ The Government moved quickly to address the weaknesses o f the PFM system through changes introduced inits 2008 annual budget law and a new organic law it has presented to the Parliament in May 2008. Furthermore, the recommendations o f the recent joint Government-IDA Public Expenditure Management and Financial Accountability Review (PEMFAR) are also being developed into a PFM action plan to be implementedin the framework o f the Cadre de Partenariat. However, the legal case has lingered since May 2007, when the former Governor o f the Central Bank was arrested. N o further progress has beenreported inbringingthis case to legal closure. 32. The government faces weak institutional capacity which it is addressing with the assistance from IDA and other memberso f the international community such as Belgium, France, The Netherlands, DFID and EU. IDA'SEconomic Management Support Project (EMSP) has been instrumental in supporting technical assistance and capacity building for a large number o f activities, especially inPFM and PSD reforms. For instance, it has supported the start-up o f the Audit Court. InJune 2008, it facilitated the training o f 98 staff from various ministries inthe implementation o f the new procurement law that was promulgated in February 2008. Starting with this ERSG program and in coordination with the EMSP, IFC PEP-Africa is providingtechnical assistanceand capacity buildingin PSD issues. The new CAS also plans a public enterprise and financial sector Technical assistanceproject for 2010. 33. Finally, the Government i s committed to an ongoing comprehensive program o f reform at the Central Bank and i s adopting a number o f laws and measures to improve transparency o f financial transactions, including an anti-money laundering law which i s currently with the Parliament. MACROECONOMIC ANDDEBTSUSTAINABILITY OUTLOOK Macroeconomic Outlook 4 The action plan included the following: (i)to conduct an external audit o f the arrears in the petroleum sector; (ii) inthe short term, to agree on an action program to close the loopholes so that such payments cannot recur in the h t u r e (including revisions to the Organic Law (Loi Organique) and the 2008 budget law); and (iii) inthe medium term, to strengthen the accountability and transparency o fpublic spending by implementing the reforms proposed in the PEMFAR, which i s currently under preparation, and would be supportedby the proposed ERSGI1grant and other international partners. 10 34. The macroeconomic framework and reform agenda framework i s consistent with the Government objectives o f fostering growth and poverty reduction. The growth path takes into account recent developments in the economy and i s in line with the latest IMF analysis The medium-term economic framework assumes an acceleration o f real GDP growth from 3.6 in2007 to 4.5 percent in2008 to 5 percent for the remaining period. The main driving force behind the real GDP growth rate remains the primary sector, which contributed on average 49 percent to GDP between 2000 and 2006, although a slow shift to the secondary and tertiary sector i s expected5. The increase in the secondary sector from 2009 onwards i s due to higher value added from agro-processing and mining prospects6. 35. Annual average inflation (measured by the GDP deflator), which spikes in2008 to 18.5 percent due to the sharp increases in international food and petroleum prices, i s expected to decrease dropping to 8.7 percent in 2010, helped by the improved liquidity management o f the Central Bank, and limited financing o f Government activities by the Central Bank7. 36. The current account deficit (excluding official transfers as percentage o f GDP) narrows from 36.3 percent in2006 to 31.9 percent in2010. The improvement stems from an increase in exports due to success o f the reform process especially inthe coffee sector and developments in the mining sector. Imports are expected to increase at a slower pace as the mainpost-conflict reconstructionand rehabilitation efforts come to an end. After a disappointing year with no growth in 2007, the primary sector is expected to recover from 2008 onwards. The main contribution to the primary sector comes from food crops (on average 80 percent between 2000and 2006) A strong reform process in the agricultural sector will be necessary to achieve this improvedperformance. The reform o f the coffee sector is expected to lead to higher output and quality o f coffee. Additional stimulus is expected in the tertiary sector from strong public expenditure in the priority sector, renewed investment in the telecom sector following the expected privatization o f ONATEL and the increased dynamism o f the financial sector with the recent reopening o f the headquarter o f the Eastern and Southern African Trade and Development Bank inBujumbura. 7World Bank medium term projections suggest that the prices will ease as supply responses will kick in. 11 Table 3: MainEconomicIndicators 2002 2003 2004 2005 2006 2007 2008 2009 2010 Actual Prel. Proiections (annual percentagechange) Real GDP 4.4 -1.2 4.8 0.9 5.1 3.6 4.5 5.0 5.0 Real GDP per capita 0.7 -4.0 2.8 -1.1 3.1 0.6 1.5 1.9 1.9 Lnflation (GDP-deflator) 1.8 11.6 8.3 16.6 4.4 8.2 18.5 10.0 8.7 Exports, f.0.b. (US Dollar) -19.5 21.0 27.5 19.5 2.6 -14.3 40.6 14.2 14.9 hports, f.0.b.(US Dollar) -1.1 19.7 16.1 27.6 28.7 20.6 26.8 8.4 4.0 Export volume -19.1 28.8 -10.9 -1.7 -7.6 -5.2 27.6 12.6 15.9 h p o r t volume 0.2 25.7 3.9 16.4 10.3 -3.3 4.4 15.2 10.8 Terms o f trade 0.9 -1.4 28.1 10.9 -4.9 -16.0 -11.4 5.3 6.4 (percent of GDP) Balance of Payments Current account balance incl. official transfers -3.5 -4.6 -8.1 -1.2 -14.5 -16.0 -19.1 -20.1 -17.8 excl. official transfers -17.5 -21.1 -25.5 -29.1 -36.3 -37.7 -36.3 -34.2 -31.9 Gross official reserves [months of imports) 5.1 4.9 3.6 4.2 3.6 4.0 4.1 4.3 4.5 Public external debt 195.1 207.5 189.7 143.8 141.4 135.0 113.1 97.3 27.8 Investment (constant prices) 5.7 10.6 13.0 10.5 16.3 19.3 25.0 26.5 27.5 Private 2.1 2.3 2.7 4.0 8.0 7.1 9.8 10.5 11.5 Public 3.6 8.3 10.3 6.5 8.3 12.2 15.2 16.0 16.0 Publicfinance Total revenue (excl. grants) 20.3 21.1 20.1 20.0 18.9 18.7 19.1 19.1 19.1 Total expenditure 25.9 34.9 39.8 36.8 38.2 38.7 43.8 40.3 39.0 Primary fiscal deficit 2.2 -0.8 -3.5 -1.7 -1.5 -5.6 -8.3 -8.5 -6.3 Fiscal deficit (excl. grants) -5.7 -13.8 -19.7 -16.8 -19.3 -20.1 -24.8 -21.3 -19.9 Fiscal deficit (incl. grants) -1.4 -6.2 -4.9 -6.3 -1.8 0.8 -2.2 7.0 -1.1 Memorandum items Exchange rate FBu/US$ (average) 931 1,083 1,101 1,075 1,029 1,087 - Nominal GDP (FBubillion) 585 644 132 861 945 1.059 1.312 1.515 1.7291 Source: IMF, World Bank,own calculations GovernmentFinancial Outlook 37. The outlook for Government finances is for a continued overall fiscal deficit (including grants), except for 2009 whenthe country reaches HIPC completion point. The fiscal deficit excluding grants i s estimated at 20.1 percent o f GDP in2007 and i s expected to decrease to 19.9 percent o f GDP in 2010. Revenues are expected to remain relatively constant as in the medium term the country will implement tariff policies related to its 2007 membership inthe East African Community, reducing its tariff intakes. Also, inthe next 1-3 years the tax base i s not expected to increase notably as informality, tax evasion and exemptions are relatively high and will only start to come under control once the tax reforms have started to be implementedin 2008. Tax reforms include improvements in tax information (registration and computerization o f the tax processes), reform o f the tax rates and better collection. Recurrent expenditures will decrease as a result o f a drop in interest payments from reaching the HIPC Completion Point in 2009. The debt stock i s expected to fall substantially for the same reason. Wage and salary restraint will also 12 contribute to expenditure discipline, reflecting the demobilization effort and wage restraint. It i s important to note, however, that the post conflict nature o f the country requires higher police and armypresence. 38. Aid pledges for 2007 are expected to meet projected requirements and consist largely o f external grants. External grants for 2007 are projected at FBu221.3 billion (or 25.7 percent o f GDP), o f which 45 percent i s budget support (including special programs for demobilization and reintegration o f ex-combatants), 37 percent project grants and 18 percent HIPC relief. The financing gap in the following years i s expected to be covered by additional bilateral and multilateral assistance, provided Burundi stays on track with its reform agenda. Table 4: Government Finances and Financing Sources 2005-2011 (Inpercent ofGDP, unless otherwise indicated) 2005 2006 2007 2008 2009 2010 Actual b e l . Projections Financing (percentofGDP) Primaryfiscal deficit* -1.7 -7.5 -5.6 -8.3 -8.5 -6.3 Overall fiscal deficit (excl. grants) -16.8 -19.3 -20.1 -24.8 -21.3 -19.9 Externalgrants 11.7 17.9 20.9 22.5 96.2 18.8 Externalborrowing 2.3 0.7 2.3 1.5 1.1 Adjustment to scheduledinterest payments 0.5 1.8 0.4 -75.8 0.0 DomesticborrowingiFinancia1gap -1.4 -3.2 -0.4 -0.6 0.0 Debt (in FBubillions) Total debt stock 1431.3 1544.6 1680.9 1665.0 1686.7 686.5 Domesticdebt 193.1 243.3 209.1 203.5 194.9 194.4 Foreigndebt 1238.2 1301.3 1471.9 1461.5 1491.8 492.1 DEBTSUSTAINABILITY 39. Inthe absenceoffullHIPC relief, Burundiwould be indebt distress, highlighting the need for accelerated efforts to meet the HIPC completion point triggers. Even after enhanced HIPC and MDRIassistance, Burundi i s at highrisk o f debt distress mainly due to the low export base o f the country'. Burundi's end-2006 stock o f public and publicly guaranteed debt was US$1,464 million (US$1,5 17 million including arrears), US$51 millionhigher than at the end o f 2005. 40. The baseline scenario assumes continued interimHIPC relief. Under this scenario, all debt sustainability indicators will breach the policy dependent thresholds, except for the debt-service to revenue indicator (see Table 5). Hence, Burundiis considered to be in debt distress. Full delivery o f HIPC and MDRI assistance, assumed in the alternative scenario, would lead to a substantial decline o f the debt indicators, compared to a scenario with only interim debt relief. Most o f the debt indicators would remain below * The analysis updates analysis presented in the HIPC decision point document of July 2005 and the LIC DSA of July 2006. 13 their indicativethresholds. The NPV o fdebt-to-exports ratio, however, will remain above its threshold for the entire period, thereby placing Burundi in the `high risk o f debt distress' category. Further stress tests indicate that less concessional borrowing as well as lower GDP and export growth substantially increase the risk o f debt distress. Table 5: Summary of Debt Sustainability Indicative Average Threshold 2007 2017 2027 2007-2027 NPV of debt to GDP Baseline scenario 85 38 32 45 30 Alternative scenario 85 20 28 22 NPV of debt to exports Baseline scenario 998 230 158 100 315 Alternative scenario 998 118 139 141 NPV of debt to revenue Baseline scenario 468 192 157 230 200 Alternative scenario 468 99 139 111 Debt service to exports Baseline scenario 15 35 15 10 20 Alternative scenario 35 4 6 8 Debt service to revenue Baseline scenario 25 17 12 10 15 Alternative scenario 7 3 6 6 41. Overall, for Burundi to lower the debt indicators related to exports and maintain the other indicators below their thresholds, particular emphasis has to be placed on: (i) implementation o f a strong and sustained reform effort, especially a diversified export base to support robust growth in exports and GDP; (ii) implementation o f prudent and fiscal monetary policies to ensure fiscal discipline and macroeconomic stability; (iii) prudent debt management and meeting financing needs in the short- and medium-term with grants and highly concessional loans; and (iv) strengthening o f debt management policies and institutions, which would also contribute to higher indicative debt thresholds. 14 111. STATUS OFREFORMS INITIATEDUNDER 2006 ERSG(ERSGI)9 42. The 2006 ERSG was a stand-alone two-tranche operation, which closed end o f March 2008, after successful tranche releases inNovember 2006 and December 2007. It was designed to support reforms in public financial management (PFM) and promote policies to accelerate growth. The ERSG objectives were to: (i)improve public expenditure management and its impact on the poor; (ii) revive agriculture export crop sectors (coffee, tea, and cotton) and ensure better revenue distribution sectors among actors; and (iii) revive the private sector by improvingbusiness climate, accelerating State divestiture, and settle the Government domestic arrears to the private sector. While progress in PFM has been relatively steady and the Government has taken a number o f important measures to improve the business environment, the pace o f structural reforms was slower than anticipated. 43. The ERSG program in PFM has progressed well given the weak institutional capacity. For instance, a new and unified nomenclature has been implemented, helping identify pro-poor expenditures. The new double-entry accounting system has been implemented. The Interim computerized financial management information system (SIGEFI) was functional for the 2006 budget year and produced quarterly budget execution reports for 2007 and early 2008. The Government has progressively consolidated its cash management by closing off-budgetary accounts. The General State Inspectorate (Inspection Ge'nkraZ de Z'Etat) was created and became active in 2006. Nonetheless, given the scope o f the ERSG program and the country's political fragility and institutional weaknesses, not all reforms progressed as quickly as was hoped. For instance it i s only in February 2008 that the new procurement law was promulgated and the planned reconstitution o f the control unit o f the MEFCD is only materializing under the ERSG11grant. 44. In the PSD area, the ERSG program made progress but at a slower rate than expected. It focused on (i) reviving the private sector by improving business climate, accelerating State divestiture and settling the Government domestic arrears to the private sector; and (ii)reviving agriculture export crop sectors (coffee, tea, and cotton) and ensuringbetter revenue distribution sectors among actors. Despite good progress toward reforming the business legal and regulatory environment, the pace o f structural reforms was affected by several Government changes in2006-2007, low institutional capacity and lack o f a unified and strategic approach in some policy areas. The Government has taken a number o f measures to improve the business environment and promote private sector development. For instance, in 2006, the Chamber o f Commerce and Industryestablished the BurundiArbitration Center, to facilitate arbitration as a means o f commercial conflict resolution. loBy August 2007, the authorities followed through their commitment to settle Government debt to the private sector, providing it with some financial space. The Government has enacted the insolvency law. Burundi became a member o f the East Annex 9 provides further details o f the implementation o f the 2006 ERSG. 10 with financial assistance under the IDA supportedEconomic Management Project 15 African Community (EAC) in mid 2007 to facilitate its integration into the regional economy. 45. The Government's strategy to divest from economic activities has been to undertake (i) a differentiated approach to privatization o f the public enterprises and (ii) a reform program for the agricultural sector (coffee, tea and cotton) to revive exports and improve revenues to producers. The Government has made some progress inprivatizing public enterprises. They have liquidated some bankrupt enterprises, re-launched bids for the sale o f Government shares in other enterprises and recently have finalized studies o f the financial status o f seven major public enterprises. However, the privatization law still in force is outdated. The institutional framework to prepare, manage and monitor the reform o f the public enterprises is highlyinadequate. Finally, the overall approach for the reform o f the remaining public enterprises still lacks a solid analytical underpinning around which to build a consensus about the way forward. 46. In the coffee sector the Government adopted a law in 2005, which liberalized coffee prices and commercialization, and a rolling three year action plan in late 2006 to reform the sector. It has undertaken a number o f activities to reform the sector, such as creating the coffee reform committee in 2006, undertaking major studies supported by IDA and the EU, and facilitating visits for international buyers. However, the sale o f the washing stations has experienced a long delay. Also, the reforms experienced setbacks in mid-2007, with two announcements (that set coffee prices and granted a monopoly for the commercialization o f all Burundian coffee for 2006-2007), going against the 2005 law. The program o freform intea and cotton sectors did not progress. 11 IV. THE GOVERNMENT'SPROGRAM 47. The Government's PRSP, which was formally adopted in September 2006 and was presented to the IDA andIMFboards inMarch2007, intendsto redirect the economy away from a post-conflict focus and towards economic growth and development. The PRSP aims to strengthenpolitical stability, consolidate peace, and reduce poverty through accelerated, sustainable, and equitable growth. There are four principal strategic axes in the PRSP: (i) improve governance and security; (ii) promote sustainable and equitable economic growth; (iii)develop human capital; and (iv) combat HIV/AIDS. The accompanying CAS document provides a discussion o f these four axes. 48. Both the Interim PRSP and the PRSP call for a reorientation o f public expenditure, with a need to increase hnding for health and education, while ensuring adequate funding for governance and security. They also list priority programs and cost "TheAuthoritiessetupaTeaReformCommitteebutitdidnotbecomeoperationalandthetechnicaland financial audit o f the Office o f Tea o f Burundi (OTB, Office du Thd du Burundi) was not undertaken. Inthe cotton sector, the state weaving company (COTEBU) is inbankruptcy and has closed its doors. The Government has developed a strategy for reform COTEBU that includes opening to enterprise to private sector investment, most likely inpartnership with investors from People's Republic of China. SCEP has developed an action planbasedon this strategy 16 these programs. Also, public expenditure financed from HIPC funds only started inmid- 2005. Nonetheless, the reduction in the share o f defense and security in 2001-2005 and availability o f HIPC funds in 2006 helped increase the share o f economic and social priority sectors from 28.6 percent o f total public expenditures in 2001 to 34.1 percent in 2005 and 38.2 percent in2006. While procurement issues and lack o f capacity ledto the disbursement o f only 38 percent o f the 2006 HIPC total envelope o f 39.5 BFbu(or US$4 million), the HIPC funds that were used went predominantly to finance capital expenditures (73 percent). Education received nearly half o f total HIPC funds, and over 98 percent o f these hnds financed the construction o f primary schools, in line with the large expansion o f primary education, following the Government's decision in September 2005 to make primary school education free. In health, 24 percent o f total HIPC funds were used to finance recurrent expenditure-such as programs that promote the health o f mothers and infants, subsidies for caesarians, and community based family planning activities-while only 0.2 percent financed health infrastructure. In June 2007 the authorities established a HIPC supervisory committee to better monitor HIPC expenditures. BANKSUPPORT TO THE GOVERNMENT'S STRATEGY 49. The proposed grant continues to support the Government o f Burundito transition from the current post-conflict economic environment to one that i s focused on designing and implementing policies that support economic development driven by private sector activities. To consolidate recent progress inreconstruction, effectively mobilize increased donors support, accelerate growth and reduce poverty, the Government needs to remove bottlenecks to economic growth and governance. To this end, progress i s critical in the priority areas already identified by two PRSP axes: (i)to improve governance and security; and (ii) to promote sustainable and equitable economic growth. Specifically, to improve governance the Government has identified several priorities: (i) strengthen the legal andjudicial framework and the democratic culture; (ii) promote an efficient public administration; (iii)reinforce decentralization; and (iv) to put in place a transparent system o f management for public finance management and fight against corruption. To promote sustainable and equitable economic growth, the priorities of the Government are to: (i)reenergize the sectors that contribute to growth, notably agriculture (food and exports), livestock, commerce, mining and industrial processing; (ii)diversify opportunities for employment and revenue in the rural sector; (iii) rehabilitate and modernize infrastructure (transport, energy and telecommunications) to increase the competitiveness o f the economy; and (iv) reestablishmacro-economic stability. 50. The proposed ERSG 11aims to support authorities to implement a number o f priorities identified in these two PRSP axes. Specifically, the program supports the Government objectives to: (i) put inplace a transparent systemo fmanagement for public finance management through the PFM reforms with the ultimate goal o f improving allocative efficiency in public service delivery; (ii)strengthen the legal and institutional framework for private sector development by developing and adopting best practice laws and regulations and by supporting analysis o f and the development o f a systematic approach to public enterprise reforms; and (iii)reenergize a key export sector that 17 contributes to growth and to diversifying opportunities for employment and revenues by supporting reforms in the coffee sector. Finally, the grant supports macroeconomic stability by providing continuedbudget support. 51. The series is also in full alignment with the new CAS that is under development and will be presented to the Board alongside this operation. The new CAS pursues and consolidates the objectives set forth in the ISN, which were to assist the Government contain strong social demands while identifying areas and mechanisms to promote sustainable economic growth. Its goal i s to support Burundi transit from a post-conflict to a development economy by selectively assisting the Government inthe implementation o f the PRSP. The strategic objectives o f the CAS are: (i) to promote sustainable and broad- based economic growth; (ii)improve access to social services and consolidate social stability. Governance will be a cross-cutting objective. Relationshipto Other BankOperations 52. The proposed grant series i s a follow-up to the ERSG operation approved by the Board in 2006. It i s developed in close coordination with the Economic Management Support Project (EMSP), an IDA financed project, which provides technical assistance and capacity building in all areas o f economic reforms to the authorities. This proposed grant series i s also closely coordinated with IFC's PEP-AFRICA which i s starting an extensive program o f technical assistance and capacity building to improve the business environment inBurundi. COLLABORATIONWITHTHE IMFAND OTHERDONORS 53. Coordination with IMF. The proposed grant is beingprepared inparallel with the sixth review o fthe first 3-year PRGF andhas coincidedwith the discussions to launch the second 3-year PRGFthat took place inMay 2008. The aim is to ensure coordination and consistency o f the macroeconomic and structural policy programs o f the grant and the PRGF. The grant's focus on PFM is to improve the transparency and quality of expenditures and on PSD sector reforms to support broad-based diversified growth complement the IMF's areas o f focus. 54. Coordination with other donors. The team i s working in close coordination with several bilateral and multilateral donors within the existing Cadre de Partenariat established for the ERSG grant. The Netherlands and Norway, which have provided co- financing of the ERSG grant, have committed to continue co-financing the ERSG11.The team will continue to promote enhanced coordination and harmonization among donors, in order to improve the predictability of budget support and coordination of donor supports for the PFM and PSDreforms. 18 55. Sectoral cooperation. The proposed grant involves participation o f IDA specialists in agriculture, private sector development and public finance management. It also coordinates with the plannedIFC support to improve the DoingBusiness Indicators. LESSONSLEARNED 56. Lessons from previous support for Burundi, such as the Emergency Economic Reform Project and the Economic and Rehabilitation Credit, indicate that these instruments were effective injumpstarting the economy in a post-conflict environment and initiating key reforms that helped the authorities show the benefits o f peaceful settlement o f conflict. However, in order to be effective, project design and implementation needed to be sensitive to the prevailing circumstances. It i s unrealistic to expect a Government to carry out a broad and complex economic reform program. Therefore operations shouldbe sharply focused. Also, the need to payparticular attention to "poverty alleviation" components o fpost-conflict programs cannot be overemphasized. 57. Review o f the Economic and Rehabilitation Credit also highlighted that before launching a privatization program, it i s important to liquidate those public enterprises that are technically bankrupt. The reform o f the coffee industry i s essential for improving Burundi'sexports and the incomes o f a large number of small farmers. Improvingpublic finance management was essential for enabling the transition Government and its successor to finance critical programs aimed at national reconciliation, enhanced security, and rehabilitation o f economic and social infrastructure. 58. Lessons from the 2006 stand-alone two-tranche ERSG (ERSG I)operation indicate that several factors are key to the sustainability o f the reform program. First, operation design needs to be sensitive to the internal consensus building process, in particular around difficult structural reforms. This i s all the more important if Government changes in a fragile and conflict prone environment, with the incoming Government needingto first establish its own understanding o f policy priorities. Second, the creation, proper functioning and continuity o f technical and policy level institutions will ensure institutional memory and help avoid backtracking or repetitive / parallel initiatives in the reform process. Third, the design and scope o f the program need to be simpler, less ambitious and more focused to take into account the fragile political environment and weak institutional and human capacities to implement reforms. For instance, the ERSG program could have been more focused in the scope o f its overall program, both in PFM reforms as well as agriculture. In the later case, the reforms envisioned for tea and cotton sectors did not progress as expected. Agreeing to critical yet realistically achievable measures with the authorities is key to minimizing delays in implementing reforms and will avoid budgetary issues related to delayed tranche release. Fourth, closer coordination with other development partners from the early stages o f the development o f the operation will help strengthen the "Cadre de Partenariat", unify budget support process among donors further and lessen the transaction costs to the authorities o f dealing with the conditionalities and administrative processes o f multiple donors. Fifth, the importance o f in-depth analytical work in informing policy dialogue and reforms can not be over-emphasized. 19 ANALYTICALUNDERPINNINGS 59. The Public Finance Management components o f the ERSGseries are based on the analytical underpinnings o f a Public Expenditure Management and Financial Accountability Review (PEMFAR) under preparation. While reviewing the reforms already made in improving public expenditure and budget reforms - supported by the 2006 ERSG and other donors - the PEMFAR highlights the need for continued: (i) progress in updating the legal and regulatory framework; (ii)reforms in budget preparation practices; (iii) streamlining o f budget execution practices; (iv) strengthening o f cash management; and (v) further developing the internal and external audit systems. A summary o f PFM findings from the PEMFAR is provided in the annex 5. The preliminary findings o f the PEMFAR were presented in a joint workshop held with the authorities inOctober 2007 inBujumbura, where some o f the directors and technical staff o f the MEFCD participated inpresenting the results o f the study. The feedback from this joint workshop was incorporated into the PEMFAR. A validation workshop will take place inlate summer 2008. 60. The PSD component o f the ERSG series i s based on three existing analytical pieces: (i) the Sources o f Rural Growth prepared in 2007 (a summary o f findings is provided in the annex 7); (ii) Diagnostic Trade Integration Study (DTIS, 2004); and the (iii)backgroundstudyonthepublicenterprises. TheDTISstudyisbeingupdatedand a complemented by the diagnostic work from IFC PEP-Africa specialists who visited the country in 2007 at the request o f the President o f the Republic to assist the authorities in improving the DoingBusiness Indicators. 0 The Sources o f Rural Growth i s intended to highlight key priority areas with potential to generate a rapid increase in agricultural production in the short- to medium-term. Inthis regard, it recommends transforming the use o f Burundi's rural assets, notably coffee, to enable this sector to become a better contributor to shared growth inthe short term and to provide the state with sufficient revenues to assist in the long term diversification o f the economy. The reinforcement of export crops' contribution to growth will require a sound privatization o f the coffee and tea sub-sectors as a means o f improving the sector's competitiveness and o f contributing to shared growth. The results o f the study were presented in a two day workshop in Bujumbura in May 2007 with active participation by the representatives o f the Government and the private sector. The feedback from the workshop was incorporated into the analysis. Annex 7 provides an extensive summary o fthe study and issues related to coffee and tea subsectors. 0 The Diagnostic Trade Integration Study (DTIS, 2004) recommends sweeping reforms to restore competitiveness after a decade lost to internal conflict. Indoing so, the study highlights five priorities: (i) regional integration; (ii) further develop and implement an export promotioddiversification strategy; (iii)introduce measures to reform the coffee sector; (iv) update and revamp the entire business regulatory framework, including the Investment code, the Commercial Code, the Labor Code, Energy Code, Telecommunication Code, and the Bankruptcy 20 legislation to foster and attract foreign direct investments (FDI); and (v) trade facilitation and customs administration to reduce the cost o f doing business by eliminating the unnecessary administrative burdens and lowering the cost o f imports and exports. 0 The background study on the public enterprises summarizes the known facts and figures about the universe o f public enterprises in Burundi. It also provides historical background about the reform efforts, the institutional framework to lead the reform, results o f the reform process and explanations as to its failure. From the scant information available, the study notes the poor financial conditions o f many o f these enterprises and highlights the need to undertake further in-depth financial studies before launching into a reform o f the sector. Such an analysis will allow the authorities to better understand what approach to adopt for the reform o f the public enterprises. 61. Generally, more in-depthstudies are neededto identify the economic and sectoral issues before suggesting wide ranging reforms to the authorities. The upcoming ERSG111 will benefit from an analysis of the institutional capacity to reform the public enterprises and more complete information on the financial situation o f public sector enterprises and their potentialimpact onthenationalbudgetand the economy ingeneral. An ICA isbeing finalized, following the investment climate survey conducted in July 2006 and the validation seminar held in Bujumbura in April 2008. The study on divestiture o f the coffee sector assets and the sectoral environmental assessment will provide hrther analytical bases for the Government policy choices. Inthe PFM area, several surveys are underway that will inform the improvements o f the allocative efficiency o f the budget. These are: (i) education, health, and justice sectors budget tracking exercise (PETS - the budget monitoring) o f public spending on the delivery o f pro-poor; (ii) evaluation by an users o f the quality o f services provided; (iii) evaluation by providers o f constraints to an effective delivery o f pro-poor services; and (iv) preparation o f an action plan to address problems identified. V. THE PROPOSEDERSGI1 OPERATIONDESCRIPTION 62. The design o fthe ERSGseries as atwo-operation programmatic series is basedon successful examples in fragile states where peace and national reconciliation has led to significant improvements in the prospects for reform. In the case o f Burundi several factor weigh in favor o f such an approach. The country i s working towards consolidation o f peace as shown by the Arusha peace agreement in 2000, the democratic elections and peaceful transition o f power to the elected Government and continued efforts by the authorities to consolidate peace. The Government i s committed to the reform process at the highest level and engages inpolicy dialogue with the international community, where it has strong support. The Government's reform agenda, as outlined in the PRSP, embraces governance as well as social and economic issues. The Government has 21 undertakennoted measures inreforming and improving public finance management with the support of IDA,the IMF, European Union and bilateral donors. 63. The programmatic approach o f the ERSG series can act to mitigate the risks associated with budget support operations in Burundi. It signals commitment by the Bank and other donors as well as by the Government to follow-on support, compared to a stand-alone single tranche operation. The continuity o f the policy dialogue and reform agenda that started with the 2006 stand alone ERSG grant and i s now set out inthe ERSG series, together with the technical assistance and capacity building from Economic Management Support Project (EMSP), and in partnership with the IFC PEP-AFRICA program, will contribute to support the reform agenda that i s expected to help the country transition to an economy focused on development goals. This approach will also provide adequate time to ensure that policies are built on analytical work and the policy adopted i s country-owned, especially as it relates to the coffee sector and reform o f the public enterprises. The programmatic approach o f the ERSG series offers the benefit o f laying out a clear road map for obtaining future support, without forcing the definition o f binding tranche release conditions in areas where policy formulation is ongoing (i.e., in the coffee sector). Future support will hinge on sufficient progress against policy objectives attached to identifiedreforms. Finally, the ERSGseries will be developed on a time table that will align its tranche release to the country's budget cycle. This alignment with the national budget cycle is expected to be complete by the effectiveness of the second grant (ERSG 111),which i s expected for August 2009. July i s the beginning o f the new budget cycle expected to be adopted by the Authorities as part o f their recent membership inthe East African Community. 64. The proposed Economic Reform Support Grant I1(ERSG11)is the first ina series o f two grants designed to assist the Government o f Burundito continue implementing the country's poverty reduction strategy inorder to transition from a post conflict economy to one that i s focused on economic development driven by private sector growth. The proposed ERSG I1will support the Government to continue: (i)reforms in the public finance management system to improve accountability and transparency in public spending; (ii)reforms in the business legal and institutional environment to foster private-sector-led growth; and (iii) reforms inthe coffee subsector. 22 Box 1: GoodPractice Principleson Conditionality Principle 1:Reinforcecountryownership The Government o f Burundii s strongly committed to the reforms supported under the operation. The grant supports the Government's PRSP, which was developed ina participatory manner involving consultation o f a wide range o f stakeholders and including 17 provinces and sectors. The process was led by the Permanent Secretariat for Monitoring Economic and Social Reforms, with the support o f 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 supportedthe Government inthis process. Principle 2: Agree up front with the Government and other financial partners on a coordinated accountabilityframework The Government and the budget support donors have agreed on a common framework "Cadre de Partenariat" and the Government is developing a P F M action plan based on the PEMFAR (2008) around which donors can consolidate their support. Principle 3: Customize the accountability framework and modalities of Bank support to country circumstances The ERSG series i s 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 Bank support and policy dialogue, which is complemented by specific projects providing focused investment assistance. Budget support i s seen as necessary instrument to address the budgetary needs o f 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. This approach i s fully consistent with the Government objectives, and in some areas broadens the setting o f the policy dialogue to multiple stakeholders, beyond Government policy declarations. Principle4: Choose only actions criticalfor achievingresultsas conditionsfor 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. A higher number o f measures are included in the policy matrix (annex) as measures o f progress to monitor the overall progress o f the reform program. Principle 5: Conduct transparent progressreviews conducive to predictable and performance-based financialsupport A full and close supervision o f the program progress review will take place in line with the agreed PartnershipFramework between the Government o f Burundiand the budget support donors POLICYAREAS 65. The table below provides the prior actions and indicative triggers for the ERSG series program. The choice o f the reforms and the content o f the policy matrix were based on ensuring country ownership and priorities, as expressed in the PRSP; capacity o f the country to implement the reforms, realism o f the timeline to implement them; the need for a simple methodology for monitoring progress; results focus with a medium-term horizon and the need to provide technical assistanceon several o f the measures. 23 Table 6: Prior Actions for ERSGI1andIndicative Triggers for ERSGI11 ERSGIprior actions ERSG I1-Prior Actions ERSGI11- Indicative Results and implemented By April 2008 Triggers tranche release Bv December 2008 conditions I.MoreAccountableand TransDarentBudgetManagementProcess A. Budget Preparation and Alignment with PRSP Identifiedpro-poor The new organic law that is Finalize the public Up-to-date budget framework law with expenditureprograms inline with modern expenditure tracking surveys clear definitions o f tasks and including HIPC international practices is (PETS) inhealth, education responsibilities o f all involved entities. expenditure to be approvedby the Council o f andjustice sectors and reflected in2006 budget Ministers and submitted to beneficiary assessmentsand Draft budget for each new fiscal year is law and tracked underthe the Parliament. publishall relatedreports on presented to the National Assembly 3 Government budget and Governmentwebsite. months before the beginning o f the new accounts classification Adopt a decree establishing fiscal year. system. the budget preparation Submit a draft budget law for timetable, responsibilities and 2009 to the parliament by Increased share o f expenditures on health, Submit draft budget law the content o f the "lettre de October 2008 reflecting a (i) education, infrastructure and social for 2006 to the parliament cadrage" to improve timeline closer alignment with PRSP protection indraft budget 2009 compared reflecting an increase of and efficiency inthe budget goals and (ii) increased an to 2008; and draft budget 2010 compared the share o f pro-poor preparation process. share o f expenditures directed to 2009. expenditureintotals to health, education, expenditurecompared to Improve identification o f agriculture and social 2005 budget. expenditures for poverty protection compared to 2008. reduction inthe functional classification based on the Poverty Reduction Strategy Framework (PRSP). B. Budget Execution Establish an interim The MEFCDprepares and . . SIGEFI includes (i) a Budget execution data as reported from computerized financial implements inconsultation functional module for the SIGEFI will include most state operations management and with five main line ministries calculation o f the payroll and (including HIPC and pro-poor information system revolving quarterly cash flow (ii) completebudgetcycle the expenditures and full budgetary cycle for (SIGEFI) for expenditure plans (i)based on realistic for the payroll. the civil service payroll) and execute the 2006 revenue forecasting and budget onthe basis o f assessmentof seasonal SIGEFI (i) includes most Percent o f expenditure authorized and such system. expenditurerequirements and State operations inthe normal executed by exceptional procedures will (ii)providing line ministries expenditure process and (ii) decrease from 2007 to 2009. Procurement: Adopt an the quarterly ceiling o f allows minimumstandard emergency action plan to commitments. (starting with budget executionprocess improve competition and 4 2 2008). (including the monitoring of transparency inpublic the file's movements, the procurement. reservationo f appropriations and transfers, the control o f Submit the revised commitment through procurement law to the appropriation quota, the parliament. partial payment, the closing o f the Governmentbalanced account). Establish the procurement regulatory authority which has a status and a mission in accordance with the procurement code 1/01 o f C. Budget Accountingand Control Produce quarterly budget Reestablishthe internal The revised accounting and The unitis operational as evidenced by the execution reports based inspection and control unit budgetary chart is adopted production o f a minimumnumber o f on the SIGEFI and and ensure satisfactory and the revised manual o f reports covering a minimumpercent o f including the budget cycle staffing and functioning. accountingprocedures i s total state income andor expenditures for 24 ~~ (budget allocation, implemented. 2008 and 2009 respectively. commitments, Submit 2006 and2007 liquidations,payment Governmentgeneral accounts Compared to 2007 quarterly budget orders, andpayments) andextrabudgetaryaccounts executionreports for 2008 and 2009 are starting with endMarch for audit to the Audit Court more accurate, comprehensive andtimely. ERSGprior actionsand ERSGI1 ERSG 111 Results triggers fully met Prior Actions Indicative Triggers ByNovember 2007 By April 2008 By December 2008 11. ImprovedBusiness Legaland Institutional Environment for Growth Enactthe new insolvency The new investmentcode that The new commercial code Updatelegalframework with simpler and bill. i s inline with modem and the code for private and moretransparentguidelines. internationalstandards is public companies that are in Satisfactoryprogress in approvedby the Councilof line with modeminternational The simplified tax reduces tax complexity implementing the Ministersand submittedto standards havebeenapproved by consolidating at least 3 taxes into one. Government's strategy for the Parliament. by the Councilof Ministers settlingof its domestic and submittedto the Decreasethe percentof cases where the arrears to the private Parliament. maximumdelays inrenderingjudgment is sector, includingthe over 60 days. banks. Relaunchthe public-private Simplified small business tax consultationframework i s includedin the draft budget Facilitateregular dialogueon economic throughthe adoptionof a law for 2009. policybetweenthe privatesector andthe decree. Government. Improvethe performanceof the CommercialCourt, specially delays inrendering judgments oncases. Broughtto the point of Launch a study that will The revisiono f the The analyses oninstitutional capacity and sale of: (i)the State's analyze the existing Privatizationlaw, inline financial status of the six fully publicly shares inALCOVIT; and institutional capacity for with modeminternational owned enterprises contribute to the (ii) percentofState's 70 public enterprise reform and standards, is approvedby the knowledgebaseof the Governmentand shares inONAPHA. that will include a related Councilof Ministers and donors. action plan to strengthensaid submittedto the Parliament Re-launchthe bidding capacity. Modemlaw clarifies the rules and process for the saleof all Finalizeandpublish the responsibilities for any privatizationof OCIBU's assets insectors financial assessment for six public enterprises. other thancoffee andof fully public enterprises (Air all of its shares inSociete Burundi; APB; ECOSAT; HoteliereNouvelle du FIC; FOSIP; OTRACO). Burundi (new Hotelier Company ofBurundi) 111. RenewedImpetus in Coffee Sector Reforms Issue decreerelatedto the Publishthe regulationfor By December 2008, the Coffee commercialization regulation liberalizationof the commercialization of coffee Government will adopt a revisedto facilitate growthinthe number coffee sector, inparticular to clarify to stakeholders in time-boundplanof its chosen of active traders. the producer pricesetting the coffee sector the rules divestiture option for key andthe marketing. regardingmarketingfor the coffee sector assets. Reductioningovernment ownership of upcomingcoffee campaign coffee assets. Adopt a 2006-08 detailed (2008-09). implementationaction Divestitureoptionis implemented. plan to reformthe coffee sector" 12 Action plan included: (i) the restructuring of the sector debt; (ii) setting-up of legal, a regulatory and institutional the framework consistentwith the liberalization and privatization of the sector; (iii) arrangements for managingand financing services; (iv) strategiesto privatize State's assets (washing stations and factories managedby SODECO); and (v) accompanyingmeasures, notably a socialplan in the event of layoffs, institutional support and capacitybuilding. 25 PUBLICFINANCE MANAGEMENT 66. The findings from PEMFARsuggest that Burundiwould benefit from: 0 The implementation o f sound budgetary operating procedures, as provided for in the draft organic law and evidenced by the assessmentsprovided by internal audit and inspectionbodies; 0 A higher degree o f consolidation o f public expenditure into the budget than is currently the case (an increase o f on-budget expenditure); 0 A reasonable degree o f financial discipline, as evidenced by the credibility o f the budget (comparison o f budget estimates and outturns, both in aggregate and by sector); 0 Reasonably accurate recording and reporting o f financial and physical data, as evidenced by the regular production o f consistent Government accounts and the opinions o f auditors. 67. Continuing the reforms supported by the 2006 ERSG, the ERSG series supports additional PFM reforms that take into account PEMFAR's findings and will improve fiscal transparency and accountability, with the ultimate goal o f improving service ' delivery. The ERSG I1 will focus more tightly on reforms related to preparation, execution and reporting o f the budget and internal audits. This focus i s grounded in the experiences from the 2006 ERSG two-tranche operation, the governance issues that arose during its implementation highlighting the need to focus on the basics o f budget operations, and the findings o f the PEMFAR. ERSG m will follow up on reforms launched with the support o f ERSG11, but will also focus more on the issues related to budgetary allocative efficiency. This later goal will be informed by results of: (i) the education, health, andjustice sectors budgettracking exercise (PETS- budgetmonitoring) o f public spendingon the delivery o f pro-poor, (ii)an evaluation by users o f the quality o f services provided; (iii) an evaluation by providers o f constraints to effective delivery o f pro-poor services; and (iv) the preparation o f an action plan to address problems identified. 68. While progress has been made in this area since 2005, further progress i s needed inseveral areas. 0 Legal and Regulatory Framework. The current legal framework Law o f March 19, 1964 i s outdated and a source o f many derogations and exceptions. The new draft law ("Loi organique") developed during the 2006 ERSG program and supported by the Economic Management Support Project (EMSP), sets the fundamental principles and rules for sound public finances. Inaddition, complementary laws would further set the rules for the application 26 o f the organic law in public finan~e.'~The new draft organic law was approved by the Council o f Ministers in March 2008 and submitted to the Parliament inMay 2008 as a prior action for ERSG II.A next step under the program through 2008 i s the implementation o f the law, including development and adoption o f the manual o fbudget executionprocedures. 0 Budget comprehensiveness and coverage. As noted in the 2006 ERSGand in the PEMFAR, the budget ought to become comprehensive, integrating recurrent and investment budgets, civil service payroll, domestic and foreign expenditures. In2007 the Government adopted a unifiedbudget nomenclature and i s now working towards electronic integration o f the recurrent and investment budgets, working with the support o f technical assistance financed by the EMSP. The 2006 ERSG reforms have helped strengthen the link between the PRSP and the annual budget, as seen by the higher expenditures in social sectors. The Government is now working to push these reforms forward. The non- recording, or partial recording o f foreign-financed, and NGO-financed operations i s a serious handicap for the authorities to devise a meaningful strategy for the fight against poverty. Also, the authorities, aware that the method adopted for the codification o f poverty reduction expenditures needs to be further refined, simplified the methodology and improved the identification o f expenditures for poverty reduction in the functional classification based on the Poverty Reduction Strategy Framework (PRSP). This improvement i s a prior action for ERSG II. The on-going public expenditure tracking surveys (PETS) in health, education and justice sectors and beneficiary assessment, which are supported by the EMSP, are expected to inform the Government's decision for the 2009 budget cycle. The proposed ERSG111program will follow the preparations for the 2009 budget to make sure the link and consistency between PRSP and annual budget 2009 will improve. Submitting a draft budget law for 2009 to the parliament by October 2008 reflecting a (i)closer alignment with PRSP goals and (ii)an increased share o f expenditures directed to health, education, agriculture and social protection compared to 2008 i s an indicative trigger for ERSGIII.The finalization o f the public expenditure tracking surveys (PETS) and beneficiary assessmenti s also an indicative trigger for (ERSGIII). 0 Budget preparation. As noted by the PEMFAR, the budget preparation process needs improvements at all levels. In June 2008, the authorities adopted a decree establishing a new budget preparation timetable, l3The most important of these laws is the new law on public accounting which would set the essential rules and procedures for the execution o f the budget and would cover : (i) the streamlining o f the expenditure circuit; (ii) the clarification and strengthening o f the internal control and audit systems. A new law would better define the architecture of the control and audit systems. Related decrees would clarify the presentatiodscope and the preparation o f the budget law and the budgetary and accounting plan o fthe State. 27 responsibilities and the content o f the lettre de cudruge (framework letter) to improve timeline and efficiency in the budget preparation process. The new decree includes a budgetprocess that starts inFebruary/March by ensuringthe availability o f the macro-economic framework. The lettre de cadruge i s to include expenditures ceilings by ministry, information on the macroeconomic forecasts, and the general trend o f public expenditures on the Government economic and social strategy and the expected results, particularly inthe fight against poverty. The adoption o f this decree i s a prior action for the ERSGII. The issuance o fthe related "lettre de cudruge" and ensuing budget preparation process for 2009 will be next steps during 2008. IDA has provided technical advice on the content o f the decree. These steps should prepare the country for an eventual MTEF, which, when implemented, should help allocate resources in accordance with the PRSP priorities. In the medium term, the authorities need to strengthenthis capacity for multi-year budgetary planning. This includes creating capacity to manage and supervise budget limits, arbitrage, improve the macroeconomic and revenue forecasts, consolidate and synthesize the budget. It i s also necessary to build capacity to prepare a reliable multi-year plan that takes into account expenditures for each budget entity and allocates the resources according to the medium-term priorities definedbythe Government. Budget execution. As noted in the 2006 ERSG and the PEMFAR, budget execution i s overburdened by a multiplicity o f compliance/regularity controls, most o f the time redundant, leading to substantial amount o f expenditures to be executed using exceptional procedure^'^. They obscure the budget process, and reduce the relevance o f reports on budget execution. It will also be u s e h l to abolish redundant controls and reinforce the levels o f critical controls. The adoption and implementation o f manual o fbudget executionprocedures based on the new organic law during 2008 will help streamline budget execution process including redundant controls. Also, to improve execution o f the budget, the new procurement code, promulgated in February 2008 and going into effect in October 2008, will need to be implemented correctly and systematically. Already, 98 staffs from different ministries andpublic entities have been trained about the implementation o f the new law with the assistance o f EMSP project. The establishment o f the regulatory framework required by the new law will provide the necessary oversight o f procurement practices from the beginning. Establishing the procurement regulatory authority in accordance with the new procurement code i s an indicative trigger for ERSG 111. 14This is particularly the case for: (i) foreign-financed expenditures are paid from accounts opened in most commercial banks; (ii) extrabudgetary accounts; and (iii) expenditures made from Government accounts by non autonomous public entities. A payment is derogatory to the rules when allocations are made available to entities without legal personality and financial autonomy. 28 Furthermore, the authorities should reintegrate the state's operations in the normal expenditure process and in the interim Integrated Financial Management System (SIGEFI).'' SIGEFI needs to be further developed, strengthened and be fully owned by the authorities. The Government is working with the support o f the EMSP to improve the interim SIGEFI in general and its weak management o f salaries, including the obsolete software for the computerized management o f the payroll.'6 The Government has created a project management structure within MEFCD, to execute an action plan for the finalization o f SIGEFI which takes into account the required documentation and training for the users; and the specifications elaborated by the end-users o f the system. Improving the SIGEFIwould involve ensuring that (i) state operations are included in the normal expenditure process most and (ii) allows minimum standard budget execution process including SIGEFI the monitoring o f the file's movements, the reservation o f appropriations and transfers, the control o f commitment through appropriation quota, the partial payment, and the closing o f the Government balanced account. As regards payroll functions, the SIGEFI started in early 2007 to incorporate wages and salary data comprehensively at the payment order stage. As an additional step to control the wage bill, the authorities have launched a comprehensive census o f the civil service and the police with the assistance o f EMSP and the Dutch Government. They have launched a census o f the military and security forces, financed out o f the Government's own budget. Following the census, a new database o f public service personnel will be created. Also, the authorities are moving to develop, test and implement a module as part o f SIGEFI to calculate and process the wage bill. Improvement o f the SIGEFIand including the functional model for the calculation o f the payroll are major reform measures o f the ERSG series program. Both measures are indicative triggers for the ERSGIII. Budget reporting. While progress is being made in budget accounting, processes need further strengthening and reports need to be prepared more accurately, regularly and ina timely fashion. A new budgetary and accounting plan is being implemented since 2005 and substantial progress has been achieved by authorities inaccounting. l5 Since the inception o f the SIGEFI in 2005, the four steps o f the expenditure chain (commitment, liquidation, payment orders, and payments) have been integrated into the system. The system i s still an interim system and was not based on a defined general architecture with the target o f integrating all public finance operations. Also, the Government still i s burdened by an sizeable wage bill as share o f the state's budget, with weak management of salaries. The software for the computerized management o f the payroll i s obsolete, and the MEFCD i s not in a position to effectively ensure the verification o f the delivery o f the goods or services and the amount to be paid ("liquidation") and the payment o fthe public servants' wages. l6 The transfer o fthe wage billmanagement from a private enterprise to the MoF is underway withthe assistance o f the World Bank, which is also assisting inthe development of a new software program for the management o f the public service data, which should inthe medium-term facilitate the control o f the wage bill 29 There are still difficulties with the reliability and regularity o f budget and accounting reports: (i) data on expenditures are not accurate as they do not include most foreign-financed operations and expenditures; (ii)budget implementation reports are not produced at regular intervals; (iii) are there important delays between the time funds are cashed andthe accounting report; and (iv) accounting procedures are not fully mastered leading to discrepancies in 2005 and 2006 accounts. Progress on the first problem will depend on greater efforts from the donor community to share its planned program o f assistance. With technical assistance from IMF, the authorities are working on revising the 2005 accounting plan and procedures to ensure the last two outstanding problems are corrected. These revisions would lead to more accurate, timely and regular reports. The adoption o f the revised accounting and budgetary chart and implementation o f the revised manual o f accounting procedures i s an indicative trigger for ERSGIII. The authorities still need to ensure the comprehensiveness o f their budget process by recording all transaction in SIGEFI at various stages o f the expenditure process, including expenditure from the HIPC fund, and foreign- financed and counterpart funds. Regularizing the periodicity o f the general balance o f accounts and reports on revenues and expenditures will further facilitate budget management. As part o f its reform program, the Government plans to create a unit within the Directorate o f Accounting in charge o f centralizing the information on executions from different sources (project executions, disbursements from Central Bank, and the like). 0 Cash management. Cash management remains weak. The state's cash resources remain fragmented, budget revenue projections are not exhaustive and expenditures did not benefit from a systematic quarterly programming. Some progress has been made recently. An effort has been made to move towards the single treasury accounting with the authorities closing 125 accounts in 2005 and 2006 and another 50 in the first half o f 2007. All the transit accounts at customs and tax directorates inthe commercial banks have beenclosed. The MEFCD and BRB have established ajoint cash management committee. Domestic debts were audited and a debt settlement plan was implemented, closing end August 2007. Finally, to better forecast cash balances and cash flow needs to smooth out budget execution, the MEFCD has developed and is implementing in close consultation with five main line ministries (health, education, defense, police and agriculture) to develop revolving quarterly cash flow plans which are (i) based on comprehensive and realistic revenue forecasting and assessment o f seasonal expenditure requirementsand (ii)providing line ministries the quarterly ceiling o f commitments. Developing and implementing these revolving quarterly cash flow plans starting for the second quarter o f 2008 was a prior action for the ERSG 11grant. Implementation of subsequent quarterly cash flow plans will be anext step under the Government program. 30 To further improve cash management, the Government should request donors through the "Cadre de Parenariat", to transfer project accounts to the sub accounts o f the Directorate o f Accounting at the BRB and to provide the schedule and amount o f their budget support for integration into budget previsions. Also, it would be useful to establish a Cash Management Committee, under the authority o f MEFCD who chairs its meetings, along with a technical group with a permanent secretariat to assist the Cash Management Committee. Internal audit. Internal controls are weak. They are the responsibility o f "Inspection Gkne`ral de Z'dat" (IGE) created in September 2006 under the aegis o f the Minister o f Good Governance, the control unit o f the MEFCD, which i s to be reconstituted in2008, and internal units insome line ministries, that suffer from low capacity' The authorities are working to strengthen the audit functions. They have started to submit the general accounts o f the Government to Audit Court. To support this effort, submitting 2006 and 2007 Government general accounts and extra budgetary accounts for audit to the Audit Court is a prior action for ERSG 11. Another important step i s to speed up the full start o f the operations o f the MEFCD internal inspection and control unit. Given the clear interest expressed by the authorities, and since both the 2006 ERSGandthe PEMFAR note the importance o f re-establishing internal control at the MEFCD, re- establishment and satisfactory staffing and functioning o f this unit i s a prior action for the ERSG I1program. The Minister o f Economy, Finances and Cooperation for Development has signed a decree inearly 2008 to re-establish the unit. The staff o f the unit has been nominated and a work plan for 2008 developed. The staff o f the ministry i s developing the internal regulations for the new unit. PRIVATE SECTORDEVELOPMENT" 69. The overall approach o f the ERSG series builds on the 2006 ERSG reform program. Given the scope o f the 2006 ERSG program and the experience in implementing it (discussed above), the ERSG series has opted for a simpler, less ambitious and more focused approach to accommodate the political and institutional realities o fthe country. The proposed ERSGI1program also benefits from reforms which were shepherded by the 2006 ERSG and the EMSP project. It has also benefited from new analyses on the agriculture sector and the public enterprises. Background 70. There i s very little information about the size and impact o f the private sector (both formal and informal) inthe Burundi economy. Most notably, there i s no estimate o f 17 Information for this section obtained from draft ICA inprogress and from Republic o f Burundi, Sources o fRural Growth Study", Report No. 40138 - BI ,Africa Region, World Bank, 2007. 31 the size o f the informal sector (excluding agriculture) in terms o f contribution to the economy or employment. The ongoing Investment Climate Analysis supported by IDA and the upcoming technical assistance to foster private sector development by IFC will provide much needed insight to inform further policy dialogue. A better knowledge o f the structure o f the labor force (by pullingtogether data from different statistical sources like tax and social security records), a survey o f the informal sector and a new household survey would help enrich the informational and analyticalbase o f this dialogue. 71. The private sector, while very small, has remained an important actor in some o f the economic sectors such as energy, ago-industry, mining and communications. The formal private sector consists o f about 3000 registered enterprises, largely small and medium sized, employs some 37,000 workers (2004) and produces mainly for the local market". Estimates o f Direct foreign investment vary according to different sources, between 0.5 percent and 1.5 percent o f GDP for 2005 compared to 0.4% inRwanda and 3.5 percent in Uganda." Private sector growth i s hampered by the small size o f the domestic market, the landlocked position o f the country, other structural constraints and anuninvitingbusiness climate. 72. The scant available information on employment suggests that the agriculture sector employs over 90 percent o f the total workforce o f 3.9 million (2006), but underemployment i s rampant. The modem sector i s very small; it i s estimated to employ 107,000 persons in2004, o fwhich two-third are inthe civil service andparastatals. 73. The Government is aware that to secure peace it needs to promote sustainable and diversified economic growth led by the private sector - an objective identified as one o f the PRSP axes. Coffee i s currently an essential source o f income for the country, and a recent IDA study recommends diversification to higher value added crops within agriculture as one major source o f rural growth and income creation2'. The authorities are also interested in developing other sectors to strengthen the economy's ability to withstand external shocks inthe mediumto long run. 74. To achieve a diversified and private sector led growth, the pace o f reforms needs to be accelerated and their scope broadened. The authorities are committed to improve the current legal and regulatory framework o f the business environment. They intendto retrench from economic sectors by undertaking a systematic and economically sound reform o f public enterprises. The structural reforms o f the coffee sector, which stalled in mid-2007 due to contradictorypolicymeasures, will be launched again. '* Data from tax records suggests that about 3000 enterprises are formally registered, o f which 300 are registered with the UnitC des Grandes Entreprises o f the Tax Directorate. These 300 enterprises account for 92 percent o f the income tax revenue. l 9"Republic o f Burundi, Sources o f Rural Growth Study", Report No. 40138 - BI ,Africa Region, World Bank, 2007 20 Same as reference 19. 32 75. The constraints to private sector driven growth and income creation include inadequate infrastructure (transport, energy and telecommunication)2'. The proposed ERSGgrant series was not deemed the appropriate instrument to facilitate infrastructure development at this stage o f the country's development due to lack o f a comprehensive analytical background; the complexity o f these types o f reforms and lack o f national capacity to properly undertake them; and the length o f time needed to develop such a program and implement it. IDA i s already engaged in the road sector and a project in water and energy was presented to the Board o f the World Bank in May 2008. Also, Burundiwill participate inregional telecommunications program supported by IDA that will facilitate the country's connectionto the world. Business environment 76. There i s much room for improvement inthe business environment and promoting private sector development. The average time for completing the steps for registering a business i s reported to be 43 days andthe cost i s about 200,000 FBu, almost twice the per capita income. This performance i s only slightly above the average for sub-Saharan Africa. Furthermore, a 2006 enterprise survey indicates that a firm's senior management spends on average about 5.7 percent o f their time in dealing with requirements o f Government regulations. 22 Unofficial payments for a typical firm to `get things done' amount on average to 4.5 percent o f turnover; more specifically, 23 percent o f firms indicate that they are expected to make such payments (or `gifts') in meetings with tax inspectors. 77. Major reforms would foster a more favorable business climate for investmentsin Burundi.They include: (i) business laws and administrative regulations to avoid clarify provisions open to interpretations or discretionary decisions, (ii) reform the judiciary system to reduce excessive delays in the commercial court and promote arbitration and mediation as a means o f settling commercial disputes; (iii) strengthen public-private dialogue; (iv) facilitate business registration; (v) simplify the tax system for small businesses; and (vi) develop a better analytical understanding and a systematic approach to the reform o f public enterprises. Successfully implementingreforms (i), and (iii) (iv) will have the added benefit o f facilitating starting a business, registeringproperty, getting credit, protecting investors, paying taxes, enforcing contracts, and closing a business. 21 Inlandlocked Burundi, road transport determines access to markets for subsistence produce and export crops and therefore their quality and prices. Burundi has a meshed system o f roads, but out o f the 11,300 kilometers, only 1,209 kilometers are paved. The short-term key priority is to strengthen the rural road network and develop physical capital at the community level. Energy i s a critical constraint to growth. While the country is endowed with abundant water resources that could provide up to 250 megawatts, the population suffers daily power outages. So far the lack and unreliability o f energy generation and distribution has prevented development o f processing activities that would provide much needed added value to agricultural produce. Therefore, rationalizing energy production and distribution to better use existing facilities would support sustainable growth. Finally, the country lacks an Internet backbone reaching all provinces and enabling connections to other countries o f the region. The development o f a quality telecom network would be critical for accessing market intelligence that will be fimdamental to reach the coveted specialty coffee, tea, and horticulture markets. 22. The survey i s being used inthe ongoing Investment climate Assessment (ICA). 33 (9 Improve the legal and regulatoryframework for businesses and thefunctioning of the commercial court 78. Background and key issues. The business laws and regulatory framework in Burundi lack overall coherence and have not adapted to an increasingcomplex business environment, deterring investments. 0 Investment Code: The current Burundi investment code needs to be revised as it lacks some o f the basic guarantees which foreign investors expect, such as transferability o f dividends, and capital in case o f closure o f the business. Fiscal incentives for local and foreign investors are discretionary and do not allow for planning untilthe lengthy approval process i s completed. In June 2008, the Council of Ministers adopted and submitted to the Parliament a new draft code, which includes best practice features in investment legislation, including investor protection and freedom to transfer capital and dividends and a streamlined approval process. Non-discretionary incentives are included in the tax law and the tariff book. This action was a prior action for the proposed ERSG II.Technical support from the World Bank will continue to beprovided as needed. Business laws. The Government is in the process o f updating the 1993 Commercial Code (Code du Commerce) and the 1996 Company law (Code des sociitis privies et publiques) with the assistance o f the EMSP. A competition law i s also being drafted23.The country has recently adopted two insolvency laws (loi sur lesfaillites et loi relative au concordatjudiciaire de l'entreprise en d@cultb, 2006) and has legislationon real estate collateral. The adoption o f a new commercial code and a code for private and public companies by the Council o f Ministers and submission to the Parliament i s an indicative trigger for the ERSG I11grant. The adoption of these laws by the Council o f Ministers will follow a wide validation process to ensure national ownership. Technical assistance from the World Bank will continue to be provided as needed. Commercial court. The functioning o f the commercial courts needs to be improved. Burundi has only one commercial court in the capital Bujumbura, which while fully staffed (with about 15 full-time magistrates), still lacks adequate facilities, equipment, and skills, despite receiving some training and equipment through EMSP. The high turn over o f magistrates contributes to a relatively low performance in terms o f caseloads. Also, there i s a significant level o f corruption i s reported inthe judicial system in general, and especially at the commercial court were stakes are higher financially. Getting sentences 23The draft competition law will also be finalized an adopted, either as part of the general commercial law or as a free-standing text. Both approaches are used inother African countries and are acceptable. 34 enforced constitutes an additional problem for the party who wins a court case. These shortcomings significantly affect the duration o f the court proceedings -theaveragecasetakesfouryearsbeforeasentenceisrendered,andan estimated backlog o f about 400 case files i s pendingat any time. To improve the functioning o f the judiciary in general, the Government has increased the salary o f judges and magistrates significantly to discourage corruption. The remaining agenda i s twofold. First, the court needs to reduce the average duration o f court cases by reforming its internal organization (r2glement interieur) to improve magistrates' performance. The Ministry o f Justice also needs to ensure a certain stability o f the magistrates posted to the court. Second, the court should develop a realistic plan for resolving the backlog o f pending cases. Improving the performance o f the Commercial Court, specially the maximum delay in renderingjudgments on cases is an indicative trigger for the ERSG111grant. (ii) Strengthen theprivate-public dialogue 79. Background and key issues. There i s no systematic policy dialogue between the private sector and the public sector on issues that affect the business environment and economic growth. A framework for public-private sector consultation (cadre de concertation a r r W du Vice-president n"05/VP/03/du 03/I0/2003) was created in 2003. Two high-level meetings took place since then. However, there was no specific agenda and the meetings producedno recommendationor follow-up. A well-organized dialogue between the public and private sectors to promote the right conditions for private sector development and poverty has become an important part o f the private sector reform process. The public-private sector dialogue can facilitate investment climate reforms by supporting champions for reform, creating momentum, and accelerating the reform process. Governments that listen to the constraints o f the private sector are more likely to devise sensible prioritization plans and workable reforms. This, inturn, can encourage investors to take a longer view and cooperate with laws and regulations. The monitoring and evaluation systems put in place by a public- private dialogue initiative promote a culture o f compliance and entice Governments to perform regulatory impact assessments. Given these considerations, in June 2008 the government adopted a decree to relaunch the public-private consultation framework to facilitate dialogue on economic policy between the private sector and the Government. The adoption o f the decree i s a prior action for the ERSG II.The content o f the decree was developed in extensive consultation with private and public stakeholders and with the support o f the EMSP and IFC PEP-AFRICA. Technical assistance from the World Bank Group will continue to support implementation o f this activity. (iii) Facilitate business registration 35 80. Background and key issues. As noted above, registering new businesses is lengthy and costly. With the support o f the EMSP, the business registry located in the Commercial Court i s in the process o f being computerized to speed up one o f the legal requirements for the business registrationprocess.24 81. This measure is part o f the overall ERSG program. Simplifying the business registration procedures would improve Burundi's ranking in the "Creating a Business" sub-indicator inthe DoingBusiness ranking. (iv) Simplifi the tax systemfor small businesses 82. Background and key issues. Paying taxes in Burundi i s cumbersome and complicated by the multiplicity o f taxes25, stifling private sector development as it affects the formalization o fbusinesses and leaves room for uncertainty and corruption. A study on the reform o f the tax code completed in2007 suggested replacing theforfait and other small taxes paid by the small businesses by a simplified small business tax (imp6t synthe`tique) based on verifiable and mostly quantitative criteria 26927, This reform would have several benefits: (i) well a designed tax system will help draw into the formal economy those informal entities whose primary motivation for evading tax i s not fraud, but the complex and burdensome rules and regulations (such as multiplicity o f taxes); (ii) entrepreneurswill know in advance their tax liability and the Government will have a more predictable revenue stream; (iii) newly formal businesses the usually have better access to credit and procurement opportunities allowing them to grow and contribute economically to the country; (iv) the reform will reduce the possibility o f corruption involved in the present method o f "estimating" business turnover; and (v) formalization o f informal businesses will contribute economically and expand the tax base providing some tax relief for the existing formal businesses. 24 A preliminary study financed by the Economic Management Support Project is under way and will be followed by the development and installation o f the software and training o f staff. 25The country ranks 109 out o f 178 inthe Doing Business Indicator "Paying Taxes". 26 At present, Burundi's tax code that affects small businesses includes a number o f small taxes, including a tax option calledforfait for small registered firms (below a turnover o f 15 million Burundi Francs (Fbu) annually - equivalent to appr. US$ 15,000 - for services, and below 20 millionFBUfor all other activities); eligible firms do not have to comply with accounting regulations. Theforfait is not a lump sumpayment (as its French name might suggest); it i s calculated as a percentage o f a prior "estimate" o f the turnover by the tax inspector. 27 Assessment o f the amount o f tax will be made by easily verifiable, mostly quantitative indicators: the nature of the economic activity, the geographic location o f the business (city-centre or outskirts), the type o f construction and/or the square footage o f commercial space, the number o f employees, and the capacity o f equipment used. A system o f predetermined coefficients based on the above indicators would be used to calculate the business tax due. 36 0 The inclusion o f the simplified small business taxation (imp6t synthe'tique) into the annual budget law for 2009(Loi desfinances), the traditional vehicle for modification o fthe tax code, i s an indicative trigger for ERSGIII. (v) Public Enterprise Reform 83. Background and key issues: The Burundi economy appears to be dominated by public enterprises (PES), many o f which are in poor financial shape with potential disastrous consequences for the central budget. Many have provided poor level and quality o f goods and services. The 2006 PRSP acknowledges that the States needs to retrench from productive sectors to allow a sustainable and accelerated growth led by the private sector. However, the existing analytical base does not provide sufficient information to fully understand and evaluate the financial situation o f many o f the PES, their impacts on Government finance and on the opportunity cost to the country and the best option for the reform each PE. The Government still lacks a well-informed and clear reform strategy. A 2007 overview study o f the status o f the PESin Burundi found that as o f mid-2007, the State had shares in 48 entities (40 enterprises and eight banks and financial institutions), of which 16 are fully publicly owned2'. However, accurate and reliable data was not available for an in-depth analysis o f a majority o f these enterprises. The study focused on a broad review o f the 12 filly publicly owned enterprises within the productive sector, where data was most available andreliable. 0 As o f 2005, these 12 enterprises employed more than half of the civil service (23, 259 persons) and contributed 7.4 percent o f the fiscal revenues to the State. However, they are also the most heavily indebted (155 B Fbu or approximately 18 percent o f GDP as o f 2005). In fact, three o f the major enterprises, The OfJice du The'du BURUNDI (Tea company, OTB), the OfJice National des Telecommunications (the telecommunications company, ONATEL) and the Re'gie de Production et de Distribution d'Eau et d' Electricite' (the water and electricity company, REGIDESO) owe over 60 percent o f total debt. The State continued to subsidize the PESin difficulty since the 1980s, paying 2.7 Billion Fbuin2005 to keepingthem afloat. These subsidies adversely affected the central budget and the competitiveness o f the economy. Introduction o f management contracts did not bear positive results and large PES that dominated major productive sectors had to declare bankruptcy (for instance, VERRUNDI in glass making and COTEBU in textile). The effects o f these bankruptcies still ripple through the economy in the form o f unemployment, loss o f exports, and the like. A handfil o f PES dominate the exports o f the country: coffee, tea, beer, sugar and cigarettes (to the subregion), while all PESimport mostly sector specific products. ** The State has majority ownership in 16 and minority ownership in another 17. The 17 enterprises where the State has minority ownership are mostly o f small size and most do not provide reliable data to the State. 37 0 The most recent Government efforts at reforming PEShave been focused on a graduated approach, supported by the 2006 ERSG grant". This approach involved: (i)proceeding with simple privatization transactions that don't require extensive preparatory work, and (ii)assisting the Government in conducting the preparatory work for more complex ones, in particular public utilities. As discussed above (Section In),the Government hasmadeprogress in implementing its approach: it has liquidated several bankrupt enterprises, sold some public properties, re-launched bids for the sale o f Government shares in some enterprises and banks. The gains from privatization receipts to the central budget have been modest: 0.4 percent o f GDP in 2006 and an expected 0.5 percent o f GDP in 2007 and 2008. Also the Government, with the support from the EMSP project, has recently finalized studies o f the financial status o f seven major fully public enterprises (OTB, ONATEL, SOSUMO, REGIDESO, COTEBU, OCIBU and SRDI). 84. Even this graduated approach to PE reforms seems optimistic in hindsight. In post-conflict countries it takes time to undertake a proper preparation and evaluation o f the various options to improve productivity in PES, including restructuring, contract management, private-public partnership, or outright privatization, and involve Government and stakeholders in a decision making process leading to consensus on reform measures. Moreover, the political economy implications o f these options need to be considered explicitly. The Government should consider a more systematic and transparent approach to the reform o f the public enterprises. To start with, the Government needs to strengthen the institutional framework to prepare, manage and monitor the reform process. Therefore, it has launched a study that will analyze the existing institutional capacity for public enterprise reform and that will include a related action plan to strengthen said capacity. Launching this study i s a prior action for the ERSG 11program. Secondly, the authorities need to have a better understanding o f the financial status o f all 13 fully publicly owned enterprises to understand their potential implicit and explicit risks to the central budget3' To follow on the study that analyzed seven PES,the authorities intend to launch a financial study/audit o f the remaining six fully publicly owned enterprises (Air Burundi, APB, ECOSAT, FIC, FOSIP and OTRACO). Finalizing this second study i s an indicative trigger for ERSG111. Finally, as the Government may decide to privatize some o f the PES,it should revise the current outdated Privatization Law and adopt one that includes international best practices. These activities can be supported through the EMSPproject as needed. Agriculture 85. Background. Agricultural sector growth has been slow and volatile in line with the weak performances o f the predominant coffee sector, which provides direct income 29 In2005 some privatization transactions were launched but most either failed to attract bidders or were temporarily interrupted by the new post-transition Government who was willing to reconsider the evaluation o f assets and insome cases, the privatization strategy. 30Fromthe 16 fully publicly owned enterprises, one has disappeared (OPHAVET), another one is ina liquidationprocess (BCC) while a third one (ONAPHA) i s currently ina privatizationprocess. 38 for 67 percent o f the households in the country. Resuming rural growth entails boosting food production and enhancing coffee and other export crops' contributions to growth both significantly and durably. Since the Arusha peace accord (2000), the Government has given high priority to the promotion o f agricultural exports as a way to enhance shared growth and debt sustainability. However, the effort has lacked consistency and direction, and results have been modest to date. The coffee sector has a prominence in these reforms due the subsector's dominant position in the economy and the need to strengthenits competitiveness. The reform agenda also included targeted actions in the tea and cotton sub-sectors. The three agendas included the following objectives: (i) removing constraints associated with price policy and marketing in order to increase returns to producers; (ii) enhancing the legal, regulatory and institutional framework to encourage incremental private investment ; (iii) divesting the state's assets in order to reduce the fiscal burden and bring in more effective and flexible management; (iv) improving services to producers and processors to increase production and improve quality; and (v) assuring continued access to requiredpurchased inputs. However, little progress has beenmade yet inimplementingthese measures. 86. IDA currently supports the rehabilitationo fdomestic agricultural markets through the Burundi Agricultural Rehabilitation and Sustainable Land Management Project (PRASAB), a US$35 million lending operation, granted in 2004. PRASAB seeks to increase crop and livestock production and productivity, diversify farm income, support farmers' organizations, and promote sustainable land use. IDA approved a supplemental budget o f US$15 millions in 2008 to strengthen the project's results and help Burundi scale up activities. Under the next CAS, a follow-on agricultural project i s programmed to promote high value export crops such as coffee, tea and horticulture. Other donors such as the European Union, FDA, USAID and Belgiumalso provide direct investments inbothdomestic and export agriculturalmarkets. 87. Given this background, the proposed ERSG series, building on the work undertaken under the ERSG Igrant, focuses on continued practical measures to help the Government develop, assess and implement state divestiture options inthe coffee sector, the first source o f export revenues. The ERSG program will also follow the reform progress in the tea sector, the second source o f export revenues. Proposed activities under the ERSG IIfocus on coffee sector reforms, with the objective to help Government o f Burundi overcome institutional and regulatory constraints preventing sector growth. (0 Coffee 88. Background and key issues. Coffee i s the major export o f the country, accounting for more than 70 percent o f export revenues and providing income to approximately 800,000 people. The Burundian coffee sector suffers from low and declining coffee production and yields, aging plant stock, high intermediary costs, low export prices and an inadequate incentive framework. Yields are approximately halfthose inneighboring countries (200/250 grams per tree versus 450/500 grams pertree inKenya for instance). Production dropped from 42,000 tons in the early 2000s to 6,000 tons in 2007-08, which i s one o f the country's historic lowest records, although part o f this i s due 39 to cyclical fluctuation. The current market structure does not allow direct contracting, and most production i s sold on the commodity market at relatively low prices. Fully-washed coffee, which commands higher quality and premium prices than washed coffee, i s only 50 percent o f the production this year while it was more than 75 percent o f the production since the washing stations were built in the nineties. Declining and volatile production also affects buyers' perceptions o f the reliability o f Burundi as a supplier, and therefore further reduces prices. Inefficient intermediation under the present ownership structure and marketingrules further increase costs and reduce returns to producers. 89. Increasing the coffee sector competitiveness and diversifjmg export risks and revenues will necessitate improved competitiveness inthe commodity market and a focus on high value-added cultures, which has a better potential to increase the share o f revenues benefiting the most vulnerable3'. Required investments in market intelligence andmore productiveplant stock are at present constrained by institutional and regulatory conditions that depress returns to producers and discourage potential investors and foreign trading partners. 90. Despite significant public attention to reforms in the coffee sector, little practical change has beenaccomplished to date. Government still owns most o f the sector's assets (133 washing stations, and two large dry mills factories), which have operated since the early nineties by local entrepreneurs (SOGESTAL and SODECO), under a lease agreement. Reforms o f the sector resumed in2005 - after a longhiatus related to the civil war - with the adoption o f a presidential decree to liberalize price setting and marketing activities, to reduce taxes on orchards, and to remove state guarantees for financing the sector. Several key studies were undertaken (see annex) and in March 2006 the Coffee Reform Steering Committee was created. The Government adopted a sectoral action plan inNovember 2006 that included developing a strategy for the privatization or divestiture o f 133 washing stations as a key reform measure. However, development o f this strategy has experienced a long delay. In May 2007, the President o f the Republic declared that coffee producers were owners o f the coffee bean (cherry and green). This latter step was an important confirmation o f the right o f producers to undertake their own decisions regarding marketing, but its import was poorly understood. Lack o f clarity was compounded by the Government's decision in 2007 to fix prices and contract all externally marketed fully-washed coffee to a single foreign buyer. It i s therefore important to clarify the implications o f the President's declaration and to spell out subsequent changes in roles and responsibilities inthe sector. Rules governing campaign preparation, marketing, and exportation must be clarified urgently. Key issues to address are: (i) are the producer organizations representative and effective; (ii) whether these producer organizations have to pre-finance the coffee campaign now (to pay for input provision, etc.) and if so, how, given their absent credit history; (iii) can they reach how 31Two studies were performedas background work for the study on the sources o f rural growth in Burundi. The first study assessed the potential to develop productionand sales o f specialty coffee from Burundi (Integrative Report inSupport o f the BurundiCoffee Value Chain Diagnostic and Strategy Development, MSU,February2007), while the second studyidentifiedcandidates for fast-tracking privatizationpilots (BurundiCoffee pilot selectionandplanning, MSU,June 2007) 40 the markets (commodity and specialty) at the best possible price; (iv) what are the consequences on coffee price setting (how do they share international market prices with other stakeholders o f the sector, who provides them with wet and dry mill services, extension, rural road maintenance, etc.). Eventually, any actual changes in business conduct induced by the May 2007 presidentialmedia statement should be reflected inthe legal and regulatory framework. 91, Reinvigorating the coffee production and introducing high value added culture call for reforms that invoke complex issues o f political economy. In addition, uncertainties regarding practical modalities to implement the Government's intentions remain. For example, the decision to divest o f the coffee washing stations requires determination o f the method o f divestiture; e.g., sale to prospective buyers, transfer to producer organizations, or other approach. Which approach i s preferred i s in part an empirical question, and requires determination o f the existence o f potential buyers, reservation prices, and (in the alternative approach o f transfer to producer organizations) an assessment o f needs for enhanced capacity for producer organizations. Moreover, once decisions are made regarding the modality o f divestiture, new arrangements to assure continued financing o f purchased inputs must be put in place that are consistent with the new ownership structure ofthe processing sector. 92. Inlight of the above, the ERSGseries will help Government of Burundiidentify and assess alternative options for the ownership structure, organization and regulatory framework, to improve the competitiveness and profitability o f the coffee sector, with particular emphasis on a sustainable increase inreturns to producers. Ina first critical step the government has issued in April 2008 a new regulation for commercialization of the green coffee for the 2008-2009 season to stakeholders in the coffee sector elaborating on the implications o f the May 2007 Presidential declaration for marketing options. This regulation has been advertised widely in French and Kirundi in the national media to inform producers and other stakeholders o f the different marketing options available to them, such as direct sale to buyers. Issuance of this regulationwas a prior action for the ERSG 11program. A second critical step is to explore divestiture options based on the specificities o f the Burundian coffee sector. Undertaking this divestiture study, managing public consultations on the options suggestedby the study, and adopting an option and a related actionplanconstitute an indicative trigger for ERSG111. 93. These reforms are part o f a comprehensive coffee sector reform process which i s receiving support from the EMSP project. They are expected to lead to the implementation o f the state divestiture option with the best potential to increase the sector's competitiveness and producers revenues. The coffee sector reform action plan would entail strengthening the leadership provided by the Coffee Reform Committee and clarifying its mandate, enriching public information and understanding, and addressing practical bottlenecks to change inthe ownership structure and regulatory framework. 41 (io Tea 94. Background and key issues. Tea i s the second largest agricultural export after coffee. Between 2001 and 2006, average tea production amounted to 7,500 tons. Two thirds were producedby smallholder^^^. The average earning for a Burundian tea grower in 2006 was about US$46. Most production, transformation, trade, marketing, and regulatory aspects o f the industry are handled by the parastatal Office du ThC du Burundi (OTB). Despite changing world market conditions such as declining prices, demand for quality differentiation, and competition from man-made beverages (especially soft drinks), and the structure o f Burundi's tea industryhas remainedlargely unchanged since its inception. The sector faces numerous constraints, including structural inefficiencies o f the tea factories and plantations, poor incentives to smallholders and estate laborers, limited use o f inputs and extension services, and non-existent research. These constraints have led to a considerable decline in the quality and the price o f Burundian tea. For example, during 2005 and 2006, Burundian tea was traded with a 30 percent discount over Kenyantea at the Mombasatea auction where most East African tea i s traded. 95. To improve the income earning capacity o f the Burundi tea growers, reforms in the tea sector should address constraints to profitability, competitiveness, and the ability o f the industry to innovate in response to new opportunities. The reform program will include five main activities. A financial and technical audit o f OTB is necessary to identify clusters o f assets that can be divested as units, and assets that should be closed to reduce excess capacity and improve profitability. A time-bound plan for divestiture and modality o f proceeding should be developed. Prior to divestiture and while divestiture i s being planned, outsource management o f the asset clusters. Clarify formula for division o f net revenues (after subtraction o f the management fee) between and among actors in the industry (separately for those working in and with state farms, and smallholders). It is also necessary to identify residual functions o f OTB and assess capacity to fulfill them. Finally, depending on the industry structure selected (e.g., fully competitive, territorial concessions, regulated monopoly, or other) identify the set o f complementary regulations required to facilitate good performance o f the structure, and the entity or entities responsible for undertaking the regulation. These reforms are discussed inmore detail inthe appendix. 96. Inbalancingthe low nationalimplementationcapacity, the needto keep the ERSG 11grant focused and the need for structural reforms inthe tea subsector, the program will closely follow a number o f recommended actions to reform the subsector as part o f the preparatory work for ERSG III.The ERSG111grant will consider the possibility o f fuller engagement inthe reforms o f this subsector. 32 Tea i s produced infive regions by estates and smallholders. Average green leaf yields were about 4.0 tons per hectare for the smallholders compared to 4.8 tons per hectare for the factory estates. Yields o f made tea (the finished product) o f one ton per hectare are less than halfo f the regional well runplantations. Inaddition to their sub-standard equipment, Burundi's tea factories are using only 41% o ftheir installed capacity compared to 70% for competing producers. 42 VI. OPERATIONIMPLEMENTATION POVERTY AND SOCIAL IMPACTS 97. The proposed ERSG series is expected to have likely and significant impact on poverty. 98. Improvementsinthe management o f scarce public resources are expected to make more resources available to finance PRSP priorities and to achieve the Government poverty reduction objectives. The PEMFAR provides indicative results by simulating the impact o f fiscal consolidation (debt relief) and changes to the level and the composition o f public expenditure on real growth and poverty in Burundi in the medium-term (2008- 2015). A baseline simulation based on increasing real GDP per capita from 1.3 percent in 2007 to an average 1.6 percent between 2008 and 2015 leads to a large drop in poverty rate (from 66.9 percent to 44.8 percent) by 2015. Several policy alternatives are analyzed and the simulation results suggest that the composition o f public expenditures has a large impact on economic growth and poverty.33 For instance, increasing the share o f capital expenditure financed by external assistance by four percentage points between 2008 and 2012 will lead to the poverty rate falling from the baseline poverty incidence o f 44.8 percent to 18.2 percent by 2015, as real GDP per capita rises34. Likewise, reducing the wage billby 1.5 percentage points o f GDP in2009 inrelation to the baseline scenario will reduce poverty by 17.5 percentage points below the baseline rate. On the other hand, the impact on poverty o f a budget neutral reallocation o f spending from recurrent expenditures to capital expenditures i s lower: poverty rates fall by 15.8 percentage points inrelationto baseline rates. 99. Public enterprise reforms are in a process o f policy formulation. In reviewing options for state or private ownership o f the public enterprise portfolio the Government will be encouraged to weigh economic, poverty, and social benefits on the basis o f the studies o f individual enterprises. 100. Business climate reforms are expected to have long-term positive growth and poverty implications. Given that ESRG I1focuses on administrative measures to facilitate business registration, court proceedings, and investor protection, no significant distributional implications are expected from these measures. 101. Inthe long run, the coffee sector reforms aim at accelerating growth and more specifically increasing producers' production factors and income. Following the monopoly marketing arrangement for sale o f coffee set up in 2007 by the authorities, the adoption of a regulation to commercialize green coffee for the 2008-2009 coffee season, a prior action for the ERSG 11, i s intendedto clarify the different marketing arrangements available to producers, including the option o f directly selling to foreign buyers, and to 33The five policy alternatives are: (i) increase inpublic investment financed by aid; (ii)budget-neutral an a reallocation o f spending from other recurrent expenditures to capital expenditures; (iii) a reduction o f debt; (iv) a total forgiveness o f foreign debt; and (v) a reduction inwages and salaries. 34Based on an assumed growth-poverty elasticity o f -0.5, poverty will fall by 5.2 percent. 43 avoid monopoly trading by coffee washers. By clarifying these options, which leave the current institutional arrangements inplace, it i s hoped that producers would benefit from more competitive market conditions, selling at higher prices and therefore earning a higher income. Thus, the regulations would give farmers additional options and better prices for selling their crop, and thus are not likelyto have significant negative impact on poverty or income distribution. The ERSG 111 will support the identification o f divestiture options and adoption o f an action plan for the chosen option during 2008. The identification o f divestiture options will be through undertaking due diligence studies (financial, judicial, regulatory, institutional and environmental, evaluation o f enterprises and marketing) as well as developing and presenting different divestiture options to the authorities. The options presented will be developed in consultation with the stakeholders, especially coffee producers, to ensure that the interests o fthe majority o f the actors in the coffee sector are taken into account. The authorities, in turn will decide about the appropriate divestiture option after extensive national consultation. Review o f the options will include a review o f the likely poverty and social implications o f reform options. IMPLEMENTATION, MONITORINGEVALUATION AND 102. Monitoring and evaluation arrangements will continue to rely on Government arrangements with the aim o f strengthening Government capacity and institutions, with particular attention to the regularity and quality o f the M&E process and its outcomes. Discussions with the national partners and the working arrangements during the pre- appraisal mission have led to the development o f the following national M&E structure (see figure below). Sector or subject specific technical units who work on the details o f the reform program (including prior actions and triggers) feed information to the Coordinating Technical Unit, which includes a representative from REFES. REFES i s the technical committee that follows up the progress in the implementation o f the PRSP as well as the global reform programs o f the State, provides regular progress reports to national policy makers (such as the second vice presidency and the inter-ministerial committee for the follow up o f the reforms located at the second vice presidency), and seek policy guidance. Strengthening the institutional and technical capacity o f REFES would endow both the Government anddonors with a better M&E system. 103. The Coordinating Technical Unit in turn reports to the Policy Committee, mandated by the Second Vice-presidential and presided by the Minister o f Economy, Finances and Cooperation for Development. This Policy Committee includes representation by different relevant ministries and representation by the second Vice- Presidency. This Comittee supervises the implementation o f the economic reforms included in ERSG I1 and will supervise the development and implementation o f the ERSGIIIreform program (see figure below). 104. The M&E structure takes into account the scope o f the proposed reform in each sector or area in defining the nature and complexity o f the national intervention. The existing technical units at the MEFCD and Ministry o f Commerce remain primary interlocutors for the development and follow up o f reform program in PFM and PSD. 44 The technical unit at the Ministry o f Commerce i s complemented by representatives from other relevant ministries (such as the Vice Minister o f Planning and MEFCD) to ensure inter-ministerial coordination and development o f a unified vision for the PSD reforms and their expected outcome. For coffee and the reform o f the public enterprises, the contact for technical monitoring and evaluationi s directly with the related institution. 105. IDA will work closely with the Government and other international partners within the Cadre dePartenariat to monitor the reform agendaunder the proposed grant. 45 I FIDUCIARY ASPECTS 106. Like many low-income countries, Burundi's financial management systems suffer from serious weaknesses in budget formulation and execution, financial reporting, procurement and oversight systems. There i s also typically a weak linkage between agreed policies, budget planning and execution. Inthe case o f Burundi, the destruction o f relevant institutions and humanresource base during the years o f conflict has contributed to these fiduciary risks. The provision o f budget support is acceptable if clear expenditure priorities and a strong Government commitment for addressing institutional weaknesses reduce the risk to an acceptable level relative to expected benefits. Budget support should help strengthen partner countries' public financial management systems, including transparency and accountability. Improvements in this area are both a precondition for, and objective o f the proposed ERSG 11. 107. The authorities have made significant progress in the past few years to improve management o f the public resources and to mitigate fiduciary risks. These mitigating measures include measures to improve transparency o f the budget process (revision o f the organic finance law, adoption o f a new budget classification, the creation o f an interim computerized financial management information system (SIGEFI) for the 2006 budget and subsequent years, production o f quarterly budget execution results) and to control expenditures and expenditure processes (establishment o f an audit court, publication o f the first audit o fbudget execution, audits o f the treasury). The Government is committed to implementing additional reforms and i s preparing an integrated medium-term reform action plan, on the basis o f the PEMFAR, covering the legal framework, budget formulation, budget execution, public procurement, financial management and reporting, internal control and audit, external oversight, and control over the wage bill. 108. The Burundian authorities also have repeatedly stated their commitment to fight corruption, and have asked for Bank support in designing an anti-corruption strategy. Furthermore, they have taken swift action when governance issues have arisen. For instance, they acted swiftly to adopt mitigating measures related to the sale o f the presidential airplane, including: undertaking an external audit o f the sale and adopting a related action plan in September 2007.35 Similarly, in the aftermath o f the Interpetrol affair, the authorities once again acted swiftly by undertaking an audit, taking legal measures and agreeing to a program o f action to improve the governance o f public resource management. 35 The action plan includes development and adoption o f a law on sales o f public goods and establishment o f a Parliamentary commission to pursue the investigation and identify the responsible individuals. A technical group has already been formed to develop a draft o f the law and the Parliamentary commission has also been created in September 2007. 36 The program included: (i) conduct an external audit o f the arrears in the petroleum sector; (ii) the to in short term, to agree on an action program to close the loopholes so that such payments cannot recur in the future (including revisions to the Organic Law (Loi Organique) and the 2008 budget law); and (iii) inthe medium term, to strengthen the accountability and transparency o f public spending by implementing the reforms proposed in the PEMFAR, which is currently under preparation, and would be supported by the proposed ERSG I1grant and other international partners. 47 109. Key fiduciary risks and risks mitigation measures have been identified in the PEMFAR under finalization and the draft Program Document for the proposed ERSG11 continues to address the status o f fiduciary assessments and the risk mitigation measures (see details inAnnex 2) as was the case for the precedent operation (ERSG). 110. The proposed operation treats public financial management reforms inBurundias a priority area and improving public expenditure management and its impact on the poor i s a major component. Inparticular: (i) assessment o f the fiduciary environment o f the an country i s included, based on the 2004 CFAA and the PEMFAR; (ii) policy matrix the reflects actions that constitute a sound strategy to improve public financial management and lower fiduciary risks in Burundi; (iii) technical support to implement this financial management reform agenda and capacity building in this area i s provided by IDA Economic Management Support Project (EMSP) approved in 2003; and (iv) the funds flow arrangements have been adequately described, including the disbursement procedures to be followed and the modalities to be adopted. 111. The IMF completed a safeguards assessment o f the Burundi Central Bank (BRB) in January 2006, and reported that the BRB was committed to improving financial reporting procedures and strengtheningits system o f internal control. However, IDA was unable to obtain a copy o f the report. Furthermore, the governor o f the BRB was accused o f being involved in the Interpetrol scandal referred to in the governance section above, which evidenced weak controls over payments made by the BRB. The governor i s currently under arrest awaiting further legal proceedings. These two developments constitute sufficient grounds to request additional steps needed to secure acceptable fiduciary arrangements for development policy lending. Given the circumstances, appropriate additional steps would involve the setting-up o f a dedicated account in the BRB. IDAreserves the right to request an annual audit o fthe dedicated account. 112. These actions are sufficient to ensure the operation will support the mitigation o f fiduciary risks related to the management o f public funds, particularly the support the operation lends to the long term strategy for public expenditure management reform. Recent public financial management improvements and the strong Government commitment to improving governance as demonstrated by the recent actions taken inthis area are encouraging. DISBURSEMENT AUDITING AND 113. A single-tranche of SDR 18.5 million (US$30 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 disbursedagainst satisfactory implementation o fthe development policyprogram. 114. Once the Grant i s approved by the Board and becomes effective, the proceeds o f the Grant will be deposited at the request o f the Recipient by IDA ina DedicatedForeign Currency Deposit Account (DFCDA) designated by the Recipient at the Central Bank (Banque de la Rkpublique du Burundi, BRB) and forming part o f the official reserves o f Burundi. Within a week, the BRB will credit the local currency (Burundi Franc) equivalent o f the Grant proceeds to the Government Treasury account. The BRB will not impose any charges or commissions on the Government for these transactions. The 48 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 requiredto 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 o f the exchange rate applied and the date o f the transfer. IDA reserves the right to request an annual audit o f the DFCDA. If the proceeds o f the grant are used for ineligible purposes as defined in the Financing Grant Agreement, IDA will require, promptly upon notice from IDA, the Recipient to refund an amount equal to the amount o f said payment to IDA. Amounts refunded to the Bank upon such request shall be cancelled. The administration o f this grant will be the responsibility o f the Ministry o f Economy, Finance and Cooperation for Development. ENVIRONMENTAL ASPECTS 115. The proposed ERSG 11focuses primarily on institutional reforms, which are not expected to have likely and significant effects on Burundi's environment, forests, and other natural resources. The agricultural reforms that will be undertaken once the studies on divestiture options are finalized (in December 2008), may have environmental effects. The reform aims at increasing the share o f producers in the border price and increasing boththe production and quality o f coffee. The increase inproduction i s expected to come from an improvement inthe current extremely low productivity and more efficient use o f land not through clearing o f forests, nor extending cropping into marginal lands and commons. To build sufficient analytic knowledge under the program for follow-on operations, the terms of reference o f the studies on divestiture options for the coffee sector take into account the environmental aspects. In addition, in order to fully understand the potential environmental consequences o f such a reform and suggest mitigating measures when needed, a coffee sector environmental assessment will be undertaken. Regulatory and Institutional Framework 116. Environmental management and natural resources management institutions have developed slowly in Burundi since the creation o f the Ministry o f Environment, Land Management and Tourism in 1989. Today it i s called Ministry o f Environment, Land Management and Public Works. This ministry has the responsibility o f planning, coordinating, implementing and monitoring all activities and actions related to the environment. In a bid to improve and facilitate coordination and collaboration o f all ministries with activities related to the environment, the Government set up a National Commission for Environment. This Commission has representatives o f line ministries which include environmental matters and the Environment Directorate o f the Ministryo f Environment, LandManagement and Public Works i s the secretariat o f this commission. 117. In June 2000, the country adopted an environmental code (Code de 1'Environnement) that places environmental impact assessment (EIA) at the heart o f Government efforts towards achieving the goals o f sustainable development. The environment directorate at the ministry i s responsible for reviewing and approving EIAs. The capacity o f the directorate to review, monitor and enforce compliance with national environmental regulations i s weak. This i s compounded with the fact that, since the 49 adoption o f the code, there has not been any procedural guidelines on how to prepare EIAs. Other legal and policy frameworks include Land Code (Code foncier), Forestry Code (Code forestier), Mining and Petroleum Code (Code minier et petrolier). Implementationo f these different codes has beenweak due mainlyto staffing and funding concerns. Plans are underway to review these codes. EnvironmentalPolicyImplementation 118. In 1996, the country prepared and adopted a National Environmental Strategy, which highlights the focus o f the Government in the area o f environment and natural resource management. Acknowledging the fact that there i s limitedinstitutional capability at the environment directorate, the ministry assessed the need to strengthen the national capacity to comply with national environmental regulations as well as to monitor and effectively enforce compliance with environment regulations. After consultations with donors, a five year action plan was prepared and adopted inJanuary 2006. The actionplan i s based on four global objectives: (i) promotion o f coordinated management o f the the environment; (ii) the sustainable management o f land, water, forest and the atmosphere; (iii) conservationofnaturalhabitatsandbiologicaldiversityand;(iv)thepromotion the o f the tourism sector. On each o f these objectives, the action plan specifies the activities to be put inplace, the performance indicators, the responsible institutions, the budget and calendar. The authorities are seeking funding from the international community for most o f activities elaborated inthe action plan. R I S K S AND RISK MITIGATION 119. Despite the commitment o f the Government which remains unequivocally strong, especially at the highest level, the years o f civil conflict have accentuated the weak technical capacity and sub-optimal institutional and organizational arrangements. As a result, the expected outcomes o f the proposed ERSGI1are subject to a number o f risks. These risks are mitigated to a large extent by several factors, including: (i) design o f the the proposed operation; (ii) strengtho fthe Government's ownership and commitment, the affirmed at the highest level, to implement the proposed measures and the Government's resolve to advance its reform agenda; (iii) an active and continuous policy dialogue between the Bank and the Government; and (iv) a close collaboration betweendonors to provide technical assistance and ensure full financing o f the reform program. 120. The main risks are the following: First,Burundi is apost-conflict country with a longhistory of ethnic conflict and a fragile political stability that has had deleterious effects on economic growth, poverty reduction and the pace o f implementation o f the reforms. The new and more representative Government taking power in November 2007 will help mitigate this risk. Also in early 2008, the FNL-PALIPEHUTU, the last rebel group, announced its intention to return to the peace negotiations, which are expected to re-start in the first quarter o f the year. The Bank will continue to encourage the authorities to finalize negotiations with FNL-PALIPEHUTU to reap the full socio-economic rewards o fpeace. 50 0 Second, there i s the risk o f the macroeconomic program going off track. The performance of the dominant agricultural sector and external shocks affect economic growth and overall macroeconomic performance. Many o f the public enterprises are inpoor financial shape and can have serious impact on the central budget in terms o f direct and contingent liabilities. Also, the combined impact o f recent increases infuel and food prices on the 2008 budget are estimated to leadto an additional financial need of FBu 11billion (or about 1.1percent o f GDP). The recent increases in the prices o f food and oil are believed to be medium term phenomena and are expected to affect the poor in Burundi due to the increased costs o f transportation and imported foods. These impacts are expected to be mitigated by recent government policies, such as reducing tariffs on diesel imports (from 12 percent to 9 percent) which has a higher direct impact as it i s used by poorer households. To reduce the risk, IDA, the Fund and other development partners will work closely with the Government to help in monitoring macroeconomic performance and in taking corrective actions in a timely manner. Also, IDA already has a successful agricultural project (Agriculture Rehabilitation and Sustainable Land Management - PRASAB) to support food production in Burundi, which is being given an US$15 million in additional funding inFY08. The new CAS also includes further support o f the agricultural sector in the form o f a follow-on project. 0 Third, there is also a risk that even if the macroeconomic program is in place, structural measures are not implemented in time. This risk has been partially mitigated by the resumption o f the Parliamentary activities, allowing approval o f long delayed legislations related to the reform program. Furthermore, the commitment to reforms at the highest levels i s highlightedby the recent creation o f the Ministry o f Good Governance, Privatization, General State Inspectorate and Local Administration. This ministry i s directly attached to the Office of the President o f the Republic. 0 Fourth, as discussed earlier, there i s a high risk of debt distress, even after HIPC completion point and MDRI assistance mainly due to the low export base o f the country. The Government will need to ensure more concessional borrowing, and foster continued economic and export growth to avoid substantial risks o f debt distress. Inthe mediumterm the diversification o f the economy - a main objective o f the authorities and the proposed ERSG program - will mitigate the vulnerability o f the economy and the Government's management capacity to natural shocks. 0 Fifth, as a landlocked country, Burundi faces increased risks associated with its dependence on neighboring countries for its trade routes. For instance the recent unrest in Kenya limited the import o f petroleum products to Burundi and put upward pressure on their prices. The authorities have joined the EAC in July 2007 to cement regional cooperation and peace building, reduce potential risks and create further economic opportunities through integration. Already, prospective regional programs and projects (such as a regional telecoms project, 51 the Burundi-Tanzaniaroad and the Burundi-Rwanda-Tanzaniarailroad) signal the promise o f improved and cheaper infrastructure services. 0 Sixth, Burundi is highly dependent on aid inflows and any difficulty in maintaining budget support or delays in mobilizing such support can derail fiscal performance, affect the ability o f the authorities to manage budgetary processes effectively and potentially destabilize the country. Aid pledges for 2007 are expected to meet projected financial requirements(FBu251.3 billion) and consist largely o f external grants; the financing gap in the following years i s likely to be covered by additional bilateral and multilateral assistance. The staff will work closely with the authorities to improve and regularize the existing donor coordination framework (Cadre de Partenariat). 0 Seventh, the recent governance scandals indicate that economic governance remains challenging and a source of continued risk. The proposed grant i s attempting to mitigate this risk by helping the authorities reform public finance management and increase transparency and rule o f law in the business environment. Moreover, the authorities have agreed to work with IDA and other donors to improve public financial management (PFM) systems. Inthat context, a public expenditure management and financial accountability review (PEMFAR) co-prepared with a national counterpart team is being finalized and will serve as a key inputto the authorities' PFMreform actionplan. 0 Eighth, there is a risk that the Government will struggle with lack o f technical capacity for the implementation o f the reforms supported by the proposed grant. To ensure that this risk i s mitigated the proposed grant i s being developed inclose coordination with the EMSP technical assistance project, which i s geared to provide technical assistance and capacity building in PFM and PSD to the authorities. 121. As a result o f the above risks, the Bank faces reputational risks in supporting programs in post-conflict country, especially as regards political instability that leads to substantial delays in reform implementation and governance issues. However, it should be noted that inthe context of Burundi, the cost o f the Bank not gettinginvolved 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 inthe program and (ii)governance measures are implemented, especially in public finance management. 52 ANNEX 1: BURUNDIERSGI1 Letterof DevelopmentPolicy - REPUBklQUEDU BURUNDI Bujumbura,le 4 9 I 0 6 MOO8 MINISTEREDE L'ECONOMIE, DES FINANCES ET DELACOOPERATIONkU DEVELOPPEMENT Monsieur Robert Zoellick Prbident de la Banque mondiale 1818HStreet, NW Washington, D.C., 20433 MonsSeurle President, Nous avons l'hhonneur de vous tran erne ci-joint la Lettre de Politique de Dkveloppernent (LPD) convenue dans le &re du nouveau progmrnc d'nppui budg6inire conch cntre le Burundi et 1'Association Intcrnaticmalede Mveloppement (IDA) autitre duDond'Appui h la RdformeEconomique@ARE 21. 1, Le Gouvernement du Burundi a men6 a bien, de 2006 ii 2007, un programme appuye par le Don d'Appui a la Rtfome Economique(DARE); des prop& importantsont et6 accomplis, durant cette ptriode, dims la stabElisationet ies rCfonncs tconarniques, ainsi que dans la lutte contre la puvretd it travers la mise en auvre du cadre slratdgiquede aoissikslce et de lutte contre la pauvrete csI .P). 2 Sur Ie plan politique, le Gouvemeinentdu Burundi mntinue A consolider le processusde paix par la poursuitede la mise en ouwe des accords signts entre le Burundi et tous tes bellighnts. 3. Pour relevcr ladtfis mnjeursauxquels le pays fait face, le Gouvernem du Burundi sollicite un nouvef appui de l'IRh pour la mise en oeuvre d'un programme de &formes kcommiquespour la periodecouvrant le 30juiflet 2008 au 31 juillct 2009 dans le cadre du DARE 2 pour un rnontzrnt6quivalent ii 18,5 53 milIions de DTS, soit 30 millions de doliars E.U. Le Gwvernement dcmwde aussi la poursuitede I'aide intdrirnaire accordte par I'IDA au titre de I'Initiative renforck en faveur des Pays Paums TrrSs Endettbs (PPTE). L'assistmce de 1'IDA ouvfica egaiement (tu Burundi la voie vcrs le point d'ach8vemenl de ]'initiative PPTEattenduavanl la fin de I'annCe 2008. 4, La tcrtre de Politiquede Ddveloppemenlci-jointe enonce les objectifs et les politiques que le Gouvernernentdu Burundicntendprendredms le cadre d`un programme de &formes economiques dans les domahes de la gestion des finances pubiiquw et de l'amr5liorationduclimat des affaires. 11Wudrait toutefois mcntionner que la rdforme dans le secfeur cafe demeure dans ce contexte une priorit6essentjeilepour ie Gouvernement. 5. La Lene de Politique de Dhebppeinent ddcrit aussi la strat&@ de dformes 6cononiiques B mayen-term que le Gouvernements'engage it mettre en @urnJnns ICcadre duDon ct &u-dcl&,afin de matkrialisct les iinpCratifsde lutte ' contre la pauvrete avec I'appui des autres partensires du dkeloppement du Burundi. 6. Le Gouvernement est convaincu que les politiques et rnesures exposteu dans la Leme de Politique de Ddveloppement pennettront de pousuivre lcs r6cents efforts entreptis en matidre de gestion des finances publiques et d`amClioration du climat dcs affaires, y compris dms d'autres domaines, en vue d'accCECrer la croissancc:kanornique et d'assurer I'irr6versibilitrj des politiques en cours. Aussi, le Gouvernement est pr& 9 adopter toute mesure additionnelle que I'iDA jugerait n6cessnire pour as~urerie succb du programme. Enfin. le Gouvcrnencnt est disgosd & rbpondre favorablement d toute demande d`infomation de la paa de I`IIUA pour assurer le suivides progrhs rkalisCs dans la mise en czuvrcdes politiqueset meswescontenuesdans le programme. 7. Les autari~dsbumdaises souhaitenl que la Lem de Politique de Ddveveloppement et le document de programme dant elk accompagne saient rendus publics. Elks autorisent par consequent leur publicationet leur afichage sur le site Internet de la Banque rnmdide une fbis que l'aaccsrtl du Conseil d'Administration aura &ttcobtenu. Ces documents wont tgalement afftchks sur les sites officiels duGouvernement duBurundi. Veuillez agber, Monsieurle PrMdent, I'expressiande notrehautecansideration. B.P. 1W BujumburaTCI: 237 n 7 7 S E-mlil:niniih@ usan-bu-ner--. 54 REPUBLIQUEDUBURUNDI DOND'APPUI BUDGETAIREET DE SOUTIENA LA REFORMEECONOMIQUE (DARE 11) LETTREDEPOLITIQUEDE DEVELOPPEMENT 55 I. INTRODUCTION GENERALE 1. L e Gouvernement sollicite un appui de 1'IDA pour soutenir son programme des reformes economiques de la periode 2008-2009 qui visent l'ajustement et la stabilisation macrokconomique ainsi que la mise en Oeuvre des reformes structurelles pour la reduction de la pauvrete a travers la consolidation des progrbs deja realises dans la cadre des reformes de la gestion des finances publiques et de la promotion de l'environnement des affaires du DARE II.L a presente lettre de politique resume le contexte social et l'evolution recente de l'economie. Elle decrit les politiques que le Gouvernement entend poursuivre dans les domaines concernant (i) l'elaboration d'un cadre strategique de lutte contre la pauvrete (CSLP); (ii) mise en Oeuvre des politiques pour le developpement du la secteur prive et principalement le developpement du secteur cafe; iii)les reformes visant l'amelioration de la gestion des depenses publiques. 2. L e programme du Gouvernement, enonce dans le CSLP vise a assurer la transition d'une Cconomie de post-conflit vers une situation de croissance economique et de developpement. L e CSLP a donc pour objectif le renforcement de la stabilite politique, la consolidation de la paix et la reduction de la pauvrete a travers une acceleration de la croissance Cconomique durable et equitable. Les principaux axes strategiques du CSLP sont les suivants: (i) l'amelioration de la gouvernance et la securite, (ii) promotion la d'une croissance Cconomique durable et equitable, (iii)le developpement du capital humain et (iv) la lutte contre le V M / SIDA. Des progrbs ont et6 rtalises dans les quatre domaines. 3. L a mise en Oeuvre satisfaisante des rkformes deja engagkes a permis le rktablissement des equilibres financiers qu'il convient de consolider. La decision des conseils d'administration de 1'IDA et du FMI approuvant en aoQt 2005 l'eligibilite du Burundia l'initiative PPTE en est une preuve eclatante. Pendant la pkriode de transition, l e Gouvernement a enregistre des progres en matiere de reformes qu'il entend poursuivre en vue d'accelerer la croissance et assurer l'irreversibilite des politiques deja mise en Oeuvre. Cela permettra au Gouvernement duBurundid'acceder au point d'Achevement de l'hitiative PPTE attendu en Decembre 2008. 4. Toutefois, ces resultats ne doivent pas occulter le constat que notre Cconomie est encore confrontee A de nombreux defis et qu'il existe d'importantes opportunites que le Burundi devrait saisir en vue de l'amelioration de l'environnement kconomique, la modernisation de l'outil de production et son positionnement sur le marche international. Les sources de croissance actuelles sont l e fait du secteur agricole, essentiellement les filibres exportatrices telles que le Cafe, le Coton et le The. Les autorites pensent que les reformes a engager dans ces filibres agricoles permettront d'assurer une expansion du secteur agricole avec: (i)une contribution accrue a la croissance; (ii)des revenus importants pour les producteurs agricoles et notamment ceux du milieurural. 5. L e Burundi sollicite aussi d'autres contributions des bailleurs de fonds dans la realisation de ce programme et aura besoin d'un cadre de reference pour une politique harmonisee des bailleurs de fonds. A cet kgard, le Gouvernement souhaite obtenir une 56 coordination plus accrue de 1'IDA et l'adhesion de l'ensemble des partenaires financiers autour du CSLP dont le premier rapport d'kvaluation est a la phase de rkdaction et sera disponible au mois de Juillet 2008. 6. La presente lettre traduit le programme du Gouvemement en matike des rkformes sur les deux prochaines annees, mais elle presente aussi les indicateurs de performance qui permettront de juger de la qualitk de sa mise en ceuvre. Conscients des difficultes inhkrentes aux reformes economiques et fortes de l'expkrience du pass&, les autorites entendent impliquer judicieusement tous les acteurs en vue de rechercher l'adhesion necessaire A la reussite de toute reforme ayant des implications socio-economiques. 11. DEVELOPPEMENTSECONOMIQUESRECENTS 7. Durant la periode 2001-2006, la performance Cconomique du Burundi s'est sensiblement amklioree; cependant le taux de croissance annuel moyen demeure faible (aux alentours de 3.2 %) du fait notamment des fluctuations cycliques de la production agricole. Au cours des six dernibres annees, le Gouvemement a restructure les depenses publiques, augmentant la part des crkdits affect& A l'kducation, a la santk et aux infrastructures et doublant les dkpenses d'investissement. Neanmoins, pour accelerer la croissance et reduire la pauvrete, le Burundi doit relever plusieurs dkfis : diversifier la production agricole et la structure de l'economie, accroitre la productivitk de l'agriculture et investir dans l e dkveloppement des ressources humaines et les infrastructures. 8. Jusqu'en 2006, la structure de l'economie restait dominee par l'agriculture (48,4% du PIB), suivie des services (35,2% du PIB) et de l'industrie (16,4% du PIB). L'agriculture demeure le principal secteur economique aussi bien de par sa contribution au PIB qu'en tennes de nombre d'emploi que ce secteur gknke en dkpit d'une baisse relative de sa contribution au PIB causee par une faible productivitk et les effets des conditions climatiques et les episodes de plusieurs annkes de guerre civile. Les exportations agricoles en particulier le cafe, representent plus de 60% des recettes d'exportation. L a contribution du secteur des services n'a cesse d'augmenter au cours des demibres annees. Le secteur industriela connu une lkgbre augmentation qui pourrait Stre attribuee principalement a unregain d'activite dans le domaine des constructions. 9. L a consolidation du processus de paix a contribue a relancer le processus de reconstruction nationale, et cr& des perspectives positives pour le pays. Depuis l'an 2000, le pays a progressivement rkcupere de sa croissance economique negative (-1,8% en moyenne) de la decennie caracterisee par des problemes politiques et economiques, pour se situer a untaux de croissance economique positif de 5,1% en 2006. L a croissance economique est largement influencee par la forte volatilite du secteur agricole. Alors qu'en 2004, la croissance du PIB rkel avait atteint 4,8%, une grave secheresse en 2005 a conduit A une croissance du PIB reel estime A 0,9%, avant de revenir a 5,1% en 2006. Selon les statistiques provisoires, la croissance tconomique delle pour 2007 a connue une legere augmentation (a 3,6%) et moins forte que celle de l'annee prkckdente, malgre l'accroissement des dkpenses en capital principalement financees par les appuis des bailleurs de fonds. Cette contre performance est due A une mauvaise recolte agricole. 57 10. L e taux d'inflation, mesure par l'indice des prix a la consommation, a atteint une moyenne de 7.2% par an de 2001 a 2006. Cette moyenne cache des fluctuations considerables avec un pic de 13.6% en 2004 et un minimum de 2.7% en 2006. Les ajustements des prix administrks qui ont eu lieu fin 2007, de mCme que le rencherissement recent des denrees alimentaires et la desorganisation de l'offfe d'importations imputable aux difficultes que le Kenya a connues apres les elections, ont exacerbe la hausse des prix a la consommation, qui a et6 portee a 14'7% en glissement mensuelfin 2007 -contre unobjectif d'inflation a unchiffre. Le taux moyend'inflation A fin dkcembre 2007 Ctait de 8.3%. A moyen terme, on prevoit que le taux d'inflation restera inferieur A lo%, grkce au recours limite au credit bancaire pour le financement des depenses publiques. L'indice des prix a la consommation est calcule a partir d'un panier de biens de consommation - base sur les prix pratiques sur le march6 central de Bujumbura - qui n'a pas ete modifie depuis 1991. Une enquCte sur la consommation des menages est envisagee ; elle devrait permettre de modifier le panier utilise pour le calcul de l'indice. 11. Les resultats sur le plan de la politique budgktaire en 2005-06 ont kt6 satisfaisants. Le programme du Gouvemement pour 2007 avait pour but de poursuivre la stabilisation macro-economique, de surmonter les retards dans l'application de certaines rkformes structurelles, et continuer le renforcement de la gestion des finances publiques. L a loi de finances 2007 a continue de reorienter les depenses publiques vers les depenses de reduction de la pauvrete tout en contenant le deficit budgktaire (hors dons). Le contr8le de la masse salariale (10,6% du PIB en 2007) et la demobilisation continuent d'Ctre parmi les priorites du Gouvemement. L a demobilisation et les reformes du secteur de la sCcuritC devront continuer afin qu'une reorientation des dkpenses publiques des secteurs de securite vers les secteurs sociaux (et pro-pauvres) soit possible. 12. L a performance budgetaire de 2007 en deqa des attentes s'explique par le ralentissement du processus de demobilisation. D e plus, la rupture des pourparlers de paix avec le demier groupe rebelle (FNL) a aussi contribue au ralentissement du processus de demobilisation, ce qui a conduit A une masse salariale relative au PIB plus grande que prevue. L e besoin de financement budgktaire a conduit le Gouvemement a prendre des mesures compensatoires telles que l'augmentation de certains imp8ts' la reduction de certaines depenses nonprioritaires et le report de l'augmentation des salaires de prestations A la fonction publique pour 2008. Nearnoins, le deficit budgetaire (hors dons) devrait atteindre 22'4% du PIB en 2007 (comparativement a 19'4% du PIB en 2006), A la suite d'une augmentation des depenses publiques de 38,4% du PIB en 2006 a 40'5% en 2007. 13. La position exterieure du Burundi est restee compatible avec les objectifs du programme du FMI en 2007. Bien que les exportations aient baisse (14%) -du fait de stagnation des exportations du cafe - et que les importations aient connu un vif essor (20%' dii principalement a l'augmentation de la demande de biens intermediaires et d'kquipement), les flux d'aide exterieure ont contribue a maintenir la balance exterieure dans les limites escomptees. 58 111. LESLECONSDUDERNIERACCORD DAREETDEFISA RELEVER A. Les leqons du dernier accordDARE 14. L e Gouvernement avait sollicit6 l'appui de I'IDA a travers l e Don d'Appui aux Rkformes Economiques pour pouvoir faciliter la mise en Oeuvre de sa politique de lutte contre lapauvretk et 1'accClCration de la croissance. 15. Les reformes, notamment dans les domaines de la stabilisation macrotconomique, de la gestion des finances publiques, de la politique monCtaire et de change ainsi que des reformes structurelles comme la privatisation des entreprises publiques et le secteur du cafk etaient entrain d'Ctre entrepris. 16. Ces rkformes, qui sont A la base du dkveloppement et de la croissance kconomique nkcessitaient des appuis des bailleurs de fonds pour leur mise en Oeuvre effective. C'est dans ce contexte que le DARE a ete conch entre le Gouvernement du Burundiet 1'IDA. 17. Dans le domaine de la gestion de finances publiques appuyees par le DARE, des resultats importants ont kte enregistres. 18. Uncadre legidatifet reglementaire coherent de lagestion des finances publiques a ete amorce notamment par l'adoption par le parlement du nouveau code des marchks publics ; l'adoption par le Gouvemement de la nouvelle Loi organique relatives aux finances publiques ;le nouveau code des douanes a et6 mis en vigueur ;la rationalisation des comptes de 1'Etat vers un compte unique du tresor est en cours de finalisation et la reorientation des depenses publiques vers les secteurs de lutte contre la pauvrete a ete introduite dans la structure du Budget de 1'Etat depuis l'exercice 2006. 19. Dans le domaine de la relance du secteur prive, le Gouvernement a fait des efforts remarquables en apurant la totalite des arrikrks de la dette envers le secteur privk. Cette action qui a et6 appuyee par le DARE a abouti par la mise en place d'une strategic d'apurement des arrieres de la dette interieure de 1'Etat envers le secteur prive. 20. A cet effet, un march6 de bons et obligations du Trksor a Ctk mis en vigueur et fonctionne correctement. 21. Dans le domaine de la privatisation des entreprises publiques et du desengagement de 1'Etat des secteurs economiques, des efforts ont et6 men&. L e Gouvernement a adopt6 un plan detail16 des entreprises publiques A privatiser et la mise en Oeuvre duprogramme de privatisation suit son cours. 22. Dansunenvironnement post-conflit difficile, l'exkcution dudemier accord DARE (2006-07) a Ctk dans l'ensemble satisfaisante. L a plupart des rtformes engagtes dans les domaines de la gestion des finances publiques et dans le secteur du cafe ont bien progress&, ce qui a permis au Gouvemement de mettre en Oeuvre les politiques qui ont maintenu l'economie relativement stable. L e Burundi a aussi mis fin A certaines restrictions du commerce et de change. I1a en outre adhkre a la Communaute de 1'Afrique de 1'Est (CAE). 59 23. L e DARE visait a soutenir le Gouvernement dans la mise en Oeuvre du CSLP intkrimaire dans quatre domaines: (i) l'amelioration de la gestion des depenses publiques et son impact sur les pauvres, (ii) reforme des secteurs de culture de rente (cafe, the et la coton), (iii) relance du secteur prive, et (iv) la reforme des entreprises publiques a la travers le desengagement de 1'Etat. 24. L e Gouvernement a fait des progrbs satisfaisants dans l'execution de son programme de rkformes. En plus des actions prkalables qui avaient conduit au dkcaissement de la premiere tranche du Don en 2006, d'autres actions contenues dans l'accord de Don pour le dkcaissement de la seconde tranche du Don ont &e remplies en 2007. Ces dernieres sont rksumkes ci-dessous: 0 Production d'un rapport trimestriel complet d'exkcution budgktaire, en commenpnt par celui qui couvre le premier trimestre de 2006. Cette condition a et6 remplie. Les rapports sont, dans la forme et le fond, jug& satisfaisants par 1'IDA. L e Ministere en charge des Finances a fourni des rapports trimestriels sur l'execution du budget depuis la mi-2006. Ces rapports sont bases sur le systeme informatique de gestion des dkpenses (SIGEFI) qui a ete introduit en Janvier 2006, en utilisant la nouvelle nomenclature budgetaire. L e systeme permet d'identifier le cycle budgetaire (dotation budgetaire, engagements, liquidations, ordonnancement, paiements), mais la couverture est encore partielle. Avec l'aide de laBanque mondiale et duFMI,les autorites font des efforts considkrables pour amdiorer la couverture et la fiabilitk du systeme. Prksentation a 1'Assemblee nationale d`une version revisCe de la loi sur les marches publics, dont le fonds et la forme sont jug& satisfaisants a 1'IDA. Cette condition a kt6 remplie. IDA a examine et juge satisfaisant le droit des marchks publics adoptk par le Gouvernement et present6 au Parlement. L e projet de loi a CtC presente au Parlement en Octobre 2006. L a loi permettra un processus de passation des marches publics plus moderne et plus transparent. Le projet de loi a ktk approuve en commission parlementaire en Octobre 2007, et promulgue par le Chef de 1'Etat en Fevrier 2008. 0 L a realisation de progres dans la mise en Oeuvre de la stratkgie d'apurement des arrieres de 1'Etat vis a vis du secteur privk, y compris les banques, tels que certifies par un audit externe indtpendant. Cette condition a et6 remplie. Les progrbs rCalises dans le reglement des arrikrks du Gouvernement au secteur prive national ont CtC, sur la forme et le fond, juges satisfaisants par IDA. L e reglement des arrierks a CtC men6 pour allkger le fardeau financier du secteur prive et renforcer l'activitk kconomique. Un audit externe des arriCrCs avait et6 finalise en Fkvrier 2006. Les autorites ont adopte une stratkgie nationale d'apurement de ces arrikres. Cette strategie a ete elaborke en coordination avec le FMI, et adopt6 par le Conseil des ministres. L a strategie a permis la mise en place d'un march6 de bons et obligations du TrCsor en 2006 et 2007. D e plus, les autorites ont allouk a chaque creancier la somme de 100 millions de Fbu (1'6quivalent de 97000 dollars E.U.).Lereglementdes arrierks a Cte finalist a la fin dumois d'aoQt 2007. 60 0 Adoption d'un plan d'action triennal (2006-2008) pour la reforme du secteur du cafe. Cette condition a et6 remplie. L e plan d'action est sur la forme et le fond, jug6 satisfaisant par IDA. A la fin de 2006, le Gouvernement a lance unprocessus de consultation elargie avec les principaux acteurs du secteur du cafe, ce qui a conduit A la conception d'unplan d'actions detaille pour la reforme du secteur. L e plan d'actions enonce le processus de mise en Oeuvre de la reforme du secteur du cafe. I1 englobe la gestion de la dette du secteur, la conception d'un cadre legal, reglementaire et institutionnel, et la conception de l'execution d'une strategie efficace permettant la vente d'actifs publics du secteur. Ce plan d'action a et6 partag6 avec le FMI, UE / Stabex et la Banquemondiale. I1avait ete adopt6 par le Conseil des ministres du 28 Decembre 2006. 0 Relance du processus d'appel d'offres pour: (i) vente de toutes les actions la detenues par l'Office du Cafe du Burundi (OCIBU) dans la Societe HBtelibre du Burundi (NOVOTEL); et (ii)la vente de tous les actifs de 1'OCIBU dans des secteurs autres que le cafe. Cette condition a et6 remplie et publike.L a relance du processus d'appel d'offres pour la vente de toutes les actions de 1'OCIBU dans la Societe HBtelibre du Burundi,a et6 publiee le 4 juin 2007, dans L e Journal officiel l e Renouveau. L a sous condition "vente de la totalite des actifs de 1'OCIBU dans les secteurs autres que le cafe" n'a pas Cte formulee correctement, en raison du manque d'informations sur la structure de propriete de 1'OCIBU au moment du developpement du Don. L e Gouvernement a fourni un accord sign6 en 1993, montrant que OCIBU n'a pas de patrimoine propre a lui, mais gbre les biens de 1'Etat dans le secteur du cafe. Publication des resultats de l'audit de la vente par le Gouvemement en juin 2006 d'unavion presidentiel a Delaware Corporation, et l'adoption d'un plan d'actions correspondant refletant les recommandations de l'audit. Cette condition a et6 remplie. L'audit a et6 public intkgralement dans le journal officiel national Le Renouveau, du 28 Mai, 2007. L e Conseil des Ministres a adopte unplan d'actions y relatif en Septembre 2007. L e plan d'actions comprend : (i) l'adoption d'unplan de communication, (ii) prksentation au Parlement d'un projet de loi sur la vente la de biens publics, (iii)la poursuite des enquetes sur la vente de l'avion par l'etablissement d'une commission parlementaire, (iv ) le renforcement de la transparence de la gestion des droits economiques, politiques et administratifs. En Septembre 2007, une commission chargee d'elaborer le projet de loi sur la vente des biens publics a ete mise en place et en Octobre 2007, la commission parlementaire a et6 creke. B. DCfis relever 25. L e Burundi est confronte a des dkfis considerables tant sur l e plan politique qu'economique et social. Sur le plan politique, ils'agit de consolider le processus de paix et la stabilite politique. En vue d'eradiquer definitivement les sequelles d'un conflit qui vient de durer environ 15 ans et dejeter des bases solides pour undeveloppement durable et harmonieux, le Gouvernement a initie des cadres de dialogue et de concertation impliquant tous les partenaires socio-politiques. Cette option a permis au pays de retrouver un environnement serein et propice a la restauration de la confiance entre les 61 parties prenantes de la sphbre politique nationale, notamment a travers la mise en place d'un gouvernement d'union nationale en novembre 2007. Cette avancke sur le plan politique a et6 quelquepeuperturbke par la reapparition de quelques cas d'insecurite suite au brusqueretrait du PALIPEHUTU-FNL du Mouvement Conjoint de Verification et de Suivi (MCVS). 26. Depuis le mois d'avril 2008, cependant, gritce a l'appui de 1'Initiative Regionale et du Directoire Politique dont la mission premibre consistait a renforcer la mediation entre l e PALIPEHUTU-FNL et l e Gouvernement, l e dernier mouvement rebelle, le PALIPEHUTU-FNL, vient de reprendre et de poursuivre la mise en application de l'accord de cessez-le-feu. L e Gouvernement est convaincu que le processus de cessation definitive des hostilitks amorce, permettra la reinstauration de la skurite sur tout le territoire national et partant la reprise effective de l'activitk economique et la lutte contre lapauvrete. 27. Sur le plan economique et social, il s'agit de realiser une croissance forte et durable pour faire reculer la pauvrete et progresser vers les Objectifs du Millenaire pour l e Developpement (OMD). L e Burundi est l'un des pays les moins avances du monde, l e niveau de pauvrete demeure important. L'incidence du VIH/SIDA est klevee et les infrastructures sociales peudkveloppees. Le Gouvernement devra s'atteler a : Assurer laviabilitk budgetaire afin de reduirela lourde charge de la dette. Ramener le taux d'inflation a un chiffre. Des progrbs significatifs ont et6 accomplis sur le plan de la stabilisation macroeconomique, mais beaucoup reste a faire pour maitriser l'inflation surtout dans le contexte international caracterise par les prix eleves dupetrole et des produits alimentaires. Renforcer les capacites institutionnelles et la bonne gouvernance. Les reformes structurelles demeurent essentielles pour rehausser la croissance et faire reculer la pauvrett. L e renforcement des capacitts institutionnelles et l'amelioration de la gouvernance seront primordiaux a cet egard. Progresser dans l'integration regionale. L'appartenance a la CAE ouvrira au Burundi des debouches economiques klargis. Toutefois, le pays a encore beaucoup a faire pour developper une strategie globale, mettre en Oeuvre les reformes institutionnelles indispensables et negocier avec le secretariat de la CAE les modalites de sa mise en conformite avec les conditions posees par la Communaute. Pour ce faire, une assistance technique et financibre de la part des donateurs est indispensable et urgente. 62 IV. LENOUVEAUDOND'APPUIA LAREFORMEECONOMIQUE (DARE 11) :2008-2009 28. L e nouveau Don d'Appui aux RCformes Economiques DARE II, a aider l e vise Gouvernement dans la poursuite des rCformes en vue d'une croissance economique durable et equitable ainsi que dans la lutte contre la pauvretk tel que spkcifik dans le Cadre Strategique de Lutte Contre la Pauvrete. Le DAREIIconstitue donc une continuit6 des objectifs du premier don dans le domaine de la gestion des finances publiques et de la promotion du secteur privk. 29. Le DARE 11a pour objectifs spkcifiques, 1'amClioration de la transparence dans la gestion des finances publiquesainsi que l'amelioration de l'environnement des affaires. 30. Dans le domaine de la gestion des finances publiques, un PEMFAR a et6 organis6 conjointement par les autorites et la Banque Mondiale. Une demarche largement participative a ttk utiliske. L'etude a identifib des reformes prioritaires qui sont indispensables pour ameliorer la transparence dans la gestion des finances publiques. Ces rkformes identifikes par le PEMFAR seront mises en Oeuvredans le cadre du DARE11. 3 1. Les mesures prioritaires concernent entre autres l e renforcement des capacites pour preparer, gerer et contr6ler les rkformes des finances publiques ; continuer a renforcer le cadre legal et reglementaire par la mise en vigueur de la L o i Organique relative aux finances publiques, renforcer la supervision parlementaire ; etablir progressivement un compte unique du trksor ; renforcer les capacitks et rationnaliser le fonctionnement du systbme d'audit des services publics. 32. Dans le domaine de l'amelioration de l'environnement des affaires, la strategie du Gouvernement est de crker des conditions institutionnelles et juridiques destinkes A promouvoir le secteur prive. 33. Dans ce cadre, le Gouvernement a deja adopt6 et transmis au parlement le projet d'un nouveau code des investissements qui a kt6 largement discute avec tous les partenaires privks. I1 entend aussi accelerer la finalisation des nouveaux codes du commerce et des societks prives et publiques afin de le faire adopter par le parlement prochainement. 34. Ainsi, le programme DARE I1inclut dix mesures prealables regroupkes en deux composantes: (i) les mesures appuyant la reforme de la gestion des finances publiques et (ii) mesuresappuyantlareformepourledkveloppementdusecteurprivk,ycomprisle les secteur cafe. 1. Gestiondes FinancesPubliques 35. Les autorites et l'equipe de la Banque Mondiale ont convenu sur les six mesures prealables suivantes appuyant la reforme de la gestion des finances publiques : 36. L a nouvelle loi organique, conforme aux bonnes pratiques internationales, est adoptee par le Conseil des Ministres et soumise au Parlement. L a loi a Cte adoptee par le 63 Conseil des Ministres le 26 mars et le Gouvemement l'a transmise au Parlement le 21 mai 2008. 37. Adopter un dkcret definissant le calendrier de preparation du budget, les responsabilites des diffkrents acteurs et le contenu de la lettre de cadrage pour amkliorer les delais et l'efficacite de la procedure de la preparation budgetaire. Unprojet de decret qui reflbte les observations principales transmises par IDA le 5 fevrier 2008 au Ministre de l'Economie, des Finances et de la Cooperation au Dkveloppement a kt6 adopt6 en Conseil des Ministres le 20 mars 2008. L e decret a ete signe par le President de la Republiquele 3juin 2008. 38. Amkliorer l'identification des dkpenses pro-pauvres dans la classification fonctionnelle, bas6e sur le CSLP. L e Gouvemement et 1'IDA se sont convenus sur la necessite de faire le travail technique ensemble pour mieux identifier les depenses pro- pauvres qui correspondent effectivement a l'effort que le Burundi consentira dans l'affectation du budget sur ressources nationales en faveur de la lutte contre la pauvrete. Une note decrivant la mkthodologie a suivre en vue de l'amklioration de l'identification des depenses pro-pauvres a et6 redigee. Elle decrit les critbres d'identification retenus des projections d'affectations budgetaires de 2007 et 2008 basees sur cette nouvelle methodologie prouvent la credibilite de la nouvelle classification des depenses pro- pauvres et nonpauvres. 39. L a participation des economistes locaux aux travaux et la mise a disposition d'experiences intemationales par 1'IDA ont contribue a la finalisation de ce processus. 40. Le Ministke de l'Economie, des Finances et de la Cooperation au Developpement prkpare et met en Oeuvre en consultation avec les 5 principaux ministbres sectoriels des plans de tresorerie trimestriels glissants (i) fondes sur des previsions de recettes et une evaluation de la saisonnalite des depenses rkalistes ; et (ii) Ctablissent des plafonds qui trimestriels sectoriels d'engagement a partir du deuxi6me trimestre 2008. L a mise en Oeuvre de cette mesure contribuera a arnkliorer la previsibilitk des recettes et des dkpenses et contribuera donc a l'amelioration de la gestion des depenses pendant l'annke budgetaire. Les autorites ont dkja identifie et commenck le travail avec cinq ministbres sectoriels aux budgets significatifs (SantC, Education, Agriculture, Dkfense, et Interieur). Ces ministeres sont representes dans ungroupe de travail avec la Direction du budget sur la gestion de la tresorerie. 41. Deux reunions ont ete tenues pour aborder notamment les questions de saisonnalite d'engagement des depenses dans les ministbres sectoriels. Par courrier du 13 mars 2008, la Ministre de l'Economie, des Finances et de la Cooperation au Developpement a demand6 aux ministbres concemes de transmettre leurs previsions d'engagement pour le second trimestre 2008. Une comparaison a ete effectuke entre les plans de tresorerie du demier trimestre 2007 et leur rkalisation effective, de manike a affiner les hypothbses retenues. Sur base de ce travail, des projections annuelles des plans de tresorerie budgetaires pour tous les ministbres ont et6 ainsi effectuees et seront actualisees rkgulibrement. 64 42. Retablir l'unite d'audit et d'inspection interne du Ministbre de l'Economie, des Finances et de la Cooperation au D6veloppement en la dotant d'un personnel adCquat et en assurant son fonctionnement satisfaisant. L'ordonnance no540/0014 du 9 janvier 2008 portant organisation du service d'inspection et de contr6le interne du Ministbre de l'Economie, des Finances et de la Cooperation au Developpement a et6 signee par Mme la Ministre de l'Economie, des Finances et de la Cooperation au DCveloppement. Par ordonnance ministerielle no 540 /659 du 16 /06/2008, la Ministre de l'Economie, des Finances et de la Cooperation au Dkveloppement a nomme egalement les cadres et agents qui composent l'unite d'inspection et du contr6le interne. Les critbres de competence et de connaissances professionnelles ont kt6 mis en avant dans la mise en place de cette Cquipe. Un plan de travail pour 2008 et une esquisse du manuel des procedures ont kt6 deja elaborts. Ce manuel des procedures sera developpe par les membres de l'unite d'inspection et du contr6le interne et seront appuyks par un consultant afin de pouvoir se conformer aux normes internationales en la matibre. Des locaux de travail et des moyens de fonctionnement de cette nouvelle structure vont Ctre disponibilises dans les meilleurs delais par le ministbre. 43. Soumettre les comptes de gestion de 1'Etat et les comptes extrabudgktaires des annees 2006 et 2007 a la Cour des Comptes. L e compte de gestion 2006 a et6 transmis a la Cour des Comptes en mai 2007, et le projet de loi de reglement correspondant en septembre 2007. La Cour a produit son rapport sur l'exkcution de l'exercice 2006 le 12 decembre 2007. L e Ministbre de l'Economie, des Finances et de la Cooperation au Developpement n'a pas pu repondre a la Cour dans les delais impartis suite aux travaux de preparation du budget 2008 pendant la periode concernee mais a envoye ses commentaires sur le rapport de la Cour fin mars 2008. Les autorites et 1'IDA ont convenu que le compte de gestion 2007 devrait &re transmis a la Cour avec unmois de retardpar rapport a l'echeance legale du 31 mars 2008. Par la suite, le rapport de gestion de l'exercice 2007 a kt6 effectivement transmis a la Cour des comptes le 30 avril2008. 2. DCveloppementdu Secteur PrivC 44. Le nouveau Code des Investissements, conforme aux bonnes pratiques internationales, est adopt6 par le Conseil des Ministres et soumis au Parlement. Lors d'un atelier d'kchange d'idees, organisk en collaboration avec le Vice-ministre charge de la Planification, avec la participation des autorites et du secteur prive, les autorites et la Banque mondiale ont convenu de l'approche ainsi que des grandes lignes et mesures a inclure dans le nouveau Code des Investissements. Un comite de suivi du Code des Investissements a et6 mis en place. Un nouveau projet de Code a et6 tlabore avec l'assistance technique de la Banque mondiale et de la Societe Financibre Internationale (SFI). Ce projet de code a et6 revu par les parties-prenantes burundaises et les commentaires de la Banque mondiale et de la SFI ont &e integres. L e Conseil des Ministres a adopt6 le nouveau code le 14 juin 2008 et l'a transmis a 1'AssemblCe Nationale pour analyse et adoption le 16juin 2008. 45. Adopter un decret definissant les conditions pour une concertation constructive entre les secteurs public et prive. L'adoption du dCcret est la premibre &ape pour relancer la concertation entre les secteurs public et privC sur les politiques economiques qui influencent la croissance du secteur prive. L e decret definira le cadre, les partenaires et 65 les mecanismes de cette concertation. Les autorites et la Banque mondiale ont convenu d'un plan de travail et l'assistance technique appuyee par la Banque mondiale a deja commence. Le projet de decret a ete prepare pour discussion par les partenaires locaux a la mi-avril. L a Banque mondiale et la SFI ont prksente leurs commentaires dans les meilleurs delais. L e decret a ete sign6 par le President de la Rkpubliquele 17juin 2008. 46. Lancer une etude pour analyser les besoins en renforcement des capacites institutionnelles pour la reforme des entreprises publiques, incluant unplan d'action pour les renforcer. Les autorites on present6 unprojet de termes de reference qui a kt6 revu par la Banquemondiale. L a mesure prealable a et6 satisfaite par le fait que l'identification et la signature du contrat du consultant ont 6t6 dkja realisees. 47. Adopter le rbglement de ventes du cafe par le Conseil d'Administration de 1'OCIBU pour clarifier les regles de commercialisation pour la campagne cafeiere 2008/09 et diffuser largement ce rbglement de ventes en frangais et en Kirundi. Les autorites et la Banque mondiale ont convenu de l'importance critique de diffuser le reglementde ventes qui clarifie les modalites qui gouverneront la commercialisation du cafe vert. Unprojet de rbglement des ventes du cafe vert a l'exportation a kt6 elabore par 1'OCIBU et publiquement discute avec les partenaires techniques et financiers actifs dans l e secteur du cafe, a qui ila 6te demand6 de produire des suggestions d'amelioration sous huitaine. L'objectif vis6 etant d'ameliorer ce reglement pour le rendre un instrument de promotion de la transparence et de la concurrence dans le secteur cafe. Sur la base des suggestions d'amkliorations qu'ils ont regues de la Banque mondiale, de 1'USAID et du FMI, les autorites ont finalist le projet de reglement de vente du cafe pour la campagne 2008-2009. L e rbglement des ventes a kt6 adopt6 par le Conseil d'Administration de 1'OCIBU le 24 Avril 2008. Une note d'infomation relative A la commercialisation du cafe sera presentee par le Ministre de 1'Agriculture et de 1'Elevage au Conseil des Ministres. Cette note sera transmise a 1'IDA pour completer la mesure prealable. V. LESUIVI DUPROGRAMMEDUDON 48. L e suivi du programme et des mesures de la matrice des reformes structurelles sera assure par l e Gouvernement qui s'appuiera a cette fin sur le comite institutionnel en charge du suivi et de l'kvaluation des reformes appuyees par le programme du DARE11 et du futur DARE In.Les autoritks se rassureront que le comite est engage au suivi etroit des reformes en cours en coordonnant et supervisant l e travail de 1'Cquipe interministerielle et des comites techniques. 49. L'equipe interministerielle, inclut des points focaux des Ministbres de l'Economie, des Finances et de la Cooperation au Developpement, du Commerce, le SCEP et du comite en charge du secteur cafe. Les comitks techniques portent sur les reformes des finances publiques, du climat des affaires et du secteur cafe. Ces equipes nationales ont participe activement au developpement du programme kconomique et A l'klaboration de la liste des mesures prealables des deux composantes du DARE II. 66 VI. LESDECLENCHEURS DUPROCHAIN APPUI BUDGETAIRE DARE 111~' 50. Six mesures indicatives prealables appuyant la reforme de la gestion des finances publiques ont kt6 choisies par le Gouvernement et 1'Cquipe de la Banquemondiale pour l e DARE III. mesures qui devraient Ctre Ctablies au plus tard en Decembre 2008, Ces incluent: 1. Finaliser les enquCtes de suivie des dkpenses publiques (PETS) dans les secteurs de l'education, de la santk et de la justice et les enquCtes auprks des beneficiaires, publier ces rapports sur un site internet du Gouvernement ; et produire unplan d'action de mise en Oeuvre issu des analyses effectuees. 2. Soumettre un projet de loi de finances pour 2009 au Parlement en debut octobre 2008 qui: (i)soit plus coherent avec les objectifs du CLSP ; (ii) par rapport A 2008, presente une augmentation de la proportion dubudget affectee A la sante, l'education, l'agriculture et la protection sociale. 3. L a proportion des depenses discretiormaires executkes selon des procedures exceptionnelles (depenses sans ordonnancement prkalables hors dette et depenses sur fonds extrabudgetaires) est largementreduite de plus en 2008 par rapport a 2007. 4. L e SIGEFI couvre de manibre satisfaisante le cycle complet d'exkcution budgktaire (y compris une meilleure gestion de la transmission des dossiers; un module de gestion des traitements, la gestion des reservations et des virements des credits, le contrble de la disponibilitk des credits, engagements, les possibilites de paiement partiel, la clGture des comptes et la gestion de la balance d'entrke). 5. Adopter le planbudgktaire et comptable revise et mettre en Oeuvre le manuel des procedures comptables revise. 6. Mise en place d'une autorite de regulation des marches publics ayant un statut et une mission en conformite avec la loi 1/01 du 4 fkvrier 2008 portant code des marchks publics. 51. Six mesures ont et6 identifiees comme indicatives prkalables appuyant le developpement du secteur prive dans le contexte du prochain appui budgktaire (DARE3): 1. Les nouveaux Code du Commerce et Code des Sociktes Privees et Publiques, conformes aux normes internationales sont adoptks par le Conseil des Ministres et soumis au Parlement. 2. L'ImpGt synthetique pour les petites entreprises est insere dans le projet de la Loi des Finances 2009. 37Ces mesures devraient Qtresatisfaites au plus tard en Decembre 2008. 67 3. AmCliorer la performance du Tribunal de Commerce, surtout en matibre des dklais de prononcer jugement sur les dossiers. 4. L a rkvision de la loi sur la privatisation, conforme aux bonnes pratiques intemationales est adoptee par le Conseil des Ministres, et soumise au Parlement. 5. Finaliser et publier les Ctudes financibres sur cinq entreprises publiques : AIR BURUNDI,ECOSAT,ONATOUR, FOSIP, OTRACO. 6. D'ici DCcembre 2008, le Gouvemement adopte un plan d'actions (avec un CchCancier) pour mettre en Oeuvre l'option choisie pour la cession des actifs dusecteur cafkier. 68 .- 5 3 0 0 2 .- 5 0 0 c5 99 Y .3 a cl .I v1 5B3 L I L a 2 0 a Y za2 w a2 I e 'a2 L a ; .I c) 0 a 9 h Y0 0" a2 -7 .I ad s.. a e? v1 a2 a w .3 .I I Y sa8 0 .3 c, h 2 3 c e u S F N 8 - N W c ?I Y wE REPUBLICOF BURUNDI Bujumbura (19/06/2008) (ENGLISHTRANSLATION) Ministryofthe Economy, Finance and Cooperation for Development Office o f the Minister N/Ref.: 540/2746/2008 Mr.RobertZoellick President o f the World Bank 1818 HStreet, NW Washington, D.C., 20433 Subject: Letter o fDevelopment Policy for the Second Economic Reform Support Grant (ERSG 11) Dear Mr.Zoellick, We have the honor to transmit to you the attached Letter o f Development Policy prepared under the new budget support program agreed between Burundi and the International Development Association (IDA), within the context o f the Economic Reform Support Grant (ERSG11). 1. The Government o f Burundi sucessfully implemented, from 2006 to 2007, a program supported by the Economic Reform Support Grant (ERSG); significant progress was made during this period, with respect to stabilization and economic reform, as well as poverty reduction, through the implementation o f the Poverty Reduction Strategy Paper. 2. On the political front, the Government o f Burundi continues to consolidate the peace process by pursuing the implementation o f agreements signed between Burundiand all armed opposition. 3. To address the major challenges facing the country, the Government o f Burundii s seeking new IDA support for the implementation o f an economic reform program covering the period from July 30, 2008, to July 31, 2009, under ERSG 11, for an amount equivalent to SDR 18.5 million, or USD 30 million. The Government i s also requesting the continuation o f the interim aid granted by IDA under the enhanced Heavily Indebted Poor Countries' Initiative (enhanced HPC). IDA assistance will enable Burundi to make progress towards the completion point o f the H P C Initiative, expected before end-December 2008. 78 4. The attached Letter o f Development Policy describes the objectives and policies that the Government o f Burundi intends to implement within the framework o f an economic reform program in the areas o f public finance management and improvement o f the business climate. However, it should be mentioned that the reform o f the coffee sector remains a key Government priority inthis context. 5. The Letter o f Development Policy also describes the medium-term economic reform strategy that the Government intends to implement under the Grant and beyond, in order to carry out the key elements o f poverty reduction with support from Burundi's other development partners. 6. The Government believes that the policies and measures described inthe Letter o f Development Policy will make it possible to pursue the recent efforts undertaken to strengthen public finance management and improve the business climate, including in other areas, with a view to accelerating economic growth and ensuring the irreversibility o f ongoing policies. Therefore, the Government is ready to adopt any additional measures that IDA may deem necessary to ensure the success o f the program. Finally, the Government i s ready to respond to any request for information from IDA to help monitor the progress achieved in the implementation o fpolicies and measures contained inthe program. 7. Burundian authorities wishes to make this Letter o f Development Policy and the accompanying program document available to the public. Consequently, they authorize their publication and their posting on the World Bank's website once they are approved by the Board o f Directors. These documents will also be posted on the official websites o f the Government o f Burundi. Sincerely, / S I The Minister of Economy, Finance andDevelopement Cooperation Clotilde NIZIGAMA 79 REPUBLICOF BURUNDI (ENGLISHTRANSLATION) BUDGET SUPPORTAND ECONOMIC REFORM SUPPORT GRANT (ESRG11) 80 I. GENERALINTRODUCTION 1. The Government is requesting IDA support for its 2008-2009 economic reform program aimed at macroeconomic adjustment and stabilization and the implementation o f poverty-reducing structural reforms through consolidation o f the progress already made in public finance management and the improvement o f the business environment under ERSG II.This policy letter sums up the social context and recent economic developments. It describes the policies that the Government intendsto implement inareas related to (i) the preparation of a poverty reduction strategy paper (PRSP); (ii)the implementation o f private sector development policies, especially in the coffee sector; and (iii) reforms aimed at improving public expenditure management. 2. The Government's program, as presented in the PRSP, seeks to ensure the transition from a post-conflict economy to a situation o f economic growth and development. Accordingly, the objective o f the PRSP i s to reinforce political stability, consolidate peace and reduce poverty by boosting sustainable and equitable economic growth. The main strategic axes o f the PRSP are (i) improving governance and security; (ii) promoting sustainable and equitable economic growth; (iii) developing humancapital; and (iv) controlling HIV/AIDS.Progress has beenmade inall four areas. 3. The satisfactory implementation o f reforms already initiated made it possible to restore the financial balances that need to be consolidated. The decision o f the IDA and IMF boards, approving Burundi's eligibility to the HIPC Initiative in August 2005, is eloquent proof o f this. Duringthe transition period, the Government made progress inthe reforms it intends to pursue in order to boost growth and ensure that the policies already implemented are irreversible. This will enable the Government o f Burundi to reach the completion point o fthe HIPC Initiative inDecember 2008 as expected. 4. However, these results must not obscure the fact that our economy still faces many challenges and that there are important opportunities which Burundishould seize in order to enhance its economic environment, modernize its productive base, and improve its position on the world market. The current sources o f growth are in the agricultural sector, especially export sub-sectors like coffee, cotton, and tea. The authorities believe that the reforms to be initiated in these agricultural sub-sectors will lead to an expansion o f the agricultural sector with (i)a higher contribution to growth; and (ii)significant incomes for farmers, especially those inrural areas. 5. Burundiis also requestingother contributions from donors for the implementation o f this program and will need a reference framework for a harmonized donor policy. In this regard, the Government wishes to obtain greater IDA coordination and the adherence o f all financial partners to the PRSP, whose first assessment report i s being drafted and will be released inJuly 2008. 6. This letter presents the Government's reform program over the next two years as well as the performance indicators that will be used to assess the quality o f its 81 implementation. Aware o f the difficulties inherent in economic reforms and drawing on past experience, the authorities intend to judiciously involve all stakeholders in order to secure the support needed for the successful implementation o f any reforms that have socio-economic implications. 11. RECENT ECONOMIC DEVELOPMENTS 7. From 2001 to 2006, Burundi's economic performance improved substantially; however, the average annual growth rate remains low (about 3.2%) on account o f cyclical fluctuations in agricultural output. Over the last six years, the Government has streamlined public spending, stepped up allocations to education, health and infrastructure, doubling investment spending. Nevertheless, to accelerate growth and reduce poverty, Burundi needs to address several challenges, namely: diversify agricultural production and the structure o f the economy, increase agricultural productivity, and invest inhuman resource development and infrastructure. 8. Until 2006, the structure of the economy remained dominated by agriculture (48.4% o f GDP), followed by services (35.2% o f GDP), and industry (16.4% o f GDP). Agriculture remains the dominant sector in the economy by virtue o f its contribution to GDP and in terms o f the number o fjobs it creates, despite a relative decline in its GDP contribution due to low productivity, poor weather conditions, and multi-year episodes of civil war. Agricultural exports, particularly coffee, account for over 60% o f export earnings. The contribution o f the services sector has been growing steadily over the last few years. The industrial sector recorded a slight improvement which could be attributed mainly to increased construction activity. 9. Consolidation o f the peace process has helped revive the national reconstruction process and has created a positive outlook for the country. Since 2000, the country has gradually recovered from its negative economic growth (-1.8% on average) o f the decade characterized by political and economic problems to achieve a positive growth rate o f 5.1% in 2006. Economic growth i s largely affected by high volatility in the agricultural sector. Although the real GDP growth rate reached 4.8% in 2004, it fell to an estimated 0.9% in 2005, due to severe drought, before rallying back to 5.1% in 2006. According to provisional statistics, the real economic growth rate for 2007 only increased slightly (3.6%) compared to the previous year, despite an increase in capital expenditures financed mainly with donor support. This weak performance i s due to poor harvests. 10. The inflation rate, measured by the consumer price index, reached an annual average o f 7.2% from 2001 to 2006. This average masks considerable fluctuations with a peak o f 13.6% in 2004 and a trough o f 2.7% in 2006. The adjustment o f administered prices at the end o f 2007, the recent hike in food prices, and the disorganization o f import supplydue to post-electoral difficulties inKenya, exacerbated the rise inconsumer prices which stood at a month-on-month rate o f 14.7% at the end o f 2007 - compared to a single-digit inflation target. The average inflation rate at the end o f December 2007 was 8.3%. In the medium term, the inflation rate i s projected to remain below lo%, due to 82 limited recourse to bank credit to finance public spending. The consumer price index is calculated based on a basket o f consumer goods - at current prices in the Bujumbura central market - which has not changed since 1991. A household consumption survey i s envisaged; it should make it possible to modifythe basket used to calculate the index. 11. Fiscal policy performance for 2005/2006 was satisfactory. The goal o f the Government's program for 2007 was to pursue macro-economic stabilization, make up for delays in the implementation o f certain structural reforms and continue consolidating public finance management. The 2007 budget law has continued to reorient public spending towards poverty reduction expenditures while containing the budget deficit (excluding grants). Control o f the wage bill (10.6% o f GDP in 2007) and demobilization continued to feature among the Government's priorities. Demobilization and security sector reforms need to be pursuedto help reorient security sector public spendingtowards social (andpro-poor) sectors. 12. Fiscal performance for 2007 fell below expectations because o f the slowdown in the demobilization process. Moreover, the breakdown in peace talks with the last rebel group (FNL) also contributed in slowing down the demobilization process, thus generating a larger than expected wage bill as a percentage o f GDP. The need for budget financing led the Government to take offsetting measures such as raising certain taxes, scaling back some non-priority expenditure items and postponing a public service salary increase to 2008. Nevertheless, the budget deficit (excluding grants) should reach 22.4% o f GDP for 2007 (compared to 19.4% o f GDP in 2006) following an increase in public spending from 38.4% o f GDPin2006 to 40.5% in2007. 13. Burundi's external position remained compatible with IMF program targets in 2007. Although exports declined (14%) - due to the stagnation o f coffee exports - and imports surged (17% due mainly to higher demand for intermediate and capital goods), foreign aid flows helped maintain the external balance within the expected limits. 111. LESSONSLEARNED FROMTHE LAST ERSGAGREEMENT AND CHALLENGES A. Lessonslearnedfrom the last ERSGagreement 14. The Government had requested IDA assistance through the Economic Reform Support Grant to facilitate the implementation o f its poverty reduction policy and enhance growth. 15. Reforms, especially in the areas o f macroeconomic stabilization, public finance management, monetary and exchange policy, as well as structural reforms such as privatization o fpublic enterprises and the coffee sector, were being implemented. 83 16. These reforms, which are the basis for development and economic growth, required donor support for their effective implementation. It is in this context that the ERSGwas concluded betweenthe GovernmentofBurundiand IDA. 17. Inthe area of public finance management, supportedby the ERSG, important results were recorded. 18. A coherent legal and regulatory framework for public finance management was initiated including through the adoption by parliament of the new public procurement code; the adoption by the Government o f a new public finance organic law; the new customs code has become effective; the streamlining of Government accounts into a single treasury account i s being finalized; and the re-orientation o f public spending towards poverty-reduction sectors has been introduced in the budget structure since FY2006. 19. With regard to the promotion o f the private sector, the Government has made remarkable efforts by clearing all debt arrears owed to the private sector. This action, which was supported by the ERSG, was concluded through the adoption o f a strategy for clearing the Government's domestic debt arrears to the private sector. 20. To that end, a market for Treasury bonds and bills has been established and is fully operational. 21. Efforts were also made in the privatization o f public enterprises and in the Government's divestiture from economic sectors. The Government adopted a detailed plan for public enterprises to be privatized and the privatization program i s being implemented. 22. Ina difficult post-conflict environment, the implementationo fERSG(2006-2007) was satisfactory on the whole. Most of the reforms initiated in public finance management and in the coffee sector went on well, and this enabled the Government to implement policies which kept the economy relatively stable. Burundi also eliminated some trade and exchange restrictions. It also joined the East African Community (EAC). 23. The ERSGwas aimed at helpingthe Government implementthe interimPRSP in four areas: (i)improving public expenditure management and its impact on the poor; (ii) reforming the cash crop sector (coffee, tea, and cotton); (iii) jump-starting the private sector; and (iv) reformingpublic enterprises through Government divestiture. 24. The Government has made satisfactory progress in implementing its reform program. Inaddition to the prior actions which had led to the disbursement o f the first tranche o f the Grant in 2006, other Grant agreement conditions for the disbursement of the second tranche were fulfilled. These conditions are summarized below: 0 Production o f a complete budget execution quarterly report, starting with the one covering the first quarter o f 2006. This condition was met. The IDA deems the reports satisfactory in format and content. The Ministry in charge of Finance has 84 provided budget implementation quarterly reports since mid-2006. These reports are based on the computerized expenditure management system (SIGEFI) introduced in January 2006, using the new budget nomenclature. The system makes it possible to identify the budget cycle (budget allocations, commitments, settlements, payment orders, payments), but its coverage i s still partial. With World Bank and IMF assistance, the authorities are making considerable efforts, to improve the coverage and reliability o f the system. 0 Presentation to the National Assembly o f a revised version o f the public procurement law, whose content and format were deemed satisfactory by the IDA. This condition was fulfilled. The IDA examined and deemed satisfactory the public procurement law adopted by the Government and presented to Parliament. The bill was presentedto Parliament in October 2006. The law will allow a more mordern and more transparent public procurement process. The bill was approved by a parliamentary commission in October 2007 and promulgated by the Head of State inFebruary 2008. 0 Progress in implementing the strategy on the settlement o f Government arrears to the private sector, including banks, as certified by an independent external audit. This condition was fulfilled. The progress made inclearing Government arrears to the private sector was deemed satisfactory, in form and content, by the IDA. Arrears were cleared to ease the financial burden on the private sector and boost economic activity. An external audit o f arrears had been finalized in February 2006. The authorities adopted a national strategy for the settlement o f these arrears. This strategy was prepared in coordination with the IMF and adopted by the Council o f Ministers. The strategy made it possible to set up a Treasury bills and bonds market in 2006 and 2007. Furthermore, the authorities allocated FBu 100million (the equivalent o f US$ 97,000) to each creditor. The settlement o f arrears was finalized at the end o f August 2007. 0 Adoption o f a three-year action plan (2006-2008) for coffee sector reform. This condition was fulfilled. The IDA deems the action plan satisfactory, informat and content. At the end o f 2006, the Government launched a broad-based consultation process with key coffee sector stakeholders, which led to the preparation o f a detailed action plan for sector reform. The action plan outlines the coffee sector reform implementation process. It covers sector debt management; the design o f a legal, regulatory and institutional framework; and the preparation o f a plan for implementing an efficient strategy for selling the sector's public assets. This action plan was shared with the IMF, EU/Stabex and the World Bank. It had been adopted by the Council o f Ministers on 28 December 2006. 0 Restart the biddingprocess for: (i) sale o f all shares heldby Ofice du Cafe' du the Burundi (OCIBU) in Socie'te'H6teliBre du Burundi (NOVOTEL); and (ii) the sale o f all OCIBU assets in sectors other than coffee. This condition was fulfilled and published. The relaunch o f the biddingprocess for the sale o f all OCIBU shares in Socie'te' H6teliBre du Burundi was published in the government newspaper Le 85 Renouveau. The sub-condition "sale o f all OCIBU assets in sectors other than coffee" was not correctly formulated due to lack o f information on OCIBU's ownership structure at the time the Grant was prepared. The Government provided a signed agreement in 1993, showing that OCIBU does not own property, but rather manages State property inthe coffee sector. 0 Publication o f the audit results on the sale o f the presidential plane to Delaware Corporation by the Government in June 2006, and adoption o f a related action plan reflecting audit recommendations. This condition was fulfilled. The audit was published in its entirety in the government newspaper Le Renouveau o f 28 May 2007. The Council o f Ministers adopted the related action plan in September 2007. This action plan covers: (i) adoption o f a communication plan; (ii) the the presentation to Parliament o f a bill on the sale o f public property; (iii) the continuation o f investigations on the sale o f the plane by setting up a parliamentary commission; and (iv) the promotion o f transparency in the management o f economic, political and administrative rights. In September 2007, a commission responsible for preparing the bill on the sale o f public property was established and in October 2007, the parliamentarycommissionwas created. B. Challenges 25, Burundi faces considerable political, economic and social challenges. Politically, it has to consolidate the peace process and political stability. In a bid to eradicate the vestiges o f a conflict that has lasted for about 15 years and lay a solid foundation for sustainable and balanced development, the Government has initiated dialogue and consultation frameworks involving all socio-political partners. This measure has made it possible for the country to create a serene and enabling environment to restore confidence among stakholders on the national political arena, mainly through the formation o f a national unity government in November 2007. This political achievement was somehow disruptedby the resurgence o f a few cases o f insecurity following the briefwithdrawal o f PALIPEHUTU-FNL from the Joint Verification and Monitoring Mechanism (MCVS). 26. Since April 2008, however, the last rebel movement, PALMEHUTU-FNL has resumedand is pursuingthe implementationo fthe ceasefire agreement, thanks to support from the Regional Initiative and the Political Directorate, whose primary mission was to reinforce mediation between PALIPEHUTU-FNL and the Government. The Government strongly believes that the ongoing process for final cessation o f hostilitities will help restore security across the entire national territory and thus, effectively revive economic activity and poverty reduction. 27. From the economic and social standpoint, the idea i s to achieve robust and sustainable growth, reduce poverty and progress towards the Millennium Development Goals (MDGs). Burundi i s one o f the least developed countries in the world and its level of poverty remains high. HIV/AIDS incidence is high and social infrastructure i s hardly developed. The Government must strive to: 0 Ensurebudgetary sustainabilityinorder to reduce the heavydebt burden; 86 0 Bring inflation down to single digits. Significant progress has beenmade in macroeconomic stabilization, but a lot remains to be done to curb inflation, especially inan internationalcontext characterized by highoil and food prices. 0 Build institutional capacity and promote good governance. Structural reforms remain essential to boost growth and scale back poverty. To that end, institutional capacity-building and the improvement o f governance will be primordial. 0 Enhance regional integration. Membership o f the EAC will open up greater economic opportunities for Burundi. However, the country still has much to do to develop a comprehensive strategy, implement key institutional reforms and negotiate with the EAC secretariat on the terms o f compliance with the conditions laid down by the Community. To that end, the technical and financial assistanceo f donors i s indispensable and urgent. IV. THE NEW ECONOMIC REFORM SUPPORT GRANT (ERSG11):2008-2009 28. The new Economic Reform Support Grant (ERSG 11) i s aimed at helping the Government implement its reforms with a view to achieving sustainable and balanced economic growth as well as poverty reduction, as specified inPoverty Reduction Strategy Paper. ERSG 11therefore pursues the objectives o f the first grant in the area o f public finance management and private sector development. 29. The specific objectives of ERSG11are to increase transparency inpublic finance management and improve the business environment. 30. In the area o f public finance management, a PEMFAR was jointly organized by the authorities and the World Bank. A largely participatory approach was used. The study identified the priority reforms which are indispensable for increasing transparence in public finance management. The reforms identifiedby the PEMFARwill be implemented under ERSG II. 3 1. The prioritymeasures include, inter alia, buildingthe capacity to prepare, manage and control public finance reforms; continuing to strengthen the legal and regulatory framework through implementation o f the public finance organic law; reinforcing parliamentary supervision; gradually establishing a single Treasury account; building capacity and streamlining the operation o f the public services audit system. 32. With regard to the improvement o f the business environment, the Government's strategy i s to create institutional and legal conditions for private sector development. 33. Inthis area, the Government has already adopted and transmittedto parliament a new draft investment code which was widely discussed with all private partners. It also 87 intends to accelerate the finalization o f new codes on trade and on private and public enterprises so that they can be adopted by parliament soon. 34. Thus, the ERSGI1program includes six preliminary measures grouped under two components: (i)measures supporting public finance management reform; and (ii) measures supporting private sector development reform, including the coffee sector. 1. PublicFinanceManagement 35. The authorities and the World Bank team have agreed on the following six prior actions to support public finance management reform: 36. The new organic law, which is in line with international best pratices, must be adopted by the Council of Ministers and submitted to Parliament. The law was adopted by the Council of Ministers on 26 March and the Government sent it to Parliament on 21 May 2008. 37. Adopt a decree defining the budget preparation schedule, the responsibilities o f the various stakeholders and the content o f the budget guideline letter to improve the deadlines and efficiency o f the budget preparationprocedure. A draft decree reflecting the main observations sent by the IDA on 5 February 2008 to the Ministry o f the Economy, Finance and Developement Cooperation was adopted by the Council o f Ministers on 20 March 2008. The decree was signed bythe President o f the Republic on 3 June 2008. 38. Improve identification o f pro-poor expenditures in the functional classification, based on the PRSP. The Government and the IDA agreed on the need to do the technical work together in order to better identify the pro-poor expenditures which effectively reflect the budgetary efforts that Burundi will make to allocate domestic resources to poverty reduction. A note describing the methodology to be followed to improve the identification o f pro-poor expenditures has beendeveloped. It describes the identification criteria retained in the budget allocation forecasts for 2007 and 2008; these criteria are based on this new methodology and prove the credibility o f the new classification o f pro- poor and non-poor expenditure. 39. The participation o f local economists in the work. Treasury cash flow and the provision o f international expertise by IDA contributed to the finalization o f this process. 40. The Ministry o f the Economy, Finance and Development Cooperation, in consultation with the five main sectoral ministries, should prepare and implement quarter-on-quarter Treasury cash flows (i) on revenue estimates and an assessment based o f the seasonality realistic expenditures; and (ii)setting quarterly sectoral commitment ceilings starting in the second quarter of 2008. Implementation o f this measure will help increase revenue and expenditure predictability and thus, enhance expenditure management during the fiscal year. The authorities have already identified, and started working with, five sectoral ministries with significant budgets (Health, Education, Agriculture, Defence and Interior). These ministries are represented in a working group on cash management, together with the BudgetDirectorate. 88 41. Two meetings were held mainly to discuss issues regarding the seasonality o f expenditure commitment in the sectoral ministries. By letter o f 13 March 2008, the Minister o f the Economy, Finance and Development Cooperation asked the ministries concerned to forward their commitment forecasts for the second quarter o f 2008. The Treasury cash flows for the last quarter o f 2007 were compared with actual implementation in order to fine-tune the assumptions retained. Based on this study, annual budget cash flow forecasts for all ministries were prepared and will be updated regularly. 42. Restore the internal audit and inspection unit o f the Ministry o f the Economy, Finance and Development Cooperation by providing it with adequate staff and ensuring its satisfactory operation. Order No. 540/0014 o f 9 January 2008 to organize the internal inspection and control unit o f the Ministry o f the Economy, Finance and Development Cooperation was signed by Madam the Minister o f the Economy, Finance and Development Cooperation. By Ministerial Order No. 540 /659 o f 16 /06/2008, the Minister of the Economy, Finance and Development Cooperation also appointed the managers and staff members o f the internal inspection and control unit. Competence and professional know-how were the criteria used in selecting the members o f this team. A work plan for 2008 and a draft procedures manual have already been prepared. This manual will be developed by the inspection and internal control unit team with the assistance o f a consultant inorder to comply with applicable international standards. The ministry will provide the new structure with working premises and operational means as soon as possible. 43. Submit the Government's revenue and expenditure accounts and extrabudgetary accounts for 2006 and 2007 to the Audit Court. The revenue and expenditure account for 2006 was forwarded to the Audit Court in May 2007, and the corresponding budget review law in September 2007. The Audit Court produced its report on FY 2006 budget implementation on 12 December 2007. The Ministry o f the Economy, Finance and Development Cooperation could not respond to the Audit Court within the prescribed deadlines as the 2008 budget was beingprepared during the period concerned. However, it sent its comments on the Audit Court's report at the endo fMarch2008. The authorities and the IDA agreed that the 2007 revenue and expenditure account be sent to the Audit Court with a one-month delay after the official deadline o f 31 March 2008. The 2007 revenue and expenditure account was indeed sent to the Audit Court on 30 April 2008. 2. Private Sector Development 44. The new Investment Code, in keeping with international best practices, should be adopted by the Council o f Ministers and submittedto Parliament. Duringa brainstorming workshop, organized in collaboration with the Vice Minister in charge o f Planning, and with the participation o f the authorities and the private sector, the authorities and the World Bank agreed on the approach as well as the major components and measures to be included inthe new Investment Code. An InvestmentCode follow-up committee was set up. A new draft code was prepared with the technical assistance o f the World Bank and the InternationalFinancial Corporation (IFC). This draft code was reviewed by Burundian 89 stakeholders, and the comments o f the World Bank and the IFC were included. The Council o f Ministers adopted the new code on 14 June 2008 and transmitted it to the National Assembly for consideration and adoption on 16June 2008. 45. Adopt a decree defining the conditions for constructive consultations between the public and private sectors. The adoption o fthis decree i s the first step to revive public and private sector consultations on economic policies impacting private sector growth. The decree will define the framework, the partnersand the mechanisms o f such consultations. The authorities and the World Bank agreed on the work plan, and technical assistance supported by the World Bank has already started. The draft decree was prepared for discussion by local partners in mid-April. The World Bank and IFC presented their comments in a timely manner. The decree was signedbythe President o f the Republic on 17 June 2008. 46. Launch a study to analyze institutional capacity-building needs for public enterprise reform, including an action plan to build such capacities. The authorities presented draft terms o f reference which were reviewed by the World Bank. This prior action was fulfilled as the identification and signature o f the contract o f the consultant have already been achieved. 47. The OCIBU Board o f Directors should adopt regulations for the sale o f coffee in order to clarify marketing rules for the 2008/2009 crop year, and disseminate these regulations widely inFrench and Kirundi.The authorities and the World Bank agreed on the critical importance o f disseminating sales regulations, which clarify the rules that will govern the marketing o f raw coffee. The draft regulations on the sale o f raw coffee exports were prepared by the OCIBU and discussed publicly with the technical and financial partners operating in the coffee sector, who were asked to make improvement suggestions within a week. The objective i s to improve these regulations so they can become an instrument to promote transparency and competition in the coffee sector. Using the improvement suggestions received from the World Bank, USAIDand IMF, the authorities finalized the draft coffee sale regulations for the 2008/2009 crop year. The sales regulations were adopted by the OCIBU Board o f Directors on 24 April 2008. An information notice on coffee marketing will be presented to the Ministry o f Agriculture and Livestock by the Council o f Ministers. This notice will be sent to IDA infulfillment o f the prior action. V. MONITORINGOF THE GRANT PROGRAM 48. The program and the measures listed in the structural reform matrix will be monitored by the Government through the institutional committee responsible for the monitoring and assessment o freforms supported bythe ERSG11and the future ERSGIII. The authorities will ensure that the Committee i s closely monitoring ongoing reforms by coordinating and supervising the work o f the inter-ministerial team and technical committees. 90 49. The inter-ministerial team includes focal points in the Ministry o f the Economy, Finance and Cooperation for Development; the Ministry o f Commerce; SCEP; and the coffee sector committee. The technical committees deal with public finance reform, the business environment, and the coffee sector. These national teams have actively participated inthe development o f the economic program and inthe preparationo f the list o fpreliminary measures for the two ERSG11components. VI. TRIGGERSOFTHE NEXT ERSGI11BUDGET SUPPORT38 50. Six indicative measures supporting public finance management reform were chosen by the Government and the World Bank team for ERSG III.These measures, which should be implementedno later than December 2008, include: 1. Finalizing public expenditure tracking surveys (PETS) inthe education, health andjustice sectors, as well as beneficiary surveys; publishthese reports on the Government's website; and produce an implementation action plan from the analyses made. 2. Submitting a 2009 budget bill to Parliament in early October 2008, which (i) i s more consistent with PRSP objectives; (ii) compared to 2008, increases the share o f the budget devoted to health, education, agriculture and social protection. 3. Reducing largely the amount o f discretionary spending executed through exceptional procedures (non-debt spending without payment orders and spending financed with extra-budgetary resources) in2008, relative to 2007. 4. SIGEFI satisfactorily covers the entire budget execution cycle (including better management o f file transmission; a salary management module, reservations management and credit transfers, control o f credit availability, commitments, partial payment options, accounts closing and management o f entry balances). 5. Adopting a revised budget and accounting plan, and implement the revised accounting procedures manual. 6. Setting up a public procurement regulatory authority endowed with a status and a mission in accordance with Law 1/01 o f 4 February 2008 on a Public Procurement Code. 5 1. Six measureswere identified as indicative measures supporting private sector development inthe context o fthe next budget support (ERSG111): 38These measures should be met by December 2008 at the latest. 91 7. The new commercial code and the code for private and public companies, which are in line with modem international standards, have been approved by the Council of Ministers and submittedto the Parliament. 8. The synthetic tax for small enterprises i s included inthe 2009 budget bill. 9. Improve the perfonnance o f the Commercial Court, specially delays in renderingjudgments on cases. 10. The revision o f the privatization law, in keeping with international best practices, i s adopted by the Council o f Ministers and submitted to Parliament. 11.Finalize and publish financial studies on five public enterprises: AIR BURUNDI,ECOSAT, ONATOUR,FOSIP, OTRACO. 12. By December 2008, the Government should adopt an action plan (with a schedule) to implementthe option chosen for the sale o f coffee sector assets. 92 n LI a a fD -2 L. b u I 51 E ANNEX 3: BURUNDIERSGI1 Poverty OutlookAnd Social Development - 1. For many years conflict displaced a large portion o f the rural population and destroyed important economic and social infrastructure. As a result, poverty i s particularly widespread in rural areas, which account for over 90 percent o f the population. 63 percent o f the population suffers from food insecurity. Surveys estimate that poverty incidence stood at 66.9 percent in 2006, a noted drop from 81 percent in 1998 yet far from the 2015 MDG target o f 30 percent. Rural poverty i s estimated at twice the rate o f urban areas. Regional differences are particularly acute, with poverty rates fluctuating from a low o f 28.7 percent in Bujumbura to a high o f 82.3 percent in the province o f Kirundo. The intensity o f poverty also varies among groups. Households living inurban areas whose head or spouse has a better education and who benefit from better employment are less likelyto be poor or feel poor. 2. Health. Life expectancy rose fi-om 42.8 years in 2000 to 44.6 years in 2005, however, much more needs to be done as the conflict affected health services delivery severely, with shortages o f essential medicines and qualified staff. Major causes o f morbidity and mortality include malaria, acute respiratory infections, diarrhea, tuberculosis, and malnutrition. The spread o f HIV/AIDS is taking a heavy toll on communities, with the prevalence rate in the general population o f 4.8 percent in 2007, leaving many households vulnerable. Infant mortality rates are as high as 114 (2004) per 1,000 (compared to African averages o f 103.1 per 1,000, and to the MDGtarget o f 36 per l,OOO), and maternal mortality rates average 990 (2000) per 100,000 (compared to African averages o f 916.8 per 100,000, and to the MDG target o f 202 per 100,000 by 2015). As a consequence o f the long civil strife, child immunizations for under-five years old fell dramatically during the 1990s. However, recent efforts have led to increases in vaccinations rates again: the measles vaccination coverage rate has increased from 78 percent in 2004 to 92 percent in 2006. The coverage o f the vaccine DTC-Hib-Hep3 increased from 83 to 92 percent, while Polio3 coverage increased from 76 to 88 percent. 3. Sanitation and potable water. Sanitation services inrural areas are quite limited. Only 22 percent o f the population has access to functional facilities; 90 percent o f these are traditional pit latrines. Inrural areas, only 43 percent o f the population has access to potable water. Forty percent o f the rural water supply i s derived from the existing 22,000 improved spring facilities, the bulk o f which are nonfunctional. This situation can be explained by the lack o f maintenance o f water-related infrastructure. Furthermore, the distances to traditional potable water sources are long. 4. Education. Less than half o f the population i s literate (only 43 percent o f adults are literate (53 percent males versus 32 percent o f females) and education at all levels suffers from a lack o f qualified teachers, teaching material and adequate infrastructure. Disparities in education outcomes among gender and regions are large. Females comprise 45 percent o f the studentsat the primary level, 41 percent at the secondary level, and 25 percent at the university level. The gross enrollment rate (GER) goes from 130 percent inthe city o fBujumbura to 50 percent inthe provinces o fNgozi and Muyinga. 102 5. Primary school enrollments were restored to the pre-crisis long-term trend level, with a net primary enrollment ratio o f 57 percent by 2002. Since the "free school" policy was introduced in September 2005, primary education enrollment has significantly improved from 80 percent in 2003-04 to about 100 percent in 2005-06 (matching the MDG target o f 100 percent by 2015). However, completion rate is just 37 percent and only 47 percent o f those children that start first grade finish the primary cycle in2005. At the secondary level, the GER o f 13 percent i s below the average for Sub-Saharan Africa (SSA) (25 percent). In the non-formal education system, approximately 300,000 people are enrolled for basic literacy and numeracy instruction. However, the quality o f this type o f education i s very low. Box 2: Burundi'sProspects for Achieving the Millennium Development Goals by 2015 Goal 1: Eradicate extreme poverty and hunger. Unlikely. The internationally agreed baseline year o f 1990 for the MDGs coincides with the beginning o f a decade o f political turmoil and civil war during which GDP fell by almost 20%. The national poverty headcount increased from 36% to 67% during that period. About 55% o f the population still lives on less than US$l/day (the MDGtarget is 18%). Meeting the hunger target is unlikely. Malnutrition rates were very high even before the crisis, and in2000 Burundi had the highest under-five malnutritionrates inAfrica with 57%. However, according to the latest 2005 survey, malnutrition rates decreased to 44% (the MDGtarget is 23%). Goal 2: Achieve universal primary education. Likely. Burundi will potentially meet the target for universal primary enrollment. Since free universal primary education was introduced in September 2005, gross enrollment reached close to 100%. But completion rates remain low at only 36%. Goal 3: Promote gender equality and empower women. Likely. The target on gender equality inprimary education will very likely be met with the ratio o f girls to boys currently at 0.8. The target on women participation in parliament has been met. However, women's lack o f control over resources will remain a key challenge. Goal 4: Reduce child mortality. Highly unlikely. Child and infant mortality rates remain high at 190 and 114 (per 1,000 live births) but show improvements from their 2000 peak rates o f 291 and 156, respectively. Communicable diseases, such as malaria, diarrhea, respiratory infections, and the compounding effect o f malnutrition are the major causes o f mortality and morbidity especially among children. Goal 5: Improve maternal health. Highly unlikely. Maternal mortality remains very high at 1,000 (per 100,000 live births).At the same time, the proportion o f births attended to by skilled health personnel is only 31%, well below the MDG goal of 100%. The key challenges to enhance utilization o f health services are: (i) to households; and (ii) cost lack o f trained people. Goal 6: Combat HIV/AIDS, malaria and other diseases. Likely. Burundi will potentially meet the HIViAIDS target. Overall HIV prevalence o f 3.4% i s low. However, Burundi's rate o f 12% HIV affections among pregnant women is quite high compared with neighboring countries (Rwanda 9.8%, Uganda 8.5%, and Tanzania 7.5%). Goal 7: Ensure environmental sustainability. Unlikely. Only 50% o f the population has access to improved water resources. Among these, 75% live inurban areas and only 45% inrural areas. 103 ANNEX 4: BURUNDI ERSGI1 Statusof ReformsInitiatedUnder 2006 ERSG(ERSGI) - 1. The 2006 ERSG was a stand-alone two-tranche operation, which closed end o f March 2008, after successful tranche releases inNovember 2006 and December 2007. It was designed to support reforms in public financial management (PFM) and promote policies to accelerate growth. The ERSG objectives were to: (i)improve public expenditure management and its impact on the poor; (ii) revive agriculture export crop sectors (coffee, tea, and cotton) and ensure better revenue distribution sectors among actors; (iii)revive the private sector by improving business climate, accelerating State divestiture; and settle the Government domestic arrears to the private sector. The Government has made uneven progress in implementing its reform program. While progress in PFM has been relatively steady and the Government has taken a number o f important measures to improve the business environment, the pace o f structural reforms was slower than anticipated. 2. The ERSG program in PFM included two major subcomponents: (i) the deepen reforms o f the Public Expenditure Management (including external oversight and procurement); and (ii)increase the volume o f high quality pro-poor expenditure (including development o f basic mediumterm forecasting and programming, undertaking PETS and strengthening statistics). The focus coincided with the country acceding to HIPC Initiative decision point. The ERSG was geared to support Government efforts to reach several o f the conditions for the HIPC Completion Point.39 The reform, which includes several components, has progressed well given the weak institutional capacity. A modem organic law of finance consistent with international standards, was developed with the support o f the program and was just approved by the Council o f Ministers in March 2008 and submitted to the Parliament in May 2008 as part o f the ERSG I1 program. The law will help streamline budgetary procedures and ex-ante controls. A new and unified nomenclature has been implemented, helpingidentify pro-poor expenditures. The new double-entry accounting system has been implemented. The Interim computerized financial management information system (SIGEFI) was functional for the 2006 budget year and produced quarterly budget execution reports for 2007 and early 2008. It i s now being further updated to process a comprehensive budget and eventually include the full payroll process for the civil service. The Government has progressively consolidated its cash management by closing off-budgetary accounts. The General State Inspectorate (Inspection GCnCralde 1'Etat) was created and became active in2006. 3. The scope o f the 2006 ERSG program in PFM combined with the country's political fragility and institutional weaknesses led to other reforms not progressing as expected. For instance, the control unit o f the MEFCD (Inspection Ge'ne'ral des Finances, IGF), which was supposed to be reconstituted in 2006-2007 was not. A modem draft procurement law was submittedto the parliament inthe fall o f 2006, but not promulgated until early 2008 due to the political stalemate at the National Assembly delaying the reform process. It was finally promulgated in February o f 2008 and will become effective in October 2008. Furthermore, while the authorities have succeeded in 39See Burundi - EnhancedHeavily IndebtedPoor Countries (HIPC) Debt Initiative. IDNR2005-0174, 104 redirecting more budget towards the social sectors, especially inlight o f the HIPC interim debt relief, the slower than expected demobilizationhas ledto a constrained fiscal space. The lack o f capacity did not allow the adequate development o f medium term forecasting and program budgets. Improvements in monitoring and evaluation are still critically needed, including improvements in statistics, finalizing the surveys on expenditure tracking in education, health andjustice as well as undertakingpoverty and social impact analysis to examine the likely effects o f the future coffee reforms on differentgroups. 4. The ERSG program in PSD focuses on (i)reviving the private sector by improving business climate, accelerating State divestiture; and settle the Government domestic arrears to the private sector; and (ii) reviving agriculture export crop sectors (coffee, tea, and cotton) and ensure better revenuedistribution sectors among actors; The Government has taken a number o f measures to improve the business environment and promote private sector development. The Government has enacted the insolvency law and i s developing a commercial code, a company law and a draft competition law. It has developed a draft law to modernize the investment code and i s revising its privatization law. In2006, the Chamber o f Commerce and Industry established the BurundiArbitration Center, to facilitate arbitration as a means o f commercial conflict resolution. 40 By August 2007, the authorities followed through their commitment to settle Government debt to the private sector, providing it with some financial space. An investment climate assessmenti s being finalized. Burundibecame a member o f the East African Community (EAC) inmid2007, to facilitate its integration into the regional economy. 5. Despite good progress toward reforming the business legal and regulatory environment, reforms in the financial sector stalled due to the absence o f needed microfinance entities and the inability o f the World Bank and IMF to accommodate the Government's request for an FSAP. Also, the pace o f structural reforms has been much slower than anticipated due to several Government changes in 2006-2007, low institutional capacity and lack o f a unified and strategic approach in some policy areas. The Government intended to divest from economic activities by undertaking (i)a differentiated approach to privatization o f the public enterprises and (ii) a reformprogram for the agricultural sector (coffee, tea and cotton) to revive exports and improve revenues to producers. 6. The Government has made some progress inprivatizing public enterprises, under a differentiated approach as agreed with IDA. The authorities started with some o f the simpler privatizations. They have liquidated some bankrupt enterprises, re-launched bids for the sale o f Government shares in some enterprises and recently have finalized studies o f the financial status o f seven major public enterprises. However, the privatization law still in force i s outdated. While the Sewice Charge' des Entreprises Publiques (SCEP) has received some technical assistance and capacity building, and undertaken the privatization discussed above, the institutional framework to prepare, manage and monitor the reform o f the public enterprises i s highly inadequate. Finally, while the President o f the Republic and the second Vice President has repeatedly expressed a wish 40 with financial assistance under the IDA supportedEconomic Management Project 105 for reform, there i s no clear and systematic reform strategy. The overall approach for the reform o f the remaining public enterprises still lacks a solid analytical underpinning around which to build a consensus about the way forward. 7. Inthe coffee sector the Government adopted a law in 2005, to liberalize coffee prices and commercialization, and a rolling three year action plan in late 2006 to reform the sector. It created the Coffee Reform Committee in 2006, undertook studies, and facilitated visits for international buyers. However, the reach o f the authority o f the coffee reform committee has not been clear and the President made two major policy decisions during in mid-2007 that led to setbacks for the reform process, as they set coffee prices and granted a monopoly for the commercialization o f all Burundian coffee for 2006-2007, going against the 2005 law. Finally, the sale o f the washing stations has experienced a long delay. The program o f reform in tea sector did not progress as expected. The Authorities set up a Tea Reform Committee but it did not become operational and the technical and financial audit o f the Office o f Tea o f Burundi (OTB, Office du The' du Burundi) was not undertaken. In the cotton sector, the state weaving company (COTEBU) i s in bankruptcy and has closed its doors. The Government has developed a strategy for reform COTEBU that includes opening to enterprise to private sector investment, most likely in partnership with investors from mainland China. SCEP has developed an action planbased on this strategy. 106 rr 0 a B ANNEX 6: BURUNDIERSGI1 Summary of - The Roleof PublicEnterprisesinthe EconomyofBurundi 1. The parapublic sector in Burundi represents a large share o f the economy. Overall, it comprises about 50 public projects; about 15 public administration entities (Etablissements Publics CE CaractBre Administratif - EPA); about 30 state entities (Administrations Personnaliskes de 1.Etat -APE) and agencies, as well as about 50 semipublic enterprises (SPE). O f the SPEs listed in the productive sector, 17 are fully-owned public enterprises (PE); 16 are mixed enterprises inwhich the state has a majority ownership- SM1 (more than 50 percent); and 17 are mixed enterprises inwhich the state has minority ownership - SM2. 2. Because o f the state's control o f the management of SPEs (the focus o f this analysis) these SPEs weigh heavily on public finances. This management does not ensure efficient resource allocation or better redistribution, and inhibits economy from being more dynamic. These economic distortions translate notably into poor management resulting in poor performance, state subsidies and an often unsustainable debt level. 3. To address this problem, the state initiated a reform that led to the adoption o f a privatization policy. This reform advocated a policy of openness/liberalization aimed at withdrawal o f the state from the productive sector through privatizatiodtransfer o f its shares to private economic operators; as well as promotion o f the private sector through a host o f incentives, including, inparticular, the investment code, which has been revisedseveral times to this end. 4. To achieve this objective, the state put in place a legal, regulatory, and institutional framework to guide the process. The legal and regulatory framework comprises notably a privatization law, a code for public and private enterprises, as well as a series o f schedules. At the institutional level, the Government has set up an interministerial privatization committee (IPC), responsible for leading the process, with decision-making prerogatives on all privatizations. This committee was to be supported by the public enterprises division (Sewice chargk des Entreprises Publiques -SCEP), created for this purpose. 5. Little progress has been made since the launching o f the privatization process in 1991- 1992 and in 1994, despite the measures put in place. Less than one quarter o f SPEs were subjected to asset transfers by the SCEP. The proceeds from these transactions would have been paid into a treasury account; however, this cannot be verified from existing documentation. 6. Several main constraints explain the poor performance o f the recent reform process. The main ones are (i) political crisis that broke out in 1993, creating an environment that was not the conducive to private investment or to the pursuit o f sustainable institutional reforms, and that curbed donor support (notably for pre-privatization studies, investments to upgrade equipment, financial restructuring funds, technical and financial support to the SCEP, etc.); (ii) low public support, owing to lack o f communication on the reform process, thus worsening its poor perception and rejection by society; (iii)lack o f access to credit and insufficient national private savings; (iv) poor preparation oUsupport for potential national buyers with respect to the real requirements of taking over comparatively bigger entities in terms o f managerial capacity; (v) 109 lack o f reliable data; and (vi) continuous changes in the trusteeship o f the SCEP and the presidency o f the 0,which are not geared to facilitating the rapid processing o f reform documents. 7. The relaunching o f the privatization process consisted in a series o f reform measures. These measures included: (i) commitment to adopt a new approach, including the preparation the o f a road map comprising sectoral studies o f enterprises in different sectors, the improvement o f the institutional framework for privatizations, and the strengthening o f human and institutional capacities; (ii)the preparation o f communication plans for the privatization program to ensure the involvement o f the different actors, including civil society; and (iii)prioritization based on a differentiated approach, from the easiest transactions to more and more complex transactions. 8. The analysis takes into account all the SPEs, including those with at least a 40% state ownership, except for those in the banking and financial system, which are not included here. Ultimately, the analysis involves 27 SPEs, 17 o f which i s PES(70%), 7 SM1 (30 %) and 3 SM2. As well, deeper analysis was conducted on the 12 SPEs inthe productive sector (44%), 6 (22%) o f which export their products. Some investigations were rather limited because o f data unavailability or unreliability. Overall, the 12 SPEs in the productive sector were analyzed, reviewing indicators such as taxation, value added, indebtedness and subsidies; employment and labor costs; investment; profits and savings; exports, imports and protection. Inaddition, a sectoral analysis was conducted where data was available, including inthe main agri-food sectors (coffee, tea, cotton, sugar, rice andbeer); textile, chemistry, energy and telecommunications. 9. Financial analyses revealed that the majority o f PESoperating in these productive sectors no longer have equity capital and are almost in default and bankruptcy. Inthe agri-food sector, PESoperating inthe coffee sector is almost indefault and bankruptcy, as well as those operating inthe rice and tea sectors, while the cotton sector is experiencing serious difficulties related to the obsolescence production tools. Similarly, the textile sector is totally bankrupt, as is the energy sector, while the PE operating inthe chemical sector no longer exists. Only the sugar and telecommunications sectors have shown some viability. 10. There i s chronic debt in the productive parapublic sector, taxation i s often avoided and fraudulent, and the level o f competitiveness i s very low. In 2005, the debt o f the 27 operational SPPs stood at Fbu 175 billion, or exactly 102% o f Government revenues (excluding grants) and 20% o f GDP. Government subsidies o f about Fbu 3 billion fill the deficits resulting from often chaotic management, while the state resorted to the treasury, worsening the domestic deficit, in addition to the guarantees given to PESin difficulty, which, in turn, asphyxiated the financial system, which is still very fragile. 11. The immediate causes o f this situation are linked primarily to the choice o f economic policy and thus, to the political economy o f developing countries, particularly the least developed ones. These include primarily: (i)Government protection, which in turn promotes lax management that does not necessarily adhere to management standards for a competitive environment, nor to any obligation for results, which in turn erodes the profitability and performance o f the enterprise; (ii) the recourse to state subsidies and to chronic debt - with or without state guarantees - to address the said consequences; and (iii) resistance to change and to 110 reform, well orchestrated by interest groups (lobbies) and pressure groups (union), which are better organized socially than downstream consumer organizations (recipients o f products/services from the said enterprises). 12. The consequence o f this type o f choice is the introduction o f distortions that inhibit the dynamism o f the economy. The state has in fact continued to maintain inefficient units through subsidies and all types o f tax exemptions and waivers; the provision o f debt guarantees with no hope o f reimbursement and/or protection schemes that are not accompanied by catching-up policies and, therefore, are not based on any form o f economic rationality or guarantee o f long- term efficiency. These distortions generally weaken the financial system (which i s itself in an embryonic stage); combined with the effects o f the protection o f public entities inthe productive sector, this weakening ends up stifling the development o f the private sector and, thus, o f the economy. 13. Inthe context o f Burundi, quality technical information, through comprehensive studies on the entire state portfolio in the productive sector, would allow the Government to make optimal choices in the reform o f the SPESand to justify them. Indeed, it would enhance the authorities, capacity to anticipate and take an option on the best possible reform choices when necessary (restructuring, mixed or independent management, privatization o f management, privatization, liquidation, etc.). It should be combined with a communications program on the relevance o f the SPE reform, which i s indispensable, particularly for the different groups involved. 14. The objective o f the reform o f the parapublic sector in Burundi can be beneficial in at least two aspects. A first benefit i s improving the Government's fiscal space, primarily by reducing the weight o f public enterprises on public finances. This i s essentially by reducing direct and indirect subsidies that had become rather heavy in the context o f an often deficient state management. Also, streamlining and expanding the tax base by eliminating all types o f exemptions conferred by the public status o f firms (for example, for imports), and improving performance by streamlining the management. A second benefit i s to jump-start and boost the economy by promoting the private sector, which plays the role o f engine o f the economy through management based on a performance criterion (accountability) and promotion o f the productive sector. 15. Inprinciple, sustained and long-term growth is achieved when productive activity is based on a dynamic private sector in a competitive environment. In this particular case, the impact o f productivity and scale-based gains on the economy in general could translate into the creation o fjobs and added value, and specifically, the impact on the budget could increase the fiscal space and contribute more to the financing o f infrastructures to support the economy. Conversely, when productive activity i s conducted by the state, as i s the case with public enterprises operating in an "imperfect" market environment (and a more or less efficient management), the impact o f enterprises on the economy in general can translate into debt that undermines the financial system-often with state guarantees-and the specific impact on the budget translates into subsidies that reduce the fiscal space and, while contracting investments, runcounter to theveryprinciple ofoptimalresource allocation. 111 16. Inthe context ofregionalization, temporary protectioncan only be efficient ifit covers a dynamic internal process for transforming the economy, for catching-up, and for improving the legal business framework. Technological progress i s unavoidable when one needs to be able to compete eventually with dynamic partners. However, state management o f the productive economy neither helps promote competitiveness nor close the technological gap, since the behavior o f economic agents i s guided by signals from a very imperfect market inthis case. The withdrawal o f the state from productive activity and the restoration o f the principle o f a market- based competition are essential for a moratorium to be useful, particularly when the economy must prepare itself for openness. The latter considers the improvement o f the business environment as a sign o f the credibility o f policies that promote foreign direct investment (FDI) inflows. Hence, the vision o f an emerging private sector can draw on the theory o f regional strategic partnerships Cjoint ventures, sub-contracting, sectors), with each party underscoring its comparative advantages, revealedhistorical (market preeminence versus implantation costs, knowledge o f the environment, availability o f cheap labor, etc.) or built (technological progress, availability o f support infrastructures and o frelated services, etc.). Table 7: Financial Ratios of some SPES(2005) Debt-equity SPE/Item ratio Working-capital ratio Quick ratio Comment OTB More equity capital ;Default and (Tea) 1.87 0.48 0.12 bankruptcy OCIBU Operation More equity capital; Default and (Coffee) 2.18 0.57 0.45 bankruptcy OCIBU Asset More equity capital ;Default and base (Coffee) 4.54 12.25 11.25 bankruptcy SODECO More equity capital ;Default and (Coffee) 1.58 0.61 0.53 bankruptcy SOGESTALMu More equity capital ;Default and minva (Coffee) 1.67 bankruptcy SRDI More equity capital ;Default and (Rice) 1.51 1.os 0.66 bankruptcy COGERCO (Cotton) Outdated production tools, low profitability o f the sector and storage 0.62 2.54 0.34 problems for delivery to COTEBU COTEBU More equity capital ;Default and (Textile) 1.77 0.48 0.08 bankruptcy REGIDESO (Water and 0.91 More equity capital ;Default and Energy) 0.59 0.42 bankruptcy SOSUMO Excellent ratios ; could incur debt to 7.71 5.04 expand 0.69 0.54 Fragile financial situation ;need liquidity 1. Debt-equity ratio =Total o f short- and long-term debdtotal assets 2. General liquidityratio (working capital) = Current assets/Current liabilities 3. Quick ratio = Stocks/ (Current assets - Current liabilities) 112 ANNEX 7: BURUNDIERSGI1 The Agricultural Sourcesof Growth - Executive Summary 1. Burundi, situated inthe heart o fthe Great Lakes Region, is one o f the poorest nations on earth. As a small landlocked country with some 7 million persons it has one o f the highest population densities on the African continent. Socio-economic fault-lines dating back to colonial intervention in the nineteenth century have given Burundi a particularly violent and turbulent history. Beset by coups d'etats, presidential assassination and genocide, the country has been caught in a cycle o f violence and under-development whereby brief periods o f peace have been followed by further state repression and armed conflict. Since the 2000 Arusha peace accords, the Pretoria agreement o f late 2003 with the CNDD-FDD, the peaceful elections o f 2005 and the recent Dar as Salaam peace agreement with the FNL have all ushered in a period o f relative stability. However, this fragile political process has not been matched by a parallel rebound in economic growth which i s the normal experience o f `post-conflict' countries in Africa. As recognized in the country's PRSP and the concomitant UN Peace building Strategy, economic growth i s a vital component o f national and international efforts to sustain peace in Burundi, along with security sector reform and good governance. The critical question for policy makers i s how to support economic growth insuch a way as to reinforce the durability o fBurundi'speace. 2. The Sources o f Rural Growth (SoRG) strategy aims to identify those areas in Burundi's rural economy with the most immediate potential that can be harnessed to stimulate growth in such a way as to consolidate peace. In so doing, it provides guidance for the next three years on the means with which the Bank with its partners can help the Burundian Government and its people toward economic recovery after a long period o f civil war. Inproviding this counsel, it i s recognized that by focusing on the rural economy inthe short term, the Government will have to work on other critical areas in the medium term in order to sustain growth. This will be particularly important for the industrial and service sectors to absorb a burgeoning youthhl and increasingly urbanized generation. However, a sound agricultural base will be a vital foundation for an economic model that helps break Burundi's tragic cycle o f violence. And therein lays the central question -how can such a growth strategy break this cycle o f violence? 3. The challenge for the Government i s to take stock o f the key lessons suggested by international best practice and the Burundian history so as to develop the foundations for long- lasting growth. Key lessons from international best practice suggest the need for outlining a coherent peace building framework, designing pro-poor reforms, strengthening institutions to enable effective aid absorption, and prioritizing reforms to overcome the most binding constraints. In Burundi, the vicious cycle o f poverty and violence was fed by unbalanced investmentsbetween the three main constituencies o f the society: the state, communities and the private sector. Weak governance, political instability and the inability to set up a proper business climate to soundly develop the private sector are important reasons why the state and the Burundian communities have been so miserably supported and the private sector did not yet become a fruitful source o f growth for the economy. In Burundi indeed, most investments were poorly designed, channeling rent seeking for a private sector, which was typically made o f an urban elite, specifically close to the ruling Government. The SoRG strategy builds upon 113 international best practice and defines sectoral interventions that address key weaknesses the three main constituencies o f the Burundiansociety. 4. The main purpose o f the SoRG is to support an increase in economic growth to some 6 percent per year. The two objectives in meeting this aim are to i)boost food security by strengthening food production and ii)transform use o f Burundi's rural assets, notably coffee, to enable this sector to become a better contributor to shared growth in the short term and to provide the state with sufficient revenues to assist in the long term diversification o f the economy. Inorder to undertake these objectives, the SoRGstrategy is comprised o f three pillars: 0 At the state level, our work advocates for a strong and effective macroeconomic management and the design and implementation o f radical reforms, which are pre- conditions for a steady and long-lasting growth. These changes would require drastically improving state capacity to effectively design pro-poor policies and undertake the much needed reforms (including the privatization o f the main series o f agricultural parastatal) and productive investments. At the communitylevel,the SoRGrecommends investing inhuman and physical capital to ensure food security and further develop the agricultural sector. Over the last forty years o f cyclical violence, communities have certainly been the most injured constituencies o f the Burundian society, struggling to make use o f trivial investments, totally unable to satisfy the most basic needs. The overarching objective should now be to move away from emergency conditions, where the focus i s on subsistence only. At the privatesector level, the report recommends a radical change inbusiness conduct and interventionto respond to the ineffective focus on commerce and under-investment in production. The development o f an economy i s generally made possible by the expansion o f a vigorous and scrupulous private sector, which serve the nation's interest while seeking (and finding) its own. One o f the roles o f the state i s to foster the reinforcement and the enlargement o f such a private sector by setting rules which makes private and public interests intersect. The ultimate goal i s therefore not only to increase the private sector involvement inthe economy, but also its very contribution to shared growth. The main interventions recommended by the SoRG are further explained and detailed in Chapter 1. The need for long-lasting and stable performance in Burundi i s developed in Chapter 2. The following Chapters 3 and 4 establish a diagnostic o f the agriculture sector, concluding with Chapter 5 which suggests ways to lift the most bindingconstraints. Key findings A. (Chapter 1)Breakingthe cycle: a strategy for conflictsensitive ruralgrowth 5. Burundi's turbulent history reveals the inextricable link between civil war and the country's growth, poverty levels, and economic composition. The vicious cycle o f poverty and violence in Burundiwas fed by unbalanced investments between the state, communities and the 114 private sector. As part o f a longer term effort, the SoRG defines a new approach to better target investments and reforms and enable the Government to drive positive change. It describes sector interventions that the World Bank could carry out inthe next three years to help the Government of Burundiaddress weaknesses o f the three main constituencies o f its society. The strategy builds upon the main findings o f the contributors to the SoRG report in the light o f a three-pillar approach, inspiredbyAddison, and presented inthe figure below. blVt & Physicalcapital valuechains - Foster macroeconomlc reform to underpin - Re-build - Foster Human Capital privatization of parastatal companles In sustainable growth the coffee and tea sub- sectors - Improve State - Invest in Physical - Develop capacity to undertake small pro-poor pollcles Capital entrepreneurship in hodicuIture B. (Chapter 2) Burundi's growth:the needfor long-lastingandstableperformance 6. The macroeconomic analysis identifies past sources o f growth and binding constraints. It reveals that the weakness and volatility o f Burundian growth resulted from the economy's very high dependence on coffee and the mediocre performances of the sector. Also, the analysis underlines the impact o f high and ineffectively targeted Government expenditures and a debt ratio above sub-Saharan average. It suggests that full attention should be given to reinforcing State capacity and transformation toward the state being an instrument o f development rather thanpredation. 7. The poverty analysis acknowledges that growth i s a necessary but insufficient condition for poverty reduction. It identifies specific vulnerabilities and potential opportunities in Burundi that need to be considered to soundly tailor sector reforms and effectively target investments. This analysis shows that households in agriculture are not only the largest but also the poorest group. Hence, the State should target agricultural households first and this i s why the SoRG strategy focuses on the rural economy. 115 C. (Chapter3) Agriculturalrecovery:food securityandbeyond 8. The food situation in Burundi remains a matter o f great concern. For several years, food crises have been rife in certain parts o f the country, a consequence o f repeated conflicts, insufficient food production and the rapid population growth resulting from highbirth rates and the return o frefugees. 9. Subsistence crops and livestock products represent the main source o f income for most households and amount to 91% o f agricultural GDP. The current performance o f these sub- sectors i s very low and imports o f foodstuff are increasing steadily, causing important currency losses. The weak results o f the agricultural sector are partly explained by inefficient production systems, arduous access to inputs and the dramatic lack o f investment in human and physical capital. With a food demand increasing annually at a 3-6% rate, it i s urgent to endeavor turning the subsistence crops and livestock sub-sectors into muchbetter contributors to growth. Chapter 3 points a way forward to ensure agriculture recovery and move beyond by promoting the commercialization o f food produces. D. (Chapter 4) Exportcrops: towarda significantcontributionto growth 10. Cash crops account for almost all export revenue. The main contributor by far i s coffee, which i s produced by about 800,000 households and accounts for 85 percent o f the country's export revenue despite its mediocre performance. Tea is currently Burundi's second largest cash crop. It provides 12 percent o f total merchandise exports and i s producedby four estates and over 50,000 smallholders in arid highlands, where no competing crop can be grown. Burgeoning horticulture has undergone recent efforts supported by the DTIS and appears as one o f the solid candidates for diversification o f agricultural risk and revenue. 11. Chapter 4 (D) suggests that the reinforcement o f export crops' contribution to growth will require a sound privatization o f the coffee and tea sub-sectors and the development o f small entrepreneurship inthe horticulture sub-sector. The privatization o fthe coffee and tea sub-sectors should ensure that the property transfer, from the public to the private sector, i s a means o f improving the sector's competitiveness and o f contributing to shared growth. Increasing the contribution o f horticulture to growth entails a much different approach, as there i s no public asset to privatize. It will mostly require improving the business climate and access to rural finance. E. (Chapter 5) Overcomingthe mainobstaclesto growth 12. Inpost-conflict Burundi, security o f goods and people is a prime obstacle. Overcoming this major hurdle entails improving security and justice while reducing inequalities and discrimination. Preventing conflict would also imply better managing the land tenure issues, which fuel tensions and directly reduce investments and people's incentives to perform. 13. Given its financial resources, landlocked location, and mostly rural nature, post-conflict Burundihas encountered considerable difficulties indeveloping effective infrastructure services. Short-term priority i s to strengthen the rural road network to unlock food production. The next urgent step would entail rationalizing energy production and distribution to better use existing 116 facilities and enable sustainable growth. Developing electricity generation and distribution could foster processing agricultural products and therefore increase value added. The country lacks an Internet backbone reaching out to all provinces and enabling connections to other countries o f the sub-region. 14. Finally, doing business remains costly and riskyinBurundi.It is important to improve the legal and regulatory framework and reduce costs while increasing availability o f production factors. Another source o f improvement o f the investment climate would require strengthening the public institutions, which support private businesses. 117 ANNEX 8: BURUNDIERSGI1 The CoffeeSubsector Summaryof RecentAnalytical Work - - 1. In2002, a very comprehensive technical and financial audit was performedby Agrifor Consult with financial support from the European Comrni~sion~~.The work consisted o f three main reports: 0 an in-depth diagnostic o f the coffee sector inBurundi, 0 a strategy for state divestiture from the Burundian coffee sector with a detailed action plan, suggestingthe needto privatize the sector's assets after refurbishment 0 priority action plans to refurbishthe sector's assets and move towards privatization. 2. Importantly, the strategy identified privatization as the best option for state divestiture, but did not provide any further detail on the desirable privatization scheme (type o f investors, unbundling strategy, deregulation process, sale method, etc.). Inparticular, the work suggested that producer organizations could be given partial or full ownership o f a number o f washing stations but didnot explain how they would be giventhe capacity (including financial) to become such stakeholders. Let us note that the third report provides all relevant information on current contractual arrangements with SOGESTAL, SODECO and OCIBU, as well as a technical and financial evaluation o f each and every assets o fthe sector before and after its refurbishment. 3. In2004, the findings ofthese reports and similar work conducted onthe tea and cotton sub-sectors were included in the `strategy for State Divestiture from cash crops (coffee, tea and cotton)',42 led by the Ministries o f Finance and good governance. The strategy was endorsed same year by the Inter-Ministerial Counsel for Privatization. 4. Based on these inputs, reforms of the sector resumed in2005 - after a long hiatus related to the civil war - with the adoption o f a presidential decree43to liberalize price setting and marketing activities, to eliminate taxes on orchards, and to remove state guarantees for financing the sector. InMarch 2006 the Coffee Reform Steering Committee was created and inNovember 2006, Government o f Burundi adopted a sectoral action plan that included a strategy for the privatization or divestiture o f the washing-stations and drill-mill factories as a key reform measure. 5. In2006 and 2007, the World Bank supported further work needed for determination of the divestiture method with the highest potential to enhance the sector's contribution to shared growth. Main findings are as follows. The World Bank poverty profile investigated how people inBurundiperceivedtheprivatization agendas andenlightened the needto set forth the details o f the privatization schemes and to develop a communication strategy on agriculture sector reform. 41 Agrifor Consult, Programme de Rehabilitations Prioritaires dans le cadre du Dksengagement de 1'Etat des Activites Productives et de Commercialisation dans les Filikres de Culture de Rente : Etude de la Filikre Cafe, 2002 42Ministkre des Finances et Ministkre de la bonne gouvernance. "Plan de dksengagement de 1'Etat des filikres de culture de rente (cafe, the et coton) D, 2004 43Decret no100/012 du 14janvier 2004 portant reforme de la Filikre cafe ;Ordonnance Ministerielle n0540/710/650 du 16juin2005 portant autorisationdes ventes directes ducafe. 118 A study led by Michigan State University (MSU) provided an updated diagnostic of the Burundian coffee sector, enlightening its potential to access high value export markets and the sets o f actions needed to improve production and marketing capacities a~cordingly.~~assess To this finding, Government of Burundiorganized a couple o fvisits o f specialty coffee roasters and major players o f the specialty market bought Burundian coffee. Marketing toolkits, including a website and a media kit, were then developed to further promote Burundian coffee. This reality check was followed by another study led by MSU, identifying pilots for fast-tracking privatization. Candidate for eligible for such operation are washing stations with a clear potential to produce specialty coffee.4sBased on objective criteria (soil, altitude, etc.), this work suggests differentiating state divestiture methodology depending on whether the washing-stations can be used to access specialty markets or commodity markets. Indeed, fully-washed coffee has a better potential to access specialty markets if it i s processed in a station owned or operated by producer organizations or small entrepreneurs while it could be more competitive on the commodity market ifproduced by larger operators with the potential to benefit from scale and scope returns. Inparallel, InternationalAlert carried out an in-depthanalysis ofrisks relatedto State divestiture from the coffee sector in Burundi.46This analysis identifies tools meant at mitigating these risks and making sure that coffee sector reform will fuel growth and not conflicts. It i s therefore an important input for On the Frontier, the consulting company who i s helping Government o f Burundi designs a national communication campaign on the objective and means o f the coffee sector reforma4'Eventually, an audit has also been performed to update financial information on the sector. 44Dan Clay and al. Integrative Report in Support if the Burundi coffee value chain diagnostic and strategy development.2007. 45DanClay andal. Burundicoffeepilot selectionandplanning. 2007. 46International Alert. Conflict prevention inthe process of privatising the coffee subsector in Burundi. 2007 (draft report). 41OTF. CommunicationStrategy on the Reformofthe Coffee Industry inBurundi. 2007 (draft report). 119 Table 8: Optionsfor State Divestiture Service Management ease^'/ Concession Greenfield Asset contract contract affermage contract49 transfer5' Asset Public Public Public Public Public I Private ownership Private Capital Public Public Public Private Private Private investment Commercial Public Public Shared Private Private Private risk Operations I Private I Private Private Private Private Private maintenance Public Contract 1-2 years 3 -5 years 10-12 years 15 to 30 10 to Indefinite duration years indefinite 48Option currently implemented inBurundi 49There are many sorts o f green field contracts (BOT, BOO, BOLT, BLOT, DBFO, ROT). While these contracts are widely used ininfrastructure projects, there are not used inagriculture inAfrica. 50Asset transfer can be done through trade sale (to investors, parastatal employees and / or producers) or flotation. This type o f option is the one under discussioninBurundi. ANNEX 9: BURUNDIERSGI1 The Tea Subsector - 1. Background and key issues. Tea i s the second largest agricultural export after coffee. Between 2001 and 2006, average tea production amounted to 7,500 tons. Two thirds were produced by the smallholders51. The average earning for a Burundian tea grower in 2006 was about US$46. Most production, transformation, trade, marketing, and regulatory aspects o f the industryare handledbythe parastatal Office duThk duBurundi(OTB). 2. Despite changing world market conditions such as declining prices, demand for quality differentiation, and competition from man-made beverages (especially soft drinks), and the structure o f Burundi's tea industryhas remainedlargely unchanged since its inception. The sector faces numerous constraints, including structural inefficiencies o f the tea factories and plantations, poor incentives to smallholders and estate laborers, limiteduse o f inputs and extension services, and non-existent research. These constraints have ledto a considerable decline inthe quality and the price o f Burundian tea. For example, during2005 and 2006, Burundiantea was traded with a 30 percent discount over Kenyan tea at the Mombasa tea auction where most East African tea is traded. 3. Reforms inthe tea sector should address constraints to profitability, competitiveness, and the ability o f the industry to innovate in response to new opportunities. A steering committee with representatives o f all stakeholders to coordinate, manage and monitor reforms in the tea sector has been created. This entity can provide leadership for the actions in the tea sector identifiedbelow. 4. At present the amalgamation of ownership, management, and regulatory authority within the OTB i s serving the industry poorly and creating a drain on the public budget. In order to understand options for alternative structures achievable with minimal disruption in the performance o f the industry, a financial and technical audit o f OTB should be conducted. Discussing the findings o f this audit will permit consensus building among all the stakeholders around the reform process. The purpose o f this audit will be to identify clusters o f assets that can be divested as unit, and also to identify those that should be closed in order to reduce excess capacity and improve profitability. Once the asset clusters have been identified, a time-bound plan for divesting these from state ownership should be formulated, together with an agreed modality for proceeding. The state farms will require specific attention separately from the industrial assets. During the interim and while divestiture i s beingplanned, management o f the asset clusters should be contracted out with appropriate safeguards to protect their value from further deterioration. The conditions o f the management contract should specify the fee and an agreed formula for sharing o fnet revenues between and among actors inthe industry. 5. Once the asset clusters have been identified and contracted, the residual functions o f OTB can be identified and the capacity o f the entity to perform them assessed. For example, OTB may 5' Tea i s produced in five regionsby estates and smallholders. Average green leafyields were about 4.0 tons per hectare for the smallholders compared to 4.8 tons per hectare for the factory estates. Yields o f made tea (the finished product) o f one ton per hectare are less than halfo f the regional well runplantations. Inaddition to their sub- standard equipment, Burundi's tea factories are using only 41% o f their installed capacity compared to 70% for competing producers. 121 remain as a clearing house for information about market conditions and opportunities, or an entity for registry o frecognized qualities andproducts. OTB mayrequire additional assistance to undertakethe identifiedfunctions. 6. Once the industry structure has been decided upon and the approach to divestiture agreed, regulatory functions to complement the selected structure will need to be identified. For example, if the structure chosen i s a territorial concession for processing, entry will need to be regulated. Ifa fully competitive structure, mechanisms for registering liens against pre-financing o f inputs will be required. These regulatory issues can be identified only after the decisions on divestiture are made, and they will be very important for facilitating success o f the reforms. Decisions about public and private participation in improved advisory services for tea growers can also bemade after the basic structural issues are settled. 7. In summary, the reform program will include five main activities. A financial and technical audit o f OTB i s necessary to, identify clusters o f assets that can be divested as units, and assets that should be closed to reduce excess capacity and improve profitability. A time- bound plan for divestiture and modality o f proceeding should be developed. Prior to divestiture and while divestiture i s being planned, outsource management o f the asset clusters. Clarify formula for division o f net revenues (after subtraction o f the management fee) between and among actors in the industry (separately for those working in and with state farms, and smallholders). It i s also necessary to identify residual functions o f OTB and assess capacity to fulfill them. Finally, depending on the industry structure selected (e.g., fully competitive, territorial concessions, regulated monopoly, or other) identify the set o f complementary regulations required to facilitate good performance o f the structure, and the entity or entities responsible for undertaking the regulation. 122 ANNEX 10: BURUNDIERSGI1-IMP Staff's Assessmentof RecentEconomicPerformance IMFCompletesSixthandFinalReview Underthe PRGFArrangementwith BurundiandApprovesUS$11.4MillionDisbursement Press Release No. 08/07 January 16,2008 The Executive Board o f the International Monetary Fund (IMF) today completed the sixth and final review o f Burundi's economic performance under the SDR 69.30 million (about US$110.3 million) Poverty Reduction and Growth Facility (PRGF) arrangement. The completion o f the review will enable the release o f an amount equivalent to SDR 7.15 million (about US$11.4 million), which will fully disbursethe total amount available under the arrangement. Incompleting the review, the Board also granted Burundi a waiver for the nonobservance o f a quantitative performance criterion pertaining to a temporary accumulation o f external payments arrears and a structural performance criterion on the establishment o f a unified data file for computerized payroll management. The PRGF arrangement was originally approved on January 23,2004 inan amount equivalent to SDR 69.30 (about US$110.3 million) (see Press Release No. 04/13). In July 2006, the arrangement was extended to September 30,2007, andthen again to January 22,2008. The PRGF is the IMF'sconcessional facility for low-income countries. It is intendedthat PRGF- supported programs are based on country-owned poverty reduction strategies adopted in a participatory process involving civil society and development partners and articulated in a Poverty Reduction Strategy Paper (PRSP). This i s intended to ensure that PRGF-supported programs are consistent with a comprehensive framework for macroeconomic, structural, and social policies to foster growth and reduce poverty. PRGF loans carry an annual interest rate of 0.5 percent and are repayable over 10 years with a 5%-year grace period on principal payments. Following the Executive Board's discussion on Burundi's economic performance, Mr. Murilo Portugal, DeputyManaging Director and Acting Chair, stated: "The authorities' commitment to sound macroeconomic policies, and the outlook for stronger economic growth and reduced inflation in2008 are encouraging. Since mid-2007, the Burundian authorities have taken steps to address governance issues, shore up fiscal balances, and improve economic and monetary policy performance. Maintaining steadfast policy implementation will beneededto raise investment,sustain higher economic growth andreduce poverty substantially. 123 "Improved revenue performance coupled with careful management o f expectations for a peace dividendinthe public sector will contribute to strengthening Burundi'sfiscal position. Enhanced public financial management, incorporating effective financial controls, will help to ensure fiscal integrity. "Improvements in the governance and efficiency o f the central bank, including measures to enhance its independence and accountability, are encouraging. The progressive strengthening o f operations and the pursuit o f a proactive approach, along with reinforced cooperation between the Ministry o f Finance and the central bank, will help to improve liquidity forecasting and add to the effectiveness o f monetary policy. Work i s ongoing to bolster the banking system, by improving supervision and raising bank capitalization norms. "It is important that structural reform efforts, including preparations to privatize the productive sectors o f the economy, especially the coffee sector, be accelerated. Improving the investment climate will be vital to attracting private investment and spurring economic growth. "Burundi is in debt distress. Progress toward the completion point under the Heavily Indebted Poor Countries (HIPC) Initiative has been slower than envisaged. Efforts towards this end need to be accelerated, debt-service payment procedures improved and recourse to external borrowing on non-concessional terms should be avoided," Mr.Portugal said. 124 ANNEX 11: BURUNDIERSGI1 CountryAt A Glance - Burundi at a glance 9/28/07 Sub- Key Development Indicators Saharan LOW Burundi Africa income Age dlstributlon. 2006 (2006) Male Female Population,mid-year (millions) 7.6 770 2,403 I Surface area (thousandsq. kin) 28 24,265 29,215 70-74 8064 Populationgrowth (%) 3.7 2.3 1.6 50-54 Urban population (% of total population) 10 36 30 4044 GNI (Atlas method, US$ billions) 0.8 648 1,562 30-34 GNI per capita (Atlas method, US$) 100 642 650 20-24 GNI per capita (PPP. international$) 710 2,032 2,696 10-14 0.4 Real GDP growth (%) 5.1 5.6 6.0 30 20 10 0 10 2C Real GDP per capita growth (%) 3.1 3.2 6.1 percent (most recentestimate, 2000-2006) Poverty headcount ratio at $1 a day (PPP, %) 55 a 41 I Povertyheadcount ratio at $2 a day (PPP, %) 66 Under-5 mortallly rate (per 1,000) a 72 Life expectancyat birth (years) 49 47 59 Infant mortality (per 1,000 live births) 109 96 75 Child malnutrition (% of children under 5) 45 29 Adult literacy,male (% of ages 15 and older) 67 69 72 Adult literacy,female (% of ages 15and older) 52 50 50 Gross primary enrollment, male (% of age group) 91 98 106 Gross primary enrollment,female (% of age group) 76 66 96 Access to an improvedwater source (% of population) 79 56 75 Access to improved sanitationfacilities (% of population) 36 37 36 1890 1885 2000 2005 I 0 Burundi OSub-Saharan Africa Net Aid Flows 1980 1990 2000 2006 ' (US$ rni//ionsj Net ODA and official aid 116 263 93 365 IGroWth of GDP and GDP per caplta (%) Top 3 donors (in 2005): United States 4 16 1 55 Netherlands 1 1 4 23 Belgium 26 40 6 21 5 Aid (% of GNI) 12.6 23.5 12.8 47.0 0 Aid per capita (US$) 28 46 14 46 5 Long-Term EconomicTrends .rn 95 00 05 Consumer prices (annualaverage % change) 9.5 7.0 24.3 2.6 GDP implicit deflator (annual% change) 16.4 6.0 13.2 4.4 -GDP - GDP per capita Exchangerate (annual average, local per US$) 90.0 171.3 720.7 1,028.4 Terms of trade index (2000 = 100) 225 I46 100 102 1980-90 1990-2000 200046 (averageannualgrowth %) Population, mid-year (millions) 4.1 5.7 6.5 7.6 3.2 1.3 3.1 GDP (US$ millions) 920 1,132 709 916 4.4 -2.9 2.5 (% of GDfj Agriculture 62.2 55.9 40.4 34.8 3.1 -1.9 -1.5 Industry 12.6 19.0 16.6 20.0 4.5 -4.3 -6.2 Manufacturing 7.4 12.9 6.7 8.8 5.7 -8.7 Services 25.1 25.2 40.6 45.1 5.6 -2.6 10.4 Householdfinal consumptionexpenditure 91.4 94.5 66.5 90.9 3.4 -4.8 Generalgov't final consumptionexpenditure 9.2 10.8 17.5 29.3 3.2 -2.6 Gross capital formation 13.9 14.5 6.1 16.7 6.9 -0.5 Exports of goods and services 8.6 7.9 7.6 6.4 3.4 -1.2 Importsof goods and services 23.3 27.6 19.9 26.6 1.5 -1.6 Gross savings -5.4 0.5 I.7 Note: Figures in italics are for years other than those specified. 2006 data are actual. .. indicatesdata are not available. a. Country poverty estimate is for 1996. b. Aid data are for 2005. Development Economics, Development Data Group (DECDG). 125 Burundi Balance of Paymentsand Trade 2000 2006 IGovernance indicators, 2000 and 2006 (US$millions) Total merchandise exports (fob) 49 59 Total merchandise imports (cif) 127 234 Vace and accountability Net bade in goods and services -96 -245 Pditica stability Workers' remittances and compensation of employees (receipts) Rwulatmy quality Current acwunt balance -50 -134 Rule d law as a % of GDP -7.0 -14.5 Control of corruption Reserves, including gold 38 131 0 25 50 75 100 Central Government Finance M20ffi Country's percentle rank (0-100) 02000 hgher v d ~ emplyb3nerratngS s (%of GDP) Current revenue (including grants) 19.2 36.8 Source: Kaufmann-Kraay-Mastma,. Worn Bank Tax revenue 18.3 17.8 Current expenditure 18.8 27.1 Technology and Infrastructure 2000 2005 Overall surplusldefiat -1.8 -10.4 Pavedroads (% of total) 7.1 10.4 Highest marginal tax rate (%) Fixedlineand mobile phone individual SubsCTibers (per 1,000 people) 6 18 Corporate High technology exports (% of manufactured exports) 0.0 5.9 External Debt and Resource Flows Environment (US$ millions) Total debt outstanding anddisbursed 1,108 1516 Agricultural land (% of land area) 88 9 1 Total debt SeNiCe 22 50 Forest area (% of landarea) 7.7 5.9 Debt relief (HIPC, MDRI) 826 Nationally protectedareas (% of land area) .. 5.7 Total debt (% of GDP) 156.3 165.1 Freshwater resources per capita (cu. meters) .. 1,338 Total debt service (% of exports) 39.0 56.8 Freshwater withdrawal (% of internal resources) 2.9 Foreign direct investment (net inflows) 12 1 CO2 emissions per capita (mt) 0.04 0.03 Portfolio equity (net inflows) 0 0 GDP per unit of energy use Composition of total external debt, 2005 (2000 PPP 5 per kg of oil equivalent) Energy use per capita (kg of oil equivalent) Pkale. 2\%on-term,,IBRO,O 35 ) (US$ millions) IDA 751 IBRD Total debt outstanding and disbursed 0 0 Disbursements 0 0 Prinapai repayments 0 0 Interest payments 0 0 MF,58 US%mllims IDA Total debt outstanding and disbursed 600 797 Disbursements 36 29 Private Sector Development 2000 2006 Total debt service 13 22 Time required to start a business (days) - 43 IFC (fiscal year) Costtostarta business (% ofGNl percapita) 222.4 Total disbursed and outstanding portfolio 0 0 Time required to register property (days) -- 94 of which IFC own acwunt 0 0 Disbursements for IFC own account 0 0 Ranked as a major constraint to business Portfolio sales, prepayments and (% of managers SUNepd who agreed) repayments for IFC own account 0 0 Electriaty .. 40.7 Access to/wst of financing .. 16.0 MIGA Gross exposure 0 1 Stock market capitalization (% of GDP) New guarantees 0 0 Bank capital to asset ratio (%) Note: Figures in italics are foryears otherthan those specified. 2006data are actual. 9/28/07 .. indicates data are not available. - indicates observation is not applicable. Development Economics, Development Data Group (DECDG). ILU Goal 1: halve the rates for $1 a dag pouertg and malnutrition 1990 1995 2000 2005 Poverty headcountratio at $1 a day [PPP,Z of population] #52 .w 6 Poverty headcountratioat nationalpovertyline IZ ofpopulation] 36.4 Shareof income or consumptionto the poorestqunitile[ Z ] >?.9 5l Prevalence of malnutrition[Z of childrenunder 51 45.1 Goal 2: ensure that children are able to complete primarg schooling Primaryschool enrollment [net,z] 5.7 43 60 Primarycompletionrate [Z of relevantage group] 41 5.7 25 36 Secondaryschool enrollment[gross,Z ] 5 13 Youthliteracyrate [Z of people ages15-24] 54 73 Goal 3: eliminate gender disparitgin education and empower women Ratio of girlsto boysinprimaryand secondaryeducation [Z] .e3 84 Womenemployed inthe nonagriculturalsector [Z of nonagriculturalemployment] 13 Proportion of seats heldby womeninnationalparliament[Z] 6 31 Goal 4: reduce under-5 mortalitgbg two-thirds Under-5mortality rate[per 1.000] 190 190 190 190 Infantmortalityrate [per 1,000live births] 114 114 114 114 Measles immunization[proportionof one-yearolds immunized.Z ] 74 80 75 75 Goal 5: reduce maternal mortalitg bg three-fourths Maternal mortality ratio[modeledestimate,per 100,000livebirths] 1,000 Birthsattendedby skilledhealthstaff [Z of total] 25 Goal 6: halt and begin to reverse the spread of HlYlAlDS and other maior diseases Prevalenceof HIV [Z of populationages 15-49] 3 3 Contraceptiveprevalence[Z of womenages 15-49) 16 Incidenceof tuberculosis [per 100,000 people] 125 218 298 334 Tuberculosiscases detectedunder DOTS [z] 19 34 30 Goal 7 halve the proportion of people without sustainable access to basic needs Access to an improvedwater source [Zof population] 69 73 77 79 Access to improvedsanitationfacilities [Z of population) 44 40 38 .w Forest area [Z of total landarea] 113 7.7 5.9 Nationallyprotectedareas [zof total landarea] 5P CO2 emissions[metric tons per capita] 0.0 0.0 0.0 I-rn GDP per unit of energy use [constant2000 PPP$ per kg of oilequivalent] Goal 8: develop a global partnership for development Fixedline and mobilephonesubscribers[per 1,000people] 1 3 6 m Internetusers(per 1,000 people) 0 0 1 5 Personal computers[per 1,000people] 1 .'i Youth unemployment[zof total laborforce ages 15-24] Education indicators [%I Measles immunization [% of 1- ICT indicators[per 1.000 people] gear olds] 20 1 lii--"25 2000 2002 2005 +Primary 1990 1995 2000 2005 2000 2002 2005 net cnrollrncnt ratio -0-Ratioofgirlstoboysinprimary b 0 Fixed mobilc subxribcrs 0 Burundi 0 Sub-Saharan Africa sccondarv education 0 Internet users Note:Figuresinitalicsare for years other than those specified. indicatesdata are not available 9m107 DevelopmentEconomics.DevelopmentDataGroup[DECDG) 127 MAP SECTION