I- 2 Report No. 6754-BU Burundi Structural Adjustment and Development Issues Executive Summary January 20,1988 Division AF3CO South-Central and Indian Ocean Department Africa Region FOR OFFICIAL USE ONLY Document of the World Bank This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. Currency Equivalents and Units Currency unit = Burundi Franc (FBu) Exchange rate = US$ 1.00 - FBu 114.17 (Annual average 1986) = FBu 123.12 (Average Jan.-Nov. 1987) = SDR 1.00 = FBu 134.08 (Annual average 1986) FBu 159.50 (Average Jan.-Nov.1987) Standards = Metric system Fiscal Year - January 1 to December 31 Glossary of Abbreviations and Acronyms ADF African Development Fund BCC Burundi Coffee Company BEI Development Budget BNDE National Bank for Economic Development BO Ordinary budget BRB Bank of the Republic of Burundi (central bank) CADEBU Burundi Savings Bank CCI Chamber of Commerce and Industry COGERCO Company for the Management of the Cotton sector COOPEC Rural Cooperative of Credit COTEBU Textile Company of Bujumbura CPI Center for Industrial Promotion EDF European Development Fund FP Family Planning FWA Fully Washed Arabica (coffee) IEC Information/Education Campaign ICA International Coffee Association IDA International Development Association IMF International Monetary Fund ISABU Agronomic Sciences Institute KAP Knowledge, Attitudes and Practices MCH Maternal and Child Care MOH Ministry of Health OCIBU Industrial Culture Office of Burundi ONAPHA National Pharmaceutical Office OTB Burundi Tea Office PE Public Enterprise PEP/PIP Public Expenditures Program/ Public Investment Program PHN Population, Health and Nutrition PTA Preferential Trade Agreement RDC Regional Development Companies SAL Structural Adjustment Lending SAP Structural Adjustment Program SCEP Service in Charge of Public Enterprises SME Small and Medium Enterprise SMIG Minimum Daily Wage SNES Service National d'Etudes Statistiques SOSUMO Sugar Production Enterprise in Mosso TRC Tanzania Railway Company UNFPA United Nations Fund for Population Activities WHO World Health Organization FOR OFFICIAL USE ONLY PREFACE This Summary report includes the main findings and recommendations of a compreheasive report (available upon request) which was prepared by an economic mission that visited Burundi during November/December 1986, and was updated following discussion with the Government in November 1987.1 The mission comprised Mmes. Maria E. Preire (mission chief), Dale Hill (agriculture), Judith Press (SMEs, consultant), Miriam Schneidman (population, health, nutrition), and Messrs. Didace Butare (industry, Resident Mission), Jean M. Cour (urban and regional development), Martyn Kebbell (export promotion, consultant), Janvier Kpourou-Litse (employment, external debt, statistical appendix), Benoit Millot (education), and Jan Weijenberg (agriculture). Additional contributions were rveived from Messrs. Robert Broadfield (energy sector issues and updating), Marc Blanc and J.J. Raoul (transport sector), and Christian Schmidt (financial aector). The sections concerning the structural adjustment program reflect the work of various Bank missions which visited Burundi between May 1985 and December 1986 for the preparation and supervision of the First SAL as well as of IMF missions which have collaborated closely in discussions on the adjustment program and the joint work carried out to prepare twoIPolicy Framework Papers (1986 and 1987) for Burundi. Ms. Lynne Sherburne-Benz (consultant) assisted in preparing the final draft. i The background report was sent to the Burundian authorities in July 1987 and, following the change in Government, discussed with the new Government in November 1987. This comprehensive report was intended to serve as the basis for detailed discussion of a wide range of macroeconomic and sectoral issues relevant to the implementation of SAL I (effective since September 1986) and to the preparation of SAL II. Many of the recommendations made in the report have already been adopted by the Government; others aze expected to be addressed in the context of the dialogue between the Government of Burundi and the Bank. Wherever appropriate, a note has been inserted to that effect. The statistics used in the report are based on data provided by the Burundian Government. Th4se generally cover the period up to December 1986. Many of the official dAta for the 1984-86 period used in compiling the Statistical Appendix are preliminary and subject to revision by the authorities. 1/The objectives of the main mission were to update recent economic developments and to identify major issues in key sectors as an input to the analysis of the Fifth Development Plan and to our economic and sector dialogue with the country. The Table of Contents of the background report is attached. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CWtNTRY OATA-BURUNDI AREA (housand eq. km.) POPULATION D8iSITY (1985) 27.8 4.9 million (1986) 169 per square km. Rate of growth: 2.8a 210 per square km. of arabIa land. (from 1982 to 1985) POPUtLATION oCARACTERISTICS (1982-1985) HEALTH (1979) Crude birth rate (per 1000) 47 Population per phy-lcian 4J020 Crude death rate (per 1000) 19 Population per hospital bed 744 (1970) Pertent urban 6 INCOME DISTRIWTION ENERGY CONSU1PTION PER CAPITA X of national income, highest quintile -- (Kilograms of oil equivalent) 15 lowest quintile - ACCESS TO SAFE WATER (1980) ACCESS TO ELCTRICITY U of population - total 24 j % of population - total - urban 90 - rural - rural 20 FOOD A NUJRITION (1982-1985) EDUCATION (1985) calorie intake as # of requiremento 102.1 Adult ulteracy rate S 30 per capita protein intake (am/day) 78.1 Primary school enrollment S 64 ONP PtR CAPITA IN 19Se a/: USd240 GROSS DOMESTIC PRODUCT IN 1986 A L RATE OF QWAlN (S. CONSTANr 1970 PRICES) US$ ML. S 1980-65 1986 MDP at market prices 1305.3 100.0 3.0 4.6 Gross domestic inveotment 168.3 12.9 4.5 19.1 Gross national savings 67.3 5.2 2.2 66.5 Current account balance -72.8 5.8 -4.7 0.8 Exports (genfa) 157.4 12.1 14.5 -2.9 Imports (c+nfa) 244.2 18.7 4.1 2.2 CDP at factor cost 1187.7 100.0 3.1 3.3 Primary sector 719.8 60.6 2.4 3.2 Secondary sector 162.5 13.7 5.0 8.4 Tertiary Sector 305.4 25.7 3.7 3.5 COYVE80dT FINANCE (Central Government) (Fbu bin.) S of ODP 1986 1986 1981 Current revenue b/ 24,09 16.2 13.3 Current expendrture c/ 18.07 12.1 12.2 Current surplus 6.02 4.1 1.0 Developmnt expenditure c/ 16.98 11.4 12.1 a/ The per capita ONP estimato calculated by the same conversion technique ao the world Bank Atlas. All other conversions to dollare in this table are at the average exchange rate prevailing during the period covered. b/ It does not include official capital grants. c/ On a cash basis. --/ not available. / not spplicable. COUNTRY DATA - UtRlNI (Millions Fbu Outetanding End Period) MOEY, aWrT AND PRICES 1980 1981 1982 1988 1984 1988 1986 money Supply a/ 12681 15698 18878 16786 19954 23822 24774 Claims on Governeent (not) 4615 7806 9541 12389 14090 15798 14712 Claims on the Ecano"y 6276 11000 10989 11818 11430 12678 18645 Crodit to Publile Enterpries 1887 574 488 4854 4150 5128 7219 (percentage or Index %umbero) Money as I of CDP 15.8 18.0 16.9 16.6 16.9 18.4 16.6 CPI Averoge 1980.100 100.0 118.8 119.8 129.8 148.5 154.0 156.8 Annual Percentage Chansen in: I Consumer Prieo Index 12. 18.8 S.7 8.8 14.4 3.7 1.8 Claims on Government (net) 2S. 38.8 80.5 29.0 18.7 12.1 -6.9 Clairl on the Eonm . 2.9 -0.4 7.8 -8.2 10.9 7.6 Sank Credit to Public Enterprie -- -S7.7 -20.2 880.8 -4.7 23.8 40.8 BALANCE OF PAYMENTS 1980 1981 1982 1988 1964 1985 1986 MWH NDISE EXPORtS (AVBUOE 1980-1986) (1B8 MLLI"NS) US11 Min. Percent Ejports (g*nfe) 81.0 87.7 102.6 96.7 101.8 128.8 187.1 Imports (genfe) 205.6 198.6 286.1 288.7 247.9 228.0 248.7 Coffe 80.6 87.4 Teo 8.9 4.1 Reaource Gap (deficit-) -124.6 -110.9 -153.5 -159.0 -146.6 -99.2 -86.6 Cotton 1.2 1.4 Other 6.6 7.1 Factor Services (net) -7.1 -20.1 -26.2 -26.4 -26.9 -2.7 -82.4 Total 92.2 100.0 Current Transfore (net) 47.1 68.7 58.6 81.6 44.4 46.8 66.S Balance on Current Account -84.6 -67.8 -126.1 -188.8 -129.1 -65.6 -72.8 EXTGdAL DET AS OF DE. 31, 1986 USS Min. Official Capital Crent. 85.2 SB85 40.1 89.9 89.8 89.8 39.8 Public Debt, Inel. Ouarnteed S26.41 Direct Priv. Foreign Investment 1.1 0.6 1.8 0.4 0.9 1.6 1.5 Non Guaranteed f *vate Debt -- Not KLT Loans 80.6 22.8 40.7 110.7 81.1 56.1 80.2 Total Outetanding ;nd Disbureed 526.41 Short Term Capital (noet) 12.8 12.4 14.5 20.4 2.0 2.8 -1.2 Al location of SDRe 0.0 0.0 0.0 0.0 0.0 0.0 0.0 DE3T RSVWICE RATIO FOR 1986 b/ Percent Error. A Omimuione -1.0 -87.4 -6.1 -23.2 8.6 -2.7 -8.9 - - ------------- Increase in Reservee(-) -8.0 -81.0 -85.4 i4.0 -1.8 11.4 88.7 Public Debt, Inl. Guaranteed 28.2 Non Guarantoed Private Debt -- Petroleum Imports 24.7 82.2 90.1 28.. 82.8 82.8 26.8 Total Outetanding and Dlebursed 28.2 IDA LECINO AS OF ODE. 81,1986 USS Min. RATE OF EWCHANOE Annual Averagoo ----------------- -------- ---- ---- -----… --- ---------------. ------------… 1980 1981 1962 1968 1984 1985 1986 Outstanding and Di7bursed 184.0 Undisbureed 108.1 US$ 1.00 a Buf 90.0 90.0 90.0 98.0 119.7 120.7 114.0 Outstanding Incl. Undiebureed 290.1 e/ Includeo money and quasi-money. b/ Debt service as a percentage of exports of goods nnd non-factor services. BURUNDI STRUCTURAL ADJUSTMENT AND DEVELOPMENT ISSUES EXECUTIVE SUMMARY Table of Contents Pate No. I* INTRODUCTION ............... . ................... 1 II. RECENT POLICY REFORMS AND ECONOMIC PERFORMANCE ............ 2 III. THE LONG-RUN CHALLENGE 4 A. Macroeconomic Management 4 B. Increasing Efficiency in the Public and Parastatal Sectors 5 C. Increasing Agricultural Productivity and Ensuring Food Security 6 D. Emphasising Regional/Urban Development ................. 8 E. Promoting Export Growth and Diversification ........ 9 F. Promoting Private Investment, Small Enterprises and Employment 10 G. Issues in the Physical Infrastructure Sectors 11 H. Improving the Effectiveness of Population and Human Resource Programs 13 IV. MEDIUM-TERN PROSPECTS AND EXTERNAL RESOURC! REQUIRMENTS... 15 Attachment I: Table of Contents of Background Report Attachment II: Selected Tables BURUNDI STRUCTURAL ADJUSTMENT AND DEVELOPMENT ISSUES EXECUTIVE SUMMARY I. Introduction 1. The last economic memorandum on Burundi (December 1984) highlighted the needs for improvement in macroeconomic policies and provided the first assessment of the public investment program included in the Fourth Development Plan (1983-87). Its preliminary conclusions were presented at a donors' Round Table Conference which took place in Bujumbura in January 1984. This economic memorandum reviews recent economic developments, examines the significant adjustment effort initiated in 1986, 1 and identifies the broad objectives for the next phase of the adjustment process. The report also addresses the major medium- and long-term issues in key sectors, reviews the country's medium-term prospects, and assesses the needs for external financing during the next five to ten years. 2. The main theme of the report is the following. While the Government's recently initiated reforms represent a fundamental change in the economic environment conducive to growth and development, structural adjustment is a long-term process which will probably take more than a decade to materialize. Burundi's economy remains very fragile in terms of resource base and vulnerability to fluctuations in coffee prices and weather conditions. Any adverse developments on these fronts are likely to produce considerable hardship in the economy and reduce the confidence in the expected results of the program. The long-term success of the program will require Government'* continued commitment to the reforms initiated in 1986, improved economic management to adapt economic policies to changes in the external setting, development policies in key sectors, and firm support of the international community. 3. The report emphasizes the need to pursue the policy program with special attention to macroeconomic and public sector management. It recommends further policy actions to reinforce the restructuring of the Burundian economy: a) active export promotion policies; b) liberalization of the labor and financial markets; and c) promotion of private investment, both domestic and foreign. At the sectoral level, priority needs to be given to measures aimed at improving productivity in agriculture, avoiding depletion of natural resources, developing small-scale activities, ensuring adequate maintenance of infrastructure, and improving efficiency in the social sectors. 1/The Government's structural adjustment program is described in detail in the President's Report for SAL I (No. P-4250-BU), April 1986. 4 I - 2 - II. Recent Policy Reforms and Economic Pe-6rformance 4. After a period of relatively good performance and growth, due partly to the coffee boom of the mid-197Os and i.ncreased foreign aid, Burundi's economy faced serious economic and financial difficulties beginning in 1981. The deterioration in t,he terms of trade (45 percent between 1978-81), caused by the decline of coffee prices, oil price increases and accelerating international inflation, together with the lack of adjustment policies, led to a deterioration in the balance of payments and large budget deficits. Between 1978 and 1983, the current account deficit increased from 5 percent of GDP to 12 percent, and the budget deficit from 7 percent to 16 percent. Domestic inflation, which was running at a high rate of 15 percent a year, led to a rapid apprec4ation of the Burundi. franc in the absence of corrective adjustments. At end-1983, disbursed and outstanding external public debt had reached US$292 million (27.1 percent of GDP, compared with 7.3 percent in 1977); domestic arrears accumulated to 30 percent of total expenditures. To reduce the pressure on the balan!.e of payments, administrative controls were imposed on imports and foreign exchange. Moreover, price controls were enforced for imported and domestic goods. This network of controls had adverse effects on the economy: it led to a system of diatorted prices, high rents accruing to monopolist importers, weak incentives to invest in productive sectors, and a slowdown in economic activity. 5. At the end of 1983, the Government took some adjustment measures. The Burundi franc was depreciated by 30 percent against the U.S. dollar; producer prices of the main export crops were increased significantly; some tax rates were raised; public wages were frozen; and an effort was made to control both recurrent and capital expenditures. The impact of these measures was felt in 1984, but only partially. While government revenues increased appreciably due to higher coffee revenues (in part, because of the devaluation), continued import restrictions on intermediate goodE hindered the output of the modern sector. In addition, climatic conditions were extremely adverse: a prolonged drought led to a reduction'in agricultural value added and to a decline in real GDP of one percent. The annual inflation rate approached 15 percent. 6. The economy rebounded in 1985, following the recovery of agricultural production to the pre-draught levels and a substantial expansion of manufacturing production. Despite a slowdown in public investment, GDP grow--! reac'hed 4.2 percent. The balance of payments improved as well. The current account deficit declined from 12 percent of GDP in 1984 to 7.4 percent. However, due to a decline in net M< flows, net foreign reserves at end-1985 were equivalent to only 1.3 months of imports. 7. In recognition of the serious economic consequences that could result from failure to correct the financial imbalances, the Government embarked in 1985 on the preparation of X major program of economic reforms. The program aimed at redressing the main financial imbalances, accelerating economic growth, diversifying the country's productive base, and reducing the economy's dependence on coffee. With the assistance of the World Bank and the IMF, preparation for the first Structural Adjustment Program began in May 1985 and the first measures were implemented mid-1986. 3 8. The set of economic policies adopted by the Government had two objectives: (i) to restore financial equilibria in the short term, and (ii) to initiate a medium-term restructuring of the economy. The main elements of the short-term financial ad1ustment proaram included: the adoption' of a realistic and' flexible exchange rate policy; the correction of the appreciation of the real effective exchange rate which had occurred during the last few years; progressive liberalization of exchange controls; and prudent financial policies compatible with the objectives of: (i) reducing the budget deficit; (ii) maintaining a sustainable balance of payments position (one which allowed the current account deficit to be financed by grants and concessional foreign loans and the debt service to be reduced to less than 20 percent of exports by 1990); (iii) containing inflation to about 5-6 percent a year; and (iv) increasing credit to the private sector. The medium-term structural adlustment program was geared towards rationalizing the incentive, system (through liberalization of the economy), and improving efficiency in resource allocation and utilization. The main objectives of the Government were to obtain an average GDP real growth of 4 percent per year, based on improved agricultural performance and continued expansion of the industrial sector; to raise the domestic savings rate from 4 percent in 1982-85 to 6-7 percent during 1986-90; and to increase thejparticipation of the private sector in the formation of fixed capital. In the process, the Government has implemented major changes in trade and industrial policies and taken important steps to strengthen public expenditure management and rehabilitate the public enterprise sector. 9. The economic impact of the program has been felt in several areas and it has been, by and large, positive. There are indications that it has led to increasing domestic competition; encouraged export-oriented activities; helped in ipainteining broad financial discipline; and improved the competitiveness of Burundi's exports. Faced with increased competition, firms are now looking for cheaper sources of imports (notably in the regional market) and showing an interest in exports. This positive development on the export front, which has benefitted from regional economic cooperation, led to a doubling of manufactured exports in 1986, a trend which is continuing in 1987. At the same time, the currency adjustment, together with price liberalization, has contributed to containing the growth of merchandise imports. 10. GDP growth in 1986 is estimated at about 4.9 percent, due to good agricultural perform6nce as well as expansion of manufacturing and construction activities. Private investment has responded more siowly than expected partly because of the significant increase in interest rates (on loans). For most of the program period, these were quite high in real terms due to a lower-than-expected inflation rate. A favorable agricultural output and reduced trader margins (a consequence of the liberalization measures) helped to limit the inflation rate to about 2 percent* 11. The overall financial position of the central administration also improved in relation to 1985. Revenues increased by about 20 percent in nominal terms, and expenditures by 9 percent. The overall deficit (on a cash basis and excluding capital grants) declined from 9.4 percent of GDP -4- in 1985 to 7.5 percent 4.n 1986. The external position improved as well, with the current account deficit being reduced from 704 percent of GDP to 5.6 percbnt. This improvement was, however, lose favorable than envisaged under the Government's program, as coffee exports were adversely affected by lower-than-expected average prices and by transportation and marketing problems which prevented Burundi from exporting all of its coffee production. Burundi used in 1986 about US$ 10 million under the IMF Structural Adjustment Facility. This, together with the first tranche of SAL I, led to a substantial increase in the net capital account. At end- 1986, net foreign exchange reserves corresponded to 2.5 months of imports, nearly twice the level at end-1985, but lower than the 4.5 months estimated under the program. The debt service ratio2 rose to 22.1 percent, compared with the 16.3 percent programmed -- an increase which reflects the weaker export performance rather than an increase in short-term debt. 12. Preliminary estimates available for 1987 indicate a continued good performance in GDP real growth: about 4.5 percent. The financial situation has, however, deteriorated seriously due to the weakening of the coffee market (coffee prices declined from US$4.30/kg :Ln 1986 to US$2.50/kg in 1987). While tIe new set of economic policies should lead to a large increase in manufactured and non-coffee agricultural exports, coffee still accounts for more than 75 percent of the country's exports. The current account deficit is estimated at about 12 percent of GDP, compared with 5.6 percent in 1986. Given the poor prospects for the world coffee market, any substantial improvement will be unlikely in the near term. By 1990-91, however, a progressive increase in non-coffee exports could lead to a reduction of the current account deficit to about 7 percent of GDP. III. The Long-Run Challenge 13. The success of the Government's structural adjustment program will be, measured in the long run by increased per capita incomes and cohsumption, sustained economic growth, and reduced dependence on exceptional balance of payments support. While the reforms put in place are the first step to create a favorable environment for private investment and more efficient resource allocation, complementary measures are needed. These are highlighted below. A. Macroeconomic Management 14. As mentioAed before, Burundi's financial situation improved significantly between 1983 and 1986 as a result of both an improvement in the world coffee prices and the fiscal and monetary discipline enforced in the context of the adjustment program. In 1987, however, the country's financial position has weakened due to the decline in coffee revenues and the absence of compensatory measures. In the face of the uncertainty characterizing the coffee market -- and therefore the level of public revenues -- it is essential that the macroeconomic policies be made sufficiently flexible to adjust the level of expenditures, both recurrent and capital, to unforeseen changes in the level of revenues. While the 2/As a proportion of exports of goods and non-factor services and private transfers. identification of a core public investment program was a first step in that directioni, more needs to be done at the level of budget preparation and monitoring. Strengthening Burundi's overall financial management capacity is thus an urgent priority. 15. In the external sector, the improvement registered between 1983 and 1986 has been eroded in 1987 with the decline in coffee prices. Moreover, while the financing of major development projects had been generally on concessional terms, the public debt-service burden reached 26g in 1986 and will probably exceed 38% in 1987. Current projection.3 are for a slow decline in this ratio (to 302 in 1991) 'if future borrowing on commercial terms is avoided, as the Government intends to do. Further corrective measures, including adjustments in the exchange rate, are needed to promote exports and increase their competitiveness and to maintain external equilibrium with prudent foreign debt levels. Such adjustment will need to take into account: the need to correct the appreciation in the real effective exchange rate which may have occurred since April 1987;? the need to maintain the incentives to producers of main export crops; the evolution of exchange rates of its main trade partners, notably in the regional market; and the need to improve the competitiveness of Burundi's exports. The possible adJerse effects of an adjustment are certainly much smaller than the re-introduction of controls on' imports and foreign exchange. The continuation of the tariff reform initiated in 1986 (to reduce effective protection rates and provide a more neutral structure of incentives to economic activities) is equally important, as it will contribute to further improvements in the external sector in the medium term. B. Increasing Efficiency in the Public and Parastatal Sectors 16. Public Expenditure Program. Important steps have been taken to improve the management of public expenditures. The first three-year rolling public expenditure program (PEP) is under preparation, and the capacity to prepare and appraise projects is being strengthened with IDA support. In order to make the PEP an important instrument of macroeconomic policy, there is a need to: (i) accelerate the preparation of a comprehensive PEP (1989-91), paying particular attention to the economic justification of major projects and to the adequate allocation of recurrent expenditures to priority programs; (ii) move into a consolidated single budget and improve the accounting system of the Ministry of Finance; and (iii) strengthen the project implementation follow-up process. 17. Parastatal Sector. The Government action program included the creation of a supervisory body for the sector, initiation of the rehabilitation programs for five priority enterprises, closure of four enterprises facing serious iinanciai problems, and identification of six other enterprises to be rehabilitated in the second phase. The program needs to be implemented speedily with the objective of making the concerned e.nterprises financially and economically sound and competitive with the 3/After a period of active exchange rate adjustment (July 1986-March 1987), monthly adjustments were discontinued. Following the interruption of the Stand-by arrangement, the former Government decided to suspend the automatic adjustment process until a new financial program was negotiated. -6- private sector. Moreover, there is a need to adopt a process of automatic tariff revision for public utilities taking into account the potential for reducing'operating costs in some of the enterprises. This is particular important for public utilities (REGIDESO) and transport parastatals (OTRACO). C. Increasing Agricultural Productivity and Ensuring Food Security 18. Food Security. Burundian farmers have been able to cope with increasing demographic pressures by a combination of extension of cultivated area, multicropping, and shifting towards higher-caloric crops. Food imports remain small and, on average, caloric availability has been sufficient to enisure an adequate nutritional status. The sector remains basically subsistence oriented with low productivity levels, low monetary incomes and little or no use of cash inputs. Moreover, important distributioa problems are beginning to be detected which are leading to seriouq malnutrition levels among most vulnerable groups. These are likely to be 4ggravated in the future by the absence of well focused programs. Although land constraints are severe -- only 25 percent of the land Is available for fiirther cultivation and is, in general, of poor quality -- an increase in the use of fertilizers and improved varieties may lead to considerable increases in yields (average yields for most crops are less than half of those in research plots), provided that the institutional support is available. Smallholders predominate in agriculture and account for most of Burundi's poor households. So, increased yields on smalholdings should provide, directly or indirectly, greater food security as well. 19. Expandin2 Export Crops. Expanding coffee export revenues continues to be a priority for the Government. Programs have been launched to improve quality, and prices have been increased to improve farmers' incentives. Washing stations hove been built to process fully washed coffee, which can receive, on average, about 15 percent premium in international markets. Important issues relate to product quality, marketing strategy and transportation capacity. In recent years, the quality of fully-washed coffee has' declined and its premium eroded because of its excessive moisture content, insufficient fermentation and drying, and the mixing of bad and good quality coffee. Moreover, the existing pricing mechanism, whereby all agents are remunerated according to a fixed price, hinders efficiency in the cof'9e process. 20. Concerningltea and cotton, significant progress h6a been made since 1980. With EDF assistance, tea production increased by more than 20% a year, and due to improved marketing, Burundian tea has fetched the highest prices in London markets. Given the poor prospects for world tea prices in the near future, greater flexibility should be used in determining producer prices. Some of the production costs currently financed by the parastatal concerned (e.g., fertilizer and pesticide costs) could be passed on to the producers. For cotton, the prospects for increased production and exports are uncertain, given the fluctuations in world prices and the existing competition between foodcrop and cotton production at the farmer level, Following the 50 percent decline in the world price in 1985, Burundian cotton lost its external competitiveness (production costs were too higih, partly because of the high producer -7- prices) and exports declined from about 1,500 tons in 1984 to 130 tons in 1986. In 1987, world prices rose again (by 60 percent in US$ terms) and Burundi's cotton exports reached a record high of 3,600 tons. A large part of fiber is now sold to the textile company (COTEBU) at 10 percent above COGERCO's production cost, to enable it to compete with imported cotton cloth, especially when international prices are very low. In line with the trade liberalization measures, cotton textile imports (now subject to quantitative restrictions) are to be liberalized by 1990. A review of the overall cotton sector is, therefore, urgent to assess the potential for reducing production costs. 21. Policy Agenda. The major elements of a medium-term strategy for the agricultural sector concern the need to: a) review pricing and marketing policies; b) improve quality and efficiency of major export crops production; c) review land tenure and settlement policies; d) increase employment and income-earning opportunities for farmers; and e) examine the potential for regional specialization and the policy instruments to implement it. (a)Pricing and Marketing. The Government practices only minimum intervention in foodcrop pricing and marketing. Incentives for increased market production, however, need to be improved by providing cost-reducing and yield-increasing innovations to farmers, as well as by specific actions in the following areas. First, pricing policy for import substitution crops (wheat, sugar, palm oil, rice) needs to be reviewed in order to avoid the establishment of non-competitive activities and to promote specialization according to the country's comparative advantage. Second, care should be taken to ensure that food aid does not interfere with production incentives. Institutional arrangements for set:ing food aid policy and monitoring its implementation need to be clarified. Third, measures to regulatt markets and the activities of specialized traders need to be reviewed, as they result in increased costs for traders and reduced incentives to increase commercial production.4 Fourtb, there is a need to study the structure of communal taxes and their effect on producer Incentives, as well as to strengthen the cooperatives and encourage their greater involvement in the marketing and storage of food products and in the distribution of inputs. (b) Export Crops. Concerning coffee, the Government needs to prepare a medium-term strategy which will take into account the opportunity costs of increased production and the financial viability of the sector. In particular, there is a need to review the present coffee pricing mechanism ("echelle mobile") to allow the fluctuations of international prices to be passed on to the intermediaries while providing incentives for higher efficiency. This would include: (i) simplification of the present "echeile mobile"'; (ii) introduction of incentives to producers of high- quality coffee; (iii) improvement of management of washing stations with the increased participation of producers in the different stages of processing and marketing of coffee. Concerning tea and cotton, there is a need to review the financial prospects of the sectors and pass on to 41The new Government has already taken important measures in this direction. For example, the tax imposed on farmers' sales of their own produce in local markets has been eliminated. -8- producers the charges now borne by parastatals, notably fertilizer costs. A comprehensive analysis of the country's agricultural export potential could help in identifying the comparative advantages of Burundi's traditional exports as well as in assessing the importance of pricing policies in an overall strategy to promote and diversify agricultural exports. (c) Land Tenure and Settlement. Prevailing land tenure traditions hinder the most efficient use of land. Government should ensure that the land market is open and flexible, that cultivation rights are secure, and that formal land registration is strengthened and supported. Moreover, settlement in froatier areas is cu'rrently controlled by the communal administration, but lacks an overall perspective of the development potential of these areas which could orient and support the new settlers in establishing their farming systems. There is a need to consider alternatives to develop the still available land and promote high- productivity agriculture. (d) Increasing Employment and Income-Earning Options for Farmers. The major constraint for farmers to pursue off-farm employment is a structural ones the market for non-agricultural products is limited by the small size of the urban and ncn- farming sectors and the low monetization of the rural economy. However, administrative controls on internal migration also hamper the development of non-farm employment. Permanent settlement outside the home "collinel requires, first, permission to leave the home commune, and second, certified, approved residence and employment in the welcoming one. Based on other countries' experience, these requirements constrain the development of artisans and traders' mobility and activities. (e) Regional Specialization. The design of a regional specialization strategy should avoid the administrative approach of deciding (top-down) which crops should be grown in each region and enforcing such decisions through extension services. Regional specialization should be viewed as a gradual process which would emerge from expanded markets, supported by increased availability of improved seeds and cash inputs and deregulated prices. This approach would apply equally to export/cash crops. If prices (and marketing) of traditional cash crops were progressively deregulated, farmers would be able to decide on their crop mixes according to the expected returns. In the long run, it is likely that specialization would favor production and exports of fooderops (versus cotton, for example). Export of fooderops (already taking place informally to neighboring countries) could then become an important source of export revenue, provided that the marketing channels are improved and support for diversification is available. D. Emphasizing Regional/Urban Development 22. The structural change of Burundi's economy will imply a progressive transformation of the subsistence-type agricultural sector to a more market-oriented economy favoring specialization and higher levels of agricultural productivity. This change can only occur when the market for food surplus is developed sufficiently, and when non-farm employment opportunities are created. -9- 23. Policy Agenda. The new Government has recognized the importance of supporting the development of decentralized urban growth to promote employment, stimulate monetization, and provide opportunities for the development of the private sector and small enterprises. To support these objectives, the following actions would be necessary. First, at the institutional level, there is a need to strengthen the regional planning capacity of the Planning Ministry and improve coordination between the Ministry of Public Works (in charge of the urban policies) and the Ministry of Planning (rural policies) as well as between the Central administration, Governors and Communes. Second, greater emphasis should be given to the potential for urban development, both in Bujumbura and secondary towns, through such meens as public work programs to promote local entrepreneurs and policies in support of development of small and medium enterprises. Third, the Government should ensure that the regional development companies (RDCs) serve the interest of the city in which they have the headquarters. Fourth, an appropriate geographical planning and location of new infrastructure ana services (schools, dispensaries, etc.) could stimulate the development of regional markets and the establishment of non-farming activities. There is also a need to improve statistical information on population distribution and urbanization. The next population census should address questions related to peri-urban areas, internal migration, and evolution of immigration areas. The preparation of basic maps would provide a socio-economic-demographic picture of the country, with identification of poles of activities. E. Promoting ExRort Growth and Diversification 24. The Governeht*s adjustment program is expected to have a considerable effect in reorienting incentives towards export-oriented activities. Exports of manufactures have already increased since the Government implemented the first measures of its structural adjustment program (SAP), and the trend is continuing. An exercise to estimate export comparative advantage indices has been undertaken for the purpose of this Memorandum on the basis of limited data for Burundi, Rwanda, and Kenya. The results indicate that Kenya is probably the most important competitor for Burundi in all neighboring markets, including Uganda and other PTA5 countries. There are good prospects for increasing exports of cotton and other textiles, construction materials, metallic manufactures, food products and furniture, notably to Zaire and Uganda. In all these cases, enterprises are workihg below capacity, and a rapid expansion of production could be achieved witiout further investment. However, for the potential of Burundian exports to, fully develop, constraints in management, organizational skills, quality control, etc. need to be removed in a systematic manner. 25. The appropriate short-term actions to promote export growth and diversification (already being discussed with the Government) include, in addition to the active exchange rate policy discussed above (see para. 15), (i) measures to use the draw back system more effectively; (ii) establishing a concessionary tax rate on profits based on export I/Preferential Trade Zone, the members of which include 20 Eastern African countries: Burundi, Botswana, Comoros, Djibouti, Ethiopia, Kenya, Lesotho, Malawi, Mauritius, Mozambique, Rwanda, Seuchelles, Somalia, Swaziland, Tanzania, Uganda, Zambia, and Zimbabwe - 10 - performance; (iii) allowing marketing expenditures to be deducted from the taxable income; (iv) reimbursing the current deposit of FBu 10 million required from foreign importers in proportion to investments in export- oriented activities; (v) simplifying immigration procedures for entrepreneurs who need to travel to promote their business; (vi) providing support to existing industries in such areas as market information, marketing fairs, and technical assistance; and (vii) launching a study to evaluate Burundi's long-term resource and market potential. 26. In the medium and long term, further institutional support would be needed by potential exporters in terms of market information and project identification. An Export Promotion Board could be set up for that purpose which would centralize the assistance needed for domestic exports to penetrate foreign markets. Eventually, in three or more years, the Government could set up a Free Trade Zone, after the results of the export potential study are obtained and viable export projects and potential investors are identified. F. Promoting Private Investment, Small Enterprises and Employment 27. Growth of manufacturing value added averaged 14 percent per year during 1978-81 but slowed down during 1981-84 as new possibilities for import substitution decreased, export opportunities continued to be exploited, and the regulatory system in place hindered incentives for increased production. Recent government policies of flexible exchange rates, import liberalization, price deregulation, tariff restructuring and positive real interest rates are conducive to increased efficiency. Further actions are needed in the following areas: a) investment policies; b) small and medium enterprises; c) employment policies; and d) financial sector. (a) Investment Policies. Efforts should continue to attract private investment, both domestic and foreign. The Government's objective of Burundization should be implemented with care, avoiding discretionary policies against foreign companies whose role is essential in bringing in technology, promoting employment and exploitin- new markets. The Burundization objective can be better pursued by motivating larger companies to increase African-Burundian ownership t'irough widespread public offerings (in case of divestitures) and by continuing to support programs for developing Burundian entrepreneurs in the small-scale sector. For foreign investments, the Government should reduce delays in the repatriation of dividends, allow full and immediate repatriation of sale proceeds, and ease the restrictions on the exercise of some professions, notably those related to import/export activities. (b) Small and Medium Enterprises. The Government should undertake policy revisions in the following areas: (i) clarification of responsibilities of those institutions in charge of promoting industrial sector development: Ministry of Commerce and Industry, Center of Industrial Promotion (CPI), Chamber of Commerce and Industry (CCI), National development bank (BNDE); (ii) set up a suitable version of the Entrepreneurship Development Program to identify and assist new entrepreneurs; (iii) promote active participation of the financial institutions in the financing of small-scale projects, notably through * | ~~~~~- ii'- efficient operation of the Guarantee Fund; (iv) identify a number of sub- sectors with development potential and which would benefit from technical assistance to get started and operate efficiently, notably clothing, furniture and cbnstruction materials, bdsic agricultural equipment, and selected branches of food processing; and (v) in the medium term, consider the establishment of a leasing agency to assist companies using imported equipment and a risk fund to help those with lack of initial capital funds. I (c) Employment Policies. Short-term policy actions needed includes (i) deregulation of the formal labor market; (ii) alleviation of social charges borne by enterprises -- social security, medical care, etc; (iii) removal of restrictions to import second-hand technology; and (iv) improvement of training and education programs. Concerning Public sector employment, the present salary scales for the highest categories of public servants do not appear to be competitive with the private sector, even after allowing for the fact that public servants enjoy considerable fringe benefits in the form of allowances and housing benefits. A review of the compensation scale for the higher-skilled personnel seems to be necessary to enable the public administration to use and retain its most qualified employees. In the informal sector, policy actions are needed to facilitate parti4ipation of informal enterprises in procurement procedures; relaxation of int'ernal migration, to favor the development of the informal sector in urban or peri-uroan sites; the establishment of sites for informal activities; preparation of training programs; access to credit mechanisms; and promoting activities in specific sectors such as development of small implements, construction activities, and small-scale manufacturing. (d) Financial Policies. The Government should liberalize the financial sector, at present controlled by a cumbersome set of regulatory measures. Progressively, it should remove fnterest rate controls (maintaining a single rediscount rate), simplify the current reserve and liquidity requirements imposed on commercial banks, and develop a secondary market with market-determined interest rates for government securities. It is also necessary to Improve the managerial capacity of the main development bank, to address the serious financial situation of CADEBU (the main savings institution, in charge of the compulsory saving scheme) while promoting the development of the new credit cooperatives (COOPEC), which in the long run, would replace CADEBU. Moreover, the system of guarantee, which gives the Treasury prior claim on all guaranteed property, should be reviewed. I G. Issues in the Physical Infrastructure Sectors 28. Energy. The main issues in the energy sector concern the ongoing depletion of fuelwood resources, the szonomic viability of using Burundi's large peat resources, efficient arrangements to import and distribute petroleum products, improving management of REGIDESO and careful choice of investments in the sector. (a) Fuelwood. Present annual wood increment averages a low 3 O3/ha, and that increment reprpsents only about 20 percent of woodfuel consumption. This has resulted in declining wood stocks and substitution of fuelwood by agricultural residues, with nigative consequences for soil - 12 - fertility and crop yields. Public reforestation averaged 6,OoOlha/year during 197d-85 -- only a fraction of what is needed to arrest destruction of wood stocks. Concurrently with sustained investment in reforestation, measures are required to: (i) raise average forest yields to the achievable 10 m3/ha; (ii) encourage expansion of private tree planting, through agro- forestry extension and seedling programs; (iii) raise efficiency of traditional charcoal production by introducing improved production methods; and (iv) popularize more efficient charcoal stoves. (b) Peat resources are abundant (ovsr 57 million tons) although difficult and costly to exploit. Consumption is about 10,000 tons, of which the Army accounts for 90 percent. In terms of economic cost, peat is competitive with fuel oil but not with fuelwood. However, due to its high ash content and lack of proven and economic technology, its use for industrial purposes is very limited. Peat may have potential as a household fuel if carbonized to reduce weight, smoke and smell. The feasibility of this option needs to be tested. (c) The main issues in the petroleum sub-sector are the high cost and vulnerability of supply, which are partly a result of the country's landlocked location. Direct purchase of supplies on the Middle East market and the negotiation of reduced transport charges from Mombasa have reduced costs by about 15 percent since 1980. Further savings are possible through the use of the central corridor. It is recommended that the Government hire an expert in petroleum supply and distribution to examine product purchase and transportation alternatives and to prepare a contingency plan for coping with supply disruptions. (d) Following the construction of the Mugere and Rwegura plants and participation with Rwanda and Zaire in the Ruzizi II hydroelectric project, Burundi will likely have excess power capacity from 1989 to 1993. An obvious priority in the sector is, therefore, to uti'ize this surplus of power to meet potential power demand. However, the iasue concerns the financial situation of REGIDESO (power utility) which has deteriorated seriously: in 1985, the enterprise was unable to cover its operating costs, while debt service arrears rose to US$2.3 million. Urgent actions are required to improve this situation, notably though higher electrioity tariffs, improved revenue collection and better control of operating costs. There is also a need to ensure that the investments in the sector are well justified. REGIDESO has begun preparing a long-term, least-cost investment plan for national power development. This exercise should include a comparison of national projects with regional projects which could be developed at the lowest cost to all network users. 29. Transport. As a landlocked country, Burundi's transport costs to ports on the Indian Ocean are quite high, representing about 30 percent of the c.i.f. cost of most imports. This is caused by long distances, cumbersome transit procedures, and Imbalanced import and export flows. The main issues in the sector relate to: (i) the need to ensure multicountry coordination to improve transport infrastructure and streamline transit procedures. In the northern corridor, the multicountry transit agreement signed in 1985 has not yet been implemented. In the central corridor, the cheapest - 13 - alternative for Burundi, the Government has improved conditions in the Port of Bujumbura and in Kigoma but actions are still needed to improve coordination and reliability between BujuMbura, Kigoma and Dar-es-Salaam. (ii) ensure transport security and evaluate available alternatives in case of sudden disruption. The Government is considering investments in two alternative roads to Isaka. The choice of one of them should be based on a careful assessment of costs and benefits of those roads as well as those of the lake/rail alternative for which investments are already planned (Bujumbura port and shipyard). (iii) allocation of budget resources between new investments and maintenance. The domestic network is adequate for the country's needs and has been adequately maintained until recently. In 1987, the allocation for road maintenance was 20 percent less than what was required. Clearly, this situation should be avoided. The preparation of a 3-year PEP should provide the framework to ensure a correct balance between maintenance and investment expenditures in the sector. (iv) parastatals efficiency. Actions are also required to address the difficult financial situation of OTRABU (international freight) and OTRACO (passenger), particularly actions to reduce operating costs. H. Improving the Effectiveness of Population and Human Resource Programs 30. Population. Burundi's population is growing at about 3 percent per year. In the absence of an active policy to reduce fertility rates, the annual population growth rate would accelerate to 3.1 percent during 1990-2005 and to 3.3 percent afterwards. Total population, estimated at 4.7 million in 1985, would reach 12 million by 2015, doubling again in the following twenty years. Under a policy scenario where the total fertility rate declined from the current 6.5 children per women to 5 children in 1995 and 3.1 in 2010, population growth would slow down to 2.4 percent a year during 1990-2005 and to 2 percent during 2005-2015. Total population would reach 9.5 million (instead of 12 million) in 2015, doubling in the following 40 years (instead of 20). 31. The consequences of a rapid population growth are serious: in terms of employment, new entrants in the labor force will increase from the annual average of 67,400 during 1985-90 to 84,000 in 1990-95, 111,000 in 1995-2000, and 140,000 during 2000-2005 regardless of the implementation of any population growth policy. However, after 2005, the effects of an active fertility reduction policy will be substantial: at present fertility rates, new entrants in the working age group would reach 165,000 during 2005-10 and 190,000 during 2010-15. Under a scenario of accelerated decline in fertility rate, they would stabilize at 145,000. 32. The Government's commitment to family planning has been demonstrated at the highest political level. As policy and program formulation are in the initial stages, further effort would be required to design a strategy with clear objectives, to set up an appropriate agency to follow-up implementation, and to include demographic variables in macroeconomic planning. In terms of supply of family planning services, there has been substantial progress: 55 percent of health centers are - 14 - providing some family planning services, versus 6 percent three years ago. Demand for family planning is growing, although the contraceptive prevalence rate is still low, about 1 percent. Moreover, there are serious gaps in knowledge which influence practices and the efficiency of the methods used. In order to improve the situation and promote a more effective policy, the Government -- assisted by major donors (including the World Bank) -- is planning to launch an information education campaign and to strengthen the administrative capacity of the Ministry of Health, within a general improvement of the Health sector, and the Maternal Children Health Program. 33. Nutrition. Information on nutritional status among population groups has improved through numerous surveys launched by the Government with assistance from major donors and NGOs. According to these surveys, malnutrition seems to be serious among infants during the weaning period leading to high mortality rates among children of 12-36 months. Although some of these problems stem from skewed income and land distribution, cultural factors could help explain the high levels of malnutrition. Due to the rapid population growth and increasing pressure on land, nutritional problems are expected to increase in the absence of corrective measures. Well-focused programs need to be prepared to address the more vulnerable groups of the population. In this respect, the Government could consider two alternatives: (i) to set up a domestic feeding program using local resources and the organizational structure at the community level, or (ii) to seek external assistance to cushion the negative effect of the withdrawal of the Catholic Relief Services which, until 1986, served 82,000 children and mothers. Moreover, the nutrition unit of the Ministry of Health, which has been instrumental in carrying out the recent surveys, should be strengthened to enhance the capacity for preparing nutritional policies. Coordination between the Ministries of Agriculture, Health and Planning is also required to improve the nutritional situation. 34. Education. The Government's objective is to reach full primary scholarization of 7-year olds by 1987/88 and universal scholarization by 1992/93. Important measures implemented to reduce the impact of increasing numbers of primary students on the state budget include: double shifting, automatic promotion, parental contribution to finance operating costs and construction of schools, and better utilization of available teachers. In the near future, the objective of universal primary education would require a slowdown in entrants into secondary and higher education until the population in primary education stabilizes and further growth can be allowed in the other education leveis. This strategy, which is in line with the Government objective to enhance the living conditions and earning potential of its population, may lead to serious social tension as curtailing growth of new entrants into secondary education will be opposed. It is, however, consistent with the need to improve the basic human skills of the population at large and can lead to important results in the long run, notably when agricultural development will be increasingly based on non-traditional practices. 35. There is a need to monitor the capacity to increase cost recovery, to decentra4ize educational expenditures to the communes? and to evaluate in a long-run perspective the consequences of the current decisions to sacrifice post-primary education in favor of universal primary education. !J - 15 - The Government has prepared in collaboration with the Bank a sector program which includes carefully chosen objectives in terms of promotion rates, admission of students in post-primary education levels, better use of non- teaching human resources, and reduction of costs in boarding schools. 36. Health. By African standards, Burundi is relatively well served in terms of access to health care. The issues in the sector relate to the low utilization rates in urban/regional hospital in-patient care (less than 50 percent) and the need to improve cost recovery schemes in the sector. Improvements in the institutional framework are also needed -- an issue which is being addressed by the IDA-financed Population and Health Project. Moreover, there is a need to: (i) strengthen the network of health centers; (ii) establish criteria for health center construction; (iii) allocate available resources to primary health care intervention (reversing the previous trend which favored hospital construction) with the objective of reaching wider population groups in an effective manner; (iv) improve knowledge and data collection on such areas as: levels and causes of maternal and child mortality, nutritional status, financial viability of the hospital sub-sector, willingness and ability to pay for health services, and financial ability of the communes to support expanded involvement in health care. 37. The prevalence of Acqutred Immunodeficiency Syndrome (AIDS) has become an important health issue. National estimates for seropositivity rates range from 3 percent in the general population of the capital to 48 percent in particular vulnerable groups. To address the problem, which appears to be spreading, the Government has set a national committee and a control program is being prepared with WHO technical support. In the context of the IDA-financed Population and Health project, the Bank is assisting the Government to control this epidemic through such actions as: donated blood screening, public information, health worker training, the establishment of a surveillance systems, and research and evaluation. 38. Substantial improvement is also required concerning sector planning and investment, A preliminary study of health financing concluded that new sources of financing must be found, even to maintain existing health services at their present levels. This is mainly due to: (a) the financial policies which will restrain the growth of public expenditures; (b) increasing takeover of mission facilities by MOH; and (c) high recurrent costs of the Kamenge Teaching Hospital. To address this problem, the study recommended: (i) the development, within five to ten years of a mandatory national ihsurance scheme; and (ii) the decentralization of health facilities management. Before implementing these schemes, the Government should undertake further analysis on resource allocation, cost- effectiveness of key interventions and management at the commune level, before embarking in a major insurance scheme. IV. Medium Term Prospects and External Resource Requirements 39. Two scenarios were prepared covering the period 1987-96. (The assumptions and their results are summarized in Attachment II.) The base case assumes considerable strengthening of the structural adjustment process initiated last year. The key elements of the adjustment process in - 16 - the base case are: (i) continuing trade policy measures conducive to high export growth, especially in manufacturing, but also in traditional exports; (ii) some increase in public investment levels to improve the country's social and physical infrastructure and provide the vehicle for agricultural development; (iii) improved incentives for domestic resource mobilization; and (iv) continued liberalization to encourage growth in private investment (both domestic and foreign) and in productivity. Under the base case, GDP is expected to grow at 4.3 percent a year during 1987-91 and at 4.5 during 1991-96. In agriculture, significant growth in the medium term will require adequate funding and strengthening of extension and research programs, better policies to provide adequate use of fertilizers and other inputs, and the establishment of improved incentives to marketing aid specialization in food crops, and increased efficiency in main export crops. Under the base scenario, agricultural growth is projected to average 3.2 during the first period and 3.6 percent in the second one, as the effects of the above policies become more strongly felt. In industry, an acceleration of growth is projected (8 percent per year), which reflects, first, the increase in capacity utilization of selected enterprises now exporting to the neighboring markets, and, later on, the effects of new investments, provided that the Government moves quickly to promote exports and to develop an environment conducive to private investment. 40. Burundi's terms of trade, which have declined by more than 35 percent in 1987, are expected to improve very little during the the rest of the projectioi period. This means that in order to build up foreign exchange reserves and finance the level of imports required to support GDP growth at the above rates, exports would need to grow faster than imports - - if external equilibrium is to be maintained with prudent foreign debt levels. Under the base case, Burundi's exports would grow by about 8 percent p.a, a rate higher than the average for the period 1981-85 (5.4 p.a). Imports are projected to grow by 5.3 percent p.a. during the first period and by 4.8 percent in the later period, which reflects the progressive substitution of imported raw materials by domestic ones, and a change in consunmption patterns. Official and private current transfers were assumed to remain unchanged in constant prices. 41. The base case represents a feasible but nonetheless ambitious long-term scenario for Burundi. Maintaining economic growth rates of 4-4.5 percent through 1995 will require a sustained commitment on the part of the Government to the structural adjustment process, aided by the international community. An alternative scenario was prepared to explore the consequences of lower growth of exports and private investment. Since the scope for the Government to increase its resources through external commercial borrowing is limited by the already high external debt service level, the alternative scenario would imply lower imports, a reduction in investment growth, and lower economic growth. The import growth consistent with the lower export alternative would be about 2.8 percent p.a., leading to a GDP growth rate of less than 3 percent p.a. during the projection period -- and, at best, a stagnation in per capita income. 42. Under the base case, Burundi's external capital requirements over the period 1987-91 would amount to about $1.13 billion, which will have to be met from disbursements of public and medium and long-term (MLT) debt, - 17 - official grants, and private direct investment (see Attachment II, Table 4). About $350 million will be available from disbursements of previously contracted debt (until end-1986), including $42 million from SAL I and SAF; $230 million from capital grants; US$25 million from direct investment (assuming adequate policies to attract such resources). Tne remaining $525 million would need to be financed from new commitments. To mobilize this level of disbursements and accommodate its future debt service requirements, during the same period, Burundi will need total new loan commitments of about $770 million, or about $150 million a year. This amount is 25 percent higher (in real terms) than the average received by Burundi in the last five years. Increased support of the international community will thus be necessary for Burundi to attain its growth objectives. 43. The above scenarios are based on the assumption that Burundi will manage to pay its already high debt service. Such payments, in the absence of increased support from the international community, would however represent a substantial burden which could limit the growth of per capita income and consumption, slow down the adjustment pace, and weaken the support required for its Implementation. The availability of additional external resources, together with the possibility of favorable debt rescheduling, would certainly improve Burundi's prospects for a successful implementation of its adjustment program. The challenge for the new Government is to use the additional resources to finance priority investments and the needed supplies to ensure the efficient functioning of governmental services -- found deficient in the tree-year public expenditures program -- in the context of a financial program aimed at achieving medium-teri6 sustainability in the domestic and external fronts. 44. This increased support is not only needed but also amply justified. The realism of Burundi's economic policies -- which the new Government is committed to pursue and strengthen -- and its search for greater effectiveness and coordination of external assistance have made it a leader among African countries which have embarked on a process of structural adjustment supported by a close partnership with the international donor community. The Round Table meeting which the Government plans to organize by mid-1988 can provide the appropriate forum to share with the major donors the main policy orientations and sector strategies adopted by the new Goversment, as well as to reaffirm the donor support crucially needed. - 18 - Attachment. I BURUNDI STRUCTURAL ADJUSTMENT AND DEVELOPMENT ISSUES Table of Contents of Background Report Page No. INTRODUCTION *........................*.....*....e 1 Progress Since Last CEM .......... .......... . . 1 Organization of Present Report .............................. 2 I. RECENT POLICY REFORMS AND ECONOKIC PEoRFOi WICK ............ 3 A. An Overview of Recent Policy Reforms ................... 3 Background ..... a ........................ .......... 3 Adjustment Policies 5.................................. 5 B. Recent Economic Performance ......................e.. 8 Sector Growth and Policies ........................... 8 Investment and Savings ........................ ....... 11 The External Sector ................. a 12 External Public Debt ................................. 15 Public Finance .. ......... i 16 Monetary Policies ........ ............................ 21 Price and Price Determination ..,....., ............... 23 Wages and Employment ................. . 24 IIo THE LONG-RUN CHALLENGE .aaa..aa a a a a ...................... 27 A. AGRICULTURE aaaaaaaa... a a ....... 27 Food Security *aaaaaaaaaaaaaaaaa.aaaaaaaaaaaaaa......... 28 Government Programs a a a aa a a aa a a aa a a aa a a aa a a aa a .a. 29 Imports and Food Aid .... 30 Shortages/disruptions aaaoaeaaaaaaaaaaaaaaaaaaaaaaaaaaa 31 Increasing Export Earnings from Cash/Industrial Crops aaaaaaaaaaaaaa.aaaeaaaaaaaa 32 Strategic Issues for the Long-run aaaaaaaaaaaaaaaaaaaa 35 Capacity for Meeting Food Demand aaaaaaaaaeaaaaaaaaaaa 35 Increasing Export Crops and Competition with Foodcrops *aaaaaaaaaaaaaaaaaaaa 37 Market Development and Regional Specialization .aaaaa...... 38 Policy Agenda a aaaaaaaaaa. a a a a a a a a a a a a a a a. 38 Short-term Agenda ...aa..a.a....a.a.a..a.a.a..a.a.a..a.a.a..a.a.a..a.a.a. 39 Long-term Agenda .......a.a..a..a..a..a..a.aa.aa.aa.aa.aa.a..a..a..a..a. 41 Institutional Issues aAa aa a aa a a a a aa a aa a aa a a a a aa a..a... 42 - 19 - Attachment I B. RURAL-URBAN LINKAGES AND REGIONAL DEVELOPEWT ........... 44 Population and Employment e ¢ §*0 lp 0 * .. *.. . ................. . 6 .......... 44 Moaetari2ation of the Agricultural Septor and Rural Development ....... ....................* 45 Urbanization and Regional Deve*pment .................. 49 Conclusions and Recommendations ............* ........... 49 C. EIPLO'!NET *.....@..........*.............* 0 .0 * .*oea* e*aa00 0 0a0 52 The modern Sector ............. .. .. .. .. .. .. .. . .. .. .. .. .. . . 52 Recent Employment Trends ............................. 52 The Social Security Sv'tem ........................... 55 Civil Service Salary Scale and Wages ......*0 ......... 55 Government Policies ........ . .. . . . .. . . ............... 56 The Informal Sector ......... . .. .. . .. . .. .. . .. . ..*.. . .. . 58 Recommendations ......... .. .. . .. ..... . .. .. .. . .. .. .. . . . 60 Do SMALL-SCALE ENTERPRISES ............................. 61 The SME Sector ............................. 61 Major Constraints and Development Potential .............. 62 Institutions ................................. 63 Issues . 64 Possible Approaches .................. ................. . 65 Potential Problems ...****.*,...*... .. . ................. 65 Summary of Proposed Actions ........................ 66 Re EXPORT PROMOTION ........................................ 67 Structure of Exports ....... ........................... . 67 Liberalisation and the Policy Environment ............... 68 Market Prospects ........ .. .. .. .. .. . .. .. .. .. .. . .. .. .. .. . 69 Export Promotions Action Program ....................... 70 Short-Term Measures ................ . 71 Medium-Term Measures .... * ....................... .. . 72 Long-Term Measures .... *0O * ..................... .. 73 F. MAJOR ENERGY SECTOR ISSUES ........................ .... 74 G. TRANSPORT ......... ................. ... *... .. 77 S. SOCIAL SECTORS ............................................ 80 1* POPULATION *,@**...........**,,........ ........* 80 Population Growth and Socio-Economic Consequences .... 81 Family Planning Policies and Programs ................ 83 Recommendations *000000 ** ..... ..................... 86 2* EDUCATION ..**.. .... ... *.. ****... .... .*..*.. **. * ......... 86 Government Objectives and Strategy ................... 86 Issues *......... ... **...... ....*.*.. .*...*.... .... ... . 88 Recommendations ...*... **,,,**,*****,*, ** ...... 89 3. NUTRITION ............................ 91 Nutrition Status .................. ......... 91 Nutrition PolicieslPrograms ......................... 92 Recommendations ......................... . 93 - 20 - Attachment i 4. HEALTH *.............................. ...... 94 Health Status .......... .. ... .. ..*.... . * , * * * * * * . 94 Health Policies and Programs .............. @.......... 94 Health Financing ........... .. .. . .. .. . .. . .. .. . ....... 96 Recomuendations ......***.*.**** .. .. *..,............ 98 . DOHESTIC RESOURCE MOBILIZATIO ........................... 100 Mobilizing Private Savings .............................. 100 Financial Sector ........... ..... . .. . .. .. . .. .. . .. . .. . * . 100 Policy Issues .................................. 101 Interest Rates . ......... ...*.. ................. . 102 Monetary and Credit Policies ....................... 103 Guarantees **.&..........................., 104 Determinants of Financial Savings Level .............. 105 The COOPEC System .......... .. ... .. .. .. .. .. .. .. .. .. . . 106 COOPEC Lending and SSEs .............................. 106 Summary of Recommendations .............................. 107 III. MEDIUM-TERM PROSPECTS ............. ........ 109 A. Policies for Sustained Growth: An Agenda ................. 109 Trade Policies ............................. 109 Liberalization ...... * * * * * *........................... . 110 Domestic Investment ............ . .. . . ................ 110 Public Investment Program, 1987-89 . ................... 111 B. Growth with Equity: Reducing Population Growth and Strengthening the Social Base ...................... 115 C. The Base Case ................. *......................... 115 Investment and Savings. .. ... * *..*........... ....... . 117 Balance of Payments ... ............................... 117 D. Alternative Scenario ......... ... ... ................... ... 118 B. Foreign Capital Requirements ............................. 119 Medium-term Financing Requirements, 1987-91 .......... 119 External Borrowinig Strategy .......................... 121 ANNEX I - Demographic ProilActions ANtNE II - Technical Note on Competiveness of Burundi's Exports ANNEX III- Issues in Trade Promotion ANNEX IV - Issues in the Energy Sector, an Update STATISTICAL APPENDIX - 21 - Attachment Xl Table 1: HISTORICAL AND PROJECTED GROWTH RATES, BASE CASE (percent) --------------------------------------------------------------__--------- Actual ' Proloctod 1978-81 1981-88 1987-91 1991-86 -------------------------------------------------------------__--------- Real growth rates GDP (market prices) 4.1 -0.9 4.8 4.6 CDP (factor cost) 6.6 0.6 4.2 4.5 Agriculture 8.8 -0.9 8.2 8.6 Industry 6.2 4.4 7.1 7.5 Consumption 2.7 -1.8 4.8 8.8 Fixed Investment -1.8 7.3 8.5 6.6 Merchandisp exports 9.0 5.4 7.4 9.2 of which': coffee 8.1 8.8 3.6 8.6 non-coffee 17.4 2.8 19.5 12.9 Merchandise Imports -1.6 8.0 5.8 4.8 Shar. of CDP (period average) Investment a/ 14.7 16.4 16.9 10.0 Financed by: Cross national savings 7.8 6.8 7.1 8.1 Foreign savings 7.0 10.8 9.8 9.9 a/ Includes change In stocks. Source: Mission estimate.s Table 2: COMPONENTS OF ALTERNATIVE GROWTH SCENARIOS, 1987-1996 Base Case Lower Export Growth Growth Rates: CDP (factor cost) 4 ' 8.0 Fixed Investment B6. 2.2 National savings 6.4 2.6 Exports (GANFS) 8.0 4.0 Imports (GANFS) 5.4 2.8 Selected Ratios 1990 1998 199 199 Current balance/GDP -13.4 -11.2 -16.4 -18.2 Debt Service ratio 80.4 28.1 38.4 30.1 Source: Mission ostimates. - 22 - Attachment XI Table 8: BASE CASE BALANCE OF PAYMENTS PROJECTIONS, 1988-98 (Miltlion current US$) 1988 1987 1988 1989 1990 1991 1998 Exports f.o.b 18 101 112 126 138 158 284 (coffee) (114) (69) (78) (81) (84) (93) (186) Imports c.lf 298 224 268 284 810 889 480 Seryicos (net) -69 -92 -90 -92 -95 -101 -122 (Interest) (14) (18) (18) (18) (18) (19) (26) Current transfers Go e6 67 74 78 81 9f Current Accgunt -78 -160 -18B -177 -191 -208 -288 (exol. public, transfors) (-164) (-216) (-240) (-260) (-274) (-288) (-29W) Direct Investment 2 2 4 6 7 9 18 Capital grant. 40 42 44 46 47 49 80 MLT Loans (not) 80 118 120 124 112 109 144 Disbursemnts 99 189 148 152 140 140 189 Ropayments -19 -26 -28 -28 -28 -80 -45 Other capital n.e. 4 4 Overall balance 24 7 1 -2 -24 -88 -11 Financina goo 44 18 88 37 12 Memorandum Ites: Net reserves as months of Imports 2.1 2.2 4.0 4.0 4.0 4.0 4.0 Debt Service ratio 28.2 88.5 86.2 83.1 80.4 28.9 26.1 Coffee exports Volume (QO tons) 28 29 80 81 82 84 40 Price (US8/kg) 4.02 2.87 2.52 2.82 2.67 2.78 8.28 Current Account/ODP (6) 6.6 11.6 12.4 18.6 13.4 18.1 11.6 (adjusted) M/ 8.2 8.9 9.5 8.8 8.7 8.2 7.5 p/ In terms of constant effective exchange rats using 1982 as the base year. Source: Mission estimates. - 23 - Attachment I1 T&1 1. 4: SUMMARY OF EXTERNAL CAPITAL REQUIREMENTS AND SOURCES 1907-91 (millIon US. dol lare) 1907-91 Caeital Ro"uIreents 1128.9 Current account ds Ticlt (oxel.Tntt rest) e/ 822 4 Interest 91.0 Amortization 187 S Increase in reserves ?8J0 Soures (medium a*nd long-term capital) ire1ct Invoetnt2t Official Assistance Capital grants 227.4 MALT loans disbursements: *-isting comwitments 854.2 Bilateral Sources 101.8 Multilateral Sources 247.8 Private loans 5.1 Additional aid requirments 521.7 Disbursemonts from expected new commitments 882.8 Bilateral SourceB 126.5 Multilateral Soureds 256.8 Financing pp 138.9 a/ Includes current transfers. Soure: Staff estimates I ; ~~NOTES I~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ ll~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ I I