40314 INTERNATIONALMONETARY FUNDAND INTERNATIONALDEVELOPMENT ASSOCIATION BURUNDI DecisionPointDocumentfor the Enhanced Initiativefor HeavilyIndebtedPoor Countries Prepared by the Staffs o f the International Monetary Fundand the World Bank July 11. 2005 Contents Page I Introduction.................................................................................................................... . 3 I1. Background and Assessment o f Eligibility and Qualification for HIPC Assistance .....3 A. PRGFand IDA Status.......................................................................................... 3 B. Dimensions of Poverty......................................................................................... 4 Recent Political and Security Developments....................................................... 5 D. C. Macroeconomic and Structural Adjustment Record............................................ 5 I11. Medium-Term Strategy for Poverty Reduction............................................................. 9 A . The PRSP Formulation Process........................................................................... 9 B. Macroeconomic Objectives ............................................................................... 11 C . Governance, Structural and Institutional Reforms............................................. 11 D. Social and Sectoral Policies............................................................................... 12 IV . Debt Sustainability Analysis andEnhanced HIPC Initiative Assistance..................... 14 A. Debt Reconciliation Status................................................................................ -14 B The Structure of External Debt.......................................................................... 14 C.. DebtSustainability Analysis.............................................................................. 16 D. Possible HIPC Initiative Assistance................................................................... 18 Impact o f HIPC Initiative Assistance ................................................................ 19 F. E. Sensitivity Analysis ........................................................................................... 20 G . Summary o fFindings from the DSA................................................................. 21 V. The Floating Completion Points.................................................................................. 22 A. 22 Monitoringthe Floating Completion Point Triggers ......................................... Triggers for the Floating Completion Point....................................................... B C.. The Use andMonitoring of EnhancedHIPC Initiative Debt Relief..................23 24 D. The Views o f the Authorities ............................................................................. 25 VI. Issues for Discussion.................................................................................................... 26 Contents Page Boxes 1. Poverty and Social Indicators ........................................................................................ 4 2. Selected Economic Policy and Structural Measures, 2003-05 ...................................... 7 15 4. 3. Arrears Clearance......................................................................................................... Paris Club Rescheduling.............................................................................................. 16 5. MainAssumptions intheDebtSustainability Analysis .............................................. 17 6. Triggers for the FloatingCompletion Point................................................................. 23 7. Expenditure Priorities for the Use of HIPC DebtRelief.............................................. 25 Figures 1. Composition of Stock ofExtemal Debt at End-December2004 Before FullUse of Traditional Debt-ReliefMechanisms........................................................................ 27 2. Composition of Stock o f External Debt at End-December 2004 After FullUse of 27 External Debt Profile: Extermal Sustainability Indicators, 2004-24 ........................... Traditional Debt-ReliefMechanisms......................................................................... 3. 28 4. 29 External DebtProfile: Fiscal Sustainability Indicators, 2004-24 ................................ Sensitivity Analysis, 2004-24 ..................................................................................... 5. 6. External Debt Profile: Net Present Value o fDebt-to-GDP Ratio, 2004-24 ................30 31 Tables 32 2. 1. Balance o fPayments, 2003-24 .................................................................................... Selected Economic andFinancial Indicators. 2002-08 ................................................ 33 3. Nominal andNet Present Value of ExternalDebt Outstanding by Creditor Groups, End-December 2004..................................................................................... 4. HIPC Initiative-Assistance Discount and ExchangeRate Assumptions at End-2004............................................. Under aProportional Burden-Sharing Approach..........34 35 36 6. 5. 37 Net Present Value of External Debt After HIPC Assistance, 2004-24........................ External Debt Service, 2004-23................................................................................... 7. 39 External Debt Indicators and Sensitivity Analysis, 2003-23 ....................................... 41 9. 8. 43 Long-TermMacroeconomic Assumptions, 2003-23 ................................................... External Resource Transfer, 2005-24 .......................................................................... 10. 44 11. PossibleDelivery o f IMF Assistance Under the EnhancedHIPC Initiative, 2005-15 ...................................................................................................................... 46 12. PossibleDelivery o f World Bank Group's Assistance Underthe EnhancedHIPC Initiative, 2005-39...................................................................................................... 47 13. HIPC Initiative: Status of Country Cases ConsideredUnderthe Initiative, June 1,2005 ............................................................................................................... 48 Annexes I DebtManagementCapacity......................................................................................... 49 I1. . Burundi: Debt Sustainability Analysis for Low-Income Countries Framework .........50 - 3 - I.INTRODUCTION 1. This paper presents an assessment of Burundi's eligibility for assistance underthe enhanced Initiative for Heavily IndebtedPoor Countries (HIPC). The Executive Boards o f the IMF and IDA discussed the preliminary HIPC document (EBS/05/2 and IDA Report No. 31202-BIY01/06/2005) for Burundi on January 19 and 27,2005, respectively. Onthese occasions, Executive Directors made a preliminary determinationthat Burundi could be eligible for assistance under the enhanced HIPC Initiative on the basis o f its heavy debt burden, its track record o fperformance under IDA-and IMF-supportedprograms, and its status as an IDA-only and PRGF-eligible country. Directors generally agreed that Burundi could reach its decision point by mid-2005, provided that policy implementationunder the government's macroeconomic and structural program i s satisfactory. They noted that Burundi's heavy debt burdenwould require strong export growth and extemal assistance in the form o f grants or loans on highly concessional terms. 2. The debt sustainability analysis (DSA) herein indicates that Burundi's extemal debt would remain above the HIPC threshold even after the full application o f traditional debt- relief mechanisms. The present value (NPV) o f debt-to-exports ratio i s estimated at 1,772 percent at end-2004 and i s projected to remain above 150percent throughout the projection period. 3. With the implementation o fthe Arusha Peace accord o fAugust 2000, Burundihas achieved, through early 2005, demonstrable progress with economic stabilization and reform, and the authorities have remained committed to policies o fmacroeconomic and financial stability, growth and poverty reduction. Inlight o f such progress and commitment and o f Burundi's heavy debtburden,it is the opinion o fIDA and IMF staffthat Burundihas met the conditions for reaching the H P C decision point. 4. Section I1provides background information on eligibility and qualification for the enhanced HIPC Initiative, the dimensions of poverty, political and security developments, and the policy track record. Section I11discusses the Poverty Reduction Strategy Paper (PRSP) process, medium-term macroeconomic objectives, and the sectoral and structural reforms to be implementedbefore reaching the completionpoint. Section IV presents the DSA. SectionV lists the proposed floating completion point triggers, specifies how the enhanced HIPC Initiative assistance after the decision point will be used and tracked, and reports the views o f the authorities. Finally, Section VI presents issues for discussion by the Boards o f Executive Directors. 11. BACKGROUND AND ASSESSMENTELIGIBILITYAND QUALIFICATION FOR OF HIPC ASSISTANCE A. PRGFand IDA Status 5. Burundiis an IDA-only country, with anominal per capitaGDP o fabout US$83 in 2003, and is eligible to receive resources under the IMF's Poverty Reduction and Growth Facility (PRGF). Burundiwill continue to need substantial concessional assistance from the - 4 - international community and i s likely to remain an IDA-only country and eligible for PRGF resources for many years to come. B. Dimensionsof Poverty 6. Although income per capita inBurundihas recovered since 2000, it still remains less thanone-half the historic highof US$180 attained before civil conflict erupted in 1993. Since 1992, the percentage o fpeople livingbelow the poverty line has doubled, from 35 percent overall to 68 percent in2002 (68.7 percent inrural areas, 66.0 percent inurbanareas). In terms o f social welfare indicators, Burundii s the fourth least developed country inthe world (2004 Human Development Index).' The government's immediate priorityis to restore pre- conflict levels o f social services recognizing that meetingthe MillenniumDevelopment Goals (MDGs) will be a challenge. 7. Burundi's social indicators reflect the effects o fpoverty compoundedby decades of violence (Box 1). Inaddition, child malnutrition has risen from 35 percent in 1987 to 45 percent in2000. Access to safe water and health services remains extremely low, at less than48 percent and20 percent o fthepopulation, respectively. Displacedpersons (some 200,000 internally and inrefugee camps, down from one million at the peako f the fighting) suffer from deprivation, malnutrition, and lack o f sanitation, health, and education services. HIVIAIDS prevalence i s rising, particularly inthe refugeecamps, and an estimated 1in9 sexually active Burundians is infected. The number o fpeople with HN/AIDS in 1999 was about 360,000 inthe 15-49 age group, and 19,000 for those under 15. There are some 200,000 AIDS orphans (out o fa total o f some 556,000 orphans). Box 1.Poverty and Social Indicators (Inpercent, unless otherwise specified; as of latest year for which data are available) Indicator Burundi Sub-Saharan Africa Population(inmillions; 2002) 7.3 702.6 Population growth (2003) 2.0 2.1 GDP per capita (US$; 2003) 83 490 Lifeexpectancy at birth(years; 2002) 41.7 45.8 Infant mortality rate (per thousand, 2002) 123 103.1 Child mortality rate (per thousand, 1998) 208 173.9 Maternal mortality rate (per 100,00O/live births; 2001) 1300 916.8 HIViAIDS prevalence(percent o f active sexually population ;2001) 11.3 n.a. Literacy rate (percent of population; 2001) 55.4 64.9 Gross schoolenrollment rate (percent of age group; 2001) 71.0 87.0 Male 79.5 94.0 Female 62.4 80.0 Population density (persons/sq km) 262.0 29.2 Sources: BurundiI-PRSP; World Bank, African Development Indicators2004 and World Development Report 2005; and UNESCOdatabase. `The UnitedNations Development Program (UNDP) HumanDevelopment Index measures a country's achievements inthree aspects of humandevelopment: longevity, knowledge, and a decent standard o f living, - 5 - C. Recent Politicaland SecurityDevelopments 8. After independence in 1962, Burundiwas one o f the best performers inthe economic and social areas insub-Saharan African countries, althoughprogress was marredby periods of ethnic violence. However, with the 1993 civil conflictprogress was halted and, combined with the effects o f a regional economic embargo in 1996-99, Burundiunderwenta ten-year period o f economic decline. The turningpoint was the signing inAugust 2000 o f a peace and reconciliationaccordamong 39 political-ethnic groups, inArusha, Tanzania. A transition government and ethnically balanced senate and parliament chambers were established in2002, and a peacefulrotation o f the president from a Tutsi to a Hututook place as envisaged in2003. The remainingholdout rebel group agreed to a cease-fire inMay 2005. The politicaltransitionis now drawingto a close. InFebruary 2005, a nationalreferendum overwhelmingly approved a new constitution and, on June 23, communal elections were held.Parliamentary elections were heldon July 4, 2005. The new parliament is to elect anew president by late August; subsequent presidentswill be directly elected bypopular vote. The new constitution provides for majority rule while maintainingrights andrepresentation for minorities and women; minority Tutsis are assured 40 percent o f seats inthe National Assembly and o f positions inthe council o fministers. 9. The creation of a new, ethnicallybalancedarmy and nationalpoliceforce began in late2004 by incorporating former rebelcombatants. The UnitedNations maintains operations inBurundi( O W ) , including a peacekeeping force o f 5,650 (including civilians), which is assuring security and supporting the national Disarmament, Demobilization, Reinsertion, and ReintegrationProgram (DDR), along with IDA and bilateral donors through the regional Multi-Country Demobilization and Reintegration Program (MDRP).By end-May 2005, almost 10,000 ex-combatants had beendemobilized. A National Commission on Reintegration o f Refugees was established in2003, and has since assisted the resettlement o f some 500,000 refugees and internally displaced persons. In January 2005, a National Truth and Reconciliation Commission was set up with a two-year mandate to investigate acts o f ethnic violence between Burundi's independencein 1962 and the 2000 peace accord. D. MacroeconomicandStructuralAdjustmentRecord 10. Within a difficult political environment, and starting from dire economic and social conditions, Burundihas made good initial progress in stabilizingthe economy, implementingfinancial and structural reforms, and beginningto restore social services, However, large challenges remain, including the consolidation o f democracy, full demobilization o f armed combatants, promotion o fprivate sector-led growth, and, especially, addressing widespread deep poverty. 11. Burundi's economic andsocial recoveryhas beensupportedby IDA and the IMF.IDAhasprovided anEmergencyEconomic Recovery Credit in2000, anEconomic - 6 - Recovery Credit in2002, sector grants and credits (including for DDR), and managed support through a trust fund for multilateral debt service.2 A Post-Conflict Transition Economic Recovery grant (US$50 million) i s plannedfor 2005. In2001-02, Burundi implemented an IMF Staff-Monitored Program and, subsequently,received support under the IMF's Emergency Post-Conflict Assistance policy (2002-03), which ledto approval o f a three-year PRGF arrangement beginning inJanuary 2004 (SDR 69 million). The first review o f the PRGF-supported program was concluded by the Executive Board o f the IMF on January 19,2005. The European Union and bilateral donors have also provided important assistance and ina donor forum inJanuary 2004, Burundireceived pledges o f more than US$1 billion over three years. 12. Since 2002, the authoritieshave maintainedgenerallyprudentfinancialpolicies and implementedstructuralreformsthat have helpedto establishthe conditionsto resumeeconomic growth.Real GDP growth has pickedup, inflation has been broadly contained, andthe intemational reserve position has strengthened, while financial support from the international community has beenmobilized (Table 1). During2004 and early 2005, performance under the PRGF-supported program has beengood. Such progress i s all the more noteworthy inthat it has beenachieved ina difficult political and economic environment o f strong expenditure pressures stemmingfrom the establishment o f the transitional institutions envisaged inthe Arusha peace accord to include representatives from former rebel factions and the need to restore social programs. The heavypolitical agenda, which has drawn out the transition process, has, at times, delayed sensitive structural reforms (Box 2). 13. Real economic growth picked up in2004 to close to 5 percent and i s expected to be sustained at that level in2005. Continued vigor inthe service sector would offset a cyclically smaller coffee crop in2005 and uncertainties regarding the food crop. Consumer price inflationdidnot decline as plannedin2004, but rose to almost 12 percent, owing to the impact on food prices o f drought inthe north, the surge inimportedpetroleumprices, and pressure on nontradable goods prices from the increasinginternationalpresence inthe ~ a p i t a lThe continued impact o f these factors, together with rapid monetary growth, led to a . ~ further increase ininflation inearly 2005. O n the extemal side, the current account deficit, including grants, in2004 (7.2 percent o f GDP) was significantly smaller than expected and international reserves increased. Exports rose strongly on account o f a large coffee harvest and a strong recovery inworld coffee prices, while imports rose less than projected, owing to lower-than-expected humanitarian assistance. Belgium, Italy, the United Kingdom, France, and Norway have supported an IDA-managed trust fund for debt service and arrears clearance to the African DevelopmentBank. The only available CPI is for Bujumbura, which may not accurately reflect price developments for the country as a whole. - 7 - 14. Fiscalperformancewas broadlyinlinewith the PRGF-supportedprogramin2004, althoughthe primarydeficit was somewhat higher thanprogrammed, owing to higher domestic counterpartoutlays for projectspendingthat was only partially offset by a lower- than-expectedwage bill. Overallrevenues exceededthe programtarget, reflecting strengthenedtax administration.Social sector spendingrose to 6.7 percent of GDP.Fiscal performanceinthe first quarter o f2005 was well within programtargets. Box 2. Selected EconomicPolicy and Structural Measures, 2003-05 ~~ Measures Status Elimination o f remainingexchange restrictions on current account September 2003 transactions andbonafide amortizationpayments. Preparationand adoption by the cabinet of agender action plan, September2003 satisfactory to IDA, to eliminategender disparities, including enablingwomen to inherit landandother properties. Extensiono f transactionstax to domesticallyproducedgoods and January 2004 services. Adoptionby the cabinet of draft legislationto establishan Ofice of March 2004; audit service to be created in Auditor Generalresponsiblefor auditingthe financialoperations of 2005 public agencies, and the submissiono fthe draft legislationto the NationalAssembly. Assessment of bank compliancewith minimum capitalrequirement. March 2004; two banks subsequentlyclosed Adoptionby the cabinet of an actionplanfor the reformo fthe public August 2004 procurementadministration. Adoption by the cabinet of a comprehensivestrategy,developedin October 2004 consultationwith stakeholders,to revivethe coffee, tea, and cotton subsectors. Mandatorynature of BRB auctionreferenceexchange rate for December2004 commercial bank transactions abolished; official exchange rate now i weighted average of daily commercialbank transactions. Adoptionof a new govemmentbudget andaccounting nomenclature. December2004 Reductioninnumber of import tariff bands andrates. Implementedwith 2005 budget Decree liberalizing privateentry and investment inthe coffee sector, January2005 and operationsat all levels ofthe supplychain. Abolishedthe remainingexport foreignexchange surrender January2005 requirement(50 percent ofcoffee, tea, andcottonexports). Establishmento f a new audit court (Cowdes Comptes). December2004. Audit of 2004 govemment accountsbegan in April 2005 Abolishedthe centralbank's credit ceilings to financialinstitutions April 2005 anddirected sectoralcredit. Market-basedliquidity (CrediUdeposit)auctions introduced. April 2005 Trade restrictionsandpricecontrols on sugar abolished. May 2005 - 8 - 15. A key strand of fiscalpolicyin 2005 is the transition from a "conflict" to a "peacetime" budget.The security sector projects (military integration andcreation of the national police force), which are vital for securing durable peace, will raise the share o f military and security spending inthe short term, while the demobilization effort will eventually permit a shift from military spendingto social outlays. As a result, the share of military spending intotal expenditure would rise in2005, while the share o f social sector spendingwould decline ~lightly.~ Assumingthe pace ofdemobilization is maintained, and given the smaller number o f soldiers and ex-combatants than originally assumed, budget savings on security spending appear possible from late 2005. 16. The management o fpublic finances, severely weakened by the loss o f skilled and experienced staff because o f the conflict and low wages, i s being strengthened. Key actions have been undertakeninpublic expendituremanagement,supported by IDA since 2000 and currently underthe Economic Management Support Project (EMSP). These include adoption o f a unifiedfunctional and economic classification o fbudgetary expenditure and a double-entry accounting system, implementation o f a system for monitoring the flows of external assistance and government expenditures, and computerization o f expenditure management.5 Inaddition, civil service payroll management i s being strengthened. InMay 2005, an inventory o fdomestic payments arrears o fthe government was completed, on which an extemal audit is expected to begin shortly. A sustained effort inthese areas will be needed, supported by technical assistance from the IMF and IDA. Measures to improve budgettransparencyinclude the establishment o f an audit court (Cow des Comptes)in 2004, which began a review o fthe 2004 government accounts inApril 2005. Revenue mobilizationreforms include strengthenedtax administration and collection, the introduction of a single taxpayer identification number, the elimination o f loopholes inthe import pre- shipment inspection regime, and the income tax liability o f Burundian nationals working for international organizations is now being recognized and enforced. 17. For the remainderof2005, the authoritiesaimto containmonetarygrowthwith a view to reducinginflationto 10percentby year-end. To this end, the BREIhas taken measures to enhance the efficiency and effectiveness o f its liquidity management. InApril 2005, liquidity auctions were introduced and the central bank's specific credit ceiling system was abolished. 18. Major progress has been madein liberalizingthe foreign exchangesystem since 2000, which has ledto the gradual convergence o f the parallel and official exchange rates, to about 3 percent by late 2004. Restrictions on current transactions were removedin2003 and The share o fsocial spending maybe higher by year-end taking into account the use o fpossible HIPC debt relief and the payment o f retroactive wage adjustments to teachers. An integratedpublic expenditure computerized systemconnected to the central bank (BREI)designed for (i)efficient and transparent public finance management, (ii) spending monitoring, including HIPC poverty resources, and (iii)accurate reporting and closing o f budget execution account books, i s expected to be introduced by October 2005. - 9 - inDecember 2004, the BRBabolished the mandatory nature ofits foreign exchange auction reference price for commercial transactions and changed the determination o fthe official exchange rate to the daily weighted average o fbanking system transactions. Inearly January 2005, the remaining foreign exchange surrender requirement on export earnings was abolished. 19. Furtherstructural and sectoral reforms arebeingundertaken or have beeninitiated as follows: e A reform programwith IDAsupport, is beingimplementedto strengthenthe capacity of the Ministry o f Development Planningand Reconstruction, inparticular to collect andprocess statistical information, leadingto timely and reliable availability o f national accounts, estimates, and forecasting. e Reform o f thejustice systemto bring about ethnic balance, and ensure equity and human rights. To that end, a Judiciary Reform Strategy i s to be prepared with assistance from IDA'SEMSP project. e The coffee sector reform strategy, adopted inOctober 2004, is under way. The first step was the opening o f the state marketing board (OCIBU) auctions to a wider range o f participants inDecember 2004. InJanuary 2005, private entry and investment in the sector and operations at all levels ofthe supply chainwas liberalized. The coffee productiontax (loyer verger) was abolished inApril and a ministerial order was issued inJune freeing coffee sales outside o f the state marketingboard (OCIBU). In mid-2005, the privatization o f state assets inthe coffee sector is expected to begin with the launching o f offers to sell o fwashingstations andprocessing factories. Later in2005, an actionplanwill be adopted definingthe new roles o fcoffee sector institutions (including OCIBU) to be inplace for the start o fthe 2006 crop season (April 2006), consistent with the coffee sector reform strategy. e A tea and cotton sector reform strategy was approvedinOctober 2004. e The sugar sector was also liberalized inMay 2005 with the abolition o f export restrictions, minimumimport prices, and domestic price controls. III.MEDIUM-TERMSTRATEGYFORPOVERTYREDUCTION A. The PRSP Formulation Process 20. The govemment's InterimPoverty Reduction Strategy Paper (I-PRSP) is based on broad consultations, limited insome provinces by security conditions. The I-PRSP presents a long-term vision o f development based on six strategic themes for promoting sustainable, equitable economic growth deemed essential for poverty alleviation: (i) peace and democratic governance; (ii) reintegration o f conflict victims and disadvantaged groups into the economy; (iii) private sector development; (iv) human capital development; (v) fighting - 10- HIV/AIDS; and (vi) advancing the role o fwomen indevelopment. These priorities were confirmed ina 2004 opinion survey covering 3,000 respondents nationwide. The survey found that (i) more than 80 percent o frespondents think that poverty has remained while constant or increased over the last 5 years, some 40 percent predict that poverty will decrease inthe next five years; (ii) povertyis related to the inability for households to feed their family, have decent housing, andpay for health care; (iii) satisfaction with the quality of public services is low, except for primary schooling; (iv) the endo fthe conflict is cited as the most important factor for reducing poverty, and together with the provision o f education services, i s seen as the most important action that the government can undertake; and (v) improving food security and increasingyouth employment are also seen as important areas for government intervention. 21. With the forthcoming finalization o fBurundi's full PRSP,it will be essential to put inplace a soundmonitoring andevaluationsystem.Atpresent, reliable anddetaileddata are lackingto monitor poverty andother social indicators inBurundi,and to assess who benefits from public spending. The last available household survey, dated 1998-99, estimates poverty at close to two-thirds o f the population. The situation has likely changed over the last seven years. The implementation in2005 of a new nationally representative extended Core Welfare Indicators Questionnaire (CWIQ) will be an opportunity to reassessthe level o fpoverty in the country and the mainvulnerable groups, andto provide abenchmark assessmento fthe state of social services delivery. Budgetary and delivery data for social services also needto be strengthenedinorder to better target andassess pro-poor spending, including specifying what expenditure shouldbe considered pro-poor. To this end, data will be collected among potential users o f facilities such as hospitals, clinics, and schools to helpmeasure more precisely user-satisfaction with basic service delivery and identify unmetneeds, and assess how to more effectively transfer resources to end-users. 22. The Joint StaffAssessment (JSA) o fthe I-PRSPby IDA and IMF staff, endorsed by the respective Boards o f Directors, concluded that the I-PRSP framework was sound. A PRSP PreparationStatusReport (PSR), issuedbythe Burundiauthorities inApril 2005, indicates that Burundii s on track to adopt a full PRSP based on a comprehensive participatory process at the colline (neighborhood) level, with local and provincial reports now completed. The analysis and synthesis o fthe results, including existing sources o f poverty data, especially the household surveys, i s expected to be completed by mid-July. The authorities now expect the full PRSP to be finalized inlate 2005 (compared with end-August inthePSR), to account for the possibility o ffurthertechnicaldelays and the possibleimpact of the current electoral process. It will be important to prepare well-costed sector strategies that would be integrated into the budgetary process. Ina Joint Staff Advisory Note (JSAN) on the PSR, IDA and IMF staff found that the authorities' revisedPRSP preparation timetable appears feasible. - 11- B. MacroeconomicObjectives 23. The authorities' medium-termmacroeconomicobjectives are to achieve sustained economic growth of some 5 percent per annum, lower inflation to about 4-5 percent, maintain foreign reserves at 6 months o f imports o f goods and services, reduce the extemal current account deficit (after grants) to some 5% percent o f GDP by 2015, limit external financing to grants and highly concessional credits, restore a sustainable extemal debt position, and boost private savings and investment.To achieve these objectives, the government's reform agenda focuses on promoting private-sector-ledgrowth, including through privatization, improved governance, and nurturinga business and regulatory environment that encourages private sector activity. Sustained export-led growth will also be essential and policies to attain this objective are addressedin a recently completed Diagnostic Trade Integration Study (DTIS), prepared inthe context o fthe Integrated Framework and will be furthered by an IDA Sources of Growth studyto be completedbyJune 2006.6 C. Governance, Structuraland InstitutionalReforms 24. Goodgovernance is a major aspirationof the Burundianpeople as evidenced in the Arusha Accord and in the I-PRSP.Measures taken include the appointment o f a state minister for good governance in2003, the establishment o fan inter-ministerial committee to promote good governance and fight corruption, the preparationo f a governance action plan, the strengthening of the Inspectorate General o f Finances and the creation o f an audit court, and the establishment o f an International Commission o f Inquiryon political prisoners. Outside the government, an Observatory for the Fight against Corruption and Economic Embezzlement (OLUCOME) provides vocal criticism o fmalfeasance. 25. Privatesector developmentunderpinspro-poor growth.As with public resources, attention to the local and ethnic aspects o fprivatizationprograms i s essential inorder to reduce the origins o f violent conflict. Actions undertaken to promote the private sector include programs to clear the government's arrears to private sector suppliers, the implementation o f a revised corporate law, and preparationo f a new commercial law. Revisions to the bankruptcy law and improvements inthe arbitration systemare underway, and a policy framework to implement the public enterprise privatization program has been prepared. Like other countries inconflict, Burundihas experienced major net disinvestment and destruction and as a result now has a deteriorated capital stock. Durable peace i s necessary, as well as further policy actions, to improve the business environment and sustain The DTIS provided a comprehensive assessment o f Burundi's strengths, weaknesses and opportunities, and necessary steps to be taken to improve trade performance through the promotion o f trade facilitation. Burundi's integration into the global economy would be enhanced through better market access, further liberalization of its trade regime, an investment climate conducive to the development o f a strong private sector, and promotion of sectors with highexport and growth potential to expand the export base and generate sustained growth for poverty reduction. - 12- the revival o f growth. The DTIS will also provide guidance on the pro-private sector growth strategy. 26. Other key reformsconcern communitydevelopment and decentralization.The government's priority inthis area i s effective decentralization and improved social services delivery through a community-driven project, supported by IDA. The main goals o f the project are to: (i)promote social cohesion within and across communities; (ii)facilitate and support the reintegrationo f social groups displaced, or marginalized, as a result o f the conflict; and (iii) local accountability through a participatory decision-making process foster for communities' investments. D. Social and SectoralPolicies 27. Burundiis far from meetingthe MDGsrelatedto health,education, including both child and generalmortality.Public sector contributions to social services have been neither sufficient to restore services that were diminishedor lost to the effects o f conflict, nor-despite extensive programs-to raise the level o f services to previously disadvantaged groups to national levels. Large-scale population displacements have seriously disrupted the delivery o f social services, while the equally large retumo frefugees and displacedpersons will place new burdens on overloaded local services. 28. Humanresourcedevelopment. Programs for the rehabilitationof education and health infkastructure are beingimplemented. Priorities are to improve access to these services informerly underservedethnic communities, decentralize healthmanagement to improve coverage and quality o fbasic health services, introduce an independent and autonomous management structure for public hospitals, and use cost-recovery mechanisms to improve and ensure sustainable provision o fhealth services. A multi-sector strategy for the fight against HIV/AIDSi s under way. 29. Educationsector. The government's efforts inthe short term will be focused on rehabilitating facilities, ensuringthe availability o f minimumsupplies, redeployingteachers to where there are shortages, and organizing teacher-training courses. Inaddition to these emergency actions, strategies need to be launched to revive the development o f the sector. Key actions needed to reach the objectives o funiversal primary enrollment and improved access, quality and relevance for secondary and higher education include: (i) training of teachers at all levels in sufficient quantity and quality; (ii)updatingtechnical education and university curricula and regulation; (iii) providing suitable teaching materials; (iv) upgrading the status andcareer prospects o fteachers; (v) improving school planning andthe distribution of schools; and (vi) implementing a framework for community empowerment and participation inprimary and secondary schools. 30. Health sector. The government has embarked on anational consultationprocess to formulate a strategy that aims at improving access to affordable basic services to the general population. Inline with the short-term objective o f restoringservices to pre-crisis performance levels, the government i s focusing its efforts on: (i) improving health care - 1 3 - coverage by rehabilitating and strengthening existingbasic health services, establishingnew facilities inline with the health map, and re-equippinghealth centers; (ii) strengthening preventive (reproductive health, immunization, sanitation, and nutrition education) and curative care through structured management and monitoring o f epidemics, particularly HIVIAIDS; (iii) improving the availability o f medical services and drugs by enhancing local production capacities and improving distribution channels; and (iv) redeploying health workers to, and offering incentives to retain available humanresources in, areas o f shortages especially rural and secondary towns, while continuing to train medical personnel. The medium-termobjective is to instituteand carry through reforms including: (i) establishing an independentnational drug agency with management autonomy; (ii) initiating and developing a decentralized health sector management system; and (iii) establishing a coherent operational research program to identify and adequately address vulnerability and inequalities. 31. Gender and social protection.Actions taken include the preparationof a gender action plan, and establishment o f a fimd to support the development o f micro-finance institutions inrural communities andsafety net mechanisms to assist the poor and victims of conflict. The matrimonial code has been revised to grant property rights to wives, including the right ofwidows to inherit land. Campaigns to promotethe role o fwomen have been undertaken. Representation o fwomen inpublic offices has been increased (the new Constitution assures 40 percent o fparliamentarians are women, and the Arusha Accord established a minimumthreshold that 30 percent o fpublic office holders mustbe women). 32. Rural sector. This sector contributes nearly 50 percent of GDP and supports more than 90 percent o f the population. Therefore, increasing agricultural productivity and diversification and rural development are among the government's major priorities to revitalize the economy and reduce poverty. Implementationo f the coffee sector reform strategy i s expected to raise the income levels o f some 800,000 small rural producers o f this main cash crop. Measures have beenimplementedto rebuildlivestock herds. Demographic pressures have led to the degradation o f land and the government i s addressing this through anAgriculture Rehabilitation and Sustainable Land Management Program supported by IDA, While seekingto increase the area available for farming, the government gives priority to programs for resettlingwar victims and returningrefugees and reintegratingthem in agricultural activities, restoring them where possible to their former properties, and arranging new properties or vocations for others. 33. Agriculture. The government's priorities include enactment o fnew land legislation that would reduce disincentives against on-farm investment; implementation o f a matching grant program designedto provide training and funding support to farmers' groups for the start-up o fproductive and income-generating activities; a national program to enhancethe supply and the quality o f training and extension services to small producers, andto provide backstoppingsupport to farmers' organizations; and a National Action Program to address theproblem oflanddegradation. Beginningin2005, activities fundedbyIDAandthe Global Environment Facility (GEF) are expected to reduce pressure on critical fragile marshlands, - 14- help maintain hydrological cycles, and contribute to carbon storage and nutrientcycling in forests andwetlands. 34. Infrastructure. The I-PRSP establishes a direct link between limitedaccess to infrastructure services and the deteriorated social and economic indicators. The government strategy for the sector emphasizes seven areas: (i) preservation o fthe existing roadnetworks; (ii)anincreaseinlocalfinancialresourcesforroadmaintenance;(iii) improvement o f sector management; (iv) involvement o fbeneficiary populations; (v) improvement o f access to the sea and balanced development o f road infrastructure; and (vi) improvement o froad safety. Labor-intensive techniques, together with active community ownership and participation, can help speed up an increase inthe stock o f sustainable infrastructure and the delivery o f services inrural and urban areas, while making a direct contribution to poverty reduction. IDA will continue to support this area through a supplementto its ongoing Public Works and Employment Creation project. 35. Mining. The miningsector holds some promise. The government strategy i s to relaunch a national miningexploration promotion program and to improve the legal and regulatory framework for the sector inorder to attract private local and foreign investment. The government-with technical and financial assistance from UNDP, Germany, and France-has beenexploring Burundi's mineral potentialwith the objective o fdeveloping sufficient information to attract foreign investments. Iv. DEBTSUSTAINABILITY ANALYSISANDENHANCED HIPC INITIATIVEASSISTANCE A. Debt Reconciliation Status 36. The DSA presented below was preparedjointly by the authorities andIDA and IMF staff, based on loan-by-loandata provided by the authorities and creditors for public and publicly guaranteed debt outstanding and disbursed as o f end-December 2004. All outstanding debt data has beenreconciled with creditors. B. The Structure of ExternalDebt 37. At end-December 2004, Burundi's public andpublicly guaranteed extemal debt, including arrears, i s estimated at US$1,384 million.' Multilateral creditors account for 84.5 percent o f this debt and Paris Club bilateral creditors for 10.5 percent (Box 3). Other official and commercial creditors account for the remaining 5 percent. After assuming full use o f traditional debt reliefmechanisms for bilateral and commercial debt, and excluding remainingmultilateral arrears (which have been cleared primarily through extemal grants), 'Or a net increase ofUS$33 millioncomparedto the stock of debt at end-2003 reportedinthe preliminary documenton the HIPC Initiative for Burundi (EBS/05/2 and IDA Report No. 31202-BI, 01/06/05). This is mainlydue to newborrowing fromIDA (US43 million) andunder the PRGF(US$lO million) andthe effect of the devaluationof the dollar vis-a-vis other currencies in2004. - 15 - the stock o f external debt outstanding at end-2004 inpresentvalue (NPV) terms i s US$902 million (Table 3, Figures 1 and 2).* Box 3. Paris Club Rescheduling Paris Club creditors agreed, on March 4, 2004, to a restructuring of Burundi's public extemal debt, following the approvalof a PRGF arrangement inJanuary 2004. The deadline for concluding the bilateral agreementswas extendedfrom end-September 2004 to March2005 and hrtherto September, By February 2005, bilateral agreementshadbeensignedwith all but one creditor (Austria is waiting to signa write-off with an elected government). The reconciliation ofthe debt was carried out inthe context of the bilateral agreements. A total of US$85 millionwas treated, of which US$4 millionwas cancelled. The specifics are summarizedbelow: 0 The agreement treats bothaccumulatedarrears as of end-2003 and current maturities falling due in 2004-06 under Naples terms. 0 Pre-cutoff date (June 20, 1999) official development aid(ODA) debts are rescheduledover 40 years, with 16 years grace, at interest rates at least as favorable as the original interest rates. 0 Pre-cutoff date commercial credits are rescheduledover 23 years, with 8 years of grace, at market interestrates, with apresentvalue reduction of 67 percent. 0 75 percentof interest accruing in2005-06 onrescheduledamounts was capitalized, with repayment (inequalsemi-annual installments)betweenSeptember2008 andMarch2016. 0 Creditors agreedto top-up the reduction rate to 90 percent (Cologneterms) as soon as Burundihas reachedits decisionpoint under the enhancedHIPC Initiative. 0 Burundicommitted to seek comparabletreatment from other externalcreditors. 38. Burundihadreachedagreementsto clear all its arrears to multilateralby end-2004 (Box 4). At end-2004, the total stock of remainingarrears amounted to US$78.6 million or 6 percent o f total debt outstanding. This represents a US106.1 million decrease compared to end-2003. About 27 percent oftotal arrears (US$21.3 million) were owed to multilateral creditors, but either resources have already beenpledgedto clear the arrears (conditioned on reaching the decisionpoint) or the government has reached an understanding with the creditor to reschedule the arrears. The remaining 73 percent oftotal arrears (US$57.3 million) were owed to bilateral and commercial creditors, ofwhich arrears to Paris Club bilateral creditors amountedto US13.8 million (Box 4). US$43.5 million of arrears was still outstanding to other bilateral and commercial creditors. The clearance of arrearsto multilateral creditors (or anagreement inprinciple to do so) is a condition to reach the HIPC decisionpoint and, as a rule, the concessionalelement embeddedinthe treatment ofthe arrears counts toward the creditor's share of HIPC debt relief ( "HIPC DebtInitiative-Approach to Arrears to Multilateral Institutions," March2, 1998). - 16- Box 4. Arrears Clearance Burundi has made major efforts to normalize relationswith creditors, and from 2003 to February2005 reached the following agreements with multilateral and bilateral creditors: The African Development Bank Group (AfDB) approveda framework for assistingpost-conflict countries (PCC) to clear their arrears to the AfDB inJuly 2004. The framework is basedon sharingthe financing cost amongst the country, donors, andthe AfDB PCC facility determinedon a case-by-casebasis. Earlier in 2004, Burundi had paid U A 6.7 millionto clear 30 percent of total UA 22.6 million (USS35.9) inarrears at end-2003.' Donors (France andthe EU) committed U A 8.0 million and the AfDB Board of Directors approveda UA 8.0 million grant from the PPC facility to completethe arrears clearance programin October 2004. The OPEC Fund implemented a Commodity Import Program(CIP) to achieve a concessionalrescheduling o f USS6.0 million in arrears at end-1998. The program was frozen after Burundi failed to repay USS1.5 million falling due in 1999.The CIP was resumed in 2003, after a payment from Burundi. The OPEC Fund granted an additional CIP to clear USS3.2 million inarrears accrued since 1998. BADEA agreed on consolidating US$16.7million in arrears in July 2003 and repayments falling due from August 2003 to end-2004. The total amount of USS17.3 million will be repaid on concessional terms over 11years. Arrears to the EuropeanUnion totaling US27.1million to the EU and the EuropeanInvestment Bank were cleared in mid-2004 entirely with a grant providedby the EuropeanCommission as budget support. Arrears to Paris Club creditors were cleared in the context ofthe March2004 rescheduling, with the last bilateral agreement signed in February 2005. Austria is awaiting an elected government with which to sign a write-off of its debt (Box 3). `iThe PCC facility is a legal autonomousentity underthe auspices ofthe African Development Fund(AfDF) for the sole purposeof providing grant resourcesto assist qualifying PCCs clear their AfDB Group arrears. The facility is financedfrom UA 100 million from the AfDB net incomeallocations, UA 100 million from ADF-10 resources, and UA 7 million from Nigeria Trust Fund income allocations. ~~ C. Debt SustainabilityAnalysis 39. The underlyingmacroeconomicprojectionsassume that Burundi's economy continues to recoverin linewith the government's 2005 program,with the supportof externalfinancing on highly concessionalterms (Box 5). According to the baseline scenario, which incorporates a domestic savings effort taking hold as recovery continues, Burundi's external debt is projectedto remain above the HIPC threshold for aconsiderable period and even after HIPC assistance (Tables 4-7). To reach the HIPC threshold at an early date would require a very highproportion o f external financing to be provided as grants early intheprojectionperiodto finance priority expenditure (see sensitivity analysis below) and deep reforms to underpinstronger growth and export performance. 40. The medium-termoutlook envisagesstrong economic growth, continued consolidation of the peaceprocess, macroeconomic stability, a deepening of structural reforms, and full normalizationof relationswith creditors.Real GDP growth is projected to be maintained at 5 percent, a pace that could be exceeded early inthe projection period, under the impulse of the reconstruction effort, as returningrefugees and demobilized combatants beginproductive activities, land and other property inrecently insecure locations are reclaimed and are put to economic use, and structural reforms take hold (Box 5 and Table 10). Starting from a low base in2004, exports are projectedto drive growth over the long term, with the recovery o f traditional sectors such as coffee, tea and cotton, as reforms and privatization take effect. Inparticular, coffee sector reforms are geared toward enhancing the quality o fproduction andBurundi's coffee is projectedonce again to fetch apremium - 17- over internationalprices starting in 2008. Nontraditional sectors in areas such as horticulture, fresh fruits andvegetables, and tourism are expected to make an increasing contribution with the expected return of direct air links to Europe, as the security situation continues to improve. Securing these developments will require the authorities to energetically implement their private sector growth strategy. With imports easing after the reconstructionperiod, the trade balance o f goods and services improves over the projection period. The current account deficit i s projected to widen initially to above 10 percent o f GDP, before narrowing to about 3.5 percent of GDP by 2024, while gross investment and national savings gradually rise to 13.7 and 10.1percent o f GDP, respectively, by 2024. Program financing is assumed to be on IDA credit terms, while project financing is assumed to be 50 percent on IDAterms and 50 percent on ODA terms. The financing gap would be coveredby enhanced HIPC Initiative debt relief. Box 5. MainAssumptions inthe Debt SustainabilityAnalysis Real GDP growth averages 5 percent over 2004-24, underpinnedby a peacetimebroad-based recovery inagricultural production and other private sector activities. CPI inflation (end-period) is projectedto decelerate from 12percentin2004 to 10percentin2005, and subsequentlyto drop steadilyto 4 percentby 2011andremain at that levelthrough 2024. Fiscal policy aims at achieving the government's spendingpriorities while maintaining macroeconomic stability. Revenues, excluding grants, are assumedto rise from about 18 percentof GDP in2005 to about 21 percentof GDP by 2024. Gross official external financing (grants plus loan disbursements)i s expectedto be about 22 percent of GDP during 2004-05, thentrenddown to about 10percentby 2009 and further to 6 percent o f GDP in2024.Net resource transfers are expectedto remainpositive throughout the projectionperiod trending down from 32 percent in2005 to 9 percent of GDP in2024. Official financing: program loans (excluding the IMF) are assumedto be entirely at concessional rates onIDA or comparableterms. The financing gap would be coveredby HIPC debt relief. Project loans would be evenly split betweenofficial ODA terms and IDA terms. Export receipts inU.S. dollars are expectedto remain stable in2006, rise by 21 percent in2007, and then rise annually at rates between7 and 11percent, with coffee production gradually reaching about 55,000 tons. Coffee quality is assumedto improve, reflecting the impact of the sector's reform, and the price discount relative to world prices is assumedto revert to apremiumafter 2008. The composition ofexports is expectedto gradually shift frompredominantly coffee andtea to include other sectors (other agricultural products, processedfoods and light manufactures). In volume terms export growth would average 6.5 percentover the projection period, including a spurt to 8 percent inthe 2015-20period from non-traditional sectors. The GDP share of exports of goods and services is projected to rise from 10percentin2005 to about 13 percentin2024. Imports of goods and services inU.S. dollars are projectedto average 34 percentof GDP in2004- 05 and, with emergency assistance andreconstruction-related imports winding down, to decline to 25 percentof GDP in2013 and subsequentlytrend gradually down to 22 percentof GDP in2024. In volume terms, import volumes would rise an average of 4.5 percent from 2009 onwards, following the 2006-08 period ofconsolidation. - 18- 41. The projectedbaseline growthrates and exportperformancemay appear optimistic,especially seen against Burundi's past experience. The rate o freal GDP growth slightly exceeds that observed inperiods o fpeace during the 1980s, but i s inline with evidence from post-conflict recovery elsewhere. It is likely that growth will be bolsteredby the economic contribution o f the hundredso f thousands o freturningrefugees and displaced persons, and the reintegrationo f tens o f thousands o f former armed combatants into productive society. Moreover, the baseline does not incorporate a likely post-conflict catch- upperiod with higherrates o fgrowth. Coffee exports areprojectedto about triple over the next twenty years, consistent with Burundi's potential and historical highproduction. The projections also take into account an export-led diversification o f the economy, which has potential to expand into agro-based goods, light industrial manufactures, and possibly high value mineral resources. 42. On the basis of these assumptions, and takinginto account the phased-in provisionof enhancedHIPC Initiativeassistance, the NPV of outstandingdebt-to- exports ratiowould remainsignificantly above 150 percentthroughout the interim period(Table 7 and Figure3), notwithstandingthe assumedhighshare o f grants inofficial assistance. The estimates for the amount o f HIPC assistance are based on the NPV o f the stock o f multilateral debt at end-2004 prior to arrears clearance and on the end-2004 NFV o f bilateral and commercial debt assuming the full use o f traditional debt relief mechanisms as simulated by a hypothetical stock-of-debt operation on eligibledebt on Naples terms. After the fulldelivery ofHlPC assistance, the ratio o ftheNPV ofdebt to exports is projectedto rise initially to 168 percent in2010 and thento decline steadily to 86 percent in2024. This profilereflects significant new reconstruction and adjustment lending by multilaterals on highly concessional terms or as grants inthe 2005-06 peri~d.~ D. PossibleHIPC InitiativeAssistance 43. T o bringthe externaldebt-to-exportsratio down to the target ratio of 150 percentrequires,after the full use of traditionaldebt-relief mechanisms, a common reductionfactor of 91.5 percentfor all creditorsor reliefin the amount of US$826 millionin NPV terms (Table 4). Possible assistance from multilateral creditors would be about US$701 million inNPV terms, and relief from bilateral and commercial creditors would amount to US$124 million. Paris Club are expected to provide US$86 million o frelief inNPV terms, commercial creditorsUS$5 million, andother official bilateral creditors US$33 million. Assumingthe time profile and modalities laid out below, this translates into about US$1,495 million of debt reliefinnominal terms over time.'' The following During the period June 2005 to June 2006, IDA will provide financing of aboutUS$120 million inthe form of grants, accordingto IDA allocation rules for fiscal year 2005/06. Multilaterallending includes disbursements under the current PRGF arrangementand the ongoing lending programon the AfDB. loParis Club creditors, togetherwith IDA, the IMF, and the AfDB, represent 84 percent of the NPV of debt. -19- assumptions were made inprojecting the time profile o fpossible enhanced HIPC Initiative assistance: 0 Paris Club bilateralcreditors.There would be a flow rescheduling on Cologne terms-or a 90 percent NPV reduction-after reaching the decision point (which i s assumed to take place at end-June 2005), with delivery o f the remaining required assistance at the completion point expected at end-2006, through a stock-of-debt operation. Paris Club creditors agreed to grant a topping-up o f the debt reduction to Cologne terms once Burundireaches decision point underthe HIPC Initiative. 0 Comparable treatment would beprovided by non-ParisClub official bilateral and commercial creditors. 0 IMFassistancewouldtotalUS$27.84 millioninNPVterms. Immediately following the approval o fthe decisionpoint by the Boards of IDA and the IMF,the IMF would provide interim assistance equivalent to about 50 percent o f debt-service falling due (equivalent to interest obligations on PRGFborrowing) from the decision point in2005 through end-2006. PRGFprincipal repayments are due to the IMF beginning August 2009. Therefore, most o f the IMF's remaining HIPC reliefwould bedelivered following the completionpoint, with debt-service reductionthrough 2015 (Table 11). 0 IDA would provide total assistance amounting to US$424.8 million inNPV terms, Immediately following the approval o f the decisionpoint by the Boards o f IDA and the IMF, IDAwould beginto provide interimassistanceinthe form o f debt-service reduction on debt outstanding and disbursedat end-2004, and, assuming that Burundireaches the completionpoint at end-2006, would continue until2039 (Table 12). Delivery of the interimassistanceby IDA i s expected to start inAugust 2005. Savings as a percent o f debt service due to IDA for 2005 i s expected to be 39 percent and to increase to 90 percent thereafter." 44. All other multilateralcreditorsare assumedto provide debt-service reductionuntil their contributions meet the requirementunderthe enhancedHIPC Initiative. Discussions are ongoing with the AfDB and other multilaterals as to the precise modalities. E. Impactof HIPCInitiativeAssistance 45. Based on the underlyingmacroeconomic projections,the NPV of debt-to-exports ratiowould not declinebelow 150 percentuntil2013, and significantdonor support on grant terms will be necessarythrough the mediumterm. However, HIPC assistance would considerably reduce the debt-service burdenover the mediumterm. After the "Savingsasapercentageofdebtserviceareexpectedtobe85percentofdebtservicedueduringtheperiod August-December2005 and90 percent thereafter through August 2038. - 20 - clearance o f arrears owed to multilateral creditors and notwithstanding the reliefreceived from Paris Club creditors in2004, scheduleddebt service would rise as a consequence of the reprofiled repayment terms on the arrears and the repayments o fmoratorium interest (Table 6). HIPC assistance inthe interimperiod (July 2005 to end-2006) would reduce debt service due from 52 percent o f exports and 29 percent o f fiscal revenuein2005 to 12.6 percent o f exports and 6.2 percent o f fiscal revenuein2006.12Debt service would subsequently trend down to an average o f 5.3 percent o f exports and 3.2 percent o f fiscal revenue in 2015-24. Additional external resources, includingfrom the recovery of exports, will more than offset debt service obligations and result ina net positive inflow during the interim periodand beyond. Inthe interimperiodprojectedratios o f debt service to exports after HIPC relief do not compare favorably with the average ratio (8.2 percent in2004) of the 27 countries that have reached their decision or completion points because o f the limited number o f creditors assumed to provide interimrelief and debt service on new borrowing. The reduction o f debt service as a result o f HPC assistance i s expected to average nearly U S 2 6 million in2005-06, increasing to an annual average o f about US$46 million after the completion point." The amount o f resources freed by HIPC reliefwould permit a sizeable increase inBurundi's poverty reducing spending, and is projected to exceed current expenditure on health and education. F. Sensitivity Analysis 46. Four scenarios were carried out to test the sustainability o f Burundi's external debt after HIPC Initiative assistance(Table 8, Figure4). 47. A first scenario highlights the risks of failing to achieve robust andprolongedexport growth. The baseline scenario assumes that exports would significantly contribute to growth over the mediumand long term. Ifthe assumption i s changed so that export volumes are projected to increase at a rate 1percentage point lower than that o fthe baseline scenario, the NPV of debt-to-exports ratio is projectedto average 29 percentagepoints more thanthe baseline scenario in the period 2004-14 and 130percentage points above the baseline level at the end o fthe projectionperiod. 48. The secondscenario considers the sensitivity o fthe baseline projections to higher non-oil prices on imports, assuming an unchanged level o f investment and private andpublic consumption. Non-oil prices are assumed-tobe 5 percentage points higherthan projected during2006-09 andthereafter to increase accordingto the baseline scenario. The higher import growth i s assumed to be partially financed by additional concessional borrowing for "InterimreliefisassumedtobeprovidedbytheIMF,IDA,theAfricanDevelopmentBank,othermultilateral creditors and the Paris Club. l3Innominal flow terms, HIPC assistance by multilateralcreditors is defined as the reduction indebt service due after arrears clearance and after HIPC assistance. For bilateral and commercial creditors it is defined as the difference between debt service due after traditional debt relief and that due after HIPC assistance, - 21 - the whole projection period. Under these assumptions, the debt-to-exports ratio worsen considerably at an average o f almost 50 percentage points above the baseline in2004-14 and remaining at about 105 percentage points above the baseline thereafter. The debt service ratio, however, would deteriorate only slightly. 49. The third scenario considers the impact of a two percentage point increase ininterest rates paid on all loans, starting in2005 and remaininginplace throughout the projection period. This scenario highlightsthe needto maintain prudent debt management inthe long run,giventhe low exportbase.Bothexport receipts andgovernment revenues are assumed to remain unchanged from the baseline scenario. Underthese assumptions, the ratio o fthe NPV of debt to exports would remain on average almost 60 percentage points higherthanthe baseline scenario over the period 2004-1 4, while the debt-service-to-exports ratio would average some 6 percentage points higher, a differential that would be maintained to the end o f the projection period. 50. A fourth scenario illustrates the effect ondebt ratios of assuming future financing (excluding the IMF) is entirely ingrants untilthe ratio ofNPV o f debt to exports reaches 150percent, Underthis scenario, Burundiwould benefit from 100percent grant financing duringthe period 2006-07. After 2007, financing needswould bemetbya mix of 70 percent grants and 30 percent concessional loans to maintain the NPV o f debt permanently below the HIPC threshold. The highlyconcessional financing lowers the debt-service ratio only marginally with respect to the baseline scenario over the projection period. 51. The sensitivityanalysis indicatesthat Burundi's ability to service externaldebt after HIPC reliefis very vulnerableto externalshocks and export performance.The achievement o f a robust external debt position i s also heavily influencedby the composition andterms of external assistance. The small export base constrains the amount o fdebt that Burundiwill beable to service inthe medium and longterm, especially ifpublic expenditure i s to give priority to achieving the MDGs. The analysis underscores the importance o f a strong and sustained domestic reform effort, an active program to develop exportable production (traditional and nontraditional), prudentdebt management strategy, and external assistance heavily weighted toward grants. G. Summary of Findingsfrom the DSA 52. The DSA shows that even after HIPC assistance Burundiwould remain above the HIPCthresholdfor a considerableperiod of time, leavingit vulnerable to prolonged risk of debt di~tress.'~ Furthermore, the sensitivity analysis underscores the vulnerability of Burundi'sdebt situation to exogenous shocks and export performance. Inparticular, the analysis highlightsthe fact that Burundi's small export base implies that relatively modest l4 The DSA usingthe low-income country (LIC) DSA framework reportedinAnnex I1confirms this assessment. - 22 - shocks can lead to substantial changes inthe risk o f debt distress as measured bythe ratio of the NPV o f debt to exports. Inaddition, achievement o fa robust external position is heavily influenced by the composition and terms o f external assistance. 53. The evolutionof Burundi's debt situation will dependcriticallyon actionin several policy areas. First, the small export base constrains the amount o f debt that Burundi will be able to service inthe mediumand long term, especially ifpublic expenditure is to give priority to achieving the MDGs. This underscores the importance o f a strong and sustained domestic reform effort, notably an active program to develop exportable production (traditional and nontraditional), aimed at promoting private sector investment and improved infrastructure. Second, as underlined by the fourth scenario, the provision o f external financial assistance would needto beheavily weighted (more so than inthe past) toward grants. Third, a prudent debt management strategy shouldbe pursued. V. THEFLOATING COMPLETIONPOINTS A. Triggers for the FloatingCompletionPoint 54. IDA and IMFstaff have reachedunderstandingswith the authorities on the choice of completion pointtriggers, summarized inBox 6, which also reflect the views expressed by Executive Directors duringthe discussion o f the preliminary HIPC document, These include (a) the standardgeneral triggers pertainingto (i) preparation o f a full PRSP the through a participatory process and one year o f implementation, duly documented in an annual progress report that has beenthe subject o f analysis in a Joint Staff Advisory Note; (ii)maintenance o f macroeconomic stability as evidenced by satisfactory performance under the program supported by aPRGF arrangement; and (iii) utilization o f enhanced HIPC Initiative budgetary savings in line with the priorities identified at the decision point and in the PRSP and approvedbyparliament, andto be monitored by a national independent oversight committee (see section C below); and (b) specific and monitorable policy measures on public expenditure management, governance, demobilization, structural reforms, key social sectors (health and education), and debt management. These triggers are considered essential to the success o fthe enhanced HIPC Initiative inBurundi.The governance trigger reflects the need to raise the knowledge base and undertake the analyses necessary to improve service delivery inkey sectors. The trigger on demobilization reflects the importance o f security to a durable peace and development. Similarly, privatization will play a key role inattracting investment and inachieving higher growth rates, not least inthe key coffee sector. Should Burundiremain on track with regard to implementation o f its poverty reduction strategy and economic reforms supported by IDA and the NF, the HIPC completion point could be reached as early as end-2006. - 23 - Box 6. Triggers for the FloatingCompletionPoint 1. PRSP Preparation of a full PRSP through a participatory process and its satisfactoryimplementation for one year, as evidencedby an Annual ProgressReport that has beenthe subject of analysis ina Joint Staff Advisory Note. 2. Macroeconomicstability Maintenance of macroeconomicstability as evidencedby satisfactoryperformanceunder the PRGF- supportedprogram. 3. Use of budget savings resultingfrom HIPC-related debt-service relief during the interim period Use of budgetary savings from debt relief inaccordancewith the priorities identified at the decision point and inthe PRSP duly documentedanddiscussedby anational IndependentOversight Committee on a semi-annualbasis. 4. Public expenditure management Establishment of an integratedpublic expenditure computerizedsystemthat provides a budget monitoring and control system, inparticular for poverty-related spending, and the production o f at least two quarterly budget executionreportsbased on the new unifiedbudget nomenclature. 5. Governancemeasuresand the delivery of services in key sectors Completion for the education,health, andjustice sectors of (i) abudget tracking exercise (budget monitoring) o fpublic spendingon the delivery of pro-poor services; (ii) an evaluationby users of the quality of services provided; (iii) an evaluationby providers of constraints to effective delivery ofpro- poor services; and(iv) preparationof an action plan to addressproblems identified. 6. Demobilization Execution of the NationalDDRPrograminline with the pace and final objectives set forth inthe Letter of DemobilizationPolicy to the World Bank, dated 19 February2004. 7. Structural measures: Tendering for sale the state holdings ina majority of coffee washing stations. 8. Social sectors Education: Increase inthe gross national enrollment rate inprimary schools from74 percent in 2003/04 to 77 percent in2006; and from 16 percentin2003104 to 18 percent in2006 insecondary schools, subject to the provision that the average increase inprovinces with lower than average enrollment rates in2004 must be higher than the increase inthe national rate over the same time period. Health: Increase inthe national immunization rate for children o f less than one year of age from75 percentin2004 to 85 percentin2006, subject to the provisionthat the average increasein provinces with lower than average immunization rates in2004 must be higher than the increase inthe national rate over the same time period. 9. Debt management Production of monthly external debt reports, including projections for the upcoming three months, for at least six months before the completion point. B. Monitoringthe FloatingCompletionPointTriggers 55. IDA and IMF staffwill work together closely to monitorthe completionpoint triggers, with each institutionleadingon issueswhere its staff has primary competence, while also incorporatingcontributionsof the staff from the other institutions.IMFstaff will take the lead inmonitoring macroeconomic stability. IDA staff will take the lead in monitoringprogress inthe preparation and implementation of the PRSP, as well as progress - 24 - on sector-related triggers, including those pertaining to governance, service delivery, public expenditure management and tracking o fpoverty-related expenditures (including those financed by enhanced HIPC Initiative assistance), and demobilization. IMF and IDA staffs willjointly monitor budget control andmanagement, structural reform, and progress in improvingdebt management. C. The Use and MonitoringofEnhancedHIPC InitiativeDebtRelief 56. The authorities are committedto ensuringthat assistanceunder the enhanced HIPC Initiativeis usedto enhance poverty-relatedspending. Securing the effective use of debt relief assistance for poverty reduction and, more generally, the capacity to implement andmonitor a shift inthe composition o f expenditure toward poverty-related objectives, i s a key element o f the enhanced HIPC Initiative. The authorities are committed to continuing efforts to strengthen the programming, management and control o f expenditure, and to improve service delivery inkey sectors. Within this framework, the technical assistance that i s already beingprovided in the area o fpublic expenditure management by IDA, particularly through the EMSP andby the IMF, will be essential to establishing adequate budget management capacity. 57. A new budgetnomenclaturehas been put in place with the 2005 budgetto enablethe trackingof poverty-relatedresources allocatedby activity and region,and the monitoringof the efficiency of resourceuse for povertyreduction.Inaddition, financial management i s to be strengthened by the introduction o f a computerized integrated public expenditure management system in2005. A special treasury subaccount will be established inthe centralbank where the budgetary savings from the debt relief will be deposited. IDA'SEMSP and a grant on procurementreform will provide resources to strengthen and modemize the public procurement systemwith the adoption and implementation o f a legal, regulatory, and institutional framework in line with intemational best practices. 58. The governmentintendsto use the HIPC-relatedsavings to fund activities identifiedin the I-PRSP and PRSP (whichis expectedto be completed by late-2005). These activities and the related financing from enhanced HIPC Initiative debt relief would be incorporated ina supplementary budget for 2005 and/or the 2006 budget. The related spending will be codified as H P C expenditures inthe integrated public expenditure management system, usingthe new budget nomenclature, to permit the monitoring and evaluation o fpoverty-related expenditures ingeneral and those f h d e d from enhanced HIPC Initiative debt relief inparticular. A proposed, but nonexclusive, set of areas where the use of enhanced HIPC Initiative debt relief assistance could have a significant impact on poverty reduction inBurundiis shown inBox 7. -25 - Box 7. ExpenditurePrioritiesfor the Use of HIPC Debt Relief National reconciliation and security Resettlement o f intemally displaced people and refugees. Economic reintegration o f civil strife victims. Justice system reform. Public awareness programs to control the spread o f HIVIAIDS. Rehabilitation and strengthening o f existing basic health facilities and services and, establishment o f new facilities inunder served areas. Training and retraining o f health personnel o f all categories and using incentives to deploy and retain them inthe health facilities, especially inrural areas and secondary towns. Reinforcing programs for the prevention and control o f the major endemic-epidemic diseases and promoting health education. Improving the availability o f drugs inurban and rural facilities. Improving the performance o f national child vaccination program. Improving access to potable water suppliesparticularly inthe rural areas. Education Rehabilitationor reconstruction o frural schools. Provision of suitable teaching materials for rural and urban schools. Increasing the number o f teaching personnel, particularly in rural and underserved areas. Infrastructure Rehabilitationand expansion o f coverage o f rural water supply systems. Rehabilitationo f key rural roads and bridges. Construction o f new roads and bridges inurban and rural areas. Agriculture Strengthening research and development through support to agricultural research institutions. Promoting private sector involvement. 59. The expendituresfinancedby enhanced HIPC Initiativedebt reliefwill be monitoredby an IndependentOversightCommittee made up of nationaland local representatives,as well as members of the internationaldonor community.This approach has been successfully implementedin other countries inthe region. The use of enhanced HIPC Initiative assistance would be subject to independent technical and financial audits to ensure the effective use of these resources for poverty reduction, and all such audits would be made publicly available. D. The Views of the Authorities 60. The Burundiauthoritieshave emphasized that Burundi's externaldebt and debt service remainunsustainablyhigh and could further delay nationalreconstructionand social improvement.They have also noted that Burundi i s one o f the poorest countriesin sub-Saharan Africa, with a large segment o f its population lacking access to basic needs such as education, health, and safe water, and that the conflict aggravated the level o fpoverty b y the massive destructiono finfrastructure, especially inrural areas. Debtreliefthat couldbe - 26 - available under the enhancedHIPC Initiative would help free financing for critical social and infrastructure programs, and allow the government to accelerate and intensifyreconstruction efforts, as well as improve access to primary education, preventive health care, andurbanand rural infrastructure. VI. ISSUES FOR DISCUSSION 61. This paper presents a decision point assessment o fBurundi's eligibility for assistance underthe enhanced H P C Initiative, and seeks the Executive Boards' endorsement ofthis assessment. Inaddition, Executive Directors' views and guidance are sought on the following issues: Eligibilityand decision point. Do Directors agreethat Burundiis eligible for relief underthe enhanced H P C Initiative, and do they recommend approval of a decision point? Amount and delivery of assistance. Inorder to reduce the NPV o fdebt to exports ratio to 150percent, the total amount o f assistance under the enhanced HIPC Initiative i s estimated at U S 8 2 6 million inNPV terms (Table 4). Of this amount, US$424.8 million is to beprovided by IDA and US$27.9 million by the IMF. The staff and management recommendthat the World Bank and IMFprovide interim assistanceinline with existing guidelines. Do Directors agree that the IMF and IDA should provide interimassistance between the decision and completion points, inline with existing guidelines? Completionpoint.Do Directors agreethat the floating completionpoint will be reached when the triggers inBox 6 have beenmet and satisfactory assurances o f other creditors' participation underthe enhanced HIPC Initiative have beenreceived? - 27 - - 28 - Figure3. Burundi:External Debt Profile: External Sustainability Indicators, 2004-24 (Inpercent) NPV ofdebt-to-exports ratios 2000 1800 * , * - = e * 150 percent line (right 160.0 1600 4 axis) 140.0 I400 t 4 1120.0 1200 \ 100.0 1000 ,-80.0 800 760.0 600 400 200 0 0.0 20042005200620072008 2009201020112012201320142015201620172018201920202021 202220232024 Debt service-to-exports ratios 70 - 60 - 50 - 40 - Before HIPC assistance 30 - ' 8 20 - 8 After HIPC assistance I O - o I- - I I \ # t 1 1 1 - 4 - m 1 1 1 1 1 = = . 0 - I Sources: Burundi authorities; and staff estimates and projections. - 2 9 - Figure4. Burundi:Sensitivity Analysis, 2004-24 (Inpercent) NPV of debt-to-exportratios 300 0 250 0 .._ ...... .... ._...-... .-._ ........ .-. ................. .....-.- ........ 200 0 IS00 100 0 50 0 0 0 2004 200.5 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Debt service-to-exportratios 35 0 30 0 2s 0 20 0 I S 0 I O 0 ..................... ...... >.--.>. 5 0 0 0 -~ 200s-Baseline 2006 2007 2008 2009 2010 201I 2012 2013 2014 201s -.-. Higher non-oil import prices .....Lower concessionality of newborrow'ng ---Highergrantfinancing Lower expan growth Sources: Burundiauthorities; andstaff estimates. - 30 - Figure5. Burundi:ExternalDebtProfile: Fiscal SustainabilityIndicators, 2004-24 (Inpercent) NPV of debt-to-revenue ratios 800 - 1 150.0 700 - 130.0 600 . 500 ' 400 - 300 - 200 ' 100 ' 0 " " " " " " " " " " ' ~ -10.0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 40 35 1- Debtservice-to-revenue ratios 30 - Before HIPC 25 - 20 - 8 15 - 8 8 I O - After HIPC assistance 8 0 ' ' ' 1 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 Sources: Burundi authorities; and staff estimates and projections. - 31 - Figure 6. Burundi:External Debt Profile: Net PresentValue ofDebt-to-GDP Ratio, 2004-24 (Inpercent) 160- 18.0 140- 16.0 - c z - - 1 * * After HIPC assistance (right 1 z axis) 120- * - - i14.0 I - 1 . 1 - 1 12.0 100- * - * 10.0 8.0 6.0 4.0 2.0 z" t i Y - 0.0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 Sources: Burundiauthorities; and staff estimates and projections. - 32 - Table I.Burundi: SelectedEconomic and Financial Indicators, 2003-08 2003 2004 2005 2006 2007 2008 Prog I/ Act Prog I/ Rev Projections EBSi041179 EBSl04i179 pros (Annualpercentagechange. unless othenviseindicated) National incomeandpriccS Real GDP growth -1 2 5 5 4 8 5 0 5 0 5 0 5 0 5 0 GDP deflator II6 8 0 8 3 6 7 153 8 4 5 5 5 4 Consumer prices (periodaverage) 10 7 7 5 8 0 6 6 163 7 8 5 1 5 0 Consumer prices (endof period) I O 7 85 1 1 8 5 5 103 5 2 5 0 5 0 Extemal sector Exports. Co b. (inUS dollars) 21 0 9.4 275 39 I 44.4 0.1 20 8 8 0 Impons. t o b. (in U.S.dollars) 175 44 9 13.4 6 2 422 -1 6 3 1 3 9 Exportvolume 28 8 -18.2 .10.9 392 17.1 -0.3 23.0 5 4 Imponvolume 25 6 30 9 -0.7 6.5 32.1 -3.0 2.8 3 2 Terms of trade (deterioration-1 0 4 20.9 25.3 0 1 14.5 -1.1 -2.0 I 8 Real effectiveexchangerate (annualaverage, depreciation-)2/ -18 6 ... -4.1 -1.1 Centralgovemment Revenue I 4 9 4 9 8 0 9 1 9 9 162 122 II8 Total expenditureand net lending(commihent basis) 48 4 364 296 I 5 0 189 0 5 0 7 8 7 Noninlereslcurrentexpenditure (excl demobilization and elections)31 I 5 9 227 186 197 1 8 2 115 116 II0 (Changein percent of beginning-of-periodM2, unless othmvise indicated) Money and credit Net foreignassets I 9 0 .7.7 -Ill 2.8 126 -1 4 II 1 2 Domestic credit I 4 0 306 34.1 11.6 1.6 8 4 8 3 7 9 Government 9 6 18.9 32.8 -4 9 -10.5 -2.5 0 0 0 0 Private sector 5 5 13 8 1 7 164 139 11.3 8 7 8 3 Money and quasimoney(M2) 23 I 18 6 15 7 14.9 17.4 16.5 15.0 I O 7 Incomevelocity (ratio ofGDP to M2. end ofperiod) 3 7 3 6 3.6 3.5 3 7 3.7 3 s 3 5 Reservemoney(12-monthgrowthrate) 109 269 37.2 7.7 -1 1 3.3 126 I O 7 Central bank refinancingrate (in percent. end ofperiod) 41 14 5 145 14.5 I 4 5 Commercial bank lendingrate(in percent; medium tmn; periodaverage) 20 7 20.5 20.5 (Inpercenlo f GDP) Centralgovemment Revenue(excludinggrants) 21 I 194 20 1 190 18.2 18.6 188 I 9 0 Total expenditureandnet lending 34 9 42.2 398 434 39 I 345 31 4 30 8 Rimary budget balance (excludingforeign-financedprojects) 31 -0 8 .3 2 -3.5 -4 3 -3 5 -2 5 -2.2 -I9 Overallbalance (commitmentbasis) Excludinggrants -13 8 -22.8 -19.7 -243 -209 -15.9 -12 5 .II8 Including grants -5 9 03 -1.3 -3 6 -02 0 9 -02 0 8 Savings-investmentbalancesSi Current account balance -4 8 -9 5 -7.2 -15 5 -7 I -10.5 -99 -8 6 Gross investment I O 4 12.4 13.7 12.8 11.9 II5 11 8 II7 Public 8 3 9 4 107 9 4 8 6 7 5 7 5 7 1 Private 2 1 3.0 3 0 3 3 3.3 4 0 4.3 4 6 Gross nationalsavings 5 5 3 0 6.5 -27 4 8 1 0 1 9 3 2 Public II 4 4 5.6 3 1 6 2 3.6 4 8 5 5 Private 4 4 -1.4 0.9 -5.8 -1.5 -2.6 -3 0 -2 4 (In millions 0fU.S dollars.unless othenviseindicated) Externalsector Currentaccount51 -28 8 -63 2 -47.7 -1207 -568 -94 9 -960 -89 2 Overallbalance of payments -I5 4 25 4 13.2 -27 0 0 4 -498 -388 -39 5 Grors official reserves (endofperiod) 68 9 81 7 69.5 1150 1253 116 1 1197 I24 4 Gross official reserves (in months of imports,c.i.f) 5 6 4 3 5.0 5 8 6 4 6 0 6 0 6 0 Net official reserves(in months of imports, c if ) 2 7 1 7 1 4 16 2 2 2 0 2 0 2 0 Debt-serviceratio (scheduled, in percent of export and servicereceipts) 92 6 146.0 1179 624 622 640 51 3 47 9 Stock ofdebt 1,336 4 1,221 2 1,382.3 1,434 4 1,532 9 1,5360 1,5376 1,5192 Externalpayments arrears 184 7 ... 786 0 0 0 0 0 0 0 0 Memorandumitems: GDP at currentmarketprices (in billions ofBurundi francs) 644 2 7343 7312 8225 8850 1,0078 1,1172 1.237 2 Sources. Burundi authorities,and Fundstaff estimatesand projections I1 "he programcolumn for 2005 has beenrevisedto reflect areclassificationof fiscalspendingon Ihe police force and of extemalprogramgrants. 21Datathrough April 2005 31Theprogramand revisedprogramcolumns for 2005 havebeen adjustedto reflectareclassificationof fiscalspending on the new police force from projects to recurrentspending 41Data through June 15, 2005. 5/ The programcolumns for 2004 and 2005 reflectareclassificationofprogram grants from the capitalaccount to ofticid transfers - 33 - Table 2. Burundi. Balanceof Payments,Medium-TennScenario.andSensitivityAnalysis,2004-24 2004 2005 2006 2007 2008 2W9 2010 2015 2020 2024 Re1 Pr0,cclIOIu ~ (InmillionsofU Sdollus) Cunem dLCOYlt I1 47.7 4 6 8 -94 9 -96 0 -89 2 -94 7 -96.0 -98 7 -105.1 -1165 (ncludiogofficial nansfers) -161 8 -231 4 -228.6 .ZIP6 .2149 -220.5 -223 I -248 8 -282 9 J206 Trade bdmce -94.9 -1340 -130 8 -122 5 .I23 9 -1297 .I348 -1583 -1780 -2022 Eilponr. f o b 47 9 69.1 69 2 83 6 90 3 96.3 IC48 1637 259 8 345 8 Ofwhich coffee 29 4 48 5 46.2 58 7 63 4 67 7 73.9 I O 5 I 139 5 1710 Impons. f.0.b. -142 8 -203 I .I99 9 -206 I -2142 -226 I -239.6 -322 I 4 3 7 8 -548 0 Ofwhich n o n d -1163 -163.1 .I56.8 -161.1 -1702 -180.9 -192.7 2 5 9 2 -353 4 4 4 3 4 Services (net) -51 3 -77 4 -79 8 -75 8 -76 0 -77 4 -75 I -78 9 -93 9 -1077 lncame(ne!) -27.3 -32 5 -32 2 -32. I .32.5 -32 7 -33 5 -37 4 4 4 0 -50.8 Ofvhneh ininatonpublicdebt(ioeludiogIMFchuges) .9.9 .12.6 -12 9 -129 -12.9 -12 6 -124 -105 -9 6 -9 I Cwent uanrfers(net) 11 125.9 187.1 147.9 1344 143 I 145.2 1474 1760 210.9 244 2 Private(net) I 1 8 12.5 I 4 2 I5 8 17.5 19.3 20 3 25 9 33 0 40 I Official(nn) 114 I 174 6 133 6 118.6 125 6 1259 127 I 150 2 177.8 204 0 Capiul account I1 49 0 43 6 42 0 44.I 45 6 47.2 48 9 55 3 6 4 4 73 2 Financialaccount 16 6 13.5 3.1 13.1 4 1 3 1 0 0 -0 7 1 8 2 9 Ofwhich. Medium- and long-termoffic?d loans(net) 11.5 27.7 -67 2 3 -7 0 -8.4 -10 6 -175 -I5 8 .I89 Dirbunmens 42 5 65 8 33.6 40 9 32.1 30.6 26 5 30 8 30 6 33 2 ArwrtiLatioa (excludingIMF) -310 -38 2 4 0 3 -38 6 -39 I -39.0 -37 I 4 8 1 4 4 -52.0 Enors andOmissioN 4 8 0.0 0.0 0 0 0 0 0.0 0 0 0 0 0.0 0.0 13 2 0 4 49.8 -38 8 -39 5 4 4 3 4 7 I 4 4 0 -38.8 4 0 4 Fmancing(incrclre in aseu.) .I32 -164 14.1 .I2 -1 6 -2 3 -2.6 4 4 -5 0 -5.7 Chmgc incenml b dnet foreip rume3 (iocrearc.) 12 8 -23 6 4 6 -1 2 -1 6 -2 I -2 6 -3.4 .5 0 -5 7 IMF.net -106 .22.0 -22 0 -110 0 0 4 1 10.3 8 9 0 0 0.0 0 t hreserves.ne( ~ 23 4 .I 6 26 7 9 8 -I6 -64 -13 0 -123 -5 0 -5 7 Changeinmeus iicrease +) -106.1 -78 7 0.0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Exceptional financingU 80.1 85 9 9 5 0 0 0 0 0 0 0 0 0.0 0 0 0 0 Canrellrtion 41 0 0.0 0 0 0 0 0 0 0.0 0.0 0 0 0 0 0 0 Reschedulingofdebt smice md meus 39 I 85 9 9 5 0 0 0 0 0 0 0.0 0 0 0.0 0 0 Financinggap 0 0 1 6 0 35 7 40.0 41 I 46 6 49 7 47 4 43 8 46 I Poteotirl HlPC relief 16 0 35 7 40 0 41.1 46.6 49 7 47 4 43.8 46.I (InpercentofGDP, unlessoth-re hdicaled) Memorandumitems Trade bdancc -143 -16.7 -14.5 .12.6 -11.9 .I16 -11.1 -9 0 -7 2 .6.2 Cwmt mount -7 2 .7 I .IO 5 -9.9 -8.6 -8.4 -7 9 -5 6 4.3 A 6 (excludbgofficialumsfns) -24 4 -28 9 -25 4 -221 -206 -196 -184 -14.2 .11.5 -9.9 ~ r o officid reserves u bmillioasafUS. dullus 69.5 125 3 116 I 1197 1244 131.3 139 I 1870 254 2 3183 bmonthsofimpom. c if. 5.0 6 4 6 0 6 0 6 0 6 0 6 0 6.0 6.0 6.0 Financhggip (hpemeotofGDP) 0 0 2.0 4 0 4 1 3 9 4 2 4 1 2 7 1.8 1.4 NominalGOP (inU.S dollars) 664 1 800 4 901 6 9693 1.0430 1,122.9 1.211 8 1.751 4 2,460.2 1,239 8 Red GDP goauth rate 4 8 5 0 5 0 50 5 0 5 0 5 0 5 0 5 0 5 0 innationrite (period average; inpercent) 8 0 16.3 7 8 5 1 5 0 4.8 4 3 4 0 4 0 4.0 Expollsto GDP rrua (inpmmt) 7 2 8 6 7.7 8 6 8 7 8 6 8.6 9 3 10 5 I O 7 LmpmtoGDPratio (inpcrccnt) -21 5 -25 4 -22 2 .21 3 -20 5 .20.1 -19 8 .18.4 .17 8 .I69 Scniitidy wmvias (Inunisindicated) Highncoffeecprim 31 C u r " account (ex1 official l"fRS) In mil1ionsofU.S dollars -154 4 2 1 9 3 .2170 .IS99 -199.0 -203 6 .204.6 -222 5 -248 0 -277 8 la percentofGDP -23 2 -27.4 .24 I -206 .I9 I -I8 I .16.9 -12 7 -10.1 4 6 Financingp p (bmillionsafU S. dollus) .I2 2 3 9 24.1 2 5 3 2 5 2 29.7 31 2 21.1 8.9 3 4 l o percentofGDP -1 8 0.5 2.7 2 6 2.4 2.6 2 6 1 2 0.4 0 1 Higher a o n d impnprices 41 C w " accouo~(ex1 official aansfms) Inmillions ofUS dollars .I676 -239 5 -244.6 -238 8 .2475 -262.2 -264 8 -290.5 -324 6 462 3 In percentofGDP -25.2 .29 9 .27.1 .246 ,237 -23.4 -21 9 -166 -13.2 .I12 Financinggap (in millionr of US dollus) 5.8 24.2 51 7 64 I 73.7 88.3 91 4 89 I 85 5 87 8 Io perceoiofGDP 0 9 3 0 5 7 6 6 7.1 7.9 7 5 5.1 3 5 1.7 Sovrcrr Burundiruthonus;md Fundruffalimnu and projections ll R o p m gamshave bcenreclassified tom the capildl ~ c o u nto current m m f m l 2/ includingL e Much2004 Puis Club rescheduling a Naples I-. and arsummp reschedulingofcureot deb1senice md mevr to non.Paris Club 31Inlemationd pn'cerare assumed to be 25 percenthighn lhm the World EconomicOutlookWEO) blselioc projccrian d~rougbcutL e projestionperiod 41Non.furl impon pricesare risvmed 10 be 5 pBcenthi& than B e WE0 projectionbaselineprojection for 2W5-09 - 34 - Table 3. Burundi: Nominal andNet Present Value of Extemal Debt Outstanding by Creditor Groups, End-December 2004 ~~~~ NPV of Debt After NominalDebt Stock Stock o f Arrears M V of Debt Traditional Debt Relief I/ US$million Percent US$million Percent US$million Percent US$million percent of total of total of total of total Total 1,384.1 100.0 78.6 100.0 894.8 100.0 902.0 100.0 Multilateral 1,169.9 84.5 21.3 27.1 713.8 79.8 766.3 85.0 IDA 794.7 57.4 0.0 0.0 464.1 51.9 464.1 51.4 A D B Group 223.8 16.2 12.2 15.5 140.1 15.7 163.2 18.1 AfDB 5.9 0.4 5.9 7.5 6.1 0.7 15.0 1.7 AfDF 217.2 15.7 6.0 7.6 133.4 14.9 147.4 16.3 NTF 0.7 0.0 0.3 0.4 0.7 0.1 0.7 0.1 IMF 41.0 3.0 0.0 0.0 30.4 3.4 30.4 3.4 EuropeanUnion 51.0 3.7 0.0 0.0 35.1 3.9 62.2 6.9 FAD 30.3 2.2 0.0 0.0 18.3 2.0 18.3 2.0 BADEA 16.9 1.2 0.0 0.0 14.5 1.6 16.9 I.9 OPEC Fund 10.1 0.7 8.4 10.7 10.0 1.1 10.0 1.1 BDEGL 2.1 0.2 0.7 1.0 1.2 0.1 1.2 0.1 Bilateral and commercial 214.2 15.5 57.3 72.9 181.0 20.2 135.7 15.0 Pans Club 21 145.1 10.5 13.8 17.6 115.2 12.9 93.7 10.4 Post-cutoff date 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 ODA 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Non-ODA 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Pre-cutoff date 145.1 10.5 13.8 17.6 115.2 12.9 93.7 10.4 ODA 142.9 10.3 13.8 17.6 112.8 12.6 91.3 10.1 Non-ODA 2.2 0.2 0.0 0.0 2.4 0.3 2.4 0.3 Austria 16.8 1.2 0.0 0.0 8.2 0.9 3.8 0.4 Belgium 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Denmark 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 France 90.5 6.5 0.0 0.0 70.6 7.9 59.8 6.6 Germany 0.4 0.0 0.0 0.0 0.3 0.0 0.1 0.0 Ireland 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Italy 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Japan 34.7 2.5 13.8 17.6 33.4 3.7 27.4 3.0 Luxembourg 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Netherlands 0.1 0.0 0.0 0.0 0.1 0.0 0.0 0.0 Russia 2.2 0.2 0.0 0.0 2.4 0.3 2.4 0.3 United Kingdom 0.3 0.0 0.0 0.0 0.2 0.0 0.1 0.0 Other official bilateral 62.5 4.5 42.9 54.6 59.6 6.7 36.2 4.0 Post-cutoff date 5.4 0.4 5.4 6.8 5.4 0.6 5.3 0.6 ODA 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Non-ODA 5.4 0.4 5.4 6.8 5.4 0.6 5.3 0.6 Pre-cutoff date 57.1 4.1 37.6 47.8 54.3 6.1 30.9 3.4 ODA 48.7 3.5 37.6 47.8 46.8 5.2 28.1 3.1 Non-ODA 8.5 0.6 0.0 0.0 7.5 0.8 2.8 0.3 Abou Dhabi Fund 2.5 0.2 2.5 3.2 2.5 0.3 2.0 0.2 China 13.7 1.o 0.0 0.0 12.0 1.3 4.0 0.4 Kuwait 20.2 1.5 18.4 23.5 20.1 2.2 13.7 1.5 Libya 5.4 0.4 5.4 6.8 5.4 0.6 5.3 0.6 Saudi Fund 20.7 1.5 16.6 21.1 19.7 2.2 11.1 1.2 Commercial 6.6 0.5 0.5 0.7 6.2 0.7 5.8 0.6 Post-cutoff date 6. I 0.4 0.0 0.0 5.7 0.6 5.7 0.6 Pre-cutoff date 0.5 0.0 0.5 0.6 0.5 0.1 0.2 0.0 Germany 0.5 0.0 0.5 0.6 0.5 0.1 0.2 0.0 Israel 6.1 0.4 0.0 0.0 5.7 0.6 5.7 0.6 Sources: Burundi authorities; andBank-Fundstaff estimates. I/Includesastock-of-debtoperationonNaplestermsatend-2004;andatleastcomparableactionbyotherofficialbilateralandcommercial creditorson eligible debt @re-cutoffand non-ODA). The increase inthe NPV of debt for the African DevelopmentBank group, the European Union, and BADEA reflectsthe countingof arrearsreschedulingand forgivenessoperations in 2004. The concessional element of the rescheduling of USS16.7 million owed to BADEA and the cancellationof USS23.0 million owed to the AfDB group are consideredas part of the HIPC relief effort US$27.1 million in arrears owed to the European DevelopmentFundwere paidby the govemmentof Burundi with agrant providedby the EuropeanCommissionas budgetsupport. 21 PansClub cutoff date is June 30, 1999. - 35 - Table 4. Burundi: HIPC Initiative-Assistance Under a ProportionalBurden-SharingApproach I/2/ (InmillionsofUS.dollars, unlessotherwiseindicated) NPV of debt- Common Reduction to-exports-target Factor 41 (inpercent) Total Bilateral 3/ Multilateral (inpercent) (InNPV terms at end-2004) 150 826 124 701 91.5 Memorandum items: NPV ofdebt 51 902 136 766 Paris Club creditors 31 94 Ofwhich: pre-cutoffnon-ODAdebt 2 Non-Paris Club creditors 31 42 Of which: pre-cutoffnon-ODAdebt 3 Ofwhich: commercialcreditors 6 Three-year average of exports 50.9 Current-year exports 58.9 NPV of debt-to-exportsratio 61 1,772 Sources: Burundiauthorities; and staffestimates. 11The proportional burden-sharingapproachis described in "HIPC Initiative-Estimated Costs andBurden-Sharing Approaches" (EBSl9Jl12J andIDNSEC M 91-306,1/1191). 21Includes a hypothetical stock-of-debt operation on Naples terms (December 2004) andcomparabletreatment treatment by other official bilateral creditors. 31Includes official bilateral creditors and commercial debt. 41Each creditor's NPV reduction inpercentof its exposureat the decision point. 51 Based on end-2004data after full application o f traditional debt-reliefmechanisms. 61Basedon the three-year export average (backward-lookingaverage, i.e., 2002-04). - 36 - Table 5. Burundi: Discount and Exchange Rate Assumptions at End-2004 ~~~ Discount Rate l / Exchange Rate 21 Currency Name (Inpercentper annum) (Currency per US.dollar) Austrian Schillings 4.82 10.10 Belgian Franc 4.82 29.62 Canadian Dollar 5.36 1.20 CFA Franc 4.82 481.58 Chinese Yuan 4.64 8.28 Danish Krone 4.94 5.47 Deutsche Mark 4.82 1.44 Euro 4.82 0.73 Finnish Markkaa 4.82 4.37 French Franc 4.82 4.82 Great Britain Sterling 6.01 0.52 Irish Punt 4.82 0.58 Italian Lira 4.82 1421.53 Japanese Yen 2.15 104.12 Kuwaiti Dinar 5.03 0.29 Libyan Dinar 4.64 1.24 Netherlands Guilders 4.82 1.62 Norwegian Krone 4.70 6.04 Portuguese Escudos 4.82 147.19 Russian Rouble 4.64 0.60 Saudi Arabia Riyal 4.64 3.75 Spanish Peseta 4.82 122.15 Special Drawing Rights 4.64 0.64 Sweden Kronor 4.37 6.61 Swiss Franc 3.48 1.13 United States Dollar 5.03 1.oo United Arab Emirates Dirham 4.64 3.67 Memorandum item: Paris Club cutoff date June 20,1999 Sources: OECD; and IMF,Intemational Financial Statistics . 1/ The discount rates used are the average commercial interest referencerates over the six-month period prior to end-December 2004, Le., the end o f the period for which actual debt and export data are available. 2/ The exchange rates are expressed as national currency per US.dollar at end-December 2004. - 37 - N w m - P P o - 0 w - o C N 0 0 o P o o C ~ ~ - O NCC 0 0 m p I m O O m " N 0 0 0 , 5 0 , $ $ $ ~ m " N 0 0 = p-0, N m e P O C - N V I o o r - o m - o V I 0P. P N O m C I m N O O h 0 0 " m O 0 N O O h VIP P O zO =N - 1 0 1 0 V I o - o m - o V I VIP P O r'= m - o m m O o - m m m - O N P N O O - N m m - O N - e 1 0 - O N o m O O O o O m eO =m V I - O N m O O O 0 0 m e = VIP P O VIP P"- C i - O N P N o m m m P V I - * i 0 0 N P N C O w 0 O o C V I c 0 o o w VIP P10N - 10- 1 0 -- 0 - 38 - m, 0 i- N 0 P 0 0 y 0 m - - i r i ~ o o o o o o o i - 2 2 - ? ? h LI - 3 9 - - 40 - -41 - Table 8. Burundi: ExternalDebt Indicators and Sensitivity Analysis, 2004-24 I/ (Inpercent, UIII~ES otherwiseindicated) 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Baselinescenario NPV of debtm-GDP ratio 11.5 12.7 13.7 15.0 15.6 16.1 16.2 15.8 15.2 14.4 13.8 13.2 NPV of debt-to-exportsratio 2131 150.0 156.1 165.7 164.8 167.6 166.5 167.7 163.3 154.8 144.9 136.3 128.5 NPV of debt-to-revenueratio41 57.2 69.7 73.6 79.8 82.3 83.7 83.5 81.0 77.0 72.4 68.4 65.2 Debt seMce.to-exports ratio ... 32.2 12.6 4.5 4.6 4.6 5.7 9.6 11.9 12.3 11.2 9.4 Debt service.to-revenue ratio ... 18.0 6.2 2.5 2.5 2.5 3.0 5.2 6.5 6.7 6.1 5.2 Sensitivity analysis Lower export gowih 51 NPV ofdebt-to-exports ratio 2131 150.0 156.1 170.5 173.2 184.8 191.7 202.7 207.5 206.9 205.5 204.7 203.0 NPV of debt-to-revenue ratio 41 57.2 69.7 75.4 83.0 89.0 93.6 97.2 98.1 97.3 96.1 95.3 94.6 Debt service-to-exportsratio ... 32.2 12.8 4.7 4.9 5.0 6.3 10.7 13.3 13.9 12.9 11.1 Debt senice-to-revenue ratio 41 ... 18.0 6.3 2.5 2.6 2.6 3.2 5.5 6.7 7.0 6.5 5.6 Higher non-oil import pricesscenario 61 NPV of debt-to-exportsratio 2131 150.0 156.1 175.7 186.1 202.2 215.2 229.7 236.6 237.1 235.5 233.5 230.3 NPV of debt-to-revenue ratio 41 57.2 69.7 78.1 90.1 99.2 108.1 114.4 117.3 118.0 117.7 117.3 116.8 Debt service-to-exportsratio ... 32.2 12.8 4.8 5.1 5.3 6.6 10.7 13.1 13.5 12.5 10.7 Debt service-to-revenue ratio 41 .., 18.0 6.3 2.7 2.8 2.9 3.5 5.8 7.1 7.3 6.8 6.0 Lower concessionalityof new borrowing scenm'o 71 NPV of debt-to-exportsratio 2131 150.0 183.2 207.1 215.0 227.3 232.8 239.9 240.0 234.6 227.5 220.8 213.9 NPV of debt-@revenue ratio 41 57.2 81.8 92.0 104.1 111.6 117.0 119.4 119.0 116.7 113.7 110.9 108.5 Debt service-to-exportsratio ... 34.3 16.2 8.7 9.4 10.1 11.6 15.8 18.2 18.6 17.5 15.7 Debt service-to-revenue ratio 41 ... 19.2 8.0 4.8 5.2 5.4 6.2 8.5 9.8 10.1 9.6 8.7 100percentgrant financing 81 NPV of debt-to-exportsratio 2131 150.0 156.1 152.5 147.5 144.4 139.1 136.7 134.4 128.0 120.8 114.4 108.3 NPV of debt-to-revenue ratio 41 57.2 69.7 67.7 71.4 70.9 69.9 68.1 66.6 63.7 60.4 57.5 55.0 Debt service-to-exportsratio ,.. 32.2 12.5 4.3 4.3 4.2 5.2 9.2 11.5 11.9 10.9 9.1 Debt service-to-revenue ratio 41 .,. 18.0 6.2 2.4 2.3 2.3 2.8 5.0 6.2 6.5 5.9 5.1 Memorandumitems: Higher non-oil import prices scenario hTV of debt after HIF'C assistance 76.3 101.8 131.0 164.5 196.8 233.1 268.5 300.0 328.3 355.9 384.8 415.4 Debt service after HIPC assistance ... 26.3 10.6 4.9 5.5 6.2 8.3 14.8 19.7 22.2 22.4 21.2 GDP 664.1 581.2 684.5 769.4 844.1 919.2 1,007.1 1,100.0 1,196.8 1,300.2 1,411.7 1,529.1 Governmentrevenue41 133.5 146.1 167.8 182.6 198.3 215.5 234.8 255.8 278.3 302.4 328.1 355.6 Lower concessionalityof new borrowing scenario NPV of debt after HIPC assistance 76.3 119.5 154.4 190.0 221.3 252.1 280.4 304.3 324.7 343.8 363.8 386.0 Debt service after HlPC assistance ... 28.0 13.4 8.7 10.2 11.7 14.6 21.8 27.4 30.5 31.4 31.0 100 percentgrant financing scenario NPV of debt after HIPC assistance 76.3 101.8 113.7 130.4 140.6 150.6 159.8 170.4 177.2 182.6 188.6 195.5 Debt service after HIPC assistance ... 26.3 10.3 4.3 4.6 4.9 6.6 12.8 17.4 19.5 19.5 18.0 Lower export growth NPV of debt after HIPC assistance 76.3 101.8 126.6 151.6 176.5 201.8 228.1 250.9 270.6 290.7 312.8 336.4 Debt serviceafter HIPC assistance ... 26.3 10.5 4.6 5.1 5.6 7.6 13.9 18.7 21.1 21.3 20.0 E x w m of aoods and nonfactor services 91 .~ 58.9 81.6 82.3 98.6 105.6 111.6 120.3 130.8 141.2 152.2 165.0 180.0 Exponsofgoods andnonfactorservices ( 3 9 average) IO1 50.9 65.2 74.3 87.5 95.5 105.3 112.5 120.9 130.8 141.4 152.8 165.7 GDP 664.1 800.4 901.6 969.3 1.043.0 1,122.9 1,211.8 1,308.0 1,409.8 1,517.5 1,631.3 1,751.4 Sources:Burundi authorities; andstaff estimatesand projections. I/Alldebtindicatorsrefertopublicandpubliclyguaranteed(PPG)debtandaredefinedafterHIPCassistanceassumeddeliveredunconditionallyatend-2004. 2/ As defined in IMF, Baiunce ofpayments Manual, 5th edition, 1993.2001 excludes senice exports to MONUC. 3/ Basedon a three-yearaverage of exports on the previous year (e&. export average over 1999-2001 for NPV of debt-to-exportsratio in 2001). 4/ Revenueis defined as central govemment revenue, excluding grants. 51Assumes 1 percentlower export growth from 2005 to 2023. 61Assumesthat non-oil import priceswould increase 5 percentmore each year in 2005-09 andwould increaseat the same rate wumed in the baselinescenario thereafter. 71Assumesthat the interestrate on all debt is 2 percentagepoint higher than inthe baseline from 2005 onwards. 81Assumesthat project financing andbudget support(excluding the PRGF) are in the form of grants, from 2006 to 2007; in 2008-1 Ifinancing will be in the form of 50 percentgrantsand50 percent concessionalloans, before returning to the same level as in the baseline. 91As defined in IMF, Balanceof Pay?nentsManual, 5th edition, 1993. Refersto currentyear exports. IO1Three-year backward-looking average o fexports of goods andnonfactor services. - 42 - Table 8. Burundi: External Debt Indicators and Sensitivity Analysis, 2004-24 11(concluded) (Inpercent, unless otherwiseindicated) 2016 2017 2018 2019 2020 2021 2022 2023 2024 2024-14 2015-24 Averages Baseline scenario NPV of debt-to-GDP ratio 12.9 12.7 12.5 12.3 12.0 11.7 11.3 10.8 10.4 14.5 12.0 NPV of debt-to-exports ratio 2131 121.8 116.3 111.4 106.5 102.5 97.8 93.7 89.4 85.5 158.0 105.3 NPV of debt-to-revenue ratio 41 63.3 62.2 61.3 59.8 58.5 56.6 54.6 52.2 49.9 75.3 58.4 Debt service-to-exports ratio 6.8 4.9 4.1 4.2 4.4 4.4 4.9 4.9 4.8 10.9 5.3 Debt service-to-revenue ratio 3.9 2.9 2.5 2.6 2.7 2.8 3.1 3.1 3.0 5.9 3.2 Sensitivity analysis Lower export growth 51 NPV ofdebt-to-exports ratio 2131 202.1 202.4 203.3 204.6 206.1 208.0 209.8 212.2 215.1 186.7 206.7 NPV of debt-to-revenue ratio 4/ 95.6 97.6 100.0 101.9 103.4 104.7 105.3 105.8 106.1 86.5 101.5 Debt service-to-exports ratio 8.4 6.5 5.9 6.4 7.0 7.4 8.3 8.8 9.0 11.7 7.9 Debt service-to-revenue ratio 41 4.3 3.4 3.2 3.4 3.8 4.0 4.5 4.6 4.7 6.I 4.2 Higher non-oil import prices scenario61 NPV of debt-to-exports ratio 213/ 226.3 222.2 218.0 213.7 209.2 204.7 199.7 195.0 190.4 205.2 210.9 NPV of debt-to-revenue ratio 41 117.6 118.8 119.9 120.1 119.5 118.4 116.3 113.8 111.0 98.8 117.2 Debt service-to-export5 ratio 8.2 6.4 5.9 6.4 6.9 7.2 7.9 8.2 8.2 11.6 7.6 Debt service-to-revenue ralio 4/ 4.7 3.8 3.6 3.9 4.3 4.5 5.0 5.1 5.1 6.3 4.6 Lower concessionality of new borrowing scenario 71 NPV of debt-to-exports ratio 2131 206.8 200.0 193.7 187.8 182.1 176.7 171.1 166.0 161.1 216.2 185.9 NPV of debt-to-revenue ratio 41 107.5 106.9 106.5 105.5 104.0 102.2 99.6 96.8 93.9 103.9 103.2 Debt service-to-exprt5 ratio 12.9 11.0 10.2 10.4 10.6 10.7 11.2 11.2 11.1 16.0 11.5 Debt service-to-revenue ratio 41 7.4 6.5 6.2 6.4 6.6 6.7 7.0 7.0 6.9 8.7 6.9 100percent grant financing 81 NPV ofdebt-to-exports ratio 2/ 31 103.4 100.2 97.8 95.6 93.4 91.4 88.9 86.4 83.9 138.5 94.9 W V of debt-to-revenue ratio 41 53.7 53.6 53.8 53.7 53.4 52.9 51.8 50.4 48.9 65.7 52.7 Debt service-to-export5 ratio 6.5 4.1 3.3 3.3 3.5 3.5 4.2 4.4 4.5 10.6 4.6 Debt service-to-revenueratio 41 3.7 2.4 2.0 2.0 2.2 2.2 2.6 2.8 2.8 5.8 2.8 Memorandum items: Higher non-oil import prices scenario NPV of debt after HIPC assistance 450.0 488.1 528.2 567.8 606.3 644.0 679.3 713.7 747.3 23 I.O 584.0 Debt serviceafter HIPC assistance 17.9 15.6 15.8 18.4 21.7 245 29.0 32.1 34.6 14.1 23.1 GDP 1,653.4 1,783.4 1,917.7 2,062.8 2,218.4 2.384.1 2,564.5 2,756.8 2,962.1 952.6 2,183.2 Governmentrevenue 41 382.5 410.9 440.6 472.8 507.2 544.1 584.2 627.2 673.4 222.1 499.9 Lower concessionality ofnew borrowing scenario NF'V ofdebt after HIPC assistance 411.1 439.3 469.4 498.9 527.7 555.9 582.0 607.5 632.5 239.2 511.0 Debt serviceafter HIPC assistance 28.4 26.6 27.2 30.1 33.4 36.4 40.8 43.9 46.5 19.8 34.4 100percentgrant financing scenario NPV ofdebt after HIPC assistance 205.5 220.1 236.9 254.0 270.8 287.7 302.3 316.1 329.3 144.7 261.8 Debt service after HIPC assistance 14.3 10.0 8.7 9.6 11.0 12.0 15.3 17.3 18.7 12.6 13.5 Lower export growth NPV ofdebt after HIPC assistance 365.8 401.1 440.5 481.6 524.4 569.4 615.2 663.4 714.6 198.9 511.2 Debt serviceafter HIPC assistance 16.6 14.1 13.9 16.3 19.2 21.8 26.1 29.1 31.6 13.5 20.9 Exports of goods and nonfactor services9/ 197.9 216.6 235.3 254.4 273.7 293.2 312.8 331.7 352.0 .~~ 113.5 264.8 Exports ofgoods and nonfactorsewices(3-F average) 101 181.0 198.2 216.6 235.4 254.5 273.8 293.2 312.6 332.2 103.4 246.3 GDP 1,878.0 2,011.4 2,151.7 2,303.6 2.466.2 2,640.3 2,826.6 3,026.2 3.239.8 1,143.6 - 2.429.5 Sources: Burundi authorities: and staffestimates and projections. I/ All debt indicators refer to public andpubliclyguaranteed(PPG) debt and aredefined after HIPC assistanceassumed delivered unconditionally at end-2004. 21 As defined in IMF, Balanceof PoymenfsManual, 5th edition, 1993.2001 excludesservice exporls to MONUC. 31 Basedon athree-year average of exporls on the previous year (e.& export averageover 1999-2001 for NPV of debt-to-exports ratio in 2001). 41Revenuei s defined as central government revenue, excluding grants. 51Assumes Ipercent lower export growth fiom2005 to 2023. 61Assumes that nondil import prices would increase5 percentmore each year in 200549 andwould increase at the same rate assumed inthe baselinescenario thereafter. 71Assumes that the interest rate on all debt is 2 percentagepoint higher than in the baselinefiom 2W5 onwards. 8/ Assumes that project financing andbudget support (excluding the PRGF) are in the form of grants, from 2006 to 2007; in 2008-1Ifinancing will be in the form of50 percent grants and 50 percentconcessionalloans, before returningto the same level as inthe baseline. 91As defined in IMF, Balance of Payments Manual, 5th edition, 1993. Refersto cunent year exports. IO/ Three-yearbackward-looking average ofexpons of goods andnonfactor services. - 43 - ,0$0$1- r o o m e P o 0 0 - o r - ' 0 0 - 0 " " 0 P 9 P P O O O o o m m \ o v i m r - - o m * o l v i m m o m v i o o c r - " - 0 m " N 0 m m m o o * P w v i c o c " - - O w * - - c % $ m o o % $ m o o O r - - N c w m o o c w o w - c * * - * w - o * - - N O P m N O O % $ N O 0 P P C O O - m m - o w ' o o l - 0 m O - N c % $ N O C 3 q m o o * P O C O m m m - 0 ? m e a - 0 o l u - N O rU- o m 0 0 P P P P C i O O 0 m m c o c 0 m P - o m r - r - - 0 C C - N C , $ $ * O C W O * C O P P * m o o 0 p $ l n o o m m N - 0 m c m - 0 O P - N O $ $ m o o * " l o c o u m P - 0 o m r - - o C P - N O W $ " O C W $ " O O * O C 0 0 m o m - 0 O O - N C & 4 $ " C O " 0 0 0 N - 0 - 0 m N 0 - O c r - - m c mom P - w o o v i m O I C I W O O c w o o o m o l m - 0 W O N - c -w *v w o o - m - N O i ~ g u o o P ' O C O C C N * O O m o u o o c o u o o -wmm1 o o c " - N O uvi r - u o o c " m W 0 o l m m u c o l N W 0 0 m1cI S E W 0 0 " - N O r - u o c o P - P U P 0 " U P 0 g ~ u o om Y I N - N C m v i o u c c m v i o c o olur4-0 o l w - N c N C I r - N O m u C i o o o c m - w o o , $ 4 m m o m - s o 0 W R " " 0 W P - N C m c i c o c o l r - - w * P O - w * U o - N O o l W h l l C PCI g t o l m o m m o o c - P o " v i m o w m m u o p m s N Q o l " v i m N W O " v i m m P - O N * * N o m m - t o u m 1cIm O P m * N m O N O N N N - 44 - 9 9 9 - ? ? ? 0 N P P - - a 2 2 - 1 1- ? ? - ? w 2 w q N ? ? ? ? ? ovi5.q-3 n-m-? 3 -"m - - 3 " ? ? N ? " n m - u z p N ? ? - "N q m m h " - 9 X5 -&?N?e 9 " : p " N 9 9 - 9 via ":q -45 - r-Nr.V) i <"N0 4 Y " ? ? - r r"NO N - " l ? ? p ? e O ? ? ? ? ? - P r - c o - d "t O"N ? ? V ! n N l O ? - m"N w o - 46 - 2 N f w ? ? " ? 101000 2 o" h 0 0 9 9 , N 2 o" h 0 0 9 ' 0 - N - 0 e 2 N 8 a m m r r 0 0 0 3 r- L4N 0 0 0 " V I " ? 0 0 0 0 0 10 a 8 09 L4N 0 0 0 . VI x I t - 0 0 0 .- g .- U E aI e! VI .-E a k1 U5 c4 ie O - 47 - m m m m 0 v) \o 01 0 0 m m 0 8 v; 0 N 0 5 m 0 4% m 0 0 a -4 t 0 -u 9 8a h 0 .-P W (0 0 6 Y 8 =mI Bx 9 0 m a 8 % .- 2 1 'E E m .- % vi e, .5 L 0 'E3 8 8$ e3 - a0 6z 1 q Bas .-$9 dre,l - 48 - Table 13. HIPC Initiative: Status ofcountry Cases ConsideredUnder the Initiative, June I,2005 Target EshmatedTotal NPV of Debt-to- Assistance Levels I/ Percentage Nominal Debt Decision Completion ClOV. (In millions 0fU.S.dollars.present value) Reduction Service Relief Country Point Point Exports, revenue Multl- World inNPV of (In millions of ( i n p e r c e n t ) Total Bilateral lateral M F Bank Debt D U.S.dollan) Comoletlon voint reached under enhanced framework . . Benin Jul. 00 Mar. 03 I50 265 77 189 24 84 31 460 Bolivia 1,302 425 8i6 a4 194 2,060 originalframework Sep. 97 Sep. 98 ?25 448 157 291 29 s4 14 760 enhanced framework Feb. 00 Jun. 01 I50 854 268 585 55 140 30 1,300 Burkina Faso 553 83 469 57 23 I 930 originalframework Sep. 97 Jul. 00 ?05 229 32 I96 22 91 27 400 enhancedframework Jul. 00 Apr. 02 IS0 19s 35 161 22 79 30 300 topping-up Apr. 02 150 129 16 I12 14 61 24 230 Ethiopia 1,982 637 1,315 60 832 3,275 enhancedframework Nov. 01 Apr. 04 I50 1,275 482 763 34 463 47 1.941, topping-up Apr. 04 150 707 155 5s2 26 369 31 1,334 Ghana Feb. 02 Jul.04 144 250 2,186 1,084 1,102 1I 2 78I 56 3,500 Guyana 591 223 367 75 68 1,354 originalframework Dec. 97 May 99 107 280 256 91 I65 35 27 24 634 enhancedframework Nov. 00 Dee-03 I50 250 335 132 202 40 41 40 719 Honduras Jul. 00 Mar-05 1I O 250 556 215 340 30 98 18 1,000 Madagascar Dec.00 Ocr-04 150 836 474 362 19 252 40 1,900 Mali 539 169 370 59 185 895 originalframework Sep. 98 Sep. 00 200 121 37 84 14 43 9 220 enhancedframework Sep. 00 Mar. 03 150 417 132 285 45 143 29 675 Mauritania Feb. 00 Jun. 02 137 250 622 261 361 47 100 50 1,100 Mozambique 2,023 1,270 753 143 443 4.300 originalframework Apr. 98 Jun. 99 200 1.717 1.076 641 125 381 63 3,700 enhancedframework Apr. 00 Sep. 01 I50 306 I94 112 18 62 27 600 Nicaragua Dec. 00 Jan. 04 I50 3,308 2,175 1,134 82 191 73 4,500 Niger 663 235 428 42 240 1,190 enhancedpamework Dec. 00 Apr. 04 IS0 52I 21I 309 28 170 53 944 topping-up Apr. 04 IS0 143 23 119 14 70 25 246 Rwanda 696 65 631 63 383 1,316 enhancedframework Dec. 00 Apr-05 I50 452 56 397 44 228 71 839 topping-up Apr-05 I50 243 9 235 20 I54 53 417 Senegal lun. 00 Apr. 04 133 250 488 212 276 45 124 19 850 Tanzania Apr. 00 Nov. 01 150 2,026 1,006 1,020 120 695 54 3,000 Uganda 1,003 183 820 I60 517 1.950 origmal/mmework Apr. 97 Apr. 98 202 347 73 274 69 160 20 650 enhancedframework Feb. 00 May 00 I50 656 110 546 91 357 37 1.300 Zambia Dec. 00 Apr-05 I50 2,499 1,168 1,331 602 493 63 3,900 Decision point reached under enhanced framework Cameroon Oct. 00 Floating 150 1,260 a74 324 37 179 27 2,800 Chad May. 01 Floating 150 I70 35 134 18 68 30 260 Congo, Democratic Rep.of Jul. 03 Floating 150 6,3 I 1 3,837 2,474 472 831 80 10,389 Gambia, The Dec. 00 Floating I50 67 17 49 2 22 27 90 Guinea Dec. 00 Floating 150 545 215 328 31 152 32 800 Guinea-Bissau Dec. 00 Floating 150 416 212 204 I2 93 85 790 Malawi Dec. 00 Floating 150 643 163 480 30 331 44 1,000 SPO Tome andPrincipe Dec.00 Floating I50 97 29 68 24 83 200 Sierra Leone Mar.02 Floating 150 600 205 354 123 122 a0 950 Decision point reachedunder original framework Cdte dlvoire Mar. 98 31 141 280 345 163 182 23 91 6 41 800 Total assistanceprovidedlcommitted 32,245 15,549 16,560 2,552 51 7,732 54,758 Preliminary HIPC documentissued Burundi ... 150 801 120 681 24 414 92 1,313 Cdte dIvoire 61 ... 91 250 2,569 1,027 918 I66 438 37 3,900 Sources: M F andWorld Bank Boarddecisions,completion point documents, decisionpoint documents,preliminary HIPC documents.andstaff calculations. 11 Assistancelevels are at counhies' respectivedecision or completion points, as applicable. 21 Inpercentofthe net present value o f debt at the decision or completion point (as applicable), aAer the full use of haditional debt-reliefmechanisms. 31 C6te dlvoire reachedits decision point under the original framework in March 1998. The total amountof assistancecommitted thereunderwas USS345 millioninNpV terms. 41 Nonreschedulabledebt to non-Paris Club officialbilateral creditors and the London Club, which was alreadysubject to a highly concessionalrestructuring, is excluded from the NPVof debt at the completion point in the calculation ofthis ratio. 51 Equivalent to SDR 1.722 million at an SDRAJSD exchangerate of0.6804, as of June I,2005. 61 11is suggestedthat enhancedHIPC relief for Cdte d'lvoire overtakethe commiments made under the original HIPC framework. - 49 - ANNEX I Burundi: Debt ManagementCapacity 1. The "Direction de la Dette Exterieure" (DDE) at the Ministry o f Finance i s responsible for debt management; while the central bank, Banque de l a Republique du Burundi(BRB),collects and gathers debt and external sector statistics. 2. The main impediment to debt management remains the lack o f trained human resources at the DDE and the lack o f communication among the units responsible for the management of external debt. This considerably limits the authorities' debt management capacity particularly inthe context o fthe enhanced HIPC Initiative debt sustainability analysis (DSA) process. During2004, the authorities have benefited from training on the enhanced HIPC Initiative, debt rescheduling, and debt management by Debt Relief International. The authorities recognize the urgent need to reinforce the DDE and are planning a major restructuringof the DDE and a strengthening of capacities. At present, debt management i s tracked and monitored by SYGADE software, but due to limited trained human resources SYGADE i s not used inits full capacity. However, data produced on the level of debt disbursed, amount o f debt serviced, and payment plan schedules are accurate andup to date. Also, while Debt-Pro software has beeninstalledit is not yet beingused, Furthermore, for effective external debt management, Burundi should have well-coordinated institutional arrangements that are fully integrated within the overall macroeconomic policymaking framework. Inthis regard, the DDE should be strengthened to be able to better coordinate with the cabinet o f the Finance Minister and all services incharge o f IMF/WB program monitoring. Support to address these weaknesses and improve the authorities' debt management capacity i s planned as part o f the World Bank's Economic Management Support Project (EMSP). 3. Years o f civil war have affected Burundi's dialogue with its creditors and its debt- servicing capacity, which has resulted inpoor records on the existing level o f indebtedness. However, inthe recent past Burundi has made major efforts to remain current with respect to key creditors and to reach agreements on the repayment o f arrears. Looking ahead, the country's engagement inthe enhanced HIPC Initiative will further improve its relations with creditors and its awareness o f its level o f indebtedness. -50- ANNEX I1 Burundi:Debt SustainabilityAnalysis for Low-IncomeCountriesFramework(LIC DSA) 1. This annex assesses the external and public debt dynamics o f Burundi using the forward-looking framework for debt sustainability for low-income countries (LIC DSA), and draws some conclusions on the forward-looking sustainability o f the country's debt. Baselinescenario 2. The baselinescenario reflectscontinuedgrowth of real GDP sustained by an increasein export volumes, and financing in the form of grantsor highlyconcessional borrowing(Box 5 inthe main text). The medium-term outlook envisages achieving macroeconomic stability and solid economic growth, supported by a consolidation o fthe peace process, a deepeningo f structural reforms, and full normalization o frelations with creditors. Exports are projected to drive growth over the long term based on the recovery of traditional export sectors and development of nontraditional exports. The current account deficit is projected to widen initially to above 10percent o f GDP in2006, before narrowing to about 3.5 percent o f GDP by 2024, while gross investment and national savings gradually rise to 13.7 percent and 10.1percent o f GDP, respectively, by 2024. Unless otherwise indicated, all debt ratios inthis annex assume full delivery o f HIPC assistance as proposed for the decision point and reflected inthe HIPC DSA reported inthe main text. Externaldebt sustainability assessment 3. The resultsunderthe baseline scenario indicatethat, even after full delivery of HIPC assistance, Burundifaces a considerable riskof debt distress.TheNPV of debt-to- exports ratio remains above the indicative threshold for countries with comparable policies and institutions for a considerable period o ftime before falling below it in2020 (Box 1). Eventhough all other debt burdenindicators are below their respective thresholdduring the projection period, the NPV o f debt to exports ratio indicates that even after H P C relief, and assuming future financing on highly concessional terms, that a debt distress situationwould remain a concern over the next 15 years. 4. At end-2004, Burundi's stock of public and publicly guaranteed(PPG) external debtwas US$1,384million, or US$895 inNPV terms. Assuming the full delivery ofHIPC 'See "Debt Sustainability inLow-Income Countries: Proposalfor an Operational Framework and Policy Implications" (SMi04127 and IDAISECM2004/0035, 2/3/2004) and "Debt Sustainability inLow-Income Countries:Further Considerationson an OperationalFramework and Policy Implications" (SM/04/318 and IDAiSECM2004/0629,9/10/2004). This DSA was preparedjointly by the staffs o f the Fundand the Bank. - 51 - ANNEX I1 assistance,2 the NPV o f debt would amount to US$76.3 million, corresponding to 13.8 percent o f GDP, 155.6 percent o f exports, and the ratio o f debt service to exports would be 123.1 percent3The debt sustainability indicators are projected to remain virtually unchangedor improve in2005. Thereafter the profiles o f the debt and debt service ratios over the long-term are as follows: 0 TheNPV of debt-to-exports indicator remains above the indicative thresholdfor much of theprojection period, increasing over the medium term before gradually improving over the long-term (Table 1 and Figure 1).The NPV o f debt-to-exports declines from 155.6 percent at end-2004 to 76.2 percent in2024. 0 The external debt service indicators suggests a more modest and manageable debt burden both in the short and medium terms. Public external debt service i s projected to average about 9.6 percent o f exports duringthe 2005-24 period and the projected trajectory shows an initial decline andthen an increase through 2012, before decreasing to 6.1 percent in2024 (Table 1and Figure 1). Generally, the relatively low debt-service-to-exports indicators reflect: (i) a stable and relatively highgrant element on the debt stock resulting ina relatively low debt service requirement, and (ii) high export growthduringthe period when debt service requirementsincrease as a result o f the end o f grace periods.The external debt service to fiscal revenues (including grants) follows a broadly similar trajectory and i s well below the indicative threshold. a The ratio of the NPVof debt to GDP isprojected to increase to 18.3 percentin 2009, beforedecliningto 10 percentin 2024. 5. Alternative scenarios and stress tests indicatethat lower growth, less concessional borrowingand macroeconomic instability,substantiallyincrease the risk of debt distress. Underthe LIC framework an alternative scenario is shown inwhich the main parameters that determine the debt dynamics are assumed to remain at their historical averages. For Burundi, the period considered to calculate the historical averages i s 2001-04, starting after the implementationo f the Arusha Peace accord o f August 2000. The historical scenario is intended to provide an indication about how optimistic the baseline i s relative to the country's past performance duringnormal times. As shown inFigure 1, all debt burden indicators under the historical scenario present a significant deterioration compared to the baseline. Inparticular, the ratios o fthe NPV of debt to GDP andto exports exhibit an upward trend. The significant deterioration o f debt and debt service indicators under the "historical TheNPV ofdebt-to-exportsratio inthe HIPC DSA methodology is 150percent.Annex I1Box 2, presentsthe methodological differences betweenthe HIPC framework andthe LIC framework inthe calculation of the NPV debt-to-exports ratio, as well as the impact o f such differences Debt service in2004 includes the repurchase of SDR 19.2millionpreviously drawnunderthe IMF's post- conflict emergency assistancepolicy. - 52 - ANNEX I1 scenario" underlinesthe critical importance o frealizing the overall growth and export growth projections under the baseline. 6. Stress tests signal the vulnerabilityof Burundito adverse developments, Burundi's debt sustainability indicators experience aconsiderable deterioration under stress tests assuming lower GDP and export growth or exchange rate depreciation (Table 2). For the NPV o f debt-to-GDP ratio, there i s a sizeable increase relative to the baseline when all the mainparameters determiningthe debt dynamics are assumedto be one-half standard deviation below their respective historical averages duringthe period 2006-07. A significant increase inthe extemal debt-to-exports and debt service-to-exports ratios i s observed when exports are assumed to grow at the historical average minus one standard deviation. Fiscal sustainability analysis 7. The baselinemacroeconomic scenario (Table3 and Figure2) is premisedon increasinggovernmentrevenues and financingthe reconstructioneffort and poverty reductionin the mediumto longterm primarilywith grants.This would allow the public sector borrowing requirementto fall over time, while keeping expendituresconsistent with the government's poverty reduction strategy. Inparticular, it i s assumed that revenues as a percentage o f GDP rise from 18 percent o f GDP in2004 to 21percent o f GDP in2024 and that borrowing decreases from 7.6 percent to 1percent o f GDP between 2005 and 2024. burdenindicatorsare projectedto remainbelow their respective indicative threshold^.^ 8. Given the relativelystrongrevenue effort, fiscal debt (externaland domestic) The NPV of debt-to-revenue ratio i s projectedto drop from 101.8percent in2004 to 49.6 percent in2024, and the debt service-to-revenue ratio i s projected to decline from 36.6 percent in2004 to 12.3 percent in2010 before dropping to 8.9 percent in2024 (Table 3 and Figure2). 9. As in the externaldebt sustainability analysis, alternativescenarios and bound tests signala significantincreasein Burundi'srisk of debt distress over the medium term. The no reform scenario, which maintains theprimarybalance at the 2004 level, signals an increase inall debt indicators (Table 4). However, ifthe envisaged fiscal restraint i s implemented, such a scenario would be a pessimistic benchmark. But, ifthere was no improvement inthe fiscal primarybalance after 2004, the NPV of debt-to-revenue indicator i s projected to increase to 283 percent in2024, a difference o f 233 percentage points with respect to the baseline (Figure 2). 10. Other stress tests highlightthe negativeimpactof temporary shocks on debt burdenindicators.Inparticular, an exchange rate depreciationo f 30 percent has the largest impact on debt stock indicators (Table 4 and Figure2). Inthe LIC DSA methodology, the ratio ofdebt serviceto revenue is calculatedwith revenueincluding budgetary grants. Under the HIPCDSA framework, grants are excluded. - 53 - ANNEX I1 Box 1:Summary of Baseline Debt Sustainability Indicators 1/ Indicative I 2005 I 2015 I 2024 I Average 1 Threshold 21 2005-24 N P V o f debt to GDP 30 13.9 136 9.9 14.1 N P V o f debt to exports 100 136.3 120.2 76.2 127.8 N P V of debt to revenue 200 35.7 46.4 36.5 47.1 Debt service to exports 15 35.9 9.2 6.I 9.6 Debt service to revenue 25 9.4 3.5 2.9 3.4 Note: Figures in italics are under the indicative thresholds. I/AlldebtindicatorsassumethefulldeliveryofHIPCreliefandrefertotheNPVofpublicandpubliclyguaranteed extemal debt. 2/ Threshold over which countries with similar evaluationsof policies and institutions would have at least a 25 percent chance of having a prolonged incidentof debt distress inthe coming year. Burundilies within the bottomquintile of countries ranked by the World Bank's Country Policy and InstitutionalAssessment Index (CPIA). Conclusion 11. Burundi's NPVof external debt-to-exports ratio after enhanced HIPC assistance, is projected to remain above its indicative threshold over the period 2005-20. Inaddition, the DSAindicates that adverse shocks would negativelyimpact the debt sustainability indicators and would place Burundiin the high debt distress category for low-income countries. The debt sustainability indicators for total (domestic and external debt) suggest a more robust position, reflecting a strong domestic revenue effort. However, as reflected inthe extemal debt indicators, the foreign exchange constraint could be binding. Indeed, the external debt sustainability indicators suggest that particular attentionbe given to exports as the driver o f overall growth. 12. Sensitivity analysis reveals that if the pace of GDP (or export growth) falters, or the exchange rate depreciates, the debt burden could become unsustainablein the mediumterm. The sensitivity analysis highlights the importanceo f sustained export-led growth and macroeconomic stability to decrease Burundi's risk o f debt distress. 13. The debt sustainability analysis indicates that in order for Burundito lower its high debt stock ratios with respect to exports and to maintain the other debt indicators below their respective thresholds, particular emphasis needs to be placed on four aspects of future economic performance. First, the authorities will need to implement a strong and sustained reform effort, especially to develop a diversified export base, to support robust growth inexports and GDP. Second, the authorities need to implementprudent fiscal and monetary policies to ensure fiscal discipline and macroeconomic stability. Third, together with prudent debt management, future financing needs to be mainly inthe form o f grants and highlyconcessional loans. Fourth, attention should be givento strengthening of policies and institutions, which would raise the indicative debt thresholds for the risk of debt distress. - 54 - ANNEX I1 ~~~ Box 2. Impact of the Use of the LIC FrameworkMethodologyon the End-2004 NPV of Debt-to-Exports Ratio Usingthe new LIC framework methodology,Burundi's NPV of debt-to-exportsratio is estimatedto have reached 155.6 percent at end-2004.This is 5.6 percentagepoints higher comparedwith the 150percent obtained usingthe HIPC methodology,assumingfull delivery of HIPC assistance.The increase is due to three factors: (i) a 34 percentagepoints increase is due to the change inthe exchange rates used to calculate the projected debt service streams (projected exchange rates fromWEO; under the LIC framework versus end-2004exchange ratesunderthe HIPC methodology), (ii) a 7.9 percentagepoints decrease is explainedby the change inthe discount rate usedto calculatethe NPV of debt (a single 5 percentdiscountrateunderthe LIC framework versus currency-specific discountrates under the HIPC methodology), and (iii) a 20.5 percentagepoints increase i s due to the change inthe denominator usedto calculate the ratio (current exportsunder the LIC framework versus a three-yearbackward-looking average underthe HIPC framework). Burundi: Decomposition ofthe decrease inthe NPV of debt-to-exportsratio at end-2004 I/ (inpercentagepoints, unless otherwise indicated) Factorsexplaining the change inthe NPV of debt. to-exports ratio Impact of methodologicalchanges Total Change 5.6 Of which: due to changes in: Exchangerates 34.0 Discount rates -7.9 Exports of goods andservices -20.5 Memorandum items: Decision point LIC framework End-2004 NPV of debt-to-exportsratio 150.0 155.6 Exports of goods and services Current 58.9 58.9 Three year average 50.9 50.9 ~~ 1/ Refers to publicandpublicly guarenteedextemal debt. - 55 - ANNEX I1 Figure 1.Burundi:IndicatorsofPublic andPubliclyGuaranteedExternalDebt UnderAlternative Scenarios, 2005-2024 l/ (Inpercent) "V -Baseline NPV o f debt-to-GDP ratio 50 - --- Historical scenario ..... / M o s t extreme stress test ... rc / I 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 NPV of debt-to-exports ratio -Baseline ---Historical scenario Most extreme stress test 0 1 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 T i 40 - . -Baseline ---Historical Debt service-to-exports ratio scenario 35 - Most extreme stress test // # / 30 - . / / 25 - 4 20 - 15 - I O - 5 - O [ 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 Source: Staffprojections and simulations. li Most extreme stress test is test that yields highest ratio in2015. - 56 - ANNEX I1 Figure2. Burundi:Indicatorsof PublicDebtUnderAltemative Scenarios,2005-24 I/ (Inpercent) NPV of debt-to-GDP ratio 90 - 80 - 70 ---_---__-- 60 -- 50 - 40 - 30 - -Baseline 20 - ---Nofiscal adjustment (A21 I O - -Most extreme sfless test 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 3w NPV of debt-to-revenueratio 21 c # _/@I / 250 cI 4 I/0 c I 200 I 5 0 IO0 -Baseline 50 ---Nofiscal adjustment (A2) __Most extreme stress test 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 18 Debt service-to-revenueratio 21 16 - 14 - 12 - __---__---- I O - 2 ---Nofiscal adjustment (A2) -Most extreme stress test 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 Source: Staff projectionsand simulations. 1/ Most extreme stress test is test that yields highest ratio in2015. 2/ Revenueincludinggrants. - 57 - ANNEX I1 0 (o 9 9 m in O " " m N 0 b l I . o - 0 - :: m b l i n 0 s s C N C b l O 0 - i - 4 - p - r i o - 58 - ANNEX I1 Table 2. Burundi: Sensitivity Analyses for Key Indicators o f Public and Publicly Guaranteed External Debt, 2005-24 (In percent) Est. Rojections 2005 2006 2007 2008 2009 2010 2015 2024 NPV o fdebt-to-GDP ratio Baseline 14 15 17 18 1 8 18 1 4 10 A AlternativeScenarios A I Key variables at their historicalaverages in 2005-24 I1 14 25 27 29 30 31 34 57 A2 New publicsector loans on less favorabletermsin 2005-24 21 14 16 19 21 22 22 19 16 B BoundTests 01 RealGDP growthat historicalaverage minusone standarddeviationin2006-07 14 16 20 20 21 20 I 5 II B2 Exportvalue growth at historicalaverage minusone standarddeviation in 2006-07 31 14 17 22 22 22 22 17 II 83. US dollar GDP deflatorat historicalaverage minusone standarddewationin 2006-07 14 19 25 26 27 26 20 14 B4 Net non-debt-creatingflows at historical averageminus one standarddeviation in 2006-07 41 14 22 29 29 29 28 22 13 B5.Combinationof Bl-84usingone-hallstandarddeviationshocks 14 26 41 41 41 40 32 19 06. One-time10 percentnominaldepreciationrelativeto the baseline in 2006 51 14 21 24 25 25 25 19 14 NF'V of debt-to-exports ratio Baseline 136 166 167 172 177 172 I20 76 A. AlternativeScenarios A I Key variablesat their historicalaverages in200524 I/ 136 269 262 276 293 299 299 438 A2. New public sectorloans on less favorableterms in 2005-24 21 136 177 187 199 209 208 172 127 B BoundTests BI RealGDP growth at historicalaverage minus one standarddeviationin2006-07 136 166 167 172 177 172 I20 76 B2 E x p value growth at historicalaverageminusone standarddeviation in 2006-07 31 ~ 136 274 565 574 585 565 404 234 B3. U.S dollar GDP deflator at historicalaverage minus one standarddeviation in 2006-07 136 166 167 172 177 172 120 76 B4 Netnon-debt-creatingflows athistorical averageminusone standarddeviationin 2006-0741 136 215 276 277 279 269 195 104 BS CombinationofBl-B4 usingone-half standard deviationshocks 136 262 440 442 447 431 I12 166 B6 One-time 30 percentnominaldepreciationrelativeto the baseline in 2006 51 136 166 167 172 177 172 120 76 Debt service ratio Baseline 36 II 5 5 5 I O 9 6 A. AlternativeScenarios AI Key variablesat their historicalaverages in 2005-24 I/ 16 13 8 8 9 18 34 37 A?.. New public sector loans on less favorablet m in 2005-24 21 36 11 6 7 7 9 I O 8 0.BoundTests BI.Real GDP growthat historicalaverage minus one standarddeviationin2006-07 36 II 5 5 5 I O 9 6 0 2 Exportvalue growth at historicalaverageminus one standarddeviationin 2006-07 31 36 17 I S 16 16 29 27 19 B3 US. dollar GDP deflatorat historicalaverage minus one standarddeviation in 2006-07 36 II 5 5 5 10 9 6 84 Netnon-debt-creatingflows at historical averageminusone slandard deviation in 2006.07 41 36 II 6 7 7 12 13 9 B5 CombinationofBI-B4usingone-hallstandarddeviationshocks 36 13 I O II II 19 20 14 06. One-time30 percent nominaldepreciationrelativeto the baseline in 2006 51 36 II 5 5 5 I O 9 6 Memorandum item: Grantelement assumedon residual financing(i e , financing requiredabove baseline) 61 53 53 53 53 53 53 53 53 Source. Staffprojections and simulations li Vanablesincludereal GDP growth. growth ofGDP deflator (in US dollar terms), non-interestcment accountinpercent ofGDP. and non-debtcreatingflows. 2Assumesthat the interestrateonnewborrowingis by2 percentagepointshigherthaninthebaseline., whilegraceandmaturityperiodsare thesameasinthebaseline 31Expo% values are assumedto remainpermanentlyat the lower level. but the cmmt account as ashare ofGDP is assumedIo returnto its baseline level aflcr the shock (implicitly awning an offsettingadjustment in import levels). 41Includesoficial and privatelranafers and FDI. 51Depreciationis definedas percentage declinein dollarAocal currencyrate, suchthat it never exceeds 100percent. 61Applies to all stressscenarios except for A2 (less lavorable financing) inwhich the t e m on all new financing are as specifiedin footnote2. - 59 - ANBEX I1 a -?: O N z z P O a I 1 9 m v r - 7 5 CI 2 2 P o P p m " - 60 - ANNEX I1 Table 4. Burundi:Sensitivity Analysis for Key Indicators of Public Debt, 2005-24 Est. Proiections ZOOS 2006 2007 2008 2009 2010 2015 2020 2024 NPV ofDebt-to-GDP Ratio Baseline 31 29 30 29 29 27 20 16 13 A. Alternative scenarios A I , Real GDP growth and primary balanceare at historical averages 31 34 37 41 45 48 67 93 I15 A2. Primary balance i s unchangedfrom 2004 33 35 38 40 43 45 55 68 76 A3. Permanently lower GDP growth I/ 31 30 31 32 32 32 32 37 41 8. Boundtests BI. Real GDP growth is at historical average minus one standard deviations in 2006-07 31 32 36 37 38 38 39 43 45 82. Primary balance is at historical average minus one standarddeviations in 2006-07 31 34 37 37 37 36 33 32 31 B3. Combination ofBI-BZ using one half standard deviation shocks 31 34 39 39 39 38 33 33 32 B4. One-time 30 percent real depreciation in2006 31 94 88 82 77 73 54 46 41 85. I O percent ofGDP increase in other debt-creating flows in 2006 31 35 35 35 35 35 3 1 31 30 NPV o f Debt-to-Revenue Ratio 21 Baseline 79 83 97 93 92 89 67 58 50 A. Alternative scenarios A I,Real GDP growth and primary balanceare at historical averages 79 94 117 I26 138 149 210 300 375 A2. Primary balance is unchangedfrom 2004 84 99 121 128 138 146 189 245 283 A3. Permanently lower GDP growth I/ 79 86 101 101 103 IO4 109 131 148 B. Boundtests B I,Real GDP growth is at historical average minus one standard deviations in 2006-07 79 89 110 112 116 119 129 152 163 82. Primary balance is at historical averageminus one standarddeviations in2006-07 79 95 119 118 119 118 112 116 114 83. Combination ofBI-B2 using one halfstandard deviation shocks 79 95 122 119 120 119 Ill 115 1I 6 B4. One-time 30 percent real depreciation in 2006 79 265 282 261 249 236 186 165 I50 65. I O percent o fGDP increasein other debt-creating flows in 2006 79 98 114 112 114 113 107 112 Ill Debt Service-to-RevenueRatio 21 Baseline 16 I1 I 2 II 11 12 II 9 9 A. Alternative scenarios A I . Real GDP growth and primary balanceare at historical averages 16 12 12 12 12 14 14 I 5 16 A2. Primary balance is unchangedfrom 2004 16 11 12 11 11 13 I 2 12 12 A3. Permanently lower GDP growth I/ 16 II I 2 II II 12 I 1 9 8 B. Boundtests B 1, Real GDP growth is at historical average minus one standard deviations in 2006-07 16 12 12 12 12 13 12 I O 9 B2. Primary balance is at historical averageminus one standard deviations in 2006-07 16 II 12 II II 12 I 1 9 7 83. Combination ofBI-82 using one halfstandarddeviation shocks 16 I 2 I2 12 I2 13 1 1 9 7 B4.One-time 30 percent real depreciation in2006 16 12 12 I 1 II 13 II 8 7 B5. 10percent ofGDP increasein other debt-creating flows in2006 16 II 12 11 11 I 2 11 9 7 Sources: Country authorities: and staff estimatesand projections. I/AssumesthatrealGDPgrowthisatbaselineminusonestandarddeviation dividedbythesquarerootof20(i.e., thelengthoftheprojectionperiod) 21Revenuesare defined inclusive ofgrants.