Document of The World Bank FOR OFFICIAL USE ONLY Report No. 82249-BI INTERNATIONAL DEVELOPMENT ASSOCIATION PROGRAM DOCUMENT FOR A PROPOSED GRANT IN THE AMOUNT OF SDR 17 MILLION (US$26 MILLION EQUIVALENT) TO THE REPUBLIC OF BURUNDI FOR THE SEVENTH ECONOMIC REFORM SUPPORT GRANT (ERSG VII) October 30, 2013 Poverty Reduction and Economic Management 5 Country Management Unit AFCE1 Africa Region This document is being made publicly available prior to Board consideration. This does not imply a presumed outcome. This document may be updated following Board consideration and the updated document will be made publicly available in accordance with the Bank’s policy on Access to Information. REPUBLIC OF BURUNDI Government Fiscal Year January 1–December 31 Currency Equivalents Exchange Rate Effective as of September 30, 2013 Currency Unit Burundi Franc US$1.00 Fbu 1,537.99 ABBREVIATION AND ACRONYMS ADC Democratic Alliance for Change (Alliance Démocratique pour le Changement) AfDB African Development Bank API Investment Promotion Agency (Agence de Promotion de l’Investissement) APR (PRSP) Annual Progress Report ARFIC Coffee Regulatory Authority (Autorité de Régulation de la Filière Café) BOP Balance of Payments BRB Central Bank of Burundi (Banque de La République du Burundi) CAS Country Assistance Strategy CASA Conflict -Affected States in Africa CEM Country Economic Memorandum CIP Interministerial Privatization Committee (Comité Interministériel de Privatisation) CNAC National Confederation of Coffee Growers Associations (Confédération Nationale des Associations de Caféiculteurs) CNDD National Council for the Defense of Democracy (Comité National pour la Défense de la Démocratie) CNTB National Lands Commission (Commission Nationale des Terres et Autres Biens) CFAA Country Financial Accountability Assessment COMESA Common Market of Eastern and Southern Africa CP (HIPC) Completion Point CWIQ Core Welfare Indicator Questionnaire DBC Directorate of Budget and Control (Direction du Budget et du Contrôle) DC Directorate of Accounting (Direction de la Comptabilité) DeMPA Debt Management Performance Assessment DGP Planning Directorate (Direction Générale du Plan) DFID Department for International Development (UK) DP Development Partner DPO Development Policy Operation DRC Democratic Republic of the Congo DTIS Diagnostic Trade Integration Study EAC East African Community EC European Commission ECF Extended Credit Facility EERC Emergency Economic Recovery Credit EITI Extractive Industries Transparency Initiative EMSP Economic Management Support Project ERC Economic Rehabilitation Credit ERSG Economic Reform Support Grant EU European Union EXIM Export-Import FAO Food and Agriculture Organization Fbu Burundi Franc (Franc burundais) i FDD Forces for the Defense of Democracy (Forces pour la Defense de la Démocratie) FDI Foreign Direct Investment FNL National Liberation Front (Front National pour la Libération) FPSDP Finance and Private Sector Development Project FIAS Foreign Investment Advisory Service GDP Gross Domestic Product GER Gross Enrollment Ratio GIZ German International Cooperation (Deutsche Gesellschaft für Internationale Zusammenarbeit) GNP Gross National Product Government Government of Burundi HIPC Heavily Indebted Poor Countries (Initiative) HIV/AIDS Human Immuno-deficiency Virus/Acquired Immune Deficiency Syndrome HRMIS Human Resource Management Information System ICA Investment Climate Assessment ICAS Investment Climate Advisory Services ICRR Implementation Completion and Results Report IDA International Development Association IFMIS Integrated Financial Management Information System IFRS Normes Comptables du Secteur Privé (International Financial Reporting Standards) IGE State General Inspectorate (Inspection Générale de l’Etat) IMF International Monetary Fund JSAN Joint Staffs Advisory Note LNBTP National Laboratory for Construction and Public Works (Laboratoire National de Bâtiments et Travaux publics) LDP Letter of Development Policy MCM Monetary and Capital Markets MDG Millennium Development Goal MDRI Multilateral Debt Relief Initiative MFEDP Ministry of Finance and Economic Development Planning MTEF Medium-Term Expenditure Framework MTFF Medium-Term Fiscal Framework NIF Tax Identification Number (Numéro d’Identification Fiscale) NGO Non-Governmental Organization NPV Net Present Value NTB Non-Tariff Barriers OBR Burundi Revenue Authority (Office Burundais des Recettes) OCIBU Office de Café du Burundi (Burundi Coffee Board) OECD/DAC Organization for Economic Cooperation and Development/Development Assistance Committee OHADA Organization for the Harmonization of Business Law in Africa (Organisation pour l'Harmonisation en Afrique du Droit des Affaires) PAGE Economic Management Support Project (Projet d’Appui à la Gestion Economique) PEMFAR Public Expenditure Management and Financial Accountability Review PE Public Enterprise PER Public Expenditure Review PETS Public Expenditure Tracking Survey PFM Public Finance Management PRGF Poverty Reduction and Growth Facility PRSP Poverty Reduction Strategy Paper PSD Private Sector Development REFES Permanent Secretariat for Monitoring of Economic and Social Reforms (Secrétariat Permanent des Réformes Economiques et Sociales) REGIDESO Régie des Eaux (National Water and Electricity Authority) RTFP Regional Trade Facilitation Project SCEP Service in charge of Public Entreprises (Service Chargé des Entreprises Publiques) ii SDR Special Drawing Rights SDRI Imbo Regional Development Agency (Société Régionale de Développement de l’Imbo) SIGEFI Financial Management Information System (Système d’Information de Gestion Financière) SIP Public Mortgage Corporation (Société Immobilière Publique) SOGESTAL Coffee Washing Stations Management Corporation (Société de Gestion des Stations de Lavage de Café) SODECO Coffee Milling and Processing Company (Société de Déparchage et Conditionnement) SSA Sub-Saharan Africa SOSUMO Moso Sugar Company (Société Sucrière de MOSO) SME Small and Medium Enterprises SSA Sub-Saharan Africa TF Trust Fund UN United Nations UNDP United Nations Development Program UNOB United Nations Operation in Burundi UPRONA Union for National Progress (Union pour le Progress National) USAID United States Agency for International Development VAT Value Added Tax WBI World Bank Institute WFP World Food Program WHO World Health Organization Vice President: Makhtar Diop Country Director: Philippe Dongier Country Manager: Rachidi R. Radji Sector Director: Marcelo Giugale Sector Manager: Albert Zeufack Task Team Leader: Mamadou Ndione iii REPUBLIC OF BURUNDI SEVENTH ECONOMIC REFORM SUPPORT GRANT (ERSG VII) TABLE OF CONTENTS I. INTRODUCTION AND COUNTRY CONTEXT ...........................................................................1 II. MACROECONOMIC POLICY FRAMEWORK ...........................................................................2 A. Recent Economic Development .................................................................................. 2 B. Macroeconomic Outlook and Debt Sustainability ...................................................... 6 C. IMF Relations ............................................................................................................. 9 III. GOVERNMENT’S PROGRAM .......................................................................................................9 IV. THE PROPOSED OPERATION ....................................................................................................10 A. Link to the Government Program and Operation Description .................................. 10 B. Link to the CAS and other Partners’ Operations....................................................... 12 C. Prior Actions, Results, and Analytical Underpinnings ............................................. 12 V. OTHER DESIGN AND APPRAISAL ISSUES..............................................................................27 A. Poverty and Social Impacts ....................................................................................... 27 B. Environmental Aspects ............................................................................................. 28 C. PFM, Auditing, and Disbursement Aspects .............................................................. 28 D. Implementation, Monitoring and Evaluation ............................................................ 29 E. Summary of Risks and Mitigation ............................................................................ 29 LIST OF ANNEXES Annex 1: Burundi ERSG VII - Letter of Development Policy ..................................................... 31 Annex 2: Coffee Sector in Burundi............................................................................................... 52 Annex 3: Burundi ERSG VII – Lessons Learned from Other IDA operations............................. 56 Annex 4: Burundi ERSG VII - Good Practice Principles on Conditionality ................................ 59 Annex 5: IMF Assessment of Recent Economic Performance ................................................ 60 Annex 6: Burundi ERSG VI-VIII Results Framework ................................................................. 61 Annex 7: Burundi at A Glance .................................................................................................. 63 Annex 8: Country Map ............................................................................................................... 66 LIST OF TABLES Table 1: Selected Economic Indicators (2006-2016) ...................................................................... 4 Table 2: Fiscal slippage and impact of corrective measures and Bank budget support (in % of GDP) ......................................................................................................................... 5 Table 3: Government fiscal 2006-2016 (in % of GDP) .................................................................. 9 Table 4: Comparison of the PRSP I and II pillars......................................................................... 10 Table 5: Summary of Proposed Prior Actions for ERSG VII ....................................................... 13 Table 6: Analytical Underpinning................................................................................................. 14 Table 7: Proposed Indicative Triggers for ERSG VIII ................................................................. 15 Table 8: Indicators for PFM Reforms (ERSG VI-VIII Series) ..................................................... 20 Table 9: Indicators for Reforms in PSD (ERSG VI-VII Series) ................................................... 25 Table 10: Indicators for Social protection measures (ERSG VI-VIII Series) ............................... 27 iv The Burundi ERSG VII was prepared by a IDA team consisting of : Mamadou Ndione (TTL, Sr. Country Economist, AFTP5), Jacques Morisset (Lead Economist/Sector Leader, AFTP5), Chiara Bronchi (Lead Public Sector and Governance, AFTP5), Nneoma Nwogu (Counsel, LEGAM), Henri Joel Nkuepo ( Associate Counsel, LEGAM) Ferdinand Bararuzunza (Economist, AFTP5), Aurélien Beko (Poverty Economist, AFTP5), Evariste Niyonkuru (Consultant, AFTP5), Nicola Carlene Woodroffe (Consultant, ATFP5), Michaela J. Weber (Private Sector Development Specialist, AFTE), Aissatou Diallo (Senior Financial Officer, CTRLA), Faly Diallo (Financial Officer, CTRLA), Alex Kamurase (Senior Social Protection Specialist, AFTSE), Rachel Berniche Perks (Mining Specialist, SEGOM), Karima Laouali Ladjo (Program Assistant, AFTP5), Maude Valembrun (Language Program Assistant, AFTP5), Lydie Ahodehou (Program Assistant, AFTP5), Pacifique Ndoricimpa (Team Assistant, AFMBI), and Lyse Kayambo (Team Assistant, AFMBI). The team also benefitted from the overall advice of Albert Zeufack (Sector Manager, AFTP5), Philippe Dongier (Country Director, AFCE1), and Rachidi B. Radji (Country Manager, AFMBI). The core team was coordinated, and the Program Document produced, by Mamadou Ndione. The team also worked closely with the IMF team headed by Oral H. William. v REPUBLIC OF BURUNDI SEVENTH ECONOMIC REFORM SUPPORT GRANT (ERSG VII) GRANT AND PROGRAM SUMMARY Borrower Republic of Burundi Implementing Agency Ministry of Finance and Economic Development Planning Financing Data IDA Grant Terms: IDA standard grant Amount: SDR 17 million (US$26 million equivalent). Operation type The second in a series of three programmatic Development Policy Operations. Pillars of the Operation The program aims to contribute to the Government of Burundi’s objective of protecting and and Program consolidating the country’s transition from a post-conflict to a more stable economy through: Development Objectives (i) strengthening Public Finance Management and Budget Transparency; (ii) promoting private sector development and economic diversification; and (iii) improving protection of vulnerable groups. The ERSG series is structured around three pillars, namely: (i) Public finance management; (ii) Private sector development; and (iii) Social protection. Key outcomes indicators Baseline End program Indicators (year) target (2015) 17.3% Gap between MTEF and budget (in percentage of budget) 10% (2012) Delay (months) in budget presentation to Parliament 2 months (difference between month of presentation and legal month, 0 (2012) which is October) Share of public procurement contracts (value) awarded on a <10% (2011) <10% sole source basis PEFA indicator PI19- iii on public access to public D (2012) B procurement Share of communes where budget information tables are 0 (2012) 100% available Share of civil servants managed within HRMIS who are 0% (2013) 100% identified or registered in the biometric census database Number of days to obtain a construction permit at the new 137 (2012) 90 “Guichet Unique” (one stop shop). Estimated value of tax exemptions as a share of total tax 23.8% (2011) 15% revenues. Percentage of budget allocated to the construction/maintenance of feeder roads and small scale 2.2% (2012) 3% irrigation. Share of the private sector in the ownership of the Coffee 35% (2013) 60% Washing Stations 0 Number of EITI pre-candidacy steps completed 4 (2012) Does not exist Availability of a Social Safety Net Strategy Exists (2012) New Availability of household consumption data and Last available vulnerability vulnerability assessment data 2006 assessment available Risks and Risks The main risks to the program, along with identified mitigation measures, include: mitigation (i) Ongoing governance risk: The presidential election scheduled in July 2015 may renew instability and insecurity which could weaken the government’s commitment on the economic vi reform program. Mitigation measures include: (a) program design emphasis on continuity and incremental complexity in the proposed reforms; (b) concrete measures/activities to cement buy-in from key national stakeholders; and (c) broaden private sector participation to maintain the focus on economic growth. (ii) External risks, such as a weak performance in the agricultural sector (owing to adverse weather) and/or increased volatility in the external environment, could compromise adherence to the overall macroeconomic framework and deepen poverty and vulnerability. Mitigation measures include close and regular macro-monitoring by IDA, IMF, and other Donor Partners, to identify shocks and remedial actions. The program itself will foster Burundi’s resilience to external shocks at the macro level by providing additional fiscal space, and promoting economic diversification and safety net programs for the most vulnerable households. Moreover, IDA’s ongoing agro-pastoral project aims to improve the resiliency of the agriculture sector to external shocks through technology acquisition, small scale irrigation and improved market access. Burundi is extremely vulnerable to aid inflows, as grants represented nearly 60 percent of total government resources. The projected decline in aid in the coming years will be mitigated by reforms aimed at rising domestic revenues. The Bank’s program will help Burundi maintain external assistance by supporting continued reforms in public financial management, the public wage bill, accelerated export earnings, and improving the business climate through transparency and anti-corruption measures. (iii) Capacity constraints in Government could delay reforms and/or overwhelm government. These are mitigated by: (i) a deliberate narrow focus on a limited set of reforms aligned with the Government’s own and the Bank’s overall strategies (PRSP II/CAS); (ii) leveraging technical support from on-going IDA projects; and (iii) close donor coordination within the “Burundi Partnership Framework” (Cadre de Partenariat). (iv) Resistance to reform and vested interest: Some resistance is expected with respect to measures to: (i) promote state disengagement from productive and commercial activities, (ii) enhance transparency and accountability in public procurement and the regulatory framework for mining; and (iii) improve efficiency and transparency of payroll management. The proposed program fully leverages ongoing government initiatives that are nationally owned in all these areas and will generate tangible benefits for reformers in government, and the general public. Operation ID Number P144612 vii IDA PROGRAM DOCUMENT FOR THE PROPOSED SEVENTH ECONOMIC REFORM SUPPORT GRANT TO THE REPUBLIC OF BURUNDI I. INTRODUCTION AND COUNTRY CONTEXT 1.1 This program document proposes a single tranche Seventh Economic Reform Support Grant (ERSG VII) for the Republic of Burundi in the amount of SDR 17 million (US$26 million equivalent). This operation is the second of a programmatic series of three ERSGs, which supports the implementation of the country’s second Poverty Reduction Strategy in a context characterized by a continued challenging domestic and global environment. The aim of this series of ERSGs is to contribute to the Government of Burundi’s objective of consolidating the country’s transition from a post-conflict to a more stable economy through: (i) promoting greater transparency and efficiency in public finance management; (ii) promoting private sector development and economic diversification; and (iii) improving protection of vulnerable groups. The grant will be financed from new IDA amounting to SDR16.3 million envisaged in the CAS and recommitted IDA of SDR0.7 million. 1.2 The decade lasting conflict in Burundi resulted in the destruction of key economic and social infrastructure and weakened the country’s capacity and institutions. Despite progress over the past decade, no MDGs will be achieved by 2015. Poverty is widespread with 67 percent of the population living below the national poverty line in 2006 when the last household survey was conducted. Since then, modest growth and repeated shocks have maintained growth in per capita income to a low level, leading only to marginal improvements on poverty incidence. Burundi still ranks at the bottom of the UNDP’s Human Development Index (178th out of 186 countries in 2013), though education and health outcomes have been improving over the past few years. As in other post-conflict states, governance and institutional capacities are very weak, limiting the government’s capability to address the country’s huge development challenges. 1.3 In addition to the weak capacities, the narrow fiscal space limits the country’s available means to address the challenges and makes the country even more vulnerable. Fiscal space has been narrowing for several reasons. First, the already low level of fiscal revenue has been further weakened by the setbacks in tax revenue mobilization, resulting in a tax to GDP ratio of only 13 percent. Second, with weak institutional capacity and very low export base, the country is already at a high risk of debt distress. Third, given the relative scarcity of external financing, grants are expected to decrease to around 15 percent of GDP, down from 22 percent in 2008-2012. Fourth, as the domestic banking sector is very small and the domestic financial market quasi-inexistent, domestic financing of a wider fiscal deficit will likely be inflationary or crowd-out private investment. Finally, as the non-discretionary spending absorbs almost all the domestic revenue, with salaries representing 60 percent of the tax revenues, room for spending cuts is very limited in the short term. 1.4 By focusing on selected key areas, the proposed operation supports the adoption of several critical but overdue reforms in the areas of fiscal policy and management, private 1 sector development, and social protection. By adopting an incremental approach, the proposed series should help keep the reform momentum and empower reformers in government. At the same time, the operation would provide additional fiscal space at a time when the government has been facing revenue shortfalls and aid inflow reductions. In the short run, streamlining of tax exemption, better spending planning and control, as well as improved procurement could provide additional fiscal space. In the medium run, private sector development, increased coffee export earnings, as well as smart exploitation of natural resources will help consolidate the drive toward economic transformation and help the country exit from its current fragility trap and initiate the trend toward ending extreme poverty. Finally, the focus on agricultural sector, together with the building of the foundations for a comprehensive safety nets strategy will help increase the revenue for the bottom 40 percent and promote shared prosperity. 1.5 Though the overall security situation has improved significantly, the situation in the Great Lakes remains fragile. The most important challenge facing the government is maintaining peace. Substantial improvements occurred over the past decade, notably thanks to the relatively well performing demobilization program. Security and legal entities are under the government’s control and the army is now seen as one of the main stabilizing institutions. However, the situation remains tense in the Great Lakes region. The latest round of fighting in the eastern Democratic Republic of the Congo has had devastating consequences on the civilian population, both for those living in and around Goma as well as for the host communities and governments of the neighboring countries. The Peace, Security, and Cooperation Framework which includes a broader reform package and effort from the international community, including the Bank and UN 1, will likely help to improve the security situation and the economic environment of the Great Lakes region. 1.6 The proposed series has been prepared in line with good practice principles for development policy operations in situations of fragility. It builds on the lessons from the previous programmatic series (ERSG I ERSG II-III and ERSG IV-V) and deepens the reforms started in the first operation ERSG VI of the current series. It maintains the focus on areas of importance to the country: (1) strengthening public confidence in government by improving the transparency of budgets and accountability of public officials; (2) building investor confidence through rapid improvements in the business climate and quick creation of economic opportunities by focusing on potential sources of growth and employment, particularly on labor- intensive exports; and (3) mitigating social vulnerabilities by helping to design an effective and well-targeted safety net strategy. II. MACROECONOMIC POLICY FRAMEWORK A. Recent Economic Development 2.1 Over the past decade, Burundi has mostly enjoyed uninterrupted GDP growth, but economic performance has been weakened by the fuel and food price crisises. Output growth averaged 4.1 percent in 2004-2013 with only one brief episode of decrease in per capita 1 A Framework for Peace, Security, and Cooperation has been signed by 11 countries in the region and 4 international organizations in February 2013. Security Council Debate on the Situation in the Great Lakes Region: DRC and the Great Lakes, July 25th 2013, Security Council Chamber. More than 100 women leaders from signatory countries of the Framework attended the conference held from 9 to 11 July in Bujumbura, including the Gender Ministers of the Democratic Republic of the Congo, Rwanda, Uganda and Burundi. 2 GDP in 2005, but it remained below the 7 percent projected in the PRSPs and the average of the other East African Community (EAC) countries. The breakthrough in the peace process and the associated reduction of violence in Burundi triggered a rebound in the economic performance. However, since 2009, succession of shocks slowed down economic growth from 5.1 percent in 2006-2008 to 3.9 percent in 2009-2012, marginally above the population growth rate. Burundi, like other landlocked countries, faces a severe disadvantage to access overseas markets. The country has to rely on neighboring countries (Tanzania and Kenya) for reliable transit routes but distances to seaports are long, lowering the country’s connectivity and limiting the potential benefit from regional integration and international trade. 2.2 Burundi’s economic growth is expected to accelerate in 2013. Real GDP growth is projected to reach 4.5 percent, up from 4.0 percent in 2012. The secondary and tertiary sectors are the main contributors to the growth. A recovery in the mining and manufacturing sectors fueled by improvement in electricity supply, together with momentum in the construction sector supported the rapid growth in the secondary sector, while the tertiary sector has continued its expansion (telecommunication, banking, and tourism) but at a slower pace than in recent years, partly due to the fire of the central market in Bujumbura. The contribution of the primary sector has remained modest as the increase in food crop production has been offset by the decline in coffee production. On the demand side, private consumption and public spending are still the main drivers of the economic growth in 2013. Gross fixed capital, though growing in percentage of nominal GDP is still below US$250 million while export growth has remained limited. 2.3 With modest economic growth over the past few years, unemployment, underemployment, and poverty patterns have likely remained unchanged. Poverty remains widespread reaching two third of the population, with higher rates in rural areas (69 percent) compared to urban areas (34 percent). The decline in coffee output (mainly rural) and its contrast with the momentum in the service and construction sectors (mainly urban), may have even deepened the inequalities between rural 2 and urban areas in recent years. Also, poverty varies widely across regions (from a low of 29.7 percent in Bujumbura to a high of 82 percent in the province of Kirundo). Poverty incidence varies also by size of household and nature of displacement. Small households with less than 3 members are less poor (30.9 percent) than big households with 7 members or more (80.8 percent), while the internally displaced (67.6 percent) and the displaced to neighboring countries (73.7 percent) are poorer than the never displaced (61.7 percent). The results of the new household survey completed in 2013 and expected to be available in mid-2014, should shed light on recent aggregate and regional trends in poverty. 3 2.4 The current account deficit is expected to narrow to 16 percent of GDP in 2013 as import value follows falling oil prices and aid financed imports. Despite lower coffee exports, owing to natural cycle of coffee production, the trade balance should narrow in 2013 as the value of imports is expected to decline faster than export receipts, reflecting a return to normal levels following the unprecedented record of 35.8 percent of GDP in 2012. The balance of services is slightly improving as exports of services are gradually picking up, driven by new investments in the tourism, telecommunication, and banking sectors. The net current transfers are still positive but with declining margin following the decreasing trend in official aid. External assistance is provided mainly by the African Development Bank (AfDB), the European 2 In rural Burundi, food insecurity affects about 30 percent of the population in harvest periods, and up to 60 percent during lean periods. 3 A new Poverty Assessment based on the 2011/12 household survey is under preparation with World Bank support. 3 Commission (EC), IDA, and bilateral donors such as Belgium, France, Netherlands, Norway, and the United States. The financing of the current account deficit is ensured by drawing from concessional loans, small FDI and official reserves. Foreign direct investments are modest, though prospective are good for the mining sector in the medium term. Official reserves are projected to increase to 4 months of imports. Foreign exchange policy has remained flexible as the daily reference exchange rate continued to be determined by the weighted average of foreign currency rates set the preceding day. Table 1: Selected Economic Indicators (2006-2016) 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Proj. Proj. Proj. Proj. National Accounts (growth rates, % ) Agriculture 3.1 -8.8 -2.1 3.0 3.9 4.4 5.4 0.8 3.3 3.1 3.1 Industry 5.4 8.2 -1.4 4.9 4.9 5.9 4.1 11.6 8.2 8.5 8.8 Services 7.4 20.1 13.3 3.5 3.6 3.6 2.7 5.1 4.4 4.3 4.5 GDP at market prices 5.4 4.8 5.0 3.5 3.8 4.2 4.0 4.5 4.7 4.8 5.0 Real per capita GDP 1.9 1.3 1.6 0.0 0.4 0.9 0.8 1.3 1.5 1.6 1.8 Annual average inflation (%) 2.8 8.3 24.1 11.0 6.4 9.7 18.0 10.0 8.0 8.0 8.0 National Accounts (% GDP at current market prices) Agriculture 44.5 44.3 37.3 40.6 40.5 40.4 40.3 40.6 39.7 39.1 38.5 Industry 18.5 16.7 18.0 16.0 16.6 16.7 16.9 16.9 17.9 18.4 19.1 Services 37.1 38.9 44.6 43.4 42.8 42.8 42.8 42.5 42.5 42.5 42.5 Gross domestic investment 22.0 23.6 26.7 23.2 30.5 27.6 28.4 29.1 28.3 28.6 28.5 Public investment 7.2 10.1 22.4 18.9 22.1 15.6 13.4 10.5 11.7 12.8 13.2 Private investment 14.7 13.5 4.2 4.4 8.5 12.0 15.0 18.6 16.5 15.8 15.3 Increental Capital Output Ration (ICOR) 4.1 4.9 5.3 6.7 8.1 6.6 7.1 6.5 6.0 6.0 5.7 Gross domestic savings -17.6 -3.4 -1.8 -13.1 0.3 -0.7 -0.1 1.9 2.1 0.8 1.2 Gross national savings 7.5 9.4 2.5 -2.9 12.7 12.1 17.4 17.9 17.9 16.7 17.0 Balance of Payments (% GDP at current market prices) Current account balance (including current official transfers) -25.1 -12.8 -4.3 -10.2 -12.5 -12.8 -17.5 -16.0 -15.8 -15.8 -15.8 Current account balance (excluding current official transfers) -25.1 -12.8 -4.3 -10.2 -12.5 -12.8 -17.5 -16.0 -15.8 -15.8 -15.8 Debt Indicators (end of period) Total Public Debt to GDP 118.8 120.8 96.3 43.3 38.4 32.9 35.1 31.3 29.6 28.2 26.6 External Public Debt to GDP 101.2 104.3 82.1 26.2 21.2 17.8 20.5 18.0 17.0 16.2 15.0 Internal Public Debt 17.6 16.4 14.3 17.1 17.2 15.1 14.6 13.3 12.6 12.0 11.6 Gross Official Reserves in months of imports 3.5 4.9 6.0 7.5 4.5 3.6 3.3 4.0 4.1 4.2 4.2 Government finance (% GDP at current market prices) Current revenues 11.9 11.9 11.4 12.1 13.9 15.4 14.8 13.0 13.4 13.7 13.9 Current expenditures 16.9 17.7 18.7 19.9 18.9 24.4 22.2 19.6 18.7 17.6 17.6 o/w wages and salaries 6.9 7.6 8.1 8.4 9.0 9.4 8.1 7.3 6.9 6.8 6.7 Capital expenditures 7.2 10.1 22.4 18.9 22.1 15.6 13.4 10.5 11.7 12.8 13.2 Overall fiscal balance excluding grants (commit. basis) -12.2 -15.9 -29.7 -26.6 -27.1 -24.7 -20.8 -17.1 -17.0 -16.7 -16.9 Overall fiscal balance including grants (commitment basis) -7.3 -3.9 -2.3 -5.3 -3.6 -4.0 -3.7 -1.7 -2.5 -2.0 -1.7 External borrowing (net) 1.0 1.6 0.7 0.9 0.8 0.6 Domestic borrowing (net) 1.7 2.1 0.6 0.8 0.8 0.8 Monetary indicators Broad money (M2) (% annual growth) 16.4 10.1 34.2 19.8 19.4 6.1 10.3 16.9 12.9 13.0 12.2 Credit to the economy (% annual growth) 22.4 4.3 26.0 29.1 16.2 33.7 16.4 17.1 19.1 17.8 15.7 Credit to the economy (in % of GDP) 15.8 14.7 14.2 16.4 16.3 18.3 17.8 17.8 18.8 19.6 20.2 Velocity (GDP/M2; end of period) 4.4 4.4 4.3 4.0 3.9 4.4 4.8 4.8 4.8 4.8 4.8 Memo: GDP at current market prices (Fbu billion) 1,309.7 1,467.1 1,910.9 2,140.2 2,494.6 2,970.7 3,566.4 4,169.1 4,707.7 5,321.4 5,971.7 GDP at current market prices (USD million) 1,273.2 1,356.1 1,611.6 1,739.8 2,026.9 2,355.7 2,472.4 2,642.5 2,823.2 3,019.4 3,205.9 Nominal average exchange rate (Fbu per US$) 1,028.7 1,081.9 1,185.7 1,230.2 1,230.7 1,261.1 1,442.5 1,577.7 1,667.5 1,762.4 1,862.7 Source: Authorities, IMF, and World Bank 2.5 Monetary policy helped to bring inflation down. In response to rising domestic prices, the Central Bank tightened monetary policy in 2012. Headline inflation reached a peak of 25 percent (y-o-y basis) in March-April 2012 up from 14.9 percent in end 2011, before declining to 11.8 percent in end 2012. As inflation pressures ease, the Central Bank of Burundi (BRB) lowered slightly its policy rate in early 2013, leading to expansion in credit to the private sector. Credit to the economy is expected to grow by 17 percent in 2013 and reach 18 percent of GDP, fuelled by improved liquidity conditions following shortage in 2012. Donor aid inflows, including the disbursement of the Bank’s budget support (ERSG VI) in early 2013, new entry of 4 regional banks 4 with access to cross-border financing, as well as the government’s timely repayment of debt service contributed to the improvement in liquidity conditions. Nevertheless, the structure of domestic credit is still unchanged with approximately 90 percent of loans concentrated in short-term instruments. Broad money (M2) increased by 17 percent, and should reach 21 percent of GDP at end-2013. 2.6 Greater exchange rate flexibility allowed the economy to adjust to a series of external shocks. Exchange rate policy remained flexible as the daily reference continued to be determined by the weighted average of foreign currency set on the preceding day by commercial banks. However, in March 2013, the BRB decided that the margins applicable to foreign currency transactions had to be contained within a one percent bracket around the reference rate published by the Central Bank. In response to the sharp depreciation of the exchange rate in early 2013, the authorities intervened to smooth exchange rate volatility and removed the withdrawal limits on residents’ dollar-denominated accounts. 2.7 On the fiscal side, revenue slippages occurred in the first quarter of 2013. The Government of Burundi revised in early 2013, the income tax law to introduce exemptions for income below US$100 5 as well as tax advantages related to transport and housing benefits. At the same time, additional VAT exemptions were granted to enterprises and donor-financed programs resulting in overall revenue shortfall of about 2.5 percent of GDP compared to initial budget projections (see Table 2). These new measures came on top of already relatively generous exemptions. In 2012, the government had already provided tax exemptions on basic foodstuffs and the Investment Code included a series of tax benefits for investors. 2.8 Against that backdrop and in the context of their Table 2: Fiscal slippage and impact of IMF-supported ECF program, the authorities adopted corrective measures and Bank budget support (in % of GDP) in July 2013 strong fiscal corrective actions. These 2013 actions aim at increasing revenue mobilization by 0.6 Initial Revised budget Bank Revised budget Slippages with no budget Budget with budget percent of GDP and at cutting spending by 1 percent of budget support support support Revenue and grants 29.5 -2.6 0.6 0.9 28.4 GDP. Revenue measures comprised an increase in taxes on Current revenue 14.9 -2.4 0.6 13.0 petroleum products, vehicles, tobacco, and telecoms as Tax revenue 13.8 -2.4 0.4 11.9 Nontax revenue 1.0 0.0 0.2 1.2 well as the elimination of tax exemption on foodstuff. The Grants 14.6 -0.2 0.9 15.4 expenditure cuts consisted of a mix of current and capital Program support 2.2 0.0 0.9 3.2 Project support 7.5 -0.1 7.4 spending. However, the budget allocation for the priority Other grants and transfers 4.9 -0.1 4.8 sector has remained globally unchanged, especially for Total expenditure 31.2 -0.1 -1.0 30.1 agriculture (including the feeder road and fertilizer fund), Current expenditure 20.1 -0.1 -0.4 19.6 Capital expenditure 11.2 0.0 -0.6 10.5 education, and health. Overall, the sectoral composition of Fiscal deficit -1.7 -1.7 -1.7 -1.7 -1.7 the revised budget remained relatively close to the MTEF Financing gap 0.0 2.5 0.9 0.0 0.0 allocation. Source: Authorities, IMF, and Bank 2.9 With the measures successfully implemented, the overall fiscal deficit is expected to remain at 1.7 percent of GDP. Current revenue (fiscal and non-fiscal) are expected to amount 4 In 2012, Kenya Commercial Bank (KCB) and Tanzania's Cooperative Rural Development Bank (CRDB), two of the East African Community’s largest banks opened their first branches in Bujumbura. 5 The lack of well-functioning social safety nets system limits the policy options available to government and increases the recourse to tax exemption to ease living conditions. 5 to 13 percent of GDP, down from 14.8 percent in 2012, while total expenditure and net lending will decline to 30.1 percent of GDP down from 35.6 percent in 2012. Following these adjustment measures, the IMF approved the third review of the ECF program on September 6, 2013 and recommended drawing of US$ 5 million to manage negative impacts. The proposed operation, including the financing will help the country stabilize the macroeconomic situation and facilitate the creation of the environment for strong and sustained economic growth. B. Macroeconomic Outlook and Debt Sustainability 2.10 Burundi’s medium term macroeconomic outlook confirms the need to balance between fiscal sustainability and growth. Burundi’s ability to strongly increase per capita GDP will largely depend on its capacity to stimulate productivity growth. The country has improved recently access to education but skills development and basic pro-growth infrastructure are still lagging, even by regional standards. Though market oriented institutions need to be developed and overall governance improved for better protection of property right and more efficient resource allocation, greater public investment is necessary. At the same time, the country fiscal position is still vulnerable. Domestic revenues are projected to remain limited, and aid levels should decline after reaching unprecedented record levels in recent years. This decline has already started with foreign resources accounting for about 54 percent of total budget in 2013 against 63 percent in 2010. Overall economic governance has improved over the last decade, focusing mainly on improving security, ensuring better macroeconomic management and implementing basic PFM reforms. These efforts have yielded positive outcomes but will need to be consolidated by a new set of reforms. This second wave of reforms should include improvements in revenue mobilization, especially through the better management of existing tax exemptions. 2.11 Trade openness and diversification, especially through Figure 1: Evolution in Total regional integration and the burgeoning extractives' sector, Factor Productivity 10.0% offers opportunities for further public investment and Productivity growth productivity gains. Productivity’s contribution to economic 8.0% Changes in laobor force growth is still negative. Isolated Burundi needs to upgrade its 6.0% Changes in capital stock infrastructure so the country can be linked to the regional and 4.0% global markets. In this context, regional integration, as well as 2.0% cooperation will be critical to reduce the transport, energy and 0.0% communication infrastructure gap 6. Given its catalytic role for -2.0% various activities such as trade, agriculture, and tourism or for the -4.0% movement of labor, infrastructure development is a priority area -6.0% of the EAC, and should foster economic growth and 1980-1993 1994-2003 2004-2013 transformation in Burundi. Source: Authorities and Bank staff 2.12 In the medium term, GDP growth is expected to accelerate gradually and converge toward the EAC average. Assuming that the global environment continues to improve, growth is projected to reach 4.5 percent in 2013, and moving toward 5 percent in the coming three years before reaching the EAC growth levels. This positive trajectory will be supported by structural reforms, including in the coffee and mining sectors, as well as new investments in the energy 6 See the report (AfDB 2009) for a detailed presentation of the situation of different types of infrastructure in Burundi and the opportunities offered by regional integration 6 sector. Output growth is expected to be driven by the mining, construction and services sectors (banking, tourism, transport, and telecommunication). The recovery in the agriculture sector is expected to contribute to economic expansion in the medium to long term. On the demand side, private consumption and government spending will continue to be the main drivers of the economy. Private investment and export earnings are expected to increase because of improvement in business environment, coffee and mining sector reforms, as well as export diversification. 2.13 The external current account deficit will remain high in the medium terms; reflecting higher imports associated with infrastructure projects and the resumption of growth, as well as the continued weakness in exports. For the medium term, the current account deficit is projected to slightly decrease from its 2013 level (16 percent of GDP) but will remain above 15 percent of GDP until 2015. The financing of the current account deficit will be ensured by the combination of external aid and FDI. As a result, Burundi’s national reserves should remain slightly above 4 months of imports in the medium term. 2.14 Monetary policy will remain focused on reducing inflation and stabilizing the impact of external shocks. Inflation is expected to be maintained to single digit in the medium term, provided that global fuel and food prices remain stable. Continued prudent monetary and exchange policy by the Central Bank, should help control for inflation, which is projected to decrease to below 10 percent in 2013 and beyond. The authorities will continue to promote exchange rate flexibility, to ease the adjustment of the economy in case of external shocks. 2.15 Though the authorities are committed to maintaining a prudent fiscal stance over the medium term, fiscal management is expected to remain challenging as the country moves towards the 2015 presidential election. The need to preserve debt sustainability continues to anchor medium-term fiscal deficit below 2.5 percent of GDP. Domestic revenue is expected to increase gradually to 14 percent of GDP as the Government streamlines tax exemptions and extends the fiscal base. Tax exemptions are very high (more than 5 percent of GDP) and their impact on investment is not obvious. The Government intends to limit tax exemptions within a ceiling. The investment code will also be revised to streamline exemptions. Current expenditure is expected to decrease from 19.6 percent of GDP in 2013 to 17.6 percent in 2016 to provide room for increased capital spending, including expanding or renewing the feeder roads network for agricultural development. Critical areas for better control of spending are the wage bill and procurement, both of which are included in the proposed operation. More generally, there remains significant scope for improving the efficiency and equity of public spending and the quality of services. Public finance management and procurement reforms, stronger sector policies, and a new focus on social protection and safety nets will be crucial to further underpin human capital development and poverty reduction. The authorities’ effort to develop medium-term budgeting tools for several key sectors has been a critical step in the right direction to achieve greater predictability in budgetary allocations to priority sectors. 2.16 There are significant uncertainties, which could cloud the medium term macroeconomic and fiscal outlook. First, the risk of an uneven commitment to reforms is heightened, including the streamlining of fiscal exemptions, as the country moves towards the next presidential elections currently scheduled for mid-2015. Spending pressures could lead to a deterioration of the fiscal position, while governance slippages and slow implementation of PFM reforms could curtail donor support. Wage claims and the associated strikes are already rising. Influx of refugees affected by the conflict in Eastern Congo and the repatriation of refugees from 7 Tanzania are likely to exacerbate the situation. Second, aid inflows could also fall short from projections, particularly if development partners perceive weakening government commitment to reforms. Third and last, a protracted or deepening macroeconomic downturn in trade and partner country economies, mainly in Europe 7, still represents a significant risk. 2.17 Burundi will also remain at high risk of debt distress over the medium term. Under the baseline scenario of the most recent joint World Bank-IMF Debt Sustainability Analysis, the present value of debt-to-exports ratio temporarily and marginally breaches the policy threshold, while other indicators remain below the respective policy thresholds. Slower GDP growth could lead to a deterioration of debt indicators. This fragility is explained mainly by the country’s narrow export base and low capacity of government institutions including debt management. Adding domestic debt, while raising the debt burden indicators, does not change the overall risk assessment, but confirms the need for prudent fiscal policy. However, Burundi is currently able to service its public and publicly guaranteed debt and is not accumulating external arrears. The authorities need to continue to implement prudent borrowing policies and accelerate the structural reforms required for private sector led growth, particularly in infrastructure and export diversification, to mitigate risks to debt sustainability. 2.18 The authorities are pursuing their efforts to strengthen debt management capacity, in line with the recommendations of the World Bank DeMPA mission of August 2012. The legal framework governing debt management is being revised and a fiscal and monetary policy coordinating committee is being established. In view of the central role of debt management in the budgeting process, the government intends to prepare a quarterly report on debt management. While the government is committed to seek only grants or highly concessional loans, they have requested a modification of the non-concessional borrowing policy to help finance a key road project 8. The project aims to connect Burundi with Rwanda and Tanzania, and is aligned with the Poverty Reduction Strategy of addressing infrastructure bottlenecks. The project (US$28 million) has a grant element of 49.2 percent only slightly below the policy floor. 2.19 Overall, Burundi’s macroeconomic framework for 2013 and the medium term outlook, albeit challenging, provide an adequate basis for the proposed operation. The medium term macroeconomic outlook (2014-2016) is consistent with the framework of the IMF’s ECF program. The third review of the IMF’s ECF program, which was concluded on September 6, 2013, confirms that Burundi’s performance has been satisfactory, and that its economic outlook is broadly positive, though risks are rising. Developments in early 2013 have underscored the need to ensure a credible, fully funded and sustainable fiscal stance. The recent measures adopted to close the fiscal gap have confirmed the government’s commitment to economic stability and fiscal sustainability both essential for maintaining the country on a sustainable economic path. These measures have started to produce positive outcomes. For example, in July and August 2013, the revenue mobilized has been above the monthly targets. By focusing on the critical areas (streamlining fiscal exemptions, improving the management of the wage bill, and increasing transparency in procurement), the proposed operation, including the financing, will help the country strengthen the macroeconomic situation to facilitate strong and sustained economic growth. It also supports economic diversification by accompanying the restructurating of the export sector, including the coffee and the mining sectors. 7 Europe remains Burundi’s main trade partner and the destination for 60 percent of its exports. 8 The project is financed by the Saudi Development Fund and the OPEC Fund 8 Table 3: Government fiscal 2006-2016 (in % of GDP) 9 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Proj. Proj. Proj. Proj. Revenue and grants 16.8 23.9 38.8 33.5 37.3 36.1 31.9 28.4 27.9 28.4 29.2 Current Revenue 11.9 11.9 11.4 12.1 13.9 15.4 14.8 13.0 13.4 13.7 13.9 Tax revenue 11.7 11.6 11.4 12.1 13.9 14.3 13.8 11.9 12.3 12.5 12.7 Direct Taxes 3.4 3.6 3.5 3.9 4.6 4.4 4.4 3.6 3.7 3.8 3.9 Indirect Taxes 8.3 8.0 7.9 8.3 9.3 9.9 9.4 8.2 8.5 8.7 8.8 On domestic goods & services 6.4 6.3 6.1 6.9 7.8 8.4 8.0 7.2 7.4 7.5 7.6 On international trade 2.0 1.7 1.8 1.4 1.5 1.5 1.4 1.0 1.2 1.2 1.3 Nontax revenue 0.2 0.3 0.0 0.0 0.0 1.1 1.0 1.2 1.2 1.2 1.2 Grants 4.9 12.0 27.4 21.4 23.4 20.7 17.1 15.4 14.5 14.7 15.2 Program support 3.9 2.1 3.2 2.1 2.1 2.2 Project support 11.0 9.0 7.4 8.2 9.0 9.4 Others 5.9 6.0 4.8 4.2 3.6 3.7 Total expenditure and net lending 24.1 27.8 41.1 38.8 40.9 40.0 35.6 30.1 30.4 30.4 30.8 Current Expenditures 16.9 17.7 18.7 19.9 18.9 24.4 22.2 19.6 18.7 17.6 17.6 Wages and Salaries 6.9 7.6 8.1 8.4 9.0 9.4 8.1 7.3 6.9 6.8 6.7 Interest payment 1.5 2.0 1.4 1.2 1.1 0.9 0.7 0.9 1.0 0.9 1.0 On external debt 0.8 0.8 0.7 0.4 0.6 0.1 0.1 0.2 0.1 0.2 0.2 On domestic debt 0.8 1.2 0.8 0.8 0.6 0.7 0.7 0.7 0.8 0.8 0.8 Other Current Transfers 8.5 8.0 9.1 10.3 8.8 14.2 13.4 11.5 10.8 9.9 10.0 Subsidies 2.8 3.2 3.7 5.4 5.0 10.9 10.5 8.9 8.6 7.6 7.7 Consumption 5.7 4.9 5.4 4.9 3.8 3.3 2.9 2.6 2.3 2.3 2.3 Capital expenditures and net lending 7.2 10.1 22.4 18.9 22.1 15.6 13.4 10.5 11.7 12.8 13.2 On domestic resources 3.5 2.6 2.5 2.3 2.6 2.8 On external resources 12.1 10.8 8.0 9.4 10.2 10.4 Overall Surplus/Deficit -7.3 -3.9 -2.3 -5.3 -3.6 -4.0 -3.7 -1.7 -2.5 -2.0 -1.7 Overall Surplus/Deficit, excl. current Grants -12.2 -15.9 -29.7 -26.6 -27.1 -24.7 -20.8 -17.1 -17.0 -16.7 -16.9 Primary Surplus/Deficit, excluding interest -5.7 -1.9 -0.9 -4.0 -2.5 -3.1 -3.0 -0.9 -1.5 -1.1 -0.7 Total Government Debt 118.8 120.8 96.3 43.3 38.4 39.7 35.2 31.3 29.6 28.2 26.6 External Debt 101.2 104.3 82.1 26.2 21.2 17.8 20.5 18.0 17.0 16.2 15.0 Domestic Debt 17.6 16.4 14.3 17.1 17.2 15.1 14.6 13.3 12.6 12.0 11.6 Source: Authorities, IMF, and World Bank C. IMF Relations 2.20 On July 2012, the IMF Executive Board approved the three-year arrangement under the Extended Credit Facility (ECF) of SDR 30 million. The first and second reviews were completed on July 27, 2012 and February 14, 2013, respectively. The third review was concluded on September 6, 2013, with all performance criteria observed, with the exception of one indicative target on pro-poor spending. Satisfactory progress has been made on structural reforms, albeit with some delays. Policy discussions focused on measures to strengthen fiscal performance which have been reflected in a revised 2013 budget, bolstering public financial and debt management. The Fund also delivered Technical Assistance to the MoF on tax administration, debt management, and statistics. III. GOVERNMENT’S PROGRAM 3.1 The Government’s priorities are set-out in the second Poverty Reduction Strategy Paper (PRSP II) adopted on January 24, 2012. The new strategy builds on the first PRSP (PRSP I), while introducing new pillars on sustainable spatial and environmental management (Table 5). PRSP II aims at: (i) transforming the economy for rapid job-creating growth and food security; (ii) making growth more inclusive and sensitive to vulnerable groups; (iii) realizing the potential of the population with a thriving private sector by increasing trade with neighbors; and 9 The surge in subsidies since 2011, reflect the classification of the reimbursement of the Africa Mission to Somalia (AMISOM) in the other grants and the counterpart in the transfers and subsidies. 9 (iv) developing institutions to improve governance and the quality of services. The PRSP’s envisioned approach is broken down into: (i) strengthening the legal and judiciary system, (ii) tackling corruption and institutional performance, (iii) improving public financial management, and (iv) promoting gender equality. Table 4: Comparison of the PRSP I and II pillars PRSP I Pillars PRSP II Pillars Governance and security Rule of law, governance and gender equality Equitable and sustained growth Equitable and sustained growth for job creation Developing human capital Access to quality services and national solidarity Controlling HIV/AIDS Sustainable spatial and environmental management 3.2 Promoting growth remains a priority of the PRSP II, with added emphasis on job creation. Without growth, the goals of providing basic social services and protection for the weak and vulnerable are not sustainable beyond the medium term. To promote growth, the government’s strategy relies essentially on: (i) developing priority sectors including agriculture (with an emphasis on export crops and agribusiness), mining and tourism; (ii) tackling underlying bottlenecks, particularly energy, transport and ICT; and (iii) deepening regional integration. The underlying theme is the promotion of private sector participation in the economy to support job creation. 3.3 The focus on increasing access to essential social services remains central, together with new attention to social protection and vulnerability mitigation. The Government’s strategy includes: (i) increasing the capacity of the education system to accommodate higher secondary and tertiary intake and enhancing quality at all levels; (ii) strengthening performance in health service delivery and access to water; (iii) controlling population growth; and (iv) consolidating the good progress on HIV/AIDS prevention. PRSP II also targets social protection with short term actions (through community-based interventions and livelihoods promotion in rural and informal environments) and longer term initiatives (formal social insurance and social protection institutions and access). 3.4 The last objective of the PRSP is to enhance spatial and environmental management. This pillar covers: (i) urban management and planning and land management/titling, (ii) environmental protection and climate change mitigation, (iii) water resources management, and (iv) mainstreaming the environment dimension in sector programs. IV. THE PROPOSED OPERATION A. Link to the Government Program and Operation Description 4.1 The proposed operation is rooted in the Government program. By focusing on PFM reform, particularly promoting MTEF, budget transparency, and better wage bill management, the first pillar of the proposed operation supports the first pillar of the PRSP II: Rule of law, governance and gender equality. The second pillar of the operation, which promotes private sector development and economic diversification, is aligned with the second pillar of the government program: Equitable and sustained growth for job. The proposed operation supports this pillar through the combination of the following set of measures. First, it seeks to strengthen Burundi’s export generating activities in coffee and mining, through promoting greater private sector role in productive and commercial activities. Second, it supports the promotion of broad 10 based growth and economic diversification by promoting a transparent mining regulatory framework. Third, it targets vulnerability directly through supporting public investment for agricultural productivity (since a vast majority of vulnerable households are food insecure and rural). Finally, by helping build an effective and well-targeted safety net system, it also aims to improve the government’s capacity to cope with external shocks – the third pillar of the PRSP II: Access to quality services and national solidarity. 4.2 The proposed operation builds directly on the previous development policy operations and from similar operations in fragile countries 10. The proposed operation builds on the previous programmatic series (ERSG I ERSG II-III and ERSG IV-V) and pursues the reform started in the first operation in this series. Main lessons derived from these experiences include the following: i. In fragile states, sustained budget support engagement is essential to close the fiscal gap, promote the policy dialogue and sustain domestic reform efforts. Burundi remains at a crossroad: it may continue on the path of economic consolidation and political stabilization but may also return to fragility. While the trajectory will ultimately depend on government actions, donor support will be vital as well, notably given its importance in public financing. ii. Define objectives commensurate with local capacity: Prior actions and triggers in the last ERSG series were well specified and phased but unequal gains were made toward achieving some of the envisaged development objectives. Such variability was linked to a large number of agencies and departments in charge of implementing reforms. iii. Adjust expectations to reality and socio-economic context: Experience suggests that it may be unrealistic to expect rapid change to economic and social conditions in small, poor and fragile countries. It is therefore, good to be cautious on the extent and pace with which: (a) economic transformation can take place; (b) policy inputs translate into outcomes; and (c) behavioral patterns of bureaucratic inertia can be altered. Therefore, development goals must be well-targeted, with modest expectations reflecting the realities of national capacity. iv. Provide for close monitoring while maintaining flexibility. At the current juncture of Burundi's socioeconomic development and recovery efforts, continued budget support will be necessary for several years to enable the Government to strengthen and consolidate PFM, PSD, and export promotion reforms. Progress must be monitored closely, with each phase of the programmatic series implemented incrementally, allowing flexibility and mid-course corrections. v. Using budget support in tandem with investment lending and technical assistance may be more effective than each instrument alone. DPOs can signal and facilitate reforms while investment lending can provide technical assistance and bring good practice. Previous development policy operations benefited from the Economic Management Support Project (EMSP) which provided needed technical assistance to complement the existing weak capacity within the government. The operational 10 The Emergency Economic Recovery Credit (EERC) was approved in 2000, the Economic Recovery Credit (ERC) in 2002, the first Economic Reform Support Grant (ERSG I) in 2006, and the second and third (ERSG II and III) in 2008 and 2009, ERSG IV and V in 2010 and 2011. 11 alignment of EMSP with the ERSG series made logical sense. The ERSGs were continually under close scrutiny and re-adjustment within the overall Bank/GoB dialogue. The EMSP implementation framework allowed agreed actions in support of broader policy objectives to be moved quickly but this could be seen as diminishing endogenous project focus. Such linkages are being established between the proposed operation and the Financial and Private Sector Development project (FPSD). B. Link to the CAS and other Partners’ Operations 4.3 The proposed operation is aligned with the main objectives the new CAS for FY13- 16, discussed by the Board on October 24, 2012 (Report No. 72334-BI). The proposed program supports: (i) Pillar I of the new CAS (Competitiveness) by promoting improvements in the business environment and greater participation of the private sector in strategic export oriented and employment-creating activities; (ii) Pillar II (Resilience) by supporting short term measures to mitigate the impact of food price hikes on the poor and the formulation of a comprehensive social protection policy for the medium term as well as measures to enhance productivity and diversification in agriculture; (iii) governance, which is the foundation of the CAS, supported through measures aimed at improving the realism and transparency of public finance management, including the budget process and public procurement. 4.4 The proposed policy reforms package is supported by IFC and development partners operating in Burundi. These include the African Development Bank and the European Commission that are providing general budget support through a Partnership Framework bringing together all institutions providing budget support. The Bank team, as in the past, continued to work closely with the IMF and the donor community, through joint missions, including in the monitoring of the Fund’s ECF program and Article IV consultations missions. Although there is no co-financing anticipated, the proposed operation benefits from complementary technical assistance provided through other Bank supported projects and programs supported by partners, including in PFM and private sector development. 11 The Bank is also working very closely with UNICEF, ILO, and other UN agencies on social protection. On the Bank’s side, private sector promotion is at the core of the Financial and Private Sector Development Project and well coordinated with IFC. The development of agriculture is supported by the Agro-Pastoral Modernization Project. Other partners such as EU, AfDB, USAID, France, Switzerland, and Belgium, are also involved in the areas of PFM, investment climate, education, health, social protection, and agriculture. The proposed operation benefited from feedback from civil society, private sector, and coffee stakeholders. C. Prior Actions, Results, and Analytical Underpinnings 4.5 The proposed ERSG-VII supports seven policy actions deemed critical to achieving its development objectives. These prior actions were identified during the preparation of ERSG-VI, in close coordination with the authorities, and based on analytical work (Table 6). Some changes are proposed following recent discussion with the authorities. The process of hiring a consultant to conduct the procurement audit, with financing from the Bank supported FPSD project, has been delayed because the recruitment process was not satisfactory enough to proceed to the signing of the contract. With Bank support, the TOR has been revised and the 11 The Netherlands and Norway co-financed the ERSG I and II grants, as well as ERSG III-IV. Norway provided co-financing to ERSG V, and Belgium co-financed the second tranche of the ERSG I. 12 process re-launched. The legal and institutional framework for privatization has been revised recently with the Bank support to include, among others, a Parliament decision on the list of public enterprises to be privatized. Because of lack or readiness, the Parliament excluded the tea and sugar sectors from the list of public enterprises/sectors to be privatized. 4.6 Table 5 below details the implementation status of the prior actions. Compliance with these prior actions forms the basis for IDA to proceed with the proposed operation. All the seven prior actions have been completed. Table 5: Summary of Proposed Prior Actions for ERSG VII Trigger for ERSG VII as in ERSG VI Program Document Proposed prior action under ERSG VII Component 1: Strengthening Public Finance Management and Budget Transparency 1. The Recipient has transmitted the MTFF and MTEF to Confirmed. The Recipient has adopted and Parliament and organized pre-budget debates in line with the Loi submitted to its parliament the 2014-2016 Oganique and the Decree on Budget Governance Budget Orientation Document (BOD) and the budget framework letter consistent with the BOD for the preparation of its 2014 budget law. 2. The Recipient has hired an independent and reputable Dropped. The trigger is replaced by a new firm to undertake a comprehensive audit of the public trigger for ERSG VIII that includes the procurement system. publication of the audit report. 3. The Recipient has prepared summary tables in French Confirmed. The Recipient has published, the and Kirundi, including key sector budget information, 2013 Citizen Budget in French and Kirundi disseminated in public places at the communal level to enable highlighting information on sectoral budget citizens to obtain information on sector budget allocations allocations on a Government website and has (schools and health sectors) in the communes. disseminated it to the 17 communes. 4. The Recipient has validated the civil servant database Confirmed. The Recipient has updated and following the process of updating information on staff turnover consolidated the civil servant database since April 2007. (HRMIS) and has implemented the career module. Component 2: Private Sector Investment Promotion and Economic Diversification 5. The Recipient has established a Guichet Unique (One Confirmed. The Recipient has established and Stop Shop) for construction permits. rendered operational a guichet unique (one-stop shop) for construction permits. 6. The Recipient has increased relative to the previous Confirmed The Recipient has increased its year, the budget allocation for feeder roads and irrigation in line allocation for feeder roads and irrigation under with the MTEF allocations. the 2013 Budget Law in line with the 2013- 2015 MTEF. 7. The Recipient has adopted a strategy for the reform of Dropped. Building from recent experience, the the tea sector clarifying the role and responsibilities of the Recipient has adopted a sequential approach, regulatory agency of the sector. consisting of refocusing its effort on the privatization of the coffee washing stations so that it can learn and extend this experience to other agricultural subsectors, including tea and sugar. 8. The Recipient has promulgated a mining code Confirmed. The Recipient has promulgated a acceptable to the Association. mining code acceptable to the Association. Component 3: Strengthening Social Protection 9. The Recipient has appointed a task force to oversee the Dropped The proposed trigger is dropped. development of a comprehensive social protection strategy and However, the Recipient has appointed a task action plan for implementation. The task force has undertaken force to oversee the development of a and validated a social safety nets assessment. comprehensive social protection strategy and 13 Trigger for ERSG VII as in ERSG VI Program Document Proposed prior action under ERSG VII action plan for implementation. 10. The Recipient has finalized a Household Expenditure Confirmed. The Recipient has finalized a Survey and developed a National Poverty Map. household expenditure survey to update the National Vulnerability Assessment. Table 6: Analytical Underpinning Prior Actions Analytical Underpinning Component 1: Strengthening Public Finance Management and Budget Transparency The Recipient has adopted and submitted to its parliament the • WBI’s Corruption diagnostic survey (2008) 2014-2016 Budget Orientation Document (BOD) and the • PEMFAR (2008) budget framework letter consistent with the BOD for the • PEFA (2009; 2012) preparation of its 2014 budget law. • Policy Note Series (2011-12) • PER (2013 The Recipient has published, the 2013 Citizen Budget in • Policy Notes Series (2011-12) French and Kirundi highlighting information on sectorial • PER (2013) budget allocations in a Government website and has disseminated it to the 17 communes. The Recipient has updated and consolidated the civil servant •PEMFAR (2008) database (HRMIS) and has implemented the career module. •Study on the options for pay reform (2009/2010) • Policy Note Series (2011-12) • PER (2013) Component 2: Private Sector Investment Promotion and Economic Diversification The Recipient established and rendered operational a Guichet • CEM (2010) Unique (One Stop Shop) for construction permits. • ICA (2008) • Policy Note Series (2011-12) The Recipient has increased the budget allocation for feeder • CEM (2010) roads and irrigation in line with the MTEF allocations. • Sources of Rural Growth (2007) • Policy Note Series (2011-12) • Ex ante PSIA (2005-2012)-+ • • PSIA on Coffee (2013) • RSEA (2011) The Recipient has promulgated a mining code incorporating • CEM (2010) fiscal regime and local content provisions acceptable to the • Policy Note Series (2011-12) Association. Component 3: Strengthening Social Protection The Recipient has finalized a Household Expenditure Survey • Policy Note Series (2011-12) to update the National Vulnerability Assessment. 14 4.7 The proposed triggers of ERSG-VIII are summarized in Table 9. This list is still indicative and will be assessed with the authorities. Table 7: Proposed Indicative Triggers for ERSG VIII Component 1: Strengthening Public Finance Management and Budget Transparency 1. The Recipient has prepared sectoral MTEF in three ministries consistent with the central MTEF, and the Budget Orientation Document for the preparation of the 2015 budget law. 2. The Recipient has disclosed to the public the full itemized list of tax exemptions granted over the past year and published the budget document that clearly specifies the estimated amount of tax exemptions as a share of tax revenues. 3. The Recipient has published an independent audit of the public procurement contracts awarded in 2011-2012 and prepared an action plan to address the identified weaknesses. 4. The Recipient has cleaned and validated the HRMIS database using the updated biometric civil servant census database. Component 2: Private Sector Investment Promotion and Economic Diversification 5. The Recipient has launched the privatization process for the remaining coffee washing stations and initiated the evaluation of the offers. 6. The Recipient has designed and validated a program to improve the productivity of the coffee sector. 7. The Recipient has completed an EITI scoping study with an action plan to complete the necessary requirements for pre-candidacy for the EITI membership. Component 3: Strengthening Social Protection 8. The Recipient has adopted a comprehensive strategy of safety nets, which includes an action plan and proposed financing. 9. The Recipient has carried out and disclosed an updated National Vulnerability Assessment. 4.8 The ERSG series covers three key areas, namely: (i) Strengthening Public Finance Management and Budget Transparency; (ii) Private Sector Investment Promotion and Economic Diversification; and (iii) Strengthening Social protection. These areas are consistent with the government’s PRSP II and the Bank’s CAS and the Africa Region’s Strategy. The design of the series has also incorporated lessons from previous operation. The overall framework of this series and the rationale for the three areas are detailed in the sixth ERSG program document (Report No. 70931-BI). However, the Private Sector Development component has been slightly revised with a greater emphasis on the reforms of the coffee sector, reflecting new lessons learnt from the Implementation Completion and Results Report (ICRR) for the previous series (ERSG IV-V) and taking into account recent developments in the country. Component 1: Strengthening Public Finance Management and Budget Transparency Key issues 4.9 In Burundi, one of the highest priorities for economic development and peace building is to improve the efficiency and transparency of public finance. The maintenance of sound public finance management and aggregate expenditure control is important not only to contain inflation and restore fiscal sustainability, but also to create fiscal space for higher developmental expenditure for post-conflict recovery, economic growth, and ultimately poverty reduction. Thus, a more efficient allocation and more efficient use of public expenditure are required to support higher developmental expenditure. 4.10 More than a decade of political and civil unrest has devastated Public Finance Management capacity. The tools and procedures for revenue administration and expenditure management were completely obsolete. The budget preparation process was purely mechanical 15 and medium-term expenditure forecasts were non-existent. Budget exhaustivity was uneven and extra-budgetary funds and accounts had proliferated, partly because of the vicious circle of weak accountability, fund earmarking, and lack of incentive to improve accountability. In budget execution, physical and financial monitoring practically disappeared as well as the capacity to conduct internal and external audit. Human resources in the Ministry in charge of Finance and Planning and the budget offices of the line ministries had become sparse with huge skill gaps evident. A lack of reliable civil service management information hampered the proper management of the civil service, leading to inefficiency, fraud, and to a significant increase of the wage bill, which was absorbing near 50 percent of fiscal revenues in 2005. The budget was completely opaque and the regulatory framework for procurement was absent. By end 2007, 19 out of the 28 PEFA (2008) indicators were rated D or D+, and 6 were C or C+. Progress to date 4.11 Since mid-2000s, Burundi has made significant progress toward sound public financial management systems and practices. The basic legal framework for public finance (Loi Organique) was overhauled in 2008 and the Ministry of Finance and Economic Development Planning has used the new law to improve the efficiency and transparency of public finance management. Budget execution also improved as reforms started to take root within public administration. Budget execution rates in priority sectors were very low in 2006 but improved significantly in recent years, following the improvement in the institutional framework. As a result, the gap between the initial budget (Loi de Finance Initiale) and the budget execution law (Loi de Règlement) decreased from 25 percent in 2008 to less than 1 percent in 2010. Rules on commitments have been tightened and exceptional public spending procedures (Paiements sans ordonnancements préalables), which were widely used in the past, have been brought under control. Finally, most of the existing extra-budgetary accounts (including one from the Presidency) have been closed or integrated into standard budget documents. The strengthened Cour des Comptes has begun to play a major role in auditing executed budgets and reviewing critical public finance issues. Its special audit of off-budget accounts, performed at the request of Parliament, was instrumental in the closure of eight of the nine off-budget accounts and the subsequent integration of corresponding transactions in the 2009 budget. The capacity of Cour des comptes was also reinforced with the appointment of 34 new magistrates in April 2011 for six-year mandates. By end 2011, only 8 out of 26 PEFA indicators were rated D+, 9 were rated C or C+, and two indicators were not rated. 4.12 The previous programmatic series, together with extensive analytical work and technical assistance, provided by the Bank as well as other donors contributed substantially to those achievements. Clearly, the ERSG program for Burundi improved since its inception in 2006 (the first ERSG) as evidenced by evaluations of the first programmatic series of DPOs (ERSG II and III) and second programmatic series (ERSG IV and V). In particular, these series supported the government’s effort to consolidate reforms in PFM, thereby introducing discipline, transparency, and accountability in public accounts, and strengthening the links between the country’s development strategies and budget planning (through the extension of the MTEF process). As all indicative targets were met, the PFM component of the second series was rated satisfactory on outcome but the risk to development outcome was rated significant. These risks reflect several challenges, including in the areas of budget planning, wage bill and civil service management, and procurement. Way forward 16 4.13 Public financial management reforms are complex, requiring sustained effort over time to allow ownership within public administration and bring structural change. For this reason, the ERSG VI-VIII series seeks to consolidate measures initiated under the earlier ERSG series, while extending them gradually in scope and depth. The PFM and budget transparency component of ERSG VI has three main sub-components: (a) strengthening strategic and budget planning processes to improve the quality of public spending; (b) reinforcing transparency of PFM and procurement; and (c) streamlining the management of the public wage bill. a. Strengthening Government Strategic planning to Improve the Quality of public Spending 4.14 Following the adoption of a central MTEF 12, the gradual extension of medium-term expenditure frameworks is expected to consolidate the link between strategic policy objectives and budget allocations. This will be done through three main measures: (i) improving the reliability of macroeconomic and revenue projections in order to set credible spending caps, (ii) validation by the Council of Ministers of multi-year inter-sector allocations reflecting the objectives of the PRSP, and (iii) empowering line ministries to propose intra-sector allocations based on their own strategies and priorities. The development of three-year rolling MTEFs in key sectors will address longstanding weaknesses in the link between recurrent and investment spending, and will improve the prioritization of intra-sector expenditures. Unlike for other post-conflict countries where progress was limited, Burundi made a lot of progress in improving budget planning through the development of the MTEF, though the bottom up part of the process remained weak. From 2009 to 2012, its PEFA score improved from “D” to “B”. 4.15 The latest programmatic series seeks to consolidate the progress achieved toward program budgeting as planned in the Budget Framework Law, with the goal of reducing the gap between the MTEF and the budget (indicator 1) and the delay in the presentation of the budget to the Parliament (indicator 2). Budget preparation remains partially a top-down affair. A sound overall budget emerges partly from the iteration between top-down expenditure ceilings and bottom-up budget proposals from the line ministries and agencies, thus reducing gaps between the MTEF ceilings and the sectorial budget proposals. Indeed, the capacity to prepare a realistic and efficient budget remains weak, with few exceptions, requiring progressively strengthening of the budgeting capacity in line ministries, although all ministries receive budget ceiling for the preparation of their budget 13. ERSG VI reinforced the role of the MTEF process by supporting the adoption by the Council of Ministers and a timely transmission to Parliament of the central MTEF for 2013-15 along with the budget framework letter (lettre de cadrage) requested for the 2013 budget (prior action under ERSG VI). 4.16 Yet, the assertive role of the Parliament and the performance orientation of the budget system need to be strengthened. The authorities intend to introduce program budgeting in 2014. A ministerial regulation adopted a new budget classification, which unifies budget and accounting classifications, simplifies the structure of the budget, and plans to introduce a 12 A central MTEF (in contrast to sector MTEF) is a tool developed by central ministries such as the Ministry of Finance and the Ministry of Planning (now combined into a single ministry: Ministry of Finance and Economic Development Planning following a government reshuffle), which indicates the global envelop of resources expected based on macroeconomic projections and provides expenditures ceiling for each institutions financed through the budget. 13 The preparation of the second PRSP will also provide an opportunity to refine sectoral strategies to place these strategies within a medium term framework, and to define targeted outcomes for service delivery. 17 program classification that will better reflect the government’s policy objectives and how these policies will be implemented. A selective introduction of results indicators and beginning of a systematic dialogue on previous year’s performance as part of the preparation of the budget for the following year will complete the shift toward performance budgeting. Thus, an informed and assertive role of the legislature will become increasingly important for Burundi’s stability and development. The proposed ERSG VII promotes pre-budget debates, by supporting the timely submission to the Parliament of the MTEF 2014-2016, together with the Budget Orientation Document (BOD) (ERSG VII Prior Action 1). The indicative trigger for the ERSG VIII is the preparation of sectoral MTEF in three ministries consistent with the central MTEF, and the Budget Orientation Document for the preparation of the 2015 budget law (ERSG VIII Trigger 1). b. Reinforcing Transparency of Public Finance Management and Procurement 4.17 Transparency and public access to budgetary information are essential for sound public finance management and procurement system. Public access to comprehensive and timely information on the government’s budget and financial activities give citizens opportunities to participate in decision making. This strengthens tax payers’ oversight of government’s actions and improves policy choices. Restricting access to information creates opportunities for hiding unpopular and wasteful spending, thus reducing the resources available to fight poverty. Civil society organizations in Burundi recognize the need for greater access to information regarding the management of public affairs and the government has started to respond to it. Previous Bank operations played a major role in the development of a computerized Integrated Financial Management Information System (IFMIS), which was essential to improve budget execution and monitoring as well as timely availability of information. Overall, from 2007 to 2011, the PEFA indicator on public access to budgetary information improved from C to B. A first step (supported by ERSG V) has been the publication of budget documents on the website of the Ministry of Finance and Economic Development Planning. This action demonstrates the commitment of the government to increase transparency and give civil society adequate access to public finance information. For the continuity of these reforms, the ERSG VI supported the publication by the authorities of the decisions of public procurement (selected firms, contract amounts and ranking of the main bidders) and activity reports on the website of the Ministry in charge of Finance 14 with the exception of defense and security contracts (pursuant to the law) and contracts whose amount is below the thresholds requiring DNMP review. Those actions are being sustained. 4.18 Despite this progress, the majority of Burundians are still facing barriers to access key budgetary information. Though Burundi is not yet rated by the Open Budget Partnership, the government recognizes the importance of Citizens Budget 15. The proposed ERSG VII supports the publication of the 2013 Citizen Budget in French and Kirundi highlighting information on sectoral budget allocations at the communal level to enable citizens to obtain information on budget allocations for school and health centers in their communes (ERSG VII prior action 2). Since the adoption of the new procurement framework in 2008, the internal control unit prepares and publishes regular activity reports. The 2012 report estimates the share 14 http://www.finances.gov.bi/index.php?option=com_content&view=category&layout=blog&id=81&Itemid=133 15 A simplified version of a budget document that uses nontechnical language and accessible formats in order to facilitate citizens’ understanding of, and engagement with, the government’s plans and actions during the budget year. 18 of procurement contracts awarded on a sole basis at 7.4 percent, below the 10 percent regulatory ceiling. However, no external audit report has been prepared by the regulatory authority to confirm the figures and review the regularity of the procurement processes as required by the procurement code. To fill this gap and reinforce transparency in procurement, the publication of the procurement audit reports for 2011 and 2012 and the establishment of an action plan to address the identified weaknesses are proposed as indicative trigger for the next operation (ERSG VIII Trigger 2). The government is in the process of hiring an independent firm with Bank support, to undertake a comprehensive audit of the procurement contracts awarded in 2011 and 2012. The process had been launched several months ago, but outcomes were not satisfactory to proceed to the signing of the contract. The authorities have revised the bidding documents and intend to complete the selection process before end December 2013. For this reason, the trigger identified during the preparation of ERSG-VI was dropped (hiring an audit firm) and replaced by a new trigger for ERSG-VIII, as explained above. 4.19 There is also growing need to improve transparency in fiscal exemptions. As highlighted above, fiscal revenue is particularly weak in Burundi with tax revenue to GDP at around 11.9 percent in 2013, down from 14.3 percent in 2011 and well below the regional average (14.9 percent). The high level of tax exemption explains mostly the low level of tax revenue in Burundi compared to the neighboring countries. A recent analysis prepared by IFC 16 suggests that the fiscal incentive scheme is very generous and leads to substantial unrealized government revenue, estimated at US$100 million (5 percent of GDP in 2010). This was divided in three roughly equal parts between income tax exemptions and credits, VAT waivers, and customs fees waivers. The study also found that the effectiveness and costs of the incentive regime are not evaluated systematically. In addition, more than 75 percent of investors do not consider fiscal incentives as a major factor in their decision to invest in Burundi. On this basis, a revision of the fiscal incentive scheme to invest appears to be a priority for both increasing government revenue and improving the business environment. Equally important is that the use of current exemptions is not always transparent, and opens space for abuse and distorts the competitive environment. Several stakeholders, including CSOs are demanding greater transparency in the fiscal expenditure. The disclosure to the public of the full itemized list of tax exemptions granted over the past year and the inclusion in the budget document of the estimated value of tax exemptions as a share of tax revenue are proposed as an indicative trigger for ERSG VIII. c. Improving the Management of the Public Wage Bill 4.20 The rapid growth of the public wage bill remains an important PFM issue. The legacy of the conflict imposes structural rigidities in the wage bill but represents the part of the cost of securing peace in a post-conflict setting. Since 2005, the share of the government wage bill as a percentage of the tax revenue steadily increased to reach a peak of 70 percent in 2008, mainly because of the country’s demobilization and reintegration program as well as the government’s ambition to generalize education and prenatal health care for selected group of women. Since then it has been declining, but it is still absorbing more than 60 percent of the internal revenue, leaving little room for discretionary spending. At about 8.7 percent of GDP in 16 According to the 2013 PER, the IFC (2012) estimates that in 2010, tax incentives and exemptions cost the government USD 100 million in Revenues—amounting to 39 percent of overall revenues or 7 percent of GDP. 19 2011, the wage bill is also higher than the level of 6-7 percent of GDP reported in many other low income countries. 17 At the same time, human resource management is very weak. Salary discrepancies exist and the issue of teachers, who represent about a third of the public service workforce, poses a big challenge to the government because of their threats to go on strike. The government needs an effective human resource management strategy, which should include: (i) adequate hiring, training, and retaining of personnel with key technical skills, such as doctors and nurses whose current salaries are relatively low; (ii) substantial restructuring aimed at reducing the wage bill while improving the delivery of services; (iii) appropriate institutional arrangements for managing the staffing and the salaries of public employees; and (iv) improved coherence of recruitment and human resource planning with the objectives of ministerial sector strategies. 4.21 The reform in public administration needs to be managed very carefully. The previous programmatic series focused on addressing the lack of an up-to-date civil service management information system that has hampered the proper management of the civil service. ERSG IV supported the development of Human Resources Management Information System (HRMIS) interfaced with IFMIS (SIGEFI). The HRMIS ended the dependency on a private enterprise that was managing civil service information on behalf of the government. Continued training of technicians responsible for managing the system contributed to a smooth internalization of the system and its maintenance. But the functioning of the system continued to rely on two ministries (Civil administration and Finance), with little coordination, hindering its effectiveness. ERSG VI supported the creation of a single center for processing of payroll and career management (ERSG VI prior action), simplifying its structure and clarifying the roles. However, the existing databases have to be consolidated and centralized in a single information system that could be cleaned using the 2008 civil servant census to eliminate duplication and ghost workers. The proposed operation will support the updating and consolidating of the civil servant database and establishing a career tracking program within its human resource management information system (ERSG VII prior action 3). Another measure proposed as an indicative trigger for ERSG VIII (Trigger 4) is the cleaning of the HRMIS data using the updated biometric civil servant census database to ensure uniqueness of civil servants being paid. Also, the government is committed to collect the biometric data for all new recruitments to ensure the sustainability of this measure. Table 8: Indicators for PFM Reforms (ERSG VI-VIII Series) Sub-Objective Indicator 1. Strengthening government (i) Gap (in percent of overall budget) between budget ceilings in strategic planning to improve the MTEF and approved budget. the quality of public spending (ii) Gap (months) between effective budget presentation to Parliament. 2. Reinforcing Transparency of (iii) PEFA indicator PI19-iii on public access to public procurement Public Finance Management information. and Procurement and controls (iv) Share of communes where budget information tables are available. (v) Share of procurement contracts awarded on a sole basis (vi) Estimated value of tax exemptions as a share of total tax revenues. 17 Options for Reforming Staffing, Pay and the Management of Staff and the Wage Bill (January 2009), a report prepared for the Economic Management Support Project (EMSP) with financial support from the Japan Policy and Human Resources Development (PHRD) Fund grant. 20 Improving the Management of (vii) Share of civil servants within HRMIS who are registered in the the Public Wage Bill biometric census database Component 2: Private Sector Investment Promotion and Economic Diversification Key issues 4.22 Burundi’s private sector faces severe structural constraints in both demand and supply side. ·The demand side constraints are mainly linked to the high level of poverty, which is endogenous, and the landlocked location of the country and its associated high transport costs, lack of infrastructure and related services. ·On the supply side, constraints include low skills, obsolete equipment, limited availability and high cost of imported inputs, lack of access to and high cost of credit, and lack of economies of scale. The significant businesses are controlled by the State through State-owned enterprises or by a small group of business leaders. Outside the coffee sector, which accounts with tea, 90 percent of foreign exchange earnings, business formation, and value addition have not been widespread, and hence a significant majority of the population has been largely excluded from direct economic empowerment. Most of the private sector is comprised of small or very small companies and small farmers operating outside the formal sector. 4.23 Burundi faces numerous challenges. These challenges include economic and export diversification, the improvement of firm productivity, including in agricultural sector, the development and upgrade of infrastructure, including transport and electricity, and the improvement of access to financial services. Policy-induced and regulatory constraints can be relieved by more supportive policies, a reduction in corruption, and continued improvements in macroeconomic management. The government has committed itself to structural and financial reforms, including disengagement from productive sectors of the economy, the liberalization of foreign exchange policies, a reduction of customs duties and specific non-tariff barriers, and the abolition of certain taxes. However, given the key role that the private sector is expected to play in Burundi’s economic revival, the government should continue to give credible signals to convince investors and the business community that the economic outlook is positive and that future improvements to the country’s regulatory framework will favor private sector growth. Decision makers in the public sector are not well informed on the constraints faced by private operators and often do not foresee how their decisions will impact private sector activities. 4.24 Coffee growing is one of the most important productive activities in Burundi. Coffee, mainly of the Arabica variety, is the country’s primary export crop. Coffee accounts for more than 60 percent of all of Burundi’s export earnings, depending on the year. Around 2.3 percent of the country’s total land area is under coffee cultivation, and between 50 and 67 percent of all households depend on coffee farming for their livelihood. Mixed farming (coffee trees intercropped with subsistence crops such as bananas or beans) is practiced throughout the country on arable land, which is approximately 35 percent of the country’s total land area. There are two types of coffee processing in Burundi: washed and fully washed. The vast majority of Burundi’s coffee is fully washed, evidenced by the extensive presence of coffee washing stations (CWSs), most of them built in the 1980s. While the production is entirely private with small farmers growing all the coffee trees, the large majority of the CWSs were formerly state-owned. Moreover, Burundian coffee growers have always received much lower prices than farmers in neighboring countries. Today, a Burundian coffee grower receives less than 50 percent of the world coffee prices. Until 2009, the price for coffee was fixed by the state with a system of 21 guarantee that did not always benefit the famers. This lack of incentive has discouraged investment in the sector; including in coffee trees and efficiency improvement in the entire value chain. The coffee sector continues to suffer chronically from low and declining productivity. Progress to date 4.25 Burundi made substantial progress in improving its business climate in the period from 2006-2012. The Doing Business indicators show significant progress in creating a business as Burundi gained 71 ranks over the DB 2012 and stands now globally at rank 28. It takes now 8 days (14 days in 2011) to start a business in Bujumbura and the cost of starting a business in Burundi has continuously fallen from 241 percent of GNI per capita in 2007, to 116 percent in 2011 to 18.3 percent of GNI per capita in 2012. The impact of the reforms is visible in the number of firms created, which increased from 500 per year in 2009 to 800 per year in 2012. Burundi was listed among the top 10 investment climate reformers in the 2011 and 2012 Doing Business reports 18, although starting from a very low base (its rank improved from 172 to 159). Many other key laws governing private sector activity have also been recently modernized. These recent improvements have signaled the government’s commitment to promote private sector development, but much remains to be done. 4.26 The implementation of the reforms in the coffee sector has been progressing slowly. One of the most significant changes promoted by the reform has been the privatization of the washing stations. In 2009, the government launched the bids for the privatization of 117 washing stations, which resulted in the sale of 13 coffee washing stations to an international company. These 13 CWSs represented 23.1 percent of the Burundi’s wet mills in 2010. In the context of the 2010 elections, the government postponed the second phase of the bidding process. Subsequently, the Inter-Ministerial Privatization Committee (CIP) approved the launching of the second phase but the Coffee Reform Committee called for an evaluation of the first phase before launching the second phase. The recommendations from this evaluation were integrated in the bidding documents for the second phase that was completed in December 2011. As a result, 28 additional coffee washing stations and one dry mill factory were sold to local investors. The third phase has been slowed by a revision of the privatization law in early 2012 that includes now a parliamentarian decision to fix the list of SOEs to be privatized. The tea company (OTB) and the sugar manufacturing plant (SOSUMO), all state owned, were excluded recently by the Parliament from the list of enterprises 19 to be privatized. For this reason, the trigger identified during the preparation of ERSG-VI was dropped (preparing a privatization strategy for the tea sector). It is replaced by the launch of the privatization process for the remaining coffee washing stations and the design of a program to improve the productivity of the coffee sector (new triggers for ERSG-VIII. Findings from the recently completed Poverty and Social Impact Analysis (PSIA) suggest that the privatization of CWSs has not negatively impacted coffee growers’ livelihood. 4.27 The previous programmatic series and technical assistance provided by the Bank as well as other donors contributed to those achievements. Thanks to the support of previous ERSG operations and the associated TA project (EMSP/FPSD), the government set the stage for 18 Significant improvements in the “protecting investors” indicator largely explain the change in Burundi ranking. 19 Other important public enterprises like the telecommunication company ONATEL and Air Burundi are included. The Bank will support the privatization process through as set of instruments, including the proposed DPL series and the FPSD project. 22 addressing these grievances by enacting a series of legislation including: (i) competition law, (ii) commercial code, (iii) companies act, (iv) privatization law, and (iv) the investment code. Specifically, the previous series (ERSG IV and V) helped the stimulate private investment, by strengthening the Investment Promotion Agency (API), improving power supply; and supporting the preparation and implementation of public enterprise privatization plans, including the privatization of part of the state owned coffee washing stations. Interesting lessons have been learnt from that experience. Way forward 4.28 Building on lessons learnt from past experiences; the authorities recognize that the development of the private sector will require actions on many fronts, which are integrated in the design of the proposed operation. The reforms targeted through the ERSG VI-VIII series are: (a) promoting private investment through improvements in the legal and regulatory framework; (b) improving agriculture productivity while restructuring the export and services sectors; and (c) promoting the development of the mining sector. Full implementation of the measures proposed under this new programmatic series should lead to measurable improvements in the business environment and accelerate the development of the private sector and economic diversification. The initial design of this component included the tea and sugar sector as opportunity for greater private sector participation and proposed triggers for ERSG VII and VIII. Building on lessons from recent experiences and taking into account the recent policy development in the topic of privatization, the ERSG proposes to drop those sectors as well as their related outcome indicators. This shift is also justified with the increased emphasis given to reforms in the coffee sector. a. Promotion of Private Investment Through Legal and Regulatory Framework reforms 4.29 The government is pursuing the reforms related to the time and cost of business start-up and construction permits. With technical assistance from IFC/ICAS as well as the Bank’s Financial and Private Sector Development project (FPSD), the ERSG VI supported the establishment and operation of a “one stop shop” for business start-up aimed at reducing processing time and costs. To further improve the business environment, the proposed operation supports the establishment of a guichet unique (one-stop shop) for construction permits to reduce processing time and costs (ERSG VII prior action 4). This reform will facilitate the investment in the construction and tourism sectors, the two faster growing sectors. b. Improving Agriculture Productivity while Restructuring Export 4.30 Agriculture productivity and economic diversification. Agriculture is the main source of employment, on which almost 80 percent of the population depends. The government seeks to raise agricultural productivity, the lowest in the EAC, in a sustainable way. To meet this goal, key elements to be taken into account include continuing the privatization of state assets in the coffee sector (washing, processing and packaging), which is already under way, functioning input markets (such as seeds, fertilizer, and the sale and maintenance of production tools), adequate pricing mechanism and other incentives, and greater access to infrastructure (feeder road network). Overall, the different parts of the coffee value chain need to hold all together from the coffee producer to the coffee trader. All these elements are being considered by the government. The proposed operation focuses on areas where there is strong consensus. The 23 adequate increase in budget allocation for feeder roads and irrigation under the 2013 Budget Law in line with the 2013-2015 MTEF is the prior action 5 for the proposed ERSG VII. Despite the expenditure cuts in the context in the revised budget for 2013, the provision for feeder roads has been preserved, together with education and health spending. As the authorities are committed to shift the management of coffee sector from a state-maintenance one to a private-led one, a clear next step is the launch of the privatization process for the remaining coffee washing stations, initiation the evaluation of the offers and designing of a program to improve the productivity of the coffee sector are proposed as triggers for ERSG VIII. c. Promoting the development of the mining sector 4.31 The mining sector represents a good opportunity to further diversify the Burundian economy. Burundi possesses large mineral deposits, such as nickel (5 percent of international known reserves), and coltan (5th world reserve). However, the mineral economy consists predominantly of artisanal and small-scale operations. Up to now, mining plays a limited role in overall GDP, but in terms of providing targeted employment, it has made a noteworthy impact. The sector's growth over the last decade has been further impacted by the internal war, the regional conflicts, and the consequent peace process but local mining continued to provide stable employment opportunities for various populations, including demobilized soldiers. The test for Burundi is how to navigate a transition towards more diversified mining activities where small- scale operators and large-scale operators can co-exist. This is made even more challenging by the Wall Street Consumer Protection Act 20 which requires any export of Burundi's principal minerals to US markets to be certified as “conflict free”. Similar legislation is likely to be adopted soon by the European Union and reinforce the demand for transparency and strains on Burundi’s mineral sector. 4.32 Thus, it is imperative that Burundi considers measures that address both short and long-term policy priorities to the sector's development. In the short term, Burundi's efforts to improve transparency and overall governance in the mining sector are critical. Building on the adoption of the new mining code (prior action for ERSG VII), benefited Burundi’s need to further develop necessary policies and the regulatory framework and establish and maintain institutional capacity to govern the sector. An important further measure is Burundi's completion of its EITI Candidacy, a process initiated in November 2012 by the President but which has seen little progress to date. The Bank will support these efforts through existing Bank facilities such as the EITI Trust Fund, the EI Technical Assistance Facility, and the new Africa EI-TAF. Bank support to inform policy dialogue and planning would include: (i) an updated mineral sector assessment with a road map defined for Bank collaboration on the medium-term; (ii) an EITI Scoping Study to assist the Government in defining its Candidacy Action Plan, which is proposed as indicative trigger for ERSG VIII; (iii) and a pilot on mineral revenue management. 20 The Wall Street Consumer Protection Act is an US law. 24 Table 9: Indicators for Reforms in PSD (ERSG VI-VII Series) Sub-Objective Indicator 1. Promotion of Private Investment through legal 1. Number of days to register a business at the new and regulatory framework reforms “Guichet Unique” (one stop shop); 2. Number of days to obtain a construction permit at the new “Guichet Unique” (one stop shop); 2. Agriculture Productivity while Restructuring 3. Share of the private sector in the ownership of the Export and Services Sectors Coffee Washing Stations; 4. Percentage of budget allocated to the construction/maintenance of feeder roads and small scale irrigation. 3. Promoting the development of the mining sector 5. The number of EITI pre-candidacy steps completed. Component 3: Strengthening Social Protection Key issues 4.33 Burundi’s conflict over the last few decades has increased vulnerability in most parts of the region. Poverty is massive in Burundi (67 percent in 2006) and food insecurity high. About 60 percent of the population faces food insecurity 21, leading to suboptimal coping strategies by households and under-investment in human and productive capital. Child stunting is high at 58 percent of children under 5 with 27 percent in a severe situation according to DHS 2010. Stunting is even worse in some of the districts reaching 71 percent in Ngozi in Northern Burundi. Moreover, during the period of conflict and years after, over one million Burundians lived as refugees or internally displaced, loosing valuable assets as land for production and exposed to diseases. With the very high density of population, more than half of the households farm less than one hectare of land, lack of which is considered a major source of vulnerability in the country. About 9 Burundians in 10 live in the rural areas where the size of land ownership has been significantly reducing as the population grows. Gender equality is also an issue, though Burundi does relatively better than average African countries. This structural vulnerability has been exacerbated by the cumulative effect of successive adverse shocks like droughts and high food prices. 4.34 After 13 years of conflict, the urgency of addressing the pressing social and economic needs of the population led the authorities to implement a variety of social protection programs, including cash for work programs (rural roads, small irrigation works), school feeding, and health care access for pregnant women and children under 5. In addition, many international and national NGOs have launched their own initiatives to help the most vulnerable groups, such as facilitating school access and providing training and psycho-social counseling for disabled and those impacted by conflict. 22 21 Food insecurity is estimated at 34 percent if a low caloric threshold of 1400 Kcal per equivalent adult per day is used and 63 percent of the population if a more reasonable caloric threshold of 2100 Kcal is used. 22 In May 2012, to cope with the impact of rising inflation on households' welfare, the government suspended for a period of six months, taxes (import taxes and VAT) on basic food commodities (imported and local) consumed by the poor. The measure is estimated to have caused fiscal revenue losses of about US$8-10 million. 25 4.35 Weak information system makes it very difficult to target the poorest and measure the efficiency and effectiveness of safety net programs in Burundi. Poverty indicators have not been updated since 2006, making it difficult to consistently assess the impact of poverty reduction efforts. In general, the statistical information is not readily available. The National Statistics System (SSN) produces limited data on an irregular basis, standard surveys are not conducted at regular intervals, and analytical capacity is weak making it difficult to discern major trends and their policy implications. To build its knowledge base that will inform the design of pro-poor and gender sensitive policies and adequately monitor the impact of development programs, Burundi should aim to produce high-quality statistical information regularly. Progress to date 4.36 Since 2008, the authorities have taken temporary measures to mitigate the impact of the increasingly volatile international food and fuel prices by removing taxes and tariffs on basic goods consumed by poor households and by expanding their social safety net programs. ERSG V contributed to protecting vulnerable groups by reducing excise taxes on fuel and food imports and increasing budget allocations to: (i) primary school feeding programs; and (ii) primary health care services for children under five and women giving birth. However, these are short-term responses. Current programs, at best, reflect what has “worked” in other conflict countries, but are often poorly designed and imperfectly targeted. Given the growing needs and the multiplicity of programs, there is an urgent need to create institutional capacity to back-stop social protection activities with technical support for the design and development of cost- effective programs based on best practice for impact assessment, beneficiary evaluation and the development of local oversight mechanisms. At present, responsibility for social protection is diffused and programs lack coordination leading to both duplication and gaps in coverage. Way forward 4.37 The Government has recognized that it needs to do more and better to protect its vulnerable population. Beyond food security, the new PRSP focuses on: (i) the social and economic re-insertion of displaced persons (35,000 persons still live in Tanzanian camps); (ii) women and youth unemployment, particularly in the rapidly growing municipalities; (iii) assistance to women who seek to create small enterprise; (iv) enrollment of girls at the secondary school level through scholarships; (v) training and placement of the disabled; (vi) HIV/AIDs prevention, together with programs to educate youth about survival skills regarding STDs, substance abuse, illegal association and education/training counseling; (vii) functional literacy programs for productive adults; and (viii) assistance to marginalized groups such as the Batwa. 4.38 By placing social protection at the center of the ERSG series will create momentum around an area that requires cross-sector support and involvement of multiple-players in the medium and long term. The approach in the social protection component will be incremental. There was no prior action under ERSG VI but the Bank was committed through its analytical assistance to support the authorities in their efforts to finalize the national social protection policy, establish the appropriate institutional framework, and to develop the appropriate tools for targeting and monitoring mechanism. As part of this process, the government is preparing a social safety nets (SSN) assessment, with support from the Bank, ILO, and UNICEF, which will provide recommendations for establishing a coordinated safety net 26 program. A key step toward the completion of the SSN assessment is the appointment of the task force. The task force will also oversee the strategy and provide technical support to departments and agencies responsible for social protection service delivery and for helping local government and CSO providers “tool up” and manage grassroots programs, including for gender equality. Another proposed prior action for ERSG VII is the completion of a Household Expenditure survey to update the poverty profile in Burundi. The adoption of a comprehensive strategy of safety nets, which includes an action plan and proposed financing, is a proposed indicative trigger for ERSG VIII. Another proposed indicative trigger for ERSG VIII would be the publication of the vulnerability assessment for Burundi, to better monitor poverty- reducing expenditures. Table 10: Indicators for Social protection measures (ERSG VI-VIII Series) Sub-Objective Indicator 1. Strategy for improving safety 1. Availability of a Social Safety Strategy nets system 2. Existence of a vulnerability assessment based on a new household consumption survey. V. OTHER DESIGN AND APPRAISAL ISSUES A. Poverty and Social Impacts 5.1 Measures supported by this operation could have a significant distributional impact. Poorest households should be favored through the expected improvements in pro-poor and pro- growth spending, which should promote better social services and infrastructure to a broader range of the population. The emphasis given to social protection should also lead to improved living conditions for the most vulnerable groups. Lastly, the improvements in the business environment should encourage the creation of new enterprises (as well as foreign investment), which in turn would generate additional jobs and help absorb a fast growing young population on the labor market as well as demobilized military and police forces. 5.2 The focus on agriculture should help generate productivity gains that will translate into higher revenues for most rural households. Privatization of public enterprises and coffee washing stations will transfer assets from the public sector to the private sector, bringing fresh fiscal resources and innovation in supply chains. A growing private sector in agriculture and rural development will create additional jobs for skilled workers in the areas of technical services, as well as in rural infrastructure, including feeder roads and irrigation works. The government and the World Bank will monitor the impact of the supported reforms on households and producers. The PSIA on the coffee sector, together with the planned poverty assessment and the establishment of the national safety net strategy will provide the tools for monitoring and evaluation, including beneficiary assessment, as feedback to both government and the private sector. These tools will also help improve the targeting of social service delivery. 5.3 Findings from the recently completed PSIA suggest that the privatization of CWSs has not negatively impacted coffee growers’ livelihood. The proportion of coffee growers utilizing coffee receipts for food expenses has remained the same before and after privatization. Since privatization in 2009-2010, the average cherry coffee receipts per household is estimated at US$70 for those selling in public CWSs and US$94 per household for those selling in private CWSs. Furthermore, coffee growers experienced lower subjective poverty when trading with private CWS. In particular, those who sold cherry coffee mainly to private washing stations 27 experienced better overall socioeconomic situation. By analyzing the subjective poverty from the June 2013 coffee grower survey, significant differences were noticed between public and private destination of the cherries. Overall, 40 percent of the coffee growers who brought their cherries mainly in private washing stations declare themselves poor while 52 of those who brought cherries in state-owned washing stations declared themselves poor. B. Environmental Aspects 5.4 The prior actions of the proposed ERSG program are unlikely to cause significant effects on Burundi's environment, forests and other natural resources. ERSG VI-VIII will provide general budget support to the government of Burundi. Policy actions aimed at improving public finance management procedures and private sector development are, in themselves, not likely to have any significant effects on the country’s environment, forests, or natural resources. Policies aimed at supporting agricultural-productivity enhancing expenditures are likely to reduce the pressure on land. The construction and rehabilitation of feeder roads will take into account the impact on the environment. Moreover the new mining code (to replace the current 1974 code) must include much more stringent environmental regulations and safeguards. No significant environmental impact is foreseen as a result of increased coffee output, as new investors are required to modernize the industrial tool. A detailed and comprehensive analysis of potential environmental impacts and mitigation options recently undertaken through a “strategic environmental assessment” (SEA) of the coffee sector in Burundi confirmed the limited environment impact of coffee reform. A similar exercise for other export crops is also envisaged in the near future. C. PFM, Auditing, and Disbursement Aspects 5.5 The Central Bank’s capacity to ensure transparent management of funds is limited, requiring the use of a dedicated account. A safeguards assessment of the Burundi Central Bank (Banque de la République du Burundi, BRB) was performed in 2006 and updated in June 2008 and December 2010. The updates noted improvements (e.g., external audits have been completed on a more timely basis and audited financial statements comply with International Financial Reporting Standards (IFRS) and are published). However, they also identified significant remaining control weaknesses and recommended more robust controls over domestic disbursements to the government and its creditors, including contracting an external auditor to review such controls. Other recommendations included a continuation of semi-annual audits of disbursements to the government, and establishing guidelines for investment operations. The Governor of the Central Bank and the authorities have committed to implementing these recommendations. 5.6 A single-tranche of SDR 17 million (US$26 million equivalent) will be disbursed upon effectiveness. The grant will be financed from new IDA amounting to SDR16.3 million envisaged in the CAS and recommitted IDA of SDR0.7 million. The proposed grant will follow the Bank’s disbursement procedures for development policy operations. Grant proceeds will be disbursed against satisfactory implementation of the development policy program. 5.7 Funds will be deposited in the dedicated account. Once the IDA grant is approved and becomes effective, and provided the Association is satisfied with the program being carried out by the Recipient and with the appropriateness of the Recipient's macroeconomic policy framework, the proceeds of the grant will be deposited at the request of the Recipient by IDA in 28 a dedicated account at the Central Bank (BRB) designated by the Recipient and forming part of the official foreign exchange reserves of Burundi. Within a week, the Central Bank will credit the local currency (Burundi Franc) equivalent of the grant proceeds to the government Treasury account. The BRB will not impose any charges or commissions on the government for these transactions. The conversion from United States dollar to Burundi franc will be based on the prevailing exchange rate on the date that the funds are credited to the Treasury Account. The government will be required to provide confirmation to IDA that an amount equivalent to the grant proceeds from IDA has been credited to the Treasury Account, with an indication of the exchange rate applied and the date of the transfer. The Government of Burundi will provide a written confirmation to IDA within 30 days of disbursements. The confirmation will include the local currency amount credited to account that is used to finance budgeted expenditures, the exchange rate applied and the date of the transfer. If the proceeds of the grant are used for “excluded expenditures” as defined in the Financing Agreement, IDA will require, the Recipient to refund an amount equal to the amount of said payment to IDA promptly upon notice from IDA. Amounts refunded to the Association upon such request shall be cancelled. The administration of this grant will be the responsibility of the Ministry of Finance and Economic Development Planning. IDA reserves the right to request an audit of the dedicated foreign currency account. D. Implementation, Monitoring and Evaluation 5.8 Monitoring and evaluation arrangements for this operation will continue to rely on government systems. The operation benefits from the consultation mechanism established for the PRSP, among others. The Comité des Reformes at the Ministry of Finance and Economic Development Planning works closely with the Permanent Secretariat for Economic and Social Reforms in the PRSP secretariat. Both were actively involved in the design and preparation of the operation. The team will continue to work with them as well as with the chamber of commerce on private sector issues. On the side of Development Partners, the Cadre de Partenariat provides a forum to align the reform program with complementary interventions and joint monitoring. The authorities will prepare and share with the Bank a bi-monthly progress report on the program, within two weeks of the end of the period. The following box summarizes the type of information to be included in the monitoring report. E. Summary of Risks and Mitigation 5.9 Political risks remain high despite improvements over the past years. Risks of renewed political instability, perhaps partly linked to the Presidential elections in 2015, or resurgent violence that could derail government focus are mitigated by: (i) the program’s alignment with PRSP priorities, that benefit from wide popular support; (ii) direct efforts to cement political buy-in in Government, such as the March 2011 high-level Cabinet Seminar which focused on unleashing economic growth, fiscal space creation and improved governance; and (iii) active dialogue with civil society and the private sector to ensure demand side pressure for reforms. The bulk of the reforms supported by the ERSG series aims at promoting transparency in the use of public resources as well as improving private sector development, especially in the agriculture sectors which are vital for inclusive growth and broader participation in growth processes. 29 5.10 Macroeconomic risk and fiscal pressures could compromise the government’s willingness to privilege fiscal sustainability and the allocation of public resources toward pro-growth areas as well as social protection. The success of the proposed reform program is contingent on Burundi’s ability to continue to maintain macroeconomic stability, in conformity with its program with the IMF. The weak performance of the agricultural sector (generally exacerbated by external shocks) has affected economic growth and overall macroeconomic performance. The narrow export base and low revenue mobilization capacity exacerbate debt distress risks for both the short and longer terms. Further, many of the public enterprises are in poor financial shape and can have serious impact on the government budget in terms of direct and contingent liabilities. Moreover, if donor grants diminish substantially, there is a risk that the financing gap in the coming years may be larger than currently projected. To mitigate these risks IDA, IMF, and other development partners do and will work closely with the government to monitor macroeconomic developments and, when needed, to design and implement corrective actions in a timely manner. The recent measures, adopted in July 2013, illustrate well such coordination, in particular with the IMF. The government will need to ensure grant funding and concessional borrowing, and foster continued economic and export growth to avoid debt distress. In the medium term, diversification of the economy—a main objective of the authorities and the proposed ERSG program—through improvements in the business environment and reforms in the mining sector will mitigate the vulnerability of the economy to these shocks. 5.11 Exogenous risks (climatic shocks and volatility on international markets). Burundi is vulnerable to climatic shocks (almost a quarter of its GDP and 90 percent of its labor force are agriculture based) and is exposed to variations in demand and prices on international markets. These risks could compromise adherence to the overall macroeconomic framework and deepen poverty and vulnerability. Mitigation measures include close and regular macro-monitoring by IDA, IMF, and other DPs, to identify shocks and remedial actions. The program itself will foster Burundi’s resilience to external shocks at the macro level, by promoting economic diversification and safety net programs for the most vulnerable households. Burundi is extremely vulnerable to reduce aid inflows, as grants represented nearly 60 percent of total government resources, as the Government garnered international support for political and economic reforms. Grants as a percentage of GDP are expected to decline, to 15 percent, in 2013, while room for increasing fiscal space through taxation is limited. The Bank’s program will help Burundi maintain external assistance by supporting continued reforms in public financial management, the public wage bill, accelerated export earnings, and improving the business climate through transparency and anti-corruption measures. 5.12 Institutional capacity weaknesses could delay key reforms and affect program performance. Lack of technical capacity could lead to delays in the implementation of reforms. The risk of weak technical capacity is mitigated by: (i) concentrating on a limited number of themes/areas; (ii) leveraging technical support from ongoing IDA projects; (iii) working with other donors to reduce the number of activities to be implemented by the government and better target the focus of technical assistance. 30 Annex 1: Burundi ERSG VII - Letter of Development Policy SCANNED REPUBLIQUE DU BURUNDI Bujumbura, le 4-10/2013 MINISTERE DES FINANCES E T DE LA PLANIFICATION DU DEVELOPPEMENT ECONOMIQUE CABINET DU MINISTRE N/Ret.: 540.11/.3513.H.F/ 2013 A Monsieur Jim Kim President de Ia Banque Mondiale 1818 H Street, NW Washington, D.C.20433. Objet : Lettre de Politique de Developpement a pour le Septieme Don d'Appui Ia Retorme Economique (DARE VII). Monsieur le President, Nous avons l'honneur de vous transmettre ci-joint Ia Lettre de Politique de Developpement (LPD) convenue dans le cadre du nouveau programme d'appui budgetaire entre le Burundi et !'Association a lnternationale de Développement (IDA) au titre du yeme Don d'Appui Ia Reforme Economique (DARE VII). Le Gouvernement du Burundi a mis en reuvre avec succes le programme 2012-2013 appuye par Ia a sixieme operation de Don d' Appui Ia Retorme Economique (DARE VI). Durant cette periode, des resultats appreciables ont ete enregistres dans Ia gestion transparente et efficace des finances publiques ; !'amélioration du climat des affaires en vue de stimulant le developpement du secteur a prive ainsi que Ia promotion de l’expansion des secteurs haut potentiel de croissance et Ia diversification des exportations du pays notamment dans les secteurs agricoles et miniers. 31 Au niveau politique, Une feuille de route a ete convenue avec taus les acteurs politiques et de Ia societe civile pour une organisation des elections apaisees de 2015. Le retour des leaders des partis de I'opposition qui avait boycotte les elections de 2010 est le resultat d'un dialogue franc entre tous les acteurs politiques avec l'appui des nations unies pour preparer les elections de 2015 dans un environnement apaise. Le code electoral est en cours d'adoption et est le resultat d'un consensus·de toutes les parties prenantes. Bref, le Gouvernement reste engager a assurer un bon fonctionnement du systeme democratique, consolider Ia bonne gouvernance et promouvoir le dialogue politique et social. Les grandes priorités du Gouvernement restent la consolidation des acquis économiques et sociaux du CSLP 1, et la mise en œuvre du CSLP2 qui remettra le pays sur la voie de la croissance, en privilégiant les axes stratégiques suivants : (i) Renforcer l'Etat de Droit, consolider la Bonne Gouvernance et promouvoir l'égalité du genre ; (ii) Transformer l'économie par une croissance soutenue créatrice d'emplois à travers notamment l'investissement dans le secteur de l'énergie électrique ; (iii) Améliorer l'accès aux services de base de qualité afin de renforcer la solidarité nationale et (iv) Bien gérer l'espace et l'environnement pour un développement durable. Toutefois, les defis de Ia recherche de cette croissance forte et partagee restent immenses et Ia diminution constante des appuis budgetaires accordes combine au deficit energetique risque d'empirer Ia situation. La mobilisation des moyens financiers consequents reste Ia cle de reussite pour faire face a ces defis. C'est dans ce cadre, que le Gouvernement du Burundi sollicite un nouvel appui de I' IDA pour faciliter Ia realisation d'un programme de reformes economiques sur Ia periode du 1er juillet 2013 au 30 juin 2014 dans le cadre du DARE VII pour un montant equivalent a 16,5 millions de droits de tirages speciaux(DTS), soit 25 millions de dollars E.U. Les priorites mises en avant dans le cadre du DARE VII concernent Ia gestion transparente et efficace des finances publiques, I'amelioration du climat des affaires et developpement du secteur prive. Cette Lettre de Politique de Developpement expose aussi Ia strategie de reformes economiques a moyen terme que le Gouvernement s'engage a realiser dans le cadre du don et au-dela, afin de renforcer les actions de lutte contre Ia pauvrete avec l'appui des autres partenaires au developpement du Burundi. Les politiques et mesures indiquees dans Ia lettre de politique de developpement contribueront a renforcer les efforts entrepris en matiere de gestion des finances publiques et a ameliorer le climat des affaires, en vue d'accelerer Ia croissance economique et d'assurer l'irreversibilite des progres atteins. Toutefois, le Gouvernement reste prêt a adopter toute mesure additionnelle que I'IDA jugerait necessaire pour assurer le succes du programme. 32 Entin, dans le but de faciliter le suivi des progres accomplis dans Ia mise en ceuvre des politiques et mesures contenues dans ce programme, le Gouvernement reste pret a repondre favorablement a toute demande d'informations de Ia part de I'IDA. Les autorites burundaises souhaitent que Ia Lettre de Politique de Developpement et le document de programme qui l'accompagne soient rendus publics. Elles autorisent par consequent leur publication et leur affichage sur le site de Ia Banque Mondiale, une fois que ces documents sont transmis au Conseil d'Administration. Le Gouvernement fera autant sur ses sites officiels. Veuillez agreer, Monsieur le President, !'expression de notre haute consideration. 33 REPUBLIQUE DU BURUNDI SEPTIEME DON D'APPUI A LA REFORME ECONOMIQUE (DARE VII) I LETTRE DE POLITIQUE DE DEVELOPPEMENT I Octobre 2013 I. Introduction 1. Le Gouvernement sollicite l'appui de l'IDA pour compléter le financement de son programme de Politique économique en 2013. Le but de ce programme est de poursuivre la mise en œuvre du Cadre Stratégique de Croissance et de Lutte contre la Pauvreté de deuxième génération (CSLPII) et vise à consolider les fondamentaux de l'économie burundaise. Ses objectifs peuvent être résumés de la façon suivante: (i) maintenir l'inflation à un chiffre; (ii) améliorer la composition des dépenses publiques au profit des secteurs porteurs de croissance économique, tout en préservant les dépenses pro-pauvres et la viabilité budgétaire; (iii) renforcer la gestion des finances publiques (GFP) et la bonne gouvernance; et (iv) renforcer les systèmes de contrôle interne de la banque centrale. Une utilisation stratégique des instruments de politique économique et une accélération de la mise en œuvre des réformes structurelles permettront au Gouvernement de consolider la stabilisation macroéconomique et promouvoir une croissance forte, soutenue, et créatrice d'emplois. 2. L'exercice 2013 coïncide avec la mise en œuvre du CSLP II qui opérationnalise la Vision «Burundi 2025 ». Cette vision à long terme guide les politiques et les stratégies de développement durable, afin de satisfaire les besoins des générations présentes sans compromettre les chances des futures générations. Le CSLP II s'articule autour des trois axes stratégiques suivants : (i) Renforcer l'Etat de droit, consolider la bonne gouvernance et promouvoir l'égalité du genre ; (ii) transformer l'économie pour une croissance soutenue, créatrice d'emplois; (iii) améliorer l'accès et la qualité des services de base pour renforcer la solidarité nationale; et (iv) gérer l'espace et l'environnement pour un développement durable. Sans les tensions budgétaires et financières résultant de la hausse des prix alimentaires et énergétiques de 2010 et 2012, les fondamentaux de l'économie burundaises auraient été plus solides. En vue d'atténuer les effets de la flambée des prix sur les populations les plus vulnérables et assurer en même temps le financement adéquat du CSLP II, le Gouvernement a organisé une Conférence des bailleurs de fonds en octobre 2012 à Genève où de promesses de financement équivalentes à 2,6 milliards de dollars ont été enregistrées. En outre, la 1ère conférence sectorielle sur le Burundi organisée en juillet 2013, a été un cadre de dialogue stratégique pour trouver des réponses appropriées et durables aux nombreux défis actuels de notre pays en matière de développement économique et social tels que décris dans le CSLP II. 3. Ce document résume les récentes performances économiques et sociales du Burundi, particulièrement dans les domaines soutenus par le Don d'Appui aux Réformes Economiques (DARE) et présente les perspectives pour l'année 2014. 34 II. Développements Economiques et Sociaux Récents 4. Malgré les chocs successifs, les performances économiques du Burundi ont été positives. Le taux de croissance annuel moyen du PIB a atteint 4,4% au cours de la période 2006-2011 mais est resté en dessous des objectifs du Gouvernement et insuffisant pour réduire significativement la pauvreté. Grâce aux réformes structurelles en faveur du développement des secteurs porteurs de croissance, au fonctionnement effectif de l'Office Burundais des Recettes (OBR) et aux appuis budgétaires de nos partenaires, le Gouvernement a pu relever la croissance économique de 3,9% en 2010, 4.5% en 2013. Ce regain d'activité serait tiré essentiellement par les investissements dans les secteurs des télécommunications, de l'hôtellerie et du tourisme ainsi que dans le secteur manufacturier. De plus, des investissements structurants ont été réalisés dans le secteur énergétique avec la mise en œuvre d Kabu 16 et 1' arrivée de générateurs diesels supplémentaires à la REGIDESO. Ces investissements ont permis d'augmenté sensiblement l'offre d'électricité dans le pays et une réduction des délestages. 5. La persistance de la hausse des prix internationaux du carburant et des denrées alimentaires a accru l'inflation. La pression inflationniste s'est accentuée, et le taux d'inflation a augmenté de 15% en décembre 2011 à 24% à fin mars 2012. Cette forte hausse de l'indice des prix à la consommation s'explique également par la chute de la production agricole de l'ordre de 30% au cours du premier trimestre 2012. De plus, le Gouvernement a relevé les tarifs de l'électricité et de l'eau qui ont également contribué à la hausse des prix à la consommation. Compte tenu des mesures prises par le Gouvernement pour lutter contre l'inflation et grâce à la mise en œuvre des mesures et des instruments de politiques définis en accord avec le Fonds Monétaire International (FMI) dans le cadre de la Facilité Elargie de Crédit (FEC), le taux d'inflation pourrait s'établir à 9,0% pour 2013. 6. Le déficit budgétaire global de 2012 (base caisse, dons inclus) est estimé à 3,7% du PIB. Comparativement aux années précédentes, nous constatons une baisse du déficit budgétaire base caisse (dons inclus). Cette baisse du déficit est la conséquence d'une bonne gestion des dépenses publiques, qui privilégie les dépenses pro-pauvres, de l'opérationnalisation de I'OBR dont les recettes sont estimées à 14,8% du PIB, et d'une meilleure coordination des politiques monétaire et budgétaire grâce à la production régulière de plans de trésorerie (Comité de Gestion de la Trésorerie) et à la rationalisation des comptes de l'Etat (fermeture des comptes hors budgets depuis la fin décembre 201 0). En outre, conformément aux objectifs du CSLP et des OMD, les autorités augmentent constamment les dépenses de lutte contre la pauvreté. Malgré les contreperformances en matière de recouvrement des recettes en 2013, le déficit budgétaire devrait continuer de s'améliorer grâce à un meilleur contrôle des dépenses des dépenses courantes. Le gouvernement a pris des mesures correctrices difficiles dans le cadre de la loi de finance révisée de 2013 afin de maintenir les objectifs de déficit budgétaire en ligne avec les capacités de financement. Ce déficit est financé principalement par les bons et obligations du trésor ainsi que les tirages sur dettes directes au titre du financement extérieur. 7. Selon la dernière revue du FMI, le budget 2013 est conforme aux objectifs macroéconomiques convenus. Le cadre macroéconomique a été révisé pour tenir compte du ralentissement de l'activité économique, des effets de la crise énergétique et alimentaire sur les dépenses et financements publics et sur la position extérieure du Burundi. En outre, soucieux d'accélérer la progression vers les OMDs, le Gouvernement a privilégié les dépenses publiques porteuses de croissance et visant à réduire la pauvreté. Il a aussi pris des mesures d'abattement fiscal visant à réduire les tensions sociales. Grâce à ces mesures, l'impact de la crise sur les conditions de vie des ménages les plus pauvres sera moins grave. 8. Enfin, la position extérieure devrait continuer de s'améliorer grâce aux mesures de libéralisation et de diversification des exportations. Dès 2013, le Gouvernement entend poursuivre le programme de privatisation des stations du café. Afin décembre 2012, 41 stations de lavage ont été vendues à des Investisseurs privés nationaux et étrangers en deux appels d'offres. Les 76 stations de lavage restantes feront l'objet d'un nouvel appel d'offre après l'adoption par le Parlement de la Loi sur les privatisations. En raison des besoins de financements importants pour la relance du secteur, le Gouvernement entend donner un rôle prépondérant au secteur privé dans sa stratégie visant à accroître la production et la réduction de la cyclicité de la production du café. Le Gouvernement va donc continuer d'appuyer les secteurs café et thé : (i) en encadrant les associations de producteurs; (ii) en investissant dans l'irrigation 35 et la distribution de produits phytosanitaires ; et (iii) en adaptant la loi sur les privatisations en fonction des meilleures pratiques internationales. 9. Ces récentes performances peuvent être consolidées et renforcées au cours des années à venir. Avec l'amélioration continue de la sécurité sur toute l'étendue du territoire, le Gouvernement reste convaincu que si les financements sont orientés dans le domaine de l'agriculture et l'élevage, de l'énergie et des mines, du transport (infrastructures), du tourisme et du développement du secteur privé, le taux de croissance pourrait dépasser les 7% nécessaires pour éradiquer l'extrême pauvreté. Le CSLP II ambitionne de mettre le pays sur ce sentier de croissance forte, durable et partagée. Le Gouvernement a déjà commencé la prise en charge des grands défis identifiés dans le CSLP IL Des réformes importantes -lancées dans le cadre des précédents DARE et avec l'appui d'autres bailleurs de fonds (notamment la Commission Européenne et certains bilatéraux) -ont permis de créer les bases : (i) d'une amélioration sensible du climat des affaires, qui reste encore peu incitatif, et d'un renforcement de la transparence budgétaire et fiscale, de la gouvernance de la lutte contre la corruption; (ii) de la promotion de l'innovation et de l'augmentation soutenue des investissements dans les secteurs porteurs de croissance, y compris dans le capital humain ; (iii) d'une réduction du déficit en infrastructures productives telles que l'énergie; et (iv) d'une croissance de la production et de la productivité agricole, qui est resté insuffisante pour créer des emplois dans le monde rural tractée par des efforts continus de diversification des produits et d'amélioration des systèmes de commercialisation. Ce sont ces mêmes principes qui inspireront la sélection des programmes et activités permettant d'atteindre les objectifs rappelés au premier paragraphe ci-dessus. 10. Le Gouvernement sait qu'une croissance économique forte passera par une promotion agressive du secteur agricole. L'agriculture, avec une croissance de 5,2% en 2012, continuera de jouer un rôle moteur dans la croissance de l'industrie (8,0% en 2012%) et des services (3,0% en 2012). Ce rôle prépondérant s'explique par ses liens avec l'industrie en tant que pourvoyeur d'intrants, sa forte contribution aux recettes d'exportation (environ 47% en 20 12) et son apport en revenu à la grande majorité de la population du Burundi (plus de 90% de la population active travaille dans l'agriculture). Conscient des menaces auxquelles fait face l'agriculture burundaise en général et le secteur café en particulier, le Gouvernement, avec l'appui de ses partenaires, est prêt à faire de grands efforts pour stimuler la production et promouvoir la productivité du secteur agricole. Dans ce cadre, il a été mis sur pied un fond commun des fertilisants. Pour concourir positivement à la sauvegarde des terres cultivables, le Gouvernement a mis et continu à mettre en place des programmes destinés à renforcer la maîtrise de l'eau pour irrigation, l'aménagement des terrasses radicales, le creusement des fossés antiérosifs et les opérations de reboisements. Cependant, une profonde transformation de l'économie burundaise, créatrice d'emplois et de revenus salariaux et fiscaux, nécessitera aussi une promotion saine des services et de l'industrie (donc du secteur privé), dont les parts du PIB devront donc fortement augmenter. En accord avec ses partenaires, le Gouvernement a défini un programme de réformes prioritaires pour 2013. 11. Le Gouvernement a pris d'importantes mesures visant à faire du secteur privé le pivot du développement économique et social du Burundi. Le rapport du « Doing Business 2012» a classé le Burundi parmi les 10 premières économies réformatrices mondiales qui ont exécuté des réformes significatives en très peu de temps. Le rapport Doing business 2013 concerne les réformes initiées dans sept indicateurs dont: (i) la création d'une entreprise, (ii) l'obtention du permis de construire, (iii) le raccordement à l'électricité, (iv) le transfert de propriété, (v) le paiement des taxes et impôts, (vi) le commerce transfrontalier et (vii) la résolution de l' insolvabilité. Des avancées significatives ont été mises en évidence avec notamment la réduction du nombre de procédures, des délais et des coûts pour la création d'une entreprise. Ainsi, un guichet unique regroupant l'ensemble des services concernés a été créé. Aujourd'hui, la création d'une entreprise se fait en un seul jour à un coût de 44.900 à 54 900 de Fbu. 12. Le rétablissement de la sécurité sur l'ensemble du territoire national constitue un progrès Considérable. Une étape décisive a été la transformation du dernier mouvement armé en parti politique. Les élections générales de mai et septembre 2010 -qui ont réélu le Président sortant, Mr Pierre Nkurunziza confirment le choix du processus démocratique, comme 1 'unique moyen de surmonter les divergences et de régler les problèmes politiques et sociaux du Burundi. Malgré le coût de ces élections, partiellement financé par les partenaires du pays, les autorités gouvernementales ont su maintenir le cap des réformes. Pour consolider le processus de reconstruction politique, 36 condition nécessaire pour une croissance forte et durable, un forum des partis politiques a été créé en 2010 pour un dialogue continu sur les questions concernant le bien-être de la population. D'autres initiatives importantes pour la stabilisation politique, telles que la création d’institutions nationales sur les droits de 1 'homme et la justice transitionnelle, ont aussi été prises en 2011. Le 11 février 2011, le bureau d'Ombudsman a commencé à fonctionner officiellement (la loi portant organisation et fonctionnement de l'Ombudsman a été promulguée le 25 janvier 2010). Une commission ad hoc a été chargée d'examiner des cas d'exécution extrajudiciaire et torture. En mai 2013, le Gouvernement a organisé sous les auspices du Représentant du Bureau Intégré des Nations Unies un séminaire-atelier de tous les acteurs politiques du Burundi dans le cadre de l'amélioration du code électoral en préparation aux échéances électorales de 2015. En plus, le gouvernement du Burundi a organisé du 05 au 09 août 2013 les états généraux de la justice sous le thème central « La justice au Burundi » de l'Accord d'Arusha à nos jours. Plus de 400 participants en provenance du secteur public et du secteur privé de même que de la société civile et des partenaires au développement du Burundi ont pris part à cette rencontre afin de faire des recommandations utiles et constructives pour la consolidation de la justice. Les thèmes qui ont été retenus sont l'indépendance de la magistrature et la responsabilité du juge, le fonctionnement du système judiciaire, la chaîne pénale, l'administration pénitentiaire, l'accès à la justice, la justice commerciale et sociale, l'allocation des ressources, la professionnalisation des acteurs de la justice et la formation, l'équilibre ethnique et la gestion des ressources humaines. Le Gouvernement poursuivra les efforts entrepris pour assurer le bon fonctionnement du système démocratique, consolider la bonne gouvernance, et promouvoir le dialogue politique et social. 13. Par ailleurs, le Gouvernement va réviser sa stratégie de protection sociale et consolider les filets de sécurité mis en place en faveur des populations pauvres et vulnérables. Depuis 2008, le Gouvernement a pris un certain nombre de mesures d'aide aux populations vulnérables afin de les protéger contre les chocs. Les réductions tarifaires temporaires et ciblées pour les importations de produits alimentaires et pétroliers les plus consommés par les pauvres ont été combinées avec des filets de sécurité sociale (suppléments nutritionnels, mesures urgentes de sécurité alimentaire, cantines scolaires, transferts de kits aux agriculteurs, microcrédits agricoles pour les ruraux, assistance aux réfugiés et déplacés, etc.). De plus, pour faire face à la situation de vulnérabilité des déplacés, le Gouvernement, avec le soutien des partenaires au développement, a entrepris depuis plusieurs années, des programmes visant la réintégration socio-économique des personnes affectées directement ou indirectement par le conflit burundais. Dans le cadre de l'extension progressive de la couverture de la protection sociale à toute la population, le Gouvernement poursuivra l'opérationnalisation de la carte d'assurance maladie (CAM) et son harmonisation avec les mutuelles de santé communautaire. Enfin, pour accroître la production agricole, le Gouvernement a organisé l'approvisionnement des paysans en semences et en engrais, lancé la réhabilitation du système d’irrigation de la plaine de I'Imbo, et entrepris la réhabilitation des infrastructures de base. Le Gouvernement souhaite poursuivre ces programmes pendant les prochaines années afin d'améliorer la condition de vie des plus pauvres. III. Les Principales réalisations des DARE II, III, IV, V et VI 14. Les réformes du Gouvernement démontrent sa volonté d'atteindre les objectifs de développement du CSLP. Le programme de réformes est articulé autour des objectifs suivants : (i) consolider la stabilité macroéconomique; (ii) des réformes structurelles visant à améliorer le système de gestion des finances publiques, la politique monétaire et la politique de change ; et (iii) renforcer l'efficacité du système productif, notamment par la privatisation des entreprises publiques et la restructuration du secteur des exportations (café, thé, coton). Sur chacun de ces axes, la série des DARE, en combinaison avec les programmes des autres bailleurs, a permis des avancées significatives qu'il convient de rappeler. 15. La mise en œuvre de réformes globales de la gestion des finances publiques a produit des résultats substantiels. Le Parlement a adopté une nouvelle Loi Organique des Finances Publiques et une nouvelle Loi sur les Marchés Publics. Ces deux lois intègrent les principes modernes de gestion et de transparence et spécifient les concepts, les principes et les responsabilités régissant l'action des agents publics. Un décret relatif au le cadre de préparation budgétaire a été adopté et est appliqué. Pour améliorer la qualité des dépenses publiques, une enquête PETS a été réalisée en 2007 et a donné lieu à l'adoption de plans d'action en 2009 ; l'introduction d'un CDMT central dans la préparation budgétaire a été réalisée; elle garantit la cohérence entre les plans budgétaires et les objectifs du 37 CSLP. Par ailleurs, les comptes extrabudgétaires ont été éliminés et des plafonds d'engagement ont été fixés (de concert avec les Ministères sectoriels) pour éliminer des arriérés de paiement et progressé vers l'unité de la trésorerie. En complément de ces réformes lancées dans le cadre de la première série des DARE, une Loi instituant la Taxe sur la Valeur Ajoutée a été promulguée le 17 Février 2009 et 1' élimination de toutes les exonérations de fiscalité indirecte a été décidée et incorporée dans le nouveau code des impôts. Le Gouvernement a effectué en 2008 le recensement biométrique des fonctionnaires civils de l'Etat, de la police et des forces armées. La base de données mise en place à cet effet sera prochainement actualisée et utilisée pour apurer et fiabiliser la base de données du logiciel des ressources humaines et de la paie (OpenRH) pour que des cartes magnétiques d’identification personnelle soient distribuées à tous les fonctionnaires. 16. Une nouvelle Stratégie de Gestion des Finances Publiques (SGFP) a été adoptée en mai 2009 par le Conseil des Ministres. La nouvelle stratégie a bénéficié des leçons tirées de la mise en œuvre de son prédécesseur et de l'évaluation PEFA. Elle comporte un plan d'action sur la période 2012-2014. Le suivi de sa mise en œuvre est fait régulièrement grâce à des rapports trimestriels validés par le Comité de Pilotage des Réformes des Finances Publiques. La deuxième stratégie poursuit les mêmes objectifs que la première et s'articule autour de 12 programmes. Elle. Parmi les principales actions réalisées dans ce cadre, il y' a lieu de citer: l'adoption de la loi n° 1102 du 24 janvier 2013 portant impôt sur le revenu, l'adoption en août 2013 par le Conseil des Ministres le projet de décret sur le Comité National de la Dette Publique (CNDP), l'adoption en août 2013 par le Conseil des Ministres du CDMT (2014- 2016) et CBMT(2014-2016) qui sont les principaux outils de planification et de budgétisation, l'adoption de l'Ordonnance ministérielle 54011302 du 31 juillet 2012 portant fixation des attributions des règles de fonctionnement et de 1' organisation du Contrôleur des Engagements des Dépenses, l'adoption de l'Ordonnance ministérielle n°540/1950/6112/2012 portant manuel d'exécution de la dépense publique, l'élaboration et la validation du manuel du contrôle des engagements de dépenses. La mise en application de ces trois derniers textes ont permis: (i) d'améliorer le taux d'exécution de la dépense; (ii) de réduire le nombre des intervenants dans le processus, les 5 étapes ayant été remplacés par une seule, celle du CED; (iii) et réduire le traitement des dossiers dans un délai de 5 jours. 17. Des progrès appréciables ont également été réalisés dans la mise en œuvre de mesures visant à améliorer l'environnement des affaires. Un nouveau Code des Investissements conforme aux meilleures pratiques internationales a été promulgué en septembre 2008, et devrait contribuer à l'amélioration du climat des affaires, après harmonisation avec le nouveau Code des Impôts. Le Conseil des Ministres a adopté des projets de Codes du Commerce et des Sociétés Privées et Publiques conformes aux normes internationales. Leur formulation a suivi un processus largement participatif. Le décret portant création du cadre de dialogue public-privé a été signé par le Président de la République en juin 2008 et le Tribunal de Commerce a réduit de plus de 10% le nombre des litiges passant plus de 60 jours en délibéré. La nouvelle législation rend plus rapide et moins coûteuse la création d'entreprise. Elle améliore la transparence et la responsabilisation, augmente la confiance des investisseurs et établit des procédures de forclusion. L'Agence Burundaise de Promotion des Investissements (API) est pleinement fonctionnelle depuis 2010. La gestion du secteur financier a également progressé avec l'adoption d'une stratégie de réforme du secteur. En outre, le Parlement a adopté une nouvelle Loi portant statuts de la Banque Centrale de la République du Burundi (BRB) qui renforce l'indépendance et la gouvernance de l'institution. La BRB a en outre mis en œuvre d’importantes mesures visant à renforcer ses contrôles interne et son système de gestion des risques en application des recommandations du rapport du FMI sur l'évaluation des clauses de sauvegarde financière. Elle poursuit également la mise en œuvre du projet de renforcement de l'infrastructure financière et de modernisation de systèmes de paiement (RTGS et compensation électronique). Toutes ces actions renforcent les mesures soutenues par les DARE. 18. Des avancées significatives ont été réalisées dans la réforme de la filière café. Après l'adoption par le Conseil des Ministres d'une stratégie de désengagement de l'Etat en 2008, un décret présidentiel a mis en place l'Agence de Régulation du secteur café (ARFIC), lançant ainsi le processus de cession des actifs de l'Etat dans le secteur. Bien avant cela, le Gouvernement avait adopté un nouveau règlement des ventes qui ouvrait les exportations de café aux opérateurs locaux et internationaux. L'application de ce règlement s'est traduite par l'entrée effective des nouveaux exportateurs sur un marché devenu compétitif et transparent. En plus de la création de l'ARFIC, le DARE a soutenu : (i) des campagnes nationales de sensibilisation sur les avantages de la privatisation des actifs du secteur café; (ii) le 38 lancement de l'appel d'offre international pour la vente de ces actifs; et (iii) l'abrogation de la convention de 30 ans qui liait les SOGESTALS à l'OCIBU. L'opération a permis de vendre 13 stations de lavage à un groupe international réputé. Dans le cadre du DAREV, 28 stations de lavage et une usine de démarchage ont été cédées à des Opérateurs économiques nationaux et à un Investisseur étranger respectivement. Etant donné que le café constitue toujours la principale source de revenus, pour environ 800.000 ménages, et de devises, la priorité a été accordée à l'accroissement des rendements. Les opérations menées à cet effet ont porté sur: (i) le provisionnement en intrant et matériel caféicole, (ii) le recepage du verger caféicole incluant la reconversion, la taille et l'entretien. L'autre volet à signaler a trait à l'amélioration de la qualité du café dont les principaux résultats sont (i) le relèvement de la part du fully wached qui a atteint 55%, (ii) augmentation de la production du café exportable (23.739 tonnes de café vert) et (iii) la dotation à18 station de lavage de système de traitement des eaux usées. IV. Les défit du DARE VII 19. La mise en œuvre du DARE VII coïncide avec celle du CSLP II qui ambitionne la réalisation d'une croissance forte et soutenue, basée sur une transformation profonde de l'économie, dont le financement proviendrait de la mobilisation des ressources intérieures et des dons Le DARE VII complétera les réformes lancées par les précédents DARE tout en s'alignant sur le programme du Gouvernement. Comme le DARE VI, la recherche de synergies a été un critère que le Gouvernement a privilégié dans la définition des actions préalables du DARE VII. Dans cette optique, le CSLP II sera la référence des politiques auxquelles le DARE VII contribuera. V. Les Actions Préalables du DARE VII VI. Renforcer la Gestion des Finances Publiques et la transparence budgétaire 20. Dans ce domaine, quatre mesures sont concernées : (i) transmission au Parlement du CDMT et du CBMT 2014- 2016 et organisation des débats pré-budgétaires; (ii) diffusion dans les média et publication au niveau communal des tableaux synthétiques des informations clés du budget ; et (iii) validation de la base de données sur les fonctionnaires de 1 'Etat à la suite du processus de mis en jour des informations sur le recensement du personnel d'avril 2008. 21. Préparation du CDMT et du CBMT 2014-2016 et organisation des débats pré-budgétaires. Les CBMT et CDMT Central 2014-2016 ont été élaborés et finalisés en mai 2013. Ces deux documents d'orientation budgétaire ont été adoptés en conseil des Ministres en août 2013. La lettre de cadrage servant à la préparation du projet de Loi de Finances 2014, élaborée à partir du CDMT Central 2014-2016, a été transmise aux Ministères sectoriels le 19 août 2013. Le document d'orientation budgétaire a été également transmis au parlement en août 2013. La conduite du premier débat d'orientation budgétaire au sein des deux chambres du Parlement, tenue le 29 août 2013, constitue un progrès important dans le renforcement du contrôle externe des finances publiques. 22. Diffusion dans les média et publication au niveau communale des tableaux synthétiques des informations clés du budget. En vue de promouvoir d'avantage la demande pour la bonne gouvernance au niveau locale et s'assurer que les allocations budgétaires se concrétisent au niveau où les services sont fournis ainsi que la culture de l'accès à l'information, le Gouvernement a élaboré des notes synthétiques intitulées «où sont mes impôts » sous forme de prospectus qui donnent toutes les informations essentielles sur le budget alloué aux différents secteurs de la vie nationale, avec un accent particulier sur les secteurs de l'éducation et de la santé. Lesdites notes synthétiques traduites en Kirundi ont été distribuées à toutes les communes du pays rassemblées en 4 groupes régionaux. 23. Validation de la base de données sur les fonctionnaires de l'Etat à la suite du processus de mise à jour des informations sur le recensement du personnel d'avril 2008. Conscient que la migration et l'intégration des éléments biométriques, issus du recensement 2008, dans la base de données de 2010, sont d'une importance capitale pour assainir le fichier des fonctionnaires en éliminant définitivement les fonctionnaires fictifs, le Gouvernement a procédé à la nomination d'un Comité de pilotage de gestion post recensement par la Décision, du Ministre de la Fonction Publique, du Travail et de la Sécurité Sociale, n° 570/876/CAB/2013 du 18 juillet 2013. Ce Comité s'est 39 déjà réuni plus d'une fois et, en collaboration avec le Consultant qui a été sollicité pour aider 1' implémentation de contrôle des fonctionnaires, est en train de finaliser un plan d'action y relatif. Le Comité a pour mission: (i) de donner des orientations stratégiques de mise en œuvre de l'intégration de la mise à jour des données du recensement des fonctionnaires et agents civiles de l'Etat de 2008; (ii) de valider tous les rapports de suivi évaluation de l'activité;(iii) de définir les modalités pratiques de l'exécution de l'activité et de mettre sur pied les TORs ad hoc;(iv) en collaboration avec toutes les Administrations et Institutions concernées par la question dans le cadre de la réalisation du déclencheur du DARE VII le Comité déterminera les modalités pratiques et les moyens nécessaires à l'accomplissement de cette activité; et (v) exécuté tout autre tâche jugé nécessaire pour la réussite de la gestion post- recensement. Le module carrière du système informatique de gestion du personnel (OpenRH) a été développé et les informations concernant les carrières des fonctionnaires ainsi que leur ménage mis à Jour. VI.l. Promouvoir l'investissement du secteur Privé et diversification économique 24. Dans ce domaine, trois mesures sont concernées : (i) la mise en place et l'opérationnalisation d'un guichet unique pour les permis de construire; (ii) l'augmentation par rapport à l'année précédente du budget alloué aux routes de desserte et d'irrigation en respect des allocations du CDMT; et (iii) l'adoption et d'un Code minier conforme aux meilleurs pratiques internationales; 25. Mise en place et l'opérationnalisation d'un guichet unique pour les permis de construire. Avec le retour à la stabilité, le gouvernement du Burundi s'est engagé dans un programme de réformes pour améliorer le climat des affaires et favoriser la relance de la croissance économique et l'intégration régionale dans la Communauté Est- Africaine. Les réformes récentes ont permis la création et la mise en place d'un guichet unique (one stop shop) pour la délivrance des permis de construire en mars 2013. Le guichet a déjà délivré 149 permis de construire au 19 août 2013, dont 28 permis en faveur des entreprises. Un manuel des procédures y relatif a été élaboré. Une campagne de communication a eu lieu pour expliquer les nouveaux processus d'obtention d'un permis de construire. Les délais ont été fortement réduits, passant de 99 à 51 jours tandis que le nombre des procédures a été réduit de 21 à 7. 26. Augmentation par rapport à l'année précédente du budget alloué aux routes de desserte et d'irrigation en respect des allocations du CDMT. Sur base de la loi budgétaire révisé 2013, le budget alloué à la construction des routes de desserte agricole et aux ouvrages d'irrigations a augmenté de 36% en 2013. Cette augmentation largement supérieure à celle prévue est due surtout au projet de construction du barrage Kajeke, à l'étude d'aménagement des marais de construction des barrages, à l'aménagement des bassins versants et au projet d’aménagement du bassin de la Kagera. 27. Adoption et soumission au Parlement d'un Code minier conforme aux meilleurs pratiques internationales. Conscient des opportunités qu'offre le secteur minier en matière de diversification des exportations et des revenus budgétaires, le Gouvernement s'est engagé à amélioration gouvernance et la transparence dans le secteur. A cet effet, il a entrepris la révision et la modernisation du code minier afin de rentre conforme aux standards internationaux. D’intensives consultations ont effectuées au cours de l'année 2013 afin d'aboutir à un consensus qui préserve les intérêts du Burundi. Le code a été récemment adopté et promulgué. V.3 Renforcer la protection sociale en vue de réduire les vulnérabilités 28. Dans ce domaine, deux mesures sont concernées: (i) nomination d'un comité technique chargé d'élaborer une stratégie exhaustive de la protection sociale, assortie d'un plan d'actions pour sa mise en œuvre, ainsi qu'un état de lieu du système de protection sociale ; (ii) finalisation de l'enquête consommation des ménages et définition du profil de vulnérabilité au niveau national 29. Nomination d'un comité technique chargé d'élaborer une stratégie exhaustive de la protection sociale, assortie d'un plan d'actions pour sa mise en œuvre, ainsi qu'un état de lieu du système de protection sociale. Le Gouvernement a élaboré un document de Politique Nationale de Protection Sociale (PNPS) qui a été adopté en 40 Conseil des Ministres en 2011. Le document prévoit trois organes à savoir : (i) la Commission Nationale de Protection Sociale(CNPS) chargée du pilotage politique de la politique sociale et composée de 11 Ministres sous la Présidence du Chef de l'Etat, (ii) le Comité Technique de la CNPS ainsi que (iii) le Secrétariat Exécutif Permanent. La Commission Nationale de Protection Sociale(CNPS) est déjà en place, le processus de mise en place du Comité Technique de la CNPS est en cours et sa mise en place du Secrétariat Exécutif Permanent est prévue en janvier 2014. 30. Finalisation de l'enquête sur les conditions de vie des ménages et définition du profil de la pauvreté au niveau national et sur la main d'œuvre. Une enquête auprès des ménages sur la démographie et la santé conduite au Burundi sur la période allant de fin 2011 jusqu'au début de l'année 2012 comporte un module sur les dépenses de consommation des ménages. Les données sont déjà disponibles. Une autre enquête sur les conditions de vie des ménages, couplé avec l'enquête sur la main d'œuvre, est en cours de préparation sur financement de la BAD et exécutée par AFRISTAT en partenariat avec I'ISTEEBU. VII Autres mesures envisagées dans le cadre de futures opérations (notamment DAREVIII) VII.l. Renforcer la Gestion des Finances Publiques et la transparence budgétaire 31. Dans ce domaine, le Gouvernement envisage notamment(i) de soumettre au Parlement le projet de loi du budget 2015 avant novembre 2014; (ii) d'organiser une formation pour les unités d' inspection ministérielles et mettre en œuvre un plan de travail pour l' inspection conjointe;(iii) d'effectuer un audit du (a) système de gestion de la paie, (b) gestion des ressources humaines(RH) et (c) SIGEFI et élaborer un plan d'actions pour la mise en œuvre des recommandations. Afin de renforcer le CDMT, le Gouvernement élaborera, à partir du budget 2015, des CDMT sectoriels pour les ministères en charge de l'Agriculture, de l'Education et de la Santé cohérents avec le CDMT central. Vl.2 Améliorer le cadre légal et réglementaire pour la promotion de l'investissement du secteur privé et la diversification économique 32. Dans ce domaine, le Gouvernement envisage de rendre public la liste détaillée des exonérations fiscales accordées au cours de l'année précédente et une annexe à la loi de finance 2014 précisera de façon réaliste et sur la base des réalisations des trois dernières années, le montant projeté des exonérations fiscales pour l'exercice 2014. Il Gouvernement envisage par ailleurs rendre public les règles relatives à la préparation indispensable des plans d'aménagement urbains. VI.3 Promotion du développement du secteur privé 33. Le Gouvernement a déjà révisé le code minier et compte poursuivre les efforts visant à mettre à niveau l'ensemble des textes définissant le cadre réglementaire et régissant les activités d'exploitation minière au Burundi. Aussi, pour renforcer la transparence dans le secteur minier, le Gouvernement envisage de soumettre sa candidature à 1 'Initiative de Transparence des Industries Extractive (EITI). A cet effet, il va créer une commission EITI et de fournir des ressources adéquates pour mettre en œuvre un plan détaillé d'activités afin de permettre au pays d’adhérer à l'initiative. 34. Vue l'importance du secteur café dans l'économie et le rôle qu'il peut jouer dans l'éradication de l'extrême pauvreté, le Gouvernement compte poursuivre et achever la réforme de la filière. A cet effet, il envisage élaborer un programme pour améliorer de façon durable la productivité du secteur. En plus de finalisation du processus de privatisation des stations de lavage, le Gouvernement compte appuyer la production proprement dite afin de s'approcher de la production potentielle. A cet effet, il sollicitera l'appui de la Banque mondiale ainsi que celui des autres partenaires pour relever ce défi. 41 VI.2 Renforcer la protection sociale en vue de réduire les vulnérabilités 35. Dans ce domaine, le Gouvernement envisage: (i) d'adopter la stratégie de protection sociale et commencer la mise en œuvre de la stratégie et allouer des fonds nécessaires (avec la participation du secteur privé) ;(ii) de réaliser et rendre publique le résultat d'une enquête PETS (y compris l'évaluation des bénéficiaires dans les secteurs sociaux). VIII Conclusion 36. Telles sont donc quelques-unes des mesures qui ont dominé et qui continuent à dominer l'action du Gouvernement au cours de cette année (2013) et l'année prochaine (2014). Ce programme, qui a été discuté avec les experts de la Banque Mondiale, a été suivi de façon rigoureuse par les autorités. Le Gouvernement s'engage à poursuivre ses efforts et travailler en commun accord avec la Banque et les autres partenaires pour la réalisation effective du programme. Afin de renforcer sa collaboration avec la Banque et faciliter les échanges de vues entre les deux parties, le Gouvernement s'engage à fournir dans les meilleurs délais prévus les informations nécessaires pour le suivi de la mise en œuvre du programme. 42 REPUBLIC OF BURUNDI SEVENTH ECONOMIC REFORM SUPPORT GRANT (ERSG VII) LETTER OF DEVELOPMENT POLICY October 2013 I Introduction 1. The government is requesting IDA support to supplement the financing of its economic policy program for 2013. The purpose of this program is to continue the implementation of the second-generation Poverty Reduction and Growth Strategy Paper (PRSP II) and to consolidate Burundi’s economic fundamentals. It aims to: (i) keep inflation at single digit levels; (ii) improve the structure of public expenditures to foster growth while protecting pro-poor spending and maintaining fiscal sustainability; (iii) strengthen public finance management (PFM) and improve governance; and (iv) improve the central bank’s internal control systems. Strategic use of economic policy instruments and acceleration of the implementation of structural reforms will enable the government to consolidate macroeconomic stabilization and promote strong and sustainable growth that creates jobs. 2. In fiscal year 2013, the implementation of the second-generation PRSP (PRSP II), which includes the country’s vision “Vision Burundi 2025,” will continue. The long-term vision guides the sustainable development strategies and policies in order to meet the needs of the present generation without jeopardizing the fate of future generations. The PRSP II is structured around the following four pillars: (i) strengthening the rule of law, consolidating good governance and promoting gender equality; (ii) transforming the economy to achieve sustained growth that creates jobs; (iii) improving access to and the quality of basic services to strengthen national solidarity; and (iv) managing the land and environment for sustainable development. Without the fiscal and financial pressures resulting from the rise in food and fuel prices in 2010 and 2012, Burundi’s economic fundamentals would have been much stronger. To mitigate the effects of these price increases on the most vulnerable group of population and at the same time ensure adequate financing of the PRSP II, the government organized a donors’ conference in Geneva in October 2012 where financing commitments equivalent to US$2.6 billion were announced. As well, the first sectoral conference on Burundi organized in July 2013 provided a framework for a strategic dialogue for appropriate and sustainable responses to the numerous social and economic development challenges that our country is currently facing, as described in the PRSP II. 3. This letter summarizes Burundi's recent economic and social performance, particularly in the areas supported by the series of Economic Reform Support Grants (ERSG) and presents the outlook for 2014. 43 II Recent Economic and Social Developments 4. Despite successive shocks, Burundi's economic performance has been good. The average GDP growth reached 4.4 percent in 2006-2011, although it remained below the government's targets and was insufficient to significantly reduce poverty. Thanks to the structural reforms that promoted the development of growth sectors, the successful operation of the Burundi Revenue Authority (OBR), and the budget support received from our partners, the government was able to increase economic growth from 3.9 percent in 2010 to 4.5 percent in 2013. This upturn was supported essentially by investment in telecommunications, hotel and tourism sectors, and manufacturing. In addition, structural investments were made in the energy sector with the implementation of Kabu 16 and the acquisition of additional power generators by the National Electricity Company (REGIDESO). These investments made it possible to significantly increase the country’s supply of electricity and to reduce load shedding. 5. Persistent high international prices for fuel and foodstuffs drove inflation. Inflationary pressures increased the inflation rate from 15 percent in December 2011 to 24 percent at end-March 2012. This sharp increase in the consumer price index is also explained by the decline in agricultural output by about 30 percent during the first quarter of 2012. In addition, the government raised electricity and water tariffs, which also contributed to the rise in consumer prices. With the measures taken by the government to combat inflation and the implementation of policy defined together with the International Monetary Fund (IMF) in the context of the Extended Credit Facility (ECF), inflation is expected to decline to 9.0 percent in 2013. 6. The overall fiscal deficit in 2012 (cash basis, including grants) is estimated at 3.7 percent of GDP. Compared to previous years, there was a decline in fiscal deficit (grants included) as a result of good public finance management and the priority given to pro-poor spending, the start of OBR operations (with collections estimated at 14.8 percent of GDP) and better coordination of fiscal and monetary policies owing to the regular production of cash flow plans (Cash Management Committee) and the streamlining of the government accounts (closing of off-budget accounts at end-December 2010). Moreover, in accordance with the objectives of the PRSP and the Millennium Development Goals (MDGs), the authorities are steadily increasing spending for poverty reduction. Despite poor revenue collections in 2013, the fiscal deficit should continue to improve owing to better control over current expenditures. The government has taken difficult corrective measures in its revised budget law for 2013 in order to keep the fiscal deficit targets in line with its financing capacity. This deficit is financed primarily by treasury bills and bonds and by drawings on direct external debt. 7. According to the most recent IMF review, the 2013 budget is in line with the agreed macroeconomic objectives. The macroeconomic framework has been revised to take account of the slowdown in economic activity and the effects of the energy and food crisis on public expenditure and financing and on Burundi’s external position. Moreover, with a view to accelerating progress toward the MDGs, the government has given priority to public spending aimed at increasing growth and reducing poverty. It has also implemented tax relief measures to reduce social tensions. Owing to these measures, the impact of the crisis on the living conditions of the poorest households will be less severe. 8. Finally, the external position should continue to improve, owing to export diversification and liberalization measures. In 2013, the government intends to continue its program to privatize coffee washing stations. At end-December 2012, 41 washing stations were sold to domestic and foreign private investors in two public tenders. The remaining 76 washing stations will be covered by a new public tender after the adoption of the Privatization Law by Parliament. Given the substantial financing needed to revitalize the sector, the government intends to give a primary role to the private 44 sector in its strategy for increasing output and reducing the cyclical nature of coffee production. The government will continue to support the coffee and tea sectors by: (i) supporting producer associations; (ii) investing in irrigation and the distribution of phytosanitary products; and (iii) adapting the Privatization Law based on international best practices. 9. These recent results can be consolidated and strengthened in the coming years. With the continued improvement in security throughout the national territory, the government is convinced that if financing is directed to agriculture and livestock, energy and mining, transportation (infrastructure), tourism, and private sector development, the growth rate could exceed the 7 percent needed to eradicate extreme poverty. The PRSP II aims to put the country on the road to strong, sustainable and shared growth. The government has already begun to tackle the major challenges identified in the PRSP II. Important reforms – launched in the context of previous ERSGs and with the support of other donors (particularly the European Commission and certain private donors) – have made it possible to lay the foundations for: (i) a sustainable improvement in the business environment, which remains a deterrent, and improved tax and budgetary transparency, governance and anticorruption efforts; (ii) promotion of innovation and a sustained increase in investment in growth sectors, including human capital; (iii) a reduction in the productive infrastructure gap, including energy infrastructure; and (iv) increased agricultural output and productivity (which remain insufficient to create jobs in the rural sector), driven by ongoing efforts for product diversification and improvement of marketing systems. These same principles will be used to select programs and activities to achieve the objectives set out in the first paragraph above. 10. The government knows that strong economic growth requires aggressive promotion of the agricultural sector. Agriculture, which grew 5.2 percent in 2012, will continue to play a primary role in the growth of industry (8.0 percent in 2012) and services (3.0 percent in 2012). This important role is explained by its links with industry as a supplier of inputs, its strong contribution to export revenues (approximately 47 percent in 2012), and its contribution to the incomes of most of the population in Burundi (over 90 percent of the labor force works in agriculture). Aware of the threats facing Burundi agriculture in general and the coffee sector in particular, the government, with the support of its partners, is prepared to expend an enormous effort to stimulate production and promote the productivity of the agricultural sector. In this context, a funding pool for fertilizers has been established. To contribute to the protection of arable land, the government has established and continues to establish programs aimed at controlling water for irrigation, managing terraced farmlands, digging anti-erosion ditches, and organizing reforestation operations. However, a profound transformation of the Burundi economy that creates jobs and generates wages and tax revenues will also require strong promotion of services and industry (and thus of the private sector), the share of which in GDP should increase significantly. In agreement with its partners, the government has defined a priority reform program for 2013. 11. The government has taken important measures to make the private sector the driver of economic and social development in Burundi. The "Doing Business 2012" report ranked Burundi among the top 10 reforming economies in the world, i.e., economies having implemented significant reforms in a very short period of time. The 2013 Doing Business Report focuses on the reforms initiated in the seven indicators: (i) starting a business; (ii) obtaining construction permits; (iii) getting electricity; (iv) transferring property; (v) paying taxes; (vi) trading across borders; and (vii) resolving insolvency. Significant progress has been made, particularly through the reduction in the number of procedures, time and cost of starting a business. In addition, a one-stop shop that brings together all services concerned has been created. Today a business can be started up in a single day at a cost of between Fbu 44,900 and Fbu 54,900. 45 12. The restoration of security throughout the national territory is a significant achievement. A decisive step was the conversion of the last armed movement into a political party. The general elections held in May and September 2010 – in which the outgoing President, Pierre Nkurunziza, was re-elected – confirmed that democracy has been chosen as the only way of overcoming differences and handling Burundi's political and social problems. Despite the cost of these elections, which were partly financed by Burundi’s partners, the government authorities were able to stay the course on the reforms. To consolidate the political reconstruction process, which is essential for strong, sustainable growth, a forum of the political parties was created in 2010 to establish an ongoing dialogue on issues relating to the welfare of the people. Other important measures for political stabilization, such as the creation of national institutes for human rights and transitional justice, were also taken in 2011. On February 11, 2011, the Ombudsman’s Office officially started up operations (the law on the organization and operation of the Ombudsman’s Office was enacted on January 25, 2010). An ad hoc commission has been charged with examining cases of torture and extrajudicial execution. In May 2013, the government, under the auspices of the Representative of the United Nations Integrated Bureau organized a seminar/workshop involving all political stakeholders in Burundi in the context of the improvement of the electoral code in preparation for the 2015 electoral deadlines. As well, the Government of Burundi organized a participatory forum on justice from August 5 to August 9, 2013 on the central theme of “Justice in Burundi,” from the Arusha Accords to the present. More than 400 participants from the public and private sectors as well as civil society and Burundi's development partners took part in this meeting, making useful and constructive recommendations for the consolidation of justice. Topics identified were the independence of the courts and the accountability of judges, the operation of the judicial system, the criminal system, penitentiary administration, access to justice, social and commercial justice, the allocation of resources, the professionalization and training of those involved in the justice system, ethnic balance and human resources management. The government will continue the efforts undertaken to ensure the sound operation of the democratic system, consolidate good governance, and promote the political and social dialogue 13. As well, the government will revise its social protection strategy and consolidate the social safety nets established for the poor and vulnerable. Since 2008, the government has taken a number of measures to protect vulnerable segments of the population against shocks. Temporary, targeted price reductions for imports of food and oil products most consumed by the poor have been combined with social safety nets (nutritional supplements, urgent food security measures, school canteens, distribution of kits to farmers, agricultural microcredit for the rural population, assistance for refugees and displaced persons, etc.). Moreover, to deal with the vulnerability of displaced persons, the government, with the support of the development partners, has in recent years implemented programs for the social reintegration of persons directly or indirectly affected by the Burundi conflict. As part of the gradual extension of the coverage of social protections to the entire population, the government will continue to implement the health insurance card (CAM) and its harmonization with the community health care mutuals. Finally, to increase agricultural output, the government has organized the distribution of seed and fertilizer to farmers, begun to rehabilitate the irrigation system on the Imbo plain and undertaken the rehabilitation of basic infrastructures. The government hopes to continue these programs in the coming years to improve the living condition of the poorest segments of the population. III Main Achievements of ERSG II, III, IV, V and VI 14. The reforms undertaken by the government reflect its commitment to achieving the development objectives of the PRSP. The reform program focuses on the following objectives: (i) consolidation of macroeconomic stability; (ii) structural reforms aimed at improving the public finance management system, monetary policy and exchange policy; and (iii) enhancement of the 46 effectiveness of the productive system, particularly via the privatization of public enterprises and the restructuring of the export sector (coffee, tea, cotton). In each of these areas, the ERSG series, together with the programs of other donors, has made it possible to make significant progress. 15. The implementation of broad public finance management reforms has had significant results. Parliament has adopted a new Public Finance Framework Law and a new Procurement Law. These two laws include modern management and transparency principles and set out the concepts, principles and responsibilities guiding the actions of public officials. A decree on the budget preparation process has been adopted and is being implemented. To improve the quality of public spending, a Public Expenditure Tracking Survey (PETS) was conducted in 2007 and resulted in the adoption of action plans in 2009 and a central Medium-term Expenditure Framework (MTEF) was introduced in the budget preparation process, ensuring consistency between the budget plans and the objectives of the PRSP. As well, the off-budget accounts were closed and commitment ceilings were established (in coordination with the sectoral ministries) to eliminate payments arrears and move toward consolidated cash management. To supplement these reforms, launched in the context of the first ERSG series, a Value-Added Tax Law was enacted on February 17, 2009 and all indirect tax exemptions were eliminated (this measure was included in the new tax code). In 2008, the government conducted a biometric census of the civil service, police and armed forces. The database established will be updated shortly and used to reconcile the HR and pay software database (OpenRH) and make it more reliable in preparation for the distribution of magnetic stripe ID cards to all government officials. 16. A Public Finance Management Strategy (PFMS) was adopted by the Council of Ministers in May 2009. The new strategy benefited from the lessons learned from the implementation of its predecessor and the Public Expenditure and Financial Accountability (PEFA) assessment. It includes an action plan for 2012-2014. Its implementation is regularly monitored via quarterly reports validated by the Public Finance Reform Steering Committee. The second strategy targets the same objectives as the first and is structured around 12 programs. Some of the key actions include: adoption of Law No. 1/02 of January 24, 2013 on income tax, the adoption in August 2013 by the Council of Ministers of the draft decree on the National Public Debt Committee (CNDP), the adoption in August 2013 by the Council of Ministers of the 2014-2016 medium-term expenditure framework (MTEF) and medium- term fiscal framework (MTFF), which are the main planning and budgeting tools, the adoption of Ministerial Order No. 540/1302 of July 31, 2012 setting out the powers, rules of operation and organization of the Expenditure Commitment Auditor, the adoption of Ministerial Order No. 540/1950/6/12/2012 establishing the public expenditure execution manual, and the preparation and validation of the expenditure commitment audit manual. Implementation of the latter three orders made it possible to: (i) improve the rate of expenditure execution; (ii) reduce the number of persons involved in the process, the five stages having been replaced by one: the expenditure commitment audit phase (CED); and (iii) reduce the time required to process files to 5 days. 17. Significant progress has also been made in the implementation of measures aimed at improving the business environment. A new Investment Code in line with international best practices was enacted in September 2008 and should help improve the business climate after harmonization with the new Tax Code. The Council of Ministers adopted a draft Commercial Code and a draft Public and Private Companies Code in accordance with international standards. These codes were created in a largely participatory process. The decree creating the public-private dialogue framework was signed by the President of the Republic in June 2008 and the Commercial Tribunal has reduced the number of disputes that take more than 60 days to deliberate by more than 10 percent. The new legislation reduces the cost and time required to start up a business. It improves transparency and accountability, increases investor confidence and establishes foreclosure procedures. The Burundi Investment Promotion Agency (API) has been fully operational since 2010. Management of the 47 financial sector has also progressed as a result of the adoption of a sectoral reform strategy. As well, Parliament has adopted a new law setting out the charter of the Central Bank of the Republic of Burundi (BRB), which strengthens its independence and governance. The BRB has also implemented important measures aimed at increasing the effectiveness of its internal controls and its risk management system in application of the recommendations of the IMF safeguards assessment report. It is also continuing to implement the project to strengthen the financial infrastructure and modernize the payment systems (RTGS and electronic clearing). All of these actions increase the effectiveness of the measures supported by the ERSG series. 18. Significant progress has been made in the reform of the coffee sector. After the adoption by the Council of Ministers of a government divestment strategy in 2008, a presidential decree established the Coffee Sector Regulation Agency (ARFIC), thus launching the process for the sale of government assets in the sector. Earlier, the government had adopted a new sales regulation, which opened coffee exports to local and international operators. The implementation of this regulation led new exporters to enter the market, which has become competitive and transparent. In addition to the creation of ARFIC, the ERSG supported: (i) national awareness campaigns on the advantages of the privatization of assets in the coffee sector; (ii) launching of the international public tender for the sale of those assets; and (iii) cancellation of the 30-year agreement between the Coffee Washing Stations Management Corporations (SOGESTAL) and the Burundi Coffee Board (OCIBU), which resulted in the sale of 13 washing stations to a reputable international group. Under the ERSG V, 28 washing stations and a coffee milling plant were sold to national operators and a foreign investor, respectively. Given that coffee is still the main source of income for approximately 800,000 households and a key source of foreign exchange, priority has been placed on increasing yields. Operations to this end have focused on: (i) distributing coffee inputs and equipment; and (ii) improving coffee farms, including redevelopment, size and maintenance. Also of note was the improvement in the quality of coffee, with the following important results: (i) an increase in the fully washed segment to 55 percent; (ii) an increase in the production of exportable coffee (23,739 metric tons of green coffee) and (iii) the construction of wastewater treatment systems for 18 washing stations. IV The ERSG VII Challenges 19. Implementation of the ERSG VII coincides with implementation of the PRSP II, which aims to achieve strong, sustained growth based on a profound transformation of the economy financed by domestic resources and grants. The EGSG VII will complete the reforms started by the previous ERSG series, while remaining aligned with the government program. As in the case of the ERSG VI, the government has looked for synergies in the definition of the prior actions for the ERSG VII. The PRSP II will therefore be the reference for the policies to be supported by the ERSG VII. V ERSG VII Prior Actions V.1 Strengthening Public Finance Management and Fiscal Transparency 20. Three measures are planned in this area: (i) submission to Parliament of the 2014-2016 MTEF and MTFF and the organization of pre-budget debates; (ii) dissemination of a Citizen Budget containing key budgetary information in the media and at the communal level; and (iii) validation of the database of civil servants following the updating of the data from the personnel census held in April 2008. 21. Preparation of the 2014-2016 MTEF and MTFF and organization of pre-budget debates. The 2014-2016 Central MTEF and MTFF were prepared and finalized in May 2013. These two budget guidance documents were adopted by the Council of Ministers in August 2013. The budget guidance letter for the preparation of the draft 2014 Budget Law, which was prepared on the basis of 48 the 2014-2016 Central MTEF, was submitted to the sectoral ministries on August 19, 2013. The budget policy document was also submitted to Parliament in August 2013. The first budget policy debate in the two chambers of parliament, held on August 29, 2013, constitutes an important step forward in strengthening external control over public finances. 22. Dissemination of a Citizen Budget containing key budgetary information in the media and at the communal level. To further promote the demand for good governance at the local level and ensure that budgetary allocations are made where services are provided and to encourage a culture of access to information, the government prepared summary notes entitled “Where Are My Taxes” that provide all essential information on the budget allocated to the various areas of national life, with particular emphasis on the education and health sectors. The summary notes, translated into Kirundi, were distributed to all communes around the country, organized into 4 regional groups 23. Validation of the database of civil servants following the updating of the data from the personnel census held in April 2008. Aware that the migration and integration of biometric data from the 2008 census in the 2010 database are of capital importance to ensure the accuracy of the list of civil servants by eliminating ghost workers for once and for all, the government appointed a Post- Census Steering Committee by Decision No. 570/876/CAB/2013 of July 18, 2013 of the Minister of the Civil Service, Labor and Social Security. This committee has already met several times and, in cooperation with the consultant hired to help implement the audit of civil servants, is in the process of finalizing an action plan. The mission of the committee is to: (i) provide strategic guidance for the updating of the data from the census of government officials held in 2008; (ii) validate all monitoring and assessment reports; (iii) define practical terms and conditions for this activity and establish ad hoc terms of reference; (iv) in cooperation with all levels of government and institutions concerned by this issue in the context of the achievement of the ERSG VII trigger, the committee decided on the practical terms and conditions and resources needed to complete this activity; and (v) carry out any other task deemed necessary to ensure the success of the post-census management. The career module of the HR management computer system (OpenRH) has been developed and the information on civil servant careers and their households has been updated. V.2 Promoting Private Sector Investment and Economic Diversification 24. Three measures are proposed in this area: (i) establishment and implementation of a one-stop shop for construction permits; (ii) increase in the budget allocated to irrigation and access roads over the previous year’s amount while respecting the MTEF allocations; and (iii) adoption of a Mining Code in line with international best practices. 25. Establishment and implementation of a one-stop shop for construction permits. With the return to stability, the Government of Burundi has undertaken a program of reform to improve the business environment and promote economic recovery and regional integration in the East African Community. The recent reforms resulted in the creation of a one-stop shop for the issuance of construction permits in March 2013. The one-stop shop issued 149 construction permits by August 19, 2013, 28 of which were issued to businesses. A procedures manual has been prepared, and a communications campaign has taken place to explain the new process for obtaining a construction permit. The time required has been reduced significantly, from 99 to 51 days, while the number of procedures has been reduced from 21 to 7. 26. Increase in the budget allocated to irrigation and access roads over the previous year’s amount while respecting the MTEF allocations. Based on the 2013 revised budget law, the budget allocated to the construction of agricultural access roads and irrigation works was increased by 36 percent in 2013. This increase was significantly larger than the planned increase, mainly owing to 49 the project for the construction of the Kajeke dam, the study on the management of dam construction wetlands, watershed management, and the project for the management of the Kagera basin. 27. Adoption and submission to Parliament of a Mining Code in line with international best practices. Aware of the opportunities offered by the mining sector for the diversification of exports and fiscal revenues, the government has undertaken to improve governance and transparency in the sector. To this end, it has undertaken the revision and modernization of the Mining Code to bring it into line with international standards. Intensive consultations were held in 2013 to achieve a consensus that protects Burundi's interests. The code was recently passed and enacted. V.3 Strengthen Social Protection to Reduce Vulnerabilities 28. Two measures are planned in this area: (i) the appointment of a technical committee responsible for preparing a comprehensive social protection strategy, along with an action plan for its implementation and an inventory of the existing social protection system; and (ii) completion of the household consumption survey and definition of the profile of vulnerability at the national level. 29. The appointment of a technical committee responsible for preparing a comprehensive social protection strategy, along with an action plan for its implementation and an inventory of the existing social protection system. The government has prepared a National Social Protection Policy Paper (PNPS), which was adopted by the Council of Ministers in 2011. This document provides for the establishment of three bodies: (i) the National Social Protection Commission (CNPS), responsible for political guidance of social policy and made up of 11 ministers under the chairmanship of the Head of State; (ii) the CNPS Technical Committee; and (iii) the Permanent Executive Secretariat. The CNPS has already been established; the process for the establishment of the CNPS Technical Committee is under way; and the Permanent Executive Secretariat is expected to be in place by January 2014. 30. Completion of the survey on household living conditions, including the definition of the profile of poverty at the national level, and the labor survey. A household health and population survey conducted in Burundi in late 2011 and early 2012 included a module on household consumption expenditures. The data are already available. Another survey on household living conditions, combined with the labor survey, is being prepared with financing from the IDB and carried out by AFRISTAT in partnership with the Burundi Economic Research and Statistics Institute (ISTEEBU). VI Other Measures Planned as Part of Future Operations (specifically ERSG VIII) VI.1. Strengthen Public Finance Management and Fiscal Transparency 31. In this area the government is planning to: (i) submit the draft 2015 budget law to Parliament by November 2014; (ii) organize training for ministerial inspection units and implement a work plan for joint inspections; (iii) conduct an audit of (a) the pay management system; (b) human resources management; and (c) SIGEFI; and (iii) prepare an action plan for implementation of the recommendations. To strengthen the MTEF, the government will prepare sectoral MTEFs for the Ministries of Agriculture, Education and Health that are consistent with the central MTEF, starting with the 2015 budget. VI.2 Improve the Legal and Regulatory Framework for the Promotion of Private Sector Investment and Economic Diversification 32. In this area the government plans to publish the detailed list of tax exemptions granted in the previous year, and an annex to the 2014 budget law will provide a realistic projection of tax exemptions for 2014 on the basis of actual results in the preceding three years. The government also plans to publish the rules for the preparation of urban development plans. 50 VI.3 Promote Private Sector Development 33. The government has already revised the Mining Code and plans to continue efforts to update all of the laws and regulations governing mining activities in Burundi. As well, to improve transparency in the mining sector, the government plans to apply for membership of the Extractive Industries Transparency Initiative (EITI). To this end, it will create an EITI commission and provide adequate resources for the implementation of a detailed activity plan to allow it to join the Initiative 34. Given the importance of the coffee sector in the economy and the role that it can play in the eradication of extreme poverty, the government plans to continue and complete the reform of the sector. To this end, it plans to prepare a program for the sustainable improvement of the sector’s productivity. In addition to finalizing the process for the privatization of washing stations, the government plans to support production in order to bring it up to potential levels. It will seek the assistance of the World Bank and other partners to rise to this challenge. VI.4 Strengthen Social Protection to Reduce Vulnerabilities 35. In this area the government plans to: (i) adopt the social protection strategy and begin to implement it and allocate the necessary funds (with the participation of the private sector); and (ii) carry out and publish the results of the PETS survey (including the evaluation of beneficiaries in the social sectors). VII Conclusion 36. These are some of the measures that have dominated and will continue to dominate the government’s work this year (2013) and next (2014). This program, which has been discussed with World Bank experts, has been closely monitored by the authorities. The government is committed to continuing its efforts and to working together with the Bank and other partners to ensure effective implementation of the program. To strengthen its cooperation with the Bank and facilitate discussions, the government undertakes to provide the information needed to monitor program implementation on a timely basis. 51 Annex 2: Coffee Sector in Burundi 1. Coffee sector plays an important economic and social role in Burundi. Coffee is the country’s main export, providing more than 61 percent foreign currency revenues in 2011, and representing 3.2 percent of GDP. About 600,000 rural households grow coffee, with an average of 300 coffee trees per household of which only one third is productive. These rural families are among the poorest in the country and coffee washing, drying, grading, storage, and other processing steps are for them, a significant source of employment. Mixed farming (coffee trees existing with subsistence crops such as bananas or beans) is practiced throughout the country on arable land, which is approximately 35 percent of the country’s total land area. Around 70,000 hectares, 2.3 percent of the country’s land area or 7 percent the arable land is under coffee cultivation. Figure 1: Number of coffee trees per household Figure 2: Share in total merchandise exports Ensemble Number of Manufactures 8% producing Ngozi Hides and skins Others coffee trees 5% 9% per Mumirwa household Cotton 0% Kirundo-Muyinga Number of Coffee non- Tea 17% 61% producing Kirimiro coffee trees per Kayanza household 0 100 200 300 400 Source: Coffee producers survey (2013) Source: MFPDE/ISTEEBU Figure 3: Production of green coffee in tons Figure 4: Productivity in kilograms per hectare 45,000 600 40,000 500 35,000 30,000 400 25,000 300 20,000 15,000 200 10,000 100 5,000 0 0 1990/91 1991/92 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 1990/91 1991/92 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 Source: MFPDE/ISTEEBU Source: MFPDE/ISTEEBU 2. Burundi coffee is of the Arabica species, though some Robusta production exists. The first Arabica coffee tree in Burundi was introduced by the Belgians in the early 1930s and coffee cultivation has been growing in the country ever since. There are two types of coffee processing methods in Burundi: washed and fully washed. Around 80 percent of the coffee is fully washed in washing stations; the remaining 20 percent is processed manually by hand pulping and sorting and by drying the parchment on sisal mats. Coffee production has steadily increased until 1993. From 5,000 tons in 1948, the production on green coffee reached 15,000 tons in 1965 and 35,000 tons in 1993, just before the conflict. The production reached its peak of about 45,000 tons in the early 80s. From 1980 to 1993, Burundi invested heavily in the coffee sector with assistance from the World Bank, engaging in an ambitious program of coffee washing station construction and tree planting. The number of coffee trees increased from 90 million to over 220 million and Burundi constructed and equipped 133 washing stations using wet process for the supply of fully washed coffee. Burundi has the potential for 52 exporting 60,000 tons annually of high quality Arabica during peak production years, but that potential as not been fully developed. 3. Since 1993 the production had shown a decreasing trend reflecting a steady decline in productivity. The production of green coffee per hectare that uses to fall between 300 to 500 kilograms in the 90s varies now between 100 to 350 kilograms per hectare, representing only two third (2/3) of the world average (550 kgs/ha) and one quarter (1/4) of the average yield in Brazil and Vietnam (1,400 kgs/ha). Also, the production has become more volatile with a two-year natural cycle characterized by a succession of good and bad year. Different initiatives have been taken in the past to increase production and productivity in the coffee sector at the different level of the value chain and the organizational structures of the sector. Some pilot projects have also been implemented or ongoing. For example, a closed USAID-project indicated that mulching, pruning, and applying fertilizers and pesticides could contribute to increase productivity by 30% and also directly affect quality, by minimizing cyclical fluctuations in production. Also, the Bank supports coffee landscape management for sustainable use of soil resources are an important aspect longer-term productivity. Ageing coffee trees have also contributed to production fluctuation and quality. In Burundi, about 33 percent of coffee trees are reported to be over 20 years old and due to be replaced. Lack of term credit available to coffee farmers, or a financing plan with support from government to assist farmers bridge the period of non-productivity of young trees, has constrained rejuvenation of the national coffee tree stock. 4. The complex relationship between the stakeholders and the lack of incentive and transparency in the fixation of the prices constrained also the productivity growth in the sector. The sector has been managed under different organizational structures, from coercive methods before independence in 1962 to the undergoing privatization since 1991. Today, the coffee value chain counts four categories of stakeholders and a regulatory body. At the first level, the production is entirely private with hundreds of thousands small farmers growing all the coffee trees and sending the coffee cherries to the processing system. At the second level are more than 100 Coffee Washing Stations (CWSs) of which 76 are state-owned, that receive the cherries and remove the seeds/beans before they are dried. The wet method requires the use of specific equipment and substantial quantities of water. The third level in coffee processing involves removing the last layers of dry skin from the now dry coffee, and cleaning and sorting it. This step is ensured by two big dry milling companies and small private enterprises. The fourth level involves several export companies since the liberalization of the export mechanism. The activities are supervised and regulated by a regulatory authority ARFIC. The pricing mechanism has recently evolved with the suppression of the stabilization fund and the link of the producer prices with the export prices. However, a revenue sharing mechanism is still applied without taking into account the real cost of each activity and distinction in quality. The producer is expected to receive 72 percent of the export receipts, the CWSs 16 percent, the SODECOs 5 percent, ARFIC 2 percent, and the remaining 5 percent other kind of taxes. Figure 5: Coffee sector value chain 5. With the entry of the private sector in the coffee processing industry, the revenue sharing mechanism is losing its relevancy. One of the most significant changes promoted by the reform of the 53 coffee sector in Burundi has been the privatization of the washing stations. The privatization has brought new players into the coffee industry, of which an international investor and owner of 13 CWSs and national private investors who own 28 washing stations. These entries have put preliminary light in the profitability of the CWSs and the sustainability of the current pricing mechanism. The coffee sector faced a dire financial situation with more than US$12 million in debts and US$10 million of negative equity for SOGESTALS, but the lack of accountability prevented efficiency gain and improvement in the management. While it is too early to assess the entire benefit from the privatization, there is evidence in the literature suggesting that overall the impact of coffee market reforms on producer prices had been positive in the long term (albeit with a risk of asymmetries in price transmission). Also, the experience of successful coffee reforms in neighboring Rwanda indicated that reforms could provide opportunities to farmers for growing higher quality coffee that would also increase the prices and generate growth for the country. 6. Findings from the recently completed PSIA suggest that the privatization of CWSs has not negatively impacted coffee growers’ livelihood. The proportion of coffee growers utilizing coffee receipts for food expenses has remained the same before and after privatization. Since privatization in 2009-2010, the average cherry coffee receipts per household is estimated at US$70 for those selling in public CWSs and US$94 per household for those selling in private CWSs. Furthermore, coffee growers experienced lower subjective poverty when trading with private CWS. In particular, those who sold cherry coffee mainly to private washing stations experienced better overall socioeconomic situation. By analyzing the subjective poverty from the June 2013 coffee grower survey, significant differences were noticed between public and private destination of the cherries. Overall, 40 percent of the coffee growers who brought their cherries mainly in private washing stations declare themselves poor while 52 of those who brought cherries in state-owned washing stations declared themselves poor. 7. The Government is aware of the problem in the sector and intends to use a holistic strategy, including the continuation of the privatization of the sector to address the sectoral issue at all levels of the value chain. The priorities appear to be to improve farmer organization, strengthening of INTERCAFE, and clarification of extension responsibility. Timing and packaging of the third tranche of coffee washing stations are also important steps, but the strategic options need to be clarified. The government’s new agenda will benefit from results emerging from the PSIA with World Bank support. Consultations with key stakeholders will be important to confirm the main needs and opportunities, to assess where the Bank can most constructively focus its efforts, in coordination with other external partners, and to gauge practical paths that take into account national political and economic calendars. 8. The World Bank Group will also adopt a multi-sectoral approach to accompany the reform in the coffee sector. An immediate starting point is to conduct a quick assessment of the sector, followed by a joint WBG team (FPD, SD, PREM, and IFC MAS/Agri and IC) with the latter to support the definition of a PPP program. These would examine the potential for greater support and impact through adjusted and coordinated deployment of existing projects and instruments in the country program. The proposed ERSG operation will continue to focus on the policy side and will benefit from the sector assessment. 9. An Action Plan is already in place to mitigate potential environmental risks and sustain the benefits generated throughout the coffee’s value chain. At the production phase, the Action Plan suggested the implementation of a training program on shade-grown coffee and sustainable land and water management (including integrated pest management). This program would address the risk of increased land degradation due to agrochemical pollution from the uncontrolled use of pesticides, 54 the use of coffee farmers of marginal lands on steep slopes and the elimination of shade cover on many hillsides. At the processing phase, an increase in coffee production without any efficient technology or specific regulations may lead to an increase in the demand for water as well as increased water pollution from coffee dumped into the rivers. The Rapid Strategic Environmental Assessment suggested the need to promote the issuance of environmentally sound standards, and regulations for the coffee washing stations and the development of studies about the potential for recycling water economically in the CWSs. At the marketing phase, the assessment recommended the development of a coffee certification program and a marketing study for the potential of coffee to access niche markets and diversification strategies. Finally, the Action Plan suggested the need to work in Protected Areas in order to adequately manage the possibility that some farmers could expand their plantations to the remaining pockets of forest within protected areas. The implementation in ongoing, with a support from the GEF project and will facilitate an enabling environment for a long-term sustainable coffee sector. 55 Annex 3: Burundi ERSG VII – Lessons Learned from Other IDA operations The lessons of these operations can be summarized as follows: • Bank-financed Development Policy Operations had a major influence on government policies. Specifically: (i) they helped stabilize the economy and improve public finance management systems; and (ii) they encouraged the government to give high priority to pro-poor public spending in key economic and social sectors. • Selectivity and donor coordination is important in the selection of prior actions and triggers. The design of some DPOs (notably ERC and ERSG I) was too complex 23 and beyond the capacity of weak public institutions in a post-conflict situation. This was exacerbated by the need for the government to implement policy reforms supported by other donors, which, according to government officials, served the same objectives as the Bank’s program, but whose conditions and timetables were not always fully consistent with specific aspects of Bank operations. • ERC and ERSG I addressed politically sensitive privatization and export crop restructuring issues, which should have been better prepared, both technically and politically. This preparation should have included not only detailed diagnostic studies, but also extensive consultations with all stakeholders, including farmers’ organizations and potential domestic and foreign investors. The Economic Management Support Project (EMSP), approved by the Board in 2004 and restructured in 2007, eventually financed these studies and extensive consultations with stakeholders were organized in 2008. • ERSG II and III adopted a programmatic approach to reform, thus helping to ensure the continuity of reforms in an otherwise unpredictable post-conflict policy environment. By approaching complex reforms, such as that in the coffee sector, in a gradual programmatic manner, the government was able to build buy-in and make progress on more politically sensitive reforms. • It is more effective to continue reforms in which the government has already taken ownership, than to begin reforms in new domains. ERSG II and III built off reforms, where a strong dialogue had already been established with the authorities under earlier operations (ERC and ERSG I), or where the government advised they hoped to make progress. The design of the proposed programmatic series also benefits from lessons learned from, and synergies with, other on-going and forthcoming IDA funded operations. • The relative success of the public finance management components of the Bank’s program is largely due to the achievement of IDA’s EMSP. The project provided financial technical assistance support for the design of major PFM reforms, including preparation of new codes (e.g., organic law of finance, and procurement code), census of the public service workforce, implementation of PFM-related capacity-building programs, and introduction of PFM information systems. It also supported the design and implementation of the preferred strategic option for the reform of the coffee sector and the privatization of processing facilities in the sector. Most of the business environment legislations so far enacted (e.g., Commerce Code, Company Code, and Investment Code) were supported through EMSP, with complementary support from the IFC. The preparation of business environment-related implementation texts are 23 ERSG I had two tranches, 12 prior actions and nine triggers. 56 expected to be undertaken with support from the Financial and Private Sector Development Project currently managed by the project implementation unit (PIU) of EMSP. • With respect to the involvement of beneficiaries in the assessment of public services, the proposed operation series draws lessons from two existing projects: (i) The Burundi Community and Social Development Project (PRADECS), which supports the newly designed policies of the various sectorial ministries to reach out to the rural poor by putting them at the center of the daily management of the basic social infrastructure that benefit them; and (ii) the Health Sector Development Support project, which is currently experimenting in performance based financing. Lessons learned from their preliminary experience should help to enrich the analytical base for looking at the quality of service delivery and the effective use of beneficiary assessment and performance based budgeting in future operations. • There are strong synergies between the reforms supported in the proposed programmatic series and the activities of the Agro-Pastoral Productivity and Markets Development Project approved by the Board (May 2010). The PAD for this project recognizes that, “on- going and projected reforms in the coffee and tea sectors, as well as the development of small entrepreneurs in the horticulture subsector are vital to increasing the contribution of export crops to growth. This will depend critically on increased productivity, as well as on improvement of the investment climate and access to rural finance.” The new agricultural operation will help to spur growth in the rural sector through support to agricultural productivity and improved access to markets. • The Multi-Sectorial Water and Electricity Infrastructure Project and the Emergency Energy Project (grant of IDA’s Crisis Response Window) focus on urgent investments to rehabilitate the energy and water sector. While this project also supports the strengthening of the capacities of the public utilities company, later operations in the programmatic series will attempt to reinforce these efforts by supporting much needed reforms of the sector. • The Financial and Private Sector Development Project (FPSDP), already managed within the same project implementation unit as ESMP, is supported targeted reforms in privatization and public-private dialogue. The project also supports follow-on activities which started under EMSP. These include, among others, technical assistance to improve performance and corporate governance of PEs by reinforcing SCEP’s overall capability and monitoring of PEs, and supporting ongoing privatization efforts, and promoting public-private dialogue by strengthening the institutional framework of private, parastatal, and public enterprises that are pivotal to private sector development and regional integration (i.e., the Arbitration Center, the Chamber of Commerce, the Association of Women, etc.). • The IFC also supports a complementary set of advisory services. In the past several years the IFC has taken a key role in supporting the business environment through investments and advisory services to government and businesses. In the financial sector, the IFC Financial Advisor Service is currently scoping potential interventions, including agribusiness and SMEs. It is also expected that the IFC Investment Climate Team, in cooperation with the IFC Conflict Affected States in Africa (CASA) program, will help the authorities to undertake a range of reforms including: (i) Doing Business; (ii) business taxation; (iii) public-private dialogue; (iv) support to the implementation of the EAC Common Market Protocol; and (v) reform communication. • Finally, the Emergency Demobilization and Transitional Reintegration Project (and its predecessor operation the Burundi Emergency Demobilization, Reinsertion and 57 Reintegration Program), support the ongoing reforms by helping the authorities to resolve some of pressing issues related to the transition to peace. The demobilization process of ex- combatants is complementary to the on-going reforms in PFM as demobilization has created some fiscal space for other priority and social expenditures (see PEMFAR 2008 for more details). Further, by providing support to demobilized ex-combatants, this project help to alleviate some of the short term political and social pressures the authorities face working in a fragile state, so that they are able to take on forward looking reform efforts. 58 Annex 4: Burundi ERSG VII - Good Practice Principles on Conditionality Principle 1: Reinforce country ownership The Government of Burundi is strongly committed to the reforms supported under the operation. The grant supports the government’s PRSP, which was developed in a participatory manner involving consultation of a wide range of stakeholders and including 17 provinces and sectors. The process was led by the Permanent Secretariat for Monitoring Economic and Social Reforms, with the support of international partners and local non-governmental organization (NGOs), quantitative and qualitative surveys were undertaken in all the provinces and more than 145 grassroots civil society groups were consulted. The Bank has actively supported the government in this process. The new PRSP, under preparation, is following the same participatory process. Principle 2: Agree up front with the government and other financial partners on a coordinated accountability framework The government and the budget support donors have agreed on a common framework “Cadre de Partenariat” and the government is implementing a PFM action plan based on the PEMFAR (2008) and the PEFA (2009) around which donors can consolidate their support. Principle 3: Customize the accountability framework and modalities of Bank support to country circumstances The ERSG series is fully aligned with the PRSP and has been developed through extensive consultations with the government, the private sector, and development partners. The ERSG series should be seen as the overall umbrella for the Bank’s support and policy dialogue, which is complemented by specific projects providing focused investment assistance. Budget support is seen as necessary instrument to address the budgetary needs of Burundi while strengthening the government’s systems. The series is designed to give the necessary space to develop critical, but sensitive, reforms in coffee and public enterprise reform as well as reviewing progress made in the energy sector reform. This approach is fully consistent with the government objectives, and in some areas broadens the setting of the policy dialogue to multiple stakeholders, beyond government policy declarations. Principle 4: Choose only actions critical for achieving results as conditions for disbursement The ERSG series focuses on a few selected prior actions and triggers that are based on the PRSP. The prior actions and indicative triggers were chosen based on extensive discussions with the authorities and the private sector to identify the actions that would be critical steps for implementing the government’s program within a realistic timeframe. They would provide meaningful outcomes and help loosen major constraints or facilitate further reforms. A higher number of measures are included in the policy matrix (Annex 8) as measures of progress to monitor the overall progress of the reform program. Principle 5: Conduct transparent progress reviews conducive to predictable and performance-based financial support A full and close supervision of the program progress review will take place in line with the agreed Partnership Framework between the Government of Burundi and the budget support donors. 59 Annex 5: IMF Assessment of Recent Economic Performance Press Release No. 13/328 September 6, 2013 The Executive Board of the International Monetary Fund (IMF) today completed the third review of Burundi’s performance under the program supported by the Extended Credit Facility (ECF) arrangement. Completion of the review will allow for the disbursement of an amount equivalent to SDR 5 million (about US$7.5 million), bringing disbursements under the arrangement to an amount equivalent to SDR 15 million (about US$22.6 million). In completing the review, the Board also approved a request for a modification of performance criteria for end-September and end-December 2013, and the continuous performance criterion on nonconcessional external debt contracted or guaranteed by the government or the Bank of the Republic of Burundi. Burundi’s three-year ECF arrangement was approved on January 27, 2012 (See Press Release No.12/35) with total access equivalent to SDR 30 million (about US$45.3 million). At the conclusion of the Executive Board’s discussions, Mr. Naoyuki Shinohara, Deputy Managing Director and Acting Chair, made the following statement: “Burundi has made progress under the ECF-supported program amidst challenging socio-political and economic circumstances. Economic growth is expected to pick up, while inflation has been declining aided by moderating international food and fuel prices and tight monetary policy. The medium-term economic outlook remains difficult, with downside risks arising from uncertainties in the external environment, and the influx of refugees stemming from the conflict in Eastern Congo. Strong commitment to program policies and structural reforms remains critical going forward. “Revenue slippages that emerged were addressed through corrective measures which formed the basis for a revised budget that was adopted by parliament. A recommitment to revenue mobilization notably by further strengthening tax administration and containing exemptions is critical to the success of the program. Efforts are also needed to enhance public financial management reforms. “Debt sustainability remains the anchor for medium-term fiscal policy. Burundi continues to be at high risk of debt distress, and it will be important that any future borrowing relies mainly on grants and highly concessional loans. The ongoing finalization of a debt law governing the contraction of debt constitutes an important step towards strengthening the public debt management framework. “Monetary policy should continue to focus on stabilizing inflation expectations. While underlying inflation has declined significantly in recent months, a potential fiscal deterioration financed by recourse to central bank financing could reignite inflation and reverse recent gains. Maintaining exchange rate flexibility will allow the economy to adjust to external shocks,” Ms. Shinohara stated. IMF COMMUNICATIONS DEPARTMENT Public Affairs Media Relations E-mail:publicaffairs@imf.orgE-mail: media@imf.org Fax: 202-623-6220 Phone: 202-623-7100 60 Annex 6: Burundi ERSG VI-VIII Results Framework POLICY ACTIONS Target Medium Term Baseline Outcome indicators Objectives ERSG VI prior actions ERSG VII prior actions ERSG VIII Triggers (Year) 2015 The Recipient has issued and submitted to Parliament (for information) the 2013-16 COMPONENT 1: STRENGTHENING PUBLIC FINANCE MANAGEMENT AND BUDGET The Recipient has adopted and Indicator 1: Gap between MTEF and 17.3% Strengthening Medium Term Fiscal The Recipient has prepared 10% submitted to its parliament, for budget (in percentage of budget) (2012) strategic and Framework (MTFF) together sectoral MTEF in three informational purposes only, budget with the budget framework ministries consistent with the the 2014-2016 Budget planning to letter for the 2013 budget. central MTEF, the budget Orientation Document (BOD) improve the The Recipient has issued a draft framework letter, and the Budget and the budget framework letter quality of decree on budget governance Orientation Document for the consistent with the BOD for the Indicator 2: Delay (months) in budget public intended to redefine the preparation of the 2015 budget preparation of its 2014 budget presentation to Parliament (difference 2 months spending procedures for drafting, law. 0 law Prior action #1 between month of presentation and legal (2012) submitting, and voting the month, which is October) budget as well as for budget execution and control. The Recipient has disclosed to Indicator 3: Estimated value of tax The Recipient undertakes the 23.8% the public the full itemized list of exemptions as a share of total tax 15% TRANSPARENCY publication of the decisions of (2011) Reinforcing tax exemptions granted over the revenues. public procurement (selected transparency past year and the budget firms, contract amounts and The Recipient has published, and efficiency document clearly specifies the classification of the main the 2013 Citizen Budget in Indicator 4: PEFA indicator PI19- iii of PFM, estimated amount of tax bidders) and activity reports on French and Kirundi on public access to public procurement D (2012) B procurement exemptions as a share of tax the website of the Ministry in highlighting information on Information improved from D to B and controls revenues. charge of Finance with the sectoral budget allocations on a and exception of contracts of secret Government website and has Indicator 5: Share of communes where stimulating The Recipient has published an 26.5% nature (pursuant to the law) and disseminated it to the 17 budget information tables are available 100% the demand independent audit of the public (2012) contract whose amount is below communes. Prior action #2 for good procurement contracts awarded the thresholds requiring DNMP Indicator 6: Share of public governance in 2011 and 2012 and established review. procurement contracts (value) awarded <10% an action plan to address the <10% on a sole basis. (2011) identified weaknesses The Recipient establishes through a joint ministerial ordinance (Minister in charge of The Recipient has updated and Streamlining The Recipient has cleaned the Indicator 7: Share of civil servants Finance and Minister of Civil consolidated the civil servant public wage HRMIS database using the within HRMIS who are identified or 0% administration) of a center for database (HRMIS) and has 100% bill and HR updated biometric civil servant registered in the biometric census (2013) processing of the payroll and implemented the career management census database. database career management (and the module. Prior action #3 appointment of the Head of the center). 61 Medium Term POLICY ACTIONS Baseline Target Outcome indicators Objectives ERSG VI prior actions ERSG VII prior actions ERSG VIII Triggers (Year) 2015 Improving the Indicator 8: Number of days to obtain a 137 COMPONENT 2: PRIVATE SECTOR INVESTMENT PROMOTION legal and construction permit at the new “Guichet 90 The Recipient established and (2012) regulatory The Recipient operates a Unique” (one stop shop). rendered operational a Guichet framework “Guichet Unique” for business Unique (One Stop Shop) for for the start-up to reduce processing Indicator 9: Number of days to create a construction permits Prior promotion of time and costs business at the “Guichet Unique” (one 11 (2009) 5 action #4 private sector stop shop). AND ECONOMIC DIVERSIFICATION investment Improving The Recipient’s Interministerial The Recipient has increased its The Recipient has launched the Indicator 10: Percentage of budget 2.2% 3% agriculture Committee for Privatization has allocation for feeder roads and privatization process for the allocated to the (2012) productivity authorized the SCEP to prepare irrigation under the 2013 remaining coffee washing construction/maintenance of feeder the launching of the third phase Budget Law in line with the stations and initiated the roads and small scale irrigation. for the sale of the 76 coffee 2013-2015 MTEF Prior action evaluation of the offers. washing stations remaining by #5 The Recipient has designed and preparing a list of public assets validated a program to improve (including 76 coffee washing the productivity of the coffee Indicator 11: Share of the private sector stations) to be privatized. The sector. 35% in the ownership of the Coffee Washing 60% list will be submitted by the (2013) Stations Council of Ministers to Parliament as required by the Law. The Recipient has completed an Promoting The Recipient has promulgated EITI scoping study with an the a mining code 24 acceptable to action plan to complete the Indicator 12: The number of EITI pre- 0 development =====> 4 the Association. Prior action necessary requirements for pre- candidacy steps completed (2011) of the mining #6 candidacy for the EITI sector membership. The Recipient has appointed a STRENGTHENING task force to oversee the The Recipient has adopted a COMPONENT 3: Strengthening PROTECTION development of a comprehensive strategy of safety Indicator 13: Existence of a Does not safety nets =====> Exists comprehensive social nets, which include an action comprehensive Social Safety Strategy exist SOCIAL systems protection strategy and action plan and proposed financing. plan for implementation Improving The Recipient has finalized a The Recipient has carried out Indicator 14: Availability of household Last Vulnerability targeting of Household Expenditure Survey =====> and disclosed an updated consumption data and vulnerability available Assessment vulnerable to update the National Poverty National Vulnerability Profile. assessment. data 2006 available groups Profile. Prior action #7 24 The code includes clear fiscal regime, local content provisions, right to obtain an exploitation license for holders of an exploration license, and clear process for approval of licenses with a timeframe for approval of feasibility plans. 62 Annex 7: Burundi at A Glance 63 64 65 IBRD 33380 BURUNDI SELECTED CITIES AND TOWNS MAIN ROADS PROVINCE CAPITALS PROVINCE BOUNDARIES NATIONAL CAPITAL INTERNATIONAL BOUNDARIES RIVERS 29°E 30°E 31°E Lake This map was produced by the Map Design Unit of The World Bank. To Kigali Kivu The boundaries, colors, denominations and any other information shown on this map do not imply, on the part of The World Bank Group, any judgment on the legal status of any territory, or any To endorsement or acceptance of such boundaries. Gitarama Kagera Lake Lake Rweru Cohoha R WANDA KIRUNDO To Cyangugu Kirundo To Butare To Rulenge u ar y u an uv uv K R CIBITOKE MUYINGA NGOZI Muyinga To Cibitoke Nyakanura Ngozi Kayanza Rusiba 3°S Musada Ruvuvu 3°S Buhiga To Bubanza AYA A K AYYA N Z A Karuzi si Kakonko M w eru BUBANZA izi KARUZI CANKUZO Rus vu Cankuzo vu Muramvya V YA Ru R AM MU To Uvira BUJUMBURA L uvironza Gitega WA R O M WA RA Ruyiga DEM. REP. Mwaro RUYIGI BU OF CONGO GITEGA To Kibondo M gu JU p un Mt. Heha U Rum (2,670 m) Bukirasazi B Matana TA NZA NIA BURURI Mutangaro R U TA N A Bururi Most distant Rutana Rumonge headwater of the Nile River 4°S 4°S Makamba BURUNDI MAKAMBA z i ara Mabanda r ag Mu Lake Nyanza-Lac Tanganyika To Kasulu 0 10 20 30 40 Kilometers 0 10 20 30 Miles 29°E 30°E 31°E SEPTEMBER 2004