IMF Approves US$75.6 Million PRGF Arrangement for Burundi

The Executive Board of the International Monetary Fund (IMF) today approved a three-year SDR 46.2 million (about US$75.6 million) arrangement under the Poverty Reduction and Growth Facility (PRGF) for Burundi, to support the implementation of the country's poverty reduction program and its efforts to consolidate macroeconomic stability. It takes into account the financial impact of rising world food and oil prices in 2008.
The Executive Board's approval enables Burundi to draw an amount equivalent to SDR 6.6 million (about US$10.8 million) under the PRGF arrangement.

Following the Executive Board's discussion, Mr. Murilo Portugal, Managing Director and Acting Chair, said:
"The Burundian authorities are to be commended for the progress they have made in implementing Burundi's first PRGF-supported program in a difficult post-conflict environment. Though structural reforms have been slow, most monetary and fiscal reforms have progressed well. However, despite the progress made, poverty remains widespread, and the challenges for Burundi in meeting the MDGs continue to be significant.
"The new three-year PRGF-supported program, anchored in Burundi's Poverty Reduction Strategy Paper, is designed to reduce inflation to single digits; ensure fiscal sustainability in the face of heavy debt; improve the composition of spending; strengthen public financial management and enhance governance; and accelerate structural reforms to stimulate growth and reduce poverty.

"The authorities' fiscal program for 2008 targets a substantial increase in capital spending, while accommodating additional spending to boost agricultural output and help alleviate the impact of increasing food and fuel prices on the poor.
"The success of the authorities' PRGF-supported program will depend, in part, on strong and coordinated assistance from the international community. Accelerating structural reforms, most notably on governance issues, will also be critical," Mr. Portugal said.

The approved PRGF arrangement for Burundi succeeds an arrangement that expired earlier this year. The PRGF is the IMF's concessional facility for low-income countries. PRGF loans carry an annual interest rate of 0.5 percent and are repayable over 10 years with a 5½-year grace period on principal payments.

ANNEX

Recent Economic Developments
Economic growth decelerated in 2007, while inflation increased, mostly driven by rising food and energy prices. Higher grants disbursement from international donors contributed to an improved fiscal position and helped build international reserves.
After an upturn in 2006, real GDP growth decelerated from 5 percent to 3.6 percent in 2007, mainly because of a poor coffee harvest. End-period inflation increased to 14.7 percent, from 9.3 percent in 2006, owing to higher international commodity prices and exchange rate depreciation. In the first four months of 2008, domestic prices of fuel and basic staples rose on average by 23 percent, pushing the overall inflation rate to 11.7 percent during the same period. Excluding food and oil, the inflation rate would be about 3.5 percent.
The overall fiscal position improved in 2007. The overall fiscal balance (on a commitment basis and after grants) shifted to a surplus of 0.5 percent of GDP from a deficit of 1.8 percent in 2006. Social spending was estimated to have increased from 8.7 percent of GDP in 2006 to 9.2 percent in 2007. The authorities have implemented a number of measures with a view to ensuring fiscal discipline and improving transparency in public finances.

Program Summary
The purpose of the new PRGF arrangement will be to consolidate macroeconomic stability, further reduce the heavy debt burden, and help the government of Burundi pursue implementation of its Poverty Reduction Strategy Paper. It will also support the government's efforts to obtain debt relief under the enhanced Highly Indebted Poor Countries (HIPC) Initiative and the Multilateral Debt Relief Initiative (MDRI).

The main objectives of the new three-year PRGF program will therefore be to:
• Return to single-digit inflation. An independent central bank with price stability as its principal mission will be essential for this purpose. Better budget and monetary policy coordination will also be essential, especially during this period of increasing inflationary pressures.
• Improve the composition of public spending to the benefit of the priority sectors, while preserving fiscal sustainability. To that end, the wage bill will have to be controlled. It will also be important to rely mainly on grants and highly concessional loans to avoid unsustainable debt.
• Strengthen public financial management (PFM). The program will seek to stabilize the existing PFM system, with particular attention to two ongoing initiatives: (1) the passing and gradual implementation of the new budget organic law; and (2) consolidation of a single Treasury account and an effective cash flow management plan; and
• Strengthen the internal control systems of the central bank. Emphasis will be placed on parliamentary passing of the draft central bank law and on the implementation of a number of financial safeguard measures to strengthen internal controls and risk management systems.
Provided that the public security situation continues to improve, the macroeconomic objectives are as follows for the period of the PRGF program: (1) GDP growth should average 5 percent over the medium term, up from the average of 3.6 percent in 2004-07; and (2) inflation would slow to about 6 percent by 2011.

The projected growth pattern, which resembles those observed in other post-conflict countries, is predicated on three factors: (1) continued removal of major economic distortions, especially in the coffee sector, which will boost total factor productivity; (2) a substantial increase in investment, driven by international aid and largely consisting of infrastructure renovation, which will help relieve major supply bottlenecks; and (3) further advances in trade liberalization with accession to the East African Community, which will help diversify the economy, stimulate competition, and attract more investment.

The International Monetary Fund