Burundi’s medium-term economic outlook remains difficult, with downside risks arising from political uncertainties ahead of the 2015 elections, according to Naoyuki Shinohara, Deputy Managing Director of the International Monetary Fund (IMF).
In addition, Shinohara said in a statement released Wednesday that the east-central African country faces vulnerabilities to external shocks given its narrow export base, and the large influx of refugees.
He made the remarks following the IMF Executive Board’s discussion of Burundi’s economic performance under a three-year programme supported by the Fund’s Extended Credit Facility (ECF).
Though the country has made satisfactory progress under the ECF arrangement, the IMF executive directors have underscored the need for authorities in Burundi to strengthen public financial and debt management to mitigate fiscal risks.
Economic growth is expected to pick up to about 4.7 percent in 2014, while inflation has been declining aided by moderating international food and fuel prices and stable monetary conditions.
Shinohara emphasised that sustaining revenue mobilisation, enhancing tax administration, and rationalising discretionary exemptions are critical to the success of Burundi’s economic programme.
“Monetary policy should continue to focus on stabilising inflation expectations. While underlying inflation has declined in recent months, a potential fiscal deterioration financed by recourse to central bank financing could reignite inflation and reverse recent gains,” he warned.
Observing that debt sustainability remains the anchor underpinning medium-term fiscal policy, Shinohara added that Burundi continues to be at high risk of debt distress.
Both the IMF and the government of Burundi were of the view that it is important for the country to rely mainly on grants and highly concessional loans to finance capital intensive projects.
Burundi’s parliament was expected to pass a new debt law in September, which will provide an overarching framework for effective public debt management and policy. The law has been prepared with IMF technical assistance.
Meanwhile, the IMF staff, who in June 2014 held discussions with the officials of Burundi on economic developments and policies in the country, reported that governance issues or delays in making measurable progress in public financial management (PFM) reforms, and heightening of political tensions could curtail donor support.
“Reintegrating repatriated refugees is likely to add to unemployment pressures, increase demand for public services, and exacerbate social conflict over access to land,” the report said, also pointing out that unions were clamoring for wage increases in the run-up to the 2015 presidential election.
The IMF team, however, affirmed that Burundi’s response to past IMF advice has been broadly satisfactory and the country “has maintained macroeconomic stability”.
Fiscal adjustment in the face of declining budget support and tighter monetary policy in response to the food and fuel shocks have reduced inflation to single digits and stabilised the exchange rate.
Macro-critical reforms in the coffee and electricity sectors have progressed, while improvements in the business climate have been noteworthy.
Though the Fund continued to support the authorities’ reform efforts through policy advice and technical assistance, the report said, “weaknesses in revenue mobilisation persist and warrant a redoubling of efforts”.
On poverty reduction, the IMF report said progress has been mixed as achieving higher growth proved difficult in the face of large food and fuel shocks and inadequate financial resources.
In particular, revenue mobilisation has proven to be challenging, and when combined with aid volatility, constrained the implementation of a sustainable medium-term expenditure framework.
“A limited supply of electricity punctuated by frequent blackouts, stymied growth and proved insufficient to put a major dent in poverty,” said the IMF staff report.
In spite of the constraints, public access to basic services improved, with primary school enrolment reaching almost 100 percent and achievement rates rising appreciably while social protection programes in the health and education sectors have borne fruit.
“The authorities continue to pursue policies aimed at developing critical infrastructure, the modernisation of the agricultural sector including through privatisation of coffee, promoting tourism, and greater financial inclusion in order to boost medium-term growth,” said the report.