Document of The World Bank FOR OFFICIAL USE ONLY Report No. 36723-BI INTERNATIONALDEVELOPMENT ASSOCIATION PROGRAMDOCUMENT FOR A PROPOSEDGRANT INTHE AMOUNT OF SDR40.4 MILLION (US$60 MILLIONEQUIVALENT) TO THE REPUBLIC OF BURUNDI FOR AN ECONOMIC REFORM SUPPORT GRANT July 6,2006 Poverty Reductionand Economic Management3 Country Department 09 Africa Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bankauthorization CURRENCY EQUIVALENTS (Exchange Rate Effective M a y 31,2006) Currency Unit = BurundiFranc (FBu) US$1 =FBu 1,100 SDRl =USl.48703 WEIGHTS AND MEASURES Metric System FISCAL YEAR January 1 - December 31 ABBREVIATIONS AND ACRONYMS ALCOVIT Aliments Compose's Vitamine's (Mixed Vitaminized Food) APB Abattoirs Publics de Bujumbura (Slaughterhousesof Bujumbura) APMs Armed Political Parties and Movements AU African Union BCB Banque de Cre'ditde Bujumbura (Credit Bank of Bujumbura) BCC Burundi Coffee Company BRB Banque de la Re'publiquedu Burundi (Central Bank of Burundi) CAS Country Assistance Strategy CET Common External Tariff CFAA Country FinancialAccountability Assessment CIP Comite'Interministe'riel de Privatisation (Inter-Ministerial Committee of Privatization) CNCA Comite'National de Coordination des Aides (National Aid Coordination Committee) CNDD-FDD Comite'Nationalde De'fense de la De'mocratie- Forcespour la De'fense de la Ddmocratie (National Council for the Defense of Democracy - Forces for the Defense of Democracy) CNE CommissionNationale de 1'Environnement(National Commissionfor Environment) COGERCO Compagniede Ge'rancedu Coton (Cotton Management Company) COMESA Common Market for Eastern and SouthernAfrica COTEBU ComplexeTextile de Bujumbura (Textile Complex of Bujumbura) CPI Consumer Price Index CPIP Country Procurement Issue Paper CWIQ Core Welfare Indicators Questionnaire DAF DirectionAdministrative et Financibre (Administrative and Financial Directorate) DDR Demobilization, Disarmament, and Reintegration EERC Emergency Economic Recovery Credit EMSP Economic Management Support Project (Projet d'Appui a la Gestion Economique, PAGE) EPB Etablissementdu Port de Bujumbura(Port of Bujumbura) ERC Economic Rehabilitation Credit ERSG Economic Reform Support Grant EU EuropeanUnion FAB Forces Arme'es Burundaises (BurundianArmed Forces) FADS AdministrativeandFinancialDirectorates FBu BurundiFranc FIRST FinancialSector Reform and StrengtheningInitiative (Initiativepour la Re'forme et la Consolidation du Secteur Financier) FNL-PALIPEHUTU Forces Nationales de Libe'ration-Parti pour la Libe'ration du Peuple Hutu (NationalLiberationForces-Partyfor the Liberationofthe HutuPeople) GDP Gross Domestic Product GNP GrossNationalProduct HIPC HeavilyIndebtedPoor Countries HIV/AIDS HumanImmunodeficiency Virus/AcquiredImmunodeficiencySyndrome ICR ImplementationCompletion Report IDA InternationalDevelopmentAssociation IF IntegratedFramework IFC InternationalFinance Corporation IFMIS IntegratedFinancialManagementInformationSystem IGE Inspection Ge'ne'ralede 1'Etat (State GeneralInspection) ILO InternationalLabor Organization IMF InternationalMonetary Fund I-PRSP InterimPovertyReduction Strategy Paper I S N InterimStrategy Note ISTEEBU Institut de Statistique et des Etudes Economiques du Burundi (Instituteof Statistics andEconomic Studieso f Burundi) LDP Letter of DevelopmentPolicy MDGs MillenniumDevelopmentGoals MDRP Multi-CountryDemobilizationandReinsertionProgram MFIs MicrofinanceInstitutions MICS MultisectoralIndicatorsCluster Survey MINEDUC MinistryofNationalEducationandCulture MOF Ministry o fFinance MTEF Medium-TermExpenditureFramework NGO Non-GovernmentalOrganization OCIBU OfJice de Cafi du Burundi (Coffee BoardofBurundi) ONAPHA OfJiceNational Pharmaceutique (NationalPharmaceuticalBoard) ONUB UnitedNationsOperationinBurundi OPHAVET Office Pharmaceutique Ve'terinaire(VeterinaryPharmaceuticalOffice) OTB Office du The' du Burundi (TeaBoardof Burundi) PER PublicExpenditureReview PETS Public ExpenditureTrackingSurvey PFM PublicFinanceManagement PRAP ProcurementReformActionPlan PRGF Poverty Reductionand GrowthFacility PRSP Poverty Reduction Strategy Paper SCEP Service Charge'des Entreprises Publiques (Office incharge of Public Enterprises) FOROFFICIAL USE ONLY This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not be otherwise disclosed without World Bank authorization. SIVCA Socie'te'Industriellede Valorisation du Cafe' (Industrial Company for Coffee Valorization) SOCABU Socie'te'd 'Assurancedu Burundi (BurundiInsuranceCompany) SODECO Socie'te'de Dtparchage et de Conditionnement (Coffee Curing and Packing Company) SOGESTALs Socie'te'de Gestion des Stations de Lavage de Cafe' (Coffee Washing Stations Management Company) SONICOFF Source ofNile coffee UNDP UnitedNations Development Program USAID UnitedStates Agency for International development VAT Valued Added Tax WB World Bank WHO World HealthOrganization Vice President : Gobind Nankani Country Director : Pedro Alba Sector Manager : Yvonne Tsikata Co-Team Leaders : Claude Leroy-Themeze ;Jean-Pascal N.Nganou REPUBLIC OF BURUNDI EconomicReform Support Grant (ERSG) ProgramDocument Table of Contents 1. INTRODUCTION ............................................................................................................................ 3 I1. BURUNDI'S ECONOMY ............................................................................................................... 6 A. Political and Social Context........................................................................................................ 6 B. Recent Macroeconomic and Fiscal Performance. 2000-2005..................................................... 9 C. Long-Term Macroeconomic Challenges .................................................................................. 12 D. Medium-Term Macroeconomic Framework and FinancingRequirements. 2006-2008..........13 I11 BURUNDIMEDIUM TERM REFORMPROGRAM 2006-2008 . ............................................ 16 IV THE PROPOSEDOPERATION . ................................................................................................. 17 A. Background and Rationale for the Grant .................................................................................. 17 B Linksto andLessonsLearnedfrom Previous Credits . .............................................................. 17 C. The proposedReform Program................................................................................................. 19 1 ImprovingPublic ExpenditureManagement and their Impacton the Poor . ............20 a. Deepening the Reforms inPublic Expenditure Management .................................. 21 b. Increasingthe Level and Impact of Public Spending on the Poor inPriority Areas .............................................................................................. 29 2. Accelerating Growth ....................................................................................................... 34 a. Reformingthe Coffee. Tea. and Cotton sectors....................................................... 34 b. Improving Private Sector Environment................................................................... 45 c. ReformingPublic Enterprisesthrough Privatizationand Privatepublic Partnerships...................................................................................... 47 V . GRANT FEATURES ..................................................................................................................... 51 A. ExpectedPoverty Impact.......................................................................................................... 51 B. Linkages with the InterimStrategy Note.................................................................................. 51 C. EnvironmentalAspects ............................................................................................................. 52 D. RisksandRiskMitigation......................................................................................................... 55 E. Collaboration with Other Donors.............................................................................................. 56 F. FinancingAmount. DisbursementProcedures. andFiduciary Arrangements ......................... 58 G. Conditionality ........................................................................................................................... 60 H. InstitutionalArrangements andProgram Monitoring............................................................... 62 ListofTables Table 1: Economic Trends. 2000-05 ....................................................................................................... 11 Table 2: Medium-TermMacro-Economic Framework. 2006-08............................................................ 14 Table 3: External FinancingRequirements and Sources. 2002-08 (Inmillions ofU.S. dollars) ........... 15 ListofBoxes Box 1: Public Finance Management: Diagnostic and Technical Assistance.......................................... 20 Box 2: Burundi-Coffee Sector- Production. Processingand Marketing ................................................ 38 Annex 1: Progresstowards the MDGs .Key Goals. Targets. and Indicators relatedto the MDGs........63 ListofAnnexes Annex 2: Key Economic Indicators......................................................................................................... 64 Annex 3: Policy Reform Matrix .............................................................................................................. 66 Annex 4: Key issues identifiedinthe 2004 CFAA, reforms already launched, and priorities supported under the operation ................................................................................................ 82 Annex 5: Coffee Sector Reforms: The Point of View of Producers........................................................ 85 Annex 6: RoadMap for the Coffee Sector Reform................................................................................. 91 Annex 7: Poverty and Priorities ofthe Poor inBurundi.......................................................................... 92 Annex 8: Diagnostic Trade Integration Study (DTIS)............................................................................. 97 Annex 9: Burundi At a Glance .............................................................................................................. 100 Annex 10: BurundiSocial Indicators .................................................................................................... 102 Annex 11: Letter of Development Policy.............................................................................................. 103 Annex 12: Burundi-IMF Staffs Assessment of Recent Economic Performance............................... 182 Listof Maps Map 1: IBRD33380 ............................................................................................................................... 185 The ERSG team includes: Claude Leroy-Themeze (Task team leader). Jean-Pascal N. Nganou (Co-Task team leader). Bruno Boccara. Brendan Horton. David Tchuinou. Eric Mabushi. Peter Osei. Paula White (AFTP3); Estella Malayika (AFMBI); Nicaise Ehoue (AFTS4); Pierre Morin. Prosper Nindorera (AFTPC); Leif Jensen. Joseph Kizito Mubiru. Alain Catalan (AFTFM); Sameena Dost (LEGAF); Wolfgang Chadab (LOAG2); Lucy Fye. Korotoumou Ouattara (AFTPS); Ann Christine Rennie (AFTFS) . The peer reviewers are William Leslie Dorotinsky (PRMPS). Patrick Labaste (AFTS4). and Ivan Rossignol (AFTPS) . Joseph Baah-Dwomoh (Sector Manager. AFTS4) provided guidance on coffee. tea and cotton sector reforms and Alassane Sow (Country Manager. Burundi)wrote most of the political background and in many important ways provided support in our dialogue with the Government. Hinh Dinh (Lead Economist. AFTP3) and Jan Walliser (Sr. Economist. OPCCE) provided valuable advice and guidance. REPUBLIC OF BURUNDI Economic Reform Support Grant FINANCING PROGRAMSUMMARY AND Recipient: RepublicofBurundi Beneficiaries: PopulationofBurundi Amount: SDR 40.4 million (US$ 60 million equivalent) Terms: Standardfor an IDA Grant Description: The proposed Grant is designed to help implement the Government's economic reform program during 2006 and Burundi's Interim Poverty ReductionStrategy Paper (I-PRSP) by supportingkey policy measures aimed at: (i)improving public expenditure management and their impact on the poor; and (ii)accelerating growth. Benefits: The proposed operation is expected to help the implementation o f the Government's poverty reduction program by making more resources available to achieve the Government's poverty reduction objectives through improvementinthe managementof scarce public resources. Inparticular, the operation is expectedto translate into: (i) improved services for the poor and greater well being of the population; and (ii)increased income-generating activities; employment opportunities through private sector development and State disengagement; and increased producer income through coffee, tea and cotton sector reform. Risks: Six main risks could influence the expected outcomes of the proposed operation:(i) internal and/or regional instability and disruption of thepeace process. The peace process in Burundi remains to be consolidated, in particular with regardto the FNL-PALIPEHUTUwhich continues to threaten the population and hinders the reform of the security sector. However, we should keep in mind that, the FNL-PALIPEHUTU has neither the force nor the popular support to fight the newly elected Government. It would be beneficial, in the interest o f peace, for the Government and the FNL- PALIPEHUTU to reach a negotiated settlement in the ongoing ceasefire discussions. Furthermore, the Great Lakes region remains unstable. It will take a long time for the security problems to be settled on the east border of Burundiand these will remaina risk for the Burundipeace process.However, preparations are underway to call an international conference on the Great Lakes Region; needless to say that Burundi, DRC, Rwanda, and Uganda are all on a good pathto achieving stability; (ii) externalfactors such as further collapse of coffee prices or adverse climatic conditions could jeopardize 1 Burundi's foreign exchange position making it difficult to service external debt even after HIPC relief, and eventually putting the recovery efforts at risk; (iii) reversals and/or slippages in key reforms could affect the policy Government's ability to maintain a stable macroeconomic environment and focus expenditure on povertyreducingpriorities identifiedinthe I-PRSP; (iv) weak administrative and absorptive capacity (human, institutional, and managerial) could slow down the pace o f improvements in economic and public expenditure management; (v)fiduciary risks with regardto the use of public finds remainas internaland externalcontrolmechanisms remainweak and capacity of the Audit Court is limited; and (vi) shorlfall in donor support and/or difficulty to translate donor support into action and results could have a deterring impact on growth, reduce government resources and affect the Government's ability to conduct its reformprogram. EstimatedDisbursement: To be released intwo tranches o f SDR 23.55 million (or US$ 35 million) and SDR 16.85 million (or US$ 25 million) each in2006 with the first tranche to be released upon effectiveness and the second one following completion of agreedmeasures. ImplementingAgency: The Ministry o f Finance. Project ID Number: PO91475 2 InternationalDevelopmentAssociation ProgramDocumentfor an Economic ReformSupport Grant (ERSG) To the Republic of Burundi I. INTRODUCTION 1. Burundi is emerging from recurrent episodes o f civil war that have torn the country since the mid-1960s. During the latest episode of civil war which started in 1993, it i s estimated that more than 250,000 people were killed and 1.2 million displaced. The international community sponsored a framework for national reconciliation and lasting peace among Burundians, under former presidents Nyerere o f Tanzania, and Mandela o f South Africa. Negotiations towards a comprehensive peace agreement were concluded in Arusha, Tanzania in August 2000. By the end o f 2003, the transitional Government had signed new peace and cease-fire agreements with all armed political parties and movements that did not sign the Arusha Agreement, with the exception of a fringe FNL-PALIPEHUTU faction. Since December 2003, major fighting has halted in all but one province, Bujumbura Rural, where sporadic FNLactivity still remains. 2. The political transition has been well managed and successful, widening the window of opportunity for peace and stability opened by the Arusha Agreement. A referendum for the adoption o f the new post transition constitution was held peacefully on February 28, 2005. Communal and parliamentary elections were held in June and July 2005. The transition came to a successful end when Mr. Pierre Nkurunziza (CNDD-FDD), elected President by the Parliament on August 19, 2005, was sworn in on August 26, 2005. The post transition Government took office on September 1, 2005. Appointments in the Legislative and Executive bodies have been held in full compliance with the new post transition constitution, interms ofgender and ethnic representations. 3. The last decade o f civil war has had a devastating effect on Burundi's economy. GDP per capita (constant 2000 US$) has fallen by almost 18 percent, from US$ 127 in 1994 to US$ 105 in 2004. The percentage of people living with less than a dollar a day has nearly doubled, from 35 percent overall to 68 percent in 2002. 4. Within a difficult political environment, and given dire economic and social conditions, Burundihas made good initial progress in stabilizing the economy, implementing financial and structural reforms, and beginning to restore social services. Based on sound macroeconomic policies and progress in reforming the economy, external financial aid has resumedand culminated with Burundibeinggranted accessto debt reliefunder the enhanced HIPC initiative in August 2005, which will reduce debt by over 90 percent inNPV terms, and scheduled debt service by some US$ 30-40 million per year for the next thirty years. But Burundi will continue to require significant external support, as domestic savings, even augmented by those resultingfrom the HIPC initiative will be far below the level needed to help Burundi make substantial progress with regard to accelerating growth, raising living standards, reducingpoverty and makingprogress towards the MDGs. 3 5. The Interim Poverty Reduction Strategy Paper (I-PRSP) was completed inNovember 2003 and discussed by the Boards of the World Bank and the IMFin January 2004. It reflects the Government's priority to address the challenges of transition from conflict to peace as stated in the preamble o f the Arusha peace agreement. The Government's priorities in the economic area are rural development, infrastructure, disengaging the State from the production sector, and reviving the private sector. Preparation o f the full PRSP i s well advanced with broad and inclusive consultations being completed. Sectoral consultations were heldinNovember 2005. A first draft i s being finalized and the full PRSP i s expected to be approved by the Government during the second semester o f2006. 6. The proposed Economic Reform Support Grant (ERSG) builds on the Emergency Economic Recovery Credit (EERC, 2000) and the Economic Rehabilitation Credit (ERC, 2002) the last tranche o f which was disbursedin January 2005. As outlined in the 2005 Bank Interim Strategy Note (FY06/07), the ERSG aims at supporting the Government in implementingthe interim PRSP in four areas: (i)improving public expenditure management and the impact on the poor; (ii)reforming cash crop sectors (coffee, tea, and cotton); (iii) reviving the private sector; and (iv) reforming public enterprises through State divestiture and private/public partnerships. 7. The reform program to be supported by the ERSGfocuses on assisting Burundiin:(i) addressing short-term weaknesses inparticular inthe area o f public expenditure management and (ii)deepening and extending its economic structural reform agenda in a credible and sustainable manner. It proposes to: (i)consolidate reforms already underway (measures to accompany the 2005 liberalization o f coffee sector; revise the legal and regulatory framework for private sector); (ii)deepen reforms (public expenditure management); (iii)refine the implementation action plans for reform strategies already adopted by the Government (tea and cotton sector reforms); and (iv) move to the implementation phase (public financial management reform agenda as agreed under the 2004 CFAA action plan). In addition, it also aims at reviving reforms which were not given priority during the political transition (public enterprise reform and State divestiture) and initiate diagnostic work in areas where action i s needed but knowledge i s too limitedto designa meaningful reform program (financial sector and investment climate). 8. The reform program was also designed with the view to help the Government in securing sustained financial resources through: (i)economic growth; (ii)external financial assistance; and (iii)debt relief. It therefore focuses on helping Burundi reach the HIPC completion point by early 2007. 9. The Grant would be disbursed in two tranches, of which the first (US$ 35 million equivalent) would be released upon effectiveness and the second (US$ 25 million equivalent), following the satisfactory fulfillment o f a limited number o f specific conditionalities and providing that macroeconomic performance continues to be satisfactory. Both tranches would be released in the second half o f 2006 and support the 2006 budget. The proposed ERSG would bridge the period between now and the preparation o f the next Country Assistance Strategy to support the full PRSP which i s expected to be completed in 2006. In addition, a number o f milestones for end 2006-mid 2007 are proposed, which could be used as indicators o f progress for a follow-up Development Policy Operation that could be included inthe next Country Assistance Strategy. 4 10. Thus, at the conclusion of the proposed operation, one would expect to see tangible progress with respect to each component o f the proposed reform program including: (i) measurable improvement in public expenditure management; (ii)an increase in pro-poor spending; (iii)progress in the execution of the reform pertaining to coffee; (iv) measurable improvements in the environment for private sector; and (v) the establishment of a credible program for State disengagement from productivesectors. 5 11. BURUNDI'SECONOMY A. POLITICALAND SOCIAL CONTEXT 11. Burundi is emerging from recurrent episodes of civil war that have torn the country since the mid-1960s.Since the first outbreak in 1965, the country has experienced four more episodes o f civil war in 1972, 1988, 1991, and 1993. The recurrence o f civil war seems to suggest that the political leadership o f Burundi has been unsuccessful in creating institutions that can promote and sustain peace. The tensions between the two dominant ethnic groups, the Hutus (over 80 percent o f the population) and the Tutsis (around 15 percent) which have fueled political instability and civil conflict for several years, took a heavy toll on human lives and on the country's economic and social fabric. Since the beginning o f the latest wave o f the conflict in 1993, over 300,000 people have lost their lives. B y 2003, about 1.2 million (16 percent o f the population) have been internally displaced and became refugees. The war has had a devastating impact on Burundi's economy that was compounded by an economic embargo by neighboring countries, and several episodes o f drought. As a result, GDP per capita has fallen by almost 40 percent, from US$ 180 in 1993 to US$110 in 2003. 12. A widening window of opportunity for peace and stability through the Arusha Agreement.The international community sponsored a framework for national reconciliation and lasting peace among Burundians, under former presidents Nyerere o f Tanzania, and Mandela o f South Africa. Negotiations towards a comprehensive peace agreement were concluded in Arusha, Tanzania in August 2000. Signatories o f this Arusha Agreement included seventeen political organizations. However, several rebel groups, including the CNDD-FDD, the largest rebel group, and the FNL-PALIPEHUTUdid not participate inthese talks. In this context, a transitional constitution was adopted in October 2001; a thirty-six- month Transitional Government (TG) was appointed in November 2001, based on the principle o f power-sharing among the country's two main ethnic groups. A transition Parliament was installed in January 2002. President Buyoya, a Tutsi, led the first eighteen months o f the Transitional Government, with Mr Ndayizeye, a Hutu as Vice-president. In May 2003, a smooth handover was observed, and Ndayizeye was appointed to lead the second halfo f the Transitional Government along with a Tutsi as Vice-president. By the end of 2003, the Transitional Government had signed new peace and cease-fire agreements with all armed political parties and movements that did not sign the Arusha Agreement, with the exception o f a fiinge FNL-PALIPEHUTUfaction. Since December 2003, major fighting has halted in all but one province, Bujumbura Rural, where sporadic FNL-PALIPEHUTU activity still remains. These peace agreements resulted in a larger Transitional Government wherein leaders o f the new signatories were appointed. The thrust o f these new agreements has been to allocate power positions in the army, the central, provincial, and district Governments roughly in accordance with the relative political weight o f the respective groups. 13. Prospects are good for the integration of all armed factions into new security and defenseforces, anddemobilizationand reintegrationof former combatants thatwill not be enlisted in these forces. The TG launched in January 2003 the preparation o f a 6 national Demobilization, Reinsertion and Reintegration program (DRR), with support from the Bank and inthe context of the regional framework of the Multi-country Demobilization and Reintegration Program for the greater Great Lakes (MDRP). In May 2004, UN Security Council resolution 1545 transformed the African Union interposition force -AMIB- into a UN peacekeeping operation (UNOB) to monitor cease-fire agreements and to support the consolidation o f the peace process. By mid 2004, UNOB had deployed its mandated strength of about 5,000 peacekeepers. This development played a major role in facilitating the implementation o f the DRR and the accompanying security sector reform program. 14. Implementation of the demobilization of soldiers and ex-combatants has been satisfactory. Demobilization activities started in December 2004 and by December 2005, about 20,000 ex-combatants have been demobilized, including 3,O 15 child-soldiers and 482 female ex-combatants. Until recently, significant delays in finalizing the implementation strategy for reintegration activities have hinderedprogress in this area. A new management team has been recently appointed, and related activities are all underway. Financing o f the DRRprogram has been securedthrough an IDA grant (US$ 33 million) andthe Multi-Donor Trust Fund -MDTF- (US$ 41.8 million) of the MDRP. The MDTF also finances a special project (US$ 3.5 million) for the demobilization, reintegration and recruitment prevention o f child soldiers inBurundi. 15. The political transition has been well managedand successful. As per the Arusha Agreement, national elections were scheduled to be heldby end-October 2004. However, the Transitional Government has not been able to adhere to this timeline for political and logistical reasons. Burundian political leaders have chosen, to their credit, to bring to the forefront and to debate openly the sensitive issue o f the ethnic divide. This made the transition process more challenging and much slower than initially envisaged, but may have made much contribution to the success o f the electoral process. Thus, agreement to, and adoption o f a post transition constitution have proven to be thornier than anticipated. The issue of power sharing between the two main ethnic groups--in the executive, legislative, and military institutions-- has been a major source o f dissent for a few Burundian politicians. The minority Tutsi-dominated political parties heldthe position that power sharing should also be allocated across political party lines, a position not endorsed by the Transitional Government. But thanks to the strong leadership and resolve o f the president of the Transitional Government and the constructive attitude o f an increasing number o f Burundian leaders, a referendum for the adoption of the new post transition constitution was held peacefully on February 28, 2005. Communal and parliamentary elections were held in June and July 2005. The transition came to a successful end when Mr.Pierre Nkurunziza (CNDD-FDD), elected President by the Parliament on August 19, 2005, was sworn in on August 26, 2005. The post-transition Government took office on September 1, 2005. Appointments in the Legislative and Executive bodies have been held in full compliance with the new post transition constitution, interms o f gender and ethnic representations. 16. Fear and skepticism still abound, although most of the country is currently at peace, with sufficient security for economic activitiesto resume both at a local leveland on a country-wide scale. A window of opportunity has opened, after eleven years o f conflict. Both research and experience in other countries suggest that exceptional levels o f support are needed rapidly to take advantage o f this opportunity. Reconciliation efforts need to be consolidated, displaced persons need to be reintegrated into their communities, and thousands o f ex-combatants need to be demobilized and reintegrated. Furthermore, concerns 7 are highamong a large part o f the population about lack o f economic opportunities to follow on the wake o f an expected lasting peace. During consultations with stakeholders in the context o f the preparation o f the recent Bank's Interim Strategy, several participants indicated that a key obstacle to the peace process i s the people's fear o f peace, as the conflict has been used to rationalize the deep state o f poverty. Thus, a strong signal from the international community to support economic recovery would have an important positive impact on peace prospects. 17. Peace prospects in Burundi remain intrinsically linked to regional stabilization. The Gatumba massacre of over 160 Congolese refugees o f Tutsi origin in August 2004 in Burundiprovided a somber reminder of the inter-linkages betweenthe conflicts o f Burundi, Rwanda and the Democratic Republic o f Congo (DRC). A continued instability and lack o f law and order in the eastern DRC would provide a vacuum all too easily exploited by Burundian rebel groups such as the FNL-PALIPEHUTU. It is hoped that the recent strengthening of the UN peacekeeping presence in the eastern DRC (MONUC) will help minimize future security threats emanating from that country. Peace has now returned to the majority o f the country but one armed group, the FNL-PALIPEHUTU, continues to oppose Government forces in the provinces o f Bujumbura Rural and Bubanza. Calls for cease-fire and reconciliation with the FNL-PALIPEHUTUhave been made by the new Government, so far without success, partly because o f lack o f consistent views among members o f the FNL- PALIPEHUTU leadership on the way forward. The FNL-PALIPEHUTU appears increasingly isolated in the regional and international communities. However, as long as it remains a security threat, it might be difficult for the Government to implement fully its security sector reforms. So far, the Government i s on track in implementing its letter o f demobilization policy, including the reduction o f the size o f the army to 25,000 by end o f 2006. 18. Social developments. The decade o f recurring conflicts has had a devastating effect on Burundi's economy. Following the sharp deterioration o f social indicators over the past decade, Burundi seems to have made some slight progress since the returnto peace although Burundi's social indicators remain among the weakest of sub-Saharan Africa. According to the 2004 United Nations Development Program (UNDP)-Human Development Index, Burundi is ranked as the fourth least developed country in the world. Child malnutrition increased from 37.5 percent in 1987 to 45 percent in 2000 while the population below the minimum level of dietary energy consumption rose from 49 percent in 1990 to 70 percent in 2001. Immunization coverage' in 2001 had risen to its pre-crisis level o f 1990 (75 percent) from an all time low level o f 40 percent in the 1994, and seems to continue on a positive trend. Under-five and infant mortality rates went up from 152.5 per 1,000 and 73.7 per 1,000 live births respectively in 1984-1987 to 231 and 156 per 1,000 in 20002. Displaced persons (some 200,000 internally and in refugee camps, down from one million at the peak o f the fighting) suffer from deprivation, malnutrition, and lack o f sanitation, health and education services. HIV/AIDS prevalence i s rising, particularly in the refugee camps. The prevalence was estimated in 2002 at 9.4 in urban areas, 10.5 in peri-urban areas and 2.5 in rural areas. Global sero-prevalence i s estimated at 3.2 and seems to be stable in urban areas, while rapidly rising inrural areas. This is the immunization of children 0 to 1year of age against measles Results from anew MultisectoralIndicators Cluster Survey (MICS) will be available inMay 2006, which would permit to evaluate whether there has been a slight improvement on child mortality. 8 19. Improvement in access to and quality o f education is a priority in the new Government strategy as part o f the nation's recovery strategy. In line with this, the Ministry o f National Education and Culture (MINEDUC) has prepared a strategic policy plan, "Options and Priorities for Education and Training" which aims to reach the goals o f Education for All (EFA). In accordance to the EFA strategy, the first and most important policy measure taken by the new Government was the elimination o f school fees in September 2005. The main objectives o f this policy are: a) expanding access at primary level and diversification o f the services offered at secondary level (technical and vocational education); b) improving quality through reforming pre-service teacher training, enhancing in-service training, implementing a new curricula and institutional strengthening. The Government will further develop this strategy, which will be supported by the Bank and other donors in ajoint operation during 2006. 20. The decision to eliminate "school fees" in September 2005 has resulted in a huge increase in first grade enrollment. As a result, the primary school enrollment rate has significantly surpassed the pre-crisis, long-term level, with a gross enrollment o f 80 percent in 2003/04 and close to 100 percent in 2005/06 (due to the elimination of school fees). However, still only 47 percent o f those children that start first grade finish the primary cycle and, as a result, education reaches only a limited fraction o f the population: only 43 percent o f adults are literate (53 percent males versus 32 percent for females). To address the huge surge in first grade enrollment, the Government already recruited 3,500 additional teachers in 2005 and an additional 1,800 will be recruited in 2006. However, the infrastructure needs will take several years to cover all students at a reasonable studentkeacher rate. At the secondary level, the gross enrollment ratio o f 12 percent is below the average for sub- Saharan Africa (25 percent). Disparities in education's outcomes among gender and regions are huge: a) females comprise 45 percent o f the students at primary level, 41 percent at secondary level, and 25 percent at university level and; b) gross enrollment rate goes from 130 percent in the city o f Bujumbura to 50 percent in the provinces o f Ngozi and Muyinga. The quality of education had also deteriorated severely due to the conflict and insecurity. To bring inmore pupils, a double-shift system was put inplace in 1982, but it ledto a 20 percent reduction inteaching time per pupil, thereby affecting the quality o f education inthe primary. Repetition rates are more alarming: 28 percent for years 1-4 o f primary, 37 percent for year 5, and 44 percent for year 6. 21. In addition to some signs o f recoveryhmprovement in health and education indicators, access to safe water experienced a notable improvement after the sharp deterioration in mid-late 1990s. Access to improved water source increased from 69 percent of the population in 1990 to 78 percent in 2001 while access to improved sanitation at 88 percent in 2001 was back to its 1990 pre-crisis level (87 percent). The Government's immediate priority i s to restore at least pre-crisis levels o f these social services recognizing that meetingthe Millennium Development Goals (MDGs) will be a challenge (see Annex 1). B. RECENT MACROECONOMIC AND FISCALPERFORMANCE, 2000-2005 22. Burundi has made good progress in implementing its macroeconomic policy agenda despite a complex politicalenvironment,a full legislativeagenda, and exogenous shocks. Within a difficult political environment, and starting from dire economic and social conditions, the Government has made good initial progress in terms o f macroeconomic 9 stabilization, implementation of financial and structural reforms, and restoration o f social services. Many challenges are still ahead, including among others the weight o f the State in the economy, the low economic diversification and high dependency on coffee, the low level o f integration o f the economy with the rest o f the world, a shallow financial sector, and the pressure on the Government to deliver rapidly improved services. 23. Since 2000, the Government has maintained generally prudent policies and implementedstructural reforms conducive to the establishment o fthe conditions necessary to boost economic growth. After a slowdown in 2003 mainly due to unfavorable climatic conditions and historically low coffee production, real GDP growth has rebounded in 2004 (4.8 percent), but declined again in 2005 to about 0.9 percent reflecting the country high dependency on coffee and the high vulnerability to adverse climatic conditions. These structural factors which accounted for the economic growth fluctuations were aggravated in 2005 by the decline o f gross investment to GDP ratio, the increase in trade deficit, and sluggish subsistence agriculture. Inflation which declined in 2004 rose in 2005 to about 13.4 percent, owing to the impact on food prices o f unfavorable climatic conditions (e.g., drought inthe north), the surge in the prices of imported petroleum, and the pressure on nontradables o f an increasing international presence in Bujumbura. In addition, the rapid money growth in the first half of 2005 (26.5 percent) from 16.7 percent in 2004 contributed to the increase in inflation. The international reserve position o f Burundi has strengthened, while financial support from international community has been mobilized (Table 1). Moreover, real per capita income growth has deteriorated as a result o f the past strife and poor harvests in Burundi.GNIper capita is amongthe lowest inthe region at US$100 in2005 compared to a regional average o f US$600 in the sub-Sahara Africa. Burundi has also been plagued with low domestic savings and low private sector investment,also reflected inthe indicators. 10 Table 1: Economic Trends,2000-05 1999-2000 2001-03 2004 2005 Population (million) 6.7 7.1 7.3 7.5 Populationgrowth (percent) 1.9 1.9 1.9 1.9 GDP (US$,billion) 0.8 0.6 0.7 0.8 GNI per capita (Atlas method, US$) 115 93 90 100 Real GDP growth (percent) -0.9 1.8 4.8 0.9 Real GNI per capitagrowth (percent) -0.6 -1.4 0.2 -2.6 Inflation(CPI, average, percent) 13.8 6.2 8.0 13.4 RealEffective ExchangeRate (percent change) 4.1 -13.0 -2.8 9.2 Terms of Trade (percent change) -10.8 -6.6 28.1 11.0 Gross investment (percent o f GDP) 6.2 7.2 13.3 10.8 Gross private investment (percent of GDP) 1.1 1.8 3.0 4.2 Gross national savings (percent of GDP) -1.8 1.9 5.2 0.3 Fiscal balance (primary balance, percent of GDP) 0.7 0.2 -3.5 -1.7 Current account balance (percent of GDP) -8.0 -5.3 -8.1 -10.5 Overall balance of payments (percent of GDP) -3.8 -3.9 1.7 2.8 Gross international reserves(monthsof imports) 4.7 3.9 2.2 2.9 Export growth (volume, percent) -5.2 5.6 -10.9 -1.6 Share of coffee inexports (percent of exports) 72.8 55.4 61.4 70.8 Debt service to export ratio (percent) 84.4 106.7 109.2 47.1 Source: Burundi authorities and IMF estimates. 24. Monetary policy has focused on the liberalization of the exchange system: The Central Bank (Banque de la Ripublique du Burundi, BRB) has made good progress in strengthening its monetary policy capacity and in liberalizing the foreign exchange regime. Most restrictions on exchange rate holdings and transactions were eliminated and exchange rate bureaus were licensed. Following the unification o f the foreign exchange market in July 2000, the BRB has continued to liberalize the exchange regime and progress has been achieved in reducing money growth and inflation, which, although have increased in 2005, are expected to be sustained at a reasonable level in the following years. In April 2005, liquidity auctions were introduced and the Central Bank's specific credit ceiling system was abolished. Regular sales o f foreign exchange on the auction market have contributed in reducing the parallel market premium. The differential between the official and parallel market exchange rates had narrowed to around 3 percent inMarch 2005. 25. The external current account deficit increased with the gradual surge of imports and reached 10.5 percent of GDP in 2005. Since 2003, exports have gradually increased after the deterioration experienced in the early 2000s. Meanwhile, imports rose rapidly and significantly increased in 2005 compared to 2004, owing to the reconstruction effort and to humanitarian assistance. Consequently, current account deficit increased from about 5 percent o f GDP in 2003 to 10.5 percent o f GDP. With the resumption o f external financial assistance, the overall balance o f payments moved from a deficit o f about 4 percent o f GDP in2000 to a small surplusof2.8 percent in2005. 26. The present value of external debt-to-exports ratio (after full use of traditional debt relief mechanisms) far exceeded the HIPC threshold for debt relief. During 2003 and 2004 the authorities made substantial efforts in repaying external arrears and in servicing external debt in full. By the end o f 2004, Burundireached agreements to cancel or reschedule 11 all arrears owed to multilateral creditors and obtained debt relief on concessional (Naples) terms in March 2004 from Paris Club creditors. Discussions are ongoing to secure at least comparable treatment from non-Paris Club creditors. Burundi remains current on its nonreschedulable external debt obligations and debt service payments after traditional debt relief remained very high in 2004, equivalent to 60 percent o f exports o f goods and services. The HIPC decision point was reached by BurundiinAugust 2005 upon World Bank and IMF Board approval thus paving the way for immediate access to interim debt relief o f about US$ 30 to 40 million per year. The African Development Bank approved Burundi's request for HIPC relief inNovember 2005. 27. The Government maintained a prudent fiscal policy since 2000. Fiscal revenues, excluding grants, remained at above 20 percent o f GDP, thanks to a marked improvement in tax administration. However, the primary fiscal balance deteriorated as a result of: (i) increased outlays to secure the peace process and current social expenditure; (ii)higher domestic counterpart outlays for project spending; and (iii)repayment o f guaranteed coffee sector credit losses, and domestic and external arrears. With the increase in government expenditure, the primary fiscal balance moved from a small surplus in 2000 to a deficit o f 1.7 percent o f GDP in 2005. C. LONG-TERM MACROECONOMIC CHALLENGES 28. Notwithstanding the encouraging recent progress in stabilizing the macroeconomic environment, Burundi faces significant challenges in igniting sustained high broad-based economic growth that can achieve poverty reduction. Addressing such challenges would require major structural reforms. 29. The long-run scenario underlyingthe Debt Sustainability Analysis conducted in the context o f the HIPC decision point (mid-2005) i s based on an average annual growth rate o f five percent o f GDP over the next twenty years (2003-24). Over the whole period, net exports would show a deficit gradually lowering to about 11 percent o f GDP and the current account deficit would also progressively decrease to 4.4 percent o f GDP after 2015. Gross domestic investmentwould rise to about 13 percent with the public investment increasing to about 4 percent o f GDP and private investment rising to 9 percent. Annual per capita income would rise from US$ 87 in 2003 to US$270 in 2024 or 62 cents per day which i s less than 45 cents per day in 2003 dollars assuming an average inflation o f 2.5 percent per year. In short, over the nexttwenty years, Burundiwould remain aid dependent on account of its external current deficit and still be extremely poor at the end o f the period with an average per capita GDP of less than 50 cents per day in 2024. It would seem clear that poverty reduction requires sustained higher growth rates, which in turn require higher rate o f both public and private investment. To make this happen, and in addition to maintaining a sustainable macroeconomic environment conducive to economic growth, major structural reforms are likely to be neededas regards both the public sector per se, the environment for private sector investment, andthe development o fexports. 0 Increase public investment. In order to increase public investment, it will be necessary either to increase the level o f fiscal revenues (which are already a respectable 18-20 percent o f GDP) or foreign financing or, ceteris paribus, to constrain domestically financed recurrent expenditures. In that connection, the 12 government wage bill (civilian and military) which has risen to about 9 percent o f GDP in2006 budget is on the high side comparedto other African countries, with services and transfershubsidies representing another 10 percent or so. Since increasing the tax ratio above its existing level i s likely to be neither easy nor perhaps even desirable on economic grounds, increasing public investment will continue to be constrained by the availability o f foreign savings unless current expenditures are constrained and their efficiency increased. Thus, public sector structural reform appears likely to be a subject o f considerable importance in Burundifor the foreseeable future. Increase private investment. Similarly increasing private investment will be constrained by the level of private national savings, which has been very low and sometimes even negative over the last few years, and foreign savings. Under these conditions, it will be o f vital importance to improve the climate for private investment in general and foreign investment in particular. This will require attention not only to: (i) traditional questions o f the reform and modernization the o f the legal and regulatory framework for private sector, and access to finance; (ii)thedisengagementofStatefromproductiveactivitiesandtheliberalizationof critical sectors such as coffee; but also, just as important; (iii) improvement in an the overall security situation, broadly defined. 0 Develou exports. With respect to export development, the primary areas o f concern will be: (i)an appropriate macroeconomic policy and exchange rate stance; (ii)particular attention to the development o f exports to regional markets; and (iii) lower transport and logistics costs through trade facilitation (see Burundi Diagnostic Trade Integration Study, September 2004). D. MEDIUM-TERM MACROECONOMIC FRAMEWORK AND FINANCINGREQUIREMENTS, 2006-2008 30. The Macroeconomic Framework for 2006-08. The Government's macroeconomic framework and the structural reform agenda are consistent with the objectives o f accelerating growth and reducing poverty. Growth i s expected to improve from 2.5 percent on average over 2001-04 to 6.6 percent on average in 2006-08 (see Table 2). Growth in the primary sector is expected to recover during 2006-08 after the drop in both food and coffee production in 2005. Secondary sector's growth would be strong over 2006-08 after a slight decline in 2005 as a result o f a drop in manufacturing production with respect to the coffee processed. GDP growth would be driven by the tertiary sector (above 6 percent in 2006-08). A 7-8 percent pick-up in services, in particular in commerce and transportation, is expected to underpin growth inthe tertiary sector. 31. To sustain the overall GDP growth rate, the investment-to-GDP ratio i s expected to rise from 5.5 percent in 2001-02 to 18.3 percent in 2006-08, as Government's finances are strengthened and domestic investment opportunities improve. Public investment in infrastructure and social sectors would increase in line with the GDP. Private investment would increase slightly from 2 percent o f GDP during the period 2001-03 to 8 percent in 2006-08. However, higher investment would depend also on the implementation o f policies 13 leading to higher domestic savings. Increases in investment will result in a higher level o f imports and an increase inthe external deficit including grants. Table 2: Medium-TermMacro-EconomicFramework,2006-08 2002 2003 2004 2005 2006-08 Projections Growth, Investment. and Savinps Real GDP growth (percent) 4.4 -1.2 4.8 0.9 6.6 Real GDP per capitagrowth (percent) 2.5 -3.1 2.9 -1.0 4.7 GNIper capita (Atlas method, US$) 90 90 90 100 Gross investment (percent ofGDPj 5.2 10.4 13.3 10.8 18.3 Government investment (percent of GDP) 3.6 8.3 10.3 6.5 10.3 National savings (percent of GDP) 0.0 5.5 5.2 0.3 2.9 Public Finance Government revenue (percent of GDP) 20.3 21.1 20.1 20.0 19.7 Government expenditure (percent of GDP) 25.9 34.9 39.8 36.8 41.6 Primary balance (percent of GDP) 2.2 -0.8 -3.5 -1.7 -7.1 Overall balance including grants (percent of GDP) -1.4 -6.2 -4.9 -5.1 -0.5 Balanceof Pavments Terms of trade (percent) 0.9 0.4 28.1 11.0 -2.0 Exports (GNFS;percent of GDP) 6.2 9.3 9.6 -33.9 -36.7 Current account balance (percent ofGDP) -3.5 -4.6 -8.1 11.4 12.8 Current account balance excluding official -19.1 -21.3 -25.5 -10.5 -15.4 transfers (percent ofGDP) Gross International reserves (months offollowing 5.8 3.6 2.2 -34.3 -37.3 year's imports) External debt Debt service to GDP ratio (percent) 11.7 8.6 10.5 5.4 5.0 Debt service to export ratio (afier debt relief; 134.1 101.8 109.2 30.5 14.7 percent) Source: Burundiauthorities and IMF estimates and projections 32. The fiscal framework for 2006-08 targets a primary deficit (excluding grants) o f 7.1 percent o f GDP since government revenue as a share o f GDP i s expected to decrease by nearly 1 percentage point from 20.4 percent o f GDP in 2005 to 19.7 percent in 2006-2008, while government spending as a share o f GDP is projected to rise by 5 percentage points from 37 percent of GDP in 2005 to 42 percent in 2006-08. This increase in government expenditures reflects mainly an expected rise in HIPC-financed expenditures. Recurrent expenditure as a share o f GDP i s expected to increase from 23 percent o f GDP in 2005 to 25 percent by 2008. Meanwhile, capital expenditure estimated at 9.6 percent o f GDP in 2005 is expected to increase significantly to 15.1 percent by 2008 (see Annex 2). 33. External FinancingRequirements. The external financing needs estimated at US$ 307 million in 2006, would be entirely covered by project disbursements (US$ 136 million), HIPC relief (US$ 36 million), IMF disbursement (US$ 32 million under the PRGF) and program financing (US$ 103) (see Table 3). Projected program financing o f main donors include IDA (US$ 60 million o f the proposed grant), AfDB (US$16 million), EU (US$ 17 14 million of FED program) and bilaterals (US$ 15 million o f which Belgium (US$2 million), France (US$ 3 million), and Netherlands (US$10million). Table 3: ExternalFinancing Requirementsand Sources, 2002-08 (In millionsof U.S. dollars) 2002 2003 2004 2005 2006 2007 2008 1. Current account (excl. program grants) -44.7 -42.8 -109.2 -122.0 -264.7 -246.2 -279.4 Exports, fob 31.0 37.5 47.9 57.2 70.0 83.9 94.4 Imports, fob -107.2 -125.9 -148.9 -239.0 -309.8 -364.9 -390.3 Netservices and incomes -49.3 -45.6 -78.8 -109.9 -135.4 -137.3 -146.2 Private transfers 5.5 7.0 10.5 17.3 19.2 21.2 23.7 Official transfers (excl. program grants) 75.4 84.2 60.2 152.4 91.4 150.9 138.9 11. Capital account -15.7 -76.2 -51.7 5.8 -8.5 16.9 8.8 Scheduled amortization -37.7 -39.9 -3 1.O -31.6 -39.9 -38.0 -38.3 IMF repayments -2.5 0.0 -28.5 0.0 0.0 0.0 0.0 Other capital (net) 24.5 -36.3 7.9 37.4 31.3 54.9 47.2 111.Debt relief obtained 1/ 0.0 27.1 80.1 31.1 4.5 0.0 0.0 IV. Change in official reserves (increase -) -36.3 -8.6 0.1 -45.5 -32.3 -14.0 -15.4 V. Change in arrears (decrease -) 23.4 -1.9 -106.1 -22.2 -5.6 0.0 0.0 VI. External financing requirements -73.2 -102.3 -186.7 -152.8 -306.6 -243.2 -286.0 VII. Expected disbursements 73.2 102.3 186.7 152.8 306.6 157.4 196.5 a. Project financing (excl. HIPC relief) 28.7 54.0 90.6 61.9 135.8 114.5 125.4 b. Program financing 32.1 34.9 55.2 64.2 103.4 0.0 30.0 Program Grants 12.1 14.0 55.2 37.9 103.4 0.0 30.0 Concessional loans 20.0 20.9 0.0 26.2 0.0 0.0 0.0 of which IDA c. HIPC relief 0.0 0.0 0.0 7.4 35.7 32.4 41.1 d. IMF 12.5 13.5 40.9 19.3 31.7 10.6 0.0 VIII. Financing gap (e) 0.0 0.0 0.0 0.0 0.0 85.8 89.5 Total Program financing req. incl. IMF (b+d+e) 44.5 48.4 96.1 83.5 135.0 96.4 119.5 Source: IMF 1/ Before MDRIand Paris Club debt reduction on Cologneterms. Includes the March 2004 Paris Club reschedulingon Naplesterms, and assuming reschedulingof currentdebt service and arrearsto non-ParisClub creditors at comparable terms. 15 111. BURUNDIMEDIUMTERMREFORMPROGRAM 2006-2008 34. The InterimPoverty Reduction Strategy Paper (I-PRSP) was completed inNovember 2003. The Government's I-PRSP i s based on broad consultations except for some provinces where the consultations were limited due to security reasons. The I-PRSP proposes a long- term vision based on six strategic themes for promoting sustainable and equitable economic growth deemed essential for poverty alleviation: (i)peace and democratic governance; (ii) reintegration o f conflict victims and disadvantaged groups into the economy; (iii)private sector development; (iv) human capital development; (v) fighting HIV/AIDS; and (vi) advancing the role o fwomen indevelopment. 35. The I-PRSP reflects the Government priority to address the challenges o f transition from conflict to peace as stated in the preamble o f the Arusha peace agreement: "the reestablishment in Burundi of a legal, institutional and social environment based on good governance, the rule o f law and the efficiency o f public management, justice for all, the search o f social consensus and participation by civil society in the definition and implementation o f national policies, constitutes an essential element o f the strategy for reconstruction and reconciliation". The Government's priorities in the economic area are rural development, infrastructure, disengaging the state from the production sector, reviving the private sector, and promoting the mining sector. 36. Burundi's I-PRSP was discussed by the Boards o f the World Bank and the IMF in January 2004. It i s expected that the full PRSP under preparation will elaborate on a number o f weaknesses and gaps identified in the I-PRSP: (i)the analytical underpinningsin various areas including growth (in the context o f Burundi's specific challenges as a small open land- locked economy vulnerable to fluctuations in international coffee prices, and a post-conflict country); (ii)the development o f more detailed sector strategies and programs likely to have a significant impact on poverty; (iii) the prioritization, costing, and financing o f policies and strategies; and (iv) more specific targets, indicators and monitoringmechanisms. 37. The formulation o f the full PRSP was launched in May 2004 under the leadership o f the Head of State. With the support o f the Bank and other donors, the full PRSP is expected to be completed in the second half o f 2006. Community participatory and inclusive consultations have been completed and provincial reports are available as well as the synthesis o f the overall consultations. Sectoral and thematic consultations were completed in November 2005. These consultations focused on: (i)developing sectoral policies and strategies; (ii)identifying priority sectoral activities; (iii) identifying performance indicators as regard to the Millennium Development Goals (MDGs) as they relate to the long term development vision o f Burundi; (iv) costing sector activities in line with the medium term expenditure framework and priority pro-poor expenditure programs; and (v) preparing a sustainable macroeconomic framework. In May 2006, a workshop aimed at strengtheningthe conflict resolution aspect o f the PRSP, to which attended the SP/REFES, and other development stakeholders, was organized in Bujumbura. The conclusionshecommendations of the workshop are expected to be included inthe final draft o fthe PRSP. A first PRSP draft which addressesthe issues o f good governance and security reforms, to be finalized in its fill version shortly, will be discussed with all stakeholders at national, provincial and communal levels in order to take into account their comments and recommendations. 16 IV. THE PROPOSED OPERATION A. BACKGROUND RATIONALE FORTHE GRANT AND 38. Burundi has been traditionally beset by periods of civil strife and conflict, most recently beginning in 1993. However, peace and security have been gradually restored since the Arusha agreement of August 2000. On the economic front, a solid and ambitious economic program (supported by the Bretton Woods Institutions) has been satisfactorily implementedsince the inception o fthe Transitional Government inNovember 2001. This has culminated in Burundi gaining access to debt relief under the enhanced HIPC initiative in August 2005. 39. However, on the social front, the crisis remains acute. Social services delivery has been largely weakened and poverty has increased during the conflict. Thus, while the achievements to date, in particular on the political and economic fronts, are important steps forward, they are only the beginning o f a long process and need to be consolidated. Long term financial assistance from the international financial community will be essential because domestic revenues and savings are not high enough to finance the recurrent and capital expenditures needed to have a significant impact on growth, poverty reduction, living standards, and making progress towards the MDGs. 40. Inthis context, IDA'SInterim Strategy Note (ISN) for the nexttwo years (FY06/07), approved by Executive Directors in May 2005, i s fully aligned with the priorities set forth in the interimPRSP to be mainstreamedinthe full PRSP currently under preparation. It aims at consolidating achievements o f the past transition period, and at setting the stage for sustainable peace and economic growth. The strategic elements o f the I S N are three-fold: (i) promotion o f security, social stability, and improved delivery o f social services; (ii)debt relief, economic growth and diversification; and (iii) strengthening public sector governance and institutions. 41. The first step has beenthe granting of accessto debt relief under the enhanced HIPC initiative in August 2005, which will reduce debt by over 90 percent in NPV terms, and scheduled debt service by some US$30-40 millionper year for the next thirty years. 42. The proposed operation is part o f the long term international effort to provide assistance to Burundi and would focus on the key themes o f the ISN, namely: (i) consolidating the social and economic gains achieved from implementing the I-PRSP in 2004-05; (ii) improving public expenditure management and increasing the level o f pro-poor expenditure and services; and (iii) reviving the private sector including disengagement o f the State from productive activities inthe agricultural, industrial and financial sectors. B. LINKS ANDLESSONS TO LEARNED PREVIOUSCREDITS FROM 43. The proposed operation follows up and builds upon the Emergency Economic Recovery Credit (EERC) and the Economic Rehabilitation Credit (ERC) approved by the Board in2000 and 2002 respectively. 17 44. The objectives o f the EERC were: (i)to support the stabilization and recovery o f the private sector and (ii)finance public expenditures for rehabilitation in critical sectors (health, education, and infrastructure) and reinsertion o f households stricken by the conflict. In parallel with the implementation o f the Credit, the Government undertook a Public Expenditure Review in order to identify measures to improve the transparency sought by other donors as a precondition for resumingsignificant levels o f development assistance. The ICR o f EERC concluded that the operation attained its objectives and maintained them after the closing date, and ratedthe operation as satisfactory, ajudgmentwhich OEDconfirmed. 45. The ERC had broader scope. Its objectives were to: (i) improve the legal environment o f private sector through revisions and updating o f commercial law including the labor code, the insolvency law, and arrangements for the settlement of commercial disputes; (ii)support the implementation o f the privatization program; (iii)support ongoing efforts to liberalize prices and marketing arrangements in the agricultural sector, especially as regards coffee, tea, cotton and the distribution o f agricultural inputs (fertilizer, seeds, etc); (iv) further improve public expenditure management; and (v) reduce gender disparities by: (a) the adoption o f a law allowing women to inherit land and other priorities, (b) the preparation o f a gender action plan to eliminate all gender discriminations, and (c) monitoring the implementation o f the 30 percentplan that requires that female participation inpublic offices be at least 30 percent. 46. The operation had three tranches, all of which have been released. The first tranche was released upon effectiveness (October 2002), while the second was released in April 2003 following: (i)the preparation o f a strategic privatization program; (ii)the production o f a report assessing weaknesses in public financial management and the adoption o f an action plan to improve it; (iii)2003 budget allocations for priority expenditure programs identified in the interim PRSP and the adoption of a system for monitoring the execution of such programs; and (iv) the production of a report on the audit o f the Treasury and an action plan to improve its operations. The third tranche was released (January 2005) following: (i)the adoption o f a comprehensive strategy to revive the coffee and tea sub-sectors; (ii)the adoption o f an action plan for the reform o f the public procurement administration; (iii)the submission to the National Assembly o f draft legislation for the creation o f an Audit Court (Cow des Comptes);and (iv) the adoption o f a gender action plan. 47. Progress with respect to public finance reform has been the most significant. The Government has steadfastly continued to improve public expenditure management systems and an Audit Court has been created. It has made assiduous efforts to improve the structure of expenditure in favor o f pro-poor sectors. Regarding coffee and tea sectors, it took about a year longer than expected for the Government to prepare and adopt the reform strategy (done in late 2004). Recently, the coffee sector reform has begun to be implemented with: (i)the adoption o f key liberalization decrees (first halfo f 2005); (ii) the launching o f a first round o f privatization o f coffee washing stations; (iii)the announcement that key coffee sector institutions will be reformed; and (iv) the setting-up o f the national commission in charge o f the coffee sector reforms, including various partners of the sector (March 30, 2006). However, the Government remains cautious about the possibly adverse effects o f the reforms on producers. The tea reform has yet to begin, but it i s expected to start by the end o f 2006 and beginning of 2007. Progress with respect to the implementation o f the privatization program has beenmuch slower than planned, with essentially no progress. 18 48. The first post-transition Government remains committed to these reforms, which it sees as essential to furthering its development agenda. The important lessons from these operations are that: (i)in post-conflict countries, the structural reform agenda, the pace o f reforms and their sequencing need to take into account specific constraints related to the security, political, and institutional transition that affect the Government leadership and capacity to manage sensitive and complex structural reforms; and (ii)sustainable reforms require support over a protracted period of time for any country but even more in a post- conflict environment. The proposed operation would thus aim at consolidating and deepening those reforms that are geared to address the long-term macroeconomic challenges identified in section 1I.C and where good progress has been made, particularly in the area of public finance management, while strengthening those where progress has been slower or where they are just getting off the ground. (coffee, tea, private sector development), or have yet really to begin brivatization, public sector disengagement). c. THEPROPOSEDREFORM PROGRAM 49. The Economic Reform Support Grant (ERSG), an integral part of the Bank's Interim Strategy (ISN), i s to support the transition to economic recovery and the implementation o f the Government's reform program over the 2006 period. In addition to supporting ongoing Government's efforts for economic and social recovery, the proposed ERSG will support a number o f policy and institutional reforms to consolidate the progress made under the EERC and the ERC, build the base for economic diversification, sustained growth and poverty reduction. The proposed ERSG would focus on the following long-term development objectives: 0 Improving public expenditure management and their impact on the poor; Reviving agriculture export sectors (coffee, tea and cotton) and ensure better revenue distribution sectors among actors; and 0 Reviving the private sector by improving the investment climate, accelerating State divestiture; and settling the government domestic arrears to the private sector. 50. The 2006 program supported by the proposed ERSG was designed following a pragmatic approach, considering efforts already underway and what more needs to be done, looking to both the medium/long-term development challenges and actions that can achieve quick results. One o f the objectives i s to gradually, as the government institutional capacity improves, move away from ad-hoc short-term actions to a more structured reform agenda. The program is based on a three-fold approach: (i) addressing short-term shortcomings and rehabilitating basic State functions; (ii)furthering reforms undertaken under previous operations; and (iii)conducting analytical work through technical assistance to define and refine reformprograms where needed. 51. For each component o f the proposed program, this section provides: (i)the background and key issues; (ii)the medium term reform agenda; (iii)progress to date; and (iv) the main actions expected to be taken under 2006 proposed ERSG program. The full program o f actions to be supported by the proposed operation i s set-out in the Policy Matrix (Annex 3). Moreover, as described in the Policy Matrix, technical assistance and capacity building activities necessary to help the Government in implementing the reform program 19 supported by the proposed ERSG i s being financed under IDA Economic Management Support Project (2003). 1. ImprovingPublicExpenditureManagementand their Impact on the Poor 52. The overall goal o f this component o f the reform program i s to: (i)deepen the reform o f public finance management, as regards expenditures; and (ii)increase the volume o f high quality pro-poor spending. The latter i s particularly important following Burundireaching the decision point under the enhanced HIPC initiative which will provide some US$ 30-40 million per year in debt relief for the next 30 years. Donors are particularly keen on seeing that these resources are used for the intended purpose o f poverty reduction, and that they reach intended beneficiaries, and have the intended impact. Also, these resources should be managed in a way that controls for fiduciary risk. Moreover, it should be possible to track the use o f funds using a functional budget classification. 53. With the resumption o f financial assistance from donors and the HIPC initiative, Burundi'spublic expenditure management has been under close scrutiny. Detailed diagnostic work has been conducted by various donors and technical as well as financial assistance have been provided to the Government in this area (see B o x 1). Given the dire state o f public finance management after a decade o f civil war, the priority has been given to restore the fiscal base and rehabilitate budget management by fixing the fundamentals at every step o f the budget process. Indeed, as summarized in Annex 4 and described in the section below, since 2004 Country Financial Accountability Assessment (CFAA) and Country Procurement Issue Paper (CPIP), significant progress has been made in improving public financial management and reducing fiduciary risk. Box 1: Public Finance Management: Diagnostic and Technical Assistance Public Expenditure Review. Following the suspension of economic embargo in January 1999, the Bank's Interim Strategy (1999-2001) for Burundi was designed as an integrated framework for supporting the re- engagementof donors in Burundiafter almost a decade of civil strife. Donors conditionedthe resumptionof aid on: (i) the achievement of aPeaceAccord and (ii) the initiation of a Bank-supervisedPublic ExpenditureReview (PER), with the primary objective of improving budget transparency. The PER was conceived as Technical Assistanceand was financed usinga PPF advance under the EmergencyEconomic RecoveryCredit (EERC) in 2000. Further work was undertaken inthe context of the 2002 Economic RehabilitationCredit (ERC), o f which US$ 1 million was allocated to the PER Unit within the Ministry of Finance. This unit was charged with carryingout diagnosticwork pertaininginparticularto: (i) budgetpreparation; (ii) budgetexecution; and(iii) the nationalaccounting system. As an outcomeofthe PERwork, areformstrategywas validatedduring a workshop inAugust 2003. HIPC expendituretracking. Inthat context, the Governmentinitiated a diagnostic assessmentof public finance management issues using the 15 HIPC tracking benchmarks related to budget processes with the view to improve management and increase the poverty reduction impact o f resources from the HIPC relief, in preparationfor Burundi's qualificationfor the enhancedHIPC initiative. A report was completedinMarch2003 that includes a program to restructure and modernize the management o f public finance and civil service (conditionfor ERC secondtranche release). Country Financial Accountability Assessment. In addition, in 2003/04 the Bank undertook a CFAA, which systematically reviewed public finance management procedures and confirmed the previous diagnosis. The CFAA action plan proposed as an overall objective, to improve public finance management (PFM) by specifically:(i) streamliningand modernizingrevenuemobilization internallyand at customs; and (ii) providing the governmentwith a framework aimed at strengtheningtransparencyand accountabilityinbudget formulation and executionfor povertyreduction. Country Procurement Issue Paper. Similarly, in 2004, a Country Procurement Issue Paper (CPIP) was preparedtogether with the authorities. Technical assistance. IDA provides technical assistance through the Economic Management Support Project (EMSP). Technical assistancemissions have also been undertakeninthe area of public finance managementby DFID, EU, andthe IMF (publicexpendituremanagement missionsandpublic accountingsystem). 20 a. Deepeningthe ReformsinPublicExpenditureManagement 54. The objective under the ERSG is to continue efforts to strengthen the programming, management, and control o f public expenditureso as to reduce the fiduciary risk and improve efficiency through budget alignment on development and poverty-reducing objectives. 55. The 2006 ERSG program in the area of public expenditure management has three aspects: (i)continue reform efforts which are underway; (ii)address critical weaknesses; and (iii)prepare a medium-termconsolidated reform action plan. Over the last five years, a large number of reform action plans have been developed to address shortcomings in various aspects of public expenditure management. However, these action plans are not well coordinated at the level of the Ministry o f Finance and their implementation i s not systematically monitored except for conditionality measures under donor supported programs. As a result, there i s a lack o f vision, strategy and o f realism regarding institutional capacities. In addition, there has been a proliferation o f fragmented short-term actions, the abandon o f critical measures (for instance some critical reforms envisaged under 2003 Public Expenditure Review action plan have not been followed-through), and a lack o f appropriation by the units in charge; all weaknesses that are not conducive to progress and successful implementation o f the reforms. Moreover, this fragmented approach does not take into account the necessary links among reform measures. For instance it will be difficult to significantly improve public procurement without addressing the issue o f long payment lags (estimated at 60 days in 2004 CFAA). But at the moment, public procurement reform i s managed as a stand-alone reform and payment lag issues are not beingaddressed. 56. To overcome these weaknesses, the Government will prepare a consolidated medium- term action plan for the public expenditure management reform based on all existing reform plans. This consolidated reform action plan will carefully review sequencing issues and schedule among other things the following reforms: (i)the progressive introduction o f a Medium-Term ExpenditureProgram (MTEF) includingbasic elements o f program budgeting (link budget request to results); (ii)a comprehensive budget including consolidated current and capital expenditure programs; (iii)the simplification o f public expenditure procedures and the rationalization o f ex ante controls; (iv) the delegation to sectoral ministries o f the responsibility to manage expenditure commitments; (v) the strengthening o f ex post internal control and audit ; (vi) the transfer o f wage bill management from the Ministry o f Civil Service to the Ministry o f Finance; and (vii) the upgrade o f the interim Financial Management Information System (i-FMIS) into a full Integrated Financial Management Information System (IFMIS). 57. A workshop will be organized jointly with active donors in this area, in particular those providing budget support to Burundi, to launch the preparation o f the consolidatedhtegrated reform action plan. It will focus on: (i)stocktaking o f existing diagnostic work; (ii)stocktaking o f existing fragmented reform action plans; (iii) brainstorming on priorities, sequencing, targets, and outputs; (iv) discussing technical assistance needs in developing the consolidated reform action plan; and (v) launching a joint PEFA reviewhating providing both the Government and donors with: (a) a common reference on which to define reform priorities, adjust the sequencing (building blocs) and 21 base reform targets with a medium-long term perspective; and (b) a common baseline on which to assess future progress. 58. To support this approach, the Ministry o f Finance set up a Public Finance Reform Committee under the direction o f the Cabinet o f the Ministry o f Finance at the end of 2005. The Committee is in charge o f developing, implementing, and monitoring the consolidated reform action plan. In addition, the Ministry o f Finance has set-up a technical reform support team which will be coordinating, managing and monitoringthe reforms on a day to day basis. The ongoing IDA-financed EMSP operation provides technical assistance to this team as needed. 59. The section below describes the main issues to be addressed over the medium-term and progress in implementingreform action plans as well as the measures expected to be taken under the ERSG-supportedprogram. Legal framework 60. Background and key issues. According to the CFAA, the legal framework governing public finance management needs to be completely overhauled. Even though the 1964 Law enshrines most commonly accepted principles, there are a number o f important exceptions. In particular: (i)not all receipts have to be deposited in the Treasury's consolidated account; (ii)there are extra-budgetary accounts which are not included in the Finance Law; (iii)the budget i s not unified; and (iv) there i s no obligation to produce end o f year government accounts. In addition, the Ordonnateur Tresorier du Burundi, OTB, i s also the principal accountant, which contradicts a basic principle o f the separation o f the two roles: that o f government accountant and o f issuingpayment orders. This i s an example o f the inconsistencies and/or contradictions inthe current legal framework that have led to a lack o f clarity o f roles and responsibilities, resulting in undesirable management practices. The control function o f the Audit Court could also be weakened since there i s no legal obligation on the Government to produce end-of-year financial statements (Zoi de r8glement). This deprives the Parliament o f information that would be vital for them in fulfilling their mandate to control public expenditure management, and in particular, to verify whether the budget in any year is executed in line with Parliamentary authorizations. 61. Reform agenda. The Government intends to revamp and update its legal and regulatory framework for financial management. A draft budget framework law (Loi Organique des Finances) whose preparation has been launched will address the existing weaknesses and strengthen the management o f public financing by clearly defining the principles for the management o f public resources in Burundi. It will also provide for budget management procedures that are streamlined and effective. It will provide for the government obligation to produce government accounts in a timely manner, to submit them for audit to the National Audit Court (Cour des Comptes), and to report to the Parliament on budget law execution (budget reporting law). In addition, the draft budget framework law will provide for further integration o f investment and recurrent budgets, the adoption o f budgets that respect MTEF ceilings, and sector allocations in line with the priorities o f the PRSP (see below budget formulation weaknesses). 62. Progressto date. The Government has undertaken a revision and update o f the legal and regulatory framework o fthe budgetprocess. 22 63. 2006 ERSG program.The Government expects to finalize the revision and updating o fthe Budget Framework Law, adopt it and submit it to Parliament before the end o f 2006. Budget formulation and presentation 64. Background and key issues. A program budgeting approach was initiated in the early 1990s but abandoned following the outbreak o f hostilities in 1993/94. The main weaknesses include: (i) weak administrative arrangements for budget preparation both at the Ministry of Finance and sector ministries; (ii)the budget preparation process is fragmented and disconnected from macroeconomic forecasts and budget constraints; (iii)the budget i s not comprehensive, in particular it does not always include current expenditure related to capital expenditure and, investmentprojects are presented separately; and (iv) the budget law does not read easily. It is mostly a list o f budget lines that does not show clearly Government priorities. More importantly, it does not allow for input from sectoral ministries and the debate on competing demands from these ministries. 65. Reform agenda. To improve both budget preparation and presentation, the Government plans, over the medium-term, to: (i)restructure the Ministry o f Finance, in particular, reinforce the administrative arrangements for coordinating the preparation o f the budget at the Ministry o f Finance and in sector Ministries; (ii)initiate the preparation o f the budget earlier inthe year and link it with the country macroeconomic framework; (iii) ensure that the budget provides a comprehensive picture o f central government revenue, expenditure, and the deficit; (iv) resume the preparation o f program budgets starting with selected ministries(see section b. below for expected measures in 2006); and (v) improve the presentation o fthe budget law including adding summary documents and explanations. 66. Progress to date. The budget preparation process now involves greater upstream involvement by line ministries and, sector strategies have been developed for a number o f ministriesto support budget preparation and align the budget to the Government's strategic priorities. The 2006 budget is specifically linked to the priorities identified in the context o f the PRSP under preparation and recent progress in developing sector development policies, particularly in health, education, agriculture, and justice. Moreover, pro-poor expenditures the budget law (prior action - see more details insection b). including those financed under HIPC resources have been identified and are integral part o f Budgetexecution 67. Background and key issues. Centralization and complexity characterize budget implementation procedures in Burundi, yet without adequate controls pertaining to the mitigation o f fiduciary risks. Authority to spend has been concentrated exclusively in the Ministry o f Finance. Representatives from the Ministry o f Finance (financial controllers) perform ex-ante controls in almost every phase o f the procedure (commitments, verification o f service rendered).The multiplicity o fthe stages at which ex-ante verification i s carried out renders the process cumbersome and conducive to delays (the payment lags, defined as the average time between the payment request by the beneficiary and the actual transfer o f funds was estimated at 60 days in 2004 CFAA), inefficiencies and mistakes; in addition, it dilutes responsibility and accountability. Moreover, it encourages the recourse to irregular practices in order to facilitate/accelerate the processing o f bills. The issuance o f payment orders is 23 centralized in the Ministry o f Finance, while payments are the exclusive responsibility o f the Central Bank (Banque de la Rkpublique du Burundi, BRB). 68. The management o f the payroll3 by the Ministry o f Civil Service i s not satisfactory: (i)computerization is limited and thus payrollprocessing involves a number of manual interventions that may be the source of errors or gaps in controls; (ii)the Ministry o f Finance, which i s in charge o f issuing payment orders related to the payroll, i s not satisfactorily equipped to execute the required controls; and (iii)the civil service roster is not regularly updated. A civil service census conducted in 2004 identified 4,000 "ghosts" on a total o f 43,500 representing about FBu 2.4 billion in wages. Externally financed projects4 are executed from special accounts opened either at the Central Bank or in commercial banks. The Ministryo f Finance has limited information onthese expenditures. 69. Reform agenda. The Government has initiated some actions pertaining to the in- depth public finance reform envisaged following 2003 Public Expenditure Review and supported by the IDA-financed EMSP. This reform agenda i s aimed at facilitating, securing, and accelerating budget execution transactions in a transparent and comprehensive manner. Ultimately, all public expenditures would be executed through an integrated computerized expenditure management system (Integrated Financial Management Information System, IFMIS) that covers all expenditures including civil service payroll and externally financed project expenditure from commitment to payment and support government accounting. This reform entails: (i) revisingand simplifying, procedures and streamlining ex-ante controls; (ii) restructuring the financial administration including the Ministry o f Finance to align it with the new public finance management system and creating Directorates o f administration and finance (Direction Administrative et FinanciBre, DAF) in sector ministries; (iii)delegating the capacity to issue payment orders from the Ministry o f Finance to the DAFs in sector Ministries; (iv) strengthening the role of financial controllers in the sector ministries and, partly, to help build capacity for better internal control in the spending agencies, partly to make controls more efficient and less time consuming; (v) transferring the civil service payroll management from the Ministry o f Civil Service to the Ministry o f Finance; and (vi) computerizing the new system. 70. The DAFs to be created in sector ministrieswould be in charge of: (i)coordinating the preparation o f sector budget proposals; (ii)making commitments and issuing payment orders once the service has been provided or the goods delivered; (iii)providing adequate information to update civil service records at the Ministry o f Civil Service and the payroll database at the Ministry o f Finance as well as perform sector related administrative staff management tasks. 71. Ultimately, the new system would coincide with the adoption o f an IFMIS which would strengthen expenditure controls and make timely monitoring and reporting possible. The integrated computerized public finance system would link all agents who intervene in public finance management at the Ministry o f Finance, the DAFs, and the BRB. It would enable the automatic generation o f budget execution reports, Treasury balances and Government accounts (CompteAdministratif and Compte de Gestion). It would also provide Payroll expenses constitute 40 percentoftotal current expenditure. 30 percent of total public expenditure in 2005, aproportionthat is expected to increaseover the comingyears. 24 data to regularly produce the Government Financial Operations Table, which i s the basis on which development partners monitor the execution o fthe Government financial program. 72. Progress to date. An interim Financial Management Information System (i-FMIS) covering public expenditure at every step o f the budget execution (budget allocations, commitments, liquidations, payments orders, payments) was introduced in early 2006, which has dramatically improved the tracking o f public resources through the budget execution chain and transparency o f budget execution. Moreover, the launching of the preparation of procedures manuals for budget execution has been initiated. 73. 2006 ERSG program. The implementation o f the IFMIS is a medium/long-term endeavor supported by the IDA-financedEMSP. Inthe meantime, the Government i s putting in place an interim financial management information system (i-FMIS) covering all the administrative and accounting steps of budget execution, including its extension to wage management and a computerized link with the Central Bank (prior action). The interim system which is based on the new budget classification can generate standard budget execution reports and reports on poverty-reducing expenditure and/or HIPC expenditure execution. It will also be necessary to produce a budget execution manual to support the operationalization o f i-FMIS.The manual i s expected to be completed and formally issued in the form o f an appropriate legal instrumentin 2006. Also, ERSG supports the production on a quarterly basis o f central government financial operations tables as well as quarterly budget execution reports based on i-FMIS statements. To strengthen the management o f the civil service, the ERSG also proposes the following measures: (i)establishment o f a central file and a single identification number for all sectors (education, civil service, army, police); (ii) physical census; and (iii) attribution o f a personalized identification card. Procurement 74. Background and Key Issues. The procurement reform is on the Government's agenda since March 2001 when the Government organized the first workshop on this theme. In June 2003, the Government established a steering committee including representatives from the public and private sectors and the civil society. The steering committee was aimed at carrying out an assessment o f the national procurement system in order to propose a procurement reform action plan. In 2004 the Bank conducted a Country Procurement Issue Paper (CPIP) issued, in June o f the same year. The Government and Bank assessments concluded that Burundi procurement system shows a significant number o f deficiencies: (i) the legal and institutional framework is outdated; (ii)the environment is not conducive to effective procurement as it is plagued by political interference; and (iii)there is a lack o f accountability, as well as non-compliance with the existing procedures, either because the rules and regulations are not widely known and/or due to the absence o f the capacity to handle procurement in an efficient manner. 75. In June 2005, the steering committee reviewed and updated the Government action plan and merged it with the CPIP action plan. The integrated Procurement Reform Action Plan (PRAP) i s built on five components namely: (i) the revision o f the institutional and legal framework with a view to separating the execution function from the regulatory function; (ii) the modernization o f procurement procedures; (iii)the strengthening o f procurement capacity; (iv) the setting up o f an independent ex-post control system; and (v) the enforcement o f adequate measures against corruption. 25 76. Reform agenda. The PRAP as adopted by the Government (Council o f Ministers) is reflected in the ERSG policy matrix. For the implementation o f the PRAP, it i s expected that the Government will do the following: Improving the Legal and Institutional Framework: Establish a modern legal procurement framework acceptable by international standards. To this end, the Government will submit a draft revisedprocurement Code by July 30,2006 to the National Assembly for adoption. As recommended in the reform action plan adopted by the Government, the new law will: (i)create a policy and oversight entity independent of execution; (ii)set up hnctional and competent procurement units inMinistriesand public enterprises. Modernizing Procurement Procedures: Develop tools such as guidelines, manuals, standard bidding documents, model o f contracts, and data bases for technical specifications to be operational in 2007. Strengthening Procurement Capacity: Develop and implement a capacity building strategy. To that end, the Government will prepare, in 2006, a capacity assessment and develop an action plan to strengthen capacity in public procurement. 77. Inaddition to the above measures, the Government has defined an emergency action plan including a set o f measures to be implementedwithin six months aimed at reinforcing the competitiveness and the transparency o f the procurement process. Under the emergency action plan, all the procuring entities will sign a transparency pact committing themselves to: (i)make publicly available their annualprocurement plans; (ii)post on the procurement website to be created the bidding documents and all the information the bidders are entitled to know ;(iii)disclose all information on award o f contract; and (iv) make publicly available the amount, the name o f the parties to the contract, the scope o f the contract for all contracts awarded through direct contracting and the reason o f the direct contracting. The adoption o f this emergency plan is aprior action. 78. Progress to date. An emergency Procurement Reform Action Plan designed to improve competitiveness and transparency in the bidding process has now been adopted by the Government. Financial Management and Reporting 79. Background and key issues. The lack o f harmonization between the nomenclature o f public accounting system and the Budget constitutes a major weakness in Burundi's expenditure management system, and so does the absence o f a computerized linkbetweenthe accounting departments in the Ministry o f Finance and the Central Bank. Movements on Government accounts are registered manually although some specific accounts are computerized (customs and debt). All manual accounts records are centralized and computerized by the accounting service to produce a monthly report. There are inadequate records maintained relating to the administrative phase o f budget execution, and the Ministry o f Finance relies on BRB for information on effective payments to update its own records. However, even this interchange o f information i s weakened by the absence o f the computerized link, and this is one o f the factors that impede the preparation o f Government accounts. Furthermore, weakened treasury controls have led to the proliferation o f 26 Government accounts, particularly those opened for extra-budgetary expenditures, projects, or autonomous administrations.This situation prevents the Government to properly manage its treasury resources. 80. Reform agenda. Starting with the 2006 budget, it is expected that (i)the management system o f Treasury accounts will be computerizedwith the aim o f producing accurate balances for these accounts; (ii)a consolidated administrativeGovernment account (CompteAdministratif); and (iii)a consolidatedpublic accounts balance (Comptede Gestion) will be producedregularly and in a timely manner. In addition, special public accounts will be integratedinto the Government accounting system. The Ministry o f Finance will develop a cash management plan aligned with budget execution. This cash management plan will be computerizedunder the full IFMIS.Annual audit o fGovernment accounts by the Audit Court will be made availableto the public. 81. Progress to date. A unified functional and economic classification o f public expenditure and a double-entry accounting system were adopted in 2004 and are implemented with the 2005 budget. Based on the new functional classification o f public expenditure, an identification system has been put in place to track pro-poor spending and HIPC expenditures. The Government has now submittedthe 2005 budget executionreportto the Audit Court for audit. Also, the Government has taken steps to tighten the rules for the opening and maintenance o f bank accounts, in addition to the closure of most Treasury accountsthat are redundant. 82. 2006 ERSG program. Given that the Grant is under the responsibility o f the Minister of Finance who signed the financial agreement although ERSG supports a multisectoralprogram,the Minister o f Finance will reportto IDA based on PRSP Secretariat (SPREFES) assessmentsheports o f the entire program supported by the Grant. More specifically, the MinisterofFinancewill submit to IDA on a quarterlybasis, and no later than one month after the end of the quarter, a report of activities describinghncluding: (i)the progress report of the implementationof the reform program as described in the Matrix o f Policies; (ii)the implementation o f the macroeconomic policy; (iii)the quarterly Government's Financial Operations Table (TOFE); (iv) a report of quarterly budget execution based on i-FMIS statements indicatingpro-poor and HIPC expenditures; and (v) any informationon recent developments which couldhave an impact on the objectiveso fthe reformprogramsupportedbythe Grant. Internalcontrol and audit 83. Background and key issues. Government arrangements for internal oversight and control were reviewed during the 2004 CFAA. At the moment, the General Inspectorate of Finance (Inspection Ge'ne'rale des Finances, IGF) has a government-wide mandate to perform inspection functions in Government entities. It operates under the authority o f the Ministry of Good Governance where it was transferred from the Ministry o f Finance. The IGF capacity is weak for several reasons: (i) it does not control its auditingprogram; (ii)its autonomy is also limited by a lack of budgetary resources; (iii)its reports are not public and there i s no follow-up on their recommendations; and (iv) its expertise in auditingtechniques i s in need o f strengthening. The recent relocation o f IGF services appears to have created a gap by depriving the Ministry o f Finance o f a service to perform government internal audit functions. The Government has announced its intention to reorganizethe Ministry of Finance 27 and create a department o f internal audit. This, and the envisaged creation o f a General State Inspectorate (Inspection Ge'ndrale de I 'Etat, IGE) under the Ministry o f Good Governance exacerbates existingweaknesses in particular, the lack o f competent human resources and the lack o f clarity o f roles and responsibilities. In the medium term, with the strengthening o f public finance management, the need for ex-ante control should decrease while efficient ex- post financial control and audit functions should be developed. 84. Reform agenda. Inthe short run, the Government will commission a study to design a strategy for government-wide internal audit and control. The strategy is expected to lead to the clarification of the roles and responsibilities of the various institutions, and provide for the operational independence andthe strengtheningofthe capacities ofthese institutions. The strategy will consider the Government's options in: (i)retransferring the IGF under the Ministry o f Finance, and (ii)creating Directorates o f Internal Verification and Inspection in key ministries.The Government will also: (i)prepare a comprehensive program o f institution and capacity building designed to overhaul its internal control and auditing system to be supported by IDA EMSP; and (ii)ensure the broad diffusion o f IGF reports and implement and monitor audit report recommendations. External oversight 85. Background and key issues. The creation o f a National Audit Court (Cow des Comptes) in 2004 was an important step towards the strengthening o f jurisdictional control over public finance management. In order to ensure an efficient control, it will be critical to ensure the continued independence of this institution and its judges through transparency and professionalism inrecruitment policy and through membership o f international organizations. Other Government Public Finance Management (PFM) reforms will enable the availability o f informationnecessary for the Audit Court to fulfill its mandate. 86. Reform agenda. It is expected that the Ministry o f Finance will produce and submit financial statements for audit to the Audit Court for the year ending 31 December 2005. The Audit Court will then produce its audit report in 2006. The Government intends to develop a strategy to assist in the continued strengthening o f the Audit Court to enable it to fulfill its mandate. The strategy will seek to develop a concrete program o f training for magistrates and staff. The Government will also take measures to facilitate the membership o f the Audit Court in the International Organization o f Supreme Audit Institutions (INTOSAI) as a mean o f enabling it to benefit from interaction and knowledge sharing with other similar institutions o f Government external audit. To reinforce the country's capacity for monitoring and auditing, the Government will seek support from reputable international audit organizations to assist the Audit Court in the auditing o f the national budget beginning with the budget endingon December 31,2006. 87. Progress in this area will be an important consideration in subsequent Bank assistance. The computerization o fthe Audit Court i s also supported under the ERSG. 88. Progress to date. The Audit Court officially received the 2004 Government budget execution report in April 2005, and has initiated its audit resulting in the publication of its first budget execution audit (for 2004 budget). The launch o f the recruitment o f 17 magistrates has been initiated. Also, a law providing for a renewable six-year tenure for magistrates has now been enacted. Under the framework o f providing professional training 28 for judges, the IDA-financed EMSP recently funded the visit o f Audit Court judges to countries such as France and Senegal, to familiarize themselves with operationalprocedures o f the audit courts o fthose countries. b. Increasingthe Leveland Impact of Public Spendingon the Poor in Priority Areas 89. Background and key issues. Over the recent years, given the budget and capacity constraints, the Government and donors have put emphasis on controlling the Government deficit and re-establishing basic rules and procedures o f public finance management. With the full PRSP under preparation, progress made in macroeconomic stabilization and strengthening public finance management, the resumptiono f external aid, and the provision of interim HIPC assistance, it is critical to strengthen the Government capacity to implement and monitor a shift inthe compositiono f expenditure toward poverty-reducingobjectives and to improve service delivery in key sectors. As described above, the budget preparation process remains an extremelyformal exercise with little integrationwith the macroeconomic framework and sector development strategies, while it is expected that the full PRSP to be completed in the second half o f 2006, will present a set o f prioritized, sequenced, and well costed poverty reducing programs. Moreover, the country's budgetary situation leaves little room for increasing pro-poor spending in the short-run without proceeding with trade-offs over time. 90. Reform agenda. It is proposed to introduce gradually, but as soon as 2006, basic programbudgetinginthe context o f a Medium-Tern ExpenditureFramework, startingwith: (i)medium-termfiscal forecasts consistentwith macroeconomicprojections; (ii)medium- term sector indicativeenvelopes reflectingthe Government sector priorities as defined inthe PRSP; and (iii) budget programs inkey ministrieswhere sector development strategies basic are available (education, health, water and sanitation, agriculture and possiblyjustice). Pilot ministries should aim at developing sector strategies that can be translated into a logical framework, linking requested inputs to activities, outputs, and specific and sector objectives. Program budgets should cover both capital and recurrent expenditures whether they are financed domestically or externally. In the context o f the preparation of the full PRSP, a medium-term macro-budget framework is being developed as well as sector strategies that will be translated into costed priority sector programs. The Government shall submit a draft 2007 budget law to the Parliamentreflectingan increase o fthe share o f pro-poor expenditure intotal expenditure comparedto 2006 budget. 91. Progress to date. Pro-poor expenditureprograms includingHIPC expenditure to be reflectedin 2006 Budgetlaw have been identifiedand tracked under the Governmentbudget and accounts classification system. Also, the Government submitted a draft revised budget law for 2006 to the Parliamentreflectingan increase inthe share of pro-poor expenditurein total expenditure comparedto the 2005 budget. 92. 2006 ERSG Program. The Government has informedIDA staffthat the proceeds of the grant will be used for povertyreductionprioritiesas definedinthe I-PRSPandthe PRSP, and monitoredby a special committee. It was agreed that in anticipationof the consolidated reform action plan expected to be prepared in 2006 and which will provide for the institutionalizationofa medium-termexpenditureframework and basic programbudgetingin 29 priority sectors, measures would be taken in 2006 to improve the preparation o f 2007 budget. Inparticular, the MinistryofFinance will: Advance the launching o f budget preparation to June; Base budget forecasts on a medium-term macroeconomic framework and clear sector objectives and result indicators where sector development strategies are available; Provide sector ministrieswith indicative sector envelopes including current and capital expendituresconsistent with macro-budget constraints as identified in the macroeconomic framework; Strengthen with the support o f the EMSP, the capacity o f the Budget Directorate and sector ministriesto prepare the budget; Set up a budget preparation committee in sector ministries (given that the setting- up of Financial Administration Directorates (DAFs) in sector ministrieswill take time); Request from sector ministries to prepare sector expenditureprograms consistent with the PRSPpriorities and the indicative sector envelops. ImprovingMonitoring and Evaluation 93. Backgroundand key issues. The I-PRSP proposes an ambitious and comprehensive system to monitor the poverty reduction strategy, based on three components: (i)poverty monitoring per se; (ii)monitoring of the implementation of poverty reduction policies/programs; and (iii)the PRS and policy impact evaluation; and monitoring PRSP overall objectives. Although studies and surveys have been conducted recently with the support o f donors includingthe Bank, to date, given severe capacity constraints, this system i s not operational. It i s expected that the hll PRSP will propose a comprehensive plan to improve data collection and analysis, and establish a comprehensive and sustainable Poverty Reduction Information System. 94. Improve poverty data. Studies and surveys, as well as other socio-economic research conducted inthe past, have provided much useful informationon poverty inBurundi,but that information i s neithercomprehensive nor continuous. 95. Strengthen the monitoringof PRS imulementation. The full PRSP is also expected to contain a more precise monitoringand evaluationplan, includingnew periodic surveys. Ensure the regular production o f key statistics and performance indicators: Inthe context o f the preparation o f the PRSP, work is being conducted to identify PRSP monitoring indicators and data sources gaps (surveys and/or administrative data). It is expected that in addition to the list o f monitoring indicators and targets, the PRSP will present a plan to fill these gaps. In particular, most ministries have a Directorate o f Studies and Planning which includes a division o f Statistics. These units needs to be strengthened (work program, human resources, equipment, computerization, methodologies and tools) in order to resume regular production o f statistics useful for decision making. This i s particularly urgent for Education, 30 Health, Agriculture, and population (at Ministry o f Interior). See next section on statistics. 0 Tracking poverty-reducing expenditure: Existing expenditure tracking mechanisms are, by the Government's own admission, insufficient to effectively keep track o f pro-poor expenditures. With the i-FMIS, operational since the beginningof 2006, it is technically possible to track pro-poor spendingand HIPC expenditure that have been identified under the budget classification. Based on the unified budget functional and economic classification o f expenditure, pro- poor spending that include HIPC expenditure have been identified both in 2005 budget and in 2006 budget. Identified pro-poor spending have been codified into the budget classification so they can be easily tracked and periodic execution reports will be prepared. The Minister o f Finance has recently set up an Independent Oversight Committee to monitor expendituresfinanced by enhanced HIPC initiative as agreed at the HIPC decision point. This committee will intervene ex-ante and ex-post but will not interfere with normal budget execution procedures. Moreover, the committee can order audits o f the dedicated account to make sure that HIPC resources have been used for their intended purposes as specified inthe budget law, as well as other types o f audits. 0 MonitorinP progress in deliverv o f services in key sectors. As a trigger o f the HIPC completion point, the Government i s committed to complete for education, health, and justice sectors: (i)a public expenditure tracking exercise; (ii)an evaluation by users o f the quality o f services provided; (iii)an evaluation by providers o f constraints to effective delivery o f services; and (iv) the preparation o f an action plan to address problems identified. A technical team comprising concerned line ministries, the Ministry o f Finance and the National Institute o f Statistics has been set-up under the leadership o f the PRSP Secretariat (SPREFES) which i s also in charge o f coordinating the action plan to reach the HIPC completion point. An action plan, budget and timetable have been prepared by the PRSP Secretariat. The work is expected to be completed by September 2006. The Bank i s providing technical assistance and financing is expected from a BelgiumTrust Fundwhich i s also assistingBurundiinpreparing the full PRSP. 96. Evaluating the impact on poverty o f PRS policies, reforms, and programs. With the adoption o f the coffee sector reform strategy in 2004, Burundi has engaged in a long and risky process. As developed below, Burundi is liberalizing its coffee sector by restructuring and privatizing all enterprises intervening in the sector including the coffee parastatal, OCIBU, and by promoting strong producer organizations. A key objective o f the reforms i s to improve farmers' income. Such a reform i s raising a lot o f concerns from various stakeholders that can impede the pace o f implementation and undermine its effectiveness. To address these concerns and fine tune the reform program, and following preliminary work completed for the Burundi poverty report and presented in March 2005 in the country (see Annex 5), the Government will initiate a poverty and social impact analysis to examine the likely impact of the reforms on different groups and to get a sense o f the welfare impact on farmers. Moreover, the study will propose permanent monitoring and evaluation mechanisms. Technical assistance financed under the EMSP and a Belgium Trust Fund will be made available. 31 97. Developing statistics and strengthening monitoring institutions. The weaknesses o f - Burundi's statistical apparatus have been well identified and there is a consensus among donors on the priorities (AFRISTAT, 20015; UNDP6, 2004; IMF Data Dissemination Standards GDDS; 2004). Main weaknesses concern the legal framework, the institutional capacity and statistic production o f the National Institute of Statistics (ISTEEBU) and sectoral statistics as monitored under the IMF GDDS initiative which are the core sectors to monitor IMF programs. While it i s critical to restore the National Institute o f Statistics capacity to produce key statistics, conduct survey work, and coordinate the overall statistical system, it is necessary to progressively strengthen the rest o fthe statistical apparatus. Incomplete and outdated statistical legal framework: The development o f statistics i s hampered by: (i) the lack o f a modern statistical law; and (ii)the lack o f an effective coordination framework for statistical programs (3 8 services under 12 ministries). A draft statistical law and related implementation decrees7 were transmitted to the Council o f Ministers for approval. The Government will shortly discuss these draft documents with the view to get the law and the Statute for the staff o f ISTEEBUsubmittedto the Parliament in early 2006. Critical gaps in statisticalproduction: There are a number o f fimdamental gaps that undermine the Government's ability to design, implement and monitor appropriate policies and programs. These include the General Population Census and an agriculture survey combined with a budget-consumption survey. The General Population Census is due every ten years and the latest was carried out in 1990. Conducting a General Population Census is essential to update the surveys sampling base. An agriculture survey combined with a budget-consumption survey is also indispensable to resume the production o f national accounts which were discontinued in 1998. The next general population census is scheduled for 2008. Moreover, the National Institute o f statistics institute will update the emergency program proposed by AFRISTAT in 2001. This emergency plan covering 2006-08 will provide for : (i) the resumption of national accounts; (ii) the preparation of agriculture surveys as a basis for producing reliable national accounts; (iii)the conduct o f the general population census; and (iv) the preparation o f a five-year statistical development plan based on identified priorities o f statistics demand, in particular the rehabilitation o f basic statistical infrastructure, the monitoring o f Government policies and programs, the PRSP indicators, and the MDGs. The five-year statistical development plan will include an institutional development plan and a capacity building program based on the proposed statistical production program. The 2006-08 emergency program i s expected to be adopted in July 2006 in order to be reflected inthe full PRSP. The adoption o f this emergency program i s a prerequisite for IDA EMSP to provide assistanceto the National Institute o f Statistics. ((Rapport d'Cvaluation du systkme statistique du Burundiet propositiond'un mecanisme d'elaboration d'un programme de developpement statistique, MartinBalCpa B. ((Mission de consultationpour 1'Claborationde la loi statistiqueet des textes d'application y relatifs dans le cadre du renforcementinstitutionnel du systkme statistique au BurundiD, report discussed at the National validation workshop on December 3,2004, Bujumbura. One decree regardingthe role, composition, and organization ofthe National Committee for StatisticalInformation (CNIS), and adecree restructuringthe national statistical institute. 32 0 ISTEEBU is not able to play its role because o f weak material and human resources and dependency to donor financing (work program contingent to donor financing). As a result, data collection i s characterized by overlapping and gaps, and lack o f continuity. This assessment was made in 2001 AFRISTAT report and concrete proposal were made to remedy this situation in the short and longer run. So far, very few actions have been taken. A five-year action plan (2004-08) to strengthen its capacity has been prepared and adopted by the Steering Committee for statistics system enhancement. This action plan is to be financed by donors including the World Bank, UNDP, France, etc. Unfortunately, this action plan focuses on capacity building with little consideration with statistical production. Inparticular, it does not finance fundamental statistical activities such as national accounts, general population census etc. Theses issues will be addressed both in the context o f the emergency program and the five-year statistical development plan. 0 Strengthen priority sector statistics: Preliminary evaluation o fthe statistical units in priority ministries (education, health, interior (population, registry), and agriculture) indicates that the availability, quality, and reliability o f basic statistics are hampered by: (i)the lack o f professionals; (ii)the deficiencies o f data collection systems; (iii) the lack of computerization; (iv) the dependency to external technical assistance and financing; and (v) weak methodologies/tools. In line with the approach taken for the National Institute o f Statistics, the Government will prepare for each o f the priority sectors, an emergency plan for 2006-08 that will provide for: (i)a minimal production program; (ii)immediate capacity building measures to ensure sector statistical units are able to implement the minimal production program; (iii)a plan to prepare a five-year statistical development plan based on effective demand for sector statistics. The EMSP and a BelgiumTrust Fund can provide assistance to prepare the emergency plans that will need to be reflected inthe full PRSP. 98. Reform agenda. To fill the statistical information gap mentioned in paragraph 97, Burundi i s introducing a permanent system o f poverty information. This system would provide welfare monitoring indicators for the population at large as well as specific welfare indicators o f poor households. The interim PRSP contains fairly up-to-date data on prevalence and characteristics o f poverty in Burundi. The combination o f household survey data and extensive consultations enabled the collection o f information on key social indicators and poverty including regional poverty incidence. It i s expected that the full PRSP would contain a more detailed analysis o f the data and a better assessment o f key determinants o fpoverty. 99. On improvingpoverty data, the Government will prepare and adopt a comprehensive plan under the full PRSP to improve data collection and analysis, and establish a comprehensive Poverty Reduction Information System. With respect to improving statistics, the Government will (i)submit to the Parliament the draft legal framework for statistical activities; (ii)adopt and start implementing a 2006-08 emergency plan for the National Instituteof Statistics to be reflected in the first PRSP; (iii)launch the preparation o f a five- year statistical development plan as part o f the emergency plan for the National Institute o f Statistics; and (iv) prepare and adopt a 2006-08 emergency plan for sector statistics 33 (education, health, agriculture, and population). On monitoring the impact on poverty o f policies and reforms, the Government i s expected to establish a monitoring and evaluation system o f the social and environmental impact o f coffee sector reforms including an ex-ante evaluation o f the impact of the reform measures identified in the detailed reform action plan once it has been adopted. On monitoring the implementation o f poverty reduction policies and reforms, Government will (i) prepare and adopt an action plan to improve data collection and analysis for monitoring the implementation o f the PRSP; (ii)prepare a report on the execution o f pro-poor expenditureprograms and HIPC expenditure and submit it to the HIPC Expenditure Oversight Committee; and (iii)implement the action plan related for the HIPC completion point trigger related to monitoring progress in delivery o f services in education, health andjustice sectors. 100. Progress to date. The institutional framework for coordination, monitoring and evaluation o f the reform program has been established. In fact, the inter-ministerial committee chaired by the Vice-president in charge o f social and economic reforms and the PRSP Secretariat (SP-REFES) have been reactivated by the decree o f June 6, 2006. Moreover, the first meeting o f the committee was organized on May 22, 2006. Relevant Ministers, member o f the committee, have been asked by the Vice-president to designate their representatives inthe Technical Committee which will serve as counterpart to the PRSP Secretariat. A household survey on poverty perceptions was carried out in 2004 as well as a Core Welfare Indicators Questionnaire (CWIQ) in 2002. The 2005/06 edition o f the CWIQ i s underway and first results are expected early in the third quarter o f 2006. Also, the Multisectoral Indicators Cluster Survey (MICS) i s ongoing with detailed results expected in 2006. An action plan to improve data collection and analysis for monitoring the implementation o f the PRSP i s described in the first PRSP. In April 2006, an FBu 100 million line was included inthe revised 2006 Budget as a provision to ensure that ISTEEBU starts producing at least national accounts data while other sources o f funding become available. Also, the membership o f Burundito AFRISTAT i s underway. 101. 2006 ERSG Program. In order to ensure that budgetary resources (including the Grant) reach the final beneficiaries, the Government will undertake, with the help of the World Bank, a Public Expenditure Tracking Survey (PETS) for 2006 inthe education, health, and justice sectors. This survey could be financed under IDA Economic Management Support Project ,(EMSP) and through a Belgian Trust Fund. As mentioned in paragraph 95, this is atrigger for the HIPC completionpoint. 2. Accelerating Growth a. Reforming the Coffee, Tea, and Cotton sectors 102. Overall Background. Agricultural exports (coffee, cotton and tea) will remain the mainstay o f the Burundian economy in the near future although there i s a considerable potential for growth in other sectors including non-agricultural exports8. However, several internal and external factors have hampered their adequate development. Since 1992, the Burundian Government has embarked on structural reforms in the export sector, with a The Diagnostic Trade IntegrationStudy conductedinBurundi in2003 provides a general reform programto harness this potential (see a summary ofthe DTIS inAnnex 8). Also, the Bankwill conduct a growth study in agriculture sector inFY07. 34 particular emphasis on coffee sector which provides 60-80 percent o f the country export revenue, contributes to 50 percent o f its GDP and supports about 800,000 families (see Annex 5). The political crisis in 1993 and the following economic collapse brought the reform program, inparticular the Government disengagement process, to a halt. 103. The first post-transition Government has renewed its commitment to promote agricultural exports as a way to ensure sustainable rural development as well as overall economic growth and poverty reduction. To this end, coffee, tea and cotton sector reforms are at the top o f its rural development agenda which aims to increase farmers' revenues through improved sector competitiveness in terms o f price and quality. Reform programs include: (i)liberalizing all activities in the sectors including price setting and marketing; (ii) setting-up an adequate legal, regulatory and institutional framework conducive to private investment; (iii)privatizing Government's assets in the coffee, tea and cotton sectors with growers being able to hlly participate as shareholders; (iv) providing adequate services (feeder roads, information management systems, extensionhesearch, access to inputs and fertilizers, etc.) to secure increased production levels and improved quality; and (v) providing the needed accompanying measures (social safety nets, setting up of price fluctuation protection and risk management instruments, and capacity strengthening for institutions in the sector). Coffee sector 104. Backgroundand key issues.The coffee sector is in crisis and the principal cash crop for most Burundian farmers is failing to deliver them an adequate income - indeed, their income is currently so low that over half o f them cannot afford the basic essential services of primary education for all o f their children or simple health care for their families. Performance has been low and in decline due to structural issues that have been aggravated by a decade o f insecurity and conflict, poor management and governance, and a sharp decline in international price of coffee. The coffee sector suffers from low and declining coffee production and yields (coffee yields are down to an estimated 200/250 grams per tree which i s extremely low and less than half those that Kenya i s enjoying or 450-500 gramdtree). Quality is also declining. Burundian coffee, which formerly commanded a premium on world markets, has been sold in recent years at a discount. The sector i s also characterized by high intermediary costs that result in low share o f producers in border price compared to regional standards (over the 1999-2004 period, the producer share o f fully washed coffee varied between 55 percent o f the Kenya FOB market price to 72 percent) and huge financial deficits (the sector has been in financial deficit since 1997) that has been up to recently a drain on public finance (the current sector debt i s estimated at US$ 12 million). 105. The sector performance is hampered by: (i)tight State control and monopoly in ownership, management, pricing, processing and marketing; (ii)weak participation o f growers in decision making; (iii)production problems and years o f neglect o f industrial equipment and research facilities aggravated by a decade of civil war; and (iv) high cost o f financing; all this in a context o f unprecedented low world coffee prices. Tight State control and monopoly inownership, management, pricing, processing and marketing resulting in low competition and distorted price incentives: Until 1992 reforms which opened timidly the sector to private investment, and 2005 measures to liberalize the sector, the coffee sector has been under the control o f the State at every 35 stage including the production (see Box 2). The absence o f competition and a highly administrated sector plagued with mismanagement and low capacity have led to high intermediary costs, low share o f producers in the border price compared to regional standards, and lack o f incentives to improve performance at all stages. 0 Production problems and years o f neglect o f industrial equipment and research facilities aggravated bv a decade o f civil war: Low productivity i s explained by a number of factors, including: (i) fact that growing conditions are not optimal in the much o f the country and nearly a quarter o f trees would have been planted on unsuitable land where yields are particularly low; (ii)security problems, lack of funding, weak capacity, and lack o f incentives have had a dramatic impact on the effectiveness of extension services; (iii)diseases have become more severe inthe past few years and chemical control is extremely expensive and not always effective; (iv) many trees are not well tended or need replacing but budgetary problems have literally brought coffee research to a halt. Research and extension services have failed to introduce new varieties over the past 30 years, with the result that the two most common varieties o f coffee are those that were being planted in colonial times; and (v) farm-gate prices are so low that farmers are not willing to invest more in their coffee, reducing diseases and improving yields. On the processing side, the State has been unable to finance the maintenance and the replacementhpgrading o f equipment. Processing has been further hampered by power shortage. Milling factories operate much under their capacity given average production levels (e.g., SODECO: 42,000 tons; SONICOFF: 12,400 tons; and SIVCA: 8,200 tons) generating high fixed costs. Moreover, the SODECO processing systems prevent access to coffee specialty markets as they involve mixingall qualities. 0 Poor management and governance: Despite its statute change from a governmental agency to a mixed enterprise with share capital o f 65 percent privately subscribed, OCIBU' s managers were appointed by the Government and retained substantial effective control over the coffee sector. Poor management and governance on the marketing front have been particularly detrimental to the sector development. Although green coffee was owned by SOGESTALS and to some extent SONICOFF and SIVCA, export decisions (through auctions) were made by OCIBU which considers itself as holding the sole mandate to bring the harvest to market by conducting the auctions itself. In fact, the auction committee membership was restricted to OCIBU management staff whose wrong market decision led to a considerable increase in financing and storage costs at the expense o f the owners. This was especially the case in2002/03 harvest (unusually highat 37,000 tons) where slow initial sales led to the accumulation o f stocks in a falling market and quality deterioration. An apparent failure to meet market price offered at auction led to the withdrawal o f many unsold parcels to be reoffered later with huge losses. Moreover, retribution o f the different actors in the sector has not always been made in transparent manner. In fact, while the sector was regularly affected by huge deficits these past years, dividends were regularly paid to SOGESTALs memberships at the expense o f the sector, the State, and the economy (for instance, about US$ 12 million o f dividend over 2004/05 campaign were distributedto the SOGESTALS when large sector debt i s not served). 0 Unsustainable high cost o f financing: Up to and including the 2003/2004 harvest, the collection, processing and export o f coffee have been financed by a consortium o f 36 local banks. The State guaranteed any shortfall between the official producer price and the net sales value and provided refinancing through the Central Bank at subsidized rates. OCIBU has been unable to repay loans received from commercial banks, which have not received the shortfall due to them under the guarantee extended to them by the State. Instead they have received Treasury bonds (FBu 10.5 billion), on which the Government has also accumulated arrears. Arrears on payments o f both principal and interest have accumulated, creating serious concerns in the banking sector. Sharp decline in coffee international price: The collapse o f world coffee prices following the end o f the last International Coffee Agreement in 1989 has been well documented, and its devastating impact on the economies o f producer countries i s well known. The value o f Burundi's coffee exports, for example, was around US$ 20 million in 2001/2002. However, at 1980s prices, the same coffee would have earned the country US$48 million. The loss o f US$ 28 million in income as a result o f the fall in world prices represents a sum equal to nearly one-fifth o f the total budget o f the State, far more than the amount spent annually on health care and education. These figures understate the position: higher export prices would have raised the level at which investment in coffee i s economic, so that volumes and quality would have been higher too. Nonetheless, Burundian coffee has consistently been traded at discount prices, i.e. at prices below the international price for the same grades o f coffee - a gap increasing from 10 percent to 30 percent over the last decade. There are three related problems. First, the l o w price o f coffee worldwide means buyers can choose where to place their orders. Second, Burundian coffee i s o f poorer quality than Kenyan or other competitors' coffee, so the price i s lower. Third, the auctions are poorly managed (see above). Moreover, the whole structure o f the sector, whose losses have always been underwritten by the State, is not conducive to entrepreneurial initiative. The SOGESTALs are not allowed to look for their own markets, and have little incentive to do so anyway. A s a result, most coffee importers have little reason to take an interest in the Burundi coffee, unless they know there are bargains available. 37 Box 2: Burundi-Coffee Sector- Production, Processingand Marketing I Coffee berries in the fully washed line are bought b!. a washing-station company -either directl! from the farmer or via a middlemantrader (the s!'stem of traders was initiated by the washing stations in early 2002). The washing stations are owned b!' the State. but are managed b!. regional companies which until recentl!. had a monopol!. on all the \\.ashingstations in their area. There are fi1.e such regional companies. called SOGESTAL (SociPrL; de Gestion des Stations de Lavages). and until recentl! the!. too were state-owned. There has been limited pri\.atization of these companies. hich jealously guard their monopolies. but three out of fi1.e of them \\ are still more than half-owned b!. the State. There is also one prkate cornpan!. - SOSICOFF (1998) - no\\ allowed to run nashing stations. The coffee beans. once bought b!. the local SOGESTAL. remain its propert!' until it sells them at auction. Parchmentcoffee is cured. which in\,ol\.esremo\.alof the parchment.graded and bagged b!. one of two factories olvned b!. the State and managed b! SODECO. a state cornpan!. with an almost total monopol! on curing fully \vashed coffee. SODECO is paid a set percentage of the sale price of the coffee. decided each !ear b!. the Government. The washed coffee. processedb! farmers is cured by one of three companies allo\\ed to cure it - SODECO. SONICOFF or. in northernBurundi, SIVCX (1995). The resultant beans are knojvn as green coffee. Once the green coffee is bagged. it is stored until it is sold at auction.Auctions are arranged b!. OCIBC. the state coffee authority. and nobod!. \\as allo\ved until recentl!, to export their coffee except \,ia an OCIBL auction. These are held e\ er)' neek in the capital Bujumbura. and any of the licensed exporters. members of ABEC (the Burundian Association of Coffee Exporters), ma!' attend. OCIBL decides which coffee it wants to sell. and will ask coffee onners (SOGEST.ALs or one of the pri\.ate companies) to suppl!. a certain quantit!. of coffee of a given qualit!. The exporters send samples of the green coffee beans to the importers \vith nhom the) are associated with in Europe. America or Japan. If the resen'e price set by OCIBL is reached. then the coffee is sold to the highest bidder. If the resene price is not reached. OCIBU will withdrav the coffee and will try and sell it again at another auction. The mone!. recei\ed at auction is then dkided up between all the stakeholders. according to a formulae laid doun by the Go\,ernment. Certain percentages go to OCIBU for managing the countr).'s coffee sector as a whole: to SODECO for curing the coffee: to the \[inistry of the Interior for the tax le\,ied for commune administration: and to the \linistr). of Financeto repa)' in\.estmentsin the infrastructure o f the washing stations. The balance left o\'er is in theor) for the owner of the beans - one of the fi\,e SOGESTALs or SOSICOFF. In practice. though. for most of the past !'ears there has not been a balance but a deficit. caused mainl! b!, losses on washed coffee. The State has co\,ered losses b!, issuing treasun' bonds to repa! the banks for loans made to finance the purchase of coffee from farmers and traders. The "prkate" companies function. in a sense. less as entrepreneurialbusinessesthan as service pro\,idersfor the State. being paid a set amount regardlessof the value of their coffee - in a not dissimilar fashion to SODECO. The guarantor of everl'one in the coffee sector is the Central Bank BRB (Banyue de la RPpbliqur du Burundi)- in other words. the State. 106. Reform agenda. The early reform program during the 1990s succeeded to replace the State's export monopoly with an open auction system. The State Coffee Agency, OfJice de Cafe' du Burundi (OCIBU) was restructured and charged with the development and co- ordination o f the overall sector strategy, including marketing. Operational responsibility for the 133 government-owned coffee washing stations was transferred to five regional management companies: Socie'te's de Gestion des Stations de Lavage (SOGESTALS).~ Another company, Socie'te'de De'parcharge et de Conditionnernent (SODECO) was created to operate the two coffee mills. However, a lack o f political will compounded by the 1993 conflict brought this reform to a halt. 107. The objectives and the focus of the reforms. The main assumption under the current debate over the need for reforms i s that, in the short to mediumterm at least, coffee will remain essential for the Burundian economy. Moreover, the crisis in the sector is such ~~ These play a centralrole inthe campaign,beingresponsiblefor maintenanceo frural tracks, providing inputsto farmers andpayingthem. 38 that all are convinced that some reform i s needed. It i s also generally acknowledged, however, that the vested interests o f individual actors can mean that reforms are subverted, blocked or at least delayed. The overall objective o f the reform is to reverse current trends that are detrimental to the Burundian economy. With the reform, the ultimate goal pursuedby the Government is to increase farmers revenues through an adequate share o f the international price paid for the Burundian coffee, thereby contributing to its poverty alleviation agenda inthe rural areas. 108. In order to make coffee more profitable to Burundi, reforms would focus on three main lines: Liberalizing the sector and reducing the role of the State through: (i)freeing prices at all levels including producer prices and export prices, and removing State guarantees; (ii)freeing entry into the sector from production to export, opening the sector to private investment; (iii)ensuring free and fair competition at all levels (farm-gate purchasing, washing station operation, coffee milling, and export); (iv) removing all unnecessary bureaucratic controls including at the production level; and (v) selling o f the State assets to the private sector; Improvingproductivity of coffee orchards: impliesthat bold actions are taken to rejuvenate the Burundian coffee orchard. In this perspective, it i s important for Burundi to re-establish its research capacity and closely link it to an efficient extension service which could provide services and disseminate the basic technology and the adequate information to farmers and other stakeholders in a timely manner. This would imply an overhaul of the institution framework with the redefinition o f the role o f different actors, in particular the role o f the State, the private sector and farmers and their organizations without neglecting the establishment o f effective public-private partnerships; Improving quality to attract premium prices in niche markets: in a liberalized coffee industry, private washing station operators will have direct access to the market. This would enable them to establish relationships with importers and roasters, to tailor coffee characteristics to the requirements o f such buyers, and to enter into longer-term supply contracts. Such contracts would in turn enable them to offer growers attractive and guaranteed prices to ensure production sustainability and quality improvement. It i s expected that Burundian coffee would be able to penetrate, on the long-run, the market for specialty coffee on the world market. 109. While these first steps are decisive, the success of the reform will require not only liberalizationof marketing and pricing as already put in place by the January and June 2005 decrees, but additional measures. To achieve the ultimate objectives o f the reforms, it would be necessary and important to clarify the following: (i)the regulatory framework within which a liberalized and privatized sector would operate (essentially what will be the rules o f conduct in a liberalized sector) (ii)the institutions responsible for enforcing agreed on rules; (iii)the role o f different actors, private sector, farmer organizations, and Government; and (iv) the management and funding o f the critical functions and services necessary for running the sector and support an improvement o f production levels, yields, and quality (extension, input supply, research, quality control, road maintenance, etc.). Moreover, while adopting this reform strategy, the Government expressed 39 concerns relative to the crop financing following the suppression o f Government guarantee to banks operating in the sector and the possible negative impact on farmers in a case of continuing price fall on the world market. The success o f the reforms will require addressing sector financing issues and setting appropriate risk management instruments. In effect, the removal o f State guarantee changes the way that commercial banks appraise credit worthiness o f individual operators. The banks will demand sound balance sheets and adequate collateral to secure advances, often lacking in the past. Burundi legislation deals with collateral (but not bankruptcy) but does not adequately cover the security requirements o f banks financing trade in commodities. This could impede access to reasonably priced credit and so, indirectly, impact on farm gate prices. Moreover, a liberalized market also exposes the industry to price risk, presently assumed by the State. In a liberalized environment, coffee processors and exporters will, in the future, need to protect themselves against price risk, not only because o f price volatility but also because without cover against price risk reasonably priced credit may, again, not be available. Additionally, if price risk cannot be covered, then processors and exporters will have to increase margins instead, impacting still further on farm gate prices. Presently risk management instruments are not available in Burundi nor do foreign exchange regulations make provision for such transactions. The International Risk Management Group, under the auspices o f the World Bank, could develop capacity with the Burundi financial system by carrying out the necessary familiarities and training activities in light o f what has been successfully done and achieved inthe Tanzania coffee sector. 110. Progress to date. Under IDA EERC, the Transition Government committed itself to liberalize and to gradually withdraw from the sector includingthe sale o f State assets such as washing stations and coffee mills. Assisted by EU and IDA, the Government prepared a coffee sector reform strategy and action plans, which were adopted by the transition Government in October 2004. This strategy called for: (i)immediate liberalization o f entry into the sector at all stages, in particular primary marketing, processing and exporting; (ii) liberalization o f primary marketing and producer prices as o f the 2005-06 crop season; (iii) abolition, as o f 2005, o f government guarantees to commercial banks extending crop financing to OCIBU and SOGESTALs; (iv) the privatization o f individual coffee washing stations, the SOGESTALs and SODECO; and (v) reform o f the key public sector institutions operating inthe sector. 111. Inorder to implement swiftly the reform strategy, the Transition Government took in 2005 a number o f critical measures to liberalize the sector, alleviate the burden on public finance, and initiate the disengagement o fthe State from the sector. These measures include: 0 Hold a national workshop in March 2005 with all stakeholders to validate the coffee sector reform strategy; 0 Adopted a Presidential Ordinance liberalizing entry at all levels o f the sector (January 14, 2005); 0 Adopted a Ministerial Ordinance, which (i)liberalized prices throughout the sector; and (ii) authorized direct sales, i.e. bypassing OCIBU (on June 16,2005); 0 Adopted a ministerial Ordinance stipulating that OCIBU will become a coordinating and regulatory agency (June 8,2005); 40 Abolished, as o f 2005, Government guarantee to banks extending crop financing to OCIBU; Launched the bidding process for the sale o f two washing stations in August 2005. The latter was unsuccessful as there were no offers. 112. Moreover, the Transition Government took a number o f measures that had an immediate positive impact on producer's income and in order to facilitate the financing o f 2005-06 crop season in the absence o f State guarantee to the banks extending crop loans. A supplementary payment was made to farmers o f FBu 30 per kg for the 2004-05 crop year, given that the sector had an operating surplus o f FBu 15.6 billion for the first time since 1998/99. The remainder o f the surplus was to be used to finance the 2005-06 crop (FBu 6.7 billion) and the purchasing of phyto-sanitary products and fertilizers for sale to producers (FBu 2.7 billion). The Government also eliminated a para-fiscal levy on producers without any counterpart service (tax verger). 113. 2006 ERSG Program. Under the ERSG, concrete actions will be initiated by the Government with the support o f the Bank and other donors. They will focus on the enabling and regulatory environment and the disengagement o f Government from the industrial and commercial activities o f the sector. These actions are part o f an agreed roadmap (see Annex 6) which sets out all the steps that need to be taken to implement the reform strategy and manage its multiple effects. Under this road map the Government has agreed on the following: The setting up of an appropriate legal, regulatory and institutional framework consistent with a liberalized and privatized environment. This will include the definition and/or the redefinition o f the roles o f the many actors, public and private alike, which will be required to support higher levels o f production and an improvement in quality. Furthermore, quality enhancement will certainly also require new investments in the industrial sector. It will therefore be important to ensure that the overall legal and regulatory fi-amework defines clear rules o f conduct for all concerned and does not discriminate against new private sector investment in the coffee sector. The first step will be to conduct an assessmento f existing institutions, especially OCIBU and other public sector agencies, and to redefine their roles if necessary so that they can function in a liberalized environment and effectively contribute to improving quality and increased production. The rules and new institutional structure should be inplace as soon as possible and operational no later than the beginning o f the 2007/08 crop season. This process needs to begin as quickly as possible. The provision andfinancing mechanismsfor key services (extension, research, maintenance o f roads, access to fertilizers, quality control etc.) to support an increase inproduction and improved quality. 0 The setting-up o f an ef3cient information management system should be in place to make public, decrees and ordinances recently taken to foster competition. Stakeholders, particularly farmers and their associations should have easy access through local mass media to up to date information regarding domestic as well as international prices for cherries and parched coffee. 41 0 Accompanying measures will be needed including: (i)social safety nets to help the poorest producers to adjust to the new environment; (ii)the setting-up of modern financial risk management techniques both by exporters and banks to enable them to hedge against price fluctuations in the internationalmarket; and (iii) capacity buildingfor producersorganizationsandnew institutions. Other related reforms in the areas of private sector legal environment,financial sector, and fiscal regimes would be needed to maximize the potential positive impact o fthe coffee sector reform. Inparticular,the modernizationof the private sector legal environment is needed so that banks are better able to function in a world in which they no longer benefit from a government guarantee on crop financing, which in fact has been less than fully effective.The key reforms to be undertaken in this regard would enable banks to be better able to set up and execute liens on coffee stocks, and this requires a number o f legal reforms pertainingto the law of credit recovery, insolvency etc. (see the section below on privatesector environment). 0 On theprivatization front, ensuring a successful transfer o f Government's assets to the private sector and avoiding the constitution of private monopolies that would impede competition in the sector, requires a sound financial/economic analysis o f possible scenarios to guide the Government's decisions in privatizing washing stations, the SOGESTALs and the mills managed by SODECO. This would help Burundi to implement, in a timely manner, the HIPC-completion point trigger related to putting at least 50 percent of washing stations for sale. However, under mutual agreement with the European Union (EU) the Government will undertake the rehabilitation of washing stations before the privatizationprocess starts. The Governmenthas agreed to discuss the issue with EU shortly in order to avoid any further delay. 114. From a road map to a detailed reform implementation plan. In order to translate the roadmap for the reform into a detailed implementationactionplan, the Governmentwill prepare studies in 2006 with technical assistance from IDA EMSP to define: (i)the legal, regulatory and institutional framework consistent with a liberalized and privatized environment; (ii) the provisionand financing mechanisms for key services in liberalizedand privatizedenvironment; (iii) strategies for privatizing washing stations, the SOGESTALs the and the mills managedby SODECO; and (iv) the accompanyingmeasures. These studies will be reviewed by the Reform Steering Committee (with stakeholders represented) that was recentlyput inplace and helpto generate full consensus as to the best strategiesto adopt. 115. Managing the transition to a fully liberalized and privatized sector. While the Government should position itself in dealing with the medium term issues, the transitional phase before the washing stations are effectivelyprivatizedand adequate mechanisms are in place to facilitate the financing of the primary marketing, should be carefully managed. During this transition, the SOGESTALs will remain in charge of managing the primary marketingand OCIBUwill continue, de facto, to handleauctions ofthe final productwith the support o f the commercializationcommittee (even though exports have been liberalized in principle). 42 116. Given that the expected production for 2006/07 is much higher than in 2005/06 (30,000-35,000 tons against 6,000), financing the crop season without credit from the banking sector will be very challenging. In the absence o f State guarantee, the financing arrangements for 2004/05 crop season will be renewed. OCIBU is preparing a financing plan for 2006/07 that includes: (i) mobilizing the surplus o f 2004/05 and 2005/06 crop seasons as auto-financing (OCIBU would provide loans to the SOGESTALs); (ii)mobilizing a guarantee for bank financing through a regional mechanism; and (iii)reducing delays in the management o f the crop season, in particular the delivery to washing stations and the launching o f auctions (May rather than July) so as to reduce the overall financing needed. 117. The reform is technically and politically complex, and is likely to take several years to complete, so the strategy and the related action plan are likely to require several iterations and strong leadership i s needed. The Reform Steering Committee representing all stakeholders will prepare in 2006, in agreement with IDA, a well sequenced three-year rolling implementation action plan (2006-08) based on the existingprovisional road map (see Annex 6). The Government will: (i)launch the studies listed above; (ii)make decisions on new legal, regulatory, and institutional framework, arrangements for the provision and financing o f key services and accompanying measures; (iii)finalize the detailed implementation action plan; and (iv) set up the new institutions and/or restructure existing ones and launch the privatization o f the washing stations before the beginning o f next crop year. Taking stock and update o f the implementation action plan will be required at least on an annual basis, but in any case, prior to the opening o f the crop season. It i s proposed that the timely adoption and implementation of the rolling three-year implementation action plan for the 2006-07 crop season constitute a second tranche conditionality and for the 2007-08 crop season an area where progress i s expected as a basis for a possible follow-up Development Policy Operation. Teasector 118. Backgroundand key issues. The Burundian tea sector presents a high development potential which needs to be seriously explored. Tea exports o f good quality have increased regularly in recent years, in contrast to other export sectors. Like the coffee sector, the tea sector has also been dominated by a parastatal, the Oflce du The' du Burundi (OTB) which has a monopoly on processing of green leaf into dry tea in its five factories. OTB i s also responsible for supplyingtea planters with seeds, inputs (fertilizers and herbicides) on credit. 119. However, OTB i s in dire financial state, an expansion o f production as well as an increase in quality will require a complete reorganization o f the sector, including opening up to private sector investment. To this end, in October 2004, the Government adopted a reform strategy tentative calendar for the disengagement o f the State fi-om the sector, based on studies prepared with the assistance o f the European Union, SCEP, and specialized consultants. 120. Reform Agenda. The Government will update and adopt the sector reform strategy as well as a road map providing for all the steps and the main components o f the reform strategy. Also, the setting-upo f a steering committee with representatives o f all stakeholders to coordinate, manage and monitor the sector reform i s required under ERSG. Moreover, the Government will translate the 2004 reform strategy into a three-year implementation action plan detailing all steps necessary to achieve the reform objectives, including: (i)a timetable 43 for liberalizing all activities includingprice setting and marketing; (ii) up an adequate setting legal, regulatory and institutional framework conducive to private investment; (iii) privatizing Government's assets with producers being able to fully participate as shareholders; (iv) providing adequate services to secure increased production levels and improved quality; and (v) providing the needed accompanying measures. 121. 2006 ERSG Program. Given the rapid deterioration o f OTB financial performance, a technical and financial audit will be conducted in 2006 and a restructuring plan will be designed to address swiftly the situation in particular to make sure that arrears to producers are settled. The adoption of a satisfactory implementation plan by end o f 2006 would be a trigger for a possible follow up Development Policy Operation. Cotton sector 122. Background and key issues. Cotton was once the third export product after coffee and tea. However, since 1996 virtually no cotton has been exported, and all production has been sold on the domestic market. Production has been particularly negatively affected by poor security and adverse weather, particularly the droughts o f 1998 and 2001. From 1993 to 1999, the planted area declined almost continuously, with plantations being abandoned as a result o f population displacement. Production declined from 8,500 tons in 1993 to 2,900 in 2001, before increasingto 3,500 tons in2003, with further increases planned for the future. 123. The cotton sector is under State control. COGERCO, a state-owned company is responsible for primary marketing o f`seed cotton, while COTEBU, a state-owned weaving company sells gray and colored fabrics. The key structural issues confronting the sector are: (i)decliningrawcottonproduction from 1993-2001; (ii)COGERCO's monopsony onthe purchase o f raw cotton production; (iii)the obligation on COGERCO to sell all o f its production to COTEBU. Both companies are in a disastrous financial situation and COTEBU i s unable to purchase all o f COGERCO's production. However, COGERCO i s not allowed to export the surplus, hence there has been accumulation o f unsold stocks while COGERCO was accumulating arrears to producers. In addition, low capacity utilization at both COGERCO and COTEBU has increased the share o f fixed costs which the companies offset by loweringproducerprices and increasing sale prices to domestic garment factories. 124. Reform agenda. As for coffee and tea, the Government has undertaken a review o f the sector and concluded that complete restructuring is needed. The key elements of this strategy would include: (i)a comprehensive reform o f the legal and regulatory framework; (ii)liberalizingthesectorinparticularabolishingCOTEBU'smonopsonywithrespecttothe purchase o f ginned cotton from COGERCO; and (iii) opening up the sector to private capital. Inthe mediumterm, the sector should be, liberalized, in particular exports of ginned cotton, and COGERCO should be substantially restructured, with a view to partial or total privatization. The same stands for COTEBU. Moreover, the COGERCO equipmentneeds to be rehabilitated for the company to continue to operate. As immediate measures, COGERCO will sell the rest of the stock (1,300 tons) which should provide about US$2.5 million to pay producers and buy inputsfor the next campaign. 125. Progress to date. To address the current sector distress, the authorities have granted permission to COGERCO to export all o f its existing stock o f cotton (about 2,800 tons from the 2004/05 campaign) since COTEBU is unable to purchase it. To date, all the stock o f 44 ginned cotton has been sold abroad but this was not enough to alleviate the company's cash flow needs in a sustainable manner (about US$2.5 millionfor the current crop season). 126. 2006 ERSG program. The authorities will finalize the strategy and prepare a road map indicating all the steps to be taken to implement the strategy. The Government will request the update o f the technical and financial audit o f GOCERGO (to be completed in 2006) and revise the contract between COGERCO and COTEBU to, in particular, abrogate definitively the obligation for COGERCO to supply 900 tons o f ginned cotton to COTEBU. Adoption o f a strategy and road map would be a trigger for a possible follow up Development Policy Operation. b. Improving Private Sector Environment 127. Background and key issues. The private sector in Burundi is underdeveloped and dominated by informal activities and like the public sector, it has suffered from recurrent internal conflicts which destroyed its meager human resource base, economic and social infrastructure. The industrial sector i s small and contributes about 5 percent o f GDP. Moreover, Burundi is highly dependent on coffee exports for its foreign earnings. This high dependence on mono-cropping has become a threat to Burundi although there have been no change o f policy towards diversification from dependence on coffee and tea as main cash crops. There are other crops like cotton, sugar, palm oil and tobacco that need to be boosted and become important economic activities. Private sector development is hampered by: (i)a State monopoly in almost all sectors o f the economy; (ii)an obsolete and incomplete legal framework; (iii)the absence o f regulatory frameworks in most sectors which will become necessary once State disengagement and economic liberalization become effective; (iv) a non conducive business environment; (v) low level o f credit to the economy; and (vi) government arrears that undermine its capacity to borrow money for investment. 128. Reform agenda. The Government recognizes the needto elaborate a comprehensive reform program geared towards developing the private sector and creating an enabling environment for economic prosperity and growth. In this regard, one o f the objectives o f the ERSG is to assist in creating a conducive business environment in Burundito promote the growth, opportunities for entrepreneurship and enterprise development in order to generate employment. This i s essential not only to promote private sector development per se, but to advance the privatizationprogram. 129. Specifically, the Government plans to: (i)complete the work underway to strengthen the legal and regulatory framework for private sector operations; (ii) conduct an evaluation o f the investment climate that would serve as a basis to design more comprehensive reform program to build a conducive business environment; (iii) strengthen the financial sector and to increase the access to financing for the private sector; (iv) clear all government arrears to the private sector; and (vi) reduce State domination inmost productive sectors. 2006 ERSGprogram. 130. Strengthenthe legal and regulating framework of the businesses. It is imperative to review, update and modernize the commercial and business laws to ensure that they promote the development of the private sector. It is also critical to strengthen the capacities o f the institutions o f the legal system, like the Magistrate Courts where most o f the commercial 45 cases are held, to ensure that businesses are not constrained by administrative procedures and processes. In this regard, under the ERSG, the Government will: (i)enact the insolvency law that was adopted recently by the Parliament; (ii)complete the revision and modernization o f the Companies and Trade Act (which was last revised in 1996 and 1993); (iii)adopt the investment code which was revised in 2004 and awaits Cabinet's approval; and (iv) strengthen arbitration centers. 131. Building. a conducive businesses environment. The Government has expressed the need to carry out an evaluation o f the investment climate (Investment Climate Assessment, ICA) with the support o f the World Bank. The evaluation o f the investment climate in Burundi will provide decision makers and investors with the analysis and information necessary to identify areas for improvement and build consensus and support among the public and private sectors on the priorities for action and reform. The I C A i s expected to be conducted in 2006 with first results available inthe last quarter. 132. Strengthen the financial sector and increase the level of credit to the economy. Burundi's financial sector is shallow and undiversified, and access to financial services, particularly credit, i s limited. The sector is dominated by State-owned commercial banks. The civil conflict over the last decade has negatively impacted the health o f the banking sector, which has suffered in recent years from poor liquidity, high levels o f non-performing loans, and low capitalization. The effectiveness and financial sustainability o f these organizations needs to be assessed. Limited financing available for private sector investment. Limited access and high cost o f finance is an obstacle to development of the private sector. The limited credit available in Burundi goes primarily to the public sector or to short- term trade finance, and 75 percent o f credit is short-term. Constraints to development o f the financial sector and increasing access to financial services include the following: (i)the recent history o f political and macroeconomic instability, which has restricted both the supply and demand for credit and has resulted in high loan losses, which in turn have increased the cost o f credit; (ii) deficiencies in the legal framework, and in the creation, registration and enforcement o f property rights and collateral; and (iii)the predominance o f the informal sector, lack o f reliable financial information, and lack o f credit information on potential borrowers. With the support o f the Bank and the Fund, the Government will conduct a more thorough assessment o f the financial sector inorder to identify issues and design aprogram ofreforms to enable the financial sector to contribute to shared growth and private sector development. The launching o f a Financial Sector Assessment Paper (FSAP) expected before the end o f 2006 would be a trigger for a subsequent development policy operation. In addition, a banking sector review (forward looking privatization strategy) i s needed. e Limited access to Jinancing for small businesses and in rural areas. The microfinance sector in Burundiwhich aims at providing financial services to low income populations especially in rural areas, micro and small enterprises remains relatively young and not well developed. However, microfinance in Burundi has beenrapidly expanding and reached 214,000 clients at the end o f 2002 with about 10 specialized microfinance institutions (MFIs) including financial cooperatives 46 or COOPEC, NGOs, several government funds, as well as development banks. Prospects for developing a vibrant microfinance sector that contributes meaningfully to growth and economic development are good as long as the proper actions are taken and the necessary support i s provided to the sector. The main obstacles that are preventing the microfinance sector from providing better access to financing and other financial services include weak capacity o f the institutions, poor awareness and application of international standards, as well as an absence o f a proper legal and regulatory framework. The challenges for microfinance inBurunditoday are numerous. 133, Proper development o f microfinance in Burundi would thus require technical assistance to strengthen the capacity o f institutions to provide primarily savings and loan services with training o f staff and adoption o f adequate MIS and good governance rules. An orderly expansion o f microfinance in Burundi would also require putting in place a conducive environment including a legal and regulatory framework that i s in harmony with international standards. In addition to the cooperative law, a legal text for microfinance regulation i s being drafted that will apply to all institutions, cooperatives and non- cooperatives alike. The implementation o f the microfinance regulation will, undoubtedly pose several challenges to the regulatory and supervisory authority. To ensure proper supervision o f microfinance and the soundness o f the microfinance sector, steps are already being taken to strengthen the capacity o f the supervisory authority to be created within the Central Bank thanks to a UNDP/ILO project. Draft o f the legal text for microfinance regulation has been prepared and is being reviewed by donors. The draft law i s expected to be submittedto the Parliament by October 2006. 134. Settling the Government domestic arrears to the private sector. As a way forward to promote the private sector and support the economic activity, the Government conducted a census o f domestic arrears as o f end 2004", the results o f which have been audited" by a reputable and independently selected firm. The Government i s committed to normalizing its financial relations with suppliers after establishing the nature and extent o f its domestic arrears, which indeed, weigh heavily on the embryonic private sector and the banking system. On that basis, the Government will define in 2006, a settlement strategy consistent with the budgeted amount provided in the draft 2006 budget law and settle all arrears to the private sectors including banks. Satisfactory progress in implementing the settlement strategy i s a condition for second tranche release. IDA EMSP will provide assistance to the Government for the preparation o f a strategy. c. ReformingPublicEnterprisesthroughPrivatizationand Private/Public Partnerships 135. Backgroundand Key Issues.Burundi's economy is dominated by the State which is inmost sectors ina monopoly or quasi monopoly situation (see above for instance the case of coffee which is the main sector o f the economy). Like in most developing countries where privatization has been advocated, the main reasons for privatizing are that public enterprises: lo"Ordonnance MinistBrielle No 540/2198 du 24/12/2004 -Ministredes Finances. Conclusions o fthe independent audit are expected by mid-December 2005. The provisional amount estimated by the Committee which conducted the inventory is about FBu41 billion (around US$40.2 million). 47 (i)have beenprovidingpoor services; (ii)are constantly in loss-makingmode; (iii)are undercapitalized and in need o f additional capital which should come from private sector involvement. There i s broad consensus that: (i)State ownership in Burundi i s too large; (ii) the private sector needs to be much more involved in the economy either through privatization and/or publidprivate partnerships; and (iii)State disengagement should be conducted in a way that is conducive to increased competition, in particular avoiding replacing State monopolies by private ones. 136. However, in the context o f a very poor post-conflict country such as Burundi, successful implementation o f a privatization program presents significant specific challenges in the short run: (i)although the security has much improved and peace is taking hold since the Arusha agreement was signed in 2000 and cease-fires have been enforced with the majority o f armed rebels, security and peace are still fragile and the country remains a high political risk environment; (ii)since the independence, the State and the economy have been dominated by a minority Tutsi elite who has the financial resources to invest and participate in a privatization process while the majority could be de facto excluded for lack of resources inthe short run. The post-transition Government which represents the majority is concerned by this risk; (iii)the economy remains extremely fragile and dependent on coffee while the market size i s very limited, which reduces considerably its attractiveness for potential private investors; (iv) after a decade o f civil war, the capacity to design, implement and monitor Government policies and complex structural reforms is limited both at the level o f the leadership and the administration. Moreover, in the case o f Burundi privatization program, the Government is concerned by a number of associated governance issues such as fairness, equity, and transparency, and is worried that the administration in charge o f the privatization program i s not equippedto address effectively these issues. 137. Reform Agenda and Progress to date. In effect, due to the recent conflict in Burundi, implementing privatization programs has not been a top priority. Forty two enterprises in total were privatized as o f 1997 o f which 25 state-owned companies had been privatized before 1994. N o privatization transactions have beenrecorded since 1998. In2003, in the context of IDA ERC, a privatization program was prepared but it was never implemented due to the difficult political environment and remaining security issues. In 2005, some privatization transactions were launched but most either failed to attract bidders (sale o f two coffee washing stations), or were temporary interrupted by the new post- transition Government who was willing to reconsider the evaluation o f assets and in some case, the privatization strategy (sale o f OCIBU's shares inthe banking sector). Moreover, the 2005-08 privatization program adopted by the transition Government i s under review by the actual post transition Government. As the new Government reiterated its commitment to implement its strategy to disengage from productive sectors and given the specific challenges listed above, it was agreed to follow a differentiated approach to privatization which involves: (i)proceeding with simple privatization transactions that don't require extensive preparatory work, and (ii) assisting the Government in conducting the preparatory work for more complex ones, inparticular for public utilities. 138. In addition, the success of a privatization program requires a clear institutional framework for implementation o f the program. In Burundi, the Service Chargk des Enterprises Publiques (SCEP) at the Ministry o f Good Governance and General State Inspectorate i s the agency that supervises the Government's 57 Public Enterprises. The Privatization Law was enacted in 1996. In 2002, several laws related to Privatization and 48 Public enterprises were reviewed, revised and adopted. The Comite' Inter-ministe'riel de Privatisation (CIP) has the overall responsibility to oversee and make decisions on the program. CIP i s comprised o f Ministers o f Finance, Commerce and Industry, Planning and Public Enterprises' management. Line ministries are also part o f the CIP when public enterprises in their sector are being privatized. SCEP provides technical and secretariat services to the CIP. However, the existing institutional framework for the privatization program does not work well due to cumbersome processes. In particular, the SCEP needs to refer to the CIP approval at every technical step o f the privatization process when arranging inter-ministerial meetings i s very difficult. In this regard, there i s a need to streamline the institutional framework to make it i s clear and simple. The SCEP needs to be strengthened and provided with technical assistance in order to perform its duties, in particular to prepare clearly laid down policy and well prepared transactions where same opportunities are provided to all the investors. An effective communication program to accompany the privatization program i s also critical to the success o f the program because it helps to build consensus and to attenuate the negative perceptions about the impact o fprivatization. 139. 2006 ERSG program. The focus under the ERSG supported program in 2006 is to: (i) theGovernmentputinplaceanadequateframeworktoprepare,manageandmonitor help the reform properly; and (ii)proceed with simple privatization transactions as agreed under the differentiated approach. 140. Underthe first objective, the Government is expected to : 0 Clarify and streamline the institutional framework and privatization processes while strengthening them to improve fairness, equity, and transparency; 0 Strengthen the SCEP capacity to monitor and supervise public enterprise including setting-up a database o f public enterprise (technical, economical and financial data); Build SCEP capacity to conduct the preparatory work and the transactions through technical assistance and capacity building activities e.g. training; 0 Develop an effective communication strategy; 0 Revise the Privatization Law and align it with recommendations from studies conducted by E.U., SCEP, and specialized consultants. 141. Under the second objective, the Government is expected to: 0 Update and adopt a three-year rolling privatization program; 0 Prepare, adopt and start implementinga detailed road map providing for all the preparatory work needed to successhlly implement its privatization program including sectoral studies and privatization strategies for each envisaged transaction; 0 Proceed with agreed privatization transactions. This includes re-launching the sale of: (i) o f OCIBU in non-coffee sector; and (ii)all OCIBU's shares in assets Socie'te' HdteliBre Nouvelle du Burundi (New Hotelier Company o f Burundi) (condition for the second tranche release) and launching the bidding process for the sale o f State shares in ALCOVIT (Mixed Vitaminized Food) and ONAPHA. Additionally, the Government i s expected to undertake the bidding process for 49 the sale o f the State shares in EPB, BCC, APB, OPHAVET and an insurance company UCAR (areas where progress will be monitored for future bank support). Transfer OCIBU's shares inbanks, SOCABU(insurance company), EPB and the BCC to the State. 142. IDA EMSP will provide in 2006 short and long-term assistance to the SCEP in the following areas: (i)preparing disengagement strategies for each envisaged transaction including sector studies in particular for public utilities; (ii)setting-up a database of public enterprise (technical, economicaland financial data) as a basis for evaluatingthe impact o f the privatizationprogram;and (iii) develop an effectivecommunicationstrategy. 50 V. GRANTFEATURES A. EXPECTED POVERTY IMPACT 143. The ERSG i s expected to have in the medium to long run the following benefits on poverty: 0 In the long run, the structural economic reforms supported by the ERSG aim at accelerating growth and more specifically increasing income-generating activities and employment opportunities (private sector development and State disengagement) and producers' income (coffee, tea, and cotton sector reforms). These are expected to translate into poverty reduction and improved well-being for the population concerned. 0 Improvement inthe management o f scarce public resources as proposed under the ERSG is expected to make more resources available to finance PRSP priorities and achieve the Government's poverty reduction objectives. 0 Improve financing for service delivery to the poor. By supporting a shift in the structure o f public expenditure in favor o f poverty-reducing expenditures and social sectors and providing new resources, the ERSGwould provide resources to finance PRSP priorities, which should translate into improved services for the poor. Specifically, the ERSG will help support better schools through teacher hiring and training, educational material, and classroom improvements via grants to school to compensate for the suppression of school fees, promoting health services (by equipping and rehabilitating health centers in poor areas and better distribution o f health personnel). 0 Improved well being o f the population. Better service delivery should translate into improved outcomes overtime, such as higher primary enrollment rates, higher school attainments, better health status, and increased public satisfaction with services. 144. These objectives will need sustained efforts and attention on the part o f Government, donors and stakeholders over several years in order to produce sustainable improvement. In the meantime, progress can be monitored through intermediate indicators as proposed under the interim PRSP. It is therefore important to set up monitoring and evaluation capacity over the mediumterm as proposedabove. Inthe short term, Government and donors will continue to rely on existing capacity and provide external assistance to fill criticalgaps. B. LINKAGES THEINTERIMSTRATEGYNOTE WITH 145. The ISN is fully aligned with the priorities set forth in the I-PRSP. Its objective is two-fold: first, to ensure that communities and populations have access to basic social services and income generating activities and thus, are supportive o f the peace process and the economic reform agenda; second, to help restore the foundations on which growth and poverty alleviation efforts can be undertaken in a sustainable manner, including the preparation o f a participatory and inclusive full PRSP. The ERSG i s the Bank's only budget 51 support instrument to support the implementation o f the I S N over FY06/07. Apart from contributing to fiscal and macroeconomic stability, which i s critical in facilitating robust and sustained growth over the medium- to long-term, the financing will contribute to the realization o fthe I S N objectives by: (i)improvingbudget management, which i s instrumental for promoting good governance; (ii)increasing pro-poor public expenditure; (iii)identifying ways to increase the impact o f public spending on the poor; (iv) promoting private sector led- growth; and (v) rehabilitating the cash crop sectors which contribute to 80 percent of total export earnings and constitute a major source o f income inrural areas. C. ENVIRONMENTAL ASPECTS 146. The proposed development policy grant supports mostly economic governance reforms that are unlikely to have any additional significant environmental effects. The potential environmental and social effects associated with the proposed ERSG are mainly related to the coffee, tea, and cotton sector reforms and the privatization program. In particular, under the 2006 ERSG-supported program, facilities already considered as polluting, such as coffee washing stations, SODECO curing factories, and a slaughterhouse, are scheduled for privatization. Moreover, specific policies related to these reform programs to be initiated under the 2006 ERSG program are part of broader programs whose activities span over the mediumterm and may also be supported by IDA follow-up DPLs. Therefore, a two-fold approach has been adopted, one dealing with reform actions that are expected to be initiated and/or completed under 2006 ERSG-supported program and the other with the medium-termreform programs. 1. Sector reformprogramand environmentalaspects Coffee sector reform 147. The coffee sector reform aims at increasingthe share o fproducers inthe border price and increasing both the production and quality o f coffee through liberalization, privatization, and revamping o f services. The increase o f production i s expected to result fiom an improvement in the currently extremely low productivity and more efficient use o f land not through clearing o f forest, nor extending cropping into marginal lands and commons. In effect, it i s generally estimated that coffee yields could more than double if unproductive trees were replaced, newer disease-resistant varieties were introduced and husbandry practices (e.g. timely mulching, pruning, and field sanitation) were improved. The implementation plan for improving productivity inthe coffee sector (as well as in the tea and cotton sectors described below) will include advice to growers on integrated pest management. Moreover, over the medium- to long-term, the reform i s expected to help Burundi access the specialty coffee market where quality label associated with organic certification would warrant a better price for Burundian coffee and provide the incentives for maintaining environment-friendly and sustainable coffee cultivation practices. 148. Regarding possible environmental and social risks associated with privatization o f washing stations and coffee processing factories (degradation o f water quality), please refer to the section below on privatization. 52 149. It was agreed that the monitoring and evaluation system to be put in place by the Committee in charge o f coordinating and monitoring the coffee sector reform program will cover environmental aspects and assess ex-ante and on a regular basis the potential effect o f sector specific policies supported by the medium-termreform program. Tea sector reform 150. The tea sector reform is less advanced than the coffee sector reform. Under the ERSG, Burundi is expected to prepare a detailed implementation plan based on the reform strategy adopted in late 2004. The objectives are similar to the coffee sector reform. Expanding tea production can be detrimental for environment, as tea-growing areas are extremely prone to soil erosion. Although no action is expected to be taken under the 2006 ERSG-supported program, the country has agreed to: (i)conducting a sectoral environmental assessment (2006); (ii)based on the result o f this assessment, preparing a plan addressing environmental aspects o f the reform program if needed (2006); (iii)implementing the plan (2007); and (iv) monitoring its implementation throughout the implementation o f the reform plan (2007-onward). Cotton sector reform 151. Cotton sector reform i s even less advanced than the previous two, as there has not been any agreement yet on the reform strategy. It is however, expected that similar objectives as in coffee and tea will be achieved through liberalization, restructuring, liquidation and/or privatization. The approach to address possible environmental and social negative impact o f the reform will be the same as for the two other sectors. Once a reform strategy has been adopted, the road map to implement it will provide for the preparation o f a sectoral environmental assessment, the development o f a plan to address any potential negative environmental effect if any, and monitoring while the implementation action plan will detail all the steps to be taken. 152. The Bank is already providing institutional capacity building to the environmental sector in Burundi to deal with land management and degradation issues through the Agricultural Rehabilitation and Sustainable Land Management project jointly with the GEF Agricultural Rehabilitation and Support. The Environment Directorate will ensure that these efforts are well coordinated and there is not duplication. Privatizationprogram 153. Industrial facilities to be privatized under the Government privatization program include facilities which have to be reviewed for potential environmental, social, health and safety issues. Inadvance of the transactions, enterprises to be privatized will be reviewed for any environmental, social, health and safety issues and/or past environmental damage or liability. This will be done through environmental audits to be ordered by the SCEP which is in charge of implementing the Government privatization program and conducted by the concerned sector Ministry with support o f the Bank and/or other donors involved in the area. Based on the audits, a plan to address any identified environmental issue and that identify responsibilities for remedial action, management plans and procedures, will be prepared. 53 154. For each privatization transaction agreed in the Government privatization plan, when retrenchment is involved, the SCEP will assess in the preparatory studies the likely negative social impact o fthe transaction and prepare a realistic social plan. 155. Among the transactions scheduled to be launched under 2006 ERSG-supported program, coffee industrial facilities (washing stations, les usines SODECO, and 2 mills managed by SODECO) and a slaughterhouse are concerned. These facilities are believed to be polluting, but so far the Government has been unable to ensure compliance with national environmental safeguard policies. The studies to define the privatization strategy that will be conducted under the ERSG-supported program with the assistance from IDA EMSP will assess the extent o f actual environmental liabilities and identify which actions are needed to address these issues and who will be responsible for implementingthem. These transactions will therefore have a positive effect on the environment. 2. Recipient's Systems for addressingEnvironmental Issues 156. Regulatory and Institutional Framework. Institutions for environmental management have developed slowly in Burundi since the creation o f the Ministry o f Land Management, Environment, and Tourism in 1988. This ministry i s in charge o f planning, coordinating, implementing and monitoring all activities and actions related to environment. In order to improve coordination of all public interventions related to environment, the ministry set up a National Commission for Environment (Commission Nationale de 1'Environnement, CNE). This Commission includes representatives o f line ministries which intervene in environmental areas. The country adopted an environmental law (Code de 1'Environnement) in 2000 that places environmental impact assessment (EIA) at the core o f the Government efforts towards achieving the goals o f the sustainable development. The Code provides for the preparation o f implementation decrees mandatory as well as national guidelines to conduct EIAs. The Environment Directorate at the Ministry o f Land Management, Environment, and Tourism i s responsible for reviewing all EIAs. 157. Environmental Policy Implementation. In addition, the country prepared and adopted in 1996 a National Environment Strategy under difficult transitional circumstances. This strategy needs to be regularly updated to take into account ongoing changes. It highlightsthe main objectives o f the country in the area o f environmental management. The Environment Directorate is responsible for implementing the Ministry's mandate in area o f environmental management. As regards the control o f the country's major environmental threats, the Environment Directorate focuses on deepening the regulatory framework and developing environmental compliance and enforcement tools. 158. The institutional and technical capacity o f the Environment Directorate is limited both to assess environmental issues and to enforce compliance with national environmental safeguards. The Environment Directorate will assess the need to strengthen the national capacity to comply with national environmental regulations as well as to monitor and effectively enforce compliance with environmental regulations. After consultation with the Bank and other donors who intervene in the environment sector, an action plan will be prepared and adopted. 54 D. RISKSAND RISKMITIGATION 159. The Commitment o f the Government, especially at the highest level, remains unambiguously strong. At the same time however, weak technical capacity and sub-optimal institutional and organizational arrangements constitute a challenge that one would expect from a newly appointed Government. Six main risks (listed below) could influence the expected outcomes o f the proposed operation. These risks are mitigated to a large extent by several factors, including: (i)the design o f the proposed operation; (ii)the strength o f the Government's ownership and commitment, affirmed at the highest level, to implement the proposed measures and the Government's resolve to advance its reform agenda; (iii)an active policy dialogue between the Bank and the Government; and (iv) a close collaboration between donors to provide technical assistance and ensure full financing o f the reform program. 160. The six main risks are the following: 0 The first risk is the internal and/or regional instability and disruption o f the peace process. Though much progress has been achieved, the peace process remains to be consolidated within Burundi, in particular with regards to the FNL- PALIPEHUTU. However, we should keep in mind that, the FNL-PALIPEHUTU has neither the force nor the popular support to fight the newly elected Government. It would be beneficial, in the interest o f peace, for the Government and the FNL-PALIPEHUTU to reach a negotiated settlement in the ongoing ceasefire discussions. The greater challenge i s to address the peace situation from a regional perspective, including the Democratic Republic o f Congo (DRC) in particular, whose eastern border has a strong bearing on Burundi'speace process. Recent developments in the DRC are encouraging. National elections are scheduled for the second half o f 2006, and the country is engaged in a vast program o f Disarmament, Demobilization and Reintegration (DDR). Moreover, preparations are underway to call an international conference on the Great Lakes Region; needless to say that Burundi, DRC, Rwanda, and Uganda are all on a good path to achieving stability. 0 The second risk i s that external factors such as hrther collapse o f coffee prices or adverse climatic conditions couldjeopardize Burundi's foreign exchange position making it difficult to service external debt even after HIPC relief, and eventually puttingthe recovery efforts at risk. While this risk can only be reduced through economic diversification over the long-run, it appears limited over the proposed operation period. Climatic conditions have been so far favorable to coffee production which i s expected to peak at above 30,000 tons in 2006. Also, international coffee prices are currently expected to decrease only mildly from the recovery peak in 2005 (113.7 cents per lbs in 2006 on average against 117.6 in 2005 and 60.4 in 2002); 0 The third risk i s that policy reversals and/or slippages inkey reforms could affect the Government's ability to maintain a stable macroeconomic environment and focus expenditure on poverty reducing priorities identified in the I-PRSP. This risk appears limited over the ERSG implementation period as: (i)the new post- 55 transition Government has reiterated its commitment to the policies and reforms defined in the Arusha Agreement and the I-PRSP; (ii)the authorities have maintained sound macroeconomic policies including strict implementation o f the budget law in 2005, a challenging year considering general post-conflict elections; and (iii) the 2006 draft budget law provides for a significant increase in poverty reducing expenditures while remaining consistent with macro-budget constraints and external assistance availability; 0 The fourth risk is that weak administrative and absorptive capacity (human, institutional, and managerial) could slow down the pace o f improvements in economic and public expenditure management. For this reason, the preparation and implementation o f the ERSG will maintain a strong hands-on support to Burundian authorities. In addition, the implementation o f the proposed ERSG program will be supported by IDA Economic Management Support Project (EMSP) in all its three components: (i)strengthening public expenditure management; (ii)reforms in the coffee, tea, and cotton sectors; and (iii)reviving the private sector; The fifth risk is that fiduciary risks with regardto the use o f public funds remain as internal and external control mechanisms remain weak and capacity o f the Audit Court is still limited. The capacity o f the Audit Court will be strengthened with the support of IDA EMSP, it is expected that the introduction o f the interim FMIS for 2006 budget (prior action) will significantly improve transparency in public expendituremanagement and deter misuse o f public funds. Moreover, the ERSG program provides for the preparation o f a strategy to strengthen the internal ex-post control function government-wide, a first step to further reduce fiduciary risks. Finally, as set in Annex 4, the Government has made significant progress on improving financial management systems and will continue to do so over the life o f this program with strong technical support from its partners; The sixth risk i s that shortfall in donor support and/or difficulty in translating donor support into action and results could have a deterring impact on growth, reduce government resources and affect its ability to conduct its reform program. Following the successful political transition, donor community mobilization is high. Since the new Government has taken office, a number o f donors have announced new commitments to assist Burundi's economic and social recovery. Several donors are currently preparing new assistance strategies which will be based on the full PRSP expected in early 2006. Finally, as indicated in section E below, initiatives are being taken to improve donor coordination and provide the Government with more predictability o f external assistance. E. COLLABORATION WITH OTHERDONORS 161. The programs financed by the Bank and the Fund have been closely coordinated since financial assistance to Burundi resumed in 2000. A macroeconomic program agreed with the IMF under a 3-year Poverty Reduction and Growth Facility arrangement has been implemented since January 2004. The first review was endorsed by the IMF Board on January 19, 2005, and the second on July 27, 2005. The mission to conduct discussions on 56 the third review took place from November 1 to 16, 2005. Overall performance under the program has been broadly satisfactory and all the quantitative performance targets for June and September 2005 were met. However, the mission could not conclude the third review. An action plan was agreed upon to make up by end-2005 for the structural performance criteria and benchmarks that were missed and finalize the medium-term macroeconomic framework and program for 2006. Discussions for the third and fourth PRGF reviews (end- June and December 2005, respectively) were combined with those for the 2006 Article IV consultation in Bujumbura in March 2006, and in Washington in April 2006, and understandings were reached, ad referendum, on an economic program for 2006. IMF staff is in the process of preparing the necessary documentation in support of Burundi's request to complete the third and fourth reviews under the PRGF arrangements and the 2006 Article IV consultation. The IMF Board consideration i s expected to take place on July 14, 2006. 162. The macroeconomic framework and financing requirement are jointly assessed and agreed on by the Bank, the Fund and the Government. The content o f the reform program to be supported by the ERSG is closely coordinated with the IMFthree-year PRGF program and the two instrumentscomplement each other. The reform program underpinningthe proposed financing i s consistent with the macroeconomic program supported by the PRGF. The interim PRSP was discussed by the Bank and Fund Boards in January 2004. The HIPC decision point Document was jointly prepared by the Bank and Fund staff and approved by the Boards ofthe two institutions inAugust 2005. 163. The Bank is the second largest financier in Burundi, following the E.U., and has been involved in a broad range o f sectors. In order to maximize the impact o f the Bank's relatively limited resources, the synergy between Bank-supported activities and other donors' programs was discussed with key partners during the consultations o f stakeholders under the ISN. Selectivity criteria have been agreed upon with Burundians and other donors. These include: (i)activitiesthatpromisetohavethelargestpay-offwithregardto supportingtherecovery and reconciliation; (ii)areas in which the Bank has a comparative advantage vis-&vis other donors currently involved in Burundi including areas where the Bank i s already active; and (iii)areasthatarecomplementarytootheractivitiesplannedorunderway-tobesupported by other donors or local stakeholders. 164. The new Government puts donor coordination high on its agenda, and issued in December 2005 a decree that establishes a National Aid Coordination Committee (Comite` National de Coordination des Aides, CNCA). This committee is headed by the second Vice- President who is in charge o f coordinating economic and social policies, and includes as permanent members the Minister o f External Relations, the Minister o f Planning, the Minister of Finance, and the Minister o f Interior. Donors and other members o f Government may be invited at the committee meetings when needed. The mandate o f the committee is to provide a framework for consultation between the Government and donors, to assess funding opportunities and priorities, and disbursementstimetables. Funding for, and implementation o f the PRSP i s considered a major agenda item for the committee. The CNCA provides a great opportunity to organize donor coordination in a more formal way and to develop an explicit and written medium-termcooperation framework. 165. In addition, several initiatives to improve donor collaboration are underway or planned, namely along thematic lines. Donor coordination o f budget support operations was formalized in a memorandum o f understanding signed in May 2005 between the Minister o f 57 Finance o f Burundi and Belgium, France, AfDB, EU, IDA, and UNDP. The IMF i s associated and DFID i s expected to join shortly. The memorandum o f understanding defines a coordination framework regarding: (i)the macroeconomic framework; (ii)the PRSP monitoring; and (iii)public finance including the update o f the public finance reform program and the monitoring o f public finance. Inthis memorandum o f understanding, donors commit to: (i)align the processing of their operations with the Government budget cycle; (ii) rely as much as possible on Government monitoring and evaluation systems; (iii) provide the Government with timely information on their contributions to the financing gap; and (iv) contribute to capacity building through coordinated and complementary institutional support projects. Recently, the Netherlands agreed to join the effort by providing US$ 10 million (grant) to the budget support operation. 166. On DRR, donor collaboration has clearly been a best practice approach, involving UNOB, the Bank, Belgium, France, DFID, and the E.U.Regular consultations and exchanges o f informationhave been held, along with periodic joint implementation support missions. In the reforms o f key agricultural sub-sectors including coffee and tea, the Bank and the E.U. have jointly played a leading role in supporting the Government reform agenda. In the education sector, a joint effort coordinated by UNICEF and involving the Bank, DFID, Belgium, and France is underway that will provide funding and technical assistance needed to address new Government policy to promote universal primary education. On community development and decentralization, the UNDP i s leading a coordination effort for the preparation o f a national program, involving the Bank, DFID, the E.U. and Belgium. On health and HIV/AIDS, excellent collaboration has been maintained between the Bank and WHO. In recent months, collaboration with all the sectors donors, UNICEF, UNAIDS, USAID, UNFPA, Belgium Cooperation, UNDP, and the EU has been established. The BurundiMultisectoral HIV/AIDS Control and Orphans Project is among the best performing Multisectoral HIV/AIDS programs in Africa.. Finally, on the PRSP, the Bank and UNDP have developed close collaboration in the provision o f technical assistance and hands-on support. F. FINANCING AMOUNT,DISBURSEMENT PROCEDURES, AND FIDUCIARYARRANGEMENTS 167. Financing Amount. The proposed financing amounting to SDR 40.4 million (equivalent to US$ 60 million) would be disbursed in two tranches to support 2006 budget; one tranche o f SDR 23.55 million (equivalent to US$ 35 million) and a second tranche o f SDR 16.85 million (equivalent to US$ 25 million). The entire financing amount would be provided as a grant. The first tranche would be released upon effectiveness. The second tranche would be released upon fulfillment o f the conditions for the tranche. It i s expected that both tranches would be released in the second half o f 2006. The ERSG also includes indications o f areas where progress is expected as a basis for a possible follow-up DPL operation. 168. Safeguard assessment of the foreign exchange system. The IMF's Finance Department initiated a safeguard assessment o f Central Bank o f Burundi (BRB). The results o f these assessments have been published in the reports o f the reviews done within the framework o f the PRGF. The first stage o f the assessment was completed in June 2004. This involved an evaluation o f the areas considered critical to preventing the possibility o f 58 misreporting and safeguarding Fundresources, notably, the BRB's external audit mechanism, financial reporting framework, and the system o f internal controls. The second review in September 2005 noted that the BRB had made good progress since late 2004 in strengthening its monetary policy capacity and in liberalizing the foreign exchange regime. As part o f the BRB's efforts to improve its governance, the first external audit of its operations was completed inJune 2005. This development represents significant progress toward bringing its operations in line with international best practices. The audit was carried out by an International firm o f accountants, Ernst & Young and it i s expected to be carried out on an annual basis. They made recommendations on the adoption of International Financial Reporting Standards (IFRS) and improvements in BRB operations and internal controls, particularly in respect o f accounting, internal audit, and management systems. The BRB has developed an action plan to implement these recommendations. The second stage o f the assessment will evaluate BRB's legal framework and internal audit mechanism. 169. Disbursement. Disbursement arrangements will follow OP 8.60. The first tranche will be made available upon effectiveness. The second tranche would be released upon fulfillment o f the conditions for the tranche. Grant proceeds will be disbursed against satisfactory implementation o f the development policy program. Once the Grant i s approved by the Board and becomes effective, the proceeds o f the Grant will be deposited at the request o f the Recipient by IDA in a Foreign Currency Deposit Account (FCDA) designated by the Recipient and acceptable to the World Bank at the Central Bank (Banque de la Republique du Burundi, BRB). The Recipient will ensure that upon the deposit o f the Grant into said account, an equivalent amount in local currency i s credited in a Local Currency Deposit Account (LCDA), in a manner acceptable to the Bank. The Recipient will report to the Bank on the amounts deposited in the foreign currency account and credited in local currency to the LCDA. If the proceeds o f the Grant are used for ineligible purposes (Le. to finance goods or services on the standard negative list), as defined inthe Development Policy Financing Agreement, IDA will require the Recipient to promptly, upon notice from IDA, refund an amount equal to the amount o f said payment to IDA. Amounts refunded to IDA upon such request will be cancelled. The administration o f this Grant will be the responsibility o f the Ministry o f Finance. The Government will have the foreign currency and local currency deposit accounts audited annually by a reputable, external, and independent auditor. Moreover, the Recipient will furnish to the Association as soon as available, but in any case not later than four months after the end o f the Recipient's fiscal year: (i)certified a copy o f the report of such audit, o f such scope and in such detail as the Association will reasonably request; and (ii)such other information concerning the Deposit Accounts and their audit as the Association will reasonably request. 170. Budget resources management. Despite the above fiduciary measures, diagnostic studies o f the public financial management arrangements in Burundi carried out previously indicated that given the current political context, the fiduciary risks related to the use o f public resources in Burundi remain high. The list o f these studies i s summarized in Box 1. This is primarily due to the destruction o f relevant institutions and the human resource base during the years of conflict. To mitigate these risks, the Government has adopted a plan of actions through which it aims to reinforce its financial management system. The plan includes actions that are already being implementedwith the support o f IDA EMSP. Some significant successes have already been achieved, such as the establishment o f the Audit Court, and the continuing installation o f the 1-FMIS. Other actions are presented inthe matrix o fpolicies (Annex 3) to be supported by the ERSG. 59 G. CONDITIONALITY 171. The full program of actions to be supported by the proposed operation is set out in the Policy Matrix (Annex 3). The prior actions listed in the next paragraph have already been undertaken and the conditions for second tranche release are also presented below. Actions to be taken under the 2006 ERSG program by end-2006 or beginning of 2007 have been identified as triggers for a subsequent operation. The maintenance of a satisfactory macroeconomic framework as described in the Letter of Development Policy (LDP) included in this document would be necessary to release the ERSG. In addition, recruitment of an internationally reputable firm acceptable to IDA to conduct an audit of the June 2006 government sale of the presidential aircraft 1982 Falcon 50 S/N 66, on the basis of terms of reference acceptable to IDA, is a condition of effectiveness of the legal agreement for the Grant. Prior actions already completed by the Government: · To enhance public expenditure management o Establish an interim computerized financial management information system for expenditures and execute 2006 budget on the basis of such system; o Identify pro-poor expenditure programs including HIPC expenditure to be reflected in 2006 Budget Law and tracked under the Government's budget classification; o Submit a draft budget law for 2006 to the Parliament reflecting an increase of pro-poor expenditure compared to 2005 budget law; o Adopt an emergency action plan to improve competition and transparency in public procurement. · To reform the coffee, tea, and cotton sectors o Issue decree related to the liberalization of the coffee sector, in particular the producer price setting and the marketing. · To improve the private sector environment o Enact the new insolvency law that was approved by the Parliament. · To reform public enterprises o Bring to the point of sale: (i) State shares in ALCOVIT (Mixed Vitaminized Food), and (ii) 70 percent of State's shares in ONAPHA. Conditions for second tranche release: · To enhance public expenditure management o Produce quarterly budget execution reports based on the i-FMIS (budget allocations, commitments, liquidations, payment orders, and payments) starting with end March 2006; o Submit the revised public procurement law to the Parliament. o Complete and publish the audit of the June 2006 Government sale of the presidential aircraft 1982 Falcon 50 S/N 66 and adopt an action plan acceptable to IDA based on the findings and recommendations of said audit. · To reform the coffee, tea, and cotton sectors o Adopt a 2006 - 08 detailed implementation action plan to reform the coffee sector, including: (i) the restructuring of the sector debt; (ii) the setting up of legal, a 60 regulatory and institutional framework consistent with the liberalization and privatization o f the sector; (iii)arrangements for managing and financing services; (iv) strategies to privatize State's assets (washing stations and factories managed by SODECO); and (v) accompanying measures, notably a social plan in the event of layoffs, institutional support and capacity building. 0 To improve theprivate sector environment o Achieve satisfactory progress in implementing the Government strategy for settling all domestic arrears to the private sector as certified by the independent external audit and inconsistency with the 2006 budget allocation. To reform public enterprises o Re-launch the bidding process for the sale of: (i)OCIBU's assets in sectors other than coffee; and (ii)all OCIBU's shares in Socie`tPH6telidr-e Nouvelle du Burundi (New Hotelier Company of Burundi). Areas where progresswill be monitored for future Bank follow-up operations: 172. As indicated above, the ERSG is supporting medium to long-term reform objectives, that would require sustained efforts over a long period o f time to achieve the objectives and get results. Also continued support o f development partners in general and o f IDA in particular i s considered essential to both help design the programs and sustain the momentum for reform. Without prejudging any decision on the design and timing o f a subsequent operation, the Government would be expected to achieve certain milestones in its program, to justify continued financial support from IDA. Drawing on the Government's Letter of Development Policy, milestones for continuing such assistance would focus broadly on the areas covered by the proposed operation. The prior actions for a subsequent operation will be determined during pre-appraisal and appraisal missions for that operation. In the specific areas covered by the ERSG-supported program for which medium-term plans have been agreed with the Government, the following measures are expected to be completed by end 2006 or early 2007: e To enhancepublic expenditure management o Adopt a budget law for 2007 reflecting a shift in public expendituretoward pro- poor expenditure programs; o Prepare a comprehensive budgetexecution report for 2006 Budget; o Set up the institutions provided for inthe revisedpublic procurement Code. To reinforce the capacity of the Cow des Comptes o To seek support from reputable international audits institutions in order to reinforce the country's capacity for monitoring and auditing national budgets e Toreform the coffee, tea, and cotton sectors o Satisfactorily implement the rolling three-year implementation action plan and adopt an updated action plan for 2007-09 ina timely manner; 61 o Adopt a satisfactory three-year action plan to implement the 2004 tea sector reform strategy (liberalization,privatization,institutionalreforms); o Adopt a satisfactory strategy and road map for reforming the cotton sector including the State disengagement from the sector and the privatization o f COGERCO. To improve theprivate sector environment o Make significantprogresson the ongoingInvestmentClimateAssessment; o Begina FinancialSector Assessment Paper (FSAP). e To reform public enterprises o Launchthe biddingprocess for the sale ofthe State's shares inEPB (management o f Port facility), BCC (coffee export company), APB (Slaughterhouse), OPHAVET (veterinarypharmaceuticalOffice), andUCAR (insurance company). H. INSTITUTIONALARRANGEMENTS AND PROGRAMMONITORING 173. The ERSG supported program will be coordinated and monitored by the same institutions that are overseeing the IMF PRGF and other donor budget support operations. The Ministry o f Financeis responsiblefor coordinatingthe overallprogramsupported by the proposedERSG working with a TechnicalImplementationCommittee (TIC). The Ministries of Finance, Plan, Good Governance, Agriculture and Commerce, the BRB and the PRSP Secretariat (SPKEFES) are represented in this Committee. The TIC i s overseen by a Steering/Policy Committeeheadedby the Vice President in charge of coordinatingeconomic and social reforms and comprisingthe Minister o f Finance and the Ministers o f Plan, Good Governance, Agriculture and Commerce. The SteeringPolicy Committeeprovides guidance on implementation o f the reform program. The Minister o f Finance will provide quarterly written progress reports on ERSGprogram implementation and a monthly report on budget outcomes. Implementationwill be closely monitoredby the World Bank Country Office and supervision missions, including joint missions with the IMF and other donors providing budget support to Burundi. These arrangements are aligned with PRSP coordinating and monitoringmechanisms. 62 Annex 1: Progresstowards the MDGs Key Goals, Targets, and Indicators related to the MDGs - Objective Goal Indicator Early Latest data 1990 Halve, between 1990and Proportion of the 35 58.4 (Priority 2015, the proportion of population livingbelow the (1990) Survey peoplewhose income is poverty line (percent) 1998) 1.Eradicateextreme below the poverty line poverty and hunger Halve, between 1990and Percentageof children less 45,1(MICS 2015, the proportion of than 5 years old who are 2000) peoplewho suffer from undernourished(stunting) hunger. 2. Achieve universal Provide all children the Youth literacy rate (15-24 51.6 66.1 (2002) primary education means to completeprimary years) (percent) (1990) education Net primary enrollment 52.0 53.4 (2001) ratio (percent of relevant (1990) age group) (percent) Percentage of cohort 61.8 64.0 (2001) reachinggrade 5 (1990) 3. Promotegender Eliminate gender disparities Ratio of girls to boys in 82.0 79.4 (2001) equality and inprimary educationby primary and secondary (1990) empower women 2005 and at all levels of education(percent) educationby 2015 4. Reduce child 66 percent reduction in Share of children dying 184 208 (2002) Mortality child mortality ratebetween before 5 years of age (per (1990) 1990and2015 1000) 5. Improve maternal 75 percent reduction in Maternal mortality rate (per 1000 (2001) Health maternalmortality between 100,000 live births) 1990and2015 Stop the spreadof Prevalencerate of 11(MICS 6. Fight HIV/AIDS HIViAIDS and reverse the HIViAIDS (among ages 2000) and other major currenttrend 15-24) (percent) diseases Managethe spreadof Malaria relatedmortality malaria and reversethe rate currenttrend Integratethe principles of Percentage of land devoted 9,4 3,7 (2001) sustainable developmentin to forests (1990) the national development policy 50 percentreductionof Proportion of the 69 78 (2001) proportion of the population population having access to (1990) 7.Ensure without access to safe safe drinking water environmental . drinking water by 2015 (percent) sustainability Improve access, for as many Proportion of the 87 88 peopleas possible,to decent population having access to (1990) (2001) and affordable housing a better drainage system (percent) Proportion ofthe population having access to decent housing 8. Build a global partnership for Viability o f debt Debt serviceiexport ratio 44 83 development (percent) (1990) (2003) Source: Compiledfrom Government,UNICEF, UNDP and World Bank estimates. 63 Annex 2: Key Economic Indicators Actual Estimate Projected Indicator 2001 2002 2003 2004 2005 2006 2007 2008 National accounts (as percent of GDP) Gross domesticproducta 100 100 100 100 100 100 100 100 Agriculture 39.5 40.5 40.1 40.1 35.0 36.0 35.6 35.3 Industry 19.0 18.6 18.9 18.9 20.1 20.5 21.2 22.0 Services 41.4 40.9 41.0 41.0 44.9 43.5 43.2 42.7 Total Consumption 109.0 111.4 108.2 111.0 123.1 120.6 118.7 115.9 Gross domestic fixed investment 6.2 5.5 11.3 13.0 10.5 16.1 18.6 20.2 Governmentinvestment 4.0 3.6 8.3 10.3 6.5 9.6 10.6 10.7 Private investment 2.2 1.9 3.O 2.7 4.0 6.5 8.0 9.5 EXPOITS (GNFS)~ 6.9 6.2 9.3 9.6 11.4 11.9 13.0 13.4 Imports(GNFS) 22.1 24.0 28.8 33.9 45.3 48.6 50.4 49.5 Grossdomestic savings -9 -11 -8 -11 -23 -21 -19 -16 Gross nationalsavings' 0 1 6 5 0 -1 -5 -2 Memorandum items Gross domestic product 662 628 595 664 801 957 1045 1143 (US$million at currentprices) GNI per capita (US$,Atlas method) 100 90 90 90 100 Real annual growthrates (percent, calculated from 1980prices) Gross domestic productat marketprices 2.1 4.4 -1.2 4.8 0.9 6.1 6.6 7.1 Real annual per capitagrowth rates (percent, calculatedfrom 1980 prices) Gross domestic productat marketprices -4.4 2.5 -3.1 2.9 -1.0 4.7 3.9 5.6 Total consumption -8.3 7.3 -12.0 5.4 7.5 5.4 3.6 3.6 Private consumption -11.5 9.3 -17.7 5.0 9.2 2.6 4.6 3.5 Balanceof Payments (US$millions) EXPOITS (GNFS)~ 45 39 55 64 91 114 136 153 MerchandiseFOB 39 31 38 48 57 70 84 94 Imports(GNFS)~ 146 151 171 225 363 464 527 566 MerchandiseFOB 108 107 126 149 239 3 10 365 390 Resourcebalance -101 -112 -116 -162 -271 -350 -391 -413 Net current transfers 75 93 105 126 214 240 213 251 Current account balance -39 -33 -29 -54 -84 -161 -246 -249 Net private foreign direct investment 0 0 0 10 15 8 20 23 Long-termloans (net) -13 -3 2 11 38 1 -3 -8 Official 1 31 31 8 Private -15 -34 -29 3 Other capital (net, incl.errors& omissions) 41 36 18 62 156 221 245 Change inreserves 13 -6 -9 15 -3 1 -4 8 -11 Memorandum items Resourcebalance(percent ofGDP) -15.2 -17.8 -19.5 -24.3 -33.9 -36.7 -37.4 -36.1 Realannual growthrates ( YR80 prices) Merchandiseexports (FOB) 3.8 -18.9 28.8 -10.9 -1.6 22.0 16.9 15.5 Merchandiseimports(CIF) 4.3 0.2 25.6 3.9 46.7 24.8 15.7 6.1 (Conti nued) 64 Burundi Key Economic Indicators - (Continued) Actual Estimate Projected Indicator 2001 2002 2003 2004 2005 2006 2007 2008 Publicfinance (as percent of GDP at market prices)e Current revenues 21.0 22.3 23.5 29.9 29.4 36.7 25.2 25.1 Current expenditures 21.6 20.5 22.0 22.3 23.3 26.4 25.2 24.8 Current account surplus (+) or deficit (-) 1.8 1.5 7.6 6.1 10.3 0.1 0.3 Capital expenditure 5.7 5.5 12.9 16.0 9.6 13.3 18.8 15.1 Foreign financing 2.0 9.3 5.9 5.9 6.9 4.8 7.3 7.6 Monetary indicators M2lGDP 20.2 24.1 27.0 27.7 29.8 36.2 36.6 36.6 Growth o f M2 (percent) 16.1 27.2 23.1 16.7 26.5 20.5 11.5 11.8 Price indices(YR80 =loo) Merchandise export price index 50.8 50.4 47.4 67.8 82.4 82.6 84.7 82.5 Merchandise import price index 94.6 94.1 87.7 99.8 109.2 113.4 115.5 116.4 Merchandise terms o ftrade index 53.7 53.6 54.0 68.0 75.5 72.8 73.4 70.9 Real exchange rat&(US$/LCU)' 66.9 56.8 46.2 44.9 49.1 Consumer price index (percent 9.3 -1.3 10.7 8.0 13.4 2.5 3.3 4.0 change) GDP deflator (percent change) 5.5 1.8 11.6 8.3 16.6 4.8 3.6 4.3 a. GDP at factor cost b. "GNFS" denotes "goods and nonfactor services." c. Includes net unrequited transfers excluding official capital grants. d. Includes use of IMF resources. e. Consolidated government. f. "LCU" denotes"local currency units."An increaseinUS$/LCU denotesappreciation. 65 Li 5irl t f 2\o e m 0 0 c1 d w 4 v) m L Q) .-.- m U h L 0 .-e L E L 0 0 e Q) E, E 0 acd M -.-e V a a L a * 0 V m .- = 3 E m + I Q) I Q) a2 E, P m a L V cC 4 3 -3 a E 2 Y vi 13 m 3 m $ 3 e m e, 9 9 00 W 0 0 N d c) 0 0 B -0 s 3 EE L d s I? 0 0 c1 0\o e m 0 c1 0 5aE I L z t- 0 0 N P\o s 0 0 N - - rA c I 5 a b 5 !28 CI 0 5 ce 0 L Q) C U L m a zYaa . a2 U m 2a w ci 3 - 0 - C 4 a P m r t " ' n 3 .I c, E42a 0 9 Q) L W Q) 3a E I , I I c, Y a a z% .I c, .I L 0 .I a L W %9 EoE 1 Q I I I I I 4 h eu L 0 I Q2 10 E 4 2u d 0 0 e4 942 I I E .I B 'D 2 B z5% c, .I 8zv1 G 4 2 A c 0 3i 5 I I m 00 I I I I I I I I I I I i- m "8 I I I 41 0 m Annex 5: Coffee SectorReforms:The PointofView of producer^'^ While the coffee sector remains at the core o f Burundi's economy, there has been a decline duringmost o f the 1990s as well as in recent years in both the quality and quantity o f coffee produced. This decline can be attributed to a number o f factors. One key factor is the civil war which, among others, forced many growers to stay away from their farm for fear of being attacked, and led to a lack o f maintenance o f the roads needed for the transportation o f crops to coffee washing stations. Another important factor that has contributed to the decline inproduction and quality is the persistent decrease (in real terms) inthe prices paid to coffee farmers since the 1980s. While nominal producer prices increased in the 1990s, inflation rates were still higher, leading to a decline in real prices. These low prices combined with the impact o f the conflict and a lack o f incentives in the pricing structure to encourage farmers to improve the quality o f their product contributed to the drop in both the quantity produced and quality observed since the early 1990s. These adverse effects on both quality and yields o f the conflict and the low prices paid to farmers (as well as o f the lack o f sufficient differentiation in prices paid to farmers according to the quality o f their crop) have been further exacerbated by production problems such as aging o f trees, delays in the application o f treatment (insecticides) against disease and poor maintenance o f farms. Insufficient inputs, soil degradation, and Coffee Berry Disease have also been factors affecting the quantity and quality o f production. Technical problems emanating from years o f neglect o f industrial equipment and research facilities are also believed to have affected the processingo fparchment coffee. On the financial side, the drop in production and quality, as well as a market decline in the efficiency o f the marketing chain, led to large deficits in the sector which had to be financed by the state because o f guarantees provided by the Government to the financial intermediaries involved in the sector. After a short recovery in early 2003, coffee prices plummeted in 2004 to the lowest level in almost ten years, but then recovered somewhat in 2005. Still, the cumulative deficit o f past campaigns has placed pressure o n the ability o f the Government to fund much needed reintegration and reconstruction efforts as well as public services in the areas o f education, health, and access to basic infrastructure services. In order to understand the point o fview o fproducers regarding past and future reforms o fthe sector, a survey-based analysis o f the perceptions o f producers was implemented in 2004, and presented in a workshop in Burundi in March 2005. The objective o f this annex is to present key results from this survey. But before doing so, it i s useful to explain selected issues around the needto improve performance through reforms. Selected issues in the sector and need for reforms. Recommendations for liberalization of the coffee industry essentially call for the implementation o f the following measures: removal o f price guarantees by the state; the ability o f each participant in the industry to individually negotiate with banks for credit; the exposure o f all participants in the industry to market forces; free entry of prospective investors at all stages o f the sector including direct export and their ability to compete fairly in the market; and the removal o f unnecessary regulatory controls in the market. One key issue is that the removal o f government guarantees would expose participants inthe market to a greater level o f risk. Considering that coffee is the mainstay o f the economy, the concern o f l4This annex isbasedonbackgroundwork preparedfor the Burundipovertyreport at the World Bank. 85 the Government i s the fact that destabilization o f the industry, caused by external factors, could reverberate throughout the economy with serious adverse consequences to other sectors. As much as donors sympathize with this concern, it i s argued, however, that maintaining the status quo could result in even greater economic and social costs to the country. Under the current proposals, the two coffee mills managed by SODECO would eventually be disposed of. In the meantime, the Government would facilitate the entry o f more privately-owned coffee mills into the industry. The infusion o f private capital into coffee mills would lead to the introduction o f modem and more productive mills designed to enhance the quality o f coffee produced. Indeed, even though Burundi had washing stations which should help meet the increasing world demand for good quality coffee, it has been unable to do so because the two large industrial type coffee mills were not designed to preserve the quality o f coffee sent from coffee washing stations. In recognition o f these problems the Government has lifted the limitations placed on the ownership and operation o f privately owned coffee mills. In addition to allowing private investors to establish coffee mills and washing stations, the reform proposals call on the Government to put inplace a policy that specifically allows coffee washing station operators to be in charge o f their own marketing decisions. This means that they would have direct access to the market where they can establish relationships with specialty importers and roasters, adapt their coffees to the requirements o f such buyers, and enter into longer-term supply contracts with such buyers. In addition to enabling operators to offer growers more attractive and possibly more stable prices, such contracts could also imply that auctions will gradually become an alternative sales channel, whereas OCIBU's current price setting role will change to a monitoring role. Freedom to compete at the farm gate would also motivate operators to make sure that they attract sufficient cherry supplies. Together with the potential benefits o f being able to market better quality coffee, this would lead to better interaction with and support for the grower. The Government's commitment to reform the coffee sector would require legal and regulatory reforms which address the concerns o f financial institutions with respect to the exposure to risk from financing coffee purchases. Financial institutions play a major role in financing the purchasing, processing and export of coffee. Under the current system, the Government guarantees the repayment o f loans taken to finance coffee purchases and processing for export. The new policy recommendations, however, call for freeing up o f producer prices and removing state guarantees. Part o f the rationale for removing government guarantees stems from the fact that currently, most o f the interest costs are incurred by OCIBU, which has large unsold stocks o f coffee on hand, also leading to quality degradation and hence lower prices. Removing state guarantees, as agreed by the authorities in January 2005, would help provide incentives for speeding up the marketing o f coffee. The removal of state guarantees would however have two other implications. First, commercial banks would be forced to take additional steps to ensure that loan applicants are following proper business practices and have adequate collateral to secure advances. Second, without state guarantees, coffee processors and exporters would have to protect themselves against price risk, stemming from the volatility of coffee prices. Inadequate coverage against price risk would mean that processors and exporters would not be eligible for reasonably priced credit which may force them to increase their margins, with adverse effects on farmgate prices. To 86 minimizethe undesirableconsequences o fthe removalof state guarantees, it is recommended that the Government establish a legal and regulatory framework that address the legitimate security concerns of the bankingsector and facilitates access to risk management instruments and affordable(international) credit. The liberalization will also mean that exports o f coffee will now be permitted, thereby solving the issue o f the "smuggling" of coffee into neighboring countries. This would not be smuggling anymore, but would instead be legal, and it could even help to set adequate reference prices in the domestic market, so that farmers get the full benefit o f their production. As mentioned above, one problem that affectedthe quantity of coffee officially produced in Burundi in the past was the illegal smuggling of coffee by farmers and other intermediariesto neighboringcountriesin search o fhigher prices.When taxes were leviedon coffee exports, such illegal exports could imply a significant drain on the sources of revenue of the Government.But these taxes have been eliminated. Free exports could in fact help to increase producerprices to competitive levels in comparisonto prices offered in neighboring countries (coffee growers might get 55 percent to 60 percent o f the world market price). Finally, the liberalizationof the coffee sector would serve as a prelude to the disposal o f coffee washing stations managed by the SOGESTALs, and the coffee mills operated by SODECO. While the Government is in principle committed to implementing the various reforms described above, it is also importantthat specific steps be takento ensure that by the end o f the target date, the transition from a publicly-ownedto a privately-run and managed coffee industry would have occurredwith a minimum risk of financial upheaval. A number o f measures couldhelp to ensure a smoothtransition. Producer perceptions about the sector and reformproposals This annex provides an analysis of a perceptions survey implemented in July 2004 with funding from the Belgian Poverty Reduction Partnership in order to inform the preparationofBurundi's PovertyReductionStrategy Paper. The survey data shed some light on the importance of agriculture, as a source of income in the Burundian economy. At the nationallevel, income from agricultural activities is the principal source of revenue for more than half of the individuals or population. Some 53 percent o f the population mentioned various agricultural products as their main source o f revenue compared to wage income, which is the main source o f revenue for only 19 percent of the population. Among agricultural products, foodstuffs serve as the main source of revenue for the highest percentage (30 percent) o f individuals.This is followed by coffee, which constitutesthe main source ofrevenue for 14 percent ofthe population. At the national level, 35 percent of the population identified itself as engaged in coffee production. Most coffee producers live in rural areas and within the consumption quintiles, the number of people who are involved in coffee farming decreases as wealth increases. Also, most coffee producers are small scale growers. At the national level, two thirds o f coffee growers producedless than 300kgs of coffee during the last season. When farmers are asked how their revenue from coffee has evolved over the last 5 years, about 70 percent say that they have experienced a decrease in revenue during that period. A higher percentage of those whose incomes fell over that period are women and rural dwellers. These results are not surprising given the impact o f the ongoing conflict, the drop in world coffee prices, andpast losses in qualityand quantity ofcoffeeproducedinBurundi. 87 Opinions are mixed regarding the way coffee i s currently marketed in the country. When people were asked to compare the level o f difficulty o f the current system o f marketing for their crop versus the system that existed five years ago, 40 percent state that the current system i s easier than the previous system, but 45 percent feel that the current system i s more difficult, with the rest stating that the current system is not really different from the previous one. Still, the fact that close to half o f the respondents are not satisfied with the current system suggests that reforms for the sector are needed. For those who feel that the current system makes it more difficult to sell their crop, the weaknesses o fthe current system are related to the reduction inproducer prices and a lack o f transparency. Inurban areas, most people feel that the current system is in fact responsible for the reduction in producer prices, and a decrease in the number o f collection points for crops. In rural areas, the main issue with the new system is also the reduction in producer prices, plus the lack o f transparency. Poorer farmers tend to be more concerned with the reduction in producer prices, the decrease in the number o f collection points after harvest, mismanagement and corruption within the agencies, and the lack o f transparency. In the wealthiest quintile, the main problems are mismanagement and corruption within the agencies, the limited number o f collection points and the lack o f transparency. Thus, the responses suggest dissatisfaction with, and a lack o f confidence in the reforms o f the early 1990s which were intended to serve as incentives for farmers to improve the quantity and quality o fthe coffee produced. The opinion survey also asked about the perceptions o f farmers regarding the potential for positive and negative consequences from the creation o f the SOGESTALs in the management o f the coffee production system. When asked if they have had any negative experiences with the SOGESTALs and the two privately-owned coffee mills (SIVCA, SONICOFF), most respondents said that there were no negative consequences. But among those who had issues with these institutions (30 percent o f respondents at the national level), the three main problems in rural areas were delays in the reimbursement o f expenses, decreases in the producer price o f coffee, and decreases in the quantity o f coffee produced. The three main problems in urban areas were delays in the payment for coffee purchases, decreases in the quantity o f coffee produced, and decreases in the producer price o f coffee. Within quintiles, the likelihood o f raising issues was higher in the lowest quintiles, i.e. the share o f respondents stating that there were no negative consequences decreases as wealth increases. This suggests that perhaps these institutions have not sufficiently catered to the concerns o f coffee growers who belong to the poorest quintiles. Positive experiences with the SOGESTALs include improvements in the process o f weighing the coffee (this i s a sensitive issue for farmers since the income they receive depends on the weight o f their crop), prompt payment for coffee purchased, and the establishment o f coffee washing stations and centers where cherries can be manually processed. In rural areas, most people were impressed with the decline in discrepancies at the weighing stations, prompt payment for the harvested coffee, and the establishment o f washing stations. In addition to these factors, urban respondents were pleased with the sense o f responsibility given to them by these institutions. Across quintiles, respondents were also pleased with the substantial decline in discrepancies in weighing coffee, the convenient location of washing stations and other processing centers, and the prompt payment by the institutions for the coffee purchased. It i s not surprising that these factors were repeatedly 88 cited by respondents since taken together, they often determine how much and how rapidly farmers get paid for their crop. It i s also notable that unlike the previous question where a significant number o f respondents said that there were no negative consequences associated with the creation of these institutions, only a few respondents said there were no positive outcomes from the creation o fthe washing station management companies and coffee mills. As for the overall assessment of the washing station management companies and coffee mills, the results indicate that a very large majority (78 percent) o f respondents at the national level had a positive view o f these institutions. In rural areas where more residents rely on the services o fthese institutions, the support was lower than inthe urban areas. Yet at the same time, support was slightly higher in the lowest quintiles. The survey also suggests that most o f coffee farmers are either not well-informed on the credit making functions o f commercial banks. Among those who are informed, many farmers do not even try to apply for loans from banks because o f collateral requirements which they cannot satisfy. The data show that over the previous three years, only 5 percent o f respondents said they contacted a bank, albeit often unsuccessfully, to obtain credit for farming purposes. Many o f those who applied for credit to buy coffee trees, the main reason for rejection by the bank was that they did not sell their coffee to the authorities (this may relate to farmers who sell their coffee to merchants or travel to neighboring countries to take advantage o f higher prices or favorable rates o f exchange.) Another 23 percent needed funds to buy fertilizers and pesticides, but could not provide good collaterals. Some 14 percent needed the banks to help for the purchase o f equipment, but interest rates were too high. Finally 17 percent needed funds for general purpose loans for their coffee farms, and these said that they were unsuccessful because they could not provide a collateral acceptable to the bank. It i s worth noting that among those who could not get loans because the interest rate was too high, women outnumber menby at least 10percentage points. The fact that credit i s so difficult to get i s in part due to non-payment o f loans by farmers. The survey indicates that 50 percent o f respondents believe that the main reason for the non-payment of debts is the lack o f the means to pay back the loans, whereas 32 percent feel that when someone fails to payback a loan, it i s usually because the person had no intention to pay it back to start with. The fact that one out o f every three respondents believe that loans are defaulted on purpose suggests significant issues with the credit market, and help explain why private financial institutions which could be a good source o f credit may be discouraged from participating inthe credit market or may require strong guarantees that then disqualify most credit seekers, especially the poor and economically vulnerable. Most o f the people interviewed seem to be aware o f the wider implications o f loan defaults by a few farmers in any given community. When they were asked to suggest possible solutions for the potentially high rate o f defaults, respondents mentioned higher requirements as collaterals (29 percent) and rigorous credit checks for loan applicants (22 percent). Most respondents (85 percent) at the national level are not aware o f suggestions by the Burundian Government and donors to privatize the Coffee Marketing Board (OCIBU) and sell its shares inthe Management o fthe Coffee Washing Stations (SOGESTALs) and the company managing the coffee mills (SODECO). The share o f respondents aware o f the Government's intention to disengage from the sector was higher for richer households. Because the amount o f coffee produced decreases with the wealth o f households, coffee producers who also tend to be poorer households are the least informed about privatization 89 issues. Respondents have concerns about what might happen under privatization. Among potential negative consequences, the three most cited are a reduction in producer prices (31 percent), a more complicated system o f marketing harvested coffee (27 percent), and concerns that small scale producerswill be at a disadvantage (27 percent). Some respondents also see some potentially positive effects, namely an increase inproducer prices (19 percent), and better management practices (17 percent). Yet the number o f respondents concerned about negative consequences outnumbers those who expect a positive outcome from privatization. At the same time, most respondents would support attempts by their respective cooperatives to purchase shares in the SOGESTALsregardless o f any adverse consequences. At the national level, 58 percent of respondents said that they would be in favor of buying shares in the SOGESTALs. In response to a question asking those in favor o f such investmentsto provide reasons why they would financially support their cooperatives intheir bid to purchase ownership shares in the SOGESTALs, over 76 percent o f respondents cited the beneficial effects o f the potential growth in revenue as the key motivating factor in supporting this decision. The reason is especially important among female respondents and residents o f rural areas. These responses suggest a strong desire to participate in the decision-making process o f these institutions, as well as in some respects a vote o f confidence in the management o f these institutions, as only 14 percent o f respondents saw their potential investmentas a means of gaining access and influencing the decision-making process o f the SOGESTALs. The data also suggests that 62 percent o f those who would support such investments would be willing, if necessary, to make financial contributions to their cooperatives to facilitate the purchase of shares. The willingnessto makethese financial contributions i s higher with women than men and, as expected, increases with the well-being of the household. In fact, three out o f four people in the highest quintile expressed their interest in makingthese contributions. It is also worth noting that there were some respondents who were not in favor of their cooperatives purchasing shares in the SOGESTALs for two main reasons. First, there were concerns over the distance o f the cooperatives from the SOGESTALs. Second, these respondents did not think that the degree o f representation that the SOGESTALs were likely to offer to the cooperatives would be good enough to enable them to influence the decisions made by those institutions. At the national level, about 35 percent o f respondents who did not support the purchase o f shares in the SOGESTALs had concerns about how much representation the cooperatives would get in the management o f the SOGESTALs. For 24 percent o f respondents against the purchase o f shares, the distance o f the cooperatives from the SOGESTALs was the main reason for not supporting the buying o f shares. The issue of distance i s o f greater concern to respondents in rural than in urban areas. Indeed, it makes sense that for the cooperatives to actively participate or monitor the activities o f coffee washing stations, proximity to these institutions i s required. 90 Annex 6: Road Map for the Coffee Sector Reform Responsibility 1eadIine Observations A. Safeguard measuresfor the 2005/2006 and 2006/2007 crop seasons The RegionalTrade rn Financing the 2006/2007 crop season Facilitation Project base in 1. Financialflow analysis of the 200412005 and OCIBU lec. 2005 Nairobi may be asource 2005/2006 to guaranteethe financing 2. Negotiations for crop financing OCIBU Ian.2006 B. Establishing of an adequate legal, regulatory and institutionalframework in a liberalized context. rn Decisions already made/activities implemented 1. Freedom of establishment along the coffee supply Ministriesof chain GovemanceiAgricul Ian. 14.2005 Implemented 2. New commercialization committee Ministry of Agricul. ran.19. 2005 Implemented 3. Establishmentof OCIBU restructuring committee Ministry o f Good lune 8 2005 Implemented 4. Authorization of direct sale Governance 5, OCIBU restructuring committee's report Ministry Finance lune 16 2005 Implemented 2"dVice-presidency 3ct. 2005 Implemented rn Decisions to be made/Activities to be implemented 1. Establishing a steering committee for coffee reform 2. Study for the legal, regulatory and institutional 2ndVice Presidency Feb.2006 framework 3 , Implementation of legal regulatory/Institutional SCEPEMSP May 2006 measures 4. Promulgation ofbankruptcy law 2ndVice-presidency July 2006 5. Creation of professionalassociationiInterprofession 6. Establishing aprice system mechanismet price Presidency Dec. 2006 OCIBU/Prof,Associat. June 2006 I information InterprofessioniOCIBU OCIBUiInterprof. March 2006 C. Financial stabilization of the sector rn Reinforcingthe surveillanceand control of OCIBU Ministry ofFinance Feb. 2006 financial status rn Sector debt management Ministry of Finance Feb. 2006 D.Transfer of State's assets to the private sector Preliminary measures SCEPEMSP May 2006 1, Study on the transfer of the washing stations and CIP SODECO May 2006 2. Privatizationofstate assets incompaniesand sell of state properties 3. Rehabilitationof washing stations STABEX Sept. 2006 rnTransfer of washing stations and SODECO 1. Transfer of 2 washing stations CIP March2006 2. Transfero f washing stations r CIP Jan. 2007 3. Transfer of SODECO CIP Jan.2007 E.Accompanying measures SocialPlan 2"dVice-presidency Jan. 2007 rn Establishmentof price risk managementmechanism OCIBU/Interprof./Banks Jan. 2007 91 Annex 7: Poverty and Prioritiesofthe Poor in Burundi 1. This Annex provides new estimates of poverty in Burundi, as well as an analysis of the perceptions of poverty and the priorities of the population. The annex is based on the poverty report prepared by the World Bank. The poverty estimates were prepared in collaboration with Afristat and the UNDP, with funding from the Belgian Poverty Reduction Partnership. 2. Prior to the outbreak in hostilities in 1993, Burundi was already one o f the poorest countries in the world. The conflict brought death to over 300,000 Burundi, injury to untold numbers, massive displacements and loss of property, and the destruction of much of the country's social infrastructure. The combined effect o f the civil war and reduction o f aid was devastating for Burundi's economy. Between 1991 and 2001, nominal GDP grew by an average o f 10 percent per year. However, during the same period, inflation averaged about 15 percent, so that real GDP growth rate was negative (see Figure A1 for a trend o f GDP per capita in constant US$). In fact, over the period 1993-2002, real GDP declinedby 20 percent. Together with population growth, income per capita fell to about US$ 109 per year on average from 1994 to 2004. The investment rate was been cut in half, and exports plummeted. Foreign exchange reserves declined as well, and the country suffered from chronic financial imbalance. Burundiwas also hit by a declining trend in world coffee prices and a fall inthe level o fproduction o f coffee. Figure Al: GDPper Capita in US$2000 Prices, Burundi 1965-2004 150 140 130 120 110 100 90 80 1965 1968 1971 1974 1911 1980 1983 1986 1989 1992 1995 1998 2001 2004 Source:World BankSIMA. 3. Today, poverty in Burundi i s truly massive. Because the estimates o f poverty previously used in Burundi for the I-PRSP suffered from methodological weaknesses, new estimates o f poverty have been prepared by the World Bank in collaboration with Afristat, ISTEEBUand Burundi's authorities using the 1998-1999 household survey, the latest such survey with detailed consumption data. New poverty lines have been defined in terms o f the estimated cost of basic food needs and non-food essentials. The estimate o f the population in poverty at the national level i s 81.1 percent. This level of poverty is unlikely to have changed much since 1998-1999, since as shown in Figure A.l, GDP per capita has remained 92 stagnant over the last few years. The results for 1998-99 also show that poverty i s twice as high in the provinces as compared to the capital, and there are large differences in the probability o f being poor according to household characteristics such as education, type o f employment, demographic structure, and localization. 4. Beyond the profile o f poverty and the analysis o f its determinants, it i s interesting to look at the perceptions o f poverty and priorities o f the poor. Data are available from an opinion survey funded by the World Bank implemented in the summer o f 2004 (3,000 respondents in the whole territory.) These data are presented below according to both objective poverty (Le., expected per capita consumption o f the respondent's household below the poverty line) and self-declared subjective poverty. For this exercise, in order to put more emphasis on the very poor, some 60 percent o f respondents were considered as objectively poor (those are the households with the lowest levels o f consumption, i.e. who belong to the first three quintiles o f the distribution of consumption) and approximately 60 percent as well subjectively poor. The key findings would not change much with different definitions o f the objectively and subjectively poor. 5. More than 80 percent o f respondents think that poverty has either remained constant or increased over the last 5 years (Le., between 1998-1999 and 2004), with more than 50 percent o f respondents suggesting a large increase. This suggests that as in other countries, even if objectively measuredpoverty may not have changed dramatically between 1998-1999 and 2004 (given the fact that GDP per capita remained flat), the perceptions o f the population regarding their standards o f living have deteriorated further since 1998-1999. As for the future, only 40 percent o f respondents believe that poverty will decrease in the next five years, with a similar share predicting a further increase inpoverty. When asked "what i s the main consequence o f poverty?", more than half o f the respondents state the inability to feed their family. Other aspects o f poverty include a lack o f decent housing, the inability to work and to pay for medical expenses for family members who are sick. Not owning livestock, being illiterate and lack o f security are also mentioned, although less often. Importantly, satisfaction rates with the quality o f public services i s low, and especially so among the poor. The only public services for which users express moderately high levels of satisfaction are primary schools, basic needs retail stores, drinking water, and public transportation. Satisfaction rates are below 50 percent for maternities, health centers, and community centers. Satisfaction rates among the non-poor are systematically higher than that among the poor, suggesting that the quality o f the services provided to poor households is below that o f services provided to the whole population. 93 Figure A2: Satisfaction Rate with Public Services among Users (Percentage) 6. The end of the civil war is cited as the number one factor that could help in reducing poverty, by close to a third o f the population, with the poor placingmore emphasis on the end the war than the non-poor. State interventions are viewed as another avenue for poverty reduction. Other factors rank lower. Figure A3: How can poverty be reduced? (Percentage) 35, , 1 30 25 20 15 Householdinitiatives Stateinterventions End of the civilwar Associationpromtion other 7. There are some differences between the poor and the non-poor in terms o f how they perceive the priorities o f their communities, and also in terms o f their own priorities, but these differences are smaller than those observed between the perceived priorities o f the communities and what household would actually like to see. The main priorities in 94 communities appear to be the provision o f potable water (30 percent o f respondents), followed by the promotion o f productive activities (20 percent), and the building o f health centers and schools (close to 10 percent each). Other areas such as providing adult alphabetization, public transportation, and the preservation of the environment are not ranked high in the list o f perceived priorities o f communities. In terms o f their own priorities, respondents place by far the highest weight on the promotion o f income generating activities (25-30 percent), followed by four different types o f activities at close to 10 percent: the provision of basic services, support for community organization, financial support and access to credit, and the promotion o f livestock activities. Figure A4. What are the main priorities of your community?(Percentage) other Create employwnt for youth Reduce violcence / insecurity Develop public transportation Reserve environmnt does not feel poor Rovide basic goods IBpoor Break isolationof c o m n i t y Adult alphabetization Romte productive activities Build health center Build Schools Rovide Potable Water 0 5 10 15 20 25 30 35 FigureA5. What should be the prioritiesinyour community?(Percentage) Others Reduce consumption goods price Improve security Ease land ownership for the poor Improvethe access to agricultural markets feel poor Ease access to credit for small business Udoes not feel poor Promotesocial justice poor non-poor Promote livestock activlties Break isolation of community train the population Provide financial support Help community to get organized develop basic social services Promote income generating activtties 0 5 10 15 20 25 30 35 95 8. Different priorities emerge regarding the role o f the state (as opposed to the role o f the community). Health, education and security come first on list o f priorities that the state ought to pursue, with poor respondents giving a higher weight to education as compared to the non-poor. Food security, price reductions for consumption goods, and youth employment are also important priorities for state action. Other areas, such as access to transport infrastructure, producer prices and credit are ranked lowers. FigureA6: What should be the prioritiesofthe state?(Percentage) Transport infrastructure Food security O f e e l poor increase security 0does not feel poor Increase producer price poor Access to credit market non-Door Reduction of consumption good price Heash Empiyment for yoJtn EdLcar.on 0 5 io 5 2 c 2 5 3 3 96 Annex 8: Diagnostic Trade Integration Study (DTIS) The DTIS is a product o f collaboration between the Government o f Burundi, the International Monetary Fund (IMF), the United Nations Conference on Trade and Development (UNCTAD), the UnitedNations Development Program (UNDP), the World Bank, and the World Trade Organization (WTO) in the context o f the so called Integrated Framework (IF). The IF has two key objectives (i) to mainstream (Le. integrate trade) into national development plans such as the PRSP o f the least developed countries; and (ii)to assist in the coordinated15delivery o f trade-related technical assistance inresponse to needs identified by individual countries. The Burundireport consists o fninechapters (see Box 1). Salient points are as follows. Macroeconomic Context. Burundi is a very poor country, with income per capita (in real terms) which has halved over the last decade to about US$ 110. It has been aid dependent for many years, with exports (dominated by coffee and tea) o f 5-7 percent o f GDP, as compared to 15-16 percent for imports-. External debt rapidly becomes unsustainable, Box 1: DTIS Table of Contents reaching about 1900 percent o f exports at end 2003, with some accumulation of external arrears. While the I.TheOverallContext 11. The MacroeconomicEnvironment: Recent debt sustainability issue should be largely resolvedvia Performance,Outlook andthe Poverty Context the terms o f Burundi's access to the enhanced HIPC 111. Key Featuresof ForeignTrade: Recent Performanceand Outlook initiative in 2005, there remains the underlying IV. Analysis of ForeignTrade Policy problem o f a very small tradable sector, and a too V. Trade Facilitation and Export SupportConstraints Major MarketAccess Issues and Integrationofthe small export sector. Growth o f the tradable sector VI. BurundiEconomyinto the Global Economy; especially exports i s imperative if Burundi i s not to VII. Business RegulatoryEnvironment and Constraints remain aid dependent for many years to come. for Operationsand Growth of Enterprises; VIII. Review of Sectorswith HighPotentialfor Exports, Growthand Employment Poverty and trade. In 1999, the latest year for which IX. InternationalTrade andPovertyLinkages X. Strategy and Action Programfor Mainstreaming data were available at the time of the study, over two Trade thirds o f the population was living below the poverty line. The highest incidence o f poverty i s observed in the plains followed by the eastern plateaus. In the city o f Bujumbura - the main urban area o f the country - poverty incidence was estimated to be 67 percent in- 1999, as compared to about 33 percent in 1992. Sources o f household income Box 2: Incidenceof Absolute Poverty, by region, 1999 highlight the importance o f trade for the poor in Region Burundi. Food crops and other agricultural activities line in FBu dominate as the major sources o f household income, Plains 91,947 with a significant share o f the tradable sector. Coffee EasternPlateaus 91,947 alone provides up to about 20 percent o f household Bujumburacity 410,499 income, especially for the poor. Taking into account Mountainsand 91,947 the agricultural wages and income from other cash- transition crops, tradable agriculture sector income contributes Western Plateaus 91,947 over 30 percent o f household income. The key role Total 107,994 68.7 played by the tradable sector i s also evident in the employment statistics across sectors. Around 93.5 percent o f the workforce i s employed in agriculture, 2 percent'industryand 4.5 percent in services and government. Is The study was undertakenbetweenDecember2002 andDecember2003. Preliminary conclusions andrecommendationswere discussedandendorsedat aNationalWorkshop onDecember 18-19, 2003 inBujumbura. 97 The coffee sector alone supports nearly halfthe farming population. Inother words trade is essential, especially for the poor in Burundi, as most o f the poor derive their incomes from the tradable sector and most o f their cash income from coffee tea and cotton, which are the principal agricultural exports. The primary sector is the largest employer contributing about 50 percent of GDP and 88 percent of exports. Furthermore nearly 90 percent o f the poor live and are active in the rural sector. Because tradable agriculture, particularly coffee and tea, dominates economic activities o f the16poor, growth in agricultural exports i s expectedto have a disproportionately large effect on poverty. Under these conditions, effective poverty reduction as set forth in the I-PRSP will depend crucially on the performance o fthe tradable sector. Burundi's trade potential and constraints. Traditional sectors (coffee, tea, cotton) still have the potential to grow, and there is considerable potential in non-traditional agricultural exports (fruits, vegetables, flowers, etc). However, the capacity to harness this potential i s compromised by shortcomings pertaining to macroeconomic management (exchange rate, high inflation, and high interest rates), anti-export bias in the customs regimes and indirect taxes, outdated and burdensome international trade producers, inadequate access to working capital, inadequate quality control, etc. The report concludes by formulating a strategy and action plan of a general and sector- specific nature as follows, while emphasizingthe need for capacity building and technical assistance. General Recommendations Maintain a competitive macroeconomic framework, in particular a competitive exchange rate and low rates o f inflation so as prevent a large spread between domestic and international nominal interest rates. Make regional integration a priority Abolish remaining export duties, if any, on non-traditional exports. Reform export related customs regimes, such as drawback and duty suspension regimes, to make them operative and to reduce anti-export bias. Idem as regards internal indirect taxes, which discriminate against exports and, can favor imports over domestic production. Over the longer run introduce a VAT. Rationalize import duties, reduce escalationand phase out unjustifiedexemptions. Facilitate trade through far reaching simplification and modernization o f all international trade, transit and transport procedures, including through greater use o f Electronic Data Interchange including the Advance Cargo Information System (ACIS). Modernize customs, adopt Asycuda ++, adopt the WTO customs valuation code, etc. Create a single trade window (one stop shop). Overhaul the legal framework pertaining to business transactions in general (investment code, commercial code, labor code, mining code, telecommunications code, energy code). Particular attention i s drawn to the investment code which i s outdated and the commercial code, whose reform -- begun in the early 1990s - i s incomplete. With regard to the latter, (i) 16 DTIS, Chapter 9, pages 83-85. 98 implementation decrees have yet to be prepared and promulgated, which gives undesirable scope for administrative discretion; (ii)the dispositions relative to the operations of foreign owned companies are undefined; (iii)there are no provisions for bankruptcy and reorganization; and (iv) there i s a shortage o f qualified personnel in private and public sectors. All o f these shortcomings should be addressed inthe short run. Inthe longer run, the commercial code would needto be harmonized with those in other COMESA countries. Revise and modernize legal provisions pertaining to the constitution and realization o f collateral in order to facilitate better access o f coffee producers and exporters to working capital financing, both national and international. Enact legislation on commercial arbitration. Specific sector recommendations: Agricultural sector in general: facilitate improved access to equipment and inputs to increase yields and maintain soil fertility, otherwise there i s a risk that the survival of arable farming may be seriously compromised within twenty years or so, given population pressures and the overexploitation that has resultedfrom it. Coffee sector: o Liberalize prices and permit and facilitate private investment and ownership of coffee washing stations. o Allow individual producers to market their own products would help them establish relationships with specialty importers and roasters. o Create o fprice protection and risk management instruments inorder to mitigate increased price risk faced by farmers inthe absence o f state guaranteed prices. o Give special attention to reducing transportation costs which represent about 31 percent o f FOBprices compared to only 15 percent in landlocked countries in Southern Africa. o Reform OBICU, inparticular its price setting role, and other coffee sector institutions. o Introduce legislation to cover bankruptcy and use o f financial collateral to mitigate credit risks. o Strengthen quality control systems. o Liberalize and privatize commercialization only after (i)thorough analysis o f all economic social and financial consequences; and (ii) taking stock o f lessons from other countries. o Support the establishment o f coffee growers' associations. o Establishand maintain effective research and extension capacity. Tea and cotton o Prepare reforms similar to those proposed for the coffee sector. 99 Annex 9: BurundiAt a Glance Burundiat a glance 6/4/06 Sub- POVERTY and SOCIAL Saharan Low- Burundi Africa income I Developmentdiamond' 2005 Population,mid-year(millions) 7.5 726 2,343 GNi per capita (Atlas method, US$) 100 600 510 Lifeexpectancy GNI (Atlasmethod, US$ billions) 0.72 437 1188 1 T Average annual growth, 1999-05 Population(%) 1.9 2 3 1 9 Laborforce 1%) 3.2 2 4 2 2 GNI Gross Per primary Most recent estimate (latest year available, 1999-05) capita enrollment Poverty(% ofpopulationbelownationalpovertyline) Urban population(% of totalpopulation) 10 37 31 Lifeexpectancy at birth (years) 44 47 58 Infantmortality(per 1,OOOlive births) 114 101 79 Child malnutrition(% ofchlldren under5) 45 43 I Accessto improvedwater source Accessto an improvedwater source (% of population) 79 58 75 I Literacy(% of populationage 15+) 60 61 Gross primaryenrollment (% ofschool-agepopulation) 80 93 100 -Burundi Male 87 98 105 ....-. Low-incomegroup Female 73 87 94 KEY ECONOMICRATIOS and LONG-TERMTRENDS 1985 1995 2004 2005 Economicratios* GDP (US$ billions) 1.1 1.o 0 66 0 80 Gross capitalformationlGDP 13.9 6.4 13 3 10 8 Exportsof goods and services/GDP 11.0 12.9 9 6 114 Trade GrossdomesticsavingslGDP 4.1 -8.0 -11 0 -23 1 Gross nationalsavingslGDP 3.6 5 2 0 3 1 Currentaccount balance/GDP -6.9 -2.8 -8 1 -10 5 InterestpaymentslGDP 0.9 1.2 2 5 Domestic Capital Total debWGDP 39.6 116.2 208 5 savings formation Totaldebt servicetexports 20.4 27.7 135 2 Presentvalue of debWGDP Presentvalue of debtfexports Indebtedness 1985-95 1995-05 2004 2005 2005-09 (average annual growth) GDP 1.2 0.9 4.8 0 9 6 6 -Burundi GDP per capita -1.5 -1.1 2.9 -1 0 4 6 - . Low-incomegroup Exportsof goodsand services 4.8 24.1 19.3 20 1 9 9 STRUCTUREof the ECONOMY (% of GDP) 1985 1995 I Growth of capitaland GDP ("h) h Agriculture 61.5 48.1 40.1 35.0 150 Industry 13.0 19.2 18.9 20.1 100 Manufacturing 8.1 9.5 8.5 8.9 50 Services 25.5 32.6 41.0 44.9 0 -50 Householdfinal consumptionexpenditure 88.1 88.9 84.9 96.6 Generalgov't final consumptionexpenditure 7.8 19.1 26.1 26.5 importsof goods and services 20.8 27.3 33.9 45.3 1985-95 1995-05 (average annualgrowth) IGrowthof exports and imports ( O h ) I 1 Agriculture 0.3 -0.7 3.4 -6.3 100 T Industry -0.1 -1.2 8.2 7.4 Manufacturing -0.1 Services 2.3 5.2 5.5 7.9 Householdfinal consumptionexpenditure 0.8 -3.1 7.0 11.3 Generalgov't final consumptionexpenditure 2.8 9.7 8.8 3.8 -20 1 00 01 02 03 04 05 Gross capitalformation 0.7 19.0 26.0 27.3 -Exports *Imports importsof goodsand services 2.0 24.7 28.4 34.8 Note: 2005 data are preliminaryestimates. * The diamondsshow four key indicatorsinthe country(in bold) compared with its income-groupaverage. ifdata are missing,the diamondwill be incomplete. 100 Burundi PRICES and GOVERNMENTFINANCE 1985 1995 2004 2005 Domestic prices lnflatlon (%) I (X change) 30 T Consumer prices 3.8 19.4 8.0 13.4 25 ImplicitGDP deflator 5.1 16.1 8.3 16.6 20 15 Governmentfinance 10 (% of GDP, includescurrentgrants) 5 0 Current revenue 13.4 18.9 29.9 29.4 5 Current budget balance 2.7 0.9 7.6 6.1 Overall surplusldeficit -10.0 -4.5 -8.4 -3.5 TRADE I985 1995 2004 2005 (US$ millions) Exportand Import levels (US0 mill.) Total exports (fob) 114 113 48 57 300 - Coffee 95 89 29 41 Tea 5 10 10 10 Manufactures 6 7 6 7 Total imports (cif) 188 206 174 279 Food 17 29 11 19 Fueland energy 32 25 27 40 Capitalgoods 63 63 42 74 1 Export price index (2000=100) 164 173 102 121 99 00 01 02 03 04 05 Import price index (2000=100) 59 78 99 107 I Exports W Imports Terms of trade (2000=100) 281 221 102 113 BALANCE of PAYMENTS 1985 1995 2004 2005 (US$ millions) Current account balanceto GDP (%) Exportsof goods and services 127 129 64 91 Importsof goods and services 237 273 225 363 Resource balance -111 -144 -162 -271 -4 Net income -18 -12 -18 -20 -B Net currenttransfers 128 126 214 8 Current account balance -80 -28 -54 -84 -10 Financingitems (net) 106 30 39 115 -12 Changes in net reserves -27 -2 15 -31 -14 Memo: Reserves includinggold (US$ millions) 215 67 113 Conversionrate (DEC, local/US$) 120.7 249.8 1,100.9 1,075.3 EXTERNAL DEBT and RESOURCEFLOWS 1985 1995 2004 2005 (US$ millions) omposition of 2004 debt (US0 mlll.) Total debt outstandingand disbursed 455 1,162 1,385 IBRD 0 0 0 0 IDA 140 591 793 751 F G 20 F 111.1 Total debt service 26 39 08 IBRD 0 0 0 IDA 3 8 20 21 Compositionof net resourceflows Official grants 43 229 Official creditors 62 28 8 Privatecreditors -3 -1 -5 Foreigndirect investment(net inflows) 1 2 Porlfolio equity (net inflows) 0 0 World Bank program Commitments 55 36 77 a E Bilateral - Disbursements 19 27 43 50 Principal repayments 2 3 14 15 Net flows 17 24 29 35 Interestpayments 1 5 6 6 Nettransfers 16 20 24 29 Development Economics 6/4/06 101 Annex 10: Burundi Social Indicators Latest single year Same region/income group Sub -Saharan Low- 1975-80 1985-90 1998-2004 Africa income POPULATION Total population, mid-year (millions) 4.1 5.5 7.3 719.0 2,338.1 Growthrate(percentannual average for period) 2.3 2.8 1.9 2.2 1.8 Urbanpopulation (percent o f population) 4.3 6.3 10.3 36.7 30.7 Total fertility rate(births per woman) 6.8 6.8 5.7 5.2 3.6 POVERTY (percent ofpopulation) Nationalheadcount index 36.4 Urbanheadcount index 43.0 Ruralheadcount index 36.0 INCOME GNI per capita (US%) 220 220 90 600 510 Consumerprice index (1995=100) 29 60 309 Foodprice index (1995=100) INCOMEKOKSUMPTIONDISTRIBUTION Gini index 42.4 Lowestquintile (percentof income or consumption) 5.1 Highestquintile (percento f incomeor consumption) 48.0 SOCIAL INDICATORS Public expenditure Health(percentof GDP) 0.6 2.6 1.5 Education(percentof GDP) 3.4 3.9 3.4 3.2 Net primary schoolenrollment rate (percent of age group) Total 53 57 64 78 Male 57 62 68 82 Female 49 52 60 76 Access to an improvedwater source (percent ofpopulation) Total 69 79 58 75 Urban 96 90 82 89 Rural 67 78 45 69 Immunization rate (percent of children ages 12-23 months) Measles 74 75 61 66 DPT 86 74 59 67 Child malnutrition(percent under5 years) 38 45 44 Lifeexpectancyat birth bears) Total 46 44 42 46 58 Male 44 42 41 45 57 Female 48 45 42 46 59 Mortality Infant(per 1,000 live births) 116 114 114 101 79 Under 5 (per 1,000 live births) 195 190 190 171 122 Adult (15-59) Male (per 1,000 population) 489 460 648 519 317 Female (per 1,000 population) 400 379 603 461 266 Maternal (modeled, per 100,000 live births) 1,000 24 538 Birthsattended by skilledhealthstaff (percent) 19 25 39 38 Note: 0 or 0.0 meanszero or less than halfthe unit shown.Net enrollmentrate: break inseries between 1997 and 1998 due to changefrom ISCED76to ISCED97. Immunization:refers to children ages 12-23 monthswho receivedvaccinationsbefore one 102 Annex 11: Letter of DevelopmentPolicy A Monsieur Paul Woli`o%vitr. PrCsident de la Banquo Mondiale IS18 H Street, NW Washington, DC: 20433 La Lcttrc dc Poiitiyue de D' oppcrnintconfjrme Ics cngagcnicnfsde par !e Gomernement wu\ le I>on d'r`ippui atix RPtiirnies Econoniiyues Plus le Gc7ii~eriiemenfe n t d intensifier les effbits dan5 Ies doinaines con l'elnborotion d`uti cadre 51 iqiie de lutte contrc la pauvrctC (CS1,P); (ii) les ri$&m.x sisant l'arniliordtion de. lu on dc5 finances publiqtics ;et errfin (iii) kt misu en ceuc~e d'un cadre kg:d er r6glcinentaire adPquat pow amkliorcr ICcliinat des affaires ill8r3urtrndi r ICdd~eictppementdu sectcur p r i d I f sied par aikurs de mentionncr que la s 9es secteurs CUE, toton et th6 demeure dam ce contextc uric priori16 cssentietle pour ICGouvemernent. AUSSIfaudmit-if rappeier que pendant la pCriodede transition. ICGouverncmentdu trC dcs progrits en matiitrede rdformcsqui l i r i ctnt V ~ L par exemple $011 I atk e des Pays I'ativreS 'I`rks Endettes. De plus, It:Gouvernement entend poursuivre se5 recents effbrts entrepris etr mati&redc gcsijon finmcii.re, y conipris la mise en ~emrcd'un systhnie d'infomiation des finances pubfiyucs interiniairc (SIGEFI), ainsi que dans d`autres doinaines, en vue d'acc616rcr la craissaiice econoiniqueet d'sssurer l`irrkversibilit6 des politiques dCji niises en ccuvre. Cette Lettse dc Politique de Dtveloppementdkcrit aussi la stratCgiede rCformc.i moyen-tcrmeque le Couvcmemcnt s'cngage ii rnettre en axivre dans le cadre do Don ct au- dell, afin de miitkrialiser les dividetides de la paix et les EnipBratif:r de lutte contre ra paurrctC, avec I`appui des autres pnnenairesdu dkveloppement du Burundi. 103 IA, - hloiiszeur PICDKC) Albrt. Ikirectcur des Opdratiotrh - pour ie Btinrndi, Region Afrique a la Rnnqtre klondiale Monsitur Alsssan Sow, RepresentantRCsidont de la J3anque Momkale I - Monsieur ;tl:ithinb SlNA1\1ENYE,Adtniniatratcur piiur le Burundi Monsieur ,Xran-Psscnl Nguesssn Ngaaoit, Ecoriotniste pays poitr le Burundi - QMCloit\ieur I',hil)assadeur la Banqttc Itlondialc tlu Rurnrldih Wirsliitigton 104 REPUBLIQUEDUBURUNDI DOND'APPUI BUDGETAIRE ET DE SOUTIENAUX REFORMESECONOMIQUES (DARE). LETTREDEPOLITIQUEDEDEVELOPPEMENT Bujumbura,le 26 Juin 2006 105 INTRODUCTION GENERALE. L e Gouvernement sollicite un appui de I'IDA pour soutenir son programme des reformes dconomiques de la periode 2006-2008 qui visent l'ajustement et la stabilisation macroeconomique ainsi que la mise en ceuvre des reformes structurelles pour la reduction de la pauvretC. L a prksente lettre de politique rCsume le contexte social et l'kvolution rCcente de l'economie. Elle dCcrit les politiques que le Gouvernement entend poursuivre dans les domaines concernant (i)l'daboration d'un cadre stratkgique de lutte contre la pauvretk (CSLP); (ii)la mise en ceuvre des politiques pour le dCveloppement du secteur privC et principalement le developpement des secteurs cafC, coton et the ; enfin les reformes visant l'amklioration de la gestion des dkpenses publiques. 2. L a mise en ceuvre satisfaisante des rCformes deja engagCes a permis le rktablissement des equilibres financiers qu'il convient de consolider. La recente decision des conseils d'administration de 1'IDA et du FMI approuvant 1'eligibilitC du Burundi a l'initiative PPTE en est une preuve Cclatante. Pendant la periode de transition le Gouvernement a enregistre des progrits en matiere de rkformes qu'il entend poursuivre en vue d'accClCrer la croissance et assurer 1'irrCversibilitC des politiques dCjA mise en ceuvre. 3. Toutefois, ces risultats ne doivent occulter le constat que notre Cconomie est encore confrontde de nombreux dCfis et qu'il existe d'importantes opportunitks que le Burundi devrait saisir en vue de l'amelioration de l'environnement Cconomique, la modernisation de l'outil de production et son positionnement sur le march6 international. Les sources de croissance actuelles sont le fait du secteur agricole, mais essentiellement les filiirres exportatrices telles que le CafC, le Coton et le ThC. Les autoritCs pensent que les rCformes h engager dans ces filikres agricoles permettront d'assurer une expansion du secteur agricole avec (i)une contribution accrue h la croissance; (ii)des revenus importants pour les producteurs agricoles et notamment ceux du milieurural. 4. Cette vision doit &re complCtCepar une strategie plus large visant l'instauration de la bonne gouvernance, le developpement du secteur privC pour plus de croissance et de creation d'emplois. L'exCcution du programme soutenu par le Don-objet de la prCsente lettre de politique - aura l'avantage d'aider le pays a avancer vers la realisation des dhclencheurs pour le point d'achevement de l'initiative PPTE, mais bien plus, ce programme permettra au Gouvernement nouvellement install6 de biitir la reconstruction du pays sur des piliers Cconomiques solides. Pour ce faire, la lettre reprend dans les paragraphes qui suivent ; les performances Cconomiques enregistrkes au cours des derniires annies, le programme A moyen terme 2006-2008 et les rCformes 9 mettreen oeuvre dans le contexte du Don en appui budgCtaire sur 2006 et 2007, notamment en matikre de rCformes des finances publiques, de la croissance et la rCduction de la pauvretd, le diveloppement du secteur privi et la promotion des filikres CafC, Coton et ThC. 5. L e Burundi sollicite aussi d'autres contributions des bailleurs de fonds dans la realisation de ce programme et aura besoin d'un cadre de reference pour une politique harmonisCe des bailleurs. A cet Cgard, le Gouvernement souhaite obtenir une coordination plus accrue de 106 1'IDA et 1'adhCsion de l'ensemble des partenaires financiers autour du CSLP dont la version complbte est la phase de rCdaction et sera disponible au mois de Juin 2006. 6. L a prCsente lettre traduit le programme du Gouvernement en matibre des rCfonnes sur les deux prochaines annCes, mais elle presente aussi les indicateurs de performance qui permettront de juger de la qualite de sa mise en ceuvre. Conscient des difficultks inhCrentes aux riformes Cconomiques et fort de l'expirience du passC, les autoritCs entendent impliquer judicieusement tous les acteurs en vue de rechercher 1'adhCsion nkcessaire 21 la rCussite de toute rCforme ayant des implications socio-Cconomiques. CONTEXTE ET EVOLUTIONSOCIOPOLITIQUE RECENTE 7. L e dCveloppement du Burundi a CtC freinC par une longue pCriode de guerre civile dCclenchCe en 1993, suivi d'un embargo economique sous-rdgional de 1996 a 1999. L a signature de 1'Accord d'Arusha en aoQt 2000 entre les partenaires politiques a permis d'engager le processus de paix gCrC par un Gouvernement et un parlement de transition choisis selon un dosage ethnique Cquilibre. L e processus de reconciliation nationale s'est poursuivi sans heurts et la paix a CtC progressivement rCtablie suite a la signature de l'accord global de cessez le feu signe l e 16 novembre 2003 A Pretoria en Afrique du Sud. L a gestion apaisCe de cette periode transitoire s'est traduite par l'adoption d'une nouvelle constitution, laquelle a CtC suivie par (i) des Clections des conseils communaux du 3 juin 2005, (ii)les Clections des membres de 1'AssemblCe Nationale et du SCnat lesquelles ont eu lieu respectivement les 4 juillet 2005 et 29 Juillet 2005. 8. L e PrCsident de la RCpublique a CtC Clu le 19 AoQt 2005 et un nouveau Gouvernement inclusifqui succkde au Gouvernement de transition est a pied d'ceuvre. Avec la mise en place des institutions dkmocratiques, l'environnement sociopolitique a CtC renforcC. Cette situation facilitera la mise en ceuvre des rCformes de fonds devant pemettre au Burundi de retrouver une croissance nCcessaire A son dCveloppement ainsi que la crCation d'un environnement propice attirer des investissements privCs, en vue d'une croissance durable et l a rCduction de la pauvrete. 9. L a rCconciliation amorcee depuis 2000 a CtC soutenue par l'ensemble de la communautk internationale et principalement les Institutions de Bretton Woods pour faciliter la reprise Cconomique et la remise en Ctat du bon fonctionnement de 1'Etat. A ce titre, les programmes socioiconomiques exCcutCs 21 ce jour ont permis : l a dCmobilisation des ex-combattants impliquCs dans les conflits et leur reinsertion dans la vie civile y compris la rCinsertion des personnes rCfugiCes et/ou dCplacCes dont le nombre est estimC a environ un million d'individus. Dans cet environnement politique encore sensible, le dCfi pour les autorites consiste a renforcer les acquis de la phase transitoire en matibre de paix et sCcuritC, promouvoir la croissance itravers le developpement des filibres cafe, coton et thC et celui du secteur privC en gCnCral pour augmenter les revenus tant publics que privCs, continuer avec 1'amClioration de la gestion des finances publiques en vue d'accrottre les services publics de qualit6 aux pauvres et amCliorer la gouvernance. Ces axes de rCformes sont contenus dans le CSLP-Complet que le Gouvernement est entrain de finaliser avec l'appui de la Banque mondiale. 107 CADRE MACROECONOMIQUE ET BUDGETAIRE 10. Performance2000-2005 : L e defi de reduction de la pauvrete dans le contexte du Burundi est important car les besoins sont nombreux notamment pour ce qui est de procurer aux populations les conditions de vie meilleures et poursuivre le programme de reconstruction. I1 faudrait dans les conditions actuelles, des taux de croissance annuelle moyens d'environ 5% pendant au moins dix annCes pour retrouver le niveau duPIB par t&te de 1993, ce qui indique l'ampleur de la ttiche a rkaliser. Des progres importants nCanmoins ont CtC rCalisCs pendant la pCriode transitoire, ce qui a permis de rCtablir progressivement la paix. 11. L e Gouvernement a adopt6 depuis 2000 des programmes de rCformes appuyCs par I'IDA et depuis 2004 le Burundia obtenu un accord de la FRPC auprbs du FMIapds l'exkcution d'un programme de rCfCrence en 2001-2002. De m&me d'autres appuis auprbs des autres partenaires de la communautC internationale ont contribuC aux recentes performances de 1'Cconomie. La poursuite de la mise en ceuvre de ces reformes se dCroule jusqu'a prCsent de faqon satisfaisante et constitue une avancCe vers la stabilisation et le rktablissement du fonctionnement des services publics. A ce propos, ily a lieu de noter que la deuxibme revue de la FRPC a CtC conclue par le Conseil d'Administration du Fonds Monetaire International l e 27 juillet 2005. Par ailleurs, le Conseil a en m&metemps approuvi 1'CligibilitCdu Burundi a l'initiative PPTE renforci. L e Conseil d'Administration de la Banque mondiale a pris la m&medCcision le 4 aoQt 2005. Les troisikmes et quatriemes revues du PRGF devront &tre conclues enjuin 2006. 12. La performance macro-Cconomique au cours de 1'annCe 2005 a CtC mitigCe avec un taux de croissance du PIB de l'ordre de 1% par rapport 2004 ou 1'Cconomie avait enregistrCuntaux a de croissance de 4.8% malgrC les conditions climatiques sevbres. Au plan de 1'exCcution des finances publiques, les reformes mises en ceuvre par le Gouvernement ont permis de restaurer la discipline budgCtaire. La relance Cconomique amorcCe a contribuC 51. la rialisation des recettes a hauteur de 20% du PIB en 2004 et de digager un solde primaire de -3'5%. L'inflation a CtC contenue a hauteur de 11,9% en fin de pCriode contre 1,7% en 2003 et cet accroissement a CtC gCnCrC par l'augmentation progressive des prix des produits de consommation et les produits pitroliers. L e Gouvernement a riussi a maintenir le dCficit primaire autour de 3,5% du PIB et un dCficit de la balance courante hors transfert qui a atteint 24.4% en 2004. Les rCsultats budgktaires enregistrks en 2005 ont CtC satisfaisants dans l'ensemble. Les recettes se sont ClevCes a 20% du PIB et les depenses globales ont atteints 38,8% du PIB. L'inflation est demeurCe ClevCe sous l'effet de la sCcheresse qui sCvit au nord du pays et la pression sur les prix exercCe par la forte prCsence de la CommunautC internationale. Promotion de la Bonne Gouvernance 13. Le Gouvernement du Burundi a annoncC des son entrCe en fonction au dibut du mois de septembre 2005 que la Bonne Gouvernance constituait son cheval de Bataille. Bien plus, lors de sa premiere sortie internationale, en qualit6 de Chef de 1'Etat dCmocratiquement Clu au Burundi, Son Excellence le PrCsident Pierre NKURUNZIZA, a prCsentC un discours important du haut de la tribune des Nations Unies lors du Sommet du MillCnium + 5 en Septembre 2005, 9 New York. L e chef de 1'Etat burundais s'Ctait exprimC en disant :<(Notre Gouvernement a fait du respect des droits de la personne humaine son cheval de bataille. L a 1os primautC de 1'Etat de droit, la gestion rigoureuse de la chose publique et la promotion de la Bonne Gouvernance sont les conditions prCalables d'un dCveloppement durable. Elles sont au cceur de notre stratCgie de dCveloppement D. Abordant l'aspect spkcifique de la promotion de la Bonne Gouvernance, le Chefde 1'Etat burundais avait poursuivi en disant :(( S'agissant de la Bonne Gouvernance, notre Gouvernement s'est engage dks sa mise en place a lutter contre toutes les formes de fraude, de corruption, malversations Cconomiques et financibres et autres dktournements de deniers publics. Une loi anti-corruption sera bient6t votee tandis qu'une brigade anti-corruption sera bient6t opCrationnelle. Dans la meme optique, notre gouvernement est dCterminC a assainir les dCpenses publiquesnotamment en reduisant et en regroupant les Ministkres qui sont passCs de 26 a 20, en revoyant leurs missions et leur mandat et en se dksengageant partiellement ou totalement de certaines entreprises publiques. Toujours dans le cadre de la Bonne Gouvernance, mon Gouvernement est decide a promouvoir la riorganisation du secteur de la justice en vue de la promotion d'une justice impartiale, rapide et Cquitable et de lutte contre 1'impunitC D. Ainsi, la loi anti-corruption a CtC promulguee en avril2006, et la brigade anti-corruption a CtC approuvke par le Conseil des Ministres du 27 Avril 2006. 14. Dans le cadre du suivi de la mise en ceuvre des objectifs du millhaire pour le dCveloppement (OMD), le Burundi a franchi unpas important sur l'aspect concernant deux OMD & savoir le 2emeet le 3eme: Assurer 1'Cducation primaire pour tous ;et Promouvoir 1'CgalitC des sexes et l'autonomisation des femmes. Lors de son entrCe en fonction, le PrCsident burundais a annonce la dCcision de faire bCnCficier de la gratuitC de l'enseignementprimaire & tout enfant en Bge d'etre scolarisC a partir de 1'annCe scolaire 2005-2006. Cette mesure a provoquC un afflux massif de nouveaux inscrits (prks de 500,000 Clkves). D'autre part, les institutions qui ont et6 mises en place avec le nouveau pouvoir issu des Clections dkmocratiques de 2005, accordent enfin ti la femme la place qu'elle merite. En effet, pour la premiere fois de l'histoire au Burundi, 1'AssemblCe nationale est dirigCe par une femme et les deux vices PrCsident du SCnat sont des femmes. De plus, sur les vingt departements ministkriels, 7 sont dirigCs par des femmes alors qu'au niveau de l'administration territoriale on y trouve plusieursgouverneurs ou administrateurs communaux )) 15. Pour accroitre les chances de rkussite des programmes du Gouvernement pour lesquels il sollicite des appuis, ila CtC nicessaire de rechercher 1'adhCsion des groupes d'intdret affect& par les rCformes, d'assurer une meilleure coordination avec l'ensemble des bailleurs pour permettre une meilleure harmonisation des politiques, gage de succbs. Ainsi, en dCcembre 2005, le Gouvernement a mis en place un ComitC National de Coordination des Aides (CNCA) afin de favoriser le dialogue et la coordination avec les bailleurs de fonds. Bien plus, en FCvrier 2006, le SecrCtariat Permanent du CNCA a CtC crCC pour assurer une gestion efficace des aides de 1'Etat et un cadre permanent de concertation entre le Gouvernement et les bailleurs de fonds, a CtC instauri au sein du CNCA. Ameliorationdu systkmede gestion des finances publiques et execution budgdtaire. 16. Avec l'appui de la Banque mondiale a travers le projet PAGE et l'assistance technique du FMI, le Gouvernement poursuit 1'amClioration de la gestion des dCpenses publiques avec la mise en place du systime intirimaire de gestion des finances publiques dCja opdrationnel A partir de janvier 2006. Ce systkme intigre la nouvelle nomenclature unifiCe permettant le 109 suivides dCpenses de pauvretC, ildevrait terme permettre de produire de fagon automatique le tableau des opirations financibres de 1'Etat et la balance consolidee du tresor. L a formation des cadres et des agents publics de 1'Etat sur l'utilisation efficiente de ce systbme est en cours, y compris les cadres de la BRB. L e Gouvernement est en train de procider a la saisie de toutes les opCrations financibres de l'exercice fiscale 2005 afin de produire unprojet de loi des r6glements d'ici Juin 2006. 17. L a nouvelle gestion du systbme de change a mieux fonctionnk et a permis de faire converger les taux de changes officiels avec ceux du marche parallble. L e diffkrentiel actuel est de l'ordre de 3% alors qu'il dCpassait 10% au debut du programme. Depuis le dCbut 2005, la monnaie nationale BIF s'est apprCciCe contre le dollar EU (10%) ce qui a contribuC au ralentissement sensible de l'inflation en DCcembre. Perspectives pour 2006 et a moyenterme. 18. L'annCe 2005 aura CtC une annCe charnibre pour le diveloppement du Burundi avec la mise en place des organes et institutions consacrCes par la nouvelle constitution notamment les institutions communales, parlementaires et sknatoriales. Les objectifs macro-Cconomiques a moyen terme visent a parvenir a une croissance suffisante pour reduire de fagon significative la pauvretC par un accroissement de l'investissement privC et le diveloppement de la production des biens echangeables. A moyen terme et A l'horizon 2006-2008, les autoritis visent une croissance moyenne annuelle d'environ 5% et de porter l'investissement prive a hauteur de 5% du PIB en moyenne sur l a meme pCriode. Dans ces conditions, l'objectif du Gouvernement est de favoriser l'initiative privCe en particulier dans les domaines d'activitC de l'agriculture (CafC, Coton, ThC et Sucre), l'agro-industrie y compris les PME, les nouvelles technologies de l'information et de la communication et la micro finance afin d'en faire la base de la croissance Cconomique. Par ailleurs, les autorites burundaises reitbrent 21 travers cette lettre de politique, leur engagement a poursuivre le processus de dksengagement de l'Etat des Entreprises Publiques. Les investisseurs prives Ctrangers et nationaux seront encouragCs a exercer dans les secteurs clCs de 1'Cconomie notamment les tClCcommunications, 1'ClectricitC, etc. 19. Ainsi, avec l'aide de la communautC internationale, le Gouvernement entend dCvelopper les infrastructures et rCduire l a dCpendance CnergCtique ainsi que les autres contraintes au dCveloppement du secteur privC, notamment celles relatives au cadre riglementaire des affaires. 20. Conscient de la nCcessitC d'accroitre l'accbs des plus pauvres aux services publics essentiels, le Gouvernement veillera ti accroitre le financement des ressources d a m les secteurs sociaux et plus spkcifiquement en zone rurale. Les ddpenses sociales (Education SantC, Travaux publics) vont progresser pour varier de 28 % a environ 34 YOen moyenne sur la pdriode 2006-2008. 110 REFORMES APPUYEES PAR LEDONDEL'IDA 21. L e Gouvernement sollicite l'appui de I'IDA A travers le D o n d'Appui aux RCformes Economiques et BudgCtaires (DARE) pour faciliter la mise en ceuvre de sa politique de lutte contre la pauvretC et l'acceleration de la croissance. L e Gouvernement souhaite que le DARE soutienne: (i)la finalisation et la mise en ceuvre du CSLP; (ii)la promotion de la croissance a travers : (a) le dkveloppement du secteur privi, (b) le disengagement de 1'Etat des activites commerciales et industrielles et (c) la mise en ceuvre des rCformes dans les filikres de cafC, the et coton conformiment aux engagements deja pris lors de l'exicution du Credit de Relance Economique approuve par I'IDA (CRE), ainsi que , (iii) I'amelioration de la gestion des finances publiques et l'extension des services publics de qualiti aux populations, notamment les populations pauvres. 22. L e Gouvernement est convaincu que ces rkformes constituent la base pour un diveloppement durable. En effet, les indicateurs montrent qu'environ 49% de la production est agricole dont 10'1% pour le cafe, et plus de 90% de la population vivent en zone rurale" avec un taux de pauvretC supirieur a SO%, ce qui implique aussi que les perspectives de croissance et de crCation d'emplois en vue de riduire la pauvretC dependent essentiellement du secteur agricole dominant et plus specifiquement des filikres cafC, thC et coton. 23. L'Etat intervient dans tous les secteurs economiques, et son intervention limite la concurrence et handicape le diveloppement des exportations et celui du secteur privk en general. Jusqu'en 2003, le credit intirieur Ctait essentiellement effectuC au profit du secteur public y compris les entreprises publiques de moins en moins performantes. L e secteur prive, contraint sur le march6 du crCdit retrici n'a pas pu accroitre ses investissements qui sont necessaires a la croissance. En conformiti avec le programme Cconomique appuyi par l e DARE, les autorites vont entreprendre une riforme du secteur public associie au desengagement de 1'Etat des secteurs productifs, la liberalisation des prix, la facilitation du commerce pour Climiner les freins contre le dkveloppement des exportations. Pour ce faire, les reformes viseront a promouvoir les activites economiques privies generatrices d'emplois et de revenus et contribuant a Climiner la pauvrete et l'exclusion. STRATEGIE DE REDUCTIONDELA PAUVRETE L'objectif et les rbsultats anticipbs au terme du Don 24. S'agissant de la lutte contre la pauvretk, les principaux objectifs recherchis au terme du programme finance par le DARE sont (i)l a production du CSLP complet et (ii)son execution satisfaisante pendant une annee. L a mise en ceuvre de ces deux actions constitue unrepirre-clCpour atteindre le point d'achirvement de l'initiative PPTErenforce. "Plusde92%delapopulationviventenzoneruraleet93%delapopulationtotaleactiveestoccupCedansl'agriculture 111 Les actions d6ja entreprises 25. Au terme d'une dizaine d'annees de conflit, la population burundaise s'est davantage appauvrie :le PIB a baissC de 25% sur les quatre premibres annCes de conflit en meme temps que le taux de pauvretC passait de 35% en 1992 a 81% a la fin de la decennie. Ces constats objectifs sont confirm& par un sentiment de pauvretC relativement rCpandu dans la sociCte. L'enquete Perception rCalisCe en 2004, montre que huit burundais sur dix estiment que la pauvretC n'a pas regress6 sur les cinq dernibres annCes. Au vu de ces risultats, la stratCgie de rCduction de la pauvretC au Burundi doit viser la fois la croissance de la production et une a redistribution Cquitable, notamment en faveur des plus pauvres. L e suivi et 1'Cvaluation des politiques de developpement s'inscrivent Cgalement dans le cadre des stratCgies de reduction de la pauvretC dans la mesure o i ils permettentde responsabiliser les acteurs dans la mise en ~ ceuvre et le devoir de rendre compte de l'utilisation des ressources publiquesnotamment en ce qui concerne la gestion des finances publiques. 26. L e Gouvernement a ClaborC avec la participation de la soci6tC civile et de tous les autres acteurs un CSLP-IntCrimaire bAti autour de 6 grands axes qui sous-tendent la politique des autoritCs dans lutte contre la pauvretC, et notamment : (i) promotion de la paix et de la la bonne gouvernance, (ii)la reinsertion des victimes du conflit et des groupes dCfavorisCs, (iii) la promotion du secteur privC, (iv) le developpement du capital humain, (v) la lutte contre le VIHBIDA, et (vi) la promotion du r61e de la femme dans le developpement. L e CSLP- IntCrimaire a Cte conqu et ClaborC autour d'un consensus participatif recherchC par le Gouvernement dbs 2000 et le document a CtC ensuite prCsentC au conseil de I'IDA et du FMI en janvier 2004. Depuis lors, le gouvernement s'attelle a la mise en oeuvre du CSLP- IntCrimaire et la finalisation du CSLP-Complet l'daboration du CSLP final. Les Actions a entreprendreen 2005 et 2006 27. La synthbse des consultations communautaires et des consultations sectorielles et thkmatiques a CtC achevie en novembre 2005. La rkdaction du CSLP a dCbutC en dCcembre 2005 pour inclure les rCsultats des consultations participatives. I1 est a signaler Cgalement que les services concernes ont ClaborCs un cadrage macroCconomique et budgCtaire pluriannuel comportant des plafonds budgktaires pour les secteurs-clC constituant les axes du CSLP. Les autoritis burundaises espkrent rendre disponible l'avant projet enjuillet 2006, et l'echanger avec la communautC des bailleurs des fonds aprbs sa validation par toutes les parties prenantes. 28. Dans la perspective du suivi Cvaluation, diverses actions ont CtC entreprises : (1) la crCation d'une cellule des comptes nationaux a 1'ISTEEBU; (2) la rCalisation d'un recensement agricole et des enquetes aupr&s des mCnages tel que l'enquete Perceptions sur la pauvreti (2004). D'autres Ctudes sont en cours dont : le questionnaire UnifiC des Indicateurs du Bien- Stre (QUIBB) 2005/2006, le Multiple Indicators Cluster Survey (MICS) 2005 et l'enquete sur l'emploi et le secteur informel (Enquete 1-2-3 pour 2005/2007). L'Claboration et la mise enceuvre du systbme de suiviCvaluation est unenjeu crucial pour le succks de l'exicution du document cadre de stratCgie de rCduction de la pauvretC. I1s'agira d'une part de renforcer les institutions de suivi et d'autre part de dkvelopper la production des donnCes statistiques nkcessaires. L e renforcement des institutions portera essentiellement sur : 1) le changement du statut de I'ISTEEBUet de son personnel (le projet a deja CtC prCparC, mais n'a pas encore 112 CtC transcrit en projet de loi ; 2)le renforcement des capacitks humaines ; 3)le renforcement des outils de collecte des donnCes administratives, en particulier aux ministeres de l'Education, de la SantC, de I'Agriculture et des Finances. 29. Pour ce qui est de la production des donnCes statistiques, un recensement gCneral de la population est envisage en 2007 afin de disposer des donnCes fiables pour l'affectation des ressources dans le cadre de la decentralisation. Ce recensement servira aussi de base de sondage fiable pour les enquCtes futures aupres des mCnages. D e mCme, des enquCtes nicessaires a la production des Comptes Nationaux seront rCalisCes. I1s'agit en particulier de 1'EnquCte Agricole et de 1'EnquCteBudget Consommation qui seront combinees. Des Ctudes approfondies sur l'impact des politiques sociales viendront complCter ce dispositif de suivi Cvaluation. I1 s'agit notamment de l'etude sur l'offre de services de base dans les secteurs Education, SantC et Justice, et d'une Ctude de l'impact de la rCforme de la filiere Cafe sur la pauvretC. Indicateursde progrLts Action Date cible 0 Achbvement de la prkparation des consultations Novembre 2005 sectorielles et thematiques Tenue, synthbse et restitution des consultations Mai 2006 sectorielles et thematiques 0 Elaboration du premier draft CSLP Mai 2006 0 Elaboration du deuxibme draft du CSLP y compris le Juin 2006 cadrage macroeconomique et budgetaire complet 0 Document CSLP final disponible Juillet 2006 0 Rapport d'exicution de la premiere annCe de mise en AoClt 2007 oeuvre L'ACCELERATIONDE LA CROISSANCE (PROMOTION DES POLITIQUES GENERATRICES DE CROISSANCE) 30. L e Gouvernement a entrepris des rCformes pour promouvoir le dkveloppement du secteur privC et relancer les exportations en vue de rCduire la dipendance du pays vis-&vis des financements extCrieurs dont la prCvisibilitCest incertaine. L'analyse de la soutenabilitk de la dette ClaborCe dans le contexte de l'initiative PPTE indique que le ratio de la valeur actualisie nette de la dette sur les exportations est de 136'3 % et la valeur actualisee nette du service sur les recettes d'exportation est de 35,9 % en 2005. Dans le contexte burundais, cette situation indique unrisque ClevC de crise d'endettement mCme aprbs le recours aux initiatives de dksendettement y compris l'initiative PPTErenforcCe. 3 1. Pour enrayer une telle situation et amCliorer les indicateurs indiquCs ci-dessus, une politique de croissance soutenue par les exportations est nCcessaire et vitale pour 1'Cconomie burundaise. L e Burundi s'est rCsolument engagC iimettre en avant le Commerce dans le processus de croissance et de lutte contre la pauvrete. I1 a dans cette optique, dCjA rCalisC, sous la supervision de la Banque mondiale et en collaboration avec le FMI, le PNUD, l'OMC, le Centre de Commerce International et la CNUCED, ((1'Etude diagnostique de l'intkgration commerciale du BurundiD. L'Ctude et le Plan ont CtC valid& en dCcembre 2003 113 et adopt& par le Gouvernement en 2004. L e Gouvernement sollicitera un appui auprbs de ses partenaires pour la mise en application de ce Plan. 32. Les autorites s'engagent a mettre en place une politique de developpement des exportations devant gCnCrer plus de devises en vue de minimiser les chocs exogbnes auxquels le pays fait face. Les rkformes pour promouvoir ces exportations et developper le secteur prive viseront en priorit6 : 1) 1'amClioration de l'environnement des affaires, 2) le rbglement integral de la dette intkrieure; 3) les rdformes du secteur public ; 4) le dksengagement de 1'Etat des Entreprises Publiques, notamment celles du secteur financier et des filibres agricoles et des tC1Ccommunications) DEVELOPPEMENTDUSECTEURPRIVE Objectifs et rksultatsanticipes 33. L e gouvernement entend promouvoir un environnement propice au developpement du secteur prive competitif pour accroitre l'investissement privC tant national qu'ktranger, d'amplifier la croissance et creer des emplois en vue de reduire la pauvrete. Cette strategic exige une adaptation du cadre reglementaire des affaires et l'amklioration du climat des investissements, une adaptation de l a fiscalit6 des entreprises, une rCvision du code du travail, du code des investissements et la facilitation du commerce international pour promouvoir et developper les exportations, amelioration de l'accbs au credit par l'adoption d'un rbglement sur les institutions et operations de micro-finance. Le rbglement de la dette intkrieure de 1'Etat envers les entreprises privees constitue un autre volet qui vise a (i) redonner du souffle aux operateurs economiques qui iprouvent de rielles difficultis A contenir leur endettement vis-a-vis des banques, (ii)reconstituer la solidite de la trksorerie des entreprises pour le financement de leurs investissements, et (iii)assurer l'adhision des entreprises a la nouvelle politique de relance et du disengagement de 1'Etat. 34. L e gouvernement conduira avec l'appui de la Banque mondiale une etude sur le Climat des Investissements au Burundi. Une rCvision des codes du commerce et des soci6tCs est envisagee. Les textes revises portant sur ces codes seront approuvks par le Gouvernement, puispresent& au Parlement pour adoption. Actions deja entreprises et progrksa ce jour 35. Environnement des affaires : le code des investissements a CtC revise et devrait Stre prCsentC bientht au Gouvernement pour approbation. Unprojet de loi portant organisation et rkglementation des institutions de Microfinance est en cours d'klaboration. L a nouvelle l o i sur la faillite a deja CtC promulgude. 36. Dette intkrieure : L e Gouvernement a a c h e d le 27/07/2005 un recensement des arriCrCs de 1'Etat sur le secteur privC ainsi que les arriCres de la dette intkrieure pour les crdances nCes entre 07/1979 et 31/12/2004. L e recensement estime a environ 35 millions de dollars EU le 114 montant de ces arriCrCs. Ce recensement a et6 complCtC par un audit international financC par le projet PAGE. L e Rapport dkfinitif a CtC disponibilisC a fin fCvrier 2006. 37. Sur base du rapport de cet audit, une commission ad hoc chargCe d'Claborer la stratCgie d'apurement de ces arriCrCs a CtC mise en place. Son rapport est attendu B fin avril 2006 et prCcisera les modalites et 1'CchCancier du paiement a partir dejuin 2006. 38. Dans l e cadre du desengagement de 1'Etat des entreprises publiques pour la piriode 2005- 2008, le Gouvernement s'est engagC a adopter un plan stratkgique de privatisation des entreprises publiques'' au titre du CrCdit de RChabilitation Economique accord6 par l'IDA en 2002. 39. Ce crCdit devait appuyer l'amelioration du cadre institutionnel organisant les privatisations et restructurations, comprenant la preparation de la stratCgie proprement dite, ainsi que la programmation des activitCs y affkrentes avec un planning de dksengagement pour chaque entreprise publique retenue. L e Gouvernement a honor6 cet engagement pris dans le cadre du credit de rehabilitation et le Ministre d'Etat chargC de la Bonne Gouvernance et de 1'Inspection gCnCrale de 1'Etat qui avait sous sa responsabilitk le secteur de la privatisation, avait soumis au conseil des ministres du 25 mars 2005, un plan dCtaillC du programme de privatisation. 40. L e Gouvernement a en effet d6marrC la mise en ceuvre du programme de privatisation. Dans le secteur du cafi, les appels d'offies pour la privatisation de deux stations de lavage ont CtC lands le 22 juillet 2005. Cette opCration pilote a semi de test et permettra d'affiner et d'adopter la strategie de cession dCfinitive des stations de lavage. 41. Par ailleurs, les appels d'offres pour la vente de 2 villas et 2 anciennes usines ont 6tC lances respectivement les 5 et 18 aoQt2005. Pour ce qui est du patrimoine hors secteur cafe, en date du 25 aoQt 2005, l'appel d'offies a CtC landpour la cession des actions de 1'OCIBU dans les banques. Les textes reglementaires pour la liberalisation du secteur cafd ont et6 sign6s. Aussi, le CIP a adopt6 la stratigie de privatisation du secteur des TClCcommunications. I1 a Cgalement adopt6 la stratCgie de privatisation des Entreprises Publiques et ouvrages publics (ONATEL, COTEBU, ONAPHA, OTB, OPHAVET, SociCtCs du Secteur Cafe, les anciennes usines A CafC, etc.). 42. Pour le cas de 1'Office Nationale Pharmaceutique (ONAPHA), le Gouvernement a aussi procCdC A 1'Cvaluation de ses actions. Une convention de partenariat entre 1'Etat du Burundi et une sociCtC Sud Afiicaine de production de mCdicaments (SOPROME) a CtC signCe. L'Claboration d'une note priliminaire relative au programme de desengagement de 1'Etat dans les Entreprises publiquesest en voie de finalisation avec le SCEP. les entreprisesconcernees sont :EPB(Etablissements duPort de Bujumbura), APB (AbattoirsPublicsde Bujumbura),UCAR (UnionCommercialed'Assurance et de RCassurance),BCC (Burundi Coffee Company), ONATEL(Office de tClCcommunications), Le COTEBU(Complexetextile duBurundi), laFEGIDESO(1'Agence d'ClectricitC et des eaux), L'ONAPHA (Officenationalpharmaceutique), L'OPHAVET (L'office pharmaceutiqueet VCtCrinaire), SOSUMO (compagnie sucribre) ALCOVIT ,y comprisles actions de 1'Etatdans les entreprises publiques du secteur CafC incluant les SOGESTALs. 115 43. Les autoritCs vont poursuivre les efforts dans ce sens et engager un processus de sensibilisation des opCrateurs Cconomiques et tous les partenaires impliquCs dans le processus (y compris les groupes d'intCret comme les employCs) pour rechercher leur adhision a cette importante reforme. Actions a entreprendre dans le cadre du don pour 2005-2007 44. RCvision du cadre rbglementaire: La nouvelle loi sur la faillite a dCjB CtC promulguee. Dans le meme temps, les autorites procCderont avec l'appui de la Banque mondiale, a une Cvaluation du Climat des affaires afin de fournir aux opCrateurs Cconomiques et autres dkcideurs, une analyse de l'information requise pour identifier les caractkristiques du climat national de l'investissementimportant pour la productivitd et la croissance. L e Gouvernement a ClaborC le fichier d'identifiants unique qui servira a l'ensemble des opCrations de fiscalisation en liaison avec les services des imp6ts et des douanes. L a base de donnies a CtC dCveloppCe et est opCrationnelle. L e NIF est opCrationne1 et a deja enregistrd un grand nombre d'operateurs Cconomiques. I1 sera utilisi par les dipartements des ImpBts et les Douanes. 45. FiscalitC. L'introduction de la TVA en remplacement de la Taxe de Transaction vise a dCpCnaliser les entreprises pour adopter une fiscalit6 indirecte plus neutre. Avec l'appui de la Banque mondiale et du FMI, la TVA sera opkrationnelle d'ici la fin de l'exercice 2007. Les autoritis prendront des dispositions necessairespour riduire davantage les tarifs douaniers et les aligner sur les tarifs du COMESA. 46. A moyen terme, les taux des droits de douanes seront davantage rCduits pour les matibres premikres, les produits intermkdiaires et les produits finis, avec un tarif zero pour les matikres premibres et les Cquipements. 47. DCveloppement des exportations: En plus des mesures ci-dessus concernant l'alignement des tarifs douaniers, les autoritCs mettront en ceuvre les recommandations de 1'Ctude diagnostique sur l'intkgration commerciale (DTIS). L e Gouvernement prendra en compte les politiques commerciales dans le CSLP et mettra les actions suivantes en ceuvre a compter de 2006. I1 s'agit de : (i)L'application intCgrale du protocole de la zone de libre-Cchange du COMESA et l'alignement integral des tarifs sur le TEC du COMESA ; (ii) L'exploitation des possibilitCs offertes par les arrangements prkfkrentiels proposes par 1'Union europCenne et l'initiative AGOA des USA ; (iii) l'application du code d'dvaluation en douane et 1'Climination des exondrations tarifaires sur les importations ; (iv) la simplification et la rationalisation des mecanismes de remboursement des droits de douanes Cligibles ;Enfin, (v) la liberalisation des filikres agricoles traditionnelles comme repris ci-dessous pour ce qui est du cafe, duthC et du coton. 48. Renforcementdu secteur financier :I1y a sept banques commerciales au Burundi, qui ont CtC fortement impliquies dans des pr&tsau Gouvernement et qui financent en majeure partie les opirations des grandes entreprises lesquelles prisentent des meilleures garanties. 116 49. Ces Banques dktiennent un portefeuille compromis en raison de la crise. L e Gouvernement sollicitera l'appui des partenaires bilatkraux et multilatkraux pour assainir le secteur financier. Pour promouvoir l'accks au financement par tous les operateurs economiques de toute taille, ilest impkratif de mettre en place un cadre de micro-finance au Burundi, surtout pour la petite entreprise du secteur informel. Les travaux prkliminaires dans ce domaine ont ktk initiks avec l'appui du PNUD" et l'adoption d'un texte juridique y relatif est une priorite. Aussi, la vente des actions de 1'Etat dans le secteur financier reste une autre priorit6 pour le Gouvernement. 50. Dette intbrieure : L e Gouvernement s'est fix6 pour objectif d'apurer la dette intkrieure et de ne plus accumuler les arrieres sur le secteur privk. L a stratkgie d'apurement des arrikrks qui sera adoptke par le gouvernement permettra de fixer les modalitks de nkgociation avec les crkanciers et le rkglement dkfinitif de ces arrikris. 51. Relance du programme du dbsengagement de 1'Etat et de privatisationdes entreprises publiques: Comme avec la plupart des reformes d'envergure engagees au Burundi, un programme de privatisation entrepris en 1992 avec l'appui de I'IDA a ktk ralenti a cause de la crise et l'absence des moyens suffisants pour engager cet important chantier. L e Gouvernement entend relancer le processus de privatisation avec l'aide de la Banque mondiale, et d'autres bailleurs et veillera A: (i)constituer une feuille de route comprenant les ktudes sectorielles, des entreprises considerees comme stratkgiques (entreprises de service public) comme les entreprises des secteurs de l'eau, de l'klectricite, les tklkcoms, (ii) ameliorer le cadre institutionnel des privatisations, renforcer les capacites institutionnelles et humaines; (iii)klaborer le plan de communication du programme de privatisation pour assurer la concertation et l'adhksion des diffkrents acteurs y compris de la socikte civile. 52. DkjA, les autoritks ont entrepris de libkraliser les secteurs kconomiques notamment le cafe et les tklkcommunications et complkteront la liste par les secteurs du the et du coton. 53. Dans un premier temps, le Gouvernement a adopt6 une liste de 15 entreprises pour lesquelles ilentendsolliciterlaparticipationdusecteurprivkavant2008.Unpland'actionopkrationnel a CtC dkveloppk et transmis a 1'IDA le 22 Juillet 2005. L'Etat se dksengagera de la fili&re Cafk notamment des SOGESTALS et de la SODECO et poursuivra la mise en ceuvre des mesures d'accompagnement pour assurer la rkussite du programme de libkralisation et de dksengagement de 1'Etat de la filikre. Avant fin Juin 2006, les autoritks transmettront a 1'IDA le plan d'action pour le dksengagement de 1'Etat de ces filikres avec les strategies affkrentes. 54. Au titre des mesures d'accompagnement de cette politique de libkralisation et de privatisation, le Gouvernement soutiendra toutes les actions visant le renforcement des capacitks et des activitks d'Investissement dans le secteur privC. Toutefois, il veillera B assurer les fonctions d'encadrement de la production ainsi que la recherche dkveloppement. l 9L e Programmedes NationsUniespour le DCveloppement 117 Indicateursde progrks Action Date cible Mars 2006 0 Promulgation de la nouvelle loi sur la faillite 0 Adoption par le Gouvernement du code rCvisC de Av. Juin 2006 l'investissement 0 Adoption par le Gouvernement du Projet de loi sur la Av. Juin 2006 micro finance 0 Achbvement d'une Cvaluation du climat 2006 d'investissement, entreprendre avec l'appui de la Banque Mondiale et prkparation du plan d'action en rCsultant, concernant notamment (a) le cadre juridique ; (b) la fiscalit6 ;(c) la compktitivite ;et (d) la facilitation du commerce exterieur,notamment les exportations 0 DCbut d'exkcution dudit pland'action Juillet 2006 0 DCmarrage du rbglement effectif de la dette intdrieure Juillet 2006 0 Achbvement d'une Cvaluation financibre et2006 organisationnelle de toutes les entreprises publiques pour 1'annCe 2005 0 L a rCforme des entreprises publiques par voie (a) de A compter de privatisation et de partenariats publics privCs (PPP) de janvier 2007 diverses formes. DEVELOPPEMENTFILIERESCAFE, THE ET COTON DES Contextegeneral, objectifset resultatsanticipes 55. Les exportations du Burundi et les cultures de rente sont dominCes par les secteurs clCs du cafC, du thC et du coton. Les trois secteurs sont largement dominies et/ou contr61Ces par des structures Ctatiques ou mixtes : ils'agit respectivement : dans le secteur du cafC, de 1'Offce du CafC du Burundi (OCIBU); dans le secteur du thC, de 1'Office du The du Burundi (OTB) ; et enfin dans le secteur du coton, de la COGERCO et du COTEBU, bien que la production agricole soit gCnCralement assurCe par des petits exploitants individuels. Cependant, ceux-ci sont gCnCralement mal rCmunCrCs. La situation financibre des secteurs en gCnCral, et des structures Ctatiques en particulier, est largement dkficitaire. Les secteurs constituent directement ou indirectement un gouffre pour les finances publiques et le secteur bancaire. 56. L'objectif global que vise le gouvernement dans ces secteurs est de promouvoir le ddveloppement des exportations et d'assurer une croissance agricole durable afin de relancer 1'Cconomie burundaise, accroitre la production globale et la rCmunCration des exploitants agricoles, ce qui contribuera A rCduire la pauvretC en particulier en milieu rural oh vit la grande majorit6 de la population. Les reformes visent spCcifiquement A : 1) augmenter le revenu du producteur par 1'amClioration de la compCtitivitC des filibres cafC, thC et coton avec l'adoption de nouveaux cadres rkglementaires, lCgaux et institutionnels propices a l'investissement privC. 2) &der les actifs de 1'Etat aux investisseurs privCs avec la participation des producteurs dans l'actionnariat des sociCtCs cCdCes dans un souci d'CquitC ; 118 et 3) mettre en place des mesures d'accompagnement afin de skuriser non seulement l'offre mais Cgalement la qualit6 de la production. 57. Des riflexiom importantes ont CtC menees sur ces secteurs depuis un certain temps. Une stratCgie globale de rCforme a CtC adoptCe par le Gouvernement en octobre 2004, la stratCgie est plus dCveloppCe dans l e secteur du cafC, suivi par le secteur thC et ensuite le secteur du coton. A ce stade, ils'agira de finaliser - si besoin Ctait - les strategies et les plans d'actions correspondants, et ensuite de procCder dans les meilleurs dClais a leur mise en ceuvre. L e processus de mise en oeuvre a dCjA commencC dans le secteur du cafC et les autoritCs entendent la poursuivre sur la pCriode 2006-2007. Dans les secteurs du thC et du coton, il s'agira (i)dans 1'immCdiat de prendre des mesures d'urgence, surtout dans le coton, et (ii) puisfinaliser les stratigies le plut6t possible en 2006, et enfin commencer leur mise en euvre aussit6t aprbs. 58. Afin de faciliter la prise de dCcision et le respect du calendrier des reformes dans les filibres cafC, thC et coton, le Gouvernement a mis sur pied un ComitC de coordination, de gestion et suivi des rCformes de la filibre cafC en date du 30/3/2006. Ce comitC a pour mission de coordonner, de gCrer et de suivre tout le processus de privatisation/ 1ibCralisation dans le strict respect de l'objectif de durabiliti du secteur CafC. Pour les filibres ThC et Coton, le Gouvernement mettra sur pied les organes ad hoc chargCs de piloter les rkformes. Ces organes pourront faire appel autant que de besoin 2i l'expertise internationale pour les appuyer sur des questions spkcifiques notamment le disengagement de 1'Etat des entreprises publiques. L e comitC devrait Claborer une feuille de route pour chaque filikre en accord avec la Banque mondiale et suivre tout le processus de rCformejusqu'a son terme. Secteur cafk 59. L e contexte de la rCforme, ses objectifs et les principes de base. L'analyse du secteur cafC met en relief une situation trks difficile pour une culture qui procure au pays plus de 90 pourcent des devises a l'exportation. L e diagnostic indique (i)une forte decote du cafe burundais sur le march6 international ; (ii)un secteur caractiris6 par une presence excessive de 1'Etat au niveau de la production, de la transformation et de la commercialisation ; (iii) des producteurs mal rCmunCrCs et de plus en plus dCsinteressCspar la culture ; (iv) un dCficit important au niveau du budget et du secteur financier ;(iv) unvieux verger et peu productif; (v) une faible production ; (vi) des intermkdiaires peu performants au niveau de la commercialisation, et (vii) des acteurs rCmunCrCs selon un systbme (RCA), ce qui tend a les ddresponsabiliser plut6t que de les inciter ; et (viii) un systbme de gestion de risque mal adapt6 aux besoins du secteur et des opkrateurs. 60. Les objectifs spkcifiques de la reforme consistent A : (i)restaurer et developper le label de qualitC dont a bCnCficiC le cafC burundais par le pass6 ; (ii)augmenter la production du secteur ; et (iii)augmenter le revenu des planteurs (en termes absolus et en pourcentage du cours mondial qui leur revient) tout en essayant de leur permettre de mieux se prCmunir contre les fluctuations normales des cours sans intervention de 1'Etat. Toutefois, eu Cgard 2i l'importance du secteur dans 1'Cconomie nationale et a sa vulndrabilitk, des interventions Ctatiques exceptionnelles et ponctuelles en pCriode d'effondrement des cours mondiaux (qui se produisent de temps A autres) consistant A la mise en place des mkcanismes permettant le 119 fonctionnement ininterrompu de la f i l i k e seront nkcessaires particulibement, pour compenser les pertes subies par les producteurs qui seront nkgativement affect& par la reforme. A ce titre, ilsera important de suivre et d'ivaluer de manih-e rCguliGre, l'impact de la reforme sur le plan social et sur la reduction de la pauvreti. 61. Les principesdirecteurs de cette reforme sont :(a) la libkralisation totale du droit d'exercer et des prix dans tous les maillons du secteur ; (b) l'elimination de toute taxation indue, qu'elle soit explicite ou implicite, surtout au niveau de la production agricole ; (c) le disengagement total de 1'Etat des unit& de premibre et deuxibme transformation et comprenant les stations de lavage, les SOGESTALs, les usines de diparchage et de torrefaction ; (d) 1'Climination des garanties Ctatiques en faveur des banques et autres institutions financikres au niveau de leur financement ;(e) le recentrage des activitks de 1'OCIBU pour qu'il assure la regulation et le contrBle des activitCs de la filibre et le suivi de 1'exCcution des fonctions (telles que la vulgarisation, la recherche, la maintenance des pistes rurales, la promotion, la distribution des intrants, etc.). L e gouvernement est persuade que ces actions conduiront A 1'Cpanouissement de tous les opirateurs dans le secteur en gCnCral, et des cafeiculteurs en particulier mais aussi A l'expansion de ce secteur-cl6 de 1'Cconomie. Actions dbja entreprises 62. Des actions importantes ont CtC deja entreprises dont l'adoption de l a note de reforme du secteur cafe en Octobre 2004 comprenant un plan de dksengagement de cette filih-e, l'organisation d'un atelier de haut niveau en vue de discuter des enjeux des reformes dans la filibre du cafe avec tous les acteurs en Mars 2005. Par ailleurs, le Gouvernement a decrCte la libertC d'etablissement et d'exercice dans tous les maillons de la chaine de production, de transformation, d'exportation et de financement dans le secteur cafC a tout opkrateur qui le souhaite2' en date du 14janvier 2005. Les autorites ont aussi : (9 abrogi le texte relatif a la taxe verger; (ii) (ii)procCdCA laIibCralisationduprixauxproducteursde cafC en cerises et en parche washed ; (iii) mis en place un comitk Clargi de commercialisation du CafC enjanvier 2005 ainsi que celui chargC de restructuration de 1'OCIBU enjuin 2005. (iv) rCaffirmC la libertC d'achat, de vente, de commercialisation et de transformation du cafe cerise et marchant, y compris par voie de vente directe, ouverte A tous les opkrateurs Cconomiques etc. Actions a entreprendredans le cadredu don pour 2005-2007 63. En urgence, le Gouvernement s'assurera que tous les dkcrets et ordonnances deja pris pour amCliorer la compCtitivitC du secteur cafC sont largement diffusCs et effectivement appliquds en particulier celui du 16 Juin 2005. I1 analysera les mkcanismes et les implications des ventes zi terme et annoncera, le cas CchCant, que les ventes A termes sont permises pour des exportateurs qui y sont intCressCs. I1s'engage Cgalement 2i publier rdgulibrement par voie des mCdias, les prix indicatifs du cafC cerise, parche washed du Burundi ainsi que les prix DCcretNo 100/012 du 14 Janvier 2005 120 internationaux du cafC vert afin que tous les acteurs de la filiere en soient largement inform& 64. En vue d'opCrer un choix judicieux adapte au dCveloppement de la filiere cafC, le dksengagement de 1'Etat des stations de lavage et des usines de diparchage sera pr&cCdCpar des Ctudes ad hoc dont les termes de rCfCrence sont dijA disponibles. I1 sera ensuite propose un cadre lCgal, rdglementaire et institutionnel Cgalement adapt6 a une filibre 1ibCralisCe et privatisee, favorable A son dkveloppement. 65. L e Gouvernement procCdera au choix dkfinitif du meilleur scCnario de privatisation des stations de lavage et des deux usines de la SODECO (BUTEREREet SONGA). L a prise de cette importante dCcision en toute objectivitC et transparence nCcessite une analyse Cconomique et financiere de differents scenarios possibles. 66. A cet effet, le Gouvernement recrutera une expertise internationale pour l'assister dans cette tAche A l'issu des Ctudes programmkes et financCes par I'IDA. Les procCdures de recrutement d'un cabinet chargC de la rCalisation de ces Ctudes sont en cours. Face B cette situation le Gouvernement estime qu'il faut attendre le rCsultat des Ctudes sur la stratCgie definitive de vente des stations de lavage avant de relancer les DAOs. 67. I 1 va, par ailleurs, s'atteler A 1'exCcution aux dates indiqukes des actions prevues dans la feuille de route/plan d'actions du secteur cafe en accord avec la Banque mondiale. I1 s'assurera ensuite de la meilleure prkparation et du bon dkroulement de la campagne 2006/2007 prCcCdant la liberalisation totale de la filiere en conformit6 avec les engagements pris auprbs des bailleurs de fonds. Dans ce contexte, un Comite de restructuration de 1'OCIBU a CtC mis en place et son rapport prisentant un plan d'action ddfinissant les nouveaux r6les des institutions du secteur du cafe, y compris I'OCIBU, a &tC transmis a 1'autoritC depuis le 28 octobre 2005. 68. L e nouveau statut de I'OCIBU devra &re analysC en reference avec les conclusions de 1'Ctude sur l e cadre lCgal, rkglementaire et institutionnel avant son adoption par les autoritCs habilitees. 69. Un systeme de gestion du risque et de politique de crCdit qui rCpond aux pdoccupations des tous les acteurs de la filihe y compris les producteurs sera mis en place. A cet effet, l e Gouvernement entreprendra une Ctude sur la gestion des risques et l a politique de credit. Cette Ctude permettra d'identifier les contraintes de financement de la filiere et de proposer des solutions approprides. L'Ctude permettra Cgalement d'informer les banques sur les techniques modernes de financement des produits de base et en particulier celui du cafC. L e lancement de cette Ctude dont les termes de rCfCrence seront discutCs prealablement avec 1'IDA aura lieu avant la mi-Novembre 2006. A moyen terme, le Gouvernement s'assurera que la majorit6 des stations de lavage ont CtC cCdCes en plus des usines de la SODECO conformCment aux engagements pris dans le cadre du programme PPTE. 121 Indicateursde progres Action Date cible Tous les producteurs sont inform& du prix de la cerise Fin septembre et parche et du prix international 2005 Tous les opirateurs privCs ont connaissance des Fin septembre diffkrentes modalitCs autorisies de commercialisation 2005 du cafe (vente aux enchirres, etc.) Lancement effectif de l'appel d'offres pour le Mai 2006 recrutement de l'expertise en charge de l'analyse Cconomique des scenarii de cession des stations de lavage. CrCation du comite de pilotage de la rCforme Mars 2006 Adoption d'un plan d'action definissant les nouveaux Septembre 2006 ,r8les des institutions du secteur du cafC (y inclus I'OCIBU) qui devront &re en place pour le dCbut de la campagne 2006/7 (avril 2007)' conformCment a la strategie de rCforme de la filikre du cafe. L e Comite de restructuration de 1'OCIBU a transmis le dossier a la 11- Vice-Prksidence. Choix du scCnario de privatisation et adoption de la Septembre 2006 feuille de route sur le cafC Vente effective du patrimoine immobilier de 1'OCIBU Septembre 2006 et cessions des actions dans les Ctablissements bancaires Plus de 50% des stations de lavage ont CtC vendues Juin 2007 Vente effective des usines de la SODECO Juin 2007 L a FilierethC Actions deja entreprises 70. L e thC reprCsente le deuxikme produit agricole du pays aprirs le cafC et la production brute connait des rendements importants. La production moyenne du thC sec varie entre 7000 et 10000 tonnes21.L a plus grande production dCja atteinte en 2001 s'Cleve A 9018 tonnes de thC sec mais elle semble stagner autour de 7500 tonnes de thC (c'est a dire 37500 tonnes de feuilles vertes). Prks de trois-quarts de la production viennent des plantations familiales et l e reste provient des plantations industrielles de L'Office du ThC du Burundi (OTB). 71. Cette sociCtC d'Etat a le monopole de la transformation des feuilles vertes en thC sec traitCes dans ses cinq usines dont les Cquipements n'ont pas CtC renouvelCs depuis au moins (vingt ans). Le dkveloppement du secteur est handicap6 par l'absence d'un renouvellement des infrastructures et des Cquipements. En effet, la situation des finances publiques de 1'Etat ne *'Source :TableauNo8 Evolution de laproductionagricole (en milliersde tonnes) contenu dans le rapport de lapremiereannte d'extcution de la CSLP-I / Janvier 2005. 122 permet pas d'envisager du moins a court terme l'expansion de la transformation des feuilles vertes. 72. Pour maintenir et accroitre la qualite et la quantite des exportations du The, il faudrait : accroitre les investissements dans le secteur qui, dans le contexte actuel pourraient &re assures a travers un partenariat public et prive. Ce partenariat passe par une liberalisation du secteur. En 2004, des organes techniques de 1'Etat ont pripark une strategie de reforme du secteur en procedant a une analyse de la filibre the et la priparation d'un document qui dicrit les options en matibre de reforme, qui sont toutes axees sur (i)la restructuration de l'Office du The, qui domine actuellement la partie aval du secteur ; et (ii)L a reconnaissance de l'autonomie de gestion aux unites de transformation. 73. L e Gouvernement a deja souscrit a la politique de desengagement de 1'Etat du secteur agro- industriel pour laisser place, A terme, aux prives interesses et disposant des capacites techniques et financibres requises, les pouvoirs publics n'interviendront plus dans ce cas, travers 1'OTB-siege actuel que pour reguler. L e Gouvernement souhaite bknificier des conseils de I'IDA avant de se fixer sur la strategie definitive de la reforme, qui sera adoptee dans l e meilleur des cas, avant septembre 2006 et mise en ceuvre aussit8t aprbs. Actions a entreprendre dans le cadre du don 74. L e Gouvernement s'attellera a la definition et a l'adoption d'une feuille de route pour le desengagement de 1'Etat partir de l'analyse de la filiire. I1 s'adjoindra aussi une expertise requise a cet effet. L'Etat mettra en place un comite de coordination, de gestion et de suivi de la reforme incluant les representants de tous les acteurs du secteur. 75. Au cours de la periode 2006/2007, le Gouvernement mettra &jour et adoptera l a strategie de reforme du secteur ainsi qu'une feuille de route decrivant les principales Ctapes de la reforme. Enfin, cette feuille de route sera traduite dans un plan d'action triennal de reforme 2007-2009 et, un audit technique et financier de 1'OTB sera realise pour la periode 2005 avec l'appui de I'IDA travers le projet PAGE. Indicateurs de p r o g r h Action Date cible 0 Rialisation de l'audit technique et financier de I'OTB Septembre 2006 0 Adoption de la strategie definitive de reforme du secteur Septembre The ainsi que duplan d'actions et d'une feuille de route 2006 correspondante 0 DCsengagement de 1'Etat de la filibre The Juillet 2007 L a fili&recoton Contexte et actions d6ja prises 123 76. L a production du coton a connu un dCclin suite A l'abandon des plantations et aux dkplacements des populations pendant les pCriodes troubles. La rCcolte cotonnikre a atteint les 3600 tonnes de coton graine en 2003 pour une production potentielle estimCe a douze mille tonnes environ. Le secteur est domine par deux societes d'Etat. D'une part ; la procede a l'usinage et a la commercialisation du coton fibre et de ses derives. D'autre part, le COGERCO qui assure l'encadrement des planteurs de coton, collecte la production et COTEBU, une entreprise de tissage qui produit des tissus Ccrus et teints. L e COTEBU constituait un monopsone bCnCficiant des dispositions administratives obligeant la COGERCO a lui livrer en priorite le Coton fibre. 77. Les difficultks financieres actuelles du COTEBU se traduisent par son incapacite a acheter A temps et au prix du marche, toute la production collectee par la COGERCO. Celle-ci a son tour, ne peut plus rCmunCrer les producteurs devenus otages d'une filiere entierement administree. En consiquence, plus de 1000 tonnes de la production de la campagne 2003/2004 etait longtemps stockCe sous les intemperies avec le risque d'accumulation des stocks, la perte de la production, l'accumulation des dettes et des intCri2ts auprks du secteur financier. 78. L e Gouvernement a mis en ceuvre un plan d'action permettant a la COGERCO la vente de tout le stock de coton. A cet effet, la COGERCO s'est adjoint l'expertise d'un courtier avec l'appui de la Banque Mondiale pour concevoir une strategie rapide d'Ccoulement du produit actuellement en stock. La COGERCO a pu ainsi, par la suite Ccouler sur le march6 international une partie de ses stocks de coton. Grgce au produit de cette exportation les arrieres vis-a-vis des producteurs ont CtC rCglCs. Actions a entreprendredans le cadre du Don pour 2005-2007 79. Compte tenu des difficultis actuelles que connait la filiere cotonnikre Burundaise, le Gouvernement prendra trois mesures urgentes : (i)mettre en place un comite de coordination, de gestion et de suivi de la reforme ; ii)accorder la libertC a la COGERCO d'kcouler son coton fibre sur le march6 mondial et dCnoncer le protocole qui lie la COGERCO au COTEBU; et (Z)mettre A jour et adopter la strategie de reforme du secteur et une feuille de route dicrivant lesprincipales Ctapes de lareforme. 80. Au cours de la pCriode 2006/2007, le Gouvernement realisera un audit technique et financier de la COGERCO pour l'exercice 2005 avec l'appui de I'IDA A travers le projet PAGE. A terme, il faudra completer la restructuration de ce secteur, dont les autorites estiment posskder des perspectives importantes de croissance au niveau agricole, en passant par la liberalisation et en accordant une place beaucoup plus importante a laparticipation du capital privC, notamment au niveau de la COGERCO et du COTEBU. 81. Toutefois, il serait nkcessaire de proceder a des reformes de fond au niveau des cadres juridique, riglementaire et institutionnel tant au niveau de la production agricole que de la transformation de la commercialisation des produits semi-finis et finis. I1 y a lieu de noter qu'un volet important des rdformes concernera le regime foncier, dont certaines dispositions actuelles pourraient compromettre la volontk des agriculteurs d'investir dans le secteur. 124 Enfin, ilsera demand6 au Gouvernement d'annuler la convention obligeant la COGERCO vendre le coton fibre au COTEBU. ~ Indicateursde progrks Action Date cible AoCt 2006 0 Notification de la lettre annonqant la libertC de vente du coton fibre a l'exterieur 0 Stock de coton vendu Novembre 2006 0 Adoption de la strategic et la feuille de route pour la Fin DCcembre reforme du secteur du coton 2006 0 Traitement du probkme foncier ler semestre 2007 0 Lancement des reformes janvier 2007 GESTIONDESDEPENSESPUBLIQUESETEXTENSIONDESSERVICESPUBLICS DE BASEAUX POPULATIONSPAUVRES 82. L e programme de reforme en matiere de dCpenses publiques vise trois objectifs a savoir (i) L'amCliorationdelastructureetlaqualit6desdepensespubliquessurtoutcelles likesa la reduction de la pauvretC ; (ii)L'ameliorationdusuividesdipensespubliquesdelapreparationa1'exCcution. (iii)LaRCformedusystemedepassationdesmarches Amklioration de la structure et la qualitk des dkpenses publiques surtout celles likes a la rkductionde la pauvretk 83. L e souhait des autorites est de faire de la politique budgitaire et de l a L o i de Finances des instruments plus efficaces de lutte contre la pauvrete. Nous entendons assurer que les allocations budgetaires sont alignies autant que possible avec nos objectifs sectoriels de developpement et de reduction de la pauvrete. Ceci va entrainer, dans le Budget 2006 une modification de la structure des dkpenses budgitaires dans le sens d'augmenter reguliirement le volume des ressources budgetaires destinees aux secteurs-cl6 tels que la sante, l'iducation, et les activitCs de demobilkation et de reintegration, etc. Dans ce contexte, au niveau de l a structure du budget, les autorites veilleront, pendant la durCe du Don, a ce que les Lois des Finances 2006 et 2007 integrent (i)les programmes de depenses prioritaires du CSLP tout comme (ii)les economies budgetaires gCnCrCes par la remise de la dette issue de l'initiative renforcke PPTE. Par ailleurs nous entendons utiliser les fonds de contrepartie budgetaires du D o n pour augmenter ces dCpenses clks. Objectifset risultatsantkipis 84. Dans le cadre de l'execution du CSLP, le Gouvernement s'est engage accroitre les dkpenses sociales et de lutte contre la pauvreti pour amiliorer les conditions de vie des populations. Comme indiquk dans la section macro6conomique ci-dessus, le Gouvernement 125 poursuivra sa politique de rehabilitation paralldement avec la politique d'investissement pour amCliorer l'accks des pauvres aux services publics essentiels en liaison avec les politiques dCfinies dans le CSLP. Les indicateurs sociaux revdent que le Burundi connait actuellement beaucoup de retard pour l'atteinte des Objectifs du Millenaire pour le DCveloppement. Dans le secteur Cducatifpar exemple, le taux brut de scolarisation" dans le primaire est d'environ 80% pour 2004/2005 avec des taux de redoublements de 30% et un taux de 8,6% pour les abandons, ce qui indique que le pays est loin d'atteindre l'objectif de scolarisation universelle h CchCance de 2015 tant que le systbme produira autant d'abandons et de redoublements et demeurera inefficace. 85. Les strategies sectorielles vont chacune entreprendre chaque fois que de besoin de mesurer les efforts nkcessaires pour remettre le Burundi sur le sentier normal permettant d'atteindre les objectifs du millhaire. L e Gouvernement mettra tout en ceuvre pour relever les dCfis dans les secteurs en retardpar rapport aux Objectifs du MillCnaire pour le DCveloppement (OMD) et notamment ceux de la santC et de 1'Cducation conformiment la strategic dCclinCe dans le a CSLP-I. Dans le domaine de l'Cducation, le Gouvernement s'est engage 9 planifier et organiser 1'Cducation des enfants et la formation des jeunes suivant les besoins de la population. I1 s'efforcera d'installer les Ccoles primaires et secondaires partout ou c'est nCcessaire pour que tous les enfants soient scolarisis. En outre les autorites entendent poursuivre le programme de rkinsertion et de rCintCgration des populations dans le contexte de lamise en ceuvre du projet PNDRR. Actions dCja entreprises 86. RCinsertion et rkintegration des populations: L e Gouvernement a adhere au programme de la dCmobilisation, de la reinsertion et de la riintkgration (DRRP) ayant pour objectifs d'aider 9 consolider la paix au Burundi et la rCgion des Grands lacs par l'execution des articles appropries de l'accord de paix d'Arusha et des accords suivants de cessez-le-feu. Les trois principaux objectifs du programme sont: (i)dkmobiliser les 55.000 ex-combattants environ des forces armCes, les militants des partis et des mouvements politiques arm& (APPMs), et plus tard les forces de la dCfense nationale (FDN), aussi bien que l'appui 9 leur rCintCgration dans la vie civile ;(ii) fournir l'aide de reinsertion 9 20.000 Gardiens de la Paix et aux 10,000 militants combattants (iii) contribuer a la redistribution et/ou la rCallocation des dCpensespubliquesde la defense en faveur des secteurs sociaux et Cconomiques. 87. La dCmobilisation des mouvements armis se poursuit de manikre satisfaisante. En juillet 2005, 15.780 ex-combattants ont CtC dCmobilisCs (2.908 soldats y compris les enfants et 478 ex-combattants fkminins). L'opCration de dCmobilisation des Gardiens de la Paix et autres militants combattants a CtC lancCe en juillet 2005. L e dkcaissement des allocations de subsistance provisoires aux ex-combattants dans leurs provinces de r6intCgration se poursuit aussi de manikre satisfaisante. 88. Sant6 : Dans le cadre du crCdit d'urgence de redressement, plus de 24 centres de santC ont CtC construits, 240000 moustiquaires imprCgnCes ont CtC distribuCs paralldement 9 la ~ 22L e taux a ktk calculk sur l a base des chiffres du Ministtre du Plan. Ce chiffre serait de 86% si l'on considbre les projections des Nations Unies. 126 pulvCrisation intra domiciliaire dans les zones qui sont infestCes de moustiques. Dans le contexte du crCdit de rkhabilitation (CRE), le Gouvernement a poursuivi les objectifs en conformit6 avec la strategic du CSLP-I et les dCpenses de sant6 financCes sous le CRE representent environ (4,3%) du budget d'investissement du ministere de la Sante. Un plan national de diveloppement sanitaire a CtC adopt6 A l'issue des Ctats gCnCraux de la santC tenus en septembre 2004. Le Plan national de lutte contre le VIH/SIDA a CtC l a n d parallelement au Plan national de developpement sanitaire avec trois principaux volets : la prkvention, la priseen charge et le renforcement des capacitis. 89. Education : Dans le secteur de l'kducation, le CRE-I avait permis aux autorites de continuer les actions entreprises sous le crCdit de rkhabilitation notamment : la remise en Ctat des Ccoles y compris la construction et l'kquipement, la formation appropriee des enseignants non qualifiks, ainsi que l'acquisition de manuels et matCriels didactiques pour les enseignants et Cleves des colleges communaux, l'acquisition des fournitures d'imprimerie pour la fabrication des manuels de classe pour les Ccoliers et maitres des Ccoles primaires. - Par ailleurs, le nombre d'enseignants recrutCs en 2004 a CtC plus important qu'au cours des annCes prCcCdentes : 2300 dans le primaire et 2000 dans le secondaire contre un plafond respectif de 1000 et 600 prialablement fix6 par les autoritks. C. Actions a entreprendre a moyen terme 2005-2007 90. Demobilisationet Reinsertion :L e Gouvernement va poursuivre les opCrations relatives au programme de reinsertion en conformitC avec les Conditions du passage au point d'achevement de l'initiative PPTE. L'exCcution de la composante de rkintegration a CtC retardee, et son opCrationnalisation rapide sera une priorit6 principale pour le SecrCtariat Executifde la Commission Nationale pour la dCmobilisation, la rkinsertion et la rCintCgration dans les prochains mois. 91. SantC : Dans ce secteur, la stratCgie nationale est en cours de finalisation avec pour objectif principal d'amiliorer l'accks des populations aux soins essentiels. A court et moyen terme, les autoritCs mettront tout en ceuvre pour rChabiliter les Centres de SantC en droite ligne avec la stratCgie engagCe dans le cadre du CRE-I. Les actions d'offre de service de santC poursuivies par les autorites se subdivisent en trois grands domaines : le dCveloppement des infrastructureset des services, le renforcement des capacitCs des structures sanitaires, et enfin l'implication des populations aux efforts d'amClioration des conditions sanitaires. 92. La politique de dCveloppement equitable des infrastructures portera sur la poursuite des efforts de construction, de rihabilitation et d'Cquipement des structures sanitaires et des points d'eau potables, l'extension des maternitis A l'ensemble du pays pour que la population puisse se faire soigner A unprix abordable et sans devoir parcourir de longues distances, mais aussi sur la mise en ceuvre d'une politique dynamique d'offre de midicaments. Le Gouvernement s'est engagi A divelopper une politique visant 1'amClioration sensible de l'accbs aux soins de SantC pour tous ainsi que la poursuite de la mise en application du plan stratkgique nationale de lutte contre le VIWSIDA dont l'une des axes essentiels est le renforcement des capacitds de prdvention et le traitement des maladies opportunistes liCes au VIWSIDA. 127 93. L e renforcement des capacites des structures sanitaires concerne (i) appui aux institutions un de formation et la formation continue, (ii) politique de stabilisation du personnel de la une sante dans les zones les plus necessiteuses et (iii) un appui aux structures de lutte contre le VIWSIDA. 94. L'implication de la population aux efforts d'amelioration des conditions sanitaires portera sur (i)la promotion des programmes de prevention : Cducation et sensibilisation aux problemes d'hygiene et de santC de la famille, difhsion des methodes de prevention priconisees par l'OMS, etc ; (ii)le renforcement de la prise en charge des malades du SIDA et la promotion des micanismes de solidarite communautaires, (iii)la promotion des mutuelles communautaires de sante, et (iv) la promotion de la gestion communautaire des sources d'eau. 95. Education : Dans le court terme, le Gouvernement entend poursuivre la rehabilitation, assurer la disponibilite des fournitures scolaires, procCder au redeploiement des enseignants et continuer la formation continue des enseignants. Dans le cadre de la preparation du CSLP complet, le Gouvernement vise l'amelioration de la scolarite universelle. Bien plus, lors de son entree en fonction, le Chef de 1'Etat a annonce la decision du Gouvernement de faire benkficier de la gratuiti de l'enseignement primaire A tout enfant en bge d'etre scolarise a partir de l'annke scolaire 2005-2006. 96. L e Gouvemement poursuivra avec la formation des enseignants et l'amelioration du systeme de progression dans leur carribre, l'amelioration de la repartition des Ccoles et l'accroissement de la participation des structures communautaires dans leur gestion. A moyen terme, les efforts d'offre de service d'education devront contribuer a une amelioration significative des indicateurs de performance dans ce secteur. A l'horizon 2007, le Gouvernement espere rihabiliter ou construire au moins une ecole primaire sur chaque colline de recensement. Cette action entrainera la construction d'environ 800 salles de classe en 2006, le recrutement de 5000 nouveaux enseignants. Quant a l'acquisition de materiel didactique elle sera rCalisCepour uncoat estimatif de 15 millions dollars EU. 97. Energie : L e Gouvernement estime que le developpement du secteur de l'energie constitue un prealable pour le developpement du pays. En effet, actuellement le Burundi developpe largement de l'energie importee du Congo qui reprisente pres de 50% des consommations totales. 128 Indicateursde progrks Action Date limite cible 0 L'adoption d'une L o i de Finance pour 2006 qui incorpore les DCcembre dkpenses de pauvretC, conformCment a la sous classification 2005 ci-dessus mentionnke (notamment ceux dans le CSLP), celles qui sont financdes par le programme PPTE ainsi que celles qui seront financks par le D o n ; Les dCpenses pro- pauvres sont codifikes de maniere a &re identifides dans la L o i de Finances 2006. L a codification fonctionnelle est dCtaillCe et concerne les 6 axes stratkgiques. 0 L'adoption d'une L o i de Finances pour 2007 qui incorpore Decembre les dCpenses de pauvretk, conformkment 9 la sous 2006 classification ci-dessus mentionnCe (notamment celles du CSLP), celles qui sont financees par le programme PPTE ainsi que celles qui seront financCs par le Don. 0 L'Augmentation de l'education universelle et le taux de DCcembre scolarisation brut national conformkment aux objectifs et 2006 niveaux fixis dans le document du point de dkcision de l'initiative PPTE 0 L'Accroissement du taux d'immunisation national des DCcembre enfants de moins d'un an selon les objectifs et les niveaux 2006 fixks dans le document du point de dkcision de l'initiative PPTE. 0 L'Accroissement des dkpenses budgktaires du secteur de la Dkcembre SantC d'au moins 5% en 2006 2005 0 L'Accroissement des dCpenses budgktaires du secteur de DCcembre 1'Education d'au moins 10 % en 2006 2005 AmCliorationde la gestion des dkpensespubliques Objectifset rCsultatsanticipCs 98. L a rCforme de la gestion des finances publiques est au centre de la rCforme du secteur public et vise en particuliera moderniser les instruments de gestion, garantir la transparence dans la passation des march& et amCliorer l'effcience de l'action gouvernementale. Cette rCforme permettra : (i) mise en place d'un systeme informatis6 interimaire des dCpenses publiques la qui permet d'assurer un suivi et un contrble du budget, notamment des dCpenses de lutte contre la pauvretC depuis janvier 2006, (ii)l'ktablissement des rapports trimestriels sur I'exCcution du budget au moyen de la nouvelle nomenclature budgktaire unique, (iii)la production du TOFE en cohCrence avec la balance du trCsor a fin septembre 2006. En outre, dipenses a moyen terme cohCrents avec le CSLP. Les autoritCs disposeront a l a suite de cette l'objectif vis6 consiste 9 mettre a la disposition des ministeres itmoyen terme, des cadres de rdforme, des instruments appropriCs de gestion et un arsenal administratif qui sera difhsC tous les acteurs intervenant dans le cadre du suivi participatif. Parallelement, les autoritks 129 entreprendront la rCforme de la passation des march& en vue de mettre en place un dispositif qui assure latransparence et permet une meilleure allocation des ressources publiques. Actions dCja entreprises 99. Pour ce qui est de la prkparation budgktaire : L e gouvemement a revu les nomenclatures budgCtaires basCes notamment sur les standards internationaux, y compris la classification fonctionnelle. La classification budgetaire et comptable incorpore dCja un systime d'identification (par codage) des dCpenses de pauvretC (CSLP et PPTE). 100. Ces nomenclatures ont CtC utiliskes pour Claborer le budget 2006. L e rapport annuel 2005 est en cours de production sous la nouvelle nomenclature malgrC l e retard enregistri dans l'application du Plan BudgCtaire et Comptable de 1'Etat. 101. L'exCcution et le suivi du budget : L'articulation du Plan BudgCtaire et Comptable valid6 en 2004 et mis en ceuvre pour 2005, vise l'harmonisation des nomenclatures budgitaires et comptables, l'actualisation du plan comptable, la facilitation de la production des Ctats de suivi budgetaire et comptable, notamment la balance du TrCsor et le TOFE. L'exercice de production d'une balance du trCsor a dCmarrC depuis 2004. 102. Par ailleurs le Gouvernement a prCparC depuis mars 2005 un systkme informatique intCrimaire de gestion des finances publiques dont la finalit6 sera notamment (i)de pouvoir suivre les dCpenses au niveau sectoriel surtout celles likes a la pauvrete, depuis l'engagement jusqu'au paiement ;et (ii) production rCguliere des tableaux de synthkse. Les la travaux ont conduit a l'elaboration d'un progiciel incorporant la saisie et la consultation des engagements, la gestion des paiements et uncertain nombre d'Ctats de suivi comptables et/ou budgktaires. Ce produit incorpore la nomenclature unifieedu PBCE. 103. L e contrdle externe et la mise en oeuvre de la cour des comptes : L a Cour des comptes a CtC mise en place en 2004, et un cahier des charges de l'informatisation de l'institution est disponible. Cependant, la Cour doit &re renforcCe pour la rendre pleinement opkrationnelle. A ce titre, les capacitCs humaines de cette structure seront renforcCes par des recrutements spCciaux et une formation appropride sera dispensCe aux cadres de la Cour des comptes pour leur permettre de faire leur travail d'audit et de contrble externe de la gestion des ressources publiques. 104. Le Gouvernement vient de finaliser la mise en place du systime informatique intkrimaire de suivi de la chalne de la dCpense avec une liaison du ministire des finances et de la BRB. Ce systkme est en mesure de produire les Etats de SuiviBudgCtaire sur une base trimestrielle, y compris pour les dCpenses de pauvretC, d compter du le` 2006. L e premier de ces janvier rapportstrimestrielsa couvert le le` trimestrede 2006. Actions a entreprendre dans le cadre du don (pour 2005-2007) 105. Pour ce qui est de la prbparation budgktaire La classification budgitaire et comptable a CtC compl6tCe par un systkme d'identification (par codage) des dCpenses de pauvretC (CSLP et PPTE). 130 106. Concernant 1'ExCcution budgetaire ; L e Gouvernement devra harmoniser les rkgles relatives a l'exkcution de la depense publique par l a production d'un manuel complet ddcrivant l'ensemble des procCdures d'exkcution de la dCpense, depuis la mise en place des crCdits, l'engagement et les contr8les de rCgularitC, jusqu'a l a phase comptable. Un plan de formation intense et trks large devra etre ClaborC et mis en ceuvre au profit de l'ensemble des acteurs de 1'exCcution de la dCpense publique. 107. Audit budgktaire.Pour mieux renforcer les capacitCs du pays dans les domaines de suivi et d'audit, le Gouvernement du Burundi s'engage 21 demander l'appui des institutions internationales d'audit ayant une rkputation Ctablie, afin d'assister la Cour des Comptes dans l'audit de 1'exCcution budgktaire annuelle, 2I partir de 2006. 108. Par ailleurs, le Ministkre des Finances mettra en place une structure d'informaticiens spCcialis6s en charge de l'exploitation quotidienne du circuit de la dCpense, et du systkme de comptabilite, apres identification et formation approfondie. L e systkme intCrimaire devra comporter dks a prCsent l'ensemble des mesures habituelles de sCcuritC, notamment celles concernant la structure des bases, les accks aux donnCes et aux locaux, la protection du rkseau, la maintenance et la perennit6 des Cquipements. 109. Dispositif de suivi des depenses pro-pauvres: Par ailleurs, ily a lieu de noter les efforts que nous entreprendrons dans le contexte du programme PPTE. En effet, deux repkres pour le point d'achkvement concernent directement les dCpenses publiques notamment (i)la production d'au moins deux rapports trimestriels d'exkcution budgCtaire (Etats de Suivi BudgCtaire) produits par ledit systkme et basis sur la nouvelle nomenclature unifiie (repkre No. 4); et (ii)des exercices de suivi Cvaluation des ddpenses publiques dans les secteurs de l'Cducation, de la santC et de lajustice, etc. 110. En outre, un comitk de surveillance indkpendant sera bientcit mis en place pour assurer le suivi des dCpenses financCes gr8ce a l'allkgement obtenu au titre de l'initiative PPTE renforcde, dont le rcile est de faciliter la mise en ceuvre et le suivi des dCpenses PPTE tel que dCfinies dans les paragraphes 56, 57, 58 et 59 du document du point de dCcision de l'initiative PPTE. Ce comitC sera cornpod des reprksentants nationaux et locaux incluant la sociCtC civile, ainsi que des membres de la communautC internationale des bailleurs de fonds. Cette approche a 6tC mise en oeuvre avec succi% dans d'autres pays. L'utilisation de cette aide sera soumise a des audits techniques et financiers indkpendants permettant de vkrifier que les ressources sont bien consacries A la lutte contre l a pauvretC, et tous ces audits seront portCs a laconnaissance du public. 111. I1 reste important de mentionner que le Gouvernement s'engage A utiliser les ressources DARE d'une manikre consistante aux objectifs du Cadre StratCgique de Lutte contre la PauvretC (CSLP). Les dCpenses faites A partir du Compte SpCcial du TrCsor (CST) rCservC aux ressources DARE seront surveillies par un comitC de suivi. En plus, l'audit externe annuel des comptes DARE sera effectuC dans les meilleurs dClais. I1 s'agit du compte dCpBt libel16 en devises Ctrangkres et le compte dCucit libel16 en monnaie locale. 131 112. En vue de s'assurer que les ressources budgktaires, y compris le D o n atteignent leurs lkgitimes bknkficiaires le Gouvernement s'engage a effectuer une enqu&te sur la traqabilitk des dkpenses budgktaires de 2006 dans l'kducation, la santk, et la justice avec l'aide de la Banque mondiale. Cette enquste sera financCe a travers le projet PAGE de la Banque mondiale et le Fond Fiduciaire Belge. 113. Nous entendons nous focaliser sur la rkalisation des repbres PPTE et le fonctionnement du comitC de suivi PPTE dans le contexte du programme de rCformes kconomiques soutenues par le Don. Indicateursde progrks Action Date limite cible 0 L'achbvement des travaux relatifs 9 l'ktablissement d'une Dkja fait nomenclature budgCtaire et comptable qui comprend notamment une sous classification ((dCpenses de pauvrete D, et leur adoption selon la rkglementation en vigueur. 0 L'achkvement de la prkparation du systkme intkrimaire de Dkja fait et gestion informatiske des dCpenses publiques comportant pr& a unlien entre le Ministbre des Finances et la BRB. exkcution dbs janvier 2006 0 Mise en place du Comitk de suivi des depenses PPTE DCcembre 2005 0 L a production, a partir du systbme informatique FinMars 2006 intkrimaire, d'un Ctat de Suivi BudgCtaire pour l e premier trimestre de 2006. 0 L a production, a partir du systkme informatique Dkcembre intkrimaire, d'au moins deux Etats de Suivi BudgCtaire 2006 trimestriel pour 1'annCe 2006 0 L'achbvement, notamment dans les secteurs de Mars 2007 l'kducation, de la sante et de la justice, des travaux de suivi Cvaluation des dkpenses budgktaires visant (i)la traqabilitd des dkpenses budgktaires; (ii)1'Cvaluation par les utilisateurs des services fournis ; et (iii)1'Cvaluation par les prestataires des contraintes a la prestation effective des services; et prCparation d'un plan d'action pour rdsoudre les probl6mes relevCs. Rdformede la passationdes marchds Objectifset rCsultatsanticipds 114. L a rCforme soutenue vise a doter le Burundi d'un cadre institutionnel et juridique moderne conforme aux meilleures pratiques. L e plan d'action met un accent particulier sur le renforcement des capacitCs, pour que le pays puisse disposer des hommes et des outils pouvant permettre un bon fonctionnement du systkme des march& publics et l'atteinte des objectifs poursuivis. 132 115. La prevention et la lutte contre la corruption sont Cgalement des preoccupations importantes. Plus de dix ans de conflit et de crise ont conduit A unaffaiblissement de l'autoritk de 1'Etat et a une ascension vertigineuse de la corruption. C'est ainsi que la lutte contre la corruption est une des priorites affichke par le nouveau Gouvernement. Actions dkjh entreprises 116. Passation des march& publics : L e gouvernement a mis sur pied enjuin 2003 unComite de Suivi de la Reforme des MarchCs Publics ayant pour mission de proposer et de coordonner les activites necessaires a l'aboutissement de la reforme de march& publics. Ce comite a conduit des consultations avec les differentes parties intCressCes par les marches publics au Burundi, afin de definir les contours de la reforme du secteur. Ces consultations ont abouti 21 un projet de plan d'action. Le plan d'action h t examine et adopt6 par le Conseil des Ministresen aoQt2004. Le plan d'action de la reforme des march& publics s'articuld autour de quatre axes suivants : (i)la refonte du cadre juridique et institutionnel ; (ii)le renforcement des capacites ;(iii) promotion de la qualit6 et de la performance ;(iv) la mise la en place des mecanismes de prevention et de lutte contre la corruption. 117. L e Gouvernement s'est engage a mettre en ceuvre un plan d'action d'urgence visant a ameliorer la gestion des marches publics dans le cadre juridique existant. L e ComitC de suivi de la reforme des marches publics est en train d'elaborer une note circulaire qui devra &re diffusee au cours du ler 2006. trimestre Actions a entreprendredans le cadre du don (pour 2005-2007) 118. Le plan d'action de reforme des marchis publics vient d'Ctre ajuste pour d'une part, mettre a jour le calendrier de la realisation des reformes et d'autre part intkgrer dans un mCme document le plan d'action issue de la note analytique de la Banque Mondiale sur les march& publics au Burundidejuin 2004 et le plan d'action adopt6 par le gouvernement en aoat 2004. Suite a cet ajustement le calendrier de l'adoption des mesures cles pour 2006 se presente comme suit : 119. Avant la fin du second semestre 2006, les mesures suivantes auront CtC prises : (i) Promulgation et publication des textes legislatifs et reglementaires concernant le cadre institutionnel des marchees publics et le code des marches publics ; et (ii)promulgation des decrets instituant les nouvelles structures de gestion et de regulation des marches publics, ainsi que l'adoption d'un plan d'action concernant la mise en place de ces nouvelles structures. 133 Indicateursde progrits Action Date limite cible Promulgation d'un cadre institutionnel et d'un code des 2006 marches publics. Adoption d'un plan d'action de renforcement des 2006 capacites portant sur l'horizon 2006-2010. Mise en place des structures de gestion et de regulation 2007 des marches publics. COORDINATIONET GESTIONDUDON 120. L e suivi du programme et des mesures de la matrice des rCformes structurelles annexee a cette lettre sera assure par le Gouvernement selon une formule appropriee et conforme au cadre institutionnel nCgocie entre les autorites et 1'IDA. 134 REPUBLIC OF BURUNDI (ENGLISH TRANSLATION) ECONOMICREFORM SUPPORT GRANT (ERSG) LETTER OF DEVELOPMENT POLICY Bujumbura,June 26,2006 135 GENERAL INTRODUCTION 1 The Government requests IDA assistance to support its program o f economic reforms for the period 2006-2008, which aim at macroeconomic adjustment and stabilization together with implementation o f structural reforms designed to reduce poverty. This letter o f development policy summarizes the social context and the recent development of the economy. It describes the policies that the Government intends to pursue in the fields concerning: (i)preparation of a Poverty Reduction Strategy Paper (PRSP); (ii) implementation o f the policies for development o f the private sector and primarily the coffee, cotton and tea subsectors; (iii)and finally, the reforms aimed at improving the management o fpublic expenditure. 2 The satisfactory implementation o f the reforms already underway has enabled reestablishment o f the financial equilibria which now need to be consolidated. The recent decision o f the IDA and IMF boards approving Burundi's eligibility for the HIPC Initiative i s resounding evidence o f this. During the transition period the Government has posted progress regarding reforms it intends to pursue with a view to accelerating growth and ensuring that the policies already in effect are irreversible. 3 However, these achievements should not be allowed to conceal the fact that our economy i s still confronted with numerous challenges, while there are also some significant opportunities that Burundi ought to seize with the aim o f improving the economic environment, modernizing the production apparatus and positioning itself in the international market. The present sources of growth are all in the agriculture sphere, and specifically the export products such as coffee, cotton and tea. The authorities believe that the reforms to be undertaken in these subsectors will make it possible to ensure expansion o f the agriculture sector, with (i) increased contribution an to growth, and (ii)enhanced incomes for agricultural producers, especially those in rural areas. 4 This vision must be rounded out with a wider strategy aiming at the institutingo f good governance, in conjunction with development o f the private sector to bring about more growth and employment creation. The implementation o f the program supported by the Grant forming the subject o f this policy letter will have the benefit o f helpingthe HIPC Initiative triggers, but what i s more this program will enable the newly installed Government to base the rebuilding o f the country on sound economic foundations. To this end the letter cites inthe following paragraphs the economic performances posted in recent years, the medium-term program for 2006-2008 and the reforms to be implementedinthe context o f the budget-support Grant in 2006 and 2007, with special reference to reform o f public finances, economic growth and reduction o f poverty, development o f the private sector and promotion o f the coffee, cotton and tea subsectors. 5 Burundi also requests other contributions from donors in the implementation o f this program and will need a frame of reference for a harmonized policy to be adopted by donors. In this connection, the Government desires enhanced coordination on the part o f IDA and acceptance by all financial partners o f the PRSP, the complete version o f which i s currently beingproduced and will be available inJune 2006. 136 6 This letter sets out the Government's program regarding reforms over the next two years, but also presents the performance indicators that will be used for assessing the quality o f its implementation. Being aware o f the difficulties inherent in economic reforms and bearing past experience in mind, the authorities intend to take care to involve all players with a view to securing the commitment necessary for the success of any reform having socioeconomic implications. Context and recent sociopolitical development 7 Burundi's development was hindered by a long period of civil war which broke out in 1993, followed by a subregional economic embargo from 1996 to 1999. The signing o f the Arusha Peace Agreement by the political partners in August 2000 made it possible to embark on a peace process managed by a transitional Government and parliament selected on the basis o f balanced ethnic representation. The process o f national reconciliation proceeded without incident and peace was gradually reestablished following the signing o f the global cease-fire agreement on November 16, 2003, in Pretoria, South Africa. It was during this calm transitional period that a new Constitution was adopted, followed by (i)election of commune councils on June 3, 2005, and (ii)election o f the members o f the National Assembly and Senate, which took place on July 4,2005 and July 29,2005, respectively. 8 The President of the Republic was elected on August 19, 2005, and a new inclusive Government was formed to succeed the transitional Government and i s now in office. The sociopolitical environment has been strengthened with the establishment of democratic institutions. This situation will facilitate implementation o f fundamental reforms designed to enable Burundi to resume a level o f growth necessary for its development and creation o f an environment favorable for attracting private investment,with a view to ensuring sustainable growth and reduction o fpoverty. 9 The reconciliation underway since 2000 has been supported by the entire international community and chiefly the Bretton Woods Institutions, in order to facilitate economic recovery and restoration o f the effective hnctioning o f the State. In this respect, the socioeconomic programs carried out to date have enabled the demobilization o f the former combatants involved in the conflicts and their reabsorption into civilian life, including the reintegration o f refugees and/or displaced persons numbering around a million individuals. Inthis political environment, which remains a sensitive matter, the challenge for the authorities consists in strengtheningthe advances achieved during the transitional phase as regards peace and security, promoting growth through development o f the coffee, cotton and tea subsectors and that o f the private sector in general, in order to boost both the public revenues and private incomes and to continue improving the management o f the public finances with a view to increasing quality public services for the poor and improving governance. These reform thrusts are set out in the complete PRSP that the Government is in process o f finalizing with the World Bank's assistance. Macroeconomic and budgetary framework 10 Performance in 2000-2005: The challenge o f reducing poverty in the context o f Burundi i s no inconsiderable one since the needs are many, especially as regards raising 137 the people's standard of living and pursuing the reconstruction program. Under the present conditions, average annual growth rates o f around 5% would be needed for about ten years to regain the 1993 level of per-capita GDP, which indicates the scale o f the task facing the Government. However, some significant progress was made during the transitional period, which hasmade itpossibleto restore peace step by step. Since 2000 the Government has adopted reform programs assisted by IDA and with effect from 2004 Burundihas obtained a PRGF loan from the IMF following execution o f a reference program in 2001-2002. Other assistance from other international- community partners has also contributed to the economy's recent performance. The implementation o f these reforms has been proceeding satisfactorily up to the present and constitutes a step forward toward stabilization and restoration o f the fknctioning o f the public services. Inthis connection, it should be noted that the second review ofthe PRGF was completed by the IMFBoard on July 27, 2005. Moreover, at the same time the Board approved Burundi'seligibility for the Enhanced HIPC Initiative. The World Bank's Executive Board made the same decision on August 4, 2005. The third and fourth PRGF reviews are to be completed in June 2006. The macroeconomic performance inthe course o f 2005 was mixed, with a GDP growth rate o f the order o f 1% compared with 2004 when notwithstanding severe climatic conditions the economy posted 4.8% growth. As regards the management o f the public finances, the reforms instituted by the Government made it possible to restore budgetary discipline. The economic recovery that began to take shape contributed to revenues amounting to 20% o f GDP in 2004 and generation o f a primary balance of - 3.5%. Inflation was contained at 11.9% at the end o f the period against 1.7% in 2003, this rise being due to the continuing increases in the prices o f consumer goods and petroleum products. The Government succeeded in holding the primary deficit at around 3.5% o f GDP while the current balance deficit excluding transfers reached 24.4% in 2004. The budget performance posted in 2005 was satisfactory on the whole. Revenues amounted to 20% of GDP and overall expenditure reached 38.8% of GDP. Inflationremained high as a result o f the drought afflicting the north o f the country and the upward pressure on prices occasioned by the sizable presence o f the international community. Promotionof Good Governance 13 The Government o f Burundi announced at the time it took office at the beginningo f September 2005 that Good Governance was its primary concern. What i s more, on the occasion o f his first international trip as democratically elected Head o f State o f Burundi, His Excellency President Pierre NKURUNZIZA delivered an important address at the United Nations headquarters in New York during the Millennium + 5 Summit in September 2005. In the President's words: "Our Government has made respect for human rights its key concern. The primacy o f the constitutional State, rigorous management o f public resources and promotion o f Good Governance are prerequisites for sustainable development. They are at the heart o f our development strategy." Regarding the specific question o f the promotion o f Good Governance, Burundi's Head of State went on the say: "With reference to Good Governance, our Government has committed itself from the moment it took office to combating all 138 forms o f fraud, corruption, economic and financial embezzlement and other misappropriations o f public finds. An anticorruption law will shortly be submitted to parliament and an anticonuption squad will soon be operational. Along the same lines, our Government i s determined to hold down public spending, in particular by reducing and regrouping the ministries,which are down from 26 to 20 in number, by reviewing their missions and mandates and withdrawing partially or filly from certain public enterprises. Also within the framework o f Good Governance, my Government i s resolved to promote reorganization of the justice sector with the aim o f fostering impartial, swift and equitable justice and eliminating impunity." The anticorruption law was in fact promulgated in April 2006, and the anticorruption squad was approved by the CouncilofMinisters on April 27, 2006. 14 In the context of monitoring the accomplishment of the Millennium Development Goals (MDGs), Burundi has made an important step forward regarding two o f these goals, namely the second and third, dealing with ensuring primary education for all, and promotion o f equality o f the sexes and self-determination for women. When he took office, the President of Burundi announced the decision to the give free primary education to each child o f school age with effect from the 2005-2006 academic year. This measure produced a large influx of newly registered students (nearly 500,000 in all). In addition, the institutions established with the new authority deriving from the 2005 democratic elections now accord women the place they deserve. Inpoint o f fact, for the first time in Burundi's history, the National Assembly i s presided over by a woman and the two vice presidentso f the Senate are also women. Moreover, seven o f the twenty ministries are headed by women while at the territorial administration level there are several women governors or commune administrators. 15 To increase the chances of success o f the Government's programs for which it is requesting assistance, it has been necessary to seek the support o f the interest groups affected by the reforms, in order to ensure better coordination with the donors so as to permit fuller harmonization of policies, a prerequisite for success. Accordingly, in December 2005, the Government set up a National Assistance Coordination Committee ("CNCA") to firther dialogue and coordination with the donors. What i s more, in February 2006 the Permanent Secretariat o f the CNCA was established to ensure efficient management of assistance received and a permanent framework for dialogue and consensusbetweenthe Government and the donors has been set up inthe CNCA. Improvementof the Systemfor Managementof the PublicFinances and BudgetExecution 16 With support from the World Bank through IDA Economic Management Support Project (EMSP) and technical assistance from the IMF, the Government is pursuing improvement o f the management o f the public finances by means o f the establishment o f an interim system for the purpose already in operation as o f January 2006. This system incorporates the new standardized nomenclature enabling monitoring o f poverty-reduction expenditures; it should ultimately make it possible to automatically produce the table of State financial operations and the consolidated treasury balance sheet. Training of senior officials and government employees, and also o f BRB senior stafc in the efficient utilization o f this system i s underway. The Government i s in 139 process o f capturing the data pertaining to all fiscal 2005 financial operations in order to produce a draft settlement law betweennow and June 2006. 17 The new management of the exchange system has functioned better and has brought about a convergence o f the official exchange rates with those obtaining in the parallel market. The present differential i s o f the order o f 3% whereas it was more than 10% at the start of the program. appreciated against the US dollar by lo%, a factor which contributed to the marked Since the beginning o f 2005, the Burundi franc has slowing o f inflation in December. Prospectsfor 2006 and in the mediumterm 18 The year 2005 will have been a turning point for the development o f Burundiwith the establishment o f the bodies and institutions brought into existence by the new Constitution, in particular the local, parliamentary and Senate-related institutions. The medium-termmacroeconomic objectives are aimed at achieving sufficient growth to significantly reduce poverty by an increase in private investment and development o f the production of tradable goods. Inthe medium term and by the 2006-2008 horizon, the authorities are aiming at average annual growth of about 5%, with private investment averaging 5% o f GDP over the same period. Under these conditions, the Government's objective i s to favor private enterprise with special emphasis on agriculture (coffee, cotton, tea and sugar), agroindustry including SMEs, the new information and communication technologies and microfinance, with a view to making these the bases o f economic growth. Moreover, the Burundi authorities reiterate through this letter of development policy their commitment to pursuing the process o f divestiture by the State of its interests in the public enterprises. Foreign and national private investors will be encouraged to participate inthe key sectors o f the economy, in particular telecommunications, electricity, etc. 19 Accordingly, with the support o f the international community, the Government intends to develop the country's infrastructure and reduce its energy dependence together with the other constraints on development o f the private sector, especially those relating to the regulatory framework for business. 20 Being aware o f the need to increase access for the poorest o f the poor to essential public services, the Government will take steps to boost resource financing inthe social sectors and more specifically in rural areas. Social expenditures (Education, Health, Public Works) are slated to be increased from around 28% to some 34% on average over the period 2006-2008. Reformssupportedby the IDA grant 21 The Government requests IDA'Sassistance through the Budget and Economic Reform Grant (DARE) to implement its policy for alleviating poverty and accelerating growth. The Government would like the DARE to support: (i)the finalization and implementation o f the PRSP; (ii)the promotion o f growth by means of: (a) development o f the private sector; (b) divestiture by the State of commercial and industrial activities; and (c) implementation o f the reforms in the coffee, tea and cotton subsectors in accordance with the commitments already assumed during execution o f 140 the Economic Recovery Credit (ERC) approved by IDA; and thirdly (iii)improvement of the management o f the public finances and provision o f quality public services, with special emphasis on the poorer segments of the population. 22 The Government is convinced that these reforms constitute the basis for sustainable development. The fact is that the indicators show that about 49% o f the country's output is agricultural with 10.1% being accounted for by coffee, while over 90% o f the population lives in rural areas23with a poverty rate in excess o f 80%, which also implies that the prospects for growth and employment creation for reducing poverty depend essentially on the agriculture sector and more specifically on the coffee, tea and cotton subsectors. 23 The State intervenes in all sectors o f the economy, and its intervention limits competition and handicaps the development o f exports and that o f the private sector in general. Up till 2003, domestic credit went essentially to the public sector, including the less-and-less efficient public enterprises. The private sector, which could only resort to the limited credit market, was unable to step up the investments needed for growth. In accordance with the economic program supported by the DARE, the authorities are going to undertake a reform o f the public sector in conjunction with withdrawal by the State from the productive sectors, decontrolling o f prices and facilitation o f commerce in order to eliminate the constraints blocking development o f exports. To achieve this goal, the reforms will focus on promoting private employment and income-generating economic activities that will contribute to eliminating poverty and exclusion. PROVERTY-REDUCTION STRATEGY The objective and the resultsexpected uponcompletionof the DARE-financedprogram 24 Regardingthe reduction o f poverty, the main results sought from the program financed by the DARE are: (i)production o f the complete PRSP, and (ii)its satisfactory execution over the space o f one year. Implementation o f these two actions will be a keybenchmark for meetingthe Enhanced HIPC Initiativerequirements. The actions already taken 25 After a decade o f conflict, Burundi's population is more impoverished than before: GDP fell by 25% over the first four years o f conflict while at the same time the poverty rate rose from 35% in 1992 to 81% by the end o f the decade. These objective observations are confirmed by a relatively widespread sense o f poverty in Burundi society. The Perceptions survey conducted in 2004 shows that eight Burundinationals out of ten consider that poverty has not eased over the past five years. In light o f these findings, the country's poverty-reduction strategy should concentrate on both increasing production and achieving a more equitable redistribution, paying special attentionto the poorest strata o f society. Monitoring and evaluation o fthe development 23More than92% of the populationlives inrural areas and 93% of the total active populationi s engaged inagriculture. 141 policies are also included in the poverty-reduction strategies in that they make it possible to require the players to assume responsibility for implementation while also holding them accountable for the utilization o f public resources, especially as regards management o fpublic funds. 26 With the participation o f civil society and o f all the other players, the Government has prepared an Interim PRSP built around the six major thrusts o f the authorities' poverty- reduction policy, namely: (i)promotion of peace and good governance; (ii) reintegration o f the victims o f the conflict and o f the disadvantaged groups; (iii) promotion o f the private sector; (iv) development o f human capital; (v) HIV/AIDS control; and (vi) promotion o f the role o f women in development. The Interim PRSP was designed and prepared around a participatory consensus developed by the Government since 2000 and the document was subsequently submitted to the IDA and IMFboards inJanuary 2004. Fromthat point on, the Government has beenworking on implementation o f the InterimPRSP and finalizing the Complete PRSP. The actions to be undertaken in 2005 and 2006 27 The synthesis of the community consultations and of the sectoral and thematic consultations was completed in November 2005. The drafting o f the PRSP was begun in December 2005 inorder to include the findings ofthe participatory consultations. It should also be noted that the departments concerned prepared a multiyear macroeconomic and budgetary framework including budget ceilings for the key sectors for the PRSP's purposes. The Burundi authorities hope to have the draft available in July 2006, and to be able to distribute it to the donor community after validation by all the partiesconcerned. 28 With regard to monitoring and evaluation, various actions have been undertaken: (1) establishment o f a National Accounts Unit in the ISTEEBU; (2) conducting o f an agricultural census and household surveys such as the Perceptions survey on poverty (2004). Other studies are in progress, including the Standardized Questionnaire on Welfare Indicators (QUIBB) 2005/2006, the Multiple Indicators Cluster Survey (MICS) 2005 and the survey on employment and the informal sector (1-2-3 Survey for 2005/2007). The preparation and putting into use o f the monitoring and evaluation system i s a crucial step for successful implementation o f the framework document on poverty-reduction strategy. On the one hand, the monitoring institutions will have to be strengthened, and on the other the production o f the necessary statistical information will have to be developed. The strengthening o f the institutions will focus essentially on: (1) the changing o f the status o f the ISTEEBUand o f the regulations governing its personnel (the initial draft has already been prepared, but has not yet been converted into a draft law); (2) strengthening o f the human resources; (3) strengthening o f the tools for gathering administrative data, especially in the Ministries o f Education, Health, Agriculture and Finance. 29 As regards the production o f statistical data, a general population census i s envisaged in 2007 so as to obtain reliable data for resource allocation in the context o f decentralization. This census will also serve as a reliable basis for future household surveys. The surveys necessary for the production o f the National Accounts will also be carried out. These include in particular the Agricultural Survey and the 142 Consumption Budget Survey, which will be combined. This monitoring and evaluation mechanism will be rounded out with some in-depth studies o f the impact o f the social policies followed, which will include the study o f the supply o f basic services in the Education, Health and Justice sectors, and a study o f the impact o f the reform o f the Coffee subsector on poverty. ProgressIndicators Action Target Date November 0 Completion of preparation o f sectoral and thematic 2o05 consultations 0 Holding, synthesis and restitution of the sectoral and thematic May 2006 consultations 0 Preparationo f first draft o f the PRSP May 2006 0 Preparationo f second draft o fthe PRSP, including the complete June 2006 macroeconomic and budgetary framework 0 Final PRSP document available July 2006 0 Report on the first year o f implementation August 2007 ACCELERATION OF GROWTH (PROMOTION OF GROWTH- GENERATING POLICIES) 30 The Government has undertaken reforms to promote development o f the private sector and revive exports with a view to reducing the country's dependence on uncertain external financing. The debt sustainability analysis prepared inthe context o f the HIPC Initiative indicates that the ratio o f the net discounted value o f the debt to exports i s 136.3% and that of the net discounted value o f debt service to export receipts was 35.9% in 2005. For Burundi, this situation points to a high risk o f a debt crisis even after recourse to debt-reliefinitiatives includingthe EnhancedHIPC Initiative. 31 To eliminate such a situation and improve the above indicators, a policy o f export-driven growth is necessary and indeed essential for the country's economy. Burundi has resolutely committed to putting trade in the forefront o f the growth and poverty- reductionprocess. Inthis connection, and under the supervision o fthe World Bank and in collaboration with the IMF, UNDP, WTO, the International Trade Center and UNCTAD, it has already preparedthe "Diagnostic Study o fthe CommercialIntegration o f Burundi". The study and the accompanying plan were validated in December 2003 and adopted by the Government in 2004. The Government will request assistance from its partners for puttingthis plan into effect. 32 The authorities undertake to put in place an exports-development policy designed to generate more foreign exchange so as to minimize the external shocks the country has to cope with. The reforms for promoting exports and developing the private sector will assign priority to: (1) improvement o f the business environment; (2) full settlement o f 143 the domestic debt; (3) reform o f the public sector; and (4) divestiture by the State o f its interests in the public enterprises, particularly those in the financial sector and in the agricultural subsectors, and in telecommunications. Developmentof the private sector Objectivesand expected results 33 The Government intends to promote an environment favorable to development o f a competitive private sector in order to increase both national and foreign investment, boost growth and create jobs with a view to reducing poverty. This strategy requires adjustment o f the regulatory framework for business and improvement o f the investment climate, appropriate adaptation o f business taxation, revision o f the labor and investment codes and facilitation o f international trade to promote and develop exports, plus improvement o f access to credit by means o f adoption of suitable regulations governing microfinance institutions and operations. Settlement o f the State's domestic debt owed to private enterprises i s another step designed to: (i) give a break to economic operators who are experiencing real difficulties in containing their indebtedness to the banks; (ii)reconstitute the resources o f enterprises to enable them to finance their investments; and (iii)ensure that businesses will support the Government's new policy focusing on recovery and divestiture. 34 With the support of the World Bank, the Government will make a study o f the investment climate in Burundi. A review o f the commercial and company codes i s envisaged. The revised texts o f these codes will first be approved by the Government and then submittedto Parliament for adoption. Actions already taken and progressto date 35 Business environment: The Investment Code has been revised and should shortly be submitted to the Government for approval. A draft law organizing and regulating the microfinance institutions is being prepared. The new bankruptcy law has already been promulgated. 36 Domestic debt: On July 27, 2005, the Government completed a listing o f the State's arrears owing to the private sector and o f the domestic debt arrears deriving from claims originating between July 1979 and December 31, 2004. The amount o f these arrears i s put at about US$35 million. The listing was rounded out by an international audit financed by the EMSP project. The final report was made available at the end o f February 2006. 37 On the basis o f this audit's report an ad hoc commission charged with formulating a strategy for settling these arrears was set up. Its report is expected at the end o f April 2006 and will specify the arrangements and schedule for payment as o f June 2006. 144 38 Within the framework o f the State's divestiture o f public enterprises for the period 2005-2008, the Government has undertaken to adopt a strategic privatization plan for public enterprise^'^ under the Economic Rehabilitation Credit granted by IDA in 2002. 39 This credit was intended to support improvement o f the institutional framework for organizing the privatizations and restructurings, comprising the preparation o f the strategy proper together with the programming o f the related activities with a divestiture plan for each public enterprise concerned. The Government has honored its commitment in this respect and the Minister o f State with responsibility for Good Governance and the Inspectorate General o f the State, who was also responsible for privatization, submitted a detailed privatization program to the Council o f Ministers on March 25,2005. 40 The Government has in fact launched the implementation of the privatization program. In the coffee subsector, calls for bids for privatization of two washing stations were issued on July 22, 2005. This pilot operation served as a trial run and will make it possible to refine and adopt the strategy for permanent transfer o f the washing stations to private operators. 41 In addition, calls for bids for sale of two houses and two old processing plants were issued on August 5 and 18, 2005, respectively. As regards non-coffee subsector assets, on August 25, 2005, a call for bids was issued for sale of OCIBU stockholdings in the banks. The regulatory texts for the decontrolling o f the coffee subsector were signed. Moreover, the CIP resolved to proceed with privatization of the telecommunications sector, and also adopted the strategy for privatizingpublic enterprises and public works (ONATEL, COTEBU, ONAPHA, OTB, OPHAVET, coffee subsector companies, the old coffee processing plants, etc.). 42 For the case of the Office Nationale Pharmaceutique (ONAPHA), the Government also made a valuation of its stockholding and a partnership agreement between the State o f Burundi and a South African drug-producing company (SOPROME) has been signed. Preparation o f a preliminary report on the State's public enterprise divestiture program i s currently being finalized with the PRSP. 43 The authorities are going to pursuetheir efforts to raise awareness among the economic operators and all partners involved in the process (including interest groups such as employees) to obtain their participation inand commitment to this important reform. Actions to be undertaken within the framework of the Grant for 2005-2007 44 Revision of the regulatory framework: The new bankruptcy law has already been promulgated. At the same time, and with World Bank support, the authorities will proceed with an assessment o f the business climate in order to provide economic 24The enterprises concernedare: EPB(Etablissements duPort de Bujumbura), APB (AbattoirsPublicsde Bujumbura),UCAB (UnionCommerciale d'Assuranceet de RCassurance), BCC (Burundi Coffee Company), ONATEL (electricityand water suppIy agency), ONAPHA (OfficeNationalPharmaceutique),OPHAVET (Office Pharmaceutiqueet VCtCrinaire), SOSUMO (sugar company)andALCOVIT, includingthe State's stockholdings inthe coffee subsectorpublic enterprisesincludingthe SOGESTALs. 145 operators and other decisionmakers with an analysis o f the information required to identify the characteristics o f the national investment climate, which is an important factor for productivity and growth. The Government has prepared the single file o f identifiers that will be used for all taxation purposes in conjunction with the tax and customs services. The database has been developed and i s operational. The NIF i s operational and has already registered a large number o f economic operators; it will be usedby the tax and customs services. 45 Taxation: The introduction o f VAT to take the place o f the Transaction Tax is designed to ease the burden on businesses by adopting a more neutral form o f indirect taxation. With the support o f the World Bank and the IMF, the VAT will be operational between now and the end o f fiscal 2007. The authorities will take the necessary steps to further reduce the customs tariffs and to align them on the COMESA tariffs. 46 In the medium term, customs duties on raw materials, intermediate products and finished products will be further reduced, with a zero tariff for raw materials and equipment. 47 Development of exports: In addition to the above measures concerning customs tariff alignment, the authorities will implement the recommendations o f the diagnostic study o f trade integration (DTIS). The Government will take trade policies into account in the PRSP and will implementthe following actions with effect from 2006, namely: (i) full application of the COMESA free-trade zone protocol and complete alignment of tariffs on the COMESA Common External Tariff (CET); (ii)utilization o f the possibilities offered by the preference arrangements proposed by the European Union and the U.S. AGOA initiative; (iii)application o f the customs valuation code and elimination o f tariff exemptions on imports; (iv) simplification and rationalization o f the mechanisms for reimbursement of eligible customs duties; and finally (v) decontrolling of the traditional agricultural subsectors as detailed below for coffee, tea and cotton. 48 Strengthening of the financial sector: There are seven commercial banks in Burundi which have been heavily involved in lending to the Government and which finance the greater part o f the operations o fthe large enterprises that offer the best guarantees. 49 These banks hold a portfolio that has become impaired as a result o f the crisis. The Government will request assistance from its bilateral and multilateral partners to rehabilitate the financial sector. To promote access to financing for all economic operators o f whatever size, it i s imperative that a microfinance system be set up in Burundi, especially for small businesses inthe informal sector. Preliminary studies in this respect have been started with UNDP" assistance and adoption o f a relevant legislative text i s a priority. Another priority for the Government remains selling off o f its interests inthe financial sector. 25UnitedNations DevelopmentProgramme. 146 50 Domestic debt: The Government has set itself the goal o f settling its domestic debt and no longer allowing arrears to accumulate vis-&vis the private sector. The strategy for clearing the arrears that will be adopted by the Government will make it possible to determine the modalities for negotiating with the creditors and arriving at a final settlement o fthese arrears. 5 1 Revival of the State divestiture and public enterprise privatization program: As with the majority of the large-scale reforms started inBurundi, a privatization program launched in 1992 with the support o f IDA was subsequently slowed by the crisis combined with the lack of sufficient resources to move ahead with this important undertaking. The Government intendsto restart the privatization process with the help o f the World Bank and other donors and will make a point of: (i)drawing up a roadmap comprising sector studies covering the enterprises deemed strategic (public service enterprises) such as those in the water, electricity and telecommunications sectors; (ii) improving the institutional framework o f the privatizations and strengtheningthe human capacities concerned, and (iii)preparing a communication plan for the privatization program so as to ensure the understanding and support o f the different players, including civil society. 52 The authorities have already moved ahead with the liberalization o f the economic sectors and subsectors, in particular telecommunications and coffee, and will shortly add tea and cotton to the list. 53 To begin with, the Government has adopted a list o f 15 enterprises for which it intends to seek private-sector participation before 2008. An operational action plan has been developed and was transmitted to IDA on July 22, 2005. The State will move out o f the coffee subsector, in particular the SOGESTALs and SODECO, and will pursue implementation of the necessary related measures in order to ensure the success o f the liberalization and State divestiture program in the subsector. Before the end o f June 2006 the authorities will transmit to IDA the action plan for divestiture o f these subsectors with the pertinent strategies. 54 Regarding the measures accompanying this liberalization and privatization policy, the Government will support all actions designed to strengthen capacities and investment activities in the private sector. Nevertheless, it will see to it that the extension services for production and research and development work are maintained. 147 Progress Indicators Action Target Date Promulgation o f new bankruptcy law March 2006 Adoption by Government o f revisedInvestment Code Before June 2006 Adoption by Government o f Draft Law on Microfinance Before June 2006 Completion o f an assessmento f the investmentclimate, to be 2006 undertaken with World Bank support, and preparation o f an action plan resultingtherefrom, focusing primarily on: (a) the legal framework; (b) taxation, (c) competitiveness; and (d) facilitation of foreign trade, especially exports Start of implementation o f said action plan July 2006 Start o f actual settlement o f domestic debt July 2006 Completion o f a financial and organizational assessment o f all public 2006 enterprises for the year 2005 Reform o fpublic enterprises by means o f (a) privatization and (b) As o f January private, public partnerships (PPPs) o f various forms 2007 Development of the Coffee, Tea and Cotton Subsectors General context, objectives and expected results 55 Burundi's exports and its cash crops are dominated by the key coffee, tea and cotton subsectors. These subsectors are themselves largely dominated and/or controlled by a number o f State or mixedorganizations and agencies, namely: for coffee, the Office du CafC du Burundi (OCIBU); for tea, the Office du ThC du Burundi (OTB); and for cotton, COGERCO and COTEBU, although the actual production i s generally done by individual small growers and planters. The latter are, however, generally poorly remunerated. The financial position o f these subsectors in general, and o f the State organizations inparticular, i s mostly characterized by deficits, and directly or indirectly they constitute a bottomlesspit for the public finances and the banks. 56 The Government's overarching objective inthese subsectors i s to promote development o f exports and ensure sustainable growth o f agriculture in order to revive the Burundi economy and increase the total output and remuneration o f farmers and planters; this will help to reduce poverty in rural areas in particular, which is where the great majority o f the population lives. The reforms are designed specifically to: (I) raise producer incomes by increasing the competitiveness o f the coffee, tea and cotton subsectors through adoption o f new regulatory, legal and institutional frameworks favorable to private investment; (2) sell off State-owned assets to private investors with the producers becoming shareholders in the corporations sold so as to foster a greater degree o f equity; and (3) put inplace accompanying measures that will ensure not only the quantity o foutput but also its quality. 148 57 Considerable thought has been devoted to these subsectors for some time now. An overall reform strategy was adopted by the Government in October 2004; this strategy i s most fully developed in the case o f coffee, followed by the tea subsector and with cotton coming in third. In this stage, the priority i s to finalize-if need be-the strategies and the related action plans, and then to proceed to implementthem as soon as possible. The implementation process has already been started for coffee and the authorities intend to pursue it over the period 2006-2007. In the tea and cotton subsectors, what will have to be done is, first, take urgently needed steps right away, especially for cotton, and then, secondly, finalize the strategies as soon as possible in 2006, and then to start implementingthem as early as possible thereafter. 58 In order to facilitate decisionmaking and adherence to the reform schedule for coffee, tea and cotton, on March 30, 2006, the Government set up a committee for coordination, management and monitoring of the reforms in the coffee subsector. This committee i s tasked with coordinating, managing and monitoring the entire privatization/liberalization process, with strict emphasis on the sustainability o f the subsector. For tea and cotton, the Government will set up ad hoc bodies tasked with steering the reforms. To the extent necessary, these bodies will be able to retain international consultants to assist them in specific matters regarding in particular divestiture by the State o f public enterprises. The committee would be required to prepare a roadmap for each subsector in agreement with the World Bank and to follow the entire reform process through to its conclusion. Coffee subsector 59 The context of the reform, its objectives and the basic principles. Examination o f the coffee subsector reveals a very difficult situation for a crop which brings in over 90% o f the country's export foreign exchange earnings. The fact i s that: (i)Burundi coffee sells at a marked discount in the international market; (ii) subsector i s the characterized by an over-heavy State presence at the production, processing and marketing levels; (iii) the growers are poorly remunerated and are becoming less and less interested inthe crop; (iv) there i s a sizable deficit inbudget terms and vis-a-vis the financial sector; (v) the plantations are old and well past their most productive years; (vi) production i s low; (vii) the intermediaries do a less-than-impressivejob as regards marketing; and (viii) the players are remunerated according to a system (RCA) which tends to lessen their sense o f responsibility rather than motivating them; and (ix) the present risk-management system is poorly suited to the needs o f the subsector and o f the operators. 60 The specific objectives of the reform comprises: (i)restoring and developing the reputation for quality that Burundi coffee enjoyed in the past; (ii)stepping up production; and (iii)increasing planters' incomes (in both absolute terms and as a percentage they receive o f the world price) while endeavoring to enable them to cope better with the normal fluctuations o f market prices without recourse to State assistance. Nevertheless, in light o fthe subsector's importance inthe national economy and its vulnerability, exceptional and one-shot State interventions in times when world prices collapse (as they are prone to do every so often) consisting o f mechanisms to enable the subsector to continue functioning without interruption will be necessary, 149 especially to offset losses suffered by producers negatively impacted by the reform. In this connection, it will be important to monitor and evaluate on a regular basis the impact social of the reform and its effectiveness inreducing poverty. 61 The basis principles governing this reform are: (a) full deregulation o f the right to operate and total decontrolling o f prices in all links o f the subsector; (b) elimination o f all undue taxation, explicit or implicit, especially at the level o f agricultural production; (c) full divestiture by the State o f the first and second-stage processing units, including the washing stations, the SOGESTALs, and the hulling and roasting plants; (d) elimination o f State guarantees and their replacement by similar guarantees by banks and other financial institutions; (e) refocusing o f OCIBU's activities to have it concentrate on the subsector's activities and monitoring o f the performance o f functions (such as extension services, research, maintenance o f rural roads, promotion, input distribution, etc.). The Government is convinced that these actions will provide a big boost to all operators in the subsector in general, and the planers in particular, but also to the expansion o f this key subsector o f the economy. Actions alreadytaken 62 Some important actions have already beentaken, including the memorandum on reform o f the coffee subsector o f October 2004 detailing a plan for divestiture o f the subsector, and the holding of a high-level workshop to discuss the stakes involved in reforms o f the coffee subsector with all the players in March 2005. Further more, on January 14, 2005, the Government decreed freedom o f establishment and operation in all links o f the production, processing, export and financing chain for all operators wishing in participate in it.`6 The authorities have also: (i) repealedthelegislationrelatingtotheplantationtax; (ii) decontrolledthepricepayabletoproducersforcoffeeincherryformandwashed unhulled; (iii)set upanexpanded Coffee MarketingCommittee inJanuary 2005 andanother committee tasked with restructuring OCIBU in June 2005; (iv) reaffirmed the freedom to buy, sell, market and process coffee in cherry and merchantable form, including by means o f direct sale, open to all economic operators. Actions to be undertakenwithin the framework of the Grant for 2005-2007 63 The Government will take immediate steps to ensure that all decree and ordinances already issued to improve the competitiveness o f the coffee subsector are widely disseminated and fully enforced, inparticular that o f June 16, 2005. It will analyze the mechanisms for and implications o f forward sales and will announce, if appropriate, that forward sales are permissible for exporters interested in such transactions. It also undertakes to publish regularly, through the media, the benchmark prices for Burundi coffee in cherry and washed unhulled form, together with the international prices for raw coffee, so that all players inthe subsector will be fully informed. 26Decree No. 100/012of January 14, 2005. 150 64 To ensure that a judicious choice is made that i s consistent with development o f the coffee subsector, the State's divestiture o f the washing stations and hulling plants will be preceded by and hoc studies for which the terms o f reference are already available. The next step will be to propose a legal, regulatory and institutional framework that is also aligned on the needs o f a decontrolled and privatized subsector and favorable to its development. 65 The Government will make the final choice as to the best scenario for privatization o f the washing stations and the two SODECO plants (Buterereand Songa). The making o f this important decision in a context of total objectivity and transparency will require an economic and financial analysis o fthe various possible scenarios. 66 To this end, the Government will retain international consultants to assist in this task after the programmed studies financed by IDA. The selection o f a firm to carry out these studies i s underway. This being the case, the Government considers that the findings ofthe studies on the final strategy for sale o f the washing stations will have to be awaited before the DAOs are reinstated. 67 The Government will moreover do its utmost to adhere to the dates laid down for the actions included in the roadmap/action plan for the coffee subsector agreed on with the World Bank. It will next work on carehl preparation and smooth operation o f the 2006/2007 crop year prior to the full deregulation o f the subsector in accordance with the commitments made to the donors. In this context, a committee tasked with restructuring OCIBU has been formed and its report presentingan action plan defining the new roles o f the coffee subsector institutions, including OCIBU, was submitted as of October 28, 2005. 68 The new status o f OCIBU will have to be analyzed with reference to the conclusions o f the study on the legal, regulatory and institution framework prior to its adoption by the competent authorities. 69 A risk-management and credit-policy system that meets the concerns of all the players in the subsector including the producers will be put into effect. To this end, the Government will make a study o friskmanagement and credit policy which will make it possible to identify the subsector's financing constraints and propose appropriate solutions. The study will also make it possible to inform the banks about the modem techniques for financing commodities and coffee in particular. This study will be started before mid-November 2006; the terms o f reference for it will be discussed in advance with IDA. Inthe medium term, the Government will ensure that the majority o f the washing stations have been sold in addition to the SODECO plants inaccordance with the commitments assumed inthe context o fthe HIPC program. 151 ProgressIndicators Action Target Date All producers informed ofthe price for coffee incherry form and EndSeptember unhulledand the internationalprice. 2005 All private operators aware ofthe different coffee-marketing EndSeptember modalities authorized (sale by auction, etc.). 2005 Actual commencement of call for bids on consultancy services for May 2006 economic analysis o fthe scenarios for divestiture o f the washing stations. Establishment o f reform-steering committee. March 2006 Adoption o f an action plan definingthe new roles o fthe coffee September 2006 subsector institutions (including OCIBU) that will have to be inplace for the start o fthe 2006/7 crop year (April 2007), in accordance with the strategy for reform ofthe coffee subsector. The OCIBU restructuring Committee has forwarded the dossier to the Office o f the Second Vice President. Choice o fprivatization scenario and adoption o fthe coffee roadmap. September 2006 Actual sale o f OCIBU fixed assets and o fthe shares inthe banking September 2006 establishments. More than 50% o f the washing stations sold. June 2007 Actual sale o f SODECO plants. June 2007 Tea subsector Actions already taken 70 Tea i s the country's second-largest agricultural product after coffee and brings in significant earnings. Average production o f dry tea ranges between 7,000 and 10,000 m.t~ns.'~Peak production, already attained in 2001, was 9,018 m.tons o f dry tea, but production has since seemed to have stagnated at around 7,500 m.tons (i.e. 37,500 m.tons o f leaf tea). More than three quarters o f the production comes from family plantations and the rest is represented by the output o f the industrial plantations o f the Office du ThC du Burundi(OTB). 71 OTB is a State corporation that has a monopoly o f the processing o f leaf tea into dry tea in its five plants, the equipment of which has not been renewed for at least (twenty years), The subsector's development is handicapped by the lack o f renewal of infrastructure and equipment. The fact is that the position o f the State's public finances makes it impossible to envisage-at least inthe short tenn-any expansion o f the leaftea processingcapacity. 27 Source:Table 8, DevelopmentofAgricultural Production(inthousands ofm. tons) containedinthe report o fthe first year of implementationo fthe PRSP-I/ January 2005. 152 72 To maintain and increase the quantity and quality o f tea exports it would be necessary to increase the investmentsin the subsector, which inthe present context could be done through a public-private partnership. Deregulation o f the subsector would be a perquisite for such a partnership. In 2004, State technical agencies prepared a reform strategy for the subsector based on an analysis o f it followed by preparation o f a document setting out the possible options, all o f which involved: (i)restructuring o f OTB, whichpresentlydominates the downstream part ofthe subsector, and (ii) granting freedom o f operationto the processingunits. 73 The Government has already adopted the policy o f State divestiture o f the agroindustrial sector, which will ultimately allow interested private parties possessing the requisite technical and financial capacities to take over, with the public authorities only intervening through OTB for regulatory purposes. The Government desires to benefit from IDA'Scounsel before making a final decision on the reform strategy, which in the best o f cases will be adopted before September 2006 and implemented immediately thereafter. Actions to be takenwithin the framework of the Grant 74 The Government will endeavor to define and adopt a roadmap for divestiture on the part o f the State based on the analysis o f the subsector. It will also retain appropriate consultancy services for this purpose. The Government will form a committee to coordinate, manage and monitor the reform, which committee will include representatives o f all players inthe subsector. 75 During the period 2006/2007, the Government will update and adopt the reform strategy together with a roadmap setting out the main stages o f the reform. This roadmap will then be converted into a reform action plan for the three-year period 2007-2009, and a technical and financial audit o f OTB will be performed for 2005, with the assistance ofIDAthrough the EMSPproject. Progress Indicators Action Target Date September 2006 0 Performance o ftechnical and financial audit o f OTB 0 Adoption o fthe definitive strategy for reform o f the tea subsector September 2006 and o f a plan o f action and a corresponding roadmap e Divestiture by State o fthe tea subsector July 2007 Cotton subsector Context and actionsalready taken 76 Cotton production has declined following the abandoning o f the plantations and the displacements o fpopulation duringthe time o f the troubles. The cotton harvest in2003 amounted to 3,600 m.tons for a potential production estimated at around 12,000 m.tons. The subsector is dominated by two State corporations, namely COGERCO, which provides extension services for cotton growers, collects their crop and handles the processing and marketing of the fiber and its byproducts, and COTEBU, a weaving 153 enterprise that produces unbleached and dyed fabrics. COTEBU i s a monopsony which benefits from administrative requirements obliging COGERCO to delivery cotton fiber to it on a priority basis. 77 COTEBU's present financial difficulties render it unable to purchase, in a timely fashion and at market price, all the cotton collected by COGERCO, which i s then in its turn no longer able to pay the growers who thus become hostages of an entirely State- controlled subsector. As a result, more than 1,000 m.tons o f the 2003/4 crop year's production was stored for a long time in the open air with the risk o f stock build-up, losses, and mounting debts and interestpayable to the financial sector. 78 The Government has put into effect an action plan that will enable COGERCO to sell the entire stock o f cotton. To this end COGERCO has, with World Bank assistance, retained the services o f a broker to design a strategy for quickly selling off the cotton currently in stock. In this way COGERCO has already been able to sell a part o f its stocks in the international market. Thanks to the proceeds from this export transaction the arrears owed to the growers have beenpaid. Actions to be takenwithin the framework of the Grant for 2005-2007 79 In view of the present difficulties of Burundi's cotton subsector, the Government will take three urgent steps: (i)establish a committee to coordinate, manage and monitor the reform; (ii)grant COGERCO freedom to sell its cotton fiber on the world market and terminate the protocol tying COGERCO to COTEBU; and (iii) update and adopt the reform strategy for the subsector and a roadmap setting out the main stages o f the reform. 80 During the period 2006/2007 the Government will perform a technical and financial audit o f COGERCO for fiscal 2005 with the support o f IDA through the EMSPproject. Ultimately, the restructuring o f this subsector will have to be completed, since the authorities consider it possesses significant prospects for agricultural growth, after deregulation and with a much more important role being assigned to participation o f private capital, especially in COGERCO and COTEBU. 81 However, it would be necessary to carry out fundamental reforms o f the legal, regulatory and institutional frameworks at the level o f agricultural production and those o f processing and marketing semifinished and finished products. It should be noted that an important component o f the reforms will relate to the landholding system, certain o f the current provisions o f which might dampen the readiness o f farmers to invest inthe subsector. Finally, the Government will be asked to terminate the protocol obliging COGERCO to sell the cotton fiber to COTEBU. 154 ProgressIndicators Action Target Date Notification o fthe letter announcingfreedom to sell fiber cotton to August 2006 other countries 0 Stock o f cotton sold November 2006 0 Adoption o fthe strategy and roadmapfor reformofthe cotton EndDecember subsector 2006 0 Resolutionofthe landholdingproblem lSt of2007 quarter 0 Commencement o fthe reforms January 2007 MANAGEMENT OF PUBLIC EXPENDITURES AND EXTENSION OF BASIC PUBLIC SERVICES TO THE POOR 82 The reformprogramregardingpublic expenditure has three objectives, namely: (i) Improvementofthestructureandqualityofpublicexpenditures,especiallythose connectedwith reductionofpoverty; (ii) Improvementofthemonitoringofpublicexpenditures,frompreparationto implementation; (iii)Reformoftheprocurementsystem. Improvement of the structure and quality of public expenditures, especiallythose connected with poverty reduction 83 It is the authorities' desire to make budgetary policy and the Finance Law more effective instruments in the cause of poverty reduction. We intend to ensure that budgetary allocations are aligned as far as possible with our sector development and poverty-reductionobjectives. This will entail, inthe 2006 budget, a modificationofthe structure o f budgetary expenditures in that the funding allocatedto key sectors such as health, education, demobilizationand reintegrationactivities, etc., will be increased on a regularbasis. Inthis context, at the level o fthe structure o f the budget, the authorities will ensure, throughoutthe durationo fthe Grant, that the 2006 and 2007 Finance Laws incorporate: (i)the PRSP priority expenditure programs, together with; (ii)the budgetary savings deriving from debt relief under the Enhanced HIPC Initiative. In addition, we also intendto use the budgetarycounterpart funds for the Grant to increase these key expenditures. Objectivesand expected results 84 Within the framework o f implementationofthe PRSP, the Governmentis committedto increasingthe social and poverty-reductionexpenditures to improve the population's 155 living conditions. As noted inthe macroeconomic section above, the Government will pursue its rehabilitation policy in parallel with the investment policy in order to improve access for the poor to the essential public services in conjunction with the policies set out in the PRSP. The social indicators show that Burundi presently has some considerable way to go to meet the Millennium Development Goals. In the education sector for example, the gross enrollment ratio'* in primary education was about 80% for 2004/2005 with repetition rates of 30% and an 8.6% drop-out rate, which demonstrates that the country i s far from achieving the goal o f universal enrollment by 2015 if the repetition and drop-out rates continue so high and the system remains ineffective. 85 The sector strategies will each, as often as is necessary, seek to measure the efforts needed to put Burundi back on the normal pathway enabling it to achieve the millennium goals. The Government will do its utmost to meet the challenges in the sectors that are behind with respect to the MDGs, and particularly those in health and education as detailed in the PRSP-I. In the sphere o f education, the Government i s committed to planning and organizing the education o f children and training o f young people in accordance with the needs o f the population. It will endeavor to build primary and secondary schools wherever necessary to ensure that all children are enrolled. In addition, the authorities intendto continue with the reintegration program inthe context ofthe implementation ofthe DRRPproject. Actions already taken 86 Reintegration program: The Government has proceeded with the program for demobilization and reintegration (DRRP) designed to help consolidate peace in Burundiand the Great Lakes region through implementation of the appropriate articles of the Arusha peace agreement and the subsequent cease-fire agreements. The three main objectives o f the program are: (i)to demobilize the approximately 55,000 ex- combatants o f the armed forces, the party militias and the armed political movements (APPMs), and later the National Defense Forces, while furnishing support for their reintegration into civil life; (ii)to provide reintegration assistance for 20,000 Gardiens de la Paix and 10,000 combatant militants, and (iii)to contribute to the redistribution and/or reallocation o f public defense expenditures in favor o f the social and economic sectors. 87 The demobilization o f the armed movements is proceeding satisfactorily. As o f July 2005, 15,780 ex-combatants had been demobilized (2,908 soldiers, including children and 478 women). The demobilization o f the Gardiens de la Paix and other combatant militants was begun in July 2005. The disbursement o f temporary subsistence allowances to ex-combatants in the provinces where they have settled i s also proceeding satisfactorily. 88 Health: Within the framework o f the emergency recovery credit, more than 24 health centers have been built and 240,000 impregnated mosquito nets have been distributed inconjunction with in-house spraying inthe mosquito-infested areas. Inthe context of the rehabilitation credit (CRE) the Government has pursuedthe objectives outlined in ______ 28Ratio calculated onthe basis of Ministry ofPlanning data. The figure would be 86% ifone usedthe U.N.projections. 156 the PRSP-I strategy and the health expenditures financed through the CRE represent about 4.3% o f the Health Ministry's capital budget. A national health development plan was adopted after the special Health Assembly (Etats Ge'ne'rauxde la Sante')held in September 2004. The national HIV/AIDS Control Plan was launched at the same time as the National Health Development Plan with three main components: prevention, management and capacity strengthening. 89 Education: The CRE-I enabled the authorities to continue the actions begun under the rehabilitation credit, in particular: the rehabilitation o f the schools, including construction and equipment, appropriate training o f unqualified teachers, and procurement o f textbooks and teaching materials for the teachers and students o f the secondary schools plus procurement o f printing supplies for producing textbooks for children and teachers in the primary schools. In addition, the number o f teachers hired in 2004 was larger than inprecedingyears: 2,300 in primary and 2,000 in secondary, as compared with the respective ceilings o f 1,000 and 600 initially set by the authorities. C. Actions to be taken inthe mediumterm, 2005-2007 90 Demobilization and Reintegration: The Government will pursue the operations relating to the reintegration program in accordance with the requirements for meeting HIPC eligibility. Implementation o f the reintegration component has been delayed, and bringing it swiftly up to speed will be a major priority for the Executive Secretariat o f the National Demobilization and ReintegrationCommission inthe months ahead. 91 Health: In this sector, the national strategy i s presently being finalized, with as its chief objective improvement o f the population's access to essential care services. In the short and mediumterm, the authorities will devote all their energies to rehabilitating the health centers, a goal that is entirely consistent with the strategy adopted in the context o f the CRE-I. The authorities' actions to expand the services offered can be subdivided into three main categories: development o f infrastructure and services, capacity strengthening o f the health organizations and facilities, and thirdly, involvement o f the populace inthe efforts to improve health conditions. 92 The policy on equitable development of infrastructure will concentrate on continuation of the efforts to construct, rehabilitate and equip facilities and water points, plus expanding maternity services to cover the entire country so that people can obtain care at an affordable cost without having to travel long distances, and also on putting into effect a dynamic policy on supply o f drugs and medications. The Government is committed on developing a policy aimed at an appreciable improvement in access to health care for all together with pursuito f application o f a national strategic HIV/AIDS control plan, one o f the key thrusts o f which i s strengthening o f capabilities for preventingand treating opportunistic infections associated with HIV/AIDS. 93 The strengthening o f health-facility capacities comprises: (i)support for training institutions and for continuous training; (ii)a policy o f stabilizing health personnel in the neediest areas, and (iii)support for HIV/AIDS control agencies and facilities. 157 94 The involvemento f the populace in the efforts to improve health conditionswill focus on: (i)promotiono fpreventionprograms: education and awareness-rousingregarding family hygiene and healthproblems, disseminationo f WHO-recommended prevention methods, etc.; (ii)intensification ofthe care o f and attentionpaid to AIDS patients and promotion o f community solidarity mechanism; (iii) promotion o f community mutual healthassociations, and (iv) promotionofcommunity managemento fwater sources. 95 Education: Inthe short term, the Government intendsto pursuethe rehabilitationwork underway, ensure availability of school supplies, redeploy the present teacher corps and continue the continuing training of teachers. In the context o f the preparationo f the complete PRSP, the Government aims to improve enrollment levels in universal education. What is more, when the Head o f State took office, he announced the Government's decision to provide free primary education for all children o f schoolgoingage with effect from the 2005-2006 academic year. 96 The Government will continue with the training of teachers and improvement of the career-developmentpaths for them, while also working on better distributionof schools and increased participationo f community bodies in their management. Inthe medium term, the efforts put into expanding the supply of education facilities are expected to contributetoward a significant improvementofthe sector's performanceindicators. By 2007, the Government hopesto have rehabilitatedor built at least one primary school in each census unit. This action will entail construction o f around 800 classrooms in 2006, together with the hiring o f 5,000 new teachers. Teaching materials at an estimated cost of US$15million will bepurchased. '97 Energy: The Government considers development of the energy sector a perquisite for the development of the country. The fact is that at the present time Burundi makes extensive use of energy sources imported from Congo, which represent nearly 50% of total consumption. 158 Progress Indicators Action Target Date 0 Adoption of a Finance Law for 2006 which includes the poverty- December2005 reductionexpenditures, inaccordance with the above-mentioned subclassification(inparticularthose inthe PRSP), those financed by the HIPC program and those that will be funded by the Grant; the poverty-reductionexpenditureswill be coded ina way that enablesthem to be identifiedinthe 2006 Finance Law. The functional codingis detailedand relatesto the six strategic thrusts. 0 Adoption o fa Finance Law for 2007 which includes the poverty- December 2006 reductionexpenditures. Inaccordance with the above-mentioned subclassification(inparticularthose o fthe PRSP), those financed bythe HIPCprogramandthosethat will be funded by the Grant. 0 Increasingofuniversaleducationand o fthe gross nationalschool December 2006 enrollmentrate inaccordancewith the objectivesand levelsset in the HIPCInitiative decisionpointdocument. 0 Increasingofthe nationalimmunizationrate for childrenunder one December 2006 year inaccordancewith the objectivesand levels set inthe HIPC Initiative decisionpoint document. 0 Increase o f at least 5% inbudgetary expenditures of the Health December 2005 sector in 2006. 0 Increase o f at least 10% in budgetary expenditures ofthe Education December 2005 sector in 2006. Improvementof the managementof publicexpenditure Objectivesand expected results 98 Reform of the management of public finances is central to reform of the public sector and aims in particular at modernizing the management instruments, ensuring transparency in procurement and enhancing the efficiency of governmental action. This reform will make it possible to: (i)set up an interim computerized public expenditure system which helps to ensure monitoring and control of the budget, and specifically of poverty-reduction expenditures since January 2006; (ii)establish quarterly reports on budget implementation using the new standardized budget nomenclature; and (iii) produce a table o f flow o f State funds (TOFE) that is consistent with the Treasury balance sheet at the end of September 2006. Another objective is to make medium-term expenditureframeworks consistent with the PRSP available to the ministries in the relatively near future. Once this reform has been completed, the authorities will have available to them appropriate management instruments and an administrative arsenal which will be disseminated to all players involved in participatory monitoring. In parallel, the authoritieswill also proceedwith reform of procurementwith a view to putting inplace a mechanismthat will ensure transparency andenable better allocation o fpublic funds. 159 Actions already taken 99 With regard to budget preparation: The Government has reviewed the budget nomenclatures on the basis o f international standards in particular, including the functional classification. The budget and accounting classification already incorporates an identification system (code-based) for poverty-reduction expenditures (PRSP and HIPC). 100 These nomenclatures were used to prepare the 2006 budget. The 2005 annual report i s now inprocess o f production usingthe new nomenclature, notwithstanding the delay in application o fthe State Budget and Accounting Plan (SBAP). 101 Implementation and monitoring of the budget: The application o f the State Budget and Accounting Plan validated in 2004 and implemented for 2005, aims at harmonization o f the budget and accounting nomenclatures, updating o f the accounting plan, facilitation o f production o f budgetary and accounting monitoring statements, in particular the Treasury balance sheet and the TOFE. Production o f a Treasury balance sheet was started in 2004. 102 In addition, since March 2005 the Government has prepared an interim computerized public-finances management system the purpose o f which will be among other things: (i)to providethe ability to monitor expenditures at sectorlevel,andespeciallythose with are poverty related, from commitment through to disbursement; and (ii)to enable regular production o f summary tables. The work done has led to the preparation o f a software package incorporating the capture and checking o f commitments, management of payments and a certain number o f accounting and/or budget monitoring reports. This product incorporates the SBAP standardized nomenclature. 103 External control and establishment of the General Accounting Office: The General Accounting Office (Cour des Comptes) was established in 2004 and a set o f specifications for computerization o f the office i s available. However, the GAO needs to be strengthened to make it fully operational. To this end, the office's human resources will be strengthened by means o f special hirings and appropriate training will be provided for the office's senior staff to enable them to perform their audit and external control duties inrespect o fthe management o f public funds. 104 The Government hasjust finalized the establishment o f an interim computerized system for monitoring the expenditure chain with a link from the Ministry o f Finance and the BREI. This system is capable of producing the Budget Monitoring Reports on a quarterly basis, including for poverty-reduction expenditures, starting from January 1, 2006. The first o f these quarterly reports covered the first quarter o f 2006. Actions to be taken within the framework of the Grant (for 2005-2007) 105 With regard to budget preparation: The budget and accounting classification has been completed by a code-based identification system for poverty-related expenditures (PRSP and HIPC). 160 106 Regarding budget implementation: The Government will need to harmonize the rules relating to effecting o f public expenditure by producing a complete manual describing all the procedures involved, from establishment o f the appropriations, commitment and verification o f compliance with current law and regulations right through to the accounting phase. An intense and very wide-ranging training plan will have to be prepared and implemented for the benefit o f all players involved in the implementing o fpublic expenditure. 107 Budget audit: To better strengthen the country's capabilities in the monitoring and audit fields, the Government undertakes to seek the assistance o f international audit firms with established reputations to assist the GAO in the auditing o f annual budget implementation, with effect from 2006. 108 In addition, the Ministry o f Finance will set up a unit o f computer specialists to be responsible for the day-to-day operation o f the expenditure process, and o f the accounting system, after the personnel concerned have been identified and put through detailed training. The interim system will have to include from the start all the customary security measures, in particular those relating to the structure o f the databases, access to data and to premises, network protection, maintenance and proper use o f the equipment. 109 Mechanism for monitoring poverty-reduction expenditures: Moreover, due note should be taken o f the efforts we will make in the context o f the HIPC program. The fact i s that two benchmarks for eligibility relate directly to public expenditure, namely: (i)production of at least two quarterly budget implementation reports (Budget Monitoring Reports) produced by the said system and based on the new standardized nomenclature (benchmark 4), and (ii) monitoring and evaluation exercises in respect o f public expenditure in the education, health andjustice sectors, etc. 110 Furthermore, an independent surveillance committee will shortly be formed to ensure the monitoring of the expenditures financed thanks to the relief obtained through the Enhanced HIPC Initiative, the purpose o f which i s to facilitate the implementation and monitoring o f HIPC-eligible expenditures as defined inparagraphs 56, 57, 58 and 59 o f the HIPC Initiative decision point document. This committee will be made up o f national and local representatives including civil society, together with representatives of the international donor community. This approach has been used with success in other countries. Utilization o f this assistance i s subject to independent technical and financial audits that make it possible to verify that the funds have been used as intended for poverty-reduction purposes, and the findings o f all these audits will be available to the public. 111 It is also important to mention that the Government undertakes to use the DARE funds in a manner consistent with the objectives of the Poverty Reduction Strategy Paper (PRSP). The expenditureseffected from the Special Treasury Account (STA) reserved for DARE funds will be tracked by a monitoring committee. In addition, the annual outside audit o f the DARE accounts will be performed as soon as possible - this audit will cover both the deposit account denominated in foreign currency and the deposit account denominated in local currency. 161 112 To ensure that the budget funds, including those providedthrough the Grant, reach their intended beneficiaries, the Government will make a study to verify the traceability o f the 2006 budget expenditures on education, health and justice, with World Bank assistance. This study will be financed through the World Bank's EMSP project and the Belgian Trust Fund. 113 We intendto focus on achieving the HIPC benchmarks and the functioning o f the HIPC monitoring committee in the context o f the economic reform program supported by the Grant. Progress Indicators Action Target Date Completion o f the work relating to establishment of a budget and Already done accounting nomenclature including inparticular a "Poverty Reduction" subheading, and its adoption in accordance with the current regulations. Completion o f the preparation o f the interimcomputerized public Already done and expenditure management system including a link betweenthe ready for imple- Ministryo f Finance and the BRB. mentation as o f January 2006 Establishment o f the committee for monitoring HIPC expenditures. December 2005 Production, usingthe interim computerized system, of a Budget EndMarch 2006 MonitoringReport for the first quarter o f 2006. Production, using the interim computerized system, o f at least two December 2006 quarterly Budget MonitoringReports for 2006. Completion, inparticular inthe education, health andjustice March 2007 sectors, o f the monitoring and evaluation o f budgetary expenditures focusing on: (i) traceability o f said expenditures;(ii) user evaluation o fthe services provided; and (iii)evaluation by the providers o fthe constraints on actual provision o fthe services; and preparation o f an action plan to resolve the problems raised. Procurementreform Objectivesand expected results 114 The reform supported by the Grant aims at providing Burundi with a modern institutional and legal framework consistent with best practices. The action plan places special emphasis on capacity strengthening, so that the country will have the people and the tools needed for proper functioning o f the public procurement system and accomplishment o fthe goals sought. 115 Prevention and elimination o f corruption are also major concerns. More than ten years o f conflict and crisis have brought about a weakening o f the authority o f the State coupled with a pronounced increase in corruption. Accordingly, the campaign to root out corruption is one o fthe new Government's declaredpriorities. 162 Actions already taken 116 Public procurement: In June 2003 the Government set up a Public Procurement Reform Monitoring Committee tasked with proposing and coordinating the activities necessary for reform of public procurement. This committee held consultationswith the different parties involved in public procurement in Burundi, in order to define the contourso f reform ofthe sector. These consultationsledto productionof a draft action plan, which was examined and adopted by the Council o f Ministers in August 2004. This action plan comprises four mainthrusts: (i)overhaul o fthe legal and institutional framework; (ii) capacity strengthening; (iii)promotionof quality and performance; and (iv) establishment o fmechanismsto prevent androot out corruption. 117 The Government is committed to implementing an emergency action plan aimed at improvingthe management of public procurement within the existinglegal framework. The Public Procurement ReformMonitoring Committee is presently drafting a circular that will be distributedinthe first quarter o f 2006. Actions to be taken within the framework of the Grant (for 2005-2007) 118 The public procurement reform action plan has just been adjusted in order to: (i) updatethe implementationschedule o fthe reforms, and (ii)integrateinto one document the action plan deriving from the June 2004 study o f public procurement in Burundi and the action plan adopted by the Government in August 2004. Following this adjustment, the schedule for adoption o fthe key measures for 2006 is as follows. 119 Before the end o f the second half o f 2006 the following measures will have been carried out: (i)promulgation and publication of the legislative and regulatory texts concerning the institutional framework of public procurement and the Public Procurement Code; and (ii)promulgation of the decrees instituting the new management and regulatory arrangements for public procurement, together with adoptionof an actionplanfor puttingthese new arrangements inplace. ProgressIndicators Action Target Date 0 Promulgationofan institutionalframework and of a Public 2006 Procurement Code. 0 Adoption o fa capacity-strengtheningactionplanfor the 2006- 2006 2010 horizon 0 Publicprocurement managementand regulatorbodies inplace 2007 Coordinationand managementof the Grant 120 The monitoring o f the program and o f the measures o f the structural reforms matrix annexed to this letter will be performedby the Government based on an appropriate formula and in accordance with the institutionalframework negotiatedby the authorities with IDA. 163 cr E d il 5 u e, -0 e, U a2 m % 2 111 51 Annex 12: Burundi-IMF Staffs Assessment of RecentEconomicPerformance I N T E R N A T I O N A L MONETARY F U N D WASHINGTON. D.C. 20431 May 25,2006 Mr.PedroAlba CountryDirector ,,r Burun World Bank Dear Mr.Alba: This noteprovides anassessmentby IMFstaff of Burundi's recent economicperformance at the requestofthe World Bank. OnJuly 27,2005, the ExecutiveBoardofthe IMF completedthe secondreview under Burundi's PRGFarrangementthat was approvedinJanuary 2004. InAugust 2005, Burundi reachedthe decisionpointunder the enhancedHIPC Initiative. Completionof the third review under Burundi's PRGF arrangementwas delayedas the newly electedgovernment neededmoretime to internalizethe Fund-supportedprogram.Discussionsfor the third and fourth reviews (end-JuneandDecember2005 test dates, respectively)were combinedwith those for the 2006 Article IV consultationinBujumburainMarch2006, andinWashington inApril 2006, andunderstandingswere reached, adreferendum, on aneconomicprogramfor 2006. IMFstaff is inthe processofpreparingthe necessarydocumentationinsupport of Burundi's requestto completethe third andfourth reviewsunderthe PRGFarrangementand the 2006 Article IV consultation.ExecutiveBoardconsiderationis expectedto take placein lateJune 2006. Macroeconomicdevelopmentsin2005 were broadly inline withthe program, albeit with lower GDP growth of 1percent, largely on account of apoor coffeeharvest anddroughtin the north. Inflationfell markedly inlate 2005 to about 1percentatyear-end, reflecting the tighteningof monetarypolicy and the appreciationof thenominal exchangerate. The exchangerateappreciatedsome 10percent innominalterms againstthe US.dollar inthe secondhalf of 2005, andhasbeenbroadlystable since, reflectingrenewedconfidenceinthe current accountdeficit (including grants) reached 10.3 percentof G projected7.1percent deficit inthe program, on bothlower exportsandhigher imports. The programremainedontrack in2005 and so far in2006. All the program ive 182 - 2 - political transition. The performance criterion on the installation o f an interimcomputerized financial management information system (IFMIS) inthe Ministryo f Finance was missed, as were three structural benchmarks, butthe measures subject to the above-mentioned performance criterion and two benchmarks were implemented at end-2005/early 2006. The program for 2006 aims at a continuation o f the improvement inthe macroeconomic environment and a deepening o f financial and structural reforms neededto set the economy on a sustained growthpath. The program envisagesGDP growtho f 6 percent, reflecting a rebound incoffee production and a further deceleration of annual inflationto about 3 percent. Gross international reserveswould rise modestly to about 3.3 months o f following year imports. Fiscal policy for 2006 envisages an increaseinsocial andpoverty-reduction spending, a strengthening inpublic finance management and the clearing o f domestic arrears. The budget incorporated an important package o f reforms that included the consolidation o f a number o f extrabudgetary funds, the reduction o f import duties, and the elimination of distortionary taxes. A revised budget will be promulgatedbefore end-June, 2006 to accommodate higher social spending, a wage increase, and the clearing o fthe government's domestic arrears. Total revenuewould decline to 19 percent o f GDP, owing largely to the abolition of solidarity fund levies to finance the war effort. Expenditures would rise to 41.8 percent o f GDP, due mainlyto the large increase inspending on educationand that linkedto the emergency program for 2006, madepossibleby the budgetary savings om external debt reliefunder the enhancedHIPC Initiative. The overall deficit, on a commitment basis, after grants, is to decline to about 0.5 percent of GDP. The authorities are committed to further improving transparency andpublic financial management and considerable progress has been made since the World Bank`s Country Financial Accountability Assessment report o f 2004. Buildingon the new system of accounts, the interimIFMISon expenditure aims to reinforce the monitoring o fbudget execution, including o f social outlays. IMFstaff is considering options on continued technical assistance on public financial management. Measures are also envisaged, with the support of the World Bank, to reinforce the management o fthe civil service. Action plans for reform inthe areas of customs, income tax, the treasury, public accounting, andprocurement will be implemented in2006. The primary objective o fmonetary policy is to see a sustained reduction ininflation, through the containment o fbankingsystem credit to the government. The central bankwill use a judicious mix o fmonetary instruments, primarilyforeign exchange sales and liquidity auctions. Monetarypolicy aims at further strengthening liquiditymanagement withthe introduction o ftreasury bills by September 2006. The program includes measures to strengthen financial sector supervision andaddress weaknesses incentralbank internal operations. The central bank i s strengtheningits governance, includingthrough its recently completedsecondannual external audit. A revised central bank charter, to secure its legal independence, i s to be submitted to parliament in2006. The liberalizationo f the exchange 183 - 3 - regime will continue, withthe objective o fachieving fillconvertibility for current international transactions in2006. On the structural side, the central element ofthe strategy is to progressively remove government from involvement inthe productive andfinancial sectors o f the economy and foster the private sector as the engine of economic growth. Key steps for 2006 include the launching o f the privatization o fthe coffee washing stations. On governance, the operations o fthe Audit Court will continue to be strengthened.An anti-money laundering law will be submitted to parliament in2006. Overall, inapost-conflict environment, Burundi has made commendable progress in implementingthe economic reformprogram supported bythe PRGF arrangement. The newly elected authorities are committedto strengthenthe reform agenda, with a particular emphasis on good governance. The programfor 2006 is fully financed, a large part o fwhich would come from IDA'SproposedEconomic Reform Support Grant (ERSG) o f US$60 millionin direct budget support. The ERSG also provides important support to the social and economic recovery andpoverty reduction. The timely disbursement o f external financial support assumedinthe macroeconomic program is essential to support implementation o f the budget andachievement ofthe programs' macroeconomicobjectives.Pastdelays inbudgetsupport, inthe context ofthe authorities stilllimitedability to managelumpyaidflows, have impacted monetary management and worsened inflationperformance. Sincerely yours, Abdoulaye Bio-Tchant Director Afican Department 184 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 To Kivu This map was produced by the Map Design Unit of The World Bank. Kigali 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 Lake Kagera Lake Rweru Cohoha RWANDA To K I R U N D O Cyangugu Kirundo To Butare To Kanyaru Rulenge Ruvuvu C I B I T O K E M U Y I N G A N G O Z I Muyinga To Cibitoke Nyakanura Ngozi Kayanza Rusiba 3°S Musada Ruvuvu Buhiga 3°S Bubanza K AYA N Z A To Karuzi Mwerusi Kakonko Rusizi B U B A N Z A K A R U Z I C A N K U Z O Cankuzo To Uvira M U R A M V YA Muramvya Ruvuvu BUJUMBURA Gitega DEM. REP. M WA R O Mwaro Luvironza Ruyiga OF CONGO B U R A R U Y I G I B U J U MMt. G I T E G A To Kibondo Heha (2,670 m) Bukirasazi Rumpungu TANZANIA Matana B U R U R I Mutangaro R U TA N A Bururi Most distant Rutana Rumonge headwater of the Nile River 4°S 4°S Makamba M A K A M B A BURUNDI Mabanda Lake Muragarazi Tanganyika Nyanza-Lac To Kasulu 0 10 20 30 40 Kilometers 0 10 20 30 Miles 29°E 30°E 31°E SEPTEMBER 2004