The World Bank

FOR OFFICIAL USE ONLY

cR/. 4CC-'3L

Rhis Ne. P-4250-BUREPORT AD RECOMMENDATION

OF TUE

PRESIDENT OF THE

INTERNATIONAL DEVELOPMENT ASSOCIATION

TO THE

EXECUTIVE DIRECTORS

ON A

PROPOSED DEVELOPMENT CREDIT

0F SDR 13.2 MILLION

AD PROPOSED AFRICAN FACILITY CREDIT

0F SDR 14.3 MILLION

TO TUE

REPUBLIC OF BURUNDI

FOR A

STRUCTURAL ADJUSTMENT PROGRAM

April 30, 1986

This document has a restricted distribution and may be used by recipients only in the performanceof their officiai duties. lis contents may not otherwise bc disclosed without World Bank authorization.

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Currency Equivalents

Currency Unit - Burundi Franc (FBu)US$ 1.00 - FBu 120.7 (Annual Average, 1985)SDR 1.00 = FBu 122.17 (Since November 1983)

Weights and Measures

1 meter (m) - 3.28 feet1 kilometer (kam) 0.62 mile1 sq kilometer (km2) - 0.386 square mile1 sq meter (m2) = 10.76 square feet1 cubic meter (m3) - 1.13 cubic yards1 metric ton (ton) = 2,204 pounds

Glossary of Abbreviations and Acronyms

AF Special African FacilityBCC Burundi Coffee CompanyBEI Extraordinary BudgetBNDE National Economic Development Bank (Development Bank)BO Ordinary BudgetBRB Bank of the Republic of Burundi (Central Bank)CADEBU Burundi Savings BankCGEP Public Enterprise CommissionCOTEBU Textile Company of BujumburaFWA Fully Washed Arabica (coffee)IBRD International Bank for Reconstruction and Development (World

Bank Group)IDA International Development Association (World Bank Group)IFC International Finance Corporation (World Bank Group)11F International Monetary FundINSE National Statistices InstituteOCIBU Industrial Culture Office of BurundiONAPIA National Pharmaceutical OfficeOTB Burundi Tea OfficePE Public EnterprisePEP Public Expenditures ProgramPIP Public Investment ProgramPTA Preferential Trade ZoneRDC Regional Development CompanySAL Structural Adjustment Lending (financed under the IDA and SFA

Credits, the Swiss and Japanese Grants, and the JapaneseLoan)

SBF Burundian Finance CompanySCEP Service in Charge of the Public EnterprisesSGS Inspection CompanySOSUMO Nosso Sugar CompanySPPF Special Project Preparation Facility

Fiscal Year

Government of Burundi: January 1 - December 31

FOR OFF0CM USE ONLY

BURUNDI

FIRST STRUCTURAL ADJUSTMENT OPERATION

Credit and Program Summary

Borrower: Republic of Burundi

Amount: IDA Credit: SDR 13.2 million (US$15 millionequivalent)

AF Credit: SDR 14.3 million (US$16.2 millionequivalent)

Swiss SJF Grant: Sv.F. 15.0 million (US$7.7 millionequivalent)

Japanese SJF Grant: Yen 400 million (US$2.2 millionequivalent)

Japanese SJF Loan: Yen 1.6 billion (US$8.9 millionequivalent)

Terms: IDA and AF Credits: Standard IDA TermsSwiss SJF Grant: Non-reimbursable contributionJapanese SJF Grant: Non-reimbursable contributionJapanese SJF Loan: Maturity: 30 years

Grace Period: 10 yearsInterest Rate: 1.25X

Description: The proposed financing would be the first in a series tosupport the Government's structural adjustment program.The principal aim of the program is to redirect theBurundian economy towards a development path which villreduce the present dependence on coffee and lay the basisfor sustained growth in the medium-term, with morereliance on market forces and a more outwardorientation. The measures to be taken in this phase ofthe program, as outlined in the Government's Letter ofDevelopment Policy and supporting Sector PolicyStatements, fall into two main categories:

(a) At the macroeconomic level, the adjustment programfocusses on the development of a mediumrtermframework, and includes rationalization of publicinvestment, improvement of public expendituremanagement, import liberalization, credit reform,and adoption of a flexible exchange rate policy.

This document bas a restricoed distribution and may be used by roecipients onWl in the performanceofh deir oficial duties. Its contenis may not otherwise be discosed without World Bank authorization.

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(b) At the sectoral level, the program includes: (i) anagriculture sector action program designed to raiseoutput and improve the quality of export cropsthrough adequate incentives to farmers andimprovement in the existing processing and marketingcapacity; and a rationalization of sectororganization; (ii) a public enterprise sector reformthrough restructuring, privatization where possible,and closure if necessary, of key enterprises; and(iii) trade and industrial reform aimed at improvingresource allocation, removing the bias againstexports, and promoting activities in which thecountry has a comparative advantage.

The credits and loans would finance all imports with theexception of items financed by other sources, militaryand para-military items, alcoholic beverages, tobacco,and precious metals or stones.

EstimatedDisbursements: The proceeds of the proposed financing vould be

disbursed in two tranches. The first tranche ofUS$25 million equivalent would be available fordisbursement upon credit effectiveness. Disbursementof the second tranche of US$25 million would becontingent upon the Government's taking the actionsexumerated in paragraph 102 of this report. Aperformance review would be held at end-1986.Disbursements of the entire credit are expected to becompleted vithin 18 months after credit effectiveness.

AppraisalReport: Not applicable.

Nap: IBRD 12260

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BURUNDI

FIRST STRUCTURAL ADJUSTMENT OPERATION

Table of Contents

Page No.

CREDIT AND PROGRAM SUMKARY .................. i

I. The Economy . . . . . . . . . . . . . . . . . . . . 1

Background . . . . . . . . . . . . . . . . 1Macroeconomic Developuents . . . . . . . . 2Adjustment Policy Issues . . . . . . . . . 5Prospects and Needs for Financing . . . . . 6

II. The Government's Structural Adjustment Prograo . . 7

A. Need for Structural Change . . . . . . . . . . 7B. The Government's Short-Term Financial

Program, 1986-87 . . . . . . . .. ... . 10

III. The SAL Program 1986-88 . . . . ........ . . 14

A. Public Expenditures Policies . .. . . . . . 15B. Public Enterprises . . .. ... . . . . . . 19C. Agriculture . . . . . . . . . . . . . . . . . . 22D. Trade and Industrial Policies . . . . . . . . . 24E. Credit Allocation System . . . . . ...... 30

IV. The Proposed Operation ....... . . .. . . 31

A. Uistory . . . . . . . . . . . . . . . . . . . 32B. Relationship between the Proposed Operation

and Policy Reforus . . . . . . . . . .. . . 32C. Effects of the Adjustment Program . . . a . . 40D. Benefits and Risks . . . . . .. . . . . . 43E. Social Costs of Restructuring . . . . . . . . . 44F. Proposed Financing . . . . .......... 45G. Disbursement, Procurement, Administration and

Auditing . . . . . . . . . . . . . . . . . . 45B. Counterpart Funds . . . . . . . . . . . . . . . 46I. Monitoring . . . . . . . . . . . . . . . . . . 46

V. Bank Group Operations and Strategy . . . . . . . . 48

VI. Relations with the IMF . . . . . . . . . . . . . . 50

VII. Recommendation . . . . . . . . . . . . . . . . . . 50

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Table of Contents (Continued)

Page No.

TEXT TABLES

Table 1: Main Economic Indicators . . . . . . . . . 3Table 2: Balance of Payments, Actual and Projected . 12Table 3: Fiscal Impact of Stabilization Program . . 14Table 4: Public Investment Program, 1986-88 . . . . 17Table 5: Structural Reform Program (SAL) . . . . . . 33-39Table 6: Projections of Selected Economic Indicators

under Structural Adjustment Assumptions . 41

ANNEXES

Annex I: Social Indicators Data Sheet . . . . . . 53Annex II: Economic Indicators; Balance of Payments,

External Capital and Debt; Status ofBank Group Operations in Burundi . . . 57

Annex III: Supplementary Project Data Sheet . . . . 61Annex IV: Covernuent of Burundi - Statement of

Development Policies . . . . . . . . . 63Aunex V: Government of Burundi - Policy Statement

on the Public Enterprise Sector . . . . 77Annex VI: Government of Burundi - Policy Statement

on Agriculture . . . .. . .. . . .. 83Annex VII: Government of Burundi - Policy Statement

on Trade and Industry . . . . . . . . . 87Annex VIII: Government of Burundi - Policy Statement

on Public Expenditure Management . . . 95

MAP

Burundi - Administrative Divisions (IBRD Map 12260)

INTERNATIONAL DEVELOPMENT ASSOCIATIONREPORT AND RECOMMENDATION OF THE PRESIDENT

TO THE EXECUTIVE DIRECTORS ON A PROPOSEDDEVELOPMENT CREDIT

AND AFRICAN FACILITY CREDIT TOTUE REPUBLIC OF BURUNDI

FOR A FIRST STRUCTURAL ADJUSTMENT PROGRAH

1. I submit the folloving report and recommendation on aproposed development credit to the Republic of Burundi forSDR 13.2 million (US$15 million equivalent) on standard IDA terms and aproposed African Facility Credit of SDR 14.3 million (US$16.2 millionequivalent) from the Special Facility for Subsaharan Africa (theAfrican Facility), established by Resolution No. IDA 85-1 of May 21,1985. In addition, I recommend that IDA would administer a proposedSpecial Joint Financing non-reimbursable contribution of SwF 15 million(about US$7.7 million equivalent) by Switzerland, and a proposedSpecial Joint Financing nonrreimbursable contribution ofYen 400 million (about US$2.2 million equivalent) from Japan. Theproposed financing aims at supporting the Government's program ofstructural reforus designed to restore financial equilibrium andachieve sustained growth.

2. Part I of this report reviews the characteristics,performance and constraints of the economy. Part II outlines theGovernment's structural adjustment program, including the short-termfinancial program. Part III describes in detail the actions to besupported under the proposed Credit. Parts IV and V assess theexpected effects of the Government's structural adjustment program, anddescribe IDA's role in the adjustment process, the proposed operation,and other IDA operations in Burundi. Part VI provides a summaryaccount of the relations of Burundi with the IMF.

PART I - THE ECONONY

3. The assessment of the Burundian economy in this report isbased largely on the work of two preparation missions (May andSeptember 1985) and the appraisal mission (November 1985) of theproposed credit. The findings o' the 1983 economic mission arereflected in the economic report (No. 4784-Eu) which vas distributed tothe Executive Directors on December 26, 1984. Country data areprovided in Annex I.

Background

4. With a per capita income of US$240 (1984 Atlas), Burundi isone of the poorest countries in the world. The country is landlocked,small in size, and densely populated, vith no significant natural

resources other than relatively fertile agricultural land. Socialindicators compare vith those of the poorest African countries.Population growth (2.9 percent per annum projected for the 1980-2000period) is high. The society is mainly rural, as only about 5 percentof the population live in the few urban centers. Despite the highdemographic pressure on already constrained land, migration to theurban centers has been limited, urban growth having averaged about5 percent a year. Although there are considerable regional differencesin income and large urban-rural disparities, there is little absolutepoverty in the sense that most people have access to basic shelter andnutrition. School enrollment has expanded, but the auult literacy rateremains low - about 30 percent.

5. Agriculture is the dominant economic sector, contributing60 percent of GDP and 85 percent of both employment and exports.Burundi is one of the few African countries self-sufficient in food (atleast for the most popular staples). The industrial sector (includingenergy and construction) accounts for about 15 percent of GDP and ouly7 percent of exports. The private sector, while small in terme oftotal fixed investment (15 percent), plays the major role inagricultural production and trade. The public sector is important inmanufacturing, energy and infrastructure, and the parastatal sectoraccounts for half of formal employment. One obstacle to Burundi'sdevelopment is its landlocked situation, which makes the countryvulnerable to the transportation conditions of neighboring countries.Although progress has been made in recent years to improve physicalfacilities and to simplify transit formalities, transportation costs toand from the Indian Ocean are very high. Passage through neighboringcountries is not reliably secure (as occurred recently because of civilvar in Uganda), and disruptions in transport can cause serious domesticshortages and shortfalls in export revenues.

Macroeconomic Developments

6. Following the accession of President Bagaza to power in 1976,Burundi undervent a substantial economic change. Frost in Brazil inthat year caused world coffee prices to triple, and this development,together with a substantial increase in foreign aid, contributed to aconsiderable increase in public savings and accumulation of foreignexchange reserves. During the second half of the '709, Burundi'sdevelopment strategy, as reflected in the Third Development Plan(1978-82), vas based on achieving a high rate of growth anddiversifying the economy. The public sector took the leading role inpromoting productive activities and financing infrastructuralinvestments. The overall outcome vas largely positive. Despite thedecline in coffee prices, the rise in oil prices and the disruptingeffects of the Tanzania/Uganda var in the supply of essential importa,real GDP growth averaged 6.7 percent per year between 1978-81,investment rose to 13-14 percent of GDP (compared vith 8 percent inearlier years), and manufacturing grev by 14.5 percent per year.Transport infrastructure, particularly roads, expanded considerably,leading to a road network vhich is basically adequate to the couutry's

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present needs. Pover generating capacity increased from 6 MW to11.6 MW. Social services, particularly coverage of education, vereimproved.

7. Developments were not as positive in some other areas.Following the decline of coffee prices and the doubling of oil pricesin the late '70s, the terms of trade deteriorated substantially(45 percent between 1978-81), but the Government did not adjust tothese developments. A rapid increase in domestic demand andexpansionist fiscal and monetary policies led to a deterioration in thebalance of payments. The current account deficit increased from5 percent of GDP in 1978 to 12 percent in 1982. Domestic savings fellfrom 6.7 percent of GDP in 1978 to 2.6 percent in 1982. Until 1980,part of the current account deficit vas financed Ly foreign aid.Hovever, after 1980, the widening current account deficit was financedlargel; by a drawdown of foreign exchange reserves, which declined toabout 1.1 months of imports equivalent by end-1982. On the fiscalfront, the growth of expenditures (both recurrent and capitaL) outpacedthe growth of public revenues. The resulting deficits were financed bycredit from the Central Bank, foreign borrowing, and an accumulation ofdomestic arrears. The overall budget deficit rose froa 4.3 percent ofGDP in 1977 to 7.6 percent of GDP in 1981 and to 6.4 percent in 1982.Inflation ran at a high 25 percent a year between 1977 and 1981,leading to a rapid appreciation of the Burundi franc, which remainedpegged tO the U.S. dollar at the same rate as in 1978. In the realsector, manufacturing grev overprotected, oriented to thr. douesticmarket, and heavily dependent on imports. Moreover, the overvaluedcurrency and the relatively high labor costs hindered expansion ofexports. Coffee remained therefore Burundi's major export commodity.

Table 1: MAIN ECONOMIC INDICATORS

1978 1981 1982 1983 1984 1985(est.)

As Z of GDP:Exports 11.7 8.9 10.1 9.0 12.7 11.5Imports 20.2 20.2 25.5 23.8 27.0 23.6Current Account Def. 5.3 8.9 12.4 12.4 12.2 10.0External Debt (DOD) 6.8 14.3 15.4 24.3 38.3 42.3Gov't. Revenues a/ 19.0 15.4 19.0 16.7 18.8 18.8Current Expenditures 11.7 11.4 11.9 12.0 13.2 13.0Public Investment 11.6 11.8 13.5 16.7 15.3 14.2Total Gov't. Deficit 4.3 7.6 6.4 12.5 9.7 8.4Investment (FGI) 14.0 13.3 15.0 19.4 19.2 19.8

As Z of Exports:External Debt (DOD) 47.8 179.3 196.7 302.1 298.9 380.2Debt Service 2.9 6.1 5.6 7.8 14.2 22.1

Terms of Trade (1978=100) 100.0 55.8 57.6 71.2 86.9 84.5

a/ Includes capital grants.

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8. The Fourth Development Plan (1983-87) vas prepared in 1982when the budget and balance of payments were already under strain.Nevertheless, the Plan incorporated an ambitious investment program ofUS$230 million per year (US$100 million more than what had beenachieved during the Third Plan), of which 70 percent vas to be financedby foreign aid and 30 percent by domestic resources, mainly from thebudget. Emphasis vas put on the development of agriculture throughlarge rural development projects and physical and administrativeinfrastructure. To finance this program, the Government tried tomobilize resources by several means. In 1983, the rates of main taxes(e.g., transaction and beer taxes) vere increased between 50 and100 percent, tax collection vas reinforced, transfers to publicenterprises vere cut drasticallv, and public vages vere frozen.(Public employment continued to expand, however, and merit andpromotion increases vere granted.) Moreover, to control the increasingdeficit in the balance of payments, the Government resorted toadministrative controls, including restrictions on imports and onremittances of foreign exchange abroad. The profession of importer vasregulated and price controls vere imposed upon imported and domesticgoods.

9. Burundi's economic and financial performance in 1983 vas notsatisfactory. While 80 percent of planned investment was implemented,this vas obtained at a high cost: public domestic debt increased by32 percent; public external debt (outstanding and disbursed) reachedUS$292 million, or ten times the 1977 level (reaching 24 percent of GDPin 1983, compared with less than two percent in 1977); domestic arrearsaccumulated, reaching 30 percent of Government spending at the end ofthe year; and the overall budget deficit rose to 12.5 percent of GDP.Moreover, the restrictions on imports had adverse effects on theeconomy. Imports of consumer goods fell by about 33 percent andimports of non-oil intermediate products declined by 9 percent,hindering the activity of the modern sector. Administrative controls,notably on imports and prices, led to a distorted price structure.High rents accrued to monopolist importers, incentives to invest inproductive sectors vere diminished, and there vas a slowdown in theeconomic activity. Non-coffee manufacturing stagnated and value addedin the tertiary sector declined in absolute terms. GDP grew by2 percent mainly due to a good performance in the coffee sector. Thebalance of payments' current account deficit remained above 12 percentof GDP, and foraign exchange reserves remained at less than two monthsof imports equivalent.

10. At the end of 1983 the Government took some adjustmentmeasures: the Burundian franc vas pegged to the SDR, with an implicitdevaluation of 30 percent against the U.S. dollar; producer prices ofthe main export crops vere increased between 6 and 50 percent; andpublic wages remained frozen. The impact of these measures vas feltmainly in the budget, whose revenues increased significantly due toincreased receipts from coffee and other exports. Hovever, continuedimports restrictions constrained capacity utilization in the modernsector due to the lack of intermediate goods and favored thedevelopment of parallel markets. In addition, climatic conditions vere

extremely adverse. A prolonged drought led to a reduction inagricultural value added, contributing to a decline in real GDP of4 percent in 1984. Inflation reached 14.4 percent.

11. The economic situation improved in 1985. According toofficial estimates, GDP growth reached 6 percent, largely as a resultof the recovery of agricultural output and increased coffee production.Coffee exports reached 32,000 tons (a 15 percent increase vith respectto 1984) as Burundi's ICY quota vas raised. On the whole, exports ofgoods and non-factor services reached US$130 million in 1985 ascompared vith US$112 million in 1984. This, together vith the increasein public transfers associated with the 1984 drought, allowed anincrease in imports of intermediate goods and an expansion ofmanufacturing output. The current account deficit is estimated to havedeclined from 12.2 percent of GDP in 1984 to 10 percent in 1985. Thedebt service ratio, however, reached 22 percent of exports of goods andnon-factor services, compared vith 14 percent lu 1984. On the publicfinance front, revenues increased by 16 percent in nominal terma due tohigher revenues accruing from coffee and excise taxes. The growth ofpublic expenditures vas about 10 percent (for a domestic inflation ofless than 4 percent), leading to an improvement in the overallbudgetary deficit, which fell from 10 percent of GDP in 1984 to8 percent in 1985. Recourse to domestic borrowing continued to beimportant. Credit to the central Government continued to absorb thelargest part of the credit to the economy.

12. The outlook for 1986 is marked by the unexpected increase(about 50 percent) of world coffee prices in consequence of theBrazilian drought. Burundi's coffee windfall in 1986 is estimated atabout US$44 million, equivalent to nearly one-third of previouslyprojected exports. This, together with the decline ln oil prices,vill provide important relief to the country's balance of payments andbudget. The Government is avare, however, that this improvement i8tumporary and it is committed to implementing a structural adjustmentprogram aimed at ensuring sustainable financial equilibria and economicgrowth in the future.

Adjustment Policy Issues

13. While the expected coffee windfall vill provide substantialfinancial relief in the short-term, there remain two critical tasksfacing Burundi's economic managers. The first i to address theunderlying financial disequilibria by increasing mobilization of publicsavings to finance public investment (hence reducing dependency ondomestic and external borroving) and by following prudent fiscal andmonetary policies to avoid inflationary pressures and difficulties inthe balance of payments. The second is to achieve longer-termstructural adjustuent of the economy by stimulating the productivesectors and private investment, lessening dependence on coffee, anddeveloping a wider resource base. With regard to the short term, themeasures included in the Governuent's financals program (to besupported by the IMF) will help the country to reach more sustainablefinancial equilibria on both the external and domestic fronts.

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14. To resolve the structural issues, a comprehensive andconsistent package of measures is needed to: (i) strengthenmacroeconomic management, including through appropriate exchange rateand credit policies, fiscal reform, and prudent foreign borroving;(ii) control aggregate demand thror:gh prudent monetary, fiscal and vagepolicies; (iii) improve efficiency in the use of public sectorrzsources, including through proper planning and effectiveimplementation of public investment/expenditure programs andrehabilitation of the public enterprise sector; (iv) rationalize andincrease incentives for export growth and efficient importsubstitution, including the adoption of adequate industrial incentives,a tariff-based trade policy and pricing policies conducive to growth ofthe agricultural export crops; and (v) increase private and publicsavings through steps such as raising interest rates and improving taxcollection. These policy areas form the basis of the Governnent'sprogram to be supported by the IMF and by the proposed StructuralAdjustment Credit (SAC).

Prospects and Needs for Financing

15. While progress has taken place in non-traditional exports,notably of manufactured goods, the bulk of foreign exchange earningsvill continue to come from coffee in the next ten years, making theeconomy vulnerable to volatility in the vorld coffee market andrendering macroeconomic management quite difficult. To accelerateeconomic growth and maintain financial equilibrium, major structuralchanges are needed in order to lessen the economic dependency oncoffee. The volume of coffee exports is presently affected by the fallin coffee production in Brazil. As coffee quotas established by theInternational Coffee Agreement have been lifted until 1987, Burundi islikely to export all its coffee production, projected at 34,000 tons in1986 and 35,200 tons in 1987. It is expected that Burundi villsubsequently be able to negotiate a ouota level compatible with itsproduction capacity, presently projected to grow at about 4 percent peryear. However, given the expected future decline in coffee prices(prices are projected to fall by 14 percent in 1987 from their expected1986 level and to remain at the same level until 1990), the exportrevenues accruing from coffee vill decline despite increases in thevolume exported. To offset in part the effects of coffee priceoscillations, Burundi needs to improve the quality, value added, andmarketing of its coffee.

16. Burundi's external borroving requirements for 1986 and 1987have been reduced by the expected coffee windfall, estimated atUS$44 million and US$14 million respectively (33 and 6 percent ofexports respectively) and by the fall in oil prices (equivalent toUS$6 million in 1986). Hovever, the need to pay increased debtservice, the requirements of major development projects, the demand ofthe modern sector for essential imports of raw materials and spareparts, the volatility of coffee prices, and the need to build foreignexchange reserves (which have fallen to 1.2 months of import equivalentin 1985), will require the implemertation of prudent policies in termsof domestic demand and monetary and fiscal policies. The Government's

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objective is to use the coffee windfall to accumulate reserves,securing a comfortable coverage of about 3-1/2 to 4 months of imports,in 1986 and 1987, and maintaining it at above 3 months in the mediumand long term. This is a sensible objective, in view of the country'slandlocked situation and its dependency on coffee exporta. Underconservative assumptions with respect to imports, external capitalrequirements to allow the country to build that level of reservesamount to about US$335 million during the 1986-87 period, of whichUS$160 million are expected to be financed by concessionary aid alreadycommitted, US$90 million from capital grants, and the remainingUS$85 million would come from the proposed financing package and otherdonors' programs. This is consistent with the public investmentprogram as agreed with the Government. The debt service ratio, whichmore than doubled from 10 percent in 1983 to 22 percent in 1985 isexpected to be 17 percent in 1986 and 20 percent in 1987, decliningsteadily aftervards. While Burundi has an important debt problem,especially taking into account the dependency of its exports on asingle coumodity, the country remains creditworthy for long-termborrowing, provided sound economic policies are pursued by theGovernuent. Given the concessionary terma of Burundi's debt(2.7 percent average interest rate, 31 years of maturity and a grantelement of 56 percent), there is no reason to consider advancerepayment of outstanding debt. In the context of the proposed program,the Goverament is committed, however, to borrow only at concessionaryteras.

PART Il - THE GOVERN~HENT S STRUCTURAL ADJUSTMENT PROGRAM

A. Need for Structural Change

17. As noted above, Burumdi's rapid economic growth in the secondhalf of the 1970s (6.5 percent per year) was in large part the resultcf the boom in coffee prices in the mid-1970s and the consequentaccumulation of public savings, which in turn, allowed a considerableexpansion of public investment and growth in related sectors. At theturn of the decade, the Goverament failed to adjust to the changingenvironment, characterized by a deterioration of the terms of trade andincreasing pressure over the balance of payments. An expansionarypolicy, together with administrative controls, led to serious financialdisequilibria, a slow-down in economic growth (1.4 percent per yearbetween 1982 and 1985) and important economic distortions. The mainobjectives of the Government's structural adjustment program are todiversify the economy and lay the basis for a sustained growth in themedium term based on the country's comparative advantages and relyingon the private sector. Diversifying the economy will be a difficulttask since coffee accounts for 10 percent of the GDP, 85 percent ofexport earnings, and about 25 percent of government revenues; moreover,much of the service sector, and some manufacturing activities, depend,directly and indirectly, on incomes generated by coffee. However, theneed for diversification is pressing. While the windfall expected fromthe recent increase in coffee prices will allow some real increase in

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imports and in growth, the coffee prospects for the long run indicatedepressed demand and prices. Moreover, the fluctuations of coffeeprices affect both public revenues and export revenues making theeconomy difficult to manage.

18. The achievement of the structural adjustment will require along-term effort, as it represents fundamental changes in attitudes,institutions, and policies. Even if appropriate policies begin to beapplied immediately, it would be unrealistic to expect the initialadjustment process to take less than a decade. During this periodBurundi will lay the foundation for an economy where both agricultureand industry are provided incentives sufficient to permit sustainedexport growth. A significant shift should progressively occur towardsgreater private investment and production activities relative to publicsector investment and production, and a more efficient public sectorshould begin to emerge vith more reliance on decentralizeddecision-making than upon direct controls. Investments ininfrastructure and the social sectors will be designed to supportefficient growth in the productive sectors and other developmentobjectives. Finally, the capacity for bringing about future neededstructural changes will be strengthened by establishing appropriatepolicies and institutional mechanisms. The Government recognizes thatwhile the adjustment process will involve some short-term hardship, itvill contribute significantly to improvements in the standards ofliving of the population over the medium term.

19. To accomplish this, even over an extended period, will not beeasy. The achievement of other objectives fundamental for sustainedeconomic growth, such as a decline in population growth (a program tovhich the Government is now fully committed), vill take even longer.In the initial period, priority should be given to reinvigorating theproductive sectors, promoting private investuent, and P:rengtheningBurundi's institutional capacity to effect the process of structuralchange. The effects of the initial adjustuent vary across sectors.The industrial sector probably will be the first to react. Inefficiententerprises which have grown up protected by an inappropriate tariffstructure and an overvalued exchange rate will have to adapt to the newsystem of increased competition; industries based on domestic rawmaterials and intermediate goods will assume greater importancecompared to those based on imported materials and components; and newtechnologies will be more labor intensive than in the past. TheGovernment's financial adjustment program includes control of publicwages, which will help to reduce the relative costs of labor (comparedto the cost of capital), promote employment, and increase thecompetitiveness of Burundi's goods abroad. Agriculture vill respondinitially through better performance of export crops (due to improvedincentives). The foodcrops sector will benefit from the increase inrevenues accruing fron higher prices for export crops as vell as fromthe reinforcement of support activities and application of improvedtechnologies. Building an institutional capacity to deal withstructural change vill require better mechanisus to deal withfluctuations of export earnings, and to implement flexible exchangerates and other pricing policies.

20. Bank support for structural adjustment. A meaningfuladjustment program vill need close support from both the Bank and theFund. Fund support is proposed initially for the implementation of astabilization program to cover the period mid-1986/end-1987. Banksupport is proposed to be extended through several Bank interventionsincluding: (i) a series of structural adjustment credits; (ii)technical assisttnce credits aimed at strengthening generaleconomic management in the ministries of Planning, Finance and someline ministries and to support the rehabilitation program of the publicenterprise sector; (iii) strengthening of technical assistancecomponents of future Bank projects in agriculture and other sectors tofocus on the structural adjustment needs of these sectors; and(iv) financing of consultants' studies under the Third and FourthTechnical Assistance projects and other IDA-financed projects.

21. The period 1986-87 covered by the first SAC vould be used top:t in place the new incentive structure and strengthen theinstitutional capacity needed for improved public expenditure planningand control as vell as other reforms. An exchange rate policy, agreedvith the INF, 6nd a new tariff structure would be put in place toprovide appropriate incentives to both agriculture and industry. Thepublic enterprise sector vould be rehabilitated, vith closure of someenterprises, and partial or total privatization of others. The sizeand composition of the 1986-88 public investment program has alreadybeen determined as a function of resource availabilities anddevelopment priorities within a three-year financial framework. Theprivate sector would be given the signal that the public sectorinvestment is to be supportive in nature and will not preempt resourcesavay from the private sector. The institutional framevork in supportof agricultural development will be strengthened.

22. As the structural adjustment process does not encompass allof Burundi's development problems, it is important that the Banksupport other projects to complement the SAL program, and to addressimportant problems not dealt with under the SAL. For example, inagriculture we propose to help strengthen and develop agriculturalresearch, as well as the central services through an agriculturalservices project. Bank vork in other related areas is also proceeding:urban sites and services, expanding vater supplies in rural areas,vocational teacher training and manpower development in agriculture asvell as technical assistance components in a number of sectors. 1/Moreover, Bank support vill be needed for the Government's structuraladjustment program even after the period covered by the first SAL.Some of this support vill consist of folloving up on actions initiatedunder SAL I. Other areas will also be addressed, notably regardingmanagement of the public sector (aiming at revieving organization andvage structure), employment generation, and preparation of the FifthDevelopment Plan (1988-92).

l/ An account of the Bank's operations in Burundi is provided inPart V.

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B. The Government's Short-Term Financial Program, 1986-87

23. The Governnent's short-term financial program has beendiscussed vith the IMF in close coordination vith the Bank. Theprogram encompasses important areas of policy which are addressedunder the proposed SAL. The financial program includes policy actionsin the folloving areas:

(a) External payments. The program aims at reducing the deficitin the balance of payments' current account, and at buildingup foreign exchange reserves while limiting debt service to areasonable proportion of exports;

(b) Budgetary and monetary policies. The objectives are to reducethe past level of Government's domestic borroving to financethe budget deficit and allow expansion of credit to theprivate sector, increase the level of public savings tofinance the public investment program, avoid inflationarypressures, and contain domestic demand; and

(c) Credit policies. The program's objectives are to improveincentives for private savings, and orient credit toproductive sectors.

24. External payments. The objectives of the government programare to limit the deficit of the current account of the balance ofpayments to a level wbich vill allow: (a) a decline, in the long term,in the ratio of external debt vith respect to GDP and that of debtservice vith respect to export revenues as needed to maintain thecountry's creditworthiness; (b) rapid improvement in the balance ofpayments and consequently in net official foreign exchange reserves;and (c) relaxation of controls over imports and transfers of foreignexchange vith the objective of encouraging foreign investment andavoiding expansion of the parallel market for goods and foreignexchange. The Government vill rely on an appropriate exchange ratepolicy and prudent monetary and fiscal policies to control demand forimports, and direct controls over imports vill be progressivelyeliminated (para. 60).

25. The financial program for 1986-87 assumes that the averageinternational coffee price vill reach US$4.70/kg in 1986, decline toUS$4.05 in 1987, and remain there in nominal terms until 1990 (asprojected by the Bank) and that the average export prices for Burundi'scoffee vill follow the same pattern. This vould imply coffee exportsof US$140 million in 1986 and US$126 million in 1987, compared to theprojections before the price increase of US$97 million andUS$112 million, respectively. The stabilization program is geared toachieving the objective of accumulating foreign exchange reserves to alevel of at least 3 months of imports (compared vith 1.2 months in1985). The Government's adjustment program therefore aims at adjustingimports and economic activity tO levels compatible vith prospectivedevelopments in the vorld coffee market and vith resources availablefrom Burundi's own foreign exchange earnings plus foreign aid

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contributions. Assuming a conservative evolution of imports, thecurrent account gap is expected to average US$105 million in 1986 and1987 (Table 2). Net inflows from the existing pipeline are estimatedto average US$55 million a year during 1986-87 and Bank non-projectlending (including African Facility Fund) is expected to provide aboutUS$25 million per year, the remaining coming from project lendingcommitments from the World Bank and other major donors. Assuming thatthe major donors endorse the program and maintain their aid levels inconstant terms (about US$70 million a year), Burundi could accumulateforeign exchange reserves to about 3-1/2 to 4 months of importequivalent during this period. The debt service ratio vould fall from22 percent in 1985 to 20 percent in 1987. The ratio vouldprogressively decline aftervards as the result of Government'scommitment to borrow only at concessionary terms and as debt contractedat near-commercial terms is paid off.

26. The management and follow-up of external debt vill bestrengthened, and the Government vill create an interministerialcoumittee vith representatives of the External Debt Service in theNinistry of Finance, the Bank of the Republic of Burundi, and theMinistry of Planning. This committee vill be established beforeJune 1986, and will be responsible for the management of the publicexternal debt, including that of the Central Government and PublicEnterprises, and vill ensure that future commitments will be only onconcessionary terms. The Bank vould provide technical assistance tothe Governmeut in this area under a proposed Fourth TechnicalAssistance project.

27. The incentive policies to be adopted by the Governmentinclude an initial exchange rate adjustment agreed vith the IMF, andfollowed by an additional adjustment over a ten-month period, and thesimultaneous adoption of a flexible exchange rate policy vith acommitment to maintain the real effective exchange rate. A majorchange in trade policies (see paras. 54-60) vill take place as vell. Arevised tariff schedule (developed by the Government with Bankassistance) to effect a more efficient and equitable structure ofprotection ,il be adopted simultaneously vith the exchange ratereform. The trade reform includes reductions in the number of tariffrates and their range, a reduction in custom duties exemptions (grantedat present under the Investment Code), and a replacement ofquantitative restrictions by tariff duties. These measures will havethe effect of increasing competition among importers, and it isestimated that the proposed trade reform vill lower the level ofprotection (measured by the decline in domestic prices of lmportedgoods after liberalization) by about 25 percent. The proposeddevaluation together with the Government's budgetary and monetarypolicies (para. 28) would restrain import growth and pressure on thebalance of payments.

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Table 2: BALANCE OF PAYMENTS, ACTUAL AND PROJECTED(in millions of dollars at current prices)

Estim. - Projected1982 1983 1984 1985 1986 1987 1988 1989

Exports 88 81 99 118 170 157 169 181(Coffee) (78) <70) <83) (93) (141) (126) (131) (136)

Imports 214 184 187 193 214 235 257 278Services & Income,Net -55 -91 -74 -87 -89 -93 -101 -110(Interest Payments) (2) (4) (9) (13) (10) (11) (12) (13)

Transfers, Net 56 52 44 52 47 48 50 53

Current Account -126 -142 -118 -111 -86 -123 -139 -155

Direct Investment 2 0 1 2 2 3 4 5Capital Grants 37 40 40 44 45 46 49 53M&LT Capital, Net 1/ 53 111 82 56 100 95 91 91(Amortization) (3) (6) (8) (16) (22) (25) (25) (25)

Other Capital 2/ 10 3 -8 19 -8 -1 4 4

Overall Balance -24 12 -3 10 54 22 9 -2

Memo Items:Debt Service Ratio (Z) 6 8 14 22 17 21 20 19Net Reserves as Month'sImports 0.7 1.4 0.9 1.2 3.3 3.8 3.8 3.4

Coffee Expts.('OOOt) 30.4 24.8 29.0 32.9 34.0 35.2 36.5 37.8Coffee Price (US cent/kg)

(international) 309 290 318 321 470 405 405 406(Burundi) 257 282 286 283 415 358 359 360

Exchange Rate 90 93.3 119.7 120.7

1/ Does not include IMF resources.2/ Includes short-term capital and errors and omissions.

28. Fiscal and monetary policies. The Governuent intends topursue a prudent budgetary and monetary policy during 1986-87 aimed atincreasing public savings, controlling inflationary pressures, andproviding incentives to efficient allocation of resources available forinvestment. The program includes the following elements:

(a) Measures to rationalize the fiscal system and increase itsrevenue potential including: (i) reform of the transactiontax; (ii) trade reform as described below; (iii) reform ofall consumption taxes from specific to ad valorem basis;(iv) reduction in the customs duty exemptions granted toselected imports; (v) strengthening of the collection andauditing system; and (vi) review of exemptions granted under

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the Investment Code. These measures, together vith theexpected effects of the increase in coffee prices and thedevaluation, are projected to raise public revenues in 1986by 49 percent in nominal terms and keep them at the samelevel in 1987.

(b) A prudent monetary polfcy vill be adopted aimed at keepingannual inflation at 10 percent in 1986 and 9 percent in 1987,while providing incentives to private savings and toinvestment in projects of assured economic justification. Toachieve this objective, in the context of a policy of tradeand foreign exchange liberalization, the Governuent vill:(i) increase the interest rates on one-year deposits by fivepercentage points (from 7 to 12 percent). The other interestrates will be adjusted accordingly; and (ii) taking intoaccount the program's objectives of increasing the level ofnet foreign exchange reserves in 1986, and the importantacceleration of monetary expansion in 1985, the Governmentwill endeavour to reduce credit expansion in 1986. Thisobjective vill be achieved by reducing net credit to theGovernment by 36 percent, while expanding credit to theprivate sector by about 12 percent. These objectives arecompatible with a reduction in the budgetary deficit fromFBu 11.2 billion in 1985 to FBu 2.4 billion in 1986 and FBu4.1 billion in 1987. Taking into account the expected levelcf foreign resources available to the budget, the Governmentvill be in a position to repay FBu 5 billion of its domesticdebt in 1986 and 1987.

(c) Restrictive public expenditures policy including (i) anaverage annual increase of 7.9 percent in personnelexpenditures and of 6.5 percent in transfers and recurrentsubsidies (including scholarships); (ii) a 12 percentincrease in non-wage operating expenses; (iii) payment ofdomestic arrears; and (iv) limit of the public investment toFBu 20.1 billion in 1986 (of which, FBu 1 billion vould befinanced by extra-budgetary sources) and FBu 22.0 billion in1987, which is compatible with the expected foreign aidavailable in these years (FBu 16.1 billion andFBu 19.6 billion, respectively), and vith the expectedavailability of budget resources to pay the localcounterpart.

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Table 3 presents the fiscal and monetary targets of the Government'sfinancial program for 1986 and 1987 and projected values for 1988-89.

Table 3: FISCAL IMPACT OF STABILIZATION PROGRAM(FBu billions in current prices)

Stabiliza--Actual-- Est. tion Prog. Projected

1983 1984 1985 1986 1987 1988 1989

Revenues and Grants 16.6 21.8 24.7 35.2 36.8 37.9 39.2Revenues 12.9 17.0 19.5 29.4 30.0 30.6 31.3Coffee 0.2 2.7 3.7 9.9 7.7 6.9 6.0

Current Expenditures 12.1 15.3 17.2 18.1 18.2 19.2 20.6Wages and salaries 6.0 6.5 7.1 7.9 8.2 8.9 9.6Goods and services 2.3 2.8 3.8 4.3 4.7 5.2 5.7Interest 0.9 1.6 1.9 2.7 2.6 2.3 2.2Payment of arrears 1.6 2.5 2.1 0.8 - - -Other 1.2 1.9 2.3 2.4 2.7 2.8 3.1

Current Balance(without grants) 0.8 1.7 2.3 11.3 11.8 11.4 10.6(with grants) 4.6 6.4 7.5 17.1 18.6 18.7 18.5

Capital Expenditure a/ 17.3 17.7 19.0 19.1 22.0 24.4 26.0Overall Balance -12.8 -11.2 -11.2 -2.4 -4.1 -5.7 -7.5Financing:Foreign 9.7 8.1 8.2 8.1 10.0 9.7 10.1Domestic 3.1 3.1 3.0 -5.7 -5.9 -4.0 -2.6

Memo item:Balance as Z of GDP 11.5 -9.7 -8.2 -1.5 -2.4 -2.0 -3.8Inflation (CPI) 8.4 14.4 3.6 10.0 9.0 8.0 8.0

a/ Includes investment of public enterprises and RDCs as includedin the Public Investment Frogram.

Source: Ministry of Finance, IMF and IBRD projections.

PART III - THE SAL PROGRAM 1986-88

29. The Structural Adjustment Program which the SAL wouldsupport, covers the period mid-1986 to end-1987. The program isoutlined in the Government's Letter of Development Policy and attachedtimetable for action (Annex IV) and covers five main areas: (a) publicexpenditures policy; (b) public enterprises policy; (c) agriculturesector policies; (d) trade and industrial sector policies; and(e) credit allocation. The structural adjustment program would beimplemented by the various government departments and agencies involvedin the reform process and coordinated by the Ministry of Planning. Aproposed Fourth Technical Assistance Project, to be appraised inSeptember 1986, would be specifically designed. to assist in theimplementation of programs initiated under the SAL. Support necessary

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before the effectiveness of the Fourth Technical Assistance Creditwould be financed from the ongoing Third Technical Assistance Credit,or under a Project Preparation Facility Advance for the FourthTechnical Assistance Credit.

A. Public Expenditures Policies

30. The public expenditures policies covered by the programinclude those affecting: (i) the public investment program;(ii) budgetary reform; and (iii) strengthening of the institutionalcapacity.

31. Public Investment Program. The Fourth Development Plan(1983-87) provided for investments of about FBu 129 billion (in 1984constant prices) or about FBu 26 billion per annum, over an estimated460 projects; of the total expenditures, about half would be for 27large projects. During the 1983-85 period, actual spending was loverthan what had been planned: FBu 19.2 billion in 1983, FBu 17.4 billionin 1984 and FBu 18.4 billion in 1985 (in constant 1984 prices).Initially, a sum of FBu 24 million had been planned for the years 1986and 1987 to keep the momentum of the investment plan and reach at least70 percent of the plan target. It is nov clear that Burundi cannotundertake these levels of investment, as the needs for domestiefinancing would be excessive compared to the requirements forstabilization of the economy. In fact, the targets of capitalexpenditures which are compatible vith the overall program are about70 percent of these levels, i.e., an average of EBu 17 billion (inconstant 1984 prices) for the two years. The Coverament has thereforedecided to eut back the investment program in an economic manner,maintaining the aliocations to the major sectors, notably agriculture(30 percent of the total investment). The completion of ongoing viableprojects and the beginning of high priority projects took precedence inthe exercise.

32. In the context of preparation for the SAL, the Governument hasreviewed the overall PIP and put apecial emphasis on the 1986 programto ensure that this vas compatible with the resources available and thestabilization requirements. Some lesser priority projects vere droppedcompletely, notably a ferryboat project, a second severage project inBujumbura, three industrial projects to produce cement, malt andbricks, a large project to invest in port storage, and six projects toimprove administrative infrastructure (including two governmentresidences and some regional administrative offices).

33. The revised program for 1986-88 comprises 123 projects, 50 ofwhich are in the agricultural sector. The average size of the projectsare small. Only 33 projects are larger than US$3 million(FBu 350 million), accounting for 75 percent of the investmentprogram. These projects have been reviewed by the Bank, and theireconomic justification has been found adequate, except for the SOSUMOsugar project (para. 34). The program is to be financed byconcessionary aid (85 percent of total investment) and by thegovernment budget.

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34. The SOSUMO sugar project (US$60 million) consists of aplantation of 1,400 ha of sugar cane and a sugar plant vith aproduction capacity of 14,000 tons of sugar a year. The projectrepresents about 15 percent of the total public investment program overthe period 1986-88. It was appraised in 1981 by the AfricanDevelopment Bank, and is cofinanced by the AfDB, OPEC, BADEA, theAbu Dhabi Fund, Belgium and Germany. The terms of financing are veryfavorable (3 percent average interest rate and 15 years of averagematurity). At the time of project appraisal in 1981, the economic rateof return was estimated at 14 percent. In the context of Its economicand sector work, the Bank expressed reservations about the assumptionson which this rate vas based, in particular the level of domesticdemand for sugar, and questioned the priority of the investment. Sincethen, the price of sugar declined subtantially (from US$0.37/kg in 1981to US$0.09/kg in 1985). A review of the project in 1985 by a Bankconsultant showed a marginal positive ERR on the basis of stilloptimistic assumptions with respect to sugar demand. The Governument ofBurundi, however, gives high priority to the project, which is tocontribute to the development of the Mosso province, a remote andunderpopulated region. At the time of appraisal of the proposedstructural adjustment program, contracts had already been signed andpenalty costs in the event of cancellation would have been high. Anunderstanding vas reached, therefore, by which the Government agreed:(a) not to enter into any new commitment vith respect to the projectuntil it has carried out a detailed analysis of the proposed investmentand until the Government has consulted the Association; (b) to contractvith a reputable management firm, vith terms of reference andqualifications acceptable to IDA, taking into account existingrequirements of other donors, for the management of the plantation andof the factory; (c) that the full cost of production should be borne bythe consumer and that there should be no operating subsidies to thesugar project from the budget; and (d) to ensure that SOSUMO will beaudited annually by an independent and reputable firm with terms ofreference and qualifications acceptable to the Association, and thatthe audit will be submitted to IDA for review and comments vithin sixmonths of the end of each fiscal year. These understandings have beenincluded in the Statement of Development Polic4es (Annex IV) and in theDevelopment Credit Agreement. A Bank mission will assess whether thedistillery component is justified despite the recent decline inpetroleum prices, and whether this component would improve the economicjustification of the project.

35. As of now, the project pipeline for 1987 and 1988 could beincreased taking into account the expected resource availability.However, the Goverument intends to decide on the allocation ofavailable resources between capital and recurrent expenditures in thecontext of an overall public expenditures program. Moreover, theGovernment will identify developient projects vhich fit theGovernment's sectoral priorities and have an adequate economicjustification. The preparation of the PIPs in 1987 and 1988 will becarried out in the context of a three-year public expenditures progranm.

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Table 4: PUBLIC INVESTMENT PROGRAM, 1986-88

All Projects Financing

Sector Allocation No. of Av. Size(FBu bn) (Z) Projects (FBu mn) Foreign Domestic

Agriculture 14.27 34.3 50 284.2 11.51 2.76Energy and Water 7.23 17.4 19 381.0 6.21 1.U2Industry 5.76 13.8 4 1,450.0 3.31 2.45 a/Telecommunications 1.89 4.5 13 145.0 1.77 0.12Roads 6.87 16.5 9 767.0 6.32 0.55Education 3.30 7.9 8 413.0 2.67 0.67Public Health .83 2.0 5 166.0 0.59 0.24Social and Administ.

Infrastructure 1.50 3.6 15 99.0 1.02 0.48

Total 41.65 100.0 123 339.0 33.40 8.25 a/

ai Includes non-budgetary resources such as local contributions.

36. Budgetary reform. The present one-year budget system has twocomponents: the ordinary budget (BO) and the extraordinary budget(BEI). The bulk of tax and non-tax revenues goes to the BO to financerecurrent expenditures and repayment of public debt. The BEI isallocated special taxes from coffee and beer, dividends accruing to theGovernment and an annual amount of Central Bank financing(FBu 2 billion) included in the BEI as regular annual revenue. The BEIfinances mostly capital expenditures (including counterpart funds forprojects financed by foreign aid) and non-capital iteus, such ascontributions to regional organizations. Investment expendituresfinanced by foreign aid are not shown in either budget. Each budget isseparately discussed and approved by the Council of Ministers; deficitfinancing is also individualized, leading to a complex structure ofpublic domestic debt.

37. The present system has serious drawbacks for an efficientpublic expenditures management: the arbitrary allocation of revenuesbetween budgets, the inclusion of bank financing as revenue, and thefailure to include foreign-financed expenditures distort the publicfinance picture, making it difficult for the Government to obtain aglobal view of its expenditure program, to progran investmentexpenditures as a function of public savings, and to adjust theexpenditure program to fluctuations of revenues.

38. To make the budget an efficient tool of macro-economicmanagement, the Covernment intends to implement the folloving refornsin the context of the SAL:

(a) Adoption of a unified system of budget preparation vith aclear identification and separation of current revenues,

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current expenditures (excluding repayments of debt), andcapital expenditures financed both by the budget and foreignaid;

(b) Preparation of a comprehensive three-year public expendituresprogram (PEP) which vill include for each executing agencyrecurrent and capital expenditures. This would permit abetter planning of resources to finance centraladministration expenditures, social services, maintenance offixed assets, and recurrent expenditures associated withon-going and new investment projects. The annual budget tobe presented to the National Assembly would correspond to thefirst year of the three-year budget;

(c) Identification vithin the public investuent program of acore" program of projects of highest priority for which fullfunding would be assured. A non-core (stand-by) programwould be prepared simultaneously; this would be financed ifadditional resources became available. The core projectswould be those with the highest rates of return (wheneverthese can be computed) and according to the criteria definedby the Government and its development priorities in terms ofinter-sectorial allocation. All projects above US$3 millionwould be subject to feasibility studies (prepared by theGovernment or donors) according to guidelines provided by theGovernment. The feasibility analysis would be discussed withthe technical ministries to ensure that the Government'spriorities and criteria are taken into account; and

(d) Consideration of the following aspects while establishing theinvestment program: (i) it must be compatible with theobjectives set for the debt service; (ii) it should requireminimal domestic bank credit; and (iii) its foreign currencypart should be financed through grants or concessionaryoans.

39. Institutional capacity. To support the implementation ofthese reforms, there is a need to reinforce existing institutionalcapacity at several levels. In the Ministry of Finance, the servicesresponsible for preparing the annual budget vould be strengthened toimprove the public accounting system (namely by adopting a double-entryaccounting system) and trained to prepare a three-year publicexpenditure program and a unified budgetary framework before theordinary and extraordinary budgets are presented to the NationalAssembly. The Government will receive technical assistance from IDA toprepare the three-year PEP, with financing under the Third TechnicalAssistance Project, and from the INF on public finance accounting.

40. At the level of the planning structure, the Government hasrecruited a consultant for two years to help establish a system tomonitor project implementation. With respect to project preparationand appraisal, there is also a need for ir.stitutional strengthening.

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At present, the largest investment projects have been appraised byforeign donors and consultants often using differing criteria andcountry parameters. The Government vishes to follov more closely thepreparatory vork of large projects as vell as to enhance the capacityof its technical ministries to carry out appraisal work for smallerprojects. In this process, common criteria and guidelines vill beused, including those of standard coot/benefit analysis (wheneverpossible) and relevant parameters which have been developed to reflectthe specific conditions of the country. These guidelines (described indetail in the Policy Statement on Management of Public Expenditures,Annex VIII) will be used by all ministries in preparing and appralsingprojects to be submitted for financing. To implement this reform, theGovernment will create a project preparation unit in the Ministry ofPlanning with satellite units in the major technical ministries. Theplanning unit of the Ministry of Agriculture vill be reinforced and newunits will be created in the ministries of Commerce and Industry,Transportation, Education and Health. Under the Fourth TechnicalAssistance Project, the Government would hire an expert on projectpreparation and appraisal for two years to assist the project unit ofthe Ministry of Planning and its satellites in technical ministries.

B. Public Enterprises

41. The Government of Burundi owns and operates about sixtypublic enterprises (PEs) which are engaged in a vide variety ofcommercial and social activities. This sector grev rapidly during theThird Development Plan period (1978-81) to play different roles,notably as provider of public services, to compensate for the lack ofprivate investment (especially in industry) and to co-ordinate economicsectors notably export crops. The role of the PE sector in the economyis considerable, accounting for about half of the formal employment andthe same proportion of industrial value added.

42. In the early 1980s, the Government channelled considerablefinancial resources to these enterprises, but the parastatal sector asa whole did not perform satisfactorily, with many enterprises operatingat a low capacity, incurring substantial operating losses, unable tocontribute to their own investment program or to service their debt.The Government has felt since 1982 that the tight public financesituation did not permit the continuation of financial support to theseenterprises, and transfers vere severely cut. Today, the burden ofthese enterprises in the government budget is therefore much smallerthan in the past. Their impact on the economy remains hindered,however, by their poor economic performance and management. A recentstudy has shown that in 1984, four of these enterprises were on theverge of bankruptcy, fifteen had suffered substantial losses, twelvehad negative cash flows and four had negative equity.

43. The poor financial performance of these enterprises steiasfrom several sources, including their unclear relations with therelevant ministries in decision making, lack of adequate managementcapacity, and excessive government coutrol over investment and pricing

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decisions. Some enterprises also suffer from inadequate capitalstructures. The Government has recognized the need to include theparastatal sector in the current structural adjustment program. TheBank has provided assistance for the diagnosis and preparation of arehabilitation program for the sector, initially during the preparationfor the Third Technical Assistance Credit and lately under the SPPF forthe proposed SAL.

44. The Policy Statement on the Public Enterprise Sector(Annex V) states the Government's main objectives for the sector:(a) to ensure that government participation vill be limited to thosecases which require public investment either because they are vitalpublic services, or because strategic sectors are involved; and (b) tomaximize the contribution of viable public enterprises to GDP byensuring that they operate efficiently. This will be accomplished byproviding a sound financial structure and more managerial autonomy tothe enterprises and by ensuring that all commercial PEs can generateprofits which justify public investment. The elements of thegovernment strategy to achieve these objectives include:

(a) Development of clear objectives for the PEs;

(b) Rehabilitation of PEs whose medium-term economicprofitability has been demonstrated;

(c) Improvement of PE management;

(d) Restructuring the parapublic sector through privatization orcessation of activity when operations are not profitable overthe medium run;

(e) Limitation of the establishment of new PEs to those whereprivate investors are not forthcoming and whose economicprofitability is demonstrated; and

(f) Establishment of systems to enable the Government tofollow up the cevelopments and performance of the sector.

45. The Government has decided to create a service withresponsibility for coordinating the rehabilitation program of thesector as vell as for monitoring its development. This Service inCharge of the Public Enterprise Sector (SCEP) vill review the currentlegislation on the sector and propose changes, as necessary, vith theobjective of avoiding overlapping responsibilities between the PEs andthe relevant ministries and decentralizing and delegatingresponsibilities to the maximum extent possible. This service villreceive technical assistance under the Fourth Technical AssistanceProject. Prices vill be deregulated and public enterprises will besubject to the same market environment as the private sector.Exceptional cases vould be made for those enterprises carrying outnon-commercial social activities (which the Government may have tosubsidize), and public utility monopolies for which price regulationwill be appropriate, and vould take into account the requirementsassociated with sound financial management.

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46. In the context of the SAL, and based on studies financed bythe Bank, the Government action plan for selected enterprises includes:

- Closure of four enterprises facing serious financialprobleus: viz., SOBECOV (foodcrops commercialization),SUPOBU (fishing), AGRIBAL (Agriculture), SOMEBU (studies).The initiation of the liquidation of these enterprises vouldbe a condition of effectivenes of the Credit. In the case ofSOBECOV commercial activities would be liquidated and themanagement of storage facilities would be transferred to theMinistry of Commerce.

- Reintegration in the public administration of the laboratoryof LAPHAVET (production and research on veterinary products),and subsidization of two other public enterprises performingnon-commercial activities: CPI (industrial promotioncenter), and ONT (tourism promotion);

- Rehabilitation of a priority group of five enterprises:CADEBU (savings institutions), ONAPHA (pharmaceuticals),OTRABU (road transportation), OTRACO (urban transportation),VERRUNDI (glass factory);

- Assistance to six major enterprises to design and implementstrategic plans to improve their economic performance in themedium to long term; and

- Review of two economic sectors (trade and tourism) andidentification of public enterprises which will be the objectof rehabilitation programs in a second phase.

47. The rehabilitation programs will be based on diagnosticstudies of each enterprise upon which performance contracts vill bedesigned and negotiated. These contracts will include _he objectivesof the enterprise, the strategy adopted, an evaluation of costs andmulti-year targets for operations, type of Government control andmonitoring, and amount of resources contributed by the State. Toassist the rehabilitation program, the Government vill establish anIntervention Fund in BNDE, which would be jointly managed by SCEP andBNDE, to finance activities such as rehabilitation investments,purchase of parts and raw materials, training of personnel, tecbnicalassistance, and enterprises' working capital. The Fund will disbursein the form of equity capital or loans, and will be financed from thecounterpart funds of the proposed credit. Institutional arrangementsfor the Fund would be designed and implemented in the context of theproposed Fourth Technical Assistance Project, which also would financetechnical assistance services to SCEP and selected enterprises.

C. Agriculture

48. The acceleration of the GDP and export growth in the mediumterm depends crucially on the performance of the agricultural sector tomaintain self-sufficiency in food crops in the rural areas, and

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increase production for export. In the past, fooderop production hasbeen sufficient for the country's staple food needs. Increasingdemographic pressure is leading to abandoning the practice of fallow,cultivation of marginal lands, reduction in average farm size anddeclining soil fertility. A higher level of productivity to offsetthese phenomena can be achieved only through intensification, whichwill require increased research for and extension of improvedcultivation packages. With respect to export crops, the Government'sobjective is to provide adequate incentives to producers, increaseefficiency in resource utilization, and improve crop quality andmarketing. The policy measures included in the SAL program consist of:(i) tlhe design and establishment of price mechanisus which would allowfor regular adjustment of export crop prices; (il) a modification ofprocessing techniques for coffee and increased efficiency in itsmarketing; and (iii) rationalization of sector organization andstrengthening of research and extension services.

49. Producer prices. Prices for locally produced fooderops, bothat producer and consumer level, are market determined, and theGovernment intends to continue to pursue this satisfactory policy. Asfor producer prices for export crops (coffee, tea, and cotton), whichare determined by the Government, the official policy has beenirregular and has led to a deterioration of prices in real terms. Forexample, coffee prices remained constant between 1980 and early 1984when they vere increased by only 6 percent. As a result, real pricesdeclined by 15 percent. For cotton and tea, the decline in real priceshas been even more pronounced. Producer prices remained constantbetween 1977 and early 1984 when they were increased by Il percent forcotton and 30 percent for tea. Considering that the consumer priceindex more than doubled between 1977 and 1984, producer prices in realterms declined by more than 40 percent during that period.

50. In the context of the proposed adjustment program, theGovernment will continue to let fooderop prices be market determined,and will establish producer prices for export crops at levelssufficient to provide incentives for increased production and quality,taking into account the evolution of international prices. For the1986/87 campaign, the Government has increased coffee prices by28 percent (from FBu 125/kg to FBu 160/kg) and tea prices by 20 percent(from FBu 15/kg to FBu 18/kg), thus raising their prices in realterms. The price of cottonseed has been maintained, given the pooroutlook for international prices for cotton and the relatively highproducer price for cottonseed in Burundi compared with other Africancountries. This increase in prices was based in part on a limitedrural consumption survey undertaken in selected producing areas. Forthe following years price will be determined on the basis of: (a) arural consumer index updated on a quarterly basis; and (b) regularsurveys of consumption and revenue patterns to assess the potentialcompetition between crops and between agricultural and non-agriculturalactivities of farmers.

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51. Coffee processing, marketing, and pricing. In recent years,Burundi has invested in the construction of coffee vashing stations toimprove the quality of exported coffee. In 1983, Burundi received apremium of 18 percent for fully washed coffee (FWA) over the price ofwashed coffee. In 1985, this premium had eroded to less than4 percent. Based on the conclusions Gf a study financed under the SPPFfor SAC I, this decline vas due to (a) a decrease in coffee qualitybecause of too-high levels of humidity of both parched and greencoffee, which resulted from inadequate storage and handling conditions;and (b) the weak management capacity and performance of the coffeemarketing board, the Burundi Coffee Company (BCC), which raises doubtsas to whether Burundi obtains the best price for its coffee. Theseproblems could be overcome at a relatively low cost (approximately USS3to $4 million) through additional investments in storage facilities,grading and handling equipment at the processing plants and at theharbor, and through improved management of both the coffee processingand marketing chains. The Governuent has taken steps to decrease thehumidity content of parched coffee by lovering the humidity requirementof parched coffee delivered to the factories and installing additionaldrying equipment at the two existing factories. The Government'saction program, in the context of the proposed credit, includes:

(a) Preparation of additional actions to improve coffee quality,including necessary investments, studies and recruitment oftechnical assistance. These measures will be prepared andfinanced under the proposed IDA Muyinga and the FourthTechnical Assistance Projects; and

(b) Preparation of a medium-term strategy for the coffee sectorto maximize export revenues, taking into account thepotential for increased output and quality, competition amongcrops, and prospects and fluctuations in the coffeeinternational market. This strategy would be based on:

- a study of the sliding scale of coffee prices, taking intoaccount the requirements of a marketing and processingsystem that places greater emphasis on quality and onefficiency of the processing and commercialization.- circuits. This study is to be carried out with financingfrom the French Caisse Centrale de Coopération Economique.

- an analysis of the revenue and cultivation practices ofthe farmers vith the objective to analyze competitionamong crops and among agricultural versus non-agriculturalactivities, which is being carried out by the lNationalInstitute of Statistics;

- analysis of the country's production potential taking intoaccount area planted, average yields, effects on ongoinginvestments to-improve quality;

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- establishment of a medium-term producer price policy aimedat maximizing incremental foreign exchange gain, takinginto account ICA quota, fluctuations in domesticproduction, and price differential in off-quota markets.

52. Institutional framework. To formulate and implementagricultural policies and maximize the impact of resources allocated tothe sector, the Government decided to review the organization of thesector, in particular the respective functions of the RegionalDevelopment Companies (RDCs) and the national offices of the Ministriesof Agriculture and Livestock and of Rural Development at the central,regional and local levels.

53. In the past, RDCs have had multiple functions, includingproductive agricultural activities (processing and marketing of exportcrops), support activities (extension, research, input distribution,and maintenance of rural roads), and social activities (education andhealth). Experience to date shows that although the RDCs have acomparative advantage for processing and marketing, their agriculturaland social services have been provided at an excessively high cost,making them dependent on financial support, either from the Governmentor from external donors. Moreover, the managerial demands imposed onthe RDCs by this multiplicity of functions exceed the existingcapacity. It is, therefore, clear that for the RDCs to be able tocarry out the functions entrusted to them in a cost-effective manner,they should concentrate on productive and commercial activities. Inthe context of the preparation of the IDA Agricultural Research andServices Project (FY88), the services of the Ministry of Agricultureand Livestock will be progressively strengthened at the regional andnational level to gradually take over some of the functions now carriedout by RDCs. They would assume primary responsibility for research andextension, in addition to the planning, project preparation andmonitoring and collection of statistics that they already carry out.

D. Trade and Industrial Policies

54. Burundi's industrial and trade policies have been highlyprotective, sheltering the modern sector from domestic and foreigncompetition. Protection is provided, inter alia, by customs duties,quantitative import restrictions and prohibitions, regulation ofimporters, and control of new investments. In this protectiveenvironment, the value added of the modern industrial sector expandedat an average annual rate of 13 percent in real terms from 1978 to1982, but then slowed to about 4.5 percent in 1983-85 as a result ofthe depressed domestic demand and lack of foreign exchange to importraw materials and spare parts. During the earlier period of rapidgrowth, production remained typical of the first generation of importsubstitution, with exports limited to processed coffee, tea, cotton andfew other goods. In addition, part of this growth was due to the startof production of new enterprises. Capacity utilization of existingfirms is low. Most of them operate at less than 50 percent capacity,with some as low as 15-20 percent.

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55. With the exception of a few enterprises, the sector isinefficient and relies mainly on imported goods. Despite the naturalprotection (provided by the landlocked situation of the country, whichis equivalent to a 30 percent tariff) and high tariffs, manyenterprises rely on prohibition of competing imports to operate. Theirproduction costs are high, and the quality of their products is in manycases below international standards. Hovever, the sector as a whole isprofitable, with profits before tax averaging 20 percent of sales.This is due to the monopolistic situation enjoyed by most firms and thecost-plus system of price setting and controls.

56. The measures proposed under the structural adjustment programreflect the increasing avareness of the Government that efficienteconomic growth, based on the country's comparative advantages, willrequire a substantial reform of present trade and industrial policies.The objective of opening up the Burundian economy to competition (bothdomestic and foreign) is an essential component of the Goverament'sstructural adjustment program. The Government's long-term policy isthat import restrictions, price controls and industrial regulationsshould not be used to protect domestic producers, vith the possibleexception of infant industries, which vill benefit from specialprotection during a limited period of time (see para. 60). It is avarethat efforts to reduce the effective level of protection and the biastowards domestic vis-à-vis export production are essential torestructure the economy and stimulate competitive exports to supportgrowth. The liberalization measures outlined in para. 60 and detailedin the Policy Statement on Trade and Industry (Annex VII) reflect theGovernament's growing recognition of the importance of market forces,correct price signals and private initiative; they include actions ontrade policies, price regulations and the Investment Code.

57. Trade policies. At present, all imports require a licensefrom the central bank (BRB). For products competing with localproduction, quantitative restrictions are in place and imports areauthorized only when domestic production is not sufficient to meetlocal demand. Import licenses are subject to a fee of one percent oftheir f.o.b. value. The profession of importer is strictly regulatedby the Government. Imports can be made only by authorized traders whoare required to specialize in one of 20 product categories and who mustensure that at least 50 percent of the total value of their importsfalls into that category. Importers pay an annual fee and makesecurity deposits of FBu 1 million (Burundian nationals) orFBu 2 million (foreigners).

58. Imports are subject to three different duties: a customsduty, a fiscal duty, and a statistical tax. All are based on c.i.f.value, which includes a substantial transport cost due to Burundi'slandlocked position. Their combined incidence yields tariff ratesvarying from 4 percent to 150 percent ad valorem. The import tariffstructure comprises: low duties (4 to 15 percent) on essentialfoodstuffs and on many inputs for agriculture and industry, includingmachinery and equipment (with the exception of those financed byforeign aid); high duties on luxury consumer goods (generally

- 26 -

100 percent or more); and mediun-to-high rates on imports competingvith domestic producte and on various consumer goods. The disparity induty rates is increased by the policy, set down in the Investment Code,of granting exemptions of duty on industrial inputs. All exports arein principle subject to an export tax, but exemptions can be granted bythe Finance Ministry. For manufactured exports the export tax is aflat 3 percent on the f.o.b. value. When duties have been paid onimported inputs, exemptions of the export tax can in principle beobtained.

59. The present trade regime is a source of inefficiency as itprovides different protection levels between sectors and firms andencourages monopolistic practices. Estimates of effective protectionconfirm the presumption of high and variable protection granted tolocal industry as rates range from 4 percent to about 800 percent, andaverage about 110 percent. When non-tariff barriers are taken intoaccount, effective protection increases significantly. The combinedincidence of tariff and licensing on non-competing imports is similarlyhigh. This situation enables importers to realize high rents rangingup to about 500 percent and causes high losses to both consumers andthe Government (the rent transfers from Governuent to importers for asample of 55 products is estimated to amount to FBu 2 billion, that ismore than half of total import duties collected in 1985).

60. To correct the distortions caused by the present protectionsystem, the Government has decided to implement a program of tradeliberalization and tariff rationalization aimed at lovering the levelof protection offered to the industrial sector and reducing thedispersion in effective protection. These measures include:

'i) Elimination of most import licenses. Only a limited numberof non-essential, luxury products (as listed in the PolicyStatement on Trade and Industry) and three groups ofmanufactured goods (glass, cotton textiles, andpharmaceutical products) vill be subject to temporaryimport licensing;

(ii) Introduction by the same time, of a simplified customstariff, comprising a reduced number of duties (two instead ofthree) and a reduced number of duty rates (5 instead of 57).The new tariff structure and implementation calendar are asfollows:

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PresentStructure - Proposed Rates-Range 1986 1987 1988 1989

Luxury Products 30-250 100 100 100 100Manufactured Goods 15-100 50 45 40 40Primary Products andIndustrial Inputs 5-55 15 20 25 30

Food Products 5-100 25 25 25 25Capital Goods 5-40 15 20 20 20

For a few cases in which higher rates appear to be necessary(e.g., to protect infant industries), the Government willintroduce formal procedures to grant selected enterprises atemporary relief in the form of an import surcharge levied ona c.i.f. cost-plus tariff. This surcharge, which vill notexceed 30 percent, vill be granted for a period of threeyears at the maximum, during which it vill be graduallyeliminated. Exemptions granted under the Investment Codevill be gradually removed and only imports by the CentralGovernment and the diplomatic corps vill be exempted fromcustoms duties. The arrangements made under the PreferentialTrade Agreement (PTA) vill be respected. Ve have reviewedthose arrangements and are satisfied that they are compatiblevith the proposed program;

(iii) Revision of regulations governing the profession of importerwith a view to eliminating provisions which lead tomonopolization.

(iv) Elimination of all export taxes on manufactured productsproduced locally. The Goverrment vill also reactivate thedrawback system which exists but is not well known toexporters.

Implementation of the new trade regime, including measures (i) to (iv)above, would be a condition of effectiveness of the proposed Credit.

61. Price controls. All imported and locally produced goods aresubject to price controls (the responsibility of the Ministry ofCommerce and Industry). Prices are set on a "cost-plus" basis, withthe manufacturer receiving a negot:iable net profit margin of 10 to20 percent. Gross wholesale and retail mark-ups are also set forimported goods and vary between 15 and 30 percent. A staff of 10persona is charged vith revieving all price submissions by importersand manufacturers, as vell as vith carrying out inspections.

62. Price control aims at preventing producers and traders frommaking excessive profits in a monopolistic market. This measure mayhave succeeded in reducing profit margins in a few cases, but its maindrawback is that it discourages efforts towards greater efficiency.The cost-plus formula does not encourage importers to look for thecheapest source of supply. Similarly, a fixed profit margin removes

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the incentive for manufacturera to reduce costs and become moreefficient. As the instructions given to manufacturers do not specifyat what level of capacity utilization the prices should be calculated,the system actually allovs firas operating at low capacity to pass onall the costs (including depreciation) and thereby remain financiallyprofitable.

63. The Governument recognizes that a price control system is notconsistent with the new liberalization policy and could hamper theprocess of relative price adjustment and rationalize resourceallocation that should occur vith the tariff reform. It has thereforedecided to liberalize prices at the same pace as imports. No controlvill be exercised on products for which importation is liberalized andonly certain strategic products (including flour, sugar, paper, ironsheets, and powdered milk) vould be submitted to a price ceiling (forno more than four months) in case of acute shortages. The price of oilproducts (gasoline, kerosene and diesel) and cement will be controlledby the Governument and adjusted periodically, taking into account theprices in international markets and fiscal considerations. Thederegulation of prices for products whose imports have been liberalized(except for the cases mentioned above) would be a condition ofeffectivenese of the proposed Credit.

64. Investment Code. Established in 1967, and revised in 1979,the Code aims at encouraging investment in priority areas by offeringcertain privileges and guarantees. To qualify for these benefits,investments must: (i) be in a priority sector as defined by the Plan;(ii) be of a minimum size, i.e., FBu 15 million (US$127,000) for newprojects and FBu 10 million (US$85,000) in the case of extensions; and(iii) be considered satisfactory from a technical point of view, asvell as in teras of job creation and value added, the provision oftraining, the impact on the balance of payments, etc.

65. The benefits offered include exemption of the import duty onmaterials and equipment at the time of installation, exemption of dutyon imported inputs for up to five years, and a tax holiday for up tofive years. Of the various other kinds of assistance offered, the mostimportant is the protection against competing imports which, however,the manufacturer could also obtain from the Ministry of Commerce andIndustry and the Central Bank. Projects of particular importance forthe development of the country, and those established outsideBujumbura, may receive additional assistance. The former must eithercreate a minimum number of jobs (100 for industrial enterprises and 150for agriculture or agro-industry projects) or consist of an investmentof at least FBu 500 million (US$4.3 million) for agriculture andagro-industry, or FBu 1 billion (US$8.5 million) for other industries.Such investment may, in addition to the benefits already mentioned,enjoy a reduction in tax on profits for a further ten years, while anadditional extension of the tax holiday to seven years is available forthose located away from Bujumbura.

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66. To obtain any of these advantages, the proposed investment isevaluated by two committees - the National Technical Committee whichreviews the project from the technical point of view, and the NationalInvestment Committee which studies the project in the conte't of theoverall national investment strategy - and must receive Cabinetapproval.

67. The overall system has several drawbacks. The administrativereview process is elaborate and time consuming. Promoters are requiredto submit a great amount if detail on the technical, economic and legalaspects of the project. If all the information is provided asrequested, it takes about four months from the time of submissionbefore the application is approved. Usually the process takes longer.Moreover, the provisions of the Code reinforce the pro-capital bias ofthe tariff system and discriminate against the development and use oflocal substitutes. Many small and medium enterprises are also noteligible for incentives under the Code since their projects aregenerally below the minimum investment requirement ofFBu 10-15 million. One of the objectives of the proposed reform is toimprove the effectiveness of the Investment Code.

68. In the context of the proposed credit, the Government hasdecided revise the Investment Code in order to:

(i) Eliminate the guarantee of the local market. The Government-ill not prohibit the establishment of new enterprises evenif they compete with existing activities;

(ii) Eliminate the exemption of import duties on equipment andindustrial imports. The Code's benefit will consistessentially of a profit tax exemption for a fixed period;

(iii) Reserve the benefits offered by the Investment Code toprojects which have an economic rate of return of more than10 percent and an investment cost per job of less thar.US$20,000;

(iv) Introduce measures to facilitate access of small enterprisesto the benefits of the Code; and

(v) Reduce the review process to a maximum of three months.Applications submitted by promoters should be approved orrejected during that period.

The adoption of the revised Investment Code would be a condition ofeffectiveness of the proposed Credit.

69. Public industrial investments. In view of the disappointingresults of past public investments in the industrial sector andconsistent with the stated objective of encouraging privateinvestments, the Government has decided to reduce its role in thesector. The public investment program for 1986-88 includes only threeindustrial projects, of which the major is the SOSUMO project (seepara. 34).

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E. Credit Allocation System

70. The major problen vith the credit system in Burundi appearsto be its insufficient orientation to productive investments, and itscontinuing de facto discrimination against small borrovers. In thisrespect, the performance of the development bank (BNDE) and theBurundian Finance Society (SBF), the two institutions whose lendingactivities should, in principle, be oriented to productive, as opposedto commercial, investments, have been particularly disappointing. Inrecent years, the large majority of credits accorded by bothinstitutions have been for short-term financing of the coffee crop,rather than for longer-term productive investments. To stimulatelending of these and other financial institutions to small- andmedium-scale enterprises, a Guarantee Fund vas established in 1984, butit has not yet begun operations.

71. The current system of credit regulation is characterized byan overly complex administrative and regulatory framework and is inneed of considerable reform. It is insufficiently adapted both to thecurrent needs of the Burundian economy - in particular the need topromote productive investments, especially by small-scale enterprises- and the increasing sophistication of domestic financialinstitutions. The requirement that all credit requests for anountsover FBu 3 million (about US$25,000) be approved in advance by thecentral bank has posed a particular problem, as it has frequently ledto substantial delays, as vell as to unnecessary uncertainty on thepart of potential borrovers.

72. In order to influence the credit allocation of commercialbanks in favor of high priority sectors, all credits, under the presentsystem, are classified by the Central Ban k as either discountable("mobilisable") or non-discountable ("non-mobilisable'). Maximumlending rates are set by the Central Bank for each category of credit,and vithin each category, lending rates are several percentage pointshigher for non-discountable credits. At the present time, lendingrates range from a minimum of 6 percent (for export credits, which arediscountable 'by nature") to 15 percent (for short-termnon-discountable credits). While in recent years about two-thirds ofthe outstanding credits of commercial banks have been classified asdiscountable, outside the coffee season only a small portion of creditsare discounted at the Central Bank.

73. In addition to Central Bank control over credit creationthrough its right of approval of individual loan requests, credit isregulated also through a series of ratios which each commercial bankmust respect (or pay a penalty). The two most important ratios are aminimum liquidity ratio, for which purposes discountable credits areclassified as liquid assets, and a minimum ratio for mediumr-termdiscountable credits.

74. The Government is avare of the difficulties which confrontthe credit allocation system and intends to introduce reforms. Initialmeasures to be implemented in the context of the SAL include:

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(a) An increase from FBu 3 million to FBu 10 million (aboutUS$80,000) for credits which can be granted by commercialbanks vithout prior approval of the Central Bank; this wouldb.e a condition of effectiveness of the Credit. This limitvill be reviewed on a regular basis to take lnto account theeffect of domestic inflation. This limit ofFBu 10 million vill also apply to medium- and long-termcredits; and

(b) Measures for promoting lending to small- and medium-sizedenterprises, auch as activation of the Guarantee Fund,which would make use of the SAL counterpart funds to startoperations.

75. To prepare for a second stage of reform, the Government villcreate an ad hoc committee under the direction of the Governor of theCentral Bank and including representatives of the commercial banks,other financial institutions, the Ministry of Finance, IndustrialPromotion Center, and other concerned agencies and institutions. TheComuittee will examine and make recommendations on the follovingIssues:

(i) The distinction between discountable and non-discountablecredits, notably on whether there is a need to distinguishbetween two categories of credits (vith different interestrates) or on whether promotion of certain economicactivities could be accomplished more efficiently throughdirect subsidies rather than through subsidized interestrates, or whether any of those are advisable at ail;

(iI) Coefficients of liquidity and use of medium-term resources.Depending on the recoumendetion concerning the above point,the Committee vill examine the possibility of replacing thepresent controls over credit allocation exercised throughthese two ratios by alternative measures (e.g., requiredreserves ratios and minimum lending rations for medium- andlong-term credits) whose definition does not involvedistinguishing between credits according to whether or notthey are discountable; and

(iii) Structure of interest rates. The Committee vill examinethe possibility of alloving banks and other financialinstitutions greater authority in setting both lending anddeposit rates.

Part IV - THE PROPOSED OPERATION

A. History

76. The proposed credit is the first of an expected series ofcredits to support the Government's structural adjustment efforts. AStatement of Development Policies (Annex IV) from the Ministers of

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Planning and Finance, sets out the major elements in the program andthe policy actions envisaged during mid-1986 to end-1987. Statementsof Policies for the Public Enterprises Sector, Agriculture, Trade andIndustry, and Public Expenditures Program have also been prepared bythe Government and are attached as Annexes V through VIII. Themacroeconomic elements of the program vere identified initially as aresult of an economîc mission which visited the country in May 1983,and whose findings were updated in July 1984. (The report waspresented to the Board in December 1984.) These were further developedjointly between the Government, the Fund and the Bank. The PublicInvestment component of the program was developed during a Bank missionwhich visited Burundi in October 1984, and its findings were reportedto the Government in April 1985. The agricultural component wasdeveloped by Bank sector mission which visited the country in July 1985to review the role of the regional development companies (RDCs), byconsultants to review the coffee sector, and by Bank staff during thefirst preparation mission (May 1985). The Industrial and Tradecomponent vas developed by a Bank Industrial Sector Mission during 1983(report was discussed with the Government in 1984), and furtherdetailed by the preparation mission and consultants' work notably oneffective protection. The Public Enterprise component was prepared byconsultants in May 1985, which updated and used to a great extent astudy financed by the Bank in 1982. Consultants' services werefinanced under an advance from the Special Project PreparationFacility.

77. An appraisal mission visited Burundi in November/December1985 and appraisal was completed in January 1986 during an officialvisit of a government delegation to Washington. Negotiations tookplace in Washington in April 1986. The Government's delegation washeaded by the Ministry of Planing.

B. Relationship between the Proposed Operation and Policy Reforms

78. The proposed credit vould finance the first phase (1986-87)of the Government's medium-term structural adjustment program which isto be implemented in conjunction with the stabilization program to besupported by the IMF. There are close linkages between the twoprograms particularly in the areas of public expenditures, trade,tariff and pricing policies. The two programs are summarized inTable 5.

TABLE S - RtPlLl STRlCTLUAL REFAU FROoM (<AL 1)

UVF ProgrueSoenor A Palicy Area lssues and object,ves Aet,ons Alroady Tabon SAL Progras Bank Secter LendiAs amd Othere

I MACRO-EC&MIY0C MANACDIfT

a. Ecchance rate To nerne ta coaatit.nanss In love4aer 193 thU. Prograu Devalopent: Agreea nt etth the OF on. Eurundi'a eaiorts and 1 -mi Burundi Franc aua dioroc.ated Ths settors

1inconthes actiuatad au aperoar;ate sachugee rate before

noes bies against tradad goda, b, 30a n relation to the by ths dsealuatoon W 11te sonorsted the IMF progrbs a sresented ta

an ouchange rts edjustaent US dollar Dus to internai by t.e SAL progrers. otably on arcas te Boarda3 reouried rhe ne. sechange unflation higher than related to aproenme u centt*sa The IBD/IW proge'a envisagesrot sili nesd to b* intrnatiomns inflation, ths <trade end industra ol icies). th real P effcct.e ceuchle-e et*

sa.ntained in rosl teras effective Pee lsuchance rats to bu sautaînsd aubseoucntlp

th,ough peroodic adjusteent. sas substentially opprociatsd Uhereafter

b Momete.y politias ossue& in .oMestry poiîcy Under SAL tha fanb hes 1W/IR ellgreedrelste te holpsd the Conernacnt to revs. - Coveotent budget iefi;t- sas or Uie buigetary the prosent apatos of creod. to ba li-etsd to l.fl of CEPdofîct unid -ta fmmanc.neo sllocetion to elîgn it *,th in 1986 end about 2.fl o. n1e7

- crudit allocation eolceis. the trade libesliastîon rtors.structure and range of nteroet - Interest rtes uill bu ine*mreidrates, eurrontly rangînoe botsos b1 f<e ercenutee poimta bg

4 and 8 SI for deposita and Jure IN4. They ,li bebuteten *.5 and 135 for lendine suteqatliy s&justsd o0 %e>

patte; reflect dcecatie nflation W- med tao oep interost rets

at e posiatis Usuae in realterce to prosote Drivate

sanings and avoid sarginalinnsstsonts.

e. Budgatary polî,cîe Cyerall public apendine In 1912 increases in Publie Bant finanucd consultant ta propars IFIIB aegrediahould be adjuatcd to rsource salarie. sere limitsd to guidelines for project epprsîsal; - atabtlication of Covernecuntawilebilbties and aediui-tore srit end prootion iucressso it *ill also assiet the Covernnnt nLrcuneuet c.pend;turea ir 14 6finencial equilibrius PrudenL In 1943. t,rnafern ta parastatals to prepare a throe-yean public capon- to FP 19 billion and paeantapsnding policieis ulid be sere drastically neduced. The diture progre aend i laeent s ot arrecrs;iîplemented and the managsemnt in.estent program bas bean unified aystes of budget proptration

of public oupenditures iswored. sdjustud in 196. - public inveptecnt progras

of about FBu 20.1 billion in186 end Fbu 22 billio in 1R7;

- annual revios of th Public

Enoonditure Prooria by thi fiant.

In the ertJent of ongoingand sen projete the neoise

o? sectorai unveat ent aromreos

sil uneras en icortsnce. BmSn

s*ettr sorS cill incuis the inputersouirod for tie tsaeration of scosrolsuanive Public epsenditurs progras.

TARLE 5 - MAtUOi: STRUCTLAL REFuR PBRMAM (SAL I)

1iF Progra.Secto' A Polie 7 Atea Issues end objectives Actions Already Taken SAL Progres Danh Smcter Lending *n4 CItero

d. Public Oeht Dua to haury borrouina to finance In the eantit of the SAL%., tài TM/IR ugredmanagement the public investsmnt proges-, Bink iii el9 Hte Coverneent Oovernuent wili establisi a co_ittee

Durundil' dSbt service hua ta proepres a etatigy to CompriSne representativea of ithîncraused frot 4-S percent finance its investcent pregrea Ministries cf Finance. Planning andof epeorta of goods and cocectiblu *itH the objective of OB. ta encure %tita ell futurenon-factor services in the of caintalnine Ue debt eervice co-itents cill be ut concessieonary tsîr.1978-83 is,iod to 22 percent ut lsos tHon 20 percent during inder tHe proboaîd four»H Tectnicelin 190S. The Conernuent ia 198e-90* declining to about Assistance roject tUhe public debtcositted to borrc onlu ut 1 percent eftlererds. canagement cepecit» of He Minîstryconcessionary tersa and ieprove of Finance ciii be etrengtiened.its foraien debt canagesnt cepecity.

I.TRADE PDLICIES AO Trade policiee huve beenINOATRIAL INCENTIVEB cheracteriscd br hean> protectionisc

which hta elloee it euietence ofinefficient fircs. oriented to Htedomestie *arbet nd etItH littleincentive to eaport. In order toramone thc bise uguinet euportc undavoid the ectablishsent of marginal Wfircs the ipreeent trade und induetrialsotcies neid ta be reforsde.

a. Turiff Rfforc Prssent turiff structure includSe 57 Financed by an MFW fron SAL Coverneent agtind ta:tariff rates, rangoing bîtcîen 4-150. coneultsnts prepsred e atudy on - combine Hta tee cuwto duties;Effective brotection rate ranges effectivc protection ates u -srduce nusber of tariff rates fron 7 to 5;betecen 4 and O . This structure input for nec tsriff structure chich - reduce tas rnge. end louer hihgestneds to be replaced b, a sore *ill rplace current CR eystes. javel:

ateionel protective systea, - recone eoeeptions aecorded by ithbasid on tariffs rather than on Inveutmnt Coda;l°t und providing un homegenouc - incosc import curchaege (coeiliue

protection to differ.nt *conomic 301J over cif. plue teriff)sectars. ta protect selectid Infant

induetrias during a *aaiuiepcrioj of three Yesre;

- define proceduree ta analysethe nued end level cf the«surcharges, ceai 6$ case.

b. lort controle Foreign trade tranauctions are ThtClvernmnt viii:cerried out by suthoriitd tradern reviec Uc decrie reguictingeho need to apecilaise in one cf he Imorter profession te increo20 producte. Al ioorts 'equire cocetition sgon ineitaes.s licene. lacei-ts hieh comeetsvith locally produccd "td5 - rcmove iaport controle end orentmubJect to CRa, detern-i,ed as a utmastic liconsine ta s1l aporisfunction of *cseetic de-and *itb iscepticn of lunury consumer geoae

TABLE à - iUiNO StRUCTUiAL REFOhM PiAiN (SAL 1)

IMF Prourau

Sector à Polley Apte Issue» end objectiesa Aetions Alréady Tahen SAL Preogrs Bani Sacior Lendin; end Othera

not mot *y local production. and thras Croups of goode ce-s*.ineAil isports arc subject to cith local manutactures Cgloss, coteon

pries regulation. tciciles end phauaceutieles) *hieh

will rassin under iscort I ccnsinq

durina liaiited meriod of ti.

c. Price controls Ail prices ot local Manufactures The oe'srnssnt hua mtied te

end l;ported goode are controllad. - derepulatî priceciPrie dia*r;nei,n i cest-plus bsaed. - replace curlpnt systie Of pries

Foer locails producsd geded the net détermination by à follo -up

profilt sargin svcraces M0. For ispoertd atitlaeicel Baies..

gooda, à aroin in fimed batseen 25-351.Margins are nagotilble. T*h precrnt Prices of ill product *i;11 be

asyaiu alloua enteprises to bh profitable aubject to ceilinga sdjustadaven sorbini at les uiiliiaiion cepacil. secerdinu to the internationsl

and des.ite large inafficiencias. Price prcea mnd fiscal considerationa.

policy retors *euld éi. at incresa;no For igiht producte considered ot

«o"etition a*spng local producers und atrsitege isportance. Crise cauInaI portera. cen bC uaed In case ef savere ahortage.

Uuch coilineg *;11 be repsed in four

omnHe et ihe liest..

d. Inventsent code At presint. Burundi e Investaeni Te Covsernsent *ill WCode gives grent protection to large

enterpriaes. Intensive in cespiil. - alisinsie lporti duty sasmptiona

The bsnifiia tend te be considerable. on rae matériels, intersediiteincludin the protection *ginst preducta cnd durable gooda

*oiernsl end douehtie ceopstition.

A refera ot the Code ia nassed io - elieleate *guaranited *arit,' *aytie

avoid h;ghly capital intenaive projecte cur,ently ln place Utroueh custoe

and liprove it as an inai.uenl. et Protection Olport bnon);*cono-ic policy.

- redtine the charactariatics

of projecta to benefi. ftre.TIvntaient Coda, inciudin:

IU hglerh the" lOti

coste er job loser than 20.000

- Includ provisions to aupport

asall- mci seaium isidniep;

3. ARICILTUAL SXCTiR

s. Pricin; policlea Producer pricae for *tport rerpa Producer prica for coffue. tes Under SAL 1, the Baab will help Coep. Under thc Thied Tschnical Assistancefor spoet crocs are ti;d snnuslly by a aliding eécte and cotton sete raiesd early to review the present ayat. for coffete Project. the nsb ;a fmnanc;ng s vide

approvcd hy the CoveranIni. le thc 194. The lacrease ose not prie« deteruination. The Covernaent aurvey of rural conwuvtion end inome

past, adjuateant has bhen made aufficlent %o recoaer th silli undenielse a etuds etf Ue coffee pattern& au sel1

es et cltifiateon

unayeteailcaelly end producar prices diterioration ln the rpal Iceel. nector, fecuaaed on thi ali;dia patterns ho sa*nen cespiltion

in real teres havs declined In thc contest of SAL prepsrstion, *cele used to determine the producer hbesecn cropu end letiseen *rieultural

substantially. In order to provid INSE hsa prpeared siUvey of aslcted pnriea snd on the opitel piattrn vergue aon-agviculture cethiitfie.

.,

TABLE B - RNDI: STLCTAL REFf PROoAu (BAL 1)

-1 Progra.Sector A Policy Ares lsaues nd objectives Actions Assidy Titan BAL Progrua ton Bactor Lendina mad Bthers

adaquste producer inre.tivesa tétera rural araes ia crder to compute of coffe production eahôc as a naed to prepare a acthodology a relevant CPI for eusort crog compatible mith the prospects in UMder ta prooo ed FourUA Techmneal

tating into accouht changea in producars. For tée 9087/88 coffea corld aaretm. Assastance Project. a itudy mold bhi

doamatic inflation and orlid prices ceaaign. Covernment ine-asad Thuae atudaes cili ba netrumental in ceraid out te crepare a mtrateey for

for main esport trops. producar prices fer coffe and aietereînina a medium tare pr;ce coffea aroduction tatiag onto atteint

tas b> 20 ind 28 percent el cy te prospect ra coffee corlid abats.

raspectivly .

b. iar-ettng Martmtne of coffea. tal und Cotton During the prosaration for SAC 1. The Rana cili hle thé Covernamnt to Inmemtaat accessary te imorova

ara the reaponsibility of thres aitg. IDA financed consultants have qualty of coffim c11 be f.naiied

beids. Progrets has been achieved analyaed tha situation M*r - Iprove the mualit> of fully--sahed unde' Uc Hya a Anicoulturalin iaproving martetins of Burundi s aide recomeandations on hoc te coffea by notns of inmstacnt und arojeat as a Cocpe_int of

tes. Siiler action prograsa need improve arocessing und marketing technical assistence. Ue iavantamts on coffee stationsto bh underteben for coffre and of Burundi coffea. included *n ths mroject.Cotton t sasii thé returas Covrnmnt héts tabtn aeasurea - Refora and improae aerhting proce-of Pest invetsaent and ta oprove ta raduce hueidity content duras of dCC o ns te s.i.iwce

both outaut sad quality. of perched coffaa. geain of coffee qualitj iprovment.

- Ocf.in coffcc production strstegy taboea

inta aeccount lita>ly de.eloeets iainternational sarbet for coffam.

- DefVie etrstmoy for producer preoe Tét uroeosed Nuyiôag Acroe. ai Oiditermination and m-iase siterstivs project miid incirae a T à I

to eli-inste current subsidoe. comonent edireang thUcm isues.

c. Inatitutionai Sitting The Oovmrnaant agricultural st,ategy The Sanab has raviaied Ue sectar. Thé The Qoverneent intendi ta s.ecialise Tha procoscd Monga Agricuiturmi

is bsaied on large Ragionsl DeOalopamnt r ter cas discussai ht Cow arnent RDCe in directly productive is th bst vehilce to impleent thU

Companies, îhich have as main objective in " t,br.he CoTvrnecnt is activitias, imaving Ue provision of reforme sugested in tAe tubn

thé iatagrated ievelopment of salected asare of the nemd to redefine ta support sarvices und arbteitne tao reort on thts eterpr;ss.

rural aroms. Thbir funetions pcin fros functions of Uh RDCh and ita stretagy he privete sector and national Tét relations bate an thedirectly Productive activities, to on RDCs hbo boom ineluded aid reaioal governeent agencies. MCs and the centrai servicas vili

ressarch und autension services, rosd lan thé Letter of Developsnt bh 5

tasteid ia théa cntstt of themaintenance and provision of aducation Poley> proposaed oiect %o rainforce thU

and hasîth services, central servicesThis aultiplicity of funetionstgetther cith ceat manageaent capacity

and Uhe lak of sslf-financine fdiaidhaa lad to inmfficiencies and ta an

ectrese dessandsny on finibneial

support fro- the Coverneant

sndaor foraign donore.

4. PUdLIC PENDITURE PmOmAn

s. ise of PIP la th past. an mac1saive l cf PIF for 985.89 csc over sbiticus Thé aOccrcct as carmad tapublic anvstemnt ld ta large eaternal and ecaeds rasource availebilities liait 1988 aime of fiamd publicborrocing and hasvy docestic torroeine: by about UiS80-450 *illion. iinebstasnt te Fut20 million. which

TASLE B - UtNClI STNRCTWL REFOuH PRODAH (<AL 1)

IH' Progras

Sete . A Policy Ares Issues eln objectives Actions Alreedy Taken SAL Progru- lank Scte. Lendinu und Othehs

Thire la e noud te tuilar the publie Coverneent hie cut th initial is coafptible mith the mv slubiiitp

investetnt progrs to a leval propased investuent by 301 et foreign aid und the objectives

copaatiblb vith eveilable resources of tha financial progrea auppo'ted

mnd stabilisation noeds. bt tho IHF

b Comvosition There is s need ta rui.sioniae 1uit PIP reviet (May 1085) Dafne a coe. investsnt orogra. of

the investeent program o tht asialyad large projecta end high ierocrty projecta und i

it con focus on e seult nusber of recoa*ended fcus on higher stand»by prgrsm of project mhich

bigh gi riait>y rojuets. defined piriaty projecte snd revit, et will be finsnced if sdditioes

uecordini Ut Covernumnt unpro-ne projecta. A revisad PIP rvaouce beco se avaieble

developsent prioitis mund mith uas preprerd and discussed in

edequate e4onomie justification. Novestmr 15S8! tekinu gn l ccount

those reco_e ndationa.

Concarnine the ISSUe projnct The Coverntsnt mill Thie hanv vill hslp the Coseuit

uhich tie Gant his seun mith to unes Uta aconsie justifiction

concerm rgsardinu pr;ority und - 14, internationel management of s distillery project vhich

econ-ic justification. Cov't fore to esaiat ths projuet froc .ould produce sîcoiol out of

has egreed to taba actions to its sturt the SBOU> solsme.

avoad turden on budget vnd improve

projact acneeolic. - Not subsidia muger producad

by 605U4O

- Analys tUe econocie justification 'J

of the projeet coponenta for

ehich ionirsets have mot buen siengd.

- Enoure that the project

is audited every yeur by s

reputable internationalfir vith TR ugruoble to

tho Bank.

c. 1Q87-89 progrue In order to provida frsneuort for Tihe preparation of this threa-yesr The propcosd Fourth Tachnical Asuistence

efficient resoureo allocetion budget will be condltion fer thu project mmiiid areidle support te thi

beteecn racurrant and capital lmd trencihe diebureaunt. Tha Co..rnoent in Uhis urue. includine tUe

apaenditures end provide the Covurnmesnt Bln, *ill provide support to ths ruinforcesnt of budget prearatien

mith a s lobal pieturs of the publie covernetnt through tea services cupesity.

espenditurs progr imlueluding the impact of consultante ihich oulid help

of investimnt projecta on recurrent Uht Covurunont té presett the Contribution of Projectp» setff

umpenditure, u thrée-year coarehensive firat ons or tua coaprehunive *ill b crucisil te deteraine

publie aupenditure progras uill be three-yesr budigta. the needa In racurrunt upendiltures

praparad. In thim contuvt, tho UtuSenb mid Ie ism e *ic aloi ensure utillestion

help thi Covernsunt te 0ta temamdis of instsllid ceascit>Y, os thot

a cingle budget systes. no investaunt sovenditures

rer finsnced st Uht ceoa of

subutilîiation cf casocity or

inabilit> te prOvide

for essentiml soclel servics.

TABLE à - BLSPIr STMCtLUAL REFO< PmOMAM (SAL 1I

IFF PrograsSetter A Polt;y Aria Issues and objectives Actions Alrasdy tahon SAL PrOgea- *snh Setter Lending Uand tiier

d. Projacb Seluction Thorn is no defîned ethodology Vith BanI finanting, the Eophases on ansur.n, thst ail ne.

mnd Evaluation for project appraisul in Burundi Coverneent preapued projects in the lla7-89 PIP *eetThe aathodology and basse paraoeters projeet aapraisal set'sfactory eriteria.

uscd in project appraisal vary eidely guidel ina to be aeed by ailamne oprojetea setters, und donors. sinistries êith projette to be Oefinat.on of genreal methodology forThe capacity to prepare nd appraise finanis d. projaec evaluation talngprojeets noeds te le reinforted to into atteint apéeifie tountryensure that projectt retained in coudi tons.

the PIP have an adequate raie oareturai and are consistent eith the Reinfortement of plenning u.'t. in The pro,oseéd Fwourh tchnical AasistenceOnvernent's davaloesenat riorities. hey ministrias snd et ctntral levai Project could proviée support in

to ensure sdequste roject préparation this ares.notobly concerning projett te blincluded in the nemi PIPs

5. PUBLIC ENTEhWISES Coverneent eut transfors to The Coverneant c-ested a Consultant have preparid an The proeosed goure Technical Asgistancesoet PUs. hoc, flinanciel Publie Enaerprieee Coei.on uataitd inanci dl sné cono-ce eedit cedi nelué e e nent t

support eones noe fro banis. (CGEP) sn 1983 to toordinate reviu of the PE sector. assisi tHe creétion and organisationforeign cid, or ocn equity. the rehabilitation p'ogaoe of of the 5CEP and provide technieelSoc, enturarises have bern elesda te guneral sector and prepare Actson: aseistsune in tHe coordination of theothers are in serious difficulties, sPecific contract plans cith Thé Covernasnt ill: rehabiletation, progras sad eaeaotieton cifYet eany of the 60 PEs eajor parastatals. close four publie anterprises cerforeance contrate. have good potential for The COEP .ca neyer ope.ationsl. <ARIBAL. 9*U0. SCECOV. SOIE); trehabilitation. There is a In the conteot cf the SAC 1.naed to prepara an overall plan a report has bean prepared by - rintegrete in publit aidinistretîonfor the e cteris ehebilitetion consultants te assesz the overail or subsidise thace enterprises

isasct cf lhe PEs secteo (ONT. LAPHAVET, CPI);und prpoe,. s* enural spprocth

for the rehabiliation effort. -rhabelitote in five prîcrity enteprirees

(CAON,BUu VcWîNII OTRACO OTRABUJ

- trate national service in chare

oc tse public *nterorp-se (S>EP)n't thi objectiva te assiet andfol lo-up the develoapente in the sector;

prepure dignoesis cf the privatesecter te sases; the potentialfor teoal or portial privatisationct selacté e ierprises;

- prepre diegnosis cf seletted

sett-es <irsMd sd teuries)as a basis to identify the

second group cf enturprises te

be rehabilîtsted.

- preopre cedius-run etrstegy plane fo

{AKLE 5 - LiDI: STRUCTIAL RWfUI PROWA (SAL 1)

XSF ProurasSettor à Polie> A-8s Issues end objectives Actions Airead, Teks.. SAL Progras *snk Secter Lendin* und Others

iceoriant Pis (COTEBJ. OTI iCIW. KCC>;

- desio a aiste. of inforsation endhosogn;te information en the publicenterpriasa to alos Oossnt'sfolios-up;

-lpisle_nt sectoral policies whichinclure pepic liberei nti n.Inersfoeeicsteiionmlear defmnition of objectives;

- croate an niner.niion und tuhopl finance soce of theréhabilitation sctions. includicu

technisel assistance and invesiasntase nsceaemrg.

B. CRÉDIT SYSTDÇ Current sagtes cf credit llocetion In fl84. thic Cv0ernnnt c;eeted e Ths Ccvern.ent hes egred t»: OnIe E for FllT neludesi unecesserily co"ple-, ineludinc Oueanile Fund to atimulait lendii snalyais of Uurundiia financiale side rats of lendine ratis. end to tal aissied enterprise. the - ectivate the Guiarantee Pund as aystes ia an input to furhserclasifiecation of credits according Fund hua not ataritd operetionn ygt. c use te support iending te reforma in tih credet allocationto thMcr final une. It elac diserici- aael sucé enterpresa sates. In the content of enet-a egainst -alil borro-rs end second SAL oserition an ed-hoc 1contains feu incentives te ineresas thi esilines ahone hich go_iamion mill ho creatcddirect. productive Investeent. comercial bianch nesi authorisatien to foi os up on ths atuid'

fro. ths central bla troc recoasndations.Ru 3 sillion te Ru 10 million.Thia seelinc i11 ts sdjuitedennuelIy taking ite sccountinflation rets.

:~~~~~~~~~~~~~~~~ .i.

- 40 -

C. Effects of the Adjustment Program

79. As outlined in Part II, the Government's mediumn-termstructural adjustuent program, the first phase of which is supported bythe proposed SAL and by the IMF program, is expected in the next 10 to15 years to substantially strengthen the productive sectors, reduce theeconomy's dependence on coffee, and lay the basis for sustainedgrowth. Projections of selected economic indicators, for both theshort and medium term and for two cases, with and vithout structuraladjustment are given in Table 6.

80. Both cases use the same assumptions regarding the coffeeprices: an increase from US$3.21/kg in 1985 to US$4.70/kg in 1986,declining in 1986 to US$4.05/kg in 1987 and staying at this level until1990. After 1990, coffee prices are projected to increase in nominalterms to reach US$5.30/kg in 1995. In the first case, the volume ofcoffee exports is projected to increase from 34,000 tons in 1986 to39,000 in 1989. This assumes that Burundi will be able to negotiate afavorable quota with the ICA after 1987 in accordance with thecountry's export potential and that producer incentives are adequateto ensure needed tree-pruning and maintenance in the short-run andreplanting in the longer run. and in the medium run through increasedarea planted. The effect of changes in producer prices on productionlevels vas projected according to estimated elasticities.

81. The two scenarios illestrate the impact of the overallstructural adjustment package on the economy. The principaldifferences lie, thus, on the assumptions on the exchange rate, theamount of external capital flows, the efficiency of resourceallocation, the tariff reform and the liberalization of the economy,the incentives to private investment, and the action program for theagricultural sector. The poli.cy case assumes an immediate devaluationof the Burundian franc vith respect to the SDR, followed by a"catch-up- devaluation during the next twelve months, and a flexiblepolicy thereafter. It assumes that the SAL capital flows would besupplemented by moderate additional amounts from other sources that arepresumed to be conditional on the SAL agreements; it assumes increasedefficiency from improved resource allocation, with consequentreorientation of production tovards exports and efficient importsusbstitution, and increased use ol local factors of production ratherthan of imports, it further assumes maintenance of purchasing pover ofexport crops producers, prudent monetary and fiscal folicies, holdinginflation to less than 10 percent, and allowing credit to the privatesector to grow in conformity vith the needs for investment; finally,the policy case assumes replacement of quantitative restrictions by atariff-based protective structure, and a decline in import exemptions.

82. The non-policy case, on the other hand, assumes that theexchange rate depreciates only in line vith the difference betweendomestic and international inflation rates; it assumes that vithout SALinflows the aid programs of other sources would be smaller as well; itassumes less efficiency in resource allocation, higher importelasticities, and higher budget deficit/GDP ratios; producer prices formain export crops are not adjusted regularly and fall in real prices,

- 41 -

leading to a slover growth in main export crops; and no trade reformwould take place. The Government would continue to control imports byadministrative means in order to limit the balance of payments deficitsand the need to borrow at commercial terms.

Table 6: PROJECTIONS OF SELECTED ECONOMIC INDICATORSUNDER STRUCTURAL ADJUSTMENT ASSUMPTIONS

With Policy WithoutAdjustment Adjustment

1978-81 1981-84 85-90 90-95 85-90 90-95

Growth Rates (1984 Prices)

GDP at Market Prices 4.9 -2.1 4.0 4.3 2.0 2.1GDP Factor Cost 6.6 -3.0 3.5 4.2 2.3 2.1Agriculture 6.6 -4.2 3.0 3.4 2.8 2.6Secondary Production 6.2 2.9 4.8 6.7 1.7 1.0Services 7.0 2.6 3.4 4.3 1.8 1.4

Consumption 3.5 -1.1 2.8 3.3 2.1 1.9Investment 6.1 6.0 2.6 4.0 0.5 0.5Exports GNFS 1.2 -1.2 4.6 6.5 3.5 2.4Imports, GNFS -1.5 13.3 3.2 3.7 1.2 1.8

Other Indicatorsas Z of GDP

Investment Total 13.9 16.6 17.5 18.3 15.8 13.5Current Account Balance 7.3 12.5 9.4 8.2 12.0 12.0Exports, GNFS 10.9 10.4 17.3 19.2 13.9 14.3Coffee Exports 9.1 8.8 14.1 12.2 9.9 10.2Imports, GNFS 21.6 25.4 25.0 24.8 23.1 23.0

Source: Ministry of Planning and World Bank Projections.

83. Short-term effects. The short-term effects of the programare the combined result of the recent increase in coffee prices, theincrease in foreign aid flows associated with the Structural AdjustmentProgram, and the Government's commitment to pursue prudent fiscal andmonetary policies, thus avoiding excessive pressure on the balance ofpayments. It is estimated that the current account deficit vill becontained at US$86 million and US$123 million in 1986 and 1987respectlvely and that foreign exchange reserves will average anequivalent of 4 months of imports. On the domestic front, publicspending will be limited to a level which can be sustained in thefuture. In this context, the expected increase in revenues togethervith a prudent policy of public spending will lead to higher publicsavings. These are expected to average 9 percent of GDP during 1986-87(compared with 5 percent in 1985), allowing the Governuent to

- 42 -

contribute to the financing of the public investment program and repaypart of its domestic debt. While this repayment is not a goal initaself, it vwll allow an expansion of private credit (and privateinvestment) while keeping expansion of the money supply at the levelsagreed upon between the Governuent and the Fund.

84. Mediua-term effects. In the medium term the improvements inthe economy as a result of more efficient investment and the creationof appropriate incentives for agriculture and industry should lead tohigher growth and more efficient resource use (as reflected ln theincremental capital output ratio and other measures of factorproductivity). Growth of non-agriculture GDP for the period 1986-90 isexpected to average 4.0 percent per annum, compared with 1.8 percent inthe absence of a reform program.

85. The most important changes in the economy would come from theagricultural and industrial sector. Agricultural exports will increaseas the result of better incentives for increased production anddiversification. Food production is expected to increase faster in thepolicy case as the result of better sector organization, easier accessto imported chemical inputs, and increased purchasing pover of therural sector. The substantial increase in income passed on to therural sector by the agreed increase in producer prices for coffee andtea ie expected to generate domestic demand for goods which can beproduced locally, by 3mali-sized enterprises, using morelabor-intensive production technologies. Moreover, the industrialsector is expected to benefit from the opening of the economy, increaseits efficiency and orient production towards exporte, folloving thereform in incentives, notably the exchange rate, the tradeliberalization, and the deregulation of prices. The major publicenterprises are supposed to engage in rehabilitation plans which villrender them more efficiert and more able to finance their owninvestments. Private investment, both from abroad and domestic, lsexpected to increase rapidly especially in the two to three years afterthe beginning of the program, allowing a growth of capital formation ofabout 2.5 percent per year, compared vith 0.5 percent in the nou-policycase. This investment is likely to be oriented in larger shares toproductive activities rather than commerce and trade as a consequenceof increased incentives to private investment (including smafl-sizedenterprised) and greater competition in the trade sector. In themedium to long term, the relative use of domestic inputs vill make theeconomy less dependent on imports and more intensive in local inputs,lncluding labor.

D. Benefits and Riske

86. Benefits. The main benefits of the SAL are in the form ofpolicy adjustment described above which are expected to lead toimprovements in the efficiency and allocation of resources and henceimprovements in the balance of payments in the long term.

- 43 -

87. Risks. The Government's structural adjustment program hastwo main risks. The first arises from the difficulties in estimatingthe quantitative effect of the policy reforms on the economy. Theprojections illustrate on the basis of one set of reasonableassumptions what the policy program is likely to achieve during thenext ten years. Hovever, neither the magnitude nor the timing of thelong-term benefits or transitional disruptions can be predicted withcertainty. Hence, although the ultimate benefits from the reforms areestimated to be considerable, the length and difficulties of theadjustment process are less clear. In particular, the prospectsoutlined in the policy scenario are derived on the assumption of exportgrowth and moderate growth in consumer goods importe folloving theliberalization efforts. Factors which may threaten the balance ofpayments equilibrium include a sudden drop in the coffee prices, theestablishment by ICA of coffee quotas for Burundi below the exportpotential of the country (forcing Burundi to export to the off-quotacountries), increased protectionism in foreign countries, a quickrevival in domestic demand, and other external factors such as adverseweather conditions or disruptions in the transport corridors. Theserisks are important for the recovery of the Burundi economy. Failureto expand import capacity, given the economic dependence on imports,would mean that Burundi wnuld have to resort to a strategy of lowergrowth as a mechanism of adjustment to avoid the problems faced inrecent years.

88. Tlue other risk relates to the tinely and continuedimplementation of the program. The trade liberalization program islikely to meet with resistance from those benefiting from excessprotection or from rents on imports, and private investment may remainsluggish if commerce activities continue to provide higher rates ofreturn than direct productive activities. These risks will diminish inthe future as the effects of the measures begin to show positiveresults. Continued support at the highest level of the Government istherefore needed to ensure the success of the program. Such supportwill have to lnclude adequate incentives to foreign capital, at leaston a non-discriminatory basis as compared with nationals.

89. There are some features which reduce the above risks. First,a flexible exchange rate vill be helpful in minimizing the pressure ofthe liberalization program on the balance of payments. Second, thereare programs to assist the enterprises to reform and to benefit fromthe new system of incentives. Third, the major foreign donors havetaken an active interest in the preparation of this program (e.g.,USAID, UNDP, France, etc.), and they are expected to provide extrafinancial support in case the expected effects of the program areslower to materialize or extraordinary circumatances occur which mayjeopardize the succesa of the Government's program. Finally, theGoverament is seriously committed to the program and to opening theeconomy to market forces and private initiative. It recently (February1986) held a seminar on the privatization of the Burundian economy, topresent the main elements of the reform and stimulate the interest ofthe private sector. This seminar was well received by the businesscommunity. The Governuent's determination to pursue the objectives of

- 44 -

structural adjustment is, in the final analysis, an importantdeterminant for the increased role of private investment in the futuregrowth of the economy.

E. Social Costa of Restructuring

90. The structural adjustient program in Burundi is likely toentail some transitional costs, primarily in terms of stagnation inreal consumption levels in order to permit savinge and investment forthe future and a reallocation of incomes between different social andeconomic groups. Although it is possible to attach some quantitativeindicators only to the first component, the second (the redistributiveimpact) is likely to be of at least equal importance during the SALimplementation. The first part of this adjustment has taken placealready. Between the period 1978-81 and 1984-85, Burundi's per capitaconsumption fell by about 10 percent in real terme. According to ourprojections of the policy case, per capita consumption will remain atabout the same level until 1990. After that it could begin to increaseby approximately 1 to 2 percent per annum.

91. Few reliable data on income distribution in Burundi areavailable. Using national accounts information we can, however, detectlarge differences between average urban and rural real incomes, thedifference is about 1:8. As a result of the program, the incomedistribution vould shift from urban areas to rural communities as awhole. Farmers' real incomes would benefit from the new pricingpolicies for agriculture exports, while urban consumers are alreadypaying higher prices for all basic food commodities. Urban incomesvill be reduced by Government policies for the containment of vageand employment increases, especially in the public sector whichrepresents half the formal employment market, and for the restraint ofother current expenditures and transfers. In the past, the publicinvestment program vas used to provide employment, but this policy canno longer be pursued.

92. The reform of incentive policies for industry may typify theoverall effects of the program on employment and income distribution:in the short run, some reduction in vage rates and/or employment mayoccur, as inefficient firms are faced with increased importcompetition. In the medium term, however, new employment opportunitiesand improved earnings are expected as manufacturing and processingindustries respond to the new situation and as controls on internaltrade are relaxed. The favorable environment for investment in theprivate sector would favor a reallocation of employment from the publicto the private sector, which would allow an increase in averagesalaries in the Central Government together wvth a readjustment offunctions and vage structure. The speed at which these economic andsocial adjustments vill take place, particularly those dependent on thesupply response of farmers and industrialists, is hard to predict.What is certain is that the Government will need to exercise all itsskills to ensure that the essential consensus in favor of the total

- 45 -

reform package is preserved. Whatever social costs are involved in theshort term, they would be lese than those compared with the situationwhich vould arise from a later forced adjustment.

F. Proposed Financing

93. The financing package would include a proposed DevelopmentCredit of SDR 13.2 million (US$15 million) and an African FacilityCredit of SDR 14.3 million (US$16.2 million) and Special JointFinancing including a Swiss grant of SwF 15 million (US$7.7 millionequivalent), a Japanese grant of Yen 400,000 (US$2.2 million), and aJapanese loan of Yen 1.6 billion (US$8.9 million). The proposedfinancing, totaling US$50 million, would cover about Il percent ofBurundi's total merchandise imports and about 20 percent of the grosscapital inflows over the calendar years 1986 and 1987, the period ofdisbursement. This amount is appropriate in light of the quality ofthe program and the size of the IDA lending program for Burundi.

G. Disbursement, Procurement, Administration and Auditing

94. The proposed financing would be disbursed in two tranches andis expected to be fully disbursed vithin 18 months of effectiveness.The firet tranche of US$25 million would be available uponeffectiveness. The second tranche of US$25 million would becomeavailable about six months later. Disbursement of the second tranchewould be contingent on satisfactory progress with respect to(i) continued implementation of the first phase of the Government'sstructural adjustment program, in particular the tariff reform andimport liberaJization program; and (ii) the measures listed inAttachment I of the Government's Letter of Development Policy andpara. 102.

95. SAL financing would be limited to imports procured from Bankmember countries, and Switzerland. Special African Facility financingwould be limited to imports procured from eligible countries under theSAF. Except for a few exclusions such as tobacco, alcohol, luxury anddefense items, any imports vould be eligible for financing, but no morethan a total of US$25.G million would be used for petroleum and foodimporta. All purchases, both public and private, under contractsamounting to US$0.8 million or more would be procured through ICB inaccordance with Bank guidelines. Imports for contracts of less thanUS$0.8 million equivalent would be in accordance with the usualpractices of the purchaser and, for imports from public agencies, vouldinclude as a minimum the submission of at least three quotations unlessthe purchase necessarily involves proprietary equipment. Expendituresfor goods procured under contracts of less than US$10,000 equivalentwould not be eligible for Bank financing.

96. The credit vould reimburse 100 percent of the foreignexchange cost of eligible imports on the basis of evidence that theywere paid for and imported after credit signing. Goode not eligiblefor financing include alcoholic beverages, tobacco, precious metals andstones, veapons and military equipnent. Imports financed by other

- 46 -

sources vould also not be eligible for IDA financing. The Central Bankwould be responsible for assembling requested supporting documentationcollected f'rom the commercial banks, to be provided as follows: Forsmall contracts between US$1O,OOO and US$200,000 equivalent, statementsof expenditures will be used. All documentation including invoiceswould be retained by the Central Bank for periodic examination by Bankstaff. The statements of expenditures would be signed by the CentralBank and vould include the country of origin, a description of goods,the date of payment, the currency in which the payment was effected,the exchange rate used for the U.S. dollar equivalent charged to theSpecial Accounts, and the name and address of the final beneficiary.For all contracta above US$200,000, full documentation would accompanywithdrawal applications. In order to facilitate disbursements, twoSpecial Accounts, one for IDA funds and one for AF funds, would beestablished in the central bank in lts name into which the IDA wouldmake two initial deposits of US$5 million for IDA and US$7 million forAF. The Special Accounta would be replenished at regular intervalsagainst withdraval applications, for a minimum of US$500,000 each.

Verification and Audit

97. To facilitate the monitoring of the use of funds under theCredit, disbursements would be subject to verification by a reputableinspection fira of quantities and quality, and except in cases of ICB,prices. The Special Accounts and the atatements of expenditures wouldbe audited by an independent auditor.

H. Counterpart Funds

98. The Governuent agreed that the Burundi franc counterpartfunds generated by the proposed financing would be deposited in theNational Development Bank and vould be used to finance operationsdesignated by the Government In support of its structural adjustmentprocesa and its development policy. The Government has indicated thatit would give priority in the use of the counterpart funds tofinancing: (i) the rehabilitation program of the Public Enterprisessector; and (ii) the Guarantee Fund for credit to small and mediuminvestors. In addition, the Governient would provide the Associationwith information on the use of counterpart funds, on a quarterlybasis.

I. Monitoring

99. Monitoring of performance under the SAL involves essentiallytwo complementary and inter-related activities: a more generalmonitoring of the progress on implementing the program and themonitoring of specific progress as a condition of tranche release. Theaction program described below reflects the agreements reached vith theGovernuent concerning the reforma to take place before crediteffectivenesa and specific conditions for release of the secondtranche. We have also included the actions which have already takenplace.

- 47 -

100. The folloving actions have already been taken by theGovernment under the proposed program:

(a) Agreement on the objectives and policïes of amid-1986/end-1987 financial prograo vith the IMF(paras. 23-28);

(b) An increase in the producer prices of tea and coffee fromFBu 15/kg to FBu 18/kg and from FBu 125/kg to FBu 160/kg,redpectively, (para. 50);

(c) Liberalization of the producer prices for rice - thegovernment intervention in the rice market is nov limited toproviding a minimum price. Producers are free to sell theirproduction to the IMBO-RDC;

(d) Preparation of a strategy and an action plan forrestructuring the Public Enterprises Sector (paras. 44-47);and

(e) Agreement on the level of public investment (para. 31);

101. The following actions vill be taken before effectiveness ofthe proposed credit:

<a) Implementation of the new trade regime (para. 60);

(b) Deregulation of prices for products for which imports havebeen liberalized (para. 63);

(c) Revision of the Investment Code (para. 68);

Cd) Increase in the credit limite above which the commercialbanks need approval from the Central Bank to FBu 10 million(para. 74(a)); and

(e) Initiation of liquidation procedures for four publicenterprises (para. 46).

102. The following conditions will be conditions of release of thesecond tranche:

(a) Preparation of the macroeconomic scenario for 1987-89,including level and composition of public investment andpublic expenditure program (para. 35);

(b) Review of the import controls still remaining on luxuryconsumer goods and on three groups of imported goodscompeting with local manufactures (para. 60(i));

- 48 -

(c) Completion of surveys on rural consumption and revenuepatterns and estimation, in consultation with IDA, of thelevel of producer prices of main export crops for the 1987/88campaign (paras. 50 and 51);

(d) Initiation of preparation of rehabilitation plans for thefive public enterprises to be rehabilitated in priority(first phase of the PE rehabilitation program) (para. 46);and

(e) Identification of public enterprises to be rehabilitated inPhase II (para. 46).

PART V - BANK GROUP OPERATIONS AND STRATEGY

103. The history of Bank Group operations in Burundi closelyfollows the country's political and economic evolution sinceindependence in 1962. During the political instability of the 1962-76period, IDA operations vere limited to coffee production, highways andwater supply. After 1976, with the period of increased politicalstability, lending expanded rapidly, notably in agriculture andhighways as well as in new sectors: fisheries, forestry, education,industry and rural development. Financing was also provided to improvethe telecommunications and pover network, explore the feasibility ofexploiting nickel deposits, strengthening the capacity of the Ministryof Planning and improve the management of urban services in Bujumbura.The effects of a decline in international aid programs and domesticfinancial constraints led to a slowdown in project lending in FY82-84which, however, was accompanied by a substantial increase in economicand sector work to assist the Government in the definition of policiesand to provide the basis for the selection of priority projects. As aresult of these efforts, IDA lending increased in FY85 and FY86 and theproposed Structural Adjustment Credit, the first policy-based IDAoperation in Burundi, was designed.

104. As of March 31, 1986, Burundi had received one loan and 27credits, totalling US$248.36 million, of which one loan and 13 credits,totalling US$82.8 million had been totally disbursed. Agricultureaccounts for 28.2 percent of total commitments; transport, power andwater supply together for about 41.1 percent; and education, localconstruction, and mining for the remaining 30.7 percent. Annex IIcontains a sumimary statement of IDA credits, and IFC investments.

105. Country assistance strategy. IDA's strategy is to continueto assist the Government in developing and implementing a realisticmedium-term adjustment program while pursuing a long-term developmentstrategy addressiug the country's structural constraints. Our policydialogue will be pursued through a series of Structural AdjustmentOperations. At the same time, IDA vill continue to support long-termefforts to develop human resources, increase agriculture production,and develop and maintain infrastructure which will have a significant

- 49 -

long-term impact on production. Priority has been given to the designand implementation of a program to control population growth. Giventhe broad development needs of Burundi and the .Leed to strengthen themanagement capacity of the Burundian administration, it is importantthat the Bank remain active in the main sectors of the economy.

106. In the agriculture sector, the projects are geared tointensify coffee production and quality (Ngozi, Kirimiro Projects),develop technical packages and extension services to intensify anddiversify fooderop production (planned Agriculture Muyinga, FY87, andAgricultural Services, FY88), protect and encourage more efficient useof land (Second Forestry Project, FY86), and improve water supply(FY86). In human resources, priority is given to the design of aprogram to control population growth through a planned Health andPopulation Project (FY88), and continuing assistance to primary andbasic secondary education and training (Third and proposed FourthEducation Projects, FY83 and FY88), as vell as technical assistance topublic sector management (Third and proposed Fourth TechnicalAssistance Projects, FY84 and FY87). Under the First Urban Project,the Bank has helped Government to establish a new urban policy,including cost recovery, while the recently identified SecondaryCenters Projects vill assist in improving communal organization andfinance, promote artisans, and generate off-farm employment in ruralareas. The Rural Water Supply Preject vill estrblish a new system ofcost recovery for rural vater supply systems. In the transport andcommunications qector, Bank projects vill contribute to lovering thetransportation cost of products to and vithin Burundi and to developingthe communications network, in particular in rural areas (Highways IVProject, FY85, and Communications Projects, FY80 and proposed forFY87). Finally, in the energy sector, projects and sector vork areassisting actions in key areas of forestry sector management, reductionof the cost of oil imports, and improvement in the pover transmissionnetwork and pover planning (Pover Project, FY86).

107. Project implementation. Project performance is, on thewhole, satisfactory. The disbursement rate of 27 percent in FY82-84 isabove the average for countries of the Eastern and Southern AfricaRegion. Physical implementation of infrastructure projects orcomponents (roads, schools, coffee stations, telecommunications) hasbeen satisfactory. In the productive sectors the record is mixed.While agricultural projects had significant success in increasingproduction and quality of coffee, as vell as forest areas, they had alimited impact on increasing food crop production because of theabsence of technical packages which could be readily adopted by farmersand the lack of a coherent policy on agricultural inputs and services.The DFC project did not succeed in developing a pipeline of smallenterprise projects in the industrial sector, partly due to the veakmanagement of the development bank. Operation of the glass containerproject financed by IFC vas affected by an overvalued exchange rate andthe heavy debt service of the IFC loan, which led to high operatingcosts and made it difficult for the products to compete in domestic andexternal markets. The lack of success of the fisheries project vas dueto its complexity iu relation to the institutional and managementcapacity of the implementing agency.

- 50 -

108. The impact of IDA projects in institutional development hasbeen slow but on the whole positive. In some projecta (e.g., coffee),the presence of an effective technical assistance team led to asuccessful project implementation, but it took longer to strengthen thecapacity of the local institutions. In education andtelecomunications projects, the institutional capacity efforts havebeen successful, as vas the Third Technical Assistance Project, vhichstrengthened the institutional capacity of the Planning and AgricultureMinistries. In most cases, IDA-financed projecte have provided auseful framevork for policy decisions. For example, discussions underthe education projects led, inter alla, to the adoption of cost savingsand cost-recovery schemes, a more equitable distribution of schoolfacilities, reorganization of secondary education, and development ofnon-formal education for adults. The Urban Project has accomplishedmajor changes in urban programs over the past several years includingthe lifting of rent ceilings and the adoption of cost-recovery schemes.

109. In addition to the policy dialogue conducted under the SAL,the FY87 economic work includes a study on employment generation with aparticular foeus on rural areas, a study to assess manpower needs, aFinancial Sector Study, a Transport Sector Study, and a CEM (FY87)-hich vill assess long-term socio-economic development issues andprospects, vith emphasis on the agricultural sector. Sector vork laprogrammed to cover most sectors as support of our lending operations.

PART VI - RELÂTIONS VITH THE IMF

110. Burundi has been a member of the IMF since September 1967,under Article XIV status. The current quota is SDR 42.7 million.There are no ongoing stand-by arrangements or special facilities. Thelast stand-by vas approved in 1976, and the last special facility(Compensatory Financing Facility) In 1979. As of January 31, 1986,Trust Fuad loan disbursements totaled SDR 18.57 million, of whichSDR 12.46 million is outstanding. IMF technical assistance to Burundihas included experts on foreiga exchange, research, bank supervisionand audits (1982, 1983, and 1984) and analysis of the country's fiscalsystem (1984 and 1985). The last Article IV consultation mission tookplace March 12-25, 1986. The Government has requested assistance fromthe Fund to prepare and implement a stabilization program to cover theperiod mid-1986/end-1987, which corresponds to the firat period of theGoverument's structural adjustment program. Agreement has beenreached as detailed in paras. 23 to 28.

PART VII - RECOMMENDATION

111. I au satisfied that the proposed Credit would comply with theArticles of Agreement of the Association.

- 51 -

112. I an also satisfied that the proposed African Facility Creditwould comply with IDA Resolution No. 85-1 adopted on Nay 21, 1985 bythe Executive Directors of the Association.

113. I recomend that the Executive Directors approve the proposedDevelopment Credit and the proposed African Facility Credit and thatthe Association vould act as Administrator of the proposed SpecialJoint Financing non-reimbursable contributions from Switzerland andJapan.

A.W. Clausen

Washington, D.C.April 30, 1986

1Ini

. t4

,ç~

l~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~.

-53 -ANNX ITALE 1 of 4

»t~ <w - .,X| ^ MCCI ~~~LuS lICO AnRs" NmIR cc

1 1 -- 0 .UTIIS16 moulu or Nom aica a. e7 maram <imm me. Do

TOTAL .1 27.1 27.r0.ACRICULTIUUAL îsa t.m

n AA (> .. .- 140.0 20.0 1043.

_;r oumon. aU cnt<XKILC Or OIL UqOIVALEN 6.0 7.0 11.0 02.1 511.5

voemnou un inaL munoncoPoPuLanT1Sn1-YA <niMâNuB) 2927.0 3350.0 4641.0 2UIWII POILATIOin (Z or TOAL 2.2 2.3 2.4 20.1 32.0

POM9.ATIOU FWUCTLCWIPOFULTION l Tu 2000 (NLL) 7.4StATIOAY OPULATO (N<LLN 24.0POPLATIONI SNENTU 1.9

OPATIoN DnMImTpu sq. s. 105.2 120.4 160.4 33.2 65.1PUE IiQ. M. AmI. LAOD U1.2 170.2 194.9 112.0 126J

roru.ano £A: srciuR (x>0-14 TU 2. 43.7 43.2 46.0 45.6

1-64 VS 4.3 S3.2 2.9 10.0 51.5us Am oA: 2.J 2.9 3a0 2.9 2.7

FOelaTtOU C mO uar <Z)MOA,L. 1. 1.13 2.2 2.a 2.9

tllAIS 1.0 1.3 2.9 6.4 5.1

u mîu mti (< nas> 47.0 46.4 46.5 47.2 47.0CRIIDL UamRAE< U 100WUS1 25.2 24.3 1" 17.0 15.0cams UROPOCrtCO RATE 3.0 3.0 3.2 3.3 3.2

acptoi usa <nlous> .. .. ...in <F NA ) .. .. 1.0 3.3 64

-m -m ansxmImm OF Faom vD. nu CAtTé<1969-71-100) 103.0 100.0 95.0 03.3 *2.J

FME CAPlTA SDPPIT 0rWCAonn (z or umquuuuuutm> 104.0 105.0 97.0 07.7 t0.S

nmzDSi<a(Cls aM r D2.0 07.0 76.0 51.9 55.OF 101Wl AnAIL AID PWLa 29.0 31.0 31.O J U.7 16.5

tIxiW (<SE 1-4> mm mat 41.6 34.4 25.0 23.1 t4.6

ti. minc. Ar ma (s>) 41.0 44J. 46.0 47.0 52.0flUiT mm. RT (mu SHWS) 175.0 162.0 123.0 119.5 lesà

ACSS TO SAMt WA (CPUl)TOTAL .. .. 24.0 f 27.1 42.4

mUR .. 7n.o 0.0 A 6. 67.RURAL .. .. 20.0 a 19.3 35.0

ACS Tu szcu DisLg(Z OF FOFULAtZCR

TOIM. .. .. 35.0 J! 26 .9uau .. .. 40.0 J! .4 57.7

RURAL .. .. 35.0 a 20.0 20.7

FoPULàTON VER MCIS 90900.0 5530.0 .. 27901.7 11791.7fP. ma fhRC PMO 4640.0 7490.0 .. 330.4 24uPOP. va IOtaL Ma

TOL 90.0 740.0 .. 1271.6 91.1UASU 30.0 110.0 .. 420.2 SJ.

RURAL 3010.0 1070.0 .. 322.3 4371.9

auSSOuS PR Am .. .. .. .. 27.2

menAVERAE Sm OF NOUsCOLD

trAL .. .. 4.3 J..URmm .. .. s.> .j.RURAL .. ..

AVERE on. OF PESUMONTArAL .. ..

mota ..LIC ..H T

TOTdI .. .. 0.6A.DURA. .. .. 22 .RRL ........

- 54 - ANNEX I

tA SLC 3* Page 2 of 4

UIItUIDI - OC.U lDICATORS DATA "RIEfU nDi WENNC COUPS (CLOuT AVERS) la

MOI Lmwmm<or aucSu ESTIMTE) fbN IICC îuoe APRICA IOLE IgCOS

1îoêtk 197aLt- mUmrAd& Soum or SwnUA anFrI S. or SA"

ADJUSTED EUOLLICNT RATIOSPRINACt TOTAL 18.0 29.0 33.0 67.8 95.7

KAML 27.0 39.0 41.0 77.6 100.0PUIALE 9.0 1I.0 25.0 54.0 83.2

SECONDRIt TOTAL 1.0 2.0 3.0 13.5 17.1IULE 1.0 3.0 4.0 17.9 25.0FPUALE 1.0 1.0 2.0 9.1 14.8

VOCATIOIAL (x OF SECONDA?Y) 35.0 13.6 15.7 13.2 S.9

OP IL-TEACIIR UTIOPUMAS? 36.0 37.0 39.0 44.9 41.1SECONDA 15.0 11.0 16.0 le 27.4 25.5

PASSRECER CAIS/TI1UOSAD POP 1.0 1.1 1.3 /t 3a 20aRADIO ECEIVERS/TIOU rAID .. 19.4 38.0 55.8 107.8TV RECIV TUSMW PNO .. .. .. 2.6 20.5NSPAES <"DAIL? CEUSZAL

lnrsutr>) CiOJLATIONPR OUSm POPULAON .. 0.1 .. 5.0 18.4

CDIIEA AMCAL AErUNDAUCE/CIPITA 0.1 t 0.0 :O0 0.5 0.4

otM romTOTAL LA OR FORCE (IOS) 1534.0 1676.0 2090.0

PUIALE (PECENT) 45.9 45.3 44.9 3.2 36.2ACRICELTJRE (PERCENT) 90.0 87.0 84.0 |d 77.5 54.5INDUST1Y <PERCENT) 3.0 4.0 5.0 fd 9.7 18.3

PARmCIPATION RAE (P<M )TOTAL 52.4 50.0 46.8 39.3 36.8KALE 58.3 56.0 53.2 50.9 47.1rmew. 46.9 44.4 41.3 7J.1 27.2

ErIUc DEPENDNr RATIO 0.9 0.9 1.0 1.3 1.3

1COE DISDTXEII;-;CZNT oF ruvAEr IFOONCUECZIvD CtY

nCEaw 5X oF nouSCD nEICHEST 520X orScEUOZAS ........ELC04Z 20 OF UOUISEOLDS ..LOIUST 202 OF MOUSEIOLDS ..LOUES 403 OF MOSEUIS ..

LCVEL TUS5 reROUSrIESTDIATE AISOLUrS POFOIS? DLEME (mS FER CAPITA)

UCRIA .. .. 213.0 165.5 590.7mIRAI. .. .. 136.0A 95.0 275.3

ESTINATED RELATIVE ro13? 11CMoELEVEL (<SS PER CAPITA)

UR AN .. .. .. 113.1 545.6*DRAL .. .. ~~~~~ ~ ~ ~~~37.0o .a.6 201.1

zsnsin roP. Lum AISOLUTEPOVETY INCONE LEVEL (<)

tUaJN .. .. 55.0 36.6DR AL .. .. 85.0 j 61.8

UDT AVAILAE

naT~~~~~~~~ 0 rL uLàNUl~~~~~~~~I OP LICAIs

/o TIe group an'rau for *ach ldmitoor *re poptlattao g td arttt a. Covongo c «ooutrl*og the 1 Iteator daponda ae « avaLLtly of dta ad la mot *u5fome.

/b UnlaJe oChIV mtedt d Dota for 16" roefr eo amy yar btom 195W9 *n 1961; mDota fer 1970" botee.1969 *d 1971; *d d ta for "et U.o.s e et ta t ot b em 1981 *ed 393.

/ 1977; Id 1980; le 1979; If 1976; f5 1978; th 162.

1UE, 1985

.

- 5S - ASEX IPage 3 of 4

DV31NOS OF SOCLAL INDICA1ICNota Akicugh du daià m dmwa fms ourm uuevaflyju d demnutcm ulbodiadvcand rimile it aauld auiobi noted ihet thiy may ns bctminadnmtllycm.le beou ef tic lack ortmadud_ dSdaima uamd o. mcd by diRtent counute in ecallcins ti data. lTi daim a nonmeticla usdW godentbe eoice ofmugmltude. i_ale tri6de, nnd dawhti. eva mjr dcean betiv oeena.uTic teraic. yrwps am (I) tiu c e -aumtuy goup cf dmi aubji country and (2) m cemty gup ith smshat hiier avemp hucam m <ha caumtrygreoupc(ticubjhtanuny <encupt for Hi icme Oil aEpnc reup g hoire u 'MIddIe Inamom Nornb At" imd Mddle Eau' lachuen b«ueua itronge

cl.cultl amUnSi.). ln tlc remm. roup data the avruge are population weiihted atdtimcl me ne fior rchi Indicator and alown only be mujorityai thc comula in a po_hp i. dat (ersth ater Snce tic cohreaeri acof mu ntana4ug t lmdtndipcmd on ie avimlhty ofldainma meSa uin mif.eaution mot bc emrciaid in reatSi a*n, da me indictir to mudi lbeai averp are only uefiatn emp itg ti value oa oam icndklor ai a mimi mamgtdm conti> md reisem. pama.

AiEA (thousmd sq.kmn) CrJ Din Rte (per tgeud>-Number of live births in tb,e yearTnt-Total surface aria compriuing land ores and inlad waters; per thousand of mid-year population; 1960. 1970. and 1983 data.1960. 1970 and 1983 data. Cr/ Deah Date (per t*es Jd>-Number of deaths in the yer

AàE stinate of agriculturd are umed tenporarily or per thousand of mid-yer population; 1960. 1970. and 1983 data.permanendy for crops. paures. market and kitchen garden or to J rakn Repnéeth Rate-Averge number oe daugtt e womtmnlie fallow, 1960. 1970 aid 1982 data. will bear in ber normal reproductivi period if shi eperieuces

prescrt age-specific fertility rmtes: usually five-year averagesendingGPN PER CAPITA (USS>-GNP per capita estimates at current in 1960. 1970. and 1983.nmarket prices calculated by -am conversion nuetitod as World hadfry PlanS g-A ceompa Asmal <thauamaf-Annual nuis-SOk Ads (1981-83 basAs); 1983 data. berotacceptors obirth-controldevices underauspicesofnational

ENERGY CONSUMfION PER CAPITA-Annual apparent family planning program.consumption of commdi pimary energy (cc and lignite. hally PmLrsdumn (pecer of artel itnaaaeu-The percen-petroleun. natural gas aid hydro-. nudear and geothermal elec- tage of married wonen ofchild-bearing age who are practicing ortridcity) in kilogramns of oil equivalent per capita; 1960. 1970, and whose husbands are practicing any form oe contraception. Wbmen1982 data. of child-bearing agi are geneally women agcd 15-49. although for

some countries contraceptive usage is measured for other agiPOPULATION AND VITAL STATISTICS groupE.

Total Populadaun, M-Veur (the.ssàJAs of JuIy 1. 1960, 1970. FOOD AND NUITIONand 1983 data.

Urée P.pfatsu (ercur c t.tfl-atioci'.~ ~~ ~fun*x fhodh.écds Per Cappt. (1969-fl - 1CM» -1 dex ofiperrm ( fmiof tis Ratio of u rlan to total capita annual production of all food commodities. Productionpopulatiao difent ns of urban as may e compar- des animal fied and seed for agriculture. Food comnmoditiesabiity of data among counties; 1960M.1970. and 1983 data. include primary commodities (c.g. sugarcane instead Of sugar)

PepdasvPrjeniss which are edible and contain nutrients (e.g. coitec and tea arePopularion in year 2000-The projection of population for 2000 exduded) thy comprise ceras, root crops. pulse oil seeds.made ror cach cconomny separately. Staring with information on vegetables fruits, nuts. sugarcane and sugar beets, Iiestock. andtotal population by age and six, fenhlity raes, mortalty ras, and livestock products. Aggregate production of eah country is basedintenational migrtion in the base year 1980, these paramiertas on national averge producer pricr weights; 1961-65. 1970. andwere projected at five-year intervals on the basis of genealized 1982 dama.assumptions untl the population became stationary. AP CGsp Sapf of Caloris (percenrt ofreqsàe >- Comput-Stadwary popsldala-Is one in which age- and sex-specific mor- id from calorie equivalent of net food supphes availablc in countryiaiity rates have not changed over l long period. whik age-specific per capita per day. Available supplies comprise domestic produc-fertility rates have simultaneously remained ai replacement level tion, imnports lms exports. and changes in stock. Net supplies(net reproduction rate- 1). In such a population. tIe birth rate is exclude animal fied, seeds for use in agriculture. quantities used inconstant and equal to the deate rte, the age strcture is also food processing and loues in distribution. Requirements wareconstant, and the growth rate is mme. The stationary population estimated by FAO based on physiological needs for normal activitysize was estmated on the basis of the projected characte_is of and hbalth considering environmental temperature. body weights,the population in the year 2000, and the raie of dcline of treihty age and sex distribution of population. and allowing 10 percent forrate to replacenent level. waste at household level 1961. 1970 and 1982 data.Poplation MoJiemrae-ls tie tendency for population growth to Per CGaa Sp4 eof Puel. (gramsper dayf-Protein content ofcontinue beyond the time that replaemnent-level fertility las been per capita net supply ofrood per day. Net supply of food is definedactieved- that is, even after thi net reproduction rate bas reachd as above. Requirements for aIl countries established by USDAunity. The momientum of a population in the year t is mItured as provide for ininimurn allowances of 60 grams of total protein pera ratio of the ultimate stationary population to the population day and 20 grains of animal and pulse protein. of which 10 gramsthe year t given ith assumption thai fertility mnins at replace- shouid bi animal protein. Thiese standards,are lower than those ofment leel trom year t onward, 1985 data. 75 grams of total protein and 23 grans of animal protein as an

>i,ar , DM*> average for the worid. proposad by FAO in the Third World FoodPer sqk»L-Mid-year population per square klometrr (100 hec- Supply; 1961. 1970 and 1982 data.tares) Of totl ara; 1960. 1970. and 1983 data. . Pr C4avt Aue Spp> uM Aml"l adg Nlze-Protein supplyPr sq.kna. agri-kra dn ead -Computed as above for agriculturl offood derived from animais and pulses in grams per day. 1961-6.land only, 1960. 1970, and 1982 data. 1970 and 1977 data.

Popdal g Srrte (<p.ema-Cit-Iden (0-14 years). work- ChU (qes 1 ) Deatl Roae (per frsd>-Number ofdeaths ofing age (15-64 years)and retired (65 yearsand over) as percentagi chikdren aged 1-4 years per thousand children in the same ageof mid-year population; 1960, 1970, and 1983 data. group in a given yen. For most developing countries data derivedA>pwulua GreCé Rate (peeeu -maal--Annual growth rates of from 1'fr ' bies; 1960. 1970 and 1983 data.total uid-year population for 1950-60. 1960-70, and 197083. HEALTH

Pu Cro Rate gorwtAnnual rowth rates Le E.rpeaucy p in (.yes)-Number of years a newbornof urban population for 1950-60. 1960-70. and 1970-83 data. infant wouid live if prevailing patterns of mortality for all people

- 56- ANNEXI Page 4 of 4

ai the time ar o its birth were to stay the amme throughout it lire; PipM-ieacher Ratin - prlor,r. and secrroari-TataI utudents en-1960. 1970 nud 1983 data. rolled in primary and accondary kvels dividcd by numbers of

1aau M Rto Jte (pt urth.sa.-Number of inarnis who die teachers in tue corresponding levelsbefore maching one ycar of ae per thousand live births in a givenyar; 1960, 1970 and 1983 data. CONSUMMIIONAces go S#a lr (pfere t tiof p.pmltn-tt1. nias d Passagr Crs (petr tl«a pop Jmha-Passnger car% comnnvra-Number of people (total, urban. and rural> with reasonable prise motor cars sating lus than cight persons; excludes ambul-acess to mre water uupply (includes tnated surface waters or ances. hearses and military vehicles.untreated but uncontuminated water such s that firom protocted Raio Rueurs (per hoad sipopul)-All Iypes Oa receiversboreholes, springs and sanituay welis) as percentages o their respec- for radio broadcasts to general public per thousand of population.tive populations. In an urban aa a public fountain or standpost exctudes un-licensed rceeivers in countries and in years whenlocatod not mon than 200 metrs lroin a bouse may be considered - registration of radio sets was in effect; data for recent years malas being witiin masonable aces io that house. In rural areas not bc comparable since most countries abolished licensing.reasonable acces vould imply that tbe housewite or members o thehousethold do not bave go tped à disproportionate par of the day TeNrd . ptr thosaWvpaJ-TV rectivers for broadcaçin fetching the bavaly s we a d neds. to generai public per thousand population: excludes unlicensed TVus fetchlng tht Diamll9 WStU ueeds e}- t recivers in countries and in years when registration of TV sets wasAccusa go Extes. Disposa (peceu of Poplatigie.-sotal. aria.. inefamd mua-Number of people (total, urbans and rural> served by n eexcreta disposa as perceuges oa their respective populations. NrwserCrider thmsmdpopdoiJ-Showstheaver.Excreta disposal may include the collection and disposal. with or age circulation of "daily general mnturest newspaper. defined as awithout treatment. of human excreta and waste-water by water- periodical publication devoted primarily to recording general news.borne systems or the use of pis privies and similar installations fi is considered to be -daily r "i appears at hast four times a wcekPopulation r Phpsd.u-Pbpulation divided by nunber of prac- Cin.. Araa Atteduce per Capita pur Vear-- Based on thetising physicians qualified fram a medical school at university level. number of tickets sold during Ithe year. including admissions to

Popalaio r Narsing Pos.-Ppulation divided b> number of drive-in cinemas and mobile usts.practicing mak and female graduate nurses assistant nurses. LAOR FORCEpractical nurses and nursing auxilaries. Total Lao Fore (rAomsais-Economically active persons. mn-

Po~pSsà.o pr flosud éd-tota. wré.. ast SflrPOPUlautot cluding anned forces ani unemployed but excluding housewsves..(tol. urban. and rural) divided by their respective nutber of a tudeng etc.. covring punlaon of ailudge toninhospitai bes avalable in pvbc and private. genea aid speaaidstuen tsrtc arcnoer on m bpopeulation ai ail ages. D1fintions mhospitals sud rehabiblation ceuiters. Hosputals anc esanutcutrabaeltiomaabeh160m97end193daapemanenuiy staffed by at hast ont physician. Establisbments prov- »enia (p)rce-Ftal labar force as pereentage oa total laboriding principally custodial care are not included Rural hospitals. force.howcver. ricude health andmedical centers not permanently stafed Agricass (permu)-Labor force in fiarming. rorestr>. huntingby a physician (but by a medical assistant. nurse. midwife. etc.) and fishing as percentage of total labor foroe; 1960. 1970 and 1980which offer in-patient accommodation and provide a limited range dataai medical facilities. lsdssry (puretém -Labor force in mining. construction. manu-Ad4sim per Hoipisal h--Total number of admissions tO or facturing and clectricityv. watcr and gas as percentage oa lotal labordischarges from bospitals divided by the number oa beds. force; 1960. 1970 and 1980 data.

Paricipation Rare (pecentd-eosal. muk, sdfemaf-ParticipationHO:UING or activisy rates are compused as total. maIe. and female labor forceAeroge sireair Homdfm (pemas er ha e rdd)-sosal ra. as percentages of total. maie and kmnale population of all agessdrrai-A houseboldconsistsofa groupofîudividualswhoshare respectvdyl: 1960. 1970. and 1983 data. These are based on ILOCsliving quaners and their main meals. A boarder or lodger may or participation rates refleting age-sex structure oa the population. andmay sot b induded in the household for statistical purposes long ttme trend. A few estimates are from national sourcesAvurae Nrsbur ofFensa r Ro.m-rosa, arda, and rurl- Erosomu DupeMusc; Ratd -Ratio Oa population under 15. andAverage number of persons per room in all urban. and rural 65 and over. to the working age population (those aged 15-64Joccupied convenional dwelings. respectively. Dweltings excludenon-permanent structures and unoccupied parts. INCOME DISTRIBLUTIONPercums of DmeuIss vs Elec soral _n, se rrai- Percaagu of Troal Disposubk lon (otà casA se ét.d>-Conventional dwellings with electricity in living quarters as percen- Accruing to percentile groups of households ranked b> total bouse-tage of total, urban. and rural dwellings respectivel1 hold income.

EDUCATION POVERTn TARGET GROUPS

A4jussu f iUe Ratios The following estimates are very approximate neasures o po'tn>Prlllar ac*oh - oral. msa ad femae-Gross total. male and levels. and should bk interpreted with considerable caution.fesmai enrolmeut of a ages at the prinary level as percetages ai Esfûnatd Absoas Ponts iscow Level WSt per cJpia> -orb- erespccive prmary choaage populations. While many couatries serdral-Absolute poverty income level is that income levelconsider primay chool ae to b 6-11 years. others do not. The belov which a mininal nutritionally adequate diet plus essentialdiferemnces in country practices in the ages and duration of school non-fooJ requirements is not affordable.are nflectcd in the ratios given. For some countries with univesal Euted Reative Prersy burau boul (USS r capta>-mwba_education. grass earolument nay exoeed 100 percent since sme se rm'a-Rural relative poveny income level is one-third ofpupils are below or above the countryWs standard primary-school average per capita personal income of the country. Urban level is

age. derived from the rural level with adjusiment for higher cost orSucondary scia - rotal. male and femoa-Compuued as above: living in urban aras.secosdary education requires at mast four years of approved pn- Eatis.ed Popatien relow Aisouru Pers ; scowm Leue! (pur-mary instruction; provides genral. vocational. or teacher training cessa-arisase rurl- Prcs Pt of population (urban and ruralinstrucions for pupils usually Oa 12 to 17 years ofage. correspond- who are absolute poor.ence courses an gmeneraily exduded.Vocationa! LiroNNaRi (perni of sâcondory.-Vocational institu- Comparative Analysis and Data Divisiontios indude t_chuiral ladusui, or other programs which operate Economic Analysis and Projections Departmnentindpeadendy or as deprtits oa secandary institutions. June 1985

- 57 -

Pal I .f 4

.c-mm»cwIc nxCeTM

Populasions 4.7 mIioner empiai m240 (04. Atlas filure>

Aseount A.ere.e Annuel Inersese tu) sh-e o O et Market Prîtes (3>(Ni.l l in Un (et Constant Prise>) Cet Carrent Prie»)

Indîcetars Carrent Pr cea) ______________________--______--________--__________--------_--______----___--________________9004 1070-1 1-84 04-U0 08-o 00-98 l07e 1w00 9le2 lu 1900 1008

MATIIAL ACCoINTS

Crse DoasetC Product/e/ 026.2 4 9 -2.1 8.8 4.0 4.3 100.0 100.0 100.0 300.0 100.0 100.0CP f"eeor ceet 833 4 8.7 -3.0 4 a 3.8 4.2

Loricultura 400 2 8.0 -4 2 0.8 3 0 3.4 84.0 88.3 52.3 01.0 40.2 47.5Secendarj 144 4 6 2 2 0 1.4 4 a 8.7 14.3 12.7 13.0 18.0 10.0 17.7er.1ioe/b/ 228.7 7.0 2.0 4.4 3 4 4.3 31.7 32.0 33.0 33.1 34.0 34.8

COnsuetion 870.1 3 à -1.1 1.9 2.8 3.3 94.8 100.4 101.1 ff.8 01.0 07.1Cies In-eteet 177.4 0.1 8.0 4.2 2.0 4.0 14.0 13.3 14.3 16.0 10.0 20.1Emporta CNRS 111.0 1 2 -3.2 10.0 48 8 .5 11.7 7.7 10.0 11.0 13.7 11.7Importa Ft; 20 0 -1 a 13.3 0.1 3.2 3.7 20.2 21.3 28.8 23.8 24.0 24.4

Cross eNtionel Sn.in 1 60 1 90. -13 2 10 9 8 0 7.3 0.1 3.0 2.0 0.4 10.8 14.0

aaount Acaragu Annuel Increme (1) Ceepof ltion of erchendise Trdde (iil" ion USI (et Censtsnt Prise) (et Current Primes)

Carrant Fric s>104 1078-11 01-U4 U4-08 08-00 e0-95 1070 1000 1002 1008 1"0 19NI

E#TEIAL TRAOE

Mrch%ndî *e Eotorta 08 a 1 2 10 16 5 6 3 1.4 100.0 100.0 100.0 îoe.o 100.0 100.0Caff- t3.0 6.2 2.2 11.5 3.6 3.6 08.0 00.0 87.3 85.1 80.1 72.6.n-caffes 5.0 /c/ -14.7 0.6 30.3 8.0 11.4 14.1 11.0 12.7 14.e 10.0 27.4

Merchand;i Iporta 107.0 -1 7 11.2 0.4 3.3 2.7 100.0 I00.0 100.0 100.0 100.0 I00.0Consu"er gods 5s.5 -13 0 8.6 1.0 1.3 -1.3 45.7 42.0 20.1 3I.2 28.7 25.7. chinsr, 47 S -8.6 20.1 12.6 3.2 4.6 30.1 311.S 41.4 20.2 27.7 29.1Oth*mr 80.0 16.0 9.7 -0.0 4.7 2.8 24.2 10.6 30.5 30.6 43.6 45.2

1070 1980 1801 1902 1983 1004 ls5PRICES ANS TEeS OF TRACE ---------- ------------------------------------------------------

CD efto, (1070.1tU) 282 9 312.5 291.0 310.5 335.1 3S6.6 411.0E.chen.g Rate(U!SUl-FR) 90.0 O0 0 00.0 00.0 03.0 110.7 120.7

Eeport Price Ind-.(1970.200) 318.5 329.6 224.0 243.6 301.0 404.3 399.0Import Pr.ce Inde.(1970100) 331.2 40E 0 420.2 442.9 474.7 476.2 400.0Terme cf Tede Inde.(1970.100>) 6 2 800a 53.3 55.0 63.4 84.9 83.1

.4- s cf CDP

PUBLIC FINANCE 2078 1980 19f3 1W7 1090 1005

Carrent Revdnue ,df 10 a 16.0 16.7 17.2 17.5 18.0Carrent E.penditre. 11.7 10.7 12.0 10.0 10.5 0.5Surplus(.> or Dfecit(-) 7.3 5.4 4.7 6.3 7.0 6.5Capital E.oenditure 11.6 il 0 17.2 13.5 13.3 12.5Fr-ie.n Finenng 5 6 7.2 13.0 9.8 7.7 6.2

OTH51 IISICATORS 1978-81 01-04 84-05 85-00 00-05

ChP Crceth Ratse() 5.8 -2.0 5.5 3.6 4.4t° par Cepits Crceth Rets 3.0 -5.0 2.8 0.9 1.5ICKW 3.8 6.7 .. 5.1 4-4Mera.nelSavhi.çsfts OS6 .. 0 2 0 1 0 2

Foo not_s

jet At ee-otant Mr,kt ponce16/ Includ- i rdi.ect te.rnici Includas re-.eporte

/d/lnelud-- fo,eipn orrte,

- 58 -

Polo 2 et 4

m r cditi n Fol cmlbisai Capital sud Omit

AaHI io et UP MI Ciuront FrIlas>

PopJmloo: 4.7 millioOU es emplis 0 2 40 (100e4>

Lotu-l Prl i.. F..uJusd

n@70 1000 îçlo 102 300 100s4 100 £00 1007 1_0 100 10.0 tom4S

Cu"ront lount bisous_______________________

ier.s .4 Omeea tei 105.2 S.1 74.0 07.0 0.1 0.0 110.0 10A.8 157.32 1u.7 10.8 108.4 843.8. of m luh Cutso _2.4 01.8 06.0 70.5 70.1 ".O O.4 141.3 1.0 U0.6 U8.0 140.4 2U9.0

Imorta o9 GCou e;e 151.7 107 2 103.2 214.2 1u.1 187.0 103.0 211.0 213. 257.2 270.1 10.1 444.0Soryius à Se_me -44.0 -30 0 -44.7 -88.3 -00.0 -74.3 -07.0 -ee.o -41.2 -0S.0 -104.0 -101.2 -U18.8mat Tonfsoora a4.3 47.2 03.7 58.0 81.1 44.4 52.0 47.3 40.0 80.0 8.O D.S 07.1

Capital count

Privsts Dirmt Inoestmnt -- 0.0 0.6 1.5 0.4 0.0 1.7 2.2 2.0 3.0 4 0 6.4 13.0Capital grant, 2S.4 35.2 30.s 7.1 30.0 80.a 44.0 45. 40.0 40.4 83.1 87.2 71.3

.LT Ln (oat>1 0.e0 40.0 21.7 82.5 110.7 e2.3 58.O 100.1 04.0 00.8 00.8 a 0.1 100.4ut shici: Amrtiastion -2.6 -4 2 3.7 -3.4 -6.2 -7.8 -10 1 -21.6 -24.7 -2.8 -24.0 -24.0 -0.5

OUM, Capitel(Short-Turm) -4.8 12.0 12.4 11.1 20.8 _1.0 11.0 -6.0 -1.0 4.0 4.0 0.0 0.0Mat Errure £ ODmiaue -7.0 -5.6 -17.6 -0.1 -11.0 -0.5 S.7 0.0 0.0 0.0 0.0 0.0 0.0

O0orsil Baance -4.0 -0.7 -7.0 -24.0 12.8 -3.4 10.0 54.0 22.0 0.0 -2.2 -2.5 18.0

Fi.nmueoog

_as e Nosnt 4.0 0.7 7.0 24.0 -12.3 3.4 -10.0 -84.0 -1.0 -0.0 2.2 2.5 -IS.O

haern LoIsa (grosle) 10.0 104.7 08.2 23.1 32.0 25.1 27.4 01.4 105.4 112.4 110.2 107.7 170.7Rosons aes muth- ;«_e ta 6.7 6.1 4.1 1.1 1.0 1.2 1.2 3.4 4.0 3.0 3.0 3.2 3.5

Actus Prola. PrOjoi«es

Estre-l Csp tal ens DOit le7ç 1i9 lisa IÇla 10U8 10eu 1907 le" 1900 100o 0 1001 102 1005

Crus. Diurs.mo»t 41.? 4'5.0 29.7 7ç.0 U3.3 121.7 119.8 115.0 115.4 112.7 112.5 114.1 230.0H1et.,rl 15.0 17.0 13.2 10.0 20.0 34.3 20.0 20.0 2S.1 25.7 27.2 20.0 32.2

moit;latiral 23.0 26.0 19.5 80.9 75.0 87.4 00.0 0.0 30.3 07.0 85.8 00.0 00.7ot sh;ch: tM 11.4 11.6 10.4 28.1 20.7 S0.9 52.1 84.7 s8 58.4 58.0 61.8 75.2

tif 7.4 0.3 -- -- -- -- - -- -- -- -- -- --

Fiononcial sd Suppieora 2.0 0.2 -- 12.1 - - -- -- -- -- -- --

E-ternal Dobt Pub. à Publicly iuarmntasDobt Ou-tandi0 mnd Dimb.r-ad 110.4 1'13 1b7.2 334.4 401.9 546.2 60. 777.6 05.6 053.0 1045.0 110.0 1137.0lUdisburo_d DObt 127.1 1U3.6 207.0 252.5 277.6 207.3 220.5 210.1 205.5 233 212.1 255.9 2a0.0

Dobt S."; ceTotal S.ice Psysmta 4.2 6.2 5.4 17.3 25.3 31.S 35.6 37.1 37.2 37.0 30.6 3S.3 4S.0

lontrnat 1.4 2.0 1.8 0.1 12.8 0.0 10.0 11.8 12.6 13.3 14.2 15 17.5Papmst m 6 smporta 4.0 10.5 6.1 24.2 22.1 11.9 20.5 20.0 18.0 17.7 16.8 14.6 12.5

LA S Omit Ootataoioneut sd o? must rcent

Ve., (le")>

Mtu"rity Structure uf DObt Outataodio 0 31

Principal duos itde n o 5 10m ld.0

Inter_st Structura of DObt Outatoodinq 2.7Int Mst due *ith;n 5 esr a 0.1

/1/ Doa oct includs rsurc.- freo tI Structura Adjustot FaS Iity

- 59 -

Annex II(Page 3 of 4)

STATUS OF BANK GROUP OPERATIONS IN BURUNDI

A. STATEMENT OF BANK LOANS AND IDA CREDITSEXPRESSED IN US DOLLARS(As of March 31, 1986)

AmountLoan or US$ MillionCredit (Less Cancellations)Number Year Borrover Purpose Bank IDA L/ Undisbursed

One Loan 2/ and thirteen credits fully disbursed. 4.8 78.03

976 BU 1980 Burundi Second Education - 15.00 0.01

1049 BU 1980 Burundi Urban Development - 15.00 4.67

1058 BU 1980 Burundi Telecomunications - 7.70 0.79

1154 BU 1981 Burundi Nickel Exploration - 4.00 0.44

1165 BU 3/ 1981 Burundi Kirimiro RuralDevelopment - 19.30 7.64

1192 BU 1982 Burundi Integrated RuralDev./Ngozi III - 16.00 9.05

1230 BU 1982 Burundi Local ConstructionIndustry - 5.20 2.64

1358 BU 1983 Burundi Third Education - 15.80 4.53

1419 BU 1983 Burundi Ruzizi II Regional - 15.00 11.27

1456 BU 1984 Burundi Third TechnicalAssistance - 5.10 4.35

1583 BU 1985 Burundi Fourth Highvay - 18.10 41 19.52

1593 BU 5/ 1985 Burundi Power Transmissionand Distribution - 12.30 4/ 12.30

1620 BU 1985 Burundi Second Forestry - 12.80 4/ 13.77

1625 BU 1985 Burundi Rural Water Supply - 9.50 4/ 9.95

Total 4.8 248.83 100.93Of which bas been paid 4.8 0.47Total now outstanding 0.0 248.36Amount sold: 6.48Of which has been repaid: 6.48

Total nov heldby Bank and IDA 0.0 248.36

Total undisbursed 100.93

- 60 -

Annex II(Page 4 of 4)

B. STATEMENT OF IFC INVESTMENTSEXPRESSED IN US DOLLARS(As of March 31, 1986)

Type of Amount in US$ MillionYear Obligor Business Loan Eguitv Total

1981 Verreries du Glass Container 4.8 0.8 5.6Burundi

Total Gross Commitments LessCancellations, Terminations,Repayments and Sales 4.8 0.8 5.6

Total Commitments NovHeld by IFC 4.8 0.8 5.6

Total Undisbursed 0.1 0.1 0.2

l/ Prior to exchange adjustments.

2/ Extended in 1957 to the Belgian Trust Territory of Ruanda-Urundi forthe improvement of the Bujumbura-Nuramvya road and the expansion of thelake port of Bujumbura. The loan, which vas guaranteed by the Kingdomof Belgium, has been fully repaid.

3/ Including a NORAD Grant participation of US$5.8 million.

4/ U.S. dollar value at signing dates.

5/ Not yet effective.

- 61 - Annex III<Page 1 cf 2)

BURUNDI

FIRST STRUCTURAL ADJUSTMENT CREDIT

SUPPLEMENTARY PROJECT DATA SHEET

SECTION 1: TIMETABLE OF KEY EVENTS

(a) Identification: November 1984(b) Preparation Mission: May 1985(c) Appraisal Missions: November/December 1985

January 1986(d) Negotiations: April 1986(e) Planned Date of Effectiveness: July 1986

SECTION II: SPECIAL IDA IMPLEMENTATION ACTION

Governuent to contract with a reputable firm qualified to verifycost, quantities and prices for goods purchased under the Credit exceptthat cost verification vould not be undertaken for goods purchased throughICB (para. 97).

SECTION III: SPECIAL CONDITIONS OF EFFECTIVENESS

(a) Implementation of the new trade regime (para. 60);

(b) Deregulation of prices for products for which imports have beenliberalized (para. 63):

(c) Revision of the Investment Code (para. 68);

(d) Increase in the credit limits above which the commercial banksneed approval from the Central Bank to FBu 10 million(para. 74(a)); and

(e) Initiation of liquidation procedures for four public enterprises(para. 46).

SECTION IV: SPECIAL CONDITIONS OF THE CREDIT

Regarding the SOSUMO sugar project, the Governument will:

(a) Not enter into any new commitment with respect to the projectuntil it has carried out a detailed analysis of the proposedinvestment and folloving consultation between the government andthe Association.

- 62 - Annex III(Page 2 of 2)

(b) Contract vith a reputable management firm, vîth terms ofreference and qualifications acceptable to IDA, for themanagement of the plantation and of the factory taking intoaccount existing requirements of other donors;

(c) Ensure that the full cost of production vill be borne by theconsumer and that there will be no operating subsidies to thesugar project from the budget; and

(d) Ensure that SOSUMO will be audited annually by an independent andreputable firm vith terms of reference and qualificationsacceptable to the Association, and that the audit will besubmitted to IDA for review and comments vithin six months of theend of each fiscal year.

SECTION V: CONDITIONS OF DISBURSEMENT OF THE SECOND TRANCHE

(a) Preparation of the macroeconomic scenario for 1987-89, includinglevel and consumption of public investment and public expenditureprogram (para. 35);

(b) Review of the import controls still remaining on luxury consumergoods and on three groups of imported goods competing with localmanufactures (para. 60(i));

(c) Conpletion of surveys on rural consumption and revenue patterns,estimation in consultation with IDA, of the level of producerprices of main export crops for the 1987/88 campaign (paras. 50and 51);

(d) Initiation of preparation of rehabilitation plans for the fivepublic enterprises to be rehabilitated in priority (first phaseof the PE rehabilitation program (para. 46); and

(e) Identification of public enterprises to be rehabilitated inPhase II (para. 46).

-63 - ANNX IVPage 1 of 14

GOVERNMENT OF BURUNDI

STATEMENT OF DEVELOPMENT POLICIES

1. For some time nov, the economy of Burundi has been confrontedvith significant economic and financial imbalances which led to slovingthe rate of growth and causing serious deterioration ïn the balance ofpsyments. Burundi's foreign exchange reserves, whïch amounted toUS$104.7 million at the end of 1980, vere depleted to less thanUS$30 million at the end of 1985. The country's foreign indebtedness(outstanding and disbursed) increased over the same period fromUS$110 million to US$402 million. While the country has been able tohonor its debt service, and there are no pending external arrears, thedebt service has increased substantially, from 5 percent of exports ofgoods and non-factor services in 1980 to 14.4 percent in 1984 and22 percent in 1985. The overall budgetary deficit increased from6.5 percent of GDP in 1980 to 12.5 percent in 1983 to decline to8.4 percent in 1985.

2. At the end of 1983, the Goverument of Burundi began to takesome adjustment measures. The Burundi franc vas depreciated 30 percentagainst the dollar and pegged to the SDR. Producer prices for mainagricultural export crops vere increased from 6 to 50 percent, some taxrates vere raised, and a strict vage policy vas maintained. The impactof these measures vas felt in 1984 but only partially. Moreover,extremely adverse veather conditions led to a decline in agriculturalproduction which contributed to a 4 percent decline in real GDP. Whileagrieultural output reached a normal level in 1985, internationalprices for the country's main exports remained loy until the end of theyear. Moreover, the restrictions on imports of intermediary goods havecontinued to hinder the activities of the-modern sector and the outputof the industrial sector, currently vorking at low capacityutilization.

3. Due to a sudden increase in the coffee prices (folloving thedrought in Brazil at the end of 1985), the country's financialsituation is likely to improve in 1986. Avare that this improvement islikely to be only temporary and that basic structural distortions villlead to a deterioration in the economic and financial situation in themedium term, the Government has decided to prepare and implement astructural adjustment program in order to restore the basic economicand financial equilibria while ensuring a resumption of economicgrowth. The Government is aiso avare that this structural adjustmentprogram cannot succeed unless a serious effort is made to stabilize theeconomy, and to this effect has agreed vith the IF on a financialstabilization program for 1986/1987.

4. The main economic objectives of the Government relate toovercoming the current economic difficulties and improving resourceallocation, videning the resource base and making the economy lessdependent on coffee. Given the struceural'characteristics of the

ANNEX IV- 64 - Page 2 of 14

Burundian economy, the structural adjustment program vill take severalyears. The period covered by the firet Structural Adjustuent Operation(SAL) vill be used to start the necessary policy reforme and to put inplace the required institutional framework.

5. In order to achieve the structural adjustment objective, theGovernment has decided to take action on the following areas:

(a) Reform of the incentive structure, including exchange rate,trade liberalization, and export promotion policies with theobjective to promote export-oriented and efficient importsubstitution activities;

(b) Rationalization of the public expenditures program vith theview to reduce the budgetary deficit, increase the efficiencyof public spending and select a public investment programcompatible with the available resources;

(c) Reforu of the monetary and credit system;

(d) Improvement of external debt management;

(e) Industrial reform aimed at improving the efficiency of thesector, notably by increasing the private sector role andeliminating economic distortions;

(f) Reform of he public enterp:ises sector, includingrehabilitation, closure and privatization of selectednon-viable enterprises; and

(g) An agriculture policy aimed at increasing volume and qualityof export crops, supported by an institutional framevorkconducive to the optimal utilization of the sector resources.

The timetable for the implementation of the Government's program isattached.

6. The Governnent expects that the implementation of such programvill lead to a substantial improvement in the economic and financialsituation. In particular, real GDP is expected to grow at 3.5 to4 percent per year. The new incentive structure vould favor asubstantial growth of the private investment, which vould keep grosscapital formation at 18 percent of GDP (in constant 1984 prices),despite a slowdown in the growth of public investment. Moreover, thecurrent account deficit of the balance of payments is to remain atless than 10 percent of GDP and foreign exchange reserves to be keptabove 3 months of import equivalent. The budget deficit would declinefrom the average 12 percent of GDP during the last five years, to about7-8 percent by 1990.

A. Incentive Policies

7. During the-period 1976-83, the FBu was pegged to the U.S.dollar at the rate of US$1.00 - FBu 90. In November 1983, the officialexchange rate was pegged to the SDR at the rate of SDR 1 FBu 122.7,with an implicit devaluation of 30 percent vith respect to the U.S.

- 65 - ANNEX IVPage 3 of 14

dollar. In 1985, about 80 percent of importe not financed by foreignaid vere subject to licensing. The remaining 20 percent of importe,classified as "importa vithout release of fvreign exchange"(importations sans octroi des devises), vere largely free ofrestrictions. About 50 products vere subject to quantitativerestrictions and import bans. With regard to the overall exchange rateand tariff structure, protection provided to domestic industry vasexcessive, a system which compounded the effects of the regulations onindustrial licensing, and the country's natural protection, leading tovide variations in effective protection between sectors.

8. In order to promote effectively the adjustment effort, theGovernuent has decided to adopt a realistic flexible exchange rate, inthe context of the IMF-supported program, vith the objective ofmaintaining the real effective exchange rate constant.

9. The Governuent will undertake significant measures in thearea of trade liberalization. Quantitative import restrictions will beremoved on all but a few luxury consumer products and three categoriesof imports competing with local manufactured goods (textiles, glass,and pharmaceutical products). Import licenses will be grantedautomatically. The restrictions on imports of luxury goods vill beremoved before the release of the second SAL tranche. At that time,the restrictions on the three categories of imports competing vithlocal production vould be rewiewed wEth the objective to assess whetherthey should be removed. The decree regulating the profession ofimporter (No. 10017) vill be amended in order to increase competitionamong importers.

10. The tariff structure vill also be revised at the same time ofthe exchange rate reform. The new and simplified tariff structure willsupport the country's industrial strategy encouraging export-orientedindustries, and de-emphasizing import dependent industries and ensuringincreased use of domestic inputs on our domestic manufacturedproducts. After 1986, ail tariffs will be on an ad-valorem basis vitha minimum of 15 percent and a maximum of 50 percent (except luxuryconsumer goods which vill be subject to a 100 percent tariff and theproducts currently included in the ZEP structure). For thoseindustries with speciai needs for additional protection (e.g., infantindustries) a maximum surcharge of 30 percent vill be added in thefirst year and vill be eliminated progressively during a maximum periodof 3 years. The exact amount of this surcharge vill be decided case hycase. The objective of the reform is to begin establishing a systemmore homogenous which vould not discriminate among economic sectors.

11. Export promotion policies will be pursued. The Governmenthas implemented a Customs Drawback system and will provide tax creditsto offset duties on imported inputs purchased locally and used in theproduction of exported goods. Export taxes on manufacturing goods willbe abolished, with the exception of re-exports.

-66 - ANNEX IVPage 4 of 14

B. Public Finance

12. The overall budgetary deficit (including investmentexpenditures of parastatale not self-financed) increased from6.5 percent of GDP in 1980 to 9 percent in 1985. The deficits werefinanced by foreign borrowing is vell as from domestic bank credit.This imbalance was largely due to an effort to implement the ambitiousdevelopment program of the Fourth Development Plan (about FBu 26billion per year) despite a substantial reduction in coffee revenues.In the context of the structural adjustment program, the Government'sfinancial objectives are the following: (i) reduction of the budgetdeficit through control of current expenditures, reduction of transfersand subsidies to parastatals, and limitation of investmentexpenditures; (il) adoption of vell defined criteria for projectappraisal; and (iii) strengthening of institutional capacity to managethe program of public expenditures.

13. Public spending in 1986 is estimated at FBu 38 billion, ofwhich FBu 19 billion for current expenditures and FBu 19 billion forcapital expenditures (excluding FBu 1 billion financed byextra-budgetary resources). The investment prograz vill be financed byforeign aid (FBu 16 billion) and the remaining by public savings. Thebudget deficit will be kept below 2 percent of GDP (compared to9 percent in 1985) and financed totally by foreign aid. Due to theimprovement in coffee prices, the Covernment intends to use the budgetwindfall to repay part of the domestic debt. This will be possible dueto the control of public expenditures (both recurrent and capital), tothe reform of the transaction tax, to the adjustment in the exchangerate, and to the improvement in the coffee prices. Moreover, thereduction in the investment program was made according to strictinvestment priorities and projects were retained according to theirsocio-economic importance. The Goverament vill continue its efforts tomaintain the budget deficit in 1987 as a low percentage of GDP.

14. The Government has decided to start in 1987 a unified systemof budget preparat'on which will be used before publishing the Ordinæryand Extraordinary Budgets and vill prepare a comprehensive three-yearprogram of public expenditures (PEP). The annual budget to besubmitted to the National Assembly vill correspond to the first year ofthe PEP. Investuent planning and programming vill be improved aswell. New guidelines for project appraisal have been prepared byend-1985 and vill be systematically used by all the ministries for newprojects starting in 1987. The existing planning capacity will bereinforced to improve the capacity to prepare, appraise and follow-updevelopment projects.

15. Concerning the financial flows between the Governuent and thepublic enterprises, the Governuent is committed to not subsidizingthose enterprises, unless in cases of non-commercial public enterprisesproviding public utility services at a price below cost, and for whichGovernment's subsidies will be included in the performance contracts tobe agreed between the Government and the enterprise.

- 67 - ANNEX IVPage 5 of 14

C. Monetary Policy

16. The Government's monetary policy is consistent vith thestabilization program. It includes a real interest rate policy, asimplified interest rate structure and soue changes in the system ofcredit allocation to increase the autonomy and flexibility of thebanking system. In particular, the Government has decided to increasethe credit ceiling above which commercial banks need authorization fromthe Central Bank, from FBu 3 million to FBu 10 million. This ceilingvill be adjusted every year to take into account domestic inflation.For medium- and long-term credits below FBu 10 million, no approvalfrom the Central Bank vould be needed.

17. In order to enhance the access of small and medium privateinvestors to the bank credit, the Government vill reactivate theGuarantee Fund, which will be managed by a development bank. This Fundwill begin operations with financing from the SAL counterpart funds.

D. External Debt

18. The Government is concerned with the rapid increase in thedebt service ratio with respect to export revenues and has decided toborrov only on concessionary terms (in terns of lnterest rate andmaturity) in order to limit that ratio to less than 20 percent ofexports of goods and non-factor services.

E. The Public Investment Progran

19. The Fourth Development Plan (1983-87) vas planned to involveexpenditures of about FBu 129 billion (in 1984 constant prices) orabout FBu 26 million per annum, over an estimated 460 projects. Ofthese, about half vould be for 27 large projects. During the 1983-84period, actual spending vas much lover than what had been planned:FBu 19.2 billion in 1983, FBu 17.4 billion in 1984, and FBu 18.3billion in 1985 (in constant 1984 prices). It has nov become clearthat to reach the proposed f inancial goals in the medium term, thelevels of investment projected for 1986 and 1987 will have to bereduced.

20. Preparation of the public investment program vill be madeaccording to the folloving criteria: (a) it must not lead to a levelof indebtedness that could jeopardize the country's creditworthiness;(b) a balanced budget must be achieved and recourse to bank financingreduced to a minimum; and (c) the foreign currency part of the PIP mustbe financed through grants or concessionary loans. Moreover, given theprobable fluctuations in the country's available resources, theGovernment will define a priority investment program, which villinclude the need for annual financing of each priority project.Projects having high priority should be assured full funding. Otherprojects vith some priority vill be financed only if appropriate

-68- ANNEX IVPage 6 of 14

financing is available. The core program of the 1986-1987 PIP ls aboutFBu 17 billion in 1984 constant prices. After 1987, these values villbe reviewed annually taking lnto account the amount of availableresources.

F. Public Enterprises

21. There are about 60 public enterprises in Burundi which areengaged in a wide variety of commercial and social activities. Arecent review of the sector has shown that some of these enterprisesare in a serious financial situation and should be closed; and thatothers have incurred deficits in recent years. During the last years,the Government has considerably reduced the financial transfers tothese enterprises and their impact on the budget is therefore reduced.The Government recognizes that the sector needs to be reorganized andthat an action program should be put in place to make the sectoreconomically and financially viable.

22. The problems affecting the sector are the result of (a) poormanagement; (b) inadequate price policies; (c) deficient design; andCd) unclear relations with the relevant ministries. As stated in thePolicy Statement on the Public Enterprise Sector attached (Annex V),the rehabilitation program of the Government includes priority actionsconcerning the sector at large and specific reforms at the level ofenterprises.

23. Sectoral Policies. The Government's objective is torehabilitate the sector of public enterprises. No PE vill be createdunless if required by the public interest, if the activities are notlikely to be attractive to the private sector, and if its medium-termprofitability is assured. The Government vill continue its policy ofnot subsidizing the PE sector and will extend to it the same advantagesextended to the private sector. The Government has created a Servicein Charge of Public Enterprises (SCEP) whose main attributes includecoordination, follow-up, and assistance to the PEs during therehabilitation period. This Service will be managed by a high rankingpublic official and vill be assisted by a consulting Committee composedof representatives of the concerned ministries, the private sector, andPEs' managers. The legislation on PEs will be reviewed vith theobjective to avoid overlapping of responslbilities and to increase theautonomy of the PEs and the decision power of their managers. TheGovernment has also decided to remove all price controls with theexception of those cases when enterprises provide monopolistic publicservices (e.g., vater and electricity). Othervise, all PEs vill beable to fix their prices freely and to cover their operating costs.The Government may subsidize those public enterprises pursuingnon-commercial activities of clear public interest. A system ofinformation/management is being prepared to provide the Governuent withinformation on the performance of the overall sector, its Impact on theeconomy and budget, and domestic and external debt.

- 69 - ANEX IVPage 7 of 14

24. Enterprises. The Governuent has decided to close down fourPEs (AGRIBAL, SUPOBU, SOMEBU, and SOBECOV1/) sad to reintegrate in thepublic administration (or subsidize) three PEu. The Government loundertaking detailed studies on five of these enterprises (CADEBU,OTRABU, OTRACO, VERRUNDI, and ONAPHA) vith the objective to(a) identify in detail the nature of the problems of the enterprises;and (b) prepare specific rehabilitation plans, which may includerecovery, partial/total privatization or closure. One part of the SALcounterpart funds vill be used to finance the rehabilitation program ofthese enterprises. This fund vill be placed at the NationalDevelopment Bank (BNDE) and managed jointly by the SCEP and the BNDE.Moreover, the Government vill prepare studies for a certain number ofenterprises which vould benefit from enhanced management to developtheir activities in the medium- and long-term and best profit from thenew environment created during the structural adjustment process.

G. Agrieultural Policies

25. Agriculture is still the major source of income of oureconomy. It contributes to 60 percent of GDP and 90 percent ofexports. Developments in the agricultural sector have beencharacterized by a slow grovth of foodcrops, which has hoveverpermitted rural "self-sufficiency in food (even if vith somedeficiencies in lipids and protenes). This relatively satisfactorysituation has avoided large importe of foodstuffs sad ls the result ofa remarkable ability of the Burundi farmer to adapt his rudimentarytechniques to increasing demographic pressure as vell as to the absenceof price controls on foodcrope. The Goverument ls avare that theincreasing pressure over limited land is causing a deterioration inland fertility and soil erosion, and is particularly concerned with theneed to develop adequate packages adapted to the local conditions whichvill be made available to farmers tbrough reinforced agriculturalextension services. This is, however, a lengthy process, and progressis expected to be slow.

26. Concerning export crops, notably coff ee, tea and cotton, theGoverument has developed an action program a-med at increasing bothproduction and quality. With the help of several foreign donors,notably the Vorld Bsnk, the European Development Bank and the CCCE(France), the quality snd production of these crope has improvedalready. Avare of the importance of keeping adequate producers'incentives, the Government has increased the producer prices for coffeeand tea for the campaign of 1986/87, from FBu 125/kg to FBu 160/kg sadfrom FBu 15/kg to FBu 18/kg respectively, tbereby mauntaining farmers'purchasing pover in 1986. A limited survey of consumer revenue andconsumption pattern for selected rural areas vas prepared as a point of

1/ In the context of the liquidation of SOBECOV, comercial activitiesvill be liquidated and a governuent agency vould manage storagefacilities.

- 70 - ANNEX IVPage 8 of 14

departure tu fix these prices. A comprehensive strategy for thosecrops is being prepared taking into consideration the evolution of theinternational prices, the adopted exchange rate policy and theimprovements in the management of the enterprises in charge of theprocessing and marketing in the sector.

27. Coffee sector. The Government, aware of the fundamental roleof the coffee sector in the economy, has initiated an action programaimed at improving the quality of exported coffee, its processing andmarketing. This program is explained in detail in the attached PolicyStatement on Agriculture (Annex VI).

28. Regional Development Companies (RDCs). The main objectivesof the RDCs include production activities (processing andcommercialization of export crope), support activities (extension,research and supply of agricultural inputs), and social activities.The Government is villing to specialize these companies according totheir comparative advantage. In this context, the RDCs' activitiesvill concentrate on directly agr4cu1tural production activities, theother activities being undertaken by specialized central services,which will be gradually strengthened.

H. Industrial Policies

29. The Governument's objectives and strategy for the industrialsector are articulated in the Policy Statement on Trade and Industry(attached, Annex VII). The incentives structure in industry isprovided by trade and exchange rate policies. At first, the newenvironnent created by the SAL will permit an increase of imports ofraw materials and spare parts in order to increase utilizationcapacity. In the longer term, there is a need to lncrease the volumeof private investment in those sectors where Burundi may havecomparative advantages. Other measures will be undertaken as vell,notably the reform of the Investment Code. In order to improve thesector efficiency and to eliminate the present distorsions, pricecontrols will be eliminated and both the local producers and importersvill be able to fix their prices freely. For two strategic products(oil products and cement) the Government would keep price ceilings; foranother eight products (see Annex VII, Attachment 3), price ceilingscould be established in case of serious shortages, due to exceptionalcircumstances, or in case of the development of import monupolies.These price ceilings vill be eliminated i-i four months.

30. The public investment program for the industrial sector in1986 includes only three projects, of which the SOSUMO project is theonly one which is of an important size and new. Concerning thisproject, the Governuent is committed (as it happens for the otherpublic enterprises) to not subsidize the operation costs of theenterprise and to treat the produced sugar in the same fashion as allthe other local manufactured goods in which concerns tariffprotection. The Government vill use an international company withexper-ise in sugar production to manage the SOSUMO project. TheGovernment vill study the feasibility of the project's components forwhich no contracts have yet been signed, notably the distillery.

- 71 - ANNEX IVPage 9 of 14

I. Institutional Capacity

31. To implement the Structural Adjustment Program, theGovernment has decided to reinforce its institutional capacity. Newplanning units vill be created in some technical ministr!es and othersvill be reinforced, and the Service in Charge of the Public Enterprisesvill be put in place. Moreover, the Ministry of Finance and theMinistry of Planning will be strengthened in order to enhance thepreparation of the program of public expenditures and to follow-up andcontrol the execution of the budget.

S.E. Mathias SINAMENYE S.E. Pierre NGENZI

Minister of Planning Minister of Finance

- 72 - Annex IVPage 10 of 14

BURUNDI

STRUCTURAL ADJUSTMENT PROGRAM - CALENDAR

FIELD ACTIONS DATE

1. MACROECONOMICMANAGEMENT

A. General Agreement on macroeconomic September 1986framework for 1987-89(including exchange ratepolicy, fiscal measures andother measures contained inthe IMF Stabilizationprogram)

B. Credit Policy Increase in the authorized Effectivenesscredit ceiling from FBu 3 of SALmillion to FBu 10 million

Start-up of operations of May 1986Guarantee Fund for Small andMedium Enterprises

C. Budget PolicyImplementation of technical June 1986assistance for theMinistries of Planning andFinance for preparation ofbudget and of publicexpenditures program

Implementation of a unified December 1986budget preparation system

2. PUBLIC INVESTMENTPR3GRAM

A. Project Selection and Reinforcement of planning May 1986Appraisal units in technical

ministries

B. 1987 PIP Agreement on scope and September 1986composition of 1987 PIP

- 73 - Annex IVPage 11 of 14

FIELD ACTIONS DATE

3. INCENTIVES POLICY

A. Tariff Reform Implementation of new tariff Effectivenesssystem of SAL

B. Imports Control Revision of Decree 10017 Effectivenessregulating entry into of SALprofession of importer

Implementation of Effectivenessderegulation measures of SAL

Revision of the list of December 1986products remainingtemporarily under licensecontrol and those exempted

C. Price Deregulation Implementatic>n of price Effectivenessderegulation, which vill of SALinclude all products butstrategic products for whichprice ceilings could beestablished in case of unu-sual scarcity (8 products)and 2 subject to priceceilings (oil and cement)

D. Investment Code Implementation of revised EffectivenessInvestment Code of SAL

4. AGRICULTURE

A. Producer Prices Increase of producer prices March 1986for coffee and tea for the86-87 season

Start-up of survey on rural May 1986consutption and revenuepatterns, followed by ananalysis aimed at preparingprice policy for main exportcrops

Discussions and agreement on December 1986a new policy for exportcrops pricing

- 74 - Annex IVPage 12 of 14

FIELD ACTIONS DATE

B. Coffee Sector Neasures to reduce the February 1986moisture content of coffee

Agreement on additional December 1986studies required to preparea global strategy for thecoffee sector, includingproduction and marketing

Agreement on a strategy for September 1987production andconmtrcialization of coffee

5. PUBLIC ENTERPRISES Mta¨res to be iuplenoted Jun 1986by Governuent:

A. Public Enterprise Reactivation or creation of June 1986Service (SCEP) the SCEP

Appointment of Head of the June 1986SCEP

SCEP technical assistance: May 1986recruitment of an advisor

Review of the legal November 1986framework

B. Closing Down of Initiation of liquidation of Condition ofSeveral Enterprises following enterprises: Effectiveness

AGRIBAL, SUPOBU, SOMEBU,SOBECOV

C. Reintegration/ Reintegration of laboratory May 1986Subsidizing of of LAPHAVET and subsidizingSeveral Enterprises enterprises: CPI and ONT

D. Rehabilitation of MNessres to be carried outPriority Enterprises by the SCEP)

Rehabilitation of CADEBU,ONAPHA, OTRABU, OTRACO,VERRUNDI

- Preparation of terms of July 1986reference

- Selection of consultants September 1986

75 - Annex IVPage 13 of 14

FIELD ACTIONS DATE

- Start-up of study November 1986(including managementauditing)

- Recovery plan completed March 1987

- Start-up of performance April 1987contract negotiations

- Conclusion of September 1987performance contract

E. Second Phase of - Enterprises in selectedRehabilitation sub-sectors

- Teros of reference of July 1986sectoral studies

- Selection of enterprises November 1986and start-up of firstatudy

- Recovery plan completed May 1987

- Start of performance June 1987contract negotiations

- Conclusion of November 1987performance contract

F. Preparation of - Preparation of terma of July 1986Management Information referenceSystem

- Selection of consultants August 1986

- Start-up of study September 1986

- Completion of first November 1986phase

- Implementation of January 1987preliminary system

- 76 - Annex IVPage 14 of 14

FIELD ACTIONS DATE

G. Study of Private - Terms of Reference July 1987Sector

- Selection of consultants September 1987

- Report November 1987

- 77 - ANNEX VPage 1 of 6

GOVERNMENT OF BURUNDI

POLICY STATEMENT ON THE PUBLIC ENTERPRISE SECTOR

The Parastatal Sector

1. The 57 public enterprises (PEs) in Burundi vere establishedfor the most part in the late 1970s, to perform several functions, suchas to provide a public service, compensate for the lack of privateinvestment <especially in industry) or coordinate economic sectors(e.g. coffee and cotton). These PEs today have a considerable impacton the economy: they account for 10,000 jobs, their revenues wereabout FBu 15 billion in 1986, and they contributed about 5% of theGNP. Their role in the modern sector of the economy is essential.

2. A difficult world economic situation, problems in domesticand foreign markets and lack of managerial experience have led to acutefinancial problems for certain PEs. Faced vith constraints in publicfinance, the Government is avare of the crucial importance ofrehabilitating these enterprises and revitalizing this importanteconomic sector.

Government Objectives

3. The Governuent is committed to improving the performance ofthe PE sector, and has decided that the PEs in difficulties should berestructured and rehabilitated, as part of a structural adjustmentprogram.

4. In the folloving paragraphs, the term PE includes the threetypes of public enterprises in Burundi: public establishments of anindustrial and commercial nature, companies under public law(entreprises du droit public) and mixed companies.

5. The Government's main objectives in undertaking this reformare:

(a) To ensure effective Government participation only in sectorsthat require public investment, either because they are newactivities or vital public services, or because they concernstrategic sectors;

(b) To maximize the PEs' contribution to value added. The PEsmust generate a positive economic and financial return. Eachenterprise should be able to cover its operating expenses andfinance at least a part of its investment expenditures; and

(c) To ensure a positive contribution to public finance. The PEsector must generate an adequate returu to justify the publicinvestment; the Government will not subsidize the PEs'commercial and industrial activities.

- 78 - ANNEX VPage 2 of 6

Rehabilitation Strategy

6. In order to accomplish these objectives, the Goverument hasadopted a rehabilitation strategy for the PE sector, based on thefolloving main elements:

(a) Development of well-defined objectives, clearresponsibilities and rigorous accounting procedures, asneeded for the sound management of these enterprises;

(b) Rehabilitation of selected PEs whose mediumn-termprofitability has been demonstrated on the basit* ofdiagnostic and rehabilitation studies; these studies villthe basis for the negotiation of pexformance contracts(contrats-plans) between the Government and the enterprises.

(c) Improvement of PE ma..agement. This involves: changes in thelegal status in order to lncrease PE autonomy; reform of theprice controls; development of a management informationsystem tailored to the needs of the managers; andintroduction of --oductivity bonuses based on performancecriteria to be t blished in agreement vith the Bank andwith the Bank's support;

(d) Redimensioning the parapublic sector through privatization,-hen operations could be adequately handled by privateinvestors or through closure when the activities are notprofitable over the medium run;

(e) Establishment of ways to enable the Government to regularlyobtain a clear picture of the performance of the sector as awhole and to follow up on the progress of main enterprises;

(f) Limitation of the establishment of new PEs and of largeinvestments to those cases when economic profitability isdemonstrated and where the alternative of having the privatesector to make such investment is not possible; and

(g) Budget financing of PEs' social objectives, whern these areimposed by the State and when their cost cannot be recoveredfrom the users.

Action Program

7. To achieve these otjectives, the Goverument intends toimplement a reform program based on past experience and on ongoingstudies. Priority actions and follow-up measures vill be taken for thesector as a whole and for individual enterprises.

-79 - ANNEX VPage 3 of 6

Priority Measures

Sector policy:

8. The Governument has decided to create a unit in the publicadministration responsible for permanent strategic analysis, follow-upand assistance of the PE sector. This National Service in Charge ofPublic Enterprises (Service national chargé des entreprises publiques -SCEP), headed by a high-ranking official, vill be responsible forcoordinating the rehabilitation program.

9. The SCEP vill study the legal framework of the PE sector andmake recomnendations as needed. The goal is to adapt the existinglegislation to the changes that have occurred in the sector over timeor that will occur as part of the rehabilitation program. The roles ofthe supervisory ministries, Directors General, Boards of Directors andManaging Committees of each enterprise vill be reviewed in order to:(i) avoid overlapping of responsibilities and conflicts of authority;(ii) decentralize authority to the extent possible; snd (iii) give PEmanagers as much responsibility as possible. The legal framework villtake into account the necessary reforme in employment policy, notablyregarding compensation, hiring and termination. These reforms villtake into consideration the existing Labor Code.

10. The Government vill relax the price controls for PE servicesand products, to bring them in line vith the private sector. To theextent possible, the prices charged for public services vill reflectthe cost of production; the prices of manufactured products vill bedetermined by market forces. If certain public non-coumercial servicesare to be provided at prices below cost, adequate subsidies vill beincluded in the performance contract and the necessary funds vill beincluded in the Governuent budget.

11. A management information system (MIS) vill be set up tocollect data on production, personnel, sales, inventory and thefinances of the PEs. The first objective of this system will be toenable the management of each enterprise to improve its performanceanalysis. Each enterprise vill participate fully in the development ofthe MIS. A periodic performance chart (tableau de bord) vill also beintroduced to follow up on the impact of the parapublic sector onpublie finance and other economic variables such as the balance ofpayments and domestic and external debt.

Enterprises

12. The SCEP vill make detailed studies of enterprises in orderto determine the types of reform required. These studies villestablish the desirability of privatization, closure or technical andfinancial recovery of the enterprise. The studies vill be made forgiven subsectors or individual enterprises. In the first phase, adiagnostic study wll be made of the enterprise (where one has not been

- 80 - ANNEX VPage 4 of 6

made recently), making it possible to identify strategie options andimplement an urgent action plan. In the second phase, a rehabilitationprogram and an action plan will be prepared. The action plan villinclude a contract plan, a privatization or liquidation program or anyother plan to resolve the probleme of the enterprise, as appropriate.

13. The Go-ernment intends to reorient the following enterprises<or subsectors):

14. Reintegration or subsidization of enterprises ofsocioeconomic significance but whose financial prospects are poor:

Enterprise Subsector

CPI StudiesLAPHAVET (laboratory) Veterinary pharmaceutical

laboratoryONT Promotion of tourism

15. Closing down of unprofitable enterprises that are not vitalto the public sector:

Enterprise Subsector

AGRIBAL Agricultural developmentSUPO'1U FisherySOMEL-U StudiesSOBECaV Warehousing/trade

16. The enterprises to be rehabilitated in priority by SCEP (inaccordance vith action plans to be defined) are the folloving:

Enterprise Subsector

CADEBU Savings associationONAPHA Pharmaceutical productsOTRABU Road transportationOTRACO Urban transportationVERRUNDI Glass factory

17. For other selected PEs, the SCEP vill formulate (withsupport from the Bank; a rehabilitation and support program to besubmitted for Government's approval. Special emphasis vill be placedon the trade and tourism subsectors. The criteria for selecting theenterprises to be studied for rehabilitation vill include the follovingfactors: eize (financial and number of jobs involved); negative cashflow, other negative financial indicators; specific managementproblems; and activities of possible interest to the private sector.

-81 - ANNEX VPage 5 of 6

18. If necessary, the SCEP vill make strategic planning stu4iesfor the following large enterprises:

Enterprise Subsector

BCC CoffeeCOGERCO CottonCOTEBU TextilesOCIBU CoffeeONATEL TelecommunicationsOTB Tea

These studies will use as basic information all previousstudies on these enterprises.

Supplementary Neasures

Sector Policy

19. The autonomy of PE management will be strengthened byperformance contracts reflecting the objectives agreed by theenterprise with the Government; a posteriori monitoring will beemphasized.

20. This autonomy of management will include, but not be limitedto, the folloving aspects: hiring of personnel which vill be lef t tothe managers of each enterprise; setting of a salary scale for eachenterprise, approved by its Board of Directors and after discussionvith the SCEP; introduction of productivity bonuses according to asystem still to be defined; reducing unnecessary staff; and allocationof net profits to reserves, investment or dividends.

21. No new PEs will be established unless: (i) they are requiredfor the public good; (ii) the activity has limited appeal for privateinvestors; and (iil) medium-term profitability is acceptable.Feasibility studies vill be made and vill take into account thesecriteria. Prior to any major investment in a PE, the Government villstudy the possibility that such an investment be carried out by theprivate sector.

22. The State vill support only projects whose public utility hasbeen deLonstrated and whose return is deemed adequate on the basis of afeasibility study. In these cases the State support will be statedin a contract plan. The State vill make it clear that there is noimplicit guarantee.

Enterprises

23. The performance contract to be prepared for each enterpriseselected for rehabilitation or strategic planning will include thespecific objectives of the enterprise, the strategy to be adopted, anevaluation of costs and multi-year targets for results of operations,type of government monitoring and the degree of enterprise autonomy,

- 82 - ANNEX VPage 6 of 6

amount of resources contributed by the State, and a system ofproductivity bonuses based performance criteria appropriate for theactivity in question.

24. The Government vill restructure the financial bases ofcertain enterprises deficient in that reopect, through an lncrease inauthorized capital. This vill make it possible to lower thedebt-equity ratio and guarantee longer-term financial viability.

25. The Government vill establish an Intervention Fund to financethe rehabilitation of selected PEs. This Fund vill be financed throughthe counterpart funds from the SAL and placed at the BNDE (NationalBank for Economic Development). The Fund's operations vill be based onan action plan drawn up for each enterprise. The Fund vill be able tofinance various types of activities, including rehabilitationinvestments, purchase of parts or raw materials, training or retrainingof personnel, technical assistance and increases in the enterpriseworking capital. The Fund vill disburse in the form of equity orloans.

26. The Government vill ensure that cross debts between PEs andbetween the PEs and the State are canceled.

- 83 - ANNEX VIPage 1 of 3

GOVERNMENT OF BURUNDI

POLICY STATEMENT ON AGRICULTURE

Agriculture Sector

1. The agriculture sector is the basis of Burundi's economy,accounting for 60Z of GDP and 90% of export revenues. In recent years,tie objectives of the Government have been to maintain foodaelf-sufficiency, increase export receipte and develop the rural sectorthrough the regional development companies (RDCs).

2. In general, the food crop sector has made satisfactoryprogress and Burundi has been able to remain food self-sufficient.However, the food balance remains precarious oving to demographicpressure, which leads to more intensive cropping and lover saoilfertility.

3. For export crops, the Government has followed a policy aimedat improving the coffee quality by investing in vashing stations andprocessing plants and improving research and extension services.Efforts to develop tea-groving have had very positive results in termsof both quality and quantity of exports. For cotton, the Governmenthas managed to stem the decline in production and since 1982 resultshave been very encouraging.

4. The RDCs have had to play in the past a multiple role:productive agricultural activities (processing and marketing of exportcrops), support activities (extension, research and inputsdistribution) and social activities. Experience to date shows thatalthough the RDCs have a comparative advantage for processing andmarketing, their agricultural and social services have not achieved theexpected results, given their cost. In view of the current financialconstraints, a less costly structure for agricultural support servicesshould be sought.

Goverument Objectives

5. As regards food crops, the Government's objective is tomaintain food self-sufficiency in the face of population growth, whiletaking into account the country's overall agricultural resources andtheir comparative advantage.

6. As regards export crops, the Goverument plans to implementincentive policies (including producer prices and marketing) that villmaintain the producer purchasing pover and aim at getting a betterprice on external markets. For coffee, this policy will depend onevolution of the international market. For tea, efforts vill involveincreasing production and maintaining high quaiity. In view of thevariations in international prices for coffee and tea and their impacton public finances and the agriculture sector, the Governuent villencourage diversification of export products.

- 84 - ANNEX VIPage 2 of 3

7. The Government vill continue its efforts to strengthen theinstitutional framework for the implementation or formulation ofrequired policies and maximization of the impact of resources allocatedto the sector. In this respect, the Government has decided tostrengthen the complementarity of the functions of the RDCs and of thenational services of the Ministries of Agriculture and Livestock and ofRural Development at the central, regional and community levels,particularly to reduce RDC operating costs and gradually replaceexternal financing vith budgetary financing of agricultural servicesand self-financing for productive and commercial activities.

Action Program

Produc -ices

8. Food crupa. The Government *ill continue itsnon-interventionist policy concerning prices of food crops.

9. Export crops. In order to maintain producer prices constantin real terms, the Government set the 1986 producer price at FBu 18/kgfor tea and FBu 160/kg for cGffee, yielding an increase in real terms.

10. A study vill be made vith a vlew to proposing a mechanism todetermine producer prices at a level which provides sufficientincentives taking into account price fluctuations on the internationalmarket. This srudy vill also analyze current policies for subsidizingagricultural inputs and make proposals on whether they should becontinued or eliminated. Prices and subsidies for the 1987-88 cropyear vill be set on the basis of that study.

Caffee

11. As part of a study financed by the Governaent, consultantsmade recommendations on improving the quality and marketing of coffee.These recommendations vere discussed by the Government and the Bank.The Government adopted the following action program:

(a) Introduction of measures to reduce progressively the moisturecontent of coffee;

(b) Preparation of a global strategy for the coffee sector toenabLe the definition of medium- and long-term policies couldbe designed, aimed at maximizing export revenues, by means ofincreased production and quality. This strategy would bebased on analyses of: the count&-y's production potential (inquality alnd quantity terms); perspectives and fluctuations ofthe international coffee market; efficiency improvement ofthe intervening agents in the production and marketingprocesses; and producer prices.

- 85 - ANNEX VIPage 3 of 3

Institutions

12. As regards the RDCs, lt is clear that they cannot undertakethe multiple functions entrusted to them in a coat-effective manner.They vill accordingly concentrate on productive and comercialactivities. Concurrent wlth this reduction of RDC responsibilities andstructure, the national offices of the Ministry of Agriculture andLivestock vill be progressively strengthened s0 that they will be ableto gradually assume primary responsibility for research and extension,in addition to the monitoring and collection of statistica and projectplanning and preparation that they currently carry out.

yAvys .9c/, ky$-

ANNEX VII-87 - Page 1 of 8

GOVERNMENT OF BURUNDI

POLICY STATEMENT ON TRADE AND INDUSTRY

A. Trade Policy

1. Burundi's trade balance is characterized by a structuraldeficit which leads to a deficit of the balance of the currentaccount. To cope with this disequilibrium, the Goverument hasintroduced a system of import licensing and controls on foreignexchange transfers. The foreign exchange control has been more or lessrigorous depending on the availability of foreign exchange. In thecontext of the SAL, the Government has decided to reorient its tradepolicy and rely more actively on the market mechanisms by:(1) pursuing an appropriate exchange rate policy; (iI) liberalizingimports and prices; and (iI) introducing a new tariff structure.

2. The Governuent recognizes that the present import licensingsystem instaured to cope with the shortage of foreign exchange hasweakened economic competitiveness and generated import rents. TheGovernment has decided to remedy this situation and graduallyliberalize imports.

3. In the first phase, the liberalization would cover theessential products, raw materials, spare parts, capital goods andimports competing with locally produced goods, vith a view to stimulatelocal producers to raduce costs and increase efficiency. Only threegroupe of imports competing with domestically produced goods (cotton,glass and pharmaceuticals) vill remain temporarilly under licensing.This will be reviewed at the time of the SAC second tranche release.

4. In a second phase, the liberalization would be extended tothe luxury goode (Attachment 1). The timetable for this process isgiven in para. 24.

5. Burundi's tariff structure includes:

- An import duty;- A fiscal duty; and- A statistical tax.

6. This structure has undergone nulerous changes over tlme,occasionally on a piecemeal basis, which have eroded its own coherenceand hindered its Impact on basic objectives (protection of economicsectors and the generation of public revenues).

7. The Government has decided to reform this tariff structure scthat it can pursue consistently and fairly the twin objectives ofrevenue generation and rational protection of national production.

8. The Goverument vanta to use the customs tariff (together viththe exchange rate) as the only instrument of trade policy whilecontinuing to generate budget revenues during the reform period. To

ANNEX VII- 88 - Page 2 of 8

achieve these objectives, the Government has decided to simplify thetariff structure and gradually correct the existing economicdistortions.

To this end:

(1) The import and fiscal duties vill be consolidated into asingle duty;

(2) The statistical tax will be kept at its current level of 4%;and

(3) The number and range of tax rates vill be reduced, asfollows:

1986Category (start) 1987 1988 1989

(in percentage)

Luxury Goods 100 100 100 100Finished Manufactured Products 50 45 40 40Food Products 25 25 25 25Primary and Intermediate Goods 15 20 25 30Essential and Capital Goods 15 20 20 20Government Imports Exempted*

* See Attachment 2 for list of products to be exempted.

9. The Government will also establish procedures for introducingimport surcharges in cases where additional protection is needed(infant industries). These surcharges vill be a maximum of 30 percentover a three-year period at most, according to the case and need.These surcharges vill be used to protect existing operations that arefinancially viable over the medium term.

10. The formal procedures regulating the use of import surchargesvill be designed s0 that the Tariff Commission vill decide on acase-by-case basis on the need for, and the amount and duration of, thesurcharge.

11. Before making the reforms scheduled for 1987, the Goverxmentvill assess the impact of the new tariff structure on the budget.Aside from luxury goods, the objective is to arrive at a narrovertariff band of 20 to 40 percent, essentially on an ad valorem basis,vith an equivalent tax rate for products of the same nature or used forthe same purpose.

12. Luxury goods would be dealt with separately as the Covernuentfeels it is not desirable to encourage consumption patterns t'aat areincompatible with the population's income levels.

ANNEX VI I89- Page 3 of 8

13. In order to uvoid the creation of import monopolies and tostimulate greater competition in the private sector, the Governmentvill amend Decree No. 10017 on the profession of importer to make entryinto the profession easier.

14. Su as not to penalize the export industries and exporters,the Government will abolish the tax on exported local manufacturedgoods. It vill further inform exportera of the existence of thedrawback system to increase competitiveness of Burundian exports.

15. The Government will study other types of export incentivesconsistent with the regional and international agreements it hassigned.

16. The adoption of the new tariff should not violate theinternational and regional preference agreements signed by theGovernment. The Governuent vill make the necessary adjustments torender the tariff compatible with those commitments.

B. Industrial Policy

17. With a view to creating a new economic env.ronment, theGovernment will revise the Investment Code with the objective ofencouraging more effective resource allocation and of promotingexports.

To that end, access to its benefits vill be conaitional on:

(1) A minimum economic rate of return of 10%;

(2) An investment per job of at least US$20,000; and

(3) A positive impact in the balance of payments

18. Only enterprises wishing to benefit from the Code will berequired to summit project briefs to the Investment Commission. Otherenterprises should make themselves known to the Ministry of Planning sothat investments in the sector can be followed up on.

19. The Ministry of Planning will not block the establishment ofany new profitable activity, even if it competes with existing ones.It will restrict itself to giving an unfavorable and non-suspensiveopinion.

20. The time taken to process applications from enterprisesvishing to benefit under the Code will be kept as short as possible,but vill not exceed three months. The exemption granted vill applyessentially to income taxes.

21. The current system of price approval and control vill begradually replaced by a recording system, folloving the same timetableas of import liberalization. There will be no price controls onimports already deregulated. In the case of petroleum products andcement, prices vill be subject to ceilings; for eight strategicproducts and in cases of exceptional scarcity (leading to temporary

J9NNEX VII- 90 - Page 4 of 8

monopolies) (see Attachment 3), the Government may establish a priceceiling in case of acute shortages due to exceptional conditions.These price ceilings vill remain in effect for four monthsl/ at most.

22. In line with its commitment to promote 8mall enterprises, theGovernuent vill introduce a series of measures, following a study ofthe private sector, to stimulate the establishment and growth ofsmall-sized enterprises. The main objectives of these measures vill beto reduce the riaks associated vith 'oans to small enterprises;increase tihe access of small enterprises to financial resources; andmake the necessary technical and management expertise available tothem. In addition, specific provisions v111 be included in the newInvestment Code proposed.

23. The Government plans to improve technical and managementsupport to manufacturing industries and offer better information oninvestment possibilities and market conditions to potential investors.

24. The liberalization of imports of essential goods and capitalgoods, raw materials, intermediate goods and finished products villtake place at the time of SAL effectiveness. The liberalization ofimports of luxury goods vill take place before release of the SALsecond tranche.

l/ The period estimated to be needed for the arrival of importedmerchandise.

ANNEX VII-90- Page 4 of 8

monopolies) (see Attachment 3), the Coverument may establish a priceceiling in case of acute shortages due to exceptional conditions.These price ceilings vill remain ln effect for four monthsl/ at most.

22. In line vith its commituent to promote small enterprises, theGovernment vill introduce a series of measures, folloving a study ofthe private sector, to stimulate the establishment and growth ofsmall-sized enterprises. The main objectives of these measures vill beto reduce the risks associated with loans to small enterprises;increase the access of suall enterprises to financial resources; andmake the necessary technical and management expertise available tothem. In addition, specific provisions vlll be included in the newInvestment Code proposed.

23. The Government plans to improve technical and managementsupport to manufacturing industries and offer better information oninvestment possibilities and market conditions to potential investors.

24. The liberalization of imports of essential goods and capitalgoods, raw materials, intermediate goods and finished products villtake place at the time of SAL effectiveness. The liberalization ofimporte of luxury goods vill take place before release of the SALsecond tranche.

l/ The period estimated to be needed for the arrival of importedmerchandise.

1. LUXURY PRQBDUCT

Tariff __19_2 1983 1984Chapter Revenue Value c.l.f. value c.i.f. Value c.i.f.Daadin L No. Doseriot 0n of Goods Entry Tan _Dutv ln Fu lo Total Out %in Fou los Total Out [ ln FBu 101 Total Dut

Chap 2 Heat Exempt 1002 2 1.471,179 1 674.174 3 2.531,362Chap 3 Fresh crustaceans and mollusks Exempt 60S 55 4,12b,bba 53 4.910,616 74 7.519.545040410 Cheese and curd 22 100l 27 27.697,926 1S 14.790,424 18 13,596,041Chap 8 Fruits, except bananas 3X lOOX 9 2,095,709 7 2.229.719 3 1,961.9be091010 Other spices Exempt 150I 64,904 0.4 597.669 1 1.469,32519.08.20 B.scuits Exempt 100l I - - S 2,5s4.866Chap 20 Praparations of vegetables and fruits,

except tomatoes and tomato pures 7S 1OO0 4 3.071.689 3 2.366.643 3 3,025.433Chap 21 t4scellaneous food preparations,

except 21.06.10 and 21.07.21 S-0OX 100I 19 7.378,031 22 3,771.567 41 8.485.03922.05 WIne, except wine ln demijohns S5 60-lOGO' 109 58.1S0,483 55 31.278.409 56 21,759.47222.06 Vermouths and other w1nes or fresh

grapes SX 200' IS 11.353,585 9 6,211.284 S 2,667,39122.09 Spirituous beverages 5-40X 230-1000' 30 40,914.880 19 21.800.593 29 11.345.b7517.01.90 to Other sugars 22 45-85s 1 798,739 2 1.082.410 2 au9.GO017.02.60

61.01.99 and Luxury garaunts SX 3S-IS10 12 9,581.129 6 7,420,887 9 5.742 79661.02.90

61.06 Scarves and shawls 5S 100I 3 2,781,918 I 1.390,593 4 4.117.941Chap 71 Jewelry, except artieles subject to duty

at 35S and less Exenot 100I à 2,193.515 2 1,411.269 12 1.890.369 iDChap 90 Apparatus, excluding 90.10.10 and except

klnds subject to duty at 25S and less 5S 50-85x 170 9,214.805 259 7,256,247 354 7.527,14016.01.90 Sausages not 1mported In

airtight containers 0OX 50 14 8.820,202 il 6,500.074 5 2,654.78516.02.92 Other prepared or ireserved mat not

Imported ln a1rt1ght containers 10 50S 17 21,413 il 1,995,686 3 1,944,063Chap 42 Leather articles, except those subject to

duty at less than 352 (suitcases orot.er travel goods) Exemt 80 29 16,949.410 17 10,859.352 s 5,955,557

Chap 7 Vegetables, except 070130, 070510 and070610 Exempt 100l 2 360,635 0.6 280.955 6. 727,338

18.06 Chocolate 3x 100I I 369,969 1 712,278 2 2,170,98317.04 Sugar confectionery not containina cocoa 2x 10ox 4 4,053.852 1 1,190,115 3 3,542,06133.0b.80- Perfumery and tollet preparations.33.06.90 whether or not conta1ning alcohol Exempt 1oo0 27 27,037,661 14 14,065,778 10 9,811,274

98.10.10 Mechanical liahters SX IoOx 8 8,319.391 il 11,804,351 2 2,125.81bS8.ol-58.03 Carpets and tapestries Exempt ISOX 5 1.672z761 2 1.139,305 16 853.28787.02.37 Hotor vehicles of 13 hp and over 52 100I 41 6.943,338 9 4.954.229 44 3.058,48589.01.60 Boats and vessels for pleasure or sport 5S 200x 1 407,066 3 73,z10 1 104.00049.09 to Other printed matter (cinema tickets, .49.011 p1cture posteards, calendar%, etc.) Exempt 100l 6 2.317,408 7 3.572,625 IS 3,672,422 " O W

16.04.20 Caviar and caviar substitutes Exempt ISOS 0.1 - 0.1 122,866 0.2 235.685 °§ rt O316.05 Crustaceans and mollusks, prepared or I 9 g

preserved Exempt 100I 0.3 7,098 0.2 20,010 0.7 408.039 F 3 V_69.11.10 Tableware and other domestic articles o

of porcelain 2n 65X I 84,294 0.8 520,754 IS 320,238 ° O 69.13 Statuettes and other ornaments Exempt 85S 0-' 34,325 0.5 354.548 0.7 n69.14 Other articles of pottery Exempt nSX 0.01 2,925 - - S 16,936 F-' Co69,05.10 Corniches, frise2es, etc. Exempt s5x. - 0.870.13.20 Articles of glass Exempt 852 I 3.520 1.4 340,842 0.4 -70.13.50 Glassware for office purposes Exempt 30X - - - - 0.2 30,27170.13.60 Glassware for ornamental purposes Exempt 65S 0.8 S67.681 0.1 40.896 0.4 -

TOTAL 63a.3 25S.808.109 545.1 165,741,108 758.2 134,675,308'Francs/liter

ANIEX VII-92 - Page 6 of 8

Attachment 2EXEMPT PRODUCTS Page 1 of 2

01.02.30 Live animais of the bovine species, including animais of the buffalofamily: for production

01.03.30 Live avine: for production

01.04.30 Live sheep and goats: for production

01.05.30 Live poultry: for production

19.07.30 Communion wafers, empty cachets of a kind suitable forpharmaceutical use, sealing wafers, rice paper and similar products

22.05.50 Comnmunion wines

27.17.10 Electric power

34.06.20 Candles, tapers, night-lights and the like: for religious purposes

48.01.20 Newsprint

49.04.10 Music, printed or in manuscript, whether or not bound or illustrated

49.05.10 Naps and hydrographic and similar charts of all kinds, includingatlases, vall maps and topographical plans, printed; printed globes(terrestrial or celestial)

49.06.10 Plans and drawings, for industrial, architectual, engineering,commnercial or similar purposes, whether original or reproduction onsensitized paper; manuscripts and typescripts

49.11.20 Instructional charts and diagrams (historical, geographical,astronomical, religious, moral, anatomical, zoological,numerological, botanical and for use in technical education)

49.11.30 Other printed matter, included printed pictures and photographs:religious

61.01.91 Ecclesiastical vestments

61.11.20 Accessories prescribed for regulation uniforms and accessories forecclesiastical vestments

62.02.40 Furnishing articles of textile fabric for churches

62.05.20 Flags, pennants, banners and other articles for religious use

71.12.30 Jeweled decorations [i.e. medals and the like], Burundian or foreign

71.13.20 Articles for use in religious services

71.16.20 Imitation jewelry: jeweled decorations, Burundian or foreign

71.16.30 Insignia prescribed for regulation helmets

ANNEX VII- 93 - Page 7 of 8

Attachment 272.01.20 Coin Page 2 of 2

83.11.20 Bells and gongs, non-electric, of base metal, and parts thereof ofbase metal: for religious use

87.08.10 Tanks and other armored fi hting vehicles, motorized, whether or notfitted with weapons, and parts of such vehicles

89.01.20 Warships of all sizes, submarine craft and landing craft

90.13.31 Optical appliances and instruments (but not including lightingappliances other than search lights or spot lights), not fallingwithin any other heading of this Chapter (including projectors);lasers other than of the diode type: for use by the Armed Forces

92.03.20 Pipe and reed organs, including harmoniums and the like forreligious purposes

92.12.61 Language courses [on record, tape]

93.01.10 Side-arms (for example, swords, cutlasses and bayonets), partsthereof, and scabbards and sheaths

93.02.20 Revolvers and pistols: for use by the Armed Forces

93.03.10 Artillery weapons (other than side-arms, revolvers and pistols)

93.06.20 Parts of arms, including gun barrel blanks, but not including partsof side-arms: for use by the Armed Forces

93.07.20 Bombs, grenades, torpedoes, mines, guided weapons and missiles andsimilar munitions of war, and parts thereof; ammunition and partsthereof, including cartridge wads; lead shot prepared forammunition: for use by the Armed Forces

- 94 - ANNEX VIIPage 8 of 8

Attachment 3Page 1 of 1

LIST OF PRODUCTS WHOSE PRICES WILL BE SUBJECT TO PRIOE OEILINGSAND TROSE WHOSE CEILINGS CAN BE USED IN CASE OF EXTRAORDINARY

SHORTAGES OR IMPORT MONOPOLIES

Import Value - 1984(FBu millions)

A. Products Whose Prices WillBe Subject to Price Ceilings:

1. Oil Products 4,468.8

2. Cement 1,286.8

B. Products Whose Ceilings Can BeUsed in Case of ExtraordinaryShortages or Import Monopolies:

1. Sugar 497.5

2. Iron Sheets 491.7

3. Powered Milk 401.7

4. Flour 304.1

5. Salt 209.3

6. Tires 237.5

7. Batteries 166.1

8. Paper Products 275.3

Total 8,338.8

ANNEX VIIIPage 1 of 5

- 95 -

BURUNDI

POLICY STATEMENT ON PUBLIC EXPENDITURE MANAGEMENT

1. One of the objectives of the Government's structural adjustmentprogram is to improve the efficiency of the public sector resources,including public enterprises and public expenditure program. The actionplan for the public enterprise sector has been spelled out in the PolicyStatement on Public Enterprises. The present statement deals with theaction program envisaged for the management of the public expenditureprogram.

Objective

2. In the recent years, Burundi's public finance situation has beencharacterized by considerable fluctuations in revenues (heavily dependenton coffee) and an ambitious investment program. This situation has led toserious budgetary deficits, excessive use of central bank financing,growing external debt and consequent increase in debt service. While somemeasures have been taken in the past few years their effect has beenpartial and the Governnent is aware of the need to implement a coherentprogram to control public expenditures to a level compatible with resourceavailabilities and stabilization needs, and to increase the efficiencyof public spending. With this objective, policy action will be taken onthe following areas: (a) budgetary reform; (b> project preparation andselection; and (c) strengthening of budget-planning capacity.

Bud_etary Reform

3. The present budgetary system is composed of two budgets: theordinary budget (BO) and the extraordinarylinvestment budget (BEI). Thebulk of the tax and non-tax (administrative) revenues are affected to theBO to finance recurrent expenditures and repayment of public debt. The BEIis allocated special taxes from coffee and beer, dividends from theparastatals and a fixed amount of central Bank financing (FBU 2 billion)included in the BEI as regular annual revenue. The BEI finances mostlycapital expenditures (including counterpart funds for projects financed byforeign aid), and some other items, such as exceptional contributions toregional organizations, and some payments of arrears. Investmentexpenditures financed by foreign aid are not shown in either budget.Preparation of the BO is the responsibility of the Ministry of Finance; theBEI is prepared by the Ministry of Planning. The Ministry of Finance isresponsible for the execution of both budgets.

4. This system has several drawbacks for an efficient management ofthe public expenditures program. In particular, it does not include theexpenditures financed by foreign aid (loans and grants), and no provisionsare made for recurrent expenditures associated with investment projects.Moreover, the separated allocation of resources to each budget, and theclassification of banking financing as revenue of the BEI distort thepublic finance picture making it difficult for the Government to obtain a

ANNEX VIIIPage 2 of 5

- 96 -

global view of its expenditure program, to program investment expendituresas a function of public savings, and to adjust the expenditure program tofluctuations of revenues. Moreover, the requirements of on-going and newprojects in terms of recurrent expenditures are not systematicallyprograuned.

5. To make the budget an efficient tool of macro-economic management,the Government intends to implement the following reforms during 1986:

(a) adoption of an unified system of budget preparation (beforepublishing the BO and BE) with clear separation of currentrevenues, current expenditures (excluding repayments of debt),identification of current balance and capital expendituresfinanced both from the budget and foreign aid. Disbursementsof domestic and foreign loans (net of repayments) will beclassified as deficit financing items. Capital grants will beclassified as government revenues. Public revenues would notbe affected to any particular part of the program, with thepossible exception of some Funds which have been temporarilyset for operational purposes (i.e. Road Fund);

(b) a comprehensive three-year public expenditures program (PEP)for 1987-89 will be prepared including for each budgetarycategory (executing agency) recurrent and capitalexpenditures. This vould permit a better planning andprogramming of resources to finance central administrationexpenditures, social services, maintenance of the State fixedassets, and future recurrent expenditures associated with cn-going and new investment projects. The annual budget to bepresented to the National Assembly vould correspond to thefirst year of the three- year budget, but would include onlyrevenues accruing from local sources and expenditures financedby domestic revenues (e.g. foreign aid financed expendituresvould not be included in the Budget Law to be submitted to theNational Assembly);

(c) the public investment program would include a "core' programof projects of highest priority for which full funding wouldbe assured. A non-core (stand-by) program would besimultaneously prepared; this would be financed if additionalresources became available. The core projects would be thosewith the highest rate of return and reflect the developmentpriorities of the Government in terms of inter-sectorialallocation. All projects above US$3 million would be subjectto feasibility studies (prepared by the Government or donors)according to guidelines provided by the Government. Thosefeasibility analyses vould be discussed with the technicalministries to ensure that the Government's priorities andcriteria are taken into account in selecting developmentprojects.

(d) in establishing the level of the investment program theGovernment will attend to the following aspects: (i) it must

ANNEX VIIIPage 3 of 5

- 97 -

not lead to a level of indebtedness that could jeopardize thecountry's creditworthiness; (ii) should be consistent with abalanced budget and need minimal bank cred't; (iii) itsforeign currency part would be financed through grants orconcessional loans.

Prolect Appraisal Guidelines

6. At present, the largest investment projects in Burundi have beenappraised by foreign donors and consultants using often different criteriaand basic parameters. The Gover.,ment intends to follow closely thepreparatory work of large projects and will enhance the capacity of theMinistry of Planning to carry out appraisal work for smaller projects inconsultation with the technical ministries. In this process, commoncriteria and guidelines vill be used, including the use of standardcost/benefit analysis (whenever possible) and relevant parameters whichhave been developed and reflect the specific conditions of Burundi. Theseguidelines will be used by all ministries in preparing and appraising theprojects to be submitted for financing.

7. The following guidelines will be used:

(a) for directly productive sectors (agriculture, industry,mining, etc..) whose output is marketed and whose price _an beused as a proxy to measure its economic value (after necessaryadjustments), projects will be selected using standard cost-benefit analysis. (A detailed manual of project appraisalwould be prepared to be used by local officials.) In thesecases, only projects with an economic rate of return above 10percent and a social rate of return high2r than 7 percent(using public revenues at border prices as numeraire) would beretained and considered for financing.

(b) for infrastructure projects, i.e. energy, water supply, andother infrastructure projects for which there are alternativetechnological configurations for the same stream of benefits(e.g. the supply of electric power, based on hydro or termicresources) projects will be selected on the basis of the leastcost solution criteria. That is, the internal rate of returnwould be the discount rate at which the discounted cost of thealternative projects is the same. The retained project wouldhave an economic rate of return above 10 percent and a socialrate of return above 7 percent. The Governnent would ensurethat all these projects would be financially viable, and thatthe final users would pay for the services provided (costrecovery);

(c) for social projects (education, health), projects would beselected taking into account their relative cost, socialcoverage, and using international indices (e.g. cost perstudent, cost per hospital bed, etc.) as a basis to evaluatethe adequacy of the proposed project.

ANNEX VIIIPage 4 of 5

- 98 -

8. Attached is the list of basic parameters to be used to convertdomestic price:; into border prices, as required for project appraisal.Those coefficients were estimated in mid-1985 and will be updated once ayear on the basis of statistical information collected by the nationalservice of economic statistics, the Ministry of Planning and the technicalministries.

Institutional caPacity

9. To support the implementation of these reforms, the presentinstitutional capacity would be reinforced at severai levels. TheGovernment intends to reinforce the services of the Ministries of Financeand of Planning in charge of the preparation and follow up of the annualbudget in order to make it possible the adoption of an unifJed budget, thepreparation of a three-year public expenditure program, and the improvementof the public accounting system (namely by adopting a double-entryaccounting system). The Government would request technical assistance fromthe IMF on public finance accounting.

10. Concerning the services in charge of planning and programming,the Government has recruited a consultant for two-years to help establisha system of follow-up of prcJect implementation. To improve the capacityof project selection, s' improve the efficiency of the public investmentprogram the governm'.:nt will. create a project preparation unit in theMinistry of Plannin,x wit' satellite units in the major technicalministries. The government will hire an expert on project preparation andappraisal for two years to assist the new units and the central projectunit in the Ministry of Planning.

ANNEX VIIIPage 5 of 5

- 99 -

STANDARD CONVERSION FACTORS TO BE USED IN PROJECT EVALUATION

Labor:Average rural worker 0.705Rural worker unemployed 0.352Professional worker 0.920Professional worker unemployed 0.770Professional expatriate 0.992

Goods and services:Average 0.926

Consumer goodsNon-durable 0.92durable 0.78

Capital goods 0.897

Intermediate goods 0.923by use:Agro-industry and food 0.932Construction 0.937Metallurgical 0.858

Non-traded:

Housing 0.937Public Works 0.859Transport and telecomunic. 0.905Min±ng and energy 0.916

Source: Appréciations des paramètres nationaux et régionaux pour.e'£valuation (conomique et sociale des projets au Burundi.M'nistëre à la présidence chargé du Plan, Octobre 1985.

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