Burundi - Economic memorandum

Report No. 1838-BU , ,+ , Economic Memorandum 6-a -7 Burundi FILE t%,v April 25, 1978 Eastern Africa CP II Ad Oll, 7X1 4 FOR OFFICIAL USE ONLY Document of the World Bank This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS AND UNITS Currency Unit: The Burundi Franc (BuF) Exchange Rates: Through February 1973 US$1.00 - BuF 87.5 March 1973 - May 2, 1976 US$1.00 - BuF 78.75 Since May 3, 1976 US$1.00 - BuF 90.0 Fiscal Year: January 1 - December 31 Standards: Metric  FOR OFFICIAL USE ONLY TABLE OF CONTENTS Page No. COUNTRY DATA SUMMARY AND CONCLUSIONS ........................................ i- iv INTRODUCTION I. SOCIAL AND ECONOMIC TRENDS ..... ....................... 1 II. THE UPSURGE IN COFFEE PRICES AND ITS IMPACT .... ....... 5 III. A NEW STRATEGY ........................................ 10 A. The Planning Machinery ............................ 10 B. Government Objectives ............................. 13 C. Constraints and Policies ................ ............ 15 a. Population and Land Availability .... .......... 15 b. Agriculture ................................... 17 c. Mobilization and Use of Human Resources ....... 18 d. The Transport System .......................... 21 IV. ECONOMIC AND FINANCIAL PROSPECTS ...................... 22 ANNEX I - ECONOMIC DEVELOPMENTS IN 1970-76 MAPS STATISTICAL APPENDIX This memorandum was prepared by an economic mission that visited Burundi in June/July 1977. The mission consisted of Messrs. Alberto Eguren (mission chief), Raymond Randriamandranto (public finance) and Ms. Adriana de Leva (research assistant). The memorandum was subsequently updated following a short visit to Burundi in February 1978. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  Page I of 2 BURUNDI COUNTRY DATA AREA POPULATION DENSITY 27,800,000 sq. km. 3.8 million (mid-1976) 137.0 per sq. km. Rate of growth 2.1 (from 1970-75) POPULATION CHARACTERISTICS (1970-75) HEALTH (1974) Crude Birth Rate (per 1,000) 48.o Population per physician 45,110 Crude Death Rate (per 1,000) 24.7 Population per hospital bed 755 INCOME DISTRIBUTION DISTRIBUTION OF LAND OWNERSHIP % of National Income, highest quintile . % owned by top 10% of owners lowest quintile .. A owned by smallest 10% of owners ACCESS TO PIPED WATER ACCESS TO ELECTRICITY Occupied dwellings without % of population-total piped water (%) .. -rural NUTRITION (1969-71) EDUCATION (1975) Calorie intake as % of requirements .. Adult literacy rate % 10.0 Per capita protein intake (grams/day) 62.0 Primary school enrollment 7' 21.0 GNP PER CAPITA in 1976 21: US$120 GROSS NATIONAL PRODUCT IN 1976 ANNUAL RATE OF GROWrH (%, constant prices) US$ Mln. % 1971 -76 1976 GNP at Market Prices 462.3 100.0 2.1 8.1 Gross Domestic Investment 52.8 11.4 3.4 23.1 Gross National Saving 25.5 5.5 5.5 168.1 Current Account Balance 4.2 0.9 Exports of Goods, NFS 61.5 13.3 1.0 -14.4 Imports of Goods, NFS 77.5 16.8 3.5 -3.1 OUTPUT, LABOR FORCE AND PRODUCTIVITY IN 1976 Value Added US$ Mln. $ Agriculture 273.7 57.8 Industry 57.6 12.2 Services 95.9 20.2 Unallocated 46.4 9.8 Total/Average 473.6 100.0 GOVERNMENT FINANCE Central Government (BuF Mln.) % of GDP 2;1976 1976 1972- 76 Current Receipts 5, 12.3 11.2 Current Expenditure 4,413.1 10.8 10.7 Current Surplus 622.3 1.5 0.5 Capital Expenditures 2,045.8 5.0 4.5 External Assistance (net) 1,242.0 3.0 3.7 NOTEt All conversions to dollars in this table are at the average exchange rate prevailing during the period covered. 2 The GNP per capita is bwaad en the World Bank Atlas methodology (1974-76 basis). not a7ailable not applicable  Page 2 of 2 MONEY, CREDIT and PRICES 1971 1972 1973 1974 1975 1976 O ECllion BuF outstanding end periodT Money and Quasi Money 2,565.9 2,491.9 2,990.9 3,542.3 3,544.4 5,220.4 Bank credit to Public Sector 702.4 775.8 897.5 897.6 1,271.6 1,125.0 Bank Credit to Private Sector 1,183.1 1,211.1 1,446.0 2,730.0 1,322.6 2,231.7 (Percentages or Index Numbers) Money and Quasi Money as % of GDP 11.3 11.6 13.2 15.8 15.5 21.0 General Price Index (1970 - 100) 103.9 107.8 114.2 132.2 153.1 163.5 Annual percentage changes ins General 'Price Index 3.9 3.8 5.9 15.8 15.8 6.8 Bank credit to Public Sector -14.2 10.4 15.7 - 41.7 -11.5 Bank credit to Private Sector 26.7 2.4 19.4 88.8 -51.6 68.7 BALANCE OF PAYMENTS MERCHANDISE EXPORTS (AVERAGE 1974-76) 1974 1975 1976 US$Mln Z (Millions US $) Coffee 34.5 85.8 Exports of Goods, NFS 33.7 34.8 61.5 Cotton 1.6 4.0 Imports of Goods, NFS 53.6 80.0 77.5 Skins 1.3 3.3 Resource Gap (deficit -) -19.9 -zP2 -16.o Tea 0.9 2.2 Interest Payments (net) -0.2 -0.4 -0.5 Workers' Remittances -8.8 -8.2 -10.7 Other Factor Payments (net) - - - Net Transfers 18.2 21.1 31.4 All other commodities 1.9 4.7 Balance on Current Account -10.1 -32.7 4.2 Total 40.2 100,0 Direct Foreign Investment 0.2 - -ETERNAL DEBT. DECEMBER 31. 1976 Net MLT Borrowing Disbursements 2.2 14.7 4.2 Amortization 0.7 1.6 2.3 US $ Mln Subtotal 1.5 13.1 1.9 Public Debt, incl. guaranteed 23.7 Capital Grants 14.6 18.4 13.9 Non-Guaranteed Private Debt Other Capital (net) -7.0 17.8 -7.0 Total outstanding & Disbursed 23.7 Other items n.e.i -6.0 -2.1 ..1Tn Increase in Reserves (7B4 -14.5 -14.1 DEBT SERVICE RATIO fol976-/ Gross Reserves (end year) / 14.3 31.0 51.3 Net Reserves (end year) 13.5 28.0 42.1 Public Debt, incl. guaranteed 4.5 FUel and Related Materials ~~~~Non-Guaranteed P'rivate Debt Fuel and Related Materials Total outstanding & Disbursed Iports of which: Petroleum 3.0 3.7 5.8 Exports of which: Petroleum - - - IDA LENDING, Oetober 31. 1977 (Million US$); RATE OF EXCHANGE IBRD IDA Through Feb. 1973 Since May 3, 1976 Outstanding & Disbursed - 6.7 US$1.00 - BuF 87.5 US$1.00 - BuF 90.0 Undisbursed - 24.! BuF 100 - US$1.14 BuF 100 - US$1.11 Outstanding incl. Undisbursed 31.0 From March 1973 to May 2, 1976 US$1.00 - BuF 78.75 BuF 100 - US$1.27 1/ Ratio of Debt Service to Exports of Goods and Non-Factor Services. 2/ CentraL Bank not available not applicable December, 1977  SUMMARY AND CONCLUSIONS i. With an average GNP per capita of about US$120 in 1976, Burundi is one of the poorest countries in the world and one of the 25 countries designated as "least developed" by the United Nations. The country became independent in 1962. It covers an area approximately the size of Belgium and has a population of about 3.8 million. With an average density of 137 persons per sq. km., Burundi is, after Rwanda, the most densely populated country in Africa. Bujumbura, the nation's capital with a population esti- mated at about 175,000, is the only important business center and contains most of the nation's industry. ii. Agri-culture dominates Burundi's economy and constitutes 58 percent of GDP, of which only 8 percent represents cash crops, the remainder being subsistence production. About 96 percent of the population lives in the rural areas on small farms, a typical family occupying a self-contained homestead on its own plot of land instead of being grouped into small villages. Coffee production generates about one-third of the money income of farmers (in 1970 prices) and constitutes the major source of foreign exchange as well as an important source of fiscal revenue. iii. Owing mainly to the sharp increases in the world coffee price, average prices for Burundi's exports more than doubled in 1976 and are expected to have doubled again in 1977. For the first time since 1970 the current account balance registered a surplus. By the end of 1977 it is estimated that Burundi had accumulated about US$86 million in net foreign reserves, equivalent to ten months of imports. The improvements in the terms of trade resulted in income gains equivalent to an increase of about one- fourth of GDP over 1975. Gross national savings, which averaged only 5.4 percent of GDP in 1970-75 and were below the level for most developing coun- tries, increased to 11 percent and 16 percent of GDP in 1976 and 1977, re- spectively. The increases in income have accrued primarily to the Government through higher export taxes, with the rest shared by the small coffee pro- ducers. Producer prices were increased two and a half fold from 1975 to 1977. The export tax on coffee was increased by more than four times in 1976 and by another 300 percent in June 1977. iv. The increase-in Government revenues allowed substantial increases in current and investment expenditures. Ordinary budgetary expenditures shot up by about 36 percent in 1976 and an estimated 25 percent in 1977, partly due to salary,increases granted to civil servants. The latter were the first since the mid-sixties and in real terms the average salary has increased very little, if any, since that period. Revenues allocated to Ministries which provide economic and social services, which had declined in real terms up to 1975, increased by 22 percent and 29 percent in 1976 and 1977 respectively. Nevertheless, budgeted amounts for agriculture in 1977 were still insufficient (below 1970 levels in real terms) and constituted only 3.8 percent of the ordinary budget.  - ii - v. In July 1976, the Government doubled the Extraordinary (Investment) Budget from the original authorized level to BuF 1875 million. Although in 1976 only half of the amount budgeted was spent, these expenditures were almost three times higher than in 1975. The greatest increases were for the agricultural, transport and mining sectors. For 1977, the Extraordinary Budget envisaged a doubling of expenditures, the greatest increases being for the transportation, agriculture, and education sectors as well as for con- struction of Government buildings and participation in mixed enterprises. In spite of the substantial increases in ordinary and extraordinary budget expenditures, overall treasury operations, which showed a deficit in 1975, registered a surplus of BuF 183 million in 1976 due to the higher growth of tax revenues. vi. The Government has set a new strategy to achieve social justice, ethnic reconciliation and improved living conditions in the rural areas. This strategy is two-pronged and consists of reorganization of the Government around a strengthened planning mechanism and policies summarized below. Regarding planning, three fundamental decisions were taken by the Government in late 1976. First, the planning organization was elevated to the rank of Ministry under the Prime Minister who became also the Minister of Planning. A Secretary General continues to head the Planning Ministry but with the rank of Minister. Second, all government investment projects must be authorized by the Planning Ministry before being incorporated into the Extraordinary Budget. Third, the Ministry of Finance may authorize expenditures under the Extraordinary Budget only after approval has been granted by the Planning Ministry. The Ministry of Planning is therefore to play a key role in influencing the allocation of public investment. vii. A number of positive steps have been taken by the Government in order to improve development planning: (a) for the first time in history the Ministry of Planning has prepared a macroeconomic framework for the third planning period, 1978-82; (b) sector and regional work, including project identification, has been conducted by working parties and subcommissions which brought together representatives from the different Ministries concerned and local authorities; (c) in order to provide incentives for improving project preparation and evaluation, the Ministry of Planning requires that adequate information be provided by the technical Ministries as a condition for in- corporating their projects into the annual Extraordinary Budget; and (d) to accelerate project execution, the Planning Ministry is conducting monthly meetings with representatives from Ministries responsible for project execu- tion. viii. The Government's policies are aimed at tackling directly the main issues which had plagued development in the 1970's and are embodied in the Third Five Year Plan (1978-82). They are as follows: (i) to increase the rate of economic growth substantially in order to provide greater employment opportunities and more income to the poorest segments of the population; (ii) to emphasize agricultural production in particular that of foodcrops; (iii) to raise the investment rate significantly; (iv) to give the Govern- ment a more active role in mobilizing financial and manpower resources and  - iii - in participating in mixed enterprises in the commercial and productive sectors; and (v) to foster decentralization of economic and social activity away from the capital city and its balanced geographic distribution through the creation of development poles, the settlement of the peasant population in villages, and migration from densely to less densely populated areas. ix. The major issue facing Burundi is how to improve the level of income of its rural population by increasing agricultural production. The problems facing agriculture are serious. In the very densely populated areas, most suitable lands are already under cultivation and even many of the less productive areas have been brought into production. However, the agri- cultural frontiers are being expanded primarily by clearing forest land. Population pressure and the diminishing availability of wood are conducing the small farmer to shorten fallowing periods and to shift the use of crop residues and manure away from their use as natural fertilizers to energy uses. As a consequence, yields are falling. To reverse this disequilibrating process, the Forestry Department in Burundi is proposing the creation of rural fuelwood plantations by communal efforts where each farmer would share in the product proportionately with his work. Given the magnitude of the energy problem and the limited medium-term financial capabilities of Burundi, this system, with the Government providing technical inputs and support, is an alternative for both increasing fuel supply and restoring ecological balance in the rural areas. x. In view of past experience and the long-term efforts which will be required to reactivate the agricultural sector, the Burundi economy is unlikely to grow at a rate higher than 4 percent per annum in the next few years. If this does materialize, by 1982 per capita income in real terms will have increased by 8 percent in contrast to its stagnant trend of the recent past. The major driving force will have to be the agricultural sector. In the long run, any major expansion of domestic demand for industrial output and for services will depend on increases in per capita rural incomes. To achieve an expansion of agriculture which will depart from the stagnation of the last six years, the Government will have to intervene effectively in providing services to rural areas, such as storage facilities, extension and social services. This will require a drastic improvement in the efficiency of administration and significant changes in attitudes. The support of the rural population will depend primarily on the provision of direct incentives for increasing production. Unless the fanners are persuaded that they will be the prime beneficiaries of increases in production, it will be difficult to enlist their support and mobilize -them for, among other things, the immense task of conserving soil fertility. Private sector resources will have to be mobilized also, particularly in industrial and tertiary activity, and to achieve this, the Government will need to spell out with greater clarity the nature and extent of its participation in economic activity as it intends to assume a bigger role in this area during the coming years. xi. Balance of payments projections indicate that Burundi could signi- ficantly increase its investment rate during the period of the third Five- Year Plan (1978-82) if the present level of assistance in grants is maintained  - iv - in real terms and if the Government actively pursues a policy for increasing its borrowing from official agencies. By 1982, the investment rate could reach 18 percent, compared to the 12 percent rate estimated for 1977, and disbursements from official agencies could be three times higher than in 1977 and amount to about US$40 million. Whether Burundi can achieve such invest- ment levels depends largely on the public sector's capacity to significantly increase its project preparation and implementation capability in a relatively short period. This would call for continued technical assistance from abroad. Furthermore, in order to finance the increasing import requirements of the economy, Burundi would need to use in the early eighties a major part of the international reserves it will have accumulated during the late 1970's. If reserves are to be accumulated at the levels required, the Government must follow cautious income policies.  Introduction This memorandum updates previous IBRD economic reports 1/ and draws on sector and project reports 2/ prepared over the last two years. A summary perspective of Burundi's historical, social and economic background is given in Section I. The economic background, which reviews economic develop- ments during 1970-76 with a view to identifying the main structural trends and recent departures, is based on statistical work done by the newly established Ministry of Planning with respect to national accounting and public finance. A detailed analysis of these developments is contained in Annex I. Owing particularly to the high world price for coffee, Burundi's main export crbp, the economic and financial situation improved markedly in the last two years. An analysis of the gains in terms of trade is given in Section II against the background of an overall presentation of economic developments in 1976 and 1977. In terms of economic policies, the new Government that came into power in November 1976 has designed a strategy to alleviate the traditional constraints and to reverse past economic trends. A Development Plan has been prepared which encompasses a number of new policies directed at improving agriculture production and rural incomes (Section III). In the light of this strategy and projections made for the new Plan, this memorandum also attempts to sketch in Section IV the main economic and financial prospects of Burundi for the next five years. 1/ "Recent Economic Developments and Prospects of Burundi," January 14, 1975 (No. 504a-BU) and "Economc Memorandum on Burundi," October 24, 1975 (No. 855a-BU). 2/ "Agricultural Project Identification Report," March 1976; "Project Performance Audit Report: Burundi Arabica Coffee Improvement Project (Credit 147-BU)," March 1977 (No. Sec M77-204); "Appraisal of the Banque Nationale de Developpement Economique," June 1977 (No. 1460a-BU); and "Education Sector Memorandum," August 1977 (No. 1717-BU).   I. SOCIAL AND ECONOMIC TRENDS Social Trends 1. Burundi is a small, landlocked country situated just south of the equator in Eastern Africa at a distance of roughly 2,000 kilometers from the Atlantic and 1,400 kilometers from the nearest port, Dar-es-Salaam, on the Indian Ocean. It covers 27,820 square kilometers, approximately the same area as Belgium. Burundi's population was estimated at 3.8 million in 1976 and has been growing at a natural rate which may be as high as 2.6 percent a year. With an average density of 137 persons per sq. km., Burundi is the most densely populated country in Africa after Rwanda; however, the population density varies considerably by region. More than 95 percent of the population live in the rural areas, making their living from subsistence farming and from one principal cash crop, coffee, which constitutes the major source of foreign exchange for the country. Bujumbura, the nation's capital with a population estimated at 175,000, is also the largest city and the only important business and industrial center. Burundi's GNP per capita was estimated at US$120 in 1976 and is one of the lowest in the world. The literacy rate of the popula- tion is about 10 percent. 2. First colonized by Germany, Ruanda-Urundi became a Belgian-mandated territory after World War I and a UN trust territory after World War II. It formed an economic union with the Belgian Congo. Separated from Rwanda, Burundi achieved independence as a constitutional monarchy in 1962. The monarchy was overthrown and a Republic proclaimed in November 1966. Burundi's development has been hampered by internal strife, the most recent upheavals occurring in 1972 and 1973. These events not only dislocated economic activ- ity, particularly in the South, but also disrupted relations with Burundi's neighbors. However, civil order was restored in 1973 and good diplomatic re- lations were reestablished with the surrounding countries. In November 1976, a supreme military revolutionary committee took power and the new government announced new policies centered on two main goals: national reconciliation and social justice. 3. The organization of Burundi's society is peculiar to the region and has been shaped by both historical and economic forces. In the rural areas, clans (blood relatives through a male line) and local kin groups (a few nuclear families) constitute the focal points of societal unity, and close- knit family units are maintained under paternal authority. However, family relationships have been weakened by land shortages which have made it diffi- cult for sons to settle near their fathers' homesteads after marriage and have forced them to migrate to new land. The population is composed of three ethnic groups: the Hutu, who represent the majority, the Tutsi, and the Batwa. Over the years, there has been gradual interbreeding among the three groups. In the beginning, the division of labor by ethnic group created a social stratification by which the Tutsi herdsmen dominated the Hutu culti- vators and the Batwa hunters and craft workers. The Mwami (king) held eminent domain over people and property, but the acreage was actually controlled and managed by the chiefs to whom it had been apportioned. The peasants worked  - 2 - their own farms or plots but, in return, had to serve on the domain of the feudal lords for whom they also had to perform services in return for cattle received. 4. This particular feudal system has weakened considerably as a result of a number of factors, chiefly: (a) the introduction in the colonial era of a more modern administration (by the creation of other bonds of authority) and the introduction of a monetized market (sales of cattle and certain agri- cultural products from the feudal domains); and (b) the breaking up of the feudal domains through inheritance as a result of demographic pressure. The survival of this system is going to be placed further in jeopardy as a result of specific land tenure and other measures introduced recently by the Govern- ment. 5. In the rural areas each family occupies a self-contained homestead on its own plot of land. These homesteads (rugos) are scattered over the slopes and summits of hills and consist normally of a small hut in an enclosed courtyard. The Barundi, as Burundi's people are normally called, have avoided settlement in the valleys and lower areas because of higher temperatures and the health hazards posed by the tse-tse fly. The rhythm of rural life follows the agricultural calendar and, since storage and preservation are difficult, it is important for the farmers to keep one or more crops maturing throughout the year. Economic Trends 6. Over this decade Burundi's economy has shown a number of specific features which are summarized in the remainder of this section. The most serious has been the stagnation of per capita product: during the period 1970-76 GDP at market prices grew at a rate of only 2.2 percent per annum, about the same as population growth. A major reason for this weak perform- ance lies in the slow growth of the agricultural sector which accounts for about 60 percent of GDP. For the products which constitute the bulk of sub- sistence production by small farmers, average yields per hectare have declined in the recent past. Because of population pressures, cultivation has been extended into relatively less productive lands and, at the same time, the length of fallow periods has diminished as well as the recourse to natural fertilizers. 7. During the period 1970-74, gross fixed investment represented only 7.5 percent of GDP, of which about one half was accounted for by the public sector. Due mainly to a significant increase in public sector investment, the rate rose to 11.7 during 1975-76. Despite this increase, Burundi's investment rate was still far below the average prevailing in the low income group of the developing countries. Investment in agriculture, almost entirely made by the Government, has been very small in per capita terms of the rural population and extremely lopsided in favor of export crops. Investment by private enterprises has been relatively weak in the recent past reflecting in part the limited size and slow growth of the Burundi market.  - 3- 8. The level of gross national savings in Burundi has been one of the lowest in the world, averaging only 1.5 percent of GNP during the period 1970-76. Although the savings rate increased to 5.5 percent of GNP in 1976, this was primarily due to the shift in relative prices resulting from a substantial increase in the world market price for coffee. In constant 1970 prices, the savings rate attained only 3.6 percent during that year. Because of the subsistence level of production of the majority of the population, it appears difficult to increase savings, at least in the medium term. 9. Burundi's foreign exchange earnings are heavily dependent on agri- cultural exports, especially coffee, which makes the country vulnerable to natural factors such as weather conditions and the biological cycle of coffee trees, as well as to changes in the world market price for this commodity. Burundi is in fact among the most unstable economies of the developing world according to ranking based on export instability ratios. This structural characteristic not only affects cyclically the capacity to import but also the financial capabilities of the Government and the purchasing power of about 400,000 small farmers who cultivate coffee as a main cash crop. The dependence on coffee has increased in recent years; during 1975-76 coffee exports repre- sented on average close to 90 percent of total merchandise exports. 10. Trends in world prices have severely affected Burundi's terms of trade during 1970-76. During this period average import prices almost doubled. Even though the volume of imports was roughly similar during the periods 1971-73 and 1974-76, the import bill rose from US$31 million to US$54 million. Although export prices were higher in 1975 than in 1970, the terms of trade declined by over 40 percent, resulting in income losses equivalent to 2.6 percent of the 1970-75 GDP; only one sixth of this income loss was recuperated in 1976 when coffee prices increased sharply. 11. In recent years Burundi has increased its foreign borrowing steeply. During 1975-76 commitments averaged US$16 million per annum, more than twice the annual average for the years 1970-74. This increase is mainly due to higher commitments on very concessional terms from multilateral organiza- tions, primarily the International Development Association and the African Development Bank Group, and are the result of the more active role which the public sector has assumed in promoting development projects. Burundi has also borrowed from private sources but only to a limited extent. Capital grants, most of which come from bilateral sources and the European Development Fund, have constituted the most important resource for financing investment and, during 1975-76, were equivalent to over two-thirds (US$16 million) of total net disbursements. 12. The allocation of the Government's current revenues has benefitted primarily the administrative, justice and defense functions to the detriment of expenditures required to operate and adequately maintain roads, schools, irrigation works, health facilities, agricultural extension services, etc. In 1976, revenues allocated to the Ministries responsible for the provision of these services remained significantly lower in real terms than in 1970. The share of agriculture in total current expenditures was low and mounted only to 3 percent of the total.  - 4 - 13. Up to 1973, prices in Burundi grew at a relatively slow pace. Double digit inflation began in 1974 when domestic prices rose by about 15 percent. A major reason for this was the acceleration of inflation in the developed countries which affected Burundi especially in 1974 and 1975. In 1974, prices of food and intermediate goods imports jumped by 65 percent and 75 percent, respectively. High inflation continued in 1975, when the effects of price increases in imports of petroleum products and of capital goods were fully felt in the Burundi economy; at the same time food prices continued to rise sharply. Domestic prices rose by about 16 percent during 1975 but in the following year the increase decelerated to between 7-9 percent following a sharp fall.in the pace of world inflation.  - 5 - II. THE UPSURGE IN COFFEE PRICES AND ITS IMPACT 14. The very large increase in world market prices for coffee which has taken place in recent years has significantly affected Burundi's economy. The market conditions for this commodity determine the cash earnings of over half of the rural population, and most of the tax revenues and foreign ex- change earnings of the country. After averaging 62 c/lb in 1973, the world price of coffee 1/ stabilized at a low level of 50-55 c/lb in the second half of 1974 until a heavy frost in July 1975 destroyed most of Brazil's prospec- tive 1976/77 crop. The price then climbed quickly, averaging 143 c/lb in 1976 and peaked at 322 c/lb in April 1977. Current IBRD forecasts are for an average price of 242 c/lb in 1977 and about 185 c/lb in 1978. 2/ 15. Average prices for Burundi's exports more than doubled in 1976 and are expected to have almost doubled again in 1977. Gross domestic income in 1975 terms is estimated to have grown by 11.5 percent in 1976 and by about 16 percent in 1977 largely due to gains in the terms of trade (Table 1). Simi- larly, domestic savings, that were negative in 1975, constituted 4 percent of gross domestic income the following year and amounted to more than twice this share in 1977. These income gains have benefitted mainly the small coffee producers and the Government through increases in the producer price and in export duties, respectively. Table 1: Gross Domestic Income, 1975-77 (in 1975 prices, BuF billion) Real Growth 1975 1976 1977 1975-77 GDP 32.0 33.2 34.4 7.6 Exports 2.7 2.3 2.3 -17.7 (in current prices) (2.7) (5.3) (10.0) Terms of trade effects - 2.5 7.1 Gross Domestic Income 32.0 35.7 41.5 29.7 Memo price indices: Exports 100.0 226.0 433.7 Imports 100.0 109.6 117.8 Terms of trade 100.0 206.2 412.7 Source: Appendix Tables 2.2 and 2.3 and mission estimates. 16. The producer price for coffee takes into account the anticipated world market price for coffee and the producer prices fixed in the neighboring 1/ The New York spot quotation of Guatemalan prime washed coffee. 2/ Forecasts dated October 21, 1977.  - 6 - countries. The producer price of Arabica coffee was increased by two-thirds in 1976 and again by 72 percent in 1977. The increase in 1976 restored the producer price in real terms to the 1970 level. The production of Arabica rose by about one-third to about 20,000 tons in 1976 from the depressed levels of the previous year. Production was initially expected to attain a similar volume in 1977. However, owing to excessive rainfall and smuggling, exports from Bujumbura amounted to only 15,000 tons during that year. The combined effect of price and volume changes resulted in unprecedented increases in cash earnings derived from coffee by small farmers estimated at 125 percent in 1976 and a further 72 percent in 1977. From about BuF 800 million in 1975 these earnings are estimated to have risen to BuF 2.2 billion in 1976 and to BuF 3.8 billion in 1977. 1/ A rough estimate indicates that in 1977, total cash earnings of the farmers (including foodcrop sales) attained BuF 6 billion, or 122 percent more than in 1975. 2/ The proportion of coffee earnings in total cash earnings increased from about 30 percent in 1975 to 63 percent in 1977. Table 2: Distribution of Coffee Revenues (in thousands of BuF per ton) 1975/76 1976/77 1977/78 (P) Producer price for green coffee 52.9 89.3 153.4 Export taxes and stab. fund 23.9 108.8 294.1 Export taxes (8.9) (59.8) (274.1) Stabilization fund (15.0) (49.0) (20.0) Other costs /1 23.5 37.1 36.3 Total export price 100.3 235.2 483.8 Memo items: Producer price for parchment coffee (BuF/kg) 39.0 65.0 112.0 Average export f.o.b. price ($/lb) 0.58 1.19 2.44 /1 Total fixed and variable costs including processing, marketing and financing. Source: Appendix Table 7.4 and mission estimates. 1/ The extent to which excessive rainfall affected production is difficult to assess. The estimates of cash earnings derived from coffee by small farmers assume that the fall in production was negligible. 2/ Estimates of foodcrop production based on national accounts in constant 1970 prices and on the food price index in Bujumbura. Cash earnings in current prices derived from the marketing of foodcrops, about 10% of foodcrop production according to 1970 accounts, would have amounted to BuF 1.9, 2.1 and 2.2 billion in 1975, 1976 and 1977 respectively.  - 7 - 17. The coffee boom has had strong repercussions on Government finances. The export tax on coffee was increased by more than four times to 59.8 BuF/ kg in 1976 and by another 300 percent to 235 BuF/kg in June 1977. 1/ Subse- quently the Government decided to establish a ceiling on the amount available to the Stabilization Fund for coffee (see par. 19), the balance being allo- cated to the Extraordinary Budget, bringing thereby the export tax to 274 BuF/kg. 2/ This resulted in an increase in tax revenues from coffee exports from a level of BuF 154 million in 1975 (4.4 percent of total current revenue) to an unprecedented BuF 1,250 million in 1976 (23 percent of current revenue), a figure estimated at BuF 4,100 million in 1977 (45-50 percent of current revenue). The increase in the financial capabilities of the Government led to substantial increases in current and capital expenditures. Ordinary budgetary expenditures shot up by about 36 percent in 1976 owing in part to a gen- eralized increase of 30 percent in the basic salary scale for public servants approved in May 1976 (BuF 280 million) and to expenditures for a planned conference of heads of state (BuF 350 million). The 14 percent devaluation in May 1976 also exerted pressure on ordinary expenditures as it raised the local currency cost of foreign exchange expenditures. Ordinary expenditures bud- geted for 1977 were about 25 percent higher than in 1976 due mainly to the effects of another 40 percent salary increase approved in July 1977, the full-year impact of the previous year's increase in salaries, and the estab- lishment of certain new ministries (Geology, Mines and Industry, Youth, Sports and Culture, and Transport). The 1977 Ordinary Budget placed greater emphasis on economic and social services than in 1976. 18. In July 1976, the Government revised upwards the Extraordinary Bud- get from the original authorized level of BuF 929 million to BuF 1,875 million. Although in 1976 only half (about BuF 975 million) of the amount budgeted was spent, these expenditures were almost three times higher than in 1975. The greatest increases were for the agricultural, transport and mining sectors. For 1977, the Extraordinary Budget envisaged a doubling of expenditures, the greatest increases being for transportation, agriculture, and education as well as for construction of Government buildings and participation in mixed enterprises. Taking into account the carry-over from 1976, Extraordinary Budget expenditures would in fact triple. In spite of the substantial in- creases in Ordinary and Extraordinary Budget expenditures, overall treasury operations, which showed a deficit of BuF 96 million in 1975, registered a surplus of BuF 183 million in 1976, as revenues increased at a faster pace. 19. When the proceeds of coffee exports are'lower than the sum of the producer price, the export tax and the costs of processing, transporting and marketing coffee, the Stabilization Fund intervenes to pay the difference. 1/ Before the harvest, the Ministry of Finance makes the final decision regarding the export duty after negotiations with the Office des Cul- tures Industrielles du Burundi (OCIBU). OCIBU administers the coffee trade and on its council are represented the Presidency, the Ministries of Finance and Agriculture and the Central Bank. 2/ The total amount allocated to the Extraordinary Budget in 1977 is es- timated at about BuF 3,100 million, equivalent to 207 BuF/kg.  - 8 - Similarly, any surplus accrues to the Fund. In 1975 about BuF 150 million were used to support the producer price. The following year, despite the significant increase of the producer price and the export duty, it is esti- mated that the Stabilization Fund accumulated BuF 850 million. About half of this amount (BuF 430 million) was used to finance the Extraordinary Budget and could be assimilated to tax revenue so that the Fund's share actually amounted to 23 BuF/kg. In 1977 the Government instituted a ceiling of BuF 300 million on the Fund, reducing its share to 20 BuF/kg. 20. Net foreign assets rose very rapidly at the end of 1976 and in- creased by nearly 80 percent for the year. Gross foreign exchange reserves stood at about US$50 million, equivalent to eight months of imports of goods and NFS. Despite an unprecedented 50 percent growth in the money supply, the increase in domestic prices during 1976 was much lower than in 1975 and attained only 7 percent as measured by the consumer price index in Bujumbura. Following a significant slow-down in world inflation (which averaged only 1.5 percent), prices of food imports and of other domestic consumer goods declined. In addition, domestic production (particularly in the food, leather and con- struction industries and in handicrafts) and to a lesser extent, the volume of food and consumer goods imports, expanded significantly in response to increases in'incomes of coffee producers and civil servants. Similarly, the inflationary potential was reduced by a massive restoration of transaction balances, as the ratio of money supply to GDP rose from 10.7 in 1975 to a trend level of 12.4 percent in 1976. 21. A major issue which confronts Burundi as a result of the develop- ments in world market prices for coffee is to avoid a rapid upsurge in domestic prices while preserving, for the medium term, the relatively large level of international reserves it has accumulated to compensate for the projected decline of international prices for this commodity. The massive injection of additional income to coffee producers and, to a lesser extent, the increases in Government salaries is bound to increase domestic demand significantly, in particular for consumer goods, which are largely imported. Government policies have been to encourage imports. The Central Bank elimi- nated in May 1977 its credit ceilings on imports of basic goods, lowered its interest rates and allowed full financing of the import value, including all marketing costs from Dar-es-Salaam to their final destination in Burundi. As import prices were expected to rise at a much higher rate in 1977 and 1978 than in 1976, this policy may not have been sufficient to hold domestic in- flation to the 1976 pace. 22. Another alternative would consist of reducing aggregate demand (including that for imports) through greater budgetary surpluses. This could be achieved by increasing the sales tax on beer and the import tariffs on commodity imports most likely to respond to the current demand situation 1/. In fact, the Government increased import tariffs in June 1977 although this affected primarily the importation of luxury goods. Additional revenues 1/ The sales tax on beer was increased by 30 percent in July 1977.  - 9 - could facilitate future adjustment when coffee export prices return to more normal levels, particularly as the significant increases in Government ex- penditures during 1976-77 are, in large measure, irreversible. Such tax measures should be accompanied by monetary measures aimed at limiting credit and money supply expansion. This could consist of lowering the amounts of central bank rediscounts to commercial banks by raising the rediscount rate, of increasing the legal reserve requirements and establishing them for for- eign liabilities, of reducing the banking system's foreign indebtedness, and of offering attractive financial instruments. To be effective, a package of fiscal and monetary policies along the lines described above would have to be adopted before any massive injection of revenues to the coffee producers. 1/ 1/ The Government continued to foster a relatively liberal import policy after May 1977, when these revenues were being injected, in order not to penalize the small farmers. Preliminary data available in early 1978 indicates that the volume of imports as well as domestic prices climbed sharply in 1977.  - 10 - III. A NEW STRATEGY A. The Planning Machinery 23. Against the background of economic stagnation accompanied by low levels of investment and savings which resulted in a long-term deterioration in rural incomes (see Section I), the Government which came to power in late 1976 has designed a new set of policies aimed at giving the public sector a more active role in the economy and at redirecting development programs to the benefit of the agricultural sector. A special emphasis given to planning should help in the implementation of this new strategy. After a brief review of recent institutional improvements in the planning machinery, we shall comment on the Government's objectives and analyze how current policies may overcome Burundi's considerable constraints. 24. Development planning has been largely ineffective in Burundi. The first Plan covered the 1968-72 period, but its final version was not published until 1971 and it consisted primarily of a public investment program and a list of projects. Inadequate project preparation before and during the Plan period, coupled with lack of annual planning, made its implementation dif- ficult and unsatisfactory. Only 40 percent of the planned investment was achieved. 25. The preparation of the second Five-Year Plan (1973-77) was started at the end of 1971. However, the work of the planning committees was dis- rupted by the political disturbances in 1972, and the preparation of the Plan was delayed by nearly a year. The committees met infrequently, if at all. The technical assistance provided by several governments was largely ineffective because of the lack of coordination between the different teams of planning experts. The second Five-Year Plan, like the first, suffered from the lack of a macroeconomic framework and failure to specify the basic economic policies and objectives. In late 1974, as a result of a ministerial reorganization, the responsibility for national planning was assigned to a new institution, the Bureau Technique d'Etudes (BTE) within the Office of the President, and placed under a Secretary General with the rank of Minister. 26. The basic structure of the present planning process in Burundi is that created in late 1974. However, three fundamental decisions were taken by the Government in late 1976 which have significantly reinforced the role of planning in Burundi. First, the BTE was elevated to the rank of Ministry under the Prime Minister who became also the Minister of Planning. The Secretary General is to continue to head the Planning Ministry with the rank of Minister. Second, all government investment projects must be authorized by the Planning Ministry before being incorporated into the Extraordinary Budget. Third, the Ministry of Finance may authorize expenditures under the Extraordinary Budget only after approval has been granted by the Planning Ministry. Thus, the Ministry of Planning has acquired an appropriate level within the government structure and a control function in the allocation of public investment.  - 11 - 27. A number of positive steps have been taken by the Government in order to improve development planning. The 1978-82 Plan is the first to have been prepared and completed on schedule. It offers a number of improvements on earlier Plans: (a) for the first time the Ministry of Planning has prepared a macroeconomic framework for the third planning period, 1978-82, which re- flects the Government's economic and social objectives and priorities, and investment implementation capabilities; (b) sector and regional work, includ- ing project identification, is being done by working parties and subcommis- sions which bring together representatives from the different Ministries concerned and local authorities as appropriate. A fruitful dialogue within the public sector has thus been initiated under the leadership of the Ministry of Planning regarding the major problems and constraints for development affecting sectors and regions and the policies and investments required to overcome them. The private sector has also been associated with the prepara- tory work for those branches of the economy with which it is particularly concerned (industry and banking). The Ministry of Planning is also making effective use of foreign technical expertise in its macroeconomic and sector work; (c) since it is a rolling plan, it allows for cyclical fluctuations to be taken into consideration; (d) in order to provide incentives for improving project preparation and evaluation, the Ministry of Planning requires that adequate information (on costs, benefits, timetables, work force requirements, etc.) be provided by the technical Ministries as a condition for incorporating their projects into the yearly Extraordinary Budget; and (e) to accelerate project execution, the Planning Ministry is conducting monthly meetings with the representatives from Ministries responsible for project execution. Once a project is finalized, a completion report is to be prepared by the Ministry concerned in collaboration with the Ministry of Planning. 28. In four major areas, however, the present situation needs to be improved: (a) The project preparation and implementation capacity of the Ministries is not yet in line with the Government's objec- tive of increasing investment significantly. This accounts in part for the important proportion of budgeted expendi- tures which are not being made (about 52 percent in 1976). Also, ministerial supervision of development projects is still weak, and often problems arising in the implementa- tion of a project are first noted by the aid agencies themselves. In addition, sector planning capabilities within the Ministries are insufficient. (b) There is insufficient coordination of the priorities for allocating external aid. In the past, external aid agencies have played a highly influential role in deter- mining the content and phasing of the public investment program mainly because of the absence of a strong planning organization coordinating external aid and the relatively weak commitment of the Ministries concerned to projects thus initiated. The rank and functions assigned recently  - 12 - to the Ministry of Planning should facilitate the task of coordination that it should assume. It is necessary to organize periodic aid coordination meetings, if required focusing on individual sectors and associated projects, particularly agriculture and related infrastructure, and attended by representatives of the aid agencies active in Burundi. The Government organized a first meeting of this nature in early 1978 (see para. 29). (c) Coordination among the different national institutions responsible for the determination of economic and finan- cial policy is not yet sufficient. It is most important for the Ministry of Planning to maintain the closest liaison with both the Ministry of Economy and Finance and the Central Bank. The mobilization of domestic financial resources and their use largely depends on their actions. This Ministry should be involved formally and informally in discussions leading to the formulation of monetary and fiscal policies. As the Ordinary Budget is in fact a one-year financial plan, the Ministry of Economy and Finance should routinely consult the Ministry of Planning in determining budget policy prior to the detailed annual budget exercise in order to ensure that all decisions contribute to the achievement of the objetives set out in the Five-Year Plan. Furthermore, since the Ordinary Budget decisions are also significant for planning, as they determine the administrative and technical resources to be made available to departments to implement their programs, formalized procedures are essential to ensure that the Ministry of Planning's views on priorities are taken into account at an early stage in its preparation. (d) It should be said again that it is important for the Ministry of Planning to exercise budgetary control over all govern- ment investment expenditures including those financed by external aid agencies, leaving the accounting function to the Ministry of Economy and Finance. 29. A Round Table Conference, convened by the Government to present its third Development Plan and coordinate foreign aid, took place during February 21-24, 1978. The proceedings of this conference are expected to be available shortly to the participants. However, some of the Government's declarations at this meeting are summarized here, as they bear on certain issues which have been raised above. Regarding coordination of foreign aid, the Government announced the decision to convene in the near future a working group on agriculture. This forum could provide an opportunity to discuss on a con- tinuing basis the major problems affecting this sector and the Government's measures to resolve them. In particular, it could institutionalize a dialogue among major donors and the Government on the experience acquired in the preparation and implementation of the several rural development projects  - 13 - currently envisaged or in execution. With the intention of increasing ab- sorptive capacity, the Government stated that the Ministry of Planning will assume an active role in identifying and evaluating projects which are to be executed by the technical Ministries and financed with foreign assistance. It also indicated that expatriates will be assigned full project management responsibilities whenever competent national cadres are not available. In addition, the Government stated that the principle of equalizing the number of technical assistants and homologues should be modified to favor a system which would associate a national cadre to the execution of a series of projects in the same sector or geographical area. B. Government Objectives 30. After a decade of economic stagnation, social strife, and relative- ly passive economic policies, Burundi's Government has embarked on a new pro- gram. Its objectives are aimed at tackling directly the main issues which had plagued development in the 1970's (see Section I). These objectives are self reinforcing and are being embodied in the Third Five Year Plan (1978-82). They are as follows: i) to increase the rate of economic growth substantially in order to provide greater employment opportunities and more income to the poorest segments of the population; ii) to raise the investment rate signifi- cantly; iii) to give the Government a more active role in mobilizing finan- cial and manpower resources and in participating in mixed enterprises in the commercial and productive sectors; iv) to foster decentralization of economic and social activity away from the capital city and its balanced geographic distribution through the creation of development poles, the settlement of the peasant population in villages, and migration from densely to less densely populated areas; and v) to emphasize agriculture production with a special attention being given to foodcrop production and integrated rural development. 31. The quantitative targets of the Five Year Plan should be viewed as the optimum which could be reached if a dramatic departure from past per- formance is achieved and if the currently low absorptive capacity of the economy is largely overcome. During the 1978-82 period, the maximum annual rate of growth in GDP is targeted at 4.7 percent in real terms on the basis of the successful implementation of all the projects included in the Plan. The primary sector would expand by about 3.3 percent per annum while the secondary and tertiary sectors would grow at rates of 13.2 percent and 5.9 percent respectively. Domestic fixed investment over the Plan period would amount to US$752 million in 1976 prices, which would be more than twice the investment realized in the preceding five years. Despite the growth in GDP, the invest- ment rate would thus increase from 9 percent to 27 percent between the two periods. 32. The public sector intends to assume a key role in promoting impor- tant investments in the mining, industry and tourism sectors through partici- pation of the Government in joint ventures with private and foreign capital. Medium and small size enterprises would be, as a general rule, the domain of the private sector. The public sector is to assume a major role in the marketing of both domestic and imported goods at the retail and wholesale levels; the Government would thus be able to influence market prices and in  - 14 - certain areas to administer or fix them. It is also to exert some control over the supply and demand of labor, which will be closely recorded and publicized by the Ministry of Manpower and Employment. A major effort by the Government in mobilizing external financing, particularly from official agen- cies, is also envisaged. The Party, UPRONA, is to assume an active role in mobilizing manpower resources for communal endeavors, encouraging peasants to regroup in villages, and fostering a policy of spaced births ("espacement des naissances"). The allocation of budgetary resources within the Adminis- tration would also be redesigned to reinforce the economic and social Minis- tries (Agriculture, Public Works, Education, Health). Finally, the Ministry of Finance is to be strengthened by exercising the treasury function which is currently assumed by the Central Bank. 33. In the industrial sector emphasis will be placed on the creation of new jobs, the use of labor intensive technologies and on foreign exchange savings and earnings. The objective is to give priority to industries which process local raw materials, particularly agricultural produce, and to the supply of tools and other inputs to this sector. In housing, priority will be given to sites and services development directed to the urban poor. In the rural areas, construction based on local materials and self-help methods will be encouraged. In mining the main effort will be in exploration. The decision on whether to invest in the development of the nickel deposits will be made upon the results of a feasibility study to begin in 1978. With respect to energy, the Government will give attention to hydroelectric power and to exploiting peat in view of the availability and relatively low cost of these resources in Burundi. In the education sector the main emphasis will be on primary education adapted to the realities of daily life, particularly in the rural areas, and on secondary education with emphasis on technical and professional aspects. Finally, in health, priority is to be accorded to preventive medicine in the rural areas; new hospitals and dispensaries are to be constructed primarily in these areas. 34. The policy of decentralization is oriented toward reducing the pres- sure on agricultural land in the most densely populated areas and redirecting rural migration away from Bujumbura. Migration to the lower altitude zones of Mosso and Buragane would also be encouraged in view of the advantages they offer for mechanized and irrigated agriculture. 1/ The Government would build the infrastructure required for the development of industry and commerce in the areas selected (development poles). 2/ Labor intensive industries and 1/ About two-thirds of the population is concentrated north of the parallel passing through Gitega and only 15% of this population is located in the southeastern triangle of the country. 2/ On the basis of four criteria, population density, agricultural and live- stock potential, balanced regional development, existing infrastructure and transport facilities, six poles have been identified: Kihofi-Rutana, Cankuzo, Ruyigi, Gitega, Kirundo, Ngozi-Kayanza.  - 15 - handicrafts would receive incentives to develop in those centers where farmers would be regrouped. It is expected that jobs could be created during the next five years to reduce the population which depends on agriculture from the current 95 percent to 85 percent of the total population. 35. For the period 1978-82 the objectives are to expand the productions of foodcrops and export crops by 3.1 percent per annum and 5.8 percent per annum respectively. Emphasis is to be put on increasing productivity in view of land constraints; new land gained for cultivation will be destined prima- rily for food crop production. To encourage a more balanced diet, at present high in sugar and alcoholic content, 1/ the production of cereals, leguminous plants, fruits, vegetables and particularly oleaginous plants is to be ex- panded. 2/ A small exportable surplus of foodcrops is expected by the Govern- ment in 1982. However, the expansion of export crops is to a large extent based on a program launched recently to increase the number of coffee trees from 60 million to 100 million by 1980. 3/ About 22 percent of total invest- ment is to be allocated directly to agriculture 4/ and an additional 35 per- cent would be invested in related infrastructure such as rural housing, water supply, electricity, education, roads, etc. The rural areas will thus benefit from about 60 percent of total investment during the period of 1978-82. In particular, the modernization of transport facilities will be pursued to facilitate the supply of inputs to the rural sector as well as the evacuation of the agricultural produce. The formation of cooperatives as well as of regional development corporations would be encouraged as institutional mecha- nisms to channel the assistance of extension services and the provision of agricultural credit. C. Constraints and Policies a. Population and Land Availability 36. Burundi is the most densely populated country in Africa after Rwanda. In 1976, it had 137 inhabitants per square kilometer and 225 per square kilometer of agricultural land. Between 1950 and 1975, Burundi's population increased by more than 50 percent to about 3.8 million. Most importantly, whereas the average crude birth rate remained remarkably stable at about 48 per thousand between the periods 1950-55 and 1970-75 the average 1/ Bananas and roots such as patate, manioc, and yam. 2/ Cereals: maize, rice and wheat; leguminous plants: beans and peas, oleaginous plants: oil palm, soja, peanuts. 3/ In addition to the Ngozi-Kayanza program currently underway. 4/ The total amount currently programmed during 1978-82 for the agricultural sector (including livestock, forestry and fishing) is equal to US$166 million of which 26 percent are constituted by projects in execution. About 32 percent are to be allocated to integrated rural development projects, 10 percent to foodcrop production, 13 percent to export crops, and 10 percent to forestry.  - 16 - crude death rate declined from 31 to 25 per thousand. 1/ The decline in death rates seems to be largely due to improved health conditions as suggested by the increase of life expectancy at birth which has taken place in Burundi since 1950-55 (from 31 to 39 years). The Government has adopted a policy of "spaced births" which may need to be reinforced. While there is a need for an active policy in this matter, its formulation is difficult mainly because little is known about the socio-economic factors affecting fertility rates. 37. The nutrition status of the majority of people in rural areas is poor. Only 88% of the requirements in calories are met, which severely constrains the work effort of adults. Moreover, the diet is very deficient in proteins and fats, which hits particularly children. The death rate of children between 1 and 4 is estimated at 48 per thousand which is over 40 times higher than the US rate. This rate is not due only to a lack of medical facilities, but mainly to post-weaning malnutrition; infant mortality is about 140 per thousand in Burundi, a figure 6 times higher than in the United States. Breast-fed infants - the rule in Burundi - are shielded from disease by their mothers' milk, which contains almost all the required nutrients. Once weaned, children suffer from inadequate food that is often indigestible' and too low in proteins. As a result, many die of diseases such as measles, that would not be fatal had they been properly fed. 38. In the very densely populated areas, most suitable lands are already under cultivation and even many of the less productive areas, in- cluding steep slopes previously used as grazing land and swamp zones, have been brought into production. However, the agricultural frontier has been expanded primarily by clearing forest land. Although no precise figures are available, it is estimated that the area covered by natural forests is decreasing at the rate of 10,000 ha per year. The area has already been reduced to 40,000 ha (1.6 percent of the total land surface of the country), of which 80 percent is in a degraded condition. Deforestation has brought about erosion which, in turn, is causing landslides and flooding of many river valleys, preventing their development for irrigated agriculture. 39. Settlement programs are at the core of Government's current demo- graphic policy. The Government's intention to further develop the Mosso as well as the Ruzizi regions is understandable, as these are the only regions where farmers from the overpopulated areas can be settled in the long run. However, these settlement programs will require detailed studies for the optimum development of the areas with the principal objective being to ac- commodate as many people as possible at reasonable cost. Past experience in the Imbo region has shown that the resettlement of farmers may encounter severe difficulties, one of which is the reluctance to change from the traditional dispersed settlement pattern to one based on villages. While these studies proceed, priority should be given to improving productivity and living conditions in the presently highly populated areas. If no im- mediate action is taken, soil erosion and deterioration of fertility will 1/ Data on population are very questionable and should be treated with all necessary caveats until the next Demographic Census planned for 1979.  - 17 - be aggravated and, in a period of five to ten years, destroy most of the potential of these areas, where, despite resettlement programs, the bulk of Burundi's population will continue to live. b. Agriculture 40. Burundi is well suited to agriculture. Owing to diversified eco- climatic conditions, depending mostly on altitude and rainfall, Burundi can produce a wide range of agricultural commodities. The Ruzizi valley, the Lake Tanganyika shores and the eastern savannahs are suitable for cotton, rice, tobacco, sugarcane and groundnuts. The central plateaus offer ex- cellent conditions for Arabica coffee, beans and maize, while wheat, barley, potatoes and tea can be grown at the higher elevations. The distribution of rainfall between two rainy seasons permits two harvests a year in most places. 41. The major issue facing Burundi is how to increase the level of in- come of its rural population through increased agricultural production. The problems facing agriculture are serious. On most farms, no industrial fer- tilizers are used and, therefore, crop yields depend upon leaving the fields fallow and on the return of crop residues to the soil, either directly or indirectly in the form of manure. However, because of population pressure on the available land and declining yields, fallow periods are getting shorter and less effective. Agricultural productivity is thus becoming more depen- dent on the use of crop residues. As the availability of wood is decreasing, agricultural residues such as maize, cassava and sorghum stalks, bean and pea haulms, and dried dung are being used as fuel to the detriment of soil struc- ture and fertility. The consequent loss of material for mulching is reducing crop yields even further. Under the present pattern, farms rely upon crop residues for the bulk of their fuel supply (used mainly for cooking and heat- ing) and this is augmented with wood whenever possible. 42. Cattle ownership is of the greatest importance in Burundi as it fulfills an economic function and is a source of prestige. The farmer recog- nizes the value of manure as mentioned above, and consumes meat and milk and utilizes or sells the animal hides. A great deal of attention is given to providing shelter for cattle, but few means are available to improve its feed- ing and health. Very little has been done yet to capitalize on the available livestock resource, the total number of which was estimated at about 760,000 in 1973, by defining a sound beef or dairy development strategy. Grazing is on communal pastures and supplementary minerals are seldom given. Repeated burning and overgrazing has led to rapid deterioration of both soils and quality of pastures. The presence of too many old cattle also contributes to exert pressure on available land. 43. Because of high cost, distribution problems, and lack of capital for investment in equipment, oil-derived fuels and electricity for domestic use have little practical significance for the bulk of the population. Burundi has no reserves of coal. The only alternative to fuelwood and charcoal is peat. Recent surveys indicate the existence in Burundi of large exploitable reserves equivalent to 500 million tons of dry peat at altitudes above 1500 m.  - 18 - Peat offers a promising solution for meeting the fuel needs of industries and population centers. The development of peat as a fuel for rural domestic households would be difficult as it would imply basic changes in social tradition, (the men of the family would have to dig and dry the peat while it is the women and children who, at present, do the gathering of the fuelwood). Otherwise, peat would have to be purchased, whereas fuelwood is generally gathered free. A pilot project financed by US AID is expected, over the period 1978-80, to test the feasibility of peat harvesting on a large scale and would include sociological studies on the acceptance of peat by small farmers as an alternative to wood or charcoal. The Forestry Department is emphasizing the creation of rural fuelwood plantations by communal effort, where each participating farmer would share in the product of his work. This may entail further contraction of the grazing land. Yet, given the magnitude of the energy problem and the limited financial capabilities of Burundi, a system of plantations with farmers organized on a communal basis and the Government providing technical inputs and support may be an alternative for both increasing fuel supply and restoring ecological balance in the rural areas. 44. A major reason for the current state of the agricultural sector in Burundi has been the failure of the Government to allocate sufficient resources for the provison of production inputs, an effective extension service and adequate infrastructure investment and, to offer appropriate incentives to the farmers as well as to civil servants responsible for de- vising and implementing measures to modernize the agricultural sector. The basic ingredients for development do exist - research, the rudiments of an extension service, and farmers who are willing to introduce new crops and improve on their present rudimentary methods of farming. 45. The new Government intends to give the highest priority to the agricultural sector by gradually redirecting the allocation of resources to better rural conditions and create a more balanced society. The emphasis which the Government intends to place on rural development projects is jus- tified by the need to combat simultaneously the interrelated factors respons- ible for the present imbalances in the rural areas and to increase the farmer's total income. These projects will focus on soil conservation, better foodcrop production, improved animal husbandry and reforestation. c. Mobilization and Use of Human Resources 46. A serious constraint to development in Burundi is the very defi- cient capability to prepare and manage programs and projects. The recent increases in civil servant salaries should help in improving the performance of Government departments, but the capability to prepare projects can only be increased gradually. Furthermore, the organizational skills required to set up a network of production and marketing associations--a major policy objec- tive of the present government for the rural areas--are not yet sufficiently developed in the public sector. In this area, the Government can benefit from the considerable experience and infrastructure of the religious missions which are spread throughout the country. In general, an analysis of manpower  - 19 - and training requirements, particularly in the economic and social sectors, is necessary if a planned approach to increasing the absorptive capacity of the country is to be followed. ILO has agreed, at Government request, to provide technical assistance for such an analysis. 47. The inadequacy of educational standards that prevailed at inde- pendence is partly responsible for the low level of absorptive capacity in Burundi today. However, government policies have also contributed to this situation by supporting an education system which is basically highly aca- demic and elitist in nature. Appreciating these weaknesses, the Government embarked on an educational reform in 1973. Its main characteristics are to foster the use of the native language, Kirundi, as a medium of instruction at the primary level, to give greater agricultural content and orientation to the primary school curriculum in order to reflect better the social and physical environment of Burundi, to strengthen the "school garden movement" so as to allow children to work two hours weekly in the cultivation of food and cash- crops and, in the higher primary grades, to complement agricultural subjects with skill-training related to agriculture. Another element of the reform is the gradual transformation of all primary schools into "community" schools, making them centers where adult education, programs for out-of-school youth and civic activities as well as primary education will take place. When classes are not in session, it is planned to use the classrooms and workshops for adult training activities or for the in-service training of lower-level ministerial staff (Agriculture, Health, Interior, etc.). As with primary education the education reform also aims at the reorganization and reorienta- tion of secondary education. 48. Four years of experience show that the Kirundization has been suc- cessful in spite of some shortcomings. Children appear to be learning all subjects far more quickly and effectively than before. For teachers, who for the most part were not sufficiently articulate in French, Kirundization is pro- viding relief and encouragement. The Kirundization of the primary curriculum is proceeding a year at a time; each year new teaching and learning aids for one additional grade are prepared and distributed. Materials for both pupils and teachers have been produced for selected subjects and are already in use in grades one through five. However, it is clear that the drastic reorienta- tion which is sought in subject-matter and the improvement in the quality of education will be achieved gradually, and its effects on the economy will be evident only in the long run. The quality of primary teachers is insufficient. Primary-teacher training still follows an academic pattern in spite of the reform. New concepts such as the "ruralization" of the primary curriculum are only beginning to be reflected in the teacher-training program, and priority needs to be given to the reform of the teacher-training curriculum. The fact that almost 90 percent of the teacher-training institutions belong to the missionary system is one of the reasons for the slow implementation of a new teacher-training program. Even though the Ministry of National Education has supervisory power over all educational institutions in the country, it seems that missionary teachers remain attached to traditional concepts of pedagogy and an academically oriented curriculum, and they want their graduates to  - 20 - reflect the same values. To date, the missionary teacher-training system has not responded actively to the Government's appeal to reorient its program along the lines of the reform. Another reason for the slow implementation of the reformed teacher-training program is that the organ responsible for it, the Rural Education Bureau (BER) has lacked the trained personnel and clearly defined policies to carry out its duties efficiently. 49. Despite the progress being made in reforming primary education, a major constraint to the development of education in Burundi is the lack of resources. Only 20-25 percent of primary school-aged children attend primary schools because there are not any schools, teachers and recurrent funds for the other 75,80 percent. Church groups in Burundi have also an important direct role in basic education. The so-called Yakamukama schools, which are operated by these groups, offer an eight-hour per week program, divided equally between religion and reading and writing, to 250,000 children through- out the country (about 40 percent of the primary school-aged group). The Yakamukama centers, however, have only very primitive facilities, for the most part, and it is probable that most of the children who attend them do not become functionally literate. 50. Existing agricultural training facilities in Burundi are presently underutilized and appear adequate to train the number of agricultural personnel who will be needed for the country's development over the medium term. The quality of the education offered in these facilities, however, is questionable. The graduates of the Technical Agricultural Institute of Burundi enjoy a good reputation for their technical knowledge, but reports are less favorable with regard to their ability to communicate with extension agents and rural leaders and to their general attitudes towards the constraints of rural life. At the lower-secondary level, the Vocational School of Agriculture attempts to train agricultural field assistants, but practical agricultural training is almost nonexistent. Therefore, although the graduates of this course are generally able to communicate well with farmers because of their own farm backgrounds, they often fail to adapt what they have learned to the reality of their nation's agriculture. With regard to the training needs of the rural popul- ation in general, the task ahead is enormous. Most of the adult population is illiterate and, since most children have no schools to attend, the situ- ation will improve only slowly. Burundi's rural adults have, over the years, devised agricultural techniques which are adapted to their minimal resources and basic level of technology; however, to depart from this situation, it is most urgent to devise and implement an active non-formal education program. 51. Opportunities for wage employment in Burundi are extremely limited. Out of a total labor force estimated at 1.9 million, only 121,000, or 6 per- cent, are wage earners. The Government is the largest employer, with about 16,000 civilian employees. The total amount of new jobs which would be directly created in the industrial sector if all the new projects presently identified were implemented would total only 6,800 during the period 1978-82. In addition, only limited opportunities exist in the medium term for replacing expatriates in industry and commerce. Yet, there are an estimated 40,000 new 15-year-olds who join the working-age group each year. This situation justifies present Government policies to give highest priority to the utilization of  - 21 - labour-intensive methods in the rural and urban areas for the building and maintenance of infrastructure, and to promote labor-intensive industries. In the long run the expansion of employment in the modern urban sector will largely depend on the expansion of agricultural incomes and the rural market. d. The Transport System 52. Two of the principal factors underlying Burundi's transport problems are the country's landlocked position, about 1,400 km from the coast, and the rugged terrain which makes highway construction and maintenance costly. The 5,500 km road network reaches most parts of the country; nevertheless, as virtually the only internal transport mode, it is inadequate for Burundi's needs, largely because of poor construction standards and inadequate main- tenance. The resulting high transport costs and frequent interruptions to service are obstacles to the expansion of agricultural output. The upgrading of some key routes with external financing and recent improvements in mainte- nance have alleviated the problems to some extent, but continued maintenance and rehabilitation remain a high priority. 53. Improvements to the internal transport system will be of limited effect unless satisfactory external links can be assured. At present, ship- ments of imports and exports through the principal outlet via Tanzania, totalling some 150,000 tons per year, encounter frequent delays and losses. Travel time between Dar-es-Salaam and Bujumbura averages 60 days, while 15 days would be sufficient under normal operating conditions. Domestic capacity is not a problem; the port of Bujumbura can handle 450,000 tons per annum, and both the lake fleet and the Central Line of Tanzanian Railways from Kigoma to Dar-es-Salaam have adequate capacity for the foreseeable future. The problem is, rather low productivity principally in the railways and in Kigoma Port arising from poor management, inadequate investment and insuffi- cient maintenance. The situation is aggravated by the fact that Tanzania concentrated its limited investment and maintenance funds on the rail branch serving Mwanza and Lake Victoria rather than Kigoma on Lake Tanganyika. However, action has been taken to improve the situation. At present, Canada is financing the rehabilitation of the railway link from Kigoma to Tabora (Tanzania). In addition, Belgium is financing a study on the Kigoma port which will determine the investments required for improvement of the existing infrastructure. The European Development Fund envisages to participate in financing improvements of infrastructure at the Kigoma and Dar-es-Salaam ports. 54. Alternative outlets do not yet compete effectively with the Tanzania route because of higher costs and, at present, political difficulties. How- ever, the link via Rwanda and Uganda to the former East African Railways and the port of Mombasa in Kenya is becoming increasingly attractive with the con- tinuing improvement in national highways between Bujumbura and the railhead. A third possibility via the lake port of Kalemie in Zaire and beyond to the ports of Matadi or Lobito cannot be regarded as an economic alternative at present. Other alternatives, such as that via the Bukoba (Tanzania) rail ferry across Lake Victoria to Kisumu (Kenya), would not be feasible without highway construction outside Burundi. The high political and economic risks incurred by Burundi resulting from its landLocked position stresses the vulnerability of its economic prospects.  - 22 - IV. ECONOMIC AND FINANCIAL PROSPECTS 55. The discussion above illustrates the formidable constraints which the Burundi economy faces. Any attempt to quantify the future is, therefore, mainly useful as a rough indication of trends within a consistent framework. In view of its current constraints Burundi's economic product is unlikely to grow at a rate higher than 4 percent per annum in the next few years. If this does materialize, by 1982 per capita product in real terms will have increased by 8 percent in contrast to its recent stagnation. The major driving force will have to be in the agricultural sector which constitutes about 60 percent of GDP. In the long run, any major expansion of domestic demand for the industrial output and for services will depend on increases in per capita rural incomes, and this, in turn, will require a steady growth of agriculture. The Government intends to allocate a much higher proportion of its resources to agriculture and intervene effectively in providing ser- vices to rural areas such as storage facilities, extension and social services. However, this will require a drastic improvement in the efficiency of the Administration and definite attitudes to enlist the support of the rural population. Unless the farmers are persuaded that they will be the prime beneficiaries of increases in production, it will be difficult to mobilize them for the immense task of conserving soil fertility. The absence of rural credit and of suitable marketing structures in the rural areas has often prevented the farmer from fully benefitting from the fruits of his labor. The steps being taken by the Government thus go in the right direction if they succeed in promoting some degree of organization among the farmers to market their production and to benefit from credit through their own associations. 56. Private sector resources will have to be mobilized also, partic- ularly in industrial and tertiary activity. The expanding intervention of the Government in the recent past in areas such as price determination, rent controls and marketing, and the attempt to exert tighter control over the labor market, although legitimate in view of the need to reduce speculative activities and promote social justice, have introduced an element of uncer- tainty in the private sector. To obtain its support, it will be necessary to specify with greater clarity the nature and extent of Government partici- pation in economic activity, especially since the Government's role in indus- trial production and in international and domestic trade is envisaged to increase significantly over the period of the third Five-Year Plan. Likewise, if Burundi is to receive the technical assistance it requires from abroad in order to achieve higher levels of investment and economic growth, it will be necessary for the Government to ensure stable working conditions to expatriates, in particular to those working under Government contracts. The Government recognizes the need for technical assistance and intends to continue pursuing an active policy to obtain it.  - 23 - 57. A few years ago, substantial deposits of high grade nickel were dis- covered in the southeast of the country, and the Government hopes that mining of this commodity will transform the country's economy and growth prospects. Table 3: PROJECTIONS OF ECONOMIC AGGREGATES (in millions of US$, 1970 prices) Average Annual Growth Rate 1977 1982 1977-82 Gross domestic product 297.0 362.5 4.0 Gross domestic income /1 324.6 360.3 2.1 Imports of goods and NFS 52.4 65.4 4.5 Exports of goods and NFS /1 54.6 28.7 -8.1 Resource balance -2.2 -36.7 Government consumption 33.3 41.1 4.3 Private consumption 254.0 287.5 2.5 Investment 35.2 68.4 14.2 Domestic savings /1 37.3 31.7 -2.9 National savings /1 48.5 46.5 -1.5 /1 Includes adjustments for changes in terms of trade: US$27.6 million and US$-2.2 million in 1977 and 1982 respectively. Source: Mission estimates. Pre-feasibility studies are being financed by UNDP and are expected to be completed by mid-1978. Implementation of the project would require the construction of substantial physical infrastructure which is practically non-existent in the region of the deposits. Even if commercial viability is proven, production cannot begin before 1985-86 in view of the time required for feasibility studies, for putting together an appropriate financial and technology package, and for building the required infrastructure. 58. Regional development in Central Africa will also be important in the long run for Burundi's economy. On September 20, 1976, Burundi, Rwanda and Zaire signed a convention establishing the "Economic Community of the Countries of the Great Lakes." The Community, which has its seat in Gisenyi, Rwanda, aims inter alia at stimulating and intensifying intraregional trade and cooperation in a wide range of activities. Preparation of a regional power project and a cement factory in Rwanda are underway and discussions are being held to facilitate the movement of people and goods within the Community.  - 24 - 59. Burundi could significantly increase its investment rate during the period of the third Five-year Plan (1978-82) if the present level of assist- ance in grants is maintained in real terms and if the Government actively pursues appropriate policies for increasing its borrowing from official agencies. 1/ By 1982, the investment rate could reach 18 percent, compared to the 12 percent rate for 1977, and disbursements from these agencies would be three times higher than in 1977 and amount to about US$40 million. Whether Burundi can achieve such investment levels depends largely on the public sector's capacity to significantly increase its project preparation and implementation capability in a relatively short period. This would call for continued technical assistance from abroad. Furthermore, in order to finance the increasing import requirements of the economy, Burundi would need to use in 1982-85 a major part of the international reserves it will have accumu- lated during 1977-81. 2/ 1/ The major assumptions made for the balance of payments projections are the following: (a) coffee prices averaging 225 c/lb in 1977 and thereafter declining according to the price indices estimated by the IBRD in "Commodity Price Forecasts" (October 21, 1977). The resulting prices are 172 c/lb in 1978, 161 c/lb in 1979, 144 c/lb in 1980 and a 1.4 percent decline per annum thereafter. Volume of coffee exported is assumed to increase from 20,000 tons in 1977 to 23,300 tons in 1982; (b) a marginal propensity to import of 0.3 (based on regressions using data for the period 1970-76) applied to the increase in terms of term gains from the 1976 level. Import elasticities were also computed on regressions using 1970-76 data; (c) international inflation averaging 7.3 percent per annum during 1977-82 and 7 percent per annum thereafter (IBRD forecasts, October 21, 1977); (d) external loan commitments increasing from an average of US$27 million per annum in 1975-77 to US$61 million in 1982; average grant element around 58 percent. 2/ Projections for the planning period also indicate that the growth of current tax revenues will be sufficient to finance a relatively rapid expansion of government current expenditures (15 percent per annum in nominal terms), particularly of those which provide services to the social and economic sectors. These projections assume: (a) Government would receive through the export tax about the same proportion of cof- fee revenues as in 1977 (53 percent); (b) IBRD's current projections of the world market price for coffee; (c) a growth of GDP of 13.6 per- cent per annum in nominal terms; (d) same tax elasticities as observed in 1970-76. If the Government were to receive only one-third of coffee revenues, its current revenues would still be sufficient to finance current expenditures during 1977-82.  - 25 - 60. If reserves are to be accumulated at the levels required for the early 1980's, the Government must follow cautious budgetary income policies, in particular regarding the salaries of civil servants. In addition, it will be difficult to maintain the present high level of the producer price for coffee, as the world market price for this commodity is expected to decline in the medium term. The producer price was fixed in July 1977 at an abnormally high level, as far as the incentives required for increasing coffee production is concerned. A major consideration then was the potential danger of the smuggling of a major porportion of the 1977/78 crop out of the country (Rwanda). If the producer price were to be maintained at the current level, it would be necessary to increase the level of taxation on those imported and domestic goods which are subject to mass consumption. Otherwise, the economy would adjust to a high level of imports (particularly of consumer goods) which could be difficult to sustain in the medium term or excessive demand could develop which would ultimately generate inflationary pressures. The more general issue of preventing smuggling can truly be solved only if the countries in the region agree to coordinate their producer price policies for coffee as well as their price and tax policies regarding consumer goods for mass consumption. 61. Projections also indicate that after the Plan period the balance of payments could become a serious constraint to development. By 1985, the debt service ratio could attain 10 percent, a level which could be con- sidered relatively high for Burundi in view of its heavy dependence on coffee exports, and all excess reserves would have been drawn. During this year, Burundi's terms of trade index would be at a level of only 40 percent that of 1977 mainly due to the expected decline in coffee prices, and continued inflation in the industrialized countries. In 1985, coffee prices are expected to be only one-third of the 1977 price in real terms and lower than the average for the past decade and the early seventies. This raises serious doubts about the rationale for allocating new land to the production of this commodity in Burundi. Although increasing the production of coffee is necessary in order to obtain the foreign exchange required by the economy, in view of the competition for land with foodcrops and cattle grazing and the poor price prospects for this commodity, it would be preferable to increase the low yields in areas currently under cultivation. This should be achieved in conjunction with efforts to increase foodcrop production, as the causes for the low productivity of most crops are similar, given the fact that the small farmer usually cultivates both crops in his holding. The growth of export volume in future years, which will depend largely on increases in coffee production, is thus bound to be moderate. In view of this, plus the instability of coffee production and world prices and the expected decline in the terms of trade, Burundi should continue to rely on financing through grants and borrowing on very concessionary terms.  - 26 - Table 4: BALANCE OF PAYMENTS PROJECTIONS (millions of US$, at current prices) 1977 1982 Exports (inc. NFS) 111.7 91.5 Imports (inc. NFS) 107.3 208.2 Factor services and transfers, net 22.9 43.1 Current account balance 27.3 -73.7 Capital grants 15.0 18.5 Medium and long-term loans 13.6 40.4 Debt amortization -2.6 -4.3 Errors and omissions -24.8 - Change in reserves (- - increase) -28.5 19.1 Source: Mission estimates.  ANNEX I Page 1 ECONOMIC DEVELOPMENTS IN 1970-76 Economic Growth 1. Economic developments during 1970-76 are reviewed in this annex in order to identify the main characteristics of Burundi's economy and the extent of recent departures. This review has been considerably facilitated by the statistical work for this period done by the recently established Ministry of Planning, particularly on national accounts and public finance. In order to reduce the effects of short-run fluctuations common to the Burundi economy and brought about by weather conditions and the world market price for coffee, comparisons are made by using averages for a few years rather than annual figures. Thus, the last two years, 1975 and 1976, for which data are avail- able are compared with the average for the years 1970 to 1974. The period 1975-76 was selected mainly because, beginning in 1975, the investment rate and the volume of imports and of external borrowing attained significantly higher levels. 2. During the period 1970-76 GDP at market prices grew at a rate of only 2.2 percent per annum, about the same as population growth, and per cap- ita product stagnated (see Table 1). A major reason for this weak performance Table 1: Gross Domestic Product by Sector Origin (based on 1970 constant prices) Share of GDP at f.c. 1970-76 Average 1970 1976 Annual Growth Rate Primary sector 66.6 64.0 1.2 Agriculture foodcrops 55.3 53.6 1.3 Agriculture export crops 5.4 4.4 -1.5 Livestock, fishing, forestry 5.9 6.0 2.2 Secondary sector 11.3 13.5 4.8 Food industry 6.4 8.2 6.1 Construction 2.6 3.0 4.1 Other 2.3 2.3 1.8 Tertiary sector 22.1 22.4 2.1 Transport, Commerce and other private services 12.7 12.0 0.9 Private non-profit institutions 2.2 3.3 8.7 Public services 4.0 3.6 0.0 Foreign aid 3.2 3.5 3.3 GDP at factor cost 100.0 100.0 1.8 Source: Appendix Table 2.1  ANNEX I Page 2 lies in the slow growth of the agricultural sector which accounts for about 60 percent of GDP. To the extent that agricultural statistics are reliable, it appears that the production of foodcrops expanded at only 1.3 percent per annum, bringing about a decline of about 5.5 percent in per capita production as compared to the 1970 level; and the production of export crops declined by about 1.5 percent per annum over the same period. However, a relatively rapid expansion took place in the secondary sector (which accounts for 13.5 percent of GDP), particularly in food processing and construction. The secondary sector grew at about four times the rate of rural-based activities. Growth in services was sustained largely by the pace of activities financed primarily from abroad, including those of non-profit institutions, mainly religious missions. 3. For five major products (beans, sorghum, maize, cassava, patates), the bulk of which is produced by small farmers for subsistence, average yields per hectare declined between the average of the 1970 and 1971 crops and that of the 1975 and 1976 crops. During this period significant in- creases were taking place in the area under cultivation (Table 2). Because of population pressures, cultivation has been extended into relatively less productive lands. At the same time, there has been some decline in the length of fallow periods and the recourse to natural fertilizers. Table 2: Average Yields of Major Foodcrops % Increase in area Average Yields (tons/ha) under cultivation 1970-71 1975-76 1970-71/1975-76 Beans 1.6 0.9 63.0 Sorghum 2.0 1.2 33.0 Maize 2.3 1.6 74.0 Cassava 17.8 11.0 46.0 Patates 16.5 7.0 88.0 Source: Appendix Table 7.1 4. In 1976, export crops accounted for about 7 percent of rural in- comes and about 35 percent of cash income in rural areas (in 1970 prices). Coffee, which represents by far the largest of these crops, as well as cot- ton, are mostly cultivated by small farmers, while tea is mostly produced by wage earners on government-owned plantations. The production of coffee fluctuated widely around a downward trend over this period owing to weather conditions and the natural cycle of this crop.  ANNEX I Page 3 Table 3: Production of Major Export Crops (in tons) 1970-71 1975-76 % Change Coffee 23,615 19,178 -18.7 Cotton 8,726 4,173 /1 -52.1 Tea -235 905 285.0 /1 1974-75 Source: Appendix Tables 7.3, 7.5 and 7.6 5. Burundi's small industrial sector includes food processing, textiles, metallurgy, construction materials and chemicals. Most industries were set up before independence to serve a wider market including Rwanda and the Kivu region of Zaire. They are reported as usually operating below capacity. Dur- ing 1970-76 this sector expanded at 5.2 percent per annum in real terms. The food industry constituted the main source of growth in this sector, in par- ticular the production of beer which more than doubled between 1970 and 1976. Other industries such as soft drinks and blanket manufacturing and those processing the major export crops stagnated or declined during this period. 6. The relatively slow growth of the services sector, about 2.1 per- cent per annum, was due mainly to the slow growth in government services and commercial activity. Commerce accounts for about one-third of the value added in the services sector. Modern commerce handles mostly the importation of goods and their sale, both wholesale and retail, in Bujumbura and the interior of the country. Traditional commerce covers retailing at a much lower scale of locally produced goods, such as beer, and soft drinks, food- crops, and handicraft products, in local markets. The slow growth of commerce reflects in part the slow increase in rural incomes, at least until 1975, as well as the difficulties of transportation resulting from an inadequate road network. Investment and Savings 7. During the period 1970-74, gross fixed investment represented only 7.5 percent of GDP, of which about one-half was accounted for by the public sector. Due mainly to a significant increase in public sector investment, the investment rate rose to 11.7 during 1975-76. Despite this increase, Burundi's investment rate is still far below the average rate prevailing in the devel- oping countries (20 percent in 1973) even within the low income group (16 per- cent in 1973). 8. Average annual gross fixed investment increased by about 65 percent, from about US$33 million to US$54 million, between 1970-74 and 1975-76 (in 1976 prices). To a limited extent, this reflects a recuperation of private  ANNEX I Page 4 investment from the low levels it attained during the period of civil strife (1972-73); most of it represents higher investment by the public sector since 1975. The distribution of investment between productive and infrastructure branches, one-third and two-thirds respectively, did not change to any sig- nificant extent during the 1975-76 period when the investment rate rose significantly. Within the productive branch, however, the share of agricul- ture declined from 24 percent to 19 percent, the share of mining and energy more than doubled, and that of industry declined marginally. Within the infrastructure group, the share of the tourism, social and administrative sectors increased at the expense of transport and housing (Table 4). If the economy is to grow at a significantly faster pace than it did in the recent past, it will be necessary to increase not only the investment rate but also the share allocated to agriculture. Although in 1975-76 annual investment in agriculture increased by about one-third in real terms compared to the annual average of the preceding five years, in absolute amounts it still remained small. During 1975-76 it averaged about US$10 million per annum equivalent to an annual expenditure of US$2.85 per capita of the rural population. A major constraint for increasing investment in agriculture has been the inadequate capabilities for preparing and executing projects in this sector. As a result, available resources have been allocated to other sectors. For example, during 1975-76 about US$7 million were invested in tourism, mainly for hotel construction in Bujumbura, which was equal to about one-third of the total sum allocated to agriculture. Table 4: Average Annual Gross Fixed Investment by Branch, 1970-76 (in 1976 prices) 1970-74 1975-76 Amount in Amount in US$ million % share US$ million % share Productive branches 11.0 33.9 17.9 33.4 Agriculture, livestock, fishing 7.8 24.0 10.3 19.3 Mining and energy 1.1 3.3 4.3 8.0 Industry 2.1 6.6 3.3 6.1 Infrastructure 21.5 66.1 35.6 66.6 Transport and telecommunications 6.7 20.5 8.8 16.5 Housing 10.6 32.7 13.2 24.7 Social and administrative 4.2 12.9 8.7 16.2 Commerce, tourism - - 4.9 9.2 Total 32.5 100.0 53.6 100.0 Source: Appendix Table 2.7  ANNEX I Page 5 9. The source of investment changed significantly during 1975-76 as the public sector increased its role and accounted for about two-thirds of gross capital formation. This shift was brought about largely by an expansion in the activities of public corporations. They increased their annual investments more than eight-fold between 1970-74 and 1975-76, or from 5.1 percent to over 26 percent of total investment (Table 5). Invest- ments by these corporations were destined to build infrastructure for the energy, transport and telecommunication sectors and for the construction of a textile mill and a hotel in Bujumbura. These investments were carried out by the public utilities company (Regideso), a commercial concern which markets selected imported goods (Office National du Commerce), the tele- communications company and the national development bank (Banque Nationale de Developpement Economique). Table 5: Average Annual Gross Fixed Investment by Institutional Source (in 1976 prices) 1970-74 1975-76 Amount in Amount in US$ million % share US$ million % share Public sector 16.5 50.5 34.9 65.1 Government 14.8 45.4 20.9 38.9 Enterprises 1.7 5.1 14.0 26. 2 Private sector 16.0 49.5 18.7 34.9 Enterprises 1.0 3.2 2.7 5.0 Households 10.6 32.7 13.0 24.3 (of which traditional) (9.0) (27.9) (10.4) (19.4) Non-profit institutions 2.5 7.8 3.0 5.6 Unidentified 1.9 5.8 - - Total 32.5 100.0 53.6 100.0 Source: Appendix Table 2.8 10. Investment by private enterprises, on the other hand, has been relatively weak during 1970-76 when it accounted for only 4 percent of the total. The amounts invested in 1975-76 averaged less than US$3 million per annum (in 1976 prices). This reflects the limited size and slow growth of the Burundi market, the fact that certain industries do not need to increase capacity, as they were originally built to cater to a much larger market than the present one, and the small size of most of Burundi's private firms which limits their investment capabilities. About 50 percent of investment by private enterprises during 1975-76 was for the expansion of beer production and 36 percent for the acquisition of fishing boats, principally by two firms  ANNEX I Page 6 located in Bujumbura; the remainder, 14 percent, was mostly for transport equipment and for a quinine plantation. Non-profit institutions, mainly missions, contributed more to capital formation than private enterprises and, during 1975-76, accounted for 5.6 percent of total investment. Most of their investment was in religious buildings, education and health facilities. 11. More than half of total private sector investments took place in housing by families using very limited means and techniques and was divided roughly equally between the rural and urban areas. Together with non-profit institutions, they accounted for about 25 percent of total investment during 1975-76 of which possibly more than one-half was outside Bujumbura. If mobilized ip a more organized manner, it would be possible to diversify and increase the productivity of the traditional sector and orient non-profit institutions so as to facilitate the implementation of Government develop- ment objectives in the rural and urban areas. 12. Investment in the rural sector in Burundi is to a large extent the result of direct Government action: during 1975-76 about 90 percent of investments in this sector were made by the Government. Estimates by the Ministry of Planning indicate that of the total cost of agricultural projects currently under execution (about US$24 million), only one-fifth are destined to increase the production of foodcrops, the remainder being for export crops, mainly coffee and tea. This suggests that investment in the agricultural sector in recent years has been extremely lopsided and would, in part, account for the low growth in foodcrop production as well as the declining marginal productivity of land. 13. During 1975-76, the share of investment in the rural sector financed by the Government was about 19 percent, a substantial increase from the aver- age of the previous five years of about 9 percent (Table 6). The balance was financed by official aid agencies. Nearly half of the capital grants made to the Government by these agencies during 1975-76 was for the rural sector. This highlights the important role the latter have in encouraging the Govern- ment to allocate resources to agriculture as well as in defining the content of the projects themselves. It seems appropriate, therefore, to coordinate investment decisions and policies in this sector among the major donors and the Government. Table 6: Financing of Government Investment in Rural Sector, Annual Averages (in millions of BuF) 1970-74 1975-76 in BuF million % Share in BuF million % Share Investment 417.5 100.0 739.9 100.0 Financing 417.5 100.0 739.9 100.0 Government budget 36.3 8.7 139.7 18.9 Foreign official grants 358.4 85.8 570.9 77.2 Foreign loans 22.8 5.5 29.1 3.9 Source: Ministere du Plan and Appendix Table 2.9  ANNEX I Page 7 14. Gross national savings in Burundi have been very low; during the period 1970-76 they constituted only 1.5 percent of GNP. In a comparison of the average savings rates of 124 countries dur.ng the period 1968-73, Burundi ranked 120th, below even those of similar and lower per capita income, except for Upper Volta, Lesotho and Jordan. (During the early 70's the average savings rate for low income countries fluctuated around 13 percent of GNP). Burundi's savings rate did increase, however, during 1975-76, although the relatively high rate of 5.5 percent of GNP attained in 1976 reflects, in part, the shift in relative prices which took place during that year due to the substantial increase in the world price for coffee. The savings rate, calcu- lated on the basis of 1970 price figures, was only 3.6 percent in 1976. During 1975-76, about 14 percent of investment was financed by gross national savings. During 1975-76 Government savings 1/ constituted about 38 percent of total gross national savings. Because of the small size of the private sector and the subsistence level of the majority of the Burundi population, it appears difficult to increase savings, at least in the medium term. Table 7: Financing of Investment, Annual Averages 1970-74 1975-76 Amount in % Share of Amount in % Share of BuF million Investment GNP BuF million Investment GNP Investment 1,951.4 100.0 8.4 3,849.4 100.0 10.8 Fixed 1,792.9 91.9 7.7 4,253.9 110.5 11.9 Change in coffee stocks 158.5 8.1 0.7 -404.5 -10.5 -1.1 Gross National Savings 322.6 16.5 1.4 556.9 14.5 2.4 Government 106.1 5.4 0.5 212.2 5.5 0.9 Private /1 216.5 11.1 0.9 344.7 9.0 1.5 /1 Includes savings by public corporations. Source: Appendix Tables 2.2 and 5.1 Balance of Payments 15. Except for 1974, Burundi's foreign exchange reserves have increased during the period 1970-76. However, from 1970 to 1973 the current account 1/ Calculated after an economic classification of the central Government Ordinary and Extraordinary Budgets.  ANNEX I Page 8 deficit averaged about US$3.0 million and it increased to US$11 million in 1974 and US$33 million in 1975 mainly because of substantially higher imports. In 1976, the current account registered a surplus, the first in this decade, associated primarily with a sharp increase in coffee exports (Table 8). The principal trends in recent years in Burundi's balance of payments have been: (a) continued, high dependence on coffee exports; (b) a gradual diversifica- tion of external trade away from the U.S. and Africa toward countries of the European Economic Community; (c) a substantial increase in import value in nominal terms after 1973 as a result of international inflation; (d) increased imports of capital goods during 1975-76 resulting from higher levels of pub- lic investment as well as increased disbursements of foreign grants and loans, mainly from official sources; and (e) a relatively high level of net interna- tional reserves which, during 1970-76, averaged about 5 months of imports of goods and non-factor services. Table 8: Summary Balance of Payments, 1970-76 (in US$ million) Annual Average 1970-73 1974 1975 1976 Exports of goods and NFS 27.5 33.7 34.8 61.5 Imports, goods and NFS 35.5 53.6 80.0 77.5 Resource balance -8.0 -19.9 -45.2 -16.0 Net factor income -9.1 -9.0 -8.6 -11.2 Net current transfers 14.2 18.2 21.1 31.4 Current account balance -2.9 -10.7 -32.7 4.2 Direct foreign investment 0.1 0.2 - - Capital Grants 8.1 14.6 18.4 13.9 Public LT capital, net 0.0 1.5 13.1 1.9 Disbursements (0.8) (2.2) (14.7) (4.2) Amortization (0.8) (0.7) (1.6) (2.3) Short-term capital -2.8 -7.0 17.8 -7.0 Errors and omissions 2.1 -6.0 -2.1 2.1 Change in net reserves ( - increase) -4.6 7.4 -14.5 -15.1 Source: Appendix Table 3.2 16. Burundi's foreign exchange earnings are heavily dependent on agri- cultural exports, especially coffee, which makes the country vulnerable to natural factors such as weather conditions and the biologial cycle of coffee trees, as well as to changes in the world market price for coffee. A ranking of 117 countries according to export instability ratios (in descending order) placed Burundi on top of the list before Zambia, Ghana, Zaire and Rwanda, all of which are heavily dependent on a few commodities for the bulk of their  ANNEX I Page 9 foreign exchange earnings. The dependence on coffee has in fact increased in recent years and, during 1975-76, coffee exports represented on average close to 90 percent of total merchandise exports. 17. Coffee export volume has fluctuated considerably during 1970-76. It was unusually high, around 26,000 tons, in 1975 partly as a result of transportation bottlenecks during the previous year that caused a spillover of physical shipments into the following year. In 1976 it declined to 21,800 tons, about the same as the average for 1970-74. About 60 percent of the coffee trees are very old and have low yields; the Government is intensifying the campaign to replace them over the next five years. Over 90 percent of Burundi's coffee exports consist of Arabica; the rest is of the Robusta type. Wide fluctuations in the world market prices and domestic production over the past seven years have been responsible for large varia- tions in export earnings. Coffee export unit values (f.o.b.) rose from 36.6 c/lb in 1971 to 55.1 c/lb in 1973; they declined to 49.1 c/lb in 1975 and reached US$1.05 in 1976. Table 9: Composition of Merchandise Exports, Annual Averages for 1970-76 (in 1970 prices) 1970-74 1975-76 Amount % Share Amount % Share (in US$ million) (in US$ million) Main primary sector exports 24.3 95.3 26.3 97.0 Coffee 21.9 85.8 24.2 89.3 Cotton 1.4 5.5 0.7 2.6 Tea 0.5 2.0 0.9 3.3 Hides and skins 0.5 2.0 0.5 1.8 Other goods 1.2 4.7 0.8 3.0 Total exports f.o.b. 25.5 100.0 27.0 100.0 Source: Appendix Tables 3.3 and 3.4 18. Cotton, tea and hides and skins are the other major commodities exported by Burundi although, together, they represent only a small share, between 8-10 percent, of total merchandise exports. Tea exports more than doubled in volume between 1972 and 1976. The cultivation of tea is being developed through projects financed by the European Development Fund which involve principally large-scale, state-owned plantations and factories. Smallholders are also included, but only to a limited extent. Since 1970, the area under tea cultivation has tripled and attained some 2,600 hectares in 1976. Producer prices were increased from BuF 7 to BuF 10 per kilogram of green leaves during 1977 following the more favorable world market prices.  ANNEX I Page 10 19. The increase in exports of tea has been more than offset by a de- cline in exports of cotton. Except for 1976, when cotton exports doubled in volume to 1,800 tons, exports of this commodity have declined steadily since 1970. In 1976, cotton output was only 35 percent of the 1970-71 aver- age largely as a result of a shift in land use to more profitable foodcrops. It was estimated that cotton return to the producer was only half that of cassava in 1975. In addition, problems have been encountered in resettling farmers from the overpopulated highlands, where coffee and tea are grown, to the relatively land abundant plains where cotton, rice and other crops are cultivated. In 1976, producer advances -- in practice, equivalent to the price the producer finally receives -- were increased from 14 BuF/kg to 20 BuF/kg, and.it is expected that this price will provide sufficient incentive to bring about an increase in the area under cotton production. 20. Although Burundi has not succeeded in diversifying the composition of its exports, there has been some shift in the destination of its export trade. Exports to the U.S. declined from 53 percent of total merchandise exports during 1971-74 to 41 percent in 1975-76. The shift was mainly to countries of the European Economic Community, in particular Germany and, to a lesser extent, France. Europe as a whole absorbed 52 percent of Burundi's exports during 1975-76, Asia 2.2 percent and African countries 2 percent. On the other hand, about two-thirds of Burundi's imports originate in the European countries, 4.5 percent in Japan and 6.7 percent in Canada and the U.S. The EEC countries have increased their share of this trade somewhat and, during 1975-76, they provided 58 percent of Burundi's imports. During the period 1970-76, a relative decline of Burundi's import and export trade with other African nations took place (Table 10).  ANNEX I Page 11 Table 10: Direction of Trade, Annual Average Percentage Shares, 1971-76 1971-74 1975-76 Exports Imports Exports Imports f.o.b. c.i.f. f.o.b. c.i.f. European Economic Community 32.1 54.9- 41.6 58.0 Belgium - Luxembourg 7.6 23.1 4.5 21.3 Federal Republic of Germany 11.8 9.8 17.5 10.5 France 2.8 10.7 5.1 11.1 Other 9.9 11.3 14.5 15.1 Other European Countries 3.2 11.0 10.4 6.3 Sub-total Europe 35.3 65.9 52.0 64.3 Asia 2.0 17.8 2.2 18.8 Japan 1.0 6.6 0.7 4.5 People's Republic of China - 2.2 1.1 3.8 Other 1.0 9.0 0.4 10.5 Africa 3.8 9.8 2.0 7.6 Kenya 1.0 3.6 0.1 4.0 Zaire 0.5 3.3 0.2 1.4 Other 3.2 2.9 1.7 2.2 America 56.4 5.4 42.9 6.7 U.S.A. 53.2 4.5 41.4 4.9 Other 3.2 0.9 1.5 1.8 Other 2.5 1.1 0.9 2.6 Total 100.0 100.0 100.0 100.0 Source: Appendix Tables 3.14 and 3.15. 21. During the period 1971-74 imports of goods declined by about 12 percent in real terms reflecting the decline in consumption and investment which took place during these years. In 1975 imports increased by about 11 percent and declined slightly the year thereafter. A major change has taken place recently in the composition of merchandise imports. Capital goods which constituted 13 percent of total imports during 1970-74 increased by about two-thirds in real terms in 1975-76 to 22 percent of the total, prompted by the increase which took place in public investment during the same period. Despite this increase, the share of capital goods in Burundi's imports, which is a function of its investment rate, is smaller than the share of such imports in lower income countries and in African countries  ANNEX I Page 12 in particular where, in 1973, it amounted to 33.5 percent. Imports of food have not increased in spite of the decline in per capita foodcrop production. Their share fell from 17 percent of total merchandise imports in 1970-74 to 15 percent in 1975-76. This trend, together with the decline in food produc- tion per capita, indicates a decline in food consumption per capita. Table 11: Composition of Merchandise Imports, Annual Averages for 1970-76 (in 1970 prices) 1970-74 1975-76 Amount % Share Amount % Share (in US$ million) (in US$ million) Food 4.6 17.0 4.1 14.9 Other consumer goods 6.8 25.2 6.8 24.7 Petroleum, oil, lubricants 1.8 6.7 1.8 6.5 Other intermediate goods 10.2 37.8 8.8 32.1 Capital goods 3.6 13.3 6.0 21.8 Total goods (cif) 27.0 100.0 27.5 100.0 Source: Appendix Table 3.6 and mission estimates. 22. Trends in world prices have severely affected Burundi's terms of trade. Between 1970 and 1976 the overall import price index (in US dollars) increased by about 194 percent, more in the case of food (228 percent), petroleum (271 percent), and capital goods (244 percent). In 1974 alone average import prices rose by about 20 percent, and during the following two years they increased by a further 17 percent. Even though the volume of im- ports was roughly similar during the periods 1971-73 and 1974-76, the import bill rose from US$31 million to US$54 million in nominal terms. Although export prices were on average 12 percent higher in 1975 than in 1970, the much faster increase in import prices during these years brought about a 42 percent decline in Burundi's terms of trade. The terms of trade losses ac- counted for about 2.6 percent of Burundi's GDP during 1970-75. In 1976 the substantial increase in the world market price for coffee allowed Burundi to recuperate only 16 percent of its real income losses resulting from the decline in its terms of trade during 1970-75. 23. In recent years Burundi has increased its foreign borrowing steeply. During 1975-76 commitments averaged US$16 million per annum, more than twice the annual average for the years 1970-74 (Table 12). This increase is mainly due to higher commitments from multilateral organizations, primarily the International Development Association (IDA) and the African Development Bank Group. An average of US$13 million was committed annually by these insti- tutions during 1975-76, about eight times more than the annual average for 1970-74. The terms of these loans are very concessional: 0.75% interest, 10  ANNEX I Page 13 years grace plus 40 years repayment. Increased public sector borrowing has led to higher gross capital inflows which, in 1975-76, amounted to US$7.5 million per annum compared to an average of US$1.1 million during 1970-74. Disbursements from IDA amounted to US$0.3 million in 1975 and US$1 million in 1976. These trends are the result of the more active role which the public sector has assumed in promoting development projects. Burundi has also borrowed from private sources but only to a limited extent. During 1975-76 only 13 percent of total borrowing originated from these sources. 24. Most of bilateral aid to Burundi comes in the form of grants, pri- marily from Belgium and France. Official flows in the form of grants, half of which for technical assistance, averaged US$40 million per annum during 1974-75, most of which came from bilateral sources, the European Development Fund, and, to a lesser extent, UN institutions. Capital grants have been the most important foreign resource for financing investment and, during 1975-76, they averaged about US$16 million per annum, equivalent to 68 percent of total net disbursements during that period. Table 12: External Loan Commitments, Annual Averages 1970-76 1970-74 1975-76 Amount % Share Amount % Share (in US$ million) (in US$ million) Official 6.2 82.7 13.8 86.8 Bilateral 4.6 61.4 0.8 5.0 Multilateral 1.6 21.3 13.0 81.8 Private 1.3 17.3 2.1 13.2 Suppliers 0.8 10.7 0.8 5.0 Banks - - 1.3 8.2 Other 0.5 6.6 - - Total 7.5 100.0 15.9 100.0 Grant element (%) 63.7 63.5 Debt Service ratio (%) 3.4 5.0 Source: Appendix Tables 4.2 and 4.3.  ANNEX I Page 14 Public Finance I! 25. In a country such as Burundi where foreign financing of projects is of major importance, recorded budget deficits are misleading since a large portion of expenditures are not included. As an illustration, during 1976 the overall deficit shown for budgetary operations was BuF 229 million, while that based on a consolidated statement of Government finances, i.e., including investment expenditures financed from abroad, showed a deficit of about BuF 1,423 million. Another factor which makes it difficult to follow Government operations properly arises from the manner in which these are classified in both the Ordinary and the Extraordinary Budgets. Current and capital expendi- tures are included in both budgets; hence it is difficult to have a clear view of the evolution of one or the other type of expenditure 2/. In short, the budgetary process is rather inadequate and not adapted to the requirements of economic planning and sound financial control. 26. The evolution of public finance during the period 1970-76 has been characterized by the following: (a) a substantial increase in capital expenditures relative to GDP, with a shift towards investment in infrastructure; 3/ (b) a substantial reduction in real terms of current revenues allocated to social and economic services; (c) a relatively unchanged tax burden and a tax base increasingly dependent on indirect taxes; and (d) an increase, relative to GDP, of overall fiscal deficits. 1/ The specific arrangements existing in Burundi regarding the preparation of Government budgets complicates the analysis of Government finances consid- erably. Budgets reflect cash transactions and consequently do not include operations which do not give rise to a cash transaction, for example, dis- bursements made directly by foreign lenders to foreign suppliers for goods delivered. This is a procedure frequently used to pay for imported equip- ment for projects financed by official external agencies. The only trans- action registered in the budget is therefore the local counterpart contri- bution to the project, perhaps 10 percent of the total, made by the Gov- ernment during a specific year. Furthermore, some projects are executed outside the budget. Therefore, Government investment during a given year cannot be obtained from budget documents. 2/ In addition, payments delayed as a result of temporary cash shortages of the Treasury or invoices submitted for amounts in excess of appropriated sums are classified as arrears and it is thus not possible to readily discover their purpose. In 1976 these expenditures represented 6.5 per- cent of the Ordinary Budget. 3/ Total capital expenditures, i.e., including those financed from abroad. This definition is also used in the following paragraphs.  ANNEX I Page 15 Table 13: Consolidated Statement of Government Finances, Annual Averages 1970-76 /I 1970-74 1975-76 Amount % of GDP Amount % of GDP (in BuF million) (in Buf million) Current Revenues 2,574.5 10.7 4,097.0 11.3 Current expenditures 2,468.4 10.3 3,884.8 10.7 Government savings 106.1 0.4 212.2 0.6 Capital Expenditures 833.4 3.5 1,804.2 5.0 Fixed investment 817.2 3.4 1,657.4 4.6 Transfers to public enter- prises 12.6 0.1 74.9 0.2 Financial 3.6 - 71.9 0.2 Overall deficit (-) -727.3 -3.0 -1,592.0 -4.4 Gross Domestic Product (GDP) 23,998.9 100.0 36,412.8 100.0 Source: Appendix Tables 2.2 and 5.1. /1 The consolidated Statement of Government Finances was prepared by the mis- sion by: a) reclassifying budget items into current and capital revenues and expenditures; b) adding external capital grants and loan disbursements to investment figures shown in the Ordinary and Extraordinary Budgets. 27. During 1975-76 Government fixed investment averaged US$21 million annually (in 1976 prices), about 41 percent higher in real terms than during the period 1970-74. From 3.5 percent of GDP, capital expenditures by the Government rose to 5.0 percent of GDP. However, the share of investment allocated to the rural areas and to transport infrastructure declined sig- nificantly to the benefit of investment in infrastructure for social and administrative purposes (see Table 14 below). Government investment has thus increasingly benefitted the capital city to the detriment of agricul- ture and related infrastructure. Close to 80 percent of Government investment expenditures were financed from abroad, mostly with official capital grants. 28. A major trend in current expenditures by the Government during the period 1970-76 has been the decline in real terms of expenditures on economic and social services. During 1975-76 the former had, on average, declined by about 24 percent and 16 percent in real terms compared to the levels of 1970- 71. The largest decline occurred in agriculture where expenditures in 1976 were only three-fourths those of 1970, followed by social affairs, public  ANNEX I Page 16 Table 14: Government's Fixed Investment, Sector Breakdown, Annual Averages, 1970-76 1970-74 1975-76 Amount % of GDP Amount % of GDP (in BuF million) (in BuF million) Total 817.2 100.0 1,657.4 100.0 Rural areas 417.5 51.1 739.8 44.6 Transport infrastructure 306.9 37.6 460.9 27.8 Social and administrative infrastructure 92.8 11.3 456.7 27.6 Source: Appendix Table 2.9. works and public health. These trends indicate that expenditures required for operating and maintaining adequately Government investments in roads, schools, irrigation works, health facilities, etc., are not being fully met and that a deterioration has taken place since the early years of this decade (see Table 15 below). The reduction in real terms of current expendi- tures on economic and social services made possible the generation of Govern- ment savings which, in 1975-76, averaged less than 1 percent of GDP. 29. The allocation of current revenues benefitted primarily the admin- istrative, justice and defense functions. Expenditures in these three areas increased by 42 percent in real terms from 1970-71 to 1975-76 and their share rose from about one-third to one-half of total current expenditures. The share allocated to agriculture, however, declined from 4.7 percent to 3.3 percent during the same period. This allocation of Government resources dur- ing recent years is manifested, for example, in the inadequate quality and volume of services provided to the agricultural sector such as extension services. The allocation of current revenues should be changed by giving high priority to the maintenance and full utilization of the capital stock and to foster increases in production which would benefit the majority of the population. Although revenues allocated to the Ministries responsible for the provision of social and economic services (Agriculture, Public Works, Communications, Public Health, Social Affairs, Education) were increased in 1976 by about 8.5 percent in real terms, they still remain significantly below 1970 levels. In particular, the amount allocated to wages and salaries in 1976 was still slightly below that of 1970 despite the important increases in the number of workers and employees which took place over this period. The implied fall in the real wage and salary level affected negatively the quality of Government services; it made it difficult for the Government to retain qualified staff, in light of the higher salaries offered in the enterprise sector.  ANNEX I Page 17 Table 15: Functional Breakdown of Government's Current Expenditures in Real Terms, Annual Averages (BuF million, 1970 prices) 1970-71 1975-76 Real Growth 1970/71-1975/76 Amount Share Amount Share % General Services A 761.1 35.6 1,080.7 51.5 42.0 Social Services 684.8 32.0 577.6 27.5 -15.6 Education (537.0) (25.1) (449.4) (21.4) (-16.3) Public Health (123.7) (5.8) (111.3) (5.3) (-10.0) Social affairs (24.1) (1.1) (16.9) (0.8) (-17.0) Economic Services 338.0 15.8 257.9 12.3 -23.7 Agriculture (100.9) (4.7) (70.0) (3.3) (-30.6) Public Works (193.6) 9.1 (150.2) (7.2) (-22.4) Communications (43.5) 2.0 (37.7) (1.8) (-13.3) Interest 51.5 2.4 26.7 1.3 Liquidation of arrears 304.6 14.2 153.5 7.4 Total 2,140.0 100.0 2,096.4 100.0 -2.0 Memo item: Wages and Salaries 1,073.5 50.2 955.4 47.5 -7.3 Goods and other services 588.4 27.5 684.9 32.7 16.4 /1 Administration, Justice and Defense. Source: Appendix Tables 5.5 and 5.7. 30. The ratio of taxes to GDP has remained practically unchanged in Burundi during 1970-76 at about 10.7 percent. Burundi ranks only above Mali and Rwanda in Africa in terms of this ratio and below low income developing countries as a group (14.8% in 1973). One reason for this is the absence of major investments in activities such as big mining and agricultural planta- tions. About two-thirds of tax revenues are derived from indirect taxes of which those on international trade play a very important role, given Burundi's export-dependent economy and the small size of the secondary sector. Taxes on foreign trade fluctuate around 40 percent of total revenue. They have been a most volatile element in the past mainly because of frequent changes in the export duties on coffee. 31. The reliance on indirect taxes has somewhat increased in recent years. Indirect taxes accounted for over two-thirds of tax revenues in 1975- 76 compared to 63 percent in 1970-74. The change was due to the increased  ANNEX I Page 18 role of export duties and taxes on consumption. Since 1970, import duties, however, have declined in real terms and as a share of both imports and total taxes partly because of exemptions granted to public sector imports. This highlights the need for a strict policy in granting these exemptions. Another major source of indirect taxes is the consumption tax, three-fourths of which is accounted for by the tax on beer. The latter was increased from BuF 1,510 to BuF 1,720 per hectoliter in 1975 and 1976 respectively. The relative importance of this tax, the rather high price-inelasticity of the demand for beer, and the facility of collecting revenues at the only brewery existing in Burundi renders it a flexible and efficient source of revenue easily adaptable to growth of income levels as well as to short-run anti-cyclical tax policies. The poll tax, a regressive source of revenue whose relative importance dec- lined gradually during this decade, was abolished by the Government in early 1977. Table 16: Tax Revenues, Annual Averages, 1970-76 / 1970-74 1975-76 Amount Share of Amount Share of (BuF million) Total GDP (BuF million) Total GDP Direct taxes 787.8 30.9 3.3 1,079.7 27.6 3.0 Income taxes 501.8 19.7 2.1 795.5 20.4 2.2 Poll tax 236.0 9.2 1.0 233.6 6.0 0.7 Property taxes 50.0 2.0 0.2 50.6 1.2 0.1 Indirect taxes 1,607.2 63.0 6.7 2,589.7 66.3 7.1 Foreign trade 1,018.2 39.9 4.2 1,626.1 41.6 4.4 Import duties (646.6) (25.3) (2.7) (874.4) (22.4) (2.3) Export duties (362.5) (14.2) (1.5) (735.6) (18.8) (2.1) Other (9.1) (0.4) (0.0) (16.1) (0.4) (0.0) Consumption tax 433.2 17.0 1.9 729.8 18.7 2.0 Turn over tax 118.7 4.7 0.5 167.6 4.3 0.5 Road Fund 37.1 1.4 0.1 66.2 1.7 0.2 Other 157.3 6.1 0.7 235.8 6.1 0.6 Total 2,552.3 100.0 10.6 3,905.2 100.0 10.7 /1 Includes tax revenues allocated to Ordinary and Extraordinary Budgets. Source: Appendix Table 5.3 and Ministere du Plan. 32. During the period 1975-76 the overall fiscal deficit represented 4.4 percent of GDP as compared to 3.0 percent in the preceding five year period. Although the share financed by foreign resources has declined in  ANNEX I Page 19 recent years, they still financed a major proportion (87 percent) of this deficit in 1975-76. However, a significant change has taken place in the composition of these resources. Net foreign borrowing by the Government, which was negative during 1970-73, 1/ increased to an average of BuF 110 million per annum in 1975-76 and financed about 7 percent of the Govern- ment's deficit. The decline in the contribution of foreign resources has been brought about by the relative decline of capital grants which, though helping to finance most of the deficit in 1970-74, did so to the extent of 80 percent only in 1975-76. In order to compensate for this decline, the Government increased its domestic borrowing and this, during the latter period, contributed to financing 13 percent of the deficit (Table 17). Table 17: Financing of Government's Overall Deficit, Annual Averages 1970-76 1970-74 1975-76 Amount % Share Amount % Share (BuF million) (BuF million) Net foreign resources 686.9 94.4 1,378.7 86.6 Grants 704.9 96.9 1,269.1 79.7 Net borrowing -18.0 -2.5 109.6 6.9 Net domestic borrowing 40.4 5.6 213.3 13.4 Net banking system 5.3 0.7 83.2 5.2 Other, net 35.1 4.9 130.1 8.2 Overall deficit (-) -727.3 100.0 -1,592.0 100.0 Source: Appendix Table 5.1. Credit, Money and Prices 33. The financial network in Burundi consists of the Central Bank (Banque de la Republique du Burundi), three commercial banks (Banque de Credit de Bujumbura, Banque Commerciale du Burundi and Banque Belgo-Africaine), all largely foreign-owned, the development bank (BNDE), the Government-owned Savings Association, the Postal Checking System, and the Social Security Fund. The Central Bank formulates credit and monetary policies and manages the country's international reserves. The major monetary instruments at its disposal include credit ceilings and agreements with the Government on public borrowing. Preservation of balance of payments equilibrium and of domestic price stability has been the primary objective of monetary policy in Burundi. 1/ May be due to accounting amortization of debts incurred by public corpo- rations as being repaid by the central government.  ANNEX I Page 20 34. Except for the very limited medium-term lending undertaken by the commercial banks mainly in the housing sector, all term-lending operations are undertaken by the Banque Nationale de Developpement Economique and the Savings Association. The latter was created in 1964, and operates through two main branch offices and nineteen post offices. As of March 31, 1977, deposits amounted to BuF 400 million, about 80 percent of which consisted of savings and term deposits by civil servants and military personnel (for whom there is a compulsory savings scheme) and private individuals. The resources of the Savings Association have been used to finance housing and personal loans, loans to banking institutions, and the purchase of treasury bonds. 35. The Banque Nationale de Developpement Economique (BNDE) was created in 1967 for the purpose of assisting in the economic development of Burundi, to provide short-, medium- and long-term financing to agricultural, industrial and tourism enterprises, and to finance housing. The public sector has a 45 percent participation in this institution, 40 percent of its share capital is held abroad and the remainder is held by domestic private interests. Until recently, BNDE was not equipped to make comprehensive technical, economic and financial evaluations of industrial projects. As a result, it had to rely for appraisal of projects on the Industry Division, located until recently in the Ministry of Economy and Finance. These appraisals were then reviewed by BNDE's management. To remedy this situation and permit BNDE to play a leadership role in industrial development and promotion in Burundi, BNDE has recently created a unit in charge of industrial projects promotion, appraisal and follow-up. The unit is to cooperate with the recently created Ministry of Industry in preparing feasibility studies and in appraising projects; this unit will also assist promoters, both foreign and local, in the prep- aration and implementation of projects. 36. Although BNDE's operations have expanded significantly in 1975- 76, loan approvals having more than doubled during the period compared to 1971-74, most of its lending has been to industry, tourism and housing and less than 2 percent to agriculture. Banking and financial infrastructure in the rural areas is virtually non existant, and very little has been achieved as yet to channel credit to the smallholders. Credit policy in the past has played mainly the role of financing import and export trade. 37. The interest rate structure in Burundi is characterized by (a) the relatively low level of rates; (b) limited differentiation between the re- muneration of savings instruments with different maturities; and (c) somewhat lower rates on medium- and long-term credits than on short-term loans when they are not rediscounted. The interest rate on savings deposits in commer- cial banks and the Savings Association is 3%. One-month and one-year treasury bonds have yields of 2% and 4%, respectively. Although the latter rates are tax free, they leave only a small margin to the commercial banks, which may explain the limited role played so far by these institutions in the mobiliza- tion of resources. Short-term loans by commercial banks may carry an inter- est rate up to 9% plus commissions, except for rediscountable loans at the Central Bank for the financing of exports, which carry a maximum rate of 5.75%, and other rediscountable loans which are made at a maximum rate of 7.5%. Medium- and long-term loans, which represent about 10% of total bank  ANNEX I Page 21 credit, are mostly extended by BNDE and the Savings Association. Interest rates for these loans vary between 5% and 9% with, in the case of BNDE, a weighted average of 8.3% for medium-term loans and 8% for long-term loans. 38. Up to 1973 prices in Burundi grew at a relatively slow pace with increases averaging 4.5 percent per annum during 1970-73. Double digit inflation began in 1974 when domestic prices rose by about 15 percent. A major reason for this was the acceleration of inflation in the developed countries from 8.7 percent in 1972 to 18.5 percent in 1973, which affected Burundi mostly in 1974 and 1975. Burundi's import prices rose by 23 percent in 1974 compared to an annual average increase of 6.9 percent during 1970-73. During that year, prices of food and intermediate goods imports jumped by 65 percent and 75 percent respectively. High inflation continued in 1975 when the effects of price increases in imports of petroleum products (61 percent) and of capital goods (35 percent) were fully felt in the Burundi economy; at the same time food prices continued to rise sharply (15 percent). Domestic prices rose by about 16 percent during 1975 but in the following year the increase decelerated to between 7-9 percent following a sharp fall in the pace of world inflation. It is important to note that while the annual average rate of growth of the money supply decreased in 1973-75 compared to 1970-73 and shot up in 1976, domestic price increases followed the exact opposite trend (Table 18). Table 18: Money and Prices, Annual average Growth Rates (%) 1970-73 1973-75 1976 Money Supply (M) 11.5 9.8 47.9 Resource availability (RA) (in real terms) 1.4 2.0 9.3 M .- RA 10.0 7.6 35.3 Domestic Demand Deflator 3.9 15.5 8.7 Consumer Price Index 4.5 10.3 6.8 of which food 4.3 19.3 6.3 Import Price Index L 6.9 19.3 9.6 of which food 11.0 38.0 12.6 International Price Index /2 11.0 17.6 1.5 /1 In local currency. /2 IBRD estimates based on exports of industrialized countries. Source: Appendix Tables 2.4, 6.1, 9.1.   2'9-, 29'30' 3'u 30&30' BURUNsDI ADMINISTRATIVE DIVISIONS R W A N D A K - ---Province, boundaries _ National capital r-k..ae Lk Arrondissement boundaries @1 Principel towns, provinces X 4 ommune boundaries O Principal towns, orrondissements ;N ___-______ Internolional boundaries Main roads 8 -j -2'30' I Rivers . RJND BUSj 2'30'- rn K!RLiD,Q - , Jj <rn :< NTFGA \gKirundo r 0~~~~~~~~~~~~~~~~~ o4BXUUKUBAef ,t IVI, ~I - V ~~~GASHC MWJM' ~K uEMuA . \ \ @ \ \ IJE>JE gE~~~~USIGA| ; L.EwuUa BLG AND A 11 DO I - - ' Y -1 G.A URW ibitoke TAJN J )Jcrr A R A A NZ~~~~~~~~~~~~ BuGozA I BA , R r / mus I ~ ~~~~~~~~ ~~~~~~~~~~~~~ 'INGL.ci A E~~~~~~~~~~~. ) T a n g a nX fi a 33g)g~~~M ank z o2, 40,6 N~ ~ ~ ~ i~ / /( BUUR iFuT i,r% M Z . b I \ tANVA U * IuZe0 >R ~~~~~~~N A i A A K < /L < ! 0 )1 0 Nc 4-30' \ 1 IheBUJUMBU/i r ^ r r<re Uytl b0<r 2jer- 1 ; 29,30' 2 sToKigoma 3,0- irorldSankuaidllr dyilrxurs 1030' FJ I-A B A Bu~ ~ ~ ~ ~ ~~~~A'FR-iC BUK RASAZI~ ~ ~ ~ ~ ~ ~~~~~K 1 Tongo T Kiom 0 0   IBRD 3818R1 29.30' BWERU JANUARY 1978 /0% [ 1.AKr COHOHA t ) R W A N D A 9\ ~ ~ ~ ~ ~ ~~JQ \ i AL lt ZAIRE-NILE DIVIDE 75 I ~)\ lo" GHLA (A U I K AN,N ZI NJZ IMA 0~~~~~~~~/0 7. 'S 2' u<* IRUZIZI PLAIN o-M13kYA6 BUJUMBURA' u.j '. 19. 11-. -J 0 SUSUNO ~~~~~~~~~~~~~~~0GNO AIt I I 1Q, 1 d\ '~ \ I RAINFALL ~~~~AND- RE IEF |Thismaphat beeni,/IuvevO pfNZ apdb th s ;uit ELEVATTON Ithe convenie a of e raders of NV N . \ AC '-. , 12 j 2500- 3000 me gthe respor tq which {fis 1attached. E >w ^/] 2000 2,500 ".Eters T he denom nations Dse and the J\ /,o 2.0 E \ > ^oundarie xshown nt~is map vb b ,J < U so 00OIQr do not imp,o hepXrtof the ___ g) ( -II.o }50mr WorldHBank'and its a} liates, any |! } -