Burundi - Second Structural Adjustment Program Project

Document of The World Bank FOR OFFICIAL USE ONLY Report N. P-4770-BU REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPMENT CREDIT OF SDR 64.9 MILLION TO THE REPUBLIC OF BURUNDI FOR A SECOND STRUCTURAL ADJUSTMENT PROGRAM May 11, 1988 This document has a restricted distribution and may be used by recipients only in the performance of their offiefal duties. Its contents may not otherwise be disclosed without World Bank authorization. Currency Equivalents and Units Currency unit - Burundi Franc (FBu) Exchange rate = US$ 1.00 * FBu 123.5 (Annual average 1987) - SDR 1.00 = FBu 159.7 (Annual average 1987) Standards = Metric system Fiscal Year - January 1 to December 31 Glossary of Abbreviations and Acronyms ADF African Development Fund AGRIBAL Societi Agricole du Burundi BCC Burundi Coffee Company BEI Development ?idget BNDE National Bank for Economic Development BO Ordinary budget BRB Bank of the Republic of Burundi (central bank) CADEBU Burundi Savings Bank COOPEC Rural Cooperative of Credit COTEBU Textile Company of Bujumbura FWA Fully Washed Arabica (coffee) IDA International Development Association IMF International Monetary Fund OCIBU Industrial Culture Office of Varundi ONAPHA National Pharmaceutical Officq ONATEL Ofice National de Telecomunications ONL Ofice National du Logement OTB Burundi Tea Office OTRABU Transport Company (Freight) OTRACO Transport Company (Passengers) PE Public Enterprise PEP/PIP Public Expenditures Program/ Public Investment Program PHN Population, Health and Nutrition PTA Preferential Trade Agreement RDC Regional Development Companies REGIDESO Public Utilities (Water and Electricity) SAL Structural Adjustment Lending SAP Structural Adjustment Program SCEP Service in Charge of Public Enterprises SJF Special Joint Financing SHE Small and Medium Enterprise SNES National Service of Statistics SOBECOV Societi de Commercialisation de Produits Vivriers SOGESA Societi de Gestion des Entrepots et Silos Alimentaires SOPUBU Societe de Peche du Burundi SOSUMD Sugar Production Enterprise in Mosso TRC Tanzania Railway Company WHO World Health Organization FOR OFFICIAL USE ONLI BURUNDI SECOND STRUCTURAL ADJUSTMENT OPERATION Credit and Program Summar Borrowers Republic of Burundi AmoMts IDA Credit: SDR 64.9 million (US$90.0 million equivalent) Co-financinf: Japanese SJF Grants Yen 700 million (US$5.3 million) Japanese SJF Loan: Yen 1.7 billion (US$12.8 million) Germany SJF Grant: DN 10 million (US$6.0 million) Saudi SJF Loans Riyals 11 million (US$2.9 million) Terms IDA Credits Standard IDA Terms SJF Grantas Non-retabursable contribution Japanese SJF Loan: Maturitys 30 years Grace Period: 10 years Interest Rate: 1.25%. Saudi SJF Loans Maturitys 50 years Grace Periods 10 years Interest Rates 1.00%. Descriptions The proposed financing is intended to support the next phase of the Government's structural adjustment program initiated under the riret Structural Adjustment Operation. The main objective of the program is to accelerate economic growth and increase per capita income and consumption levels, by reorienting the economy towards a path with more reliance on market forces and a greater outward orientation. It consolidates the policies already adopted and reinforces the adjustment process by additional measures. The economic program supported by SAL I emphasized the rationalization of the incentive structure -- to improve resource allocation and remove the bias against exports -- and increasing the efficiency of public resources utilization. Policy performance has been positive and in line with the program. In addition to fiscal and monetary stabilization efforts, most import restrictions have been eliminated, and a major customs tariff reform was initiated. The Government also started an important reform of the public enterprise sector and launched a considerable effort in public expenditure 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. rationalization. Slippages in policy implementation have occurred in the areas of planning and budgetary strengthening due to delays in getting the necessary technical assistance and the recent change in the Government (September 1987). The new Government's commitment to pursue and strengthen the measures initiated under SAL I has been affirmed in the second PFP which was presented to the Committee of the Whole on April 26, 1988. The measures to be supported by the proposed credit will strengthen the ongoing policy reforms, notably those aimed at: (i) strengthening incentives for efficient resource allocation, increased private investment -and exports, and greater efficiency of the coffee sub-sector; (ii) increasing public savings and improving public expenditure management; (iii) reforming the public enterprise sector; (iv) improving agricultural productivity and sector management. The measures will also address new policy areas to accelerate the supply response to the new markst-oriented incentive structure, notably: (v) liberalization of the labor market and amelioration of incentives for employment generation; (vi) deregulation of the financial sector; and (vii) preparation and implementation of targeted actions to address pressing poverty issues, notably related to child nutrition and women's role in development. The credit, grants and loans would finance all categories of imports with the excep-ion of items financed by other sources, military and para-military items, alcoholic beverages, tobacco, precious metals or stones, and luxury items. 'Tatimated Disbursements: The proceeds of the proposed IDA credit would be disbursed in three tranches. The first tranche of US$40 million equivalent would be available for disbursement upon credit effectiveness. Disbursement of the second and third tranches (of US$30 million and US$20 million equivalent) would be contingent upon the Government's taking the actions enumerated in paragraph 103*of this report. Performance reviews would be held around March 1989 before the release of the second tranche and around October 1989, before the release of the third tranche. Disbursements of the entire credit are expected to be completed within 24 months after credit effectiveness. Appraisal Report: Not applicable Nas IBRD 20649 BURUNDI SECOND STRUCTURA. ADJUSTHENT OPERATION Table of Contents Page No. CREDIT AND PROGRAM SUNMRY i-ii PART I - THE ECONOfY ................. .................. 1 A. Background ............................................ 1 B. Recent Policy Reforms and Economic Dovelopmenta ........... 2 C. Development Constraints and Adjustment Issues ............. 5 D. Prospects and Financing Requirements ..................... 5 E. Rationale for Bank's Involvement .......................... 6 PART 1I - PROGRESS IN TRE ADJUSTMENT PROGRAM: THE FIRST SAL ... 7 Management of the Balance of Payments ..................... 7 Fiscal Policy and Public Finance .......................... 8 Production and Investment Incentives ...................... 8 Public Enterprise Reform a............................ 8 Agriculture ..................,................ 9 PART III - CONTINUING TIE ADJUSTMENT PROCESS ................... 9 A. Strategy .......... ..................................... 9 B. The Government's Short-term Financial Program ............. 10 PART IV - PROPOSED PROGRAN UNDER SAL II ........................ 11 A. Trade and Industrial Policy ............................... 11 B. Public Expenditures Programming and Policies .............. 12 C. Public Enterprise Reform ..........a................. 14 D. Agriculture Pölicies ..............4....................... 16 E. Employment Policies *........................... 19 F. Financial Markets ....... ........... ................... 20 G. SocialPrograms and Poverty Alleviation ................. 21 H. Impact of the Adjustment Program .......................... 23 I. Riska .................. ........-... . . . . . ........... 27 J. Credit Amount and Tranching ......... ................... 28 K. Disbursement, Procurement, Administration and Auditing .... 28 L. Monitoring ................................................ 28 PART V - BANK GROUP OPERATIONS AND STRATEGY .................... 30 PART VI - RELATIONS ITH THE IMF ............................. 32 PART VII - RECOMMENDATION ...................................... 32 TabLe of Contents (Continued) Page No. TMET TABT.= Table 1: Main Economic Indicators ..................... 4 Table 2: Recent Performance and Growth Prospects ...... 24 Table 3: Summary of External Capital Requirements and Sources: 1988-92 ..................... 26 ANEB: I Social and Economic Indicators ......................... 33 II Status of Bank Group Operations ........................ 42 III Supplementary Project Data Sheet ....................... 43 IV Structural Reform Program (Matrix of Actions) .......... 45 V Letter of Development Policy ........................... 53 VI Note on Procurement Procedures ......................... 78 MAPS Burundi - IBRD Map 20649 INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXSCUTIVE DIRECTORS ON A PROPOSED SECOND STRUCTURAL ADJUSTMENT CREDIT TO THE REPUBLIC OF BURUNDI 1. I submit the following report and recommendation on a proposed Second Structural Adjustment Credit (SAL) to the Republic of Burundi for SDR 64.9 million (US$90 million equivalent) on standard IDA terms. In addition, I recommend that IDA administer a proposed Special Joint Financing non-reimbursable contribution of Yen 700 million (about US$5.3 million equivalent) from Japan. 2. The first SAL for Burundi was approved by the Executive Directors in May 1986 for a total of US$50 million with financing from IDA, SFA, and Special Joint Financing from Japan and Switzerland. In parallel, Burundi negotiated a Stand-by arrangement with the IMF (covering the period August 1986 to March 1988) and a SAF loan based on the first Policy Framework Paper (1987-1989) for a total of SDR 20 million, to be disbursed over a three-year period. A Bank mission reviewed the Implementation of SAL I -in December 1986, and the second tranche was released in April 1987. 3. An economic memorandum on Burundi (Report No. 6754-BU) was distributed to the Executive Directors in January 1988. The Report focused on the policy reform priorities for the next phase of the Government"s adjustment program. The Government requested IDA assistance in support of the second phase of the adjustment program in September 1987. This program was appraised during a mission in January/February 1988, the conclusions of which are reflected in this report. Country data are attached as Annex I. PART I - THE ECONCHf A. Background 4. Burundi is a small country (27,800 lan2) with a population of about 5 million and a per capita GNP of US$240 (1987 Atlas). The country is landlocked, densely populated (the second highest population density in Africa), and with scarce natural resources other than its relatively fertile agricultural land. The society is primarily rural, with only 5 percent of the population living in urban centers. Agriculture (commercialized and subsistence) accounts for approximately 50 percent of GDP and provides employment and income for about 85 percent of the population. Coffee is the main export, generating four-fifths of total export earnings. As a landlocked country, Burundi is quite vulnerable to the transportation conditions in neighboring countries. Progress has been made to improve transport infrastructure and to simplify transit formalities, but transportation costs are very high and passage through neighboring countries is, on the whole, unreliable. 5. After a period of political turmoil which culminated in serious civil disturbances in 1972-73, political stability was restored in 1976. -2- In early September 1987, President Buyoya took power in a bloodless coup, at the end of a period of political tension, difficult relations with neighboring countries and the Catholic Church, and adverse image in the international press. The change occurred with minimal economic and administrative disruption. The new Government's commitment to the structural adjustment program has been clearly stated in the President's Declaration of Policies pronounced in late September 1987, and demonstrated by the reform measures implemented in the past six months. B. Recent Policy Reforms and Economic Developments 6. After a period of relatively good performance during the late 1970s, Burundi's economic and financial situation took a turn for the worse in the early 1980s, as a result of a substantial deterioration of the terms of trade, expansionary fiscal and monetary policies and adverse climatic conditions. Real GDP growth, which had averaged 5.1 percent per year during 1978-81, declined to less than one percent per year during 1982-84. In 1984, the external current account deficit reached a record high of 16 percent of GDP and the overall fiscal deficit rose to 12 percent of GDP. Inflation ran at 14 percent a year, leading to a rapid appreciation of the Burundi franc. Moreover, the network of administrative controls aiming at controlling the external deficit and protecting the domestic industry led to distortions in the incentive structure, high rents accruing to monopolist importers, low incentive to invest in the productive sectors, and a slowdown in economic activity. These developments brought into light Burundi's major structural constraints: the extreme dependence on coffee, the weak role of the private sector, and the lack of incentives for a sustained growth of agriculture and industry. 7. Thrust of Adiustment Program. In late 1984, the Government requested Bank and lMF assistance to prepare and finance the first phase of a structural adjustment program with the double objective of re- establishing the basic financial equilibriz and initiating medium-term structural adjustment with more reliance on market forces and a greater outward orientation. Particular attention was given to the rationalization of the incentive structure -- to improve resource allocation and remove the bias against exports -- and increasing the efficiency of public resource utilization. Preparation for the first SAL began in mid-1985 and the first measures were implemented in 1986. 8. Policy performance has been positive and in line with the program, as described in detail in Part II. In addition to fiscal and monetary stabilization, most domestic prices have been decontrolled, the exchange rate overvaluation was largely corrected, and a flexible exchange rate policy was adopted. Most import restrictions were eliminated, and a major customs tariff reform was initiated. The Government also started an important reform of the public enterprise sector, adopted a three-year public investment program (PIP) compatible with domestic and external resource availabilities, and initiated the preparation of a comprehensive public expenditure program (PEP) to provide a framework for setting public expenditures priorities. Slippages in policy implementation have occurred in the areas of planning and budgetary strengthening, due to delays in getting the necessary technical assistance and the recent change in th Government and in the financial program, whose objectives could not be attained due to the cascading effects of the coffee revenue shortfall (see -3- para. 10). The automatic exchange rate adjustment was interrupted in March 1987 but has been resumed since February 1988. The new Government*s commitment to pursue and strengthen the measures initiated under SAL I has been affirmed in the second PFP which was presented to the Committee of the Whole on April 26, 1988. The measures to be implemented in the second phase of the adjustment program (to be supported by the proposed operation) are described in Part III. 9. Recent Developments: 1986-87. Although it is too early to perceive the full economic impact of the program -- the first full year under the program was 1987, a year of political change and marked decline in export prices -- the impact has been largely positive. Despite a substantial decline in world coffee prices (much more than what had been anticipated) starting in the second half of 1986 and intensifying through 1987, the program achieved positive results in redressing major financial imbalances, improving domestic competition, and strengthening the competitiveness of Burundi's manufactured exports while containing import demand. During 1986 and 1987, non-traditional exports grew (albeit from a very low base) by about 30 percent a year in real terms. GDP growth reached 4.4 percent in 1986, but fell to 1.7 percent in 1987 due to the marked decli. in coffee revenues (GDP growth at factor cost was 4.7 percent). Tot"d investment, which had contracted since 1984, rebounded in 1987. Inflation hit a record low level in 1986 (1.8 percent per year) as a result of increased agricultural output and reduced trader margins, but rose to 7 percent in 1987. 10. The financial situation also improved in 1986. The overall budget deficit was reduced from 7.5 percent of GDP in 1985 to 6.5 percent, and the external current account deficit (excluding transfers) also declined relative to GDP: from 11.2 percent to 10.2 percent (Table 1). Net foreign assets rose to 2.2 months of imports at the end of 1986 (compared with 1.3 months at end-1985). The improvements registered were, however, less than had been anticipated. The impact of the shortfall in coffee exports was of such a magnitude (equivalent to 30 percent of export earnings and budgetary revenues) as to make the targets of the Stand-by program (approved on August 1986) unattainable. Preparation for a new financial program was initiated in March 1987 but was delayed by the change in Government (see para. 109). A second year SAF program was approved by the Executive Directors of the IMF on May 4, 1988. 11. Burundi's financial difficulties were exacerbated in 1987 by the continuing deterioration of coffee export prices. Over the year as a whole, world coffee prices declined by 46 percent to their lowest level during the last 10 years; and Burundi's coffee export earnings contracted by US$40 million. Despite a substantial increase in non-traditional exports (from US$4.8 million in 1985 to US$13.5 million in 1987), export earnings fell to about the 1984 level. These developments, together with a weaker demand management policy and a substantial increase in debt service, led to a deterioration in the external position. The current account deficit (excluding transfers) rose to the equivalent of 13 percent of GDP and, despite the increase in net medium and long-term capital inflows, the balance of payments registered on overall deficit of US$10 million. Net official reserves fell to 1.8 months of imports equivalent. Despite the highly concessional terms of Burundi's external debt, a substantial increase in outstanding foreign debt, together with a bunching of -4- maturities and the decline in export earnings, pushed the debt service ratio (based on actual payments) above 40 percent in 1987. Table is IAIN ECONOMIC ICATORS 199 9 198 1998 1987 As X of GOP: Exports. 9.8 10.1 10.7 10.4 8.8 Import* 27.7 24.2 19.0 16.2 29.8 Current Account Def. ./ 19.7 16.2 11.2 10.2 18.9 External Debt (DOD) 24.8 85.0 84.4 89.7 55.9 0ov't Revenues b/ 12.5 14.1 18.9 15.8 12.2 Current Expenditures 12.8 11.2 10.6 11.4 18.1 Capital Expenditure and Het Lending 17.8 14.6 11.9 10.9 11.9 Total Gov't Deficit c/ 18.1 11.5 7.5 6.5 12.8 Investment (F01) 17.6 18.4 14.2 12.7 19.9 External Debt Service USS million 12.2 17.9 28.9 82.0 47.2 As X of Exports (0,NFS) 12.8 16.7 28.2 28.1 48.8 Ters of Trade (19814100) 118.8 189.9 189.1 171.9 198.8 5 change 18.8 .4.5 28.6 -89.9 GOP growth (X) Market prices 8.1 -4.1 7.4 4.4 1.7 Factor cost 4.0 .4.8 7.6 8.8 4.7 a/ Excludee public transfere. b/ Exeludes capital grants. c/ On a commitment basis and excluding official grants. 12. These developments had a significant impact on the fiscal situation. Coffee revenues fell from FBu 5 billion in 1986 to 0.6 billion in 1987, leading to a 20 percent loss in overall fiscal receipts. Overall expenditures, however, rose above the budgeted levels, as the previous Government relaxed its prudent budgetary policy and substantial increases were recorded in the debt service and extra-budgetary expenditures. The new Government had limited scope to take corrective measures in 1987. As a result, the overall fiscal deficit (including foreign-financed investment) rose to 12.8 percent of GDP in 1987, and the Government accumulated domestic arrears. The unexpected sie of these deficits necessitated increased recourse to central bank financing. 13. The adjustment program has had a generally positive Impact on low and middle-income consumers. Prices of basic commodities -- food, .clothing, and basic home construction materials -- have declined or stayed constant since 1985. The d4 valuation (33 percent in SDR terms between July 1986 and February 1988) has raised prices of some imports, but these have a negligible role in the low and middle-income market baskets. The incomes of the poor (mostly farmers) have also improved, following the increase in producer prices for coffee and tea in 1986 and the elimination, in late 1987, of the sales tax on foodcrops. The urban sector was particularly affected by the slowdown in the growth of public employment and compensation and by the freeze on salaries since 1985. Some forced early 1/ Total debt service payments, including amortization, increased by 35 percent and accounted for nearly 30 percent of budgetary revenues in 1987. -5- retirement of civil servants in 1987 contributed to social tensions before the change in Government. C. Development Constraints and Adjustment Issues 14. Burundi's structural problems will require systematic and sustained attention over several years. The recent deterioration in the terms of trade hes highlighted the persistent problems associated with overdependence on coffee. Historically, low savings and investment rates and weak private sector participation have impeded the development of non- coffee economic activities. Reliance on foreign savings has pushed Burundi's external debt to US$650 million, or about 55 percent of GDP, at end-1987. Despite the rather favorable borrowing terms,2 debt service payments are projected to remain above 30 percent of exports until 1991. The combination of a serious debt burden, overdependence on coffee, and low savingslinvestment makes it difficult to achieve the necessary structural adjustment quickly. Long-term economic development is also hindered by rapid population growth, Umited availability of cultivable land, low education and skill level of human resources, the limited size of the domestic market, and the landlocked situation of the country. 15. Laying the basis for sustained economic growth will require, therefore, a broad approach. The financial program (supported by the IMF) will help the country to reach more sustainable equilibria on both the external and domestic fronts. To address the structural issues, the Government's program -- to be supportad by the proposed SAL II -- includes a comprehensive package of both ongoing measures to: (i) strengthen macroeconomic management; (ii) create an incentive framework to stimulate exports and improve private sector confidence; (iii) reform public enterprises; (iv) improve public expenditure management; and new measures to: (v) increase the efficiency of the financial sector; (vi) liberalise the labor market; and (vii) implement well-targeted measures aimed at alleviating poverty. Development programs that address the long-term constraints and are supported by major donors include: an active population policy3 ; efforts to strengthen agricultural services; promotion of small and medium enterprises; effective management of natural resources; and improvement of the country's human resources through expanded education and health services. D. Prospects and Pinancina Reauirements 16. The Government's objective is to achieve real per capita GNP growth during the 1988-91 period, while holding the current account deficit at a manageable level. The attainment of this goal will require not only 2/ 1.5 percent interest rate, 38 years maturity, 9 years of grace period, which correspond to a 72 percent grant element. 3/ The Government's population policy is being supported by the IDA-financed Population/Health Project. The program's objectives include, inter-alia, raising the contraceptive prevalence target from 1.6% in 1987 to 142 in 1992, which would contribute to reducing the total fertility rate (from 6.1 in 1987 to a target of 4.1 by the year 2000) and would have a sizeable impact on population size (keeping the growth to 9 million against 12 million by 2015). -6- the timely implementation of the Government's adjustment program, but also increased import capacity. This will depend on the success in diversifying exports over the medium term and, more immediately, on larger inflows of concessional assistance. Despite the growth of non-traditional exports during the past few years, the bulk of Burundi's export earnings still come from coffee, tea, and cotton (85 percent of total exports). However, the world market prospects for these commodities are not biight. While earnings from non-traditional exports (e.g., manufactures) are projected to increase more rapidly than those from traditional exports -- benefitting from good opportunities to export towards the neighboring countries 4 -- their impact on the balance of payments will remain modest through the end of this decade. 17. Burundi's external financing requirements for 1988-89 have increased because of the decline in coffee prices, which is estimated to lower potential revenues by about US$50 million during the period (equivalent to about 25 percent of exports). To finance the imports associated with the above growth objectives, meet the scheduled amortization payments, and allow for some accumulation of international reserves, Burundi will require external financing totaling about US$480 million during 1988-89, as explained in greater detail in Part IV. Expected disbursements of grants and M&LT concessional loans (including the proposed financing) are estimated at about US$440 m.llion.5 A meeting of the main donors is planned to be held in Geneva in Summer 1988 to mobilize an additional US$40 million to close the financing gap during the program period. E. Rationale for Bank9a Involvement 18. Supporting the adjustment program is at the center of the Bank's assistance strategy for Burundi. Since 1985, the Bank has been quite active in helping the Government to prepare and implement the first phase of its adjustment program. The Bank's involvement has combined the following three elementas (i) analytical work, leading to the identification of major structural issues and needed reforms; (ii) an intense policy dialogue, to which the Government has been responsive, and which has contributed to an internalization of the Bank's recommendations and to the Government's commitment to the reform program; and (iii) the financing of policy-based oTperations (SAL I) and technical assistance projects, in direct support of the economic reform program, as well as of investment projects to stimulate a supply response to the new incentives structure. The successful implementation of the subsequent phases of the program will require sustained Bank and IMF support. The IMF is supporting the implementation of a financial program under the second-year SAF to cover the 1988 period. The Bank will be involved through: (i) a series of structural and sector adjustment operations; (ii) continuing technical assistance support to strengthen general economic management; and (iii) 41 For example, construction materials, textiles, soap, and some metallic products to Zaire, Kenya, Uganda, and Rwanda -- all of them, with the exception of Zaire, members of the Preferential Trade Arrangement Zone. 1/ US$163 million from already committed loans, US$100 from new official transfers, and US$177 million from new loan commitments currently planned in donor programs (including IMF support, and the proposed credit). -7- complementary operations in productive and social sectors (see Part V). Particular emphasis will be placed on continuing the actions already initiated under the first phase and the implementation of further reforms. The latter would complement the liberalization reforms initiated in the trade and industrial sectors, notably those concerning the liberalization of the labor and financial markets, while addressing the social aspects of adjustment. PART II - PROGRESS IN THE ADJUSTMENT PROGRAM: THE FIRST SAL 19. The program supported by the first SAL emphasized the stabilization measures aimed at restoring financial equilibria in the short term and initiating medium- and long-term structural change in the economy, based on the rationalization of the incentive system and improving efficiency in the utilization of public sector resources. The following paragraphs summarize the progress made in these areas. Management of the Balance of Payments 20. The first phase of the adjustment program placed heavy emphasis on export promotion and efficient import-substitution. After an initial exchange rate adjustment of 13 percent in terms of SDRs, the currency was depreciated progressively until March 1987, with a total cumulatiNth depreciation of 24 percent. In February 1988, the FBu was depreciated by an additional 10 percent. Also, in order to stimulate foreign private investment, the limits imposed in 1984 on transfers of foreigner's income were raised. Furthermore, external borrowing was limited to concessional loans, and an interministerial committee was set up to monitor the country's external debt and provide advice on new borrowing. 21. A number of import liberalization reforms were also implemented. Quantitative restrictions were largely eliminated and replaced by import duties. Import licenses are now granted automatically, except for a limited number of luxury goods and three groups of locally-manufactured goods (cotton textiles, glass bottles, and pharmaceuticals) which are subject to temporary quantitative restrictions. The former requirement for importers to specialize in specific products was abolished, leading to increased competition. In order to further reduce the anti-export bias of the trade regime, taxes on manufacturing exports were eliminated. 22. A major reform of the Import tariff structure was initiated with a view to reducing high rates of effective protection enjoyed by many import- intensive activities and providing a basic rate of protection for production of intermediate goods based on domestic resources. The number of duty rates was reduced from 57 to 5; and the tax range on non-luxury goods was narrowed from 0-280 percent to 15-50 percent in 1987 and to 15-45 percent in 1988. Luxury goods are taxed at 100 percent, the maximum rate. Ir a few cases in which higher rates might be necessary to protect industries of national interest (notably infant industries), selected enterprises may be granted temporary relief in the form of either an import surcharge (with a maximum rate of 30 percent, levied for a maximum period of three years) or reduction in custom duties on intermediate goods. -8* Fiscal Policy and Public Finance 23. Along with the tariff reform, the fiscal measures adopted by the Government included reform of the sales (transaction) tax -- from a "cascade tax" to a single-stage sales tax, at a higher rate, levied on production and Imports. Tax collection was Improved, and exemptions granted under the Investment Code were revised. The first steps to improve public expenditure management were launched. A three-year public investment program (1987-89) was prepared which was consistent with the macroeconomic framework. The sectoral allocation was also consistent with the development strategy, and priority was given to completing ongoing viable projects and starting high priority projects. The Government initiated the preparation of a three-year public expenditure program. However, Implementation delays occurred due to difficulties in recruiting consultants and in establishing an appropriate action program for the concerned ministries. To strengthen the capacity to prepare and appraise projects, an IDA-financed Economic Management and Public Enterprise Project was approved by the Executive Directors in May 1987. Production and Investment Incentives 24. The previous regime of price controls (on both local and imported goods) was eliminated. For only a limited number of strategic products (or products subject to temporary import monopolies) prices can be,.lubject to a ceiling bUt for no more than four months and only in case of acute shortages. The new price system applies to the public enterprises as well, except in the case where social services and natural monopolies are involved. A set of incentives designed to stimulate investment and production was put in places (I) the Investment Code was revised to provide automatic incentives to all investors (Burundian and foreign) who meet specified criteria related to, inter alia, employment of )abor and rate of return; (ii) the previous guarantee of the local market (whereby local enterprises were prot*4ted from foreign and domestic competition) has been eliminated; and (iii) a Guarantee Fund is being re-activated to facilitate access of small and medium enterprises to banking credit. Furthermore, in an effort to mobilize domestic savivgs and encourage efficient utilization of credit$ interest rates were raised to real positive levels. 25. In April 1986, the producer prices of key exports, which had declined in real terms since 1984, were increaseds by 28 percent for coffee and 20 percent for tea (8 percent and 2 percent in real terms, respectively). As a result, the ratio of coffee producer prices relative to world prices was maintained at 48 percent between 1984 and 1986. In the case of tea, the share increased from 24 percent to 39 percent, and in the case of cotton from 42 percent to 80 percent. The sharp downturn in 1987 in world prices of coffee limited Government's ability to grant further price increases to producers. However, by maintaining nominal producer prices* the producAr price share of the world prices reached 70 percent for coffee and 51 percent for tes. Public Enketprise Reform 26. In the context of a comprehensive parastatal sector reform, the Government has defined the criteria for State participation in the economy and prepared an overall strategy for the sector which includes -9- rehabilitation, liquidation, and privatization of selected enterprises, and the reinforcement of the central government's capacity to monitor development in the sector. A Service in Charge of Public Enterprises (SCEP) was created in July 1986 to coordinate and monitor the reform program for the sector. The SCEP completed diagnostic studies of four enterprises: CAD9BU (savings), OTRACO and OTRABU (transport), and ONAPRA (pharmaceuticals)l and a fifth diagnostic study, of Verrundi (glass products), is underway. An intervention fund was created and is available to support the rehabilitation of these or other enterprises which will be the subject of further diagnostic studies (see paras. 47-56). Four enterprises facing serious financial problems were closed down in 1986, and "liquidation commissions" were established to sell their assets and pay their debts. The Government has integrated in the public administration the research department of LAPHAVET (production and research of veterinary products) and decided to continue subsidising two public enterprises -- ONT (tourism) and CPI (industrial promotion) -- while developing efforts to Increase their efficiency. Aariculture 27. In agriculture, Important developments have taken place in terms of definition of a development strategy for the sector, including: the role of Regional Development Companies, whose functions have been streamlined and focussed on directly productive activities; emphasis on agricultural services; and Improving the sector's financial management. Concerning the coffee sub-sector, the Government took measures to reduce the moisture content of the "fully washed" coffee, which had eroded its premium in international markets, and complementary efforts are being pursued to Improve coffee quality. To tmprove the marketing capacity of BCC (coffee marketing company), the Government, with Bank assistance, established an action plan to strengthen marketing procedures and training of- BCC personnel which will be launched during the proposed operation. Moreover, the study of the financial aspects of the coffee pricing policy was completed, which provides the basis for the proposed review of the coffee pricing mechanism (para. 62). PART III - CONTINUING THE ADJUSTENT PROCESS A. Stratear 28. The reform that have taken place under the first phase of the adjustment program represent a fundamental change in Burundi's basic economic environment. They have helped to reduce distortions in the incentive structure and should favor a more efficient allocation of resources, in line with the country's resource endowment. They also provide flexibility in the economy by allowing prices to respond to changes in domestic and external supply and demand conditions, and have laid the basis for the continued adjustment which will help restore longer-term viability and sustained growth. 29. The Government's objectives for the second phase of its adjustment program include: a real GDP growth of 4.5-5 percent per year -- allowing for an increase in real per capita Incomes and consumption (population growth is projected at 3Z per year); maintaining a viable external payment -10- situation; and reducing the overall fiscal deficit to about 5 percent of GDP by 1991. The thrust of the underlying strategy is the promotion of private sector activities, through the provision of an increasing share of domestic credit to the private sector and of adequate guarantees to facilitate private capital flows. The ongoing tariff reform has already begun to eliminate the major disparities still existing in rates of effective protection. Under the proposed credit, the trade and industrial reforms will be strengthened to improve the incentive structure and promote efficient export-oriented activities. The Government will continue its policy of price liberalization and will extend it to interest rates and labor market. In order to maintain the competitiveness of Burundian exports, the Government will continue to follow a flexible exchange rate policy. 30. With regard to the public sector, the Government's strategy is to rehabilitate the country's basic infrastructure and to improve public sector management and social services in line with the budgetary resources. The Government will continue the reform of the public enterprise sector (paras. 47-56) and seek to increase domestic resource mobilization in both the public and private sectors. Domestic savings are projected to increase from 5.3 percent of GDP in 1983-87 to 8.5 percent in 1990, due primarily to increased savings of the public sector, as a result of additional fiscal reform measures, increased efficiency in the public enterprise sector and continued prudent expenditure policies. To this end, the Government has agreed to a set of budgetary targets within the framework of the approved second-year SAF program.. B. The Government's Short-Term Financial Prosram 31. The Government's short-term financial program under the second- year SAP program concluded with the IMF is designed to help reduce the overall fiscal deficit, maintain the balance of payments in line with the availability of concessional aid and avoid inflationary pressures. It was prepared in collaboration with the Bank, and there are several areas where the two programs (the IM's SAF and the IDA's SAL II) overlap andlor are mutually reinforcing. 32. The Government's financial program aims at keeping inflation at about 6 percent a year in 1988 and 5 percent in 1989, while stimulating economic activity by providing the private sector with a significantly larger share of credit. The fiscal objectives are to: (a) reduce the overall central government deficit from 12.8 percent of GDP in 1987 to 9.7 percent in 1988 and 8.1 percent in 1989, with the objective of reaching 5 percent by 1991; (b) eliminate domestic arrears by end-1989; and (c) maintain the external debt service burden at 12 percent of expenditure during 1988-90. The achievement of these objectives will be constrained by the projected heavy debt service burden (nearly 20 percent of average expenditures during 1988-90), therefore making it mandatory for the Government to refrain from external borrowing at non-concessional terms. 33. To achieve these objectives, the 1988 program includes: (a) measures to increase the fiscal revenues with the objective to increase their share in GDP from 12 percent in 1987 to 14.5 percent in 1988, namely: broadening the transaction tax base to include activities in the service sector, construction work and food processing activities and increasing its -11- tax rate from 12 to 15 percent; extending the statistical tax to all imports (except those for diplomatia use); and strengthening custom duty administration to improve collection and reduce fraud; (b) restrictive public expenditure (quarterly ceilings will be imposed on ministerial spending) aiming to limit nominal annual growth to about 9 percent in the case of personnel outlays, 11.7 percent in the case of goods and services, and 14.7 percent with respect to transfers and recurrent subsidies; and (c) prudent monetary policy aiming to reduce budgetary financing through the banking system by 32 percent and to expand credit to the private sector by about 9.5 percent. Consistent with the target for an increased level of international reserves, broad money growth is projected to be held at 7 percent a year, significantly below the projected increase in nominal GDP. PART IV - PROPOSED PROGRAM UNDER SAL II 34. The proposed second SAL will continue Bank support of a sound framework of economic policies during the next phase of the Government's adjustment program. It will consolidate the progress made in a number of areas during the first phase of adjustment but also address new reform areas, namely the operation of the financial and labor markets (both oriented to improve efficiency of resource allocation) and on poverty alleviation. The program is outlined in the Government's Letter of Development Policy (Annex V). The following paragraphs describe the components of the SAL II program which is summarized in the Matrix of Actions in Annex IV. A. Trade and Industrial Policy 35. The Government's program contains measures to improve the competitiveness of non-traditional exports and import-substitution activities, and to provide more neutral protection across economic sectors. To maintain competitiveness, the currency was adjusted in Febraary 1988 by 10 percent (in local currency terms) to correct the small appreciation which occurred since March 1987. The Government is committed to periodically review its exchange rate policy taking into account the evolution of the real effective exchange rate and developments in its external position. 36. In addition to the fiscal measures mentioned in para. 32-33, tht Government wills (a) complete the tariff reform, with the objective of narrowing the tariff range, reducing the average effective protection rate and ensuring consistency with the PTA tariff (condition of second tranche release); (b) pursue the import liberalization program -- the remaining import restrictions on luxury goods have been replaced by custom duties in March 1988, and these will be changed to excise taxes in 1989; (c) agree with the Bank on the timetable for liberalization of imports competing with domestic manufactures by mid-1990 -- the timetable for imports competing with VERRUNDI products (glass bottles), ONAPHA (pharmaceuticals) and COTEBU (cotton textiles) will be defined in the context of the contract programs to be negotiated with VERRUNDI and ONAPHA by December 1988 and the action plan for COTEBU to be finalized by March 1989. Agreement on the timetable for imports competing with VERRUNDI is a condition of second tranche release; and (d) pay interest on the FBu 10 million deposit required from foreign importers and eliminate such deposit when the importer invests in productive activities of at least FBu 20 million. -12- 37. Furthermore, to further improve the export incentives and to increase the neutrality of incentives between import substitution and export activities, an Export Promotion Decree was promulgated in April 1988 to: (i) revise the existing duty drawback system, replacing it with a simplified rebate system for exporters -- who, thereafter, will be able to receive 15 percent of the value of their sales in rebates -- while setting the stage for a later drawback system which will incorporate all indirect taxes; (ii) encourage exports through a concessionary tax rate based on export performance; (iii) allow marketing expenses incurred abroad to be fully tax deductible; and (iv) simplify administrative procedures to make it easier for promoters to travel abroad. In addition, the Government will: (a) provide support to existing or potential exporters in marketing and in financing technical assistance, notably by setting up an Office of Standards and Measures to ensure the quality of Burundi's exports; and (b) complete a study to identify and evaluate Burundi's long-term resource and market potential, thus providing the foundation for identifying viable export activities. 3. Public Expenditures Proarammina and Policies 38. The Government's public expenditure policy aims at: (a) containing expenditures in line with the available resources; and (b) concentrating public resources on vital activities for the country's economic development. The public expenditure program will focus on strengthening basic services (basic health, education, rural water supply systems, agricultural research and extension), supporting targeted programs of poverty alleviation, and maintaining existing economic and social infrastructure. Public investment will aim to strengthen the human and physical resource base, catalyse a process of urban development, and selectively expand social and economic infrastructure, while leaving to the private sector the task of investing in directly productive activity. The Public Expenditure Progran 39. During the first phase of the adjustment program, the Government focused on the preparation of the PIP as a way to improve the overall allocation of resources. In the context of SAL II, the Government will adopt a rolling three-year PEP .(covering recurrent and capital expenditures as well as technical assistance) as the basis for rationalizing public expenditure management. Progress has already been made in preparing detailed PEPs for two sectors -- education and health -- in the context of IDA-supported projects. Further work will be undertaken in 1988 to prepare PEPs in agriculture and transport sectors in the context of IDA-financed projects under preparation. 40. The objective is to prepare comprehensive three-year PEPs, starting with the PEP for 1989-91, and a consolidated formal budget by 1991. In the interim, transitional unified budgets will be prepared for 1989 and 1990. To this end, the Government has agreed with the Bank on the procedures to put in place in order to prepare the first 1989-91 PEP and the first unified budget for 1988. During this process, the Government will identify non-priority programs, assess the resource needs nf the priority programs (including project-related recurrent costs), and establish the base for a consolidated budgeting, financial monitoring and control system (see paras. 45-46). Agreement with IDA on the 1989-91 PEP -13- and the 1989 budget (the 1989 tranche of the PEP) will be a condition of second tranche release; similarly, agreement on the 1990-92 PEP and the 1990 unified budget will be a condition of third tranche release. 41. The Government will also prepare an action plan to improve the efficiency of the civil service in 1988, based on the census already prepared in 1986, and further analysis to be carried out with the assistance of the "Ecole Nationale d'Administration du Qubbec". Agreement on a medium-term human resource strategy to improve the efficiency of the civil service will be a condition of third tranche release. In addition, a technical assistance survey, being undertaken with the assistance of the UNDP (NATCAP II), will be completed to improve the efficiency of technical assistance and develop a medium-term program concerning such assistance. The Public Investment Program 42. A review of the preliminary 1988-90 PIP was carried out during negotiations. An agreement will be reached with IDA on the final PIP before effectiveness of the credit. The PIP calls for investments averaging FBu25 billion per year (13 percent of GDP) at current prices. It includes 185 projects. The average project size is small - US$ 5 million - and only 7 projects are larger than US$ 20 million. About 25 percent of the program represents activities undertaken by public utilities. The*PIP reviewed with the Bank is a core program composed of high priority projects, either with assured financing or with high probability of securing financial support. A reserve program has also been prepared, consisting of lesser priority projects which may be undertaken, within the overall financial program, if financing is mobilized and/or higher priority projects are delayed. The core PIP is financed at highly concessional terms (20 percent grants), with IDA being the largest expected donor (36 percent of total identified external financing). The reserve projects will be selected according to the criteria adopted by the Government under SAL I (i.e., comprise productive projects with an economic rate of return of at least 10 percent and social projects which meet the least cost solution). The Government intends to convene, with UNDP assistance, a Round Table in late 1988 to present the Five-Year Plan (1988-92)6 and the 1988-90 PIP to the donors and to secure the remaining financing. A preparatory meeting is scheduled in Summer 1988. 43. The structure of the PIP reflects the Government's evolving investment priorities as well as historical developments. The decline in the share of directly productive activities (see Table 4 in Annex I) is the result of a sharp reduction in direct Government investment in industry. In the infrastructure sectors, investments will be maintained at an average of FBu 6.5 billion per year. While an expansion of the port of Bujumbura is being undertaken, the ambitious road building program of past years is being scaled down, with the emphasis placed on maintenance. This component also integrates an innovative urban development program in an effort to foster the growth of urban employment which the Government considers vital to reduce pressure on scarce land resources and improve linkages between rural and urban activities. The share of social infrastructure investments i/The Five-Year Plan describes the Goverment's development strategy for the 1988-92 period. It was prepared in 1987 and is being revised by the new Government to make it consistent with its economic program. -14- to expected to rise as the Government implements important operations in basic education and health. 44. To correct some distortions in the initially proposed core program, the Government has agreed tot (1) withdraw the construction of a central market in Bujumbura from the public investment program -- the project could raise the cost of marketed goods in the capital; (ii) redesign the sport stadium (20,000 seat capacity) by eliminating ancillary facilities (olympic swimming pool and hotel) in order to reduce operating costs; (iii) abide by the results of the study concerning the extension of the oil palm processing plant; and (iv) abide by the study on the opportunity to continue with SOSUMO -- the expensive sugar production scheme (SOSUMO) whose economic viability is uncertain (para. 64). The study should be completed by end-December, as a basis for an action plan to be agreed with the Bank as condition of second tranche release. Satisfactory implementation of the action program is a condition of third tranche release. Institutional Strengthening 45. There is a need to institutionalize the process of preparing the three-year rolling PEPs so that they become a permanent feature in the expenditure programming, budgeting and monitoring cycle. To this end, a program of institutional reform will be developed and put in place during 1988-90 aimed ats (a) establishing the three-ear rolling PEP framework and integrating it throughout the administration; (b) unifying the preparation of the budget, taking explicitly into account the resource needs of development operations; and (c) preparing transitional unified budgets in 1989 and 1990, while a full-scale budgetary reform and a reform of the public accounting system are being prepared for implementation in 1991. 46. The process of strengthening the Ministries of Plan and Finance and the programming and financial management units of sectoral ministries will be accelerated with the support of ongoing IDA-financed technical assistance operations. The Government will prepare an action plan for strengthening the Ministry of Planning. The French Ministry of Finance will provide advice to help develop the budgetary and public accounting system reforms. An action plan to strengthen the finance and sectoral ministries in programming, budgeting and monitoring will be developed and agreed upon with IDA by end 1988. C. Public Enterprise Reform 47. Burundi's 57 public enterprises (PEs), most of which date from the seventies, assume a significant role in the economy, particularly in the modern sector, where they absorb around 25 percent of employment. In the early 1980s, a number of these enterprises began to face financial problems and to rely on Governmental subsidies. In 1983, budgetary support was ended, precipitating some of these parastatals into near-bankruptcy. 48. As part of its structural adjustment program, the Government has undertaken to implement a comprehensive reform program of this sector while clarifying the objectives and strategy for its intervention. Government's objectives in this area include: (a) limiting State involvement in the parastatal sector to new activities with projected medium-term economic -15- viability and to public services which would not interest the private sector; (b) in order to maximize the value added of the sector, all public enterprises should cover their operating costs and at least part of their investment costs; and (c) there must be a net contribution to public finances by the sector, and there should be no subsidies to enterprises of a commercial and industrial nature. 49. The main elements of the operative strategy includes (a) rehabilitation of PEs when justified by diagnostic studies; (b) signature of performance contracts -- defining clearly the mutual responsibilities of PEs and the concerned ministry -- for those PEs which will remain under government control; (c) reduction in the size of the sector by means of rationalization and mergers, liquidations and divestitures; (d) financing by the State budget of social objectives of PEs; (e) establishment of a performance monitoring system for the entire PE sector; (f) limiting all new Government investment to those enterprises satisfying the above criteria; (g) changing the legal framework to increase autonomy and accountability and to require external auditing of public -enterprises; and (h) completion of sectoral studies leading to the preparation of action plans concerning key issues, such as prices, tariff policies, incentives for employees and investors, and privatization. 50. In the context of SAL II, the Government will continue the program initiated under SAL I. The Government has already decided on the final steps concerning the liquidation of SUPOBU (fishing) and SOMEBU (studies) - - including transfer of their assets to the Government. The liquidation process of AGRIBAL (which has ceased activities two years ago) has been delayed due to the reluctance of its foreign partner (a foreign government which detains 60 percent of the capital) to liquidate the enterprise. The Government expects to complete the necessary diplomatic procedures by end- 1988. The final draft decree to liquidate SOGESA (the enterprise charged with the management of the silos previously managed by the already liquidated SOBECOV) has been agreed with the Bank and will be signed by the President as a condition of credit effectiveness. In addition, based on the diagnostic studies completed for a first group of PEs -- CADEBU (savings institution), OTRABU and OTRACO (transport), ONAPHA (pharmaceuticals), and VERRUNDI (glass bottles) -- performance contracts/ action plans will be prepared according to schedule specified in the action program in Annex IV. The problems of these PEs and their implications for Government action are highlighted below. 51. CADEBU. The Government has agreed to gradually eliminate special advantages enjoyed by the institution, including its monopoly regarding compulsory savings, deregulate the interest rates on its credits, remunerate those savings at market rates, and submit CADEBU to the control of the Central Bank according to a special legislation to be prepared in 1989. Agreement on a calendar spelling out the progressive elimination of CADEBU's monopoly on compulsory savings is a condition of credit effectiveness. Satisfactory progress in the action plan for CADEBU is a condition of third tranche release. 52. OTRACO's problems stem from poor management and confusion between its public service and commercial roles. Its tariff policies do not permit the enterprise to cover costs, but the extent to which its social responsibilities limit its ability to be profitable has not been clearly defined or reflected in the budget. Government will sign a performance -16- contract with the enterprise outlining mutual responsibilities. The level of subsidies required will be determined and provision made to include them in the national budget. The rehabilitation program will include tariff reforms and strengthening cost accounting. 53. OTRABU has the potential of becoming a profitable enterprise in the short-term but this will require internal management improvements, changes in fleet composition, and a marketing policy aimed at the most profitable activities and customers. The rehabilitation program will be based on partial privatization of the enterprise, which will include its conversion to a joint venture (SEM, Societe d'Economie Mixte) and the elimination of all Government subsidies. 54. ONAPHA's cost structure precludes it from competing successfully with imported products. In view of the need to supply the Burundian population with low cost pharmaceuticals, the Government has decided to abolish administrative restrictions and to seek private-sector participation to rehabilitate ONAPHA. Government will provide no further subsidies, investment or loan guarantees to the enterprise. Liquidation will be envisaged by December 1988, if the envisaged investments to modernize the plant are not financial and economically justified, or if private participation is not materialized. 55. VERRUNDI. Upon completion of the second diagnostic study, the Government will be in a position to negotiate a performance contract with the enterprise. On the basis of the first diagnostic study, it is clear that the enterprise requires a consolidation of its external debt which, at present, constitutes a severe obstacle to its competitiveness in the neighboring countries. The second study will provide the basis for preparing action programs concerning marketing, production lines, and required new investment. Signature of a performance contract with the enterprise is a condition of second tranche release. 56. Additional measures to be implemented under the program include: (i) completion, by end-1988, of rehabilitation plans for a second group of enterprises: REGIDESO (water and electricity), COTEBU (textiles), Minoterie (flour mill) and three import PEs --EPIMABU, ONC, and ONIMAC. The signature of a performance contract with REGIDESO will be condition of second tranche release; (ii) completion of reform plans for a third group of PEs -- ONL/SIP (housing), ONATEL (telecommunications) and hotels -- by March 1989; (iii) adoption of a revised legal framework concerning the relation between parastatals and concerned ministries. The draft legislation has been prepared and discussed with the Bank; it is expected to be approved by the Council of Ministers by September 1988; (iv) implementation of the management information system by end-1988; and (v) completion, by December 1988, of several studies concerning tariffs, incentives, and privatization. Agreement on an action plan for privatization will be a condition of third tranche release. D. Agriculture Policies 57. As a complement to the important investment effort made in the agricultural sector (40 percent of the 1988-90 PIP), the Government intends to take measures to: (I) improve productivity levels (notably of foodcrops) through increased utilization of fertilizers; (ii) prepare pricing policies -17- in line with the production and export objectives; (iii) strengthen the efficiency of the coffee sector; and (iv) address the economic and financial difficulties of some agro-industrial projects. 58. Fertilizer utilization, limited to one percent of producers, is hindered by insufficient knowledge of fertilizer performance in on-farm conditions, uncertainty about fertilizer demand, and insufficient institutional arrangements for distribution and marketing. The Government intends to: (a) update and extend fertilizer trial programs to crop associations in actual farm conditions; (b) conduct trials on combinations of chemical and organic fertilizer; (c) clarify import and supply policies; and (d) increase the participation of the private sector and producer cooperatives in this activity. 59. Pricina Policies. Although there is little government intervention in foodcrop pricing and marketing, price controls are in place for major export crops (coffee, tea, and cotton) and some imported foodcrops competing with local production (wheat, rice, and palm oil). As mentioned earlier (para. 25) adjustments have been made in producer prices in the past but on an ad hoe basis, leading in certain cases (e.g., tea) to financial difficulties in producing parastatals, to excess production (rice), to reduced Government revenues (coffee), or to large oscillations in production (cotton). As a basis for establishing a rational policy on producer prices, the 4overnment will undertake an agricultural comparative advantage study including an assessment of producer incentives in light of production costs. The study will be completed by June 1989. 60. Coffee Sub-Sector. Programs have been launched to improve quality of production, prices have been increased to improve farmers" incentives, and washing stations have been built to process fully-washed (FW) coffee, which can receive about 15 percent premium in international markets. Important issues to be addressed by the Government during the second phase of its adjustment program concerns (a) rationale for production expansion; (b) improvement in production quality; (c) reform of the pricing structure; and (d) strengthening marketing strategy and capacity. On the basis of past projects and existing plantings, there is a potential for coffee production to double by the end of the century. The exploitation of this potential needs, however, to be analyzed taking into account the poor prospects of the international market, Burundi's vulnerability to transport conditions in the neighboring countries, and the crop's opportunity costs (taking into account the limited availability of cultivable land). In this context, the Government will develop a long-term production strategy (to be discussed with the Bank by September 1989) based on the results of the above-mentioned study, which would also examine Burundi's relative position in the world market for coffee and assess the possibilities for penetrating the markets for best quality arabica coffee. 61. To improve the quality of the Burundian coffee, the Government intends to continue the investments in coffee washing stations to produce FW coffee. Sustained quality improvement requires, however, strengthening the management of these washing stations. To this end, the Government will analyze the advantages of transferring their ownership from the RDCs to the private sector, including producer cooperatives. The management of these -18- stations will be handled by professional firms paid on the basis of a fee. Ir this context, the role of OCIBU (in charge of processing large part of the coffee) will be reviewed. To improve coffee export marketing, the Government will also reinforce BCC's marketing and logistic capacity with a view to establishing a policy of aggressive marketing and attenuating the transportation problems arising from the landlocked situation of the country and the unreliable service provided by the Tanzania Railway Company in the past. Support will be provided through a proposed Coffee and Export Crop Policy Operation under preparation for possible IDA financing. 62. Under the present Pricing system, all intermediaries in the coffee production/processing/marketing chain are paid according to a fixed price. This creates distortions in the sector (OCIBU has accumulated substantial surplus in the past few years, at the cost to producers and the Treasury), limits the incentives for increased efficiency at processing and marketing level, and hinders the potential for increases in producer prices. The Government has initiated a review of the present pricing system ("echelle mobile*, or sliding scale), on the basis of a recently completed study. The objective is to simplify the pricing structure, to adopt a second sliding scale for the FW coffee, and introduce quality incentives for producers of this type of coffee. As a first step, the sliding scole for the 1988/89 coffee season has been adjusted and revised in consultation with the Bank. The sliding scale for the 1989/90 campaign will be reviewed with the Bank as a condition of second tranche release. The Government will also assess the possibility of remunerating OCIBU and BCC for their processing and marketing services on a fee or consignment basis rather than on a cost-plus basis (to be discussed before the 1989 pricing schedule is announced). 63. The Government has developed agro-industrial complexes to produce some import-substitution foods, notably sugar (SOSUMO), rice (IMB0), palm oil (Rumonge), and wheat (Minoterie de MURAMVYA). These enterprises are facing economic and financial problems, and the Government intends to iw,?lement a series of actions to improve their situation, as explained below. 64. The most important enterprise in the above category is the Sugar Complex (SOSUM0), representing an investment of about US$80 million to produce irrigated sugar. The project was prepared at the time when world sugar prices were particularly high; it now faces serious difficulties, as production costs are very elevated and, at border prices, the enterprise would not be able to cover operating costs. The Government will carry out a study of the opportunity cost of pursuing this project, including the option of selling the plant and producing other crops. It will also assess the scope to reduce SOSUMO's operating costs and agree with the Bank on an action plan for the enterprise. Based on the study to be launched shortly, an action program will be agreed with the Bank as a condition of second tranche release. Satisfactory implementation of such a plan is a condition of third tranche release. The Government will liquidate the enterprise if it proves economically unjustified after the first two years in operation. 65. Rice is produced and processed by the RDC of Imbo. Because of inadequate pricing and marketing policies, rice stocks have accumulated to the equivalent of twice the domestic consumption. Ex-factory cost and selling price for Imbo rice are much higher than the price of imported -19- rice, obviously making it difficult to export it. The main problem stems from an excessively high producer price (fixed by Government at FBu 401kg, or twice the level of neighboring countries). Before the 1989190 rice campaign starts (March 1989) the Government will liberalize the paddy rice market and allow the RDC Imbo to set its own prices, as a condition of second tranche release. 66. Oil Palm. Present oil plantations and processing plant are economically viable. Current difficulties stem from shortages of raw materials, due to the young age of the trees, leading to low levels of capac.ty utilization (about 30%). Plantation production is expected to increase rapidly and expansion of the current plant will be needed in the early 1990s. A planned second plant (six times larger than the present one) has been withdrawn from the 1988-90 PIP. The extension of the present plant will be decided upon based on the results of the economic feasibility study. E. Employment Policies 67. For 60,000 new entrants into the labor force every year, the modern sector creates at most 3,000 permanent jobs (less than 5 percent). Currently, the public sector absorbs two-thirds of modern employment (39 percent in the civil service and 27 percent in parastatals). Past policies, including exonerations of custom duties on imported equipment, price controls, and an overvalued exchange rate, have hindered growth in modern sector employment. Although the reform initiated under SAL I have eliminated some of the distortions, further measures are needed to improve incentives for more intensive labor utilization. The Government has already taken some actions in this direction: the payroll tax ("tax forfaitaire") was abolished; the Investment Code has been revised; and some previous administrative constraints to labor and population mobility have been removed. In particular, the settlement permit required for non- residents has been abolished, the restrictions on itinerant traders ("commercants ambulants") were eliminated, and a new urban policy to stimulate development of small/informal activities in urban centers has been adopted in the context of the IDA-financed Second Urban Project. 68. Under SAL II, the Government objectives are to further liberalize the labor market by revising the legislation on domestic and foreign labor, strengthen the role of the Ministry of Labor (as promoter of employment), put in place a series of measures aimed at reducing unnecessary costs (to employers) associated with employment (notably medical costs), and stimulate the development of artisanal and informal activities. 69. To achieve these objectives, the Government willt (a) revise the labor legislation in order to allow private sector employers to recruit directly, without prior mandatory consultation/approval by the Labor Department (DMO); (b) redefine the role of the Placement Commission (in charge of reviewing all labor recruitment) so as to make it primarily one of supervision of DMO technical staff and monitoring the impact of employment policies; and (c) strengthen the capacity of DM0 to perform its functions of evaluating employers' specific skills needs, maintaining rosters of qualified applicants, and compiling relevant statistics. Revised legislation has been agreed with the Bank and will be submitted for approval to the National Labor Council, as a condition of credit effectiveness. In a second phase, to be agreed with IDA prior to third -20- tranche release, the Government will extend the reforms to the parastatal sector. 70. At the same time, the Government will revise the legislation concerning foreign labor with the following objectives: (a) the relevant Placement Committee will include representatives of the employers; (b) the working and residence permits for certain categories of foreign workers will be issued for the same period; (c) foreign workers who lose their jobs will be allowed to seek another job without having their working permits automatically revoked; and (d) the current tax on foreign workezs' earnings will be used for training local labor. The draft legislation has been agreed with the Bank and will be submitted to the National Council of Labor for approval as condition of credit effectiveness. 71. The Government will also undertake to strengthen the capacity of the Ministry of Labor to promote employment, relying on improved information on the informal sector and on training and marketing needs. A national job classification will be prepared, and the DMO services will be strengthened with ILO assistance. Submission of an action plan to strengthen the Ministry of Labor is a condition of second tranche release. 72. The Government has already revised both the ban on imports of second-hand technology, provided they are accompanied by performance guarantee certificates, as well as the structyre of Bujumbura municipal taxes on informal and small enterprises, which were strongly biased against employment generation. As a complement to the above measures, the Government will complete the ongoing study on private sector salary structure and study alternatives to the medical insurance scheme currently available to the private sector, so that the medical costs now totally borne by the private sector employers will be shared by the employees, Improving equity and reducing excess demand for medical services. F. Financial Markets 73. The Government and the public sector have a dominant position in the financial system. Public ownership accounts for close to 50 percent of the capital of banks. With one exception (CADEBTJ), financial institutions are in fairly sound condition. Capital funds are adequate, rates of return are reasonable, and the problem of non-performing loans is manageable. Efficiency has, however, been undermined by a heavy regulatory environment which prevents competition among financial institutions. Among the factors hindering an efficient allocation of financial resources are the aforementioned monopoly of CADEBU regarding compulsory savings; the ban on pub'ic enterprises to deposit their liquid assests in banks of their cho.ce; the heavy regulation of interest rates; and the discretionary pol:-.y on Treasury Bills. 74. In the framework of the proposed SAL II, the Government's objective is to liberalise the interest rate structure and to replace the regulatory system by more efficient instruments to manage credit and liquidity. The present system of multiple interest rates will be replaced by a simplified system of two rediscount rates -- one preferential and one non-preferential -- whereby the Central Bank would regularly adjust the discount rate, while letting all the other interest rates be market determined. In parallel, the credit regulations will be simplified. -21- 75. The above described reform has been launched in April 1988 and will be completed by July 1989. In the first phase, the Government has: (a) established a public auction system for Treasury bills to rationalize the market for Treasury bills which were subject to arbitrary measures, and to provide a basic market-determined interest rate to be used as reference for determining the rediscount rate; (b) established a system of compulsory reserves, as an instrument to control overall credit expansion; (c) eliminated the prior authorization system of credit provided by commercial banks; and (d) eliminated the ceilings on interest rates for non-rediscountable credits and the minimum interest rates on sight deposits. 76. Moreover, public enterprises are now allowed to reduce their deposits in the Central Bank and invest their excess liquidity in alternative financial assets which will yield greater profitability. The system of compulsory savings will remain for the moment, but depositors will gradually be free to place them in the institution of their choice at market-determined rates. The current monopoly enjoyed by CADEBU will be gradually eliminated, as noted earlier (para. 51). The internal procedures for the Guarantee Fund (to stimulate credit to small and medium enterprises) will be adopted before credit effectiveness. 77. In the second phase (starting September 1988), the Government will reduce the number of rediscount rates from seven to three. Rediscount rates will be determined on the basis of the market rate for Treasury Bonds. The interest rates on rediscountable credits will be determined as follows: a maximum spread of 1 percentage point for the preferential rediscount rate and of 4 percentage points for the other two rediscount rates. The Government will also abolish the minimum interest rates on time and saving deposits with the exception of that on passbook deposits (to protect in this transitory phase the savings of small depositors) and adjust the "medium term coefficient' according to which financial institutions are required to hold a certain portion of their assets in term credits, by allowing financial institutions to subscribe to Treasury bills to meet that requirement and by applying a unified calculation method to all financial institutions. 78. In the third phase (starting December 1988), the Government will: (a) issue Treasury Bonds at progressive rates oriented to small savings; (b) reduce the number of rediscount rates to two; and (c) reduce the number of maximum interest rates on credits to two as well. Total liberalization of interest rates will be achieved by July 1989. The above reforms complement the measures supported by the Small Enterprise APEX Project approved in March 1988. G. Social Programs and Poverty Alleviation 79. With a per capita income of about US$240, Burundi is among the poorest countries in the world. Poverty is also apparent in the low literacy rate of the adult population (less than 30%), the high infant mortality rate (120 per thousand live births), and the severe cases of malnutrition detected among rural children. Most of the low income population is concentrated in the rural sector. Only 6% of the population is urban, with a median annual income of about US$2,600, which compares with a farm income of US$400 (for a family of five). Economic conditions during 1980-85 were particularly unfavorable to the poor. The average -22- inflation rate of 15% per year eroded rural incomes, while inadequate macroeconomic policies and constraints on population mobility hindered employment generation and development of non-agricultural activities. 80. Programs with social objectives have long figured in most of Government's development plans. Projects have been launched with the support of major donors, including the Bank, to improve coverage of social services and ameliorate rural economic conditions. As a result, health facilities are now available to most of the population; full vaccination coverage for infants is attainable by 1990; potable water is now available to 34 percent of the population (compared with only 10 percent only eight years ago); and substantial improvement hai been made in school enrollment: almost all 7-year old children have been enrolled during the 1987188 school year. Moreover, a comprehensive program of family planning and maternal and child care is being implemented with Bank assistance; increased attention has been given to foodcrop research and extension; and cooperative rural savings were established in 1985. 81. Generally, the impact of the first SAL has been beneficial for the low and middle-income consumers, although some urban dwellers have been adversely affected by devaluations and by tight public sector wage policies (para. 13). The proposed second SAL is expected to have a positive social impact through increased economic activity and employment as well as through specific measures aimed at alleviating poverty. The policies which most directly affect low-income families are the liberalization of the labor market, a tax reform to stimulate informal (traditional) sector activities, and measures to improve agricultural productivity. They complement the positive impact expected from other programs implemented under several IDA-financed projects -- Education Sector, Health and Population, Small and Medium Enterprises, Urban II and Agricultural Services -- all of which address selected social issues and the generation of incomes for the poor. 82. Nonetheless more is needed to address the social issues that Burundi faces, as a poor country which suffered economic decline in the 1980's. An action plan is to be Implemented under SAL II; it is described in the Letter of Development Policy (Annex V). During preparation of the proposed credit, the urban household survey of 1978 Was updated, providing the basis for analyzing income trends of key vulnerAble groups and for identifying poverty alleviation measures which need to be addressed. The Government has also requested to participate in the UNDP/Bank/ADF Social Dimension of Adjustment Project (SDA). The latter will provide technical assistance to strengthen the Government's social monitoring capacity and help formulate the components of a medium-term action program which would be implemented with the support of the Bank and other donors. 83. The criteria which have been adopted to guide social action programs aret (i) targeting of activities to specific low-income groups; (ii) transparent budgeting of relevant programs; (iii) least-cost solutions in the design of programs; and (iv) specific implementation calendar for each activity and its regular monitoringlevaluation before any extension beyond the agreed time frame in the Public Expenditure Program. 84. The Government has undertaken to apply these guidelines in preparing a social action program to be reviewed by the Bank before second tranche release. Priority will be given to the following activities: -23- (I) Nutritional complements for malnourished children. This would include services to support the diagnosis of malnourishment and food preparation activities, notably of weaning food carried out by women cooperatives. A young-child malnutrition diagnosis program has been prepared and is being Implemented by the Ministry of Health. Targeted nutritional interventions will be prepared to address the most severe cases when detected. Concerning infant food production, a pilot program has been initiated, supported by UNICEF, and will begin production of infant cereal through three cooperative mills during 1988. The program will be extended nationwide. (11) Special programs targeted to women participation in development have been launched on a pilot basis, with the objective of helping them invest in productive assets. Three provinces are now covered with these projects, with financing from regional branches of the National Development Bank. These actions will be reviewed and expanded. 85. The Government wil also undertake preparatory work to identify specific programs in the following areass (a) labor-intensive components in public investments, including the possible re-programming of envisaged operations; (b) development or extension of small productive projects to be supported by public and private donors, in line with ongoing pilot projects undertaken by NG0s in small-scale fish farming and small livestock; (c) a viable rural housing credit program -- which has already reached 18,000 families with US$200-275 loans .-- following an evaluation of the existing program; and (d) technology improvement in small-scale construction activities, including training in construction skills and artisanal manufacture of construction materials. 86. The Government has already started an active program to address the AIDS problem, with financing from major donors, including IDA (under the Population and Health Project). It will now ensure that the national program to combat AIDS (under preparation with WHO assistance) will be well integrated into the national health services. Based on the studies already prepared on the agricultural and nutritional sectors, the Government will elaborate a food security strategy with the objective of clarifying food aid policy and establishing an early warning system. 87. An action plan and preparation calendar for each sub-component noted above will be agreed before release of second tranche. Coordination will be provided by the Ministry of Plan which will be responsible for the implementation of the SDA Project and coordination among various Government agencies and public and private donors and will ensure that criteria for the design and implementation of social action programs are adhered to. H. Impact of the Adiustment Protram 88. Burundi's economic prospects will depend heavily on the evolution of the world coffee market, the continued implementation of the adjustment program, the performance of neighboring countries (notably in the areas of trade liberalization), and the availability of external assistance on concessional terms. With a stable external environment, the SAL II program, the policy actions being implemented in the context of major -24- development projects (aimed at increasing agricultural output and medium- scale industrial production and at improving transport and commercial circuits), GDP growth rates of 4.5 to 5 percent a year over the medium-term are well within reach, provided adequate financial support is available. Such rates are in line with past performance: real GDP expanded by 5.1 percent a year in 1978-81 (para.6) and by 4.5 percent, on average, in 1984- 87 (Table 2). 89. Two scenarios have been prepared (and included in the second PFP): a base scenario, built on most likely levels of aid -- estimated, however, without taking into account potential additional assistance that could be mobilized under the Special Program of Assistance for the low-income debt- distressed countries in Sub-Saharan Africa -- and an alternative scenario which includes the funds potentially available under the Debt Initiative. Both scenarios assume that the program described in the preceding pages is fully implemented. The base scenario is predicated upon an annual average growth rate of 4 percent at market prices, which would allow real consumption per capita to grow at just about 1 percent annually (Table 2). The alternative scenario postulates an average GDP growth of about 5 percent per year at market prices, which would allow real consumption per capita to improve at 2 percent annually. The following paragraphs focus on the base case. 90. Coffee prices are projected to recover by 6.5 percent a year in nominal terms, in line with the Bank's latest commodity projections; by 1993, however, they will still be lower (in real terms) than those of the last ten years. In the short term, prices may increase more rapidly due to unexpected market developments (e.g, impact of adverse weather conditions in major producer countries such as Brazil), but it seems likely that the underlying long-term trends of declining elasticity of coffee consumption with respect to income in developed countries will make these increases temporary. Table 2: BURUNDI - RECENT PERFORMANCE AND GROWNH PROSPECTS (Percent Annual Average Real Growth Rates) Actual Projected 198-6a 1981-1984 1984-1987 Base Case Alternative GDP, M.p. 9.5 4.5 4.0 5.1 QDP, f.e. 9.8 5.8 8.6 4.8 GY per capita -0.8 0.8 1.1 2.4 Consumption per capita 0.9 -1.9 0.9 2.1 Total Investment 1.9 4.8 2.0 4.7 Exports 8.8 9.8 6.5 7.6 Coffee 2.8 4.8 8.1 8.1 Noncoffee Goods 8.4 25.4 1.9 18.8 Imports 7.8 -1.4 4.1 5.7 91. The projected growth would originate from the agricultural and industrial sectors. The potential of agricultural resources -- already positive due to the country's favorable climate (two rainy seasons a year) and ingenious farmers -- would be harnessed through the public investment program under implementation in the sector, complemented with policy actions concerning extension and research, fertilizers and pesticides, pricing and marketing, and resource management. Agricultural value added would grow at 3.2 percent per year during the first half of the next -25- decade, accelerating to 3.4 percent during the second half, reflecting the progress anticipated in the foodcrop subsector as well as in the diversification of agricultural exports away from coffee. Secondary production would expand at 5.7 percent a year and the tertiary sector at about 5 percent. 92. The projections assume a moderate increase in coffee exports -- 3.1 percent a year -- in line with the production potential. They also assume an Improvement in the quality of Burundian coffee to assure it a stable share in the international market. Tea exports would grow by 7.3 percent a year, in line with the conclusions of a recently prepared study, and cotton by 10 percent a year. These rates are consistent with past trends and are likely to materialize provided the exchange rate policy is such as to maintain the competitiveness of these products. Manufactured exports would grow at a rate of 13 percent a rear (a conservative assumption compared with the 34 percent registered in the last two years) as a result of Increased capacity utilization, and the effect of the new investments expected in response to the program. Non-coffee exports as a whole would grow at about 10 percent per year and the share of coffee exports would decline from 72 percent in 1987 to 60 percent by 1992. 93. This export performance, together with the estimated foreign aid resources, would permit an import growth of about 4 percent a year, which is consistent with the projected GDP growth. Nonetheless, slightly improved term of trade (a 7.6 percent increase between 1987-89, which would still keep them 20 percent below the 1984-85 level), and a declining debt service/GDP burden imply that the current account deficit would decline from its 13 percent of GDP in 1987 (excluding transfers and in constant effective exchange rate terms) to 9.2 percent in 1992. 94. Taking into account the resource availabilities and the weak possibility of increasing public savings by a large amount, gross Investment would grow at about 2 percent a year. The ratio of investment to GDP would be under 19 percent during the projection period which is less than in 1987 (20 percent) and in line with the average for 1983-84 (Table 1). Financing would have to occur primarily through increased savings. Domestic savings would need to grow to about 7 percent of GDP -- compared with 4.5 percent during 1981-86. Public sector savings (after interest payments) would have to increase gradually from a negative value in 1987 to 3.5 percent of GDP by 1992, which is feasible taking into account the financial program to be Implemented. 95. Alternative Scenario. While the base scenario illustrates a situation which is quite favorable relative to the past seven years, further improvement could be achieve if additional efforts were made to increase the flows of external assistance to Burundi and if market conditions (especially in neighboring countries) were favorable. The alternative scenario corresponds to the Government's objective of achieving an average GDP growth rate of about 5 percent which would enable higher levels of per capita income and consumption levels. It also assumes that in response to the Government's active export promotion policy as a result of increased regional trade (notably in the context of PTA and CEPGL countries), non-coffee exports could grow faster than in the base case (averaging 16 percent per year). To support such growth in GDP and exports, investment would need to grow at 4.7 percent per year. The role -26- of private investment in sectors where Burundi seems to have a comparative advantage (agro-processing, fruits, some manufacturing) would raise the ratio of private investment to GDP to about 6 percent at the end of the period, compared with less than 2.5 percent during 1981-86. To finance the necessary import growth (5.7 percent a year) additional foreign resources will be needed. Additional investment, together with increased import capacity, would allow for higher growth rates: agricultural value added would grow at 3.4 percent per year during the first half of the next decade, accelerating to 3.6 percent during the second half; secondary production at 7.5 percent and the tertiary sector by 6 percent. 96. Medium-Term Financing Requirements, 1988-92. Table 3 summarizes the financial requirements associated with the alternative high growth scenario in order to highlight the financial support required to achieve a more meaningful improvement in per capita consumption, in line with Government's own objectives. Based on the above assumptions for export and import growth, the current account deficit (excluding public transfers) is projected to increase from US$225 million in 1988 to US$275 million in 1992. Over the five-year period, the current account deficit would average about US$250 million, of which $20 million comprise interest payment on medium- and long-term debt. Amortization is projected at $32 million a year. A projected reserve build up of US$24 million a year would enable an average net reserve coverage of 3 112 months in 1988 and 4 months afterwards to provide a solid basis for the liberalization program. Total external capital requirements during the period would average about $310 million, a year, which would have to be met from disbursements of public medium and long-term (MLT) loans, official transfers (recurrent and capital grants), and private direct investment. Table 8: SUMMARY OF EXTERNAL CAPITAL REqUIREMENTS AND SOURCES 1988-92 (milIon US dollars) 1987 1988-92 Per Year CaRital Requirements 288.9 1655.0 811.@ current account deficit 11--4 nw. F4@" ig9. of which Interest 18.2 (100.0) (29.0) Amortization 29.9 161.6 82.0 Increase in reserves -9.8 119.0 24.0 Other capital n.e.l. 4.8 85.0 7.0 Sources: LT-disburs.: existing commitments 211.0 225.6 45.9 Grants _W I Bilateral Sources 84.4 57.0 12.9 Multi lateral Sources 83.9 1686.9 88. Private loans 3.0 8.0 0.6 Disb't. from expected new commitments: 1021.0 204.0 Private Investment 18.9 OffIcial Transfers 580.9 116.0 New MALT loans 428.0 86.9 Bilateral Sources 180.9 89.9 Multilateral Sources 289.9 56.0 Total Financing 211.0 1246.9 249.9 anancing g 27.9 808.0 62.9 Sourcest dustment IDA (1ncl. SJF) 27.93 18189 IMF SAF (Excluding ESAF) 25.0 5.9 Identified Gap 97.0 20.0 -27- 97. About US$45 million a year is expected to be available from disbursements of previously contracted loans (up to mid-1987); US$115 million from public transfers (of which, US$60 in the form of capital grants, assuming that they remain constant in real terms at their recent trend level) and US$3 million from direct investment. On the basis of the major donors' current lending programs, or intentions, the disbursement flows from new commitments would average US$86 million a year (excluding quick-disbursing funds). The remaining financing requirement would amount to about US$60 million a year. Assuming a quick-disbursing operation by IDA every two years, and taking into account the proposed SAL II (including the SJF co-financing) and the current SAF funds (excluding ESAF), an additional US$20 million per year would have to be mobilized under the Debt Initiative to fill the gap (see Table 3 above). Due to the average favorable terms of the outstanding debt (para. 14), rescheduling would not be a useful alternative to cope with the burden of the external debt service. This will, however, continue to hinder the development potential of the country. In order to assist the Government growth efforts, continued assistance at highly concessional terms will be necessary. The share of total debt (DOD) owed to preferred creditors (including the IMF) is projected to rise from 71 percent in 1987 to 76 percent in 1992. I. Risks 98. Despite the Government's commitment to the program, there are some risks which may hinder its successful outcome. The most Important concerns the volatility of the world coffee market: for example, a decline of US$0.10 in the nominal price of coffee would cost Burundi US$4 million dollars per year and a decline of US$0.20 would erase the entire improvement in the trade balance achieved by the projected increase in nontraditional exports. The projected expansion of non-traditional exports, which in the short term is oriented to the neighboring countries, can also be hindered by protectionist policies and payment problems in major trading partners like Kenya, Zaire, Zambia, and Uganda. The political situation also poses some risks, as the new Government is rightly concerned with the need to consolidate its position and may feel compelled to soften some adjustment measures, if these appear to have excessive and enduring social costs. Finally, the weak institutional capacity of Burundi may hinder the rapid implementation of some reforms, notably those concerning the reinforcement of public sector management. 99. There are, however, some fqatures which reduce the above risks. First, further substantial decline in the world coffee price could be mitigated by a concerted action of the International Coffee Agreement. Second, the reforms implemented during the first phase of the program helped to internalize among the economic agens the advantages of increased competition and progressive deregulation of the economy. Third, the commitment of the new Government and the technical assistance provided by IDA (in consultation with other donors, such as UNDP) are likely to help reinforce the institutional basis. The Government has already strengthen its monitoring capacity by appointing a high level Committee (at ministerial level) to follow-up on the implementation of the adjustment program. Fourth, the major foreign donors have followed up with interest the progress made by Burundi in the past two years and can be expected to provide additional support if the effects of the program proved slower to materialize or extraordinary circumstances occurred which jeopardized the success of the program. -28- J. Credit Amount and Tranchins 100. The second phase of the Government adjustment program described above would be supported by a proposed Development Credit of US$90 million on standard IDA terms. The credit will be disbursed in three tranches. The first tranche in the amount of US$40 million would be released upon effectiveness, which is expected in July 1988. The second and third tranche of US$30 million and US$20 million, respectively, would become available following performance reviews (around March 1989, and October 1989) to establish that the Government has made significant and satisfactory progress in implementing the adjustment program, notably in complying with the specific actions listed in para. 103 and in Annex III, Sections IV and V. K. Disbursement, Procurement, Administration and Auditing 101. Procurement would be in accordance with the Bank's Procurement Guidelines. Except for a few exclusions such as tobacco, alcohol, and defense items, any imports would be eligible for financing, but no more than US$22.5 million would be used for petroleum and food imports. All purchases, both public and private, under contracts amounting to US$1 million or more would be procured through ICB in accordance with Bank guidelines using a standard bidding document cleared with IDA. Imports for contracts of less than US$1 million equivalent would be in accordance with the usual practices of the purchaser and, for imports from public agencies, would include as a minimum the submission of at least three quotations unless the purchase necessarily involves proprietary equipment. Expenditures for goods procured under contracts of less than US$10,000 equivalent would not be eligible for IDA financing. 102. To facilitate the disbursement of the credit, a special account of US$15 million will be open at the Central Bank (BRB). The credit would reimburse 100 percent of the CIF cost of eligible imports. Disbursements will be based on statement of expenditures (SOE) for contracts of less or equal to US$500,000 equivalent. Full documentation will be required for all other disbursements. Retroactive financing will be permitted for those eligible imports made before the date of agreement but not before April 1, 1988, up to an amount equal to US$18 million. Public and private sector imports would be eligible, except for military equipment and luxury consumer goods. Imports financed by other sources would not be eligible for IDA financing. The Central Bank would be responsible for assembling requested supporting documentation collected from the commercial banks, to be provided as mentioned in Annex VI. The closing date of the credit will be December 31, 1990. L. Monitorinx 103. Monitoring of performance under the SAL will be carried out through regular supervision missions and monthly meetings of the Resident Representative with the "Comite de Suivi". The following reflects the actions which the Government has already taken under the program, the agreements reached with the Government concerning the actions it will have to take before credit effectiveness as well as the specific conditions for the release of the second and third tranches. -29- Actions already taken by the Government under the proposed program: a. Promulgation of Export Promotion Decree (para. 37); b. Elimination of import restrictions on luxury goods (para. 36); a. Agreement on the process and launching the preparation of the 1989-91 public expenditure program and the transitional unified budget for 1989 (para. 40); d. Agreement on action program for CABEDU (para. 51), completion of liquidation procedures for SOMEBU and SOPEBU, and preparation of the liquidation decree for SOGESA (para.,50); and e. Adoption of revised municipal taxes structure (para. 72). Effectiveness conditionst a. Agreement on the definitive PIP for 1988-90, including reserve projects (para.42); b. Agreement on calendar for progressive elimination of CADEBU's monopoly on compulsory savings (para. 51); c. Promulgation of the decree liquidating SOGESA (para. 50); d. Submission of the revised labor legislation for approval of the National Labor Council (para. 69-70); and e. Adoption of internal procedures for the Guarantee Fund (para. 76). Second Tranche Release Conditions: a. Agreement on macroeconomic framework including fiscal deficit, 1989-91 PEP, and 1989 transitional unified budget (para.40); b. Implementation of third phase of tariff reform, including revision of nomenclature (para. 36); c. Signature of performance contracts with VERRUNDI and REGIDESO (para. 55-56); agreement on timetable for liberalization of imports competing with VERRUNDI production (para.36); and agreement on action program for SOSUMO to be implemented during 1989 (para. 64); d. Agreement of coffee pricing structure for 1989/90 season (para. 62); e. Liberalization of rice marketing (para. 65); f. Reduction of rediscount rates from 3 to 2 and implementation of all other measures included in the second and third stages of credit reform (para. 77-78); -30- g. Agreement on action plan for poverty alleviation (para. 84); and h. Agreement on action plan to reinforce the Ministry of Labor and its agencies in charge of employment promotion (para. 71). Third Tranche Release Conditions: a. Agreement on macroeconomic framework for 1990-92, including fiscal deficit, and 1990 transitional unified budget (para.40); b. Satisfactory implementation of action plan for SOSUM0 (para. 64); c. Completion of first phase of elimination of CADEBU's monopoly on compulsory savings (para. 51); d. Agreement on action plan to improve civil service efficiency (para.41); e. Agreement on action plan for privatizationiliquidation of the public enterprise sector on the basis of studies to be carried out during 1988/1989 (para. 56); and f. Launching second phase of labor market liberalization and extending it to the parastatal sector (para. 69). PART V - BAYK GROUP OPERATIONS AWD STRATEGY 104. The Bank has made 32 credits to Burundi amounting to US$278 million of which US$89 million has not been disbursed. Of total IDA lending to Burundi, 42 percent has been for agriculture, 34 percent for infrastructure (water, powers transportation) and the balance (24 percent) for social sectors (education, health) and technical assistance. Annex II contains a summary statement of IDA credits, and IFC investments. 105. Historically, the volume of IDA lending to Burundi has fluctuated depending on policy performance and political and economic evolution. During 1962-72, which coincided with internal political difficulties, Bank involvement was limited to operations on coffee production, highways and water supply. After 1976, IDA operations increased rapidly, with projects in agriculture and highways as well as for new sectors: fisheries, forestry, education, industry, rural development, telecommunications, power, technical assistance and housing and urban development. IDA lending increased markedly in FY85-87 with the approval of the first SAL, two major credits in agriculture and industry and support to health and education. 106. The Bank Group lending strategy is to support the Government's medium-term economic adjustment program by focusing on; (i) maintenance of external trade policies intended to accelerate export growth and efficient import substitution; (ii) improvements in policies affecting the social sectors; (iii) public sector management and fiscal policies to maintain economic growth and strengthen public savings; (iv) financial policies to stimulate domestic savings and to allocate funds more efficiently; (v) policy incentives to.expand productive employment; and (vi) investment -31- operations (outlined in the next paragraph) which complement the growth strategy of the Government and address the longer-term structural constraints through active population policies, investments to strengthen agricultural production and stimulate SME creation, effective natural resource management, enhanced food security, expanded human resource potential, and targeted poverty-alleviation programs. In addition to the proposed credit, a third SAL is envisaged in the early 1990's. 107. Several other projects already approved or under consideration complement the adjustment lending and reinforce the effort to meet the objective of the Government's structural adjustment program. In the productive sectors, the Bank is assisting the Government to improve and diversify the production base and to stimulate the participation of the private sector, hence facilitating the economic response to the policy reforms underway. In agriculture, the focus is to help reinforce basic agricultural services and improve efficiency in use of public expenditures (Agricultural Services Project, FY89) and improve efficiency of the coffee sector (Coffee Export Adjustment Operation planned for FY89). In industry, the Bank is supporting the development of small and medium enterprises to encourage the emergence of a Burundian entrepreneurial class and increase employment opportunities (Small and Medium Enterprise Project, approved in March 1988). In the social sectors, assistance is being provided to expand coverage of social services within the financial limits of the public sector, ensuring adequate cost recovery and adequate allocation to priority actions. The Population and Health project (approved in December 1987), supports the Government's efforts to control population growth, increase health coverage, address the AIDS issue, and improve the financing and efficiency of health services. The Education Sector project (approved in February 1988) is assisting the Government in extending universal primary education within feasible budgetary limits through improved planning, investment, cost recovery, and policy actions to control costs of secondary and higher education. In the urban/water supply sector, the Bank is helping to develop opportunities in artisanal activities and foster development of secondary urban centers (Second Urban project under preparation) and to improve rural living conditions through access to safe drinking water. In infrastructure (transport and energy), the objective is to assist the Government to allocate its limited resources to developmental priorities and to improve management of relevant parastatals. Expenditures on transport should maintain a proper balance between road construction and maintenance, while developing a transport investment planning capability and improving efficiency of road transport. The Fifth Highway Project planned for FY90 is designed with this objective. 108. In support of the above strategy, the economic and sector work program will focus primarily on assessing the impact of the structural adjustment process and strengthening the Government's public expenditure programming. To mobilize the external resources required to support the structural adjustment program, the Bank will continue to play a key role in aid coordination. It will collaborate with the UNDP in a special co- financing meeting planned for the Summer to present the objectives and scope of the second phase of the Government's adjustment program and mobilize the resources needed to finance the identified gap for 1988-89, discuss the TA program and review the documents to be presented at the Round Table planned for the Fall. -32- PART VI - REIATIONS WITH THE IMF 109. Burundi negotiated a Stand-by arrangement with the IMF in 1986 in order to get the IMF's endorsement to the financial program. No purchases were planned and none were made. In early 1987, the first review of the program was not concluded because of the failure to meet the performance criteria due to the shortfall in coffee revenues and, consequently, the much larger than anticipated public sector borrowing from the domestic banking system. Burundi requested assistance in implementing another financial program in early March 1987. Discussions were initiated in July 1987, in the context of the preparation of the second Policy Framework Paper, and pursued with the new Government in January 1988. A second year SAY program was approved by the Executive Directors of the IMF on May 4, 1988. The contents of the new financial program are described in paras. 32-33. Given the natpre of the proposed adjustment program and the need for fiscal and balance of payments policies to support structural reforms at the sector level, there has been close collaboration between the staff of the Bank and the IMF in the preparation of the first SAL, two Policy Framework Papers, and the proposed second SAL. PART VII - RECOMMENDATION 110. I am satisfied that the proposed Credit would comply with the Articles of Agreement of the Association. 111. I recommend that the Executive Directors approve the proposed Development Credit and that the Association would act as Administrator of the proposed Special Joint Financing non-reimbursable contribution from Japan. Barber B. Conable President Washington, D.C. May 11, 1988 -33- Annex I Page 1 1987 SOCIAL INDICATOR DATA SHEET BURUNDI Reference Groups (MRE) Most Recent Lower mid 1965 1973 Estimate Low-income income AREA Total land area (thou sq km) 27.8 27.8 27.8 Agricultural (% of total) 58.4 71.9 79.7 GNP PER CAPITA (current US$) 70 80 240 260 820 POPULATION AND VITAL STATISTICS Total population (thou) 3.131 3.576 4.573 Urban pop. (% of total) 2 2 3 22 36 Population growth rate(%): Total 1.4 2.2 2.1 2.5 Urban 1.4 2.3 3.8 4.2 Life expect. at birth (yrs) 44 45 48 60 58 Population projections: Pop. in 2000 (thou) 7,370 Stationary pop. (thou) . 23.600 Population density per sq km of agricultural land 193 179 206 349 284 Pop. age structure (%): 0-14 yrs 44 44 44 37 39 15-64 yrs 53 53 52 59 55 85 and above 3 3 4 4 8 Crude birth rate (per thou) 47 46 47 29 36 Crude death rate (per thou) 24 24 19 to 11 Total fertility rate 6.4 6.4 6.5 3.2 3.6 Infant mort. rate (per thou) 143 135 120 72 82 Child death rate (per thou) 38 34 24 9 11 Family planning: Acceptors, annual (thou) .. .. .. Users (% of married women) .. . FOOD. HEALTH AND NUTRITION Index of food production per capita (1979-81 u 100) .. 92 98 115 108 Per capita supply of: Calories (per day) 2.391 2.275 2.116 2.339 2.514 Proteins (grams per day) 82 83 78 55 56 Pop. per physician (thou) .. 45.4 .. 8.9 6.9 Pop. per nurse (thou) .. .. .. 2.4 1.4 Pop. per hospital bed (thou) .. 0.9 .. 1.1 0.8 Access to safe water (% of population): Total .. .. 24 Urban .. 77 90 Rural .. .. 20 Population Growth Infant Mortality Primary School Enrollment soa 111-.40 0 a soiL.....* 8 .--* e ***0 I9s3 190 1940 1S0F 1980 W3BURUNDI S URUNDI reasT ACY enouP V DIIAW.etIlt - 34 - Annex I Page 2 1987 SOCIAL INDICATOR DATA SHEET BURUNDI . Reference Groups (MRE) Most Recent Lower mid t9685 1973 Estimate Low-income income LABOR FORCE Total Labor Force (thou) 1.592 1.753 2.113 Female (%) 46 45 45 31 29 Agriculture (%) 94 93 93 72 55 Industry (%) 2 2 2 13 16 Participation rate (%): Total 51 49 46 41 35 Male .56 55 52 54, 49 Female 46 44 41 28 20 Age dependency ratio 0.9 0.9 0.9 0.7 -0.8 HOUSING Average size of household: Total Urban .. .a 6a .. .. Rural .. .. 4 a Percentage of dwellings with electricity: Total a Urban .. 23 a Rural EDUCATION Enrollment rates: Primary: Total 26 30 45 97 103 Male 36 42 55 109 110 Female 15 20 36 84 97 Secondary: Total 1 2 4 32 40 Male 2 3 5 41 48 Female I 1 3 25 39 Pupil-Teacher ratio: Primary 40 32 s 36 32 Secondary 11 12 .. 18 20 Pupils reaching grade 6 (%) .. 32 so 49 71 INCOME. CONSUMPTION. AND POVERTY Energy consumption per cap. (kg of oil equivalent) 5 7 26 310 345 Percentage of private income received by: Highest 10% of households .. .. .. Highest 20% .. Lowest 20% .. .. Lowest 40% .. .. Est. absolute poverty income level (US$ per capita): Urban .. .. 273 b Rural .. .. 136b . Est. pop. below absolute poverty income level (%) Urban .. .. 55b Rural .. .. 85b Passenger cars/thou pop. 0.7 1.0 .. 0.3 4.0 Newspaper circulation (per thousand population) .. 0.1 .. 16.0 14.0 IECSE Auguot 1987 .ot avalee. Note Meet recent estheats et popatatte sad a"P per capit " for its UteM otMise noted. oup evagses are popuMtbn weighted. Country seerag depends on data availabiity and is not vatform. Unles otherwise noted. IM tefers to any vea betweo 1962 gad 198 197 between 1970 and IM and seet eent estimate between 1980 and 16. e. 1979. b. 1978. - 35 - Annex I Page 3 Definitions of Social Indicators The definition of a particular social indicator may Total fertdit rate - Average number of children that vary among countries or within one country over would be born alive to a woman during her lifetiM time. For instance, different countries define -urban if during her childbearing years she were to bear area" or "safe water" in different ways.'For more children at each age in accordance with prevailing detailed definitions, see the technical notes to the age-specific fertility rates. World Development Indicators. h!/int 1aged0-1) mortalit. rute - Number of infants per thousand live births, in a given year. who die AREA (thousand square kilometers) before reaching one year of age. Total - Total surface area comprising land area and Child (aged 1-4) mortality rate - Number of deaths inland waters. of children. aged 1-4. per thousand children in the Agricultural (percentage of total) - Estimate of agri- same age group, in a given year. cultural area used for crops. pastures. market and Family planning - acceptors. (thousands) - Annual kitchen gardens or lying fallow. as a percentage of number of acceptors of birth-control measures - total. ceived under the auspices of a national family plan- ning -program. GNP PER CAPITA (USS) - 1986 GNP per capita Family planning- users (percentage of married wom- estimates at current market prices, calculated by the en) - Percentage of married women of child-bearing conversion method used for the World Bank Atlas. age who are practicing, or whose husbands are practicing. any form of contraception. Child-bearing POPULATION AND VITAL STATISTICS age is gener4lly 15 to 44. although for some coun- Total population - mid-year (millions). 1986 data. tries contraceptive usage is measured for other age Urban population (percentage of total) - Different groups. countries follow different definitions of urban pop- ulation which may affect comparability of data FOOD. HEALTH AND NUTRITION among countries. Inde. of foodproduction per capita (1979-81 -100) Population growth rate (percent) - total and urban - Index of per capita annual production of all food Annual growth rates of total and of urban popula- commodities. Production excludes animal feed and tions. seed for agriculture. Food commodities include pri- Lift expectancy at birth (years) - Number of years a mary commodities (for example. sugarcane instead newborn infant would live if prevailing patterns of of sugar) which are edible and which contn nu- mortality at the time of its birth were to stay the trients (for example. tea and coffee are excluded). same throughout its life. They include nuts, fruits, pulses, cereals, vegetables, Population projections oil seeds, sugarcane and sugar beets, livestock, and Population in 2000 - Projections of population livestock products. Aggregate production of each given total population by age and sex. fertility and country is based on national average producer price the demographic parameters of mortality rates, and weights. migration in the base year 1980. Per capita supptyqf calories - Computed from energy Stationary population - Projected population level equivalent of net food supplies available in a coun- when zero population growth is achieved: i.e., the try, per capita. per day. Available supplies comprise birth rate is constant and is equal to the death rate, domestic production, imports less exports, and the age structure is stable, and the growth rate is changes in stock. Net supplies exclude animal feed, zero. seeds for use in agriculture. quantities used in food Population density, agricultural land - Population per processing. and losses in distribution. square kilometer (100 hectares) of agricultural area. Per capita supply ofprotein (grams per day) - Protein Population age structure (percent) - Children 0-14 content of per capita net supply of food per day. Net years. working age group 15-64 years, and people of supply of food is defined as above. Requirements for 65 years and over as percentages of population. all countries. established by United States Depart- Crude birth rate - Annual live births per thousand ment of Agriculture, provide for minimum allow- population. ances of 60 grams of total protein per day and 20 Crude death rate - Annual deaths per thousand grams of animal or pulse protein. population. Population per phisician- Population divided by the -36 - Annex I Page 4 number of practicing physicians qualified from a and rural - Conventional.dwellings with electricity in medical school at university level. living quarters, as a percentage of all dwellings. Population per nursing person - Population divided by the number of practicing graduate nurses, assistant EDUCATION nurses, practical nurses and nursing auxiliaries. Enrollment rates Population per hospital bed - Population divided by Primary school enrollment - total. male and female the number of hospital beds available in public and - Gross enrollment of all ages at primary level as a private, general and specialized hospitals. and reha- percentage of school-age children as defined by each bilitation centers. Hospitals are establishments per- country, and reported to Unesco. While many coun- manently staffed by at least one physician. tries consider primary school age to be 6-11 years, Access to sqfe water (percentage of population) - others use different age groups. For some countries total, urban, and rural - People (total, urban, and with universal education, gross enrollment may ex- rural) with reasonable access to safe water supply ceed 100 percent since some pupils are younger (includes treated surface waters or untreated but or older than the country's own standard primary uncontaminated water such as that from springs, school age. sanitary wells, and protected boreholes). In an urban Secondary school enrollment - total, male and fem- area this may be a public fountain or standpost ale - Computed in a similar manner, but including located not more than 200 meters away. In rural pupils enrolled in vocational, or teacher training areas this implies that members of the household do secondary schools. The age group is usually 12 to 17. not have to spend a disproportionate part of the day Pupil- teacher ratio - primary, and secondary - Total fetching water. students enrolled in school divided by the total number of teachers. LABOR FORCE Percentage pupils reaching grade six - The percent- Total labor force (millions) - Economically active, age of children starting primary school, that contin- including armed forces and unemployed but exclud- ue until grade six. ing housewives and students. Female (percent) - Female labor force as a percent- INCOME, CONSUMPTION, AND POVERTY age of total labor force. Energy consumption per capita (kilograms of oil Agriculture (percent) - Labor force in farming. equivalent) - Annual consumption of commercial forestry, hunting and fishing as a percentage of total primary energy (coal, lignite, petroleum, natural gas, labor force. and hydro, nuclear and geothermal electricity). Industry (percent) - Labor force in mining. construc- Income distribution - Income (both in cash and kind) tion. manufacturing and electricity. water and gas as accruing to percentile groups of households ranked a percentage of total labor force. by total household income. Participation rate (percent) - total. male, and ffemale Passenger cars (per thousand population) - Includes - Participation rates are the percentage of population motor cars seating fewer than eight persons. of all ages in the labor force. These are based on ILO Newspaper circulation (per thousand population) - data on the age-sex structure of the population. Average circulation of a "daily, general interest Age dependency ratio - Ratio of population under 15, newspaper," defined as a news periodical published and 65 and over, to the working age population (age at least four times a week. 15-64). Estimated absolute poverty income level (US$ per capita) - urban and rural - Absolate poverty income HOUSING level is that below which a minimal nutritionally Average size of household (persons per household) - adequate diet plus essential nonfood requirements total. urban, and rural - A household consists of a are not affordable. group of individuals who share living quarters and Estimated population below absolute poverty income main meals. level (percent) - Percentage of urban and rural pop- Percentage of dwellings with electricity - total, urban. ulations who live in "absolute poverty." nane 4e0 ffc"82984 ¥eT qe e s e 5an8s aIs IIUseISa, aus ,asa.s a 5 1 .a 5 e a - - 9, - - i4J i ens I. effi m. m sn* Age egl0* 1 lo0. % le l 04 . 9 - K le~ le! US.W5 oeec 9I a.! a 118 g l 22 3~ .P.0@ 4 33« jq* ,*,q 40i d« ~ ddå 1 0 ine * oxe 49¥«mx mm. 9ss teg" -s1 a cse; An e ? es ,s s se g 4a 55 2 1 i011 . -- n ,,i, -Ies-I~ *n ahha Is a I~i el 1 m ill jjfli-i, b Kå håhå kåk 4kkk kakä å åb ti [id h iåi ? 1 1 hå a nn* man oe s äk'a 'aaetuf 8 4 Aa ro w 4a 1 2* ma saa :6a P M4 ial åk ' åhå #ets ockämä håhsan omge#aa j a A anna saa b•baa suo ma- å Gå6 bet.s gen . a s .,,ä s .kb kh h a I k' PM9' •' s p 040 b sak ans a •.å I *It mage kpg ammaa 9 * uassa t é s a.. sa..us. s .. ' k b' ' b b ng'am ' -ba'basbbaabs* m ama * 8oa S- aa a. *.^aO a 48» ange kåk ilaåha-iba hå4 åuååå fas na% änm åå;bk-ä å åå - 39 - ANNEX I Page 7 Table 2: BALANCE OF PAYMENTS, ACTUAL AND PROJECTIONS (in millions of dollars at current prices) 1904 1985 1986 1987 1989 1989 1990 1991 Exports f.o.b 88 112 126 96 116 180 145 162 (coffee) 78 95 108 69 76 81 84 98 Imports c.l.f 164 171 185 219 245 268 292 819 Services (net) -78 -77 -88 -96 -108 -165 -119 -115 (Interest) (8) (10) (14) (16) (18) (18) (18) (19) Current transfers 88 88 62 58 79 76 78 82 Current Account -125 -90 -89 -157 -158 -166 -181 -190 (Excl. public transfers) -168 -128 -151 -215 -225 -283 -247 -82 Direct Investment 1 1 8 2 2 2 8 8 Capital grants 40 40 48 87 40 48 50 5 MLT Loans (not) 81 6 87 118 157 148 149 188 Disbursements &/ 90 78 8 147 187 174 160 16 Repaymente -9 -17 -22 -29 -80 -81 -81 -88 Other capital n.e. -5 2 -2 - 5 -S -8 -9 -14 Overal Ibalance -2 9 22 -9 64 26 9 10 Financing oap 82 12 - 28 Memorandum Items: Net reserves as months of Imports 0.8 1.1 2.5 1.5 8.5 4.0 4.0 4.0 Debt Service ratio 16.7 28.2 26.1 48.8 88.9 84.0 80.4 29.5 Coffee exports Volume ('000 tons) 25.4 88.8 28.8 29.8 80.5 81.4 82.4 88.8 Price (USS/kg) 2.88 2.81 8.78 2.82 2.68 2.78 2.88 2.96 Current Account/GOP Excluding transfers (M) 18.2 11.0 11.5 17.0 18.1 17.0 18.8 15.7 (adjusted) b/ 16.2 11.2 10.2 18.0 10.9 9.8 9.5 9.8 a/ Includes SJF financing and IMF SAF resources in 1988 and 1989, and the third tranche of the proposed IDA credit In 1990. b/ In terms of constant effective exchange rate using 1982 as the base year. - 40 - Page 8 Table 8: PIChi IMACT F 8TABILUATIM PROAM (FIN bilion* in curren6 prIccé) 198 1986 187 1988 1989 1998 1991 1992 as**l*P a»d cran~e 24.8 29.9 24.8 8.4 84.7 88.9 89.8 42.9 Resite 19.7 28.9 18.9 24.8 28.8 29.5 81.8 34.5 Tax Revenues 18.2 21.2 17.8 21.7 25.4 27.1 28.9 81.0 0/W offe 8.7 6.8 0.6 1.6 2.6 2.7 2.0 2.9 mon tax revenus 1.5 2.6 1.6 2.6 2.8 8.0 8.8 8.6 Grante 4.8 6.2 5.4 6.0 6.6 6.8 7.1 7.4 Curr~.6 c~u.dtures 14.8 17.8 20.4 21.4 22.6 28.7 24.5 2.4 Wg** 4M Salarles 7.1 7.8 8.7 9.4 10.0 10.8 10.9 11.8 oods and Servlugg 8.8 4.8 4.5 4.9 5.8 5.7 6.0 6.8 Transfers and Subeldle 1.8 2.1 2.2 2.5 2.6 2.6 2.9 8.8 Interenh on Public Debb 2.9 2.2 8.6 8.7 8.8 8.9 8.7 8.7 (external deb6) 1.2 1.4 1.9 2.5 2.4 2.6 2.6 2.8 (d=s«tle) 8.8 0.0 1.1 2.2 2.6 1.4 1.1 1.1 ~ra 1/ 8.2 6.9 2.6 6.9 8.9 1.6 1.0 1.8 ovurnm~6 Savlp 9.7 11.7 2.9 9.0 12.1 18.2 14.6 16.6 CepItall £~ tudlr* md m* ama* 16.5 10.4 18.6 19.8 20.4 19.2 19.8 18.1 Ily fiaftmd:8EI) 2.9 2.9 4.5 4.8 4.2 4.1 4.1 4.1 EoreIgn fIna~d) 12.6 18.6 14.8 18.8 16.2 15.1 14.2 14.0 Overaff DeIeIk (Cmtl.h -5.8 -4.7 -14.6 -10.8 -8.8 -4.1 -8.6 -1.6 (ELmuding grane) -m . -_m -i-.5 -M. -. -i. -. change In ar.ra -1.6 -1.4 2.8 -1.6 -1.1 8.0 0.8 *.0 O Il «I1 ~ffwe lCal :esl 4 -d4 .1 -1.2 -12. -9.4 - :8 ..6 -1.6 Nat Finganag Forelgn orrelng 6.8 6.5 8.8 9.6 10.1 6.7 7.7 7.8 1 ~resmante 6.7 8.4 11.9 12.6 12.9 11.6 15.7 15.2 (of wh l Ah L) (..) (..) (1.7) (2.8) (8.2) (8.2) (3.6) (8.6) A~rUlzaMlon -1.4 -2.8 -2.8 -2.6 -2.8 -2.0 -3.0 -8.2 Dsle (ne6) 2.1 -0.4 8.5 2.4 -0.7 -2.6 -4.2 -6.4 BankIng syste 1.6 -1.7 1.2 0.8 -8.7 -2.6 -4.2 -6.4. 06her 8.5 1.8 2.8 1.6 .. Morandu 1le.. (1n porcent of CDP) Tax Revenu. and Grante 17.8 19.2 16.6 18.1 19.0 18.7 18.5 18.4 N-..ffee ax revenue 10.8 10.8 18.8 12.1 12.6 12.4 12.8 12.8 Total expendilture 21.5 22.8 26.8 24.2 28.6 21.8 28.1 19.8 Govermnt defilit Eeludlg grante -7.5 -6.5 -12.8 -9.7 -8.1 -6.6 -5.8 -8.9 Including grante -4.1 -3.1 -9.4 -6.1 -4.6 -8.1 -1.6 -.7 1/ Itluds gloa l adjustment to doflclö related to @xtröbudge~ery operation* on other govarmunå eccownte. - 41 - ANNEX I Page 9 Tablo 4: PI~C DNUE~VN PR~SAM 1988- 0 (In bl Il lons of cuerm Fbu end percetage) PIP Core - - Sucture 19 - PIP (In 9) Sine FBu (S) 19m 1989 19 AgrlouIture ae.8 9 41 4 42 Indust./11nIng/Enrgy 10.6 91 18 1 10 Services 2.2 47 1 4 4 Sub-Tol producblve 48.0 8 69 Tranepor/TeeOm 16.4 88 22 20 20 Urban/Houing 1.8 86 1 8 4 Sub-T*tal Econele Inf. - 17.2 28 28 24 Educ on : -' 8.2 89 11 12 Health 4.0 es $ 6 6 O ~er Sociat 1.6 80 2 2 2 Sub-TotI Solat Inf. 18.7 17 18 20 To"al 78.9 FA USS ml Ilion 627 Memøs 11m: Porawa6eI projoe~ and privat conr6u61Aong 6.9 - 42 - ANNEX II STATUS OF BANK GROUP OPERATIONS IN BURUNDI A. SUMMARY STATEMENT OF BANK LOANS AND IDA CREDITS EXPRESSED IN US DOLLARS (As of December 89, 1987) AMOUNT LESS LOAN CANCELLATIONS UNDIS- CLOSING CREDIT # YEAR BORROWER PROJECT NAME (USS MILLIONS) BURSED DATE 1 LOAN AND 17 CREDITS CLOSED 118.24 CREDITS C10499 199 GOVERNMENT/MUNICIPALITY URBAN I 16.99 .88 12/81/87 C1160 1981 GOVERNMENT OF BURUNDI KIRIMIRO R/D 19.89 1.61 08/89/88 C1192 1982 BURUNDI INT. R/D NQOZI III 16.6 8.78 08/81/88 C18689 1988 REPUBLIC OF BURUNDI EDUC. III 15.89 .57 98/89/88 C14589 1984 GOVERNMENT OF BURUNDI THIRD TAS CREDIT 5.10 8.11 98/81/88 C15889 1985 MINISTRY OF PW/DOR HHYS. IV 18.19 15.12 86/30/89 C15989 1985 G0B/REGIDES0 TRANS A DISTR.SYSTM. 12.89 9.85 12/81/89 C18286 1086 GOVT OF BURUNDI FORESTRY II 12.890 9.49 09/89/91 C16250 1988 GOVERNMENT WATER SUPPL.I 9.59 6.94 12/81/91 C17050 1988 GOVERNMENT OF BURUNDI SAC 15.99 .91 96/8/88 C17950 1987 BURUNDI ECO.MaT./PUB.ENTR. 7.59 7.59 12/81/92 C18950 1987 GOV'T/ONATEL TELECOM II 4.80 4.80 12/81/98 CIS78 1988 GOVERNMENT OF BURUNI AGRIC.MUYINGA 19.10 16.99 C18620 1988 GOVERNMENT OF BURUNDL HEALTH/POP.I 14.58 14.58 96/89/98 TOTAL NUMBER CREDITS a 14 176.78 89.49 TOTAL (NET APPROVED) 288.97 OF WHICH HAS BEEN REPAID TO THE BANK (AMOR.9 INTEREST) 10.85 7OTAL NOW OUTSTANDING 278.11 TOTAL UNDISBURSED 89.46 B. STATEMENT OF IFC INVESTMENTS IN BURUNDI EXPRESSED IN USS (December 81, 1987) 1981 Verreles du Burundi Glass container 4.7 9.8 5.6 Total gross commitments lees cancel lations, terminations, repayments and sales 4.7 9.8 5.2 Total commitments now held by IFC 0.98 1.8 1.1 The IFC loan woo fully disbursed and al I but US880,000 repaid. In 198, IFC capitalized USS259,869 Interest for 1986. I/ Extended In 1957 to the Belgian Trust Territory of Ruanda-Urundl for the Improvement of the Bujumbura-Muranvya road and the expansion of the take port of Bujumbura. The loan, which was guaranteed by the Kingdom of Belgium, has been fully repaid. - 43 - ANNEX III Page 1 of 2 BURUNDI SECOND STRUCTURAL ADJUSMENT CREDIT SUPPIEMENTARY PROJECT DATA SEET SECTION Is TIMETABLE OF REY EVENTS (a) Identifications July 1987 (b) Preparation Missiont October/November 1987 (c) Appraisal Hssion: January/February 1988 (d) Completion of Negotiations: April 26, 1988 (e) Planned Date of Effectiveness: July 1988 SECTION Iis SPECIAL IDA IMPLEMENTATION ACTION None. SECTION IIIs CONDITIONS OF EPPECTIVERESS (a) Agreement on the definitive PIP for 1988-89, including reserve projects; (b) Agreement on calendar for progressive elimination of CADEBU's monopoly on compulsory savings; (c) Promulgation of the decree liquidating SOGESA; (d) Submission of the revised labor legislation for approval of the National Labor Council; and (e) Adoption of internal procedures for the Guarantee Fund. SECTION IV: CONDITIONS OF DISBURSEMENT OF THE SECOND TRANCE (a) Agreement on macroeconomic framework including fiscal deficit, 1989-91 PEP, and 1989 transitioual unified budget; (b) Implementation of third phase of tariff reform, including revision of nomenclature; (c) Signature of performance contracts with VERRUNDI and REGIDESO; agreement on timetable for liberalisation of Imports competing with VERRUNDI production; and agreement on ,action program for SOSUMO during 1989. - 44 - ANNEX III Page 2 of 2 (d) Agreement of coffee pricing structure for 1989/90 season; (e) Liberalization of rice marketing and allowing RDC Iabo to fix paddy producer prices for 1989/90 campaign; (f) Reduction of rediscount rates from 3 to 2 and implementation of all other measures included in the second and third stages of credit reform; (g) Agreement on action plan for poverty alleviation; and (h) Agreement on action plan to reinforce the Ministry of Labor and its agencies in charge of employment promotion. SECTION Vs CONDITIONS OF DISBURSEMENT OF THE THIRD TRANCHE (a) Agreement on macroeconomic framework for 1990-92, including fiscal deficit, and 1990 transitional unified budget; (b) Satisfactory Implementation of action plan for SOSUMO (para. 64); (c) Completion of first phase of elimination of CADEBU's monopoly on compulsory savings (para. 51); (d) Agreement on action plan for improving civil service efficiency; (e) Agreement on action plan for privatizationlliquidation of the public enterprise sector on the basis of studies to be carried out during 1988/1989; and (f) Launching second phase of labor market liberalization and extending it to the parastatal sector. 8I 1 - STRUCRl. fEU~ FR (SAL. ZZ) POLCY AA AM ACTXW~ TA~B by ACTM0~ TO se TA~ REE PMA. 1. mCRlEe00C miLA~ff Agreemænt an mcro~eamtc Prepare and mgree en mcreconomio frammsrk fraesork for 1988-90 imuluding iacluding overalI budgetary deitct6: eMange ale adju~tmt m P and - for 1989-91 DOeeber 1988 p~bile finonc. obje~lives. (~ad tran~he relea~e) - for 1990-9 Iktøtar 1989 - (Bed iranche reieas.) 1.1 ECrhange tale Inc~la/mlntin A on of ftex1btø enchange Add1410al exchang rate adjute~ e During program period. D/RM pregrm envisgem 38 cmpe6Wivenees of Burundile rale. Cumulitl adjuetm of 211 oeeded takIg nte accounl ca~ peliN" vetelw the real effecive en~hange exportø, elemingte imas againet I foregn currency term of Burundi'a epore and levol of no rale to be mintalød. raded g~ode, ahieve aructural be~een July 198 and irch 197. reserve. tNproement tn WP. l0a adjust ;a Feb. e8. 1.2 P§etry pollc«e. Reve financIal sys and fire i.iberallition of Intere~l ratte and policy Our[g program DF/10 agred an the Z teus reiled to sin of meur«e Impilmented in the reform (Soo sete.. in parm. 7 of "Mtritt) pakage decribed ie pare.7 budge6 defiat, GredIt allomtlc6n, ce~ et APE eredi (PV8S). of Policy Mtri*. efflciency of the credit syte~. 1.3 sudgetary poilels Overail puble *pending mhøuld Ta measaurtm: reform at the Revene masure: be adju~led to resure tranaclon ta (0c~. 81); - Enlarge bst* of the tra~lan ta ond 1,ny 1488 - Stblti taltiat of v'f <b-u8 avallailliele mnd medIurler, reduclion of taporo duty etstp- lænree. e***le e en beer and s~t drink*. recurren expendilture in finantal equilibrium. tl-nø mnd reform of loper tariff - Stregem amitoring and øntro o cuftom~ Jun 198 1988 t Fk 21 blilt.o md Priori~me shalmd be defined in e~-rucure (July os/Juary B8). duy eaentene and tepor~ valuantio sys, payment of arrearø; the ceext of reinforced enend etelMe*l lan of 45 an a ii laporte. - Capitat expeoditure and fet thr-year PEP. - Study to 8e9#1ify the Inøomm tat ysni. End 1988 lending to abeu~ Fi 19 - strengthen cu~tos adminitIraten to redue During program bll en in 1988. fraud and ;aprov. colle6ien of tas revenuee. - Anual revlew of PEP Wth tho, Bank Centrol and ratlønalIzateon of Icrea~ parbiacpotin of pubitc - Furthor tncrer~ partialp*tion by puble During program - Gov' deficit (<el. gratth) 32 expedtuare emerpries im helr debh nervl- enterpriee in teir debe servittløgt to be liated to 9.75 of WP eing ta 1987. EltMima6n of el lanelte arrere on doese;a payoante ed im 1~08, 8.11 la 1989, and M5 arrears In De. 1988. ElilmaltIon '*vold me orrear; adju l glebl ependilure in 1991. of transfers to public enter- to reve e *hortfall.. prise of a cnmrti charaler. - In*roduce seleol~ve recruiten erskøy for Jønumry 1989 41 eivil srvice end røltenalts the elvil narv;ico. P~pro tnuat budge ba n the relevant Starting with 1989 do annual tranche of the PE. budge 2. 1A~1 AO DV IA. OUCY 2.1 apor Ltberaltitloan Ausaclt 1en Itøeess for all - Ineres the et I Ing belg hiek caomerelal April 1908 m6 Reve diltortlioe em~ed by predue. excesi giem., le~linse bank~ are .all~wed to gran t automtie qu~elte6t t.porl rearic~- and phermlce~bltale, and a fe ileee from Pøu 1 eillan to P 10 m 0 øt- SilBiiuL. 149 66 itŒAM (SAL II) POLCV AA A AC TAM Bv ACrim TO De TAM il PAA. oeJgaV GONURgIM ev GOMIUN0fr TDEWAIILE PRMS/P1,1JET ReP lons leprove cepetoien aaong xury ltem (lAuguet 198B). d Jmastle producerw and Firat groa p of rehtrlcOis en Elilinate remaining impor 1r91011i e imorterg; alloisats te laeor of lummry were eliainated - e import of lnury good April 198 anti-export bine. In Janfuary 19^ -. e Import. competing with productien of Befor. end-1990 The Economic md Public Period of lieesem validatios hae NAA, VE 1, CT glthin the Entrpriae NMagemnt Incroased from 4 to 8 monthe framework of rehabli itain of theGG antrpri*O. Proje t aupport the tim. required to validate . Agreemmsh en liberalisti1n calmedar: dlgnombc and refor program 1 $ ~on.. Tas reduced to 10-15 1A1PHA Und"l9m day (ganumry 198) COTw March 199 ffilail end-19m 2.2 Price liberailation (nd ranhe ruta.) Avoid diatorbioe in the price i.ibörallatio of price of all - Reviea and adjuot mater mod e.cr;city 196-1989 otruc re, and allo* esterpricea producoe excep eigh% mrategic tariffe (to orngthen tEDe fisancial to estabilah finanWia producta, for ghich price poitlon) and petroleum productm prices, me equilibium. ceilinge can be impoed In come noeded. of mc=t. @hormges (for a maxiuam of 4 *aath>s) petroleum mod - Liberali». prioce of certain aro-ioduetr 1 Ouring program Program to be propared under cemont; mod exprt erop in Jsy produ~te (rice, aheat. pale-oil, auor> in SAL U2 ba~d en work carried 1988. AdjGetment of tariffe for the context of the program to be promred out by GOet under the mater and eletrlcity (Feb. 8). for eenrned enterprices. Eosnpmic mod PE Mngesmk t 2.9 Tariff reform Roduce progreseively the CosolidatJen of fiecal mod lap- W ~pmmt third phae of tariff reform, Decenher 1968 In the context of E to be s average high levol of tariff ort dutiem and tariff reform. bed en tudy to carify nomnciature (2nd trasche release) carried out by DM proteation, ngrro the rang. of itwebr of dutles reduced from 7 betmeen finml nod Intermediate good . tak. taeriffe. homogesie protection to 8. Rwge of dut"e fixed et inte aceunt 2v tariff, mAd rovle level of aong mecoare. 18-50 , except for lunury goods tarlffe en intermdiate gode whi le (100) (july 198). 2d pha e of maitising flocaL reenuee (e 1dy to be the tariff reform2 rang r*dueed completed in Sept. 88). to betes 401 for manufatured producte and 1« for intermodi- *te goode. Capitel and eeeentlai good. remaiN et 1o. (Jan. 8> 2.4 rEpot Promotien Support to potetlal and SAL I reform inctuded im - Promatgete desree en export prmo6ti, April 1980 37 establlshed enterpria.m to dopreclation, Imprt lotroducing ålmpilfled duty drawback, expand emam toward seghborisg llberailable. price prefereotl profit taxe for exporter,g countrie and prepmre the baeis deregulation. re-scbivallen of al §oing markeing expense to be dedu"tlbe for long-term plan for export- drav-back Gyntom, elinatien of fro. taxed profite; md eiapilfylng oriented induetriee bed on the taxesn nn-traditonel export. emlgraien proceduren for indsmtri9 iata to comparatOve advanege of flurundi. Agreoemntö with CEPL and ZW vilet foreign marketo. countries have bees purueed by new Gov't. - Set up Office of Standarda and Measures Doceber 1988 87 C - Complete etudy to identify Burundi*e Deceber 1988 87 ongetorm re~ource and market potentiat, and viable export activities. 8~1 - SRUCT^L tePn FR~M (SAl ZZ) POLCY MiA MO ACT TMN DY ACrB TO S1 TANG6 IATE PARA. ORJECTIv GDVOENr mw 8 ue TDlEMA1LE2 PiM P~.ET EPMr 2.8 Investeeni Incenlvem lapro the acce of omall and . Implement olen of rvieod - Inform general publ4 of program*& Apk 1988 medium enterprieee to bancing Inveten% Coda and objetolvem and meare« to noreaee private credil In order to teimulate re-achivtion of the Ouarantoe 9ser emnfidence. their contribl~on to produuon Fund (Jly 1988. Implement internal procedures to eneuro Jun 1988 (Effebiv> Suppor in the cmntes of te and e*port. . ca limita on utard officin ue of the und. OVAPE project. foreign remittences. - Eil1hate o1pulery depoel required from Juin 198 8 O~sy 1988, Jan. 197> foreign lportere ahen tay have Invested ;n Liberall~iaaon of the prefoeslon produ~i*ve ecutor e6 Fes 2é 0 m.- of importer (July a8). - Remonerate c~mpuleory depoite 86 - Announcee~esure June 1988 - A lal ispiamentstlon Beginning Jan. 1988 8. R111C EXBED~ Wprove efficoney of pubil Preparaion of 8 yer PZP for - Full agreemen6 om 198-98 PIp, incuding June 1988 .Enk eupper provided by 44 expendituroe inoreeee 1988-89 and dentificeon of reserve projct. (Effeolvenes)- TeO~icat Asstne1 and coordinson bet~n capital and ca,, program taking inta acoun Buenomic and PE Ranagement recurreno expenditreo; ensure sval rtle resurce mnd fiecal - Agre. an ectIon plan to srengthen 1DILM. june 1988 48 impiementalion of high priority policy objechvee.(~p4. 1988/ Invesment projects 8~p. 1988). Firat guideltneo snd - Agree en actian plan te siren toeb M1o'IN December 1988 4ö pormenterm to be ueed in projec and core inietries. evalustion Qy 198). 41 Publi laEpenditures Program i r repr prp*red in MKy - L~unch preparalmn of public expenditure may 1988 1987. Rer1 om need for program for 1989-91. restruct ring and oörengthenIng With frenh Amistence 40 of planning system (Jan. 190 - Complete end agree with DAen P for Decebor 1988 1989-91 and tranelinlt uniffled budg for (2ad tranche relemec) 1989 based on etor Ps ( educain. helth, agriculture. transpor). - Preparaien of PEP for 19-9 and Oc1ober 1989 unifled budge for 1989. (rd tranche relesei) In es*tabo~aon WIth 68P 41 - Complete TA 'urvey. Oembor 1988 With sesistance from the 41 - Agre en actien program to leprove Giv;il fteber 1989 Canadian Gov' . service effliency. (8rd tranche relee) O 45 ( Reform of budge/prograeing system, adop Before end-1990 1 dmuble entry pubice occounting system and eystem of defining priorities: ye into - budge by prioriles. 0 4. PIM C TPIS Rehabi itaien of the est~r Crewion of the service in charge Roinforce S and impemmni During program Program linked and supported and improving system af of pubic enterprise. (SI>. tralning progras . with Renomic and Publ fel lm-up en performace (June 198 ) nterprie Project Ba % - STI8CYtAL itE P U0~ (SAL XZ) POLIC EA ACITIM TM M AC^ T T goa T~ rELATE P~A. L.egaI Praeork Draft de.re. (,iauary 1988) -Adepelen of doe.n. on PE legal fraemerk. Sept.ber 1988 68 U.quidaMton Cleom.ø of fous enterpres • Pinal s to l llquidate Pih ir~edly el~%.d: 0 (Aug. 1988) mPJmi. smæ (dias~loten an asets/debte) ay 1985 MtSAL, 0se.ber 1988 10A drift de~e. %ay 1988 t proulgatien of llquida%;on de.r~e .~un 198 (Credo .ffe.tIienes) Pirs Fkaø. of R*hbIlitotlant tiabl Iltatlen Progr, for - Signoafre of porforens ~ntreet* 410-4 OfiAC (~.t. 87), CADU. 011tan8 Ofit.C an. 1988 (Mroh 88), OmA, EIMA, L C, C. O , uw~ Septobr 1988 eMC (Apri 1988>. aP (mcten plan) D~ber 1988 EP3888, e, aC De..mbr 1988 VB88*X ho-e-- 1988 (*Ad trønek) ae~ond Phase of itabiril.ti.e: - Coopfeten of rehablital~in program for 3is!U0 .hi, 1988 58 øminoerle de r*W~A. *Ilk plan, and CO~J Novee 1988 - Signtare of perforn~e cntm: b000 . Janu~ry 199 ' 8e Nnterlo de N*M8MA, Milk plant, l nd ¢TIJ May 1989 TIrd Phae of Rehabiitain: no O~uerment deelded to 04L/SP, OIAT., H~eles rehabilltate tw housing effim. - Rehabilltatan program . rch 1989 6 (^8. and liP), WNAMEL - Signare of peform~ne co"%set.: Septeaber t989 (tole-am~ cwtlof) Wnd three subSle-bed hotels. ae~er Studies - Laun~h smaler atudi m basl for pollay my 1988 reform: (i> prl«letariff* md inet1eIv ystm (h) privetinatlon; (Ø) oreed debte and monitøring of fimecl.0 fleo. bet~een S"te &nd Ml. • Camepl~e .eoter a tudi.a. Deember 1988 Agr on -prIvotlueuin progra» bled on the 0~atbe 1989 (3rd trene. reiease) ab~v studie.. - iuagemen Informtlon Spetem Prellmingry Proje - AMre with 3D on dof nive projet Apr1I 1988 - Implement MIt Dcember 1988 88 UMMO - R7eMiUL OEfi P M (SAL ZZ> PGLCY A~M AClN TMI øy ACr TO TM~4 nEATw PMA. DBE~ C UEW ~ By 00~111VOUg TIETAILE PROM/l~ T REP~ 8. AMICMTuE åA Cøfte/Alricutural expore Nammura to roduce humidity - Eéborcte lwng-term sr""eg for Goffee Septmbr 19" Comlementory iclone so be 60 levo. of f, ..y me~ cof*.. ,.due.n b...d. n.a to d.ne <).. port. by t.e (Fe. 1986) production potentl in torma of oppor~nity Cotffe E~porl Adju8tmønt com with reopec to other 6rpe/ Opration (PP9. L*unching eaus (OCIJ) of actvitie.; mnd (1l) perspectives of epori caffe tre~. to mensetmniml potentImi for Øurundi <*ffe. ot offe. produtlon (1980) - Zestaent research program to *liito During program Supr to thio mein a1 cotøffel @p to& temte. progrm addre~.ed under Coffes E,pori Adjøstm.mt - Study to dein. efWtien6 mtruck re of Nevsmr 1988 Operation (F8). 8ag*men for ~eieng sta~lan. • Revise cff** prielng myøte (hell. . Ir1du,- *lid;ng m*«l* for felty-*ed Apr 11911. 61 cottemp . ensumi revielmn tmakng into acceunt March 1911 preelmery eatudie (d tranche røe»øø> - PI 1n place te"hsei1 offistace to to May 18 61 improve it markel6ag "pability . - N4 in plee iftoram sym ayt to fl le up Ourine progre an the world affee priam. - Cossie. mtudy of c~parøliv* advaage o une 1980 ~ %ruadie eap erope. 8.2 Fertli PpilCY - Elabermtm long-m~r poliey an fortiliserei During program ActIone to be eupported by 8 evlmate econmle utili»ation ot cheiIal the Agrilturmal Service * tarli.,6m, r.,i..e.6..>nel ,,. r...am et roj..6 <P..). løprved Isnd improwe partitlpøtien of private esctor. 8.3 Agro-Induatrial Projeote 86*0S ( (~ugar) 0overneon has agreed to: not - Launch ~tdy on osportuaity to cmntlu» vith June 198 Fll~up enviged under the M4 mubsidim. SQ~6O mnger the projec. PE aame~n project. produetien aesm po;ssbliti~ - Agre with 2 an «ion plan for 1980 bamed Deaør 1988 te reduce opermeing co.tmz ønd an abovs etdy. (med trece relenae> liquidate enterpre~ If It prove~ - Soblefectory imlenftm6oen of m~nian pløn . octuber 1*9 CD mconoleally unjulftfied after (3rd tranc~e releae) one or ~o r er f peration. Rice <obo NDC) Government agreed to liberMline - Liberal is the pddy marke and elIe tie Docember 196 es the paddy market for the. 1~b MC to fin proder pric., beginning (2nd trmnche relemme) 9^10X - STUCtM om0 M00 (SAL I)- PGLCY AREA »0 ACT^ TMB y ACT104 70 ge TAB ~EATD PARA. 0BJETE0 ff y 09O0 Nr TDMTA811 P01~1/PN0JTr 1989/1990 ca~paigan beginning in with 1989//90 campaign. March 1989) Palm oli owlt ageed to Vltkdrow a n - Co~plete feaibliitr etué ca extenemn tof 0eceer 1988 parge invetmn ta proces pall eueloing procesing plant. 68 0li and to abide by the remlte of the "tudy on etoneion of emieling procesing planh. 8. Ogitime<r POICI5 Pro~ote epolymen% cret6ion to In addlion to weroecooaic - Liberali« ayatem of recruitmant; private N9. ab~orb the 60,00 new entrante Muesre. endr SAL 1. o' ha. fl rna will be al eed to retruit rndian in the modern setor, through abo$lehed the progresive labor labor withou Matory cenultotion/ pol lcy masurce. taa,relaxed former dMini*trative approval of Miniebrj of Lobor. levie reetri6tione an urban cettement Plecemant com;itte'. functmne and la on and an if;nerant %redere. foreign lebr. Subit revised legleltin to the juna im 70 N~tionel Labor Comucll for epproval. (offscivenee) . Agree on .scond phae of liberallzation oceher 1089 70 extending program to parwataelo. ( %rd trafche releiase - l6iengthen service of initry of Lebor . Laundh ~W/ILO projcht to aelei, June 1098 ILO Will ontinue it 71 . Pub in place progre bo loprove data on Doceeber 1988 mooletance. inforMal ecctor accepted by th miniary 71 of Trade and Indu~try and the Labor Union. . Strenghen services of Ler Niniotry DOembr 1988 reponeibie for emplomnt promobion. (2nd Irenche relese) - A~thorize i~sorte of .econd-hnd technolog April 198 72 den ac imeid by perforans guarantee certificate. - Adopt rovised oujunbere munielpat ten cod. April 198 72 to reoec anti-labär biaa. 00 z D tvi - Study of health inmurance soe for Baed on heslth finance tudy 72 privat e ployees. being financed by Bank l projeet. . TmR accpted by Governaani, labor union, une 1918 0 and ~Ielth Minintry. . Propcoitlon of nem yaeo. Doceber 198 ii.,. - T^CUAL RE~4 PRDtM~ (AlN 22) - ---- POuCY AflA A0 ACTIN TAMEN ny ACT04 Te DE TAM EATD PAA. 7. MeTarY 0 CR PeCM Imarove the Gpetem of Increaseto gWal interaf 1 rate Pira6 phismq Apri 1988 Action progrm Identified omd 75 lloc6tn crocdik mnd to positive lavals (Aug. 198). -- to be oupported in paraits* ocbi li=tion of dos6ti aovings • EDlint a priori b~1ho man fm by the SOEVAve proj~t. £mrea** of 5 porc~ntage pointu 1t9 an Individusi erdita abo P% Ime. Policy owasurom al*o in rata on 12 montheevinge - Allo, Pes to deposl thair liquidities In supportd by the ~ndyear deposit. and reviion of the ~nst profitablo f*obion. Dg SA progra. intr6s rt policy (July 198) - Pir84 lasue of Trfeaury Bill, by public Revision ft Intarost rte, in mty .ucti.n ~epen to al5 fiAnaial 1987. inatitubIone); celandar of eaue. for the 2nd Guortor 198M. - Deregula intras retas on non-radiIcountable anne end *lUGint minimum int*ros ratco on as deposits. omapsent cs~pulaory r*servas ysem . Second hase: Soptamber 198 77 X ~*mue of Traury Sill* with progresiove reta (euc formul,o). - Reduce nube et rdiöcount ratfrom 7 to 8. - Rduce nuber of 'ausse intars ft retas on r*dicountabl* tredits from 8 to 3. - Elisinate all minium intorcoh ratas on dapeto swcp% for pao dposita. - Revs of med~*u1-t;e iquidity rattos. Third PhaM: December 19 8 78 - Reduc# nuber of rediscount rata. to 2 (normal and proforntiet retao). • El ifinat~ faximium intrst ratas on creditc and of minimum ratas on deposite. ourtM Phacot Liberalia»tion of elI intoroch July 1969 ------ ratms. National Guarantce Fund Procedures and status hava be~n • AapI procedura. of National Oarsntco Fund. June 1918 In parat lei with 9WAPM 78 ( ti proead in consultetion with MA (Effactivenss) crodit. (1967) - Rhl Stat. .as (Cod Fencler) • R~co.. diwpoit;on grnting te Treasury .ne 198 prior d~la on collstrl propertp. mftb02 - PTIM:CutAL. RECR Po0 A (SAL IX) ZY Amø AaTZm T~Ø Dy AcrimN TO BE T~<B RBATED P*AM. Og~11V00V1øm By Gav~6 TD«rA«L ~11,1111~jErT RP 8. S0CIAL Ate POV Y A~.VATICN PRO~AÆ - . tin Mte WP-financod/ak øXecuted April 198 o projoet on 0S~ial Dismsions "f Adjustmsnt". - DeWine program oa f i wo targetted poverty Deer 198 The. actione ~ il I bo 6487 at evit on e6ien. focued os (2ad tr#anh* releoas) prepared in the contet of (ø) nutriton prograsa for chi Idren; te SDA project. Asaessemnt (b) support to woen In developmønt; af ngøog progrømm eilt b* (c) support to smll ~cste produtive made to evaluate viability t projeots; (d) food ac#rty strategy and entend te at national (e) coordination of donorme~ss ,nce in ADS -ecale. Collboration progrf.env isaged eith tmCp, IDA-Plmd project. I*CP. - Prpare o storing øyste~ focused on social During program 87 and icoa veribble. 9. F.LRM~P OM ADJ.TW8>I PRO8RM Crestion øf comito de ouvi et - Reinforce Comit de Suivi ith pea%nt April 196 sak 4upport to b* provided im ministeri t level ønd øf ecretariat and prepare system of through the Sonoic and PE permannt seoretariat (Pøb. 86). indicatorm. Managomnt Project and closs relation *ith Resident - CAodnato closely wlth leldent ølaslon During program. Mission. CD M - 53 - ANNEX V Page 1 GOVERNMENT OF BURUNDI GOVERNMENT STATEMENT ON DEVELOPMENT POLICIES 1. In 1986 the Government of Burundi launched an economic policy program with the dual objective of correcting economic and financial disequilibria and of promoting a medium- and long-term restructuring of the economy by stimulating productive sectors and private investment. The first phase of this program (initiated in mid-1986), supported by a Structural Adjustment Credit (SAC I), resulted, inter alia, in: a) a 23% devaluation of the Burundi franc with respect to the SDR (between July 1986 and March 1987) and a 9% devaluation in February 1988; b) a revised tariff structure that reduced most of the excessively high protection accorded domestic industries while equalizing protection across sectors of the economy; c) a lifting of most price and import controls; d) a revised Investment Code; and e) an increase in producer prices for coffee and tea. In the context of a public enterprise (PE) reform program, four PEs were closed down, and five others are being rehabilitated. Efforts have been made to rationalize the public investment program and to begin preparation of a three-year public expenditure program. In the fiscal area, the structure of indirect taxation has improved and tax revenue collection strengthened. A commission was established to manage the external public debt and to ensure that external loans are contracted on highly concessional terms. 2. The Government of Burundi is committed to the pursuit of its structural adjustment program (SAP) and has requested support from the Bank and the IMF for the second phase. During this period (covering 1988-89) the policy adjustments undertaken under SAC I will be reinforced and new economic measures will be introduced. 3. Implementation of the SAP outlined below should lead to average real annual GDP growth of about 5.02. The new incentive structure should boost private investment, allowing gross fixed capital formation to be sustained at about 20% of GDP. The current account deficit of the balance of payments should be held at under 10% of GDP (corrected for exchange rate adjustments) and foreign exchange reserves should increase to the equivalent of approximately four months of imports. The overall budget deficit should decline from 12.8% of GDP in 1987 to 5% in 1991. A detailed timetable for the Government action program is appended. A. Trade and Industrial Policies 4. Under the first phase of the adjustment program, the following measures were implemented: (a) the adoption of a flexible exchange rate policy; (b) elimination of most import and price controls; (c) reform of customs tariffs; (d) revision of the Investment Code; (e) increase in producer prices of coffee and cotton; and (f) abolition of export taxes on manufactured products. These measures will be strengthened during the second phase of the SAP. 5. The Government proposes to strengthen industrial incentives and to promote efficient manufacturing for export. This requires reducing the - 54- ANNEX V Page 2 anti-export bias and strenghening the institutional framework. The Government undertakes to rabe the maintenance of a realistic and flexible exchange rate, particularl,ith,:respect to neighboring trading partners. The Government recently 'syud legislation offering exporters of manufactured products a sfMpl died drawback scheme (compensation for customs duties paid on orked.raw materials), reducing the tax on profits derived from exports of t tducts and abolishing the export taxes still in force. The prid aing of exports has been maintained but becomes automatic. 6. As part of the 's reform of trade and industrial policies the following e being implemented: a) The Government adj d'ibe value of the FBu with respect to the SDR to correct the appridtio .of the currency since March 1987. In February 1988, the, lpas devalued by 10% in local currency terms which more than comp- d.for the appreciation that had occurred since March 1987. .$hQt'change rate policy will continue to take into account the trend in,,tdorel effective exchange rate, balance of payments objectives,.) 4.need to promote non-traditional exports and improvements in,incei4ves to certain producers of export crops. b) Restrictions on Impo4 -luxury goods (which had been maintained during the first p "port liberalization) have been abolished. The value of licens "n be issued by commercial banks without BRB authorization b rsised from FBu 1 million to 10 million and the period of v*1 61 licenses has been extended from four to eight months. Rest !on three groups of imports that compete with locally manufa oods (glass bottles, pharmaceuticals and textiles) will be a ed.by 1990, at the latest, as part of recovery programs btn prepared for VERRUNDI and ONAPEA and of the action plan to be pa416red for COTEBU. c) Foreign importers: "Invested at least FBu 20 million in a productive sector 4e subject to a compulsory deposit. The other will coutingi to"= * compulsory depositis which will earn interest begin ty 1989. d) Remaining price co certain products (rice, wheat) will be progressively aboli e) The second phase of'e tariff reform which was implemented in January 1988 reduced the ap:ed. id tariffs from 15-50% to 15-45% with the exception of luxurylgh.dethat continue to be subject to a 100% tariff. The third 9 (to be implemented in January 1989) has the objective of incres '-industrial production and lowering the average tariff rate without - 'eaaing the tariff spread. It will be based on recommendations of ~ ons harmonizing the Burundian tariff structure with that iher PTA member countries, improving the trade nomenclature to bet, ierentiate intermediate from final products, and assessing the a V",..lowering current rates on intermediate goods. The target ce the effective protection-rate differential from b 0 .68 and 7735 in 1985 to between 46% and 145% in 1990 adtoM budget revenues. - 55 - ANNEX V Page 3 7. In the context of institutional reforms, the Government will strengthen the Chamber of Commerce and its capacity to dialogue with relevant ministries and the private sector through the creation of an export marketing unit. A standards agency within the Ministry of Industry and Commerce will be established with the technical support of the University of Burundi, to ensure that Burundi's expokts conform to international standards. The Government has taken steps to simplify the travel procedures for exporters. A study of Burundi's medium-term industrial and export potential which will serve as the basis for prefeasibility studies and a program of investment promotion (domestic and foreign) is also underway and will be completed by end-1988. B. Public Finance 8. An abrupt decline in coffee revenues increased the budget deficit from 6.5% of GDP in 1986 to 12.8Z of GDP in 1987. In the context of the Policy Framework Paper for 1988-90 and of the second SAL, the Government is committed to reducing the fiscal deficit to 9.7% of GDP in 1988, to 8.1% in 1989, and to 5.0% in 1991 by strengthening revenue collection, including the phasing-out of custom duty exemptions, by improving the fiscal system and by maintaining a prudent public expenditures policy, including the rationalization of expenditure priorities. 9. In 1988 the Government foresees an expenditure level of FBu 40.7 billion, comprising current expenditures of FBu 21.4,billion aid capital expenditures (including on-lending) of FBu 19.3 Ulifon. About 801 of the investment program will be financed by external,aI4pnd the remainder by domestic financing. For the period 1988-90 the:Go4ernment has decided to maintain an annual global level of public expenliture of FBu 43 billion and capital expenditures (including on-lending to public enterprises) of FBu 20 billion which is compatible with the objectives of its macroeconomic and financial program. Priority has been assigned to agriculture, which accounts for about 40% of total investment expenditure. The share of transportation investment is expected to decline in view of substantial past efforts to build a road network which meets foreseeable requirements. Resources will therefore be concentrated on the construction of secondary and feeder roads and the maintenance of existing infrastructure. 10. The ability to strengthen public finance performance is, however, subject to a number of constraints. On the revenue side, current efforts to improve tax and customs revenues is limited owing largely to the limited monetization of the economy. Fiscal pressure is already very high on the monetized economy (about 30% of modern sector GDP), which limits further increases in tax levels. Budgetary revenues are also very sensitive to variations in the international price of coffee. There are, however, possibilities to strengthen tax collection and these possibilities will be exploited in the short-term. 11. On the expenditure side, savings will most likely be realized as subsidies to parastatals are reduced, expenditure controls are tightened and as certain programs which are not consistent with the Government's adjustment program are reoriented. Nevertheless, the flexibility to operate large adjustments in the level and structure of Government - 56 - ANNEX V Page 4 expenditures will remain limited in the short run, given the importance of non-compressible expenditures (e.g., central administration, security and defense and debt service) and the need to ensure the financing of recurrent costs associated with public investments which are currently underfinanced. 12. The public debt service represents about 30% of the public resources and constitutes the most important constraint to an adjustment in the level and structure of public expenditures. The Government maintains its commitment to borrow from external sources only on highly concessional terms. It has also initiated a program to reinforce its external debt management with support from UNCTAD and is exploring the possibility of reducing its external debt burden, notably by means of an eventual debt forgiveness, for which it requests the support of the World Bank. Program of Reform and Improved Expenditure Management 13. The reform program under the SAL II includes the following components: a) Implementation of a Three-year Public Expenditure Program (PEP) for 1989-91 and a transitional unified budget for 1989; b) Improving the three-year rolling public investment program (PIP); c) launching a comprehensive budget reform; d) strengthening institutions responsible for managing the public sector's project cycle and for managing public finances; and e) implementing an.action program to reinforce the efficiency of the civil service and of technical assistance. 14. In order to improve the public expenditure management, the Government will adopt a three-year Public Expenditures Programming process (PEP). The objectives of such a system are tos (a) provide a clear view of the objectives of proposed government actions and their relative priorities; (b) prevent priority programs from being underfinanced while eliminating lesser-priority expenditures; (c) enable resource allocation decisions to be made in light of their opportunity costs; and (d) allow decision-makers to take into account resource allocation decisions taken in earlier years and the impact of resource allocation decisions for public finances in future years. 15. In 1988, a first PEP (1989-91) will be prepared in the context of the 1989 budget preparation. The PEP will include government recurrent expenditures (including the domestic and foreign debt service, public subsidies and general expenditures which cannot be allocated between sectors), detailed PEPs (including recurrent costs associated with investment projects) for the agriculture, education, health and transport sectors and PEP outlines for the remaining sectors. The 1989-91 PIP will be integrated into the PEP for the same period. Sectoral financial limits will be establised to orient the preparation of sectoral PEPs. - 57 - ANNEX V Page 5 The sectoral PEPs will identify the financing needs to cover the recurrent costs associated with projects in the PIP, whenever the necessary information is available or can be collected, even if their financing is not secured. The PEP will be refined during the following years in order to allow the Government to have a truly analytical tool to support its decision making on public expenditure priorities. An agreement with the World Bank will be reached on the content of the 1989-91 PEP and on the unified budget for 1989, as a condition of second tranche release. 16. The Three-Year Rolling Public Investment Program. The preliminary PIP for 1988-90 was reviewed with the World Bank. The definitive PIP will be submitted for the Bank's review and approval prior to credit effectiveness. Meanwhile, the Government is committed to excluding from the 1988 PIP all new projects which would lead to a level of capital expenditures in excess of the level provided for in the 1988 financial program (FBu 19.3 billion for the projects included in the central government budget, and a maximum of FBu 25 billion for the PIP as a whole). For the 1989-90 PIP, the financial envelope is fixed at an average of FBU 26 billion, which corresponds to the objectives of the Government's financial program during this period. 17. As for specific projects on which the Bank had some concerns, the Government will: (a) postpone the implementation of the Central Market of Bujumbura and exclude it from the 1988-90 PIP; (b) reduce the dimension of the sport stadium project by eliminating the proposed olympic swimming pool and hotel; and (c) invest in the extension of the oil palm processing plant if the technical and economic study demonstrates its economic justification. 18. The preparation of the PIP for 1989-91 will take place in the context of the preparation of the ?EP for 1989-91. The content of the PIP will be rationalized and will includes (a) a core program, consisting of high-priority on-going projects for which financing is assured and of new projects of demonstrated social and economic viability which can be implemented during that period; and (b) a reserve program (which is not included in the core PIP) consisting of projects of lesser priority which could be implemented within the global financial envelope witheut diverting financial resources from the core program. Finally, a monitoring system will be established to permit the follow-up of the PIP project-by-project. 19. The introduction of new projects in the PIP will satisfy the following criteria: (a) for directly productive investments and economic infrastructure, an internal rate of return of at least 10%; and (b) for social projects, cost-efficiency criteria. 20. Budget Reform. The objective is to introduce a management tool for the public expenditure program in 1989 and to evolve towards a unified budget which would be introduced in 1991 and whose contents will be consistent with the IM's presentation of government operations. In this context, a transitional unified budget will be prepared in 1989 and 1990 and will include: -58 - ANNEX V Page 6 (a) the "Budget Ordinaire" (B0) and the "Budget Extraordinaire d'Investissement" (BEI), as provided for under existing budget law; and (b) a "Budget Annexe" (not included in the existing budget law) but which will include those PEP resources and expenditures not contained in the BO and the BEI and for which monitoring will be done ex post. The reform of the budget system will include changes in the procedures concerning preparation, monitoring and control of the budget as well as of the public accounting system. An action program will be defined by the Government with the assistance of the French Ministry of Finance and will be agreed with the World Bank before the release of the second tranche of SAL II. At that time, the details and calendar of the action program will be finalized. 21. Institutional Stengthening. A program designed to strengthen the agencies responsible for the preparation, budgetization, programming and monitoring of the public expenditure program will be launched in the context of the SAC II with thi support of the Third Technical Assistance Project and the Economic and Public Enterprise Management Project financed by IDA. To this end, the Government will prepare an action plan aimed at, in the first instance, reinforcing the Ministry of Plan. 22. As part of the SAL II public expenditure component, the Government will maintain the level of the civil servants in line with available resources. With the objective of improving the efficiency of human resources in the public sector, the Government will launch, in the context of the SAL II, preparatory work to reinforce the planning and programming of its human resources, including technical assistance, permitting, therefore the establishment of its employment policy on a new basis. C. The Public Enterprises 23. Burundi's 57 public enterprises (PEs), most of which date from the seventies, were set up to carry out a range of tasks: provide public services, remedy the lack of private investment (which caused the public sector to expand), and coordinate the various sectors of the economy. These PEs currently asme a significant role in the economy, particularly in the modern sector; they employ approximately 10,000 people and generate approximately 5 percent of the country's GDP. However, as a result of the small size of the domestic market and distortions in the incentive structure, together with the lack of experience in commercial management, certain enterprises face severe difficulties. 24. The Governmentvs objectives and strategy in the PE sector remain basically the same as for the first phase of the adjustment program. A program of public enterprise restructuring and revitalization is being implemented in accordance with the following general principless (a) Cost-effective participation by the Government in those sectors that require public investment (e.g., involving new activities or public services that cannot be provided by the private sector); (b) Maximization of value added to the national economy. Public enterprises will be financially and economically viable, with each required to cover, from its own resources, all operating expenses  59 ANNEX V - Page 7 and at least part of investment expen id e. These enterprises will be subject to the same fiscal legislat a private enterprises. (c) The PE sector must generate profits fo.th6 overnment commensurate with its investments. Commercial or industrial operations of PEs will not be subsidized. The Governmefit 41 1.l )ontinue its policy of more equal incentives for the publio and. rvate sectors. 25. Public enterprise pricing will, wh e saible, reflect actual costs or be determined by market forces. It er public services are provided below cost, then offsetting measures .1i be taken in the performance contract or necessary funds w1 luded in the Government's current budget. 26. To assist with PE restructuring tb testablished in 1987 a "Service Charge des Entreprises Publiques. A .he SCEP will assure that the PE sector is being restructured thr6ugh vatisation of activities of interest to private investors. quidation of those activities that are neither of strategic n , to the Government nor potentially profitable in the medium term. ,Tha4,public enterprises that are deemed essential will be rehabilitated on t' asis of diagnostic studies which will culminate in the negotiatted 6 performance contracts with the Government. The legal charters of PEs.*l be revised to provide greater management autonomy to these enterprised. 27. New PE6 will be created only provided.that clear public interest can be established that the activity is not :attracve.to private investors, and that a reasonable rate of return inibe assured over the medium-term. Government loan guarantees will be -iWted to PE investments of demonstrable public utility and economic vijbtiUy and in cases where a performance contract is in effect. * 28. The Government will restructure selecthd aterprises according to their specific needs to ensure financial vi over the medium-term. The Government will proceed, where appropri the cancellation of reciprocal debts between itself and the ente among public enterprises. 29. Strengthenini PE management. ThebQkmit has established a "Fonds d'Intervention" to help finance the-ii ilitation of selected public enterprises. This Fund is supplied c6fAqrpart funds generated under the IDA-financed structural adjustment lerA4. Disbursements are to be made based on performance contracts prepare b* each eligible enterprise. The Fund may be used to finance'reb#bilitation investments, purchases of spare parts or raw materials, staff training or re-training, technical assistance, and the replenishment df ior)ing capital. The Fund will provide equity capital or loans. 30. The respective roles of supervisorymthidte;es, managing directors, boards of directors and managemeqt commiftees for each enterprise are to be reviewed, in order to: (i) a4oid any overlapping or conflict of authority; (ii) decentralize decision-making powers to the greatest possible extent, and (iii) give managers m:mum responsibility. - 60 - ANNEX V Page 8 The new legal framework, which allows for changes in salary policies, hiring and firing practices, while complying with the current Labor Laws, will be implemented in 1988. Several sector studies, concerning tariffs, incentives, privatization and financial flows will be completed before the end of 1988. 31. A Management Information System (MIS) is being established to collect data on PE production, personnel, sales, inventories and finances. The system, which will be refined and in place by end-1988, will reinforce senior management's capacity to analyze their firms' performance. Periodic performance charts will be prepared to monitor the Impact of the sector on public finances and on such key economic indicators as the balance of payments and the stock of domestic and external debt. 32. Specific measures for individual enterprises. SCEP is carrying out detailed studies on enterprises to determine the types of reformas required. A second phase will cover finalization of the reform program and preparation of an action plan. 33. A number of measures have already taken place or are currently underway: (a) The laboratory component of LAPHAVET (Laboratoire Pharmaceutique et Veterinaire) has been incorporated as part of the central government and a decision has been made to subsidize ONT (Office National du Tourisme) and CPI (Centre de Promotion Industrielle) in view of their social and economic importance. (b) Four loss-making enterprises of lesser priority -- AGRIBAL (agricultural development), SUPOBU (fisheries), SOMEBU (studies), SOBECOV (storage and marketing of agricultural products) -- have been closed down, and committees have been established to oversee their legal dissolution. The Government has also decided to liquidate SOGESA (which administers ex-SOBECOV's capital) before the release of the second tranche of SAL II, and its capital will be absorbed by the Central Government. (c) Reform programs will be implemented for the following five enterprises as follows: - CADEBU: This enterprise has benefited in the past from its monopoly on compulsory-savings deposits. In the context of the liberalization of the financial sector, the Government will abolish progressively CADEBU's monopoly on compulsory savings according to the performance contract to be initiated in September 1988. Given CADEBU's difficult financial situation, the Government has decided as part of the company's performance contract to limit its medium- and long-term activities and to place CADEBU under the BRB's supervision in line with a special set of regulations to be prepared during 1989. - ONAPHA's cost structure precludes it from competing successfully with imported products even if its plant were modernized. In view of the need to supply the Burundian population with low cost pharmaceuticals, the Government has decided to abolish administrative - 61 - ANNEX V Page 9 restrictions and to seek private sector participation to rehabilitate ONAPHA. The Government will provide no further subsidies or loan guarantees to the enterprise. Liquidation will be envisaged, if planned investments are not financially and economically justified, or if private participation does not materialize. ONAPHA's laboratory will be incorporated in the Central Government. - OTRABU: With improvements in management, a restructuring of its vehicle fleet and the adoption of a marketing policy geared to lucrative markets, OTRABU could become profitable in the short term. The rehabilitation program to be initiated before end-December 1988 will eliminate subsidies and will involve partial privatization (i.e., conversion from an EPIC (Public Enterprise) to a SEM, (Enterprise of Mixed Economy). The privatization study for the PE sector which will be completed before end-December 1988 will specifically examine OTRABU's case. - OTRACO: Issues are: the weakness of its internal management and efficiency, and its dual role as a public service and a commercial enterprise. The performance contract (to be signed in June 1988) will seek to define and quantify the respective responsibilities of the State and OTRACO and will include a tariff adjustment, to ensure that OTRACO maximizes cost recovery. A subsidy will be granted, based on detailed cost estimates of the company's public service function, and will be explicitly identified in the national budget. - VERRUNDI: The first phase of the diagnostic study emphasized the company's severe debt problem, which is linked, in part, to the devaluation of the currency. Improvements in the accounting system have been proposed. A second phase of the study will examine the overall operations and the economic position of VERRUNDI, and will allow the formulation of a comprehensive recovery program. The negotiation of a performance contract with the enterprise is planned for end-1988. 34. Reform programs for another 10 enterprises will be formulated in 1988/89. Rehabilitation programs for a second group of enterprises will be completed by end-1988. These include: REGIDESO (water and electricity supply and distribution), MINOTERIE DE MURAMVYA (flour milling), three import parastatals (EPIMABU, ONC, ONIMAC), and the LAITERIE CENTRALE DE BUJUMBURA (milk production). The performance contract for REGIDESO is planned to be negotiated and signed by January 1989. Reform programs for a third group of enterprises -- COTEBU (textile production), ONL, SIP (housing), and three state-owned hotels and ONATEL (telecommunications) -- will be prepared during 1989. D. Monetary and Credit Policies 35. Burundi's monetary and credit policies have been determined on the basis of annual agreements between the Government and the Bank of the Republic of Burundi (BRB) regarding the amount and terms of Central Bank advances to Government. Other credit policy instruments have included ceilings on credit expansion, managed through prior authorizations for - 62 - ANNEX V Page 10 loans in excess of a given amount, restrictive regulation of interest rates, and liquidity coefficients and sectoral allocations for rediscountable medium-term loans. While some of these monetary and credit instruments may be maintained, new instruments will be introduced in order to facilitate effective control of overall credit while deregulating the economy. 36. Interest rates will be progressively decontroled leaving a greater role for market forces and competition among commercial banks and financial institutions will be encouraged. Efficiency of the financial sector has been impaired by monopoly rights enjoyed by CADEBU (Caisse d'Epargne), the savings fund, on compulsory-savings deposits, by the inability of public enterprises to deposit funds in the institutions of their choice, and by the practice of consortium financing for the coffee campaign. Moreover, the discriminatory policy which has characterized the issue of Treasury Bond6-has hindered rational resource allocation. Aware of these deficiencies, the Government has decided to undertake reforms under the second structural adjustment credit (SAL II). Reforms will: a) promote market determination of interest rates; b) simplify an unwieldy interest rate structure; c) liberalize Treasury bond (bons du Trisor) allocations among financial institutions, through the introduction of an auction system; and d) encourage the introduction of more flexible instruments of credit control. 37. Deregulation of interest rates. The Government recognizes that competition among financial institutions is reduced as a combination of minimum deposit rates and maximum lending rates places a ceiling on profit margins. The ceiling may be counterproductive since it precludes financing of higher-risk activities and is discriminatory with respect to both savers and financial establishments. The Government is abolishing CADEBU's compulsory-savings monopoly, leaving to the market the role of setting deposit interest rates on all forms of savings. 38. In order to correct the current discrimination i interest-rate determination and the allocation of treasury bonds, the Government has decided to introduce an auction system, open to all financial institutions. The auction should facilitate the development of a domestic money market which will provide a flexible mechanism for determining interest rates on short-term funds. To promote small savers, progressive-rate treasury bonds will be issued starting in September 1988. 39. The process of interest-rate deregulation will take place in four stages and by July 1, 1989, at the latest, financial institutions will be permitted to set their rates (including commissions) for loans and deposits. The Central Bank (BRB) will maintain two rediscount rates: a normal rate and a preferential rate (i.e. to promote credit to export sectors). (a) At end-March 1988, the regulation of interest rates for non- rediscountable loans was abolished and the minimum interest rate on demand deposits in excess of FBu 100,000 was eliminated. - 63 - ANMS V Page 11 (b) Before end-September 1988, deposit interest rates will be deregulated with the exception of a minimn rate (currently 7 percent) on passbook savings deposits. The number of discount rates and interest rates on rediscountable loans will be reduced to three. Maximum commercial bank margins will be increased; however, the differential between lending and discount rates will continue to be regulated. (c) Before December 1988 the number of discount rates will be reduced to two. (d) Before July 1989 interest rates will be fully liberalized with the exception of the two discount rates. 40. Reform of money and credit control instruments. To facilitate credit control the Government has decided to introduce a reserve requirement for banks and other financial institutions. Reserves can be held in the form of treasury bonds purchased through competitive bidding thus limiting potenti,l detrimental effects of this requirement on bank profitability and promoting demand for treasury bonds. 41. The system whereby banks were required to obtain prior authorization from the Central Bank before extending a loan which would increase their exposure to a given borrower to FBu 10 million or more has been eliminated at end-March 1988. The Government is aware that such a system is not an effective instrument of control over the volume of credit becauses a) part of the small loans are not covered; b) the centralization of information on bank exposure occurs with considerable time delay; and c) the amount of outstanding prior authorizations always greatly exceeds actual outstanding loans. Moreover, its use as an instrument of selective control largely duplicates other instruments such as rediscounting and liquidity coefficients. 42. Institutional measures. The Government will ensure that all banking institutions are subject to the same degree of regulation and that competition will be promoted. However, the COOPEC (Credit Cooperatives) will be subject to special regulations to be put in place before 1989. The system of compulsory savings will also be progressively liberalized. This process will be launched at the time of the signature of the performance contract for CADEBU (planned for September 1988) and will be carried out during the SAC II period. The compulsory savings interest rates will be set by the market. Over time the compulsory savings system which has already been abolished in the rural areas, will be made optional. E. Employment Policy 43. Most of the population is employed in the rural subsistence sector where labor productivity and incomes are low and available arable land is declining. Based on an annual population growth rate of 3 percent, an estimated 60,000 persons enter the labor market every year; however, the modern sector provides only 3,000 full-time jobs. The Government has already introduced a number of reforms during the first phase of its SAP to eliminate previous bias against employment generation. Measures to reorganize and strengthen agricultural services, to reduce taxation of - 64 - ANNEX V Page 12 traded food products and to eliminate compulsory savings by small farmera have been effective. Other reforms have promoted the development of inter- regional trade and employment in the informal urban sector. 44. In the context of the second phase of its SAP, the Government will introduce additional measures to strengthen incentives for small- and medium-scale enterprise development and for employment generation. The Government's objectives are to liberalise the labor market, revise the legislation on foreign labor, strengthen the role of the Ministry of Labor in employment promotion, introduce measures to reduce the costs to employers associated with employment and stimulate the development of artisanal and informal activities. Unnecessary regulation of employment will be abolished in order to pr>gressively reduce recruitment costs. Information on the employment market and voluntary placement services available to workers and employers will be improved. The tax system and regulations on commercial, industrial and artisanal activities will be reviewed and revised, where necessary, tc promote small enterprise development in the modern and informal sectors. 45. In particular, the Government will: a) revise the labor legislation and recruitment procedures to allow employers greater freedom to select employees without prior mandatory consultationlapproval by the Labor Department (DMO). The present recruitment procedures, which are costly, will be improved. In return, employers will be required to conform to national labor standards, to protect the well-being of their employees and to give priority, given equivalent qualifications, to the employment of Burundian nationals. The revised regulations will also simplify and clarify the procedures for promoting the "Burundisation" of employment and for providing support to employers who take the initiative to provide training programs; b) revise the role of the Placement Committee so as to give it a supervisory role over placement activities. The Commission will also, where necessary, notify the competent authorities of its views regarding employment problems; and c)strengthen the capacity of DMO to perform the functions of evaluating employers' specific skills needs. 46. The legislation on the employment of foreign labor will be improved with a view to reaffirming on the one hand, the priority to be accorded nationals, and on the other hand, the need to protect enterprises' right to use foreign expertise when it is not available in the country. In this respect, the following measures will be adopted: a) the Foreign Employment Committee will be broadened to include employers and will establish precise criteria for the granting of work permits to aliens; b) whenever possible, working and residence permits will be issued for the same duration; c) foreign workers who lose their jobs will be allowed to seek another job without having their working permits automatically revoked; and d) the tax on foreign workers' earnings will be used for training local labor. - 65 - ANNEX V Page 13 47. The Ministry of Labor will strengthen its activities concerning: (a) the formulation and implementation of employment promotion policies; (b) the evaluation of the impact of the revised investment code on employment generation; and (c) the analysis of annual labor statistics to determine recent employment and wage-structure developments. The Ministry of Labor (in particular, its Studies Office and Manpower Department) will be strengthened under a project financed by UNDP and executed by the ILO. 48. The Ministry of Labor will redefine the roles of its various departments accordingly to strengthen planning and statistical functions, to introduce computerization and training activities and, finally, to reallocate personnel to employment promotion activities. It will also improve its collaboration with other ministries interested in employment issues, such as the Interior, Trade and Industry, Civil Service and Health Ministries and the Chamber of Commerce. Emphasis will be placed on social dialogue and consultation in the context of the National Labor Council -- or in any other tripartite commission, with representative% from the Government, the Burundi Workers Union, and the employers. The sub- committee for Human Resources Planning will be reinforced. 49. The Manpower Department (DMO) will continue to play an important role in employment promotion, notably in the exchange of information between job seekers and employers. To improve the DMO efficiency, the Government will implement, in a progressive fashion, the following activities: a) establishment of a job-seekers' data bank, classified by occupation and skill level; b) computerization of placement operations; c) creation of a section specializing in the placement of managers, supervisors and foremen; d) development of an occupational classification; e) establishment of a Counselling and Guidance Office to foster mini- business employment and self-employment; and f) creation of a unit to provide liaison between services demanded by the modern sector and services supplied by the informal sector. 50. These reforms of labor legislation and reglementation will be implemented in two phases. During the first phase, which will be completed by December 1989, the Government will take the necessary steps to liberalize the recruitment procedures in the private sector. Before December 1989, the impact of this first phase will be assessed, based on surveys covering the views of all social partners. The second phase, based on the results of the assessment, will envisage the extension of liberalization to the parastatal sector. 51, Other Employment-Related Issues. In consultation with a commission composed of representatives of the Ministry of Health, the Ministry of Labor, the Burundi Workers Union and the Employers Association, the Government will study alternative ways of improving the efficiency of medical coverage of private-sector employees (currently 1002 of expenses are paid by employers). The principle of a "deductible" (where part of the cost is borne by the employee) will be adopted in order to reduce the costs to employers. To ensure that this reform is consistent with the existing - 66 - ANNEX V Page 14 system and takes into account equity questions, the Government will undertake this study in the context of the studies already in progress on health service financing in Burundi (Health and Population Project). Available options such as: (1) extending insurance coverage under the civil service mutual insurance scheme (mutuelle) to private-sector employees; (11) creating a health insurance fund administered by the private sector; and (iii) setting up a single, universal system, with employee contributions administered by a health insurance department (such as the civil service mutuelle) will be clarified. Recommendations will be presented to the Commission at the end of 1988. 52. The Government will revise the Central Bank practice prohibiting the Importation of second hand technology in order to improve access by small enterprises to capital goods. Such imports will have to be accompanied either by miniumn performance warranties or by a certificate from a competent international organization attesting to the quality of the equipment. 53. To promote job creation in small and medium enterprises, including those in the informal sector, the structure of municipal taxes on businesses in Bujumbura will be revised to improve equity and also to provide greater incentives to job creation. Municipal taxes are currently set on a flat-rate basis and change every year. They also discourage job creation. (For example, a carpentry workshop employing three workers pays a tax of FBu 10,000 a year whereas a workshop with one employee more pays FBu 30,000). The reform will take into account the need to ensure adequate tax revenue to keep pace with the foreseeable development of the city of Bujumbura and increasing costs that the Municipality of Bujumbura will have to meet. The Government has also prepared tax collection and management reforms designed to ensure greater equity and to maximize tax revenue and accounting reliability. F. Agricultural Policy 54. The agricultural sector constitutes the base of Burundi's economy, accounting for more than 50 percent of GDP and contributing more than 80 percent of export earnings. However, the agricultural sector faces major structural problems. Although output has kept pace with population growth, the sector continues to be geared to subsistence farming and yields remain low. Land availability is limited and likely to be exhausted shortly. Cultivation of increasingly marginal land, progressive deforestation and reduction in fallow acreage and failure to use fertilizer are among the major factors responsible for declining land potential. Marketing of produce is difficult with fluctuations in agricultural production frequently resulting in a sharp fall in prices when surpluses cannot be marketed. 55. Nevertheless, Burundi's agricultural sector offers opportunities for growth on a larger scale than in many other African countries. The Burundian farmer has shown extraordinary ability to adapt to farming conditions. The pressure on arable land has prompted farmers to adopt new technologies in order to increase yields. Attention to applied research on these new technologies is necessary and difficulties in marketing foodcrops in the face of limited domestic demand present serious obstacles to the promotion of higher-yield techniques. - 67 - ANNEX V Page 15 56. The Government's broad objectivea are as follows: a) meet the food needs of a rapidly growing population; b) expand production and exports of agricultural products; and c) increase farm incomes to enable the rural sector to modernize and become a market for production from the industrial sector. The strategy for the sector is based on: a) rational development and utilization of the remaining available hill-slope and marsh land; b) intensification of production by small farmers through development of agricultural research (with a view to introducing new technologies), of production (where economically justified) and distribution of inputs, and of production support structures, including extension, credit and marketing channels; and c) regional specialization with a view to maximizing production by ecological zone. 57. Increasing Production of Export and Foodcrops. The Government is fully aware of the critical role of agricultural exports in the balancing of the country's external accounts. It will continue to concentrate efforts on increasing production and marketing of traditional exports as well as on diversifying the range of non-traditional agricultural exports. Targets for non-traditional products will be set based on a study of Burundi's comparative advantage. Products with a high unit value in relation to transportation costs (essential oils, spices, exotic fruits, horticulture, and medicinal.plants) will also be considered. The cost of farm inputs will progressively be transferred to farmers whose production decisions will be adjusted to price signals for various crops. 58. Although there is little government intervention in foodcrop pricing and marketing, price controls are in place for major export crops (coffee, tea, and cotton). As a basis for refining Government's policy regarding export crops, the Government will undertake an agricultural comparative advantage study including an assessment of producer incentives in light of production costs and world prices of those crops. 59. Concerning coffee, the objective is to increase production substantially. The feasibility of this target will be examined taking into account poor demand prospects on international markets, Burundi's vulnerability to transport conditions in its neighboring countries, and the crop's opportunity costs (given limited availability of arable land). Burundi's relative position in the world market for coffee will also be assessed as well as the possibilities for penetrating markets for best quality arabica coffee. In this context, the Government will develop (before September 1989) a long-term production strategy, based on the results of the above-mentioned study. 60. An action program will be introduced to improve quality of production and the efficiency of the coffee sub-sector. It will includes (a) continued investment in coffee washing stations; (b) identification of structures to ensure effective management of washing stations (producing fully washed coffee); (c) strengthening of BCC's management capabilities and esteblishing a marketing and transportation strategy; (d) resolving the problem of the "potato" taste which would upgrade the market image of Burundian coffee; (e) increasing 1the effectiveness of pricing policy - 68 - ANNEX V Page 16 through the introduction of a sliding scale for "fully washed coffee", and assessing the possibility of introducing quality bonuses for producers; and (f) exploring the feasibility of placing OCIBU and BCC on a fee basis for their processing and marketing services. 61. Government policies to increase food crop production includes (a) Land settlement and development programs in the eastern part of the country. In order to reduce risks of environmental deterioration, vulnerable areas will be set aside for other uses (forests, rangeland, etc.). (b) A National Extension Unit (Service National de Vulgarisation) will be established to coordinate provincial agricultural services and serve as a link between ISABU (research) and farmers, to disseminate the results of adaptive research and to provide farmers' feedback to ISABU. Extension services will be strengthened and efforts will be made to develop technical packages adapted to specific ecological zones. (c) Production of selected seed is based on a large number of small seed multiplication centers using ISABU's foundation seed. The system has resulted in quality discrepancies of multiplied seed and in yield increases of only between 10- 15 percent. In view of the selected seed's greater vulnerability to disease and weather, farmers prefer to use traditional seed. The Government plans to improve the program of seed production. (d) Fertilizer use is an important step toward improving yields, even before the introduction of selected seed. Research on least-cost production is needed to determine the cost-effectiveness of fertilizer use according to crop and ecological zone. The Government intends to: (i) update and extend fertilizer trial programs to mixed cropping typical of actual farm conditions; (ii) conduct trials on combinations of chemical and organic fertilizer; and (iii) clarify import and supply policies. Fertilizer marketing will be gradually. entrusted to cooperatives or private individuals, and financing could be provided by COOPECs (savings and loan cooperatives). The Government will also examine the economic feasibility of developing the Matongo phosphate deposits and of using lime. (e) The use of pesticides, phytosanitary controls and improved on-farm storage facilities is well within the grasp of the average farmer and could lead to substantial increases in production. This technology has not been widely disseminated due to a lack of funding; however, as part of the Fifth Development Plan, a national phytosanitary service will be created in ISABU. The above actions will be implemented in the context of the IDA- financed Agricultural Services Project. 62. Forestry Production and Environmental Protection. The Government intends to plant 300,000 ha of woodlots to meet construction timber and fuelwood requirements. The following principles will be applied: (a) promotion of tree planting by private individuals. Tree planting will become an integral part of the farming system and a special program will identify suitable species. The Department of Water and Forestry Resources will produce the seedlings for sale to the private sector. Pricing for wood products will be reviewed and rationalized to provide adequate incentives for wood production. (b) Planting of protective woodland on mountain ridges and other areas exposed to severe risk of erosion will be continued. (c) Training of technical staff at all levels will be encouraged. - 69 - ANNEX V Page 17 63. Until recently, efforts to protect soils have been restricted to erosion control and the planting of protective woodlots, and have met with only limited success. The Government's new policy will be based on an ecosystem approach and on a better understanding of the watersheds under development. Implementation of these programs will, wherever possible, be entrusted to the local population, with the public authorities providing only technical assistance. 64. Restructuring of the RDCs. RDCs currently have high administrative costs that are unsustainable once foreign assistance has been phased out. In addition, high overhead reduces the amount available to assist project target groups. The Government will restructure the RDCs as follows: a) streamlining administrative structures; b) improving cost recovery; c) transferring certain commercial functions to the private sector; and d) making substantial improvements in organizational efficiency enabling more resources to be transferred to producers. This restructuring will include measures to strengthen the Central Government services which must assume some of the tasks currently performed by the RDCs. 65. Rationalizine Asroindustrial Projects. Burundi has undertaken four major projects (rice, edible oils, wheat and sugar), each of which faces serious financial problems. The Government has implemented a system of high-yield rice which has been well assimilated by farmers. Yields are high but an excessively high producer price has led to a unit cost considerably above the import price. The Government will deregulate the rice paddy market for the Imbo RDC no later than the 1989190 crop year in order to reduce imbalances in the sector and to promote exports. 66. The Government is currently looking into the feasibility of extending processing capacity for oil palm. The choice of technology will be based upon its economic return. In the event that economic and financial profitability cannot be ensured the Government will not undertake the investment. 67. SOSUMO (Sociiti Sucriire du Mosso) currently produces sugar cane and a processing plant is in place with refining operations scheduled to begin in June. However, a brief analysis of the domestic cost of sugar production based on actual variable costs indicates that SOSUMO's sugar would most probably not be competitive with imported sugar in a deregulated market. The Government will maintain its commitment (made under SAL I) not to subsidise SOSUMO's operations. The company's working capital requirements including losses incurred during the start-up phase will be included in the financing plan under negotiation with the project's financiers. This financing plan will be submitted to the World Bank. An in-depth study will be undertaken to determine the opportunity cost of pursuing this project, including the identification of additional investments with an economic rate of return above 10 percent. The study will also assess the scope of reducing SOSUMO's operating costs. The consultant will be recruited prior to the effectiveness of the credit. The conclusions of the study will be converted into an action program to be prepared before December 1988. The Bank's approval of this action plan will be a condition of second tranche release. In any case, the - 70 - ANNEX V Page 18 Government will undertake to liquidate the enterprise if it is unable to demonstrate that the project is economically viable in the longer term following the first two years of operation. G. Social Sector Policy 68. Despite economic and financial constraints the Government achieved virtually all of its Five-Year Plan (1983-87) objectives for the health and education sectors. Health care facilities are now available to roughly 70 percent of the population, an expanded program to immunize every child by 1990 appears feasible, one-third of the population has access to clean water (compared with 10 percent in 1980) and practically all seven-year olds were enrolled in school this year. 69. Nevertheless studies show that certain groups remain vulnerable. Infant mortality is still one of the highest in Africa with roughly one- third of children between one and three years of age suffering from moderate to severe malnutrition. Lack of sufficient spacing of pregnancies exposes mothers to caloric deficiencies while a new health problem, AIDS, has potentially severe consequences for both mothers and children. Only 32 percent of the rural population has access to safe drinking water, and sanitation and hygiene still require attention. 70. The Government's social action program seeks to complement and expand upon the existing national programs while addressing specific povertylproblems. The main components are: a) the provision of nutritional complements for malnourished children; b) strengthening primary health care and supply of low cost drugs; c) special programs targeted to women; d) specific studies and programs aimed at improving job creation; e) the development of a food security strategy; and f) institutional measures aimed at Improving the monitoring of the social sectors and at strengthening coordination of social programs within the Government. 71. The following criteria will be applied in developing these programst (a) efforts will be targeted to reach beneficiaries without overlapping With existing programs; (b) expenditures will be explicitly budgeted to enable costs to be closely monitored; (c) in preparing these targeted programs, least-cost solutions will be favored; and (d) these programs will be designed to run for a limited duration and will be subject to a thorough evaluation to ascertain whether they should be continued. 72. Improving Nutrition of Vulnerable Groups. Monitoring of young children to detect those who are undernourished or vulnerable will be generalized in every health center throughout the country. Nutritional instruction will be aimed at mothers, taking into account the local - 71 - ANNEX V Page 19 availability.of foodstuffs and dietary habits. Food supplements will be available at every health center and adequate nutrition for pregnant women and nursing mothers will be included in maternal monitoring. 73. Priority will be given to the following activitiest (a) The Ministry of Health is currently studying the nutritional status of young children. A program to supply nutritional supplements to severely affected children will be prepared. (b) In conjunction with UNICEF, a program for manufacturing infant cereal is under way in three processing plants owned by cooperatives. This program will be subject to a mid-term review and, if results are favorable, will be extended to the rest of the country. (c) A school health program to supply nutritional supplements to children of primary school age and to disseminate relevant nutritional information will be prepared. 74. Expanding Health Services and Access to Essential Drugs. The Government will step up its efforts to improve maternal and child health and family planning setvices, including an expanded program on immunization. The availability of consulting services for infants and maternal monitoring will be enhanced. The Government will give priority to expanding the network of primary health care centers and providing them with qualified staff and sufficient equipment and supplies to enable them to operate effectively. A national AIDS program which is being prepared will be integrated into health services. The system for financing health care services will be revised to improve accessibility of the poorest segments of society. Health insurance cards will be distributed to the entire population thus spreading the costs of services. Other health insurance schemes currently in existence will be harmonized. 75. The Government's efforts to improve access to essential drugs have focused on providing the Ministry of Health with additional funds to buy drugs, increasing the number of private pharmacies partially financed by the Government through the Mutuelle system, and investments in ONAPHA. Efforts of recent years have, however, been partially offset by price increases. To reduce the cost of basic drugs and make them more readily accessible, the Government will liberalize the importation of generic drugs, while reducing customs tariffs of basic drugs. A treatment guide for major diseases will be introduced to reduce unnecessary prescription of drugs, and the Government will promote the use of generic drugs whenever feasible. 76. The Government plans to distribute essential drugs through the basic health care network. Inventory control in health centers will be strengthened to prevent depletion of supplies or the accumulation of excessive or outdated stocks. A cost-benefit analysis of the current system for distributing medicines should examine the option of a more decentralized system. 77. Special programs for women. A pilot "Women-Credit-Production" program is being implemented in three provinces. The program will be evaluated with a view to extending its coverage nation-wide. 78. Employment creation. The Government will undertake preparatory work to identify and prepare specific programs in the following areas: (a) - 72 - ANNEX V Page 10 labor-intensive components of public investments, including the possible reprogramming of identified operations; (b) the development or extension of small productive projects to be supported by public and private donors (e.g., small handicrafts, fish farming and livestock operations); (c) a viable rural housing credit scheme as a follow-up to a pilot project which has 1ready reached 18,000 rural families; and (d) technology improvements in artisanal construction and the production of construction materials. 79. Food security strategy. The Government will formulate a food security strategy taking into account the studies already available and ongoing in the agriculture and nutritional sectors, which address in particular the issues of food security and policy and will explore available options to reduce the risk of food shortages in cases of drought (early warning system, contingency plans, storage policy). 80. Institutional Strengthening. The Ministry of Plan will ensure the coordination, preparation and Implementation of the above mentioned actions, which will be specified in the context of the UNDP/3ank Social Dimension Project. This project will identify also the additional needs for coordinating the preparation and Implementation of the Government's social action programs initiated by other government agencies or by various public or private donors. April 26, 1988 S.E. Gerard NIBIGIRA S.E. Pierre BINOBA Minister of Planning Minister of Finance * 78 - ANNEX V Page 21 BURUNDI - STRUCTURAL REFORM PROGRAM (SAL II) POLICY AREA ACTIONS TO BE TAKEN BY GOVERNMENT TIMETABLE 1. MACROECONOMIC MANAGEMENT a. Agree on macroeconomic framework for 1989-91, including December 1988 overal I budgetary deficit, PEP and pi lot consolidated (2nd trenche, release) budget for 1989. b. Agree on macroeconomic framework for 1990-92, Including October 1969 overall budgetary deficIt, PEP and pilot consolidated (8rd tranche release) budget for 1999. c. Adjust exchange rate as needed to maintain external During program equi lI brium d. Monetary and credit reform (se pare.? below) During program e. Adoption of financial program supported by SAF and During program strengthen PEP preparation (par. 8 below). 2. TRADE AND INDUSTRIAL POLICY Import Liberalization: a. Increase the *leling below which banks are allowed to grant April 198 automatic 1cenee* from FBa 1 mlIlion to FOu 19 mn b.. Eliminate remaining import restrictions: - on Imports of luxury goods April 1988 - on Imports competing with production of ONAPHA, COTEBU and Before end-1990 VERRUNDI. Agreement on calendar of liberalization ONAPHA End-1988 COTEBU March 1989 VERRUNDI December 1988 Price liberalization: (2nd tranche release) c. Review and adjust water and electricity tariffs During program Tariff Reform: d. Implement 8rd phase of tariff reform, with the objective to December 198 reduce average tariff, while maintaining a neutral effect (2nd trenche release) on budgetary and balance of payment levels. Expert Promotion: e. Promulgate decree on export promotion. April 1988 f. Set up Office of Standards and Measures December 1088 g. Complete study of Burundi's long-term export potential in December 1088 manufacturing and services. Investet Incentivees h. Guarantee Fund Internal procedures: Preparation and approval of Internal procedures April 1988 Implementation June 1988(Efftoctivene) - 74 * ANNEX V Page 22 BURUNDI - STRUCTURAL REFORM PROGRAM (SAL 11) POLICY AREA ACTIONS TO BE TAKEN BY GOVERNMENT TIMETABLE 1. Eliminate compulsory depoit required from foreign June 1988 importers when they have invested at least FBu 20 million In productive sectors. J. Remunerate compulsory deposits. Announce measure June 1980 Actual remuneration January 1989 k. Announce objectives end measures of SAP to Inform economic May 1988 agents and the general public and Instill confidence in the private sector. 8. PUBLIC EXPENDITURES MANAGEMENT a. Agreement on the PIP: Agreement on 1988 PIP (size and structure) April 1988 Agreement on 1988-90 PIP based on detalled Information June 1988 (Effectiveness) b. Agree on action plan to strengthen MINPLAN June 1988 c. Agree on action plan to strengthen capacity in Finance and December 1988 sectoral ministries In support of budget reform. d. Launch public expenditures review May 1988 e. Agree on PEP for 1989-91 and pilot unified budget for 1989 December 1988 (see 1.a above) f. Complete TA survey December 1988 g. Strengthen Civil Service Efficiency: Define action program, Including recruitment procedures September 1988 Launch action program Dec. 1988 (2nd tranche) b. Reform of budget/programming system and adopt effective Before end-1996 public accounting system. 4. PUBLIC ENTERPRISES a. Adoption of decree on PE legal framework. September 1988 b. Liquidations: SUPOSU, SOMEBU (documents) May 1988 (Board) SOGESA (decree) June 1986 (Effectiveness AGRIBAL Dec. 1988 c. Signature of performance contracts: OTRACO June 1988 CADEBU, OTRABU September 1988 ONAPHA December 1988 VERRUNDI Dec. 1988 (2nd tranche) EPIMABU, ONC, ONIMAC December 1988 d. Rehabilitation Programs for REGIDESO July 1988 Minoterle do MURANVYA, Milk plant, and COTEBU November 1988 e. Signature of performance contracts: REGIDESO Jan. 1989 (tnd tranche) Minoterie do MURANVYA, Milk plant, and COTEBU May 1989 - 75 - ANNEX V Page 28 BURNDI - STRUCTURAL REFORM PROGRAM (SAL II) POLICY AREA ACTIONS TO BE TAKEN BY GOVERNMENT TIMETABLE f. ONL/SIP ONATEL, Hotels: Rehabi I itation programs March 1989 Signature of performance contractes September 19809 g. Launching sector studies as basis for policy reformes Price/tariffs and incentive May 1988 system Privatization May 1988 Reciprocal debts/ financial flows State/PE May 1988 b. Implementation of Management Information System (MIS) December 1988 5. AGRICULTURE Coffee and Agricultural Exports: a. Revision of pricing system (echel le mobi le): - introduce sliding scale for fully-washed coffee. April 1088 - annual revision taking into account preliminary studies March 108 (2nd trenche) b. Put In place technical assietance program to strengthen BCC May 10 marketing capacity c. Study of comparative advantage of Burundi export crops. September 1089 Elaborate long-term strategy for coffee production based on coffee opportunity cost and the analysis of the prospects for Burundi coffee on International markets. d. Implement reeerch program to eliminate coffee potato tate. During program e. Study efficient structure of management for washing November 1088 Stations. Inputs Policy: f. Elaborate Iong-term policy on agricultural inputs; evaluate During program In the economic utiliation of chemical fertilizers; Implement context of the Agric. national program of improved seeds; improve participation Service Project. of private sector. Agricultural Sector PIP: g. Sugar: Study on long-term feasibility of SOSUMO and December 10 agreement on action plan. (2nd tranche) Implementation of the above action plan (aptrnche 1. Rice: Liberalization of rice marketing for the 1989/90 December 108 crop year. (2nd tranch*) J. Palm Oil: Study of the projet to extend existing processing December 1088 capacity. ApVI18 - 76 - ANNEX V Page 24 BURUNDI - STRUCTURAL REFORM PROGRAM (SAL II) POLICY AREA ACTIONS TO BE TAKEN BY GOVERNMENT TIMETABLE 0. EMPLOYMENT POLICIES a. Liberalize system at recruitment: private aector enterprises will be able to recruit freely Burundian labor. Revise role and functions of Placement Committee. Revise law on foreign labor. - Submission of revised legielatilon acceptable to IDA June 18 to the National Labor Council for approval. (Effectiveness) - Agreement on 2nd phase prepared after assessment of December 199 fi rst phase reform. Ord traneho release) b. Strengthening of services of Ministry of Labor: - Launching UNDP/ILO project to assist DMO June 190 - Program to strengthen the statistics on the Informal December'1988 sector accepted by the Labor and Trade and Industry Ministries. - Strengthening the services in the Labor Ministry December 18 responsible for employment promotion. (2nd troache release) e. Authorize Imports of **Cond-hand technology when Aprl 190 accompanied by performance guayantee certificates. d. Adopt revised structure of municipal taxes on email and APi 1090 medium enterprises. *. Study of health insurance system for private employees: - TOR accepted by Govt, Labor Union and Employers and Health Ministry. June 10W - Proposition of new system Ddeeber 189 7. MONETARY AND CREDIT POLICIES First phase: a. Eliminate a priori credit authorization April 1989 b. First auction of Treasury Bills (subscription open to all may 1988 financial Institutions); calendar of Is(ues for the 2nd Quarter 1988. e. Deregulate Interest rates on non-roadiscoutable loans and April 1988 eliminate minimum Interest rates on sight deposit. d. Implement Compulsory Reserves System. Apri 198 Second phase: f. Issue of Tresu-y Bonds with progressive rate September 1988 n. Reduce number of rediscount rates from 5 to 2. September 1988 h. Reduce number of maximum Interest rates on redicountable September 10 creditn from 8 to 8. I. Revise use of medium term liquidity ratios. September 1rc8 - 77 - ANNEX V Page 25 BURUNDI - STRUCTURAL REPORM PROGRAM (SAL II) POLICY AREA ACTIONS TO BE TAKE BY GOVERNMENT TIMETABLE -------------- ------- ------------- Third phase: J. Reduce number of rediscount rates to 2 (normal end December 1988 preferential rates). (2nd tranche release) Fourth phase: k. Liberalization of the 3 maximum lending interest rates and July 1989 of the minimum deposit rate on savings deposits. Other actions: 1. Agreement with IDA on actio.i program for CADEBU May 1088 (Board) m. Completion of first phase of liberalization of compulsory October 1989 savings. (8rd tranche release) n. Adopt procedures for the National Garantee Fund. June 1988 (Effectiveness) o. Revise the real estate code provisiong granting the June 1980 Treasury an absolute priority on collateral property to the detriment of all other lien holders. 8. SOCIAL AND POVERTY ALLEVIATION PROGRAMS a. Request to join the Social Dimension of Adjustment project April 1988 financed by UNDP and executed by the Bank. b. Define and agree on program of well targetted poverty December 88 alleviation actions. (2nd trenche release) c. Preparation of a menitoring system During program 9. FOLLOW-UP ON SAL a. Reinforce Comite de Sutvi with permanent secretariat and April 1988 adoption of system of indicators. b. Coordinate closely with Resident Mission During program. - 78 - ANNEX VI DISBURSEMENT, PROCUREMENT, ADMINISTRATION AND AUDITING 1. The credit would reimburse 100 percent of the CIF cost of eligible imports, subject to documentary evidence that they have been paid for on or after credit signing. However, retroactive financing will be permitted for those eligible imports made before the date of agreement but not before April 1. 1988, up to an amount equal to US$18 million. Public and private sector imports would be eligible, except for military equipment and luxury consumer goods. Imports financed by other sources would not be eligible for IDA financing. The Central Bank would be responsible for assembling requested supporting documentation collected from the commercial banks, to be provided as follows: for small contracts between US$10,000 and US$500,000 equivalent, statements of expenditures will be used. All documentation including invoices will be retained by the Central Bank for periodic examination by Bank staff. The statement of expenditures would be signed by the Central Bank and would include the country of origin, a description of goods, the date of payment, the currency in which the payment was effected, the exchante rate used and the US dollar equivalent charged to the Special Account, and the name and address of the final beneficiary. For all contracts above US$500,000, full documentation would accompany withdrawal applications. In order to facilitate disbursements, two special accounts, one for IDA funds and one for the SJF Japanese grant would be established in the Central Bank in its name into which the IDA would make two initial deposits. The initial deposits into the special accounts will be US$15 million for IDA funds and US$5 million for Japanese grant funds. The special accounts would be replenished at regular intervals against withdrawal applications, for a minimum of US$500,000 each. 2. To facilitate the monitoring of the use of funds under the Credit, expenditures would be subject to verification by a reputable inspection firm of quantities and of quality, and except in cases of ICB, prices. The audit report would include a qualified opinion on these verifications. Special Accounts and the statement of expenditures would also be audited by an independent auditor. MAP SECTION 2r- 3b- BURUNDI ADMINISTRATIVE DIVISIONS RWANDA ARRONDISSEMENT CAPITALS PROVINCE CAPITALS * NATIONAL CAPITAL PROVINCE SOUNDARIES BLgaba akG - CDMMUNE BOUNDARIES INTERNATIONAL BOUNDARIES V b. KIRUNDO 1,41.b LTANZANIA •= =Myingo Nyamre 2o MrwI B.kin.aa Gosorwe YING •CIBITOKE KAYA' .ZA GOZI o0r b'ert ay N4gooi Buhnyu.a Bgan -3-Gtoro R.horor3 Mubanzo Mosgat o** Buhiga BU NZA KARUZI Mokiro Mpando Ro ab . Cnku ZAIRE bN ZAb R»g.i mbur, Bg.d.-ya CANKUzo A. brIrd .*yBgi BUJU U daO Kanyesha GITEGA ,T.ob M.I~k0< -T4Kayokwn4 'b'z umb. Mulk NW i d i-iG o Gish.bi Makebko B -. m. ~ Kinyiy MugambagO Bur-bi• .02 40 yger mp.g-Kayo_ Rutena 0 10 20 RotovGhUTrN MILES R~to RUT NÅ .4e T r av " "ge %URURIBkeb vynd Git.g. V0gira ., Kayagoro UGANDA ZAIRE KENYA Nyanzo-Lac KibagoAN TANZANIA 9°30 _ _ _ _ _ _ _