Economic growth should be 4.3% in 2012, less than forecast, due to lower overall demand and sluggish investment in key sectors.
With the consolidation of peace, structural and social reforms have made headway, but investors, especially in the private sector, are still wary.
Abundant natural resources could substantially boost growth and job-creation if developed and well managed.
Burundi is steadily emerging from a deep socio-political crisis that has destroyed its means of production. The economy has grown an average 4% a year since 2005 but is still fragile because of its dependence on the primary sector, which is a major part of gross domestic product (GDP) and a big source of jobs.
Bad weather dealt a blow to agriculture in 2012 and food-crop production slumped, though coffee and tea output was good. The revival of economic activity in recent years can be attributed to an expansion in services and manufacturing, driven by investment in industry and construction.
Inflation increased to an average 14.5% in 2012, due to relatively high world food prices and a 30% drop in local farm output in the first quarter. At the end of March, inflation topped 25% (before falling to 11.8% by the end of December), aggravated by government increases in water and electricity prices.
The government continued to pursue structural and financial reforms in order to strengthen the productive base, improve the business climate and revive economic activity. Budget operations were restrained in line with spending priorities set out in the poverty-reduction and growth strategy framework (PRGSF/CSLP 2), adopted in February 2012. The government also focused on increasing transparency in public finances. Burundi is still vulnerable when it comes to debt management and, despite some progress, excessive indebtedness is a risk because of the structural imbalance in trade and the susceptibility of the economy to external shocks. Uncertainty also persists over future budgetary aid, heightened by an unpredictable world economy, notably the euro area budget crisis. So the focus should be on raising more domestic revenue through continuing tax reforms.
Burundi has abundant natural resources, especially minerals and hydro-electric potential, the development of which could substantially boost economic growth and job-creation. For now, the mining sector is characterised by the expansion of subsistence mining by individuals that has limited economic benefits. This situation is a result of the long civil war and a lack of basic infrastructure, especially energy.
Recent Developments & Prospects
World economic conditions harmed the economy in 2012 and growth was stagnant at 4.3% (and lower than the 4.8% forecast at the beginning of the year), showing the vulnerability of an economy suffering (despite progress made) from lack of diversity, little investment, high production costs due to under-qualified labour and a poor business climate.
The primary sector (mainly agriculture) was 41.2% of GDP in 2012, about the same as 2011. Traditional farming methods and soil erosion has reduced production capacity over the years, with serious social and economic consequences for a vulnerable population, more than 80% of whom depend on the sector for a living. Coffee and tea are the main export crops (more than 70% of foreign exchange earned and the main income for more than 800 000 families). Coffee output rose 34% in 2012 (to 23 309 tonnes from 17 446 in 2011), bringing in some 63.1 million dollars (USD) in export sales, according to the central bank (Banque de la république du Burundi – BRB). Tea production was also higher (8 648 tonnes, up from 7 953 tonnes in 2011), earning some USD 22.9 million.
The secondary sector accounted for 20.5% of GDP, mainly due to investment in industry, which increased to 14.6% of GDP (from 13.5% in 2010). The tertiary sector contributed 38.3% of GDP in 2012.
The still-weak private sector mainly comprises mostly informal small- and medium-sized firms concentrated largely in the capital, Bujumbura. Private investment’s share of GDP is quite small but has significantly increased, from 2.2% in 2000, to 10.1% in 2010 and about 14% in 2012, led by tourism, mainly hotels. But high production costs, a poor business climate, unsuitable infrastructure (especially roads and energy) and few public services are unlikely to draw much foreign direct investment (FDI), which was estimated at less than 4% of GDP in 2012. Corruption, a weak legal system and limited access to credit also hamper the sector’s growth and the economy’s competitiveness (Burundi ranked last in the World Economic Forum’s 2012-13 Global Competitiveness Index).
Gross fixed capital formation shrank 2% in 2012 to below the 2011 level of 20% of GDP, but did not deter continuing private sector investment (about 4% of the total by volume). However, despite booming coffee exports, the external sector again contributed negatively (minus 2 percentage points) to GDP growth in 2012.
The government intends in the medium term to continue its reforms and a macroeconomic framework to revive growth, despite increasingly difficult world economic conditions. Plans include incentives to return coffee production to more than the 35 000 tonnes a year of the 1980s, expand tea production areas from 9 000 hectares to more than 14 000 by 2015 and also boost the growth potential of mining.
The government aims to achieve 5% annual GDP growth between 2013 and 2016 in line with the PRGSF 2. This depends on reducing inflation to 10% in 2013 and 2014 by stabilising prices and maintaining the parity of the Burundian franc (BIF) and the US dollar, and on better domestic revenue collection and greater control of recurrent spending (especially civil service pay and defence). Also on support for exports by raising agricultural productivity (encouraging small-scale irrigation and improving roads to isolated areas) and expanding agro-industry and mining, as well as gradually tackling the energy shortage by investing in hydroelectricity. The tertiary sector recovery, especially in banking, telecommunications and tourism, should also boost GDP.
Medium-term prospects are seriously threatened however by the economy’s great vulnerability to the weather and to sub-regional instability from fighting in eastern Democratic Congo (DRC). This external uncertainty could also reduce foreign aid and obstruct the country’s development.
The local and world economic situation weighed heavily on the execution of the 2012 national budget, with the government combating persistent high food and oil prices with tax relief to ease social tension. However, the abolition of taxes on food products in May 2012 cost the government an estimated BIF 10 billion in revenue. Income from oil fell some BIF 23 billion with reduction of excise tax and a freeze on pump prices. The June 2012 revised budget contained new taxes1 that raised about BIF 26.9 billion, boosting overall tax revenue to BIF 501.2 billion (14.4% of GDP, 1.2% more than 2011).
This cautious approach kept budgeted spending below 35% of GDP in 2012. Recurrent spending was 0.05 percentage points of GDP less than in 2011, but salaries were 9% of GDP, mainly due to continued hiring in health and education. Investment spending from domestic resources also fell, to 11.7% of GDP in 2012 from 11.8% in 2011. Anti-poverty spending (health, education, transport, agriculture) declined to 11.2% of GDP (12.5% in 2011 and 13.0% in 2010). As a result, the budget deficit (excluding grants) was held to 8.0% of GDP in 2012, down from 8.4% in 2011.
Adoption in December 2012 of a 2012-14 public finances management strategy showed the government’s reform intentions. It included completing the judicial and institutional framework, greater tax collection efforts, better drafting and execution of the budget, introducing an efficient data system and boosting the finance ministry’s execution capacity.
The government will focus on continuing tax reforms and strengthening the national tax authority (Office burundais des recettes – OBR) to increase budget revenue, along with a December 2012 law introducing income tax. This should make up for the shortfall caused by another December 2012 law cutting profits tax from 35 to 30% and abolishing the 4% instalment payable by companies. Tight spending rules will continue, with abolition of the government’s vehicle fleet in 2013 (dubbed “No more free rides”) and control of the wage bill. But continuing corruption and tax evasion and the government’s laxness over tax breaks could undermine good budget management.
Monetary officials use price stability to maintain the buying power of the poor. Higher prices of staples and oil boosted inflation in 2012 to an average 14.5% (from 9.6% in 2011), which complicates the job of the central bank.
Despite efforts to reform the system, along with monitoring the banks, the monetary situation did not improve in 2012. M2 aggregates (fiduciary circulation and local currency deposits) and M3 (foreign exchange deposits) did not increase as much as the government expected (7.3% instead of 18.4% for M2 and 9.7% instead of 29.2% for M3). The interbank rate was an average 12% in 2012.
However, the weekly report on liquidity operations by the treasury’s management committee (finance ministry and central bank) has improved the co-ordination of monetary and budget policies.
Burundi has chosen a floating exchange rate and a July 2010 measure eased supervision of transactions while confirming rules for them.
Budget support and export revenue fell significantly in 2012 and led to a more than 14% currency devaluation, to BIF 1 600 to the US dollar in December 2012 (from 1 400 in January).
Bank loans go mainly to commerce and coffee marketing. Obtaining loans is a serious problem for private firms and the World Bank report Doing Business ranked Burundi two places lower in 2012 (167th out of 185 countries) for ease of getting credit.
Economic Cooperation, Regional Integration & Trade
Burundi belongs to various regional organisations, including the International Conference on the Great Lakes Region (ICGLR), the Economic Community of the Great Lakes Countries (ECGLC), the Nile Basin Initiative (NBI), the Lake Tanganyika Authority (LTA), the Economic Community of Central African States (ECCAS), the Common Market for Eastern and Southern Africa (COMESA) and the East African Community (EAC). This shows the country’s interest in regional economic integration and in profiting from Burundi’s geographical position and the resulting spin-offs, as highlighted in the PRGSF 2, which presents it as an advantage for reviving the economy. Burundi seems to be most active in the EAC, in response to various programmes to facilitate trade through single border crossings, developing regional roads and free movement of people and goods. Membership of the EAC is important because the Community may eventually become a monetary union.
Burundi does not have much foreign trade and in 2012 it was only 0.2% of tertiary sector activity, with a 36% degree of openness (GDP to total trade) and a high 12.4 trade restrictiveness index score, above the sub-Saharan Africa average of 11.3. Despite opening single border crossings with Rwanda and Tanzania, Burundi’s ranking for ease of trading across borders is an unchanged 177th place in the World Bank report Doing Business 2013.
The country’s narrow export base, more than 70% based on coffee, partly explains this. Markets are narrow too, with most goods sold to the sub-region (the EAC countries and Democratic Congo) and to Europe (especially Germany, which buys 20% of all exports). Imports are mainly manufactured goods, reflecting the weakness of local industry and the small local market unsuited to economies of scale, and come chiefly from the EAC, the European Union and Asia.
Exports were estimated at 4.6% of GDP in 2012 (down from the record 5.3% in 2011), while imports were reckoned to be 23% (slightly down from 23.4%). The low level of current transfers (7.3% of GDP compared with 11.2% in 2011), along with the trade and services deficits, worsened the current account shortfall, which grew to 16.2% in 2012 (from 12.0% in 2011).
The trade deficit is not expected to change much in 2013 and 2014 despite a forecast higher volume of coffee and tea exports, helped by the reforms under way. Minerals would help to diversify exports.
The drop in development aid has cut into gross foreign reserves, which fell from USD 332 million (equivalent to 4.8 months of imports) in 2010 to USD 296 million in 2011 (4 months) and USD 269 million in 2012 (3.3 months).
Burundi reached the Heavily Indebted Poor Countries (HIPC) Initiative completion point in 2009 and won further relief. Public debt (guaranteed by the government) has been reduced more than 90% (in net present value terms, NPV) and in 2012 was put at USD 620.6 million (35.6% of GDP), of which USD 355.4 million was external (24% of GDP). The ratio of debt (NPV) to exports of goods and services was estimated at 187% of GDP in 2012, which is hard for the country to sustain.
Burundi has however made striking progress in managing its debt. The computerised debt management and financial analysis system (DMFAS), a new version of which was installed in 2012, produces monthly progress reports. Such regularity and improvement in data helps planning and execution of debt servicing and the servicing/exports ratio was estimated at 3.5% of GDP in 2012. Management of internal debt has also improved since an audit of domestic arrears was done in 2006 and a reimbursement calendar drawn up with the International Monetary Fund (IMF).
But risk of excessive debt is still high because of the structural trade deficit and vulnerability to external shocks. Latest assessments of the debt (DeMPA) by the World Bank in August 2012 confirmed this vulnerability and pointed to a cautious debt policy largely based on very soft loans with at least a 50% grant component. The government and its technical and financial partners (TFP) have also drafted an action plan to implement debt management reforms, including restructuring of the management team.
Economic & Political Governance
The small private sector is overwhelmingly informal. Recent trade ministry figures show a formal sector of about 3 000 firms, mostly small- and medium-sized, employing some 40 000 people (less than 2% of the working population), more than 65% in services, only 9.1% in industrial jobs, and with more than 80% of jobs in Bujumbura. This explains why private investment, though up from 2.2% of GDP in 2000 to 15% in 2012, is still quite small.
The PRGSF 2 stresses that private sector growth is a priority for the government, which has pledged to continue reforms begun in recent years, so as to encourage private business and increase competitiveness. The World Bank report Doing Business 2013 has Burundi as the only African country among the top 10 countries that have improved their business climate in 2011/12 and it moved up from 172nd place overall in 2011 to 159th in 2012. Introduction of a one-stop shop in March 2012 within the API investment promotion agency has greatly reduced or even eliminated many of the duplications between the various bodies involved in setting up businesses. Burundi thus rose from 99th place in 2011 to 28th in 2012 for ease of starting a business, reducing the number of procedures required from nine to four and the average number of days involved from 14 to eight.
Burundi has made progress in bringing its laws into line with regional legislation by ratifying the founding treaty of the EAC, but still lags far behind other member-states in competitiveness, ranking last of 144 countries in the World Economic Forum’s Global Competitiveness 2012-13 Index with a competitiveness score of 2.8 (2.9 in 2010). The government intends to tackle the many obstacles holding back private sector2 growth, including weak infrastructure for production (energy and transport), lack of access to long-term credit, the heavy tax burden on companies, inadequate business support services and an ill-trained labour force. Reforms will continue to strengthen the legal and regulatory framework to encourage FDI, whose current low level is another handicap for private sector development.
The financial sector, overwhelmingly dominated by banks, is still recovering from several years of political and macroeconomic instability, with high levels of non-performing loans and insufficient capitalisation. Still fairly new and undiversified, 80% of it is in the hands of banks, including the central bank (BRB), 10 commercial banks, a housing bank, 23 microfinance institutions and six insurance companies. The predominance of short-term loans (more than 63% of the total) squeezes funding for development investment, with about 60% of private-sector loans going to commerce.
Only about 2% of the population in 2012 had a bank account and less than 0.5% had access to bank loans. Only microfinance bodies were present in rural areas. Most small- and medium-sized firms have trouble getting loans, mainly for lack of tangible security required by banks and unreliable figures they present. An April 2010 survey by the Milken Institute in 122 countries at all stages of development showed Burundi in last place for access to credit, with a score of 1.27 in 2009 (Canada came out top, with 8.25).
The legal and regulatory framework needs to be strengthened. A new law to improve payment systems is being drafted and should ensure better integration in financial circuits. Prudential ratios are satisfactory but high risk of concentration could destabilise the sector. Two-thirds of bank loans went to commerce between 2009 and 2012. The weighted average interest rate applied by banks in 2012 was around 20% (including VAT). Transactions are mainly cash and in person.
Commercial banks have continued to be more profitable in recent years due to more demand for services and loans. The arrival of two new banks in 2012 should boost competition and eventually lower interest rates.
Public Sector Management, Institutions & Reform
The government focused in 2012 on central administration operations and performance contracts were signed by all ministers and quarterly progress reports are submitted to the president. These measures should be continued and strengthened, with a formal distinction made between technical and political functions, which is not done at present, a failing that is criticised by the privately-owned media and non-governmental organisations (NGO). Overlapping and resulting political interference undermines the state administration. The problems are compounded by civil servants being underpaid (the wage bill was only about 12% of GDP in 2012 for 120 000 employees), which does not promote ethical or professional behaviour; it also discourages competent officials.
Economic reforms backed by Burundi’s partners are making steady, though sometimes uneven, progress, including making the OBR operational, improving the business climate, revising customs regulations, a new law on government contracts, introducing a single account at the treasury and strengthening audits and monitoring.
Implementing a medium-term expenditure framework (MTEF) is helping to boost strategic sectoral planning, especially in health, education and water services, which greatly improved in 2012 and were more widely used than in the previous year. But low non-wage expenditure, especially in ministries not getting any foreign aid, limits the efficiency and quality of services.
Corruption remains a constant concern for the government despite the range of reform and progress being made. Burundi fell seven places to 165th out of 176 countries in Transparency International’s 2012 Corruption Perceptions Index. Several reports point to weaknesses and duplications in bodies monitoring public finance management (such as the general state inspectorate, the court of accounts and the anti-corruption brigade). The new action plan to tackle this, adopted in December 2012, includes measures to improve transparency and presentation of accounts.
Natural Resource Management & Environment
Burundi has ratified major international and regional environmental conventions, including the three Rio conventions and the Kyoto Protocol. But damage to the country’s environment is speeding up, mainly due to climate change. The PRGSF 2 (and PRGSF 1) takes into account environmental and climatic concerns and budgeted major sums (even if declining) to tackle these (3.9% in 2010, 2.6% in 2011 and 2.4% in 2012).
Yale University’s 2010 Environmental Performance Index (EPI) report ranks Burundi 140th out of 163 countries, with high vulnerability and very low capacity for investment in environmental infrastructure, effective pollution control and environmental management. Ecological challenges are still poorly met and the effects of climate change are not yet seen as serious, it said.
In line with the national strategy and action plan for biological diversity, a new law in 2011 provided for protected areas and a decree listed them. The law set up an environmental police force along with local monitoring committees to protect forests, parks and reforested public and private areas. Other legal and political frameworks (such as land and forest regulations) were established but their implementation is weak, mainly due to lack of money. A draft mining law in 2012 was approved by the government and sent to parliament for adoption.
Despite limited resources, the government has acted in the past two years to promote reforestation (planting more than 10 million forest and agro-forest plants and fruit trees each year), to publicise and distribute improved cooking stoves, to rehabilitate degraded protected areas and to collect, process and distribute hydro-meteorological data. Several development partners have backed these efforts, including the African Development Bank (AfDB), which has funded maintenance of watersheds.
Much progress has been made since 2005 towards restoring peace and security and the country has enjoyed one of its longest periods of political stability. Implementation of the latest peace agreement with rebel forces opened the way to successful demobilisation and reintegration of former soldiers and a drop in lawlessness, which boosted the democratic process (as well as monitoring and management bodies) and should gradually lead to good governance. Efforts are being made to achieve an inclusive political dialogue and to create an independent electoral commission (CENI) to organise the 2015 presidential and parliamentary elections.
Application of the 2011-15 national good governance and anti-corruption strategy (adopted in 2011) continues, with awareness-raising work and prosecution of corrupt officials. The large-scale return of war refugees, under a plan negotiated with Tanzania and the UN High Commission for Refugees, is aggravating social tension, especially over access to land. The fighting in eastern Democratic Republic of Congo has not yet had a major social and economic effect on Burundi but it could pose a threat to domestic security through the movement of refugees.
The political gains are still fragile and the government must urgently step up reforms to tackle a range of challenges, among them strengthening the rule of law, guaranteeing a lasting peace, eliminating impunity and establishing an independent and effective judiciary.
Thematic analysis: Structural transformation and natural resources
Burundi has substantial natural resources, especially minerals and hydroelectric potential, but its landlocked position is aggravated by a lack of infrastructure, a poor business climate and a relatively unskilled labour force. Population density, one of the highest in Africa (about 310 people per km2) brought about by high annual population growth (2.6% in 2010) is a burden on its natural resources.
These pressures, combined with traditional farming methods, constantly degrade the country’s eco-systems and this trend is now accelerating, with farmland shrinking each year (from an average 1.04 ha per family in 1973 to 0.50 ha in 2012). Farming on smaller plots is partly responsible for weak agricultural performance and slowing modernisation. It causes soil exhaustion and erosion and also rules out agricultural practices like leaving land fallow and crop rotation.
Another major result is exhaustion of forest and agro-forestry areas which have shrunk since 1992 from 211 000 ha (8% of the total land area) to an estimated 133 500 ha (5% of the land area). This sub-sector provides about 95% of the country’s energy and is being deforested by about 2% a year. Despite government measures, the trend is socially and economically disastrous, especially for the poor who live off the land.
The government is trying to encourage investment in agro-food. Over the last decade, traditional cash crops, especially coffee and tea, have been hard hit by lawlessness, quality of services and low farm-gate prices. This led to inadequate husbandry, and coffee bushes now need to be renewed to boost productivity. Reforms to open up coffee and tea farming are lagging and output remains low, with erratic world prices a big challenge to producers in search of adequate income.
Several surveys highlight the medium- and long-term potential of mining, which is presently only a small sector. Burundi has large reserves of lateritic nickel, vanadium, phosphates, carbonatites, peat and limestone, along with the world’s second largest reserves of coltan (colombite-tantalite) – some 200 million tonnes (6% of the total). National refining of nickel ore is planned to add value before export and to provide jobs.
The government has begun reforming mining law, introducing the certification of ore for export so as to encourage big producers to invest. Meanwhile, and for lack of proper resources, mining is done by individuals for subsistence leading to environmental degradation and also by children, at the risk of their health. Despite the tough working conditions and the shady nature of the operations, individual mining does supplement agricultural incomes for families. It also increases commercial activity in mining areas and adds to the volume of financial transactions.
Burundi is linked to two watersheds – the Nile (13 800 km²) and the Congo River basin (14 034 km²) – which produces a dense network inside the country of permanent rivers and lakes, which enables the cultivation of irrigated crops and livestock farming. Hydroelectric potential is estimated at 1 300 mW, of which only some 32 mW is produced. Even though the country’s average annual energy consumption is one of Africa’s lowest (only 23 kWh per person), local output is not enough to meet long-term local demand. The planned nickel refinery in the southeastern town of Musongati would need 200 mW alone, apart from the need for rehabilitation, creating other production units and the electrification of rural areas.
To meet the expected energy shortfall, the government has begun sectoral projects with support from the TFP (AfDB, the European Union, the World Bank, the German KfW and others) and with private investors. These include hydroelectric plants at Mpanda (10.4 mW) and on the Kaburantwa River (20 mW) and a new thermal plant in Bujumbura (5 mW). Work is under way on a hydroelectric plant on the River Kagunuzi (12 mW). Burundi will also get 49 mW from the Ruiz III hydroelectric plant (out of 145 mW), built under the ECGLC, and 27 mW from the plant at Rusomo Falls (out of 80 mW), which will also supply neighbouring Tanzania and Rwanda.
Progress in managing Burundi’s natural resources is still uneven and the extractive sector accounts for less than 1% of GDP. Transparency is also a key issue even though the country has pledged to respect and apply the rules and measures for the minerals trade as agreed in the December 2010 Lusaka Protocol on the illegal extraction of natural resources. Among the instruments planned under the regional initiative are: the monitoring and certification of ore; harmonisation of national mining laws; and the establishment of a database for regional trade. The TFP are also urging Burundi to join the Extractive Industries Transparency Initiative (EITI).
1. These included replacing the sales tax on beer with a specific excise tax on volume sold (BIF 30 000 per hectolitre), a new 10% tax on phone calls, raising VAT on alcoholic drinks (except beer) from 50 to 70%, a new system of assessing tax on used vehicles and higher excise tax on tobacco.
2. The World Economic Forum lists the main obstacles to business growth as credit access (19.8%), corruption (18.5%), political instability (9.8%), high taxes (9.3%), inflation (9.2%), inefficient government services (6.9%) and poor infrastructure (5.4%).