Documczkt of The World Bank FOR OmCIAL USE ONLY MICROFICHE COPY Report No. P- 5806-BU Type: (PR) DAMON, J / X34366 / J7125/ AF3CO RqeportNo. P-5806-BU REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED IDA CREDIT OF SDR 22 MILLION TO THE REPUBLIC OF BURUNDI IN SUPPORT OF A THIRD STRUCTURAL ADJUSTMENT PROGRAM MAY 12, 1992 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EOIVA Monay Unit: Burundi Franc (FBu) Exchange Rate: 1991 (Average) US$ 1.00 FBu 181.5 SDR 1.00 = FBu 273.1 Makrc 30 1992 US$ 1.00 = FBu 199.3 SDR 1.00 = FBu 273.1 Weierht and Measures Metic System Eiscal Year: January 1 - December 31 ABBREVIATIONS AND ACRONYM CADEBU Caisse d'Epargne du Burundi (Burundi svings bank) COTEBU Complexe Textle de Bujumbura (textile complex of Bujumbura) EDF European Development Fund ESAF Enhanced Structural Adjustment Facility 1W International Labor Organization MCSAP Monitoring Committee for the Stuctural Adjustment Program OGL Open General Licensing PE Public Enterprise PEP Public Expenditure Program PER Public Expenditure Review PFP Policy Framework Paper PIP Public Investment Program PPU Population and Planning Unit SAC Structural Adjustment Credit SAF Structu Adjustnent Facility SCEP Service Charge des Entreprises Publiques (Pulic Enterpises Office) SECAL Sectoral Adjustment Loan SPA Special Ptogram of Assistance for Sub-Saharan Africa SOSUMO Societ Sucriere du Moso (Moso Sugar Company) STABEX European Community's export stabilization fumd FOR OMCIAL USE ONLY BUIUNDI THRD STRUCTURAL. ADJUSTENaT CREDiT TABLE OF CONTENTS page Credt and Phrgram Sunubary ...................................... I Pat k CountryPolociesandBank Coup Asstance Stategy ......... ....... I A. Ba ........................................ 1 B. EconomicDevelopmentsThroughl991 ...................... 2 C. P rnanm e Under the Adjustnvet Program .................... 3 D. Central Development Issues .............................. 6 B. Medium-Term Macrom mic and Structal Pblicies ............. 6 F. Bank AssistnceStrat,gy andPtiorities ....................... 9 0. Crkerafor Evaluating Proges .......................... 14 H. Summary m en . ................................ 14 Part liNoposed m*d Th W lrdAdJustmetCredit .................... 15 A. Reducing the Role of the State and Render Govement More Efficient 16 - Programming and Monitoring of Public Expnditurns - Resrtuing the Composition of Public Expenditures - Restrucuring the State's Public Enterprise Portfolio B. hicentives for Private Sector Development .................... 19 - A Flexible Exchange Rate System - Current and Capital Account Liberalization - Labor Market Liberalization - Tax Reform - Revison of Legal Framework for Businesses - Completion of Tariff Reform - Agriculual Sector Liberation C. Soci Aspects of thePrgrm . ............................ 24 - Socidal Safety Net for Low-Icome Groups - Formulation of a Financing Stratey for the Social Sectors - Reconversion Program for Redundant Public Setoor Employees - Development of a National Family Planning Policy PFr 1L- Main Feurs of the Proposed Cret ........................ 26 A. Credit Anount and Tranchng ........ ................... 26 B. Management and Mo nitoring of the Program ..... ............. 26 C. Procurenet and Dibursemen ........ .................. 27 D. SAC m Condiionadlty .............................. 28 E. CodatinoandCofiancingoftheProgram .... . ............. 29 Par:t IV' BMfisandRsks ...................................... 30 Part V: nn dadmonm ....................................... 31 This document has a restricted distribution and may be used by recipients only in the performance-i of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. WURUNDI THIRD SMUCrURAL ADJUgsrNT CEDIrT CREDIT AND PROGRAM SUMMARY Borrower: ReFulic of Euundi Eeuting Agenty: Pdme MiAists Office and Mistry of Plaing Credit Amount: SDR 22 millo (US$30 mblion) Terms: IDA: Standard tem with 40 years mauity Progrm Descripton: The main objectives of the trd strucra adjustmn credit (SAC TM are to help strngthen the economy's suply response to the adjustment prcess by further reducing the role of the state In the economy and, In conjunction with an IM- suorted ESAF anagement, by contiuig to alleviate policy constraints to private sector developmaet ibis operation would also help shield vulnerable groups from the transitiona costs of adjustent. The proposed operation will upport reoms in three key areas: a reduced and more effective role for the state, elimation of policy and legalrery constaints to private sector development, and improved access to social services, pardcularly for lower- income groups. ITe redined role of the state will focus on reducing the fiscal deficit by acceleratig tie resuctur of the public enterprise sector and reducing non-developmental eh e. Private sector development and export diversification will be promoted through fther liberalization of etenal transactions, the agricultural sector and fator makets, and reform of the rgulatory, legal and flsca ms. Finally, a social sector cowmponent will pwmote a more popriae paun of public expndte through the mabtenance of a safety nete of social exendite and measures to Improve the quality of baic helth and education services. neft and is option is desipge to reduce dions in the goods and services and Risks: fac markets, while prvidng a social safety net for low-income groups. Ihe removal of the remaining insftiuona and ulatory ctrai to employment creation and private enteprie suld help to restuctre te economy throgh export-basd priva sctor develpment and export diversificato IWntiona rfrms wil improve public resourc allocaon and the efficiency of public investmn. Ihere are three sources of u tainty which could cause sUppages in the imp eon of adjumt reorms. Fist, the political situation remains fre despite the Governme's rocet aempts at the reconciiton of the two main etic groups. Second, If wodd pdrc for coffee - Burundi's main export - codtue to fail, they wil lead to a furder decine In public revenues that could have an Impact on fisa perfomance. Finally, other exogenous factors, such as Iregulrail ortumoi innegboing criesleading, amongother p, to a disruption in supply routes, coud undmine efforts to restore higher growth. e Govmmment has dayed a high sense of ownesip for the adjustmet prom Its stronqg commitment to the reform proess has led it to play a sigificant rol In the prepaaon of this opato Estmated The proceeds of the proposed IDA credit Id be dibursed in two unequa Disbubwements: tranches, consistet with the dming of the . try's needed financing. Ihe first tranhe of SDR 8 mUlioz equivalent would be avalable for disbursement upon credit efectivenes. Relea of the second tranche (SDR 14 million), expected in December 1993, would be contingent upon the Govarnen meeting the specific second tanche conditions and maintainin overal sasactaoy peforman under the adjustme progrm. Apprasal Report: Thee is no separate Staff Appraisa Report. Map: IBRI) 23898 u REPORT AND RECODATION OF THER IT OF TIE INERNATIONAL DEVEOPMENT ASSOCIATION To THE EXECUTIVE DIRECTORS ON A PROPOSED IDA CRET TO TE REPUC OF SUUNDI FOR A IRD SRUCTURAL ADJUSTMET PROGRAM 1. I submit the following report and roo aon for a proposed third Structural Adjustment Credit to the Republic of Burundi for SDR 22 mlion (US$30 million) on tndard IDA tms with a mat of 40 yeas. Paalel fnacing s exected to be prvided for ths operaon by Belgim6 the Europe Development Fund (EDF), France, Gmay, and Japan. 2. Mhe policy mes supported by the proposed Credit would build upon the refor already unertaken by the Republic of Burundi since 1986 and supported by IDA's first and second Stctura Adjustmn Crdts (SACs I and 11), and the Stctrmal Adjustment Faclity (SF) and the Eaced Stuctura Adjustmet Facility (ESAF) with the IMP. The Govment's economic reform progam Is outlinedinthefourthPolicyFramework Paper (PP) for 1991-94, which v.ss disssed by the Committee of the Whole on October 31, 1991. 3. Ti report divided into fur parts, the first of which provides an overview of Burundi's ecoomic pe m since adjusment, the country's medium-term c and structural poicies, the Bak 's strategs in Burundi, and the Banks critera for ewlutng progess. The prposed Struciur Adjustme Credt is outined In Part H Mm specific fatur of the redi are describd in Pat M. Finally, the benefits and risks associated wih the operato discussed in Part TV. Part L Country P1:ries and Bank Group Asstnc Strate A. Badcgound 4. Burnd is a small, landloced country in Cetal Africa (27,834 km2). Its per capita GDP was about US$215 in 1991. With a population of just over 5 million and a populaon growth rate of 3 prcent a year, Burundi has the second highe population density in Aica, estimated at 193 pero per square kome. Soa inicato are compaable to the avevae for SubSahara Africa. Despite the demograhic prese on aready constaned land, ural migration has been limited: only 6 perent of the ual population Is ura. The country has limited naral rores other tha relatvely file agricultura nd. Iden mierd resources include nickel, phosphate, petroleum (shae), vanadium and some alluvial god, but hi exploitation bas not yet been proven to be econmically viable. S. Agdrctue is the predominnt acdvity, contbuting half of GDP and 90 perceat of employmn and of export earis. Te mo impot export cmp iL this largely subsiten sector is coffee, which an avere accounts for about 80 percent of total exports. Burundi is one of the few Afric countries ta is selftufficlent in food. Per capita fodcrop production is sbe and, at least for the shorttem, food serty Is nota isu. Il swcondary secw (minig ad is stil sml, accuntig for about 14 pecn of GDP and 6 percent of eWpots in 1990. The privato sector, who shae of gross fixed invwestn is about 15 percent (1990), plays a major role in agricul production (through smaUholder famig ad transport. By contrast, th public sector dominates n, en and i 6 I II meamand corbut half of the cowuny's formal employment. As a landlocked country, Burundi is vulnerable to t n problems in negborg counies. Althugh progs has beea made In reent years tmprove physcal inad uctu smtplify tait foralites, transport costs to and from distt ndin Oce pors remain hgh 6. Dirndl's current govermet b led by Presde Buyoya. who took power in a militry oup in Seber 1987. In August 1988, Burundi smrenced an outburst of ehnic vlolen, which, accoring to officl figus, resulted in about 5,000 deaths In two of the norther communs. The President responded with the appoitment of a naonal unity govenment with uprweedented power sharIng, Ie., do cabinet was eqully divided beween the two main ethnc group, the majority Hutu and the minory but rling TutsL Currently, a process of d-- on-t f politcal instions Is under way. A new costitin, which Iodues a muti-pary poltical sytem, was adopted in a referendum in Marh 1992, tins paving the way for oatil elecdons expeed in eady 1993. A major chalenge for te Goverment will be to contn to push foward on e polical reom genda while deepeng strucal econ=mic reforms and exercising greater budget austerity. B. EconomIc Development Through 11 7. After a period of hi growth during the 1960 and 1970s, Burundi's econmic and financa stuatiton tnok a turn for the worse In the early 1980s due to a shap deterioration in its terms of trade, expnsioy fisca and monetary policies and adver weather condions. During the 1980-84 period, real GDP growth averaged just 0.2 percent a year. By 1984, the extrn curret account deficit (excluding official triuers) rose to 16 perce of GDP, the overall fiscal deficit (on a commiments basis) equaled 18 percent of GDP, the real effective exchange raOt of tha Burundi franc apreciated significandy, and anaal inflation reached a peak of 14 percent. The Government responded with admiitra contol aimed at conainiog th etnal deficit and proteting domesdc industry. The enuing dbtortons (e.g., overvued ehane , import conto), however, only served to hiligt Buundis major stuctu constraints: excessive dependence on coffee exports, dominant role of the public secor, and inadequat, incnives for sstaied growth. Ike Government embarked on a wmrehensive stabion nomic reform program in 1985. mat program was described in the cuntry's firs Policy Framework Paper (PFP) for 1986"-S. 8. During the 1986M90 period, stabilizain achieVments fluctated with world coffee prices. Burundis foreig exchange loss in years of faiinSg coffe price (1987, 1989 and 1990) totaled US$230 million, at 64.4 pcent of _exorts for dthse yea. World coffee prices as negatively aeced the public fice situation due to Burundi's heavy relanc on coffee for budgetary revenme. At the same time, the Govemment experienced difficultes in coniI the growth of expe. As a result of both factors, the budget deficit averaged 11.9 percent of GDP over 1986-90 (see Table 1). Neverheless, GDP growth reined postve in per capita twith the excption Of 1989, when it gew by only 1.5 percent as unfvorable weather conditions awply cut agricultural production External fancing, includ bg balance of payments sUpor, averaged about 20 pecn of GDP over 1986-90. Thus, the Goverments exenl finana situation remained cooortable thoughout the period, with gross fin exch ree risIn to th equiale of over 5 mon8t of merchndise imports. 9. Estimates for 1991 idicae tat the eonoy grew by 4.9 percent, an Improvement over the scenado envisaged under Buruindi's most ren PFP, which covers the 1991-94 period. Owing to an aest in the detrioration of the teru of trade, gross domestic incme per capita lso g modesy. Public savhin rose t 3.5 perce of GDP (compared to 0.4 perce alized in 1990). Coffee expor eains Incrased by 36 percent tns to eadier plantins and the sale of stocks accumuated te previous yea. The overal balc of payments surplus w equivalent to about 2 percen of GDP, aided in part by US$255 million in x nal assistance. Inflation rose ighty to 8.9 peent, boosted by a 3 d on In Augs 191 (15 perct In SDR tew) whi resord the coutry' ntentonal an irf lititi mThe debt s1.vice r!atrmaLned hg in pa to the ,mpact of excae rate Tl 1: S.hs -ssas ludleto GROWTH RAmU GDP (uzitet pue) 11.8 3.3 5. 4.9 1.5 3.5 4.9 130pot (GMM) 12.6 -11.1 6* 10.5 -29 1.0 15.9 1ml z (Nm MM *3.8 8.1 6.9 -1.1 -15.1 12.1 5.5 RATOS1 (%S Do% Suvlssllpods (ON}) 22.9 25.6 43.7 34.7 35.6 46.7 39.9 GzusshltnuDP 13.9 11.6 22.7 15.0 16.7 18.2 17.5 GrowDouuslso SwAsvnDP 3.8 1.1 6.9 1.6 4.4 -4.2 -1.0 MIU SaviDP 2.1 2.3 0.3 0.6 2.1 0.4 3.5 Gvt RaveauODP L3.4 153 13.5 15.4 18.2 15.8 16.7 Govt TOW Hzpa DP 23.4 23.8 30.4 26.6 2.8 28.8 26. vul uDodge Dbo GDP- -10.0 4.5 -16.7 -11.6 9.6 -13.0 -9.7 Cueot AOOuat/GP' -10.5 -11.7 -17.9 -14.6 -14.2 -20.8 -18.0 INDICnS Coawant Pues ( 3.7 1.8 7.1 4. 11.7 7.0 8.9 Te osTofoTd(1987-100) 131.7 139.6 100.0 119.5 112.0 96.4 99.7 Red B?w 3vw&agbRaoR 135.5 116.6 100.0 38.1 90. 77.7 78.3 (1987-100) . b e M190 am Flom a. Baud es uuu guana oa...obW d. 21=u48 VLqpas C. Pafiorunn Ude th AdJ i Program 10. Burd embard on the pat of adustme in 1985. The flrst SAC (US$15 miUlion), apprved In May 198, was a two-rnie ctlD t bme effective in July 1986, and the seond ranbe wa released on shd e In Ar 1987. Ih prom overed Ilve aeas: (a) publc exediur mngem (b) pubU enterprise () rfm (c) ta and dsiwa polce; (d) cedt allocti and (e) agicture sect policy. mm p a began to address the most Imot polcy disorti of ta period whch wore: (D th restictve tado regime; (1) wIdead prc contro; 011) the ovevaued ea ge rat; ad (Iv) the nftdz and poor uat tho InveM t progrm The Idtiftion ad sequencin of rem was n line with the prWities for action partcaly in the trade rea, whe importo w liberazed imiy ith at opi-up of Imports and the downtrol of Import pie. Some of the moes under SAC I which wer ondy pariy Implened (e.g., pubic ependi progr and PEfrerms), du Inlao part to th ddice sco-plievonment, was takenp ai to SAC EL 4 11. The second SAC (pved In June 1988) was a t -tranche crei In the amount of SDR 64.9 mUllon. Although the second program was ntnded to cover the 18-month peiod from mid-1988 to end- 1989, it wen_ y eadd over three-a-one-hdf year due to ple aI dl (pacularly regrIng PsF, civl sevice refrm and lialization of the labor r t). he second trnche of SAC It was reled In Api 1990 (abou 15 months behind schedule), and the third tranhe wa rleaed in Jauary 1992 (with about 24 months' dty). 12. As noted, a number of the refboms Introduced under SAC I wer continued under SAC II becas of their sesitivity and the persitent atention they required. These concern esenay: (a) continuation of the flexible exchange rate policy and futher tariff reorm; (b) measures for containg the fiscal deict and Impoving the composition and qualty of ependire; and (c) acdons to reduce the number of PEs and achiove fincial viability in thos remaing in the stat portfolio. The following new reorms wes Introduced under SAC Ii () in the fncial sector, the program called for Iterest rate deregulaon, hntroducton of a _trsuy certiflca auction and iroducdon of a rserve rqirment for commerci banks; (I) regardn the labor market, measures fosed on eiminat the nedO for pror apVl fom the Labor Ministry for hiig new employees and the obUigaton to register all new vaccies with the mpower Depatmen In the same ministry; (HI) L. -ivil servce refr, an action plw for Improving efficiency whie limiing expansion in the _nubers of civil servn w to be fmiuted; and (lv) in the socW sectots, a social acdon program for the most vulnerable s.sgments of the populaton wa to be frmulated. SAC II was complemented by the second and third years of a 3- year SAF aangement with the IMP. 13. Despie exogenous sbocks (detorating tms of tae, irrgula rainfal) and ial pjllca intbility(ethic dvalres) during the implementation of SAC U, further progress ws achieved In moving towards a competitive rate, reducing effectve potecuion, establshig a unified budget and eliminating most price cntrols (with the exception of the agricultural stor). In 1991 and early 1992, progress was also achieved In further improving public expendiate management, llialzing Imports and dergulag labor and financal markets. Aftr some initdal delays, peformae in all hes are was stbhct. Indeed, in some cases, the Govemmen wet farther than enged under the program. For exmple, SAC II had not called for the elimiatbon of compulsory wings (where, in order to promote savIng, 5 percuet of sataris was witheld and automacally deposited in a public savings insti) nor for the simplification of the lega and regulatory fmework for the privae sector. Yet, the Government took the deciion to do the former and proceded quickdy with the ltr. Performae under the major conntos of the adjustmet program is highlighted in geater detail beow. 14. E ge Rate Polky and lhde LUhratadon. The main prpos of ftis component w to impoe competvenss of non-ttonal ecports and Importsubstituton. actvties whilo prviding neutral protcn across economic secto. Under SAC ll, the Govemmet effively utiized ehae rate adjumet to mainn price competitveess with respect to its major tradig patrs. Cmv devalaton of dte re effecive exchange rate was 32.8 percent between 1986 and 1991. A furhe devaluaton of about 10 pen (in foreign currec tem) is being implemented in small Incrm s over the months of May and June 1992. Tarff reform, id under SAC I and continued une SAC II, resulted In a reduton lo the number of rates from 57 to 5 and In the iff spread on non-luxy goods fm 4-155 percen to 10-40 percent. A mnmber of dirts attri e to Iproper don of products were ao corrected. Finally, all quatative resDons on imports we abolid in Augst 1990. 15. PublIc Reoe Mnagemnt. The objecdve of these reforms was to redc the budget deficit and to improe the quality of public expeodi with the aim of restg sustainable economic growth and the vkabity of Burudi's amC 11 position. The instruments for more effetiv and taparen budget 5 execution and public expenditure programming were set in place under SAC I, including a three-year rolling public investment program (PIP), satisfactory public expenditure programs (PEP) for four major sectors (Agriculture, educadon, health, and transport) and a unified budget, combining all central government ependitures, whether financed withdomistic or external resources. The quality and coverage of the three-year rolling PIP improved significantly in the 1989-91 period. An action plan, designed to increase the efficiency of the civil service while limiing the creation of new positions to the social sectors, was formd in June 1991. As a first step, the Governmen completd an audit of the civil service and limited the numer of autorized new positions in the 1992 budget law. 16. Prior to 1991, the Government's record in reducing budget deficits was mixed because it was unable to reduce expenditure conmmensuratey with the revenue shortfls resulting fm the decline in world coffee prices. In 1991, performance improved on both fronts: revenue stability was enhanced significany by introducing an ad valorem tax on coffee exports, and remedial action was taken to contain ependiture. As a result, the budget deficit in 1991 declined to 9.7 percent of GDP from 13 percent in 1990. Ihe Government has taken additional measures in 1992 to reduce the budget deficit furter (e.g., It effected reductions in noLdevelopmental expenditure in real terms, limted net recruitment of government employees to 650 and reduced indirect subsidies to public enterprises). 17. PUlic Enhepre Rejbrm PE reform was the second major area where results under SAC U were mixed. The objectives under the progm were to improve the efficiency of PEs, reduce the finac burden of the sector on the government budget and, open up buslness oppomtnies for the private sector. The Government approach to PE reform involved the signing of performance contcs following detailed dagnostic studies and audits on a case-by-case basis. However, this approach was not successf becmas of the considerable ime and cost required to undertake detiled sbudies on a systematic basis. From 1986 to 1991, only four enteprises signed performance contracts with the Government. In recognition of the problems, in January 1991 the Government adopted a more comprehensive Wproach, classifying PEs into categories depeding on whether they were to be rehabilitated, privWized or liquidated, and fimulatng a specific tmetable and action plan for each. Since then, 10 enterprises have been liquidated and S have been privatized; bids for privatizing the capital or management of another 4 bhve been issued and subsidies to the PE sector have declined by 12 percent 18. Factor Maket 1berdhatzlon. The aim of this component - to improve the efficiency of factor makets - was partally achieved. The interest rate strucure was liberalized; however, interest rates are not yet fully market determined. More efficient and less disrminatory instruments to manage bank liquidt were introduced (e.g., reserve_equirements). Ihe monopoly of the parastatal savings instition, CADEBU, over wage eane' compulsory savings deposits (see paragraph 13) was eliminated. Conditions of employment of foreign labor were liberalized and some fiscal disincentives to employment eliminated. Ihe Government also eliminated the obligation of enterprises to obtain prior approval from the Labor Ministy for any rectument Private firms and public enterprises with private capitl are now autorized to recruit freely, provided that the per hied is registered with the Ministry of Labor and is a Burndi national. However, dismissal of employees still requres government approval. 19. Soctal ProgrW and Poverty AUevadon. With an annual per caitapincome of only US $215, Bunmdi is one of the poorest countries in the world. Yet the negative transitory social effects of the adjustmet program on vulerable groups have been marginal in Burndi, partly because about 90 percent of the population is in the subsitence sector, but also because public social sector spending (health, education) has been protected. Prior to the lauching of the adjustmet program in 1985, soci sector exenditue was 28 percent of total expendure (excluding debt service). Ihe ratio increased to 33 perent, or 4.4 percent of GDP, by 1991. A first social program was prepared under SAC U; several of its componet are being Implemented; others, including the poverty montrng system, are being 6 redesged under a proposed IDA-supported social action project, the apprais of which Is expe -l to take place In JU 1992. D. Ctal Devdopment Issues 20. Developm Objectves and Constraints. Burundi's development objectIves, as defined in the 1991-94 PEP, are to acbweve sustained growth while reducing poverty and increasing the access of the poor to basic social services. As Burundi's Economic and Social Council recognized in Decembe 1990, the country urgently needs to restore former growth levels (5 percent anmual averg GDP growth in thfe late 1970s) and encourage labor-ltensive production methods as a means of genting employment fr the rapidly growing population. The steagy for improving economic growth focusses on the expansion and diversification of the export bae through private sector development. Boti expasion and diversification are urgenly required, since coffee still represents 80 percent of export proceeds, and the coverage of imports by exports was only 49.7 percent in 1989-91. 21. To achieve these objectives, Burundi must overcome formdable physica, socW and ecoaomic constraints. Physical cOains, such as mountainous terain, remoteness and a landlocked position, inhibit economic developmevt and elevate marketing and transportation costs. Environment issues such as decinug soil fertility ad increasing pollution in Lake Tanganyka also represent cotainS to log- term growth. Tho lack of natu resource reduces oppormuites in the secondary secor. Tne small size of the domestic market and difficulties in accessig regional market also undermine growth effrs. Social cntran include: (a) rapid population growth (curreny 3 percent a year), which puts pressure on the country's infrastructre and environment, and limited supply of arable land; (b) a low adult literay rate (34 percent); and (c) 3 small private sector offering limited employment opportunities. Even with accelerated efforts on the policy fiont, Burundi's development prospect are limited by these constr , may of which will require considerable time to overcome. 22. In addiion to the physical and socal containts cited above, Burundi's past economic growth has been constral by policies which have given too great a role to the state in the owneship ad msanaementof productive assets as well as in the regulation of the economy. This has resulted in an overdimensloned and inefficiet public enterprise sector, in a crowding out of the private sector and In adequate govenment attention t those sectors - e.g., health, education and infrtructure - where the state has a crucial role to play. lhe seting In place of sound macroeconomic policies has also suffered as Govenment resources and attention have been spread tin Against this background, a major thrut of the Bank- and Fundsuppord adjustment progimn has bees to help redirect the Government's attention to those priority activities which it needs to perform better and, since 1991, there is mounQt evidence that the autoities have been moving more rapidly to reduce the role of the state in the economy. The oeaon m ed in this report would reinforce this shift in emphasis. E. Medium-Te Mic and Srucural Poldes 23. To accelerate growth, the Government is deepening Burundi's adjustment process by further modifying the state's economic role, and diversifying the economy through private sector development and export promoon. he bas was laid in SACs I and U and is being consolidated durig the proposed next pha. In particular (a) the Govermnt is completing the liberaization of current account trnsacons and has Ioduce a more auomatic system of exange rate adjusm ; (b) it is improving public resource management through an increase in the share of expendtre allocaed to developmentl uses and a shift In th compositon of ependre from directly producdve sectors towards social and eonomic iucture; and (c) it is completing tariff reform and price liberization. The Govermnent b also acceleg PE restructg, further liberizing fctor markets, and completing t legal and 7 reg,a"y nform. It has, at the ane tme, vtully compltd the liberalization of the agicultural sector. In addition, to easure sustned long-term growth, th GoverDnment s developing progrm to reduce population grwth, prvnt farther envionl degradaion, and allevia poverty. 24. The key m oe ic objectives for the 1991-94perlod, as revised during the mid-term revlew of the M-upported ESAF program nApl 1992, are to: O) achieve avere annual re GDP growth of 4.6 percet mlying rea per capita growt); (ii) achive an averge ion rate of 7 percent; Qi) reduce the etral curnt account deficit from 20.8 percent of GDP In 1990 to 18.7 prcet in 1994; and (lv) lower the fBs defici (cluding rants) tom 13 percent of GDP in 1990 to 6.8 pacent In 1994. Th surplus on te, Governmens curt operations, which was 3.5 percent of GDP In 1991, b to ices to 5.7 prcn in 1994. Por 1994, rflecing an assed steady improvemet in the economy, the objecdves are, twer alia, a GDP growth rate of 4.7 percent and an inflation rate of 5 percent. Simhlarly, the investment-to-GDP ratio iS projected to Improve, averaging 19.1 percent in 1992-94 compared to 17.5 percent in 1989-91. 25. Growth prospects will depend on te ability of the counry to shif its pattern of development from one based primarily on bistnee agriculture to one with an ieasing role for the secondary and services sCtors. This woud be via to gneaing the neceary employmet opportumies for the fast growing populaton in the fice of derasing availability of amble land. In paralel, scarce land would have to be used incre y for higher-value crops rather than for trdtonal crops. Should these critical structura trAnsomaons take plae, then there is scope for sustained real growth of about 5 percen. in the absce of these changes, real growth, which could increase ially through improved efficiency in agrict, would begin to drop off in the longer-tm as demographic prcasures rise. 26. P,*ate SectorDeweopme. Success wil critically depend on the extent to and speed with which the Government can disngage from direcdy productive ectors and promote privat sector development. Wih thbis In mind, the Government is pursuing Its economic liberalization program and conting to mprove the legl and regutog amwork, wie simplfying administative procedures linked to eeprise reation and the conduct of genra business ractons. To faciitate the entry of the privae sector it labor-Iensive, export-rliented m -and the traditional ago-industries, the Govemen has agreed to privo logressively PEs in terms both of management and ownership. PEs with de facto monopolies in key agmrindustW sectors (I.e., cofe, cotton, sugar, tea) are being dismaed or put up for sale. Competition in the financial sector is being addressed firuther by itoducing nw deposit and lendig i _nsum, promoting the use of commerci paper, and authorizing the establishmn of nobank factori opeations. The Government revisng its overly strict labor code which disourage th us of hired labor and raises costs. 27. pukc T eaw Poliy. Plic expditure is still over 25 percent of GDP and public sector Ivestm _cunt for 80 pecn of total invsenL Under the latest PFP, the Govnment is committd t reducing the shae of public ape to 22.5 percent of GDP by 1994. This is to be achieved by deeasing cuet ex iure In re terms (about 4 percent in 1992 and 1993) throu a significatt reduction in subsidies to public enerprs and in non-delopmental expenditures, and a limit on increasos in the size of the c"i service. Also, capital expentur will be stabilzed in real terms (at around 12.2 prcent of GDP) with a focus on Improving the qualty of investment. The restructurn of pubUc eqpe ill give porlit to the finciog of recurrent cost of aready completed projects and soci and economic Inastructur Itead of th ntroduction of new capita investm . On he revene s, eempons on import duties ae being limited to those provided for under international '-onventions and the inestme code. Exteral dono wil contn to play a critical role in reinforcing the Govments efts to raional public expenditue, given that they finance all of public sector Investme IT level nd omposition of extenl mlsance is being progressively adapted to the 8 redeined role of the Govenment by phasing out support to public Investments in productive activities. Donors are supporting rational public expenditre programming more actively. Efforts are underway to apply mote systematicaly project appraisa criteria and develop a harmonized methodology for callading projects benefits. Connued improvements in donor coordination are essential to the process. 28. Public merprlses. As mentioned before, in Jamuary 1991, the Government adopted a compreensive approach to reoming the sector. All 86 PEs were classified according to whether they are to be rehabilitated, privaezed or liquidated, and a detailed dmetble was agreed upon with the Bank. To help PEs improve their performance, quarterly ceilings are set on government, domestic bank and extera donor finning. The Government has agreed to refrain from influencing prices charged by PEs, with the exception of monopolies that produce non-tradeables, such as the utility companies. For the latter, a review mechanism is being established to ensure that pricing is based on long-run marginal costs of production. The Government has also agreed to a general moratorium on the creation of public enterprises. 29. Moneray and Credit Polices. The Government is committed to pursuing a prudent credit policy, limiting access to credit by PEs while allowing sufficient credit for the private sector. The subsidized lending rate for coffee has been eliminated since July 1991. Ihe competitiveness of the treasury cerficate auction is being improved by encouraging increased private sector participation in order to obtain a reliable market-determined interest rate. The smallest denomination offered for sale has been rwluced to the equivala-t of about US$600; the frequency of auctions has been increased to twice a month; and bearer certificates have been introduced which will be easier to trade in a secondary market, once it has been established. 30. Eenal Secor Polkces. The Government has fully liberalized access to foreign exchange for merhmndise trade and associated ortation and insurance costs. An open general lRcensing (OGL) system fr goods, transportation and insurance was introduced on May 1, 1992. Transfers of profis and dividends have been fully liberalized, and restrictions on all other current transactions have been reduced with a view to obt full liberalization of the current account by end-1993. A more automatic system for adjusting the excage rate was introduced in Apri 1992, as explained in pararaph 74. 31. Coffee Sector Polides. Under the IDA-financed coffee project, the Govemment is progressively opening up the coffee sector to private sector participation. The legal status of the PEs which have heretofore enjoyed a monopoly in the sector has been modified to allow for private sector participation in their capital. To date, about 20 percent of the shares of management companies that operate coffee washing stations has been purchased by the private sector. A new pricing system which wiU allow for difeental pricing according to quality Is being progressively introduced. Suice October 1991, the purchase of part of the processed coffee crop for export has been conducted through an auction system with private sector involvement. 32. Debt Mana8ement. Since 1986, the Government has followed DO and Bank recommendations to borrow only on Wly concessional terms. However, oustanding debt Increased rapidly as a percentae of GDP, from 45 percent in 1986 to 86.3 percent in 1991, despite the French and Bdgian Governments' decision to cancel approximately US $115 million equivalent in debt (or 13 percent of the total stock of debt owed by the Burundi Government). ITe increase is partly due to the impact of xhg rate devuations, but also to an acceleration of cocssional borrowing. Seventy-four percent of Burundi's debt is owed to mllateral isttions, of which 44 percet is held by IDA. The average terms of nws remained favorable during the adjustm period, with an iest rate of 1.3 pecent and 39 ye maturiW, equivalent to a grant element of about 75 percent. However, the debt service ratio rose from 25.6 percent in 1986 to 39.9 percent in 1991, although it is projected to declin 9 to 31.8 percent by 1996. This counterperformance was also the result of the unexpected drop In coffee prices. Multilateral institutions account for about half of debt service, while IDA accounts for only about 10 percent. In response to the situation, the Government has decided to set stricter ceilings on borrowing, even on concessional terms. Borrowing for technical assistance is expected to be phased out. 33. Exernal Fnnclng. According to the latest projections completed in April 1992, the external situation is likely to strengen only gradually over the program period of 1992-94. World coffee prices are expected to rv over slowly from their current levels, the lowest since World War II in real terms. Despite diversificadon efforts, depdence on coffee expors will remain high in the short-to-medium term due to necessary lags in the introduction of new exports. Externa assistance levels are projected to remain roughy unchanged over the next three years, and import growth is to be contained to about 3 to 4 percen through tighter demand management policies. Based on epected disbursements from exisig and projected commbme, and asuming that the IMP would provide US$42.7 million and IDA US$30 million in balance of payments support as programmed, the financing gap for 1992-94 is projected at US$67.2 million (see Annm U-c). This gap is expected to be financed under the Special Program of Assistance (SPA) for Africa and STABEX, the European Communities-funded commodity stabilization mechanism. 34. Reicng Popuation Growth and Preving Degradaon of the Environrent. Population pressures seriously undermine the coutry's mediumterm development prospects. They have implicadons not only for per capita income growth, but also for the provision of adequate social services and unemployment. The Government is taking specific measures: family planing services are being expanded and their quality Improved; an aggressive multi-media information campaign is underway; and icentives to encourage contraceptive use and smaller fmily size are being studied. Population pressure have also contributed to environmental degration which is eroding the country's agricultural potential. TO maintain Burundi's cuurent favorable food security position, greater investments are required to arrest soil degradation and increase agricultural productivity. Although eforts have been made to reforest sbtan tracts of land, and these have yielded positive results, there is still a need to develop regionally-adapted soil fertility management techniques that are voluntarily implemented at the fam level. The Government Is developing an Environmental Action Plan supported by UNDP, the Norwegian Fund, and the Bank. 35. Mournig Effive Programs to AlUeWae Pove. While poverty is widespread in Bumndi, the Government has made major stides to improve the well-being of the population, especially in rural areas. Access of low-income groups to health, education, and potable water has improved substaniay during the 1980s, with over 60 percent of the popuaon now living wihin 5 km of a health facility, primary enrollment rates reahing 70 percent, and a tripling of the percentage of rral population having access to dring water (from 10 to 34 percent). The Government's attack on poverty is being conducted through: (a) promodon of income-enerating actviies; and (b) actions targeted at specific issues (e.g., AIDS and protection of the most vulnerable groups). Policy reforms emphasize a pattern of economic growth conducive to the developm of labor-inve production techniques. As agriculture is the most labor-intensive sector of the economy where the majority of the poor work, policies aim at continuing to Improve rural-ua tems of trade and promotingincreased growth i tis sector. Measures are being take to Improve efficiency, effectiveness and targeting of public expendibtres for the poor. F. Bank ce State and Priorities 36. ConposltonofpastBank4uLtace. Since 1966, Burundi has received 41 IDA credits for a tota of US$ 622 million, and one Investment operation from the IFC toting US$4.8 million Ooan and equt Investment). IDA leding operatIs have financed: (a) infastructure (31.7 percent), Including road 10 maintenane, a teorm program In thO tsport sector, developmet of a tOleomnicatn eork, mral water supply, and urban development; () agriculue and rural development (21.3 percet) wkh special emphasisOtt on fing systems research, improving esion services, and forestry and fisheries development; (c) the struc adjusment program (19.5 percent); (d) human resources developmet (13.9 percet), specially priary education, preventive heath car and family planning; (e) enew (8.0 percent); (t) indstry and fince programs (3.0 percem); and (g) tehical assistance programs (2.6 percent). The table below summized past Bank-Group lendig to Brundi. Table I Dbtrlbut of LeniWg to Durd thogh FY1 Sem AomS Puwate Ne. of Frei" _nfmnatnictur. 197.4 31.7 14 Agculu 132.7 21.3 10 Human Reourc 85.8 13.9 5 EneO 50.0 8.0 3 Fnne and Industry 18.9 3.0 4 Techna Assistnc 16.0 2.6 4 -trutual AJma 121.2 19.5 2 TOTAL 622.0 100.0 42 37. Ihe current portfDio Iludes 15 IDA credits. IDA len inncreasd markedly in the FY87-90 ped with the approval of two SACs, two major ets for agriculte and tatial suWort to the health and education sectors. Annual commime hav averaged US$49.4 million for FYS991. The disbursemet rate is above the average for te Africa region and Improving. Physical impi on has been sadsfactory, ard the imct of IDA-financed project on ition building ha been generaly positdve. 38. ObJeath wad Staegy. In view of BurunCdis low per capita income, the Bans paramount objective in Buundi is to help ptomote as8usn export-ed growth and to reducoe povety. Mhe main priority of the Bans asta srate is to support the Govenments effort to ompln e the unfinished policy refm agenda whie addresing longer-tm development issues such as poor social conditions, rapid populadon growth ad degad More specifically, in its lend and ecnomic and sector work, the Bank is glving prioity to: - helg reduce In scope the roe Qf te ste and rederin gowr'mme emm ctlwe; - caadlt and h8 rsofS te eqo bae through swuort for private sector development; - allelalngpowy by promoting ecooc growth, providig a soi safety net for the poorest segmens of lth populaon and expanding and strengt social services; and ll - eOAncg the sutabably of the dewlopume pross by renforcng the role of women In developme, ng mily plamnng, improving eonmental management, developing opria farming technique, and manining economic inrscte. 39. The proposed strategy for FY93-95 envisages a reduction of Bank lending from the historically high levels of FY87-90. This Is appropriate in view of the generous availability of grants, the need to improve burden sharng between mutilateral and bilateral donors, Burundi's adequate level of extna reserves, and the planned reduction of public investmen's share In GDP to allow more room for private sector involvement. Lending wil average about two projects a year. The share of quick-disbursing lending - which came close to 50 percent of new commitmens in the late 1980s - will be phased down. This level will, however, be kept under review to allow the Bank to respond to unexpected evens such as successive years of poor agricultr production 40. In keeping with the Bank's overarcin concern with improving living conditions in Bunmdi, the lending program over the next three fiscal years wil focus on the socia secrs with 70 percent of pted commitments expected for a proposed soca action project and for follow-up opations in the education and helt and popuon sectors. Ihese social projects will, to the extent possible, involve NOOs and wil complement Bank-supported efforts to set in place an adequate social safety net for the poor as part of annual public expe e reviews. About a ffh of anticipated commitments will be environment-relaued and about 10 percent will be linked to a high priority telecommunications project, which is needed to support prvate sector development. 41. Iq,ong the Effldncy of die Sae. Reducing the scope and incrasing the effectiveness of the state is a major focus of the proposed SAC IIL This is to be accomplished primarily through public ependiure and divestitre of govenmnt assets in PEs. In addidon, support for the formulation of sectora public exp_ed programs is being provided in the con of on-going operations. Speca emphas is being placed on the need for the autffoities to iteralize public expndIture pramming and to prepare altemative expenditure scenaris prior to budget discussions. Conditionality for the proposed SAC m and planned sector investment operations will include agreement on a satsfctory PEP. Similarly, the efficiency of PEs will be addressed though the proposed SAC M, complementI the support by existing and planned investment operations. The agribusiness promotion projec, schedued for presentation to the Executive Direcors in mid-1992, will provide consulting services in investment banking and cowore law for the conclusion of private management contracts and for the leasing and sale of assets of PEs in the agroidust sector. 42. PrV Sector Dewlopmt and EJpol D hve coL In addition to the maroeonomic reforms covered under the proposed SAC II the Bank is supportng the private sector through actions at the sector and fim levels. A privae sectr development project, approved by the Executive Directors in April 1992, is desgned to Improve the busi e by supportg firther go-erent deregulaton, t granng of enterprise-bsed free zone status on a pilot basis, t'he expansion of the range of aviable baning services, the development of legal sevices to the private sectr, and international promotion elo. An agrbusine promotion project, aurey under prepartion, would finance services to: (a) make agro-industries more efficient by breakingup and Irivhzing PE monopolies; and O) support the creaton and development of small private agro-busiesses throu "demnd-driven technical assiftance at the enerprise level and the promotion of a private investent and mangement company. Ihe ocia ion, i coaboration with the IPC and the Foreig Investment Advisory Service (FIAS), iteands to use its good offic to fwclitate contacts betwen inbrested Burundi businesmen and foreip Invests. The process will be a gradual one since the Burundi private sector iS still small and Ineperined. ohe Government has also expressed inte in joining MIGA. 12 43. The IFC has played a limited role in Burundi, given the embryonic nature of the private sector. Aside from a sma equity participation and loan in a glass botde man in company, there has been no direct IFC involvement. Initiatives such as the African Enterprise Fund (AEF) and the African Project Development Pacility (APDP), for which a umber of requests have been made by potential local investors, appear to be more adapted to the small size of potential projects and private enterprises in Burundi. The Corporation will keep the sitnation under review and would be prepared to become more active if large and medium scale Investment proposals with high poteal profitability were to materialize. 44. Powerty Alkaton. Ihe proposed SAC MI would support economic reforms in favor of a wider use of labor-intensiveproduction techniques, particularly in industry, through the elimination of remaiing legal, fiscal and regulatory constraints. Proposed follow-up sector operations in education and health would help with the assessment of the poverty Impact of expendihues, the development and monitoring of core poverty programs and the implementation of cost recovery for the social sectors. A proposed social action project would promote the collection and analysis of household level data, poverty mappmg and periodic monitoring of the poverty situation. The project would also introduce, as a pilot scheme, an inovative approach to employment generation at the community level through: (a) temporary and flexible mehsms to finae poverty-orented actions; (b) traing for poorer groups by financing apprenieships and cofiancing selected costs of more formal trainig; and (c) helping with start-up costs of micro-enterprises. As part of the next Country Economic Memorandum (FY93), the Bank will be undertaking a poverty assessment. 45. Populadon, WM and Envronent. To help address the preing popuatn problem, the Bank is itensifying Its support for the development and implementation of a comprehensive population strate under a proposed second healdth and population project. The project would support nationwide expansion O fiamily planning services through: (a) training of staff; (b) adequate supply of contraceptives; (c) outreach and community-based aetivities; and (d) insified monitoring of family planning activities. Under the on-going health and population project and as part of the preparation of the folow-up opeation, the Bank is also: (1) supporting a long-term multi-media information program and the developnt of an Incentive frinework aimed at encouragmg smaller family size; and (ii) encouraging inttutional capacity building in demographic analysis and the ieion of population issues into critical sectors such as environment, labor, and social infastructure development. 46. Women play a significant role in the social and economic fabric of Burundi. In addition to collectig fuelwood, fetching water, cooking, and caring for childrn, women are the primary produc of food cros and contru to cash crop producdon, livestock rearing and onsotction work. The Ban's lending strategy includes: (a) enhancement of women's access to health services and ability to choose the size of their fimily; (b) expansion of girls' access to education (which is aready high by Sub- Saharan African standards at about 45 percent); and (c) targeting of women in poverty-oriented micr- projects, parulaly in tie rura areas. The Bank Is already targeting these objectives In the on-going agriltural services and the health and population projects. Women heads of household have been identified as a specific beneficiary group in the proposed agrbusiness promotion and social action projects. 47. Ihe enisnment is becoming an increasing concern In Burundi. An Environment Program is being prepared. ts Implemeon would be supported by a propose enviroment and natural resources mament project. lhe project would focus on: (a) soR fertility mangment techniques at the farm level; (b) lad tenure reform; (c) protection of swampy bottom lands, Identification of endangered watersheds; (d) foest cosevaton and agro-forestry; and (e) development of farming systems research incorporating environmenal issue. 13 48. Cqpacty Buldng. lhe Burundi Government, in the context of the UNDP sponsored National Tecnical Coopeation Apraisal exercise, has been assuming a more active role in defining teical assi e reuirement. Technical assistance accounts for almost half of exernal aid flows but its effecdv s has been limited. A database on in-country technical expertise th local and foreign) should facilitate a more rational and selected use of experts. Donors have agreed to modify the primarily supply-iven aproach to technical assistance and to replace progressively long-term foreign technical assistance with regula sbort-term missions by foreign experts and greater use of local consultants. The Bank is sfting it approach, too, to place emphasis on capacity building through greater use of local consltans, ssemin, workshops and short-erm training for ttie Internaization of economic policy refbrms. 49. Econonmc and Secor Woit The objectives of the ESW program are to enhance the policy dialogue, ptovide the anydcl underpiis of the lending program and strengthen aid coordination. A major elemen of the ESW strategy will be to reinforce coordination with. the Government and other donors In order to avoid duplication and to focus on areas where there are serious information gaps. In Xhe 1990-91 perod, the Bank and the cofinanciers of SAC U conducted studies on the impact of the adjustment program. Further studies dealing with adjustment and development In Burndi and the supply ponse to exchange rate adjustme are under preparation. Industi and agricultral reports focussing on the role of the private sector were completed in 1991. A review of the financial sector is in progress. A Public Expendure Review was issued in early 1992. Burundi has been selected as a test case for donor collaboradon in Public Expenditure Reviews (PER) in the frmework of the SPA. Donors have aready been closely associated with past PERs; this association wil be contiued and strengthened. Besides continuing work on structural adjustment and public expendites, ESW will place greater emphasis on longererm development issues through work to begin in FY93 on the mining and irrigation secors and the ort diversification and regional integration studies scheduled for FY94 and FY95 respecvely. Work on a Country Economic Memorandum emphasizing poverty assessment and alleviation and a decentralized pproach to the delivery of basic social services and on a population strategy will beg shordy. 50. lhe Counny Dalogw and Aid Coordion. Bank-country relations have been generally good. The focus of the dialogue has been to convince the Government of the need for far reaching reform effbrts, particuay in view of the country's formidable physical consaints. A dhallenge facing the Bank is to support the Govenmen in its efforts to manage the economic reform agenda, while being sensitive tD the political implications of the tough reforms underway. 51. Effective donor coordaiation is sine qua non for the successful implemetation of the Bank's assiance strategy, particularly with external donors financing 80 percent of inve In order to implement tis approach, a premium will be placed on improving further donor coordination and the ability of the Bank to use its technical expertise to provide the necessary leadership. In fact, there are already tangible signs of improved coordination among donors since 1990 as evidenced by extensive participation of Burundi's major donors in the prepartion of SAC m, particularly on streamlining ad Imving the transpaecy of the PIP process. In addition to reguar donor meetins under the auspices of the UNDP Round Tableprocess and the SPA, the Bank is supportg annual donor consultations before finalizing the PIEP. es eflts complement already established regular meetings of an in-country donor economis' group chaiW by the Head of the Bank's Resident Msion. 52. County Rias. Ther ae a number of politcal and economic factors which oould cause slippages in the ImpI n of refors and hence the capacity of the Bank to pursue its strategy. First, the politcal sion remains ffagile. Renewed ehic tensions could lead to a destabilization of the mrent regime. To deal wi these teusions, the Government has embarked oD sn unprecedented power sharing 14 rrangement between the two main ethic groups (the Hutus and the Tutsis) and has enacted a constition wiuch replaces the previous one-arty stat by a multir system. Elecdons are expected in early 1993. Second, government commitment to economic reform could weaken if there is widespread discontent among segments of the nding elite. 'De Tuts grop still domina the amy and PEs and feels threatened by the shfting balance of power sdmulated by economic and political refbrms. Mhe probability of this type of back-raking has declined substantilly since the reSorm program has gained momentum and most of the anti-reform elemens have lost key ministerial and civil service positions. Thid, reductions in public expenditures and the liquidadon or privaization of PEs could lead to a temporary unemployment problem and, in tu, to social unrest. Ihe Goveranment has acted prompdy to limit this risk by establishing a reconversion program for public sector employees that lose the employment, introducing a fund to cover health and education costs for individuals (and their immediate families) participating in the reconversion program and intesifying programs to assist people looking to sa their own businesses. Finally, there are also risks outside of the Government's control such as the possibility of a further decline in world coffee prices, irregular rainfall or political turmoil in neighboring countries. G. Criteria for Evaluating Progress 53. Progress in imple the Ban's straty wil be moitored by trcig seven bemarks. (I) The ratio of investment - parcuarly priva investm - to GDP. While the overah investment raio has generaly been satisfctory and is projected to rise to 20 percent of GDP in the next four years, the share of private investment has remained low and should be increased significantly. (U) EpoLt growth (in particular, non-traditional exports and the ratio of ewxports to imports). Bec;ase of Burundi's heavy dependece on coffee exports, its capacity to cover imports with export eaning has deteriorated. Alhough there are some promiing signs that certai non tional exports (e.g., frits, vegetables, garments) are growing rapidly there is scope - and an urgent need - to do much more. (ill) The ratio Of domestc savings to GDP (in particular, public sector savings). Domestics savings has been very low, averaging about 2 percent of GDP in the last five years. Beghming in 1991, the Govermnent has made a concerted effort to increase public savings. This effort should be continued and strengthened. (lv) The raio of secury-reated expeoditure to total pUblic expde. This category of expend is relatvely high but the Government is committed to reducing ts share of GDP. (v) The share of GDP allocated to primary health care. While public expure for health care has increased significantly since 1986, a large share of resources continme to be allocated to hospitals. Given the government commitment to improve services to the poor, the share of GDP allocated to primary health needs to be increased. (vi) Primary school enrollmet rates (n particular of girls). Burundi's pertfmace in this aea is quite good. The Govetmnent is aiming at a grss enrollment rate of 100 per by the year 2000. (vii) The contaceptive prevalence rate (CPR). Curet use of contraceptives is statisticaly Insignificat Consderable efforts are needed to promote more widespread use. EL SummaryAm S4. Burundi has a limked nal resource endowmenL Nevertheless, the county has a favorable climate for agriculturd production and, so far, has been able to feed its growing population despite problems of soil erosion and small farm size. On the whole, Burundi has been succes in Implementig most of the policy reform measures com by the Bank and the IMP, albeit in some cases with delay. Ihe supply response bas been limited to date. In order to maintain the momentum in favor of economic refoms, real per capita growth must be acceleraed. The focu wil be on obtaining an increased supply response to refrms by completng the liberalization process and concentating on sector arid microeconomic isues. 15 55. The Banks main objective In Burundi s to promote sustained export-led growth while reducing poverty. Through its policy advice, lending and ESW, the Bank is concentrating on the developmeat of an incentive structure geared to prmotng private sect invstme, and on reorientng public expediue away from asset creaion In the productive sectors and towards socal and economic infrructre, the development of human capkal and the presrvation of the eironme. The lending prgram calls for two operations per year on average. The share of quick-disbursing assistnce is expected to decline, but with feivBity mainned thrugh sector adjusme operations in case it is needed. The sd of Ml)A lending will be linked to government performance on adjustment and poverty alleviation. Progress wil be assessed on the basis of, Inter alla, the degree to which imports can be covered by eorts and on changes in the volume and the composition of public expenditure consitent with a diminishing role of the state in he producdve sectors and lmprovement in social and poverty indicators. Should the authorites backtrack on the agreed policy agenda and povert alleviaton goals, the Bank would drop policy-senstive opeaions, and shift to a smaller progm focussing on longer-term development issues, e.g., natu resources management and social sector opions. Part Ik Proposed Thrd Strucrl Adjustnmt Creit 56. The proposed SAC III, which is the cornesne of the Bank's lending stategy in Burundi, wil support policy reform in tree key areas: a reduction in the role of the state and improved public esource management; easing of macpoey consrints to prht sector development and ort diversification and gowth; and improved access to, and qudity of, basic social services. These refirms are detailed in the Governmens Letter of Development Policies and Policy Matrx (Annex I.a and Lb). Refors to reduce the role of the state and to render it nmre efficient include: the reduction of the fiscal defiit, whffie improving the quality of and shidting their composition in favor of development objectives tvrough csymatc preaion of dte-year roiling public expenditure programs and continued civil service reform; an increase in developmental expenditure and accelerated restructuring of the public enterprise sector. Prvmte sector deelopment and export diversification are to be promoted trugh an Improvemet in the enabling envionment, firher liberalzaton of extna taacton, gicultral sector liberaliztion, factor makret ibealiat, and the pursuit of a prudent fiscal stance to avoid a crowding outW effct on the privae sector. SocW sector rorms are to be pursued as an intg part of SAC mil through the of a "safty et of social expendiure and measures to Improve the quality of basic helt and ecaton serices. SAC m is tded tO complement the Govnment's on-going ESAF progm with the IMP. Ihe proosed operation will provide a small portion (about 5 percent) of Brundi's extenal facing rdmnfor 1992-94; however, it Is a catalyst for mizin gat resources equivent to about 50 percen of quick-disbursing reqrement. 57. The des of SAC m take into account the main lesn learned under SACs I and I. These a: (i) the importn of ternalizaton of policy refom by the authorities beyond the small circle of officials who negoated the progms; 0I) th need to have a more simple design focussing on a limited number of critical actons; il) th need for close superviion to prvent slippages that may have to be corrected subsequently; (v) the need for closer odination with the IB to esure hat macroeconomic stabia takes sufficieny into account the economy's spply side and the socia safety net requre_m; and (v) the crilcal importamce of meases to remove second geneato constain to private sector de(elp I.e., labor regulation and financial sector contrit) in conjunction wh macroenomic poicy actions (e.g., exchange rate adjusnt, removal of quantitative restictions and officia price controls). On the basis of experience with SACs I and II, SAC m is designed with substail up-frot conditionalty, which has been fully implemented. 58. In view of the projected fiancing requreme, reource truas under SAC m are back-loaded with a larger second anche. ITe Bk hs urged oinanclem to do the same with their projected 16 ontbons. In what is a dgn of inenalization of the adjustment program, the Govement itsdf praed a drat Letter of Devlopment Policies and the accompanying matrix of conditionalir prior to the appras mision. Duing the appraisal and post-appraisl miSons, the Burundi authorities took the lead role In invitiog iterted cofinanciers, organizing discussions and producing final documents. Finally, during the prepaaion and appraisal process, both the authorities and the Bank utlized the servic of local consultants, thereby contributing to building local capacity in policy anDalysi. A. Reducing the Role of the State and Rendering Govemet More Efficient 59. The Government's objectives are to reduce significantly the public sector deficit, imprwoe the composition and quality of public expenditures and reduce the role of the state In the economy. SAC m would help achieve these goals by supporting: (i) additional improvement in the quality of programming and monitoring of public expeaditures; (ii) restucturing of the composition of expenditure; and (Ill) restructring of the PE portfolio. Progra_m1ng and Monttoring of Publk Exptures 60. Past Adjusent Effrts. A major constraint to restrucuing public expendre has been the weakness of the County's istuonal framework. Although budget reform has progressed well, leading to a unified budget (inluding a breabdown of current and capita expendtures financed domestically and exteay) for 1992, public expenditure program (PEP) formulation has lagged due to inefective tic assistace ad thfe suail changes required in the way sectoral ministries program their expenditures. Nevertheless, under SAC II, improvements have been recorded each year. For example, the 1989-91 sectora PEPs had been prepared ma:. .ly at the initiative of the Bank without being intated into the budgetary process. In 1990, some of the f cial implications of the 1990-92 PEPs were taken In account in the budget; and the preparation of the 1991-93 and 1992-94 PEPs included greater government participation and the formulation of a procedural manual for use by sector minstries. 61. Under SAC 11 especially, the quality of investment expenditures has improved. The number of approved projects was limited to those identified in the Government's 1988-92 Fifth Pive Year Plan. In rewonse to failing revenues, investment ceilings were adjusted downward, with minimal disruption, primarily by slowing the Introduction of new projects rather than reducing financig of on-going projects. Finacg from the domestic investment budget has been available In a timely ashion since 1989, with a disbusement rate close to 100%. The sectoral composition of expenditure has also improved with a gradual shift out of relatively large public investment projects in the productive sectors towards smaller investments deigned primariy to improve the quality of social services. 62. SACI-Suoed fnrs. As part of up-front conditionality, a mr of imortant meass have been takeL Until 1992, budgetary authority had been divided between the Mistry of Plan (for investnt) and Miq of Finance (for current expendiures). Authority is now consolidated under the Mistry of Financ. Satisfory 1992-94 PENs covering agriculture, education, health, and tramport, and a4 about 80 percen of public expenitur, have been completed. These PEN were reviewed by Bank staff with the participation of represeives of most of the major donors. Covera wil be exended to he rural, energy and minig sectors for the 1993-95 PEP, and thnical sstance wil be more fully Icrporated with support from the UNDP. The PIP prentation is being imptoved so as to reveal better the breadown of financing among loans, grnts and public avings. In May 1992 the Government established an Inter-ministerial commission to supervise the PIP process and ensure appicatio of the crta agreed upon between the Govenent, the Bak and other donors for the appraislnd selection of projects (e.g., 10 percent ial rate of return, poverty alleviation, dmploymentpgenation). The Goveament also adopted a revised 19924 PIP (including PE investmenats) 17 which Is stfactry to IDA and created a unit in the Finance Mistry to participate In the PEP process. Following the mrii of key macroeconomic objecdves in April 1992, the 1992 budget must be adjusted. Adopton of a revised unified budget for 1992 consistent with the aproved 1992-94 PEP and sadsactry to IDA is a conditon of e.ecdveness. Adoption of a 1993 udfied budget consistent with a 1993-95 PEP, as wenl as a unified budget for 1994 satsbctory to IDA, will be a second tranhe release cond Won. Restucuing the Conpos1on of Public pExndlrs 63. Past MJusnext bus. Th Govement bas managed to avoid accumulating domestic payment arrea, but at the cost of undinanc Ivestment-related operaing costs. Despie Govemment effots to ptotect spending for m ce, recurrt costs for already completed investments are underfind by at least FBu 1 to 1.5 billion per year, or the equivalent of 15 percent of present eWpenditure on goods and sevices. The Govermnt has also been facing the following main problems in the civil service: (a) prolifeaon In the nuer of agencies and units within ministries; (b) lack of consicy between the stmucture of govenment and its primary objectives as stated in sectoral policies and agreed with donors; and (c) lack of an effective system for evaluating performance and linking performan to salary ncrases. The size of the civil service (about 31,000 at the end of 1991) is less of an issue th theneed for iernld restuctung. 64. Under SAC I, growth in the civil service wage bill has been contned to 7.5 percent a year despite rapid expion of reutmnt in the education and health sectors. This has been accomplished by copossing fuirther reawages, which have fallen below their 1980 level. The Governent has intated a civil service reform, with technical support from a UNDP-fimded project. A competitive ex o sm for re civil servants has already been intoduced, and a census of civil srns has been compleed. The Government has begn using national consultants to undetake certain speciized tasks (e.g., accouting, auditing, computer maintece, studies) on the basis of service contrt and has prepared a satisfactory action plan for civil service reform. The plan calls for limiting nnal grosrecument in the ci service to 1,000 posidons, which is equvalent to about 65O in n tems, exclusively for the education and health sectors. 65. SAC II-S&qWored fWhm,. ne objectives of the reforms a to increase finding of investm- related recu t osts and to promote the provision of good quality basic services. Mesures will focus on four areas: (0) reducing direct and indirect subsidies to PEs; (ti) reducing non-developmental recrt xpndiure (ll) reallocating the savings to finance investment-related recur costs; and (Iv) protecig cii service reriment for the education and health sectors. In May 1992, the Govenment submitted a satisfaory plan for reducing subses to PEs from 19.5 pen of tot eenditre in 1991 (including arrears) to 7 percent by 1993. The Government's plan also calls for staying within IB limit for current expditure, while containing expndiure on wages and salaries and increasing the share of expenditur on goods and senrices from 23.8 percen of crent expendke in 1991 to 28 percent by 1993. Ihis raio will reach 30 pecent, or FBu 9.7 billion, by 1994. The targets on subsidies to PEs, no-wage current expendiu on goods and services, and civil service recument wil be monitored as part of a satsfcty unified budgets for 1993 and 1994 which is a condition of second trwnhe release. The problems of civfl survice effiiency will be addred trough the Bank's review of sectoral public exendiure pograms, which themsdves are an importan part of SAC m conditionality. The number of a s tive u will be reduced in 1993, based on more accurate idenification of the priorty program in the PEP. Tecic assistance provided i the context of an on-going UNDP project is adequate to ensure tht this process is implemented within the proposed time frame. 18 Tab3: Refrudwrg of PuBic 2989 199(i 1V91 1992 199g Subsidie to PE& (emud. 25.6 21.6 19. 8.8 7.0 Snu) Wago BM 23.2 23.6 24.0 23.4 23.4 No _-waonut 13.8 14.6 11.9 12.8 14.8 (As S of ounsi? &29.6) (.3) (23.8) (25.0) (28.0) Bhpmodku. lutd. (1989 100.0 105.2 967 9.9 94.0 CurteamlUn as % d 82.7 97.6 79.1 70.8 693 Tota Dxadk ut a of 153.0 188.0 1583 146.5 140.6 Ro. (mItd. VaW) Totl oRadb hb) 48.4 4.5 55.6 60.0 60.4 Reutug te State'wPaftcs P k Emeipr PO* 66. Past A4wuwnm RjbS . In 1990, dth wer 86 PEs in Bundi. PEs accoued for abo 80 percent of totl eorts, and dpe Burn's comparate advantag in abundt and relatively nepesiv labor, PE invesmnts have bn hily capital tiv . Returns to capitl have also boen disppointing. n 1987, with FBu 19 biion In cait subsCriptions to s, the setor registered ne los of FBu 100 millo Profitabthas been eroded, In pat, by the fadt t at let 75 pcent of PE asss hwe been loan-financed, of whch 35 percent with non-concoonal, short-term credi 67. Pa SAC refirm has 1bus on testorg the financial viablt of mjor PEs trough the sipgng of pefoman contact fllowg dgostc stdes nd adt, wth the disappoinn result outiWd in pagraph 17. Al PEs ae now clasfied t fiur cateoies: I) hos whose ownerhip is to be prvated (36); () hos xpected to ean In the publc portfolio (21), of which twelvo are t have heir nmaame prvaized and ar to be rehabilitod; M dhse of an administiatIve ntro tha ar to be renegrt Io tdh governm sftrco (19); and (v) tose to be lIqukided (10). 68. SAC Ml Wd Rqbm. lhe ojectiv of the roms envis uder SAC me to enhan conmpetition In by sectors trough privs secor entry, hu Increasing th probability of a song sWly response, and to redueo the finani buden of PEs on the Govermens budget. Reforms will fcus on: ( Ithe PE secor through abt , pdvatzation or liquidation; and (H) a moraDtoum on new Investmnt In PEs tarted for privatzatlon or lHqdaton. An offical ciruar from the Pim Minister applying a moratrm on nW investm for hs PEs was igned In May 1992. As pat of te uned budget process, invesmts of PBS rcevn direct or ndirect subsidlas are Included In the PIP and reqWr pror approa fom the Mister of Finan. The Gov t no longer exnds its gUara of lnding to the PBS, and, subsi to commercial and idustriaenrpis ar bWg diminat. Upon completion of the PE prevzatn prorm set out In the prious paragraph, 19 at lad S percen of the Govmet's cut portfolio (in aset terms) Is expected to be under prvate managme, an additional 30.5 percent will be endrey prhiazed, and 14.5 prcent wfll have beea liquidatd or reintegrad to the adminbitraon. 69. Given the scope of the Govermets pdvatiaion plan nd the dWppoinig perfomance of the un pioting PE rfonn (SCEP) In the past4 the authorities have agreed. to strenghen it. As a condion cf( diwss, he SCEP wil be restrt ed in dane wih agrment reached durig negotiations, a mech will be esablid in the Pi Ministry for montoring the financial status of PEs slated for priatzaft or liquidai, sad the teventon Fund, created in 1988 and administered by the SCEP to subsidize PEs, will be liquidated. 70. Decre dsolving PBs equivalnt to 4 pecet of total assets have been issued. The Goverment has ssued invitations w bid for balf of the firms slated for privaization in 1992 and signed private management contacts for balf of the fitms to be placed under private management. Prior to 4fectvwnuss, the Governet will complete tie launching of Invitations to bid and signatures of private mangement contacts (equat to 14 pecen of PE assets) and agree on a timeble of actions sasfactory to IDA for 26 PEs whic have been tecently claded. As a condon f second ranche release, the Govement will privtz the ownship of the equivalent of at leoast 6 percent of public assets, take father appropriae action on aU unsuccessful cases of pdvazuation (e.g., decisions on privatization of -gemet, les or liquidation usatftoy to IDA), complete all liquidations, conclude the remainig privat mana g contr, and complete the bidding process for the rest of the privatization program. I. Incentives for Prvat Sector Development 71. Non-industrial private sector actvie outside the agrdcultu sector are found principally in the informal sector, in iteatonal trade (where some 350 fims, mostly importers, curanty operate) and In a growing but lmitd sevice inustry. The Burundi Chamber of Commerce Is comprised of industrial, agricural and trade associations, wih a total membesp of 2,000 buseses and individuals operatg In both the formal and the inrmal sectors. 'Te formal private sector is primarfly composed of small d medium ae ent , geneating, on average, anmnal value added of about US$200,000 per eneprse. 72. To prono ecient private sector developmeat and export divesification, the Goverment has already Implemented or wil be inroducing refm in seven major areas, of which five would be monored under SAC M aud two are lready being monhtored under the IMP's ESAF. Tbese measures are: (i) iuoduct of a mo automatic system for adjusting the ea e rate (ESAF); (U) ful current acunt libeization and some capital account libertio (ESAF); (ii) revision of the labor code to promote employmet geatin through more flexible hirig and firing regulations; (iv) reform of the tax system to imprv Incentives for private sector invesment; (v) adoption of a coberent business law; (vi) completion of the tariff reform to reduce efctve protection; and (vii) opeing-up of agriculture to greater private secoCr involvement A combination of additional macrconomic reforms under SAC m aod sectoral and c rdom to be pursued under the private sector development and proposed promotion project i expeced to crem the critical ma needed to stinwlate a supply reponse. Total prvate sector Investment is projected to surps US$50 million per year wihin the nen two to years, compared to an average of US$34.4 million In 1986-90. 20 A Redbe Exhnge Rate System 73. Past Ajustewnt Effo. Reuar exchange rate adjustments from 1986 to ealy 1991 reuted In a nominal effective deauation of 40.1 percent and a red effective devaluation of about 33 percent vis-k- vis the SDR. Although these adjustments improved the competiiveness of some traditional (hides and skins) and non-traditional exports (e.g., fruits and vegetables, garments, rice), they did not fully reflect the terms of trade loss incurred as a result of a sharp decline In world coffee prices during 1989-90. Exchange rate adjustment has also been linked more to pressure from the Breton Woods Instutions than to the Government's own response to economic and financial developments. 74. Recent Jbons. The objective is to obtain an exchange rate system ta balances the supply of and demand for foreign exchange and which allows open access to foreigl exchange for curret account transactions. Consistent with advice given by both Bretton Woods institions, but formally included In the ESAF program, a system of more automatic exchange rate adjustments was established in April 199M. A decision was also made to devalue by an additional 10 percent as explained in paragraph 14. Under the reform: (i) the Burundi franc has been pegged to a basket of currencies that closely reflects Burundi's pattem of trade, replacig the former peg to the SDR; (i) the exchange rate is being reviewed daily and adjusted flexibly, based on movements in key financial and economic indicators (e.g., evolution of monetary and credit aggregates, foreign exchange reserves, trends in inflation, trends in nominal and real effective exchange rates, the parallel exchange rate, and interional coffee prices); and (Iii) all export proceeds are to be surendered to the commercial banks, which have been accorded more autonomy in holding and managingfobreigp exchange, including the authority to set their buying and selling rates within the limits established by the central bank. The foreign exchange proceeds from foreign grants and loan1s to the public sector will contie to be surrendered through the central bank. T?he central bankrs flexibility to modify the exchange rate is enhanced since the basket can also be vaded. Ihis provides the same degree of flexibility as a floating arrangemen, but does not require major changes in the orgazation of Burundi's foreign exchange market. The arrangement takes into account the structura imbalance In th payments and receipts of foreign exchange (e.g., while receipts are conentated in the hands of the public sector, the private sector accounts for about two-thirds of all forelgn exchange payments) and the oligopolistic stucture of the commercial banking system, which precudes the Introduction of an inter-bank market at this juncture. t7rent and C4pta AccouW Liberalzation 75. PastA#jsoment 4fo. Access to foreign exchange for transfer of profits and dividends abroad and overseas remittc for foreigl workers has been fully liberalized. The limit on auomatic remitnces of expatriate salaries has been increased to 70 percent with the excepto of exporting firms where up to 80 percent of salaries may be revitted. Access to exchange by Buundi citizens for business travel and tourim has lso been relaxed. 76. Recent Rms. he objective of the reforms is to liberrlize fuly curent account transactions by end-l993, to encourage dirc foreign nvesment and, in pardcular, to stmulat foreign interest In privatization of some of the PBs by establishing more traparent and flexible rules for repatiation of capil. Consisten with advice provided by the Bank and the Fund as part of ESAP conditoality, an OGL for goods, o an ad insurance managed by commercial banks was established in May 1992. It Is based on full delegation of authority to commerci banks to Issue import licses and provide the necessay freig exchange. Licensing for export shipmenat has also been delegated to commercial bans. Tm on other service account transfers are being progressively eliminated. Commerci banks are ahrized to trade in foreign currencies, and engage in all commercial forepgn exchange tnsacons. Regaton have been amended to allow for payment of letters of credit with an ex post verificaton of 21 IMports and to illow bank to Issue licenses without payment. Responsibility for following-up on compliance with exchange control regulations, by checking the customs documents against import and export licenses, has been delegated to commercial oanks. Labor Market i4beralization 77. Past Ausft Effirtr. Past effors are described in paragraph 18 dealing with th experience under SACs I and II (e.g., liberization of conditions of employment of foreign labor, authorization for eneprises to recruit freely without government approval). Independenly of these operations, the Government autliorized the establishment of private placement offices and approved, in January 1992, the creation of a national confederation of labor unions, unattached to any political party. 78. SAC Ill-sported Refomjs. The objective of the reforms is to reduce the costs of using labor, thus promoting techniques in the moder sector that more accurately reflect Burundi's comparative advantage in abundant and relatively Inexpensive labor. This is to be pursued through a revision of the labor code and related reions. The Government drafted a new labor code which was reviewed by a Bank mission in February 1992. It incorporates a number of improvements over the existing code: (i) it attempts to deregulate the formal sector while dealing with the informal sector as a means Qf reducing the disparit between the two; (i) sets out general principles without attempting to regulate all possible evenaliWies, leaving room for collective bargaining; and (iii) elinaes many rgations that would discourage employmet However, the draft labor code remains restrictive or unclear in several respects: (a) procedures for dismissing employees are overly complicated and leave too much discretion to the Goverment, thus opening the way for frequent recourse to an already saturaed court system; (b) the definition of temporary employment is too narrow, thus penlizing sectors requiring seasonal lbor or piece-work; and (c) non-wage costs implicit in the legislation for social protecion of labor are still excessive. The draft provides for partd employer coverage of the costs of health care for employees who are part of a health insurmac system, but requires full coverage by employers for employees not affiliated with a medical insuce scheme. This could unduly penalize small- and medium-scale entepres. 79. The labor code will be revised frier to inroduce flexibility for non-disciplinary lay-offs and for teporary employment and apprenticeships. Given te tme requwired to reach a consensus among the employers' association and labor unions, adoption of a revised labor code is expected in late 1993. Prior to second trwwhe release, the Government will have: O) submitted to the national legislature for approval a revised labor code satsf ry to IDA, including relcement of regulatios requiring private employers to cover 100% of costs of medical care for employees by a cost shaing arrangement; and (ii) eased reguations on dismissal and diminated mandaory wages for various professional groups, with the exception of a minimum wage for unsilled labor. Tax Refornn 80. Past Adustmen Efforts. Tax reform measures to date have focussed almost exclusively on revenue enbancement rather than on providing incenives for private sector development. The tax code is unclear and ambiguou. Arbitrary application of excessively high tax rates (one of the highest in Africa, 57 percent with a flat 45 percent plus 20 percent dividend tax) is a major complaint regstred by the business community, and the siuation has deteriorated wh incraing pressure to increase tax revenues to reduce the goverment deficit. Tax administraton is weak, particularly regarding verification of tax return and tracton tax credis. The uneven distribution of the tax burden has also been a conorint to private sector investmen, partiulauly foeig investment. The curen tax system favors debt financing over equt finaig. Ih theory, all registered enterprises, including PEs, are subject to the 22 sam tax system. In practice, many localy-owned privae and most public nteprs either do ot pay taxes or enjoy tax holidays which have been granted on an ad hoc basi outside of investment code provions. The Government la Improving tax enforcement for PEs as part of the PE reform process. 81. SAC Ii-spored Rtjb . The objecdve of reforms will be to reuce tax rates sufficiently to eliwinate disincenves to production, while imprving tax collection to ensure that the impact of reduced rates is revenue-neutral. Tax laws also need to be more transparent so that firms can estmate their tax liabilides and make the necessary provisions. Refrms will focus on: (I) reducing corporate income tax rates while increasing the mder of fim that actuly pay the tax; (i) reducig the cascading effet of the current trnctions tax while paving the way for the introduction of a full-fledged value-dded tax in the medium term; (il) claifying regulations (e.g., for depreclation allowanes) and increasing the length of time over which losses can be carried over; (iv) hamonizing the provisions of the general tax code with those of the Investn code; and (v) authorizing commercial banks to deduct provisioning agint bad loans from their ening, and harmonizing taxation of financial instrumens. In addMion, personal income taX reform proposal already drafted by the Government will Iroduce a zero tax bracket for inomes up to the equivalent of US$450 per year, and brackets will be revised to take into aont the Impact of iflation. Submision to the legislatre of a revised genal tax code and adotion of other related regulations satisfactory to IDA is a conditionfor second tranche release. Reviion of Legal Frmeworjbr Businsesse 82. PastAt#Issentrs. Aloh not part of SAC conditionaity, the Government has moved quickly to simplify the regulory framework for businesses along the lines recommended by a Bank indui sector mission in May 1990. In October 1990, procedur for establishing a business were simplified. A law which gave the Ministry of Finance priority creditor status (even on unregistered claims) has been amended to the satisfction of the baking community. Now tax claims must be regeed withn a calendar year followmg bankruptcy in order to receive priority. Limited chages in the legal framework governing PEs to provide for greater mngement autonomy and to introduce a basis fbr the Governmen to collect dividends were made in Setember 1988. A decree providing the legal basis for the Govement's program to privaize PBs was Issued in July 1991. 83. SACmI-WFtedRq=s. lhe objective of the refoms is to facilitate general buess acivity and provide the means of enforcing business contracts and property rights. 'he legal famework and many of the existing business law date from Burundi's pre-independence era There has also been an acumuation of ad hoc legal texts in the absence of any siDge codified set of legal prvons on business, real estate, fsc and related mate. While regulatory reonn is well undeway, a good deal more effort is requred in the area of legal reform. The present situation impedes rapid and equitable resolution of disputes. Hence, tiona sport and technical assistance for legal reform will be provided by the Bank and t.ther donors. SAC m wij support revision in current business laws (specifically the commera co&) in order to: (i) eliminate inconsistencies and loopholes In exis legal texts; (i) moe clearly define the legal status of various types of firms (e.g., corporations, p,aships, mited ); and (Ho) simplify and extend (to cover PEs) bankruptcy laws, thus facilitaing exit of firms. Submision of a revised commercial code to the legislaure which is satshctory to IDA and includes prvisiom peaning to accounting of companies d freign exhange transactions will be a condon ofsecond nwae relase. Copdon of TarfeUmf 84. Past Adjusimem jFL. Tariff refrm, iaed with SAC I and continue under SAC 14 has resued ina reducion In the snmber of rates, elimination of quantitative resictions and lowering of 23 effcve proton, as plained in paragwh 14. Th Govemen, in an effort to improve tariff nisn, has adopted the Harmonized Sys tariff nomenclaure and is inttoducing a computerized custo tnatio packg (SYDONTA). Effbrts are also underway to strenten tariff colection by grantig fewer exemptons. 85. SAC ILYMPOrted ROs . The objective of fiiher reform will be to improve tariff administron, and continue to reduc effective proection ad anti-export bias. Assuming that the exchange tate Is maaind at an appropriate level, a futher reduction in the umber of exemptions from customs duties and of average tarff rates would mpve the effectiveness of tariff as an Instrument of industrial policy. Under SAC m, the Government woud undertake another reduction in the tariff spread. The objective is to cut maximum turiff rates from 40 to 30 percen for non-luxury goods, and from 100 to 70 percent for luwury goods. In order to make the reform revenu-eutral, exempions will be reduced substaially, and an excise tax wil be intoduced on certain goods (e.g., alcohol and tobacco). Tariff rates, wihin broad sectrs, are also to be hamnized. As a conion of second tranche release, the Government will in accordace with the recommendations of the on-going joilt Bank/Fund fiscal study: (i) reduce the custom's taruff spread on non-luxury goods; Ii) reduce the number of goods in the lury category; and (i) reduce the tariff on luxury goods, all in a manner sadsfatory to IDA. Upon completon of the refrm, Burundi will have one of Sub-Sauran Afcs most liberal trade regimes. Agrculual SeCAr LW erallzadon 86. The Government's system, in effsct through April 1992, of subsidized inputs and administed prices for taditiona export crops, encouraged inefficient use of inputs while discouraging higher and better quaity out Restrictions requiring cotton cultivation in certin areas and prohibitng the uprooting of coffee and tea plan on marginally productive lad have promoted inefficient input utilizaton and poor produedon incentives. The recent exansion of rice and non-traditional exports underscores the al gains from libalng marketing and productionL Agecutural extension and research services nedto cheg teirtp-down sture to incoporate feedback from users, in particiuar women, who are largely responsible for agriculturl production. This is being supported by the on-going agricultua services project, approved in May 1989. 87. Pas4AusomEfjbrts. RefimssupportedunderSACIwere aimeatioducinganauomatic system for adjusting producer prices for cash crops in order to provide incentives for improving product quality and expanding producton. Tis was not implemented. SAC II included measures to improve efficiency in the coffee sub-sector, reduce subsidies on ferilizrs, encourage higher producer prices in agricuture, rehablitae the sugar complex (SOSUMO), undertake a study of Buun's comparative advantages, and liberalize the rice sector. Although mesu to improve the quality of certain export crps and increase their production (coff, tea, cotton) were partily successful, progress in improving intemational matlettug arrangements and maintain competitive producer pjces has not been atsfactory. A long-em fertilizer policy was not formulad, but is now being corrected as part of te agricltura senies project. Measures to liraize the rice sectr and restructre the sugar complex were implemented. 88. SAC IM-p Rejbms. Successfl liberalization of the agricutural sector is crtical to the development of Buradi In the short- to m Refrms, which were fully tmplemented as part of up-font conditionality in May 1992, focus on four criticl areas: ) simplificaton of the regulatory framework for smaliholders, incudn the elination of government raints coneig madatory crap and quantes and types of inputs to be applied; Q) elimination of government-admnisd producer prices for tadWona export crops and agrcultral it; (i) elimination of monopoly rights for PEs for phading, marbet and procesing agricutura products; (lv) Impositn of a moratrium 24 on a new public sector invesment in the tea, rice and palm oil sectors; and (v) establishment of transparen acteria for allocating available public lands and resolving land-ownehip disputes. 89. Now that the agricultural sector has been fMly liberalized, the producer b in a better posidon to respond to maket signals and Improve reurns to the use of land. Producers can react to developments In export markets by sh8ifg the pattern of crops they produce, their use of modern Inputs and the time spet in malntning crops. IThe elimition of monopoly rights of PEs on the purche, processing and marketng of export crops along with the moratorium on new public investments in these secors should promote greater competion, open the way for more private sector involvement and improve the bargaining power of producers, thus ensuring them a higher share of the world market price. C. Socdl Aspects of the Pam 90. General access to health, education and potable water has improved substntly during the 19808 as described in parraph 35. However, in the education sector higher enrollment rates were achieved by inoducilg spik sessions and irereasing class sizes, resulting In deteriorating quality. Simiarly, In the health sector a considerable improvement in primary health care infrastructure has not been accompanied by qaropriat3 personnel assignments and rerren cost allocations. In 1987, the hospital sub-sector bsorbed 80 prcent of total resources, with only 20 percent available for primary health services. Burundi's social indicators are about average for sub-Saharan Africa (see Table 4). While the level of goverment expenditur on the social sectors is adequate, there is a ned to reorient public expenditures in the social sectors fiuther, specifically towards quality improvements in basic services which benefit the poor. 91. Past Ajusnent Effors. SAC H included the formulation of a social action and povert alleviation program. The program targeted child mntrition, the role of women In development, support for small productive projects, a food security strategy, and the setting-up of a monitoring system for social indicators. 1M6 4: Dwandh Comparauive Social In&adlno*. Lew inem &Sabharaa Bur= Economim Afic Life peooats in years (1931) 49 54 51 PopulWohnyp (1984) 21,120 13,910 23,850 Popukou/raung ppeson (1984) 3,040 3,230 2,460 Daily caloio supply/apita (1986) 2,343 2,226 2,096 Acs to saD wabor -% of oal pop"d=ioa 30 - 36 Pdmry Schoo Net Bolnlmut Rato 46 67 47 92. SACH u orted Re/ . The objective of the reforms is to improve the provision of ential sevices to the poor through greater cost recovery from high-income users and Increased private and NGO participation in the provision of ential services. In addition, SAC m will addreu the oaslonalcost of aduwmm thugh: (I) a core expendhiur program providing a safety net" for the poor; and (I) a reonversion program for employees who are laid off In the process of the PE restructurig or civil service reform The SAC m program wi1l be comple by a prposed social action projecL 25 Socil Sfey Net for Low-Income Groqps 93. A safety net of social expenditure is to be identified and monitored in the context of the PEPs, concenrating on primary health and education services. To operationaize this concept, major improvements In the public expenditure programming system will be sought beginning with the 1993-95 PEP: (i) a restricted turget group will be identified (at present most of the population could be considered poor); (i) a regionat breakdown of expenditure wiUl be introduced; and (iii) expenditure financed from sources other than the cewal govermet (e.g., local governments, users, NGOs) wilt be progresdvely included. However, given the relatively low institutional capacity in Burundi, fully operationalizing such a system is necessarily a medium-term objective. The Government has initiated the process of strengthenng the Statistics Insitute (ISTEEBU) and mobilizing technical assistance to put in place a piority household srvey. A basic statistical capacity is expected to be in place by September 1992, allowing the authorities to have access to: (i) an initial poverty mapping of the country; and (i) an assessment of the capacity of various income groups/regions to pay for social services. 94. The Governmen has already earmarked, in the 1992-94 PEPs for the education and health sectors, priority expenditures for the social safety net. AddWional resources will be allocated to the social sectors to ensure that the quality and quandty of basic services for low-income users are not eroded by rapid population growth. As a condition of second tranche release, the Goverment wUl improve the quality of the social safety net incorporated in the 1993-95 PEP, in a manner satisfactory to IDA. Fonrmlo4on of a Fnandng Rrategyfor tOe Social Sectors 95. Government policy iu the education sector has changed significalwly in recen years. Although priort is still given to primay education, the objective of achieving universal primary education has ben postponed from 1992 to 2000 wih an iaermeiate target enroLment rate of 86 percent In 1993. Based on the latest PEP, the share of education in overall current exenditre (excluding interest payments) will rise from 28 percent to about 30 percent, among the highest in sub-Saaran Africa. Cost reovery is a critical issue for the education sector. Equity considerations are being addressed, albeit progressively; secondary school fees were increased by 100 percent in September 1991, although the fee stmctewm is not differendated according to famiy income level or the capacity of loca government to contribute hirough its tax revenues. 96. The Government's objectives in the health sector are to give priority to preventive medicine and the expansion of primary health care, particularly in rural areas. Tle speed with which the objecdives can be reached wil be a function of resource availability. The share of health in current enditu (excluding interest paymets) is 6.5 percent and is expected to rise to about 7.0 percent by 1993. However, adequate resources will not be available to cover the costs of hiring new medical and parmedical graduates unless cost recovery is increased through the sale of medical Insurance cards and by raising the rate schedules for medical and hospital care. Based on 1987 data, users" fees covered only 14 pere of current expenditure In the sector. If insurance cards and payment of users' fees had been made obligatory, approximtely three and a half tmes more revene would have been mobilized. 97. SAC m will support the formulaton and implementation of a comprehensive strategy for fincing of services in the education and health sectors. The Bank and the Government have aready reached agr on the general princ .es of this strategy. As a condition of second tranwhe reJease, the Government will implement its comprehensive financing strategy in a manner s y to IDA. Specific cost recovery measures will be reviewed anually in the context of on-going sector Investment operations and as part of the PEP review process. 26 Reconvrsion Progrm Nfor Redawdm Pubic Secwor Emoyees 98. As part of the prepratidon of SAC , the Goverment has established a progrm to ftcitate the integration of redundan public sctor mployees into the priva secor. One to two thousad public sector employees, or 5 to 10 percent of the modern seor work force (pimarily PE employees), could be laid-off over the nex two to three years. Based on experience to dae, skilled workers are most likdy to find employment In the prvat sector; however, other categories of personnel may require some support to acquire the skills needed in the private sector. The recoversi program is structured around three basic option for individuals: Q) ate subiMz retraining programs at eist training institu ; (Ii) creating their own businesses using exsting progam targeting small and medium-scale enterprises; or (iii) partcipating In public works pro5rams. Technicalastance for estabilshing the reconversion progrm i available through grant funig from the EDF and the UNDP. Developent of a Nationad Famly Planing Poliy 99. By the year 2000, Burundi's popdulation i expected to reach 7.3 million, even if an effectve family planning program is implemented. If there is a rapid decline in the fertlity rae (a fall from 6.8 to 3.1 by 2015), the population growth can be signficantly decelerated. The objective is within reach, but priority must be given to peonalizing population objectives through the development of a national fmily plannng policy. The SAC m dialogue has inlluded discussions on how to accdera awareness of ihe popuation copnstai 100. The Goveune is cmmitted tD inasing the cnrceptive prevalence rate from 2-3 percent to 10 percent by 1996 and has icuded this in its Letter of Development Policies. Specific acdons for the fonmulation and Ilniof a comprehensive family planning prgrm are being monhored underthe Bank-fi health and populaton project and will be fully intgated into a follow-p Health and Populat opain currently under preparation. Part E MAn Featue of the Proposed Credit A. Credit Amount and Trnchig 101. The Borrower will be the Governmen of the Republic of Bunmdi. The proposed credit of SDR 22 million will cover about 6 percat of the projected financing rq during 199293. Th amount is to ser largdy as a catyst for mobiizing cofnancg on gant terms. Panllel financing is to be provided by Belm, the Dp Development Fund (EDP), France, Germany and Japan. The proposed credit amount would be sufficient to close the financing gap in conjunction with resourc from the IMP and the cofinanrs under SPA. 102. Ihe proposed credit wil be dursed in two unequal ance, consiste with Buruni's externll financing needs. The first trace of SDR 8 milion will be released upon effectveness, which is ected in September 1992. The second tance of SDR 14 million wfll be didmrsed upon the meeting of specific conditions ad of sa_ctory of the program in genera. Second tranche release is epecte i December 1993. B. and Moi of the Prram 103. The program wil be imple_ by the various agencies involved in the reform process, under the oveall respomibiliy of the Prime Minister. The Mistry of Face will take a leadersbip role for 27 lthe public rsurce manement component; the Ministry of Commerce and Industry will have primary reibility for the private sector development componen; and the Ministry of Planing wiJl coordinate th implemtation of the soci aspocts of the program and the PIP. 104. A minister level Monitoring Committee for the Stuctural Adjusment Program (MCSAP), dhared by the Pr Minister, has been in place since 1988. The MCSAP s comprised of all he economic nsters, with other ministes being invited as the need may arise. A peman secret to the MCSAP was established in 1988 to coordinate work at the technical level and to provide the secrtariat function. The Permanent Seetary reports direcdy to the Prime Minister. The Government will provide quarterly progress reports to IDA one month after the end of each quarter, startng in October 1992 for the perlod ending September 1992. 105. The Governme's implemeion capacity has Improved considerably since te begnning of SAC II in 1988; howeer, ilementation sUll requkes close montring by Bank staff and continued teical assistance, where possible from local consutg fim. The suprvsion of the SAC m- supported program will be ensured by regular missions from headquartes and by monthly meetngs between the Permnent Secretriat to the MCSAP and the Resident Mission. The Resident Mission will conue to work closely with the Governmen and the cofinancier of SAC m to monitor the progam's Implemention. Bank staff wil conme to coordinate closely with IMF staff on the monitoring of Implementtion of mc policies and on common areas of interest, espcly where the Fund is providing on-going technical assistance, such as the budgetary, tax and exchange rate areas. IDA and other donors, In particular the UNDP, already have technical assistance resources in place to reinforce the Government's economic management capacity. In addition, IDA has allocated rou through a Project Praation Facility under the private sector development project to s1pport implementaon of regulatory and legal reform. C. Pr t and Disbu 106. The credi wil reimburse 100 percent of the foreig excage cost of ger imports not contaned In the negative list (e.g., excluding luxury goods, mflitary equipment and e mally hazadous products). The raia miion reviewed the laws and derees pert to governmet procuremet and found them to be in accodance with the World Bank's Procemat Guidelines. 107. Import contrauts above US$ 2 million would be procured in accordance with simplified ICB. This thshold is consistent with the anticipated sizes of contrac and the experience of the borrower with Bank prcedr. Existing procedue used by the pubLic sector wUI be aceptable for aU procuremt below the ICB threhold. A Bank survey of public importer shows that dired contact with a limited number of suppliers occurs mainly on the basis of vendor lists 1hat are revwed and updated regularly. Disussions with the Chamber of Commerce, the commercial banks and a few private importets Indicated ta the private setor does follow establised commercal practices and, whenever possible, uses competitive biddig or comparative aseme of cost. For amouns between US$250,000 and US$2,000,000, public sector agencies will seek at least three quotations from eligible suppliers with the exceptiVon of proprety equment, spare paru and standdized equipment for reasons of compatility. The prvate sector, with the same excptions as the public sector, will follow standard commercial practices. 108. ohe Bank is satisfied with th Government's decision to ontinUe IS current contact with the preshlpme inei firm, Socit G"le de Survelac S.A.. Prcement will be coordinated by the cetal bank ot urndi under arrgements satisfactoty to the BanL he central bank will rovide quarerly pges rport on procurem activities to the Bank. Imports shpped before Januar 28 1, 1992, as we1l as conta below US$ 10,000, would not be elible for Bank financing. lhe latter threshold is corsistent with sadtiscy access by sml- and medium-sie importes, and would sdtl be manageable to admintr. Retroactive financing would be acceptable up to US$6 mfllion (or 20 percent of the total credit amount) for eligible imports paid during the four-month period preceding credit signing. 109. Disbursements for contracts under US$500,000 would be made against staemen of expenditure, with the disbursementprourement documentatin reaned in tho field and made available to audito¢s. 'Me audit's terms of reference would require the auditor to verify that procurement conforms with procedures oudined in the Credt Agreement Ihe Government will establish a new special account at the central bak to facilitate disbursements. D. SAC m Condionality Up-Ftm Ac*on 110. Much of the key conditionality associaed with the program supported by the third SAC has aready been Implemented. As part of an effort to limit the scope and imprve the effctiveness of the role of the state agreement has been readied on the parametes of a revised 1992 budget and on a 1992- 94 PEP, both satiscory to IDA. Agreement has also been reached on a plan for reducing non- developmental expenditures and for increasing spending on goods and services to cover investment-related recurrent costs. iuidation decrees have been issued for 10 PEs, bids for half of the enterprises slated for priv"tzatn in 1992 have been issued; and a moratorium has been declared on all new investment in PEs to be privatized or liquidated. In order to improve incentives for private sector development a more flexible exchange rat system and an OGL have been introduced; transfer of profits and dividends abroad has been fully lberaized; and overseas remittances of foreig workers has been significnty liberalized. In the agrictural sector, the practice of having mandatory crops, government-administered prices for iputs and producer prices for export crops, and monopoly rih of PEs for purchang, marketing or processing agricultural products have been eliminated. Moreover, criteria for allocat public lands have been established. In the social sectors, expenditures consmttutg a socia fety net have been identified, and agreement has been reached on the genera principles of a comprehensive finncing strateg for the education and health sectors. Effetieness: 111. - In the public resource managmm area: adoption of a revised unified budget for 1992 cnistent with the approved 1992-94 PEP, including civil service recument clinpgs; - In the publ eerprise rjnn area: (i) issuace of invitations to bid for the pdvatzaton of the capital of PEs lated for privatizato in 1992, sature of private maagement conacs for PEs r_pasenting 14 percent'of the Borrower's assets portfolio, and adoption of a dmetable sasfatory to IDA for the restucturg of 26 newly classified PEs; and (ii) oWng of instutional capacity through adopdon of a restrucbtg plan for SCEP, a surveillance nme ism for PEs to be privatzed or liquidated, and liquidon of the SCEP's Intervention Fund. Second lhwhe Rekase: 112. In additon to the specfc co ions dentifild below, second tranche release will be congent upon atisfatory completion of a general performac review of the program and of Burn's economic managemenM The specific condions for second trAche release ae: 29 - In the publfc resource management area, adoption of: (a) a 1993 unified budget consistent with: 0) a ysa ctoy 1993-95 PEP; (ii) a 1993 civil service rtment ceilings of 1000 individuals (in gro tems); (iii) a reducdon of direct and indirect subsidies to PEs to 7 percent of total expenditure or FBu 4.2 billion, whichever is lower; and (iv) a social safety net, satisfactory tO IDA, which covers priority expenditur for education and healt; and (b) adoption of the 1994 unified budget satisfactory to IDA consistent with an increase in non-wage current expenditre for goods and services to 30 percent of current expenditure, or FBu 9.7 billion whichever is higher; - in the pulk enterprise ronrm area: (i) completion of all ageed liquidations (equivalent to 3 percent of public asets) and the privatization of the equivalent of at least 6 percent of the state's portfolio (in asset terms); (i) completion of bidding for the remaining enterprises slated for prlvatizato and (il) conclusion of the remaining private management contracts (equivaent to 49 percent of public assets); assets of enterprises for which timetables will bs received prior to effecdveness will be added to these amounts; - in the regultoiy area (i) submission to the legislatur of a revised labor code satisfctory to DA, Icuding relcem of regulations requiring private sector employers to provide all of the coms of medical care for employees and their families with a cost-haring arrangement, and the liftg of excessive constaints on dismissal; (C) elimima of wage fixing for vadous pessiona groups with the exception of a minimum wage for unskilled labor; and (iii) submission to the legislature of a revised commercial code, satisfactory to IDA; - in the carms tarefm area: 0) reduction in the tariff spread on non-luxury goods; (H) retduction of the custms tariff on luxury goods; and (I) revision of the list of luxry goods, all satisfacory to IDA; - Submission to the legislature of the General Tax Code and adoption of other related regations, saisaor - to IDA, in order to eliminate exising intersectoral distortions and to promote prvate sector development; - Implementatio of the financing strategy for educato and health (including cost recovery), sati to DA, including the definition of the respective roles of the Borrower, the non- govern l o ions, the private sector and users in the health and education sectors. i. C n ad Cofinancg of the Progm 113. Co n with other donors and the IW has imved markedly since 1990. As sectoral PEPs improve in qualWt they shod creasingly provide the basis for budgetary targets reed with the IMP. The Bank Is working closely with the IMP to ensure that demand management measures focus on reducing cer types M of pubc consUMPtion whfle taking fully into account prnvate sector ruirements and the socia say net. The Bank is also working closely with IFC's Africa Enterprise Fund (AEF) and the Africa Project Develpmeat Faciliq (APDF) on private sector issues. As explained in paagrph 51 of the strategy secton, the Bank has moved to improve its coordination with other donors particularly in connection with the musa of the impact of SACs I and I and the preparation of SAC m. Much of the tchn mIIStaCe eWeded o implent the prpose SAC m is being provided by other donors. 114. The proposed SAC m would be complemented by tte IM's ESAF program. The ESAF angement for US$42.7 mllion (100 percent of quota) was approved by the IMP's Executive Directors In November 1991 ad Is to be disbursed over a thre-year period in the context of separate anmnal - "1' U a Ifljbj I hhJ2  1*  ii rii I. R a.s§8 _ I  0  111 iii 11111 ii 0 L311 II1f;1IIiiI w?IIiIIfl1a I 2 B 1-44.1 . I ['ii.Ii iiLiIii!iIttI F"'  ii' MILlIE 31 PWd v:s m 118. I am lflod ta the proposed crt would comply with e Atlls of Aenmt of d X A holo I recommed tua the Ex tv e Diretco apprv the propos IDA credit LProsn Wahint, D.C. May 12, 19 Annex I.a: Let of Developmet Policy Annex Lb: Policy Mmix Annex TL Key Macwenomic nmcao Arm l.b.: Balanc, of Paymens Annex Mc: Exnl FPicing and Sources Annex M: Spplem Data Sheet Annex IV: Stat of Bank Group Opeations (ak and IPC) ar jUA .3 t iii ifffy3    3 iii !!If I 1I%pPI ii! '" S op Lwp. IIii42hi ii jN. Iit r N: 1ii 8 0 d 4 1ii d a. !jij 1111 a II ii 3.oo ii i'4 [4 'ii sql p p d o0 I ..-p.  ga.  '5 51 ii'i ti '4' 0 ' - iq o4 ANNEX L.a Page 2 of 15 8. Given the persistnce of theso problems and the national dtion o the challenge of development, the Burundi authorities have confirmed their commitmento the struct reform program by expanding on the meaur taken during the first and second phases, and by adopting new measures to restore macroeconomic equilrium to ensure sound and balanced growth. 9. lhe Government is inten on strengthening its adjustment program by drawing on the lessons of the recent past. The policy of national reconciliation has the potenal to guaran a favorable climate for long-term investment and growth. Experience gained in the area of public resource managemen during the reform period, as well as the readiness of economic agents to participate in formulatig strategies and shaping development programs, are addidonal assets that sud be used to grater advantage. The newly strengthened program is expected to improve the ability of the economy to absorb externa shocks, smulate growth, and create the conditions for evetu divesfication of the productive base. 10. In the short term, however, there will be no clear progress towards diversification because of the anticipated increase in coffee production steing from recent large-scale investment in the sector. Sdill, fmancial balances should become less marked and help assure the relative stability of domestic prices and a tenable balance of payments position over the medium term. 11. As the economy continues to grow, primarily due to agriculure, two factors are expected to limit long-term growth: elevated populaton densit that is among the highest in Africa, and Intensive utilzation of arable land. The success of the program will depend on the extent and speed of public sector withdrawal from producdve acdvities. The quality of public investments must be improved and the share of prvate sector in total investment must be increased. Ihis presupposes that the public sector, In addon to tanSferring certain actvities t the private sector, will perform more efficiently in those activities for which It continues to be responsible. 12. Nevertheless, in order to promote a level of overall investment that assures an acceptable level of economic growth, the rate of government withdrawal from productive sectors must be com u with the ability of the private sector to asume its responsibilides. 13. The development strateW pursued by the authorities wil be to liberalize the economy by enabling fanmers to maxiize thir output in response to market signals, and by providing them with the right kind of support e. By less the preeminence of coffee, this strategy should serve to encourage the diveificaton of the agdcultrun sector and the promotion of labor-intensive, high value-added crops (e.g., fruits, vegetables and flowers), as well as products of animal origin. 14. The Government will also encouage industrial production, but success In this sector wil depend on promoting pvate inative as well as improving Buuds competiiveness abroad. It Is the Governt's intention to take full advantage of the increasingly numerous oudets afforded by inter- region trade, particuarly within the East Africa preferenal trade zone, and to broaden the range of products the country eMpots beyond Africa. Beginming in the first year of the program, a concerted effort will be made to re the exage and payments system, retucture both the coffee and public enterpri sectors, and revise Istume of monetary policy. Throughout the program period, the Goverment will pursue prudent demand managemnt strategies and insute policies th promote grter spply respons. ANNEX La Page 3 of 15 1S. The key goals of the third phase of the structural adjustment program are to: (i) achieve an annual average real growth of 4% of GDP; (ii) bring down inflation from 9% in 1990 to 4% In 1994; (iii) reduce the balance of payments deficit (excluding official transfers) to 14% In 1994; (iv) increase the surplus on current budget operations from 3.5% of GDP in 1991 to 5% in 1994; (v) gradually reduce the overall budget deficit (excluding grants) from 9% of GDP in 1990 to 6% in 1994. 16. Achievement of these goas will depend fimdameally on reforms In two key areas: public resource management and promotion of the private sector and exports. SAC m will also encourage a public etpeiure policy geared to reducing poverty and cushioning the adverse consequences resulting from enterprise reform. A. M - gement of Public Resources 17. The couty's macroecoomic dequilibrium has been largely due to imbalances in public finances associated with frequent fluctuations in coffee export revenues, increases in public expenditure and inefficient monitoring and administration. 18. As part of its 1991-94 macroeconomic framework program, the Government is committed to gaually reducing the overall budget deficit from 9% of GDP in 1991 to 7.5% In 1992, 6.5% in 1993 and 6% in 1994, as well as to increasing current savings from 3.S% of GDP in 1991 to 5% in 1994. In order to achieve these goals, the Government will pay strict atention to reinforcing revenue collection measures and to following a prudent public expenditure policy. 19. The Govenme's strategy is to radonalize the management of public resources through better exendture programming and strict adherence to the principle of a unified budget, to continue its withdrawal from productive aiies by restructuring public enterprises and eliminang their subsidies, and to strenge control over expenditure through civil service reform. In addition, an instutional mechanism in each ministry will be developed to allow both the PIP and PEPs to be incorporated into the budget cycle. Sub-committees will be created in the Ministies of Plan and Finance to coordinate this process. A.1 Pro n n montrn of pulc epd 20. Ihe Govement has adopted new programming and budgeting istuments to clarify its policy on the allocation of public resources (PIP, PEPs, unifed budget). The PIP, PEP and TCP (technical coopeaton program) are based on a thre-year rolling program and are reviewed each year. Beginning with the 1993 budget cycle, the Government will approve the PIP, TCPs and PENs prior to dtermining the budgetary envelopes within the context of the Finance Law. 21. Tne methodology for preparing PEPs calls for resources to be allocated among inividual programs. Their formlation will be the responsibility of the sectoral ministries, and their supervision and coordination wi be a fction of the Mnisties of Plan and Finance. This is to ensure that ) they comply with the guidelines of the Five-Year Social and Economic Development Plan and the Economic Policy Framework Paper; (il) the coherence between the finacial and physical aspects of the unified budget of the preceding year and the preparation of the curent year's budget; (-di) the physical and financial elaboration of the PIP-PEP-TCP of the preceding year. In addition to the four sector ministries ANNEX L.a Page 4 of 15 (Education Heath, Agrue, and Trsport and Roads) hat curtly ope under PEPs, the Govenment will require that the Ministres of Rural Developmen and of Energy and Ming prepar PEPs for 1993-95. 22. The PIP is an essenea component of the PENt and is an Isument the Govenent relies on in deciding public capital e diture priorities. PIP operating expenses and other recurrent costs wil be evaluated and norporated hto the unified budget as current dit. Recurret costs, however, will not be Incorporated into curent expenditre until the PEP process coves all sectors. 23. Incorporation of a project in the PIP will depend on a feasibility study that justifies a poteal economic rate of return of at least 10% for economic investments or, In the case of soci projects, ta it saisfies cost-effecdveness crteria. 24. In addition to these overall eligibiity crteria for projects in the PIP, other specific requirements connected wih th project cycle and the PIP itself will apply. In this way, third-year projects must conform with Five-Year Plan guidelines and with sectoral policies for which financing is available. All second-year projects, in addition to meetng the crteria for third-year projects, must be badked by a feasibility Ptady, an appasa report and identification of the sources from which Its recurrent costs wil be fnanced, and must be able to command finncing on concesona terms. A project wi be seleced for executon during the first year of the PIP if, besides meeting the crieria for second-year project, it is also backed by an Implementation study and is assured of external and coutepart finacing. 25. As far as PIP financing is concerned, the Government wil iher fund projects with gra or borrow on concesonal tms, keeping to a level with debt-evice rato caps. In addion, the Govemn will be caul to generate public savings through the genera budget to be allocated preealy to financing public Investme projects. Shmold public savings be insuffcient, the domesti f_in g shortfal wil be covered from cowuntpart fimds gentd by baance of payments aid. 26. The PIP wiUl be mainly prepaed by the Ministry of Plan and wil benefit from consultations with sector minities and donors. The Ministy of Pla wil issue admintve orders prescribing the selection and appraisal criteria ta a PIP projects must mee as a condition for iporation in the unified budget 27. The Governmet wiUl use the project data bae as a means of verifing complice with all eligibility and appraisal criea on which depends Iono n of projets Into the PIP. This tool wil be futher improved so that it provides a stndadized melhod of evaluatig the extet to which any project is cosistet with sectr policies and strategies. 28. Begining in 1992, pulibc resources have been allocatd under the unified budget. All public exp_km by the cerl governmet, together with public eterpris investments financed fiom subsidies and finds onlent by the TreaLy, have been included In a unified budget under the heading of capit _hure. In addion, al counterpart fund accunts have been clearly Identified as central government depos and placed with the Central Bank. All public ex u disbu from these accun have been reflected in the budgeL ANNEX L.a Page 5 of 15 29. PAor to preparadon of the Governmens gener budget, the Mnistry of Plan wiIl submk the pwoposed m omic framek t the Govemnt for aroval. This framework will be doeeoped by a tecical commtee chaired by the Ministry of Plan and consist of es from the Ministy of Finance and Central Bank 30. Ihe Mistry of Finance and the MiWty of Plan will be joindy responsible for drafing the anual Finance Law. An inter-ministerial committee will be stablished to preare the PIP and the Integration of the PEPs, TCPs and PIP It the budgetay proce and their annual budgetized rche into the Finance Law. This budget process will respect a timetable that outlines the sequence of actions to be undetaken f*m January I to Decmber 31 of each year, and which Identifies the respective responsibilities of each tecal group from the Ministries of Pla and Fiace and the Central Bank (BRB). 31. Ihe Ministe of Finmce will overee budget execution. The Govemment will ensure trough the unifled budget that public savings, prior to the Imposition of new and/or higher taxes, are firs generated by reducing subsidies to public enterprlses, radonaizing resources in the PEPs, administratve refrm, cost recovery policies, and reducing the number of Import duty exmptions (except for those oudined in Vienma Convenon and the bivsent code). These savigs, which will enable the Treasury to pay down Its debt to the domestic banldng systm, wil also help finance public invetmen. 32. Finally, the Governmen, with World Bank support, prpos to introuce a national accoundng fhmework that will ensue the complete transparency of all financial opeions and pave the way for adoption of rulations designed to inprove budget execution. A.2 R aa of currenteadiu 33. An analysis of the stucte of e has revealed a growing inmbalace between wage expnditures and CU ependtes on goods and services. Given the objectives of the program, the level of exnditur on goods and services will iase it8 ratio tD current expenditure from 24.9% in 1992 to 30% in 1994, equivent to an increae of FBu 9.7 billon. 34. The Government has decied to Improve the strcture of expnditures by liing wage costs and dire d indirect subsidis to public entpses. wil help Inc e savings to maitan economic and soc8 i. 35. In the context of redocin wage epdhr, altoh the objectve i to stabilze the wage bil in real terms withi the short term, it wil be reviewed following the reform of the civll service. 36. Stabilizaton of mst misi maing taes has aledy bee aceved as recruitment is creny limited to replacing only vacnt budgeted posts. Mhe policy is to maintain recruimt to approiately 1,000 unIts per annum oveall with preferen given to the social ministries. 37. On completion of the current execise to evaluat the mat of skills with job the Government will be abe to Ientify service staff who shold be redeployed or ecuragd to find Jobs In the private sector. Inducemes to leave will be nesary only in cases where the individual ANNEX I.s Page 6 of 15 cannot be employed usefully In some other govement position. Ihe number of persons affected will be very low, since the civil service in Burundi is not overstaffed. 38. Since 1991 all govern workers with reguar and fixed-term contracts who have reached reirent age have been nvited to leave the civil service. These eforts will be continued in 1992 and 1993 by ensuring that prolongats of service or replacements are allowed only in cases where they are absolutely Idispensable to the proper functioning of govrnmet departm. 39. The Govement has begun a rtvision of the Civil Service Staff Rules and intends to alig tem with curt policy aims and, in particular, to add legad provisions that will facilitate: (i) improved management of the civil service; Ii) Insistence on efficient performance by civil servants; (l) motivation of civil servas, in pardcular through better orguanizaon of career Jevelopment channels. 40. In addition, an ongoing UNDP-supported study designed to provide a census of civil servants and descriptions of their job positions will clarify the tasks and skills in the various units of the civil service. Tho stody wil also provide a means of dermining which fnctions te authorities could hand over to the prvate sector, local communities or private entities (for example, NGOs). TIis would, in wn, reduce other curent peditues, particularly in the form of allowances and transfer payments. 41. S neouy, the Government will encourage local communities and NGOs to take on an Ireasing share of the responsibility for development As part of this move, it will redouble efforts to recover cost in the health, education and other public sectors. 42. As far as subsidies are concerned, the Government is committed to reducing them by a significant amout and, more particiuarly, to elimnating direct and indirect subsidies to public enterprises by 8.8% of the tot budget in 1992 and to 7% in 1993. Moreover, enteries to be liquidated will no longer be athrized to obtain new loans or undertake new investment projects. A.3 Reform of oblic idses 43. Since 1986 the Goverent has gone to considerable lengths to reform PEs in order to lessen their burden on t'he budget and to Improve their perbrmance. ITe responsibility of monioring and supervising ths sector was entrust to SCEP, an agency created in 1986. Its chief task has been to draw up apprpr instrumen setftng out a clear management and monitoring strategy, the main elemens of which are: (i) definion of the sector rough classification of PBs by type of activity and legal status; (i) revionof the frmework witin which the PEs fit so as to strengtien their wtonomy of maagemnt and clari the sttutonal links betwehem and the Government; (ii) iroduCtion of a management Ifomadon system,; v) formuon of rehabition plans and the signing of pefmance coacs with the principal PBs (OTRACO, REGIDESO, SOSUMO and VERRUNDI); and (v) adoption of a system for ex diidag of the fancial sments for all PEs. 44. So far, tee has been no improvement in the net financial flows from the PEs to the Govemez Ivebmet retu In the sector remain low, borrowing by the PEs has reacbed untenable levels, PEs have consintly been granted indirect subsidies, and their tax and aas have accumulated. ANNEX La Page 7 of iS 45. The Governmes policy towards the PE sector adopted in January 1991 focuses on making it cost-effective. To this end, more far-reaching reforms have been instiuted to reduce the Government's role in the productive sectors of the economy by creating conditions that will attract private investos, and to lighten the financial drain on the Treasury created by the PEs. Ceiligs on domestic credit to PEs (in which the Governmte holds over 50% of capital) have been agreed to with the Intrnadonal Monetary Fund, with provision for the issuance of periodic reports. The Government will no longer extend Its guarantee to PEs, and a Ministry of Finance circular was issued In February 1991 to all commercial and industrial PEs advising them that indirect government subsidies were virtually eliminated. A study has been carried out to Identify strategic or profitable PEs and to allow decisions to be taken regarding their future (rehabilitation, privatzation or closing down). The Govenment has also approved a regulatory and judicial framework for the privatization of PEs, in addition to adopting a Privatizaton Law and seing up monitoring endties. 46. Based on the findins from the above study, the Government has adopted a detailed action plan to implement PE reform, which includes: (a) Classification of public enterprises by type of reform. The total assets of PEs sated for reform amount to FBu 130 bilion as of December 31 1990. According to the classification, the State will: (i) liquidate ten (10) PEs equivalent to 4% of the State portfolio; (i) privatize their capital equivalent to 4% of the State portfolio in PEs; (ili) privatize the management of PEs though contracts for management-leasing or other appropria means equivalent to 5S% of the State's capital portfolio of PEs. (b) An implementaion calendar (i) prior to end-1992: the liquidaton of ten (10) PEs, privatization of capital equWalent of 2% of assets; privaizaton of management equivalent to 12% of asset; an implementation calendar for reforms of PEs newly classified will be adoted prior to August 1992 (Annex Ilc); (H) prior to end-1993: the prvatbaon of capital equivalent to 4% of assets; the prvatization of management equiaent to 37% of asseti; (di) prior to end-1994: the prvtizaton of capital equivalent to 8% of assets; the pivazato of management of PEs equivalent to 6% of assets. The deadlines oudined In sections (a) and (b) above are the final dates by when final decisons must be made for the entis that wiU not have been privatized. (c) The p aon strateW for each PE which spells out the shares for nationals and foreigners. 47. PEs eamartked for rehabilitation will be requied to enter into pefmance co s which will contain ptovsions for semi-annual evatuations. The Govemment will continue to eliminate from Its portfolio any PBs dth are not economicaly and fnaciy viable. The Government wi refrain frm creating new Pes except for those approved in the context of the PIP or on-going Pe reform efforts. 48. Tn addition, the Government has recently completed a sector study on GovermentPE finac flows and on cross-indebtedness among PEs from which an action plan to reduce PE financia dependence on the Treasury has been fomuated. According to the plan, net deficit of Stat-PE financitl flows will be reduced to FBu S.1 bIllion in 1992, FBu 4.2 Billion in 1993, and FBu 3.8 bilion in 1994, equivalent to 8.8% of total expenditres of te unified budget In 1992, 7% in 1993 and 6% in 1994. ANNEX L.a Page 8 of 15 49. Pgs remaining in the Govenme's portfolio will be managed as profit-making conean. To this end, they will be fee to set the prices of the goods and services they produce, and will be entWed to compensaion when prices ar to be adminstr and kept below their real level. Reques for compensawry and provisionad subsidies will have to be fled with the Goverment prompdy enough to enable it to examine the mert of eah case and, where applicable, to include fimding in the budgetary cycle. The PEs wil be expected to contie investing thik cash resowces for the highest yield, finmce their own investments and mee their obligations to public- or private-sector tird parties. In the intest of sound management, the Govmeent will require PEs remaining In its portfolio to follow privae-tor management methods. SO. in addiion, the Govenment wil set limibt on both direct and indirect subsidies to the PEs. In this regard, all import duty exemptons were abolished in April 1991. In order to esue rational investment decisions, those PEs in which the Government holds over 50% of capital will be required to submit their investment plans to the Mistry of Fiance for approval. Mpreover, they will not be authorized to Invest in other PEs earmarked for privatzation or to take up equity holdings in public- or private-sector enteprises regardless of whether these are aready in operation or to be created. B. Supply Reponse 51. The economic reorms for enterprises are expected to boost eonomic productivity with a view to achievig average growth of 4% during the program period and maintainin Inflation at moderate levels. The anment of these objectives wlll be uppforted by the establishmt of an envkioment that encourages etr p competion, savings and lnvestment. The Government will seek to eliminae dbstorons and conai hat interfre with the normal interplay of market forces, to stregthen Incentives for export and investments, and to improve Insttuional caacity for providing upport and advisory servies of the private sector. B.l ComrnaLand a wiI 52. The reforms in this sector wDI be cenered on eliminating reguatoy bottlenecks and improving bureaucratic incentives with a view to making the economy more dynamic and competidve. 53. The Government has undken a review of the investment code with the goal of achieving aomatc and tra ent access to the r ed beneft and the investment code's utilization as a true marketing too. 54. Mme Government also plan to review the oveal ommeid and business code to create an wnronent conducive to priva inative. his reform, in the context of a review of current legislation, will seek to conceive new staes In areas where a lack of legislation has been identfied, and wil seek to simplify adminisa procdum . To this end, reom and I n of the Com _mcial Code in the scope of private sector rerm wil be considered a priority. 55. In order to make Burundi exports more competitve, the Goverm is commited to liberalizing trade and xchang controls. To tat end, dministratve procedures that still hamper the estbishment of new busine wil be made less cumbersome. ANNEX l.a Page 9 of 1S 56. in addition, the Governmen plans to completely liberaize foreign commerce with the adoption In May 1992 of an OGL. At the same time, teCeral Bank will surrender its dutes in this matter to commercial banks. 57. With the assistuc of the IW, an appropriate legal and regulatory framework for the management of a less centralized exchange system will be put into place. 58. In tandem with the liberalization of foreign trade, a new system of exchange rate management by the BRB was implemented in Apr 1992. Te FRu, no logr tied to the SDR, is now tied to a basket of foreign currencies which bett reflect the composition of Burundi's ineadonal trade. Furthermore, commercid banks have been authorized to establish their domesc excbange rates wiin a spread determined by the BEB and to carry out exchange bt actos for their own account or for clients. These reforms wil be supported by the adoption of appropriate pricing policies aimed at the opdmal allocation and udlization of resources. The Government wil completey abolish price controls, with the exception of those afing monopolies, which will be adminred by tripartte commissions, economic agens, government agencies and consumers. Electricity, water and mass transportation rates were revised upwards to enable PEs In those sectors to recover all costs and therby Impove their financial itudion. As gards agdcultural prices, the objective is to contdue liberdization. A floor price will be put into effect for coffee, cotton and tea, since for all otier products' prices are fully deregulated. 59. Moreover, the Government is planning to improve taxation to make it more likely to improve economic productviy. in this respect, tax reforms will be introduced with the joint suport of the IMP and the Word Bank and the results will permit the reduction of the customs tariff spread for non-luxury products to a minimum of 5% and a maximum of 30%, and to reduce to a maximum of 70% the tarM for luxury products. A reviow of the list of this last group will also be made. 60. In the metme, the Governm adopted a policy of eliinat exemptions from Import duties except for dtose stipud in the invesuet code. It also made the administrtve prcedures for drawbaclk and the prefial system of taxadon for export befits more operational and flexible. 61. Lasty, to improve the ntioncapacity to suWort privat sectwr devdopment, the Goverment will assist the CCIB and the APEE in seeking technicd and financial assistauce from donors for carying out its task. Measures wil be tamen to strengthen traiing in management, technology and industrialJ matenac. Mbe progm has aread;' been formulated for _id maintenance, and the need for expertise in Itr management training wiU be ideiied in 1992. Ihese meass will receive support from the prvat sector technical assice project. 62. Addiol meues wiUl be taken to eourae the emergence of a dynamic and competiive mana ig secor, includig: i) the development of serviced industrial lots for sml and medium industry; (i) establishment of "free trade stats for emnpries oriented totaUy or primary toward exports. B.2 &WmdWW turl aol 63. Because th a ure sector is the keyston of Burundi's economy, it will receive special aention. The Goverment wl establish structures and mecnsm to: (i) increae produedon of the ANNEX La Page 10 of 15 main crops, in particular food crops, to improve the diet of the population; (i) increase the productivity of cash crops, particlarly through the dereguation of prices and privatization of management; (ii) promote greater diversification and inease producdon of exportables. At the cash crop level, a series of measures will be itroduced to increase their rate of growth during the program. 64. Becase of their importance to the food production sector, special autention will be given to the following programs: (J) undersWnding and implementing of erosion-ontrol techniques to stop soil degradation and protect the work already done; (ii) rational use of fertlizers and selected seed; (Iii) increase research financing and focusing it on research and development; (Iv) promotion of appropriate rural extension methods; (v) formWlation and updatig of agricultural statistics and strengthning of the 'Food Information Rapid Alert and Maagement System." 65. As regards production and seed, an appropriate strategy for the production and distbution of selected seed will continue In accordae with the natonal seed plan adopted in 1988. In regads to fertization during the program, the Government will carry out applied research on the types of lime enrichment appropriate for agriculturl usage. Likewise, appropriate handling techniques wil be reseached and made known to the private sector. In additon, the marketig and pricing of fertizers has been totally derlted. 66. With a view to Improving competitiveness and the retum on cash crops, the Government will introduce a price policy that responds to market forces and have agents in the private sector manage the entire cycle, in partar, processing and marketing. For its part, the Government will concentae on providg advisory asistac and conducting research, including rural esion, reglation and quality control. This action has already begun for the coffee sector and will be gradually expanded to tea, cotton and vegetable oils. 67. As regards stockrling, the Government will make greater headway in the gradual privathzation of state fams. This action is under way and wiUl continue troughout the program Wherever possible, a budget line wil be allocated to stockralsing under the projects. ITe inteaion of firming and sockrling will remain a priority. lhe Government will consequently eliminate by June 1992 disparities in custms and tax. rates between inputs for agriculture ad tockraislg and between the private and public sectors. 68. CroppIng techniqes that conserve water and pro the soil wil be improved, and legilativ and laud tenoure will be studied. In additon, means for improving cooperation between the Ministry of Aricltme and Stckasn and the Mistry of Development, Tourism and the Enirmen will be detemned and put into practe for the desig and implion of programs in the field. 69. As regards resec, closely linkd programs will be coordinated. In supple those progms, network-based research, such as that used for small livestock, will be encouraged. Efficient mechanisms fbr cooperation with fmerl and rura exension personmel will be developed by improving researh workshops. Research will focus on animal breeds best adapted to more Intensive exploitation systems, and the Integration of stockraising acdviies and protection of soil fertility. 70. lhe allocation of resoures among the vaious reseach progrms wil be improved. The finds will come from both the Government and foreign donors, including mixed and private companies. ANNEX I.a Page 11 of iS 71. With a view to further improving the peformanc of agricultl producdon, a private collection and dibuton network will be organized to facilitate trade. Animal tion will be introduced in tura areas as an efficient mes of tasporting products to the main roads. 72. Lasy, the Governm will develop and dissminate through rural extensions appropriate meams of processing and consevat so as tO avoid post-hrest losses and shorages. This action will be cadrred out through developmeat projects and agricutural extemion services In the mral areas with the suport of the National Food Techology Center. 73. As regrds the regulatoy famework, the Goverment plans to analyze the following measures duing the program: (i) new means of cost recovery for payswaan land development relative to th level of Inteification realized by the farmer; (i) establim of other enavironment protection reguladons; (il) policy for leasing state-owned land, which could be based on the developmeat potent of the land in queson; and (v) involvement in promoting producer associations with a view to increasing their negotiti power vis-k-vis the suppliers of production inputs or purchasers of their products and providn their members with the services they nee1. B3 IsDoli 74. In seeking to match employment supply to demand and to sti_m e the creation of new jobs, the Governmen will hoduce strategies that reconcie the gradual hirn of avaiable manpower and the estalishme of a legilatve envromment suited to the country's socioeconomic development. To at ed, curret revision to the Labor Code wil seelk to: lighten non-wage costs shouldered by coies, make administrative procedures more flexible, deregulate recuitment and bring about broad involvement In the formulon of working conditions hough collective bargaining. The new Labor Code should be f.insed in the second quarter of 1992. 75. Specific aconm have alrady been envisaged and include: (i) liberalization of employment condions for exriate manpower. The Government wil replace the double work authrization permi required for freiW reddent In Burundi with a simple work permit; (n) a feability study fr the etablishment of a pdvate health isuramce system with a view to having employees contribute to socia co beginnig in 1992. 76. Furthermore, the Govermment wlU establish an instituonal framework to promote employment in the busins sector. In this respect, private placemen companies that match up job seekers with employers has been authorized since November 1991. The Governm wil introduce additional mes to itfy and eliminate all legiative and regulatory constrain on the abilty of investors to create and promote employment 77. lhe Goverment wiU fiurter develop with the assistance of varous economic sects a stratew for promoting and Impleting employment programs in both the modem and Informal sectors. In this regard, the Govment wi Implement measum likely to: (i) promote labor-Intensve lnvesment (road cenuction of pubc budings with local materials, etc.); () foster the structurng of the Irmal sector by focusing on young school dropouts and women; (ii) promote the mobility of workers among various economic sctors. ANNBX La Page 12 of 15 78. Lastly, an effective vocational taing policy wfll be formulated with a VieW to adapti curiCUla to the needs of the markeplace and focuinSg teaching methods on enuraging private inive. B.4 Money and credit policy 79. In order to bring about a more effcdve suwply response, the Government will Implement monetay policies capable of stimulating savigs ad invemt, and conting iion and presr on the balance of paymen. 80. in order to attain these objectives, the Governmnt has established seve measures since July 1991: a system for Indirect contol of credit based on reserve requirements; an impvement in the redicout rate; and unification of the rinancing rate since May 1991, which Is adjusted for changes in Tresury bil rates and other macrconomic indicators. Similarly, aumatic recorse to reinci from commerci banks has been eliminated and the amount of refin cing will be dmid based on monetary growth targets. 81. In order to safeguard healthy competition between bank, the Govement has prohibited the conerted settng of lending term by credi i 82. Ihe market for Treasy bils a pricipal instmet for managi liquidity in the econmy. Since July, the Governmen has sought to continue increasing thei efficiency and heighten their role in moneay policy. ITe mmm amount of each subscription was reduced from PBu 100,000 as of July 1991 in order to iaem the number of partcipsm. Likewise, as of Jamuay 1992, the Govenmet bn Isui berer Treasuy bils and iase the frequency of auctions to twice a month, and these ae sold with rebates. Furtmore, in the effort to crae an active secondary money markt, the authorities have ideified four finan l Itutions to act as primary go4etwees. 83. LookIng to organe an active money maket, the Central Bank will seek to develop a secondary mwket in which it will act as Intmediary between financi iniutons with ewcess liquidit and those in need of liquidiy, with padcipas freely reponig to quantity and interest rates. 84. Laty, with the a ce of donrs, the Govenmt will undeta finan reform to better determ monety and crdt policy and to Improv e stiotonal framework, paticourly In terms of oversight procedures and bank supervision C. Sodal Dmeons of Stru Adjustmed 85. The structu adjustmen progm also inludes acdons designed tO involve all sm of the ppulxao In the deveopmet effrt and to offet any adverse effect that may arise from the macroeco i refrms. 86. During te SAC m program, the Governet's conce as regards the socia dimenion of structural adjustmet wi be centered primarily around the following three Issues: (i) vocatina reaining; Qi) studies and urvey; (Hi) fnaning for the education and heath sectors. ANNEX La Page 13 of 15 87. IWO vocadonal rernig pgm wil be agtod towards employees of public ad para lic ntprise, govenmen wotkens who ar and/or will be affecot by the reforms adopted under the program and young grduates in serh of their irt job. 88. To implement the ptocess, certain actons have beeo take since the beginning of 1992: the creaion of a retining unit, impnof an isttuonal progm (pecificaly, a rerning and supervisy unit), and an evalon and search for reed financlig. The program wil focus ol: 0) an Imprved diagnostic compont regarding human resources in all audits of hose enprises to be reorganized; (i) the elinaton of taation on temiaion saowanc (15%); (ii) the establishment of a system whereby those laid off would receiveocial services peding their retraining; Ov) Implem aion of an inhrm system desipdb to rak the exce and the progress of the retraining program. 89. Te objecdve of the Ostudies and surveys progm wl be to ientfy vulnerable groups and their indicators, as welI as appropriate ways of improving the mot of those adversely affected by the rctral adjusm progrm 90. The main dicat will involve the fllowing: (i) employment statistics; (i) household Income and expendiure; (it) health and utrion statistics; (lv) education statistics; (v) staics on type of housing and related infrastuctur (vi) atural statscs cluding toe for agricultural enterprises). 91. To carry out the pogram, the Govment has already eacted the following acdons: (I) strengthed ISTBEU's abilHty t analyze and process data from the budget and consumpton suveys of 1986-91; and (i) establiment of a system r targeting vulnerable groups based on exstg data for the vwrious sector. Furthermore, the Govement plans to eact te following complement actons: 50) bishment of a pmmanent system for collectig ad preing data on household living conditons to make up for ps In iformaton and a an aid in constructing m and socioeconmic indicatrs; and (i) establihment of a studies fmnd to stregten th cacty of socW sectors in analyzing Statistics. 92. The studies and surve program wil be dedSgned prmarily to assi the Government in formulating an effective strategy for finacng soci senices, particulcary the education and health sectos. Th strategy will seek to redefine the role of Goveanim and odter parties inlved in finncing education and health services. 93. Ibe G has already identied the main polidis t wil allow a financn strategy in the sectors to be implmened. In the ar of basic educaton, the goal is to achieve universal educaon by the yea 2000 by creng the ave number of stdepr la ssoomL Impoving the quality of eduation wm be schved by better 8t of tc m ad though schol ipections, and by access to textbooks. Prmay education will remain the responl oft of the State, although the patiipation. of non-governmeMal--f-2- odonso e and the pvat sector will be encouraged. Loc uwAts wi bav primary responsibiy fdo ad rwt of schools. 94. Similar to deft at the prmary lvel, efin is wi be made to Imprve seondary educatio and attendance levels. The maik elmts of the str are: () ho gradual de lizi of finang ANNEX La Page 14 of 15 beginnin In fom community day scol to public boarding school; and (I) encouraging gat community and user pardcipation. 95. Similarly, the quality of education wil be achieved by icreasing the availabiity of tetbooks. When avalabe resources are deemed Insufficient, recourse to fineign assistance will be considered. Given that prvate sector involvement at the seconday level is increasing, a nview system will be required to ensure that the qudity of education remains adequate. 96. Policies to develop educational opportunies at the informa and technical level will need to be elaborated in close collaboration with the business sector. 97. At the superior level, the gods are to improve the quality of education by matching the growth of student to the needs of the market and the capacities of schools. A commision has been created to study the transition from secondary to superior level and the disburement of new grants. Efforts to readuce the costs of superior education by national means will be pursued. 98. An analysis of financing cos in the health sector reveal three major problems: (i) the increnag need of fnancing for basic operations; (iV inequtable allocation of public resources for primary health care compared to odter health services; and (lii) inefficiency of programmg, budgeizaton and follow-up of public expenditu in the sector. The Governmen has take the decision to tackle these problems that could, unless rectified, lead to incrng deterioration of the quality and coverage of health services. 99. The Govement, in colabotation wi itenational agencies that help fnance the secor, will eaborat a strategy to improve the quality and quantity of health services, of which the two main goals are: (1) increasig self-manageent of health centers, begining with the hospital sector; and (@) decntraizing adminitve services now under the Minisay of Health. Two results are expectd from the fist approach: greater efficiency in health centers due to private maage_mn, and the hope that the public health minstry (M) will devote more resources to priority public health programs, provide basic medicines to health centers and referral services, and personnel training and review. The second goal seeks to decentralize the administaon of the MSP, adapting it to the needs of primary health care, and to specialize the role of the MSP in areas of policy and plannin. To enur the success of th reform, it is crucial that the sector's r ing and financing strategies adapt to the new seoal appches. C.1 lonua11on C. I 100. Ihe Government of Burundi and the Economic and Social Council (CES), set up In March 1990, ave amknowledged that the problem of rapid populon gVowth was a nationa priority second only to nationa unity. Indeed, the asumal populadon gowth rate (3 percent) couldjeopardie frts undertaken by the Governmnt in favor of the country's economic and social development. Faced with tis situation, the Govenmeu has clealy identified birth control as the main solution to BuuNdi's popultion problem. In order to instdte a successib birth control program, the Governmt has receny deided to create a Nai Populatio Commisson (CONAPO) made up of r_1es from the country8 differet soco-eco c sto, and an Inter-Minal Tehnical Group on Populaon (GIP). The councl's main tasks will be to develop and implement a national popation policy. The Population and Planificadon Unit MM) wil be the technical seretarit of the Commission, with the latter directly ANNEX La Page 1S of 15 attached to the Office of the Prim M ster. The GTIP will be made up of tehias from different mistries and will serve as technical adviser to the UPP. Tbe UPP's role will be to coordinate and assess population strat withi the scope of the country's soclo-economic plannig. Terms of referene ar currently beng rtviewed and a dre esablshing the existence of these strucures wUI be promlgated shottly. Iese orgazatios, pardcularly the UPP, wil establish a national population poicy prior to en-1992 and wl help ensure ha demograpic variables are Itroduced in sectora development plans. 101. Mhe Governm has also set up a Bureau of Coordi; atlo for the Family Plnning Program (BCPF) wfihia the Mins y of Health, which has recendy drawn up a medium-term fmiy planning action plan (1992-1996) to become operational in late 1992. 102. Finally, the Govement will undetake an anlysis of the fc affecdtg family size in Burundi. Ihe concions of tis study will help detify, wihin the conte of popuation policy, programs that wil in the long term reduce ft in Burmdi. It Is obvious ta individual liberty and respect for human rgbts wil be the two fimdamental principles that guide such programs. 103. It is projected that moderm contracve methods will be employed by 10 percen of potenti users by the end of 1996 (as opposed to 2 to 3 pacent currenty in use).' Ihe Government will gunmtee dta natonal resources are available for the operation of these new Insttutons. The Govenment will also moblze the support of donors to ensure the success of its nadonal family planming program. AALb Page I of 6 BURUNDI: Shucmal Adjusent Crdit Polcy Mat& L PLIBFJCR&9OtRELM4MiG lTMI RWuiixto f q pmitf is- cal 4ustnL Two pi ifidpo pqed iD ioor _o tA t1992 1990 nd 1991 conist with PEPs a finairi of dhe PIP. 1. PAwuMtug ad MmIte f sgrIm1K haut #ad asOt. hc -.ofafi odd 199244 PP. May 992 Piquantiwaof PBPs for agricnu% -t h1adh. and btasost9 in 1989, 90,1991 Mad Cmat of a unt in th hiisy of rnae Ay 1992 1992o do_ PIuawa of 3-yrmlgP aPnc 1988. Adaptiw of a ivsd ified budgWt for 1992. Apgt I992 IutogrstimaofallPE inwtnmntsitdiPEP. Adoptic of a unified budgat for 1993, cossitot Jany 1993 Cdlect. _nmgmt of an dwoce wi th (19939 u_c apadim pmrs- cwtuutfudsby de ataiDk incuig civi sevc e,inn eln . ~~~~~Read of dh" m hxUo luaW o PEs from 8.8% to ?% Adopt.ofte 1994unfiedbudgetc with Dembe 1993 an ca.. in no-wag awat _axdtm an goods ad svie to 30 peres of un acpidis_ror Pfh 9.7 blion, wladive is hber , 2. Restrxeusring of PubUc Agmement on an acio plan for c svice Pin for reducing dirc ad inet subsidies to May 1992 remfL PL t 7% of _ and i funding of nan-wag cuml,t enpaxdieaites to 28% Adopion of a tpans selcdt syslem for of total aaditums by 1993 and 30% in 1994. rennitamat in civil service. Fioancing of te socil 'say ne to I ma Januay 1993 Ag_ement on liitaio of civil serve pnonty expeditms m the dedcaton and halt re4itmet to 1000 in gss twm for 1992 SmCtom in the 1993-9S PEP. ad 1993. AJ Lb Pag 2 o 6 BWURUD Structur Adjustwent Cedit Polity Matrix S ie of 1iudai de8e for 6 PE: Ma t99 Rodc fiwgbd 1 of PBs an dk Cad ed de mvio ill

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