Document of The WorldaBank Report No. 24611-BU INTERNATIONAL DEVELOPMENT ASSOCIATION PROGRAM DOCUMENT FOR A PROPOSED ECONOMIC REHABILITATION CREDIT IN THE AMOUNT OF SDR 40.8 MILLION (US$ 54 MILLION EQUIVALENT) TO THE REPUBLIC OF BURUNDI July 29, 2002 Poverty Reduction and Economic Management Africa Region CURRENCY EQUIVALENTS Currency Unit FBu (Burundi Franc, period average) 1993: US$1 = FBu 242.8 1998: US$1 = FBu 447.7 2000: US$1 FBu 720.7 2001: US$1 = FBu 830.4 WEIGHTS AND MEASURES Metric System FISCAL YEAR January 1-December 31 ABBREVIATIONS AND ACRONYMS AFD Agence fran,aise de developpement AfDB African Development Bank BURSAP Burundi - Social Action Program CAS Country Assistance Strategy COMESA Common Market for Eastem and Southem Africa CPPR Country Portfolio Performance Review CRP Community Rehabilitation Project DDR Demobilization Disarnament and Reintegration DRC Democratic Republic of the Congo EERC Emergency Economic Recovery Credit ERC Economic Rehabilitation Credit ESW Economic and Sector Work EU European Union HIV/AIDS Human LImmunodeficiency Virus/ Acquired Irnmunodeficiency Syndrome HIPC Highly Indebted Poor Countries IDA International Development Association IDF Institutional Development Fund IFAD International Fund for Agricultural Development IFC International Finance Corporation IMF International Monetary Fund MDTF Multilateral Donor Trust Fund MIGA Multilateral Investment Guarantee Agency NCRR National Commission on Reintegration of Refugees NGO Non-governmental organization PER Public Expenditure Review PRSP Poverty Reduction Strategy Paper SMP Staff Monitored Program TGOB Transitional Government of Burundi TSS Transitional Support Strategy UNHCR United Nations High Commission for Refugees UNDP United Nations Development Program Vice President : Callisto Madavo Country Director : Emmanuel Mbi Sector Manager : Cadman Atta Mills Country Manager : Mathurin Gbetibouo Country Economist : Hippolyte Fofack REPUBLIC OF BURUNDI ECONOMIC REHABILITATION CREDIT TABLE OF CONTENTS I. INTRODUCTION ........................3 II. COUNTRY BACKGROUND ........................4 PEACE AND RECONCILIATION PROCESS ..4 INTERNATIONAL ASSISTANCE AND EXTERNAL DEBT ..5 RECENT ECONOMIC DEVELOPMENTS ..6 HUMANITARIAN AND SOCIAL IMPACT OF CONFLICT .....................................;.7 IMPACT OF THE CONFLICT ON POVERTY AND WELFARE INDICATORS . . 8 III. THE GOVERNMENT'S REFORM PROGRAM .............................................9 A. KEY DEVELOPMENT CHALLENGES .9 B. THE GOVERNMENT'S STRATEGY .10 IV. THE BUDGET FINANCING REQUIREMENTS ..................................... 14 V. THE PROPOSED CREDIT ..16 A. CREDIT OBJECTIVES .16 Lessonsfrom the Preceding Emergency Economic Recovery Credit (EERC) . .16 Reforms supported by the proposed Credit ..17 B. RATIONALE FOR IDA INVOLVEMENT .18 C. EXPECTED CREDIT BENEFITS .19 Poverty Reduction ..19 Improved Effectiveness, Transparency and Accountability of Public resources.. 19 Other Welfare and Social Benefits: ..20 D. CREDIT AMOUNT AND TRANCHING .......................................... 20 E. RELEASE OF THE SECOND TRANCHE .......................................... 20 F RELEASE OF THE THIRD TRANCHE .......................................... 21 G MONITORABLE BENCHMARKS .......................................... 21 H IMPLEMENTATION AND INSTITUTIONAL ARRANGEMENTS . .......................................... 21 I. INDICATION OF BORROWER COMMITMENT AND OWNERSHIP .......................................... 22 J. ENVIRONMENTAL ASPECTS .......................................... 22 K. FIDUCIARY SAFEGUARDS ........................ ; 22 VI. RISK AND SUSTAINABILITY ........................ 23 VII. BANK GROUP OPERATIONS ........................ 24 VIII. COLLABORATION WITH THE IMF AND DONORS ........................................... 24 IX. RECOMMENDATION ............................................ 25 Annex 1: Country at a glance ..26 Annex 2 Key Economic Indicators ..28 Annex 3 - Key Exposure Indicators ..30 Annex 4 - Status of Bank Group Operations ..31 Annex 5 - Selected Indicators of Bank Portfolio Performance and Management .. 32 Annex 6 - Distribution of Pledges by Donors (Bilateral and Multilateral Institutions) .. 33 Annex 7 - Summary of Tranche Release Conditions and Timing of Implementation .. 34 Annex 8 - Timetable of Key Processing Events ..35 Annex 9 - Letter of Development Policy ..36 Annex 10 - Proposed Economic Rehabilitation Credit - Policy Action Matrix.. 48 ECONOMIC REHABILITATION CREDIT CREDIT AND PROGRAM SUMMARY Borrower: Republic of Burundi. Amount: SDR 40.8 million (about US$54.0 million equivalent). Terms: IDA terms with a forty-year maturity, including a grace period of ten years. Objectives: The Economic Rehabilitation Credit (ERC) is an integral part of the Bank's Transitional Support Strategy (TSS) to support the transition process and the implementation of the Government's reform program. It would help build the foundation for (i) the improvement of public service delivery and basic social services through promotion of accountability and transparency in the use of public funds, including external assistance, (ii) the Government's efforts to deepen institutional and structural reforms for sustained economic recovery and poverty reduction (iii) the establishment of a track record for early access to relief under the Enhanced Highly Indebted Poor Country (HIPC) Initiative. Benefits: This operation, by focusing on public expenditure management, rural development, private sector development and pro-poor sectoral policies, is expected to help move the poverty reduction agenda of the Transition Government of the Republic of Burundi forward. More specifically, the proposed credit will help enhance the poverty reduction program through (i) increased provision of essential social services to the poor and vulnerable groups, following the rehabilitation of destroyed social infrastructures, improved transparency and accountability in the use of public resources; (ii) support the growth process by helping clear government's arrears to private domestic suppliers and financing key imports essential for the recovery, fostering inclusion by increasing the participation of women to the production process; (iii) fostering private sector development and participation to the production process. Risks: The main risk factors are the internal conflict, the Great Lakes regional conflict, the readiness and capacity of the Transition Government to implement the reforms, and the funding of the transition. Despite the signature of the peace accord and the installation of transitional arrangements, the two rebel groups that did not sign the peace accord are continuing to carry out military incursions. The regional conflict provides Burundi's rebel groups a sanctuary in the DRC. The success in achieving the growth and poverty reduction agenda will require undertaking difficult economic and institutional reforms which are likely to face resistance from powerful interest groups that have benefited from the exclusive system of the past. Also, despite the positive response expressed by donors at the Paris conference and the Geneva Round Table meeting, there remains uncertainty regarding the amounts and timing of inflows of international assistance. These risks are mitigated to a large extent by the design of the proposed credit, which emphasizes donors coordination, and policies that support national reconciliation to facilitate progress toward a cease-fire. Schedule of Disbursement: To be released in three tranches of SDR15.1 million, SDR15.1 million and SDR10.6 million (US$20, US$20 and US$14 million each, with effectiveness scheduled for October 29, 2002. Implementing Agencies: The Ministry of Finance (MoF) has the responsibility for overall coordination. Poverty: This is a poverty-focused operation. Project ID Number: P074602 Map: IBRD 30118 2 INTERNATIONAL DEVELOPMENT ASSOCIATION PROGRAM DOCUMENT FOR A PROPOSED ECONOMIC REHABILITATION CREDIT TO THE REPUBLIC OF BURUNDI I. INTRODUCTION 1. The proposed Economic Rehabilitation Credit (ERC) to the Republic of Burundi, for SDR 40.8 million, (the equivalent of US$54 million), on standard International Development Association (IDA) terms, with a maturity of 40 years is an integral part of the Transitional Support Strategy (TSS) [IDA/R2002-0013], to help finance the rehabilitation program of the economy of Burundi. The Credit would finance eligible imports based on a negative list and the counterpart funds from the imports would finance programs in the national budget. 2. Since the outbreak of the conflict in 1993, the people of Burundi have experienced insecurity and deteriorating living standards. With the signature of the Peace Accord in August 2000, Burundian authorities are confronted with the challenges of consolidating macroeconomic stability for growth and poverty reduction, reintegrating and resettling refugees and internally displaced persons, and strengthening human resource development. Considerable efforts have already been made in the rehabilitation of destroyed economic and social infrastructure. The World Bank, in the context of the Interim Strategy discussed by the Board in 1999, provided emergency assistance to help support the peace process, the reform program and stabilization of the economy. The TSS discussed by the Board on March 7, 2002, made exceptional IDA allocation to Burundi to consolidate the progress under the Interim Strategy and further support economic reforms for growth and poverty reduction. 3. In the context of the TSS, the proposed ERC is designed to support the transition process in Burundi through the rehabilitation and the recovery of the economy. More specifically, the proposed Credit would help build the foundation for (a) the improvement of public service delivery and basic social services, (b) the Government's efforts to deepen institutional and structural reforms for sustained economic recovery and poverty reduction (c) the establishment of a track record for early access to relief under the Enhanced Highly Indebted Poor Country (HIPC) Initiative. The proposed ERC builds on the reforms and analytical work on the public expenditure management system initiated under IDA's Emergency Economic Recovery Credit. 4. Progress towards a sustainable peace, and improving the delivery of essential social services would enhance the reintegration of refugees and engagement into productive employment. This would eventually boost economic recovery and growth and help reduce the incidence of poverty. The implementation of reforms is likely to enhance the growth process, through macroeconomic stability, creation of an enabling environment for private investments and increased inflows of foreign assistance. The proceeds of the proposed Credit would relieve the acute shortage of foreign exchange faced by Burundi, which in the post-conflict period has witnessed a dramatic fall in its level of foreign assistance, from over US$300 million to less than US$48 million per annum between 1993 and 1999. 5. With progress on the peace front, international assistance is resuming, however, demonstrated by the size of the pledges at the donor conference on Burundi in Paris in December 2000, and the substantial increase in the amount pledged at the Geneva Round Table meeting held in December 2001. A number of donors have also pledged to contribute to a Multilateral 3 Donor Trust Fund (MDTF) to enable Burundi service its debt and clear arrears owed to a number of its multilateral creditors in the interim period leading to its access to debt relief under the Enhanced HIPC Initiative. 6. In addition to arrears clearance, Burundi's access to relief under the HIPC Initiative is conditioned upon the elaboration of the full PRSP and commitment of the Burundian authorities to sound economic management, evidenced by a good track record in the implementation of economic reforms. Burundi, with assistance from the World Bank and other donors, completed the consultation and participatory diagnostic processes and produced a draft interim PRSP (IPRSP). The draft IPRSP was discussed by donors in April 2002, and is expected to be presented to the Boards of the IMF and World Bank in the last quarter of 2002. The Government concluded a Staff Monitored Program (SMP) with the Fund in the second half of CY01. II. COUNTRY BACKGROUND Peace and Reconciliation Process 7. Burundians are making efforts to bring to an end a crisis engendered by recurrent conflicts and rivalry between its two main ethnic groups, the Hutu and Tutsi. The last conflict, which broke out in 1993, resulted in the death of a large number of civilians and left thousands of victims. It is believed that more than 250,000 people were killed in the eight-year civil war, and the number of internally displaced persons and refugees is estimated at 1.2 million. The increasing social and economic costs of this conflict prompted the intemational community to help Burundi establish a framework for a negotiation towards national reconciliation and durable peace. Negotiations in Arusha, Tanzania, resulted in a comprehensive peace agreement (Arusha Peace Accord), signed in August 2000. A new power-sharing Govemment was inaugurated on November 1, 2001, in accordance with the transitional arrangements of this Accord.' This Government has the responsibility to administer the country during the 36-month transition period leading to general democratic elections. The transition period has two phases, to respect the power-sharing principle. Pierre Buyoya, a Tutsi, is leading the first period, which lasts 18 months starting November 1, 2001, with Domitien Ndayizeye, a Hutu, as Vice President. Vice President Ndayizeye will lead the transition Govemment in the second 18-month period with a Tutsi as Vice President. 8. Burundi faces difficult development challenges. These include fostering inclusiveness, peace and security, promoting national reconciliation and good governance, resettling and reintegrating displaced persons and other victims of conflict, rehabilitating destroyed economic and social infrastructure, revitalizing the economy and strengthening human resource capacities. The installation of the inclusive Transition Govermnent in November 2001 and a Transition Parliament in January 2002 provides the opportunity for Burundi and its development partners to begin to address the serious conflict-related and development challenges. 9. Despite the swearing-in of the Transition Government and the installation of the Transition Parliament in January 2002, the overall situation on the ground has remained fragile, due to the continued incursions by two rebel groups, "Forces Nationales de Liberation" (FNL) and "Forces de Defense de la Democratie" (FDD), that did not sign the Peace Accord and are not part of the Transition Government. Discussions between Burundian Government and the rebel For further details on the transitional arrangements, see the Arusha Peace and Reconciliation Agreement for Burundi, the Intemational Crisis Group Africa Report No. 25, and the World Bank Transitional Support Strategy for Burundi. 4 forces,. as well as between the governments of Burundi and the Democratic Republic of the Congo (DRC), are ongoing within the framework of the Arusha, and Lusaka Peace Accord, respectively. Continued strong support of the peace process, the implementation of transitional arrangements and the transition program by the international community are critical to the success of the transition and meeting the development challenges. International Assistance and External Debt 10. The level of foreign assistance, over US$300 million per annum during the pre-crisis period, has averaged less than US$48 million per annum in the crisis period. The economic embargo imposed by regional leaders following the military coup in 1996 that overthrew a "convention Govermment" negotiated under the auspices of the UN and OAU, resulted in a sharp decline of donor support an contraction of the economy. Persistent terms of trade deterioration and declining agricultural production, especially coffee and tea, the main export crops, exacerbated. the scarcity of foreign exchange. The contraction of economic activity resulted in significant reduction of domestic revenues and the Governent faced growing difficulties in meeting its obligations on the US$1.2 billion (2000) extemal debt and it accumulated arrears to a number of its creditors. Debt service increased dramatically, from US$30 million per annum in 1994 to over US$52 million in 2001, the latter accounting for over 98 percent of exports (see Annex 1). Total extemal arrears increased to over US$103 million in 2000 and is estimated to have exceeded US$120 million in 2001. 11. The intemational community started to re-engage in Burundi after the signing of the Peace Accord. This was demonstrated by the large number of donors at the intemational conference on Burundi convened by President Mandela and hosted by France in December 2000. The level of pledges, at US$440 million exceeded expectations. During the Paris conference, donors also recognized that Burundi's extemal debt was unsustainable and supported the establishment of a Multilateral Donor Trust Fund (MDTF) to service its debt and clear its arrears to a number of creditors during the interim period leading to its access to the HIPC decision point.2 At the Geneva Round Table Meeting on December 6-7, 2001, donors increased their pledges to bring the total amount to US$830 million (see Annex 6 on the distribution of pledges.) 12. Drawing on the Rwandan debt Trust Fund experience in the post-genocide period, the donors community requested that the World Bank manage the proposed MDTF. The World Bank proceeded to open trust fund accounts, prepare letters of agreement, and carry out preliminary debt sustainability analysis to determine the level of resources needed to clear arrears and service debt owed to these multilateral institutions. Preliminary estimates indicate that a contribution of US$75-80 million will be needed to provide debt relief to Burundi over a two-year period. A number of donors (EU, Belgium and UK) have already firmed up their pledges. An agreement confirming the UK contribution to the fund was concluded early in July 2002. Other donors are expected to follow and the MDTF should become operational by the time of ERC effectiveness. 13. Discussions between Burundian authorities and the Fund are ongoing, and reportedly are satisfactory. Burundian authorities and 1MF staff are scheduled to meet in a context of an IMF mission in the first half of August 2002 to conduct the 2002 Article IV consultation discussions, and negotiate a program that could be supported under the emergency post conflict assistance facility in 2002. This post-conflict assistance program would be a catalyst for donor assistance in 2 Though Burundi is current with IDA, it is in arrears with AfDB, IFAD, EIB, OPEP Fund, BADEA and a number of bilateral creditors. 5 the context of internationally concerted efforts. Depending on the progress towards peace, a PRGF supported program could be considered in the course of 2003. Recent Economic Developments 14. Agriculture is the mainstay of the economy, employing over 90 percent of the active population and accounting for 50 percent of GDP. The conflict had a devastating effect on agriculture, with the massive movements of the population. This was reflected in the overall economic performance. The per capita GDP went down by 20 percent between 1993 and 1999, reaching US$110 from US$180, far below the Sub-Saharan African average of US$490. 15. Economic conditions in 2000 were characterized by stagnant output, increased inflationary pressures, and continued deterioration of the balance of payments. After a 4.8 percent growth of real GDP in 1998, growth rate was negative in 1999 (-1 percent), and in 2000 (-0.9 percent), as insecurity, drought and population displacement continued to adversely affect agricultural production (see Table 1). The economy recovered in 2001, with an estimated growth of 3.2 percent. With a restoration of peace in many parts of the country and return of refugees, the economy is expected to grow at about 4.5 percent per annum in 2002. 16. The stagnant economy was accompanied by rapidly rising inflation in 2000. The gains achieved in 1999, when the inflation rate declined to single digits (3.4 percent) after 5 consecutive years of double digits (peaking at 31 percent in 1997), were wiped out. Inflation increased dramatically, averaging 24.3 percent in 2000, due largely to rising oil and food prices. The Government, within the framework of the Staff Monitored Program (SMP), implemented a series of measures to curb inflation, including the establishment of access ceilings and higher financial charges on commercial banks borrowing from the central bank. Average inflation in 2001 is estimated to have declined to 9.5 percent, and the declining trend is projected to continue in 2002-2003, with the period average falling below 8 percent. 17. The overall fiscal deficit (including grants) fell sharply, from 7.5 percent of GDP in 1999, 2.1 percent in 2000. The primary fiscal balance (revenues less non-interest domestic expenditures) registered a surplus of 2.8 percent of GDP, the second primary surplus in the past 6 years. Revenue increased from 18.3 percent of GDP in 1999 to 20.1 percent in 2000, and is projected to stabilize at 20 percent of GDP in 2002-2003. The fiscal deficit was financed by net external inflows equivalent to 4.4 percent of GDP. The relative improvement of the fiscal stance is due to a number of revenue mobilization measures implemented by the Government in 2000. The tax and customs exemptions were brought under control by eliminating line ministry authority to grant exemptions and by creating units in the customs and internal revenue departments to monitor the purpose, recipients, and value of exemptions granted. Petroleum product prices were increased by 85 percent for premium gasoline and 270 percent for kerosene. 18. On the externalfront, the current account deficit (excluding official transfers) increased from -11.9 percent in 1998 to -16.2 percent of GDP in 2001 under the SMP, anrd is estimated to be -19.5 percent of GDP in 2002. This sharp deterioration of the current account is largely attributed to a conjunction of factors, including the deterioration of terms of trade and falling coffee production which accounts for over 90 percent of export revenues. The production of coffee decreased to 18,000 tons in 2000, from 31,000 tons in 1999 and an average of 36,800 tons between 1992-96. The world coffee price which was US$3460 per ton in the 1980s and fell to US$1920 and US$1370 in 2000 and 2001 respectively, is projected to rise to US$1540 in 2003 6 and US$2090 in 2005. This rising trend in coffee prices and increased output and exports of coffee will help to stabilize the current account deficit at 20 percent of GDP between 2003-2004. 19. Gross official reserves, which were steady at over 11 months of imports in 1997 have been falling consistently, and reached 3.8 months of imports in 2000. Reserves averaged 2.5 months of imports in 2001, reflecting the continued deterioration of trade deficit, which increased from US$8.7 million to US$79 million between 1997 and 2001, and is estimated to have reached US$111 million in 2002. The widening deficit was largely financed by the resumption of inflows of external assistance, mainly in the form of IDA financed Emergency Economic Recovery Credit (EERC) and resources from EU COM STABEX (Compte de Stabilization des Exportations) fund. With exhaustion of EERC resources and delays in inflows of pledge resources, the level of official reserves has resumed a declining trend. By end-April, 2002, net official reserves were down to less than a month of imports. Table 1: Selected Indicators of Economic Performance Econonic Indicators 1977 1998 1999 2000 2001 2002 2003 2004 (Est.) (SMP) (Proj.) (Proj.) Real GDP Growth Rate (%) .4 4.8 -1.0 -0.9 3.2 4.2 5.7 6.0 Inflation Rate (% CPI, period average) 31.1 11.2 3.4 24.3 9.5 7.7 7.7 7.7 An percent of GDP, unless otherwise specified) Total Government Revenue 13.8 17.4 18.3 20.1 20.9 21.0 20.0 20.0 Total Government Expenditure 23.2 23.6 28.7 25.7 26.9 28.2 29.1 28.7 Current Expenditure 18.2 17.5 21.3 19.8 21.6 19.0 18.4 17.7 Capital Expenditure 5.0 6.0 7.8 6.4 6.0 9.6 11.0 11.3 Mlitary and SecurityExpenditure 6.3 6.7 7.0 6.2 8.1 6.9 6.6 6.4 Total External Debt (end of period) 120.6 139.7 170.0 178.3 182.9 182.4 180.2 179.8 Balance of Payments Current Account Balance Excluding official transfers -5.1 -11.9 -10.3 -15.4 -162 -19.5 -21.0 -19.9 Including official transfers 03 -6.2 -3.9 -7.4 -5.2 -4.1 -7.1 -6.7 Debt-service ratio (scheduled)* 59.6 70.3 732 79.6 106.6 100.0 74.9 74.6 an million of tE dollar, unless otherwise specified) Gross Off. Reserves* 11.5 5.6 5.3 3.8 2.2 2.5 3.2 4.0 Exports of Goods 87.4 64.0 55.0 49.1 39.2 42.8 48.5 55.8 Imports of Goods -96.1 -123.6 -97.2 -107.8 -108.4 -117.0 -123.5 -1302 External Debt 1,154.3 1,207.2 1,170 1,211.4 1192.2 1176.4 1145.6 11562 Trade Balance -8.7 -59.7 -42.3 -58.7 -692 -74.2 -75.1 -74.4 Total External Arrears 53.7 72.8 76.7 101.1 112.7 120.4 110.8 109.5 * Gross official reserves are provided in terms of months of imports. Source: Burundi authorities; and IMF staff. Humanitarian and Social Impact of Conflict 20. The 1993 conflict created an unprecedented humanitarian catastrophe, with the number of internally displaced persons (IDPs) and refugees living in precarious conditions estimated at 1.2 million, accounting for about 18 percent of the total population. IDPs are spread in 13 provinces, with a large concentration in Makamba (121,400) and Bururi (87,600). The refugees estimated to exceed 400,000, are largely concentrated in neighboring Tanzania (over 380,000) and DRC (over 20,000). A large number of victims have suffered great physical and psychological hardship; malnutrition and endemic diseases are prevalent; and the return to normal life is constrained by 7 the lack of shelter and the large-scale destruction of economic and social infrastructure. The number of houses destroyed or damaged is estimated in thousands. In the health sector, 73 district health centers were either destroyed or pillaged and in the education sector, more than 105 schools were completely destroyed and 376 were seriously damaged. The donor community has been providing assistance to rehabilitate social infrastructure, the need remains enormous. 21. The conflict also weakened existing institutional and human resource capacities, and exacerbated the disparities across regions and provinces, especially in the provision of social services in the health and education sector. Most qualified teachers, for reasons of personal security are concentrated in urban areas and eight provinces representing about 45 percent of total population, leaving the rest of the largely rural provinces, where poverty is widespread, uncovered. The shortage of qualified civil servants and their uneven distribution remain the key constraints likely to compromise the objective of increasing the provision of essential social services at the regional and local level. Impact of the Conflict on Poverty and Welfare Indicators 22. Poverty: With the lingering conflict, poverty, already a widespread phenomenon in Burundi has increased significantly. Between 1993 and 1999, the headcount index increased from 40 to 68.7 percent. The increase was general across all regions, including urban areas, where the deterioration was particularly pronounced. The incidence of urban poverty increased from 41 to 67 percent; while rural poverty increased to from 40 to 69 percent during the same period. There are also regional disparities in the incidence of poverty. Poverty is highest in the eastern province of Ruyigi (93 percent) and lowest in the central province of Muramvya (49 percent). The incidence of poverty is higher for export and subsistence farmers (over 70 percent) than public sector workers and the private formal sector (57 percent). The roots of poverty include stagnant production due to the destruction of social and economic infrastructure and insecurity, a dramatic fall in agricultural production due to massive displacement of the rural population, deterioration of terms of trade, low level of investment and domestic saving, and reduced levels of international assistance. 23. HIVIAIDS has become one of the major causes of mortality among adults, and is the major factor in the rise in infant mortality rates, from 110 per thousand live births in 1992 to 116 in 2000, significantly above the Sub-Saharan African average of 92. The epidemic is affecting people in their most productive years; the proportion of adults dying before age 40 increased significantly in the 1990s. The prevalence of HIV/AIDS also increased significantly at the national level: in rural areas, it increased from less than 1 percent to 6 percent between 1989 and 1998; in urban areas, it increased from 11 percent to 20 percent during the same period. The number of people living with HIV/AIDS was about 360,000 in the 15-49 age group and 19,000 for those under 15 in 1999. There are 558,000 orphans in Burundi; about 195,000 are believed to have been orphaned by HIV/AIDS. The impact of the HIY/AIDS epidemic falls disproportionately on women and girls: about 56 percent of those living with HIV/AIDS are female. The conflict context reduces economic opportunities and further increases the vulnerability of women to the transmission of HIV/AIDS. 24. Impact on Other Social Indicators: The number of victims of malaria, the leading cause of death, also increased. This disease and the rising HIV/AIDS epidemic are largely responsible 3 These indicators are derived from the 1998 Priority Survey, using the absolute poverty line established at about 92,000 Fbu annual per capita expenditure in Rural areas and about 410,000 in Urban areas. 8 for the declining life expectancy, which fell from an already low level of 51 years in 1993 to less than 42 in 2000 (see Annex 1). Similarly, a large number of other social indicators exhibited a negative trend: access to safe water and health services remained extremely low, at less than 48 percent and 20 percent, respectively. In the education sector, gross primary enrollment fell to 51 percent from 68 percent in 1992 and the repetition rate increased from 13to 17 percent. III. THE GOVERNMENT'S REFORM PROGRAM A. Key Development Challenges 25. The conflict compounded the scope of challenges facing Burundians, particularly in the area of (i) reintegration and resettlement of refugees and internally displaced persons and other victims, (ii) security and national reconciliation, (iii) growth and poverty reduction; (iv) governance, transparency and accountability, and (v) human resource development, including curbing the trend of HIV/AIDS. The demands to meet the post-conflict recovery needs have stretched the lean resources of the Government and its partners. The level of public resources channeled to assist the victims increased significantly between 1995 and 2001, from 0.46 percent to over 5.1 percent of the budget. Budgetary allocations to priority social sectors (education, health, social protection, reinsertion and reintegration) increased by over 10 percent between 2001 and 2002, from FBu21,456 to Fbu23,762 billion, accounting for 13.3 percent and 16.2 percent of total budget, respectively. 26. Consolidating Peace and National Reconciliation: Consolidating the peace process and strengthening the national reconciliation process are important steps forward, key to beginning to heal the wounds of the past, building a more harmonious society. However, to achieve these objectives, it is important to ensure security for all Burundians, mainstream the power-sharing approach between the different ethnic groups, strengthen the justice system and the democratic process, and improve governance and accountability in the use of public resources, all essential in the construction of a peaceful, stable and inclusive nation. 27. Resettling and Reintegrating Internally Displaced Persons and Victims: The resettlement of victims and IDPs and their reintegration into productive employment is key to achieving the objectives of national reconciliation, growth and poverty reduction. With support from the international community (including EERC resources), a number of social infrastructure and housing to accommodate victims have been rehabilitated. The challenges in this area remain immense, with over 390,000 IDPs remaining to be settled and even larger numbers of refugees from neighboring countries that are continuing to return to Burundi in large numbers. 28. Poverty Reduction and Economic Growth: Burundian authorities are committed to sound economic management, essential to achieving the economic growth and poverty reduction objectives. They are committed to the PRSP process and to the Millennium Development Goal (MDG) of reducing poverty by one half by 2015. The medium-term objective is to reduce the poverty incidence by 25 percent by 2010. Sustainable and more robust growth rates would be needed to achieve this ambitious target. Revitalizing agricultural production, the main source of rural income, is essential for attaining the MDG. The government's strategy for agricultural development is to enhance the role of private sector operators, increase security of land ownership, provide extension services, and improve access to agricultural inputs. Success in achieving the poverty reduction objective also requires sustained private sector savings and investment and the diversification of the productive activity. 9 29. Burundian authorities are committed to reversing the negative trend in social indicators and have set intermediate targets within the context of the MDG. Some of these target include reducing illiteracy by 25 percent and 50 percent by 2005 and 2010, respectively, achieving universal coverage of basic health care by 2010, reducing infant mortality rate to 110 and 50 per thousand live births by 2005 and 2010, respectively, and increasing access to safe water to 80 percent of the total population by 2005 and to all by 2010. These target goals are ambitious, especially given the current status of social indicators, recent growth rates, and attaining them will require rapid implementation of peace and security, strong commitment to the reduction of gender, ethnic and regional disparities and support from the international community. 30. Human Resource Development: The level of human resource capacities, already low, deteriorated significantly during the eight-year conflict period, with negative impact on living standards. HIV/AIDS prevalence rates are on the rise; life expectancy, child immunization and enrollment rates declined significantly and are at their lowest levels since the outbreak of the conflict in 1993. The Government's challenges in this area include increasing the provision of essential social services to the poor, addressing the issue of human resource deficit and uneven geographical distribution, rehabilitating social infrastructure, curbing the spread of HIV/AIDS, achieving the universal primary education by 2015, and reducing gender disparities in education and enrollment. The representation of women in the national institutions remains relatively low, well below the 30 percent target stipulated in the Arusha Peace Accord. Gender disparities remain pervasive in Burundi, and have been exacerbated since the outbreak of conflict in 1993. The crisis has led to profound changes in the structure and composition of households and in gender roles in Burundi's society and economy. While data are scarce, women play a substantial role in the Burundian economy and dominate in the food production and processing sectors, which has important implications for households' food security and nutritional status. The Government recognizes the importance of addressing gender disparities as an integral part of its poverty reduction agenda and as a key means of bringing about an inclusive and more stable society. To this end, the Ministry in charge of Women's Affairs is preparing a National Gender Policy which will initially focus on supporting a gender-responsive legal reform process. 31. Improving Governance, Transparency and Accountability: The declining level of living standards and per capita income, the rising poverty incidence recorded since 1993 are partly responsible for the rise of corruption and fraud within an administration, which prior to the outbreak of the last conflict was known for its probity. The consultation and participatory diagnostic processes conducted within the context of the IPRSP singled out poor governance as one of the key determinant of poverty in Burundi, affecting a wide range of development aspects, including the political process and transformation, economic and natural resources management, public expenditure allocation and profiles. In addition to the conflict context, the deterioration of governance is aggravated by the concentration of powers in a highly centralized system illustrated by ethnic and geographical disparities in the management and access to public expenditures. Improving the current state of governance is key to attaining the objectives of transforming the political process and the MDG. B. The Government's Strategy 32. The previous Government presented a transitional strategy (GTS) for the period 2001- 2003 to the international community at the Paris Conference in December 2000. Under this strategy, average economic growth was projected to reach 4.7 percent by January 2004. The GTS 10 stressed continued implementation of economic reforms and the need for social inclusion and a participatory approach to development, a policy at variance with the actions carried out in the pre-crisis period, when most benefits of growth accrued to a small segment of the population largely located in urban areas. The strategy was comprehensive and emphasized increased role for the private sector in the economy, and the consolidation of the progress in reforms. Some of the key components of this strategy included (i) support to agriculture and rural development, (ii) promotion of private sector development, (iii) promotion of good governance, and (iv) strengthening of human resource development. The GOB has already begun to implement its Strategy, and the proposed Credit is to support this effort. Box 1 summarizes the key actions already undertaken by Burundian officials and Box 2 summarizes ongoing and planned actions. Box 1: Summary Of Key Actions Undertaken By The Government Of Burundi Peace and National Reconciliation: Key actions include (i) ratification of the Peace Accord by the Parliament in December 2000; (ii) promulgation of the Transition Constitution in October 2001; (iii) swearing-in of a Transition Government with representatives from the parties signatory of the Peace Accord in November 2001; (iv) installment of the Transition Parliament and Senate in January 2002. Resettlement and Reintegration of Victims: Actions undertaken include (i) signature of a protocol for access and protection of internally displaced persons in February 2001; (ii) establishment of a National Commission on Reintegration of Refugees in May 2001; (iii) signature of a tripartite agreement between the Govemments of Burundi, Tanzania, and UNHCR in May 2001 to facilitate voluntary repatriation of Burundian refugees stationed in Tanzania. Public Expenditure Management: Key actions include (i) adoption of a system for the functional and economic classification of budgetary expenditure and a double-entry accounting system; (ii) implementation of a system for monitoring the flow of resources and govemment expenditure with respect to all extemal assistance programs; (iii) computerization of the management of expenditure from the commitment phase to actual payment by the govemment's cashier at the BRB. Good Governance: Actions include (i) the appointment of a minister with broad responsibility for promoting govemance; (ii) the establishment of an inter-ministerial committee to promote good govemance and fight corruption; (iii) the preparation of an action plan to enhance the govemance agenda; (iv) the strengthening of the General Inspection in charge of finance; (iv) establishment of an Intemational Commission of inquiry on political prisoners. Private Sector Development: Key actions include the initiation of programs to (i) clear the govemment's arrears to private sectors suppliers; (ii) revise the corporate and commercial laws; (iii) revise the labor code; (iv) revise the bankruptcy laws and improve the arbitration system; (v) reform the civil code and streamline the judicial procedures; (vi) establish a privatization program for public enterprises; (vii) establish an independent regulatory authority for the telecommunication sector; (x) extend the provision of mobile phone services to private operators. Revenues Mobilization: Key reforms include (i) elimination of line ministry authority to grant tax exemptions; (ii) creation of units in the customs and internal revenue departments to monitor the purpose, recipients and value of the exemptions granted; (iii) initiation of campaigns for the collection of property, water, and forest revenues and other administrative revenues. Human Resource Development: Key actions include: (i) the rehabilitation of educational and health infrastructure; (ii) the decentralization of the health management system to improve coverage and quality of basic health services; (iii) adoption of an independent and autonomous management structure for public hospitals;.(iv) adoption of a cost recovery mechanisms to improve health services and ensure sustainability in the provision of health services; (v) the adoption of a multi-sector strategy for the fight against the HIV/AIDS epidemic. Gender and Social Protection: Key actions include (i) establishment of a fund to support the development of micro-credit institutions in rural development; (ii) establishment of safety net mechanisms to assist the poor and victims of conflict; (iii) revision of personal and matrimonial code and promotion of campaigns to enhance the role of women; (iv) an increase in the representation of women in public offices in accordance with the Arusha Peace Accord which establishes a minimum threshold of 30 percent for the representation of women in all institutions; (v) initiation of the preparation of a gender action plan. Agricultural Sector: Key actions include (i) enactment of a land law by Parliament; (ii) initiation of a study to restructure the tea sub-sector; (iii) restructuring the coffee and cotton sub-sector; (iv) implementation of measures to recapitalize livestock; (v) support and reintegration of displaced persons and other victims of conflict into agricultural production process; (vi) adoption of measures by the Cabinet to increase private sector participation in agriculture. 33. Agriculture and Rural Development: Revitalizing agricultural production and reducing this sector's vulnerability to exogenous shocks is an essential path to sustained economic growth and poverty reduction. The Government's strategy for this sector is to increase rural income through a series of measures, iricluding (i) increased production and productivity, (ii) increased access to factors of production, and (iii) access to markets. In order to increase production and productivity, the strategy emphasizes research and extension services, seed improvement, recapitalization of livestock, development of irrigation services, and protection of the environment. Measures to increase access to factors of production include enhancing land tenure, mainstreaming gender and social inclusion, and promoting the development of micro-credit institutions. Measures envisaged to increase access to markets include development and rehabilitation of rural infrastructure, diversification into high value export crops, and promotion and expansion of the use of improved agricultural inputs. 34. While the medium-term rural development strategy of the Transition Government is to diversify the sources of growth and promote investment in high value crops; in the short term, it plans to revive the tea and coffee sub-sectors, which account for over 90 percent of export revenues and will continue to be critical for growth and poverty reduction in the short-run. With the support of.the EU through the STABEX fund, Burundian authorities are in the process of preparing a comprehensive strategy for reviving the coffee and tea sub-sector. This strategy will address a number of issues, including marketing arrangements, export prices and taxes, ownership of assets, support to producers, and institutional arrangements for regulation. This will provide the basis for the reform to revive the sector. 35. Improving Governance and Public Expenditure Management: The Transition Government recognizes the importance of good governance. Its strategy is to improve transparency and accountability in the management of public resources, fight corruption, decentralize and increase community participation in the management and decision making process, and strengthen human resource and institutional capacities in economic management. To this end, it appointed a minister with broad responsibilities for accountability in all government operations, a focal point for promotion of good governance and the fight against corruption and abuse of office. Specific measures to be undertaken in the medium-term include strengthening the capacity of the new transitional institutions and the decentralization process; the simplification of laws and regulations establishing and implementing fiscal and customs tariffs; improving the budget process and the effectiveness of the budget, including the adoption of the MTEF and prioritization of the budget in line with poverty-focused priorities identified by the PRSP process; the establishment of an Auditor General Office responsible for auditing the government's resources and expenditures and the reform of the public procurement administration. Other measures include strengthened public-private sector dialogue; and the systematic implementation of external audits of government accounts. In the context of strengthening the budget and related processes, the GOB and its partners will systematically undertake public expenditure reviews, including public expenditure tracking studies. 36. Private Sector Development: The government's strategy for this sector is to establish the legal policy and institutional environment that promotes private sector development and enhances its competitiveness. Medium-term actions include the review and revision of legislation on commercial activities, promotion of private investment and trade, enhancement of financial services, the privatization of state-owned enterprises, promotion of small and medium-size 12 enterprises, and strengthening govermnent and private sector partnership. Specific measures underway include revision of the labor code, the bankruptcy laws, and the civil code to streamline judicial procedures, and the strengthening of the arbitration systems. The revision of the labor code is intended to liberalize labor markets, enhance labor mobility, and formally eliminate gender discrimination. A privatization decree was adopted by Parliament in 1996 but the process has been delayed by the conflict. A list of firms up for privatization has been established; these include utility companies, textile complexes, coffee and tea factories, the national pharmaceutical company and the Nile Source Hotel. 37. Human Resource Development: Improving human resources is also key to achieving the poverty reduction objectives. Public spending per capita on social sectors at US$4.5 in 2001 is unevenly distributed across regions and, remains among the lowest in Sub-Saharan African countries. A disproportionately large share of public spending is allocated to urban areas. The government's objectives for human resource development is to rehabilitate social infrastructure, improve access to health and education services, curb the spread of HIV/AIDS, reduce gender disparities in access to economic and social opportunities, and provide assistance to orphans whose numbers increased significantly. Key objectives specific to the education sector include reduction of gender and geographical disparities in access to education, development of communal and technical institutions, improved quality of teaching through equipment and training of teachers, increased participation of private institutions, and support to higher education to address the shortage of capacities and qualified teachers at the intermediate and lower levels. Key measures specific to the health sector include implementation of a generalized social security system to improve access, reduction of geographical disparities through support of training of health practitioners and redeployment in regions with low coverage. 38. The success in improving human resources development, and meeting the target objectives of the Millennium Development Goals will also depend on the ability of the Transition Govenment to address a number of post-conflict related challenges and emergency needs in the short-run. Some of these challenges include the rehabilitation of destroyed economic and social infrastructure, reintegration and reinsertion of internally displaced persons, refugees and other victims of conflict, ensuring a minimum coverage and provision of essential social services to the poor and vulnerable groups, especially in a context of increasingly limited public resources. Against this background, Burundian authorities have identified a minimum package of essential social services to be provided by the Government to the poor and vulnerable groups during the transition period. The priority list of items under the minimum package draws on the outcome of the consultation and participatory diagnostic processes carried out within the context of the IPRSP, and was identified through a collaborative efforts involving key sectoral ministries and development partners. Part of the package will be financed from a special fund for the reinsertion and reintegration of displaced persons and other victims of conflict approved by the Cabinet early in July 2002. 13 Box 2: Summary Of Key Actions Planned By The Government Of Burundi Peace and National Reconciliation: Key actions include (i) establishment of an Intemational Judicial Commission of inquiry on genocide and crimes committed since independence; (ii) promulgation of a law prohibiting genocide and exclusion, and respect of human rights; (iii) reorganization of army and national police force to address ethnic imbalance; (iv) efforts to bring the two rebel groups into the peace process; (v) organization of local and communal elections in 18 months, (vi) legislative elections in 36 months; (vii) presidential elections at the end of 36 months, from November 1, 2001; and (viii) implementation of measures to strengthen the National Assembly, and the justice system; (ix) establishment of the National Truth and Reconciliation commission; and (x) establishment of a National Commnission for the Rehabilitation of Refugees. Good Governance: (i) Further elaboration of the govemance agenda; (ii) implementation of measures to strengthen the public procurement administration; (iii) creation of an independent Audit Office "Cour des comptes" to fight fraud and corruption and an Office of Auditor General; (iv) implementation of civil service census and civil service reform and the strengthening of institutional capacities in economic management; (vi) implementation of the decentralization program; (vi) promotion of the institution of Bashingantahe to revitalize the gracious justice system; (vii) implementation of ongoing audit of the Treasury. Public Expenditure Management: Key reforms include (i) increase expenditures for priority ptograms identified through the PRSP process focusing on poverty reduction and economic and social recovery; (ii) reform of the budget processes to increase efficiency, effectiveness, transparency and accountability with the adoption of a MTEF; (iii) improve the monitoring of all govemment financial operations in the budget; (iv) the abolition of extraordinary expenditures; (iv) the implementation of a public expenditure tracking study to monitor and trace the flow of public spending up to public facilities and primary beneficiaries. Private Sector Development: Key actions include measures to foster the govemment's efforts to (i) maintain a stable macroeconomic environment; (ii) liberalize the foreign exchange regime; (iii) strengthen the legal and judiciary framework for commerce, and enforcement of contracts; (iv) create commercial tribunals (v) clear the government's arrears to private sectors suppliers; (vi) revise the commercial laws including the labor code and the bankruptcy laws, and improve the arbitration system; (vii) reform the civil code and streamline judicial procedures; and (viii) establishment of an operational program for the privatization of public enterprises, including the establishment of a unit to implement the privatization, identification of enterprises to be privatized, and adoption of a strategy and plan for privatization; (ix) adoption by Parliament of laws to strengthen norms and regulation in the banking sector. Agriculture and Rural Development: Key actions include (i) liberalization of producer pricing and marketing arrangements, especially in the coffee and tea sub-sectors; (ii) promotion of agro-processing, transformation and commercialization of agricultural products; (iii) implementation of a study to identify the sources of growth in rural areas; (iv) recapitalization of livestock; (v) adoption of measures to increase private sector participation; (vi) development of irrigated agriculture; (vii) support to extension services and research; (viii) diversification of sources of rural income through support to the promotion of export crops and production of high valued crops and transformation of agricultural commodities (ix) stimulate rural employment through development of public work programs and small and medium-size enterprises and industries. Gender and Social Protection: Key actions include measures to (i) adopt a system to monitor the 30 percent target gender plan of the Arusha Accord, preparation and adoption by Cabinet of a gender action plan to eliminate gender disparities; (ii) revise the labor code to enhance the role of women; (iii) passage of a law by Parliament enabling women to inherit land and other properties; (iv) increase school enrollment of girls; (v) increase social spending to assist the poor and vulnerable groups; (vi) implementation of a social security system (vii) implementation of the decentralization progran to achieve broad-based participation of the civil society in the development process; (viii) establishment of a fund to support reinsertion and reintegration of victims. Human Resource Development: Key reforms include (i) definition of a minimum package of essential social services to be provided by the Govemment to poor and vulnerable groups; (ii) increase public spending in social sectors; (iii) rehabilitation of social infrastructures; (iv) implementation of a decentralized health strategy and cost recovery mechanisms in the health sector; (v) implementation of an action plan for fighting HIV/AIDS; (vi) implementation of a teacher training program to improve coverage and quality; (vii) strengthening the management of education at central and decentralized levels. IV. THE BUDGET FINANCING REQUIREMENTS 39. Although the fiscal situation has improved significantly since 2001- the fiscal deficit fell from over 12 percent of GDP to less than 5.5 percent between 1996 and 2001, reflecting the govermnent's efforts to strengthen the revenue administration- the fiscal deficit will remain large, and is likely to increase further with the rising number of returning refugees, and 14 increasing financing requirements for reconstruction and development. Table 2 shows the projected budget financing gap for 2002-2004, amounting to about US$105.3 million. This budget, based on estimates of resource availability assuming an increasing trend in external assistance, falls short of the funding requirements for accelerated transition from emergency rehabilitation to sustained growth and development. During the calendar year 2002, the projected budget financing gap will amount to over US$44 million; and the overall external financing gap is expected to reach US$51 million. This gap could be covered by disbursements of program assistance from a number of key development partners, including Belgium, France, the EU, the IMF through the proposed Fund's emergency assistance facility, and the World Bank through the proposed ERC. Disbursements under the IMF and EU assistance are expected to be in the magnitude of US$14 million and US$13.3 million, respectively, accounting for about 27.5 and 26.2 percent of the total external financing gap. Table 2: Budget Financing Gap 2002-2004 1998 1999 2000 2001 2002 2003 2004 (Budget) (Pro;.) (Proj.) Financial Requirements (In billions of Burundian francs) Current Expenditure 68.8 85.7 96.8 118.6 116.0 125.2 136.2 Capital Expenditure 23.5 31.3 31.1 33.0 49.0 63.0 73.2 Amortization of Debt 14.2 18.0 19.9 27.8 37.6 37.9 40.3 Change in Arrears -7.7 -18.1 -20.0 -24.0 0.0 0.0 0.0 Financing (an billions of Burundian francs) Revenues 71.9 73.7 98.3 110.1 128.0 140.7 158.3 Net lending -0.5 1.7 3.6 3.9 2.4 2.4 2.4 Extemal Financing 20.0 24.7 44.7 25.2 41.2 62.3 63.0 Domestic Financing 7.4 15.1 -20.3 16.2 -7.5 -5.0 -1.5 Financial Gap in (bill. Fbu) 0.0 0.0 0.0 0.0 38.5 25.7 27.5 Financial Gap in (mill. $US) 0.0 0.0 0.0 0.0 44.2 29.5 31.5 40. Military and security-related expenditures increased markedly in the aftermath of the conflict, accounting for about 6.7 percent of GDP and 28.5 percent of recurrent expenditures in 1998. This increase was largely due to the government's efforts to restore security, maintain peace within its territory and secure its borders in the face of cross-border insurgencies in a context of regional conflict. Since 1999, military and security-related expenditures have been on the decline. Projections indicate that these expenditures could decline to 5.6 percent of GDP, accounting for about 21 percent of recurrent expenditures in 2003. Military and security related expenditures are likely to decline even further with the settlement of the Burundian internal conflict and the demobilization and disarmament of soldiers within the context of the regional DDR program. 15 41. Also, though the level of current account deficit and rising financing gap remain a cause of concems for Burundian authorities, an improvement should be expected with increased inflows of intemational assistance in the form of grants, including through the recently established Multilateral Donor Trust Fund for transitional debt relief. An improved reserve position and reduction of the balance of payments deficit are expected on the extemal front. .On the intemal front, the saving of resources, which otherwise would have been used to service extemal debt will help improve the govermment's position and resources base, and most likely contribute to the reduction of the budget financing gap. V. THE PROPOSED CREDIT A. Credit Objectives 42. The proposed Economic Rehabilitation Credit (ERC) is designed to support the govemment's reform program. It will advance the Transitional Support Strategy goals of enhancing national reconciliation, and strengthening economic stability and structural reformns for growth and poverty reduction. The proposed credit builds on progress in reform and economic recovery made under the Emergency Economic Recovery Credit (EERC) approved by the Board on April 15, 2000. The reform program is supported by a number of donors, including UNDP, the European Union, Belgium, France, and the Netherlands. Lessons from the Preceding Emergency Economic Recovery Credit (EERC) 43. Under the EERC, progress was made in a number of areas including: public expenditure management, rehabilitation of economic and social infrastructure to strengthening human resources. A foreign exchange auction was introduced to allocate to the private sector, the import support funds of the EERC. In the area of public expenditure management, the EERC supported the reform of the budget process to adopt a system for the functional and economic classification of budgetary expenditures to strengthen the links between inputs and outputs, and the adoption of a double-entry accounting system to facilitate budget analysis. These adjustments are already reflected in the 2002 budget. In addition, the EERC supported the ongoing audit of the operations of the Treasury, and increased provision of essential social services to the poor through targeted interventions. In the area of economic recovery and rehabilitation, the EERC provided foreign exchange for imports of essential goods, with counterpart funds allocated to priority activities in health, education, and agricultural rehabilitation. These counterpart funds helped in the rehabilitation of health centers, schools and community housing. By April 30 2002, about 81 destroyed primary schools have been rehabilitated and were fully operational; over 7000 damaged or destroyed houses have been either rebuilt or rehabilitated. The recovery process was also supported through clearance of arrears owed by the Government to private suppliers. 44. Most resources under the EERC have been disbursed and the project sub-components are largely executed. The Bank and Burundian authorities are finalizing the project Implementation Completion Report (ICR) and a number of lessons are being used in the design of the proposed operation and will be mainstreamed during implementation. In particular, coordination among the different sectoral ministries involved, and between the key development partners will be 16 strengthened to improve efficiency and effectiveness of resource allocation, and quality of infrastructure. In a number of areas, numerous donors were providing assistance to rehabilitate destroyed or damaged social infrastructure. In that regard, extended consultations were carried out in the preparation of the proposed ERC, and the areas of assistance identified by Burundian authorities and outlined in the Letter of Development Policy account for other donors interventions. 45. In the area of foreign exchange rate management, the EERC supported the efforts to liberalize official foreign exchange markets, through the establishment of a foreign exchange auction system. While the EERC proceeds helped reduce the spread between official and parallel exchange rates, full convergence was prevented by the shortage of foreign exchange. The spread between the official and parallel exchange rates widened with the exhaustion of EERC resources. The effectiveness of IDA assistance, functioning of the auction system under the proposed ERC and efforts to liberalize foreign exchange markets will depend on inflows of foreign assistance from other donors. The proposed operation emphasizes the importance of other donors, including those with whom Burundi is in arrears, resuming their assistance to Burundi. In that regard, the Bank has been working closely with other donors to establish the MDTF to clear arrears and service external debt to a number of donors, so that they can resume their assistance. Reforms supported by the proposed Credit 46. Under the EERC, the Government identified specific priority programs to rehabilitate economic and social infrastructure to receive incremental budget allocation from the proceeds of the EERC. The Government has decided that the ERC should consolidate the progress made in these priority areas under the EERC. It has thus identified priority programs to receive incremental budget allocations made possible by the resources provided by the ERC. Thus in addition to the programs in health, education and agriculture, other priorities identified by the PRSP will also receive incremental budget allocations. In addition to supporting ongoing government's efforts for economic and social recovery of the population, the proposed ERC will support a number of policy and institutional reforms to consolidate the progress under the EERC, sustain economic and social recovery and build the base for sustained growth and poverty reduction. These reforms are in the areas of public expenditure management and govemance, private sector development, and agriculture and rural development. * In the area ofpublic expenditure management and governance, the proposed ERC will support the Govemment's effort to (i) strengthen the budget process with the introduction of the MTEF; (ii) improve the prioritization of the budget in line with the PRSP; (iii) strengthen public procurement administration, (iv) establish an Office of Auditor General, (v) strengthen institutional capacity in macroeconomic management, (v) establish a system for monitoring the flows of govemment's resources and expenditures, and (v) implement a public expenditure tracking study to monitor the flows of public spending to facilities; and create an independent audit office (court des comptes) to fight fraud and corruption. * In the area of private sector development, the proposed ERC will support the Govermment's effort to (i) revise and update the commercial laws including labor code and the bankruptcy laws, and improve the commercial arbitration system, (ii) privatize public enterprises. 17 * In agriculture and rural development, the proposed ERC will support ongoing efforts and reforms to (i) liberalize pricing and marketing arrangements, especially in the coffee and tea sub-sector and the distribution of agricultural inputs; and (iii) privatize the state owned enterprises in the coffee, tea and cotton sub-sector. * In the area of gender and poverty reduction, the proposed ERC will support the reduction of gender disparities by (i) the adoption of a law allowing women to inherit land and other properties, (ii) the preparation and implementation of a gender action plan to eliminate all gender discrimination; and (iii) monitoring the implementation of the 30 percent plan that requires that female participation in public offices be at least 30 percent. 47. Prior Actions: In the context of the preparation of the proposed Credit, the Government has fulfilled all prior actions for release, at effectiveness, of the initial tranche (para. 51). These include: (i) initiation of a diagnostic assessment of Burundi's public Finance Management issues using the HIPC tracking benchmarks to improve the budget processes (formulation, execution and control) and increase poverty reduction impact of resources from the HIPC relief; (ii) definition of a minimum package of essential social services to be provided by the Government to the poor and vulnerable groups during the transition period, drawing on the consultation and participatory diagnostic process carried out within the context of the Interim PRSP, to continue to provide basic assistance and the support initiated under the EERC to vulnerable groups; (iii) in that context, the Cabinet approved a special fund for the reinsertion and reintegration of displaced persons and other victims of conflict to ensure effective coverage and provision of essential social services identified as part of the proposed minimum package. B. Rationale for IDA Involvement- 48. The proposed Economic Rehabilitation Credit is an integral part of the Bank's Transitional Support Strategy (TSS) to assist the Republic of Burundi in the transition from emergency assistance to development and poverty reduction. The TSS is designed to help Burundi consolidate the progress achieved under the Interim Strategy during the period 1999- 2001. The proposed ERC will provide balance of payments support essential to finance key imports needed to rehabilitate the economic and social infrastructure, particularly in the health, education, agriculture and transport sectors, foster community development and enviromnental protection, revitalize private sector, and deepen institutional and structural reforms initiated under the EERC. 49. The transition in Burundi will also be supported by a number of projects planned under the TSS, including a Multi-sector HIV/AIDS and Orphans Project; a Health Population Project III to continue to improve health care efficiency and affordability, a Demobilization and Reintegration Project, a Social Action Project (BURSAP III); a Multi-sector Capacity Building Project to strengthen public administration and transitional institutions and the Emergency Road Rehabilitation Project to enhance the link between urban and rural areas, and Burundi and other countries in the COMESA region, thus contributing to revival of agricultural production and increased rural income. 18 C. Expected Credit Benefits 50. A successful implementation of this program would consolidate the economic recovery process and facilitate Burundi access to assistance under the Enhanced HIPC Initiative. In addition to a prospective access to HIPC resources, there are a range of other social and welfare benefits expected from this operation, including the following: Poverty Reduction: * The implementation of structural reforms, particularly increased producers' prices, especially in the main export sub-sector (coffee and tea) through removal and/or reduction of taxes and support to agricultural production and rural development. * Increased expenditures for extension services and research, promotion of investment in high valued crops, recapitalization of livestock, promotion of exports, the provision of credit to rural men and women, and the rehabilitation of rural power and transport networks are likely to revive the production, raise income and reduce poverty in rural areas. Prioritization and targeting of expenditures for poverty reduction, and transparency in public expenditure management will improve the effectiveness of public spending to the greater benefit of the poor. * The implementation of privatization put idle assets into productive use, enhance private investments, and increase private production and employment. * The clearance of the government's arrears to private sector suppliers will contribute to injection of liquidity in the economy and provide needed resources for rebuilding the working capital, essential for financing investment for the resumption of production and growth in the private sector. * Private sector involvement, especially in the export sub-sector, is likely to increase the farmer confidence in the marketing system for inputs and outputs, increase producer and prices and the incentives for increase production by the farmers, and increase the adoption of modern inputs and methods of production, processing and storage. Improved Effectiveness, Transparency and Accountability of Public resources * The establishment of an Office of Auditor General that will audit the government's resources and expenditures, the strengthening of the budget process and public procurement will help to improve the transparency and accountability of public resources. The audit of the Treasury will further transparency in resource use. These reforms are likely to increase effectiveness in public service delivery. Increased confidence in the budget process and prioritization in resource allocation are likely to trigger increased donor assistance. * The implementation public expenditure reviews including the public expenditure tracking surveys (PETS) to monitor and trace the flow of public spending and resources allocation up to public facilities and primary beneficiaries is likely to strengthen accountability and increase effectiveness in the delivery of public service. 19 Other Welfare and Social Benefits: * The passage and enforcement of the laws to enhance gender equality and access to economic and social opportunities will galvanize the participation of women in economic and social affairs, improve the welfare of households and improve overall social indicators such as infant and mortality and lower the fertility rate. * The rehabilitation of education and health infrastructure, with higher public expenditures will enhance the quality and delivery of essential social services through greater coverage. D. Credit Amount and Tranching 51. The credit of US$54 million will be disbursed in three tranches. An initial tranche of US$20 million, upon effectiveness, a second tranche of US$20 million following the liberalization of the foreign exchange and other budget related conditions, and a third and final tranche of US$14 million following the fulfillment of the conditions for the tranche. It is expected that the second tranche will be released in the first quarter of calendar year 2003 and the final tranche in the 3rd quarter. Following the EERC model, the foreign exchange proceeds of the first tranche of the proposed ERC will be sold to eligible private sector operators through a series of competitive auctions according to a system and operating manual designed in close collaboration with the IMF and being used by other donors, including the EU, which has relied on auctions to channel STABEX Funds. Subsequent tranches will be released in accordance with the liberalized foreign exchange system to be agreed with the IMF. 52. Credit effectiveness and tranche releases will be conditional on the maintenance of a satisfactory macroeconomic framework, as agreed with the Bank and the IMF. For each tranche release, IDA must be satisfied that: (i) the overall macroeconomic environment is conducive to sustainable growth and poverty reduction; and (ii) the implementation of the overall reform program as outlined in the Letter of Development Policy (Annex 9) is on track. For release of the second and third tranches, the following specific actions should have been undertaken. E. Release of the Second Tranche * adoption by Cabinet of an operational program for the privatization of public enterprises, including the establishment of a unit to implement the privatization, identification of enterprises to be privatized, and the adoption of a strategy and plan for privatization acceptable to IDA. * issuance of a report and an action plan satisfactory to IDA to improve public finance management issues in light of the diagnostic assessment using the HlPC tracking benchmarks; * agreement with IDA on the 2003 budget allocations to the priority programs identified in the Interim PRSP and on the system for monitoring budget releases to the priority programs. * preparation of an action plan satisfactory to IDA for improvements in Treasury operations; 20 F Release of the Third Tranche * preparation and adoption by cabinet of a gender action plan, satisfactory to IDA, to eliminate gender disparities, including enabling women to inherit land and other properties; * adoption by Cabinet of a comprehensive strategy, developed in consultation with the stakeholders, to revive the coffee and tea sub-sectors; * adoption by the Cabinet of an action plan for the reform of the public procurement administration; * adoption by the cabinet of a draft legislation to establish an Office of Auditor General responsible for auditing the financial operations of public agencies, and the submission of the draft legislation to the National Assembly. G Monitorable Benchmarks 53. A set of quantitative benchmarks and performance indicators agreed upon (see Annex 10) with Burundian authorities will. be monitored by Bank staff to assess the contribution of the proposed ERC to the success of the government's efforts. In light of the relatively short-time span of the proposed ERC, the selected performance indicators are essentially process and output indicators. These indicators will allow the monitoring of progress under the proposed credit in the following areas: (a) governance and public expenditure management, (b) private sector development, (c) agriculture and rural development, and (d) gender and poverty reduction. H Implementation and Institutional Arrangements 54. Disbursement: The disbursement of the Credit will follow IDA simplified disbursement procedures for adjustment operations.4 The borrower will open a US dollar account in the Banque de la Republique du Burundi (BRB). Upon notification of tranche release and at the request of the borrower, proceeds of the Credit in US dollars will be deposited into this account. If the proceeds of the credit are used for ineligible purposes, IDA will require the borrower either to return the amount for use on eligible purchases or refund the amount directly to IDA, in which case IDA will cancel an equivalent undisbursed amount of the credit. Although an audit of the deposit account is not required, the Bank reserves the right to require such an audit at any time. 55. Implementation Arrangements: The Ministry of Finance is responsible for managing the economic reform program and will be responsible for the implementation of ERC working with a Technical Implementation Committee (TIC). The Ministries of Health, Education, Agriculture, Reinsertion and Resettlement, Good Governance, Communal Development, Energy and Mining, Environment, Transport and Communication, Development Planning, Gender and the BRB will be represented in this committee to coordinate activities in their respective sectors. The TIC will be overseen by a Steering/Policy Committee, headed by the Vice President and comprising the Minister of Finance (designated as chair in the absence of the Vice President) and the Ministers of Development Planning, Communal Development, Good Governance, 4See the reference "Simplifying Disbursements under Structural and Sectoral Adjustment Loans", Operational Memorandum, February 8, 1996. 21 Environment, Industry and Commerce, Public Works, HIV/AIDS, Gender, and NGO representatives. The Steering/Policy Committee will provide guidance on the implementation of the reform program. The MoF will provide progress reports on implementation to IDA, and a monthly report on budget outcomes. Implementation will be closely monitored by the World Bank Country Office and supervision missions by headquarter staff, including joint missions with the IMF and other donors. The Bank will collaborate with the IMF and UNDP to ensure that the necessary technical assistance is provided. I. Indication of Borrower Commitment and Ownership 56. Burundi has recent experience in implementing Bank-supported economic reforms. The experience with the EERC, which supported limited reforms suggests that the Government was committed to reforms and serious about implementing agreed reforms. The Arusha Accord, the institutional basis for the Transition Government, envisages deep socio-economic and political reforms. The indications are that the parties in the Government support these reforms. Burundian has also just completed consultations for the I-PRSP. These have sensitized the population on the changes needed to improve the standard of living in Burundi and improved the climate for making these changes. Nevertheless, the parts of the establishment in Burundi that benefited from previous policies could still oppose and possibly delay some reforms. J. Environmental Aspects 57. In accordance with paragraph 12, OD. 8.60 dated 1992, and the Clarification of Current Bank Policy on Adjustment Lending dated June 2000, the proposed Economic Rehabilitation Credit is an adjustment Operation, and is therefore not subject to the requirements of OP. 4.01. Nevertheless, a review of environmental policies and practices will be carried out within the context of this operation, and particularly the establishment of an operational program to enhance the privatization of public enterprises, with a view towards assessing potential environmental and social negative impacts, and proposing possible mitigating measures. K. Fiduciary Safeguards 58. A diagnostic assessment of Burundi's public finance management (PFM) using the 15 HIPC tracking benchmarks which focus on budget formulation, execution, and reporting, is being carried out jointly by the Bank, Burundian authorities and other donors, including the European Union, Belgium and France. A number of tranche release conditions are based on this assessment and its completion is among the second tranche release conditions. With assistance from the Bank, through a Belgian Trust Fund, Burundian authorities are also in the process of initiating the reform of the public procurement administration. IDA is supporting a PER planned as a technical assistance to improve impact on the budget process. Within the context of the IPRSP, the Government plans to systematically carry out external audits of government accounts and resources. The timing of implementation of such audits is being worked out. These measures being implemented by the government to strengthen financial management should ensure fiduciary safeguards on the proper use of IDA resources provided under the proposed ERC. Moreover, financial accountability and fiduciary safeguards are expected to improve with the establishment of the Office of the Auditor General which will have the responsibility of auditing the accounts of government agencies and proposing corrective actions. 22 VI. RISK AND SUSTAINABILITY 59. Risks: The main risk factors are the internal conflict, the Great Lakes conflict, the readiness and capacity to implement all the reforms needed for a successful transition, and the funding of the transition. 60. Continued internal conflict:. Despite the installation of the transitional arrangements, military action is continuing. The two rebel groups that did not sign the Peace Accord are continuing military incursions. Efforts for a cease-fire, backed by President Mandela and the international community are continuing. Domestic policies aimed at national reconciliation would facilitate a cease-fire and a durable agreement for peace. The success of the international and domestic efforts is critical for the success of the implementation of economic reforms in support of the transition. 61. Regional conflict: The continued instability in the Great Lakes region contributes to instability in Burundi. The regional conflict provides Burundi's rebel groups a sanctuary in the DRC. Since January 2001, progress has been made on the implementation of the Lusaka Accord to end the conflict in the region. Continued strong international support for the implementation of the Lusaka Accord and the regional DDR Program is likely to facilitate the end of the Burundi conflict and alleviate discord elsewhere in the region. The Governments of Burundi agreed with the Govermment of the DRC in January 2001 to pull its troops from DRC while the Congolese pledged to discontinue their support to Burundian rebels. However, only a comprehensive settlement of the crisis in the region will facilitate the control of armed rebel groups. 62. Commitment to economic reforms: Despite pronouncements reaffirming its commitment to far-reaching socio-economic reforms, the stakes are particularly high and the implementation of the reforms will be a test for the commitment of the GOB to reform. The Govemment of Burundi needs to undertake difficult economic and institutional reforms to improve govemance, stimulate economic recovery, reduce poverty, and build an economic system in which all social groups have equal opportunities. This effort will inevitably involve changes in the role of the Government in the economy. There are likely to be powerful interest groups that have benefited from the exclusive system of the past who would resist the changes. The needed reforms will not be possible without strong commitment of the Govemment and support by the civil society and the political and business establishments. Open and coordinated dialogue by Burundian authorities and the development partners is key to mitigating this risk. 63. Inadequacy of resources: Despite the positive response expressed by donors at the Paris conference and the Geneva Round Table Meeting, there remains uncertainty regarding the amounts and timing of inflows of international assistance. With the transitional arrangements in place, donors made additional pledges at the Geneva Round Table, however, funds have been disbursing very slowly. This could delay key components of the recovery program (DDR, debt relief, other resettlement and reintegration) and possibly weaken the recovery process. However, the recent establishment of the MDTF to clear Burundi's arrears and promptly service its debt to multilateral institutions (including IDA), during the interim period leading to its access to debt relief under the Enhanced HIPC Initiative should contribute to resumption of inflows of external assistance from other donors, including AFDB, IFAD, and European Investment Bank. This should reduce fiduciary risks and contribute to increased effectiveness of IDA assistance. The 23 establishment of this Trust Fund should also reduce the risk of Burundi falling into arrears with IDA. VII. BANK GROUP OPERATIONS 64. IDA: Since 1970, Burundi has received 49 IDA credits totaling US$649.92 million. Disbursements from IDA credits have totaled US$595.8 million, and have financed a broad range of projects in agriculture and rural development, infrastructures and energy, economic and social infrastructure, education and health. IDA credits have also financed private and financial sector development, public enterprise reforms, technical assistance, balance of payments and emergency support. In 2000, the International Development Association approved an Emergency Economic Recovery Credit in the amount of US$35 million to support rehabilitation and reintegration and economic reforms. Currently, IDA portfolio has five active projects for a total commitment of US$115.8 million, with an undisbursed balance of US$60.3 million. 65. IFC: IFC has one operation in agribusiness, and is exploring other investment opportunities, particularly in the area of communication. 66. MIGA: Burundi signed the MIGA convention in April 1995 and ratified it in March 1996. It also completed the paymnent for its initial subscription to the capital stock; however, MIGA has not yet received any portion of its contribution to the general capital increase. MIGA portfolio in Burundi includes two active applications for a total investment of US$6.5 million. VIII. COLLABORATION WITH THE IMF AND DONORS 67. The Bank and the IMF have collaborated on macroeconomic reforrns and public expenditure management, and the government's IPRSP. The PRSP process also provided the framework for close collaboration with other donors, especially in the area of consultation and participatory diagnostic processes. Key among the donors supporting this process are Belgium, France, the Netherlands, UNDP, and the European Union (EU). The EU is one of the most important donors in Burundi; its pledges, by far the largest, accounted for 30 and 33 percent of total donor pledges at the Paris conference and GeneVa Round Table, respectively. The Bank has been working closely with UNDP, particularly in the area of donor coordination. Together with UNI)P, it co-chaired the Paris Donor Conference in December 2000. The Bank is working with the donor community to establish a Trust Fund for the regional DDR program, which Burundi is a beneficiary and the Multilateral Debt Trust Fund to clear Burundi's arrears and promptly service its debt to its multilateral creditors. Countries which have already contributed to this Multilateral Debt Trust Fund include UK and Belgium. Discussions are ongoing with a number of other donors, including the EU, Canada, Italy, Norway and Sweden, whose contribution is expected sometimes in the first half of FY03. The regional DDR program has received funding from the Netherlands and pledges from other bilateral donors. 24 IX. RECOMMENDATION 68. I am satisfied that the design of the proposed credit would comply with the Articles of the Agreement of the Association, and recommend that the Executive Directors approve it. James D. Wolfensohn President By Shengman Zhang Washington D. C. July 29, 2002 25 Annex 1: Country at a glance Burundi at a glance 7/1/2 Sub- POVERTY and SOCIAL Saharan Low- Burundi Africa Income Devdlopmentdlamond 2000 Population, mid-year (ndlflons) 6.8 643 2,417 LiUe expectancy GNP per capta (Atlas metho, US$) 110 490 420 GNP (Atlas metwod, USS billions) 0.75 316 1,008 Average,annual growth, 1994-0 Population (56) 2.9 2.6 1.9 Labor force (X6) 2.4 2.6 2.4 GNP Gross per --iprmary Most recnt estimate (latest year available, 1994-00) capita enrollment Poverty (96 of populaton below natinal poverty line) Urban population (X of total pooulation) 9 34 31 Llfe expectancy at bth (years) 42 47 59 Infant mortality (per 1,000 live bIths) 116 92 77 Child malnutrilon (X of chilren under , .. .. .. Access to Improved water source Access to an Improved water source (S6 of population) 48 55 76 Illiteracy (X of population age 15+) 52 39 39 Gross primary enrollment (% of school-age population) 61 78 96 Bunundl Male 66 86 102 Low-4ncorne group Female 46 71 88 KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1980 1990 1999 2000 EconomIc ratio GDP (US$ biSlions) 0.92 1.1 0.71 0.69 Gross domestic investrenVGDP 13.9 14.5 9.1 9.0 Exports of goods and services/GDP 8.8 7.9 8.8 9.0 Trade Gross domestic savings/GDP -0.6 -5.4 -2.0 -6.6 Gross national savings/GDP 4.6 3.4 4.0 3.0 Curent account balance/GDP -9.3 -11.1 -3.6 -7.4 Domestic Interest paymentstGDP 0.2 1.1 0.9 1.4 Investment Total debtWGDP 18.0 78.2 165.7 178.5 savings Total debt service/exports 9.5 43.6 45.1 42.0 J Present value of debt/GDP .. .. 94.8 Present value of debt/exports .. .. 1061.0 Indebtedness 1980-90 1990-00 1999 2000 2000-04 (average annual gmwth) GDP 4.4 -2.6 -1.0 -0.9 3.8 S urbund GNP per capita 1.3 -5.2 -3.9 -3.8 1.1 Low-Income grup Exoorts of oods 3.4 7.9 8.7 2.0 10.6 STRUCTURE nf tti ECONOMY 1980 1990 1999 2000 Growth of Investment and GDP (%) (X of GDP) Agriculture 62.2 55.9 52.2 80.7 40 Industry 12.6 19.0 17.3 18.5 20 . Manufacturing 7.4 12.9 8.7 .. o Services 25.1 25.2 30.5 30.8 20 Oa 00W Prvate consumption 91.4 94.5 84.9 88.0 o* General govemment consumption 9.2 10.8 16.1 17.5 5 Imports of goods and services 23.3 27.8 18.3 23.6 (average annual growth) 1980-90 199040 1999 2000 Growth of export and Imports (') Agncuiture 3.1 -1.6 -3.0 3.8 160- Industry 4.5 -5.6 7.2 4.1 Manufactunng 5.7 -8.0 12.3 Services 5.6 -2.0 3.0 3.6 so. Private consumption 3.4 -4.5 -11.9 4.8 4 General govemment consumption 3.2 -2.1 15.0 -22.7 . V 0io Gross domestc Investment 6.9 -0.4 10.9 8.5 o.0 Imports of goods and servIces 1.5 1.1 -25.8 8.5 E -POrts l0mprsa Gross national product 4.2 -2.6 -1.5 -0.3 Note: 2000 data are preliminary estimates. The diamonds show four key Indicators In the country (in bold) compared with Its Income-group average. If data are missing, the diamond wil be Incomplete. Latest year for Improved water source data Is 2000. 26 Burundi PRICES and GOVERNMENT FINANCE 1980 1990 1999 2000 Inflation (%) Domestic prices (5 change) -0 Consumer prices 9.5 7.0 3.4 24.3 30. Implicit GDP deflator 16.4 6.0 3.4 22.5 5 0 Government inance 10 ± Ž J (% of GDP Ilndudes current grants) Currentrevenue 14.4 17.9 18.3 20.1 s5 go 97 os go Curent budget balance 2.4 2.9 -3.0 0.3 - GDP deator ...cPI Overall surplus/deflcit 6.1 -7.9 -10.4 -.3 TRADE (USS mHllbons) 1980 1990 1999 2000 Export and Import levels (USS mill.) Total exports (fob) 66 73 55 49 5e7 Coffee 58 52 42 47 Tea 2 a 11 14 Manufactures 1 4 1 1 Total Imports (cff) 168 226 97 108 Food 18 12 11 11 Fuel and energy 25 30 19 20 J Capital goods 33 80 52 59 Export pdce index (1995=100) 108 68 58 60 94 ss sr 07 93 n oo Import price Index (1995=100) 95 91 89 91 mExiEats *Imnprts Termsoftrade(1995=100) 113 75 65 66 -74 -105 BALANCE of PAYMENTS 1980 1990 1999 20W0 CurrentaccountbalancetoGDPI% (US$ millioS) Exports of goods and services 81 89 55 49 1 Importsotgoodsandservices 214 314 97 108 0 Resource balance -133 -225 -42 -59 I- 97 -2 ' ' Net income 2 -15 -37 -51 2 Net current transfers 122 219 6 5 _ Current account balance -86 -126 -74 -105 4* Financdng tems (net) 77 123 12 88 -7 Changes in net reserves 8 2 14 17 -3 Memo: Reserves nciuding gold (USS mlilons) 95 105 Conversion rate (DEC, localJUS$) 90.0 171.3 563.6 720.5 EXTERNAL DEBT and RESOURCE FLOWS 1980 1990 1999 2000 (US$ millions) Composition of 2000 debt (US$ mill.) Totaldebtoutstandinganddisbursed 166 885 1,171 1,204 IBRD 0 0 0 0 IDA 37 398 559 614 .G: 65 Total debt service 9 42 45 55 E: 1 2 IBRD 0 0 0 0 IDA 0 4 12 13 ComposifIon of net resource flows Offlcal grants 39 135 60 .. 0:285 Official creditors 38 75 .. 27 Private creditors -3 -6 Foreign direct Investment 0 1 Portfolio equity 0 0 .. .. C:7 Wodd Bank program Commitments 38 73 12 35 A - IBRD E - Bilatea Disbursements 12 49 15 36 B-IDA 0- Otler mrltiateral F - Pdvte Pdncipal repayments 0 1 8 9 C - IMF G - Short-term Net flows 12 48 8 28 Interest payments 0 3 5 4 Net transfers 11 45 3 23 Development Economics 7/1/2002 27 Annex 2 Key Economic Indicators Burundi - Key Economic Indicators Actual Estimate Projected Indicator 1996 1997 1998 1999 2000 2001 2002 2003 2004 National accounts (as % of GDP) Gross domestic product' 100 100 100 100 100 100 100 100 100 Agriculture 56 53 54 52 51 50 49 49 49 Industry 15 17 16 17 18 19 19 19 19 Services 29 30 29 30 31 31 31 32 32 Total Consumption 98 96 103 102 106 108 104 101 103 Gross domestic flxed investment 12 7 8 9 9 10 10 11 II Government investment 10 5 6 6 6 6 5 6 6 Private investment 2 2 2 3 3 4 5 5 5 Exports (GNFS)b 6 10 8 9 9 8 9 11 11 Imports (GNFS) 15 14 20 18 24 18 19 22 28 Gross domestic savings 2 4 -3 -2 -6 -8 -4 -1 -3 Gross national savingse 8 9 3 4 3 4 1 4 -1 Memorandum items Grossdomestic product 900 957 878 714 679 715 824 865 -908 (USS million at current prices) GNPpercapita(USS,Atlasmethod) 130 130 130 120 110 100 100 100 110 Real annual growth rates (%, calculated from 1980 prices) Gross domestic product at market prices -8.4 0.4 4.8 -1.0 0.9 3.2 4.2 5.7 6.0 GrossDosnesticincome -9.1 -6.0 7.1 -5.6 -8.9 -2.5 9.1 -2.4 -8.3 Real annual per capita growth rates (%/o, calculated from 1980 prices) Gross domestic product at m,arket prices -10.7 -2.0 1.7 -3.9 -3.8 0.2 2.9 -3.7 -1.7 Total consumption -22.3 -5.8 9.5 -11.9 -3.2 -7.9 4.3 -17.3 -3.6 Private consumption -23.2 -6.0 10.5 -14.5 0.0 -10.0 5.2 -19.1 -3.3 Balance of Payments (USS millions) Exports (GNFS)b 51 96 64 55 49 39 43 49 56 Merchandise FOB 41 87 58 50 44 31 30 28 35 Imports (GNFS)b 137 140 124 97 127 108 117 124 130 Merchandise FOB 100 96 88 73 78 87 108 104 84 Resource balance -86 -45 -60 -42 -59 -69 -74 -75 -74 Netcurrenttransfers 111 111 56 51 59 79 94 81 82 Current account balance -39 2 -55 -28 -50 -34 -24 -39 -40 Net private foreign direct investment .. .. .. .. .. .. Long-term loans (net) .. .. .. .. :. .. Official 7 47 35 10 .. .. Private .. .. .. .. .. . Other capital (nt, incL aos & ommissions) .. .. .. .. .. .. Change in reservesd 62 19 39 14 17 -7 -10 1 -5 Memorandum items Resource balance (% of GDP) -9.6 -4.7 -6.8 -5.9 -8.7 -9.6 -9.0 -8.7 -8.1 Real annual growth rates ( YR8O prices) Merchandise exports (FOB) -51.7 89.4 -3.5 -11.0 -9.6 -1.3 17.3 33.3 3.6 Primary -52.3 111.9 -27.1 4.7 37.7 4.7 -3.2 4.7 3.8 Manufactures -36.3 -87.7 3.0 2.2 6.2 6.1 6.2 6.3 6.3 Merchandise imports (CIF) -48.1 6.7 38.6 -25.8 8.5 7.2 15.3 3.0 1.6 (Continued) 28 Burundi - Key Economic Indicators. (Continued) Actual Estimate Projected Indicator 1996 1997 1998 1999 2000 2001 2002 2003 2004 Public finance (as % of GDP at market prices) Current revenues 15.5 13.8 17.4 18.3 20.1 20.9 21.0 21.2 21.5 Current expenditures 17.6 18.2 17.5 21.3 19.8 18.2 17.3 16.9 17.0 Current account surplus (+) or deficit(-) -2.1 -4.4 -0.1 -3.0 0.3 2.7 3.7 4.3 4.5 Capital expenditure 10.0 5.0 6.1 7.8 6.4 8.2 11.1 10.7 11.0 Foreign financing 5.2 2.9 3.6 4.5 3.7 3.3 3.5 3.4 3.3 Monetary Indicators M2/GDP 21.0 18.7 18.0 20.6 20.6 20.6 20.6 20.6 20.6 GrowthofM2(%) 14.4 10.4 12.2 17.1 21.5 17.0 16.9 8.3 8.3 Privatesectorcreditgrowth/ 42.3 8.7 77.7 92.5 131.0 105.0 105.0 105.0 105.0 total credit growth (%) Price Indices( YR80 =100) Merchandise export price index 87.1 99.3 75.3 67.6 70.5 69.5 70.9 71.8 73.2 Merchandise importprice index 125.1 116.6 107.6 109.3 111.7 113.1 114.6 116.2 119.5 Mcrchandise terms oftrade index 69.6 85.1 69.9 61.8 63.1 61.5 61.9 61.8 61.2 Real exchange rate (UJS$/LCU)f 75.7 66.1 68.0 69.6 71.6 74.1 75.9 78.3 80.8 Real interest rates Consumer price index (% change) 26.4 31.1 12.5 3.4 24.3 14.0 9.6 6.8 5.0 GDP deflator (% change) 19.0 23.3 11.2 3.4 22.6 13.4 10.3 9.1 6.9 a. GDP at factor cost b. "GNFS" denotes "goods and nonfactor services." c. Includes net unrequited transfers excluding official capital grants. d. Includes use of IMF resources. e. Consolidated central government. f. "LCU" denotes "local currency units." An increase in US$/LCU denotes appreciation. 29 Annex 3 - Key Exposure Indicators Burundi - Key Exposure Indicators Actual Estimate Projected Indicator 1996 1997 1998 1999 2000 2001 2002 2003 2004 Total debt outstanding and 1208 1154 1207 1170 1211 1192 1176 1145 1128 disbursed (TDO) (US$m)' Net disbursements (US$m)a -2 39 68 56 74 110 147 173 201 Total debt service (TDS) 63 57 44 45 55 65 77 103 134 (US$m)a Debt and debt service indicators (%/0) TDO/XGSb 2101.4 1248.1 1734.8 2106.2 2565.4 2379.8 2218.0 1865.1 1979.6 TDO/GDP 133.1 130.4 148.4 165.7 178.5 179.4 177.1 166.6 160.5 TDS/XGS 110.4 57.1 58.9 70.0 100.1 102.1 102.7 105.4 131.3 ConcessionaUTDO 93.0 94.0 96.0 96.5 98.8 98.5 97.5 97.2 95.2 IBRD exposure indicators (%) IBRD DS/public DS 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Preferred creditor DS/public .. .. .. .. .. .. DS (%)C IBRD DS/XGS 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 IBRD TDO (US$m)d 0 0 0 0 0 0 0 0 0 Of which present value of guarantees (US$m) Share of IBRD portfolio (%) 0 0 0 0 0 0 0 0 0 IDA TDO (US$m)d 588 567 603 559 614 658 698 734 772 IFC (US$m) Loans Equity and quasi-equity /c MIGA MIGA guarantees (US$m) a. Includes public and publicly guaranteed debt, private nonguaranteed, use of IMF credits and net short- term capital. b. "XGS" denotes exports of goods and services, including workers' remittances. c. Preferred creditors are defined as IBRD, IDA, the regional multilateral development banks, the IMF, and the Bank for International Settlements. d. Includes present value of guarantees. e. Includes equity and quasi-equity types of both loan and equity instruments. 30 Annex 4 - Status of Bank Group Operations Burundi Operations Portfolio (IBRD/IDA and Grants) As of 06/11/2002 Differences Last PSR Original Amount Between Supervision in US$ Millions Expected and Rating Actual Disbursements Project Project Name Develop Implem Fiscal IDA Undis- Orig. Frm ID -ment entation Year bursed Rev'd Object. Progress P064556 BI-EERC S S 2000 35 0.26772 -13.9 P000216 Health/Pop. I S S 1995 21.3 222981 4.5 3.9658 P064961 Public Works & Emp. S S 2001 40 37.0182 -3.1 P065789 Regional Trade Facility S S 2001 7.5 5.35986 -0.1 P064510 Social Action (BURSAP ID S S 2000 12 6.26245 1.8 Ovetall 115.8 51.1380 -10.9 3.9658 Result Statement of IFC's Held and Disbursed Portfolio As of 1/31/2002 (In US Dollars Millions) Held Disbursed FY Approval Cornpany Loan Equity Quasi Partic Loan Equity Quasi Partic 2000AEF V&F Export 0.43 0 0 0 0.43 0 0 0 Total Portfolio: 0.43 0 0 0 0.43 0 0 0 Approvals Pending Commitment Loan Equity Quasi Partic 2001 AEF Florex 277 0 0 0 Total Pending Commitrnent: 277 0 0 0 31 . Annex 5 - Selected Indicators of Bank Portfolio Performance and Management As Of Date 06/11/2002 Indicator 1999 2000 2001 2002 Portfolio Assessment Number of Projects Under Implementation a 3 4 5 5 Average Implementation Period (years) b 6.1 3.7 1.9 2.9 Percent of Problem Projects by Number " C 0.0 0.0 0.0 0.0 Percent of Problem Projects by Amount at c 0.0 0.0 0.0 0.0 Percent of Projects at Risk by Number d 100.0 0.0 0.0 20.0 Percent of Projects at Risk by Amount a d 100.0 0.0 0.0 6.5 Disbursement Ratio (%) @ 54.3 122.7 56.2 20.2 Porffolio Management CPPR during the year (yes/no) Supervision Resources (total US$) Average Supervision (US$/project) Memorandum Item Since FY 80 Last Five FYs Proj Eval by OED by Number 40 4 Proj Eval by OED by Amt (US$ millions) 578.6 77.2 % of OED Projects Rated U or HU by Number 35.0 75.0 % of OED Projects Rated U or HU by Amt 44.6 87.4 a. As shown in the Annual Report on Portfolio Performance (except for current FY). b. Average age of projects in the Bank's country portfolio. c. Percent of projects rated U or HU on development objectives (DO) and/or implementation progress (IP). d. As defined under the Portfolio Improvement Program. e. Ratio of disbursements during the year to the undisbursed balance of the Bank's portfolio at the beginning of the year: Investment projects only. * All indicators are for projects active in the Portfolio, with the exception of Disbursement Ratio, which includes all active projects as well as projects which exited during the fiscal year. 32 Annex 6 - Distribution of Pledges by Donors (Bilateral and Multilateral Institutions) International Donor Conference Paris - December 2000 and Round Table Donors Meeting Geneva - December 2001 Donots Natume of assistance Amount Pledged ._________ (USS million) 2000 2001 Austria Reconstruction, water and sanitation, democracy and human rights, 4.0 1326 and debt write off _ Belgium Security and humaniarian assistance, social sectors, public works and 24.0 25.42 economic management, H[V/AIDS Canada Peace and humaniarian assistance, DDR . 2.0 Denmark Humanitarian assistance 8.35 Finland Security and humanitarian assistance 2.36 1.5 France Justice and national reconciliation, reinsertion and reintegration, 6.85 3.98 rehabilitation of infrastruture, food security, mral development, public expenditure management, training and technical assistance Germany Conflict prevention and democracy, water and sanitation, FHV/AIDS 31.36 35.68 Italy Reinsertion, decentralization, gender, orphans and FHV/AIDS 2.0 6.4 Japan Food security and IV/AIDS 1.24 1.0 Netherlands Humanitaran, demobilization, disarnament and reintegration 5.0 Norway Peace and reconciliation, humanitarian assistance and DDR 6.0 4.3 OIF Governance, education through direct support and scholarship 1.5 OPEP Fund Agriculture and rural development 10.0 15 Sweden Humanitarian assistance and social sectors 4.22 Switzerland H nr assistance and debt relief 5.29 UK HIV/AIDS, debt relief 8 8 USA Humanitarian assistance, agriculture and rural development, social 70 150 sectors and H[V/AIDS, support to refugees and orphans, promotion of civil society and gender, education and training EU Balance of payments support, food securityhumanitarian assistance, 133.35 242.17 reinsertion and reintegration, rehabilitation of economic and social infrastructure, agriculture and rural development technical assistance AfDB Agriculture and rural development, infrastructure, education, social 27.7 78.53 action projects and poverty alleviation, rehabilitation of economic and social infrastructure, post-conflict reconstruction and govemance IMF Emergencypost-conflict assistance facilityand technical assistance, 25.0 25.0 macroeconomic management _ UNDP Donor coordination, food security, rehabilitation, reintegration, 20.0 32.0 governance, HIV/AIDS, technical assistance UNICEF Rehabilitation of social infrastructure and education .. 31.0 FNUAP HIV/AIDS reintegration and reinsertion .. 1.5 Wodd Bank Balance of payments support, DDR, rehabilitation of economic and 50.0 156.0 social infrastructure, public works and roads rehabilitation, education and health, HIV/AIDS and orphans, governance and public expenditure management, poverty monitoring, technical assistance, macroeconomic management. Total pledge Amount 446.24 832.74 33 Annex 7 - Summary of Tranche Release Conditions and Timing of Implementation Conditions Indicative Date General Conditions IDA is satisfied: * that the overall macroeconomic environment is conducive to sustainable growth and poverty reduction. with the implementation of the overall reform program as outlined in the Letter of Development Policy (Annex 8). Conditions for Board Presentation * Identification of a diagnostic assessment of Burundi's public finance management July 2002 issues using the HIPC tracking benchmarks * Definition of a minimum package of essential social services to be provided by the July 2002 Government to the poor and vulnerable groups during the transition period, drawing on the consultation and participatory diagnostic processes carried out within the context of the Interim PRSP * Approval by Cabinet of a special fund for the reinsertion and reintegration of July 2002 displaced persons and other victims of, conflict Conditions for the Second Tranche Release * Adoption by Cabinet of an operational program for the privatization of public February 2003 enterprises, including the establishment of a unit to implement the privatization, identification of enterprises to be privatized and the adoption of a strategy and plan for privatization acceptable to IDA * Issuance of a report and action plan satisfactory to IDA to improve public finance February 2003 management issues in light of the diagnostic assessment using the HIPC tracking benchmarks * Agreement with IDA on the 2003 budget allocations to the priority programs March 2003 identified in the Interim PRSP and on the system for monitoring budget releases to the priority programs * Preparation of an action plan satisfactory to IDA for improvements in Treasury March 2003 operations Conditions for the Third Tranche Release * Preparation and adoption by Cabinet of a gender action plan, satisfactory to IDA, to May 2003 eliminate gender disparities, including enabling women to inherit land and other properties June 2003 * Adoption by Cabinet of a comprehensive strategy, developed in consultation with the stakeholders, to revive the coffee and tea sub-sectors * Adoption by Cabinet of an action plan for the reform of the public procurement July 2003 administration * Adoption by Cabinet of a draft legislation to establish an Office of the Auditor General responsible for auditing the financial operations of public agencies, and July 2003 submission of the draft legislation to the National Assembly. 34 Annex 8 - Timetable of Key Processing Events Event Process Date and Date of Completion Overall Processing Time 6 months Project Prepared by: Government and IDA Staff Pre-appraisal: March 15, 2002 ROC Meeting: May 13, 2002 Appraisal: June 10-25, 2002 Negotiations: July 22-24, 2002 Circulation to Board: July 29, 2002 Board Presentation: August 29, 2002 Effectiveness: October 29, 2002 Project Completion: June 30, 2004 Closing Date December 31, 2004 This operation was prepared by a team led by Hippolyte Fofack (Task Team Leader, AFTP3), and included Chukwuma Obidegwu (Lead Economist, AFTP3), Mathurin Gbetibouo (Country Office Manager, AFMBI), Jean Ndenzako (Economist, AFTP3), Susan Opper (Sr. Education Specialist, AFTH4), Malonga Miatudila (Sr. Public Health Specialist, AFTH2), Willem Zijp (Operations Adviser, AFTQK), Raju Kalidindi (Research Analyst, AFTM3), Abdul Haji (Sr. Financial Management Specialist), Serigne Omar Fye (Sr. Environmental Specialist), Prosper Nindorera (Procurement Officer, AFTQK), Pamphile Kantabaze (Sr. Operations Officer, AFTH4), Isabella Micali-Drossos (Sr. Counsel, LEGAF), Michael Fowler (Disbursement Officer, LOAAF), Cecilia Kennedy (Disbursement Analyst, LOAAF), Leoncie Niyonahabonye (Program Assistant, AFMBI), Paula Joachim (Team Assistant, AFTP3). The Peer reviewers were Emmanuel Akpa (Sector Manager, AFTP4) and Arvil Van Adams (Sector Manager, AFTH4). The Sector Manager for Macroeconomic 3 was Cadman Atta Mills and the Country Director was Emmanuel Mbi. 35 Annex 9 - Letter of Development Policy REPUBLIC OF BURUNDI ECONOMIC REHABILITATION CREDIT LETTER OF DEVELOPMENT POLICY REPUBLIC OF BURUNDI Mr. James D. Wolfensohn President The World Bank Washington, D.C. LETTER OF DEVELOPMENT POLICY REPUBLIC OF BURUNDI Dear Mr. Wolfensohn, 1. I am writing to you on behalf of the Transitional Government of the Republic of Burundi to seek assistance from the International Development Association (IDA) to support our efforts at rehabilitating and carrying out economic reforns essential for growth and poverty reduction. 2. The reforms that we are planning are intended to lay the basis for national reconciliation, sustainable economic growth and the reduction of poverty. This will require a swift transformation from a heavily subsidized system where resources are for the most part controlled by the State and benefit only a small portion of the population, to a more liberal and inclusive society where the Govemment can help to create conditions conducive to economic growth and the development of the private sector. This Letter of Development Policy describes the core element of the economic reform program of the Republic of Burundi to be supported by the Economic Rehabilitation Credit (ERC). The reform program seeks to promote security and good govemance, ensure the reintegration of intemally displaced persons and other victims of conflict, strengthen the country's human resources and combat the AIDS pandemic, revive agricultural output and diversify sources of income, and foster macroeconomic stability and economic growth. 3. We are committed to economic reforms and macroeconomic stability, which are essential for achieving poverty reduction. Our development program is moving ahead on schedule, and consultations and a participatory diagnosis under the Interim Poverty Reduction Strategy Paper were completed in August 2001. These consultations provided the basis for the elaboration of the Interim PRSP which was discussed by donors in April 2002. 36 I. CONTEXT AND RECENT DEVELOPMENTS A. The social and political context 4. Burundi is slowly recovering from the civil war, which broke out inl993, following the assassination of President Ndadaye, and the economic embargo imposed by regional leaders and observed by the international community in response to a military coup, which overthrew a "Convention Government" in 1996. The civil war resulted in the death of a large number of civilians and left thousands of victims. A large number of economic and social infrastructure were destroyed. In this context, the Government and Burundian authorities focused their actions in two key priorities: re-establishing normal living conditions and revitalizing the economy. On the political front, the Government launched the process of national dialogue to seek consensus- based solutions to the social and political crisis. These efforts resulted in the signing of a comprehensive Peace Accord among all political parties with the exception of two armed groups, on August 28, 2000, in Arusha, Tanzania. As part of the implementation of the transitional arrangements outlined in this Peace Accord, an all-inclusive Transition Government was sworn- in in November 1, 2001; a Transitional National Assembly was established in January 2002, followed by a Transitional Senate in February 2002. 5. Despite these progress, the situation remains fragile, largely due to continued incursion and sporadic attacks, including on the civilian population by the two rebel groups that did not sign the Peace Accord and are not part of the Transition Government. However, discussions are ongoing between the Government and these two rebel groups to reach a cease-fire and place Burundi on the path to full reconciliation, while allowing thousands of refugees and internally displaced persons to return to their homelands. These discussions are taking place in South Africa, under the auspices of President Mandela, the mediator. The direct contact recently established between the different parties illustrate the progress accomplished and willingness to rapidly reach a cease-fire. B. Recent economic developments 6. Economic activity contracted by at least 20 percent in real terms between 1993 and 2001, reducing per capita income and causing widespread poverty, with some regions more severely affected than others. Persistent insecurity accelerated the deterioration of living conditions. On the macroeconomic front, intemal imbalances deepened, while the extemal position deteriorated sharply. Foreign reserves shrank from an equivalent of over ten months of imports in 1993 to less than 3.2 months in 2001, before falling further in the first half of 2002. By end-April 2002, official reserves were down to less than one month of imports. The dwindling of foreign aid and weak revenue flows, in the context of war and widespread impoverishment, deepened the overall budget deficit (on a commitments basis including grants), which rose from 3.5 percent of GDP in 1993 to 7.5 percent in 1999, before declining to 2.1 percent in 2000. 7. It is in this difficult context that the Government launched the reform program to support poverty reduction efforts, increase efficiency of resource allocation and utilization, and establish transitional institutions. In the area of fiscal policy, the Govemment implemented a number of measures to increase revenues mobilization, compress expenditures and reduce deficits. Among these measures, the most significant ones include: (i) stricter control over tax and customs duties 37 exemptions, after ministries were stripped of their power to grant exemptions; (ii) creation within the taxation and customs directorate of units to audit and justify the amounts of each exemption; and (iii) higher taxes on petroleum products and beer. These measures had positive impact on the primary budget balance, which moved from a deficit of 1 percent of GDP in 1999 to a surplus of 2.8 percent in 2000, while the overall deficit was reduced significantly, reaching 2.1 percent of GDP in 2000. 8. In the area of monetary policy, expansionary monetary creation fueled inflation, which rose from 1.68 percent in 1992 to more than 24 percent in 2000. Measures were taken in the second half of 2000, especially within the context of the Fund program to reduce domestic demand and restrain credit expansion and curb rising inflation. These measures were reinforced within the context of the Fund Staff Monitored Program concluded in July 2001, and resulted in a decline of inflation to about 8 percent in 2001. The decline was also accelerated by the increase supply of agricultural commodities in a relatively good harvest season in 2001, following the drought in the previous years. 9. The total level of expenditure and net loans was reduced by 3.3 percentage points compared to 1999, owing to: (i) the improved management of public procurement administration, through systematic enforcement of a competitive bidding system; (ii) the establishment of quarterly expenditure ceilings; (iii) a freeze on non-fixed commitments in case of revenue shortfalls; and (iv) cutbacks in military spending. As the people of Burundi struggle with insecurity and conflict, they were also confronted with unfavorable terms of trade and falling volume of coffee production, the main export and source of foreign exchange accounting for over 90 percent of export revenues. Total external debt reached an exceptionally high level of US$1.2 billion in 2000; and external arrears increased to over US$114 million in 2000, accounting for over 98 percent of export. Domestic arrears also rose substantially, largely because of the relatively high level of government debt to the banking system. However, with the recovery of foreign aid, including the Emergency Economic Recovery Credit (EERC) from the World Bank, the growth of indebtedness to the banking system has been considerably reduced. C. The Vision and Development Objectives of the Transitional Government 10. The Transition Government is fully aware that poverty has played a major role in perpetuating cycle of conflicts in Burundi over the last four decades, and its current policies emphasize reducing poverty and fostering inclusion. The Government recently defined a development strategy for Burundi, in the context of the elaboration of the interim Poverty Reduction Strategy Paper (PRSP). This strategy is based on the outcomes of the consultations and participatory diagnostic processes conducted at the sectoral and community levels, and involving all economic actors and stakeholders, including private sectors operators, sectoral ministries, NGOs, communities and civil society. The development strategy outlines in this IPRSP put emphasis on: (i) diversification of sources of growth and rural income, (ii) macroeconomic stability and economic growth, (iii) private sector development, (iv) peace, security and good governance, (v) rehabilitation and reintegration of victims and internally displaced persons, and (vi) strengthening human resources and combating HIV/AIDS. 38 II. THE MEDIUM-TERM MACROECONOMIC FRAMEWORK AND DEVELOPMENT OBJECTIVES 11. Over the next three years, the Government will seek to lay the basis for sustainable growth and poverty reduction by establishing an environment favorable to private sector development, within a stable macroeconomic framework. The objective is to achieve a real GDP growth rate of 5 percent on average over the period 2002-2004, and at least 7 percent for the period 2004-2010. The primary sector will continue to represent an important share of GDP. The improvement of the government's fiscal stance initiated within the context of IDA-financed Emergency Economic Recovery Credit (EERC) and the Fund SMP will be fostered through the implementation of measures to enhance revenues mobilization, including modernization of the taxation and customs administrations, reduction of tax fraud and broadening the tax base. Tax receipts are expected to grow by 2 percent of GDP to reach 17 percent in 2002-2003. On the expenditure side, the Government will prepare objective-based budgets and will control public spending and ensure its efficiency. To accomplish this, public spending will be stabilized at around 18.5 percent of GDP during the period 2002-2004, while budget allocations to priority sectors such as health, education, water and sanitation will be increased. The public expenditure review undertaken with the assistance of the World Bank will be pursued and completed, and will make possible the preparation of a medium-term budgetary framework. 12. The strategic actions to achieve these short- and long-term objectives include: (i) improving the economic and financial environment so as to stimulate economic activity and investment; (ii) reviving the agricultural sector, the country's main source of income, accounting for more than 50 percent of GDP and over 90 percent of labor force; (iii) fostering small and medium-size enterprises (SMEs), which are more suitable to the Burundian context than large enterprises, through targeted financial mechanisms such as venture capital and guarantee funds; (iv) re-launching the privatization process; (v) implementing a set of priority measures to revive investment and exports, including the rehabilitation of economic infrastructure, reactivation of the free trade zone, and promotion of exports. 13. The subsistence farming sector, which represents more than 30 percent of GDP, will be revived through regular supply of inputs and improved water management system to prevent recurrence of shortages of supply witnessed during the drought. At the same time, we expect the incomes from tradable agriculture and export crops farmers to rise, following the rehabilitation of processing plants, enhanced productivity and expansion of grain fields, and the opening of activity to private sector operators. With respect to the secondary and tertiary sectors, their performance should also improve, in a general context of implementation of measures to enhance private sector development. 14. Finally, to ensure sustainable economic growth, there is a need not only to increase investment, but also to gradually achieve a steady rise in the investment-to-GDP ratio and thereby provide a better return on national savings. It is expected that the investment rate will rise from 7.5 percent in 1999 to 25.1 percent by 2004, and increase even further over the following decade to reach 30 percent. The recovery of investment will be supported by the following priority operations: (i) rehabilitation of viable enterprises that are in difficulty because of the crisis, in particular through clearance of arrears owed to these companies; (ii) 39 rehabilitation of economic infrastructure; and (iii) resort to new financing instruments to support sensitive sectors and young entrepreneurs. 15. Export promotion will include several components: (i) export diversification, with revitalization of the privatization of the coffee and tea sector and promotion of nontraditional products (horticulture, perfume plants); and (ii) adjustments to institutional provisions governing the free trade zone. The Government's ambitious objective of reviving the private sector is based in part on providing massive training for economic operators, rehabilitating economic infrastructure, and reforming the banking and financial system. Consolidation of government finances, the establishment of a solid legal and regulatory framework, stabilization of the macroeconomic framework, and the implementation of structural and institutional reforms are also key components of the effort to revive the private sector. Im. THE ECONOMIC REFORM PROGRAM 16. The economic reform program that will be supported by the Economic Rehabilitation Credit focuses on five areas, in accordance with government priorities: (i) human resource development; (ii) promotion of the private sector; (iii) agriculture and rural development; (iv) good governance, peace and national reconciliation; and (v) reintegration and reinsertion of victims and internally displaced persons. A. Human Resource Development and Inclusion 17. Context: Burundi's social and human resource indicators, which were already among the worse in Sub-Saharan Africa deteriorated significantly with the conflict during the 1990s. The incidence of poverty increased from 40 to 69 percent between 1993 and 1999. Infant mortality increased to 116 per thousand. At the same tirne, the HIV prevalence rate among the 15-49 year age group increased to over 11 percent, with important gender disparity. The growing plight of HIV/AIDS, which has been affecting an increasingly large segment of the population accelerated the declining life expectancy. Life expectancy felt to 42 years in 2000. 18. In 1999, the number of people living with HIV/AIDS was about 360,000 in the 15-49 age group and 19,000 for those under 5; about 56 percent of those with HIV/AIDS are female. The growing number of women affected with HIV/AIDS in a context where women have been assuming increasingly greater responsibilities is a serious concern to Burundian authorities. Just like the persistence of gender bias, particularly in the area of education, literacy, and access to means of production. In 2000, gross primary enrollment was established at 55 percent for male and 46 percent for female. The disparities and inequality in Burundi exceeds the gender dimension, however; they are also prominent across regions and among the different ethnic groups. 19. The conflict context and relative instability accelerated the regional disparities in access to, and provision of essential social services. The geographical coverage reduced significantly due to large concentration of civil servants in the health and education sectors in the most secured urban areas. The Arusha Peace Accord stresses the importance of reducing these disparities and fostering inclusion in achieving the Government's objectives of durable peace and national reconciliation. This objective is prominent in the vision and development objectives of 40 the Transition Government, which envisages a number of measures to strengthen human resource development. These include the rehabilitation of destroyed social infrastructures, the reduction of geographical, regional and social disparities, increased school enrollment rates, enhancing institutional capacities to monitor and support private education and the implementation of cost-recovery policies. 20. In addition, the Government will continue the efforts undertaken before the crisis: (i) to increase schooling for girls at all levels; (ii) to decentralize school management in cooperation with local communities and parents' associations; and (iii) to find viable financing mechanisms that will address concerns of equity (schooling for children from vulnerable groups) and promote private sector involvement. The reconstruction phase must include these guidelines in the choice of development strategies for the education system. 21. In the health sector, the major challenges are still the AIDS pandemic, the resurgence of endemoepidemic diseases that thrive in a setting of malnutrition and widespread food shortages, the low level of health coverage indicators, and the shortage of human resources. The strategy to reform the sector calls for bringing the health facilities closer to the beneficiaries and developing human resources through basic training and on-the-job skills upgrading, as well as making pharmaceutical products more available. Over the short and medium term, the Government will define a new drugs policy and new strategies for the health sector by involving the beneficiaries through mutual schemes and renewing the health insurance card, as well as giving greater independence to health care establishments. 22. The Govermment will study different approaches to financing public health, compatible with state resources (in light of demographic growth and the rising demand for health care) and with household resources to ensure that health care is financially accessible to everyone. These studies will cover at least three components: (i) a health insurance card system based on the findings of a study carried out in the pre-crisis period; (ii) methods to pay for care for the most vulnerable groups; (iii) conditions for private sector involvement as well as that of traditional therapy practitioners. 23. Reforms supported by the proposed ERC: The social and economic costs of the 1993 conflict and the insecurity which followed had direct impact on the life of Burundians. Its negative impact on human resources development are enormous, calling for the implementation of a wide range of possible reforms to address imbalances in this sector and enhance human resource development. However, in light of the relatively short span of this operation, and accounting for intervention by other donors, we would like the proposed operation to support a number of key reforms likely to have impact on the life of the poor and vulnerable groups in the short and medium term. 24. These key reforms areas include the reduction of gender disparities and promotion of inclusion and the local and community levels, and in all the different branches of the administration. This reform is consistent with the provision of the Arusha Peace Accord which establishes a minimum threshold of 30 percent for the representation of women in all the different branches of the administration, and may be viewed as steps towards its implementation. More specifically, the proposed ERC will support the preparation of a Gender Action Plan to be 41 adopted by Cabinet. This Action will be prepared in consultation with the stakeholders and in collaboration with the civil society. It will support the implementation of institutional reforms to eliminate any form of gender discrimination and to increase access to ownership and inheritance by women. 25. The Government will continue working to overcome ethnic and regional inequalities and those related to gender. This challenge will be addressed through an appropriate action plan that includes sensitivity training as well as ensuring transparency and equity in the recruitment of government officials and workers, and strengthening the judicial apparatus. In addition to concerns about ethnic balance and other aspects of equality, whether in the security forces, the judiciary or other areas, the adjustments planned must keep in sight the goal of a society based upon equality of rights and duties, equality of opportunities, equity, competitiveness and excellence. In short, the return to real democracy and the rule of law should gradually overcome fears of institutionalizing ethnic considerations in the management of public affairs. 26. The rehabilitation of social infrastructures in the health and education sectors, and implementation of measures to improve access and increase the provision calls for significant increase of public resources allocated to the social sectors in the budget. Despite the Government's efforts and the support from the international community, including the World Bank through the EERC, the needs remain enormous, calling for alternative sources of financing. During the period preceding the conflict, Burundian authorities initiated the implementation of cost-recovery mechanisms and policy to increase the participation of beneficiaries through cost sharing. The outbreak of conflict and dramatic increase of poverty weakened the institutions and compromised the implementation of the cost-recovery policy. As progress is made to reach a negotiated cease-fire, we would like the proposed ERC to continue to support the rehabilitation of destroyed infrastructure and initiate the preparation of an institutional framework and reforms to underpin the cost-sharing policy in the post-conflict period. B. Promotion of Private Sector Development 27. Context: The relatively narrow tax base .is partly the result of the embryonic private sector largely confined in Bujumbura, the capital city, and the continued presence of government in most aspects of the economy, including textile industries, telecommunications, tradable agricultural sector especially coffee and tea factory and processing, and banking and financial sectors. 28. A large number of utilities are actually publicly owned. Some of these have been running structural deficits in the past, including in the period preceding the conflict. During that period, a number of publicly owned companies benefited from public resources and subsidies. However, during the conflict, the rising public deficit and increasingly shrinking public budget reduced the government's resource base and its ability to continue to support these companies. Worse, the Government accumulated arrears to a number of these companies. 29. In addition to Government's intervention, regulatory institutions are relatively weak and a number of texts and laws regulating economic transactions and business are not up to date. Some of theses include the labor code and bankruptcy laws which need revision to improve the arbitration system. The civil code which needs revision to improve judicial procedures. A 42 number of steps have already been taken to reduce the government's participation. In 1996, a privatization decree was adopted by the Parliament. However, the crisis context which followed delayed its implementation. 30. The Transition Government has reaffirmed its commitment to privatization by creating a Ministry of Good Governance and Privatization. It is committed to completing the privatization of the following public enterprises, if possible by 2004: ONATEL (National Telecommunications Office), COTEBU (Burundi Textiles Complex), REGIDESO (Water and Electricity Production and Distribution Agency), OTB (Burundi Tea Office), ONAPHA (National Phannaceuticals Office), 1NABU (Burundi National Printing Office), OPHAVET (Veterinary Pharmaceuticals Office), and SHTB (Burundi Hotel and Tourism Corp. - Hotel Source du Nil), as well as state holdings in the coffee sector. 31. Reforms supported by the Proposed ERC: The objective of the Transitional Government is to gradually reduce government participation, and establish a legal and institutional framework to promote private sector development and enhance competitiveness. The Government intends to pursue a privatization strategy that will improve management, modernize production facilities and revive output. The proposed ERC will help strengthen existing institutional framework to underpin the privatization program. This includes the preparation of a strategic memorandum and a programming framework by the Public Enterprises Unit, and the preparation of an action plan for the privatization of these enterprises, focusing on measures to (i) improve managerial efficiency; (ii) reduce or abolish subsidies; (iii) clear government arrears with private operators; (iv) modernize production facilities; and (v) promote the private sector. 32. In addition, the proposed ERC will support the revision of the labor code and bankruptcy laws, the civil code, help prepare an update of the 1996 privatization decree and suppoI- institutional strengthening and capacity building in the new Ministry of Good Governance and Privatization. 33. The Government will undertake an evaluation of the financial sector and will implement the resulting recommendation in an effort to restore stability to the sector. The Bank of the Republic of Burundi (BRB) will continue its efforts to build up its staff of inspectors in sufficient numbers and quality to supervise banks and financial institutions. Monetary policy will be designed so as not to compromise the objective of reducing inflation, and will guarantee the independence of the central bank and reinforce its external net asset position. C. Agriculture and Rural Development 34. Agriculture which accounts for over 50 percent of GDP and supports more than 90 percent of the population is the mainstay of the economy. During the years following the 1993 crisis, this sector witnessed a dramatic fall in output and production, resulting into declining revenues and increased poverty incidence. While the cause of falling production, particularly in the 1990's are intimately associated with the post-conflict context which causes massive displacement of persons, and other exogenous shocks such as drought, some of the causes are more structural and relate to institutional setting characterized by constant government intervention particularly in the coffee and tea export sub-sectors. 43 35. The vulnerability of rural income and agricultural production to exogenous shocks such as drought is partly the result of absence of diversification of sources of growth in rural arrears, and absence of risk mitigating measures. The Transitional Government strategy to revive agricultural production and diversify the sources of income is based on a number of measures, including actions to revive output in the country's traditional export sectors (coffee, tea, cotton, quinquina) with attention both to volume and to quality; (ii) promote nontraditional export crops (fruits, flowers, vegetables, vegetable silk crops, sugar, rice and other farm products). Efforts on behalf of traditional export crops (coffee, tea, cotton) will include: (i) rebuilding infrastructure destroyed or damaged during the war (warehouses, processing plants, roads); (ii) restoring farming activity and providing coaching for farmers; (iii) reinvigorating the extension services generally; (iv) raising producer prices; (v) proceeding with the policy to privatize agro-industrial activities. Attention will focus both on increased volumes and enhanced quality of output, with a view to raising the relevant indicators by 2004 at least to the level that prevailed before the 1992 crisis. Promoting nontraditional export crops will require the restoration of regular communications with international markets (scheduled flights), a solid support infrastructure, as well as appropriate credit facilities for entrepreneurs. 36. There is strong demand within the sub region for products that have not traditionally been exported, such as sugar, beans, rice, palm oil and manioc flour. The Government intends to upgrade its nontraditional export promotion programs and to help the industry in its own efforts to exploit the potential of these new export products. Activities will include: (i) an updated national policy and program for managing natural resources and the environment; (ii) reviving awareness and outreach campaigns to help family farms integrate agro-sylvo-pastoral techniques; (iii) enlisting local communities in the effort to restore and protect watersheds and ridges; (iv) introducing legal and regulatory instruments for planning and management of the sector. 37. Reforms supported by the ERC: The current economic and social context is characterized by accurate shortage of foreign reserves which have fallen to less than one month of imports. Coffee production and export is the main source of foreign exchange, accounting for over 90 percent of export revenues. The proposed ERC will support the government's efforts to revive the tea and coffee sub-sectors through elaboration of a comprehensive strategy which promotes increased participation of private sector operators. 38. A diversification of source of growth in rural areas is also envisaged as a risk mitigating measure. The IDA supported Emergency Economic Recovery Credit (EERC) supported the developments and expansion of irrigated agriculture. However, a comprehensive integrated approach is required to better identify the potential sources of growth and prospects. The proposed ERC will support the implementation of a comprehensive study to identify the sources of growth and income generating activities in rural arrears. D. Promotion of Good Governance, Peace and Security 39. Context: As a result of the conflict and rising poverty, Burundian authorities have faced growing cases of corruption, in an administration which in the past was praised for its probity. The conflict context in the 1990s was also characterized by shrinking public resources, which weakened existing institutions, and particularly public expenditure management (budget 44 formulation, execution and control). The last time Burundi prepares a comprehensive budget, including the current and capital expenditures based on the public investment program (PIP) goes back to 1992; during the year preceding the crisis PIP were systematically prepared every three years. Other branches of the administration have also been affected, including the public procurement administration. 40. The Transitional Government of Burundi recognizes the importance of governance, and transparency accountability in the growth process, stability and security. The Arusha peace Accord emphasizes govemance and accountability in the management of public resources, and the promotion of inclusion. A number of measures to improve governance have already been taken by Burundian authorities to strengthen public expenditure management. Within the context of the PER, we have been working with donors to improve the budget formnulation and processes. We have abandoned the line-items approach to budget formulation to adopt a system for the functional classification to strengthen the link between government policies and budgetary allocations. These adjustment to the budget are already taken into account in the 2002 budget. 41. The challenges remain important, however. Audits and ex-post controls systems are not implemented systematically. The relative weakness of existing control systems is aggravated by the crisis context. With the implementation of transitional arrangements, the functions and attributes of the Transitional Parliament have been substantially improved. This increases the likelihood of strong interaction between the executive and legislative branch of the administration, which is essential for ex-post controls. The Transition Government also appointed a Minister of Good Governance with broad responsibility for accountability in all government operations. 42. Reforms supported by the ERC: Burundian authorities requested technical assistance from the Bank to strengthen the public procurement administration. And we would like the proposed ERC to support the reform of the public procurement administration, which is essential to strengthen the competitive aspect of public procurement procedures, and increase the efficiency in public expenditure allocations. The reform should help establish transparency and accountability in the public procurement administration, and laws which are consistent with good international practices. 43. Other key reform areas where we are seeking support from the Bank within the framework of the proposed ERC include the establishment of the office of the Auditor General responsible for auditing financial operations of public agencies, the implementation of the audit of the Treasury which was initiated under IDA supported EERC and is ongoing, and supporting the reforms of the budget processes regarding the latter, we would like to specifically request assistance to carry out a thorough assessment of public expenditure management (budget formulation, execution and control) using the HIPC tracking benchmarks with a view to identifying issues and proposing corrective measures to be implemented within the framework of the proposes operation. 44. The interim PRSP stresses the importance of establishing poverty-reducing priority spending program and of strengthening the links between budgetary allocation and priority programs. This linkage is also relevant to the HIPC process which aims at increasing poverty 45 reduction impact and effectiveness of resource utilization. The proposed ERC will support the Transition Government efforts to strengthen the links between priority programs identified in the IPRSP and budgetary allocations in the 2003 budget. It will also support the Transition Government efforts to establish a system for monitoring the budget releases to the priority programs. E. Reintegration and Reinsertion of Victims and Internally Displaced Persons 45. Context: The 1993 crisis and internal conflict created an unprecedented humanitarian catastrophe, with the number of victims and internally displaced persons estimated at 1.2 millions, accounting for about 18 percent of total population. Of these thousands of victims, it is believed that more than 250,000 have been killed since 1993. Other are living in precarious conditions, either as internally displaced or refugees. The number of victims and the relatively precarious conditions are aggravated by the regional context characterized by ongoing conflict in the DRC, with a number of countries, which are either directly involved or affected. Burundian has over 400,000 refugees in neighboring countries, with a large concentration in Tanzania (over 380,000) and the DRC (over 20,000). 46. The massive presence of refugees and internally displaced persons living in precarious conditions is source of instability and a serious handicap to achieving peace and stability at the national and regional levels. This relative instability is a source of concerns to Burundian authorities and officials from other countries involved. At the regional levels, a number of measures have been taken to accelerate the return of refugees: in May 2001, a tripartite agreement was signed between the Government of Burundi, Tanzania and UNHCR to facilitate voluntary repatriation of Burundian refugees stationed in Tanzania. Similarly, and within the framework of the implementation of the Lusaka Accord, officials from the DRC and Burundi reached an agreement in January 2002; whereby Burundian authorities agreed to pull out their troops from the DRC, while the Congolese pledged to discontinue their support to Burundian rebels. 47. At the national level, we have also taken a number of steps to facilitate the return and repatriation of refugees. These steps are consistent with the provisions of the Arusha Peace Accord and include: the protocol for access and protection of internally displaced persons which was signed in February 2001; and the establishment of a National Commission on Reintegration of Refugees in May 2001. The Arusha Peace Accord also emphasizes the establishment of: (i) a National Truth and Reconciliation Commission, drawing on the South African post-Apartheid model, (ii) a Fund to support the reintegration and reinsertion of victims. 48. Reforms Supported by the Proposed ERC: We fully recognize that the success of the reintegration program is the cornerstone of the Government's objectives to achieve peace and stability. The Government is pursuing a policy to strengthen the program for integrating displaced persons and returning refugees, and to help them obtain the means to a livelihood as quickly as possible. For many of these victims, farming is the main source of income; and reintegration will require implementation of institutional measures to increase access to means of production by the poor and vulnerable groups, either in the form of land, capital, or through strengthening of human resources. For those who no longer have access to their property, the 46 Government is committed to finding them new lands and helping them settle at new sites. The Government will also help with housing and the provision of basic social services. 49. The priority objective in the short term, then, is to improve housing conditions, particularly for war victims living in camps and in the hills and for the stream of refugees now flowing back to their country. In order to facilitate the reintegration of refugees through increased access to social services, Burundian authorities, with the assistance from the World Bank and other donors, defined a minimum package of essential social services to be provided to the poor and vulnerable groups during the post-conflict period. In addition to donor assistance, we are envisaging that the assistance provided within the context of this package will partly be funded through a "Reinsertion and Reintegration Fund" to be created. We would like the proposed ERC to support the preparation of an institutional framework to underpin the creation and implementation of the proposed Reintegration Fund. 50. Such a framework should account for the Government's commitment to, and ongoing efforts to implement fiscal decentralization. Indeed, within the framework of implementation of the decentralization program, designed to strengthen local communities and enhance the reintegration process of returning refugees and other victims, we have transferred full responsibility from the central levels to communes in the provision of assistance to the needy. And the establishment of this Fund should make the resources available to local authorities to support the reintegration program. IV. CONCLUSION 51. The priority goal of the Transitional Government is to promote national reconciliation, ensure respect for human rights, restore security for all, and promote economic growth, which is indispensable for reducing poverty. To meet the expectations of the people of Burundi and their aspiration for poverty reduction, these efforts will have to be accompanied by the social rehabilitation of war victims, reconstruction and economic recovery. The Transitional Government will therefore focus its action on priority areas such as reviving agricultural production and rural development, reforming government finances, improving the countrys external position and controlling inflation. These objectives of poverty reduction and improved public welfare will be supported by a healthy macroeconomic framework based on realistic growth objectives, better coordination and consultation between the Government and the private sector, and a more efficient allocation of public funds based on rationalization of budgetary choices. OF TRENDI 47 Annex 10 - Proposed Economic Rehabilitation Credit - Policy Action Matrix Area & Objectives Reform Benchmarks by Board Outcome Benchmark for Mid-2003 Presentation Continue to maintain a sustainable Macroeconomic stability The Government has maintained a macroeconomic framework macroeconomic framework satisfactory to the Bank Performance under the Fund program supported by Emergency Post-conflict Assistance Facility continue to be satisfactory Public expenditure Management _ Budget formulation and execution Agreement with IDA on the 2003 budget Adoption of a system for the allocations to the priority programs functional and economic identified in the IPRSP and in the system Adoption of transparent fiscal policy and classification of budget and for monitoring budget release in the priority budget preparation practices abandon of line-items programs Budget is based on consolidated A budget Memorandum for the years macroeconomic estimtes and aggregates . . a 2002 and onward are based on etrengthensystimates accounding aggrt s miti of a fiagnoice consolidates estimates of national Strengthen system of accounting assessment of public finance Accounts and reflect the revision to the management issues using the 15 budget process Improve commitment control HIPIC tracking benchmarks. Budget Inspection/Audit/and public procurement Integration of recurrent and Completion of diagnostic assessment of investment expenditure in the public finance management issues using Increase competition for public formulation of budget the 15 HIPIC tracking benchmarks contracts Iiito fdansi contracts Initiation of diagnostic Systematic monthly reporting of budget Enhances comprehensive legal assessment of the public execution using the flash report and framework for public procurement procurement admiistration TOFE 48 Area & Objectives Reform Benchmarks by Board Outcome Benchmark for Mid-2003 Presentation Elaboration of Action plan for reforming public procurement Completion of reforms of the public administration procurement administration Initiation of Audit of the Strengthening capacities within the Treasury public procurement administration including through training and staffing In light of other country experiences, initiate The Transition Government of Burmndi investigations in the suitability to submit law on public procurement of different models to identify based on good international practices to the nature and contour of the the Transitional Parliament office of a Auditor General consistent with Burundian Complete Audit of the Treasury context Complete establishment of an office of Auditor General Poverty Reduction, Reinsertion and Reintegration of victims of conflict and 1ID P s _ _ _ _ _ _ _ _ _ _ _ _ _ Implementation of growth Definition of minimum package Establishment of institutional enhancement measures to increase of essential social services to be framework to underpin the creation of a personal income and reduce poverty provided by the Government to Micro-credit Fund. incidence poor and vulnerable groups during the transition period. Implementation of Consultation and Provision of targeted assistance to the participatory diagnostic process within poor and vulnerable groups, through Approval by Cabinet of special the context of the full PRSP 49 Area & Objectives Reform Benchmarks by Board Outcome Benchmark for Mid-2003 Presentation establishment of safety nets fund for reinsertion and mechanisms reintegration of displaced persons and other victims of conflict. Implementation of measures to reduce vulnerability and exposure to exogenous shocks including through broadening the sources of growth in rural areas Private sector Development hnprove efficiency and effectiveness Establishment of an operational Adoption of measures to strengthen the in public expenditures allocation and program for the privatization of legal and judiciary framework for use public enterprises commerce and enforcement of contracts Promote and foster economic growth Complete revision of corporate and through increased private ownership commercial laws and creation of enabling environment Elaboration of a framework for the clearance of domestic arrears Complete revision of labor code and to private sector supplies civil code Update of the 1996 privatization decree Adoption of measures to strengthen privatization agencies, including the "Service Charg6 des Entreprises 50 Area & Objectives Reform Benchmarks by Board Outcome Benchmark for Mid-2003 Presentation Publiques (SCEP)"within the Ministry of Good Governance and Privatization Agriculture and Rural Development Establishment of an operational Complete a study to identify the sources Increase rural income through program for the privatization of of growth and income generating revitalization of agricultural public enterprises, including activities in rural areas. production, diversification of sources coffee and tea processing of growth and protection against complexes Adoption by cabinet of a comprehensive adverse shocks strategy developed in consultation with the stakeholders to revive the coffee and tea sub-sectors. Implementation of institutional measures to promote increased participation of private sector operators Human Resources Development and Inclusion Foster inclusion through strengthening Definition of a minimum In consultation with all the stakeholders of human resources and reduction of package of essential social and Civil Society, Burundi Authorities disparities services to be provided by the will prepare a Gender Action Plan to the Government to the poor and adopted by Cabinet vulnerable groups during the 51 Area & Objectives Reform Benchmarks by Board Outcome Benchmark for Mid-2003 Presentation transitional period, drawing on Implementation of institutional reforms the consultation and to eliminate any sources of gender participatory diagnostic discrimination and to increase access to processes carried out within the ownership and inheritance by women. context of the IPRSP Preparation of institutional framework and reforms to underpin the implementation of cost-recovery policies and mechanisms. 52 IMAGING Report No.: 24611 BU Type: SAR