Report No. 51880-BI Report No. 51880-BI Republic of Burundi Country Economic Memorandum (CEM) Public Disclosure Authorized The Challenge of Achieving Stable and Shared Growth March 2011 Poverty Reduction and Economic Management 3 Africa Region Republic of Burundi Public Disclosure Authorized Country Economic Memorandum (CEM) Economic Memorandum Country Public Disclosure Authorized Document of the World Bank, Co-produced with the Government of Burundi, the African Development Bank and the Department for International Development (UK) Public Disclosure Authorized Currency Equivalents Exchange Rate Effective as of February 28, 2011 Currency Unit Burundi Franc USS 1.00 FBu 1,230 Government Fiscal Year January 1–December 31 Weights and Measures Metric System Abbreviations and Acronyms AfDB African Development Bank BNDE Banque Nationale de Développement Économique BRB Banque de la République du Burundi CEM Country Economic Memorandum CET Common External Tariff COMEBU Comptoirs Miniers des Exploitations du Burundi COMESA Common Market for Eastern and Southern Africa COMTRADE U.N. Commodity Trade Statistics Database CPAF Common Performance Assessment Framework DAC Development Assistance Committee DDR Disarmament, Demobilization and Reintegration DfID Department for International Development (UK) DPAF Donor Performance Assessment Framework EAC East African Community EDPRS Economic Development Poverty Reduction Strategy EITI Extractive Industries Transparency Initiative EPA Economic Partnership Agreement EU European Union FDI Foreign Direct Investment FSAP Financial Sector Assessment Program GDP Gross Domestic Product GWh Gigawatt Hours HI Herfindahl Index HIPC Heavily Indebted Poor Countries HIV/AIDS Human Immune Deficiency Virus/Acquired Immune Deficiency Syndrome JBSR Joint Budget Support Review MDG Millennium Development Goal ii MEACA Ministry of East African Community Affairs MFI Microfinance Institution MTEF Medium-Term Expenditure Framework NTB Nontariff Barrier OCIBU Office du Café du Burundi OECD Organisation for Economic Co-operation and Development PAGE Project d’Appui à la Gestion Economique PEMFAR Public Expenditure Management and Financial Accountability Review PPP Public Private Partnership PRSP Poverty Reduction Strategy Paper RCA Revealed Comparative Advantage REGIDESO Régie de Production et de Distribution d'Eau et d'Electricité SITC Standard International Trade Classification SODECO Société de Déparchage et de Conditionnement SOGESTAL Société de Gestion des Stations de Lavage TFP Total Factor Productivity VAT Value-Added Tax Vice President: Obiageli Katryn Ezekwesili Country Director: John Murray McIntire Country Manager: Mercy Miyang Tembon Sector Director: Marcelo Giugale Sector Manager: Jan Walliser Task Team Leader: Hannah Nielsen iii Table of Contents ACKNOWLEDGMENTS ................................................................................................................................ vii EXECUTIVE SUMMARY ............................................................................................................................. viii INTRODUCTION ............................................................................................................................................ 1 CHAPTER 1 MACROECONOMIC AND FISCAL DEVELOPMENTS........................................................... 2 A. Economic Growth: Historical Perspective ....................................................................................... 2 B. Burundi’s Public Finances: An Overview ..................................................................................... 11 CHAPTER 2 OBSTACLES TO ECONOMIC GROWTH AND EMERGING OPPORTUNITIES FOR BROADENING THE BASE FOR GROWTH ......................................................................... 15 A. Obstacles to Economic Growth ..................................................................................................... 15 B. Opportunities in Potential Growth Sectors .................................................................................... 32 CHAPTER 3 THE GOVERNMENT’S OPTION TO TACKLE OBSTACLES AND REAP OPPORTUNITIES FOR ECONOMIC GROWTH ............................................................................................... 52 A. An Infrastructure Action Plan ........................................................................................................ 52 B. Maximizing the Benefits of Burundi’s EAC Membership ............................................................ 59 C. Reforms Needed to Increase the Private Sector’s Contribution to Growth ................................... 70 D. Encouraging Emerging Growth Sectors ........................................................................................ 74 E. Summary of Priority Recommendations ........................................................................................ 81 CHAPTER 4 IMPLICATIONS FOR THE MACRO-FISCAL SITUATION ................................................... 84 A. Economic Prospects, Resource Allocation, and Achieving the MDGs ......................................... 85 B. How Can Aid Contribute to Increased Growth? ............................................................................ 91 C. Conclusion ..................................................................................................................................... 96 APPENDIX .......................................................................................................................................... 97 Appendix 1: Action Plan .................................................................................................................... 98 Appendix 2: Export Diversification ................................................................................................. 101 Appendix 3: Regional Integration .................................................................................................... 105 Appendix 4: Infrastructure Action Plan–Tables and Maps .............................................................. 109 Appendix 5: Infrastructure Action Plan–Main Components ............................................................ 113 Appendix 6: Business Environment ................................................................................................. 118 Appendix 7: Map of Burundi ........................................................................................................... 119 REFERENCES ........................................................................................................................................ 120 iv List of Boxes Box 1.1: Rwanda’s Growth Experience and Possible Lessons for Burundi ....................................... 10 Box 2.1: The Transformation of Uganda’s Exports—A Success Story .............................................. 21 Box 2.2: Burundi’s Tax Regime ......................................................................................................... 26 Box 2.3: Land Tenure and Economic Growth .................................................................................... 35 Box 3.1: Proposed Measures to Remove Burundi NTBs within the EAC .......................................... 63 Box 4.1: The Common Performance Assessment Framework in Rwanda ......................................... 95 Box A.1: Potential Benefits, Costs, and Guiding Principles of Regional Integration ....................... 106 List of Figures Figure ES.1: Real GDP Growth and GDP Per Capita, 1962–2008 .......................................................... viii Figure ES.2: Composition of Public Spending, 2001–08......................................................................... xiv Figure 1.1: Per Capita GDP in Burundi and Rwanda, 1962–2008 ........................................................... 2 Figure 1.2: Real GDP Growth and GDP Per Capita, 1962–2008 ............................................................. 3 Figure 1.3: The Cost Of War: Potential and Actual GDP Per Capita ....................................................... 4 Figure 1.4: Sectoral Contributions to Real GDP Growth, 1997–2008 ..................................................... 5 Figure 1.5: Private and Public Investment as a Percent of GDP, 1997–2008 .......................................... 6 Figure 1.6: Annual Growth of GDP, Capital Stock, and Productivity Per Worker, 1990–2008 .............. 7 Figure 1.7: Real GDP Growth during Post-conflict Periods in Burundi, Rwanda, and Sierra Leone ...... 8 Figure 1.8: Composition of Public Spending, 2001–08.......................................................................... 12 Figure 2.1: HI for EAC Member-Countries ........................................................................................... 19 Figure 2.2: HI and GDP Per Capita ........................................................................................................ 19 Figure 2.3: Composition of Exports in EAC Countries, 1985–89 and 2005–06 .................................... 20 Figure 2.4: EXPY of EAC Countries ..................................................................................................... 22 Figure 2.5: Governance Indicators, 1998, 2000, 2003, and 2008 ........................................................... 28 Figure 2.6: Population Projections, 2005–50 ......................................................................................... 31 Figure 2.7: Proportion of Individuals Living in Households with a Daily Caloric Intake per Adult Below