Burundi: Risk Assessment
Country Rating1
Rating: D
Business Climate Rating1
Rating: D
Risk Assessment2
Dependence on coffee prices
Economic activity was slightly affected by the world financial crisis, as a result of a decline in private remittances and direct foreign investments. Growth accelerated in 2010, despite domestic instability due to the extended election period. Business activity got a boost from higher prices and production levels for tea and coffee, which represent almost 90% of exports. In addition, the return of direct foreign investment buoyed the hotel, restaurant and construction sectors. Under the three-year agreement concluded with the IMF in 2008, reforms intended to improve infrastructure, raise productivity, and enhance the business environment are being implemented. These reforms are nevertheless too timid to make significant inroads into the supply bottlenecks which will continue to stunt growth in 2011. Inflation is expected to remain around 10%, with growth in agricultural production offset by strong demand and expansion of the money supply.
Very weak public finances, despite debt relief
Public sector accounts remain seriously imbalanced and entirely dependent on international aid, without which the budget deficit would reach one third of GDP. Burundi's external public debt was restructured in 2009 ($700 million written off by multilateral creditors and $134 million by the Paris Club). Furthermore, tax reform is in progress under the IMF agreement. Following the introduction of VAT in 2009, the Burundi Revenue Authority is expected to begin operating in 2011, thus improving State revenues. Public finances nevertheless remain beset with problems, and the situation is expected to improve only gradually.
After deteriorating in 2009, the current account deficit narrowed in 2010, thanks to the resumption of international aid and a 50% increase in tea and coffee exports, and it will likely remain around 10% of GDP due to imports of oil products, foodstuffs, capital goods, and services related to reconstruction and transport. The inflow of transfers, chiefly international aid and remittances from expatriates, will cover two thirds of the trade deficit. There is a high risk of worsening debt ratios in coming years, due to a high debt-service burden (about 20% of exports) and the existence of twin fiscal and external deficits.
Significant political risk following contested election results
Since the end of the conflict between the government and the Hutu rebel movement National Forces of Liberation (NFL) in 2009, internal political tension seemed to have eased. But accusations of fraud leveled at outgoing President Pierre Nkurunziza in the 2010 presidential and legislative elections, boycotted by the main opposition parties, testify to continuing instability. Moreover, the NFL may once again engage in armed struggle. These recurrent tensions only serve to aggravate problems of governance: excessively opaque public finances and latent corruption severely hinder the country's development.
Strengths
- Support of lenders
- Upcoming accession to the East Africa Community is a positive factor in encouraging foreign direct investment
- Cancellation of 75% of external public debt in 2009
Weaknesses
- Lack of infrastructure is a major hindrance for production and trade
- Landlocked country
- Inadequately diversified economy vulnerable to outside shocks (coffee price variations, weather conditions)
- Serious internal political instability