Burundi: Risk Assessment
Country Risk Rating
Business Climate Rating
- Natural resources (coffee, tea, gold)
- Member of the East African Community (EAC)
- World’s second-largest nickel reserves (6% of the total) and rare earth development
- Entrenchment of the political crisis that began in 2015
- International assistance reduced because of the political crisis
- Border tensions with Rwanda
- Poorly diversified economy that is vulnerable to external shocks
- Unproductive agricultural sector (30% of GDP and 90% of the labor force)
- Geographically isolated
- Activity hampered by lack of infrastructure and access to electricity
- Decrease in the labor force as the political crisis has forced some people to flee the country
Rare earths: the key to recovery
The COVID-19 crisis shattered the fragile recovery that began after the 2015 crisis. Limited measures were taken within the country to combat the epidemic (recommendations on physical distancing and hand washing). The land border with Rwanda was closed to goods and people, the border with the Democratic Republic of the Congo was also closed (although not to goods), while the border with Tanzania remained open. Land borders were reopened in August 2020. Commercial flights resumed in November after being banned in March 2020. Burundi's health system is one of the most fragile in the world and requires investment to be able to cope with the pandemic. The pandemic response plan to strengthen the health care system, the social safety net, and parts of the road network to facilitate access to patients is worth 4.7% of GDP (USD 150 million) over the period 2020-2021. The services sector was most affected by COVID-19 because of the drop in demand and travel restrictions. Unemployment is expected to increase particularly in the capital Gitega since services (tourism, hotels, and commercial services) are concentrated there. This will hurt private consumption (80% of GDP), especially as purchasing power declines. The rise in the prices of food and imported goods following disruptions caused inflation to accelerate, although it is expected to slow as upward price pressures ease. The recovery is set to be driven by the mining industry, especially Rainbow Rare Earths, the company that owns the Gakara mine. The sector has been growing in importance since the United States said it wanted to diversify its rare earth supply in the wake of the trade dispute with China. Burundi is the only African country currently producing rare earths, as a result of which the mining sector is now the main contributor of foreign exchange ahead of coffee and tea. However, industry growth is set to slow due to low investment and a still difficult environment.
Persistent twin deficits
The budget deficit widened in 2020 due to increased public spending related to the elections and the fight against COVID-19. However, mining revenues are expected to increase in 2021. The government will rely on the local market to finance itself by issuing treasury bills and bonds, and on the central bank as a last resort. Public debt is 70% domestic. The government obtained debt relief of 0.2% of GDP for the period July-October 2020 from the IMF under the Catastrophe Containment and Relief Trust. This relief could extend until April 2022 for a total amount of USD 24.97 million (0.8% of GDP).
Regarding the external accounts, the decrease in the cost of imports due to lower oil prices was offset by imports of medical products as part of the battle against COVID-19 in 2020. Dependence on imports due to low local production will continue to fuel the current account deficit in 2021. The trade balance is structurally negative because of substantial imports of manufactured goods and oil. The deficit will be contained by an uptick in exports of mining products (38.2% of the total) and agricultural products (43%), particularly coffee. The low level of external aid will be insufficient to finance the current account deficit. The central bank’s foreign exchange reserves (less than one month of imports) will continue to dwindle, accentuating the depreciation of the Burundi franc and the lack of liquidity in the economy.
Despite having a new president, the country remains isolated on the international scene
Following the presidential election of 20 May 2020 and the sudden death of incumbent Pierre Nkurunziza in early June 2020, the newly elected president Evariste Ndayishimiye, from the National Council for the Defence of Democracy - Forces for the Defence of Democracy (CNDD-FDD) Party, took office early on 18 June 2020 after beating the main opposition candidate, Agathon Rwasa, president of the National Freedom Council (CNL). Despite the leadership change, political continuity is the most likely scenario, with some members of the old government joining the new one. As the former president underestimated COVID-19, the fight against the virus was stepped up (soap subsidy, testing policy implemented) after Evariste Ndayishimiye took office. Burundi has been excluded from the international scene since 2015, and relations with the West are expected to remain limited despite the new government’s arrival. The International Criminal Court's investigation of crimes against humanity continues despite the death of the former president, who unleashed a political and social crisis when he sought a third term in 2015. The Southern African Development Community (SADC) rejected Burundi's application for membership in 2019 because of the continuing political crisis. However, the country is expected to work with multilateral partners (IMF, World Bank) to fight the pandemic. Burundi is ranked 185/189 in the UN Human Development Index.