Will Burundi make it in time to join the East African Monetary Union? ©
The Question
Burundi formally joined the East African Community (EAC) in 2007. The EAC is an intergovernmental organization with its headquarter in Arusha, Tanzania. The other member countries are Kenya, Tanzania, Uganda and Rwanda (www.eac.int).
Burundi - a francophone African nation – is situated between Rwanda, Tanzania and the DRC Congo. It has a population of approximately 7 Million People. There are three major ethnic groups in Burundi- Tutsi 14%, Hutu, 85% and Twa.1%. Traditionally, Tutsis were considered to be a Royal Tribe, known as Abaganwa. Since Burundi`s independence in 1962, Burundi has experienced multiple ethnic conflicts. The Tutsis have dominated the military and held power from 1962 until 1993. In 1993, the first democratically elected Hutu President Melchior Ndadaye defeated Major Pierre Buyoya, a Tutsi. President Ndadaye was killed by the Tutsi military after 3 months into his presidency. The coup d’état revived ethnic tensions and several Hutu rebel groups were formed. Major Pierre Buyoya took power again in a coup d’état in July 1996. The neighboring countries imposed an economic embargo that lasted until 1999. The economic embargo was put in place in order to force Major Buyoya to give up power.
Ndikumana (2001) mentioned that the ethnic conflict has severely weakened the Burundian economy. He also mentioned that the Burundian government has shifted the allocation of resources from capital and social expenditures to military and security spending. Salter (1999) assessed the impact of the economic embargo on the Burundian economy. The embargo stopped all to and exports to Burundi. Ngendakumana (1999) also said that, with the embargo, foreign donors stopped helping Burundi and the Government deficit reached 6.5% of GDP in 1996.
The EAC comprises 126 million people and has a total annual economic output of $73 billion (www.eac.int). The East African monetary union will be a Euro zone type with a single currency, the East African Shilling. Anand (2011) says that the monetary union will increase the size of the regional market and could potentially bring economic development, gains from regional integration and trade, and enhanced global competitiveness for the EAC. The current negotiations for a single currency are focusing on the differences of inflation, public debt and GDP growth among EAC members.
The East African monetary Union is scheduled to begin functioning in 2015. The proposed East African Central Bank will be launched in 2013 and will be designing the interest rates and monitor the exchange rates.
The monetary union will require the harmonization of macroeconomic policies by member countries` governments. The EAC member countries` governments will need to create sustainable and competitive business environments.
At this time therefore a question which arises is: Will Burundi make it by the proposed start date for East African monetary union?
It is this writers’ position that Burundi has a lot to do before achieving this goal.
Macroeconomic Issues
The Burundian government budget largely depends on foreign aid. In 2010, the government revenues were approximately $585 million, while expenditures were approximately $699 million. 55% of the revenues came from foreign donors and 65% of the revenues were used to pay government employees` salaries (Central Bank of Burundi Report 2010). It is in the opinion of this writer that the Burundian government should increase its revenues by efficient tax collections and anticorruption measures.
In Burundo it is generally acknowledged that the inflation rate is high. The inflation rate went from 3.5% in September 2010 to 6.5% in December 2010 (Central Bank of Burundi Report 2010). According to the Central Bank of Burundi the increase in fuel prices was the main driver for this inflation,. It is the opinion of this writer that the Burundian government swiftly undertake policies that can stabilize the inflation rate.
Corruption
While Burundi has started multiple anti corruption strategies and initiatives, corruption is still rife in Burundi. The 2010 report of Transparency International-Kenya (www.tikenya.org) revealed that Burundi is the most corrupt country in the EAC. Burundi`s East Africa bribery index was 36% while Rwanda, the least corrupt country, had a 6% bribery index.
The Organisation de la Lutte contre la Corruption et Malversations Economiques (www.olucome.bi), an anti corruption watchdog, says that the Burundian government lost $25 million in 2010 revenues due to corruption. These revenues could have been used to build schools, roads or hospitals.
The fight against corruption will need to be taken to a higher level. Corruption increases the loss of government revenues and - in the opinion of this writer – this definitely hampers economic growth.
Private Sector Development
As with almost everywhere else around the world, in Burundi, the private sector is an important potential engine for economic growth and job creation.
However this writer is personally aware that in Burundi, the private sector is underdeveloped and mainly consists of small businesses that produce for the local market. Also, the private sector does not have similar financing options – available in many other nations – that can contribute to its development.
The World Bank Doing Business Report 2009 reported that business loans typically carry a bank interest rate of around 17% and the corporate tax rate is around 37%. Nkurunziza (2009) emphasized the need for the Burundian financial sector to address the needs of core drivers of economic growth in Burundi. He identified the private sector (agriculture and industry) as the core drivers of economic growth.
In Burundi, the majority of jobs come from the Government. It is different in Kenya and Tanzania where the private sector employs more people than the Government (East African Business Council Report 2008).
Other EAC countries have created entities that have the sole purpose of supporting the private sector. For example, there are the Rwanda Investment and Export Promotion Agency and the Kenya Private Sector Alliance. Such has not occurred in Burundi.
It is the opinion of this writer that without a vibrant private sector, Burundian businesses will struggle and languish against other East African competitors.
This writer is of the opinion that – at minimum, The Burundian government should:
- Create and support a Government Agency for the private sector;
- Work with local banks in getting better financing options for small businesses;
- Make the Burundi Revenue Authority an efficient and corruption-free agency.
Financial Sector Development
Nkurunziza (2009) says that, in Burundi, the financial sector does not address the needs of core drivers of growth (agriculture and industry). Other studies such as those by Niyubahwe (2008) and Ndikumana (2001) mentioned the important role of financial systems in sustainable economic growth.
Niyubahwe (2008) says that Burundi’s financial sector is still relatively shallow, undiversified, dominated by an oligopolistic banking sector, and characterized by relatively high lending rates, extremely low insurance penetration, a scarcity of long term debt, home mortgage financing and equity capital and an inadequately functioning payments system
Other EAC countries such as Kenya have a stock market and a diversified financial sector. In Kenya, companies have raised over $1 Billion in Initial Public Offerings through the Nairobi Stock Exchange.
This writer feels strongly that the Burundian government should quickly embark on a series of reforms aimed at modernizing the financial sector, improving the financial regulations and thereby improve the performance of the financial sector in the economy.
In so doing it will begin to ready itself for active and equal membership in the proposed East African Monetary Union.
References
Anand et Al (2011), “Moving Toward a Monetary Union and Forecast-Based Monetary Policy in East Africa”, Policy paper, Princeton University.
Bank of the Republic of Burundi (BRB) Reports, 2009 and 2010.
East African Business Council Report 2008
Internet Research: www.eac.int , www.nse.co.ke, www.tikenya.org , www.eabc.info
Ndikumana L (2001), “Financial Intermediation and Economic Growth in Southern Africa”, Journal of African Economies.
Ndikumana L (2001) “ Fiscal Policy, Conflict and Reconstruction in Burundi and Rwanda”, United Nation University paper 2001/62
Ngendakumana V (1999), “Prospects for Social Protection in a Crisis Economy”, World Bank Policy paper.
Niyubahwe A (2008) ,”Financial Intermediation and Economic Growth: Time Series Evidences from Burundi”, IDEC Policy paper
Nkurunziza J. (2009), “Why is Burundi`s Financial Sector not Development-Oriented?”, UNCDA policy paper
Salter I (1999), Action Aid Policy paper, 1999
Transparency International-Kenya Report 2010
World Bank Doing Business Report 2009
