FILE COPY Report No. P - 6 7

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1 RESTRICTED FILE COPY Report No. P This report was prepared for use within the Bank and its affiliated organizations..they do not accept responsibility for its accurccy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPMENT CREDIT TO THE REPUBLIC OF BURUNDI FOR A COFFEE IMPROVEMENT PROJECT March 20, 1969

2 IThERNATIOIIAL DEVELOPM{ENT ASSOCIATION REPORT AND RECOMMNDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE REPUBLIC OF BURUNDI 1. I submit the following report and recommendation on a proposed credit in an amount in various currencies equivalent to $1.8 million to the Republic of Burundi. PART I - HISTORICAL 2. Burundi became independent in 1962 and a member of the Associa-- tion in Before independence Burundi and neighboring Rwanda formed the Belgian Trust territory of Ruanda-Urundi, to which the Bank made a loan of $b.8 million, with the guarantee of Belgium, in.1957 for a road and lake port project located in what is now Burundi. No arrangements have yet been made by Belgium, Rwanda and Burundi regarding the succession to the loan debt; Burundi has in fact been servicing all amounts due under the loan out of its annual resources fran Belgian economic assistance. In 1966, the A3sociation made a development credit to Burundi of $1.1 million to improve the water supp-ly system of the capital city, Bujumbura. The following is a summary statement of the Bank loan to Ruanda-Urundi and the IDA credit to Burundi as at February 28, 1969: Loan or Amount (US$ million) Credit Number Year Borrower Purpose Bank IDA Undisbursed Ruanda-Urundi Road and Port L Burundi Water Supply 1.1 Total: h of which has been repaid to Bank and others: 1.8 Total now outstanding 3.0 Amount sold: 2.9 of which has been repaid _ Total now held by Bank and IDA Total undisbursed All major contracts for the water supply project have been awarded and construction is expected to be completed in 1970 as schedulad.

3 4. The present project was identified in 1966 by a mission from the FAO/IBRD Cooperative Program, and its appraisal by the Association was completed in March Negotiations for the proposed credit were held in Washington in October The Government was represented by a delegation headed by Mr. Eric Manirakiza, Director of OCIBU, the government agency responsible for carrying out the project. 5. No other operations in Burundi are contemplated in this fiscal year. The Bank is executing agency for a UNDP road feasibility study which is expected to be completed by July 1969, which would lead to proposals for further investments in road development. PART II - DESCRIPTION OF THE PROPOSED CREDIT 6. Borrower: Republic of Burundi. Amount: Purpose: Amortization: Service Charge: Equivalent,in various currencies, to $1.8 million. To help increase the output and improve the quality of Arabica coffee production by smallholders from existing trees. Over a period of 50 years, including 10 years of grace, beginning May 1, 1979 and ending November 1, 2018; each instalment up to and including the payment due on November 1, 1988, to be 1/2 percent, thereafter to be 1-1/2 percent of the principal amount. 3/4 of 1% per annum. PART III - THE PROJECT 7. A report on the project, entitled "Burundi - Arabica Coffee Improvement Project" t (TO- 6 73a) is attached. 8. The econony of Burundi is heavily dependent on coffee. Coffee currently accounts for 80 to 85 percent of total exports and the cash income of about 300,000 farm families comes from growing coffee. Natural conditions in the highlands of Burundi are particularly suited to the cultivation of high- quality Arabica coffee, which was successfully developed under the Belgian Trusteeship. About 80 percent of the existing coffee trees have been planted since 1948 and can be expected to continae

4 in economic production for another 30 years. The production of coffee reached a peak of 22,000 tons in 1959, but thereafter fluctuated around lower levels, the yearly average for the past four years being about 16,000 tons; furthermore, the quality of coffee exported declined considerably. The main reason seems to be the reduced effectiveness of extension services after independence. The Government is well aware of the importance of coffee for Burundi's economy, as well as of the danger of having the economy based primarily on one crop. Its current policy therefore aims at (i) the improvement of cultural and processing methods in the better growing areas already planted in coffee trees; (ii) the progressive abandonment of coffee plantations in marginal areas; and (iii) introduction of other cash crops, such as tea in the highlands. 9. The proposed project would concern a selected 4,400 ha. area and 44,ooo smallholders in the heart of the coffee-growqing region of Burundi, and would be carried out over a period of 5 years (1969 to 1973). It would consist in the implementation of a program of fertilizer trials andl the establishment of a fertilizer sales program; the provision of farm inputs and tools to participating farmers; the construction of four pulping and fermenting factories and the improvement of existing pulping centers; the improvement of coffee tracks; and the financing of extension services which would also provide in-service training for Burundi coffee extension and processing personnel. OCIBU, a government agency responsible for coffee development, would carry out the project on behalf of the government. The total cost of the project is estimated at $2.2 million equivalent, of which $1.4 million would be in foreign exchange. The proposed IDA credit of $1.5 million would finance total foreign exchange costs and 50 percent of local costs. It is expected that goods with an estimated value of about US$0.7 million would be obtained through international competitive bidding; about $0.35 million would be disbursed for goods produced locally, and about $0.60 million for services. Approximately $0.15 million is unallocated. Purchases of goods costing over $20,000 would require prior approval by the Association. 10. It is expected that additional coffee production resulting from the project would gradually increase to 1,600 tons a year by 1980; some of it would be of superior quality. No difficulties are foreseen in marketing an increased production since,under arrangements with the International Coffee Agreement, Burundi would be allowed to increase annual exports gradually to 21,000 tons of coffee by ll. The rate of return to the economy from measurable project benefits would be about 32 percent, assuming a price of 77 cents per kilogram until 1973 and 80 cents per kilogram thereafter. The project would therefore be worth while even at coffee prices substantially lower than those prevailing at present. It is also expected that improvements in coffee husbandry achieved under the project would spread outside the project area.

5 - 4 - PART IV - LEGAL INSTRUUMENTS AND AUTHIORITY 12. The draft Development Credit Agreement between the Republic of Burundi and the Association and the Recommendation of the Cormittee provided for in Article V, Section 1 (d) of the Articles of Agreement of the Association and the text of a Resolution approving the proposed development credit are being distributed to the Executive Directors separately. 13. The draft Credit Agreement conforms generally to the pattern of agreements for similar projects. PART V - THE ECONONY 14. A report on "The Economy of Burundi" (AE-la) is being circulated separately. 15. Burundi is small and densely populated, and its income per capita is among the lowqest in Africa. The development of the modern sector of the economy has been very limited and the inadequacy of the public services hampers economic growth. Although growth increased in the 19501s, external assistance was required to finance all of the investment, as well as to support the budget and the balance of payments. The transition to independence in 1962 adversely affected the economy because Bujumbura, the capital, lost its role as commercial and industrial center for an area which included Rwanda and the Eastern Congo. An understaffed and inexperienced public administration, and a period of political instability added to Burundi's difficulties since it became independent. The Government wae unable to maintain the agricultural extension services after the departure of most of the Belgian staff, and production of coffee and cotton, the only two export crops, declined at a time when world prices were also declining. This precipitated a serious financial crisis; the budget deficit grew, external reserves declined, and prices increased rapidly. 16. A major step to restore economic stability was taken in February 1965, when a comprehensive stabilization program was introduced as part of a standby arrangement with the International Monetary Fund. This program included a devaluation of the currency, the introduction of restrictive fiscal and monetary measures and a liberalization of external trade and payments. As a result the current budget deficit was reduced and increase in prices slowed down. Public sector investment increased, but private illnestment remained stagnant for reasons largely beyond the control of Burundi. External assistance has tripled since 1962 and has covered about twfo-thirds of public sector investment and two-thirds of the current balance of oayments deficit. However, despite these efforts, the public sector has continued in deficit and the external reserves continue to decline. 17. The basic cause of the public sector deficit has not been an undue expansion of the public services. It is rather that the growth of the econorm and exports has been inadequate to generate sufficient savings

6 or tax revenue. The Government has recently organized major programs to increase and diversify agricultural production. There are projects for coffee, cotton, tea and rice production, and other projects to develop new crops or growing areas are under consideration. However, any significant increase in exports, which must form the basis for greater Government revenues, is not expected for four or five years and hence the current budget will remain in deficit over this period. Given that foreign exchange reserves should not be further reduced, the scope for local borrowing, including borrowjing from the central bank, is extremely small. At the present time, public investment and a part of the current budget are being financed from foreign assistance and the allocation of funds for investment by the Government only increases the need for funds from abroad to support the current budget. In these circumstances, there is a strong case for financing a large proportion of the cost of high priority projects, including some local expenditure. 18. In the longer run it wiill be important not only to increase the production of crops for export but also to raise the efficiency of agricultural production for the domestic market. This will not be easy in view of the wide dispersion of the peasant population and its isolation from market forces. The population is growing rapidly and even if priority is given to the introduction of a control program it wfill be some time before its effects make themselves felt. For Burundi to achieve a rate of economic growth sufficiently rapid to bring about an appreciable rise in living standards will necessarily take a long time. 19. Burundi's current external debt service ratio is 2.1 percent. HoIever, with Burundi requiring external finance to cover the current budget deficit as well as public investment, new debt service w-ill only add to the gross external assistance required. Burundi should, therefore, undertake external borrowing on the most concessionary terms obtainable. PART VI - COMPLIANCE WITH ARTICLES OF AGRE.=T 20. I am satisfied that the proposed credit would comply wzith the Articles of Agreement of the Association. PART VII - RECO]S-ELDATION 21. I recomnend that the Executive Directors approve the proposed development credit. Attachment Robert S. McNamara President Washington, D.C. March 20, 1969