Impact of the 2015 elections on Burundi’s economy

Impact of the 2015 elections on Burundi’s economy

In 2015, Burundi will face not only local and legislative, but also presidential elections. Their importance for the democratic transition process of this post-conflict and extremely poor country cannot be overestimated. But what effect will they have on the economy?

Presidential elections will arguably be the most important. Although he has yet to announce his candidacy, the incumbent Pierre Nkurunziza of the CNDD-FDD party, is expected to stand for office for a contested third mandate. Emphasizing the need to ensure an inclusive political climate, the UN called the 2015 elections the “litmus test for Burundi’s democratic process and stability”.

Unlike in 2010, the opposition has so far remained politically engaged, in spite of an increasingly constrained political arena. Allegations that the youth wing of the CNDD-FDD had been armed sparked fears of renewed ethnic conflict and civil war.

Though ethnic violence seems unlikely, some commentators warn of an increased risk of political violence. Nevertheless, because of its grip on power and the increasingly fractioned opposition, it is to be expected that the ruling CNDD-FDD and Mr. Nkurunziza will win the 2015 elections.

The economy is likely to gain momentum ahead of the elections. Increased domestic consumption in the run-up to these elections will be the main driver of growth. The impact of global demand, which is set to improve slightly in 2015, will be negligible given Burundi’s extremely small export base.

The government budget for 2015, presented to the council of ministers on November 12th, expects economic growth to increase to 5.4% as a result of sound macroeconomic management as well as increased investment in agriculture, mining and energy.

The International Monetary Fund puts its forecast at 4.8%, up from 4.7% in 2014, citing improvements in the business climate and in the coffee and energy sectors. However, because of Burundi’s extremely high rate of population growth, this economic growth is unlikely to significantly reduce poverty.

These growth forecasts crucially hinge on the execution of – mostly public – investment projects. The government has allocated an investment budget of 3.29% of GDP to agriculture, the backbone of the economy. This should lead to an estimated growth of 5.3% in the primary sector.

Industry is forecast to expand by 5.8% following public investment worth 3.85% of GDP, of which the bulk will go to energy and infrastructure projects. With 2.59% and 1.68% of GDP allocated to investments in the health and education sectors, the service sector is set to grow by 5.4%. Donors will pay 76% of these investments through project aid.

However, a number of risks related to the election process threaten the implementation and completion of these investments projects.

Some delays are to be expected in project implementation as a subset of public (human) resources will be redirected towards campaigning. Additionally, most project aid is, through conditionalities, tied to the election process. Political developments in response to social and political tension before the elections could affect these conditionalities and lead to a freeze or cancelation of one or more projects.

Given the high percentage of donor-funded investment, this could potentially have a significant impact on growth. Given the current political situation a partial freeze of some project aid seems likely. Moreover, as was the case during the 2010 elections strikes are very probable.

Finally, more than in non-election years, the government will be incentivized to transfer resources from investment to consumption.

The 2015 budget proposal already foresees a 6.5% increase in government consumption. This includes the direct costs of the elections as well as a 5.4% hike in the wage bill, as unions are pressuring the government ahead of the general elections. The total deficit is set to grow by a quarter, widening from -1.7% to -2.1% of GDP.

However, the government could come under pressure to further increase its consumption to meet popular demand as the elections approach. Increased government consumption will boost short-term economic growth.

The consequences for the medium-term outlook are less clear. Since Burundi is faced with binding constraints on international borrowing, increased domestic financing seems most likely. Pressuring the central bank into relaxing its monetary policy will not be effective due to a dysfunctional monetary transmission system. Direct deficit financing by the central bank seems more probable, especially now that inflation is subdued because of a fall in international commodity prices.

However, donor conditionalities linked to public financial management will deter such a move. Most likely is a shift of funds away from investment towards consumption. Although such a shift might boost short-term economic growth, the medium-term growth outlook will be negatively affected.

How much the government will concede depends on the likelihood of a victory. Small concessions are possible. Bigger transgressions are less likely given the current advantage of the incumbent party.

Burundi’s economic performance over the next year will be highly dependent on the election process. While it is to be expected that the incumbent party will stay in power after the elections, an intensification of election-related political and social turmoil is likely. This will distort the economy.

How the government handles these tensions will be crucial for the disbursement of aid funds, which in turn are vital to attain the forecast growth levels. A partial freezing of project aid cannot be ruled out. Therefore, the growth forecasts should be interpreted as upper bounds.

The economic outlook for Burundi remains fragile with downside risk contingent on the political developments in the run-up to the elections.

About Author

Roel Dom

Roel is a specialist in Sub-Saharan political risk and regional economic development. He currently works as an economic advisor to the Burundi Revenue Authority. He holds a MSc in Sociology and Economics from the University of Antwerp and a MSc Development Studies from the London School of Economics and Political Science. The views expressed in his articles are entirely his own.