years.<sup>10</sup> Non-tax revenue—mainly revenues from the sale of state assets, especially in the coffee sector<sup>11</sup> —will generate additional revenue of around 1 percent of GDP in each year. Grants are assumed to decline as a share of GDP. The government is expected to limit the growth of wages for the civil service and the military. Total expenditure will decline as a share of GDP reflecting declines of similar magnitude in both current and capital expenditures. Ongoing public financial management reform is expected to enhance the effectiveness of public expenditure, offsetting the impact of the (relative) decline.<sup>12</sup>

**The fiscal deficit over the next five years is expected to be financed mainly by grants and concessional borrowing from multilateral and bilateral creditors** . Grants are expected to decline as a share of GDP as the country graduates from the post-conflict status and humanitarian assistance winds down. The government is expected to finance the remaining deficit mainly with highly concessional loans with grant element of at least 50 percent. Any remaining financing gap will be closed by a mixture of less-concessional external borrowing and domestic borrowing.

# **_Baseline results_**

**Even with strong growth in the economy and commensurate growth in tax revenues, the government will continue to struggle to create fiscal space and reduce debt from its currently high level (Table 2).** Burundi is projected to run a deficit throughout the period, expanding from 1.7 percent of GDP in 2012 to 3.8 percent in 2014 and then moderating to 3.7 percent in 2015–2017. The dynamics is explained by the falling grants as a share of GDP and rigidities in current expenditure, mostly the wage bill. The combination of the two, in particular, expands the fiscal deficit in 2014. Although the government is expected to limit wage growth in real terms, unless additional revenue measures are introduced to offset the falling grants, it will struggle to reduce the deficits in the medium term. Gross financing needs will rise with the deficit, but are expected to be financed mostly with external concessional loans. Interest costs as a share of GDP will gradually fall, but with widening deficits, debt will remain high as a share of GDP.

**The results suggest the authorities should persist with prudent fiscal policy as there is not much room to maneuver** . Slippages in either revenue or expenditure targets will further worsen

> 10 The assumption on tax revenue growth is different from IMF, which assumes that share of GDP will grow from 13.8 percent in 2012 to 14.5 percent in 2016, which implies real growth in tax revenue of around 7 percent per year (of nominal growth of 15 percent per year). While it might make sense for the ECF, it will make more sense for the FSA to be on the conservative side, as the baseline in the FSA should represent largely a picture of “status quo”— i.e., not predicated upon major policy actions implemented for it to be realized. The impact of greater revenue efforts on the medium-term fiscal outcomes will be explored in the section on policy scenario analysis.

> 11 Check this with Marco.

> 12 That is, both current and capital expenditures are growing but not as fast as the nominal GDP.

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