Burundi’s monetary policy framework (MPF) targets monetary aggregates and comprises a set of official instruments complemented most recently with new tools.

Abstract

Burundi’s monetary policy framework (MPF) targets monetary aggregates and comprises a set of official instruments complemented most recently with new tools.

Monetary Policy Framework and Operations During the Pandemic1

Burundi’s monetary policy framework (MPF) targets monetary aggregates and comprises a set of official instruments complemented most recently with new tools.

A. Monetary Policy Objectives

1. The main objective of the Banque de la Republique du Burundi (BRB)’s monetary policy is to have full control of money supply and achieve price stability. To achieve this objective, the BRB’s MPF comprises operational targets, intermediary targets, and policy instruments on which the BRB take discretionary decisions.

2. To reach the targeted level of M2, the intermediate objective of the MPF, the BRB formulates in its Economic and Financial Program a target for the monetary base. The framework relies on the assumption of a stable correlation between the money supply (M2) and monetary base on one side and between M2 and price dynamics on the other side.

B. Policy Instruments

3. The BRB uses four types of instruments to regulate the monetary base.

  • Mandatory reserves. These are interest free compulsory deposits by banks to the BRB and are determined based on the monthly stance of current and term deposits of customers of commercial banks.

  • Liquidity tenders. Calls for tenders allow the BRB to ensure the proper functioning of the domestic financial system by withdrawing or providing liquidity, as needed. The interest rates on these market operations can be fixed or variable, upon BRB’s discretion.

  • Marginal lending facility. This is a permanent lending facility available to commercial banks which they can use anytime they need liquidity. The interest rate on these operations is equal to the money market rate plus a given margin.

  • Temporary advances on bills. This instrument aims at providing liquidity to banks that grant long term credit to private investors.

C. Monetary Policy Operations and Stance in 2021

4. During 2020 and 2021, the BRB has implemented, through different channels, an accommodative monetary policy to mitigate the economic impact of the pandemic. Since the outbreak of the pandemic, the BRB has used the refinancing window and has had recourse to the inter-bank market instruments to provide the banking system with additional liquidity.

Use of Liquidity

5. First, the BRB swiftly responded to the fall of commercial banks reserves and liquidity shortages using refinancing facilities and the seven days financing window (Figure 1).

Figure 1.
Figure 1.

Volume of BRB Interventions, 2019–21

(Billions BIF)

Citation: IMF Staff Country Reports 2022, 258; 10.5089/9798400219238.002.A005

Sources: Burundu authorities.
  • Starting February 2020, the BRB increased its intervention in the interbank market through the provision of liquidity on call for tenders which increased by 11.8 percent between December 2019 and August 2020.

  • In 2021, the BRB supported the banking system through the marginal lending facility which increased by 164.9 percent between January and August 2021.

  • In addition, the BRB used the temporary advances on bills as collateral instrument to provide further support to commercial banks.

  • The BRB’s interventions proved successful. The deposits of commercial banks to the BRB had grew by around 14 percent during the first 8 months of 2021, a significant improvement compared to the same period in 2020 (decline by -16 percent). According to the Report of the BRB’s Monetary Policy Committee for 2021-Q1, these figures could have been worse if the central bank did not step in.

Use of Interest Rates

6. The BRB has lowered the interest rate on Liquidity tenders from 3.07 percent in 2020– Q4 percent to 2.5 percent in 2021–Q1.

  • The BRB does not really use interest rates or the reserve requirement rate as monetary policy instruments. The reserve requirement rate has remained stable during past years (around 3 percent). The interest rate on other refinancing windows such as liquidity tenders is market determined as the results of commercial bank auctions. Given these characteristics and after discussion with authorities, the overnight rate (the interest rate paid by banks on the recourse to “Marginal lending facility”) is usually considered as a proxy of a policy rate since the BRB partly determines its level.

  • Recently, all other interest rates in the inter-bank market have increased due to their indexation to the treasury bills’ rates that went up. Regarding the public, the interest rates on outstanding loans have slightly increased during 2021–Q1 reaching 15.32 percent against 15.22 percent at end-December 2020.

New Tools/Other Initiatives

7. The BRB has created a number of new refinancing windows to influence directly credit to the private sector and has engaged into direct lending as well.

8. In July 2020, to stimulate long-term credit to the private sector, the BRB launched a new instrument named advance on bills as collateral. This new instrument has longer maturity (5 years,2 renewable once) than the call for tenders, allowing banks to provide longer term loans to domestic investors.

9. BRB has also been providing loans to priority sectors through conventions guaranteed by the government. These loans concerned mainly sectors like coffee, fertilizers, youth employment, maize, and modernization of the tax revenue office (Office Burundais des Recettes, OBR).

1

Prepared by M. M. Ly.

2

A 5-year contract is signed with yearly auctions to renew the associated liquidity provision

Burundi: Selected Issues
Author: International Monetary Fund. African Dept.