Assessing the Exchange-rate pass-through to inflation in Burundi: A RE -EXAMINATION

Abstract

Abstract This study assesses the empirical determinants of inflation in Burundi over the period from January 2007 to July 2022. A single error correction model is used in which the underlying determinants of the food and non-food components of inflation as well as structural factors are incorporated into the headline inflation equation. The major contribution to the existing literature is the study of the role of the tax sector in modeling inflation, an aspect that has been neglected in existing studies on inflation in Burundi. The empirical results reveal that the long-term sources of headline inflation are determined in the external sector market, where the exchange rate premium, world food and non-food prices determine the domestic prices as well as in the fiscal sector. In the short term, exchange rate movements, energy price adjustments, imported non-food inflation and changes in money growth as well as public sector borrowing influence headline inflation where public sector borrowing plays an important role in inflationary pressures. Three conclusions can be drawn from these empirical results: First, the dominant influence of the exchange rate on headline inflation and its sub-components deserves special attention from the authorities, who must take consistent measures to curb the depreciation excessive BIF against the US dollar. Second, with regard to the pass-through of imported inflation, expanding and diversifying the manufacturing base to limit the current heavy reliance on imports of manufactured goods and capital goods remains a policy priority. Finally, the role of supply shocks, evident in the impact of food prices on inflation, requires immediate and significant reforms in the agricultural sector to boost productivity through the use of modern production methods. JEL: E31, 055, C22, E62