Belize: Staff Concluding Statement of the 2020 Article IV Mission







March 12, 2021







A Concluding Statement describes the preliminary findings of IMF staff at the end of an official staff visit (or ‘mission’), in most cases to a member country. Missions are undertaken as part of regular (usually annual) consultations under Article IV of the IMF’s Articles of Agreement, in the context of a request to use IMF resources (borrow from the IMF), as part of discussions of staff monitored programs, or as part of other staff monitoring of economic developments.

The authorities have consented to the publication of this statement. The views expressed in this statement are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board. Based on the preliminary findings of this mission, staff will prepare a report that, subject to management approval, will be presented to the IMF Executive Board for discussion and decision.









Washington, DC:

An International Monetary Fund team led by Jaime Guajardo conducted
discussions for the 2020 Article IV consultation with Belize between
February 24 and March 10. The team met with the Honorable Mr. John
Briceño, Prime Minister; Amb. Joy Grant, Governor of the Central Bank
of Belize; Mr. Christopher Coye, Minister of State, Mr. Joseph Waight,
Financial Secretary; and other senior government officials,
representatives of the opposition, private sector, and public sector
unions.

Recent Developments, Outlook, and Risks

Belize has been severely affected by the COVID-19 pandemic. Following a successful containment of the first wave of the pandemic,
Belize experienced a large domestic outbreak starting in the summer of
2020, which has left the country with one of the highest numbers of cases
and deaths per capita in the Caribbean. The pandemic also led to a 72
percent decline in tourist arrivals in 2020, which had a large impact on
the economy as tourism accounts for around 60 percent of foreign exchange
earnings and 40 percent of GDP. Social distancing and lockdowns also hurt
activity in contact intensive sectors of the economy. As a result, real GDP
contracted by 14.1 percent in 2020.


Belize’s fiscal and external positions worsened from already weak
levels
. The pandemic resulted in a sharp fall in revenue and a rise in
expenditure aimed at combating the pandemic and supporting affected
households and firms. This led to an increase in the primary deficit from
1.4 percent of GDP in FY2019/20 to 8.3 percent in FY2020/21, and a rise in
public debt from 98 percent of GDP in 2019 to 126 percent in 2020. Public
external debt also rose, while the net international investment position
deteriorated. However, the current account deficit narrowed owing to a
sharp contraction in imports and lower repatriation of profits from foreign
owned business, which more than offset the fall in tourism receipts. This,
together with higher external financing to the government, increased
international reserves from US$271 million (3.6 months of imports) in 2019
to US$346 million (4.3 months of imports) in 2020. However, as noted below,
reserve adequacy is projected to worsen over the medium term.


The recovery from the pandemic is projected to be protracted, with real
GDP regaining its 2019 level only by 2025
. Tourist arrivals are expected to remain subdued in 2021 given still high
levels of COVID-19 cases in Belize’s main trading partners and stringent
requirements on passengers returning to the US. Belize may also remain
exposed to the pandemic as it has secured vaccines for just about one-third
of its population. Tourist arrivals are expected to pick up in 2022 when
vaccines are more widely available in advanced countries. As a result, real
GDP is projected to grow by 1.9 percent in 2021, 6.4 percent in 2022, and
return to potential growth of 2 percent over the medium-term.


In a baseline scenario underpinned by current policies, the fiscal and
external positions are projected to remain weak over the medium term
. The primary budget deficit is projected to fall gradually from 8.3
percent of GDP in FY2020/21 to 0.9 percent from FY2023/24 onwards as
revenues gradually revert to their pre-pandemic level and pandemic-related
expenditures are scaled back. Public debt is projected to rise to 133
percent of GDP in 2021, and to fall gradually thereafter to 128 percent in
2031. The continued primary deficits and high public debt are expected to
limit Belize’s access to external financing going forward and lead to a
fall in international reserves to below 3 months of imports and 100 percent
of gross external financing needs starting in 2024.


Public debt is assessed as unsustainable in staff’s baseline scenario
. Public debt is projected to remain well above the thresholds for
sustainability in the debt sustainability analysis (DSA) framework. Public
sector gross financing needs are also projected to remain above the DSA
thresholds for sustainability over the next 10 years. Moreover, public debt
and gross financing needs could increase further if prominent downside
risks to the outlook materialize.


Risks to the outlook are substantial and remain tilted to the downside
. A key risk is an intensification of the pandemic domestically and abroad.
Continued spread of the virus in the U.S. and Europe could delay the
recovery of tourism, while continued spread in Belize could lead to more
stringent social distancing and hurt activity in contact intensive sectors.
Belize also remains highly vulnerable to natural disasters. Materialization
of these shocks would reduce economic activity, weaken the recovery of
revenues, delay the unwinding of COVID-19-related expenditures, and
accelerate the decline in international reserves.

Policies to restore debt sustainability and strengthen the currency peg


Fiscal policy needs to strike a balance between supporting those
affected by the pandemic and enabling a large public debt reduction
over the medium term. In the near term, the authorities should maintain
fiscal support to mitigate the socio-economic impact of the pandemic
but should change course once the pandemic begins to wane. Beyond the
immediate response to the crisis, the key policy imperative for Belize
is to restore public debt sustainability and strengthen the currency
peg. This will require a fine balancing act involving ambitious, yet
realistic, fiscal consolidation, growth-enhancing structural reforms,
and debt restructuring, all aimed at targeting reduction of public debt
to 60 percent of GDP by 2031. Such strategy would also improve reserve
adequacy and strengthen the currency peg.

A.
Balanced and Sustained Fiscal Consolidation


The authorities need to implement a medium-term fiscal strategy aimed
at restoring debt sustainability, while preparing the ground for the
future adoption of a Fiscal Responsibility Law (FRL) with explicit
fiscal rules
. In the near term, the authorities should maintain fiscal support to
mitigate the socio-economic impact of the pandemic, which should be
gradually unwound once the pandemic begins to wane. For the medium-term,
the government needs to elaborate a fiscal strategy that targets a
reduction of public debt to 60 percent of GDP by 2031 accompanied by a
consistent and credible fiscal consolidation plan. To enhance credibility,
the authorities should publicly commit to this strategy. At the same time,
efforts should be made to prepare the ground for the implementation of a
well-designed FRL with explicit fiscal rules by introducing the necessary
public financial management (PFM) reforms and seeking broad political
support for the law.


Implementation of an FRL with explicit fiscal rules in the future would
strengthen the commitment to restoring debt sustainability
. This framework would make the debt reduction process transparent and
predictable. Its key features could include: (i) a public debt anchor of 60
percent of GDP by 2031; (ii) a gradual increase in the primary balance to 3
percent of GDP from FY2024/25 onwards; (iii) an escape clause for major
shocks, such as natural disasters, triggered with approval by Parliament
and a fiscal council; (iv) an automatic correction mechanism to be
triggered by large cumulative deviations from the primary fiscal balance
target; and (v) an independent fiscal council that produces unbiased
forecasts and evaluates compliance with fiscal rules.


Restoring debt sustainability requires a gradual and sustained increase
in the primary balance
. To strike a balance between the need to support those affected by the
pandemic in the near term and enable a large public debt reduction over the
medium term, the authorities should gradually increase the primary balance
to 3 percent of GDP in FY2024/25 and keep at that level until FY2031/32,
which relative to the baseline scenario, implies a fiscal consolidation of
3.9 percentage points of GDP over the next four years.


Fiscal adjustment should rely on both expenditure and revenue measures
. With regard to expenditures, the authorities are appropriately focusing
on reducing the wage bill and purchases of goods and services, both of
which account for a larger share of GDP in Belize than in peer countries.
Prioritizing infrastructure projects could also create savings. Over time,
the authorities should also set a natural disaster reserve fund to fund the
response to natural disasters and increase targeted social spending. On
revenues, the authorities should focus on reducing the number of zero-rated
items of the general sales tax (GST), taxing them at the standard GST rate
instead, and raising the standard GST rate to a level in line with peer
countries. GST revenue could also be expanded by taxing the hotel sector at
the standard GST rate instead of the 9 percent hotel tourist accommodation
tax levied on room revenue administered by the Belize Tourism Board. Other
options to mobilize revenues include lowering the threshold for exemption
in the personal income tax, increasing excise taxes, and enhancing revenue
and customs administration.


Executing this consolidation path will be challenging given limited
implementation capacity, political pressures, and uncertainty about the
cyclical recovery of revenue
. Belize will need to demonstrate resolve and commitment in undertaking the
adjustment needed to restore debt sustainability and market confidence.
Moreover, the adjustment needed to reach the primary balance targets could
be larger if the cyclical recovery of revenue is weaker than expected. In
this context, it will be important to elaborate contingency plans in case
the rise in the primary balance is not proceeding as expected, including
further increases in the GST rate and larger cuts to nonpriority
expenditure. A less ambitious fiscal consolidation effort will require
larger efforts in other areas, while failure to restore debt sustainability
would put the fiscal position and the currency peg at risk of disorderly
adjustment.


PFM systems and procedures should be strengthened to make the
rules-based fiscal framework more effective
. A well-designed FRL with explicit fiscal rules requires modernizing the
PFM systems and procedures, including multi-year budget preparations, cash
management, fiscal risk assessment, public investment management, and
coverage of government accounts. The authorities should also ensure
transparency and accountability in crisis-related spending, including by
publishing the audit reports when they become available.

B. Growth-enhancing Structural Reforms


Belize needs to tackle long-standing structural barriers to growth and
diversification
. Priority areas include: (i) improving access to credit through the
creation of a credit bureau and credit collateral registry; (ii)
accelerating registration processes to lower barriers to entry and exit
from the market; (iii) introducing labor market reforms that allow for more
flexible working hours and lower labor market rigidities to help businesses
adapt to changing market conditions; (iv) reducing skill mismatches by
improving education and technical training; and (v) enhancing road
infrastructure by reprioritizing investment projects.


Belize also needs to reduce crime to promote entrepreneurship
. Reducing crime through the provision of adequate resources to law
enforcement and social programs that keep at-risk youth away from crime
would help promote domestic and foreign investment and enhance the
attractiveness of the country among tourists.


Building resilience to climate change and natural disasters would lower
output volatility and boost growth
. In line with the recommendations of the 2018 Climate Change Policy
Assessment, the authorities should elaborate a comprehensive Disaster
Resilience Strategy, that internalizes resilience building into a credible
macroeconomic framework, and focuses on three key areas: (i) investing in
climate-resilient infrastructure, including in robust roads, bridges, and
seawalls; (ii) enhancing financial resilience by establishing a natural
disaster reserve fund of 1 percent of GDP to finance the immediate response
to high frequency, low-severity natural disasters, and using contingent
lines of credit and participation in regional insurance mechanisms for more
severe events, and (iii) improving post-disaster resilience by reforming
social protection programs to scale up quickly after a disaster.

C. Debt Management and Restructuring


The authorities have recognized the critical nature of their financial
situation and are evaluating needed remedial measures
. Complementing these measures, they recently announced the intention to
approach their external private sector creditors to seek a restructuring of
the superbond to complement the efforts to restore debt sustainability
through balanced and sustained fiscal consolidation and growth-enhancing
structural reforms.

D. Monetary and Financial Policies


Belize’s external position is assessed as substantially weaker than
warranted by medium term fundamentals and desirable policies
. The current account deficit remains higher than its estimated level of
equilibrium. Failure to address these imbalances increase the risk of
disorderly external adjustment over the medium term.


Reducing external imbalances and strengthening the currency peg
requires successful implementation of the strategy to restore debt
sustainability
. The authorities are strongly committed to the currency peg, which they
see as a key anchor for macroeconomic stability. , Reducing external
imbalances will require restoring debt sustainability, which would also
lower the current account deficit and increase international reserves.
Strengthening the currency peg also requires limiting government financing
by the Central Bank of Belize (CBB) over the medium term.

Safeguarding financial stability remains a priority. The banking system entered the pandemic with abundant liquidity and
strong capital buffers. Non-performing loans (NPLs) have remained
manageable at 5.8 percent of total loans as of end-2020, although this
partly reflects forbearance measures introduced by the CBB to mitigate the
impact of the pandemic on the banking system. A slow recovery from the
pandemic could accelerate the erosion in asset quality and increase NPLs,
especially for banks exposed to vulnerable sectors such as tourism. In this
context, the CBB should maintain loan classification and provisioning rules
to appraise the banks’ potential credit losses as accurately as possible,
phase out forbearance measures and loan deferrals by banks, and strengthen
prudential standards as the pandemic recedes. Dividend payments should be
restricted until the full impact of the pandemic on banks’ capital is
known. A comprehensive third-party asset quality review should be done when
the economy recovers from the pandemic. Efforts to strengthen AML/CFT
supervision of banks should continue and sanctions for non-compliance
should be enforced.


The authorities must continue strengthening the AML/CFT framework and
its implementation especially in the international financial services
(IFS) sector to enhance financial integrity and prevent loss of CBRs.

Policy priorities include: (i) conducting a cost-benefit analysis of the
international business sector including by deepening the understanding of
associated financial integrity risks of IFS practitioners, (ii) increasing
the resources and capacity of the IFSC to properly license, regulate and
supervise IFS practitioners, and imposing dissuasive and proportionate
penalties when breaches are identified; (iii) legal reforms informed by a
risk assessment to implement AML/CFT standards on virtual assets and VASPs;
(iv) identifying and sanctioning IFSC licensees falsely claiming to be
licensed to provide virtual asset-related services; and (v) ensuring that
beneficial ownership information of legal persons and arrangements is
accurate, up-to-date, and available in a timely manner.


The IMF Executive Board is expected to discuss Belize’s Article IV
consultation in May 2021. The mission expresses its sincere thanks to
the authorities and other Belizean stakeholders for their cooperation
and candor during the discussions.


Table 1. Belize: Selected Social and Economic Indicators

I. Population and Social Indicators

Area (sq.km.)

22,860

Human development index (rank), 2017

106

Population (thousands), September 2020

421.5

Under-five mortality rate (per thousand), 2017

14.2

GDP per capita, (current US$), 2020

3,917

Unemployment rate (percent), September, 2020

13.7

Life expectancy at birth (years), 2017

70.6

Poverty (percent of total population), 2009

42.0

II. Economic Indicators

Projections

2018

2019

2020

2021

2022

2023

2024

2025

2026

Prel.

National income and prices

(Annual percentage changes, calendar year)

GDP at constant prices

2.9

1.8

-14.1

1.9

6.4

4.2

2.0

2.0

2.0

Consumer prices (average)

0.3

0.2

0.1

1.0

2.0

2.0

2.0

2.0

2.0

Central government 1/

(In percent of fiscal year GDP)

Revenue and grants

31.4

31.2

27.7

28.4

29.8

31.3

31.3

31.3

31.3

Current non-interest expenditure

24.8

26.1

26.2

26.2

25.7

26.2

26.2

26.2

26.2

Interest payment

3.2

3.2

2.5

4.5

4.2

4.2

4.1

4.1

4.0

Capital expenditure and net lending

4.5

6.5

9.9

8.6

7.2

6.0

6.0

6.0

6.0

Capital expenditure

4.1

6.2

9.7

8.3

6.8

5.5

5.5

5.5

5.5

Net lending

0.4

0.3

0.2

0.3

0.4

0.5

0.5

0.5

0.5

Primary balance

2.1

-1.4

-8.3

-6.4

-3.1

-0.9

-0.9

-0.9

-0.9

Overall balance

-1.0

-4.6

-10.8

-10.9

-7.3

-5.1

-5.0

-5.0

-4.9

Public debt

(In percent of calendar year GDP)

Public debt 2/

96.0

97.5

125.8

133.0

130.6

128.5

128.6

128.6

128.5

Domestic debt

27.8

28.7

39.4

44.9

47.3

48.8

51.0

53.6

56.5

External debt

68.2

68.8

86.5

88.1

83.4

79.8

77.6

75.0

72.1

Principal payment

7.2

6.2

7.7

10.3

10.7

10.9

10.8

11.2

11.6

Domestic

4.9

3.9

5.1

6.7

7.1

7.0

7.0

7.3

7.6

External

2.2

2.3

2.6

3.6

3.7

3.9

3.8

3.9

4.0

Money and credit

(Annual percentage changes, calendar year)

Credit to the private sector

3.2

5.8

2.2

2.9

8.5

6.3

4.0

4.0

4.0

Money and quasi-money (M2)

2.6

5.7

10.6

2.9

8.5

6.3

4.0

4.0

4.0

External sector

(Annual percentage changes, unless otherwise indicated)

External current account (percent of GDP) 3/

-8.1

-9.2

-8.0

-7.7

-7.4

-7.2

-7.2

-7.2

-7.2

Real effective exchange rate (+ = depreciation)

-2.7

0.1

Gross international reserves (US$ millions)

294

278

348

360

362

345

312

285

258

In months of imports

2.9

3.6

4.3

4.0

3.7

3.4

2.9

2.6

2.2

Memorandum items

Nominal GDP (BZ$ millions)

3,765

3,839

3,302

3,399

3,688

3,920

4,078

4,243

4,414

Sources: : Belize authorities; UNDP Human Development
Report; World Development Indicators, World Bank; 2009
Poverty

Country Assessment; and Fund staff estimates.

1/ Fiscal year (April to March).

2/ Public debt includes central government debt as well as
external financial and non-financial public sector debt.

3/ Including official grants.


IMF Communications Department
MEDIA RELATIONS

PRESS OFFICER: Randa Elnagar

Phone: +1 202 623-7100Email: [email protected]

@IMFSpokesperson








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