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Belize: Staff Report for the 2015 Article IV Consultation

Author(s):
International Monetary Fund. Western Hemisphere Dept.
Published Date:
March 2016
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Background

1. The ruling United Democratic Party (UDP) of Prime Minister Dean Barrow won a landslide victory during the municipal elections of March 4, 2015 and now has time to implement the much needed fiscal adjustment. The UDP captured 62 out 67 seats, up from the 44 seats it held after the 2012 elections. The main opposition party, the People’s United Party (PUP) only won 5 seats, losing 18 seats to the ruling party. There is no election in sight before the general elections due in March 2017.

2. Social and poverty challenges remain significant. The unemployment rate remains high compared with its 2008 level of 8 percent, despite a reduction to 12.1 percent in September 2014 from 14.2 percent in September 2013 (Text Chart). Per capita GDP remains far below its regional peers (Figure 1). Belize continues to struggle to control violence, and with 39 homicides per 100,000 inhabitants, it has one of the world’s highest homicide rates according to the 2013 UN Global Study on Homicide. The 2013 United Nations Development Program Progress Report on the Millennium Development Goals noted progress made in improving access to primary education, and incidents of malaria, but found slower progress in reducing poverty and reaching other targets related to gender inequality and health.

Figure 1.Belize: Real Sector Developments 1/

Sources: Belize authorities; World Economic Outlook; EM-DAT Database; and Fund staff estimates.

1/ Estimates for 2014.

2/ Countries in the region include Barbados, Costa Rica, ECCU, El Salvador, Guatemala, Honduras, Jamaica, Nicaragua, Panama, Trinidad and Tobago.

3/ TS: Tropical Storm. TD: Tropical Depression. H: Hurricane.

Unemployment Rate

(In percent)

3. The authorities still have to implement their own fiscal commitments and recent Fund advice (Box 1). The primary fiscal balance remains well below the authorities’ commitment during the 2013 debt restructuring (2 percent of GDP) and has even turned negative in FY 2015 (April-March), moving them further away of their medium-term public debt target of 60 percent of GDP. The review of tax exemptions promised in the 2014 budget speech has not yet started. None of the fiscal measures identified by staff in recent Article IV Consultations to raise the primary fiscal balance has been implemented. Instead, implementation of promises to key segments of the population has been given priority, including spending for the new public bank and sizeable wage increases to public sector employees.

Recent Developments

4. Despite the significant deterioration of the fiscal stance, macroeconomic performance in 2014 was broadly favorable (Figures 15):

  • Real GDP growth reached 3.6 percent in 2014, up from 1.5 percent in 2013 and well above the five-year average of 2.9 percent. A rebound in agriculture, strong performances in tourism, electricity, construction and services offset the significant decline in oil-related activities. The fall in international oil and food prices pushed headline inflation (y/y) to -0.2 percent as of December 2014. However, core inflation, which excludes transportation, food and utilities, rose modestly from 0.2 percent in December 2013 (y/y) to 1.2 percent in December 2014 (y/y).

  • Despite strong tourism receipts, falling exports and relatively strong imports widened the external current account deficit to 7.6 percent of GDP in 2014, up from 4.4 percent of GDP in 2013. The contraction in oil exports, reflecting both declining production volumes and world market price, was accompanied by subdued growth in agricultural exports. Nevertheless, PetroCaribe and other official disbursements continued to finance the current account deficit and help build international reserves (equivalent to 5 months of imports at end-December 2014).

  • The fiscal stance deteriorated significantly in FY 2014/15 (April–March). The primary fiscal balance recorded a deficit of 1.5 percent of GDP, down from a revised deficit of 0.2 percent of GDP achieved in FY 2013/14 and well below the surplus of 1 percent of GDP envisaged in the FY 2014/15 budget. Revenue collection remained in line with budget targets. Spending continued to grow well above budget targets, driven primarily by increases in wages, pensions, teachers’ salaries, and capital expenditures. A significant portion of this additional spending, equivalent to 2.6 percent of GDP, was executed outside the normal budget process, and approved by parliament in a revised budget only after its execution. Financing of the fiscal deficit essentially came from a drawdown of PetroCaribe deposits and official external loans. Relatively strong GDP growth helped maintain public debt around 76 percent of GDP.

  • Private credit growth recovered and reached 4.7 percent in 2014, up from 3.5 percent in 2013, supported by strong real estate credit and loans to a new large firm in the sugar sector. Broad money grew by 7.9 percent, in line with nominal GDP. Abundant liquidity continued to support low T-bill rates and declining lending rates.

  • Banks’ balance sheets continued to slowly improve, though vulnerabilities remained (Text Table and SIP on the financial sector). At end-December 2014, the banking system’s ratio of gross non–performing loans (NPLs) to total loans stood at 15.7 percent (6.3 percent net of provisions) compared with 17.6 percent at end-2013 (9.4 percent net of provisions). The banking system’s reported capital adequacy ratio (CAR) stayed above 21 percent, though it must be qualified (para. 6). Banks’ profitability was mixed. While the return on assets (ROA) of international banks appeared comfortable at 3.2 percent at end-2014, the ROA of domestic banks stood at -1.0 percent at end–2014, mainly because of increased provisioning expenses and domestic banks’ inability to make more profitable use of their abundant liquidity.

Figure 2.Belize: External Sector Developments 1/

Sources: Central Bank of Belize; and Fund staff estimates.

1/ Estimates for 2014.

Figure 3.Belize: Fiscal Sector Developments 1/

(In percent of FY GDP)

Sources: Country authorities; and Fund staff estimates.

1/ Estimates for 2014/15.

2/ Countries in the region include Barbados, Costa Rica, ECCU, El Salvador, Guatemala, Honduras, Jamaica, Nicaragua, Panama, Trinidad and Tobago.

3/ Large residuals in 2013 and 2014 are essentialy accumulation of assets financed with PetroCaribe loans.

Figure 4.Belize: Monetary and Financial Sector Developments

Sources: Central Bank of Belize; IFS; and Fund staff estimates.

1/ Refer to the difference between lending and savings rates.

2/ Countries in the region include Barbados, ECCU, Guatemala, Honduras, Jamaica, Nicaragua, Panama, Trinidad and Tobago.

Figure 5.Belize: Debt Markets Developments

Sources: Belize authorities; Bloomberg; and Standard and Poor’s.

5. Despite the continuing decline in exports, macroeconomic performance pointed to some encouraging signs in early 2015. Real GDP growth stood at 7 percent (y/y) in the first quarter, lifted by strong performance in the primary sector and continued growth in tourism. Inflation remained low at -0.8 percent (y/y) at end-June 2015 pushed down by the fall in international oil and food prices. However, exports of goods during January-May 2015 declined by 9 percent compared with the same period last year, mainly because of falling petroleum exports. Imports of goods rose by 1.5 percent during the same period, driven largely by higher imports of machinery and equipment. Nonetheless, reserves at end-April stood at the equivalent of about 5 months of imports of goods and services owing to inflows from tourism, Petrocaribe loans and foreign direct investment. Private sector credit grew by 6.0 percent (y/y) in April 2015, driven by real estate credit.

6. The banking system’s financial soundness indicators (FSIs) in early 2015 highlighted remaining vulnerabilities (Text Table and SIP on the financial sector). At end-March 2015, the banking system’s ratio of gross NPLs to total loans rose to 16.1 percent (6.1 percent net of provisions), primarily because of a small increase in NPLs of international banks. Its CAR was 23.7 percent but is very likely inflated because of under-provisioning of NPLs in a few banks. NPLs that are classified as losses, fully collateralized and free of specific provision before December 2011, are only provisioned at 50 percent for domestic banks. Based on this provisioning rule, all domestic banks are now compliant with provisioning requirements, with the exception of the systemic bank (21 percent of the banking system’s assets at end-March 2015), which was granted an extension. Banks have until November this year to write off these NPLs, which would seriously erode the capital buffers of two banks (26 percent of the banking system’s assets at end March 2015), including the systemic one. The system’s ROA stood at 0.5 percent at end-March 2015.

Financial Soundness Indicators 1/(Domestic and international banks; in percent)
2008200920102011201220132014Mar-15
Capital/risk-weighted assets 2/20.422.223.924.219.821.621.723.7
Capital/total assets15.616.516.514.711.612.012.112.3
Excess statutory liquidity 3/30.133.543.864.383.579.184.494.7
NPLs/total loans11.714.018.721.420.317.615.716.1
Provisions/NPLs24.118.115.524.434.942.855.157.0
Provisions/total loans2.82.52.95.27.17.58.79.2
NPLs net of provisions/capital40.048.261.966.163.646.530.829.6
Return on Assets After Tax0.10.20.20.1−0.10.41.20.5
Memorandum items:
Capital/risk-weighted assets 4/20.420.919.5
NPLs net of provisions/capital 4/45.733.528.8
Sources: Central Bank of Belize; and Fund staff estimates.

Includes BZ$43 million award to Belize Bank Ltd. by the London Court of International Arbitration (LCIA). The amount is being disputed by the government.

The required capital adequacy ratios for domestic and international banks are 9 percent and 10 percent, respectively.

In percent of statutory liquidity requirement.

Excludes BZ$43 million award by the LCIA.

Sources: Central Bank of Belize; and Fund staff estimates.

Includes BZ$43 million award to Belize Bank Ltd. by the London Court of International Arbitration (LCIA). The amount is being disputed by the government.

The required capital adequacy ratios for domestic and international banks are 9 percent and 10 percent, respectively.

In percent of statutory liquidity requirement.

Excludes BZ$43 million award by the LCIA.

7. The systemic bank’s balance sheet is slowly strengthening (Text Table). Its ratio of NPLs to total loans is declining though remains very high at 23.2 percent at end-May 2015 (9.9 percent net of provisions). Its CAR is improving and stood at 16.2 percent at end-May 2015. The sale of a valuable piece of real estate (US$23 million) did offset the impact of two large expense items on its balance sheet, namely a large tax payment of US$ 4.75 million and a large provision expense of US$7.9 million on a disputed claim against the government. Excluding this disputed claim (US$21.5 million), the bank’s CAR would have been lower.

Financial Soundness Indicators 1/(The systemic bank; in percent)
20082009201020112012Dec-132014Mar-15
Capital/risk-weighted assets 2/20.621.722.516.311.713.911.213.2
Excess liquidity 3/14.22.618.213.719.624.738.962.3
NPLs/total loans18.815.531.833.829.025.022.323.0
Provisions/NPLs15.113.813.922.037.341.859.959.6
NPLs net of provisions/capital70.956.5123.5169.2158.2112.284.674.9
Return on Assets After Tax−0.40.3−0.9−2.5−3.10.3−3.33.6
Sources: Central Bank of Belize.

Includes BZ$43 million award to Belize Bank Ltd. by the London Court of International Arbitration (LCIA). The amount is being disputed by the government.

The required capital adequacy ratio is 9 percent.

In percent of statutory liquidity requirement. The strong increase in March 2015 is due to the sale of part of the bank’s investment portfolio in the US to generate the cash needed to pay out depositors of the bank’s international subsidiary that was being wound down.

Sources: Central Bank of Belize.

Includes BZ$43 million award to Belize Bank Ltd. by the London Court of International Arbitration (LCIA). The amount is being disputed by the government.

The required capital adequacy ratio is 9 percent.

In percent of statutory liquidity requirement. The strong increase in March 2015 is due to the sale of part of the bank’s investment portfolio in the US to generate the cash needed to pay out depositors of the bank’s international subsidiary that was being wound down.

8. The termination by Bank of America of a major correspondent banking relationship (CBR) with the systemic bank in early 2015 has so far had a limited impact on the financial system and economic activity (SIP on the financial sector). The new arrangements that have been put in place with the support of the Central Bank and major credit card companies (Visa and MasterCard) seem to be working as international financial transactions have not been disrupted.

Macroeconomic Outlook and Risks

9. Growth over the short-to-medium term would hover around 2.5 percent, in line with the assessment made during the 2014 Article IV Consultation, but the fiscal outlook could be worse due to excess spending. Real GDP growth in 2015 is expected to fall to 2.2 percent after a strong performance in 2014 as economic activity returns to normal levels. It would accelerate to about 3 percent during 2016–17 as a new large sugar firm starts production. Inflation would remain subdued owing to the exchange rate peg and moderate inflation in trading partners. The primary fiscal balance would remain in deficit for a while as the political climate further exacerbates spending pressures and hinder revenue-enhancing reforms. Hence public debt would continue to rise to unsustainable levels, exceeding 100 percent of GDP in 2016, as staff continues to assume that liabilities related to the nationalized companies (about 20 percent of GDP) are recognized in 2016 (Annex I).1 Given limited external financing, Belize is expected to rely massively on domestic financing, especially from banks, to meet its gross financing requirements in the medium term, with the potential to significantly reduce banking system liquidity and crowd out some private investment.2 Expansionary fiscal policies—including large wage increases and new initiatives and projects financed with PetroCaribe resources—would increase imports in the context of modest growth of exports of goods, widening the external current account deficit above levels consistent with external stability (about 3 percent of GDP or less), and contributing to a moderate overvaluation of the exchange rate (Annex II). Without strong external inflows, international reserves could decline to uncomfortable levels, especially if compensation for the nationalized utilities is paid and repatriated.

10. The baseline outlook is subject to substantial downside risks (Annex III). Other banks could also lose their CBRs with global banks with severe impact on international financial transactions. Other risks include a worsening of banking sector vulnerabilities, especially the systemic bank’s low capital buffers and banks’ exposure to an already over-indebted sovereign, lower-than-projected primary balances, and larger-than-expected compensation payments for the nationalized utilities. Fiscal risks from public enterprises appear limited, while risks from social security liabilities are considerable in the long run (Annex IV). External downside risks, which could lead to faster erosion on the international reserve cushion, include persistent U.S. dollar strength, Cuba’s entrance in the Caribbean tourism market, structurally weak growth in key advanced and emerging economies, the end of PetroCaribe financing, and a larger-than-expected drop in sugar prices after the EU reform of its sugar regime takes full effect in 2017 (Annex V and SIP on the sugar sector). On the upside, low international oil prices and growth-enhancing projects that are currently being implemented or envisaged could mitigate the above-mentioned risks.

Policy Discussions

Staff encouraged the authorities to: (i) raise the primary fiscal balance to levels that would put public debt on a sustainable path and create credible policy buffers while addressing public financial management (PFM) weaknesses; (ii) continue to address banking sector vulnerabilities; and (iii) implement a comprehensive medium-term growth strategy, taking into account constraints on human and financial resources.

A. A Fiscal Stance that Sends Credible Signals to Investors and Starts to Build Some Policy Buffers

11. Staff advised the authorities to promptly begin to progressively raise the primary fiscal balance to 4-5 percent of GDP so as to signal some commitment to fiscal consolidation and boost investor confidence as well as private investment (Text Table on macro scenarios) Even under this fiscal adjustment scenario, public debt would reach about 85 percent of GDP by 2020, well above the target of 70 percent of GDP recommended during the 2014 Article IV Consultation. The less ambitious debt target for 2020 reflects the sharp deterioration of the fiscal balance in 2014, which is expected to continue in 2015. As argued during the 2014 Article IV Consultation, staff is of the view that primary fiscal surpluses of 4–5 percent of GDP would leave room for growth-enhancing public expenditures and would have a limited impact on growth compared to baseline growth because government spending multipliers are small in the highly open Belizean economy and investors’ confidence is likely to recover (para. 30). Moreover, maintaining primary fiscal surpluses of 4–5 percent of GDP beyond 2020 would return public debt to a sustainable path, reaching the authorities’ target of 60 percent of GDP by 2030.3

Baseline and Active Macro-Scenarios, 2014-20(Percent of GDP, unless otherwise indicated)
Projections
2014201520162017201820192020
I. Baseline Scenario
Real GDP growth3.62.23.23.02.62.52.4
Inflation, end of period−0.20.71.72.02.12.02.0
Primary balance 1/−1.2−2.6−1.20.11.01.01.0
Overall balance 1/−3.9−5.2−4.1−4.0−3.4−4.5−4.4
Public debt 2/76.078.1101.198.897.997.096.1
Credit to the private sector (percent change)4.73.23.63.73.43.02.5
External current account balance−7.6−6.3−7.1−7.4−7.0−6.7−6.5
Gross official reserves (months of imports)5.25.24.94.23.42.71.9
II. Active Scenario
Real GDP growth3.62.22.52.42.72.82.9
Inflation, end of period−0.20.71.51.71.81.61.6
Primary balance 1/−1.2−2.62.03.54.54.54.5
Overall balance 1/−3.9−5.2−1.0−0.60.3−1.0−0.7
Public debt 2/76.078.1100.095.692.288.484.3
Credit to the private sector (percent change)4.73.24.24.34.24.24.4
External current account balance−7.6−6.3−7.2−6.9−6.5−5.4−5.0
Gross official reserves (months of imports)5.25.24.94.54.14.03.9
Memorandum items:
Real GDP growth (Plan B) 3/3.62.23.24.04.55.06.0
Primary balance (Plan B) 1/3/−1.2−2.6−0.90.51.81.81.8
Public debt (Plan B) 2/3/76.078.1100.997.393.589.084.0
Primary surplus (with government valuation of the nationalized companies)−1.2−2.6−1.20.11.01.01.0
Public debt path (with government valuation of the nationalized companies)76.078.189.186.184.983.882.7
Primary balance (2014 Article IV)1.01.01.01.01.01.0
Public debt (2014 Article IV) 2/77.476.797.394.191.989.8
Nominal GDP baseline (US$ million)1,7041,7631,8411,9312,0212,1142,207
GDP growth elasticity to fiscal adjustment−0.20−0.190.030.080.14
Sources: Belizean authorities; and Fund staff estimates and projections.

Fiscal projections are on a fiscal year basis (April to March).

Includes repayment of additional liabilities resulting from past nationalization of utility companies.

"Plan B" is the scenario where the government targets a primary balance close to its commitment during the 2013 debt restructuring (2 percent of GDP) and vigorously implement growth-enhancing structural reforms.

Sources: Belizean authorities; and Fund staff estimates and projections.

Fiscal projections are on a fiscal year basis (April to March).

Includes repayment of additional liabilities resulting from past nationalization of utility companies.

"Plan B" is the scenario where the government targets a primary balance close to its commitment during the 2013 debt restructuring (2 percent of GDP) and vigorously implement growth-enhancing structural reforms.

12. Fiscal measures identified during the 2014 Article IV Consultation would no longer be sufficient and will have to be supplemented for instance with cuts in transfers (Text Table on spending and tax measures).4 Recent FAD TA on tax policy suggests that the authorities can realistically collect more than 1–2 percent of GDP by removing exemptions and zero-ratings from the general sales tax (GST). Recent FAD TA on revenue administration also shows that strengthening and modernizing tax administration, including enforcing collection of undisputed tax arrears (3 percent of GDP in 2014) and creating an integrated domestic tax department would boost revenue. Spending measures discussed during the 2014 Article IV Consultation would only produce a spending adjustment of 1–2 percentage points of GDP, especially if outlays on goods and services are frozen at their FY 2015 level in real terms instead of their level in FY 2014. Better monitoring of transfers would help reach the desired spending adjustment of 2–3.5 percentage points of GDP. Staff encouraged the authorities to promptly pass a supplementary budget with fiscal consolidation measures in the areas just mentioned.

Spending and Tax Revenue Measures, 2016-20(Percent of GDP)
20162017201820192020
Total spending measures2.32.92.93.33.5
Reform of Public Officer’s pension plan 1/0.70.60.60.60.6
Cuts in wage bill (by attrition), goods and services, and transfers 2/1.62.32.32.72.9
Salaries (attrition)0.20.40.60.81.0
Goods and services (freeze in real terms)0.00.10.20.20.2
Cuts in transfers1.41.71.51.61.7
New revenue-enhancing measures3/0.90.50.60.20.0
Total adjustment measures3.23.43.53.53.5
Source: Fund staff estimates and projections.

Adjustment of pensions according to past inflation, and contributions to the pension plan.

Freezing purchase of goods and services in real terms, and cuts in transfers (excluding teacher’s salaries).

Measures include streamlining exemptions and strengthening revenue administration. The projected impact of revenue measures is conservative as they could annually yield as much as the equivalent of 2 percentage points of GDP if implemented vigorously.

Source: Fund staff estimates and projections.

Adjustment of pensions according to past inflation, and contributions to the pension plan.

Freezing purchase of goods and services in real terms, and cuts in transfers (excluding teacher’s salaries).

Measures include streamlining exemptions and strengthening revenue administration. The projected impact of revenue measures is conservative as they could annually yield as much as the equivalent of 2 percentage points of GDP if implemented vigorously.

13. Staff strongly pressed the above set of measures as necessary to achieve sustainable growth in the long term, but also noted the dangers to the economy of taking no action and urged the authorities, if they found it impossible to carry out the recommended strategy, at least to implement a “plan B” that could rely on a weaker fiscal adjustment but more vigorous growth-enhancing structural reforms (Text Table on macro scenarios). Under this “plan B”, the authorities could at least target a primary fiscal surplus of about 2 percent of GDP, which was promised to investors during the 2013 debt restructuring, and implement structural reforms more vigorously (Section C). Such structural reforms will have to lift annual real GDP growth to about 6 percent in the medium term, allowing Belize to reach the debt target of about 84 percent of GDP in 2020 and 60 percent of GDP by 2026. Staff emphasized the significant risks associated with such a “plan B,” including the fact that the growth impact of structural reforms takes time to materialize.

14. In any event, staff encouraged the authorities not to delay PFM and public sector reforms, which will help improve the quality of public spending. In particular, staff urged the authorities to implement the recommendations of the recent Public Expenditure and Financial Accountability (PEFA) assessment, including enhancing internal and external controls and audits as well as procurement practices. A more active debt management, including refinancing expensive debt with low-earning deposits (essentially from PetroCaribe), would greatly support fiscal consolidation efforts. The authorities should also consider the reform of the civil service and the public employees’ pension system, making the latter contributory.

15. Staff urged the authorities to fully weigh the risks and costs of delaying fiscal adjustment. Staff reminded the authorities that some investors could be very reluctant to continue financing the government in the coming years unless the authorities signal commitment to fiscal consolidation. Unfavorable external developments, which could deplete central bank reserves, could force the government to borrow in international markets at very high interest rates just to rebuild reserves (Annex V). Interest payments alone are now much larger than domestically-financed capital spending and the projected high level of debt would continue to limit the government’s ability to spend on growth-enhancing projects or implement counter-cyclical policies. Such a high debt path would also increase the probability of a crisis and translate into even higher debt service going forward, increasing the needed fiscal adjustment over time.

Authorities’ views

16. The authorities remain firmly convinced that the true value of the nationalized companies at the time of the nationalization was closer to their valuation, and should courts adopt their valuation, the public debt path would be better than staff’s baseline projections. With the authorities’ valuation of nationalized companies at about 8 percent of GDP (BZ$281 million), debt would stabilize at about 85 percent of GDP in the medium term under current policies. The authorities also noted that unless achieved through a settlement, compensation for the nationalized utilities will not be decided soon as ongoing litigation could last many more years.

17. The authorities acknowledged the need for a greater fiscal effort to ensure that the path of public debt is sustainable, even if courts were to accept their valuation of the nationalized companies. They do recognize that the public debt outlook has lost some ground subsequent to the 2014 Article IV Consultation and that a sustainable debt path should bring public debt toward 60–65 percent of GDP in the medium-to-long term. As a consequence, they acknowledge that a combination of fiscal adjustment and vigorous growth-enhancing structural reforms is needed.

18. The authorities are committed to returning to primary fiscal surpluses but did not commit to any specific target or measure to kick start fiscal consolidation, and insisted that a few options for policy adjustment are being considered, including PFM and growth-enhancing structural reforms.

  • Revenue. As indicated in the Prime Minister’s 2014 budget speech, the authorities still plan to set up a committee to review the list of exempted and zero-rated items under the GST. They are committed to fully exploiting insights from the revenue administration monitoring reports that staff helped them prepare and to holding the revenue administration more accountable, especially on the very low effective taxation. They will give due consideration to recommendations of recent IMF TA missions and the revenue-enhancing committee established under the 2013 wage agreement with labor unions, including the need to better collect undisputed tax arrears and modernize revenue administration. They noted that creating an integrated domestic tax department would be difficult and would require amending the existing legislation but they are determined to improving information sharing among different revenue departments. The revenue-enhancing committee will be made permanent so as to continuously monitor revenue performances. The authorities are fully cognizant of the risks of largely relying on revenue measures to achieve significant fiscal consolidation.

  • Expenditures. The authorities noted that some degree of spending is needed in infrastructure. However, they acknowledged that the 2013 wage agreement has been much costlier than initially envisaged. Nonetheless, they remain of the view that backtracking on their commitments under this agreement would be politically difficult. They agree with staff that future wage agreements will have to be conducted within a framework that takes into account fiscal sustainability and stress that they are still committed to signing a memorandum of understanding with labor unions in this regard. The framework proposed by staff during the 2014 Article IV Consultation remains a good reference point in their view. Recommendations of the cost-saving committee, also established under the 2013 wage agreement, will be considered in due course, and its tasks will be extended to reforms of the pension system. Following the passage of the Petrocaribe Act, which should strengthen the management of Petrocaribe resources, the authorities noted that Petrocaribe resources accumulated until March 2015 will continue to be used for capital spending. However, Petrocaribe resources accumulated between April 2015 and March 2016 will be saved to help pay compensation for the nationalized companies, and those accumulated beyond March 2017 will be allocated to the refinancing of more expensive external debt.

  • PFM. The authorities acknowledged that delays in submitting financial statements to the Auditor General and then to parliament represent a weakness in controls that needs to be effectively addressed. They are committed to addressing this major PFM weakness and others identified by the recent PEFA mission, though they did not specify any timetable. They acknowledge that adopting a procurement law would enhance transparency in procurement and help improve value for money. They reiterated their commitment to strengthen debt management and will finalize the draft public debt management bill prepared with IMF TA and submit it to parliament as soon as possible.

  • Other growth-enhancing structural reforms. The authorities intend to vigorously implement the Growth and Sustainable Development Strategy (GSDS) and its successful implementation could lift real GDP growth by several percentage points in the medium term and help improve the path of public debt (Section C).

B. A Financial Sector that Continues to Strengthen and Reduce Fiscal Risks

19. Staff supported the authorities’ determination to keep the banking system under tight supervision and reiterated its call for an asset quality review (AQR) of all banks to fully assess their true strength. In addition to offsite examinations, the authorities have conducted in 2014 full-scope onsite examinations of two banks, including the systemic bank, and AML-focused onsite examinations of one bank and three credit unions. Staff reminded the authorities that an AQR of all banks will complement such examinations. Quarterly financial stability reports (FSRs) should continue to be prepared, including quarterly stress tests of banks that fully take shortfalls in provisioning into account. Adequate resources should be given to units in charge of preparing such reports. Staff welcomed the authorities’ continued monitoring of weaknesses highlighted in the latest FSRs, including the need for some institutional strengthening of capital to build resiliency, the still high liquidity, as well as the high concentration of loans and deposits. With the latest technical assistance from CARTAC on the consolidated supervision framework, staff urged the authorities to start monitoring group risk, group capital adequacy, group governance and regulatory arbitrage.

20. Given challenges faced with collateral valuation in the context of illiquid local markets, staff urged the authorities to raise provisioning requirements to 100 percent on all loan losses (secured and unsecured). Banks with loan losses that are not fully provisioned should be ordered to gradually increase provisioning to 100 percent on these loan losses over a reasonable transition period and during which dividend distribution is strictly forbidden and management fees contained.

21. Staff strongly encouraged the authorities to step up progress in effectively implementing the AML/CFT framework. Although the deficiencies identified by the Caribbean Financial Action Task Force (CFATF) in 2011 have been mostly addressed, allowing Belize to recently exit the CFATF follow-up and monitoring process, this progress relates to technical compliance with the 2003 Financial Action Task Force (FATF) standard. Important reforms are still needed to ensure compliance and effective implementation of Belize’s AML/CFT regime in line with the 2012 FATF standard. In particular, the authorities should step up progress in implementing risk-based approaches to AML/CFT supervision, enhance the transparency of legal entities and arrangements and further ensure the operational and effective international cooperation of the financial intelligence unit (see SIP on the financial sector).

22. Staff welcomed the financial crisis management plan the authorities have prepared with IMF TA, including bank resolution templates as well as an updated list of technical partners the authorities may call on at short notice to support their crisis management efforts. Staff also advised the authorities to continue their support for greater coordination and cooperation among regional financial authorities.

23. Staff supported other ongoing financial sector reforms. The draft credit bureau law has been approved by cabinet and will be sent to parliament by the first half of next year. Notable progress was made in modernizing Belize’s national payments system as very critical parts of this project, including the draft legal framework, and the Automated Transfer System are near completion. The authorities have allocated resources to hire an in-house legal expert to further strengthen the Central Bank’s legal department and are in search of a suitable person with the requisite experience.5

Authorities’ views

24. The authorities reiterated their commitment to addressing remaining weaknesses in the financial system, including their supervisory framework. In particular, they are considering measures in the following areas:

  • Provisioning shortfalls. The authorities are of the view that the current provisioning rules are prudent enough to safeguard the reliability of banks’ balance sheets, but noted that provisioning requirements of 100 percent on all loan losses (secured or unsecured) were considered in the past. They decided that 50 percent provisioning for fully secured loan losses was prudent after discussions with banks, which were then given a certain number of years to provide for the legacy loans. The authorities are strongly of the view that the value of collaterals for secured loans are inflated and is thus a disincentive to a timely disposal. They greatly appreciated recent IMF TA on loan classification and provisioning and will give due consideration to the TA mission’s recommendations.

  • Financial stability reports. The authorities will continue to prepare financial stability reports including adequate stress tests and stronger analysis of group risks, taking advantage of recent CARTAC TA on consolidated supervision. They noted that recent delays in the completion of financial stability reports were mainly due to capacity constraints which are being addressed. A database that will facilitate production of future reports is being finalized.

25. The authorities strongly emphasized that termination of some correspondent banking relationships with banks in Belize has the potential to destabilize the Belizean financial system and also illustrates the need for greater transparency in advanced countries’ regulations and decision-making processes, which should be rules-based. They insisted that neither the international banks that terminated correspondent banking relationships with Belizean banks nor the regulators of these international banks ever provided any explanation for these decisions. They noted that this complete lack of transparency about decisions that have important negative spillovers on other countries is outrageous and should quickly be addressed by the international community. This lack of transparency does not only unjustly affect small open economies like Belize, but also denies the local authorities the opportunity to address the weakness since no information is shared with them.

26. The authorities are determined to effectively implement their AML/CFT framework. They insisted that their recent exit from the CFATF follow-up and monitoring process confirms the significant progress Belize has made on AML/CFT. They are strongly of the view that the recent favorable CFATF review of Belize’s AML/CFT framework and the termination of correspondent banking relations with Belize do send contradictory messages and called for greater consistency in the assessment of AML/CFT frameworks. They are confident that future rounds of CFTAF mutual evaluations will only confirm the continuous progress Belize is making on AML/CFT.

27. The authorities will continue to update the list of technical partners that could support them if there is a financial crisis. However, as mentioned during the 2014 Article IV Consultation, they reiterated that progress on regional supervision and financial crisis management is being held back due to the refusal of another regional supervisor to address a parallel banking issue with Belize (SIP on the financial sector).

C. A Medium-term National Growth and Development Strategy that Can Realistically Be Implemented

28. Growth in Belize has decelerated sharply in recent years (Text Chart). Annual GDP growth rates in Belize averaged above 5.4 percent during 1981–2007, but declined to about 2.5 percent during 2008–13. Growth accounting estimates suggest that slower total factor productivity (TFP) growth and less investment in fixed capital are the main drivers of the slowdown of GDP growth in Belize after 2008. Staff’s analysis suggests that several factors may have contributed to the recent drop in productivity, including remaining deficiencies in infrastructure, human capital and the business environment. This suggests that reforms to raise productivity should be an essential part of any comprehensive medium-term growth strategy.

Belize: Factors’ Contribution to Growth

(Percentage points)

Source: Statistical Institute of belize, and Fund staff estimates.

29. In this context, staff welcomed the authorities’ new Growth and Sustainable Development Strategy (GSDS) covering 2015–18 (Annex VI). This implementation plan of Belize’s long-term development strategy (Horizon 2030) is the nation’s primary planning document during 2015–18, providing detailed guidance on priorities and specific actions to be taken to raise growth and productivity. The GSDS does not quantify the growth impact of the structural reforms it envisages but seeks to help achieve real output growth of 5 percent annually over a prolonged period. Staff is of the view that Belize can reach such targets for real GDP growth if appropriate investments are made to fully exploit the country’s potential, especially in agribusiness, and strengthen access to neighboring markets, especially Guatemala and Mexico.6 However, staff noted that financial and human resources needed for a credible implementation of the GSDS remain uncertain. Therefore, staff strongly encouraged the authorities to quickly enhance domestic revenue collection and investment in human capital, while implementing other key reforms (para. 30). Staff also urged the authorities to develop a strategy to tap into all resources available to them through international partners and well-designed public private partnerships (PPPs).

30. Staff urged the authorities to pay particular attention to growth-enhancing reforms identified during the 2014 Article IV Consultation, keeping the following three main themes in mind:

  • Macroeconomic policies that inspire confidence, enhance competitiveness, and support private sector-led and inclusive growth. Fiscal policies will have to be sustainable and promote inclusive growth as discussed during the 2014 Article IV Consultation. The fiscal tightening recommended by staff is expected to mostly reduce imports, not GDP growth, and boost investor confidence as well as private investment. Staff analysis suggests that the real exchange rate is moderately overvalued (Annex II). Despite the risks to external stability, the costs of a nominal devaluation to facilitate the external adjustment appear high in the context of high government external debt and large pass-through to inflation, as well as the authorities’ strong commitment to the exchange rate peg. Therefore, policies could focus on external price competitiveness measures that lower production costs, liberalize the economy and increase the flexibility of labor and product markets. The new Growth and Sustainable Development Strategy considers a range of measures, including cost savings from streamlining of public services and reforms to strengthen the tradable sector by attracting foreign investment, improving export market penetration, and conducting productivity-enhancing reforms in key sectors. Amending labor regulations to provide greater flexibility in working hours could help lower labor costs in the business outsourcing and tourism industries where flexibility is needed. Nevertheless, the short-term benefits of external price competitiveness measures should not be overestimated as they have been difficult to achieve in the past.

  • Financial markets that work for the Belizean economy. With the recent low credit growth and high liquidity, the financial sector could play a larger role in boosting growth in Belize. Policies should give a greater role to competition in determining interest rates and asset prices and help lenders improve their knowledge of borrowers through a well-functioning credit bureau. Competition can be further enhanced with modern financial market infrastructure and regulations that reduce transaction costs. In this context, the recent regulation that administratively allocates foreign exchange to one importer falls short of best practice. Staff advised against such measures and urged the authorities to request IMF technical assistance to strengthen the foreign exchange market. The administrative allocation of foreign exchange does not breach Belize’s Article VIII obligations, to the extent that the sale is done at the prevailing market rate. However, staff (LEG) is currently conducting a routine review of Belize’s overall foreign exchange regime, and will conclude its assessment after discussions with the authorities.

  • Structural reforms that support key engines of growth. Staff reviewed progress made in implementing structural reforms identified during the 2014 Article IV Consultation and discussed key sectors that would support economic growth in the coming years, including agriculture, agro-processing, energy and tourism. The required infrastructure will have to be quickly built and appropriate regulations adopted to fully exploit Belize’s potential in the above-mentioned sectors. With the expected drop in sugar prices following the full liberalization of the EU sugar market after 2017, enhancing the efficiency and productivity of sugar cane production would help lower overall production costs and strengthen competitiveness (SIP on the sugar sector). Lowering the cost of energy could greatly boost external competitiveness and real GDP growth, promoting the expansion of agro-processing and tourism (SIP on the energy sector). Finally, improving the business environment, including through quicker resolution of contract disputes, simplifying the procedures for starting a new business and registering property, greater liberalization of domestic markets, including labor markets, and greater diversification of export markets, are of utmost importance.

Authorities’ views

31. The authorities will actively seek the financial and human resources required for the successful implementation of their GSDS, including through enhanced domestic revenue collection and better design of expenditure policies to boost human capital. They indeed see agro-business, tourism, and energy as key sectors with the highest growth potential and plan to devote even greater attention to them. They noted that the recent amendment of the Sugar Act to allow for more flexibility in the way sugar farmers organize themselves is a major step toward strengthening the sugar sector. In collaboration with sugar farmers and Belize Sugar Industries (BSI), they are also developing a long-term strategic plan for the sugar industry, including liberalization of domestic sugar market. On tourism, they noted that they have prepared and are implementing their tourism master plan, which recently helped increase tourism inflows to Belize. On energy, the authorities are implementing their National Strategic Plan for 2012–17, which aims among other things at improving efficiency and conservation across all sectors by reducing per capita energy intensity by at least 30 percent by 2033.

32. The authorities agreed with the thrust of staff’s views on growth and competitiveness. They acknowledged that Belize can only grow faster through increased investment and greater access to foreign markets, and therefore must become more competitive. They concurred with the thrust of staff’s external assessment and the need to further strengthen external inflows, though they still did not commit to any specific measure in this regard. They remain of the view that the current account of the balance of payments (BOP) should indeed improve notably to ensure the medium-term external stability of the Belizean economy. They continue to view the nominal exchange rate peg as a key anchor of macroeconomic policies. In line with the thrust of staff’s advice, including recommendations made during the 2014 Article IV Consultation, they are determined to implement through their strategic developments plans (Horizon 2030 and the GSDS) policies that inspire private sector confidence and support inclusive growth. They agreed that a strong financial sector and vigorous structural reforms should play a greater role in boosting the economy but did not commit to any specific measure in this regard beyond those described above (paras. 18, 23, and31) and envisaged in the GSDS.

33. The authorities also shared some dissenting views on how to make Belize grow faster. As regards the foreign exchange market, they noted that the administrative allocation of foreign exchange to the fuel importer was necessary as some banks had been withholding foreign exchange in violation of their responsibilities as authorized dealers in foreign exchange. They do not see the need for IMF TA to strengthen the functioning of the foreign exchange market. With respect to interest rates, the authorities continue to note that past reductions of the interest rate floor did not produce a comensurate drop in lending rates as banks used most of the additional profit margins they gained to strengthen their balance sheets, including through increased provisioning. Since provision shortfalls remain significant in the banking system, the authorities are convinced that removing the interest rate floor at this juncture will not lower lending rates much further. They stressed that the role of financial markets in supporting growth will be enhanced with adequate financial market infrastructure, including well-functioning capital markets, and greater transparency requirements for businesses. Financial and technical assistance will be needed in these two areas, which are also considered in their strategic development plans.

Other

34. The authorities continue to closely monitor spillover risks from other countries. Most banks in Belize still maintain some CBRs with banks in the U.S. and Europe, and the authorities and staff see termination of these remaining CBRs as the greatest spillover risk of the moment. The authorities will continue to strengthen their financial system and AML/CFT framework but do urge international partners to raise awareness of the negative consequences of some prudential regulations that are being implemented in advanced countries. Risks arising from Belize’s financial linkages with banks in Antigua and Barbuda that are currently under receivership with total exposures of around US$14million are being contained with greater provisioning. Spillover risks from trade channels are being contained through export diversification.

35. Data provision is broadly adequate for surveillance. In general, the quality, coverage, and timeliness of statistics permit an adequate monitoring of economic developments.7 The authorities confirmed that they remain committed to strengthening statistics, but acknowledged that progress remains slows. They are still committed to subscribing to the Fund’s Special Data Dissemination Standard as promised to investors during the 2013 debt restructuring. They are also preparing consolidated data on the public sector. There is no timetable for completing these two key projects.

Staff Appraisal

36. Belize’s macroeconomic performance in 2014 and early 2015 was broadly favorable despite a significant deterioration in the fiscal stance. Real GDP growth reached 3.6 percent in 2014 and 7 percent (y/y) in the first quarter of 2015, owing mainly to strong performances in agriculture and tourism. Inflation remained subdued, but the external current account deficit has widened. The primary fiscal balance deteriorated sharply to a deficit of 1.5 percent of GDP. Credit growth is recovering, driven by loans to the sugar sector and real estate credit.

37. The macroeconomic outlook broadly remains in line with the assessment made during the 2014 Article IV Consultation, but the fiscal outlook is expected to be worse due to excess spending. A weak GDP growth and an expansionary fiscal stance combined with the assumed recognition of liabilities from nationalization in 2016 (about 20 percent of GDP) would push public debt to about 96 percent of GDP in the medium term, more than 6 percentage points of GDP above projections during the 2014 Article IV Consultation. Expansionary fiscal policies would increase imports in the context of modest growth of exports, widening the current account deficit and contributing to a moderate overvaluation of the exchange rate. Without strong external inflows, international reserves would decline to uncomfortable levels, especially if compensation for the nationalized companies is paid and repatriated.

38. Substantial downside risks to the macroeconomic outlook deserve close monitoring. Compensation payments for the nationalized companies could be higher than in staff’s projections. Other banks could lose correspondent banking relationships with severe impact on international financial transactions. Cuba’s entrance in the Caribbean tourism market, the end of Petrocaribe financing, a significant drop in sugar prices, and a protracted period of weak growth in advanced and emerging economies could accentuate pressures on international reserves.

39. Public debt should credibly be brought back to a sustainable path and fiscal buffers created to safeguard against looming risks. A primary fiscal balance of 4–5 percent of GDP would contain the rise of public debt to 85 percent of GDP by 2020, which would still be unsustainable, and then reduce it about 60 percent of GDP by 2030. This could be achieved by removing exemptions and zero-ratings from the GST, building a stronger revenue administration that contains leakages, and limiting current spending, including through reform of the public officers’ pension scheme. More vigorous growth-enhancing reforms could help achieve the public debt targets above with a slightly weaker primary fiscal balance. In any event, PFM and public sector reforms that reduce low-quality spending should not be delayed.

40. Efforts to strengthen the financial sector should continue, with emphasis on strengthening banks’ balance sheets. An asset quality review of all banks will complement reviews currently done by the Central Bank and enhance confidence in the quality of banks’ books. Given the challenges in collateral valuation in the context of illiquid markets, provisioning on loan losses (secured or unsecured) should be raised to 100 percent. Preparation of financial stability reports must continue, including bank stress tests that fully take shortfalls in provisioning into account. Efforts to effectively implement the AML/CFT framework must be stepped up.

41. The national GrowthandSustainableDevelopmentStrategy(GSDS) must be vigorously implemented, taking into account constraints on financial and human resources. A strategy to mobilize financial and human resources for the credible implementation of the GSDS should be published. Enhancing revenue collection, tapping into resources available through international partners and well-designed public private partnerships, and boosting human capital, including through better public spending, will be essential. Financial markets that work for the Belizean economy, engines of growth such as agriculture and tourism that are supported with the required infrastructure and regulation, an attractive business environment that reduces the cost of doing business, greater liberalization of domestic markets, including labor markets, and greater diversification of export markets will be key to the success of any growth strategy.

42. It is recommended that the next Article IV be held on the standard 12-month cycle.

Box 1.The Authorities’ Response to Key IMF Policy Recommendations

Fiscal consolidationMarginally consistent
Strengthen fiscal policy to rebuild macroeconomic buffers in the context of rollover risks and emerging contingenciesThe outturn for the fiscal primary balance in the fiscal year 2014/15 was well below staff recommendation during the 2014 Article IV Consultation. The projected primary balance for fiscal year 2015/16 falls short of the target recommended by staff.

The authorities acknowledged the need for a greater fiscal effort to ensure that the path of public debt is sustainable, but did not commit to any specific fiscal target or measure.
Financial sector reformBroadly consistent
Closely monitor elevated risks in the financial system and continue to implement the 2011 FSAP recommendations.The authorities continue to implement key FSAP recommendations. They have prepared a crisis management plan and bank resolution templates with IMF TA. The national payment system is being modernized. The framework for consolidated supervision is being established. They have stepped up efforts to strengthen compliance of their AML/CFT framework with FATF standards. They are determined to addressing remaining weaknesses in the financial sector.
Structural reformsModerately consistent
Remove key infrastructure bottlenecks and improve the environment for doing business to boost economic growth.Bottlenecks persist in port facilities, energy, transportation, and education. Doing business indicators and investor confidence remain low. The authorities have developed a new Growth and Sustainable Development Strategy (GSDS) covering 2015–18 (Annex VI), and are actively seeking the financial and human resources required for its successful implementation. There has been progress recently, most notably in the sugar and energy sectors.
Table 1.Belize: Selected Social and Economic Indicators, 2010-16
I. Population and Social Indicators
Area (sq.km.)22,860Adult literacy rate, 15 and up (percent), 201075.1
Arable land (percent of land area), 20123.4Human development index (rank), 201384
Population (thousands), 2014 est.356.9Unemployment rate, Sep. 201412.1
GNI per capita, atlas method (current US$), 20134,510Number of physicians, 2007251
Access to improved drinking water sources
Life expectancy at birth (years), 201374(percent of population), 201299.3
Under-five mortality rate (per thousand), 201317Poverty (percent of total population), 200942
II. Economic Indicators, 2010-16
Sources: Belize authorities; UNDP Human Development Report; World Development Indicators, World Bank; 2009 Poverty Country Assessment; and Fund staff estimates.

In percent of GDP.

Including inventory accumulation.

Fiscal year (April to March).

Including official grants.

Public and publicly guaranteed external debt.

For 2009, includes the share of Belize in the special and general SDR allocations in the equivalent of SDR 18 million (US$28 million).

Est.Projections
2010201120122013201420152016
National income and prices
GDP at constant prices3.32.13.81.53.62.23.2
Of which: Oil output−0.6−1.5−1.2−0.3−0.2−0.3−0.2
GDP deflator1.34.32.41.71.01.51.2
Consumer prices (end of period)0.02.30.81.6−0.20.71.7
Consumer prices (average)0.91.71.20.51.20.11.2
Gross domestic investment 1/2/12.813.713.715.916.115.815.8
Gross national savings 1/10.412.612.511.08.59.68.7
External sector
Exports of goods and services12.115.68.92.82.40.72.1
Imports of goods and services3.616.76.27.95.8−1.93.5
Terms of trade (deterioration -)2.24.0−1.10.3−0.5−4.0−0.7
Nominal effective exchange rate−1.3−3.03.20.71.6
Real effective exchange rate1.4−10.01.9−1.00.4
Money and credit
Credit to the private sector−3.6−1.21.13.54.73.23.6
Money and quasi-money (M2)−0.45.611.01.47.93.74.4
Weighted average lending rate (in percent)13.813.012.011.1
(In percent of GDP)
Central government 3/
Revenue and grants27.427.726.427.729.227.527.0
Of which: oil revenue2.43.01.51.10.80.30.2
grants0.21.10.71.21.11.11.1
Current expenditure24.024.022.323.724.625.625.7
Capital expenditure and net lending5.04.74.67.48.57.05.4
Primary balance1.72.31.3−0.2−1.2−2.6−1.2
Overall balance−1.7−1.1−0.5−3.5−3.9−5.2−4.1
External sector
External current account 4/−2.4−1.1−1.2−4.4−7.6−6.3−7.1
Public and publicly guaranteed debt84.680.575.676.176.078.1101.1
Domestic debt11.911.110.610.210.112.736.5
External debt72.669.465.065.965.965.464.7
Debt service 5/4.74.84.46.84.24.34.5
In percent of exports of goods and services8.17.56.810.56.66.97.4
In percent of government current revenue18.118.117.326.115.316.117.2
(In millions of U.S. dollars, unless otherwise indicated)
Overall balance of payments1035361168218−15
Exports of goods and services8169441,0281,0571,0821,0891,112
Imports of goods and services8109451,0041,0841,1471,1251,164
Gross international reserves 6/218253289405487505490
In percent of gross external financing needs317450478238286335278
In percent of next year’s external public debt service307362261566645615575
In months of imports2.83.03.24.25.25.24.9
Nominal GDP1,3981,4891,5741,6241,6991,7631,841
Nominal GDP (BZ$ millions)2,7972,9783,1483,2493,3983,5263,682
Sources: Belize authorities; UNDP Human Development Report; World Development Indicators, World Bank; 2009 Poverty Country Assessment; and Fund staff estimates.

In percent of GDP.

Including inventory accumulation.

Fiscal year (April to March).

Including official grants.

Public and publicly guaranteed external debt.

For 2009, includes the share of Belize in the special and general SDR allocations in the equivalent of SDR 18 million (US$28 million).

Sources: Belize authorities; UNDP Human Development Report; World Development Indicators, World Bank; 2009 Poverty Country Assessment; and Fund staff estimates.

In percent of GDP.

Including inventory accumulation.

Fiscal year (April to March).

Including official grants.

Public and publicly guaranteed external debt.

For 2009, includes the share of Belize in the special and general SDR allocations in the equivalent of SDR 18 million (US$28 million).

Table 2.Belize: Operations of the Central Government 1/2/(In millions of Belize dollars)
Est.Projections
2010/112011/122012/132013/142014/152015/162016/172017/18
Revenue and grants7788368379101,0019801,0071,042
Revenue7718038168709629409661,002
Of which: Non-oil revenue703712769833935928960995
Current revenue766795811864956935960996
Tax revenue659670704748849818844875
Of which: Petroleum Operations5153322116867
General Sales Tax19517121423727026300
Nontax revenue107125108117107117116120
Of which: Petroleum Operations1637151511400
Capital revenue58556566
Grants733214039414141
Total expenditure8258678541,0231,1341,1651,1611,198
Current expenditure6827247077808429149591,038
Wages and salaries279297298312338388397407
Pensions4552545564606163
Goods and services164172166173199211220231
Interest payments97100581079091110161
Transfers97104131133151164170177
Capital expenditure and net lending143143147243291251202159
Capital expenditure126138144240289249199157
Domestically financed expenditure (Capital II)737366111116786641
Foreign financed expenditure (Capital III)536578129172171133115
Net lending175333332
Primary balance506841−6−42−94−445
Nongrant, non-oil primary balance−25−55−27−83−108−146−91−42
Overall balance−47−32−17−113−133−185−154−155
Financing473217113133185154155
Privatization (net)5520000000
Domestic−18−4−29−263911590144
Of which: Amortization2223222137340
External10164614093696411
Disbursements6571137291164147151104
Amortization54559115171788792
Memorandum items:
Nominal GDP2,8423,0203,1733,2863,4303,5653,7273,907
Non-interest expenditure7287677969161,0431,0741,0511,037
Oil revenue68904737271267
Revenue and grants27.427.726.427.729.227.527.026.7
Revenue27.126.625.726.528.026.425.925.6
Of which: Non-oil revenue24.723.624.225.327.326.025.825.5
Current revenue27.026.325.626.327.926.225.825.5
Tax revenue23.222.222.222.824.823.022.722.4
Of which: Petroleum Operations1.81.81.00.70.50.20.20.2
General Sales Tax6.95.76.77.27.97.40.00.0
Nontax revenue3.84.13.43.53.13.33.13.1
Of which: Petroleum Operations0.61.20.50.50.30.10.00.0
Capital revenue0.20.30.10.20.20.10.20.2
Grants0.21.10.71.21.11.11.11.0
Total expenditure29.028.726.931.133.132.731.130.6
Current expenditure24.024.022.323.724.625.625.726.6
Wages and salaries9.89.89.49.59.910.910.710.4
Pensions1.61.71.71.71.91.71.61.6
Goods and services5.85.75.25.35.85.95.95.9
Interest payments3.43.31.83.32.62.62.94.1
Transfers3.43.54.14.14.44.64.64.5
Capital expenditure and net lending5.04.74.67.48.57.05.44.1
Capital expenditure4.44.64.57.38.47.05.34.0
Domestically financed expenditure (Capital II)2.62.42.13.43.42.21.81.1
Foreign financed expenditure (Capital III)1.92.22.53.95.04.83.62.9
Net lending0.60.20.10.10.10.10.10.1
Primary balance1.72.31.3−0.2−1.2−2.6−1.20.1
Nongrant, non-oil primary balance−0.9−1.8−0.8−2.5−3.2−4.1−2.4−1.1
Overall balance−1.7−1.1−0.5−3.5−3.9−5.2−4.1−4.0
Financing1.71.10.53.53.95.24.14.0
Privatization (net)1.90.70.00.00.00.00.00.0
Domestic−0.6−0.1−0.9−0.81.13.22.43.7
Of which: Amortization0.10.10.10.10.00.63.78.7
External0.40.51.44.32.71.91.70.3
Disbursements2.32.44.38.94.84.14.12.6
Amortization1.91.82.94.62.12.22.32.4
Memorandum items:
Nominal GDP (in BZ$ millions)2,8423,0203,1733,2863,4303,5653,7273,907
Non-interest expenditure25.625.425.127.930.430.128.226.5
Oil revenue2.43.01.51.10.80.30.20.2
Sources: Ministry of Finance; Central Bank of Belize; and Fund staff estimates and projections.

Fiscal year ends in March.

Due to data limitations, the table deviates from the GFSM 2001 methodology.

Sources: Ministry of Finance; Central Bank of Belize; and Fund staff estimates and projections.

Fiscal year ends in March.

Due to data limitations, the table deviates from the GFSM 2001 methodology.

Table 3.Belize: Operations of the Banking System
Est.Projections
2010201120122013201420152016
(In millions of Belize dollars)
Central Bank of Belize (CBB)
Net foreign assets 1/376429528763930965936
Net international reserves4314845838189821,017988
Medium-term foreign liabilities 2/−55−55−55−55−52−52−52
Net domestic assets414739−105−112−90−7
Credit to the public sector (net)614341−100−105−830
Central government684547−96−104−821
Other public sector−7−2−7−3−1−1−1
Capital and other assets (net)−204−2−5−7−7−7
Base money417476568658818875929
Currency issue192211238262286364417
Reserves of commercial banks225266329396532511512
Commercial banks
Net foreign assets182254356263245256244
Net claims on central bank259305375447581567564
Net domestic assets1,8871,8461,8801,9001,9782,0732,205
Credit to the public sector (net)−75−92−98−119−177−122−68
Central government130130140134125187229
Other public sector−205−222−238−253−302−308−297
Credit to the private sector1,9631,9381,9592,0272,1232,1902,269
Other assets (net)0−119−73255
Liabilities to the private sector2,3292,4052,6112,6102,8032,8973,013
Monetary survey
Net foreign assets5586838841,0271,1751,2221,180
Net domestic assets1,9281,8931,9201,7951,8661,9222,091
Credit to the public sector (net)−14−49−57−219−282−204−68
Central government1981741873821105230
Other public sector−212−224−244−257−303−309−298
Credit to private sector (by comm. banks)1,9631,9381,9592,0272,1232,1902,269
Other items (net)−20418−1225−65−110
Liabilities to the private sector2,4862,5762,8042,8223,0413,1433,270
Money and quasi-money (M2)2,0852,2012,4442,4772,6722,7722,895
Currency in circulation158171193212237308364
Deposits1,9272,0302,2502,2652,4352,5262,638
Foreign currency deposits6586213118109114119
Capital and reserves of commercial banks401375360345368371376
(In millions of U.S. dollars)
Net international reserves of the CBB216242292409491509494
(In percent change, unless otherwise indicated)
Memorandum items:
Private sector deposits in local currency−0.65.310.90.67.53.74.4
Base money−2.714.219.216.024.27.06.1
Credit to private sector (by comm. banks)−3.6−1.21.13.54.73.23.6
Money and quasi-money (M2)−0.45.611.01.47.93.74.4
Net international reserves to M2 (percent)20.722.023.933.036.736.734.1
Required cash reserve ratio (percent)8.58.58.58.58.58.58.5
Loan-deposit ratio98.591.679.585.183.483.082.3
Sources: The Central Bank of Belize; and Fund staff estimates and projections.

Includes Central Government’s foreign assets.

Includes SDR allocation.

Sources: The Central Bank of Belize; and Fund staff estimates and projections.

Includes Central Government’s foreign assets.

Includes SDR allocation.

Table 4.Belize: Balance of Payments, 2012-20
Est.Projections
201220132014201520162017201820192020
(In millions of U.S. dollars)
Current account balance−19−72−130−111−131−142−141−142−144
Trade balance−196−267−350−308−333−347−349−365−374
Total exports, f.o.b.622609589561576586608619633
Of which:
Oil1047051262421181513
Total imports, fob8188769398699099339579841,007
Of which:
Fuel and lubricants−124−125−137−82−89−98−106−111−115
Services220240285272282293318334351
Of which:
Travel261311308301315325332351346
Income−118−118−151−152−162−175−200−206−221
Of which:
Public sector interest payments 1/−39−22−37−38−39−39−49−49−47
Current transfers767386778386909699
Private (net)8077847985899397100
Official (net)−4−42−2−2−3−3−1−1
Capital and financial account balance8515517712811787666667
Capital transfers223836181515151515
Pu blic sector−95168313613−23−41−55
Of which:
Change in assets000000000
Change in liabilities−95168313613−23−41−55
Disbursements 2/3616586718160262322
Central government3616586718160262322
Amortization−41−98−41−40−45−47−49−64−77
Central government−31−89−35−37−43−46−47−63−76
Securitisation−3−1623000000
Private sector 3/7166738066597492106
Of which:
Foreign Direct Investment, net193899010910672737271
Of which: Repatriation of compensation 4/0000036363636
Errors and omissions−303334000000
Overall balance361168218−15−55−74−76−78
Financing−36−116−82−181555747678
Change in reserves (- increase)−36−116−82−181555747678
(In percent of GDP, unless otherwise stated)
Memorandum items:
Gross international reserves (US$ millions)289.0405.0486.8504.5489.9435.2360.8285207
In percent of gross external
financing needs47823828633527823019013894
In percent of next year’s total debt service261566645615575451324232172
In months of imports3.24.25.25.24.94.23.42.71.9
Current account balance−1.2−4.4−7.6−6.3−7.1−7.4−7.0−6.7−6.5
Trade balance−12.5−16.5−20.6−17.4−18.1−18.0−17.3−17.3−16.9
Capital and financial account balance5.49.610.47.36.34.53.33.13.0
Private sector4.54.14.34.53.63.13.74.44.8
Public sector0.95.56.12.82.71.5−0.4−1.2−1.8
Overall balance2.37.14.81.0−0.8−2.8−3.7−3.6−3.5
Sources: Central Bank of Belize; and Fund staff estimates and projections.

Includes partial coupon payment of US$11.7 million (out of full amount US$23 million) on the "super-bond", paid on September 20, 2012.

Includes the general and special SDR allocations in 2009.

Detailed data on private sector flows are not available.

Compensation to former owners of nationalized companies.

Sources: Central Bank of Belize; and Fund staff estimates and projections.

Includes partial coupon payment of US$11.7 million (out of full amount US$23 million) on the "super-bond", paid on September 20, 2012.

Includes the general and special SDR allocations in 2009.

Detailed data on private sector flows are not available.

Compensation to former owners of nationalized companies.

Table 5.Belize: Baseline Medium-Term Outlook, 2012-20
Est.Projections
201220132014201520162017201820192020
(Annual percentage change)
Real economy
GDP at constant prices3.81.53.62.23.23.02.62.52.4
Of which: Oil output−1.2−0.3−0.2−0.3−0.2−0.2−0.2−0.20.0
GDP at current market prices5.73.24.63.74.44.94.74.64.4
Prices (GDP deflator)2.41.71.01.51.21.82.02.12.0
Consumer prices (end of period)0.81.6−0.20.71.72.02.12.02.0
(In percent of GDP, unless otherwise indicated)
National accounts
Consumption84.886.387.786.287.086.885.785.685.1
Gross domestic investment 1/13.715.916.115.815.815.915.915.915.9
Net exports1.5−1.7−3.8−2.0−2.8−2.8−1.5−1.5−1.0
Gross national savings12.511.08.59.68.78.68.99.29.3
Central government 2/
Revenue and grants26.427.729.227.527.026.726.325.925.6
Of which: Non-oil revenue24.225.327.326.025.825.525.224.924.7
Total expenditure26.931.133.132.731.130.629.730.530.0
Noninterest expenditure25.127.930.430.128.226.525.324.924.6
Primary balance1.3−0.2−1.2−2.6−1.20.11.01.01.0
Interest 3/1.83.32.62.62.94.14.35.55.4
Overall balance−0.5−3.5−3.9−5.2−4.1−4.0−3.4−4.5−4.4
External sector
Current account balance−1.2−4.4−7.6−6.3−7.1−7.4−7.0−6.7−6.5
Of which: Exports of goods and services65.365.163.761.860.459.359.358.357.7
Of which: Petroleum exports6.64.33.01.51.31.10.90.70.6
Of which: Imports of goods and services−63.8−66.7−67.5−63.8−63.2−62.1−60.9−59.8−58.7
Capital and financial account5.49.610.47.36.34.53.33.13.0
Public sector disbursements2.310.25.04.04.43.11.31.11.0
Public sector amortization−2.6−6.0−2.4−2.3−2.4−2.4−2.4−3.0−3.5
Other capital and fin. account transactions 4/5.75.47.85.54.43.84.45.15.5
Change in reserves (- increase)−2.3−7.1−4.8−1.00.82.83.73.63.5
Gross official reserves (in months of imports)3.24.25.25.24.94.23.42.71.9
Public and publicly guaranteed debt 5/75.676.176.078.1101.198.897.997.096.1
Domestic10.610.210.112.736.536.439.543.046.8
External65.065.965.965.464.762.458.554.049.3
Sources: Belizean authorities; and Fund staff estimates and projections.

Excludes discrepancy in external savings from the balance of payments.

Fiscal projections are on a calendar year basis.

Excludes arrears in amount of missed coupon payment (US$11.3 million) on the "super-bond" in 2012.

Includes errors and omissions.

Includes repayment of additional liabilities to the former owners of BTL and BEL (at mid-point valuation between the authorities’ assessment and the claims of the former owners of the companies) and land claims in equal installments in 2016-20.

Sources: Belizean authorities; and Fund staff estimates and projections.

Excludes discrepancy in external savings from the balance of payments.

Fiscal projections are on a calendar year basis.

Excludes arrears in amount of missed coupon payment (US$11.3 million) on the "super-bond" in 2012.

Includes errors and omissions.

Includes repayment of additional liabilities to the former owners of BTL and BEL (at mid-point valuation between the authorities’ assessment and the claims of the former owners of the companies) and land claims in equal installments in 2016-20.

Table 6.Belize: Public and Publicly Guaranteed Debt Simulations, 2012-20
Est.Projections
201220132014201520162017201820192020
(In millions of U.S. dollars, unless otherwise indicated)
1. Public and publicly guaranteed debt
Total1,1891,2361,2921,3771,8621,9071,9802,0502,121
Other public and publicly guaranteed external debt583332313130303029
Central government1,1321,2021,2601,3451,8311,8771,9502,0202,092
Domestic debt1671651722246727037989081,033
External debt9651,0371,0881,1221,1591,1741,1521,1121,058
Multilateral253270278283291294293291290
Bilateral and export credit169240284296290282263242224
Commercial 1/542527527527527527527513485
New commercial borrowing (net)000175272706660
In percent of GDP
Total75.676.176.078.1101.198.897.997.096.1
Other public and publicly guaranteed external debt3.72.11.91.81.71.61.51.41.3
Central government71.974.074.276.399.597.296.595.694.8
Domestic debt10.610.210.112.736.536.439.543.046.8
External debt61.363.864.063.663.060.857.052.647.9
Multilateral16.116.616.416.015.815.214.513.813.1
Bilateral and export credit10.714.816.716.815.814.613.011.510.1
Commercial 1/34.532.431.029.928.627.326.024.322.0
(In percent of GDP, unless otherwise indicated)
2. Flow of funds
2.1. Sources of funds4.87.14.44.74.96.46.77.27.6
Primary balance1.50.2−1.0−2.3−1.5−0.20.80.90.9
Privatization proceeds0.00.00.00.00.00.00.00.00.0
Identified disbursements3.27.05.47.06.46.65.96.36.7
Multilateral1.62.41.61.51.71.51.21.11.0
Bilateral and export credit0.75.33.52.62.71.60.10.00.0
Commercial0.9−0.70.42.92.13.44.75.25.7
Domestic (net) 2/0.9−3.20.42.92.13.44.75.25.7
External 3/0.02.50.00.00.00.00.00.00.0
2.2. Use of funds
Debt service4.87.14.44.74.96.46.77.27.6
Interest payments2.81.62.42.52.64.04.44.34.1
Domestic0.40.40.30.40.52.02.02.02.0
External 3/2.41.32.12.12.12.02.42.32.1
Principal repayments2.05.52.02.12.32.42.33.03.5
Multilateral1.11.31.11.21.31.41.21.11.1
Bilateral and export credit0.90.90.90.91.01.01.11.21.1
Commercial, including parastatal0.03.30.00.00.00.00.00.71.3
Assumptions
Nominal GDP (US$ millions)1,5741,6241,6991,7631,8411,9312,0212,1142,207
Nominal GDP growth rate (percent)5.73.24.63.74.44.94.74.64.4
Real GDP growth rate (percent)3.81.53.62.23.23.02.62.52.4
Annual inflation (deflator, in percent)2.41.71.01.51.21.82.02.12.0
Assumed domestic borrowing rate (percent)0.00.00.00.00.00.00.00.00.0
Nominal external multilateral/bilateral borrowing rate (percent)1.71.41.31.42.23.23.23.23.2
Six-month LIBOR rate (percent) 4/0.70.40.30.41.22.22.22.22.2
Spread over LIBOR rate (percent)1.01.01.01.01.01.01.01.01.0
Memorandum items:
Overall central government balance (calendar year, percent of GDP)−1.3−1.5−3.4−4.8−4.1−4.2−3.6−3.3−3.2
Implicit nominal interest rate (percent) 5/3.72.33.33.53.44.24.64.54.5
Gross financing requirement (percent of GDP)3.27.05.47.06.46.65.96.36.7
Sources: Belizean authorities; and Fund staff estimates and projections.

Amortization of the "Superbond" commences in 2019 according to the initial repayment terms.

Includes repayment of additional liabilities to the former owners of BTL and BEL (at mid-point valuation between the authorities’ assessment and the claims of the former owners of the companies) and land claims in equal installments in 2016-2020.

Includes partial coupon payment of US$11.7 million (out of full amount US$23 million) on the "super-bond", paid on September 20, 2012.

Latest World Economic Outlook assumptions.

Interest on government debt in previous year divided by stock of debt.

Sources: Belizean authorities; and Fund staff estimates and projections.

Amortization of the "Superbond" commences in 2019 according to the initial repayment terms.

Includes repayment of additional liabilities to the former owners of BTL and BEL (at mid-point valuation between the authorities’ assessment and the claims of the former owners of the companies) and land claims in equal installments in 2016-2020.

Includes partial coupon payment of US$11.7 million (out of full amount US$23 million) on the "super-bond", paid on September 20, 2012.

Latest World Economic Outlook assumptions.

Interest on government debt in previous year divided by stock of debt.

Annex I. Belize: Debt Sustainability Analysis

Belize’s public debt will remain high and unsustainable because of recognition of liabilities and weak fiscal stance, and despite the cash flow relief provided by the March 2013 debt restructuring. The main risk is the amount of compensation that justice courts will order the government to pay for the two nationalized companies. As courts’ ruling remains uncertain, staff continues to assume the mid-point valuation of these companies. Other important risks include additional contingent liabilities from the financial sector, the fiscal cost of rebuilding central bank reserves, and shocks to the primary balance, the exchange rate and GDP growth. Belize is expected to rely massively on domestic financing as well as asset reductions to meet its gross financing requirements in the medium term as official external disbursements are projected to gradually decline and external commercial borrowing is expected to be very limited within the projection horizon. Refinancing risks are expected also to increase with rising gross financing requirements. External debt would gradually decline over the medium term mainly because of non-debt creating inflows and asset reductions (mostly reserves). The public debt burden underlines the need for ambitious fiscal consolidation, a more robust debt management, and the development of the domestic debt market.

Macroeconomic Framework

Economic growth is projected to remain relatively low at about 2.5 percent in the medium term. Non-oil commodity exports, tourism, and construction, coupled with low inflation will support moderate real output growth, and at same time offset the projected decline in oil production. However, growth will remain vulnerable to external and weather-related shocks that could further deteriorate the debt outlook. Improving the business environment and attracting FDI will be critical to improving growth prospects.

The recognition of contingent liabilities could raise the level of debt stock by 22 percent of GDP in 2016. Although the Court of Appeals has ruled that the nationalization of two utilities companies was constitutional, the amount of compensation to the former owners of the nationalized companies is still unsettled. The DSA assumes that the government recognizes the additional liabilities at end 2016 and compensation payments at BZ$726 million (20 percent of GDP)—the mid-point valuation between the authorities’ assessment and the former owners’ claims, including capitalized accrued interests since 2011 and assuming interest rates in the range 6–8 percent. It also assumes that the government utilizes the proceeds from the sale of BTL shares (BZ$75 million) to pay part of the compensation, and pays the remaining balance in five equal payments starting in 2017. The DSA finally assumes that the government also repays US$94 million (2 percent of GDP) in compensation to owners of land appropriated by the government.

Belize is expected to rely massively on domestic financing as well as asset reductions to meet its gross financing requirements in the medium term. Although the authorities may opt to issue new US$2,038 bonds up to a maximum US$75 million to pay part of the compensation, the DSA has assumed no new issuance of new U.S. dollar bonds given the uncertainties regarding the demand for these bonds. As a result, the bulk of projected financing would need to be covered by domestic borrowing, as official external disbursements are projected to gradually decline and external commercial borrowing is expected to be very limited within the projection horizon. Nominal interest of domestic borrowing is expected to increase (assumed between 5 and 8 percent) as public debt rises, increasing the nominal debt service burden. The DSA assumes that the government uses its assets, mainly international reserves, to pay debt.

Public Debt

The heat map suggests that the risks to debt sustainability remain high (Figure A1.1). Subjecting the baseline to stress testing indicate that Belize’s debt burden exceeds the benchmark for emerging markets. The heat map highlights significant risks to the debt profile, including contingent liabilities, market perception (high spreads), external financing requirements, the residency of debt holders, and the currency composition of Belize’s debt. The increasing share of short-term debt in total debt is not yet a major source of concern as its level is relatively low. The fan charts show the possible evolution of debt over the medium term under both symmetric and asymmetric distributions of risk. The asymmetric fan chart shows that public debt could reach 140 percent of GDP in the medium term.

Figure A1.1.Belize Public DSA Risk Assessment

Source: Fund staff estimates.

1/ The cell is highlighted in green if debt burden benchmark of 70% is not exceeded under the specific shock or baseline, yellow if exceeded under specific shock but not baseline, red if benchmark is exceeded under baseline, white if stress test is not relevant.

2/ The cell is highlighted in green if gross financing needs benchmark of 15% is not exceeded under the specific shock or baseline, yellow if exceeded under specific shock but not baseline, red if benchmark is exceeded under baseline, white if stress test is not relevant.

3/ The cell is highlighted in green if country value is less than the lower risk-assessment benchmark, red if country value exceeds the upper risk-assessment benchmark, yellow if country value is between the lower and upper risk-assessment benchmarks. If data are unavailable or indicator is not relevant, cell is white. Lower and upper risk-assessment benchmarks are:

200 and 600 basis points for bond spreads; 5 and 15 percent of GDP for external financing requirement; 0.5 and 1 percent for change in the share of short-term debt; 15 and 45 percent for the public debt held by non-residents; and 20 and 60 percent for the share of foreign-currency denominated debt.

4/ EMBIG, an average over the last 3 months, 18-Dec-13 through 18-Mar-14.

5/ External financing requirement is defined as the sum of current account deficit, amortization of medium and long-term total external debt, and short-term total external debt at the end of previous period.

There appears to be no systematic projection bias in the macro assumptions in recent years (Figure A1.2). In the past, staff projections of GDP growth and inflation have been on average close to outcomes, with the median forecast errors of 0 and -0.58 respectively percent during 2005–13. However, projections of the primary balance have been relatively pessimistic, with a median forecast errors of 0.91 percent of GDP during the same period. Nevertheless, staff’s projections of the primary balance have been more accurate in recent years.

Figure A1.2.Belize Public DSA - Realism of Baseline Assumptions

Source: Fund Staff estimates.

1/ Plotted distribution includes surveillance countries, percentile rank refers to all countries.

2/ Projections made in the spring WEO vintage of the preceding year.

3/ Not applicable for Belize.

4/ Data cover annual obervations from 1990 to 2011 for advanced and emerging economies with debt greater than 60 percent of GDP. Percent of sample on vertical axis.

Under the baseline scenario, Belize’s public debt will remain high and unsustainable because of recognition of liabilities and a weak fiscal stance (Figures A1.3 and A1.4). Public debt would experience a hike to 101 percent of GDP in 2016 as a result of an assumption that the courts would require that the government recognize liabilities in the amount of 20 percent of GDP to the former owners of the two nationalized utility companies. Debt is projected to decline slowly, owing to weak fiscal efforts under the baseline (primary surplus of only about 1 percent of GDP after 2018) and relatively low growth. At the primary surplus of 1 percent of GDP, it would take about 30 years to bring public debt to 60 percent of GDP, levels seen by the authorities and staff as sustainable. Financing conditions would gradually deteriorate, as public sector gross financing needs would increase to 28 percent of GDP by 2020 mainly due to the maturing principal of the additional liabilities from the nationalizations and high interest rates charged on domestic financing. Moreover, short-term debt is assumed to represent an increasing share of debt as the perceived riskiness of government paper increases. Finally, financing needs would rise even more starting in 2019, when the amortization of the new external bond starts.

Figure A1.3.Belize Public Sector Debt Sustainability Analysis (DSA) - Baseline Scenario

(in percent of GDP unless otherwise indicated)

Source: Fund staff estimates.

1/ Public sector is defined as central government.

2/ Based on available data.

3/ EMBIG.

4/ Defined as interest payments divided by debt stock (excluding guarantees) at the end of previous year.

5/ Derived as [(r - π(1+g) - g + ae(1 + r)]/(1+g+π+gπ)) times previous period debt ratio, with r = interest rate; π = growth rate of GDP deflator; g = real GDP growth rate; a = share of foreign-currency denominated debt; and e = nominal exchange rate depreciation (measured by increase in local currency value of U.S. dollar).

6/ The real interest rate contribution is derived from the numerator in footnote 5 as r - π (1+g) and the real growth contribution as -g.

7/ The exchange rate contribution is derived from the numerator in footnote 5 as ae(1+r).

8/ Data for 2016, refers to liabilities resulting from past nationalization of utilities.

9/ Large residuals in 2013 and 2014 are essentially accumulation of assets financed with PetroCaribe loans. Data for 2017, refers to use of government deposits to pay for part of the compensation of nationilized utilities.

10/ Assumes that key variables (real GDP growth, real interest rate, and other identified debt-creating flows) remain at the level of the last projection year.

Figure A1.4.Belize Public DSA - Composition of Public Debt and Alternative Scenarios

Source: Fund staff estimates.

Stress tests highlight the fact that that the public debt trajectory is highly vulnerable to various shocks (Figure A1.5). As 87 percent of total public debt was denominated in foreign currency at end of 2014, the debt profile is particularly sensitive to an exchange rate shock: a 10 percent real depreciation in 2014 combined with the baseline assumption of the recognition of additional liabilities related to nationalization (20 percent of GDP) would boost total public debt to 105 percent of GDP in 2016. A financial sector contingent liability shock that increases public spending by the equivalent of 10 percent of banking sector’s assets associated with recapitalization needs of a few banks would raise total public debt to 107 percent of GDP in 2015. The debt-to-GDP ratio is also highly sensitive to shocks in growth, interest rate, and the primary balance. The fiscal consolidation scenario aiming at a debt-to-GDP ratio of 84 percent by 2020 illustrates the magnitude of the fiscal adjustment needed: 4.5 percent of GDP compared to 0.5 percent on average over the medium term in the baseline scenario. This fiscal adjustment path proposed by staff would imply cyclically adjusted primary balances that are above 3 percent of GDP, putting Belize in the top quartile. The proposed fiscal adjustment is realistic as staff has identified feasible measures that would help achieve it, though the political situation could delay the adjustment.

Figure A1.5.Belize Public DSA - Stress Tests

Source: Fund staff estimates.

1/ One-time increase in non-interest expenditures equivalent to 10% of banking sector assets.

External Debt

The external debt ratio1 is projected to gradually decline over the medium term to around 50 percent of GDP by 2020 mainly because of non-debt creating inflows and asset reductions, mostly international reserves (Figure A1.6 and Table A1.1). External current account deficits would continue to put upward pressures on external debt. Bound tests suggest that external debt is mostly sensitive to nominal exchange rate devaluation and current account shocks. In particular, under a 30 percent depreciation of national currency, external debt would surge to 100 percent of GDP in 2016 and remain elevated at 80 percent of GDP in 2020. Further vulnerability stems from a non-interest current account shock that would boost the external debt to above 65 percent of GDP over the medium-term horizon. In light of limited options for external financing, high gross external financing needs—8 percent of GDP on average annually over the next 6 years—pose additional risk to the debt outlook.

Figure A1.6.Belize: External Debt Sustainability: Bound Tests 1/2/

(External debt in percent of GDP)

Sources: International Monetary Fund, Country desk data, and staff estimates.

1/ Shaded areas represent actual data. Individual shocks are permanent one-half standard deviation shocks. Figures in the boxes represent average projections for the respective variables in the baseline and scenario being presented. Ten-year historical average for the variable is also shown.

2/ For historical scenarios, the historical averages are calculated over the ten-year period, and the information is used to project debt dynamics five years ahead.

3/ Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and current account balance.

4/ One-time real depreciation of 30 percent occurs in 2010.

Table A1.1.Belize: External Debt Sustainability Framework, 2010-2020(In percent of GDP, unless otherwise indicated)
ActualEst.Projections
20102011201220132014201520162017201820192020Debt-stabilizing non-interest current account 6/
Baseline: External debt72.669.465.065.965.965.464.762.458.554.049.3−3.4
Change in external debt−4.7−3.2−4.40.90.0−0.5−0.8−2.3−3.9−4.5−4.7
Identified external debt-creating flows (4+8+9)−5.8−7.7−10.71.20.10.21.63.12.72.42.1
Current account deficit, excluding interest payments−0.2−1.8−1.23.25.54.15.05.34.54.44.4
Deficit in balance of goods and services−0.50.1−1.51.73.82.02.82.81.51.51.0
Exports58.463.465.365.163.761.860.459.359.358.357.7
Imports57.963.563.866.767.563.863.262.160.959.858.7
Net non-debt creating capital inflows (negative)−4.8−4.4−7.8−1.2−4.6−4.7−3.6−2.4−2.7−2.9−3.2
Automatic debt dynamics 1/−0.9−1.5−1.7−0.7−0.80.70.10.20.90.90.9
Contribution from nominal interest rate2.62.92.41.32.12.12.12.02.42.32.1
Contribution from real GDP growth−2.5−1.4−2.5−1.0−2.3−1.4−2.0−1.9−1.5−1.4−1.2
Contribution from price and exchange rate changes 2/−1.0−3.0−1.6−1.1−0.7
Residual, incl. change in gross foreign assets (2-3) 3/1.24.56.3−0.3−0.1−0.7−2.3−5.3−6.6−6.8−6.8
External debt-to-exports ratio (in percent)124.4109.599.5101.3103.5105.9107.0105.198.692.785.4
Gross external financing need (in billions of US dollars) 4/0.10.10.10.20.20.20.20.20.20.20.2
in percent of GDP4.93.83.810.510.08.59.69.89.49.710.0
Scenario with key variables at their historical averages 5/10-Year Historical10-Year Standard65.458.348.637.826.715.6−7.2
Key Macroeconomic Assumptions Underlying BaselineAverageDeviation
Real GDP growth (in percent)3.32.13.81.53.62.71.32.23.23.02.62.52.4
GDP deflator in US dollars (change in percent)1.34.32.41.71.02.22.11.51.21.82.02.12.0
Nominal external interest rate (in percent)3.64.23.72.03.44.41.53.43.43.34.04.14.1
Growth of exports (US dollar terms, in percent)12.115.68.92.82.47.711.10.72.13.04.62.73.4
Growth of imports (US dollar terms, in percent)3.616.76.27.95.86.710.1−1.93.53.02.62.72.6
Current account balance, excluding interest payments0.21.81.2−3.2−5.5−1.93.9−4.1−5.0−5.3−4.5−4.4−4.4
Net non-debt creating capital inflows4.84.47.81.24.67.23.84.73.62.42.72.93.2

Derived as [r - g - r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock, with r = nominal effective interest rate on external debt; r = change in domestic GDP deflator in US dollar terms, g = real GDP growth rate, e = nominal appreciation (increase in dollar value of domestic currency), and a = share of domestic-currency denominated debt in total external debt.

The contribution from price and exchange rate changes is defined as [-r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock. r increases with an appreciating domestic currency (e > 0), and rising inflation (based on GDP deflator).

For projection, line includes the impact of price and exchange rate changes.

Defined as current account deficit, plus amortization on medium- and long-term debt, plus short-term debt at end of previous period.

The key variables include real GDP growth; nominal interest rate; dollar deflator growth; and both non-interest current account and non-debt inflows in percent of GDP.

Long-run, constant balance that stabilizes the debt ratio assuming that key variables (real GDP growth, nominal interest rate, dollar deflator growth, and non-debt inflows in percent of GDP) remain at their levels of the last projection year.

Derived as [r - g - r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock, with r = nominal effective interest rate on external debt; r = change in domestic GDP deflator in US dollar terms, g = real GDP growth rate, e = nominal appreciation (increase in dollar value of domestic currency), and a = share of domestic-currency denominated debt in total external debt.

The contribution from price and exchange rate changes is defined as [-r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock. r increases with an appreciating domestic currency (e > 0), and rising inflation (based on GDP deflator).

For projection, line includes the impact of price and exchange rate changes.

Defined as current account deficit, plus amortization on medium- and long-term debt, plus short-term debt at end of previous period.

The key variables include real GDP growth; nominal interest rate; dollar deflator growth; and both non-interest current account and non-debt inflows in percent of GDP.

Long-run, constant balance that stabilizes the debt ratio assuming that key variables (real GDP growth, nominal interest rate, dollar deflator growth, and non-debt inflows in percent of GDP) remain at their levels of the last projection year.

Summary Assessment

Under the baseline scenario, Belize’s public debt will remain high and unsustainable because of the recognition of liabilities and a weak fiscal stance. Debt reduction is projected to be slow, owing to weak fiscal efforts under the baseline (0.6 percent of GDP primary surplus on average in the medium term), relatively low growth, and high interest rates. Liquidity conditions would gradually deteriorate, as public sector gross financing needs would increase to 31 percent of GDP by 2020 mainly due to maturing principal of the additional liabilities and high interest rate charged on domestic financing. Belize is expected to rely massively on domestic financing as well as asset reductions to meet its gross financing requirements in the medium term as official external disbursement is projected to gradually decline and external commercial borrowing is expected to be very limited within the projection horizon. Refinancing risks are expected also to increase with rising gross financing requirements. External debt would gradually decline over the medium term mainly because of non-debt creating inflows and asset reductions (mostly reserves). Bound tests highlight that the public debt trajectory is highly vulnerable to various shocks, especially on the exchange rate and contingent liabilities, including compensation for nationalized utilities and potential recapitalization needs of a few banks.

Strong fiscal consolidation efforts are essential to bringing public debt back to a sustainable long-run level. Recurrent debt restructuring episodes suggests that the country’s current debt level is not sustainable debt and it would be prudent for the authorities to adopt a more ambitious target around 50–60 percent of GDP for the medium to long term. In addition to fiscal adjustment, supporting policies to improve growth, deepen domestic financial market, and improve public debt management will also be essential to improve the debt outlook.

Annex II. External Stability Assessment

The external stability assessment suggests that the real exchange rate is moderately overvalued. The overvaluation seems to reflect largely fiscal policy gaps that are projected to generate widening current account deficits and net external indebtedness. International reserves appear at a comfortable level at present but are projected to decline below standard adequacy thresholds by 2018–19.

External stability is assessed using two different approaches: external stability (ES) and external balance (EBA-lite).These external stability tools are highly indicative for small countries like Belize and the results should be interpreted with caution. The ES approach assumes a gradual strengthening of the NFA position from -114 percent of GDP at end-2014 to -100 percent of GDP by 2024 in the baseline scenario and to -90 percent by 2024 in the alternative scenario. These NFA levels appear consistent with debt paths that are sustainable. Stabilizing NFAs at these levels would imply maintaining current account deficits of -3.2 percent of GDP per year in the baseline scenario and of -2.2 percent of GDP in the alternative scenario (Text Table). This implies an average overvaluation of about 10 percent in the baseline scenario and 12 percent in the alternative scenario (calculated as the average of the minimum and maximum REER adjustment needed during the period to align the current account with the norm).

Assessment of the Real Exchange Rate Using CGER and EBA-lite Methodologies(In percent of GDP, unless otherwise indicated)
External Sustainability Approach (ES)External Balance Assessment

(EBA-lite)
Baseline Reducing NFA to below -100 percent of GDP by 2024Alternative scenario Reducing NFA to below -90 percent of GDP by 2024Baseline
Equilibrium external
current account (CA) 1/−3.2−2.2−2.2
Underlying CA balance 2/[−6.3 -7.4][−6.3 -7.4]−6.3
CA elasticity to REER 3/−0.4−0.4−0.4
Implied REER adjustment 4/
(in percent, “+” appreciation)[−8 -11.7][−10.5 -14.4]−11.5

Equilibrium CA is defined as the CA that will bring NFA to the desired level in the ES approach and as the CA norm in the EBA-lite approach.

The values in brackets show the minimum and maximum projected current acount deficits in the 2015-20 period.

This elasticity is computed using the standard long-run real exchange rate elasticities for imports (0.92) and exports (-0.71), as well as the medium-term values of Belize’s exports and imports of goods and services (in percent of GDP).

The brackets indicate the mininum and maximum adjustment needed to bring the current account in line with the norm in the 2015-20 period.

Equilibrium CA is defined as the CA that will bring NFA to the desired level in the ES approach and as the CA norm in the EBA-lite approach.

The values in brackets show the minimum and maximum projected current acount deficits in the 2015-20 period.

This elasticity is computed using the standard long-run real exchange rate elasticities for imports (0.92) and exports (-0.71), as well as the medium-term values of Belize’s exports and imports of goods and services (in percent of GDP).

The brackets indicate the mininum and maximum adjustment needed to bring the current account in line with the norm in the 2015-20 period.

The external balance approach broadly confirms these results. The EBA-lite results point to a real exchange overvaluation of 11.5 percent, which is broadly consistent with the ES baseline result. EBA-lite is based on a multilateral approach that aims to identify the policy gaps contributing to the misalignment, which for Belize appear largely related to fiscal policy.

Both traditional and risk-weighted metrics indicate that reserves would decline below the adequacy thresholds in a few years. Standard non-risk based adequacy metrics suggest that without a policy adjustment, reserves would fall below 3 months of imports and below 20 percent cover of broad money by 2019 (see Text Table below). The two risk-weighted adequacy metrics suggest that reserves would fall below the comfortable adequacy region at end-2018. The first risk-weighted measure indicates that despite their current comfortable levels, reserves would represent only 87 percent of the adequate level at end-2018. The second risk-weighted measure, adjusted for small island developing states (SIDS), reveals a similar trend – although comfortably above the 75 percent benchmark at end-2014, reserve coverage would decline to 57 percent in 2018. These reserve pressures are to some extent generated by the expected increase in capital outflows from 2017 onward to cover the increase in external debt service and potential repatriation of compensation payments for the two nationalized companies. In light of the projected widening of the current account deficit and limited access to external financing, the decline in reserves after 2017 poses risks as the authorities would have to borrow at high interest rates to rebuild reserves.

Gross International Reserves and Adequacy Metrics

(US$ millions)
Ratios of Reserves to Optimal Reserves based on Various Measures(In percent)
Risk-Weighted Measure 1/SIDS Measure 2/3 months of Imports20% of Broad MoneyShort Term Debt
2013114771491641,169
2014131891701821,301
2015133901791821,175
2016124851681691,071
201710773145143916
20188757117114574
201967439086373
202048306460272
Adequate Region100-15075-100100100100

Risk-Weighted Measure = 30% of STD at remaining maturity + 15% of other portfolio liabilities + 10% of broad money + 10% of exports (goods).

SIDS = 95% of STD at remaining maturity + 10% of broad money + 35% of exports (goods and services).

Risk-Weighted Measure = 30% of STD at remaining maturity + 15% of other portfolio liabilities + 10% of broad money + 10% of exports (goods).

SIDS = 95% of STD at remaining maturity + 10% of broad money + 35% of exports (goods and services).

Annex III. Risk Assessment Matrix
Risk Assessment Matrix
Source of RisksRelative LikelihoodImpact if RealizedPolicy measures
HighHigh
1. Fiscal policy implementation: the adoption of a lower fiscal primary balance will leave the country in a highly vulnerable position.
  • Declining petroleum revenue, the increases in compensations for civil servants, and the rolling out of the national health insurance scheme and other spending pressures stemming from the political environment have reduced the likelihood of a significant improvement in the primary balance. Moreover, the authorities are of the view that deteriorating social, infrastructure, and security conditions constrain Belize from tightening the fiscal stance beyond the primary surplus target of 1 percent of GDP.

  • Debt will continue to increase in an unsustainable manner. Gross financing needs would rise sharply over the medium term. Securing such financing would be a challenge due to undeveloped domestic market and limited external market access.

  • Carry out fiscal consolidation gradually raising the fiscal primary balance to 4-5 percent of GDP by cutting non-essential spending, improving PFM, and raising more revenue by reducing exemptions and strengthening revenue administration.

HighHigh
2. Distress in the banking system.
  • Major Belizean banks have already received termination of correspondent banking relationships with U.S. banks and finding replacement correspondents is very difficult.

  • While declining, non-performing loans remain high, and while improving, provisioning remains relatively low. Some domestic banks, including the largest bank, which is of systemic proportions, still have low capital buffers, and raising new capital to avoid a deterioration of their capital adequacy ratios could be a challenge, increasing the risk of public sector intervention.

  • Financial intermediation could be damaged and seriously disrupt economic activity.

  • Absorption of the financial cost of recapitalizing distressed banks by the government could entail significant fiscal costs, putting additional pressure on public finances.

  • Temporarily allow banks to use the central bank platforms to process international transactions, while ensuring that appropriate AML/CFT due diligence measures are effectively implemented for these transactions by the banking sector as a whole..

  • Order undercapitalized banks to raise more capital, perform asset quality review of all banks, and maintain tight supervision.

HighHigh
3. Surge in contingent liabilities.
  • Courts still have to rule on the size, modality, and timing of the compensation the government has to pay to the former owners of the two nationalized utility companies. Payments could turn out to be closer to the claimants’(upper) valuation of about 30 percent of GDP. Moreover, nonresidents, who account for a significant portion of the compensation claims, would likely not roll over their debt holdings.

  • In addition to a possible intervention for the financial sector, the government may have to incur more external liabilities, just to build up reserves and support the current exchange rate peg should BOP pressures become more severe than envisaged.

  • Debt could suddenly increase by tens of percentage points of GDP because of the compensation for the nationalized companies, further threatening fiscal sustainability and aggravating refinancing risks as nonresident debt holders pull out.

  • Even though additional external borrowing was envisaged at the time of the 2013 debt restructuring, new external lending to Belize will likely be very costly. It will also further weaken debt sustainability and undermine investors’ confidence in the Belizean economy and the currency peg.

  • Support external stability by strengthening the competitiveness of key export sectors (sugar, banana, citrus, marine products).

  • Strengthen the business environment and improve physical infrastructure to attract greater domestic and foreign investment and support the development of small-and-medium-sized enterprises.

  • Create fiscal buffers through fiscal consolidation (see point 1).

HighHigh
4. Structurally week growth in key advanced and emerging economies
  • Weak demand and persistently low inflation from a failure to fully address crisis legacies and undertake structural reforms, leading to low medium-term growth and accumulation of financial imbalances.

  • Decline in tourism and exports. A weak recovery in advanced economies, especially in Europe could significantly undermine growth in Belize, restrain public finances, and put pressures on the BOP and reserves. Belize’s share of exports to Europe is very high.

  • Strengthen resilience to external demand shocks by diversifying the export mix to include a larger share of CARICOM countries.

  • Build fiscal and external buffers to offset a potential shock.

  • Broaden the sources of growth by diversifying into economic sectors that are less vulnerable to cyclical external shocks.

5. Persistent U.S. dollar strengthHighHigh
  • As the currency is pegged to the U.S. dollar, the real exchange rate would appreciate.

  • Export of goods and services would decline, and the external current account deficit would widen.

  • Carry out fiscal consolidation and reforms to boost external competitiveness and curb real exchange appreciation through external price competitiveness measures..

6. Persistently low energy pricesMediumMedium
  • Use savings from lower oil prices to build reserves and enhance external stability. Ensure a reliable pass through of lower international oil prices to domestic prices to stimulate demand and enhance competitiveness.

  • The external current account deficit would narrow, but PetroCaribe soft financing would likely come to an end.

  • A sustained decline in oil prices would lower the oil import bill, but the positive impact on BOP would be partially offset by lower PetroCaribe financing.

Annex IV. Social Security and Pension Plan for Public Officers

Left unreformed, the two public pension systems will continue to significantly drain the budget and pose additional rapidly rising fiscal risks.

There are two public pension schemes in Belize: the Social Security Scheme, and the pension plan for public officers (PPPO).

The general Social Security System (SSS) is a contributory, partially-funded, defined benefit scheme that is based on a scaled premium system. Contributions are adjusted over time to cover the expected cost of benefits and administration. It provides retirement pensions from age 60, drawing on contributions of at least 10 years, up to a maximum of 60 percent of the highest three years of earnings in the 15-year period preceding retirement. The 2012 actuarial report recommended that contributions and other parameters of the system, such as income ceilings and the retirement age, be adjusted to ensure the system’s sustainability.

Left unreformed, Social Security reserves would vanish by 2029, and the government would have to pay all pensions by a combination of budget allocations, sharp rise in contribution rates, and drastic cuts in pensions and benefits. This would obviously have deep social and political repercussions, affecting mostly the poorest part of the population. A reform of social security parameters raising the retirement pension age to 65 and contribution rated from 8 percent to 9.5 percent, combined with a reduction in administrative cost from 30 percent of total cost to 20 percent would rebuild Social Security reserves and reduce substantially pension and benefits,1 turning Social Security financially sustainable (Figure A4. 1).

Figure A4.1.Belize: Bring Social Security Back to Financial Sustainability

Sources: Fund staff estimates.

The PPPO is an unfunded, noncontributory defined benefit scheme. It provides retirement pensions from age 55 to public officers with at least 10 years of service, up to a maximum of 67 percent of the average earnings of the last three years of service. Pension benefits are adjusted in line with public employee salaries by the government. All expenses are covered by the central government budget. PPPO expenses amount to about 1.5 percent of GDP. By combining benefits from the SSS and PPPO, some categories of public officers may obtain combined replacement rates of more than 100 percent of their average salary.

The PPPO must be reformed to become fiscally sustainable. The government should carry out an awareness campaign explaining the risks of an unfunded pension for fiscal sustainability, and negotiate with the public sector unions a package of reform, including contributions that are in line with those in other countries and a higher retirement age.

Annex V. BOP Stress Tests

Although international reserves appear presently at a comfortable level, Belize is exposed to downside risks to external stability in the medium term. This annex assesses the resilience of the external position to large but plausible shocks to tourism, exports, oil prices, and a discontinuation of PetroCaribe financing. The results indicate that the external position is vulnerable to these shocks, which could worsen the external current account deficit on average by 4–9 percentage points compared to the baseline and largely deplete reserves by 2017–18.

Although the current level of reserves appears comfortable at 5 months of imports as of end-2014, the import cover is projected to decline below the standard adequacy threshold of 3 months of imports by 2019 under the baseline barring significant changes in current policies.

External risks under the baseline stem from sluggish growth of Belize’s agricultural exports (sugar, banana, citrus) against the backdrop of a steady decline in oil exports and strong demand for imports. The strengthening U.S. dollar could fuel real appreciation, while lower oil prices would reduce PetroCaribe financing. Expected shocks to the balance of payments in 2017 would also increase Belize’s external financing needs. First, the current account could be negatively affected by changes to regulations of the EU sugar market, which would make Belize’s sugar exports less competitive. Second, higher external debt service payments and a potential repatriation of compensation payments for the two nationalized utility companies would increase capital outflows from 2017 onward and would exert downward pressure on the capital and financial accounts.

Low export diversification is a source of risk to external stability. Foreign exchange earnings depend heavily on tourism, which represented about 35 percent of total exports in 2014. Tourism revenues are sensitive to developments in major source markets such as the U.S., which accounted for about two thirds of total tourist arrivals. In 2014, Belize’s largest export markets were the U.S. (35 percent) and the U.K. (29 percent). Export concentrations in the U.S. and U.K. markets render exports revenues exposed to cyclical fluctuations in these countries. Belize’s merchandise exports are concentrated in commodities, notably sugar (9 percent), banana (8 percent), marine products (9 percent), citrus (7 percent) and oil (8 percent) and are thus sensitive to commodity price fluctuations.

In light of the vulnerabilities above, the analysis examines four negative shock scenarios (deviations from the baseline) to Belize’s balance of payments. The first scenario applies a shock to the growth rate of tourism, triggered by a slowdown in the U.S. The second scenario assumes a broad-based slowdown across Belize’s export markets leading to a sharp decline in merchandise exports. The shocks reduce the baseline growth rate by 1.5 standard deviations in 2015 and 2016 (standard deviations are based on 5 years of historical data) and then revert to the baseline growth rate. The third scenario tests the BOP resilience to oil price shocks, which would increase the growth rate of international oil prices by 1.5 standard deviations in 2015 relative to 2014 and maintain oil prices unchanged afterward. The fourth scenario assumes that PetroCaribe financing is discontinued in 2015.

The results suggest that the external position is highly vulnerable to these negative shocks. The current account deficit widens notably under the tourism and export shock scenarios and reserves are largely depleted by 2017–18 (Text Table). Out of the four scenarios, the export shock leads to the largest deterioration in the external current account and reserves. The current account deficit widens to 16 percent of GDP under this scenario, and the import cover falls below 3 months of imports in 2016. The oil price shock also widens the current account deficit but the impact on reserves is mitigated somewhat by the resulting increase in Petrocaribe financing. The estimates also point to a significant negative impact of a withdrawal of Petrocaribe financing on international reserves.

Current Account Balance(In percent of GDP)
201520162017201820192020
Baseline−6.3−7.1−7.4−7.0−6.7−6.5
Tourism shock−9.0−14.2−14.4−14.0−13.7−13.3
Exports shock−15.6−16.3−16.2−15.7−15.2−14.9
Oil price shock−10.3−11.2−11.7−11.1−10.8−10.6
Gross International Reserves(In months of next year’s imports)
201520162017201820192020
Baseline5.24.94.23.42.71.9
Tourism shock4.73.11.2−0.9−3.0−5.1
Exports shock3.51.6−0.7−3.0−5.5−7.8
Oil price shock4.13.21.90.4−1.0−2.4
Discontinuation of PetroCaribe financing4.94.23.22.00.9−0.3
Source: Fund staff estimates.
Source: Fund staff estimates.
Annex VI. Belize’s Growth and Sustainable Development Strategy 2015–18

The Belizean authorities’ new Growth and Sustainable Development Strategy (GSDS) is a detailed implementation plan that translates the vision articulated in the long-term national development framework for 2010-30 (Horizon 2030) into specific goals and policy actions for the period 2015–18. The GSDS rests on three key pillars: a proactive role for the state, tapping into global markets, and innovative social policy.

Belize has undertaken the role of a “pilot country” within the United Nations (UN) system in sustainable development planning. Hence, the GSDS incorporates for the first time poverty reduction and long-term sustainable development issues, which are at the forefront of the UN newly developed “Sustainable Development Goals (SDGs)”.

The GSDS represents an integrated system of factors, conditions, and policy actions, centered on a single overarching objective—to improve the quality of life for all Belizeans both in the short-term and in the long-term. This objective is anchored in four “Critical Success Factors (CSF)” each linked to a set of “Necessary Conditions (NC)”. In order to ensure effective implementation, the GSDS proposes concrete policy actions linked to measurable targets:

CSF1: Optimal national income and investment. The first CSF aims to lift long-term GDP growth to 5 percent by improving productivity and competitiveness. Six related NCs seek to build workers’ capacity, use more efficient technology and operations, and achieve economies of scale and scope:

  • NC1: Penetrating export markets. The GSDS aims to maintain a positive growth trend in exports over the medium term by exploiting more fully market access agreements, enhancing market intelligence, improving compliance with export standards, increasing access to export financing, and improving export promotion.

  • NC2: Attracting foreign investments. The GSDS sets the objective of bringing FDI back to levels achieved in the three-year period prior to the global crisis and sustaining a positive real FDI growth thereafter. Belize’s attractiveness to foreign investors could be improved by reducing the cost and ease of doing business, including costs of inputs (energy, transportation and telecommunications); and combating crime. The GSDS places a special emphasis on raising field productivity in the sugar sector and aligning tax incentives with World Trade Organization agreements.

  • NC3: Effective industrial policy based on Belize’s strengths. The GSDS plans to raise productive efficiency by among other things overcoming the small scale and scope of production, introducing new economic activities, developing priority sectors (agriculture, agro-processing, tourism and energy), improving access to financing, promoting inclusive growth, encouraging innovation and investment in green technologies.

  • NC4: Enhancing market efficiency. The policies in this category focus on strengthening the regulatory framework of the utilities sector, reducing the informal sector, improving labor market flexibility, strengthening the financial system, and reducing the cost of financing.

  • NC5: Adequate infrastructure. The policies in this category aim to improve the road network, the sea ports, and airport infrastructure, as well as to promote investment in electricity generation capacity and renewable energy, and to strengthen the investment climate and regulation of the telecommunications sector.

  • NC6: Adequate human capital. The GSDS aims at attaining universal primary and secondary education and higher rates of successful school completion through increased school enrollment, enhancements in teaching effectiveness and quality, and better alignment of the school curriculum with labor market needs.

CSF2: Enhanced social cohesion and resilience. The second CSF seeks to eradicate poverty by 2030 and reduce homicides to fewer than 10 per 100,000 inhabitants, among other goals, including through improvements in access to healthcare and education, optimizing the provision of social security and social protection, improvements in working conditions and social inclusion.

CSF3: Sustained or improved health of natural, environmental, historical and cultural assets. The objective of the third CSF is to ensure adequate management of natural resources, disaster risk, climate change and protection of the environment.

CSF4: Enhanced governance and improved citizen security. The fourth CSF focuses on improving technical and political governance, addressing the social causes of crime and strengthening law enforcement and border control.

Implementation of the GSDS is coordinated by the Ministry of Finance and Economic Development. Monitoring is managed by inter-ministerial Working Groups chaired by the Statistical Institute of Belize and based on a set of performance indicators. The GSDS also introduces a prioritization framework that will evaluate the urgency, impact, availability of resources, and systemic contribution of policies to guide the budget allocations.

The GSDS considers both internal and external resource mobilization. Internal financing options include improving spending efficiency and revenue generation.

In order to strengthen GSDS implementation, a detailed follow-up plan could spell out specific measures to mobilize human and financial resources, both internal and external. The external financing strategy could usefully identify projects with high growth potential and propose concrete steps to mobilize resources available from international partners and through public-private partnerships.

By law, the liabilities will be in domestic currency. For a discussion of staff’s assumptions on the fiscal cost of the nationalized companies, see the staff reports for the 2013 and 2014 Article IV Consultations (IMF country reports nos. 13/227 and 14/280). The Caribbean Court of Justice (CCJ), which is the highest court on the matter, will issue its ruling any time on the constitutionality of the nationalization of one of the companies. It would take another 12–24 months for a ruling on compensation. The legal process for the other nationalized company has not yet started but staff assumes that the government will recognize its liabilities for the two nationalized companies around the same time. An out-of-court settlement is still possible for the two companies.

Banks are expected to maintain their exposure to the government mainly because of lack of alternative investment opportunities in the context of high liquidity and the inclusion of treasury bills in the computation of reserve requirements.

International experience highlights that successful large fiscal adjustments depend on political consensus as well as fiscal structural reforms. The recent Fund-supported program for Jamaica is an example of large fiscal adjustment that was sustained for two years. For an assessment of international experience, see G. Tsibouris, M. Horton, M. Flanagan, and W. Maliszewski (2006) “Experience with Large Fiscal Adjustments,” Occasional Paper, No. 246, International Monetary Fund.

Measures identified during the 2014 Article IV Consultation included freeze in real terms of goods and services, salaries reduction by attrition, contribution of public employees’ to their pension fund (10 percent of salaries), and adjusting pensions only with past inflation. These measures yielded annual savings of about 3 percentage points of GDP at the time of the 2014 Article IV Consultation. Since then, spending on goods and services and pensions and hiring in the public sector increased. Freezing spending on goods and services, reducing the wage bill by attrition only, and adjusting pensions with inflation would now yield much lower savings because of a higher starting point.

See SIP on the financial sector for additional progress.

For example, strengthening agribusiness and trade with Guatemala and Mexico, including through better ports and transport infrastructure, would require less than US$100 million in investments.

Belize Staff Report for the 2015 Article IV Consultation-Informational Annex, Statistical Issues, p. 12.

In the absence of data on private external debt, the external DSA was limited to external public debt.

Staff used the same actuarial and demographic assumption as in Hernando Pérez Montás 2012 Actuarial Review of the Social Security Scheme, July 2013 for the baseline scenario.

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