Our Belizean authorities would like to express their appreciation to the staff for their frank assessment of their economy and the helpful research conducted during the Article IV consultation. We agree with staff that the main policy issues facing Belize are ensuring financial stability, preserving external sustainability, and placing debt on a more firm downward path. However, in some instances our authorities continue to disagree with staff on what is the optimal policy mix to achieve these goals.
Fiscal Policy and Debt Sustainability
Similar to last year, our authorities are perplexed and disappointed that the report refers to Belize’s debt as unsustainable and they would strongly encourage staff to be more factual, and less editorial, in their assessments going forward. At 78.1 percent of GDP, the debt-to-GDP ratio is higher than the authorities (and staff) would consider prudent in the long term, but it is significantly lower than many other developing (and advanced) economies whose debt has been deemed sustainable by the Fund. Unfortunately, again this year staff seems to conflate having a debt-to-GDP above the desired level as equivalent to it being unsustainable, which it is not. While our authorities agree with staff that debt vulnerabilities are high over the medium term, and absent corrective action financing pressures could be exceptional, these risks are not sufficient to conclude debt is unsustainable at this point. Seemingly in contrast to staff’s conclusion, Belize’s debt path is downward sloping in every year of the projection scenarios put forth by staff, except of course for the year(s) that the costs associated with the nationalized entities are recognized.
With respect to the costs associated with the nationalizations, our authorities remain firmly of the view that staff’s passive assumption to use the midpoint valuation of the contingent liabilities for DSA purposes erroneously inflates Belize’s debt. The recent settlement of BEL at a level significantly below the mid-point valuation is evidence in support of this view. Given the importance such a determination by the Fund can have, every effort should be made to ensure accuracy and consistency across the membership. Moreover, when significant uncertainty is present, as is the case here, staff should more explicitly highlight these unknowns and exercise caution in reaching a definitive judgment.
Our authorities recognize the need for fiscal consolidation and have already started taking action. To begin, the relatively large fiscal expansion that accommodated increased infrastructure spending, financed at favourable rates with the support of funding from the Petro-Caribe arrangement, has run its course. Going forward, the Government of Belize has committed to use any additional financing available through Petro-Caribe to lower the debt burden on Belizeans through either a debt-buyback or to compensate the former owners of the nationalized companies. This is only a first step as our authorities are reviewing various revenue and expenditure measures, such as the structure of the GST and ways to rationalize the public wage bill, which will improve the primary balance and place debt on an even steeper downward trajectory.
Notwithstanding our authorities’ commitment to fiscal consolidation over the medium term, they once again strongly disagree with staff’s recommendation to engage in harsh fiscal austerity to achieve a primary balance of 4-5 percent. They continue to have legitimate concerns that such an exceptional amount of front-loaded fiscal austerity carries with it considerable opportunity costs in an economy requiring significant investment in physical and human capital to achieve its growth potential. Moreover, staff’s ‘gradual’ consolidation path, which still envisages a substantial frontloading of greater than 4 percent of GDP fiscal adjustment in a single year, is considered by our authorities to be economically disastrous as well as socially and politically destabilizing, which could in itself undermine securing much needed medium term multi-annual adjustment. Given recent high profile discussions within and outside the Fund on what is an achievable fiscal adjustment path and what are realistic estimates of fiscal multipliers, our authorities would have welcomed a more considered, country-specific, and achievable fiscal adjustment path to anchor staff’s active scenario. It is all the more surprising that staff did not explore a more growth-friendly medium-term path given the relatively negligible difference in debt-to-GDP between the austerity driven active scenario and the growth focused Plan B as evidenced by the end-point results shown in the table on page 12 of the report.
We thank the staff for highlighting the continued progress that has been made in repairing the financial sector and bolstering financial regulatory and supervisory frameworks. While staff rightly highlight remaining vulnerabilities in the financial sector related to NPLs, it is important to place these levels into context. NPLs have continued their multi-year trend decline while simultaneously banks have complied with the Central Bank of Belize’s mandate to increase loan-loss provisions, the results of which are clearly illustrated in Figure 4 of the staff report. Similarly steady progress has been made in addressing FSAP recommendations and the recent exit from CFATF’s follow-up and monitoring progress confirms the progress Belize has made on AML/CFT and other issues.
The recent and unexplained termination of correspondent banking relationships (CBR) for some banks operating in Belize has the potential to destabilize the financial system and have large negative spillovers, largely contained at present, for the real economy. The lack of justification for terminating these CBRs, and lack of transparency on what is required for their reactivation, is particularly problematic since it denies local authorities and domestic banks the opportunity to address the concerns that may have brought the termination of the CBR. Our authorities wish to highlight that this issue is not unique to Belize, with banks (and central banks) in several developing economies losing these important business relationships, thus leaving policy makers struggling in the dark with how to respond. Our authorities hold the view that the termination of the CBR is the unintended consequence of large financial institutions responding to a rapidly changing regulatory environment and supervisory enforcement in their home jurisdictions. In rightly addressing regulatory deficiencies, the relevant policy makers and authorities do not consider the appropriate treatment of CBR, the current situation could worsen the too-big-to-fail (TBTF) issue as it is small and medium-size domestic banks that are struggling to maintain relations and stay active, not large multinational financial conglomerates. This hollowing out of the financial sector in developing economies could bring with it not only important risks to financial stability, but also affect the real economy as it is often smaller banks and credit unions who are more willing to extend credit to SMEs and the productive sectors in their economy.
The Fund has a clear role to play in resolving the correspondent banking issue, which is affecting several of its members and has the potential to quickly worsen. We understand that a working group has been created within the Fund to address this issue and would invite staff to provide Directors with additional information on this group. Our authorities would like to stress that the Fund, not only as the leading international institution in this area but also as a spokesperson for many of its small and developing members who are not able to get the international attention this issues deserves alone, needs to be proactive in this area. Our authorities believe that the Fund’s role needs to go beyond researching the topic and monitoring its effects. Rather, we strongly encourage the Fund to engage collaboratively with affected members, large financial institutions, and systemically important regulators to develop a set of concrete rules based benchmarks that can assist policymakers in safeguarding and restoring normal financial relationships between domestic banks and international markets.
Growth and Prosperity
While Horizon 2030 sets the long-term objectives that will guide development efforts in Belize, the new Growth and Sustainable Development Strategy (GSDS) for the period 2015-2018 transforms these objectives into specific goals and policy actions for the next couple of years. With support from the UN, the GSDS is intended to be operational, rather than aspirational, and explicitly takes into account the fiscal and economic realities in Belize. As mentioned by staff one goal of the GSDS is to lift growth to an ambitious, but achievable average real output growth of 5 percent - a point acknowledged by staff in their alternative scenario analysis. Achieving this goal will require a multi-faceted approach that includes improving the investment and business climate, targeted growth-inducing investments in physical and human capital, maximizing the support from official sector partners, and targeting sectors such as agribusiness that have strong growth prospects. Actioning this achievable growth strategy as well as fostering and nurturing confidence in the economic prospects will be critical to its success. In this regard, our authorities are very much aware of the role that communications of the current situation and their plans will play in this regard.
The fixed exchange rate regime has served Belize well, providing an important macroeconomic anchor and price stability. Our authorities are closely monitoring developments in the current account and the medium-term risks that are resulting from declining oil exports and consistent current account deficits. Authorities recognize the need to close the current account deficit in the coming years, which is why expanding export markets and attracting foreign investments are explicitly highlighted as necessary conditions for the success of the GSDS. The change in the current account will not occur instantly, and our authorities are aware that an alternative path of austerity and import compression as advocated by staff yield quicker results on the Balance of Payments, but they remain of the view that this is not a lasting or sensible solution nor does it help Belize meet its development and poverty reduction goals.
Our authorities are in agreement with staff on the main vulnerabilities facing the Belizean economy, although long-standing disagreements on the policy actions required in some areas between themselves and staff remain. This should not be surprising given it mirrors a larger unsettled debate within the discipline of economics. That said, our authorities do feel that the Fund could better serve its role of a Trusted Advisor if more effort was made to take into account the need for small poor countries such as Belize to focus extra attention on growth and economic transformation through a well thought out structural reform agenda. Similarly, fiscal policy discussions could be improved, and traction potentially increased, if staff explored alternative fiscal scenarios instead of the unnecessarily harsh austerity path that has been put forth year after year and rejected as unrealistic and not conducive to achieving a sustainable shift in Belize’s growth trajectory.