Belize: 2021 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Belize
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1. Belize entered the pandemic with pre-existing vulnerabilities. Real GDP growth had slowed from 4.7 percent in 2000–09 to 2.8 percent in 2010–14 and 1.8 percent in 2015–19. Moreover, the economy was in recession when the pandemic hit, with real GDP contracting by 2.2 percent year on year in the last quarter of 2019 and 6.3 percent in the first quarter of 2020.

Abstract

1. Belize entered the pandemic with pre-existing vulnerabilities. Real GDP growth had slowed from 4.7 percent in 2000–09 to 2.8 percent in 2010–14 and 1.8 percent in 2015–19. Moreover, the economy was in recession when the pandemic hit, with real GDP contracting by 2.2 percent year on year in the last quarter of 2019 and 6.3 percent in the first quarter of 2020.

Pre-Pandemic Vulnerabilities

1. Belize entered the pandemic with pre-existing vulnerabilities. Real GDP growth had slowed from 4.7 percent in 2000–09 to 2.8 percent in 2010–14 and 1.8 percent in 2015–19. Moreover, the economy was in recession when the pandemic hit, with real GDP contracting by 2.2 percent year on year in the last quarter of 2019 and 6.3 percent in the first quarter of 2020.

2. The fiscal position had weakened before the pandemic, leaving Belize with limited fiscal space to respond to it. The fiscal deficit widened from an average of 1.1 percent of GDP in 2007–14 to 4.3 percent in 2015–19, led by a rise in public expenditures that was only partly offset by an increase in revenues. The primary balance also fell from 2.2 percent of GDP in 2007–14 to –1.5 percent of GDP in 2015–19. As a result, public debt, which had declined during the previous decade, rose from 78.9 percent of GDP in 2014 to 97.5 percent of GDP in 2019.

uA001fig01

Overall Fiscal Balance and Public Debt

(In percent of GDP)

Citation: IMF Staff Country Reports 2021, 103; 10.5089/9781513573113.002.A001

Sources: Ministry of Finance and Central Bank of Belize.

3. The external position had also worsened before the pandemic. The current account deficit increased from 4.7 percent of GDP in 2007–14 to 8.7 percent of GDP in 2015–19, which, together with the decline in the financial and capital account balances, reduced international reserves from US$487 million (29 percent of GDP) in 2014 to US$278 million (14.5 percent of GDP) in 2019. The net international investment position (NIIP) also deteriorated from –159 percent of GDP in 2014 to –174 percent of GDP in 2019.

uA001fig02

Current Account Balance and International Reserves

(In percent of GDP)

Citation: IMF Staff Country Reports 2021, 103; 10.5089/9781513573113.002.A001

Sources: Ministry of Finance and Central Bank of Belize.

The Pandemic Shock

4. Belize has been hit hard by the COVID-19 pandemic. The authorities were successful in containing the first wave of the pandemic through timely closures of schools and the international airport, and the adoption of a strict national lockdown during the second quarter of 2020. However, the country experienced a second wave starting in June 2020, which intensified in the last quarter of 2020. This wave has now been controlled, but it left the country with one of the highest numbers of cases and deaths per capita in the Caribbean (Figure 1).

Figure 1.
Figure 1.

Belize: COVID-19 Infections and Deaths

Citation: IMF Staff Country Reports 2021, 103; 10.5089/9781513573113.002.A001

5. The pandemic pushed the economy into a deep recession. Tourist arrivals declined by 72 percent in 2020, which had a large impact on the rest of the economy as tourism accounts for nearly 60 percent of all foreign exchange earnings and 40 percent of GDP (Figure 2). In addition, social distancing and the national lockdown hurt contact-intensive sectors. As a result, real GDP contracted by 14.1 percent in 2020, with larger declines in sectors such as hotels and restaurants, fishing, wholesale and retail trade, and transport and communication. Employment also suffered, declining by 15 percent year-on-year in the third quarter of 2020. Female employment was more affected, with a decline of 18 percent compared to a decline of 12.5 percent for males.1

Figure 2.
Figure 2.

Belize: Tourist Arrivals and Economic Activity

Citation: IMF Staff Country Reports 2021, 103; 10.5089/9781513573113.002.A001

6. The fiscal position has weakened further. The pandemic is estimated to have reduced government revenue by 4.5 percentage points of GDP in FY2020/21, while the necessary measures to contain the spread of the virus and support affected households and firms are estimated to have increased noninterest government expenditure by 2.6 percentage points of GDP. As a result, the primary deficit is estimated to have widened from 1.3 percent of GDP in FY2019/20 to 8.4 percent in FY2020/21, while public debt increased to 127.4 percent of GDP in 2020.

7. The external position has also weakened, although the current account balance and international reserves have been resilient. The NIIP is estimated to have declined to –200 percent of GDP in 2020 led by a rise in public external debt from 69 percent of GDP in 2019 to 88 percent in 2020. However, the current account deficit is estimated to have narrowed in 2020, despite the fall in tourism receipts, reflecting lower imports, higher remittances, and lower repatriation of profits from foreign owned businesses in Belize. In addition, government financing from bilateral and multilateral creditors increased and interest payments on the superbond were capitalized, which led to a rise in international reserves from US$278 million (3.5 months of imports) in 2019 to US$348 million (4.2 months of imports) in 2020.

8. Implementation of past Article IV recommendations slowed (Annex I). The authorities continued to implement some past recommendations, including investing in resilient infrastructure, raising the contribution rate of the general social security scheme (GSSS) by 0.5 percent in 2019 and 2020, preparing a national money laundering and terrorist financing (ML/TF) risk assessment, and examining the balance sheets of banks and credit unions. However, fiscal consolidation stalled, the 1 percent rise in the GSSS contribution planned for 2021 was deferred, and the creation of credit and collateral registries was delayed.

9. The opposition People’s United Party won the November 2020 general elections by a wide margin, securing 26 seats in the 31-seat House of Representatives. The new administration inherited a difficult economic situation, due to both long standing economic vulnerabilities and the impact of the COVID-19 pandemic. The large majority in parliament provides the government a unique opportunity to embark on an ambitious reform agenda and address long-standing structural bottlenecks that have constrained growth and weakened fiscal and external positions.

Outlook and Risks

10. The recovery from the pandemic is projected to be protracted, with real GDP regaining its 2019 level only by 2025. Tourist arrivals are expected to remain subdued in 2021 given still high levels of COVID-19 cases in Belize’s main trading partners and stringent requirements on passengers returning to the US. Belize will also remain exposed to the pandemic as it has secured vaccines for only about one-third of its population. Tourist arrivals are expected to pick up in 2022 as vaccines become widely available in advanced countries. As a result, real GDP growth is projected at 1.5 percent in 2021 and 6.2 percent in 2022, converging to 2 percent over the medium term.

uA001fig03

Real GDP index

(2019 = 100)

Citation: IMF Staff Country Reports 2021, 103; 10.5089/9781513573113.002.A001

Sources: Statistical Institute of Belize; and IMF staff estimates.

11. The fiscal and external positions are projected to remain weak over the medium term in staff’s baseline scenario, despite significant fiscal consolidation measures approved in the FY2021/22 budget. To strengthen the fiscal position, the FY2021/22 budget includes reductions of 10 percent in public sector wages and 30 percent on purchases of goods and services relative to the FY2020/21 budget, which is expected to reduce current expenditure by about 2 percent of GDP in FY2021/22. These measures, together with the unwinding of pandemic-related expenditure and the expected rebound of revenues to pre-pandemic levels, are projected to increase the primary balance from –8.4 percent of GDP in FY2020/21 to 0.8 percent from FY2023/24 onwards. As a result, public debt is projected to peak at 132 percent of GDP in 2021 and gradually decline thereafter to 111 percent in 2031.2 The high level of public debt is expected to limit Belize’s access to external financing going forward, leading to a decline in international reserves to below 3 months of imports or 100 percent of gross external financing needs starting in 2024.

12. Public debt is assessed as unsustainable in staff’s baseline scenario. Public debt is projected to remain well above the 70 percent of GDP threshold for sustainability in the debt sustainability analysis (DSA) framework (Figure 3). Gross financing needs are also projected to be higher than the 15 percent of GDP DSA threshold for sustainability in some years over the next decade even though it is assumed that the government will continue to borrow at low interest rates over the medium term (Annex II). Moreover, both public debt and gross financing needs could rise further if prominent downside risks to the outlook were to materialize.

Figure 3.
Figure 3.

Belize: Public Debt and Gross Financing Needs

Citation: IMF Staff Country Reports 2021, 103; 10.5089/9781513573113.002.A001

13. Risks to the outlook are substantial and remain tilted to the downside. A key risk is an intensification of the pandemic domestically and abroad (Annex III). Further spread of the pandemic in the US and Europe could delay the recovery of tourism, while further spread in Belize could lead to more stringent social distancing and hurt activity in contact-intensive sectors. There could also be delays in reaching widespread inoculation, further delaying the tourism recovery. Activity could also be disrupted by public sector workers protests against the reduction in wages. Belize also remains highly vulnerable to natural disasters. Materialization of some of these downside risks would further tighten financial conditions, weaken economic activity, delay the recovery of revenues, postpone the unwinding of pandemic-related expenditures, and accelerate the fall in international reserves. On the upside, rapid vaccine distribution could revive economic activity earlier than expected.

Authorities’ Views

14. The authorities agreed with staff’s views on the outlook and risks, and the assessment that public debt is unsustainable. They noted that the deep recession and necessary measures to contain the virus and support affected households and firms worsened the country’s debt position from already weak levels. Moreover, the debt situation will likely remain difficult going forward as the recovery from the pandemic is projected to be protracted, with sizable downside risks, especially regarding the evolution of the pandemic and natural disasters. In this context, they pointed to the significant fiscal consolidation measures included in the FY2021/22 budget, estimated at around 2 percent of GDP. According to their projections, these measures together with a strong recovery of revenues, are expected to reduce the primary deficit from 8.5 percent of GDP in FY2020/21 to 2.9 percent in FY2021/22. However, the authorities agreed that additional measures will be needed to restore debt sustainability.

Policy Discussions

Belize’s key policy priorities are restoring public debt sustainability and strengthening the currency peg, while providing near-term support to those affected by the pandemic. This will require a fine balancing act involving ambitious, yet realistic, fiscal consolidation, growth-enhancing structural reforms, and debt restructuring, all aimed at targeting a reduction of public debt to 60 percent of GDP by 2031. Such a strategy would also improve reserve adequacy and strengthen the currency peg.

A. Balanced and Sustained Fiscal Consolidation

15. A key priority is to implement a medium-term fiscal strategy aimed at restoring debt sustainability, while laying the groundwork for future adoption of a Fiscal Responsibility Law (FRL) with explicit fiscal rules. This strategy should include near-term fiscal support to those affected by the pandemic, accompanied by a consistent and credible multiyear fiscal consolidation plan that targets a reduction of public debt to 60 percent of GDP by 2031.3 Public commitment to this strategy would enhance its credibility. At the same time, the authorities should introduce necessary public financial management (PFM) reforms for future adoption of a well-designed FRL with explicit fiscal rules, which would strengthen the commitment to fiscal discipline.

16. Restoring debt sustainability requires a gradual and sustained additional increase in the primary balance. To strike a balance between supporting those affected by the pandemic and enabling a large public debt reduction over the medium term, the primary balance should be gradually raised to 3 percent of GDP in FY2024/25 and kept at this level until FY2031/32. Relative to staff’s baseline scenario, this requires a cumulative fiscal consolidation of 2.2 percent of GDP between FY2022/23 and FY2024/25 (Text Table 1), in addition to the measures contained in the FY2021/22 budget

Text Table 1.

Belize: Recommended Fiscal Consolidation Measures

(In percent of GDP, Deviations from Staff’s Baseline Scenario)

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Source: IMF staff estimates.

17. Fiscal consolidation should rely on both expenditure and revenue measures, while strengthening resilience and inclusion. Regarding expenditure, the authorities are appropriately focused on reducing the wage bill and purchases of goods and services in FY2021/22, which account for a larger share of GDP in Belize than in peer countries (Figure 4). Limiting the growth rate of these items to the inflation rate between FY2022/23 and FY2024/25 would further reduce the fiscal deficit. The authorities should also consider stablishing a natural disaster reserve fund and strengthening the social safety net. Staff recommends reducing expenditures by 0.2 percent of GDP in net terms between FY2022/23 and FY2024/25 relative to the baseline scenario, with consideration given to:

  • Limiting the increase of the wage bill, pensions, purchases of goods and services, and transfers and subsidies to the inflation rate between FY2022/23 and FY2024/25 would lower non interest current expenditure by 2.2 percent of GDP relative to the baseline scenario in three years.

  • In line with the recommendations in the 2018 Climate Change Policy Assessment (CCPA), Belize should gradually build a natural disaster reserve fund of 1 percent of GDP to finance immediate costs related to high frequency low severity climate change related events (see ¶26).

  • Increasing targeted social spending by 1 percent of GDP over three years would help strengthen the social safety net and increase support for the strategy to restore debt sustainability.

Figure 4.
Figure 4.

The Caribbean: Government Expenditure

Citation: IMF Staff Country Reports 2021, 103; 10.5089/9781513573113.002.A001

18. Revenue measures could contribute another 2 percent of GDP in savings over three years. Most of these savings would result from broadening the base and increasing the rate of the general sales tax (GST), with the rest resulting from reduced exemptions on personal income taxes (PIT), higher excise taxes, and improvements to revenue and customs administration.

  • Broadening the GST base by taxing some of the current zero-rated items at the standard rate, bringing the hotel sector into the GST, and raising the GST rate, could raise at least 1.5 percent of GDP in additional revenue over three years. The GST is a value added tax with a single rate of 12.5 percent, and several items levied at a zero rate, including processed foods, non-prescription drugs, utilities, appliances, items for household use, business inputs, and government purchases. Belize’s GST has a low rate relative to peers and does not cover the hotel sector, which is subject to a 9 percent tax levied on hotel room revenue administered by the Belize Tourism Board.

  • Lowering the PIT exemption threshold and taxing some exempted sources of income (pensions, capital gains, and interest income) could raise 0.2 percent of GDP in revenue over three years.

  • Increasing excise taxes and fees on vehicle registrations and driver licenses could raise revenues by another 0.1 percent of GDP over three years.

  • Strengthening revenue administration could increase revenue by 0.2 percent of GDP over three years• The Belize Tax Service (BTS) has been challenged with low filing and payment compliance, tax arrears, and refunds management To modernize the system, a new electronic information technology system is being introduced and a headquarters function is being established, with a large taxpayer office and program and planning functions. To raise revenues, the authorities should: (i) implement a tax compliance plan to improve filing and payments rates, starting with the largest taxpayers; (ii) increase audit capacity and implement a risk-based audit plan; (iii) increase tax arrears collection, (iv) build capacity at BTS by providing adequate staff and training, and (v) strengthen legislative provisions and instruments.

19. Execution of this consolidation path will be challenging given limited implementation capacity, political pressures, and uncertainty about the cyclical recovery of revenue. Belize will need to demonstrate resolve and commitment in undertaking the adjustment needed to restore debt sustainability and regain market confidence. Moreover, the adjustment required to reach the primary balance targets could be larger if the cyclical recovery of revenue is weaker than expected or if there are slippages relative to the FY2021/22 budget, including because of social tensions. In this context, it will be important to elaborate contingency plans in case the primary balance is not increasing as planned, including further hikes in the GST rate, tighter control of current expenditure, and cuts to public investment. Restoring debt sustainability with less ambitious fiscal consolidation will require larger efforts in other areas such as debt restructuring, while failure to restore debt sustainability would put the fiscal position and the currency peg at risk of disorderly adjustment.

20. PFM systems and procedures should be strengthened to make the rules-based fiscal framework more effective. Implementation of an FRL with explicit fiscal rules in the future would strengthen the commitment to restoring debt sustainability and make the debt reduction process more transparent. Its key features could include: (i) a public debt anchor of 60 percent of GDP by 2031; (ii) a gradual increase in the primary balance to 3 percent of GDP from FY2024/25 onwards; (iii) an escape clause for major shocks, such as natural disasters, triggered with Parliament approval; (iv) an automatic correction mechanism triggered by large cumulative deviations from the primary fiscal balance target; and (v) an independent fiscal council that produces unbiased forecasts and evaluates compliance with fiscal rules. Such a framework would require modernizing the PFM systems and procedures, including multi-year budget preparations, cash management, fiscal risk assessment, public investment management, and coverage of government accounts. In line with good practices, the authorities should publish beneficial ownership information and procurement contracts and ensure transparency and accountability in crisis-related spending, including COVID-related spending, and publish the audit report when it is available.

Authorities’ Views

21. The authorities agreed that restoring debt sustainability requires large and sustained fiscal consolidation. In addition to the measures included in the FY2021/22 budget, they intend to freeze non-interest current expenditure in FY2022/23 and FY2023/24 at the FY2021/22 budget level, which is equivalent to a fiscal consolidation of 3 percent of GDP in two years. The authorities expect that these measures and the continued recovery of revenues will increase the primary balance from –2.9 percent of GDP in FY2021/22 to 2 percent in FY2022/23 and around 3 percent over the medium term. They also expect that this increase in the primary balance, together with the implementation of structural reforms and debt relief from ongoing debt restructuring negotiations, will reduce public debt to below 70 percent of GDP by 2030. The authorities’ fiscal consolidation plan is similar in size to the one recommended by staff, but it relies mostly on freezing current expenditure and counts on a faster cyclical recovery of revenues. The authorities also noted the need to elaborate contingency plans given the high degree of uncertainty around the outlook and the cyclical recovery of revenue, for which they are considering broadening the base and raising the rate of certain indirect and land taxes.

22. The authorities concurred with the need to implement a medium-term fiscal strategy. As a new administration, their attention has been devoted to controlling the COVID-19 pandemic, providing support to those affected by the floods, and setting the policy priorities for FY2021/22. They now plan to elaborate a comprehensive medium-term fiscal strategy aimed at reducing public debt to sustainable levels, accompanied by a consistent and credible fiscal adjustment plan. They also intend to implement a Fiscal Responsibility Law with specific fiscal rules in the future once the necessary PFM reforms have been put in place.

B. Growth-Enhancing Structural Reforms

23. Belize needs to tackle long-standing barriers to growth. A key priority is to enhance the business climate by (i) establishing a credit bureau and a credit collateral registry to improve access to credit, especially for small and medium size enterprises (SMEs); (ii) easing registration processes for new businesses to enhance competition; (iii) reducing labor market rigidities to help businesses adapt to changing market conditions; (iv) improving education and technical training; and (v) reprioritizing government expenditure to protect infrastructure investment in key areas.

24. Crime is holding back entrepreneurship. Belize has one of the highest homicide rates in the Caribbean, which puts entrepreneurship at risk. Crime is also a deterrent for tourists and foreign direct investment when comparing destinations. Reducing crime requires expanding the use of surveillance technology and providing adequate resources to law enforcement and social programs that keep at-risk youth away from crime.

25. Building resilience to climate change and natural disasters would reduce volatility and boost growth. Belize is highly vulnerable to natural disasters and climate change, including floods, droughts, hurricanes, sea level rise, coastal erosion, and coral bleaching. In line with the advice in the 2018 Climate Change Policy Assessment, the authorities should elaborate a comprehensive Disaster Resilience Strategy, that internalizes resilience building into a credible macroeconomic framework, and focuses on three key areas: structural, financial, and post-disaster resilience.

  • Structural resilience. Investing in climate-resilient infrastructure is key, including in robust roads, bridges, and seawalls. Given limited fiscal space, it will be important to prioritize these projects and increase access to grants and climate funds. Strengthening building codes and land use regulations would further reduce vulnerability to weather shocks.

  • Financial resilience. A natural disaster reserve fund of 1 percent of GDP is needed to finance the response to high frequency, low severity events. For more severe events, a mix of ex-ante contingent lines of credit and participation in regional insurance mechanisms would be advisable, although this could be an expensive undertaking given the financing constraints.

  • Post-disaster resilience. Reforming social protection programs to scale up quickly after a disaster would speed up humanitarian relief. Reforming budget classification to capture disaster events of all magnitudes would help track, assess, and improve relief and reconstruction efforts.

Authorities’ Views

26. The authorities agreed with the structural reform priorities. They noted that boosting economic growth is a key priority for the new government. In this context, during FY2021/22 they plan to improve the ease of doing businesses by fast tracking the approval of strategic foreign direct investment projects and modernizing the laws on exchange control regulations, securities and capital markets, and insolvency. They also want to continue improving road connectivity for farmers to raise agricultural production and enhance the interconnectedness between the tourism and the agricultural sectors. Another priority is to reduce crime by making use of surveillance technology to support the efforts of law enforcement agencies and providing adequate resources to social programs that keep at risk youth out of crime. Finally, the authorities noted that strengthening resilience to climate change and natural disasters remains a priority, but actions in this area will remain constrained in the short term due to the country’s limited fiscal space.

C. Debt Dynamics and Restructuring

27. Implementation of the fiscal consolidation and growth-enhancing structural reforms discussed above would not be sufficient to lower public debt to 60 percent of GDP by 2031. Increasing the primary balance to 3 percent of GDP from FY2024/25 onwards and raising potential growth by 0.5 percent over the medium term would lower public debt to 83 percent of GDP in 2031 (Text Table 2, Active Scenario). Moreover, these projections are subject to substantial uncertainty and materialization of downside risks to the outlook could result in higher debt levels.

Text Table 2.

Belize: Staff’s Baseline and Active Scenarios, 2019–2031

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Source: IMF Staff estimates.

The active scenario assumes the implementation of a fiscal consolidation package of 2.2 percent of GDP over three years, which increases the primary balance to 3 percent of GDP from 2024 onwards. It also assumes an average fiscal multiplier of -0.9 (-0.5 in the first year and -0.2 in the second and third years), in line with the estimates in Chapter 4 of the April 2018 Regional Economic Outlook: Western Hemisphere. This scenario also assumes the implementation of growth-enhancing structural reforms that lift growth by 0.5 percent over the medium term.

28. The authorities have recognized the critical nature of their financial situation and are executing needed remedial measures. In addition to fiscal consolidation and structural reforms, they have approached their external private sector creditors to seek another restructuring of the superbond with the goal of reducing the face value of this debt, not just debt service relief as in the past. They are also reviewing other types of public debt for possible savings.

D. Monetary and Financial Policies

29. Belize’s external position is assessed as substantially weaker than justified by medium-term fundamentals and desirable policies. The external stability and EBA lite approaches indicate that the current account deficit is larger than its estimated equilibrium level (Annex IV). In addition, the NIIP is projected to remain highly negative over the medium term, with reserve adequacy deteriorating in line with a more limited access to external financing. Failure to address these imbalances increase the risk of disorderly external adjustment.

30. Reducing external imbalances and strengthening the currency peg requires successful implementation of the strategy to restore debt sustainability. The authorities see the currency peg as a key macroeconomic anchor. In this context, reducing external imbalances requires restoring debt sustainability through balanced and sustained fiscal consolidation, growth-enhancing structural reforms, and debt restructuring, which would also reduce the current account deficit and increase international reserves (Text Table 2, Active Scenario). Strengthening the currency peg also requires limiting government financing by the Central Bank of Belize (CBB) over the medium term, which in staff baseline scenario is projected to rise from 13 percent of GDP in 2020 to 26 percent by 2031, with concomitant risks of higher inflation and widening external imbalances.

31. Financial soundness indicators (FSI) suggest that the banking system remains stable, which partly reflects regulatory forbearance introduced by the CBB in 2020.4 Domestic banks entered the pandemic with abundant liquidity, healthy profitability, and capital buffers well above regulatory minimums. FSI deteriorated in 2020, but not significantly so. Return on assets fell from 2 percent in 2019 to 0.4 percent in 2020, while non-performing loans (NPLs) to total gross loans rose from 5.1 percent in 2019 to 7.7 percent in 2020. Regulatory capital to risk weighted assets declined from 22.8 percent in 2019 to 19.8 percent in 2020 but remained well above the 9 percent regulatory minimum. The worsening in FSI was mitigated by forbearance measures introduced by the CBB in 2020, including (i) reductions in the liquid asset and cash reserve requirements by 2 percentage points to 21 percent and 6.5 percent, respectively; (ii) a decline in risk weights for tourism based loans from 100 percent to 50 percent; and (iii) an extension of the period to classify NPLs in sectors such as restaurants and transportation and distribution, from 3 months to 6 months.

32. Safeguarding financial stability remains a priority. A slow recovery from the pandemic could accelerate the erosion in asset quality in the banking sector, resulting in a surge in NPLs and large credit losses, especially for banks more exposed to vulnerable sectors. Banks took advantage of the regulatory forbearance introduced in 2020 and restructured about 27 percent of their loan portfolio, which represents a significant balance-sheet risk going forward as a fraction of them could turn into NPLs if the economic recovery is slower than expected. Going forward, it will be important to maintain loan classification and provisioning rules to appraise the banks’ potential credit losses accurately, phase out forbearance measures and loan deferrals by banks, and strengthen prudential standards and AML/CFT supervision including enforcement of sanctions for non-compliance. The authorities should continue to restrict dividend payments to enhance bank resilience and conduct a comprehensive third-party asset quality review as the economy recovers from the pandemic.

33. An effective mitigation strategy is needed to tackle the integrity risks related to the international financial services (IFS) sector. The Economic Substance Act enacted in 2019 requires international business corporations (IBCs) to pass the “substantial economic presence” test, which also applies to IFS practitioners licensed by the International Financial Services Commission (IFSC). While greater presence of IFS practitioners in Belize would facilitate IFSC’s oversight, the extent to which implementation of the law will lead to that remains to be seen after the grace period for compliance expires in June 2021. In this context, it will be important to understand the ML/TF risks associated with the IFS sector and develop an appropriate mitigating strategy, including by conducting a cost-benefit analysis of the international business sector and ensuring effective supervision by the IFSC. Information on beneficial ownership should be centralized to ensure that accurate and up-to-date data is easily accessible. The approach to virtual assets should be based on risks identified, while unauthorized virtual asset service providers should be identified and sanctioned. With these measures Belize would be better placed to undergo the comprehensive evaluation of its AML/CFT regime by the Caribbean Financial Action Task Force in 2023.

Authorities’ Views

34. The authorities confirmed the risks to financial stability due to asset quality erosion caused by the pandemic. The CBB noted that the forbearance measures introduced in 2020 helped facilitate the restructuring of about 27 percent of the banks’ loan portfolio by providing a grace period for the payment of interest or principal, or changing the interest rates and maturity of the loans. Although banks continue to have adequate capital levels against a moderate increase in NPLs, stress test performed by the CBB indicate that if a significant fraction of the restructured loans become NPLs, some banks could face moderate shortages of capital. Regarding AML/CFT issues, the authorities noted that a national ML/TF risk assessment has been concluded and an action plan developed to address the weaknesses identified.

Staff Appraisal

35. Belize has been hit hard by the Covid-19 pandemic. Although the pandemic is now under control, the country has one of the highest numbers of COVID-19 cases and deaths per capita in the Caribbean. The pandemic also led to a marked decline in tourist arrivals and reduced activity in contact-intensive sectors, resulting in a contraction in real GDP of 14.1 percent in 2020 and a deterioration of the fiscal and external positions from already weak levels.

36. The recovery is projected to be protracted, while the fiscal and external positions are projected to remain weak over the medium term despite some significant fiscal consolidation measures approved in the FY2021/22 budget. Real GDP is projected to grow by 1.5 percent in 2021 and 6.2 percent in 2022, regaining its 2019 level only by 2025. The primary fiscal balance is projected stabilize at 0.8 percent of GDP over the medium term, with public debt remaining above 110 percent of GDP in the next decade, a level assessed as unsustainable. Reserve adequacy is also projected to weaken over the medium term, falling below 3 months of imports starting in 2024.

37. The key policy priorities are to restore public debt sustainability and strengthen the currency peg, while providing near-term support to those affected by the pandemic. This requires a fine balancing act involving ambitious, yet realistic, fiscal consolidation, growth-enhancing structural reforms, and debt restructuring, all aimed at targeting reduction of public debt to 60 percent of GDP by 2031. This strategy would also strengthen reserve adequacy.

38. A credible medium-term fiscal strategy would signal commitment to fiscal discipline. This strategy should include near-term support for those affected by the pandemic and a consistent multi-year fiscal consolidation plan that targets a gradual rise in the primary balance to 3 percent of GDP from FY2024/25 onwards and a reduction of public debt to 60 percent of GDP by 2031.

39. The authorities will need to demonstrate resolve in executing this strategy. They took an important step with the approval of significant consolidation measures in the FY2021/22 budget. However, executing these measures and future consolidation plans will be challenging given limited implementation capacity, political pressures, and uncertainty about the cyclical recovery of revenue. The authorities should also consider improving the quality and composition of their adjustment plan by relying on both revenue and expenditure measures and allocating extra resources to enhancing resilience to natural disasters and improving the social safety net. There is also a need for contingency plans to support the fiscal consolidation efforts if the reduction of public debt is not proceeding as expected, including additional revenue and expenditure measures.

40. Reducing public debt over the medium term also requires implementing growth-enhancing structural reforms. Key priority areas include strengthening the business climate by improving access to credit for SMEs, reducing entry barriers, and enhancing infrastructure; reducing crime by providing adequate resources to law enforcement and social programs; and building resilience to climate change and natural disasters by adopting a Disaster Resilience Strategy that focuses on improving infrastructure, financial, and post-disaster resilience.

41. Restoring public debt sustainability would also help reduce external imbalances and strengthen the currency peg. Belize’s external position is assessed as substantially weaker than the level implied by medium term fundamentals and desirable policies. Reducing the current account deficit to its equilibrium level and improving international reserve adequacy over the medium term requires balanced and sustained fiscal consolidation, growth-enhancing structural reforms, debt restructuring, and lower government reliance on central bank financing.

42. Safeguarding financial stability and strengthening the AML/CFT framework remain priorities. Key priorities include maintaining loan classification and provisioning rules to appraise the banks’ credit losses accurately, phasing out forbearance measures and loan deferrals by banks, and strengthening prudential standards as the pandemic recedes. Efforts to strengthen AML/CFT supervision of banks should continue and sanctions for non-compliance should be enforced. The authorities should also prioritize reforms to mitigate the ML/TF risks stemming from the IFS sector.

43. It is recommended that the next Article IV consultation take place on the standard 12-month cycle.

Figure 5.
Figure 5.

The Caribbean: Government Revenue

Citation: IMF Staff Country Reports 2021, 103; 10.5089/9781513573113.002.A001

Table 1.

Belize: Selected Social and Economic Indicators 2018–2026

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

Fiscal year (April to March).

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

Including official grants.

Table 2a.

Belize: Operation of the Central Government 1/2/

(In millions of Belize dollars, unless otherwise indicated)

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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.

Excludes assumption of UHS debt by the government in FY 2017/18 (2.5 percent of GDP).

On calendar year basis. Public debt includes central government debt as well as external financial and non-financial public sector debt.

Table 2b.

Belize: Operations of the Central Government 1/2/

(In percent of GDP; unless otherwise indicated)

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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.

Excludes assumption of UHS debt by the government in FY 2017/18 (2.5 percent of GDP).

Table 3a.

Belize: Balance of Payments

(In millions of US dollars, unless otherwise indicated)

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

Detailed data on private sector flows are not available.

Compensation to former owners of nationalized companies.

Table 3b.

Belize: Balance of Payments

(In percent of GDP, unless otherwise indicated)

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

Detailed data on private sector flows are not available.

Compensation to former owners of nationalized companies.

Table 4.

Belize: Operations of the Banking System

(In millions of Belize dollars, unless otherwise indicated)

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

Includes Central Government’s foreign assets.

Includes SDR allocation.