Belize: 2022 Article IV Consultation-Press Release; and Staff Report
Author:
International Monetary Fund. Western Hemisphere Dept.
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Publication Date:
10 May 2022
eISBN:
9798400208652
Language:
English
Keywords:
GDP series; expenditure measure; cyclical recovery; GDP target; reprioritizing expenditure; Fiscal consolidation; Fiscal stance; Global
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1. The COVID-19 pandemic had a severe impact on Belize in 2020. It led to a 71 percent drop in tourist arrivals and a 16.7 percent decline in real GDP in 2020. The resulting fall in revenues and rise in pandemic-related expenditure widened the fiscal deficit to 10.3 percent of GDP in FY2020 and increased public debt to 133 percent of GDP in 2020, a level that was assessed as unsustainable during the 2021 Article IV consultation.1 To address this situation, the new government, in office since November 2020, presented a Medium-Term Recovery Plan (MTRP) that seeks to lower public debt to 85 percent of GDP in 2025 and 70 percent in 2030 through the implementation of fiscal consolidation, growth-enhancing structural reforms, and debt restructuring.2

Abstract

1. The COVID-19 pandemic had a severe impact on Belize in 2020. It led to a 71 percent drop in tourist arrivals and a 16.7 percent decline in real GDP in 2020. The resulting fall in revenues and rise in pandemic-related expenditure widened the fiscal deficit to 10.3 percent of GDP in FY2020 and increased public debt to 133 percent of GDP in 2020, a level that was assessed as unsustainable during the 2021 Article IV consultation.1 To address this situation, the new government, in office since November 2020, presented a Medium-Term Recovery Plan (MTRP) that seeks to lower public debt to 85 percent of GDP in 2025 and 70 percent in 2030 through the implementation of fiscal consolidation, growth-enhancing structural reforms, and debt restructuring.2

Context

1. The COVID-19 pandemic had a severe impact on Belize in 2020. It led to a 71 percent drop in tourist arrivals and a 16.7 percent decline in real GDP in 2020. The resulting fall in revenues and rise in pandemic-related expenditure widened the fiscal deficit to 10.3 percent of GDP in FY2020 and increased public debt to 133 percent of GDP in 2020, a level that was assessed as unsustainable during the 2021 Article IV consultation.1 To address this situation, the new government, in office since November 2020, presented a Medium-Term Recovery Plan (MTRP) that seeks to lower public debt to 85 percent of GDP in 2025 and 70 percent in 2030 through the implementation of fiscal consolidation, growth-enhancing structural reforms, and debt restructuring.2

2. Encouraging progress towards restoring debt sustainability was made in FY2021. In line with the MTRP, the government introduced large fiscal consolidation measures in FY2021, including a 3 percent of GDP reduction in noninterest current expenditure, led by cuts to public sector wages, subsidies and current transfers, and a 2.4 percent of GDP cut to capital expenditure. The government also completed a model debt for marine protection swap with The Nature Conservancy (TNC), which reduced public debt by 12 percent of GDP. Under this pathbreaking debt swap, a subsidiary of TNC lent funds to Belize to buy back the superbond (external debt with private creditors amounting to US$553 million or 30 percent of GDP) at 55 cents per dollar (Annex I). In exchange, Belize committed to spend US$4.2 million per year on marine conservation until 2041 and expand its Biodiversity Protection Zones (coral reefs, mangroves, and fish spawning sites) from 16 percent of ocean area to 30 percent by 2026. It also established an endowment fund of US$23.5 million to fund marine conservation after 2041. These initiatives will also support the authorities’ efforts to strengthen resilience to natural disasters and climate change and reduce greenhouse gas emissions.

3. The policies implemented by the authorities in FY2021 were aligned with staff advice (Annex II). The authorities implemented sizable fiscal consolidation measures, completed a novel debt for marine protection swap, and eased the process to register businesses and property using digital technologies. However, progress with other growth-enhancing structural reforms has been more limited, including those aimed at strengthening the resilience to natural disasters and climate change. The central bank’s approach to exit pandemic-related forbearance measures in the financial system and strengthen the Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) framework has also been aligned with staff recommendations.

4. The COVID-19 pandemic is currently under control. Belize experienced a third wave of the pandemic in early 2022, driven by the omicron variant. The 4-week cumulative cases peaked at 18,000 on February 2, about three times previous peaks, but have fallen to less than 500 since late March. The number of deaths remained moderate through this period as the Omicron variant was less lethal than previous variants and due to increased vaccination. About 52 percent of Belize’s population is fully vaccinated (a fifth of which has received a booster) and 6.5 percent has received one dose. The authorities aim to vaccinate 70 percent of the population, but vaccination of children younger than 12 has not yet been approved and vaccine hesitancy remains a problem.

Figure 1.
Figure 1.

Belize: COVID-19 Cases, Deaths, and Vaccination

Citation: IMF Staff Country Reports 2022, 133; 10.5089/9798400208652.002.A001

Recent Developments, Outlook, and Risks

5. Economic activity is recovering strongly from the slump in 2020. Real GDP expanded by 9.8 percent in 2021 and is projected to grow by 5.7 percent in 2022 and 3.4 percent in 2023, led by the recovery of tourism. The impact on growth from the war in Ukraine is expected to be modest as most tourists come from the United States, although tourism could be hurt by higher airfare and accommodation costs. The unemployment rate declined from 13.7 percent in 2020 to 10.2 percent in 2021 and is projected to fall to 8.2 percent in 2022. End of year inflation increased sharply from 0.3 percent in 2020 to 4.9 percent in 2021 driven by higher global energy and food prices and is projected at 5.2 percent in 2022 as the war in Ukraine and related economic sanctions keep global energy and food prices elevated, which is partly mitigated by the currency peg to the US dollar, the recent caps on diesel and regular gasoline prices to be achieved by adjusting the specific taxes on these fuels, and subsidies to public transportation to limit the increase in tariffs.

Figure 2.
Figure 2.

Belize: Real GDP Growth and Tourist Arrivals

Citation: IMF Staff Country Reports 2022, 133; 10.5089/9798400208652.002.A001

6. The fiscal position improved significantly in FY2021 due to the strong economic recovery and fiscal consolidation. The primary balance rose from –8.5 percent of GDP in FY2020 to 1.7 percent of GDP in FY2021, led by a 4.8 percent of GDP cyclical recovery of revenues plus grants and a 5.4 percent of GDP fall in noninterest expenditure due to fiscal consolidation. However, the primary balance is projected to decline to –0.1 percent of GDP in FY2022 partly due to measures adopted to mitigate the impact of higher global fuel prices on the economy, including a 0.7 percent of GDP cut in specific taxes on fuel and a 0.1 percent of GDP subsidy to public transportation to limit the rise in tariffs. Other factors reducing the primary balance in FY2022 are a 0.2 percent of GDP fall in revenue due to the reopening of borders; a 0.5 percent of GDP drop in grants; and a 0.2 percent of GDP rise in the wage bill partly driven by the restitution of last year’s 10 percent cut to public sector wages from July 2022. Afterwards, the primary balance is projected to increase to 0.7 percent of GDP in FY2023 as the measures adopted to limit the rise in fuel prices expire, and to decline gradually to 0.4 percent of GDP in FY2032 as grants continue to decline as percent of GDP and assuming that no additional fiscal consolidation is implemented during FY2022-32.3

7. Debt dynamics have improved significantly, but public debt would continue to be assessed as unsustainable in the absence of additional measures. Public debt declined from 133 percent of GDP in 2020 to 111 percent of GDP in 2021 due to the strong economic recovery, the smaller fiscal deficit, and the debt for marine protection swap, and is projected to fall to 85 percent of GDP by 2032 in line with the continued primary surpluses. Gross financing needs (GFN) are also projected to fall from 13.2 percent of GDP in 2021 to below 10 percent during 2022-32. However, staff would continue to assess Belize’s public debt as unsustainable in the absence of additional measures as it would remain above the 70 percent of GDP threshold for sustainability over the next 10 years even in the baseline scenario (Annex III). Moreover, debt dynamics would remain highly vulnerable to shocks to growth, interest rates, and the fiscal position.

Figure 3.
Figure 3.

Belize: Public Debt and Gross Financing Needs

Citation: IMF Staff Country Reports 2022, 133; 10.5089/9798400208652.002.A001

8. The external position improved in 2021 but is expected to worsen going forward. The current account deficit widened in 2021 due to strong import growth and higher commodity prices, but external financing rose more, increasing international reserves from US$348 million (3.8 months of imports) in 2020 to US$420 million (4 months of imports) in 2021 partly due to the IMF’s SDR25.6 million (US$36 million) allocation, which the authorities are keeping as reserves. The current account deficit is projected to remain elevated during 2022-23 in line with high global energy and food prices, moderating somewhat over the medium term. This, plus potentially scarcer external financing due to debt sustainability concerns, is expected to worsen reserve adequacy over time.

9. Risks to the outlook are substantial and tilted to the downside (Annex IV). A key risk is an intensification of the pandemic domestically and abroad, including through the emergence of new vaccine resistant variants, which could derail the recovery of tourism and hurt activity in contact intensive sectors. On the upside, further vaccination may strengthen immunity and growth. Another key risk is the de-anchoring of US inflation expectations, which could tighten global financial conditions and increase the cost of external financing for Belize, although the risk of capital outflows is mitigated by the limited access to the external capital markets. Natural disasters are also a key risk given Belize’s high vulnerability to weather shocks and climate change. Inflation could rise further because of second rounds effects and higher global energy and food prices stemming from the war in Ukraine and related economic sanctions.

Authorities’ Views

10. The authorities agreed with the views on the outlook and risks, and the assessment that public debt would remain elevated without additional measures. They noted the marked improvement in the fiscal position and the large fall in public debt in 2021 driven by the strong economic recovery, fiscal consolidation, and the debt for marine protection swap. They expect these trends to continue, with real GDP growth projected at 6 percent in 2022-23 led by the recovery of tourism. However, they agreed that public debt would remain elevated without additional measures and stressed their commitment to achieve the debt targets in the MTRP. The FY2022 budget targets a primary surplus of 0.4 percent of GDP in FY2022 and projects primary surpluses of about 2 percent of GDP between FY2023 and FY2026, which together with the rebasing of GDP to be released in May 2022, would lower public debt to below 85 percent of GDP in 2025 and below 70 percent of GDP in 2030.4 They also stressed the significant risks to inflation from global food and energy prices and the war in Ukraine, which led them to introduce a temporary reduction in specific taxes for diesel and targeted fuel subsidies for eligible bus and tour operators to limit the rise in tariffs.

Policy Discussions

Belize’s key policy priority is to restore debt sustainability, which would also strengthen the currency peg. This requires preserving the fiscal savings achieved in FY2021, ensuring that the measures adopted to mitigate the rise in fuel prices in FY2022 are temporary, and implementing additional fiscal consolidation and growth-enhancing structural reforms with the objective of reducing public debt to 60 percent of GDP by 2031. Given implementation challenges and large downside risks to the outlook, it will be important to prepare contingency plans in case public debt does not decline as expected.

A. Balanced and Sustained Fiscal Consolidation

11. The authorities should capitalize on the recent decline in public debt and continue their efforts to restore debt sustainability. Staff recommends reducing public debt to 60 percent of GDP by 2031—a slightly more ambitious target than the one in the MTRP—to ensure that public debt remains below the 70 percent of GDP threshold for sustainability even when the economy is hit by shocks. To achieve this target, staff recommends gradually raising the primary fiscal balance to 2.5 percent of GDP by FY2025 and keeping it at 2 percent of GDP afterwards. In this context, it will be key to preserve the fiscal savings achieved in FY2021 and to ensure that the measures adopted to mitigate the rise in fuel prices in FY2022 are temporary, which would keep the primary balance at about 0.6 percent of GDP over the medium term.5 The authorities will also need to implement 1.9 percent of GDP of additional fiscal consolidation over three years to reach the FY2025 primary balance target (Text Table 1). Anchoring this plan in a credible medium-term fiscal strategy with clear targets and specific measures and preparing the ground for the adoption of a well-designed Fiscal Responsibility Law (FRL), would enhance the credibility of this strategy.

Text Table 1.

Belize: Recommended Fiscal Consolidation Measures

(In percent of GDP, Deviations from Staff’s Baseline Scenario)
article image
Source: IMF staff estimates.

Contingency fund to finance the response to frequent low severity weather related events.

Expenditure on healthcare, education, and targeted social programs such as Building Opportunities for Our Social Transformation (BOOST), Food Pantry, and Conditional Cash Transfers.

12. Fiscal consolidation should rely on both revenue and expenditure measures. Following the implementation of expenditure-based fiscal consolidation in FY2021 and a temporary relaxation in FY2022, the authorities should consider rebalancing the composition of fiscal consolidation towards revenue mobilization while reprioritizing expenditure as follows:

  • Revenue. Broadening the tax base and strengthening tax administration could raise revenue by 2 percent of GDP over three years. The General Sales Tax (GST) has several items taxed at a zero rate, including processed foods, non-prescription drugs, utilities, appliances, household items, business inputs, and government purchases. Taxing some of them at the standard 12.5 percent rate could raise 1.5 percent of GDP in revenue by FY2025.6 Standardizing the Personal Income Tax exemption thresholds at BZ$20,000 could add 0.2 percent of GDP in revenue, while raising excise taxes and fees on vehicle registrations and driver licenses could add 0.1 percent of GDP. Strengthening tax administration could add 0.2 percent of GDP by adopting a tax compliance plan to improve filing and payment rates, starting with the largest taxpayers and sectors less affected by the pandemic; enhancing audit capacity; increasing tax arrears collection; building capacity at Belize Tax Services; and implementing an integrated tax administration system.

  • Expenditure. Staff recommends containing noninterest current expenditure while raising social and resilience expenditure. The authorities should consider capping the increase in noninterest current expenditure to inflation during FY2023-25, which would keep its real value unchanged while reducing its ratio to GDP by 1.4 percent by FY2025. They should also consider increasing social expenditure (healthcare, education, and targeted social programs such as Building Opportunities for Our Social Transformation (BOOST), Food Pantry, and Conditional Cash Transfers) by 1 percent of GDP over four years and creating a natural disaster contingency fund with adequate safeguards of 1 percent of GDP over four years in line with the recommendations in the 2018 Climate Change Policy Assessment (CCPA).

13. The authorities plan to reform the Pension Plan for Public Officials (PPPO) in FY2022. In addition to the standard pension benefits accrued through the General Social Security Scheme (GSSS), public officials also receive pension benefits from the PPPO, an unfunded defined-benefit noncontributory system with a low retirement age of 55 years. PPPO payments totaled 2.6 percent of GDP in FY2021 and are expected to increase over time. The authorities plan to make the PPPO a defined contribution system, in which both employer and employee pay contributions to individual accounts from which the pension benefits would be paid. In addition, the PPPO retirement age would be raised to 60-65 years in line with the GSSS. Government expenditure would increase in the near term as in addition to pension benefits, the government will also have to pay contributions to the public officials’ individual accounts. However, significant savings would be achieved over the long term once the transition to the new pension system has been finalized.

14. Contingency plans should be prepared in case public debt does not decline as planned. Implementing additional fiscal consolidation will be challenging given limited capacity and political pressures. Moreover, the fiscal adjustment required to reach the primary balance targets could be larger if the government needs to extend or implement additional measures to mitigate the impact of higher global energy and food prices, revenues underperform, the economy is hit by adverse shocks, or the pension reform leads to larger than expected increases in public expenditure in the near term. In this context, it will be important to prepare a menu of contingency measures that could be implemented if public debt does not fall as expected, including raising the GST rate, broadening the GST base and cutting nonpriority expenditure beyond the recommendations above, taxing property and capital gains, and restructuring public debt. On the upside, the required fiscal adjustment could be smaller if the economy grows faster than anticipated.

15. Efforts to modernize Public Financial Management (PFM) systems and procedures should continue. The authorities are implementing initiatives to strengthen public expenditure management, including on cash management, public debt, internal audit, and technology. They are also enhancing procurement to promote economies of scale and competitiveness among suppliers in the acquisition of all goods and services. Additional PFM areas to be strengthened going forward include multi-year budget preparations, fiscal risk assessment, public investment management, coverage of government accounts, and accounting and fiscal reporting. Progress in these areas would facilitate future implementation of an FRL with explicit fiscal rules to strengthen the commitment to fiscal discipline. In line with good practices, the authorities should publish procurement contracts and beneficial ownership information of awardees and publish the audit reports of pandemic-related expenditures to ensure transparency and accountability.

Authorities’ Views

16. The authorities reiterated their commitment to the MTRP’s public debt to GDP targets. To strike a balance between restoring debt sustainability and expanding priority spending, they are aiming at a primary surplus of 0.4 percent of GDP in FY2022, which would allow for the restitution of the 10 percent cut to public sector wages adopted in FY2021 and a temporary reduction in specific taxes on diesel and kerosene to partly offset the sharp increase in global energy prices. Afterwards, they aim to raise the primary surplus to 2 percent of GDP during FY2023-26 by containing current expenditure, broadening the tax base, and strengthening revenue administration. These efforts will be supported with the implementation of measures to strengthen PFM systems and procedures. The authorities agreed that contingency plans are needed in case public debt does not fall as expected and noted that the government continues to look for opportunities to reduce debt and debt service. They stressed their intention to make the PPPO a defined contribution system with a higher retirement age, and noted that the contribution rate to GSSS was increased by 1 percentage point on April 1, 2022, in line with the actuarial recommendations.

B. Growth-Enhancing Structural Reforms and Climate Change

17. Belize should accelerate the implementation of growth-enhancing structural reforms. Boosting growth through reforms that improve the business environment would reduce the amount of fiscal consolidation needed to restore debt sustainability. The authorities have eased the process and reduced the time required to register property and businesses using digital technologies, and introduced a new securities law to ensure a fair, efficient, and transparent capital market. Improving the business environment further requires easing access to credit for Small and Medium Size Enterprises (SMEs) through the launch of the credit bureau and the collateral registry; reducing entry barriers for businesses; enhancing human capital to reduce skill mismatches, especially in tourism and business process outsourcing; upgrading infrastructure such as farm to market roads; and containing crime by providing adequate resources to law enforcement, expanding surveillance capacity, and expanding social programs that keep youth at risk away from crime. As fiscal space is limited, advancing this agenda will require reprioritizing public expenditure.

18. Efforts to strengthen the rule of law should continue. Belize has improved its rule of law in recent years, including by adopting a Property Transaction Tax Bill that replaced the previous stamp duty process. The digitalization of the land registry is also planned but subject to securing external funding. However, the country still ranks low in global rule of law rankings. The system for the protection of property rights and enforcement of contracts has systemic problems, including inefficiencies, vulnerabilities to corruption, lack of resources, and uneven application of legal guarantees. Legislative and institutional reforms are planned in the judiciary system to improve its capacity and efficiency in deciding on commercial cases. It is important that these reforms are in line with international standards on independence and efficiency of justice systems. Public access to secondary legislation and judicial decisions is also a challenge and should be addressed.

19. Belize has an ambitious climate change mitigation and adaptation plan, but financing remains elusive. Reducing greenhouse gas (GHG) emissions and strengthening resilience to natural disasters and climate change are key priorities for the government as highlighted in the updated Nationally Determined Contribution (NDC) of August 2021, which presents the country’s ambitious targets and actions on mitigation and adaptation for the period 2021-30 (Annex IV), as well as their costs and large financing gaps. The main initiatives are as follows:

  • Mitigation. Reduce cumulative GHG emissions by 5,647 KtCO2e between 2021 and 2030 by protecting and restoring forests, mangroves, and seagrass ecosystems; expanding renewable energy generation; reducing the use of conventional transportation fuel; and enhancing energy efficiency. The cumulative cost of these plans during 2021-30 is estimated at US$1390 million (75 percent of Belize’s GDP in 2021), of which only US$150 million have been secured.

  • Adaptation. Increase resilience to natural disasters and climate change by reversing net coastal habitat and land loss; developing an early warning system for extreme weather events; using drought tolerant crops and livestock breeds; building capacity in the fishing and aquaculture sectors; developing climate resilient planning frameworks and infrastructure in the tourism sector; protecting forests and biodiversity; safeguarding water catchment areas, and improving the management of existing water supply systems. The cumulative cost of these actions during 2021-30 is estimated at US$318 million (17 percent of Belize’s GDP in 2021), of which US$172 million have been committed.

20. Adoption of a Disaster Resilience Strategy (DRS) would enhance access to financing. Belize should continue seeking funding for its mitigation and adaptation plans from bilateral and multilateral creditors, the Green Climate Fund, and The Conservation Fund. The institutional framework created as part of the government’s debt for marine protection swap with TNC can help enhance access to these sources of financing. Access to financing would be enhanced further with the swift adoption of a DRS that focuses on improving structural, financial, and post-disaster resilience, and is based on a consistent multi-year macro-fiscal framework.

21. Financial and post disaster resilience should be strengthened as recommended in the 2018 CCPA. Belize has continued strengthening structural resilience by upgrading its infrastructure and restoring natural habitats, but there has been less progress strengthening financial and post disaster resilience due to the country’s limited fiscal space. While legislation creating a natural disaster contingency fund for frequent low severity events has been passed, no funds have been allocated to it. The government has a contingent credit line with the IDB to cover losses from more severe events, but it is insufficient. Belize needs to expand the coverage of parametric insurance and other contingent financing, and reform its social protection safety net to scale up quickly after a disaster. Advancing this agenda will also require reprioritizing expenditure.

Authorities’ Views

22. The authorities agreed with the structural reform priorities. Boosting economic growth and enhancing private sector productivity is a key priority for the government. Accordingly, they fast tracked the approval of key foreign direct investment projects in 2021 and are working with the IDB to operationalize a one-stop window for foreign and domestic investment approvals. They are also modernizing the laws on exchange controls, securities, and capital markets, and advancing the implementation of e-government infrastructure, which would facilitate the payment of taxes and other transactions with the government. Road connectivity for farmers is being improved to raise agricultural production and enhance the interconnectedness with the tourism sector. Crime reduction remains a priority, including by expanding social programs that keep at risk youth out of crime and enhancing surveillance. The authorities are optimistic they can secure external financing for their ambitious agenda on mitigation and adaptation to climate change and agree that adoption of a DRS focused on improving structural, financial, and post-disaster resilience would facilitate these efforts, and thus plan to move in that direction going forward.

C. Illustrative Reform Scenario

23. Implementation of the fiscal consolidation measures and structural reforms discussed above, together with the rebasing of GDP, would reduce public debt to 60 percent of GDP by 2031. Raising the primary balance to 2.5 percent of GDP by FY2025 and keeping at 2 percent of GDP afterwards, and implementing structural reforms that raise growth by 0.5 percent over the medium term, would lower public debt to 72.3 percent of GDP by 2031 when using the current GDP series (Table 2, Active Scenario), or to around 60 percent of GDP when using a preliminary estimate of the rebased GDP series (i.e., a 20 percent increase in nominal GDP relative to the current series).

Text Table 2.

Belize: Recommended Fiscal Consolidation Measures

(In percent of GDP, Deviations from Staff’s Baseline Scenario)
article image
Source: IMF Staff estimates.

The active scenario assumes the implementation of 1.9 percent of GDP in fiscal consolidation over three years, which gradually increases the primary balance to 2.5 percent of GDP in FY2025 and to 2 percent of GDP during FY2026-32. It also assumes a fiscal multiplier of -0.5 in line with the estimates in Chapter 4 of the April 2018 Regional Economic Outlook: Western Hemisphere. Finally, the active scenario assumes the implementation of growth-enhancing structural reforms that lift growth by 0.25 percent in 2026 and 0.5 percent during 2027-32.

D. Monetary and Financial Policies

24. Although Belize’s external position improved in 2021, it remains weaker than justified by medium-term fundamentals and desirable policies. Foreign reserves rose by US$61 million to US$409 million in 2021, despite some widening of the current account deficit, led by higher external financing and the IMF’s SDR25.6 million (US$36 million) allocation. However, reserve adequacy is expected to weaken over time as the current account deficit remains elevated due to high global energy and food prices and external financing declines due to concerns about debt sustainability. Moreover, the External Stability and External Balance Assessment (EBA-lite) approaches indicate that the current account deficit is larger than its estimated equilibrium level (Annex V).

25. In the absence of exchange rate flexibility, reducing external imbalances requires implementing policies to restore debt sustainability. The authorities and staff see the currency peg as a key macroeconomic anchor that should be preserved. In this context, reducing external imbalances and strengthening the currency peg requires restoring public debt sustainability by preserving the fiscal savings achieved in FY2021, ensuring that the recent measures to mitigate the rise in fuel prices are temporary, and implementing additional fiscal consolidation and growth- enhancing structural reforms as discussed above. These measures would also lower the current account deficit, enhance access to external financing, and improve reserve adequacy over time. Strengthening the currency peg also requires limiting government financing by the Central Bank, which continued to increase in nominal terms in 2021, although not as percent of GDP.

26. Domestic banks seem well capitalized and with contained nonperforming loans (NPLs), but this could change as the expiration of the forbearance measures introduced in 2020 begins to impact their balance sheets. Regulatory capital remains well above minimum requirements, while NPLs remain manageable at 5 percent of loans. However, this partly reflects forbearance measures adopted in 2020 to mitigate the impact of the COVID-19 pandemic in the economy, which expired on December 31, 2021. The Central Bank requested domestic banks and credit unions to self-assess their loan portfolio by February 2022, which are now being reviewed before agreeing on a plan going forward with each institution. In this context, it will be important that any agreed exceptional measures are time-bound and targeted, and financial institutions resume the regular classification and restructuring procedures. There is also a need to intensify the on-site supervision for risk identification and control. The government increased the Central Bank’s capital by 0.5 percent of GDP in FY2021 to support this process. Efforts to strengthen the enforcement of AML/CFT requirements on banks should be pushed forward, including by developing guidelines on issuing sanctions to enhance the effectiveness of AML/CFT supervision.

27. The authorities must continue strengthening the AML/CFT framework and its implementation, especially in the international financial services (IFS) sector, to be prepared for the 2023 mutual evaluation by the Caribbean Financial Action Task Force. The authorities have finalized their first national assessment of money laundering and terrorist financing (ML/TF) risks and have developed an action plan to strengthen their AML/CFT framework. They intend to update both in the coming months to strengthen ML/TF risks mitigation. Policy priorities should include: (i) centralizing information on beneficial ownership so that accurate and up-to-date data is easily accessible under the legal framework for domestic and international corporations; (ii) deepening the understanding of the ML/TF risks in the sector to inform a cost-benefit analysis of the existing regulatory and supervisory framework; (iii) increasing the resources and capacity of the Financial Services Commission (FSC) to properly license, regulate and supervise all IFS licensees, and imposing dissuasive and proportionate penalties when breaches are identified; and (iv) introducing legal reforms to implement AML/CFT standards on virtual assets and virtual asset services informed by a sound risk assessment and resource considerations, and proactively identifying and sanctioning licensees falsely claiming to hold a license to provide virtual asset-related services. Advancing these reforms will help protect the country’s correspondent banking relationships.

Authorities’ Views

28. The authorities are taking a measured approach to implementing the withdrawal of forbearance measures. Following the expiration of the forbearance measures on December 31, 2021, the Central Bank requested domestic banks and credit unions to assess their loan portfolios by end-February 2022, dividing loans among viable, viable with restructuring, and unviable. The Central Bank is currently reviewing these self-assessments and will agree on a plan going forward with each institution, with the view that any extended measures should be time-bound and targeted. The Central Bank expects that most banks and credit unions will be able to absorb their losses, but some may need Central Bank support, which was part of the reason for the recent recapitalization of the Central Bank by the government. Regarding AML/CFT issues, the authorities are committed to full implementation of the recommendations of the national ML/TF risk assessment.

Staff Appraisal

29. The COVID-19 pandemic had a severe impact on Belize in 2020. Real GDP contracted by 16.7 percent and public debt increased to 133 percent of GDP, a level assessed as unsustainable during the 2021 Article IV Consultation. To address this situation, the government adopted a MTRP aimed at reducing public debt to 85 percent of GDP in 2025 and 70 percent of GDP in 2030 through the implementation of fiscal consolidation, structural reforms, and debt restructuring.

30. Significant measures aimed at restoring debt sustainability were implemented in 2021. In line with the MTRP, the government implemented sizable fiscal consolidation measures, including cuts to public sector wages, subsidies and current transfers, and capital expenditure. As a result, noninterest expenditure declined by 5.4 percent of GDP. Belize also completed a novel debt for marine protection swap with TNC, which not only reduced public debt by 12 percent of GDP in 2021, but also expanded the area of ocean to be protected and secured financing for the protection of the marine environment going forward. The swap will also support the authorities’ efforts to strengthen resilience to natural disasters and climate change and lower greenhouse gas emissions.

31. Economic activity is recovering strongly, and the fiscal position has improved. Real GDP grew by 9.8 percent in 2021 and is projected to grow by 5.7 percent in 2022 and 3.4 percent in 2023, led by the continued recovery of tourism. End of year inflation rose to 4.9 percent in 2021 and is projected at 5.2 percent in 2022 due to high global energy and food prices. The primary fiscal balance rose to 1.7 percent of GDP in FY2021 in line with the recovery and fiscal consolidation, but is projected to decline to –0.1 percent of GDP in FY2022 due to recent measures adopted to mitigate the impact of rising fuel prices on the economy. During FY2023-32, the primary balance is projected to stabilize at near 0.6 percent of GDP in a passive scenario with no additional fiscal consolidation.

32. Debt dynamics have improved, but public debt would continue to be assessed as unsustainable in the absence of additional measures. Public debt declined from 133 percent of GDP in 2020 to 111 percent of GDP in 2021—led by the economic recovery, fiscal consolidation, and the debt for marine protection swap—and is projected to decline to 85 percent of GDP in 2032. However, public debt would continue to be assessed as unsustainable in the absence of additional measures as it would remain above the 70 percent of GDP threshold for sustainability over the next decade. This would also reduce external financing and weaken reserve adequacy over time.

33. Belize’s key policy priority is to restore debt sustainability. This requires preserving the fiscal savings achieved in FY2021, ensuring that the measures adopted to mitigate the rise in fuel prices are temporary, and implementing additional fiscal consolidation and growth-enhancing structural reforms with the goal of increasing the primary balance to 2.5 percent of GDP in FY2025 and reducing public debt to 60 percent of GDP by 2031. Anchoring this strategy on a medium-term fiscal strategy with clear targets and specific measures would enhance its credibility.

34. Fiscal consolidation should rely on both revenue and expenditure measures. Following the implementation of expenditure-based consolidation in FY2021 and a temporary relaxation in FY2022, the authorities should consider raising revenue by broadening the tax base and enhancing revenue administration, while containing current expenditure and expanding targeted social and resilience spending. Executing these plans will be challenging given limited capacity, political pressures, rising energy and food prices, and downside risks. In this context, it will be key to prepare contingency plans in case public debt does not fall as planned, including additional revenue and expenditure measures and debt operations.

35. Implementing growth-enhancing structural reforms would accelerate the reduction in public debt and reduce the burden on fiscal consolidation. A key priority is to strengthen the business climate by improving access to credit for SMEs; reducing entry barriers for new businesses; enhancing human capital and 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 DRS focused on improving structural, financial, and post-disaster resilience and based on a consistent multi-year macro-fiscal framework.

36. Restoring public debt sustainability would also strengthen the currency peg and lower external imbalances. Belize’s external position is assessed as weaker than justified by medium term fundamentals and desirable policies. Reducing the current account deficit to its equilibrium level and improving reserve adequacy requires preserving the fiscal savings achieved in FY2021, ensuring that the measures adopted to mitigate the rise in fuel prices are temporary, and implementing additional fiscal consolidation and growth-enhancing structural reforms. It also requires reducing central bank financing to the government and strengthening central bank independence.

37. The authorities should continue seeking financing for their ambitious climate change mitigation and adaptation agenda. Belize’s updated Nationally Determined Contribution presents the country’s ambitious plans for 2021-30, including large reductions in greenhouse gas emissions by restoring ecosystems and expanding renewable energy, and actions to adapt to climate change in agriculture, tourism, and fisheries. As these actions will be beneficial for Belize and the world, the authorities should continue seeking financing from donors and bilateral and multilateral creditors.

38. Safeguarding financial stability and strengthening the AML/CFT framework remain priorities. Following the review of the loan portfolios of banks and credit unions, the central bank should ensure that any extended measures are time-bound and targeted, and financial institutions resume the regular classification and restructuring procedures. 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. Advancing these reforms will help protect the country’s correspondent banking relationships.

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

Figure 4.
Figure 4.

Belize: Real Sector Indicators

Citation: IMF Staff Country Reports 2022, 133; 10.5089/9798400208652.002.A001

Figure 5.
Figure 5.

Belize: Public Sector Indicators 1/

Citation: IMF Staff Country Reports 2022, 133; 10.5089/9798400208652.002.A001

1/ The other Caribbean group includes Antigua and Barbuda, Aruba, The Bahamas, Barbados, Dominica, Grenada, Guyana, Haiti, Jamaica, St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines, Suriname, and Trinidad and Tobago.
Figure 6.
Figure 6.

Belize: External Sector Indicators

Citation: IMF Staff Country Reports 2022, 133; 10.5089/9798400208652.002.A001

Table 1.

Belize: Selected Social and Economic Indicators

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

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: Operations 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.

Excludes extrabudgetary funds.

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

Calendar year. Public debt includes central government debt and 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.

Excludes extrabudgetary funds.

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

Calendar year. Public debt includes central government debt and external financial and non-financial public sector debt.

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.

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.

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.

Table 5.

Belize: Baseline Medium-Term Outlook

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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.

Includes errors and omissions.

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

Table 6.

Domestic Banks: Financial Soundness Indicators

(In percent)
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Source: Central Bank of Belize.

Annex I. Implementation of 2021 Article IV Consultation Recommendations

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Annex II. Debt for Marine Protection Swap

Belize completed a debt for marine protection swap with The Nature Conservancy (TNC) in November 2021, which reduced Belize’s public debt by 12 percent of GDP in 2021 and enhanced the protection of the marine environment going forward. Under the swap, a subsidiary of TNC lent funds to Belize to buy back its superbond (debt with private external creditors totaling US$553 million or 30 percent of GDP) at a discounted price of 55 cents per dollar. The U.S. Development Finance Corporation provided political risk insurance, allowing the loan to have low interest rates, a grace period of 10 years, and a maturity of 19 years. In exchange, Belize committed to allocate US$4.2 million per year for marine conservation until 2041 and expand its Biodiversity Protection Zones (coral reefs, mangroves, and fish spawning sites) from 15.9 percent of ocean area to 30 percent by 2026. It also created an endowment fund of US$23.5 million to finance marine conservation after 2041.

1. Following several months of negotiations, Belize and TNC finalized a debt for marine protection swap on November 5, 2021. The agreement was facilitated by the long history of collaboration between Belize and TNC, the common interest to protect the marine environment, and Belize’s need to restructure its debt following the devastating impact of the COVID-19 pandemic. This swap reduced Belize’s public debt in 2021 and will promote sustainable economic development and the protection of Belize’s marine environment going forward.

2. The swap reduced Belize’s public debt by 12 percent of GDP in 2021. TNC set up the subsidiary Belize Blue Investment Company to loan (Blue Loan) to Belize the proceeds of a Blue Bond issuance of US$364 million. The US International Development Finance Corporation insured this loan against political risk.1 Of these funds, US$301 million were used to buy back the superbond with face value of US$553 million (30 percent of GDP) at a discount price of 55 cents per dollar, including the US$27 million superbond coupon payment due in FY2021; US$24 million were used to establish a marine conservation endowment fund administered by an affiliate of TNC; US$18 million were used as an original issue discount to facilitate lower interest rates in the early years of the loan; US$10 million were put in a debt service reserve account to cover debt service payments during arbitration; and US$10 million were used to cover the closing costs of the transaction. As a result, Belize’s public debt stock declined by US$216 million or 12 percent of GDP in 2021.

3. The debt swap also reduced Belize’s debt service payments during FY2022-34. The Blue Loan has a maturity of 19 years, a grace period of 10 years, and a low interest rate of 3 percent in the first year, which gradually rises to 6 percent over the medium term (Annex Table 4.1). It also has other outlays, such as (i) marine conservation payments of US$4.2 million per year for 20 years; (ii) management fees of US$0.6 million per year for 20 years; (iii) insurance against natural disasters of US$0.8 million per year on average for 19 years; and (iv) trust payments of US$15,000 per year for 19 years. Debt service for the Blue Loan is lower than that for the superbond between FY2022 and FY2034, but higher after when the superbond would have been repaid (Annex Figure 4.1, Panel A). Excluding principal payments, the Blue Loan interest and fees are lower than those of the superbond during FY2022-25, the same during FY2026-30, and higher thereafter (Annex Figure 4.1, Panel B). Focusing on the next 10 years as in the debt sustainability analysis (Annex II), Belize’s interests and fees will decline by 0.1 percent of GDP per year on average. Moreover, some fees will be paid in Belizean dollars instead of US dollars, thus reducing pressures on the currency peg.

Annex Table II.1.

Blue Loan Terms and Expenses

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Source: The Nature Conservancy.
Annex Figure II.1.
Annex Figure II.1.

Debt Service: Blue Loan versus Superbond

Citation: IMF Staff Country Reports 2022, 133; 10.5089/9798400208652.002.A001

4. Belize made several marine conservation commitments to facilitate the debt swap. In addition to the US$4.2 million annual payment for marine conservation until 2041 and the setup of an endowment fund to finance marine conservation after 2041, Belize committed to expand the area of ocean it protects and improve the regulatory framework for sustainable development. The conservation commitments are spelled out in the Conservation Funding Agreement, are bound by deadlines, and progress is marked by milestones (Annex Table 4.2). If milestones are missed, the government will pay penalties until the situation is remedied. The commitments comprise three clauses specifying environmentally oriented actions:

  • a. The Marine Spatial Plan (MSP). Belize must complete a legally enforceable MSP and designate 30 percent of its Ocean in Biodiversity Protection Zones (milestones 1, 3, 4, 6, and 8). The MSP shall include marine conservation outcomes for biodiversity protection and denote the allowed activities that may be lawfully carried on in any part of Belize’s Ocean.

  • b. Other Conservation Milestones. Belize must also complete other environmental commitments not covered in the MSP (milestones 2, 5, and 7), including the designation of Public Lands within the Belize Barrier Reef Reserve System as Mangrove Reserves; implementation of an Integrated Coastal Zone Management Plan; and application to have at least three marine protected areas listed as Green List Areas by the International Union for Conservation of Nature.

  • c. General Conservation Undertaking. Belize also committed to other initiatives to balance the development of the economy with the social, economic, and environmental needs of a healthy and biodiverse Ocean. Belize expressed its intention to advance the initiatives listed below even though they are not linked to any Milestones and are not subject to penalties:

    • i. Aquaculture: implementation of transparent, science based, socially responsible regulations for a high-value, sustainable aquaculture and mariculture industry.

    • ii. Fisheries: implementation of a governance framework for domestic and high seas fisheries consistent with transparent, science based, socially responsible international best practices.

    • iii. Blue Carbon: development and implementation of a national regulatory framework for the blue carbon projects within the national carbon strategy.

    • iv. Managed Access Program Evaluation: completion of an independent evaluation of the Program and reasonable implementation of recommendations.

    • v. Environmental Impact Assessment Regulation: finalization of revisions to the Regulations including support of designating Belize’s sites as World Heritage Sites.

    • vi. World Heritage Sites: meeting or exceeding minimum standards for development in World Heritage Sites per the UNESCO guidelines.

    • vii. Watershed Management: development of a watershed management plan for at least two major watersheds.

Annex Table II.2.

Milestones of the Conservation Agreement

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Source: “CONSERVATION FUNDING AGREEMENT, November 4, 2021, between BELIZE and BELIZE BLUE INVESTMENT COMPANY, LLC BBRRS: Belize Barrier Reef Reserve System; MSP: Marine Spatial Plan; ICZMP: Integrated Coastal Zone Management Plan. IUCN: International Union for Conservation of Nature.

Annex III. Debt Sustainability Analysis

The pandemic led to a sharp rise in Belize’s public debt to 133 percent in 2020, which staff assessed as unsustainable in the 2021 Article IV Consultation. Belize has made significant progress to restore debt sustainability since then, including by implementing sizable fiscal consolidation measures in FY2021, which together with the strong recovery of revenue increased the primary balance from –8.5 percent of GDP in FY2020 to 1.7 percent of GDP in FY2021. Belize also completed a debt for marine protection swap with The Nature Conservancy (TNC), which lowered public debt by 12 percent of GDP in 2021. However, staff would still assess Belize’s public debt as unsustainable without additional measures, as it would stay above the 70 percent to GDP threshold for sustainability over the next 10 years. Moreover, debt dynamics remain vulnerable to shocks to growth, interest rates, or the fiscal position. Restoring debt sustainability requires additional fiscal consolidation and growth-enhancing structural reforms.

1. The COVID-19 pandemic led to a sharp increase in public debt from 96 percent of GDP in 2019 to 133 percent in 2020. This reflected an 18.5 percent fall in nominal GDP, and a widening of the fiscal deficit driven by a fall in revenue and a rise in pandemic-related expenditure. As a result, staff assessed Belize’s public debt as unsustainable in the 2021 Article IV Consultation, both because public debt was projected to remain above the 70 percent of GDP threshold for debt sustainability over the next 10 years, and because the public sector’s gross financing needs (GFN) were projected to surpass the 15 percent of GDP threshold for sustainability in some years over the next decade.

2. The authorities reduced public debt significantly in 2021. They implemented large fiscal consolidation measures, including a 3 percent of GDP cut to current expenditure and a 2.4 percent of GDP cut to capital expenditure, which together with the strong recovery of revenues increased the primary balance from –8.5 percent of GDP in FY2020 to 1.7 percent in FY2021. The government also signed a debt for marine protection swap with TNC, which reduced public debt by 12 percent of GDP in 2021 (Annex II). As a result, public debt fell from 133 percent of GDP in 2020 to 111 percent in 2021 and is projected to fall to 85 percent in 2032. Public external debt is projected to fall from 92 percent of GDP in 2020 to 51 percent in 2032, while public domestic debt is projected to fall from 41 percent of GDP in 2020 to 34 percent in 2032. The GFN are also projected to fall to between 6.5 and 10 percent of GDP over the next 10 years due to lower interest rates and a long repayment period for the Blue Loan. Key risks to the outlook stem from an intensification of the pandemic and natural disasters, which could weaken the fiscal position and increase debt. A sudden tightening of global financial conditions would increase the cost of future external financing but would have a limited impact on existing debt as a large share of it has fixed interest rates. Reliance on domestic financing would increase if any of these downside risks materializes.

3. Staff would continue to assess Belize’s public debt as unsustainable in the absence of additional measures. Without additional measures, public debt is projected to remain above the 70 percent of GDP threshold for sustainability even in staff’s baseline scenario. Moreover, economic growth and fiscal performance remain volatile, making baseline projections highly uncertain, while debt dynamics remain vulnerable to shocks to growth, interest rates, and the fiscal position. Stress testing the baseline scenario shows that Belize’s debt burden exceeds the benchmark for emerging market economies in several areas. The heat map highlights significant risks to debt sustainability arising from the level of public debt and the currency composition. The fan charts show that public debt could exceed 120 percent of GDP by 2032 with a probability of 10 percent. On the positive side, the GFN is projected to fall below the 15 percent of GDP threshold for sustainability in staff baseline scenario during 2022-32, but it could surpass it if the economy is hit by adverse shocks to growth or contingent liabilities. Restoring debt sustainability requires preserving the fiscal savings achieved in FY2021 and implementing additional fiscal consolidation and structural reforms.

4. Stress tests confirm the vulnerability of public debt to adverse shocks. Public debt is particularly sensitive to a real GDP growth shock. A one standard deviation fall in real GDP growth for two years would increase the debt-to-GDP ratio by 32 percentage points by 2032. Public debt is also sensitive to an exchange rate shock since 65 percent of it is denominated in foreign currency. A real exchange rate depreciation of 12 percent would increase public debt by 7 percentage points of GDP by 2032. Similarly, a financial sector contingent liability shock that increases public spending by 10 percent of banking sector’s assets associated with recapitalization needs of a few banks would raise public debt by 9 percentage points of GDP by in 2032.

5. Debt dynamics are also highly vulnerable to natural disasters and climate change. To illustrate this vulnerability, it is assumed that a natural disaster causes 6 percent of GDP in economic damages, about half of the damage inflicted by Hurricane Earl in 2016. Real GDP growth declines by 3 percent in the year of the disaster, by 1 percent in the next year, and it increases by 0.5 percent in the following two years (reflecting reconstruction activity). The scenario assumes that the cost for the government is 4 percent of GDP (two-thirds of the economic damage). The associated recovery and reconstruction spending are spread over three years: 2 percent of GDP in the first year, and 1 percent of GDP in each of the next two years, respectively. The shock has a material impact on public debt, shifting the entire trajectory up by around 7 percentage points of GDP above the baseline, with debt reaching 91 percent of GDP by 2031. Climate change, on the other hand, would weaken long-term growth and thus increase the ratio of public debt to GDP over time.

6. External debt declined in 2021 but remains high and vulnerable to shocks.1 External debt declined sharply from 92 percent of GDP in 2020 to 74 percent in 2021, driven by both the debt for marine protection swap with TNC and a strong pick in economic activity. Going forward, external debt is projected to decline further to 51 percent of GDP by 2032 reflecting lower fiscal deficits and a more limited access to bilateral and multilateral financing. Stress tests indicate that external debt is highly sensitive to exchange rate and current account shocks. A 30 percent currency depreciation in 2022 raises external debt to 79 percent in 2032, while a widening of the non-interest current account balance increases it to 64 percent of GDP. Half standard deviation shocks to real GDP growth or interest rates have smaller effects on external debt. A combined one-quarter standard deviation shock would increase external debt to 63 percent of GDP in 2032.

Annex Figure III.1.
Annex Figure III.1.

Belize: Public DSA Risk Assessment

Citation: IMF Staff Country Reports 2022, 133; 10.5089/9798400208652.002.A001

Source: IMF staff.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, 07-Oct-21 through 05-Jan-22.5/ 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.
Annex Figure III.2.
Annex Figure III.2.

Belize: Public DSA – Realism of Baseline Assumptions

Citation: IMF Staff Country Reports 2022, 133; 10.5089/9798400208652.002.A001

Source : IMF Staff.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, as it meets neither the positive output gap criterion nor the private credit growth criterion.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.
(In percent of GDP unless otherwise indicated)
Annex Figure III.3.

Belize: Public Sector Debt Sustainability Analysis (DSA) - Baseline Scenario

Citation: IMF Staff Country Reports 2022, 133; 10.5089/9798400208652.002.A001

Source: IMF staff.1/ Public sector is defined as the Central Government and Other Public Sector.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/ Includes asset changes and interest revenues (if any). For projections, includes exchange rate changes during the projection period.9/ 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.
Annex Figure III.4.
Annex Figure III.4.

Belize: Public DSA - Composition of Public Debt and Alternative Scenarios

Citation: IMF Staff Country Reports 2022, 133; 10.5089/9798400208652.002.A001

Source: IMF staff.
Annex Figure III.5.
Annex Figure III.5.

Belize: Public DSA - Stress Tests

Citation: IMF Staff Country Reports 2022, 133; 10.5089/9798400208652.002.A001

Source: IMF staff.
(External debt in percent of GDP)
Annex Figure III.6.

Belize: External Debt Sustainability: Bound Tests 1/ 2/

Citation: IMF Staff Country Reports 2022, 133; 10.5089/9798400208652.002.A001

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 2031.
Annex Table III.1.

Belize: External Debt Sustainability Framework 2017–2027

(In percent of GDP, unless otherwise indicated)
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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.

Annex IV. Risk Assessment Matrix1

Potential Deviations from Baseline

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Annex V. Updated Nationally Determined Contribution

1. Belize released its updated Nationally Determined Contribution (NDC) in August 2021. Its first NDC under the Paris Climate Change Agreement was submitted in 2016. The update benefits from more robust data on land use trends and emission factors, including Belize's first Forestry and Other Land Use (FOLU) sector Greenhouse Gas Inventory showing trends in emissions and removals since 2001. It also considers national capacity and circumstances, and technological advancements. It thus improves the planning and projections of national commitments over the previous NDC.

2. The updated NDC includes actions on both mitigation and adaptation, as well as their costs and financing gaps. Although Belize contributes a small share of global emissions, it can make an important contribution to global warming control efforts by protecting and restoring key natural habitats that serve as carbon sinks, such as mangrove forests, sea grass and terrestrial forests. The actions included in the updated NDC prioritize the protection and restoration of these habitats. The updated NDC also prioritizes the management of further development of the coastline to reverse net coastal habitat and land loss and initiatives to strengthen the adaptative capacity to climate change in agriculture, fisheries, aquaculture, health, tourism, and water resources.

Mitigation

3. The updated NDC identifies the most polluting sectors and key carbon sinks in Belize. The energy sector (including transport) is the largest greenhouse gas (GHG) emitter followed by the international bunkers (ships and aircraft), industry, and waste (Annex Table 4.1). In agriculture, the primary GHG emissions sources are livestock and forest fires. Mitigation opportunities for livestock are limited but preventing forest fires is feasible. Due to significant carbon storage in the Forestry and Other Land Use (FOLU) sector, Belize is a net sink of GHG emissions. Emissions in the FOLU sector stem from the conversion of forest land to grasslands or croplands. Reducing deforestation and forest degradation provide significant mitigation opportunities in the sector.

Annex Table V.1.

Historical Green House Gas Emissions (Gg CO2-eq)

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Source: National Climate Change Office (2020) Belize's First Biennal Update Report.

4. Protecting “blue carbon” ecosystems would also reduce GHG emissions. Blue carbon ecosystems (mangroves and seagrass) play important roles as a nature-based solution to climate change with mitigation, adaptation, and resilience co-benefits. These ecosystems sequester and store significant amounts of carbon, safeguard frontline communities by offsetting sea level rise and coastal erosion, and support a more resilient tourism and aquaculture industry.

5. Mitigation targets included in the updated NDC are estimated to avoid 5,647 KtCO2e in cumulative emissions during 2021-30. Key sector targets include GHG removals related to the AFOLU sector and renewable energy projects. The key actions include:

  • Reduce GHG emissions and raise GHG removals related to land use change by 2,053 KtCO2e by reforesting protected areas; restoring degraded and deforested riparian forests; mitigating forest degradation by reducing fire incidence and improving logging practices, reducing emissions related to fuelwood use, and planting shade trees in agricultural lands.

  • Remove 381 KtCO2e of emissions through mangrove restoration by doubling the mangrove protected area (currently at 12,827 hectares); restoring at least 4,000 hectares of mangroves; and the development of a national seagrass management policy.

  • Reduce methane emissions from livestock by 10 percent by 2030 and avoid emissions of at least 4.5 KtCO2e related to agriculturally driven land use change.

  • Avoid emissions from the power sector equivalent to 19 KtCO2e per year through system and consumption efficiency measures.

  • Avoid 44 KtCO2e of GHG emissions in the national electricity supply through the introduction of expanded capacity from renewable energy sources.

  • Avoid 117 KtCO2e/year of GHG emissions from the transport sector through a 15 percent reduction in conventional transportation fuel use and achieve 15 percent efficiency gain per passenger and ton per kilometer through appropriate policies and investments.

  • Improve waste management processes to avoid emissions of up to 18 KtCO2e per year, in line with the national waste management strategy.

6. There are significant gaps to finance Belize’s ambitious mitigation plans. The cost of the mitigation targets and actions listed above for 2021-30 is estimated at US$1.39 billion. Recognizing funding already committed, the funding gap is estimated at US$1.24 billion. Considering recoverable costs in renewable energy and waste, this gap could fall to US$607 million. Belize is approaching donors as well as bilateral and multilateral creditors to fill in this gap.

Adaptation

7. Climate change is already impacting Belize’s population and key economic sectors. Agriculture is sensitive to changes in precipitation, temperature, and extreme weather. Tourism is impacted by seal level rise, coral bleaching, and loss of biodiversity. Critical support systems including water resources, health and energy are likewise impacted by the increasingly variable climate in the region. Belize also hosts globally significant ecological resources including rainforest, mangrove forests, wetlands and coral reefs which are under threat from global warming.

8. The updated NDC includes specific targets set out at the sector level for adaptation and resilience to climate change (Annex Table 4.2). The main sectoral targets include:

  • Coastal zone and marine resources. A large part of Belize’s coastline has an elevation of less than one meter and is vulnerable to sea level rise. Protecting the mangrove and seagrass ecosystems will not only reduce emissions, but also protect vulnerable communities. Key targets in this area are managing the development of the coastline to reverse net coastal habitat and land loss and developing an early warning system for storm surges.

  • Agriculture. Reduce post-harvest losses through the implementation of the national adaptation strategy that includes investment in climate smart agriculture, increased access to drought tolerant crops and livestock breeds, and better soil and water management practices. Implement an early warning system for drought and extreme weather events.

  • Fisheries and aquaculture. Build capacity in fisheries and aquaculture sector through research, diversification and retraining to support livelihoods while protecting coastal ecosystems.

  • Human health. Build capacity in the health sector by assessing vulnerabilities and investing in capacity to respond to climate-related threats, including new diseases and high temperatures.

  • Tourism. Increase the adaptive capacity of tourism by developing climate resilient planning frameworks and infrastructure. This includes assessing coastal tourism areas that are vulnerable to climate change and their carrying capacity and installing appropriate infrastructure for adaptation to climate change including roads, bathroom facilities, buoys, renovation of docks and wayfinding.

  • Forestry and biodiversity. Implement protection targets of the National Biodiversity Strategy Action Plan including increased effectiveness of the National Protected Areas System.

  • Land use, human settlements, and infrastructure. Protect communities from damage caused by flooding and sea level rise through implementation of the Land Use Policy and supporting green and grey infrastructure.

  • Water resources. Enhance the protection of water catchment (including groundwater) areas and improve the management and maintenance of existing water supply systems by implementing the National Water Sector Adaptation Strategy and Action Plan.

9. The financing gap for Belize’s adaptation targets is smaller. The adaptation targets and actions listed above are estimated to cost US$318 million between 2021-30. Recognizing funding that is already committed, the funding gap is estimated at US$146 million.

Annex Table V.2.

Mitigation: Targets, Actions, and Costs

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Source: Belize 2021 Updated Nationally Determined Contribution.
Annex Table V.3.

Adaptation: Targets, Actions, and Costs

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Source: Belize 2021 Updated Nationally Determined Contribution.

Annex VI. External Stability Assessment

Although Belize’s external position strengthened in 2021, it remains weaker than the level justified by medium term fundamentals and desirable policies. It also remains vulnerable to shocks, including an intensification of the pandemic, natural disasters, or higher energy and food prices. Reserve adequacy improved in 2021, but it is expected to worsen over the medium term as the current account deficits remain elevated and external financing becomes scarcer. Since the Belizean dollar is pegged to the US dollar, reducing external imbalances and strengthening the external position will require restoring debt sustainability by implementing fiscal consolidation and growth-enhancing structural reforms.

1. Belize’s external position improved in 2021 but is projected to weaken over time. International reserves increased from US$348 million (3.8 months of imports or 154 percent of external gross financing needs (GFN)) in 2020 to US$420 million (4 months of imports or 181 percent of external GFN) in 2021, reflecting higher bilateral and multilateral financing and the IMF’s SDR25.6 million (US$36 million) allocation, which the authorities are keeping as reserves. Without additional measures, the current account deficit is projected to average 8 percent of GDP in 2022-32, while the capital and financial accounts balance is projected to average 7.7 percent of GDP due to more limited access to external financing due to debt sustainability concerns. As a result, international reserves are projected to gradually fall over time, reaching US$340 million (2.1 months of imports or 96 percent of external GFN) in 2032.

(In months of imports of percent of external gross financing needs (GFN))

International Reserves

Citation: IMF Staff Country Reports 2022, 133; 10.5089/9798400208652.002.A001

Sources: Central Bank of Belize; and IMF staff projections.

2. The external stability (ES) approach shows a large gap between the projected current account balance and the one needed to have a more sustainable net international investment position (NIIP). Belize’s NIIP rose from –217 percent of GDP in 2020 to –175 percent in 2021 due to the strong economic recovery and the debt for marine protection swap with TNC (Annex II) and is projected to stabilize at –160 percent of GDP during 2022-32. The ES model shows that rising the NIIP to a more manageable level of –128 percent of GDP by 2032 requires lowering the current account balance during 2022-32 from –8 percent of GDP to –4.9 percent of GDP, implying a CA gap of –3.1 percent of GDP and a real effective exchange rate (REER) overvaluation of about 7.4 percent. The 32 percentage points of GDP increase in the NIIP by 2032 is consistent with the strategy to restore public debt sustainability and strengthen reserve adequacy.

3. The external balance assessment (EBA-lite) indicates that Belize’s external position is weaker than implied by medium-term fundamentals and desirable policies. The current account (CA) balance adjusted by the cycle and the impact of the pandemic on tourism and remittances was –5.9 percent of GDP in 2021.1 The EBA-lite CA model estimates the CA norm (the CA consistent with medium-term fundamentals and desirable policies) at –5.9 percent of GDP, but an adjustment of 2.4 percent of GDP is made to ensure that the CA can be sustained over the medium term without depleting the stock of reserves. As a result, the CA gap is estimated at –2.4 percent of GDP, of which 4.6 percent correspond to policy gaps driven by the fiscal balance and changes in reserves. This is equivalent to a REER overvaluation of 5.6 percent. Similarly, the EBA-lite REER approach points to a REER overvaluation of 7.1 percent, equivalent to a CA gap of –3.0 percent of GDP. The results from the EBA-lite CA and REER models are consistent with those from the ES approach, pointing to a CA gap of around –3 percent of GDP and an average REER overvaluation of about 7 percent.

Belize: Model Estimates for 2021

(In percent of GDP)
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The ES model estimates the needed change in the current account balance and the REER to lower the NIIP by 32 percentage points of GDP by 2032.

Additional cyclical adjustment to account for the temporary impact of the pandemic on tourism (4.3 percent of GDP) and remittances (-0.4 percent of GDP).

Cyclically adjusted, including multilateral consistency adjustments.

Adjustment to account for a reduced access to external financing over the medium term, which lowers the current account deficit that can be sustained without depleting reserves.

4. The materialization of large downside risks to the outlook could further weaken the external position and worsen reserve adequacy. Key risks to the outlook are an intensification of the pandemic, climate related natural disasters, and a further increased in global energy and food prices due to the war in Ukraine and related economic sanctions. These shocks would weaken the recovery of tourism, widen the current account deficit, and reduce international reserves.

5. Without exchange rate flexibility, strengthening the external position will require restoring debt sustainability. The authorities and staff consider the currency peg as a key anchor for macroeconomic stability that should be preserved. In this context, reducing external imbalances will require restoring debt sustainability by preserving the fiscal savings achieved in FY2021 and implementing additional fiscal consolidation and structural reforms that boost growth, enhance competitiveness, and strengthen resilience to natural disasters and climate change. These measures would not only reduce the fiscal deficit and public debt, but also lower the current account deficit, enhance access to external financing, and improve reserve adequacy.
1

Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.

2

The Executive Board takes decisions under its lapse-of-time-procedure when the Board agrees that a proposal can be considered without convening formal discussions.

1

Belize’s fiscal year runs from April 1st to March 31st.

2

The People’s United Party won 26 of the 31 seats at the House of Representatives in the November 2020 elections, which gives the government a strong mandate to implement reforms to restore debt sustainability and boost growth.

3

These projections do not include the government’s plan to contain expenditure after FY2022 outlined in the FY2022 budget speech as these measures have not yet been approved by Congress.

4

The authorities, with support from CARTAC, the IMF, and Statistics Canada, are rebasing the national accounts. The new series will update the base year from 2000 to 2014 and upgrade the manual used for compiling the statistics from the 1993 System of National Accounts (SNA) to the 2008 SNA. Preliminary estimates indicate that GDP would increase by about 20 percent from current values reflecting new sectoral weights and an updated business registry.

5

If the rise in global fuel prices proves to be persistent, the authorities should consider gradually unwinding the tax cuts on diesel and the transport subsidies to let relative prices adjust and expanding targeted transfers to the most vulnerable. The latter should be feasible to implement once the 2022 Census has been finalized and the authorities have an updated picture of poverty incidence in the country.

6

Moreover, Belize’s GST 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, and its rate is low compared to peers.

1

This insurance covers non-payment of Arbitral Award and Denial of Justice.

1

Given the lack of data on private external debt, the external DSA covers only external public debt.

1

As of February 4, 2022. The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path. The relative likelihood is the staff’s subjective assessment of the risks surrounding the baseline (“low” is meant to indicate a probability below 10 percent, “medium” a probability between 10 and 30 percent, and “high” a probability between 30 and 50 percent). The RAM reflects staff views on the source of risks and overall level of concern as of the time of discussions with the authorities. Non-mutually exclusive risks may interact and materialize jointly.

1

The tourism adjustor (4.3 percent of GDP) corrects for the pandemic related fall in tourism, while the remittances adjustor (–0.4 percent of GDP) corrects for the pandemic-related rise in remittances.

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Cover IMF Staff Country Reports
Belize: 2022 Article IV Consultation-Press Release; and Staff Report
Author:
International Monetary Fund. Western Hemisphere Dept.
Volume/Issue:
Volume 2022: Issue 133
Publisher:
International Monetary Fund
ISBN:
9798400208652
ISSN:
1934-7685
Pages:
64
DOI:
https://doi.org/10.5089/9798400208652.002
Figure 1.

Belize: COVID-19 Cases, Deaths, and Vaccination
Figure 2.

Belize: Real GDP Growth and Tourist Arrivals
Figure 3.

Belize: Public Debt and Gross Financing Needs
Figure 4.

Belize: Real Sector Indicators
Figure 5.

Belize: Public Sector Indicators 1/
Figure 6.

Belize: External Sector Indicators
Annex Figure II.1.

Debt Service: Blue Loan versus Superbond
Annex Figure III.1.

Belize: Public DSA Risk Assessment
Annex Figure III.2.

Belize: Public DSA – Realism of Baseline Assumptions
Annex Figure III.3.

Belize: Public Sector Debt Sustainability Analysis (DSA) - Baseline Scenario
Annex Figure III.4.

Belize: Public DSA - Composition of Public Debt and Alternative Scenarios
Annex Figure III.5.

Belize: Public DSA - Stress Tests
Annex Figure III.6.

Belize: External Debt Sustainability: Bound Tests 1/ 2/

International Reserves