IMF Executive Board Concludes 2006 Article IV Consultation with BelizePublic Information Notice (PIN) No. 06/121
October 20, 2006
Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case. The Staff Report of the 2006 Article IV Consultation with Belize is also available.
On October 20, 2006, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Belize.1
After a number of years of expansionary policies, stabilization measures were implemented more forcefully in the context of the 2005/06 budget (April to March). Partly in response to a tighter policy stance, economic growth slowed from 4½ percent in 2004 to 3½ percent in 2005, while inflation rose marginally to just over 4 percent, mainly reflecting higher fuel prices.
The overall fiscal deficit fell sharply from 8.6 percent of GDP in FY04/05 to 3.3 percent of GDP in FY05/06. During the same period, the primary balance shifted from a small deficit to a surplus of 3 percent of GDP. The fiscal correction reflected revenue measures taken in May 2005, as well as lower interest payments and cuts in capital expenditure. The authorities also tightened liquidity by channeling social security deposits to the central bank and increasing the cash reserve and liquid asset requirements on three occasions by 1 percentage point each, including most recently in September 2006.
Reflecting in part the tightening of macroeconomic polices, the external current account deficit is expected to narrow considerably to 8½ percent of GDP in 2006, from more than 14 percent of GDP in the 2005. This recovery has been driven by a reduction in the trade balance, thanks to an increase in traditional exports, the onset of crude oil exports, and restraint in import growth. Continued buoyant tourism earnings have also helped improve the external current account, as did a lower interest bill, because exceptional fees and charges that were incurred in 2004 and 2005 were not repeated in 2006.
Despite these welcome developments, the outlook for 2007 and beyond remains worrisome, as scheduled debt service obligations are high and will rise over time, weighing heavily on the overall balance of payments, particularly as access to voluntary market financing at affordable terms is impaired. The authorities have recognized the sustainability problem and in August 2006, they approached external commercial creditors to seek a cooperative agreement on restructuring public sector debt.
Executive Board Assessment
The Executive Directors welcomed the progress the authorities have made in addressing Belize's serious macroeconomic imbalances in the context of a home-grown adjustment strategy. A significant fiscal correction has been achieved in FY 2005/06 by increasing tax collection, reining in discretionary current spending, and reducing capital expenditure. In addition, tighter monetary conditions have helped slow credit growth and keep inflationary pressures in check. At the same time, Directors cautioned that large fiscal and balance of payments financing gaps are likely to persist in 2007 and beyond in the absence of fiscal and monetary policies to eliminate these gaps. To set the economy on a path to medium-term sustainability, the authorities should aim progressively and on a firm timetable to close the fiscal and balance of payments financing gaps, replenish international reserves, and reduce significantly the public debt burden. In that vein, Directors welcomed the authorities' strategy to reform the revenue system, strengthen public expenditure programming and debt management, and improve financial accountability and oversight.
Directors encouraged the authorities to persevere with disciplined macroeconomic policies in coming months in order to contain domestic demand and support an orderly debt restructuring. On the monetary side, the recent increase in bank reserve requirements is appropriate, and Directors noted that the authorities stand ready to take further action, if needed, to curb excess liquidity and contain private sector credit growth. On the fiscal side, Directors urged the authorities to work to achieve a primary surplus of 3½ percent of GDP in fiscal year 2006/07.
Directors agreed that achieving balance of payments sustainability in the medium term will require a greater fiscal effort, maintaining a prudent monetary stance, external financing, and debt service relief. They recommended raising the primary surplus by about 1 percentage point of GDP above that originally targeted, first by saving the bulk of projected revenues from oil production, and in later years by enhanced non-oil revenue collection and restrained current expenditures. They welcomed the authorities' intention to pursue these objectives.
Directors stressed the need for a set of carefully sequenced structural reforms to support fiscal and monetary discipline and foster stronger long-term growth, and were reassured by the authorities' commitment and ongoing efforts to move in this direction. In the fiscal area, the tax administration should be modernized, the tax base broadened, and oil and gasoline taxation reformed. Directors pointed to the importance of reviewing the pension system with the aim of limiting the growth of spending and making the system actuarially sound. Debt management practices should be improved. Directors supported the authorities' intention to improve governance of quasi-fiscal institutions, including winding up the operations of the Development Finance Corporation. In the monetary area, the central bank should work to broaden its market-based policy instruments in order to make monetary policy more effective. Also, the government's overdraft facility at the central bank should be eliminated to strengthen the bank's independence. Directors supported the authorities' request for Fund technical assistance to facilitate early actions in the areas of tax policy and monetary instruments.
Directors welcomed that Belize's banking system is generally sound and bank supervision has been strengthened. At the same time, they urged the authorities to consider implementing those recommendations of the IMF's 2003 Offshore Financial Center assessment that remain outstanding. In particular, there is a need to strengthen insurance supervision and broaden financial sector prudential regulations, especially with regard to loan-loss provisioning and loan collateral valuation.
Directors concurred with the authorities that the fixed exchange rate regime has anchored prices and expectations, and has generally served the economy well. Sustaining the peg will require that the authorities continue to work toward implementing macroeconomic policies that address Belize's economic and financial vulnerabilities. These considerations increase the importance of responding expeditiously to changes in the domestic and external environment and avoiding policy slippages.
Directors observed that reaching a cooperative agreement with private creditors on restructuring Belize's external debt will be critical for regaining balance of payments and debt sustainability. They welcomed the authorities' continuing engagement with multilateral and bilateral creditors as well, in order to promote an orderly adjustment process.
Directors welcomed Belize's participation in the Fund's General Data Dissemination System and encouraged the authorities to continue to strengthen the quality and timeliness of the country's economic statistics.