IMF Executive Board Concludes 2010 Article IV Consultation with BelizePublic Information Notice (PIN) No. 10/142
October 22, 2010
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.
On October 15, 2010, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Belize.1
The Belizean economy in the past two years has been vulnerable to adverse shocks mainly because of a weak external position, policy rigidities, and reduced access to external financing. Since 2006, growth has been lackluster, with sources limited mostly to petroleum extraction and tourism-related construction. In 2007, debt restructuring eased external debt service, but public debt has remained high, limiting the policy capacity to respond to shocks. Macroeconomic management was complicated in 2008 by soaring fuel and food prices.
Economic activity stagnated in 2009, as a result of the global slowdown and the lingering effects from the 2008 floods. Inflation fell to minus 0.4 percent during 2009, driven by a reversal in fuel and food prices and weak domestic demand. Helped by a lower external current account deficit and the SDR allocations, foreign reserves have strengthened substantially from the low levels seen in previous years to reach 3.2 months of imports of goods and services or 160 percent of the country’s external financing needs.
In FY2009/10 (April–March), the fiscal balance weakened by 2 percentage points of GDP, to a deficit of 1.6 percent of GDP, due to lower grants and higher current spending (mainly wages), despite a decline in investment. The central bank has taken steps to improve the conduct of monetary policy, by relying on market-based monetary instruments. In the banking system, nonperforming loans have risen sharply in the recent period, while provisioning remains low.
For 2010, the economy is projected to grow by 2 percent, on an expansion in electricity generation. Inflation would rise transitorily to 6 percent, after a rebound in fuel prices and recent tax measures. Despite some increase in debt payments abroad, the external current account deficit would narrow to under 6 percent of GDP, reflecting lower energy and FDI-related imports. The foreign reserve position would improve slightly. Despite tax revenue actions taken in April, the budgeted fiscal deficit is projected to widen to 2.2 percent of GDP in FY2010/11, due largely to lower grant disbursements and increased investment. The public debt is projected to decline slightly under 80 percent of GDP at year-end.
Executive Board Assessment
Executive Directors commended the authorities for their prudent macroeconomic management in the face of the global crisis and severe floods. Growth has resumed, albeit at a slow pace, and the external position has improved. Nevertheless, the Belize economy remains vulnerable to shocks, with weak public finances, limited external financing, and risks in the banking system. This vulnerability highlights the urgency of further rebuilding macroeconomic and financial buffers, strengthening the banking system, and promoting an environment conducive to private sector-led growth.
Directors emphasized the need for an ambitious fiscal consolidation strategy, with a view to reducing public debt to more sustainable levels over time. They supported plans to improve public financial management and tax administration, building on recent progress in revenue reform. Directors encouraged further efforts to contain the public sector’s wage bill and to put the pension system on a sounder footing, and welcomed the authorities’ intention to build consensus around their reform program. They also considered it important to create space for priority social spending and infrastructure investment in a manner consistent with the fiscal consolidation strategy, and to incorporate plans in these areas into a medium-term budget framework.
Directors underscored that protecting the stability of the banking system is a priority. This will require an agreement on recapitalization plans for a few banks and their early implementation. Directors welcomed plans to upgrade the regulatory and bank resolution frameworks, bringing prudential rules in line with international best practices, with technical assistance from the Fund. They also welcomed ongoing efforts to intensify bank oversight and looked forward to continued progress in the supervision of the offshore and non-banking sectors.
Directors welcomed recent improvements in the monetary policy framework and liquidity management, particularly a shift to more market-based monetary instruments. They stressed that the fixed exchange rate regime has provided an anchor for macroeconomic policies and expectations. Its long-term stability depends on sustained fiscal consolidation, a disciplined monetary policy, and strengthened financial stability.
Directors endorsed the authorities’ development plan, which seeks to boost competitiveness and private investment. Its successful delivery, along with adequate donor support, will go a long way toward raising medium-term economic prospects and reducing poverty. Continued improvements in the business climate would help foster private sector-led growth.