IMF Executive Board Concludes 2014 Article IV Consultation with BelizePress Release No. 14/415
September 4, 2014
On June 23, 2014, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV Consultation1 with Belize.
Real GDP growth plummeted to 0.7 percent in 2013, from 4 percent in 2012, mainly due to continued declines in oil production and weak agricultural output, especially sugarcane and citrus. Unemployment stood at 14.2 percent in September 2013 and is on an upward trend since it hit its lowest level in 2008. Average inflation eased to 0.5 percent from 1.3 percent in 2012, as commodity price pressures abated. The external current account deficit widened to 4.5 percent of GDP in 2013 up from 1.2 percent in 2012, as exports of oil and agricultural products fell sharply while imports of fuel and electricity picked up. International reserves improved to 4.7 months of imports at end-March 2014 (up from 3.3 months at end-2012) mainly owing to PetroCaribe financing and private inflows.
The primary surplus for FY2013/14 (fiscal year ends in March) is estimated to have fallen to 1 percent of GDP, from 1.4 percent of GDP in FY2012/13. Revenue is expected to be better-than-budgeted, as robust tax revenues more than offset the decline in non-tax revenues. However, substantial increases in wages and salaries, transfers and interest payments drove up current expenditure. Capital expenditures were higher than budgeted because of the need to rebuild the infrastructure that was badly damaged by rain. Credit growth and monetary policy continued to be hampered by weaknesses in the financial system. Private sector credit grew by 3.8 percent (y/y) in March 2014, while broad money grew by 5.2 percent. The banking system remained highly liquid. While declining, non-performing loans (NPLs) remained high at 16.7percent of total loans at end-March 2014. The banking system’s capital adequacy ratio (CAR) improved to 23.4 percent. The authorities stepped up their efforts to address other weaknesses of the financial system, including the adoption of new anti money laundering and combating the financing of terrorism (AML/CFT) legislation.
The medium-term outlook is worse than envisaged during the 2013 Article IV consultation. Real GDP growth would be weaker than expected in the near term but hover around 2.5 percent over the medium term as declining oil production would be partially offset by higher output of other commodity exports, tourism and construction. Inflation would remain low owing to the exchange rate peg and subdued inflation in trading partners. The authorities’ policy plans would maintain the primary surplus around 1 percent of GDP in FY14/15 and in the medium term. Low primary surpluses together with the assumed recognition of debt related to nationalizations will increase the public debt-to-GDP ratio. Expansionary fiscal policies, including large wage increases, would fuel higher domestic consumption and upward pressures on the external current account deficit. International reserves could decline substantially over the medium term, especially if compensation for the nationalized companies adds to external outflows.
Executive Board Assessment2
Directors noted that Belize’s macroeconomic performance has weakened on the back of decelerating growth and increasing fiscal and external imbalances. The outlook is clouded by significant risks, including contingent compensation payments for nationalized companies and banking sector vulnerabilities, while adverse global developments could put pressure on international reserves and greatly increase Belize’s gross financing needs. Directors agreed that a vigorous policy response is needed to reduce vulnerabilities, rebuild policy buffers, and accelerate reforms that would further strengthen the financial sector, enhance competitiveness, and boost inclusive growth.
Directors emphasized the need to renew fiscal consolidation efforts to ensure debt sustainability and create policy buffers in case downside risks materialize. Most Directors agreed that the uncertainty surrounding contingent liabilities suggests it would be prudent to frontload the necessary consolidation, but a number of other Directors considered a gradual adjustment more appropriate in light of cyclical conditions. Directors agreed that strong measures are necessary to moderate goods and services and wage-related outlays, reform the public employees’ pension system, and broaden the base for the general sales tax. At the same time, spending on infrastructure, public safety, and flagship social programs should be protected. Directors concurred that strengthening public financial management, and procurement in particular, is key to improve spending quality. They supported the authorities’ efforts to strengthen debt management and looked forward to the design and implementation of a medium-term debt management strategy.
Directors welcomed progress in financial sector reform. They agreed that, in light of remaining vulnerabilities, bank asset quality should be reassessed through a comprehensive review. They called for strengthening central bank supervision, including through hiring of additional examiners and broadening the stress test methodology to include forward-looking analysis. Directors encouraged the authorities to finalize the crisis management plan, including the bank restructuring and resolution framework, making use of technical assistance from the Fund.
Directors commended the authorities for their recent efforts to address remaining gaps in the AML/CFT framework to comply with international standards. They encouraged the authorities to fully implement the revised AML/CFT framework, including the laws and regulations recently approved.
Directors concurred that adequate reforms are needed to address the widening current account deficit and boost job-creating and inclusive growth. In this regard, a more attractive business environment would encourage private sector investment, enhance external competitiveness, and help diversify exports.