## _cr04102 - Executive Summary

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---

### Executive Summary — Key findings
- Real GDP growth recovered in 2003 following shocks in 2001-02; inflation remained low.
- Underlying macroeconomic position remained worrisome: fiscal and external current account imbalances at unsustainable levels.
- Net international reserves covered about half of public short-term debt service on a remaining maturity basis at end-2003.
- Public and publicly guaranteed debt reached 92 percent of GDP (mostly nonconcessional external debt).
- Authorities committed to the exchange rate peg as a critical anchor; staff recommended urgent fiscal correction and tightening of monetary policies to sustain the peg.
- Staff recommended measures to make the exchange rate regime more transparent and market-determined, with a view to eventual unification of the markets.
- Authorities announced policy measures: central government budget for FY 2004/05 aims to reduce the deficit from around 8 percent of GDP in FY 2003/04 to below 3 percent of GDP, mainly via an increase in land taxes and compression of capital expenditure; plan to tighten monetary policy in line with staff recommendations.
- Staff supported tightening but questioned consistency of the fiscal plan: authorities’ revenue measures likely to fall short of estimated yields; staff recommended a broader range of revenue and expenditure measures and urged swift, sustained adjustment.

### Recent economic developments
- Real GDP growth:
  - 2003: 5.5 percent (estimated)
  - 2002: 4.3 percent
  - Drivers: agricultural output grew by more than 20 percent in H1 2003 vs. H1 2002; fishing sector (including shrimp aquaculture) expanded by more than 300 percent; tourism receipts grew by 25 percent in 2003.
- Inflation: around 2½ percent in 2003.
- Real effective exchange rate (official exchange rate basis): depreciated by about 4 percent during 2003 (mainly due to U.S. dollar depreciation vs. Euro).
- Central government fiscal developments:
  - Central government deficit FY 2003/04 projected to decline only to 8.1 percent of GDP from 9.6 percent in FY 2002/03.
  - Capital expenditure compressed from 12.6 percent of GDP in FY 2002/03 to 9.9 percent of GDP in FY 2003/04.
  - Factors offsetting revenue: tax exemptions, sizeable wage increases (three-year agreement calls for 8 percent annual wage increases beginning April 2003), payments for new telephony services.
- Financing and debt:
  - FY 2003/04 net external disbursements to central government projected at 12½ percent of GDP, mostly on commercial terms.
  - Public and publicly guaranteed debt rose to around 92 percent of GDP at end-2003.
  - Notable bond issuances: US$100 million 12-year global bond at 9.75 percent with an 85 percent CAC; earlier US$125 million 10-year global bond at 9.5 percent.
- Development Finance Corporation (DFC):
  - Government transfers around 2 percent of GDP in 2003 to fund DFC credit expansion and investment projects.
  - Government provided about 6 percent of GDP to refinance external liabilities of the DFC.
  - DFC nonperforming loan ratio: 24 percent (staff estimate); later note: DFC nonperforming loan ratio is estimated to have increased to 32 percent.
  - Large maturity mismatch and unsold physical assets (~one third of balance sheet); staff estimated DFC has a negative capital position when corrected for loan classification, asset valuation, and provisioning.
- Monetary sector and banking:
  - CBB repurchased about BZ$50 million of short-term government securities from commercial banks and used moral suasion to encourage lower lending rates.
  - Private sector credit expanded about 12 percent in 2003.
  - M2 continued to fall relative to GDP.
  - Loan-to-deposit ratio rose from 74 percent at end-2001 to 98 percent at end-2003.
  - Movement of deposits offshore driven by legislation allowing companies in export processing zones to move deposits to international banks and erosion of confidence.
  - Financial sector indicators (excluding DFC) generally remained strong.
- Balance of payments:
  - Merchandise exports and tourism receipts grew by about 12 percent and 25 percent, respectively, in 2003.
  - Imports rose by about 9 percent in 2003.
  - Current account deficit narrowed by 1.4 percentage points of GDP in 2003 but remained high at 15.8 percent of GDP.
  - Gross reserves fell by US$30 million during 2003 to US$76 million, about half of public short-term debt service on a remaining maturity basis.
  - Parallel market spread around 10 percent in 2003; CBB sold foreign exchange to commercial banks on an ad-hoc basis to prevent spread increases.

### Policy discussions and staff recommendations
- Authorities’ stance:
  - Agreed fiscal and monetary policies were unsustainable.
  - FY 2004/05 budget targets deficit below 3 percent of GDP, relying mainly on increased land taxes and further capital spending compression.
  - Willingness to implement additional revenue and expenditure measures if necessary.
  - Monetary policy to be tightened in line with staff recommendations.
- Staff warnings and recommendations:
  - Emphasized need for forceful, immediate, and sustained measures to avoid rapid erosion of confidence and loss of access to international capital markets.
  - Cautioned that revenues likely to fall short of authorities’ projections; historical expenditure overruns raise risks on spending side.
  - Urged swift introduction and sustained implementation of additional measures; noted the 2002 policy correction was comprehensive but short-lived.
  - Recommended tightening monetary policy to sustain the exchange rate peg and increasing transparency and market-determination of exchange rate regime, aiming for eventual market unification.

### Macroeconomic framework and projections (2003–04) — selected figures
- Key annual figures (2003 and 2004):
  - Real GDP growth: 2003 = 5.5; 2004 = 3.5
  - Contributions to growth:
    - Consumption: 2003 = 6.7; 2004 = -0.6
    - Gross capital formation: 2003 = -1.5; 2004 = -3.1
    - Exports of goods and services: 2003 = 4.0; 2004 = 6.8
    - Imports of goods and services: 2003 = -3.7; 2004 = 0.3
  - Inflation: 2003 = 2.5; 2004 = 2.5
  - Central government balance (percent of GDP, FY basis): 2003 = -8.1; 2004 = -2.7
  - Credit to the private sector: 2003 = 12.2; 2004 = 6.4
  - External current account deficit (percent of GDP): 2003 = -15.8; 2004 = -8.4
  - Gross official reserve coverage of 12-month debt: 2003 = 50.2; 2004 = 67.5
  - Public and publicly guaranteed debt (percent of GDP): 2003 = 92.2; 2004 = 92.6
- Short-term outlook under a sharp, front-loaded fiscal correction:
  - 2004 GDP growth projected at about 3½ percent, supported by strong export growth from recent investment in tourism, shrimp farming, and agriculture.
  - External current account deficit expected to fall to around 8½ percent of GDP in 2004; reserve coverage to rebuild.
  - Public and publicly guaranteed debt to remain about unchanged at around 93 percent of GDP at end-2004.
- Medium-term outlook with sustained adjustment (staff projections):
  - Overall central government balance narrows by about 8 percent of GDP over the coming two-year period, mostly in FY 2004/05; primary fiscal surplus remains around 6 percent of GDP thereafter.
  - Public and publicly guaranteed debt projected to decline from 92 percent of GDP at end-2003 to around 67 percent in 2008.
  - External current account deficit projected to improve from 8.4 percent of GDP in 2004 to 3.8 percent of GDP by 2008.
  - GDP growth projected to average about 4½ percent over the projection period, supported largely by continued export expansion.

### Debt sustainability and risk scenarios (section 13)
- Staff debt sustainability analysis: continuation of present policies would push public debt to 137 percent of GDP by 2008.
- High vulnerability to exchange rate or other shocks given the debt ratio at 137 percent of GDP by 2008.
- Even with rapid and sustained fiscal correction, economy remains highly vulnerable because of:
  - already high levels of external debt and debt service;
  - exposure to natural disasters such as hurricanes and flooding;
  - reliance on preferential trade access for exports of sugar and bananas.
- Selected exogenous shock scenarios (Figure 7 summary):
  - Lower GDP growth in 2004-05.
  - 30 percent real depreciation in 2004.
  - Higher deficit in 2004-05.
- Public sector debt trajectories (selected stress-test outcomes, percent of GDP):
  - Baseline: 2003 = 92.2; 2004 = 89.2; 2008 = 67.4 (projected)
  - A2 (primary balance under no policy change in 2004-08): 2008 = 136.5
  - B5 (one-time 30 percent real depreciation in 2004): 2004 = 131.7; 2008 = 111.3

### Fiscal policy stance, projections, and staff assessment
- Authorities’ aim: reduce the fiscal deficit to below 3 percent of GDP in FY 2004/05.
- Authorities project revenue increase of about 2 percent of GDP, mainly from improvements in tax administration and introduction of a new land tax.
- Tax structure change planned: revise various taxes during 2004 to shift emphasis from duties on international trade to taxes on domestic consumption.
- Most adjustment would result from further compression of capital expenditure.
- Authorities plan a comprehensive public expenditure review during 2004.
- Selected central government operations (percent of GDP; fiscal-year basis):
  - 2003/04 overall balance: -8.1
  - 2004/05 Budget projection overall balance: -2.7
  - 2004/05 Authorities’ projection overall balance: 2.7
  - Revenue and grants: 2003/04 = 22.3; 2004/05 Budget = 23.6; 2004/05 Authorities’ = 22.1
  - Revenue: 2003/04 = 22.0; 2004/05 Budget = 23.4; 2004/05 Staff = 21.8
  - Current revenue: 2003/04 = 21.0; 2004/05 Budget = 22.6; 2004/05 Staff = 21.1
  - Tax revenue: 2003/04 = 18.4; 2004/05 Budget = 20.5; 2004/05 Staff = 18.9
  - Nontax revenue: 2003/04 = 2.5; 2004/05 Budget = 2.2; 2004/05 Staff = 2.2
  - Capital revenue: 2003/04 = 1.0; 2004/05 Budget = 0.7; 2004/05 Staff = 0.7
  - Grants: 2003/04 = 0.3; 2004/05 Budget = 0.3; 2004/05 Staff = 0.3
  - Expenditure: 2003/04 = 29.5; 2004/05 Budget = 26.3; 2004/05 Staff = 24.8
  - Current expenditure: 2003/04 = 19.6; 2004/05 Budget = 19.6; 2004/05 Staff = 18.2
  - Interest payments (of current expenditure): 2003/04 = 3.6; 2004/05 Budget = 3.8; 2004/05 Staff = 3.8
  - Capital expenditure and net ldi: 2003/04 = 9.9; 2004/05 Budget = 6.7; 2004/05 Staff = 6.6
  - Unidentified expenditure: 2003/04 = 0.9; 2004/05 Budget = 0.0; 2004/05 Staff = 0.0
- Staff reservations and concerns:
  - Probable low yield of the land tax absent a collection agency or functional taxpayer database.
  - Lack of buoyancy of the tax regime likely to continue depressing revenue in FY 2004/05.
  - Need for wider-ranging tax measures and a freeze of current expenditure to supplement cuts in capital expenditure.
  - Concern that the deficit exceeded the budgeted level by about 3 percent of GDP in the previous fiscal year.
  - Need to monitor budget execution to avoid expenditure overruns.

### Staff-recommended additional fiscal measures (totaling around 2 percent of GDP)
- Strengthening taxes:
  - Eliminate tax exemptions, streamline and increase sales tax rates, raise or impose excise taxes, reduce the basic income tax exemption.
  - Estimated revenue impact: about 0.6 percent of GDP in FY 2004/05 and about 1½ percent of GDP on a long-term basis.
  - Objective: bring tax revenue in relation to GDP closer to levels of other English-speaking Caribbean countries.
- Freezing current outlays:
  - Estimated savings: about 1.4 percent of GDP in FY 2004/05.
  - Measures include freeze in public sector wage bill (requires review of wage agreement and public sector employment), and decline in outlays for goods and services with completion of payments to the new telephone company.
- Limiting budget-financed investment:
  - Reduce capital outlays in line with authorities’ projections and limit budget-financed investment projects to completion of those currently in progress; new projects to be financed by foreign donors and multilateral agencies.
- Improving monitoring:
  - Closely monitor budget execution to avoid expenditure overruns.

### DFC restructuring and related fiscal risks
- Authorities intend to return the DFC to its original mandate as a small development bank focused on export sector and education.
- After refinancing most of DFC’s external debt, authorities are offering some DFC assets for sale, including housing and a portion of its unencumbered loan portfolio.
- Prospectus issued; several expressions of interest received.
- Staff urged:
  - Seek technical assistance in restructuring and reorganizing the DFC.
  - Provide an equity injection if necessary for DFC to fulfill its mandate.
- Staff cautioned that DFC was expanding its loan portfolio before completing restructuring, risking misallocation of resources and higher fiscal costs.
- Decision to place DFC under central bank banking supervision beginning January 2004 welcomed by staff.
- Note on asset sale: buyer may apply for a banking license; loan portfolio for sale includes nonperforming loans and excludes performing mortgage loans whose cash flow constitutes collateral for loans to the DFC.

### Monetary and exchange rate policies
- Authorities committed to the exchange rate peg as anchor for confidence and inflation expectations (BZ$2 per U.S. dollar).
- Liquidity and reserve measures:
  - Authorities intended to increase cash reserve requirements from 6 percent to 7 percent for all types of deposits effective April 2004 (Board to consider increase effective May 1, 2004 in later statements).
  - Combined with fiscal adjustment, projected to contain growth of the CBB’s net domestic assets and slow growth in credit to the private sector to 6.4 percent in 2004.
  - Authorities acknowledged need to be ready to protect the balance of payments position by further adjusting monetary policy if fiscal adjustment fell short, but were concerned about adverse effects on growth.
- Reserve and liquidity framework changes:
  - Agreement to move towards a unified reserve requirement.
  - Authorities committed to gradually transforming the liquidity ratio to a prudential requirement while maintaining existing cash requirement ratio as a monetary policy instrument.
  - Intention to exclude mortgages from definition of “approved liquid assets” to avoid unduly encouraging residential lending.
- Exchange market reforms recommended by staff:
  - Move to a more market-determined and transparent exchange rate system.
  - Gradual widening of the band in the cambios system and removal of some operating restrictions and implicit taxation to integrate parallel market transactions into the cambios and eventually unify foreign exchange markets.
  - Define clear rules for central bank sales of foreign exchange to the private sector to limit resource misallocation and rent-seeking.
  - Staff noted multiple currency practices arising from several foreign exchange markets with rates differing by more than 2 percent from the official rate; selective central bank sales constitute an exchange restriction and require Fund approval, which would not be forthcoming without a clear timetable for elimination.
- Authorities’ stance on cambios:
  - Unconvinced about need to liberalize cambios regime; emphasized tighter controls to prevent illicit transactions.
  - Agreed to review functioning of the cambios and commissioned a CBB report due by end-April 2004.

### Structural policies, competitiveness, and trade vulnerability
- Privatization and deregulation efforts:
  - Authorities have privatized all public enterprises and deregulated (telecommunications monopoly eliminated in 2003).
  - Considering donor-financed projects to enhance export sector competitiveness via cost-reduction (transportation and storage, logistics consulting), training (ancillary tourism services), and product diversification.
- Vulnerability to preference erosion:
  - Belize among most vulnerable middle-income countries to loss of preferential market access.
  - Exports dominated by sugar and bananas, highly dependent on preferential access to EU and U.S. markets.
  - Staff estimate: a 40 percent reduction in Belize’s preference margin would cause export revenue to drop by 10-12 percent (assumes constant volumes, full utilization of preferences, and that all rents from preferential access accrue to exporters).
- Trade regime and import restrictions:
  - Trade regime relatively restrictive; non-tariff barriers pervasive.
  - Authorities have dismantled tariffs on CARICOM goods, but revenue replacement duties and comprehensive import-licensing regime remain covering 29 groups of goods.
  - Belize trade restrictiveness index: 5 (indicates a moderately restrictive regime).

### Statistics and data adequacy (sections 1 and 28; Box 3)
- General assessment:
  - Belize’s statistical information is insufficient to monitor economic developments on a timely basis.
  - Shortcomings identified in: national accounts, prices, external trade and debt, government finance, and labor statistics.
- National accounts improvements made in 2002-03 with Fund staff advice:
  - constant prices estimates based on a more recent year (2000);
  - two independent methodologies to calculate GDP at market prices;
  - sector by sector methodological improvements;
  - calculation of export and import price indexes;
  - methodology for measurement of investment based on imports of capital goods and input costs;
  - introduction of a quarterly GDP measurement.
- Remaining statistical issues:
  - CPI market basket and reference base outdated (household expenditure survey June 1990–March 1991; reference base November 1990).
  - CPI calculated only four times a year with a lag of about three months.
  - Labor market statistics scant and irregular.
  - Fiscal accounts classification (current vs. capital) does not conform to international standards; government finance data not reported sub-annually since 1997.
  - DFC accounts not well integrated into monetary or fiscal accounts.
- Staff conclusion: development of a set of high frequency indicators to monitor developments on a timely basis is a critical need.

### IMF staff and Executive Director statements (selected operational notes)
- Recent tax measures: Parliament approved revenue enhancements in February, including a 1 percentage point increase in the general sales tax; staff estimates the measures will yield just under 1 percent of GDP more during FY 2004/05 than measures envisaged in the budget.
- Government nationalized the largest phone company; intention to reprivatize once interconnection issue is settled.
- Central Bank of Belize measures: Board to consider increase to cash reserve requirement from 6 percent to 7 percent; mortgages to be eliminated from list of approved liquid assets effective April 1, 2004.
- Authorities committed to preserving the US$ exchange peg and target reduction in the overall fiscal deficit of some 5 percent of GDP in the 2004/05 fiscal year.
- Monitoring and contingency: monthly monitoring in place to control expenditure to budget; authorities stand ready to implement further revenue and/or expenditure measures if needed.

*Source: _cr04102 - Executive Summary — https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2004/_cr04102.pdf*

### Executive Summary   ....................................................................................................

### _cr04102 - Executive Summary

### Executive Summary
- Real GDP growth recovered in 2003 following shocks in 2001-02; inflation remained low.
- Underlying macroeconomic position remained worrisome: fiscal and external current account imbalances at unsustainable levels.
- Net international reserves covered about half of public short-term debt service on a remaining maturity basis at end-2003.
- Public and publicly guaranteed debt reached 92 percent of GDP (mostly nonconcessional external debt).
- Authorities committed to the exchange rate peg as a critical anchor; staff recommended urgent fiscal correction and tightening of monetary policies to sustain the peg.
- Staff recommended measures to make the exchange rate regime more transparent and market-determined, with a view to eventual unification of the markets.
- Authorities acknowledged present fiscal and monetary policies were unsustainable; policy discussions focused on the extent and depth of adjustment measures.
- Authorities announced policy measures: central government budget for FY 2004/05 aims to reduce the deficit from around 8 percent of GDP in FY 2003/04 to below 3 percent of GDP, mainly via an increase in land taxes and compression of capital expenditure; plan to tighten monetary policy in line with staff recommendations.
- Staff supported tightening but questioned consistency of the fiscal plan: authorities’ revenue measures likely to fall short of estimated yields; staff recommended a broader range of revenue and expenditure measures and urged swift, sustained adjustment.

### Recent Economic Developments
- Real GDP growth:
  - 2003: 5.5 percent (estimated)
  - 2002: 4.3 percent
  - Drivers: agricultural output grew by more than 20 percent in H1 2003 vs. H1 2002; fishing sector (including shrimp aquaculture) expanded by more than 300 percent; tourism receipts grew by 25 percent in 2003.
- Inflation: around 2½ percent in 2003.
- Real effective exchange rate (official exchange rate basis): depreciated by about 4 percent during 2003 (mainly due to U.S. dollar depreciation vs. Euro).
- Central government fiscal developments:
  - Central government deficit FY 2003/04 projected to decline only to 8.1 percent of GDP from 9.6 percent in FY 2002/03.
  - Capital expenditure compressed from 12.6 percent of GDP in FY 2002/03 to 9.9 percent of GDP in FY 2003/04.
  - Factors offsetting revenue: tax exemptions, sizeable wage increases (three-year agreement calls for 8 percent annual wage increases beginning April 2003), payments for new telephony services.
- Financing and debt:
  - FY 2003/04 net external disbursements to central government projected at 12½ percent of GDP, mostly on commercial terms.
  - Public and publicly guaranteed debt rose to around 92 percent of GDP at end-2003.
  - Notable bond issuances: US$100 million 12-year global bond at 9.75 percent with an 85 percent CAC; earlier US$125 million 10-year global bond at 9.5 percent.
- Development Finance Corporation (DFC):
  - Government transfers around 2 percent of GDP in 2003 to fund DFC credit expansion and investment projects.
  - Government provided about 6 percent of GDP to refinance external liabilities of the DFC.
  - DFC nonperforming loan ratio: 24 percent.
  - Large maturity mismatch and unsold physical assets (~one third of balance sheet); staff estimated DFC has a negative capital position when corrected for loan classification, asset valuation, and provisioning.
- Monetary sector and banking:
  - CBB repurchased about BZ$50 million of short-term government securities from commercial banks and used moral suasion to encourage lower lending rates.
  - Private sector credit expanded about 12 percent in 2003.
  - M2 continued to fall relative to GDP.
  - Loan-to-deposit ratio rose from 74 percent at end-2001 to 98 percent at end-2003.
  - Movement of deposits offshore driven by legislation allowing companies in export processing zones to move deposits to international banks and erosion of confidence.
  - Financial sector indicators (excluding DFC) generally remained strong.
- Balance of payments:
  - Merchandise exports and tourism receipts grew by about 12 percent and 25 percent, respectively, in 2003.
  - Imports rose by about 9 percent in 2003.
  - Current account deficit narrowed by 1.4 percentage points of GDP in 2003 but remained high at 15.8 percent of GDP.
  - Gross reserves fell by US$30 million during 2003 to US$76 million, about half of public short-term debt service on a remaining maturity basis.
  - Parallel market spread around 10 percent in 2003; CBB sold foreign exchange to commercial banks on an ad-hoc basis to prevent spread increases.

### Policy Discussions and Recommendations
- Authorities’ stance:
  - Agreed fiscal and monetary policies were unsustainable.
  - FY 2004/05 budget targets deficit below 3 percent of GDP, relying mainly on increased land taxes and further capital spending compression.
  - Willingness to implement additional revenue and expenditure measures if necessary.
  - Monetary policy to be tightened in line with staff recommendations.
- Staff warnings and recommendations:
  - Emphasized need for forceful, immediate, and sustained measures to avoid rapid erosion of confidence and loss of access to international capital markets.
  - Cautioned that revenues likely to fall short of authorities’ projections; historical expenditure overruns raise risks on spending side.
  - Urged swift introduction and sustained implementation of additional measures and highlighted that the 2002 policy correction was comprehensive but short-lived.
  - Recommended tightening monetary policy to sustain the exchange rate peg and increasing transparency and market-determination of exchange rate regime, aiming for eventual market unification.

### Macroeconomic Framework and Projections (2003–04)
- Key annual figures (2003 and 2004):
  - Real GDP growth: 2003 = 5.5; 2004 = 3.5
  - Contributions to growth:
    - Consumption: 2003 = 6.7; 2004 = -0.6
    - Gross capital formation: 2003 = -1.5; 2004 = -3.1
    - Exports of goods and services: 2003 = 4.0; 2004 = 6.8
    - Imports of goods and services: 2003 = -3.7; 2004 = 0.3
  - Inflation: 2003 = 2.5; 2004 = 2.5
  - Central government balance (percent of GDP, FY basis): 2003 = -8.1; 2004 = -2.7
  - Credit to the private sector: 2003 = 12.2; 2004 = 6.4
  - External current account deficit (percent of GDP): 2003 = -15.8; 2004 = -8.4
  - Gross official reserve coverage of 12-month debt: 2003 = 50.2; 2004 = 67.5
  - Public and publicly guaranteed debt (percent of GDP): 2003 = 92.2; 2004 = 92.6
- Short-term outlook under a sharp, front-loaded fiscal correction:
  - 2004 GDP growth projected at about 3½ percent, supported by strong export growth from recent investment in tourism, shrimp farming, and agriculture.
  - External current account deficit expected to fall to around 8½ percent of GDP in 2004; reserve coverage to rebuild.
  - Public and publicly guaranteed debt to remain about unchanged at around 93 percent of GDP at end-2004.
- Medium-term outlook with sustained adjustment:
  - Staff projections assume overall central government balance narrows by about 8 percent of GDP over the coming two-year period, mostly in FY 2004/05, and primary fiscal surplus remains around 6 percent of GDP thereafter.
  - Public and publicly guaranteed debt projected to decline from 92 percent of GDP at end-2003 to around 67 percent in 2008.
  - External current account deficit projected to improve from 8.4 percent of GDP in 2004 to 3.8 percent of GDP by 2008.
  - GDP growth projected to average about 4½ percent over the projection period, supported largely by continued export expansion.

*Source: _cr04102 - Executive Summary — https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2004/_cr04102.pdf*

### 13.      Weak or unsustained policy adjustment would subject the outlook to

### _cr04102 - 13.      Weak or unsustained policy adjustment would subject the outlook to

### Debt sustainability and risk scenarios
- Staff debt sustainability analysis: continuation of present policies would push public debt to 137 percent of GDP by 2008.
- High vulnerability to exchange rate or other shocks given the debt ratio at 137 percent of GDP by 2008.
- Even with a rapid and sustained fiscal correction, economy remains highly vulnerable because of:
  - already high levels of external debt and debt service;
  - exposure to natural disasters such as hurricanes and flooding;
  - reliance on preferential trade access for exports of sugar and bananas.
- Basic scenario projections (Figure 7): public debt trajectories shown for "Current policies" and "Adjustment scenario" across 2003–2008.
- Selected exogenous shock scenarios in Figure 7 include:
  - Lower GDP growth in 2004-05.
  - 30 percent real depreciation in 2004.
  - Higher deficit in 2004-05.

*Staff methodological notes*
- Fiscal data presented on a fiscal year basis, except medium-term debt sustainability analysis (Table 10), which is on a calendar year basis.
- Staff work follows methodology in “Sustainability Assessments–Review of Application and Methodological Refinements,” (07/01/2003).
- An external debt sustainability analysis cannot be carried out due to lack of sufficient information on private sector external debt and debt service obligations.

### Fiscal policy stance, projections, and staff assessment
- Authorities’ aim: reduce the fiscal deficit to below 3 percent of GDP in FY 2004/05.
- Authorities project revenue increase of about 2 percent of GDP, mainly from improvements in tax administration and introduction of a new land tax.
- Tax structure change planned: revise various taxes during 2004 to shift emphasis from duties on international trade to taxes on domestic consumption.
- Most adjustment would result from further compression of capital expenditure.
- Authorities plan a comprehensive public expenditure review during 2004.

- Operations of the Central Government (In percent of GDP; fiscal-year basis) — selected figures as presented:
  - 2003/04 overall balance: -8.1
  - 2004/05 Budget projection overall balance: -2.7
  - 2004/05 Authorities’ projection overall balance: 2.7
  - Revenue and grants: 2003/04 = 22.3; 2004/05 Budget = 23.6; 2004/05 Authorities’ = 22.1
  - Revenue: 2003/04 = 22.0; 2004/05 Budget = 23.4; 2004/05 Staff = 21.8
  - Current revenue: 2003/04 = 21.0; 2004/05 Budget = 22.6; 2004/05 Staff = 21.1
  - Tax revenue: 2003/04 = 18.4; 2004/05 Budget = 20.5; 2004/05 Staff = 18.9
  - Nontax revenue: 2003/04 = 2.5; 2004/05 Budget = 2.2; 2004/05 Staff = 2.2
  - Capital revenue: 2003/04 = 1.0; 2004/05 Budget = 0.7; 2004/05 Staff = 0.7
  - Grants: 2003/04 = 0.3; 2004/05 Budget = 0.3; 2004/05 Staff = 0.3
  - Expenditure: 2003/04 = 29.5; 2004/05 Budget = 26.3; 2004/05 Staff = 24.8
  - Current expenditure: 2003/04 = 19.6; 2004/05 Budget = 19.6; 2004/05 Staff = 18.2
  - Interest payments (of current expenditure): 2003/04 = 3.6; 2004/05 Budget = 3.8; 2004/05 Staff = 3.8
  - Capital expenditure and net ldi: 2003/04 = 9.9; 2004/05 Budget = 6.7; 2004/05 Staff = 6.6
  - Unidentified expenditure: 2003/04 = 0.9; 2004/05 Budget = 0.0; 2004/05 Staff = 0.0

- Staff reservations and concerns:
  - Probable low yield of the land tax absent a collection agency or functional taxpayer database.
  - Lack of buoyancy of the tax regime likely to continue depressing revenue in FY 2004/05.
  - Need for wider-ranging tax measures and a freeze of current expenditure to supplement cuts in capital expenditure.
  - Concern that the deficit exceeded the budgeted level by about 3 percent of GDP in the previous fiscal year.
  - Need to monitor budget execution to avoid expenditure overruns.

### Staff-recommended additional fiscal measures (totaling around 2 percent of GDP)
- Strengthening taxes:
  - Eliminate tax exemptions, streamline and increase sales tax rates, raise or impose excise taxes, reduce the basic income tax exemption.
  - Estimated revenue impact: about 0.6 percent of GDP in FY 2004/05 and about 1½ percent of GDP on a long-term basis.
  - Objective: bring tax revenue in relation to GDP closer to levels of other English-speaking Caribbean countries.
- Freezing current outlays:
  - Estimated savings: about 1.4 percent of GDP in FY 2004/05.
  - Measures include freeze in public sector wage bill (requires review of wage agreement and public sector employment), and decline in outlays for goods and services with completion of payments to the new telephone company.
- Limiting budget-financed investment:
  - Reduce capital outlays in line with authorities’ projections and limit budget-financed investment projects to completion of those currently in progress; new projects to be financed by foreign donors and multilateral agencies.
- Improving monitoring:
  - Closely monitor budget execution to avoid expenditure overruns.

- Authorities’ position:
  - Reiterated commitment to contain the fiscal deficit at the budgeted level.
  - Did not see immediate need for additional measures but agreed to reassess budget projections and consider more comprehensive tax measures if necessary.
  - Agreed to monitor budget execution closely to detect deviations early.

### DFC restructuring and related fiscal risks
- Authorities intend to return the DFC to its original mandate as a small development bank focused on export sector and education.
- After refinancing most of DFC’s external debt, authorities are offering some DFC assets for sale, including housing and a portion of its unencumbered loan portfolio.
- Prospectus issued; several expressions of interest received.
- Staff urged:
  - Seek technical assistance in restructuring and reorganizing the DFC.
  - Provide an equity injection if necessary for DFC to fulfill its mandate.
- Staff cautioned that DFC was expanding its loan portfolio before completing restructuring, risking misallocation of resources and higher fiscal costs.
- Decision to place DFC under central bank banking supervision beginning January 2004 welcomed by staff.
- Note on asset sale: buyer may apply for a banking license; loan portfolio for sale includes nonperforming loans and excludes performing mortgage loans whose cash flow constitutes collateral for loans to the DFC.

### Monetary and exchange rate policies
- Authorities committed to the exchange rate peg as anchor for confidence and inflation expectations.
- Authorities noted competitiveness indicators: strength of foreign direct investment and exports, moderate private sector wage pressures due to labor migration, business community support for peg.
- Authorities agreed present macro policy stance not consistent with maintenance of the peg and committed to adjusting demand policies as necessary.
- Staff caution: delaying adjustment risks accelerating loss of confidence and eventual loss of the exchange rate peg.

- Liquidity and reserve measures:
  - Authorities intended to increase cash reserve requirements from 6 percent to 7 percent for all types of deposits effective April 2004.
  - Combined with fiscal adjustment, projected to contain growth of the CBB’s net domestic assets and slow growth in credit to the private sector to 6.4 percent in 2004.
  - Authorities acknowledged need to be ready to protect the balance of payments position by further adjusting monetary policy if fiscal adjustment fell short, but were concerned about adverse effects on growth.

- Reserve and liquidity framework changes:
  - Agreement to move towards a unified reserve requirement.
  - Authorities committed to gradually transforming the liquidity ratio to a prudential requirement while maintaining existing cash requirement ratio as a monetary policy instrument.
  - Intention to exclude mortgages from definition of “approved liquid assets” to avoid unduly encouraging residential lending.

- Exchange market reforms recommended by staff:
  - Move to a more market-determined and transparent exchange rate system.
  - Gradual widening of the band in the cambios system and removal of some operating restrictions and implicit taxation to integrate parallel market transactions into the cambios and eventually unify foreign exchange markets.
  - Define clear rules for central bank sales of foreign exchange to the private sector to limit resource misallocation and rent-seeking.
  - Staff noted multiple currency practices arising from several foreign exchange markets with rates differing by more than 2 percent from the official rate; selective central bank sales constitute an exchange restriction and require Fund approval, which would not be forthcoming without a clear timetable for elimination.

- Authorities’ stance on cambios:
  - Unconvinced about need to liberalize cambios regime; emphasized tighter controls to prevent illicit transactions.
  - Agreed to review functioning of the cambios and commissioned a CBB report due by end-April 2004.

- Foreign exchange system structure (Box 1 summary)
  - Three markets: official market, private foreign exchange houses (cambios), and a parallel market.
  - CBB’s only recurrent source of foreign exchange: sugar exports subject to surrender requirements.
  - Cambios established mid-2002 with restrictions: authorized to buy foreign exchange in tourism sector, must sell 5 percent of gross purchases to CBB at the official rate, pay annual fee of US$5,000, cannot trade at a rate of more than BZ$2.15 per US$ or buy/sell more than US$10,000 a day in one or related transactions. Reported trading volume insignificant due to restrictions and implicit taxation.
  - Parallel market remains illegal though cambios establishment led to some integration and transparency.

### Structural policies, competitiveness, and trade vulnerability
- Privatization and deregulation efforts:
  - Authorities have privatized all public enterprises and deregulated (telecommunications monopoly eliminated in 2003).
  - Considering donor-financed projects to enhance export sector competitiveness via cost-reduction (transportation and storage, logistics consulting), training (ancillary tourism services), and product diversification.

- Vulnerability to preference erosion (Box 2):
  - Belize among most vulnerable middle-income countries to loss of preferential market access.
  - Exports dominated by sugar and bananas, highly dependent on preferential access to EU and U.S. markets.
  - Staff estimate: a 40 percent reduction in Belize’s preference margin would cause export revenue to drop by 10-12 percent (assumes constant volumes, full utilization of preferences, and that all rents from preferential access accrue to exporters).

- Trade regime and import restrictions:
  - Trade regime relatively restrictive; non-tariff barriers pervasive.
  - Authorities have dismantled tariffs on CARICOM goods, but revenue replacement duties and comprehensive import-licensing regime remain covering 29 groups of goods.
  - Authorities did not agree that import restrictions should be phased out in favor of tariffs, citing food security concerns and potential severe price volatility.
  - Belize trade restrictiveness index: 5 (indicates a moderately restrictive regime).

- Debt management and financial sector supervision:
  - Improvements in debt management recommended: harmonize and update debt statistics (including publicly guaranteed debt), set clear objectives for debt management, develop legal framework for issuance of public debt and guarantees, train debt managers, and improve technological infrastructure.
  - Financial supervision efforts intensified since December 2003 with long-term Fund advisor and technical assistance in context of Offshore Financial Center Assessment and IDB support.
  - Central bank supervisory weaknesses noted: understaffing, lack of administrative/legal/political independence to enforce prudential norms.
  - Supervision fragmented across financial entities; credit unions not effectively regulated or supervised.
  - Decision by CBB to study improvements and coordination of supervision through long-term Fund technical assistance welcomed by staff.
  - Efforts to prevent money laundering and combat financing of terrorism highlighted, including creation of a Financial Intelligence Unit as central coordinator.

*Source: IMF staff report text contained in the provided PDF chapter.*

### 28.      Belize’s statistical information is insufficient to monitor economic developments

### 28.      Belize’s statistical information is insufficient to monitor economic developments

### Statistics: National Accounts (Box 3)
- Problem statement:
  - "Until recently, national accounts data in Belize was unreliable and provided with long delays."
  - The Central Statistical Office (CSO) produced national accounts only annually and with significant lags, which "severely hampered the quality and timeliness of financial planning and budget preparation."
  - "Quarterly indicators of economic activity were also unavailable."
  - National accounts at constant prices were unreliable due to an obsolete base year "(1984)."

- Improvements made in 2002-03 with Fund staff advice and technical assistance:
  - "constant prices estimates based on a more recent year (2000);"
  - "two independent methodologies to calculate GDP at market prices;"
  - "sector by sector methodological improvements;"
  - "calculation of export and import price indexes;"
  - "methodology for measurement of investment based on imports of capital goods and input costs;"
  - "and the introduction of a quarterly GDP measurement."

- External assistance:
  - "The improvements in the national accounts benefited from advice and technical assistance from Fund staff and Statistics Sweden."

### Key staffing and data adequacy findings
- "Belize’s statistical information is insufficient to monitor economic developments on a timely basis."
- Economic data is "reported with long delays and with a quality and frequency that render some economic statistics inadequate for monitoring purposes (Appendix V)."
- The staff "welcomed the substantial improvement in the GDP statistics, which were rebased from 1984 to 2000 and the ongoing efforts to prepare quarterly GDP indicators (Box 3)."
- The authorities "expressed their appreciation for the technical assistance that the Fund has provided in the past and expressed their interest in receiving further assistance to continue to improve the quality of their data."
- Concluding appraisal statement: "Belize statistical information is inadequate to monitor macroeconomic developments sufficiently. While the staff notes the authorities’ continued efforts to improve the statistical base, the development of a set of high frequency indicators to monitor developments on a timely basis is a critical need."

### Related macroeconomic context and policy implications from Staff Appraisal
- Urgent macroeconomic needs:
  - "There is an urgent need to re-establish a viable external position through a comprehensive, swift, and sustained policy adjustment."
  - Fiscal and external current account deficits remain "at unsustainable levels," causing "severe pressures on international reserves and high and rapidly growing levels of public and publicly guaranteed debt."
  - Past short-lived adjustment efforts "have also undermined confidence and access to international capital markets, and have raised questions about the sustainability of the exchange rate peg."

- Fiscal policy recommendations:
  - "A comprehensive and sustained fiscal correction will be a critical cornerstone of any adjustment strategy, but will need to be supported by tight monetary policies and structural measures to enhance the long-term competitiveness of the economy."
  - Fiscal adjustment should rest on "both wide-ranging tax revenue measures and substantial expenditure restraint, including a freeze of current expenditure."
  - While authorities intend "to contain the FY 2004/05 deficit below 3 percent of GDP," the staff considers this "subject to considerable risk."
  - Possible additional measures: "a nominal freeze in central government current expenditure, a comprehensive tax revenue effort aimed at widening the tax base and reducing excessive exemptions, a curtailment of budget-financed projects, and improvements in budget monitoring and control."
  - The authorities should "stand ready to introduce additional corrective measures to bring fiscal performance back on track, if necessary."
  - The staff "also urges the authorities to design and implement a debt strategy."

- Financial sector and monetary policy recommendations:
  - "The staff welcomes the authorities’ decision to restructure the DFC." But there is "an urgent need to control lending and investment operations of the DFC in advance of the completion of the restructuring and disposition of its assets in order to reduce the risk of further misallocation of resources."
  - Recent decision: subjecting the DFC "to the prudential regulations applicable to commercial banks and to banking supervision."
  - Monetary tightening: "The staff welcomes the authorities’ decision to tighten monetary policy."
    - Rationale: essential to "support the exchange rate peg, including by discouraging deposit flight," and to "help strengthen the banking sector by reversing the recent increase in the system’s loan to deposit ratio."
    - Operational step: "The authorities’ decision to eliminate mortgages as approved liquid assets will assist the move toward a system of unified reserve requirements."
  - Supervision: "The authorities need to strengthen their capacity to oversee financial institutions and bolster the independence of the bank supervisory authority."
    - Staff welcomes efforts to "improve banking supervision and the decision to study possible improvements in the legal framework for supervision of non-bank financial institutions."

- Trade, exchange, and external sector recommendations:
  - "Existing import restrictions should be eliminated or converted into tariffs to improve resource allocation, increase revenue, and reduce administrative costs."
  - Belize benefits from preferential trade access for sugar and banana exports and will need "continued efforts to improve competitiveness or substitute crops in order to cope with the eventual loss of these preferences."
  - Foreign exchange regime changes: "A modification of the foreign exchange regulations would increase the transparency and efficiency of the exchange regime."
    - Need to "modify the regulations concerning the foreign exchange houses to increase the transparency of the private foreign exchange market and to create incentives to incorporate transactions from the parallel market, with the eventual goal of integrating the foreign exchange markets."
  - "Belize maintains an exchange restriction and multiple currency practices, which are subject to Fund approval under Article VIII. As the authorities have not agreed to a timetable for their removal, the staff does not recommend their approval."

_International Monetary Fund staff report excerpt: "Belize’s statistical information is insufficient to monitor economic developments" (section 28 and Box 3; Staff Appraisal excerpts)._

### 38.      It is proposed that the next Article IV consultation be held on the standard 12-month

### _cr04102 - 38.      It is proposed that the next Article IV consultation be held on the standard 12-month

### Consultation timing
- It is proposed that the next Article IV consultation be held on the standard 12-month cycle.

### Macroeconomic outlook and key indicators (selected)
- GDP at constant prices (annual percentage change): 2000: 12.1; 2001: 4.9; 2002: 4.3; 2003: 5.5; 2004: 3.5.
- Consumer prices (average): 2000: 0.6; 2001: 1.2; 2002: 2.3; 2003: 2.5; 2004: 2.5.
- Consumer prices (end of period): 2000: 0.7; 2001: 0.9; 2002: 3.2; 2003: 2.5; 2004: 2.5.
- Exports (U.S. dollars, percent change): 2000: 10.1; 2001: -6.1; 2002: 12.1; 2003: 12.2; 2004: 15.0.
- Imports (U.S. dollars, percent change): 2000: 26.1; 2001: -0.2; 2002: 8.1; 2003: 8.6; 2004: 2.0.
- Nominal effective exchange rate (annual change): 2000: 3.9; 2001: 3.2; 2002: -1.0; 2003: -5.6.
- Real effective exchange rate (annual change): 2000: 1.4; 2001: 1.9; 2002: -0.7; 2003: -5.3.

### Fiscal sector (central government, percent of GDP)
- Revenue: 2000/01: 22.3; 2001/02: 24.7; 2002/03: 22.8; 2003/04: 22.3; 2004/05 (Proj.): 22.1.
- Current expenditure: 2000/01: 17.6; 2001/02: 19.1; 2002/03: 19.1; 2003/04: 19.6; 2004/05 (Proj.): 18.2.
- Capital expenditure: 2000/01: 13.7; 2001/02: 15.2; 2002/03: 12.6; 2003/04: 9.9; 2004/05 (Proj.): 6.6.
- Primary balance: 2000/01: -7.3; 2001/02: -6.7; 2002/03: -5.8; 2003/04: -4.5; 2004/05 (Proj.): 1.1.
- Overall balance: 2000/01: -9.7; 2001/02: -9.8; 2002/03: -9.6; 2003/04: -8.1; 2004/05 (Proj.): -2.7.
- Privatization receipts: 2000/01: 3.5; 2001/02: 0.3; 2002/03: 2.5; 2003/04: 0.9; 2004/05 (Proj.): 0.0.
- Central government borrowing requirement: 2000/01: 6.2; 2001/02: 9.5; 2002/03: 7.1; 2003/04: 7.2; 2004/05 (Proj.): 2.7.
  - Foreign financing (central government): 2000/01: 12.2; 2001/02: 4.6; 2002/03: 13.0; 2003/04: 12.5; 2004/05 (Proj.): 3.0.
  - Domestic financing (central government): 2000/01: -6.2; 2001/02: 4.9; 2002/03: -5.9; 2003/04: -5.3; 2004/05 (Proj.): -0.3.

### Savings, investment, and current account (percent of GDP)
- Gross domestic investment: 2000: 29.6; 2001: 24.8; 2002: 23.9; 2003: 21.0; 2004 (Proj.): 17.4.
- Gross national savings: 2000: 10.9; 2001: 6.8; 2002: 6.7; 2003: 5.2; 2004 (Proj.): 9.0.
- External current account (including official grants): 2000: -18.7; 2001: -18.0; 2002: -17.2; 2003: -15.8; 2004 (Proj.): -8.4.

### Public debt and debt service
- Public and publicly guaranteed debt (percent of GDP): 2000: 71.6; 2001: 83.4; 2002: 88.0; 2003: 92.2; 2004 (Proj.): 92.6.
  - Domestic debt (percent of GDP): 2000: 6.0; 2001: 7.8; 2002: 1.8; 2003: 6.5; 2004 (Proj.): 9.5.
  - External debt (percent of GDP): 2000: 65.6; 2001: 75.6; 2002: 86.2; 2003: 85.7; 2004 (Proj.): 83.1.
- External debt service (central government external debt): 2000: 4.5; 2001: 5.6; 2002: 10.9; 2003: 6.2; 2004 (Proj.): 6.6.
  - In percent of exports of goods and services: 2000: 8.3; 2001: 10.8; 2002: 20.1; 2003: 11.0; 2004 (Proj.): 10.8.
  - In percent of government current revenue: 2000: 22.5; 2001: 26.1; 2002: 46.7; 2003: 29.5; 2004 (Proj.): 31.4.

### External sector and reserves
- Overall balance of payments (US$ million): 2000: 51.7; 2001: -10.5; 2002: 0.5; 2003: -29.9; 2004 (Proj.): 0.0.
- Gross official reserves (end of period, US$ million): 2000: 114.7; 2001: 104.2; 2002: 106.2; 2003: 76.2; 2004 (Proj.): 75.3.
  - Usable reserves (end of period, US$ million): 2000: 11.5; 2001: 16.0; 2002: 90.5; 2003: 69.0; 2004 (Proj.): 69.0.
  - Gross official reserves in months of imports: 2000: 0.2; 2001: 0.3; 2002: 1.7; 2003: 1.2; 2004 (Proj.): 1.2.

### Balance of payments (selected items, US$ million)
- Current account balance (US$ million): 2000: -155.4; 2001: -156.5; 2002: -159.8; 2003: -158.2; 2004 (Proj.): -89.3.
- Trade balance (US$ million): 2000: -170.1; 2001: -186.7; 2002: -190.9; 2003: -196.6; 2004 (Proj.): -155.8.
  - Exports, f.o.b. (US$ million): 2000: 291.5; 2001: 273.8; 2002: 307.0; 2003: 344.4; 2004 (Proj.): 396.0.
  - Imports, f.o.b. (US$ million): 2000: -461.6; 2001: -460.5; 2002: -497.9; 2003: -541.0; 2004 (Proj.): -551.8.
- Services (US$ million): 2000: 17.3; 2001: 38.4; 2002: 52.8; 2003: 72.8; 2004 (Proj.): 92.4.
  - Travel receipts (US$ million): 2000: 77.3; 2001: 81.4; 2002: 86.8; 2003: 108.7; 2004 (Proj.): 130.4.
- Income (US$ million): 2000: -63.0; 2001: -77.6; 2002: -99.7; 2003: -107.7; 2004 (Proj.): -120.7.
  - Public sector interest payments (US$ million): 2000: -27.8; 2001: -43.8; 2002: -54.3; 2003: -63.1; 2004 (Proj.): -76.9.
- Transfers (US$ million): 2000: 60.3; 2001: 69.5; 2002: 78.1; 2003: 73.3; 2004 (Proj.): 94.8.
  - Private (net) transfers (US$ million): 2000: 51.8; 2001: 60.3; 2002: 64.3; 2003: 67.9; 2004 (Proj.): 81.6.

### Banking and financial sector (selected)
- Money and quasi-money (M2, percent change): 2000: 15.3; 2001: 7.6; 2002: 0.2; 2003: 6.2; 2004 (Proj.): 9.4.
- Credit to the private sector (annual percent change): 2000: 25.0; 2001: 17.1; 2002: 18.1; 2003: 12.2; 2004 (Proj.): 6.4.
- Central Bank international reserves (net, BZ$ millions, end-period): 2000: 227.7; 2001: 205.5; 2002: 206.5; 2003: 146.6; 2004 (Proj.): 146.6.
- Consolidated banking system: Money and quasi-money (M2, BZ$ millions): 2000: 829.8; 2001: 892.7; 2002: 894.5; 2003: 950.1; 2004 (Proj.): 1,039.2.

### Public debt sustainability framework (selected projections, percent of GDP)
- Public sector debt (gross public and publicly guaranteed debt):
  - 2003: 92.2
  - 2004: 89.2
  - 2005 (Proj.): 84.0
  - 2006 (Proj.): 78.7
  - 2007 (Proj.): 73.3
  - 2008 (Proj.): 67.4
- Debt-stabilizing primary balance (long-run, percent of GDP): 0.6 (reported).
- Gross financing need (percent of GDP): 2003: 20.7; 2004: 11.3; 2005 (Proj.): 6.7; 2006 (Proj.): 5.4; 2007 (Proj.): 4.5; 2008 (Proj.): 3.7.
- Key macro assumptions (project averages):
  - Real GDP growth (percent): 2003: 5.5; 2004: 3.5; 2005 (Proj.): 5.0; 2006 (Proj.): 4.9; 2007 (Proj.): 4.5; 2008 (Proj.): 4.5; Proj. average: 4.6.
  - Average nominal interest rate on public debt (percent): 2003: 7.4; 2004: 9.1; 2005 (Proj.): 7.0; 2006 (Proj.): 6.9; 2007 (Proj.): 6.8; 2008 (Proj.): 6.5; Proj. average: 7.3.
  - Inflation rate (GDP deflator, percent): 2003: 2.5; 2004: 2.5; 2005 (Proj.): 1.0; 2006 (Proj.): 1.0; 2007 (Proj.): 1.0; 2008 (Proj.): 1.5; Proj. average: 1.6.
  - Primary deficit (calendar year basis, percent of GDP): 2003: 6.2; 2004: -1.8; 2005 (Proj.): -4.4; 2006 (Proj.): -4.6; 2007 (Proj.): -4.8; 2008 (Proj.): -5.0; Proj. average: -3.4.

### Debt stress tests (selected scenarios, public sector debt in percent of GDP)
- Baseline public sector debt: 2003: 92.2; 2004: 89.2; 2005: 84.0; 2006: 78.7; 2007: 73.3; 2008: 67.4.
- A1 (key variables at historical averages in 2004-08): 2003: 92.2; 2004: 92.2; 2005: 96.0; 2006: 99.8; 2007: 103.6; 2008: 107.4.
- A2 (primary balance under no policy change in 2004-08): 2003: 92.2; 2004: 96.7; 2005: 105.8; 2006: 115.3; 2007: 125.4; 2008: 136.5.
- B5 (one-time 30 percent real depreciation in 2004): 2003: 92.2; 2004: 131.7; 2005: 126.8; 2006: 121.9; 2007: 116.8; 2008: 111.3.

### Fund relations and institutional notes
- Belize joined the Fund on March 16, 1982; Status: Article VIII.
- Quota: 18.80 (SDR Million), 100.00 percent of quota.
- Fund holdings of currency: 14.56 (SDR Million), 77.45 percent of quota.
- Reserve position in Fund: 4.24 (SDR Million), 22.55 percent of quota.
- SDR Department holdings: 1.56 (SDR Million).
- Outstanding Purchases and Loans: None.
- Latest financial arrangement: SBA approved Dec. 3, 1984; Expiration May 31, 1986; Amount approved 7.13 (SDR Million); Amount drawn 7.13 (SDR Million).
- Projected Obligations to Fund: None.
- Implementation of HIPC Initiative: None.
- Exchange rate regime: Since 1976, Belize dollar pegged to U.S. dollar at BZ$2 per U.S. dollar. Since Q2 1995, central bank has rationed sales of foreign exchange to commercial banks on an ad-hoc basis except for some essential import items, giving rise to restrictions on payments and transfers for current international transactions. A parallel exchange market and foreign exchange houses trade at rates that can differ by more than 2 percent from the official rate, giving rise to multiple currency practices.
- Last Article IV consultation concluded by the Executive Board on November 1, 2002; Belize is on the standard 12-month consultation cycle.

*Source: Belize authorities; Central Bank of Belize; Ministry of Finance; and Fund staff estimates and projections as presented in the document.*

### 1. Outstanding statistical issues

### 1. Outstanding statistical issues

### General assessment
- Quality, coverage, and timeliness of Belize’s statistical information do not permit an adequate monitoring of economic developments.
- Shortcomings identified in: national accounts, prices, external trade and debt, government finance, and labor statistics.
- Authorities indicated interest in receiving technical assistance in all these areas.
- The Central Bank of Belize publishes, in irregular intervals, a quarterly bulletin covering developments in the real, fiscal, monetary, and external sectors, as well as an annual report and a statistical digest.

### External debt
- Discrepancies exist between data reported by the central bank and those reported by the ministry of finance, particularly with respect to gross external disbursements of the central government.
- Data reported by the central bank and the ministry of finance on the external debt of the public enterprises are incomplete and inconsistent with information provided by the public enterprises.
- Authorities are seeking to reduce discrepancies and inconsistencies by fostering greater cooperation among the agencies involved.

### Balance of payments
- Compilation is based on the fifth edition of the Balance of Payments Manual (BPM5); Belize has recently completed the transition to BPM5.
- Authorities are refining the process for collecting relevant data to enable presentation of quarterly balance of payments statistics.
- Coverage, currentness and reporting for publication in the International Financial Statistics (IFS) and Balance of Payments Statistics Yearbook (BOPSY): Belize has reported annual balance of payments data albeit with some lags.
- An STA mission visited Belize in April 2001 to provide assistance on balance of payments data issues.

### Real sector (national accounts, prices, labor)
- A new national accounts system has been phased-in; national accounts are now produced quarterly instead of annually.
- The base year for compilation of national accounts will move from 1984 to 2000, with consequent quality improvement of estimates at constant prices.
- CPI market basket is based on a household expenditure survey conducted from June 1990 through March 1991 and needs to be updated; the reference base currently is November 1990 and also needs updating.
- CPI is calculated only four times a year (February, May, August, and November), with a lag of about three months.
- Labor market statistics are scant and available at irregular intervals.

### Fiscal accounts
- Classification of expenditure into current and capital does not conform to international standards.
- Resumption of reporting annual data for the Government Finance Statistics Yearbook and sub-annual data for the International Financial Statistics is highly recommended.
- The most recently reported annual data were for 1997.

### Development Finance Corporation (DFC)
- The accounts of the DFC, which is a major instrument of the government’s economic policy, are not well integrated into monetary or fiscal accounts.

---

### Core statistical indicators and recent administrative actions

### Selected data reporting and frequency notes (as of February 2, 2004)
- Various series (e.g., Consumer Price Index, Exchange Rates, International Reserves) have Latest Observations dated: 11/03, 12/03, Q3/03, 07/03, 2002, 12/01, 2001, 2001.
- Date Received examples: 1/09/04, 1/29/04, 10/14/03, 8/03, 2/28/02, 3/04/02, 3/01/02.
- Frequency of Data examples: n.a., D, W, M, Q, A.
- Source abbreviations: CB = Central Bank; MoF = Ministry of Finance; CSO = Central Statistical Office.
- Confidentiality code: D = Embargoed for a specific period and are thereafter for unrestricted use.

### IMF staff statement (March 24, 2004) — key points and developments
- Recent tax measures: Parliament approved revenue enhancements in February, including a 1 percentage point increase in the general sales tax; staff estimates the measures will yield just under 1 percent of GDP more during FY 2004/05 than measures envisaged in the budget.
- Government nationalized the largest phone company (previously privatized three years earlier); intention to reprivatize once interconnection issue is settled.
- DFC financial position weakened: bankruptcy of one borrower accounted for 9 percent of the DFC’s outstanding loans as of end-2003; DFC’s nonperforming loan ratio is estimated to have increased to 32 percent.
- Central Bank of Belize monetary measures: Board to consider increase to cash reserve requirement from 6 percent to 7 percent, effective May 1, 2004; mortgages to be eliminated from list of approved liquid assets, effective April 1, 2004.

### Executive Director’s statement for Belize (March 24, 2004) — policy intentions and macro outlook
- Authorities are committed to preserving the US$ exchange peg.
- Target: reduction in the overall fiscal deficit of some 5 percent of GDP in the 2004/05 (April-March) fiscal year.
- Acknowledgement that fiscal deficits were scaled back less than foreshadowed through 2002/03 and 2003/04, primarily reflecting stronger public investment and revenue shortfalls.
- Noted macro outcomes and indicators:
  - Real GDP was 40 percent higher last year than in 1998.
  - Visible exports reached US$345m last year, up from US$195m in 1998.
  - Gross loan disbursements through 2003 exceeded US$173m.
  - Estimated fiscal tightening of 1¼ percent of GDP in the budget year ending on March 31; economic growth in 2003 could exceed 5 percent.
  - Staff prognosis for 2004: economic growth of 3½ percent; authorities’ budget estimate: 4 percent.
- Fiscal package elements to achieve about 5 percentage points of GDP deficit reduction:
  - Central government investment budgeted at 1½ percent of GDP less than last year.
  - Net DFC outlays this year will be just ½ percent of GDP, to be fully financed by normal cash-flow and new (concessional) multi-lateral loans instead of budget lending.
  - New tax measures anticipated to yield in excess of 1½ percent of GDP.
- Monitoring and contingency:
  - Monthly monitoring in place to control expenditure to budget.
  - Authorities acknowledge risk of shortfall in land tax revenue but have transferred oversight of collection to the Minister for Finance, employed a new collector, and invoiced large landholders.
  - Authorities stand ready to implement further revenue and/or expenditure measures if needed to achieve announced fiscal adjustment.
- Asset-disposal program:
  - Part-disposal of DFC assets is advanced; initial offers received; authorities point to a yield of a few percentage points of GDP to be applied entirely to paying down existing debt.
  - Expectation that a downward trend in the debt-burden should be firmly established in 2004.
- Monetary policy support:
  - From April 1, new residential construction loans will not count as part of banks’ liquid assets; neutralizing reduction in the liquid asset requirement expected.
  - Board will consider raising the cash reserve requirement from 6 percent to 7 percent, effective May 1, 2004.
- Financial sector oversight:
  - DFC has been subjected to Central Bank supervisory oversight since January.
  - A technical expert is preparing recommendations, for delivery by end-April, for coordination of supervision of Belize’s financial system (including credit unions, insurance companies and other non-bank institutions).
  - Central Bank seeks extension of its legal remit to publish financial statements of international banks; authorities considering proposal and seeking voluntary disclosure in the meantime.
- Exchange bureaux ("cambios"):
  - Authorities are not disposed to widen the allowable band in the cambios as suggested by staff; prefer to adapt macroeconomic policies to diminish parallel market incentives.
  - Existing legislation is being revisited to tighten control over reporting and supervision of cambios.

### Statistical progress noted by authorities
- Quarterly balance of payments data are available since 2002.
- Development of quarterly national accounts is underway; preliminary results have been provided to Fund staff since 2003, though not yet published.
- Monthly central government budget data are now reported to Fund staff within 2-3 weeks of each end-month, with arrangements for related financing data to follow shortly after.

*Source: _cr04102 - 1. Outstanding statistical issues (IMF staff report and accompanying statements), as provided in the supplied content.*

### 20. In sum, the staff analysis and recommendations accord with my authorities’ assessments

### 20. In sum, the staff analysis and recommendations accord with my authorities’ assessments

### Summary findings
- The exchange peg (BZ$2 per US$1) is crucial to retaining confidence in Belizean growth potential.
- Average annual economic growth of 7 percent over the past five years exemplifies recent growth potential.
- Actions necessary to sustain the peg are in train and authorities are adamant they will be implemented in full.
- There is an urgent need for comprehensive fiscal adjustment and tighter monetary policy to prevent a balance of payments crisis and restore resilience to exogenous shocks.

### Background and recent developments
- Since 1998, government measures to accelerate growth included tax cuts, a sharp increase in government investment, and subsidized credit to the private sector through the state-owned Development Finance Corporation (DFC).
- The exchange rate has been pegged at BZ$2 per US$1 since 1976 and maintenance of the peg is a primary policy objective.
- Real GDP growth: increased to 12 percent in 2000; slowed to 4-5 percent thereafter due to hurricanes, a tourism slump after terrorist attacks in the United States, and a shrimp virus epidemic.
- Loss of confidence emerged because fiscal and external current account deficits remained at unsustainable levels.
- Central government deficit remained at levels of around 9 percent of GDP since FY 2000/01 (fiscal year begins April) and was projected to decrease only slightly in FY 2003/04.
- Net international reserves fell by about a third during 2003.
- Public and publicly guaranteed debt reached 92 percent of GDP, contracted mostly as external debt on commercial terms.
- The large fiscal imbalance and accommodative monetary policy are threatening the sustainability of the exchange rate peg.

### Policy objectives and required measures
- Authorities agree the central government deficit should be reduced to below 3 percent of GDP in FY 2004/05.
- To achieve this target, required actions include:
  - Implement comprehensive tax reform to restore buoyancy to the system.
  - Freeze current expenditure.
  - Reduce budget-financed capital expenditure further.
  - Tighten monetary policy to complement demand-side adjustment.
- Combined fiscal tightening and monetary restraint could halt the loss in international reserves in 2004.
- Specific measures urged by Directors:
  - Curtail nonpriority central government expenditures and freeze the wage bill.
  - Widen the tax base and reduce excessive and distortionary tax exemptions.
  - Improve budget monitoring and control.
  - Improve management of public debt.
  - Curtail the lending and investment operations of the DFC in advance of completion of its restructuring and partial disposition of its assets.
  - Tighten monetary policy and contain credit growth to reduce pressures on the exchange rate.
  - Increase transparency and efficiency of the foreign exchange regime by adopting clearer rules for foreign exchange transactions by the central bank and foreign exchange houses to support eventual unification of the exchange markets.
  - Strengthen oversight capacity and independence of the bank supervisory authority; improve legal framework for supervision of non-bank financial institutions.
  - Continue efforts to combat money laundering and the financing of terrorism.
  - Consider phasing out existing import restrictions by converting them into tariffs.
  - Continue strong efforts to improve competitiveness and diversify the export base in view of anticipated loss of preferential trade access for sugar and banana exports.
  - Continue work, with Fund technical assistance, to improve the quality and timeliness of data reporting, including developing a set of high frequency indicators.

### Executive Board assessment (key points)
- Directors welcomed recovery of Belize’s economy and exports from external shocks in an environment of price stability.
- Directors expressed concern that fiscal and external current account deficits have remained unsustainably large, pressuring international reserves and generating high and rapidly growing public and publicly guaranteed indebtedness.
- Directors agreed Belize urgently needs comprehensive and sustained fiscal correction, supported by tight monetary policies and structural measures to enhance long-term competitiveness.
- Directors welcomed authorities’ intention to contain the fiscal year 2004/05 deficit to below 3 percent of GDP and recent adoption of a package of revenue enhancements, but considered additional measures likely needed given past budget overruns.
- Directors welcomed decision to restructure the DFC and subject it to central bank supervision.
- Directors supported tightening monetary policy and containing credit growth as essential to protect the balance of payments and support the exchange rate peg.
- Directors urged improvements in foreign exchange transparency, banking supervision, and statistical reporting.

### Selected economic indicators (annual or end-of-period values as presented)
- GDP at constant prices: 1999: 8.7; 2000: 12.1; 2001: 4.9; 2002: 4.3; 2003: 5.5
- Consumer prices (end of period): 1999: -1.2; 2000: 0.6; 2001: 1.2; 2002: 2.3; 2003: 2.5
- Real effective exchange rate: 1999: -2.5; 2000: 1.4; 2001: 1.9; 2002: -0.7; 2003: -5.3
- Credit to the private sector (annual changes in percent of liabilities to the private sector at beginning of period): 1999: 7.4; 2000: 25.0; 2001: 16.8; 2002: 18.1; 2003: 12.2
- Money and quasi-money (M2): 1999: 10.4; 2000: 14.1; 2001: 9.1; 2002: 2.3; 2003: 7.9
- Central government (percent of GDP):
  - Primary balance: 1999: -3.6; 2000: -7.3; 2001: -6.7; 2002: -5.8; 2003: -4.5
  - Overall balance: 1999: -5.6; 2000: -9.7; 2001: -9.8; 2002: -9.6; 2003: -8.1
  - Central government borrowing requirement: 1999: 5.6; 2000: 6.2; 2001: 9.5; 2002: 7.1; 2003: 7.2
- External current account (including official grants): 1999: -9.7; 2000: -18.7; 2001: -18.0; 2002: -17.2; 2003: -15.8
- Public and publicly guaranteed debt (end of period, percent of GDP): 1999: 48.2; 2000: 71.6; 2001: 84.6; 2002: 88.0; 2003: 92.2
- Public external debt (in percent of exports of goods and services): 1999: 8.4; 2000: 16.6; 2001: 21.7; 2002: 40.2; 2003: 22.0
- Central government debt (in percent of government current revenue): 1999: 19.2; 2000: 22.5; 2001: 26.1; 2002: 46.7; 2003: 29.5

*Source: Public Information Notice (PIN) No. 04/38, April 16, 2004 — IMF Article IV Consultation with Belize.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2004/_cr04102.pdf_