## _cr05352 - Executive Summary

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### Executive Summary — main messages
- Recent developments:
  - Economy grew at a relatively robust pace in 2004, supported by tourism, agriculture, and fisheries.
  - Fiscal and external current account deficits remained at unsustainable levels; public debt reached 100 percent of GDP; authorities failed to achieve envisaged fiscal policy adjustment.
- Policy tightening in 2005:
  - In May, authorities announced fiscal measures aimed at reducing the deficit to 3 percent of GDP and tightened monetary policy to contain credit expansion.
- Assessment of adjustment needs:
  - A stronger adjustment effort appears necessary.
  - The magnitude of adjustment, delays in policy implementation, and new spending commitments mean the FY05/06 fiscal target will not be achieved.
  - A substantial external financing gap is likely to emerge in 2006 and will require additional and sustained fiscal measures.
- Authorities’ stance:
  - Authorities see limited scope for additional fiscal measures given severity of measures already taken and contractionary impact on the economy.
- Development Finance Corporation (DFC):
  - Need to deal expeditiously with the insolvent DFC; assets continue to deteriorate and budget support is necessary to sustain operations.
  - Steps to restructure DFC taken, but key policy elements remain undefined.
- Debt-service relief:
  - Authorities intend to seek debt-service relief from external creditors; essential that engagement be early, transparent, orderly, and undertaken within a medium-term framework to restore debt sustainability and resilience to shocks.

### I. Economic and Political Background
- Structural features and vulnerabilities:
  - Exports of goods and services equivalent of 50 percent of GDP; main exports: sugar, bananas, citrus, shrimp, lobster; tourism a major industry only recently.
  - Fixed exchange rate peg (BZ$2 per U.S. dollar) since 1976; capital controls prevalent.
  - A widespread parallel foreign exchange market exists.
- Exposure to shocks and past impact:
  - Highly vulnerable to external trade and weather-related shocks.
  - Hurricanes and floods during 2000–02 required more than US$25 million (about 2½ percent of GDP) in emergency reconstruction.
  - Virus damaged shrimp industry in 2001–02; sharp price swings affected banana and citrus industries in 2003–04.
  - High world oil prices weakened terms of trade.
- Fiscal and debt developments:
  - Fiscal deficits averaged about 9 percent of GDP during 1999–2004.
  - Balance sheet of state-owned DFC expanded by equivalent of 28 percent of GDP due to government housing promotion policies.
  - Public and publicly guaranteed debt tripled during 1999–2003 to about US$1 billion or about 100 percent of GDP at end-2004.
- Interest expense and primary balance:
  - Interest expenses on foreign loans increased from 1½ percent of GDP in FY00/01 to an estimated 7½ percent of GDP in FY04/05.
  - This offset an improvement in the primary deficit from 7½ percent of GDP in FY00/01 to ¼ percent of GDP in FY04/05.
- Political economy:
  - Building consensus for adjustment difficult; cabinet reshuffles in August 2004 and December 2004.
  - FY05/06 budget called for fiscal effort ~2½ percent of GDP but triggered strikes; government rescinded measures equivalent to about 1 percent of GDP.
  - April 2005 allegations of corruption and mismanagement led to strikes and sporadic riots disrupting services.
- IMF relations:
  - Fund expressed growing concern and called for immediate comprehensive fiscal correction supported by tight monetary policies.
  - Authorities invited Fund staff late-2004 after external market access became impaired.

### II. Recent Economic Developments
- Growth and sectoral performance:
  - Real GDP growth: 2003: about 9 percent; 2004: estimated 4½ percent.
  - Tourism: stay-over volume increased by 5 percent; cruise ship arrivals rose by almost 50 percent.
- Fiscal outturn FY04/05:
  - Overall fiscal deficit estimated to have risen from 8¼ percent of GDP in FY03/04 to 8¾ percent of GDP in FY04/05 vs. authorities’ 2¾ percent budget target.
  - Noninterest current expenditure exceeded budget by almost 3 percent of GDP.
  - Interest payments overshot by almost 4¾ percent of GDP, mainly due to exceptional fees and charges associated with three large external financing arrangements.
  - Excluding exceptional fees, underlying fiscal deficit fell from 8¾ percent of GDP to 6 percent of GDP.
- Costly external financing (selected figures):
  - Belize refinanced and obtained fresh financing totaling US$291.3 million during late 2004 and early 2005; incurred upfront fees/charges about US$28 million (about 2¾ percent of GDP).
  - October 2004: rollover with Royal Merchant Bank of Trinidad and Tobago of US$65.5 million into a US$75.6 million note including US$12.7 million in fees (1.2 percent of GDP); yield to maturity about 13 percent; ten-year bullet with put option after three years.
  - November 2004: rollover of US$79 million of US$95 million due to IBOM into a CMFS loan with closing fees US$2.7 million (0.3 percent of GDP); yield to maturity around 11 percent; maturity seven years; put options November 2005.
  - March 2005: two new bonds through Bear Stearns totaling about US$136.7 million (about 13 percent of GDP) with yields around 13 percent; upfront charges and financing fees of US$4.6 million and prepayment of a 2‑years insurance fee of US$8.1 million (together 1.2 percent of GDP); about US$30 million placed in blocked reserve and escrow accounts.
  - Net proceeds of US$93.6 million largely released for pre-agreed debt service payments.
- DFC condition:
  - Government refinanced and assumed about US$210 million in external loans of the DFC during 2002–05.
  - IDB report: DFC critically undercapitalized; nonperforming loans >47 percent of portfolio as of May 2005; overvaluation of real estate assets; recommended closure.
  - Authorities announced intention to wind down DFC and appointed new management and Board in July 2005; other steps outstanding.
- Monetary and supervisory developments:
  - Net domestic assets of CBB increased by about 4 percent of GDP during 2004 due to sharp increases in borrowing by central government and DFC; commercial lending rates fell below 14 percent.
  - Private sector credit growth eased from 12 percent in 2003 to 7½ percent in 2004, and to 6½ percent by end-May 2005.
  - CBB raised cash reserve requirement by 1 percentage point each in December 2004 and May 2005.
  - Decision to channel BSSB receipts to CBB to reduce banking system liquidity.
  - Steps to improve supervision: Money Laundering Prevention Act procedures, risk-based banking inspection, revision of Banks and Financial Institutions Act and International Banking Act in line with Basel Core Principles, expanded supervision to include DFC effective January 2004, strengthened supervision of credit unions.
- Balance of payments and reserves:
  - Current account deficit averaged about 22 percent of GDP during 2001–03, narrowing to about 18 percent in 2004.
  - External public debt reached 80 percent of GDP by end-2004.
  - Net international reserves fell by about half during 2004 to US$40 million (0.8 months of imports).
  - Usable gross reserves amounted to US$30 million at end-2004 as some CBB foreign assets were pledged.
- Sovereign risk and market access:
  - Belize completed three refinancing operations since late 2004 totaling US$291 million (28 percent of GDP) with high fees/charges amounting to 2.7 percent of GDP during FY04/05.
  - S&P downgraded Belize to CCC- with negative outlook on June 1, 2005; Moody’s downgraded foreign-currency rating from B2 to B3 with negative outlook a week later.
- Exchange rate and parallel market:
  - Spread between official and parallel market rate remained below 10 percent during 2004 and first half of 2005.
  - Belize dollar depreciated significantly in nominal effective terms in recent years due mainly to weakness of the U.S. currency, with similar real effective depreciation.

### III. Policy Discussions, Near-term Risks, and Mission Views
- Near-term risks (April–May & July discussions):
  - Mission stressed a sizable balance of payments financing gap likely to emerge in 2006 requiring a strong adjustment effort to sustain the peg.
  - Late May: authorities announced fiscal and monetary package to address risk of “financial crisis and ensure a sustainable fiscal and external position.”
  - July mission: recent fiscal tightening judged too modest, implemented with delays, and partly offset by new spending commitments.
  - Staff estimated authorities’ adjustment program insufficient to achieve 3 percent of GDP fiscal deficit target for FY05/06 and insufficient to prevent reserve depletion in 2006.
  - Domestic political tensions and weakening international confidence left Belize vulnerable to rapid shifts in market sentiment or adverse shocks.
  - Authorities unwilling to discuss amendments to exchange rate system and preferred adjustment without a Fund-supported program; expressed interest in regular Fund assessments to support financing or debt relief efforts.
  - Authorities recognized need to approach external creditors for assistance, possibly through relief of debt service in 2006.

### A. Short- and Medium-Term Outlooks — projections, scenarios, and gaps
- Short-term staff projections:
  - Growth expected: 2005: 3 percent; 2006: 2¾ percent.
  - External financing gap of 2½ percent of GDP projected to emerge in 2006 with reserves likely exhausted by mid-year.
- Macroeconomic framework (selected reported figures):
  - Real GDP growth (annual percentage change): 2003: 9.2; 2004: 4.6; 2005: 3.1; 2006: 2.7
  - Inflation (end of period): 2003: 2.3; 2004: 3.0; 2005: 4.0; 2006: 3.7
  - Primary central government balance (fiscal year, percent of GDP): 2003: -3.3; 2004: -0.3; 2005: 3.0; 2006: 2.9
  - Overall central government balance (fiscal year, percent of GDP): 2003: -8.3; 2004: -8.7; 2005: -3.6; 2006: -3.1
  - External current account deficit (percent of GDP): 2003: -22.3; 2004: -17.7; 2005: -12.7; 2006: -7.9
  - External financing gap (percent of GDP): 2003: 0.0; 2004: 0.0; 2005: 0.0; 2006: 2.4
  - Gross official reserve coverage of 12-month debt service: 2003: 29.6; 2004: 16.6; 2005: 63.8; 2006: 62.6
  - Public and publicly guaranteed debt (percent of GDP): 2003: 103.1; 2004: 102.3; 2005: 95.4; 2006: 91.3
- Debt sustainability illustrations:
  - Maintaining primary surplus of 3 percent of GDP in subsequent years would reduce public debt ratio from ~100 percent at end-2004 to around 75 percent of GDP by 2010.
  - Additional fiscal effort raising primary surplus to around 4 percent of GDP in 2007–10 could lower public debt to around 70 percent by end-2010.
  - Worst-case scenario: primary deficits at historical average plus one standard deviation (~6 percent of GDP) during 2006–10 would increase public debt to around 130 percent of GDP in 2010.
- Staff view on adjustment costs and recovery:
  - Further policy adjustments would cause substantial short-term output losses, but disorderly exit from the peg would be more painful (staff review: average contraction of 4 percent in the year following exit from peg across 10 episodes, 1980–2004).
  - With reestablished confidence and continued positive export outlook, growth could recover to around 5 percent over the medium term.
- Risks highlighted:
  - Sustaining prolonged primary surpluses difficult given social and political pressures.
  - Continued vulnerability to exogenous shocks and erosion of EU preferences beginning in 2006; CAFTA could weaken competitiveness in U.S. markets.

### B. Fiscal Policy — measures, gaps, and recommendations
- Authorities’ FY05/06 expectation and shortfall:
  - Expected FY05/06 deficit reduction to around 3½ percent of GDP—less ambitious than late-May 3 percent target.
  - Shortfall due to implementation difficulties, delays, and additional spending commitments ~0.6 percent of GDP.
  - May package plus January budget measures estimated to reduce the primary deficit by about BZ$75 million (around 3½ percent of GDP) from FY04/05 level.
- Revenue measures (expected yields):
  - Increase in various sales tax rates; increases in excise taxes on beer, alcoholic beverages, soft drinks, and tobacco; closure of real estate transaction tax loopholes.
  - Expected yield about 2.1 percent of GDP during FY05/06 and additional 0.2 percent of GDP in FY06/07.
- Current expenditure cuts:
  - Reduction in central government employment by at least 1½ percent during FY05/06 and one-year freeze on wage increments expected to hold wages/salaries at around 10 percent of GDP (despite 8 percent general wage increase in April 2005).
  - Cuts in goods and services projected to yield 0.2 percent of GDP, more than offset by additional spending commitments of 0.6 percent of GDP.
  - Emphasis on protecting social outlays (education and health).
  - Civil service employment reduced by 1½ percent by end-July; additional cuts expected but not included in projections.
- Cuts in capital expenditure:
  - Domestically funded capital expenditure reduced from 2.2 percent of GDP in FY04/05 to 2.1 percent of GDP in FY05/06.
  - Foreign-funded public investment projects reduced from 3.5 percent of GDP in FY04/05 to 2.2 percent of GDP in FY05/06.
  - Staff noted some domestically funded capital expenditure elements are recurrent in nature; authorities plan reclassification in FY06/07 budget exercise.
- Mission warnings and recommended actions:
  - Meeting 3 percent FY05/06 deficit target would require additional 1 percent of GDP adjustment.
  - Risks to adjustment: failure of planned telecom privatization; potential additional support to DFC or BSSB.
  - Even a 3 percent deficit would leave a sizable balance of payments financing gap.
  - Recommendations: maximize fiscal effort; further cuts in current and capital spending; limit tax concessions by eliminating Export Processing Zone legislation; expand sales tax base to include electricity consumption.
  - Urged close monitoring of budget execution and early corrective action; authorities requested continued intense dialogue with Fund staff.
  - Recommended comprehensive review of revenue and expenditures: withdraw tax holidays and exemptions; introduce broad-based value-added tax (authorities requested technical assistance); move from variable fuel taxation to a specific tax to stabilize revenue.
- DFC-specific recommendations:
  - Swift closure of the DFC and orderly disposal of assets in line with IDB study.
  - DFC continued losses and inability to service central government debt imply fiscal revenue shortfall close to 2 percent of GDP in FY05/06.
  - Minimize government losses through well-managed and transparent disposal of DFC’s portfolio.
  - Concern that no supervisory audit of DFC had been completed to date.
  - Authorities noted steps to restructure DFC but unresolved whether to close or retain it as limited development bank.
- Premium gasoline — selected reported figures:
  - Landed cost (December): 2003: 29.1; 2004: 31.7; 2005 Proj.: 40.2
  - Distribution and margins (percent of retail price): 2003: 14.1; 2004: 14.5; 2005 Proj.: 14.4
  - Government taxes (percent of retail price): 2003: 56.9; 2004: 53.8; 2005 Proj.: 45.4
  - Retail price (BZ$ per gallon): 2003: 7.3; 2004: 8.3; 2005 Proj.: 9.54
  - Annual imports (millions of gallons) — Total: 2003: 48.2; 2004: 42.6; 2005 Proj.: 39.1
    - Taxed imports: 2003: 32.2; 2004: 30.9; 2005 Proj.: 31.1
    - Untaxed imports: 2003: 16.0; 2004: 11.7; 2005 Proj.: 8.0
  - Revenue replacement duty (RRD) (In percent of GDP): 2003/04: 4.0; 2004: 3.5; 2005 Proj.: 3.0
  - Observation: landed costs rose faster than retail prices (example: landed costs for premium gasoline increased by more than 60 percent between end-2003 and mid-2005, while retail price was raised by only 16½ percent); taxable fuel imports stable due to widespread exemptions; taxed domestic consumption about 31–32 million gallons annually.

### C. Monetary Policy — stance and banking sector vulnerabilities
- Team recommendations:
  - More stringent monetary policy stance needed, especially if no additional fiscal effort.
  - Establish quarterly monetary targets through 2006 consistent with fiscal target and accumulation of net international reserves.
  - Reassess policy stance continuously to ensure necessary slowdown in credit growth.
- Observed measures and effects:
  - Cash reserve requirement hikes and shift of BSSB deposits to CBB showed signs of slowing credit growth.
  - Measures had not yet affected money growth or domestic interest rates materially; interest rates are sticky.
  - Authorities confident cash reserve changes and shifts in public deposits are effective in containing credit growth.
- Financial sector vigilance:
  - Need to guard against balance sheet vulnerabilities given potential pressures on the peg.
  - Commercial banks’ balance sheets appear relatively robust, but credit risks could be exacerbated as fiscal and monetary policies tighten.
  - Encouraged CBB to ensure banks adequately account for borrowers’ credit and exchange risks.

### External debt, exchange system, structural policies, and governance
- External debt and financing:
  - External debt/GDP ratio at 80 percent.
  - Debt service costs severely limiting budget flexibility and placing foreign exchange reserves in jeopardy.
  - Recent refinancing left a sizable financing gap in 2006 and severe bunching of amortizations in the medium term.
  - Authorities intend to seek debt service relief after major adjustment measures in place, avoiding unilateral action, seeking voluntary creditor consent, pursuing transparent and equitable engagement, and engaging a reputable international financial advisor.
  - Mission recommendations: approach creditors in a coordinated, market-friendly manner; develop medium-term debt strategy; strengthen debt database; engage creditors quickly.
- Exchange system and peg:
  - Authorities committed to maintaining the peg citing anchor for confidence and inflation expectations and competitiveness factors.
  - Mission cautioned devaluation would impose significant costs given large stock of dollar‑denominated external public debt and loss of nominal anchor.
  - Mission welcomed decision to close the cambios in July 2005 due to unrecorded foreign exchange transactions and poor control.
- Structural policies and trade regime:
  - Authorities pursuing competitiveness improvements: donor-funded banana projects; sugar industry improvements; Chalillo hydroelectric and bagasse co-generation projects; new cruise-ship terminal; transport improvements.
  - Box 3 competitiveness findings (verbatim excerpts preserved in source):
    - "Export volumes of the main commodities have increased by a weighted average of 58 percent during 1999–2004, particularly in the area of shrimp farming and citrus production."
    - "Growth in tourist arrivals has exceeded the average for the Caribbean region, particularly in the area of cruise ship arrivals."
    - "The real effective exchange rate has depreciated slightly over the last 10 years, while neighboring countries have not gained competitiveness."
    - "Real wages in the private sector have grown only moderately and have remained about constant relative to the U.S. manufacturing sector over the last 10 years."
    - Loss of preferential market access for sugar in the EU projected to reduce Belize’s export revenue by about 1 percent of GDP by 2010.
  - Trade regime: CARICOM tariff schedule implemented with average tariff around 11 percent; nonautomatic licensing covers 30 groups mainly agricultural goods.
  - Staff recommended phasing out import restrictions in favor of tariffs and excises to improve resource allocation and widen tax base.
- Governance, supervision, and data:
  - Governance and transparency concerns: discretionary/unpublished tax concessions; allegations of financial misconduct; limited transparency in foreign debt management and public enterprise transactions.
  - Authorities adopted Finance and Audit Act (FAA) early 2005 and established inquiry commissions into DFC and BSSB.
  - Financial supervision: steps to improve supervision with Fund advisor support and IDB assistance; cautions about supervisory independence and fragmentation; credit unions and DFC not effectively regulated.
  - Data: quality generally adequate but scope for improvement; mission recommended high frequency indicators and strengthened monetary statistics; authorities interested in GDDS participation.

### Staff appraisal, IMF Executive Board views, and recommendations
- Staff appraisal — key findings:
  - Fiscal and external current account deficits remain unsustainably high, increasing public debt and eroding confidence.
  - "A large external financing gap is likely to emerge in 2006 and access to significant new external financing appears unlikely."
  - "A strong, frontloaded, and sustained adjustment effort is therefore needed to avoid the risk of a disorderly exit from the peg."
  - Monetary policy needs to be tightened until stronger fiscal measures take hold.
  - "The state-owned DFC should be closed immediately."
  - Debt-service relief engagement is appropriate but must be expeditious, transparent, and market-friendly within a medium-term debt strategy.
  - Staff recommends phasing out import restrictions in favor of tariffs and excises.
- IMF Executive Board concerns and recommendations:
  - Fiscal and external current account deficits “remain unsustainably high,” urgency to address imbalances to safeguard reserves and the peg.
  - Recommended campaign to educate public on benefits/risks, additional measures to boost revenue and rein in expenditure, reduce tax holidays and exemptions, reduce domestic demand, close financing gap, and tighten fiscal and monetary implementation.
  - Noted authorities’ May 2005 measures: fiscal package aimed at reducing FY05/06 deficit to less than 4 percent of GDP and CBB tightening monetary policy.
  - Staff concern: government purchase of water company (≈2 percent of GDP) and associated borrowing exacerbated debt sustainability concerns.

### Key economic indicators (selected figures preserved verbatim)
- Real GDP growth (annual percentage change): 2002: 4.7; 2003: 9.2; 2004: 4.6; 2005: 3.1; 2006: 2.7.
- Consumer prices (end of period): 2002: 3.2; 2003: 2.3; 2004: 3.0; 2005: 4.0; 2006: 3.0.
- Central government: Revenue and grants (percent of GDP): 2002: 22.9; 2003: 22.7; 2004: 22.3; 2005: 25.0; 2006: 24.9.
- Central government: Overall balance (percent of GDP): 2002: -9.7; 2003: -8.3; 2004: -8.7; 2005: -3.6; 2006: -3.1.
- Public and publicly guaranteed debt (percent of GDP): 2002: 89.6; 2003: 103.1; 2004: 102.3; 2005: 95.4; 2006: 91.3.
- External current account (percent of GDP): 2002: -20.2; 2003: -22.3; 2004: -17.7; 2005: -12.7; 2006: -7.9.
- Gross official reserves (US$ millions, end period): 2002: 106.3; 2003: 76.2; 2004: 39.9; 2005: 80.1; 2006: 80.1.
- Debt outstanding (US$ millions, end-2004): total debt 1,010.8; 2005: 1,059.1.
- Selected fiscal projection/gap figures:
  - External financing gap (percent of GDP): 2006: 2.4 (Macroeconomic Framework table); fiscal financing gap 2006: 3.1 (central government table).

*Source: IMF staff report excerpt (content unit _cr05352).*

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

### _cr05352 - Executive Summary

### Executive Summary
- Recent Developments:
  - The economy grew at a relatively robust pace in 2004, supported by strength in the tourism, agriculture, and fisheries sectors.
  - Fiscal and external current account deficits remained at unsustainable levels, public debt reached 100 percent of GDP, and the authorities failed to achieve the envisaged fiscal policy adjustment.
- Policy tightening in 2005:
  - In May, the authorities announced fiscal measures aimed at reducing the deficit to 3 percent of GDP and also tightened monetary policy to contain credit expansion.
- Assessment of adjustment needs:
  - A stronger adjustment effort appears necessary.
  - The magnitude of adjustment, delays in policy implementation, and new spending commitments mean that the FY05/06 fiscal target will not be achieved.
  - The substantial external financing gap likely to emerge in 2006 means that additional and sustained fiscal measures will be required.
- Authorities’ stance:
  - The authorities see only limited scope for additional fiscal measures, arguing limited room for a stronger fiscal adjustment given the severity of measures already taken and the contractionary impact on the economy.
- Development Finance Corporation (DFC):
  - There is a need to deal expeditiously with the insolvent DFC.
  - The assets of the failed DFC continue to deteriorate and budget support is necessary to sustain its operations.
  - The authorities have taken steps to restructure the DFC, but key policy elements are yet to be defined.
- Debt-service relief:
  - The authorities have announced their intention to seek debt-service relief from external creditors.
  - It is essential that this be carried out early and in a transparent and orderly manner, and will most likely be successful if undertaken within a medium-term framework aimed at restoring debt sustainability and a resilience to shocks.

### I. Economic and Political Background
- Structural features and vulnerabilities:
  - Belize is a small, export-dependent country. Exports of goods and services are the equivalent of 50 percent of GDP, and constitute mainly agricultural products (sugar, bananas, and citrus) and marine products (shrimp and lobster), while tourism has become a major industry only recently.
  - Belize has maintained a fixed exchange rate peg (BZ$2 per U.S. dollar) since 1976, and capital controls are prevalent.
  - A widespread parallel foreign exchange market exists.
- Exposure to shocks and past impact:
  - Belize is highly vulnerable to external trade and weather-related shocks.
  - During 2000–02, hurricanes and floods required more than US$25 million (about 2½ percent of GDP) in emergency reconstruction.
  - A virus damaged the shrimp industry in 2001–02, and sharp swings in prices affected the banana and citrus industries in 2003–04.
  - High world oil prices have weakened the terms of trade further.
- Fiscal and debt developments:
  - Fiscal deficits averaged about 9 percent of GDP during 1999–2004, largely reflecting weak expenditure discipline.
  - The balance sheet of the state-owned DFC expanded by the equivalent of 28 percent of GDP as a result of government policies to promote the housing sector.
  - Public and publicly guaranteed debt tripled during 1999-2003 to reach about US$1 billion or about 100 percent of GDP at end-2004.
- Interest expense and primary balance:
  - Interest expenses on foreign loans increased from 1½ percent of GDP in FY00/01 to an estimated 7½ percent of GDP in FY04/05.
  - This offset almost entirely a significant improvement in the primary deficit from 7½ percent of GDP in FY00/01 to ¼ percent of GDP in FY04/05.
- Political economy:
  - Building political consensus for adjustment has been difficult despite unsustainable fiscal and balance of payments positions.
  - Cabinet reshuffles occurred in August 2004 and December 2004.
  - The government’s FY05/06 budget called for a fiscal effort of about 2½ percent of GDP but triggered widespread strikes and work stoppages; the government rescinded fiscal measures equivalent to about 1 percent of GDP.
  - In April 2005, allegations of government corruption and mismanagement led to strikes and sporadic riots, disrupting telecommunications, transport, and public utilities services.
- IMF relations:
  - The Fund had expressed growing concern about fiscal and external imbalances and called for immediate and comprehensive fiscal correction supported by tight monetary policies.
  - Only in late-2004, after external market access became impaired, did the authorities invite a Fund staff team to assist in developing an adjustment strategy.

### II. Recent Economic Developments
- Growth and sectoral performance:
  - Real GDP growth surged to about 9 percent in 2003, mainly owing to strength in the tourism sector and a recovery in agriculture and fisheries.
  - The growth rate is estimated to have remained at 4½ percent in 2004, reflecting continued government expenditure and robust output growth in sugar, banana, shrimp, and citrus industries.
  - In tourism, stay-over volume increased by 5 percent, while cruise ship arrivals rose by almost 50 percent.
- Fiscal outturn FY04/05:
  - The overall fiscal deficit is estimated to have risen from 8¼ percent of GDP in FY03/04 to 8¾ percent of GDP in FY04/05, compared to the authorities’ 2¾ percent of GDP budget target.
  - Noninterest current expenditure exceeded budgeted levels by almost 3 percent of GDP.
  - Interest payments overshot by almost 4¾ percent of GDP, mainly due to exceptional fees and charges associated with three large external financing arrangements.
  - Excluding these exceptional fees, the underlying fiscal deficit fell from 8¾ percent of GDP to 6 percent of GDP.
- Costly external financing (Box 1 highlights):
  - Belize refinanced and obtained fresh financing amounting to US$291.3 million during late 2004 and early 2005, incurring upfront closing fees and charges of about US$28 million (about 2¾ percent of GDP).
  - October 2004: rollover with Royal Merchant Bank of Trinidad and Tobago of US$65.5 million into a US$75.6 million note including US$12.7 million in fees (1.2 percent of GDP); yield to maturity about 13 percent; ten-year bullet with a put option after three years.
  - November 2004: rollover of US$79 million of US$95 million due to IBOM into a CMFS loan with closing fees of US$2.7 million (0.3 percent of GDP); yield to maturity around 11 percent; maturity seven years; put options November 2005.
  - March 2005: two new bonds placed through Bear Stearns totaling about US$136.7 million (about 13 percent of GDP) with yields around 13 percent; upfront charges and financing fees of US$4.6 million and a prepayment of a 2-years insurance fee of US$8.1 million (together 1.2 percent of GDP); about US$30 million placed in blocked reserve and escrow accounts.
  - Most of the net proceeds of US$93.6 million will be released for pre-agreed debt service payments.
- DFC burden and condition:
  - The government refinanced and assumed about US$210 million in external loans of the DFC during 2002–05.
  - An IDB technical assistance report concluded the DFC was critically undercapitalized, with nonperforming loans exceeding 47 percent of its portfolio as of May 2005, and an overvaluation of real estate assets.
  - The report recommended the DFC’s closure to halt continued deterioration.
  - Authorities announced intention to wind down the DFC and appointed new management and Board in July 2005, but other steps are yet to be undertaken.
- Monetary and supervisory developments:
  - Net domestic assets of the Central Bank of Belize (CBB) increased by about 4 percent of GDP during 2004 due to sharp increases in borrowing by the central government and the DFC; commercial lending rates fell below 14 percent.
  - Private sector credit growth eased from 12 percent in 2003 to 7½ percent in 2004, and slowed further to 6½ percent by end-May 2005.
  - The CBB raised the cash reserve requirement by 1 percentage point each in December 2004 and May 2005.
  - A decision was taken to channel the receipts of the Belize Social Security Board (BSSB) to the CBB to reduce banking system liquidity.
  - Steps taken to improve financial supervision and prudential regulation include implementation procedures under the Money Laundering Prevention Act, adoption of a risk-based approach to banking inspection, revision of the Banks and Financial Institutions Act and the International Banking Act in line with the Basel Core Principles, expanded supervision to include the DFC effective January 2004, and strengthened supervision of credit unions.
- Balance of payments and reserves:
  - The current account deficit averaged about 22 percent of GDP during 2001–03, narrowing somewhat to about 18 percent of GDP in 2004.
  - Current account deficits were financed mainly through increases in public sector indebtedness; external public debt reached 80 percent of GDP by end-2004.
  - Net international reserves fell by about half during 2004 to US$40 million (0.8 months of imports).
  - Usable gross reserves amounted to US$30 million at end-2004, as some CBB foreign assets were pledged.
- Sovereign risk and market access:
  - Borrowing costs surged; credit ratings were downgraded and risk spreads increased.
  - Belize completed three new refinancing operations since late 2004 totaling US$291 million (28 percent of GDP), but these carried high fees and charges amounting to 2.7 percent of GDP during FY04/05.
  - S&P downgraded Belize to CCC- with a negative outlook on June 1, 2005; S&P noted the high probability that a restructuring would be concluded on terms that would constitute a default.
  - Moody’s downgraded Belize’s foreign-currency rating from B2 to B3 with negative outlook a week later.
- Exchange rate and parallel market:
  - The spread between the official and parallel market rate remained below 10 percent during 2004 and the first half of 2005.
  - Due mainly to the weakness of the U.S. currency, the Belize dollar has depreciated significantly in nominal effective terms in recent years, leading to a similar depreciation in real effective terms.

### III. Policy Discussions (introductory points)
- The document proceeds to discuss:
  - The Short- and Medium-Term Outlooks.
  - Fiscal Policy.
  - Monetary Policy.
  - External Debt and Debt Service.
  - Exchange System.
  - Structural Policies.
- Key issues highlighted for policy discussion:
  - The need for stronger and timely fiscal adjustment beyond measures announced in May 2005.
  - The urgent requirement to address the insolvent DFC and its fiscal burden.
  - The importance of pursuing debt-service relief from external creditors in an early, transparent, and orderly manner within a medium-term framework to restore debt sustainability and resilience to shocks.

*Source: _cr05352 - Executive Summary (IMF staff report text provided).*

### 15.      Discussions in April/May centered on the substantial risk of a crisis and the

### _cr05352 - 15.      Discussions in April/May centered on the substantial risk of a crisis and the

### April–May and July discussions / Near-term risks
- April/May discussions: mission stressed a sizable balance of payments financing gap was likely to emerge in 2006, requiring a strong adjustment effort to sustain the pegged exchange rate.
- Late May: authorities announced a fiscal and monetary package to address the risk of “financial crisis and ensure a sustainable fiscal and external position.”
- July mission: team cautioned that further substantive and sustained measures would be required to safeguard the pegged exchange rate; recent fiscal tightening welcomed but judged:
  - too modest,
  - implemented with significant delays,
  - partly offset by new spending commitments.
- Staff estimates suggested authorities’ adjustment program would be insufficient to achieve the 3 percent of GDP fiscal deficit target for FY05/06 and would not achieve the necessary contraction in demand before external reserves were depleted in 2006.
- Heightening domestic political tensions and weakening international confidence left Belize highly vulnerable to a rapid shift in market sentiment or a new adverse external shock.
- Authorities unwilling to discuss amendments to the exchange rate system; saw little immediate scope for additional measures fearing excessive economic contraction or resurgence of social tensions.
- Authorities recognized need to approach external creditors for assistance in closing the financing gap, possibly through relief of debt service in 2006.
- Authorities preferred adjustment without a Fund-supported program; expressed interest in regular Fund assessments (assessment letters) to support new multilateral financing or debt service relief efforts.

### A. The Short- and Medium-Term Outlooks — projections, gaps, and scenarios
- Short-term projections (staff):
  - Growth expected to slow to 3 percent and 2¾ percent in 2005 and 2006, respectively.
  - An external financing gap of 2½ percent of GDP would emerge in 2006, with reserves likely to be exhausted by mid-year.
- Macroeconomic Framework 2003-06 (annual percentage change, unless otherwise specified) — reported figures:
  - Real GDP growth: 2003: 9.2; 2004: 4.6; 2005: 3.1; 2006: 2.7
  - Inflation (end of period): 2003: 2.3; 2004: 3.0; 2005: 4.0; 2006: 3.7
  - Primary central government balance (fiscal year, percent of GDP): 2003: -3.3; 2004: -0.3; 2005: 3.0; 2006: 2.9
  - Overall central government balance (fiscal year, percent of GDP): 2003: -8.3; 2004: -8.7; 2005: -3.6; 2006: -3.1
  - Credit to the private sector from commercial banks and DFC: 2003: 12.2; 2004: 7.5; 2005: 3.1; 2006: 2.8
  - External current account deficit (percent of GDP): 2003: -22.3; 2004: -17.7; 2005: -12.7; 2006: -7.9
  - External financing gap (percent of GDP): 2003: 0.0; 2004: 0.0; 2005: 0.0; 2006: 2.4
  - Gross official reserve coverage of 12-month debt service: 2003: 29.6; 2004: 16.6; 2005: 63.8; 2006: 62.6
  - Public and publicly guaranteed debt (percent of GDP): 2003: 103.1; 2004: 102.3; 2005: 95.4; 2006: 91.3
- Debt sustainability illustrations:
  - Maintaining the fiscal primary surplus envisaged for 2005—3 percent of GDP—in subsequent years would reduce public debt ratio from around 100 percent of GDP at end-2004 to around 75 percent of GDP by 2010.
  - With an additional fiscal effort to increase the primary fiscal surplus to around 4 percent of GDP in 2007–10, public debt could decline to around 70 percent by end-2010.
  - Worst case scenario note: primary deficits of its historical average plus one standard deviation (around 6 percent of GDP) during 2006–10 would lead to an unsustainable increase in public debt to around 130 percent of GDP in 2010.
- Staff view on adjustment costs and recovery:
  - Further policy adjustments would cause substantial short-term output losses, but disorderly exit from the peg would be more painful (staff review: average contraction of 4 percent in the year following exit from peg across 10 episodes, 1980–2004).
  - With reestablished confidence and continued positive outlook for exports, growth could recover to around 5 percent over the medium term.
- Risks and vulnerabilities highlighted:
  - Achieving and sustaining prolonged primary surpluses would be difficult given social and political pressures.
  - Continued vulnerability to exogenous shocks: banana, citrus, and shrimp exports face price/output volatility; sugar and banana industries face erosion of EU preferences beginning in 2006; CAFTA could weaken relative competitiveness in U.S. markets.

### B. Fiscal Policy — measures, gaps, and recommendations
- Authorities’ FY05/06 expectation and shortfall:
  - Expected to reduce FY05/06 fiscal deficit to around 3½ percent of GDP—less ambitious than the 3 percent target set in late May.
  - Shortfall attributed to implementation difficulties and delays and additional spending commitments of about 0.6 percent of GDP.
  - May package plus January budget measures estimated to reduce the primary deficit by about BZ$75 million (around 3½ percent of GDP) from FY04/05 level.
- Revenue measures (expected yield):
  - (i) increase in various sales tax rates;
  - (ii) increases in excise taxes on beer, alcoholic beverages, soft drinks, and tobacco products;
  - (iii) closure of loopholes affecting collection of real estate transactions taxes.
  - Expected to yield about 2.1 percent of GDP during FY05/06 and an additional 0.2 percent of GDP in FY06/07.
- Cuts in current outlays:
  - Reduction in central government employment by at least 1½ percent during FY05/06 and one-year freeze on wage increments expected to hold expenditure on wages and salaries constant at around 10 percent of GDP (despite the 8 percent general wage increase in April 2005).
  - Cuts in goods and services projected to yield 0.2 percent of GDP, more than offset by additional spending commitments of 0.6 percent of GDP for telecom services and legal fees.
  - Emphasis on protecting social outlays (education and health).
  - Note: Civil service employment reduced by 1½ percent by end-July; additional cuts expected but not included in fiscal projections.
- Cuts in capital expenditure:
  - Domestically funded capital expenditure reduced from 2.2 percent of GDP in FY04/05 to 2.1 percent of GDP in FY05/06.
  - Foreign-funded public investment projects reduced from 3.5 percent of GDP in FY04/05 to 2.2 percent of GDP in FY05/06.
  - Staff noted domestically funded capital expenditure still included elements more accurately classified as recurrent expenditure (e.g., transfers to statutory bodies); authorities noted most recurrent elements would be reclassified in the FY06/07 budget exercise.
- Mission’s fiscal warnings and recommendations:
  - Meeting the 3 percent deficit target for FY05/06 would require an additional 1 percent of GDP adjustment.
  - Risks to adjustment: possible failure of planned privatization of the telecom company; potential additional support to DFC or BSSB.
  - Even a 3 percent fiscal deficit target would leave a sizable balance of payments financing gap.
  - Recommended actions: maximize fiscal effort; further cuts in current and capital spending; limit tax concessions by eliminating Export Processing Zone legislation; expand sales tax base through inclusion of electricity consumption.
  - Urged close monitoring of budget execution and early corrective action; authorities requested continued intense dialogue with Fund staff to monitor implementation.
  - Recommended comprehensive review of revenue and expenditures: broaden base by withdrawing tax holidays and exemptions; introduce broad-based value-added tax (authorities requested technical assistance); move from variable fuel taxation to a specific tax to stabilize tax revenue.
- DFC (Development Finance Corporation) recommendations:
  - Swift closure of the DFC and orderly disposal of assets in line with IDB study recommendations.
  - DFC continued to make losses and unable to service debt to central government, implying fiscal revenue shortfall close to 2 percent of GDP in FY05/06.
  - Importance of minimizing government losses through a well-managed and transparent disposal of DFC’s portfolio.
  - Concern that no supervisory audit of the DFC had been completed to date.
  - Authorities noted steps taken to restructure DFC but unresolved issue whether DFC should be closed or remain as a limited development bank.

- Premium gasoline, prices and imports (selected reported figures):
  - Landed cost (December): 2003: 29.1; 2004: 31.7; 2005 Proj.: 40.2
  - Distribution and margins (percent of retail price): 2003: 14.1; 2004: 14.5; 2005 Proj.: 14.4
  - Government taxes (percent of retail price): 2003: 56.9; 2004: 53.8; 2005 Proj.: 45.4
  - Retail price (BZ$ per gallon): 2003: 7.3; 2004: 8.3; 2005 Proj.: 9.54
  - Annual imports (in millions of gallons) — Total imports: 2003: 48.2; 2004: 42.6; 2005 Proj.: 39.1
    - Taxed imports: 2003: 32.2; 2004: 30.9; 2005 Proj.: 31.1
    - Untaxed imports: 2003: 16.0; 2004: 11.7; 2005 Proj.: 8.0
  - Revenue replacement duty (RRD) (In percent of GDP): 2003/04: 4.0; 2004: 3.5; 2005 Proj.: 3.0
  - Observations: landed costs rose faster than retail prices (example: landed costs for premium gasoline increased by more than 60 percent between end-2003 and mid-2005, while retail price was raised by only 16½ percent); taxable fuel imports stable due to widespread exemptions; taxed domestic consumption about 31–32 million gallons annually.

### C. Monetary Policy — stance and banking sector vulnerabilities
- Team recommendations:
  - Importance of a more stringent monetary policy stance, especially if no additional fiscal effort.
  - Suggested establishing quarterly monetary targets through 2006 consistent with fiscal target and accumulation of net international reserves.
  - Reassess policy stance continuously to ensure necessary slowdown in credit growth.
- Observed measures and effects:
  - Recent hikes in cash reserve requirement and shift of BSSB deposits to the CBB had signs of taking hold (lower growth rate in credit to the private sector).
  - Thus far these measures had not seemed to affect money growth or domestic interest rates; interest rates are sticky and not expected to move significantly with liquidity changes.
  - Authorities confident changes in cash reserve requirements and shifts in public sector deposits to the CBB were effective instruments for containing credit growth.
- Financial sector vigilance:
  - Need to guard against balance sheet vulnerabilities given potential pressures on the peg.
  - Although commercial banks’ balance sheets appeared relatively robust (limited foreign currency positions and limited exposure to public sector entities), credit risks could be exacerbated as fiscal and monetary policies tightened.
  - Encouraged CBB to ensure banks and financial institutions adequately account for borrowers’ credit and exchange risks.

### Key policy recommendations (summary)
- Sustain tight policy stance over medium term to reduce external debt and vulnerabilities.
- Maximize fiscal effort immediately: additional 1 percent of GDP adjustment needed to meet 3 percent FY05/06 target.
- Broaden tax base: withdraw tax holidays and exemptions (including EPZ), introduce broad-based value-added tax, consider specific fuel tax to stabilize revenue.
- Further cuts and reprioritization of current and capital spending; protect social outlays.
- Swift and transparent resolution of DFC to limit fiscal losses.
- More stringent and continuously reassessed monetary policy; establish quarterly monetary targets consistent with fiscal objectives.
- Close monitoring of budget execution with early corrective actions and continued intensive dialogue with Fund staff.

*From IMF staff report excerpt (content unit _cr05352).*

### 34.      The staff noted that external debt had reached critical levels. With the external

### _cr05352 - 34.      The staff noted that external debt had reached critical levels. With the external

### External debt, financing gaps, and debt management
- External debt/GDP ratio now at 80 percent.
- Debt service costs were "severely limiting budget flexibility" and "placing Belize’s foreign exchange reserves in jeopardy."
- Recent refinancing operations left a sizable financing gap in 2006 and a "severe bunching of amortizations in the medium term."
- Authorities intend to seek debt service relief from external creditors, emphasizing:
  - seeking relief after major adjustment measures are firmly in place;
  - avoiding unilateral action and seeking voluntary consent and agreement of creditors;
  - a transparent process and equitable treatment of creditors;
  - engaging a reputable international financial advisor.
- Mission recommendations on debt engagement:
  - approach creditors in a coordinated, market-friendly manner to close financing gaps for the next several years;
  - develop a medium-term debt strategy;
  - strengthen the existing debt database;
  - engage creditors quickly and through appropriate channels.

### Exchange system and exchange rate peg
- Authorities commit to maintaining the exchange rate peg, viewing it as an effective anchor for confidence and inflation expectations.
- Factors cited by authorities for competitiveness under the peg:
  - strength of foreign direct investment and exports;
  - moderate private sector wage pressures due to labor migration;
  - business community preference for certainty provided by the peg.
- Mission cautions:
  - devaluation would impose significant costs given the large stock of dollar-denominated, external public debt and the loss of the nominal anchor;
  - current policies did not yet assure the peg’s sustainability.
- Operational actions and developments:
  - mission welcomed authorities’ decision to close the cambios in July 2005 due to unrecorded foreign exchange transactions and poor control/supervision of cambios;
  - cambios had been trading at rates differing by more than 2 percent from the official rate, creating a multiple currency practice and an exchange restriction;
  - central bank reported no selective sales or rationing of foreign exchange to the private sector since late-2004, no unsatisfied demand for foreign exchange from commercial banks, and that the parallel foreign exchange market is neither legal nor tolerated.

### Structural policies, competitiveness, and trade regime
- Authorities noted efforts to improve competitiveness, attract foreign direct investment, and diversify exports, including:
  - donor-funded projects in the banana sector;
  - improvements in operations and marketing in the sugar industry;
  - projects to reduce dependency on electricity imports (Chalillo hydroelectric and bagasse co-generation);
  - construction of a new cruise-ship terminal in Belize City and transport infrastructure improvements.
- Box 3 — Competitiveness issues (selected findings preserved verbatim):
  - "Export volumes of the main commodities have increased by a weighted average of 58 percent during 1999–2004, particularly in the area of shrimp farming and citrus production."
  - "Growth in tourist arrivals has exceeded the average for the Caribbean region, particularly in the area of cruise ship arrivals."
  - "The real effective exchange rate has depreciated slightly over the last 10 years, while neighboring countries have not gained competitiveness."
  - "Real wages in the private sector have grown only moderately and have remained about constant relative to the U.S. manufacturing sector over the last 10 years."
  - Some industries adversely affected by declining terms of trade; export unit prices of the main export commodities (shrimp, bananas, citrus) have fallen.
  - "The loss of preferential market access for sugar in the EU is projected to reduce Belize’s export revenue by about 1 percent of GDP by 2010."
- Trade regime and barriers:
  - Belize has implemented the CARICOM tariff schedule and has an average tariff of around 11 percent.
  - Nonautomatic licensing requirements cover 30 groups of mainly agricultural goods.
  - Recent policy actions increased goods subjected to protectionist nonautomatic licensing (e.g., soft drinks) or minimum pricing (e.g., beer).
  - Authorities defended import restrictions citing food security concerns, smuggling, and potential severe price volatility; staff recommended phasing out import restrictions in favor of tariffs to improve resource allocation and widen the tax base.

### Governance, financial sector supervision, and data
- Governance and transparency concerns undermined consensus for adjustment, centered on:
  - widespread use of discretionary and unpublished tax concessions;
  - allegations of financial misconduct surrounding various financial institutions and telecom companies;
  - limited transparency in the management of foreign debt and privatization/management of public enterprises.
- Authorities’ actions:
  - Finance and Audit Act (FAA) drafted and adopted by the National Assembly in early 2005 to increase transparency and parliamentary scrutiny;
  - two inquiry commissions instituted to review the DFC and the BSSB, focusing on financial transactions with private investors or external creditors.
- Financial supervision:
  - steps underway to improve supervision of onshore and offshore financial institutions with Fund long-term advisor support and IDB technical assistance;
  - staff cautioned that central bank’s supervisory department appeared to lack independence, supervision remained fragmented, and credit unions and the DFC were not effectively regulated or supervised.
- Data and statistics:
  - quality of data generally adequate for surveillance but scope for improvement;
  - mission recommended establishing high frequency indicators, strengthening coverage and timeliness of some monetary statistics, and welcomed authorities’ interest in participating in the GDDS.

### Staff appraisal — key findings and policy recommendations
- Fiscal and external imbalances:
  - fiscal and external current account deficits have remained at unsustainable levels, leading to substantial increase in public debt and erosion of confidence.
  - "A large external financing gap is likely to emerge in 2006 and access to significant new external financing appears unlikely."
  - "A strong, frontloaded, and sustained adjustment effort is therefore needed to avoid the risk of a disorderly exit from the peg."
- Fiscal policy:
  - authorities have begun tightening fiscal and monetary policy, but further measures appear necessary;
  - original FY05/06 budget target cannot be achieved and a sizable external financing gap will still emerge in 2006.
  - need for a comprehensive review of revenue and expenditure to identify consolidation measures.
  - revenue measures so far mainly involved rate hikes; main growth sectors still benefit from generous tax holidays and exemptions.
  - recommendation to reduce preferences to broaden the tax base and improve buoyancy.
  - expenditure actions to date included reducing domestically financed capital expenditure, curtailing goods and services spending, postponing further salary increases, and reducing staffing; further expenditure cuts likely needed.
- Public enterprise and DFC:
  - "The state-owned DFC should be closed immediately."
  - DFC remains a heavy burden and asset base continues to deteriorate; authorities encouraged to seek technical assistance for closure and orderly liquidation and to establish a transparent mechanism to dispose of its portfolio.
- Monetary policy:
  - "Monetary policy needs to be tightened until stronger fiscal measures take hold."
  - Recent monetary measures have slowed credit growth to the private sector, but more stringent tightening of liquidity conditions is needed, particularly to prevent a critical loss of net international reserves and disorderly exit from the peg.
- Debt service and creditor engagement:
  - "Debt service on public and publicly guaranteed debt will continue to be a significant threat to the balance of payments and the exchange rate peg."
  - authorities’ announcement to approach external creditors for relief in 2006 is appropriate; must act expeditiously, transparently, and market-friendly, within a medium-term debt strategy.
- Trade and structural reform:
  - staff recommends phasing out import restrictions in favor of tariffs and excises to improve resource allocation and widen the tax base.
- Governance and transparency:
  - lack of transparency and weak governance remain concerns; staff welcomed FAA and inquiry commissions and urged perseverance.
- Statistics:
  - staff recommends establishing high frequency indicators and continued improvements to the statistical base and GDDS participation.

*IMF staff report excerpt*

### 57.      The next Article IV consultation is expected to be held on the standard 12-month

### _cr05352 - 57.      The next Article IV consultation is expected to be held on the standard 12-month cycle.

### Economic performance and outlook
- GDP at constant prices: 2002: 4.7; 2003: 9.2; 2004: 4.6; 2005: 3.1; 2006: 2.7 (annual percentage changes).
- GDP deflator: 2002: 1.8; 2003: -3.0; 2004: 0.9; 2005: 2.4; 2006: 3.1.
- Consumer prices (end of period): 2002: 3.2; 2003: 2.3; 2004: 3.0; 2005: 4.0; 2006: 3.0.
- Staff summary: “The economy continued to grow at an annual pace of around 4½ percent during the first half of 2005.” Year-on-year CPI inflation rose from 3.0 percent at end-2004 to 3.7 percent in May 2005.

### Fiscal developments and central government operations
- Central government revenue and grants (percent of GDP): 2002: 22.9; 2003: 22.7; 2004: 22.3; 2005: 25.0; 2006: 24.9.
- Current expenditure (percent of GDP): 2002: 19.3; 2003: 21.1; 2004: 25.4; 2005: 24.0; 2006: 22.8.
- Capital expenditure (percent of GDP): 2002: 13.4; 2003: 9.9; 2004: 5.7; 2005: 4.6; 2006: 5.2.
- Primary balance (percent of GDP): 2002: -5.8; 2003: -3.3; 2004: -0.3; 2005: 3.0; 2006: 2.9.
- Overall balance (percent of GDP): 2002: -9.7; 2003: -8.3; 2004: -8.7; 2005: -3.6; 2006: -3.1.
- Fiscal year FY04/05 overall deficit: “widened to 8¾ percent of GDP in FY04/05 (April to March), from about 8⅓ percent of GDP in the previous year.”
- First fiscal quarter (April–June) 2005 central government deficit: 1.6 percent of GDP, “0.3 percent larger than planned.”
- Central government borrowing requirement (percent of GDP): 2002: 7.2; 2003: 12.2; 2004: 6.8; 2005: 0.3; 2006: 2.9.
- Fiscal financing gap: 2002–2004: 0.0; 2005: 0.0; 2006: 3.1 (percent of GDP).
- Government decision: re‑nationalize the water company for roughly equivalent to 2 percent of GDP; financed by loans from the foreign owner and from Taiwan, Province of China.

### Public and publicly guaranteed debt
- Public and publicly guaranteed debt (percent of GDP): 2002: 89.6; 2003: 103.1; 2004: 102.3; 2005: 95.4; 2006: 91.3.
- External debt (percent of GDP): 2002: 86.4; 2003: 97.3; 2004: 92.3; 2005: 87.9; 2006: 79.8.
- Domestic debt (percent of GDP): 2002: 3.2; 2003: 5.7; 2004: 10.0; 2005: 7.6; 2006: 9.1.
- Debt service (percent of GDP): 2002: 23.3; 2003: 14.4; 2004: 24.9; 2005: 21.8; 2006: 10.7.
- Debt-stabilizing primary balance (Table 7 baseline): 2005 public sector debt 95.4 (percent of GDP); projections show decline to 71.4 by 2010 under baseline assumptions.
- Stress tests and scenarios (selected outcomes):
  - A1 (key variables at historical averages, 2006–10): public sector debt 95.4 → 101.3 (2006–2010 endpoint: 101.3).
  - A2 (no policy change, constant primary balance, 2006–10): public sector debt 95.4 → 80.1 (endpoint).
  - A3 (low real growth and high primary deficit, 2006–10): public sector debt 95.4 → 134.5 (endpoint).
  - B5 (one time 30 percent real depreciation in 2006): public sector debt 95.4 → 136.3 (2006), then 116.1 (2010).
- Table 6 debt outstanding (US$ millions): 2004 end-of-period total debt 1,010.8; 2005: 1,059.1.

### External sector, reserves, and balance of payments
- Current account balance (US$ millions): 2002: -187.2; 2003: -218.4; 2004: -183.5; 2005: -140.2; 2006: -93.0.
- Current account balance (percent of GDP): 2002: -20.2; 2003: -22.3; 2004: -17.7; 2005: -12.7; 2006: -7.9.
- Trade balance (US$ millions): 2002: -188.2; 2003: -206.8; 2004: -173.8; 2005: -150.3; 2006: -125.3.
- Exports of goods and services (US$ millions): 2002: 309.7; 2003: 315.5; 2004: 306.9; 2005: 350.9; 2006: 372.7.
- Imports of goods and services (US$ millions): 2002: 497.9; 2003: 522.3; 2004: 480.8; 2005: 501.2; 2006: 498.0.
- Gross official reserves (US$ millions, end period): 2002: 106.3; 2003: 76.2; 2004: 39.9; 2005: 80.1; 2006: 80.1.
- Gross official reserves in months of imports: 2002: 1.9; 2003: 1.5; 2004: 0.7; 2005: 1.5; 2006: 1.4.
- Overall balance (US$ millions): 2002: 2.1; 2003: -30.0; 2004: -36.3; 2005: 40.2; 2006: -28.0.
- IMF note: “The balance of payment remained under significant pressure... the external current account deficit narrowed somewhat in 2004—to 18 percent of GDP from an average of 22 percent of GDP during 2001–03—it remained unsustainably high.”

### Monetary, banking, and financial sector
- Money and quasi-money (M2, percent change): 2002: 2.1; 2003: 4.7; 2004: 7.5; 2005: 7.6; 2006: 7.1.
- Credit to the private sector (12-month percent change): 2002: 18.1; 2003: 12.2; 2004: 7.5; 2005: 3.1; 2006: 2.8.
- Weighted average lending rates (in percent): 2002: 14.9; 2003: 14.2; 2004: 13.9.
- Central Bank net international reserves (CBB, US$ millions): 2002: 206.5; 2003: 146.6; 2004: 76.8; 2005: 157.2; 2006: 157.2 (Dec. series).
- Monetary survey: liabilities to the private sector (US$ millions): 2002: 1,149.8; 2003: 1,233.5; 2004: 1,357.3; 2005: 1,458.3; 2006: 1,543.0.
- Banking system vulnerabilities highlighted: weak DFC positions; integration of DFC accounts into fiscal and monetary accounts is incomplete.

### IMF Executive Board assessment and policy recommendations
- Main Board concerns:
  - Fiscal and external current account deficits “remain unsustainably high,” increasing external public debt and eroding confidence.
  - Urgency to address imbalances to safeguard reserves and the pegged exchange rate.
- Recommended policy actions:
  - Mount a campaign to educate the public on benefits of reform and risks of inaction.
  - Additional measures to boost fiscal revenue and rein in expenditure; specifically reduce tax holidays and exemptions to broaden the tax base and increase tax buoyancy.
  - Reduce domestic demand, close the remaining financing gap, and restore confidence and creditworthiness.
  - Tighten fiscal and monetary implementation given risks that “implementation delays and the emergence of new expenditure commitments would make it difficult to meet the authorities’ fiscal targets for fiscal year 2005/06.”
- Authorities’ announced measures (May 2005):
  - Fiscal package aimed at reducing FY05/06 deficit to less than 4 percent of GDP through tax increases and curtailment of capital expenditure and civil service employment.
  - Central Bank of Belize tightened monetary policy to contain credit expansion.
- Staff note on additional debt risk: government purchase of water company (≈2 percent of GDP) and associated borrowing “have exacerbated staff concerns regarding debt sustainability.”

### Technical assistance and external relations
- Membership: Joined IMF March 16, 1982; Status: Article VIII.
- Fund relations: Quota SDR 18.80 (100.00 percent); Fund holdings of currency 14.56 (77.46 percent); Reserve position in Fund 4.24 (22.55 percent); SDR Department holdings 1.70.
- Outstanding purchases and loans: None.
- Last Article IV consultation concluded March 24, 2004; Belize is on the standard 12-month consultation cycle.
- Recent and past technical assistance missions and advisers listed (VAT implementation, tax administration, banking supervision, balance of payments statistics, DFC review, national income accounting improvements, tax reform design, OFC assessment, AML/CFT advice, resident banking supervision advisor).
- Relations with multilateral banks and regional partners: summaries of World Bank, IDB, CDB active projects, disbursements, and pipeline activities (project and financing data retained as presented).

*Source: IMF staff report and supporting tables and appendices (Article IV Consultation materials for Belize, 2005).*

### introduction of a value added tax and the adoption of measures to ensure the pass-

### _cr05352 - introduction of a value added tax and the adoption of measures to ensure the pass-

### Fiscal policy and governance
- Authorities introduced a value added tax and adopted measures to ensure the pass-through of international oil price changes to domestic petroleum prices.
- Directors suggested that further expenditure cuts be explored in the areas of goods and services and capital spending, excluding essential social services.
- Directors commended the authorities’ efforts to improve governance and transparency, including:
  - Passage of fiscal transparency legislation.
  - Decision to establish commissions of inquiry into the Development Finance Corporation (DFC) and the Social Security Board.
- Directors expressed concern with the lack of progress in resolving the DFC, noting:
  - The DFC continues to be a drain on the public finances as a result of its deteriorating asset base.
  - To stem further losses, Directors urged the authorities to halt operations of the DFC immediately and dispose of its assets in a transparent and orderly manner.

### Monetary policy and financial sector supervision
- Directors welcomed recent monetary policy measures aimed at tightening domestic liquidity conditions.
- Directors encouraged the authorities to monitor domestic liquidity closely and further tighten monetary conditions to support the balance of payments until an additional fiscal effort takes hold.
- Steps taken to improve financial supervision and prudential regulation were welcomed, including extension of supervisory coverage to the DFC.
- Directors emphasized the need to monitor actively commercial bank balance sheet vulnerabilities in light of rapid growth in credit to the private sector.

### External sector, debt, and exchange regime
- Directors noted that the balance of payments has come under increased strain as a result of adverse terms of trade shocks, including the rise in world oil prices.
- These shocks have compounded the severe pressures stemming from Belize’s external debt service obligations.
- Directors agreed that the authorities’ intention to approach external creditors to seek debt service relief is appropriate, but underlined:
  - The importance of engaging with external creditors in a transparent and equitable manner.
  - The need to do so within the framework of a credible medium-term debt strategy.
- A few Directors considered that a Fund-supported program would underpin Belize’s efforts to bolster confidence and secure an agreement with external creditors.
- Directors called for a strengthening of the debt database to help improve debt management.
- Directors welcomed the unification of the foreign exchange market through the closure of the “cambios”.
- Directors noted that Belize does not maintain exchange restrictions or multiple currency practices, but maintains non-tariff barriers and tax and duty exemptions that contribute to a misallocation of resources.
- Directors encouraged the authorities to phase out import restrictions in favor of tariffs and excises, noting that this will also strengthen revenue collection.

### Statistical and data transparency
- Directors commended the authorities for recent improvements in the quality and timeliness of publication of statistical information.
- Directors supported the authorities’ request for technical assistance to facilitate participation in the General Data Dissemination System.

### Key economic indicators (selected figures from table)
- GDP at constant prices: 2001: 4.6; 2002: 4.7; 2003: 9.2; 2004: 4.6; 2005 (Proj.): 3.1
- Nominal GDP (in millions of Belize dollars): 2001: 1,737.6; 2002: 1,853.0; 2003: 1,961.6; 2004: 2,071.2; 2005 (Proj.): 2,210.1
- Consumer prices (end of period): 2001: 0.9; 2002: 3.2; 2003: 2.3; 2004: 3.0; 2005 (Proj.): 4.0
- Real effective exchange rate: 2001: 2.0; 2002: -0.7; 2003: -5.3; 2004: -3.6; 2005 (Proj.): ...
- Gross domestic investment (percent of GDP): 2001: 27.2; 2002: 21.6; 2003: 24.8; 2004: 18.3; 2005 (Proj.): 14.9
- Gross national saving (percent of GDP): 2001: 4.7; 2002: 1.4; 2003: 2.5; 2004: 0.5; 2005 (Proj.): 2.2
- Central government: Revenue and grants (percent of GDP): 2001: 24.7; 2002: 22.9; 2003: 22.7; 2004: 22.3; 2005 (Proj.): 25.0
- Central government: Expenditure and net lending (percent of GDP): 2001: 34.5; 2002: 32.6; 2003: 31.0; 2004: 31.0; 2005 (Proj.): 28.6
- Central government: Overall balance (percent of GDP): 2001: -9.8; 2002: -9.7; 2003: -8.3; 2004: -8.7; 2005 (Proj.): -3.6
- Central government: Primary balance (percent of GDP): 2001: -6.8; 2002: -5.8; 2003: -3.3; 2004: -0.3; 2005 (Proj.): 3.0
- Credit to the private sector (annual percentage change): 2001: 16.8; 2002: 18.1; 2003: 12.2; 2004: 7.5; 2005 (Proj.): 3.1
- Money and quasi-money (M2) (annual percentage change): 2001: 9.1; 2002: 2.1; 2003: 4.7; 2004: 7.5; 2005 (Proj.): 7.6
- External current account (percent of GDP): 2001: -22.5; 2002: -20.2; 2003: -22.3; 2004: -17.7; 2005 (Proj.): -12.7
- Overall balance of payments (percent of GDP): 2001: -0.6; 2002: 0.2; 2003: -3.1; 2004: -3.5; 2005 (Proj.): 3.6
- Public and publicly guaranteed debt (percent of GDP, end of period): 2001: 84.1; 2002: 89.6; 2003: 103.1; 2004: 102.3; 2005 (Proj.): 95.4
  - Domestic (percent of GDP): 2001: 8.5; 2002: 3.2; 2003: 5.7; 2004: 10.0; 2005 (Proj.): 7.6
  - External (percent of GDP): 2001: 75.6; 2002: 86.4; 2003: 97.3; 2004: 92.3; 2005 (Proj.): 87.9
- Gross official reserves (in months of imports, end of period): 2001: 2.1; 2002: 2.0; 2003: 1.4; 2004: 0.8; 2005 (Proj.): 1.5

*Source: IMF staff estimates and projections as presented in the document.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2005/_cr05352.pdf_