## 1. Tax Reform for Growth, Fairness, and Sustainable Revenues ## Source details **Canonical URL:** [1. Tax Reform for Growth, Fairness, and Sustainable Revenues](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr13227.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr13227.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr13227.pdf.json) --- ### Overview - General elections of March 2012: United Democratic Party (UDP) won 17 seats in the 31-seat parliament (a 3-seat majority, down 8 seats). - Debt exchange (March 20): exchange of the 2029 “super-bond” (face value of US$546 million or 30 percent of GDP) for new U.S. dollar denominated “2038 bonds”. - Near-term cash-flow relief from exchange: about US$130 million over the next 5 years; net face value haircut is 3 percent. - Staff NPV loss to bondholders: ranges from 29 to 31 percent (measured with 9 and 10 percent discount rates). - Creditor support achieved: 86 percent (exceeded 75 percent collective action clause threshold). - Prolonged legal disputes over nationalization of Belize Telemedia Limited (BTL) and Belize Electricity Limited (BEL); additional arbitral awards (land acquisition, overpayment of taxes, non-observance of tax agreement) pending enforcement. ### Recent economic developments (2012) - Real GDP growth (2012): estimated at 5.3 percent. - Inflation (2012): averaged 1.3 percent. - External current account deficit: widened to about 1.7 percent of GDP (from 1.1 percent of GDP in 2011). - International reserve coverage: estimated at 3.4 months of imports (up from 3 months in 2011). - Fiscal primary surplus FY2012/13: expected to deteriorate to 1.3 percent of GDP (from 2.3 percent of GDP in 2011). - Private sector credit growth (2012): estimated at 1.1 percent; broad money grew by 5 percent. - T-bill rates: below 2 percent due to high liquidity. - Lending rates: fell across-the-board; single digits early in the year for residential construction and personal loans. - Banking sector indicators (percent): - Capital/risk-weighted assets: 22.2 (2009), 23.9 (2010), 24.2 (2011), 20.5 (2012) - Excess statutory liquidity (in percent of statutory liquidity requirement): 33.5 (2009), 43.8 (2010), 64.4 (2011), 33.5 (2012) - NPLs/total loans: 14.0 (2009), 18.7 (2010), 21.4 (2011), 20.3 (2012) - Provisions/NPLs: 18.1 (2009), 15.5 (2010), 24.4 (2011), 38.3 (2012) - NPLs net of provisions/capital: 48.2 (2009), 61.9 (2010), 66.1 (2011), 58.5 (2012) - NPLs at end-2012: remain high at 20 percent of total loans; banks required to write off bad loans within 3–5 years (US$18.7 million in 2012). - Credit unions: NPLs under 5 percent and ample provisioning. - Social indicators: - GDP per capita: grew about 1 percent in real terms on average yearly since 2008. - Population below poverty line: 41 percent in 2009 (up from 34 percent at the beginning of the last decade). - Unemployment: 16 percent in September 2012; youth unemployment 30 percent; female unemployment 22.4 percent. - Belize may miss half of the Millennium Development Goals by 2015 (including reduction of extreme poverty, women’s share of paid employment, and universal primary education). ### Macroeconomic outlook and risks - Baseline medium-term real GDP growth: 2½ percent. - Oil reserves: estimated to last through the end of this decade absent new discoveries; commodity exports, tourism, and construction expected to offset oil decline. - Inflation: expected to remain low in line with main trading partners. - Current account: projected to deteriorate due to declining crude oil exports; potential pressure on international reserves. - Assumed recognition of liabilities from nationalization of the two utilities: mid-valuation at end-2015; compensation to previous shareholders to start in 2016. - Financing needs projection: could rise above 6½ percent of GDP starting in 2016 and to more than 7 percent of GDP after 2018 as compensation falls due. - Baseline macroeconomic projections (selected items, in percent of GDP): - Real GDP growth: 1.9 (2011), 5.3 (2012), 2.5 (2013–2018) - GDP deflator: 4.4 (2011), 1.3 (2012), 1.1 (2013), 1.5 (2014), 1.6 (2015), 1.7 (2016), 1.7 (2017), 2.0 (2018) - Central government overall balance: -1.4 (2011), -1.5 (2012), -0.8 (2013), -1.6 (2014), -1.6 (2015), -2.4 (2016), -2.4 (2017), -3.0 (2018) - Primary balance: 2.1 (2011), 1.5 (2012), 1.1 (2013), 1.0 (2014–2018) - Public and publicly guaranteed debt: 83.0 (2011), 78.6 (2012), 75.1 (2013), 73.5 (2014), 89.5 (2015), 87.8 (2016), 86.3 (2017), 85.5 (2018) - Current account balance: -1.1 (2011), -1.7 (2012), -1.9 (2013), -2.8 (2014), -3.5 (2015), -4.5 (2016), -5.4 (2017), -5.8 (2018) - Gross international reserves (months of imports): 3.0 (2011), 3.4 (2012), 3.1 (2013), 2.7 (2014), 2.4 (2015), 2.1 (2016), 1.7 (2017), 1.4 (2018) - Risks (tilted to the downside): - Short term: - Spending pressure: automatic salary adjustment averaging 3 percent annual nominal increase; risk of more generous wage increases tightening fiscal space. - Banking sector vulnerabilities: high NPLs concentrated in a few banks; further write-offs could impair capital base and require recapitalization with potential fiscal cost. - Medium term: - Refinancing risk: amortization of 2038 bonds starts in 2019, adding about 1 percent of GDP to debt service. - Additional liabilities: compensation to former owners of nationalized utilities could push gross financing needs and public debt much higher—if compensation is closer to upper valuations, debt could climb up to 100 percent of GDP. - Pressure on FX reserves: nonresidents receiving compensation may move out of Belizean dollar assets. - External vulnerabilities: exports concentrated to the U.S. (about 46 percent) and EU (31 percent); tourism heavily dependent on U.S. arrivals. - Moderate upside: intensified oil exploration may yield a revenue windfall; staff recommends saving any revenue windfall. ### Policy discussions and recommendations - Overarching recommendation: use breathing room from the debt exchange to adopt a fully articulated macroeconomic framework including: - Robust fiscal consolidation (while protecting flagship social programs). - Active debt management. - Steady financial sector reform. - Measures to buttress external sector resilience. - Structural reforms to boost competitiveness and growth. - Fiscal stance and debt management (authorities' plans and staff views): - 2013/14 budget target: primary surplus of 1 percent of GDP (reversing prior commitment to 2 percent of GDP). - Total revenues and grants projected to increase by 3.2 percent (mainly from tax administration improvements). - Primary current spending projected to increase by 4 percent (wages and salaries; goods and services). - Overall deficit projected to deteriorate slightly to -1 percent of GDP from -½ percent of GDP in FY2012/13. - Staff view: adoption of lower primary surplus weakens consolidation; rising financing obligations likely to double in 2016 relative to 2013. - Authorities intend to raise primary balance target back to 2 percent of GDP in 2014, subject to consultations. - Authorities plan to use proceeds from previous and future sales of shares and annual dividends to finance compensation; option to issue up to US$75 million of 2038 bonds left open. - Staff recommendation for stronger fiscal package: - Raise the primary surplus gradually to 3 percent of GDP over the medium term (1 percent of GDP above the 10-year average) to reduce debt-to-GDP to less than 60 percent within a decade and below long-term value of 50 percent by mid-2020’s. - Short-term focus: raise the primary surplus to at least 2 percent of GDP in the current fiscal year via spending restraint (moderating wage pressures) and reversing erosion of the tax base by bringing many currently zero-rated GST items of domestic consumption back into the tax base. - Implement Auditor General’s 2012 report recommendations to enhance accountability and transparency in public funds use. - Medium-term priorities: implement strategic tax reform to boost growth, promote fairness, and ensure sustainable revenues; modernize tax administration (CARTAC advice); strengthen fiscal discipline through Public Financial Management reforms (enhanced budget analysis and forecasts, remove automatic wage increases, ensure fixed-term project contributions do not become recurrent). - Given uncertainties around additional liabilities, staff recommends saving any revenue windfall (e.g., from new oil discoveries). - Intensify fiscal efforts and promote development of domestic capital market to mitigate refinancing risks. - Continue intensive supervision of the banking sector and adopt collaborative approaches with weak banks to contain vulnerabilities. ### Fiscal policy anchors, consolidation, and public debt - Authorities agreed with several staff recommendations but have not set a fiscal policy anchor; negotiation delays and contingent liabilities delayed anchor decisions. - Authorities plan to calibrate fiscal anchors, including a public debt-to-GDP target, together with the Medium-Term Debt Strategy (MTDS) underway. - Political and social pressures (crime, rising poverty, infrastructure) could limit scope for aggressive consolidation. - Authorities supportive of gradual implementation of IMF tax policy recommendations; recent measures (higher personal relief threshold, elimination of taxes on commissions and royalties paid by nonresidents) have political support. - Authorities under pressure to grant wage adjustments; staff cautioned against allocating half of revenues from tax administration improvements to salary increases. - Authorities announced plans for a mortgage bank financed with PetroCaribe funds; staff cautioned against earmarking funds and creation of a specialized mortgage bank but advised regulatory and supervisory framework if pursued. - Staff recommended passing comprehensive public debt management legislation including debt management objectives and government obligation to develop an MTDS. - Belize: Selected Fiscal Indicators (In percent of GDP) — preserve values exactly (Text Table 3 excerpts) - Baseline, w/o additional liabilities: - Primary balance: 1.1 (2013); 1.0 (2014); 1.0 (2015); 1.0 (2016); 1.0 (2017); 1.0 (2018); 1.0 (2019) - Debt: 75.1 (2013); 73.5 (2014); 72.2 (2015); 70.7 (2016); 69.4 (2017); 68.4 (2018); 67.4 (2019) - Domestic: 12.0 (2013); 13.0 (2014); 14.1 (2015); 15.2 (2016); 16.3 (2017); 17.8 (2018); 19.8 (2019) - External: 63.1 (2013); 60.5 (2014); 58.1 (2015); 55.6 (2016); 53.1 (2017); 50.5 (2018); 47.6 (2019) - Gross financing requirements: 3.4 (2013); 4.1 (2014); 3.9 (2015); 3.8 (2016); 3.8 (2017); 4.2 (2018); 4.6 (2019) - Baseline: - Primary balance: 1.1 (2013); 1.0 (2014); 1.0 (2015); 1.0 (2016); 1.0 (2017); 1.0 (2018); 1.0 (2019) - Debt: 75.1 (2013); 73.5 (2014); 89.5 (2015); 87.8 (2016); 86.3 (2017); 85.5 (2018); 84.8 (2019) - Domestic: 12.0 (2013); 13.0 (2014); 27.2 (2015); 28.1 (2016); 29.3 (2017); 31.2 (2018); 33.7 (2019) - External: 63.1 (2013); 60.5 (2014); 62.3 (2015); 59.6 (2016); 57.0 (2017); 54.3 (2018); 51.1 (2019) - Gross financing requirements: 3.4 (2013); 4.1 (2014); 3.9 (2015); 6.6 (2016); 6.5 (2017); 6.9 (2018); 7.5 (2019) - Active: - Primary balance: 1.8 (2013); 2.3 (2014); 2.9 (2015); 3.0 (2016); 3.0 (2017); 3.0 (2018); 3.0 (2019) - Debt: 74.8 (2013); 72.2 (2014); 89.2 (2015); 85.4 (2016); 81.8 (2017); 78.4 (2018); 75.1 (2019) - Domestic: 11.7 (2013); 11.3 (2014); 25.8 (2015); 24.7 (2016); 23.8 (2017); 23.5 (2018); 23.8 (2019) - External: 63.1 (2013); 61.0 (2014); 63.4 (2015); 60.7 (2016); 58.0 (2017); 54.9 (2018); 51.4 (2019) - Gross financing requirements: 3.1 (2013); 2.7 (2014); 3.8 (2015); 4.6 (2016); 4.4 (2017); 4.7 (2018); 5.1 (2019) ### Financial sector reforms and vulnerabilities - Staff view: continued intensive supervision and additional efforts required to address financial sector vulnerabilities. - Revised BFIA effective January 2013: expanded central bank powers, legal basis for consolidated supervision, strengthened rules to prevent high loan concentration and limit related party transactions. - Central bank actions: maintained weak financial institutions under intense supervision; adopted collaborative approach with the banking sector. - Staff emphasized need to establish a legal department at the central bank for effective resolution practices and to update crisis management plan for bank restructuring and resolution framework under BFIA. - Provisioning and supervision: - Central bank noted excluding one bank, NPLs of the domestic banking system would be around 6–7 percent. - Provisioning requirement for fully secured loans relaxed in January (domestic banks only) to help credit recovery. - Effective April 1, 2013: specific provisions equivalent to 50 percent (initially 75 percent) of the outstanding loan balance shall be maintained. - Progress and gaps: - Progress consistent with FSAP recommendations but lagging in insurance supervision, supervision of offshore nonbank financial institutions, credit union regulation, Development Finance Corporation supervision, and central bank autonomy. - Authorities plan to revise credit union and insurance legislations, establish a credit bureau by end-2013, and have the Financial Stability Unit (FSU) draft a financial stability report. - Central bank plans to revise the international banking act and the central bank act next year; modernization of national payment system prioritized over next three years. - AML/CFT: staff encouraged further strengthening; concerns about IFSC weaknesses and lack of regulation/supervision of IBC sector. ### External stability, exchange rate, and competitiveness - Exchange rate regime: fixed peg to the U.S. dollar continues to serve as macro anchor. - External position weaknesses and risks: - Highly negative net external position: 140 percent of GDP at end-2011. - Projected widening current account deficit from 1.7 percent of GDP in 2012 to 5.4 percent in 2017. - Risk-weighted measures suggest international reserves stand below benchmarks. - Competitiveness: - Exchange rate appears in line with fundamentals, but competitiveness has deteriorated along regional trends. - Despite surge in FDI, Belize’s market share of non-oil goods exports and tourism has steadily declined over the last 10 years. - Doing Business weaknesses: enforcing contracts, starting a new business, registering property. - Main impediments to doing business: lack of security, weak institutions, poor infrastructure, high crime rate. - Authorities implementing National Sustainable Tourism Master Plan 2030; tourism board anticipating a surge of about 40 percent in tourist arrivals in 2014 based on preliminary cruise-ship bookings. ### Data provision - Data provision: broadly adequate for surveillance; authorities committed to make best effort to initiate subscription to the Fund’s Special Data Dissemination Standard in the context of the recent debt exchange. - Statistical gaps noted in national accounts, labor, and fiscal sector statistics; SIB plans to conduct business census in 2013, strengthen surveys, and rebase GDP series. ### Staff appraisal — key conclusions and policy recommendations - Growth and risks: - Output growth expected to moderate to about 2.5 percent in the medium term. - Main risks: fiscal challenges and potential weaker-than-expected global recovery affecting trade and tourism. - Fiscal strategy recommendations: - Continue consolidating public finances. - Near-term: maintain a primary surplus target of at least 2 percent of GDP (staff view), using spending restraint (moderate wage pressures) and broadening GST base by taxing many currently zero-rated domestic consumption items. - Medium-term: aim to raise primary surplus to 3 percent of GDP to reduce debt-to-GDP to less than 60 percent within a decade. - Strategic tax reform to boost growth, promote fairness, and ensure sustainable revenues. - Stronger fiscal adjustment may be warranted if additional liabilities are closer to upper valuations claimed by former owners. - Public financial management and debt management: - Rapid progress needed: reform PFM to enhance budget analysis/forecasting, remove automatic wage adjustments, avoid permanentization of fixed-term project contributions. - Develop a solid debt management program: strengthen institutional framework, operationalize MTDS, develop domestic debt market, consider market-based financing instruments. - Financial sector and contingency planning: - Continue vigilance on banking sector NPLs; use Fund TA to update crisis management plan and bank resolution framework. - Clarify scope and modality of government intervention in contingencies. - Further strengthen AML/CFT regime. - External stability and structural reforms: - Compress projected current account deficits via fiscal consolidation and comprehensive structural reform agenda to enhance productive capacity, competitiveness, and market share of non-energy exports. - Improve business environment to attract investment, expand exports, and bolster external sustainability. --- ### Annex I. Super-Bond 2.0 — summary - Exchange timeline: offer launched February 15; exchange closed March 20, 2013. - Creditor Committee represented investors holding more than 62 percent of outstanding bonds; creditor support achieved: 86 percent. - Staff NPV loss to bond holders: around 29–31 percent (assumed exit yield of 9 to 10 percent). - Alternative discounting: using discount rate equal to projected medium-term nominal GDP growth rate of 4.5 percent, NPV reduction in public debt is about 20 percent. - Restructuring financial terms: - Principal haircut: Approximately US$530 million of new 2038 bonds will be issued. Original bond (~US$546 million) subject to a 10 percent face value haircut; overdue interest added to face value of new bond (approximately 7 percent of the original principal). Net face value haircut about 3 percent. - Coupon: step-up coupon of 5 percent through 2017 (for 4.5 years) and 6.767 percent thereafter, versus original 8.5 percent. - Maturity extension: final maturity February 2038; first amortization due August 2019. - Cash-flow relief: US$47 million in 2013 (including missed interest payments) equal to 2.9 percent of GDP; about US$20 million (1.1 percent of GDP) per year from 2014 to 2017. - Total cash flow relief over remaining 16-year life of the super-bond: US$384 million. - Preliminary calculations: debt-to-GDP ratio reduced by around 8 percent in 2018, but debt burden likely to remain high due to compensation liabilities and slow fiscal adjustment. ### Annex II. Additional and Contingent Liabilities — key points - Largest contingent liabilities: nationalization compensation for BTL and BEL. - Valuation ranges for BTL and BEL: about 6 percent of GDP (government valuation) to about 30 percent of GDP (claimants’ valuation). - DSA assumption: mid-point valuation for outstanding BTL/BEL compensation of approximately 17 percent of 2015 GDP including accrued interests, recognized at end-2015 and amortized in equal installments over 2016–2020. - BTL compensation rule: payable in cash or Treasury Notes redeemable within five years; compensation bears interest at the rate paid by commercial banks in Belize on fixed deposits on date of acquisition. - BEL compensation: no specified period in amendment; authorities expect precedent of BTL. - Potential financing sources: - Accumulated BZ$75 million from sale of BTL shares in 2011. - Possible sales of BTL and BEL shares up to constitutional limit of 51 percent. - U.S. 2038 bond indenture option to issue maximum US$75 million of new bond if former owners agree. - Estimated annual dividends: BTL BZ$7 million and BEL BZ$0.4 million. - Aggregate mobilization of these financing sources could add up to approximately 11 percent of GDP. - Other contingent liabilities: - Land acquisition claims since 1980: estimated about 3 percent of GDP. - Small arbitration award due to termination of airport concession: about 0.3 percent of GDP. - Arbitration awards pending enforcement estimated at about 4 percent of GDP. ### Annex III. Debt Sustainability Analysis (DSA) — main findings - Debt exchange provided near-term liquidity relief but modest impact on debt stock reduction (net haircut only 3 percent of face value due to addition of past overdue interest). - Fiscal balance moderately more favorable after exchange owing to reduced coupon rate from 8.5 percent to 5–6.8 percent. - Recognition of additional liabilities (mid-point valuation) would increase debt stock by 17 percent of GDP in 2015 under DSA assumptions. - Growth prospects: real output growth projected around 2.5 percent over the medium term; growth vulnerable to external shocks. - DSA assumptions include use of proceeds from sale of BTL shares (BZ$75 million), potential share sales up to 51 percent, and annual dividends (BZ$7.4 million) to reduce debt; compensation amortized 2016–2020. - Reserve adequacy: - Gross international reserves: around US$286 million at end-2012. - Reserves projected to decline by about 40 percent over five years to US$172 million at end-2017. - Reserves currently above traditional adequacy benchmarks but projected to fall below three months of imports in 2014 and below twenty percent of broad money in 2016. - Risk-weighted reserve measures: first measure 86 percent in 2012 (below lower bound adequacy threshold of 100–150 percent), expected to decline to 46 percent by 2017; SIDS-adjusted: 57 percent in 2012, projected to 30 percent by 2017. - DSA stress tests indicate high sensitivity of public debt to shocks: - A 30 percent real depreciation in 2014 would raise total debt to nearly 120 percent of GDP in 2015 combined with realization of additional liabilities. - Maximum sustainable debt level range: 63–78 percent of GDP; recommended long-run debt level for emerging markets: 49–58 percent of GDP. - Contingent liabilities shock (19 percent of GDP) would cause a proportional increase in debt levels. ### Domestic financing, interest burden, and market development - Authorities may issue new U.S. 2038 bonds of maximum US$75 million as part of compensation. - Bulk of projected financing needs expected to be covered by domestic borrowing as official disbursements decline and no external commercial borrowing is expected within the projection horizon. - Assumed domestic borrowing rate: 5 percent (noted risks that nominal rates could be higher). - Under baseline: - Public debt hike to 90 percent of GDP in 2015; debt reduction projected to be slow under weak fiscal efforts (1 percent primary surplus). - Public sector gross financing needs could increase to 7.6 percent of GDP in 2019 mainly due to maturing principal of additional liabilities and high interest on domestic financing. - Identified vulnerabilities: - More than 80 percent of total public debt denominated in foreign currency in 2012. - A 30 percent real depreciation would substantially increase debt ratios. - Need to develop domestic public debt market urgently to mitigate rollover and interest rate risks. ### Box 1. Tax Reform — main findings and recommendations (selected) - Mission: FAD General Tax Policy mission visited Belize January 24–February 6, 2013; diagnostic review focused on business and income tax, GST, and excisable goods. - Taxes on businesses: - Business tax system: narrow-based. - Recommendation: transform business tax into a minimum tax at a uniform rate in the range of 1.5 percent for most businesses, credited against excess of income tax over the minimum in future years. - Broaden business income tax base to include capital gains and income from capital, taxed at 15 percent. - Eliminate many exemptions and loopholes; constrain discretionary extension of exemptions. - Impose business tax on foreign residents in Belize in line with residents’ income taxes. - Personal income tax: - Current system: serious horizontal inequities. - Recommendation: aggregate more types of household incomes (including professionals and self-employed); introduce more progressivity by adjusting personal relief and reforming rate structure; phase out deductions replaced by tax credits. - GST: - Concern: erosion of revenue base due to broad zero-rating. - Recommendation: tax many goods currently exempted (imported or consumed domestically) at the standard rate. - Conduct thorough review to make system more conducive to new businesses while protecting revenues. - Excises and customs duties: - Harmonize tax between domestic production and imports. - Increase excises on cigarettes, beer, spirits, soft drinks; introduce excise on wine; convert specific excises into guaranteed ad valorem excises; introduce excises on mobile airtime and gaming. - Special regimes: - Phase out direct and indirect concessions for CFZ, EPZ, and FIA; avoid renewal of income tax holidays and dividend holidays. - Target tax incentives to business activity via income tax credits or accelerated tax provisions. - Tourism: - Bring hotels into GST net at standard rate and eliminate Hotel Tax; keep other tourism services in GST net at standard rate. - Impose own-revenue sources on tourism sector to finance Belize Tourism Board (BTB). - Extractive industries: - Improve bidding process in oil sector; increase royalties in minerals sector. - Property taxes: - Reform to base taxes on market value country-wide with assessments by a single, professional agency. ### Box 2. Medium-Term Debt Strategy — diagnosis and recommended reforms (selected) - Institutional diagnosis: - No comprehensive institutional framework for debt management; legal basis fragmented. - Ministry lacks a debt management unit; no documented MTDS. - Central bank manages data relatively well but cost/risk of total public debt not systematically assessed. - Risk exposures: - High share of foreign currency debt: 84 percent. - Three-month treasury bills: 52 percent of domestic debt, causing frequent interest rate resetting and exposure to rollover and interest rate risks. - Amortization of U.S. 2038 bonds starts in 2019; potential payouts to former owners increase gross financing needs. - Recommended actions: - Form National Debt Management Committee with robust middle-office function. - Submit comprehensive Public Debt Management Act to parliament including objectives and MTDS obligation. - Develop domestic public debt market urgently. - Introduce market-based auction system for treasury bonds. - Establish a comprehensive capital market act. - Authorities’ response: plan to revamp debt management framework and fully implement recommendations by end-2013. ### Box 3. Financial Sector Reform Agenda — progress and remaining priorities (selected) - Banking sector: - New provisioning and loan classification requirements adopted end-2011. - BFIA effective January 2013 established legal basis for consolidated supervision and strengthened rules. - Planned directives under BFIA: corporate governance; internal controls; operational risks; valuation of collateral. - Next step: update International Banking Act. - Credit unions: amendments to Credit Union Act under way; resolution of troubled credit unions expected by mid-2013. - Crisis management and bank resolution: BFIA strengthens resolution framework; Emergency Liquidity Assistance procedures and Domestic Crisis Management Plan prepared with Fund assistance. - Financial infrastructure: credit bureau draft legislation expected mid-year; bureau in place by end-2013 or early 2014; national payments system modernization over next three to four years. - Financial stability: FSU established; first financial stability report framework in development. - Insurance and pensions: draft Insurance Act amendment and private pensions legislation in preparation; supervision of international insurance companies not progressed. - AML/CFT: central bank implementing risk-based offsite surveillance; further strengthening needed. - Central bank autonomy: future amendments could consider autonomy. ### Box 4. Authorities’ Response to Past IMF Recommendations (selected) - Fiscal consolidation: authorities have a clear plan to manage contingent fiscal liabilities; assessment: marginally consistent. - Financial sector reform: considerable progress on FSAP recommendations; assessment: broadly consistent; further efforts required for consolidated supervision and banking vulnerabilities. - Structural reforms: key infrastructure bottlenecks persist; assessment: marginally consistent. *Source: _cr13227 - 1. Tax Reform for Growth, Fairness, and Sustainable Revenues (excerpted sections and boxes)._* ### 1. Tax Reform for Growth, Fairness, and Sustainable Revenues __________________________________ 17 ### 1. Tax Reform for Growth, Fairness, and Sustainable Revenues ### Overview - General elections of March 2012 resulted in the United Democratic Party (UDP) winning 17 seats in the 31-seat parliament (a 3-seat majority, down 8 seats from the previous parliament). - The government completed the exchange of the 2029 “super-bond” (face value of US$546 million or 30 percent of GDP) on March 20, issuing new U.S. dollar denominated “2038 bonds”. - Near-term cash-flow relief from the exchange is about US$130 million over the next 5 years; the net face value haircut is 3 percent. - Staff estimates the NPV loss to bondholders ranges from 29 to 31 percent (measured with 9 and 10 percent discount rates). - Creditor support achieved was 86 percent, exceeding the 75 percent collective action clause threshold. - Prolonged legal disputes exist over nationalization of Belize Telemedia Limited (BTL) and Belize Electricity Limited (BEL) with uncertain compensation amounts; additional arbitral awards (land acquisition, overpayment of taxes, non-observance of tax agreement) are pending enforcement. ### Recent economic developments (2012) - Real GDP growth in 2012 is estimated at 5.3 percent, driven by a rebound in agriculture and tourism despite a sharp decline in oil production. - Inflation averaged 1.3 percent in 2012. - External current account deficit widened to about 1.7 percent of GDP (from 1.1 percent of GDP in 2011), due to a steep drop in oil exports and higher imports of fuel and electricity. - International reserve coverage estimated at 3.4 months of imports (up from 3 months in 2011), supported by strong FDI inflows in the sugar sector. - Fiscal primary surplus for FY2012/13 is expected to deteriorate to 1.3 percent of GDP (from 2.3 percent of GDP in 2011), reflecting declining oil-related revenues and an increased wage bill despite robust GST revenue growth. - Private sector credit growth estimated at 1.1 percent in 2012 after two years of decline; broad money grew by 5 percent. - Persistently high liquidity has driven T-bill rates below 2 percent. - Lending rates on new loans fell across-the-board, with rates dropping to single digits early in the year for residential construction and personal loans. - Banking sector indicators (domestic and international banks; in percent): - Capital/risk-weighted assets: 22.2 (2009), 23.9 (2010), 24.2 (2011), 20.5 (2012) - Excess statutory liquidity (in percent of statutory liquidity requirement): 33.5 (2009), 43.8 (2010), 64.4 (2011), 33.5 (2012) - NPLs/total loans: 14.0 (2009), 18.7 (2010), 21.4 (2011), 20.3 (2012) - Provisions/NPLs: 18.1 (2009), 15.5 (2010), 24.4 (2011), 38.3 (2012) - NPLs net of provisions/capital: 48.2 (2009), 61.9 (2010), 66.1 (2011), 58.5 (2012) - NPLs remain high at 20 percent of total loans at end-2012; banks required to write off bad loans within 3–5 years (US$18.7 million in 2012). - Credit unions show NPLs under 5 percent and ample provisioning. - Social indicators: - GDP per capita grew about 1 percent in real terms on average yearly since 2008. - Population below the poverty line measured 41 percent in 2009 (up from 34 percent at the beginning of the last decade). - Unemployment at 16 percent in September 2012; youth unemployment 30 percent; female unemployment 22.4 percent. - Belize may miss half of the Millennium Development Goals by 2015, including reduction of extreme poverty, women’s share of paid employment, and universal primary education. ### Macroeconomic outlook and risks - Baseline scenario assumes continuation of current policies and real GDP growth of 2½ percent over the medium term. - Oil reserves estimated to last through the end of this decade absent new discoveries; commodity exports, tourism, and construction expected to offset decline in crude oil production. - Inflation expected to remain low in line with main trading partners. - Current account projected to deteriorate due to declining crude oil exports, potentially pressuring international reserves. - Under the baseline, liabilities from nationalization of the two utilities are recognized at mid-valuation at end-2015; compensation to previous shareholders to start in 2016. - Financing needs could rise above 6½ percent of GDP starting in 2016 and to more than 7 percent of GDP after 2018, as compensation falls due. - Baseline macroeconomic projections (in percent of GDP, selected items): - Real GDP growth: 1.9 (2011), 5.3 (2012), 2.5 (2013–2018) - GDP deflator: 4.4 (2011), 1.3 (2012), 1.1 (2013), 1.5 (2014), 1.6 (2015), 1.7 (2016), 1.7 (2017), 2.0 (2018) - Central government overall balance: -1.4 (2011), -1.5 (2012), -0.8 (2013), -1.6 (2014), -1.6 (2015), -2.4 (2016), -2.4 (2017), -3.0 (2018) - Primary balance: 2.1 (2011), 1.5 (2012), 1.1 (2013), 1.0 (2014–2018) - Public and publicly guaranteed debt: 83.0 (2011), 78.6 (2012), 75.1 (2013), 73.5 (2014), 89.5 (2015), 87.8 (2016), 86.3 (2017), 85.5 (2018) - Current account balance: -1.1 (2011), -1.7 (2012), -1.9 (2013), -2.8 (2014), -3.5 (2015), -4.5 (2016), -5.4 (2017), -5.8 (2018) - Gross international reserves (months of imports): 3.0 (2011), 3.4 (2012), 3.1 (2013), 2.7 (2014), 2.4 (2015), 2.1 (2016), 1.7 (2017), 1.4 (2018) - Risks (tilted to the downside): Short term - Spending pressure: automatic salary adjustment averaging 3 percent annual nominal increase; pressure to introduce more generous wage increases could tighten fiscal space. - Banking sector vulnerabilities: high NPLs concentrated in a few banks; further write-offs could impair capital base and require recapitalization with potential fiscal cost; recent recapitalization of one small bank mitigates risk somewhat. Medium term - Refinancing risk: amortization of 2038 bonds starts in 2019, adding about 1 percent of GDP to debt service. - Additional liabilities: compensation payments to former owners of nationalized utilities could push gross financing needs and public debt much higher—if compensation is closer to upper valuations, debt could climb up to 100 percent of GDP. - Pressure on foreign exchange reserves: nonresidents receiving compensation may move out of Belizean dollar assets, pressuring reserves; international reserves already below risk-weighted benchmarks. - External vulnerabilities: exports concentrated to the U.S. (about 46 percent) and EU (31 percent); tourism heavily dependent on U.S. arrivals. - Moderate upside risk: intensified oil exploration may yield a revenue windfall; staff recommends saving any revenue windfall. ### Policy discussions and recommendations - Staff recommends using breathing room from the debt exchange to adopt a fully articulated macroeconomic framework including: - Robust fiscal consolidation (while protecting flagship social programs). - Active debt management. - Steady financial sector reform. - Measures to buttress external sector resilience. - Structural reforms to boost competitiveness and growth. - Fiscal stance and debt management: - 2013/14 budget targets a primary surplus of 1 percent of GDP (reversing prior commitment to 2 percent of GDP). - Total revenues and grants projected to increase by 3.2 percent, mainly from expected improvements in tax administration. - Primary current spending projected to increase by 4 percent, driven by wages and salaries and goods and services. - Overall deficit projected to deteriorate slightly to -1 percent of GDP from -½ percent of GDP in FY2012/13, reflecting higher current spending and return to full-year debt service on the 2038 bond despite lower coupon. - Staff views adoption of a lower primary surplus as weakening fiscal consolidation and debt sustainability; rising financing obligations likely to double in 2016 relative to 2013. - Authorities expressed intent to raise the primary balance target back to 2 percent of GDP in 2014, subject to consultations. - Authorities plan to use proceeds from previous and future sales of shares and annual dividends to finance compensation to shareholders of nationalized companies; left open the option to issue a maximum of US$75 million of 2038 bonds to partially cover compensation payments. - Staff recommendation for stronger fiscal package: - Raise the primary surplus gradually to 3 percent of GDP over the medium term (1 percent of GDP above the 10-year average) to reduce debt-to-GDP to less than 60 percent within a decade and below the long-term value of 50 percent by mid-2020’s. - Short-term focus: raise the primary surplus to at least 2 percent of GDP in the current fiscal year via spending restraint (moderating wage pressures) and reversing erosion of the tax base by bringing many currently zero-rated GST items of domestic consumption back into the tax base. - Implement Auditor General’s 2012 report recommendations to enhance accountability and transparency in public funds use. - Medium-term priorities: implement a strategic tax reform to boost growth, promote fairness, and ensure sustainable revenues; modernize tax administration (CARTAC advice); strengthen fiscal discipline through Public Financial Management reforms (enhanced budget analysis and forecasts, remove automatic wage increases, ensure fixed-term project contributions do not become recurrent). - Given uncertainties around additional liabilities, staff recommends saving any revenue windfall (e.g., from new oil discoveries). - Additional policy advice: - Intensify fiscal efforts and promote development of domestic capital market to mitigate refinancing risks. - Continue intensive supervision of the banking sector and adopt collaborative approaches with weak banks to contain vulnerabilities. *Source: _cr13227 - 1. Tax Reform for Growth, Fairness, and Sustainable Revenues.* ### 13. While the authorities agreed with a number of staff’s policy recommendations, they ### _cr13227 - 13. While the authorities agreed with a number of staff’s policy recommendations, they ### Fiscal policy anchors, consolidation, and public debt - Authorities agreed with several staff recommendations but have not set a fiscal policy anchor; prolonged negotiation over the debt exchange and uncertainty about additional liabilities delayed anchor decisions. - As additional liabilities are firmed, authorities plan to calibrate a set of fiscal anchors, including the public debt-to-GDP target, together with the Medium-Term Debt Strategy (MTDS), which is underway. - Political pressures and social needs could limit scope for more aggressive fiscal consolidation: need to combat crime, tackle rising poverty, and address infrastructure deficiencies. - Authorities supportive of gradual implementation of IMF tax policy recommendations because recently-introduced measures (higher personal relief threshold, elimination of taxes on commissions and royalties paid by nonresidents) have political support and reversing them may be considered tax hikes. - Authorities under intense pressure to grant more favorable wage adjustments and other concessions to public officers and teachers; staff cautioned against the government’s proposal to allocate half of revenues from improvements in tax administration (subject to an annual ceiling) to salary increases as potentially unsustainable. - Authorities announced plans to set up a mortgage bank financed with PetroCaribe funds to make residential mortgages affordable to public officers and teachers; staff cautioned against earmarking funds and creation of a specialized mortgage bank but advised appropriate regulatory and supervisory framework if pursued, to which authorities agreed. - Staff recommended passing comprehensive public debt management legislation including debt management objectives and government obligation to develop an MTDS. - Text Table 3. Belize: Selected Fiscal Indicators (In percent of GDP) — preserve values exactly: - Baseline, w/o additional liabilities - Primary balance 1.1 2013; 1.0 2014; 1.0 2015; 1.0 2016; 1.0 2017; 1.0 2018; 1.0 2019 - Debt 75.1 2013; 73.5 2014; 72.2 2015; 70.7 2016; 69.4 2017; 68.4 2018; 67.4 2019 - Domestic 12.0 2013; 13.0 2014; 14.1 2015; 15.2 2016; 16.3 2017; 17.8 2018; 19.8 2019 - External 63.1 2013; 60.5 2014; 58.1 2015; 55.6 2016; 53.1 2017; 50.5 2018; 47.6 2019 - Gross financing requirements 3.4 2013; 4.1 2014; 3.9 2015; 3.8 2016; 3.8 2017; 4.2 2018; 4.6 2019 - Baseline - Primary balance 1.1 2013; 1.0 2014; 1.0 2015; 1.0 2016; 1.0 2017; 1.0 2018; 1.0 2019 - Debt 75.1 2013; 73.5 2014; 89.5 2015; 87.8 2016; 86.3 2017; 85.5 2018; 84.8 2019 - Domestic 12.0 2013; 13.0 2014; 27.2 2015; 28.1 2016; 29.3 2017; 31.2 2018; 33.7 2019 - External 63.1 2013; 60.5 2014; 62.3 2015; 59.6 2016; 57.0 2017; 54.3 2018; 51.1 2019 - Gross financing requirements 3.4 2013; 4.1 2014; 3.9 2015; 6.6 2016; 6.5 2017; 6.9 2018; 7.5 2019 - Active - Primary balance 1.8 2013; 2.3 2014; 2.9 2015; 3.0 2016; 3.0 2017; 3.0 2018; 3.0 2019 - Debt 74.8 2013; 72.2 2014; 89.2 2015; 85.4 2016; 81.8 2017; 78.4 2018; 75.1 2019 - Domestic 11.7 2013; 11.3 2014; 25.8 2015; 24.7 2016; 23.8 2017; 23.5 2018; 23.8 2019 - External 63.1 2013; 61.0 2014; 63.4 2015; 60.7 2016; 58.0 2017; 54.9 2018; 51.4 2019 - Gross financing requirements 3.1 2013; 2.7 2014; 3.8 2015; 4.6 2016; 4.4 2017; 4.7 2018; 5.1 2019 ### Financial sector reforms and vulnerabilities - Staff view: continued intensive supervision and additional efforts required to address financial sector vulnerabilities. - Revised Domestic Banking and Financial Institutions Act (BFIA) effective January 2013 expanded central bank powers: legal basis for consolidated supervision, strengthened rules to prevent high loan concentration and limit related party transactions. - Operationalization and enforcement of some provisions warranted; further TA mostly from CARTAC may be required. - Central bank maintained weak financial institutions under intense supervision and adopted a collaborative approach with the banking sector. - Staff emphasized need to establish a legal department at the central bank for effective resolution practices and update crisis management plan for bank restructuring and resolution framework established under the BFIA. - Provisioning and supervision: - Central bank noted that, excluding one bank, NPLs of the domestic banking system would be around 6–7 percent. - Provisioning requirement for fully secured loans was relaxed in January this year for domestic banks only to help recovery in private sector credit. - Effective April 1, 2013, specific provisions equivalent to 50 percent (initially 75 percent) of the outstanding loan balance shall be maintained. - Progress and gaps: - Continued progress on several fronts consistent with FSAP recommendations, but lagging: insurance supervision and amending the insurance act; no progress on supervision of offshore nonbank financial institutions. - Additional efforts needed in credit union regulation, Development Finance Corporation supervision, and central bank autonomy. - Authorities plan to revise credit union and insurance legislations, establish a credit bureau by end-2013, and the Financial Stability Unit (FSU) will draft a financial stability report covering the entire financial sector. - Central bank plans to revise the international banking act and the central bank act next year; modernization of the national payment system prioritized over next three years. - AML/CFT: - Staff encouraged further strengthening the AML/CFT regime; concerns about IFSC weaknesses, lack of regulation and supervision of the IBC sector and potential misuse for money laundering and terrorist financing. - Authorities warned that wholesale change in legal structure would be required given private sector involvement in IBC registry. ### External stability, exchange rate, and competitiveness - Fixed exchange rate regime (pegged to the U.S. dollar) continues to serve as macro anchor. - External position weaknesses and risks: - Highly negative net external position: 140 percent of GDP at end-2011. - Projected widening current account deficit from 1.7 percent of GDP in 2012 to 5.4 percent in 2017. - Risk-weighted measures suggest international reserves stand below benchmarks. - Rising gross financing needs, limited external financing, and low international reserves pose risks, especially with potential weaker U.S. recovery and protracted slow growth in Europe. - Competitiveness: - Exchange rate appears in line with fundamentals, but competitiveness has deteriorated along regional trends. - Despite surge in FDI, Belize’s market share of non-oil goods exports and tourism have steadily declined over the last 10 years. - Staff recommended using space from the recent debt exchange to advance macroeconomic policies and structural reforms. - Doing Business weaknesses: enforcing contracts, starting a new business, registering property. - Main impediments to doing business: lack of security, weak institutions, poor infrastructure, high crime rate. - Authorities implementing National Sustainable Tourism Master Plan 2030 to raise tourism standards and develop new services sectors; tourism board anticipating a surge of about 40 percent in tourist arrivals in 2014 based on preliminary cruise-ship bookings (impact on current account expected to be modest as stay-over tourism contributes most). ### Data provision - Data provision broadly adequate for surveillance: quality, coverage, and timeliness permit adequate monitoring of economic developments. - Authorities committed to make best effort to initiate subscription to the Fund’s Special Data Dissemination Standard in the context of the recent debt exchange. ### Staff appraisal — key conclusions and policy recommendations - Growth and risks: - Output growth expected to moderate to about 2.5 percent in the medium term despite 2012 acceleration. - Main risks: fiscal challenges and potential weaker-than-expected global recovery affecting trade and tourism. - Fiscal strategy recommendations: - Progress in consolidating public finances needs to continue. - Adoption of a lower fiscal primary surplus of 1 percent of GDP (from previous target of 2 percent) weakens consolidation momentum; near-term focus should be on maintaining a primary surplus target of at least 2 percent of GDP. - Policies to achieve this: spending restraint—especially moderating wage pressures—and reversing erosion of tax base by bringing back many currently zero-rated GST items of domestic consumption into tax base. - Over medium term, aim to raise primary surplus to 3 percent of GDP to reduce debt-to-GDP ratio to less than 60 percent of GDP a decade from now. - Strategic tax reform to boost growth, promote fairness, and ensure sustainable revenues. - Stronger fiscal adjustment may be warranted if additional liabilities are closer to the upper valuation claimed by former owners. - Public financial management and debt management: - Rapid progress in fiscal reforms needed: reform PFM system to enhance budget analysis and forecasting, remove automatic wage adjustments, ensure fixed-term project contributions do not become permanent spending obligations. - Cautioned against earmarking funds and creation of specialized mortgage bank. - Need to enhance accountability and transparency in use of public funds. - Develop a solid debt management program: strengthen institutional framework, build capacity to operationalize MTDS, develop domestic debt market, consider scope and capacity to develop market-based financing instruments. - Financial sector and contingency planning: - Banking sector vulnerable with high, albeit gradually decreasing, NPL levels; continued vigilance required. - Encourage use of Fund TA to update crisis management plan, bank restructuring and resolution framework. - Need clarity on scope and modality of government intervention in contingencies. - Further strengthen AML/CFT regime. - External stability and structural reforms: - Compression of projected current account deficits needed via fiscal consolidation and comprehensive structural reform agenda to enhance productive capacity, competitiveness, and market share of non-energy exports. - Improve business environment by tackling impediments to doing business to attract investment, expand exports, and bolster external sustainability. *Source: _cr13227 - 13. While the authorities agreed with a number of staff’s policy recommendations, they* ### 36. It is recommended that the next Article IV consultation be held on the standard ### _cr13227 - 36. It is recommended that the next Article IV consultation be held on the standard ### Article IV consultation timing - It is recommended that the next Article IV consultation be held on the standard 12-month cycle. ### Box 1. Tax Reform for Growth, Fairness, and Sustainable Revenues — main findings and recommendations - Mission: An FAD General Tax Policy mission visited Belize January 24–February 6, 2013 to undertake a diagnostic review of the tax system, focusing on business and income tax, GST and taxation of excisable goods. - Objective: Identify short-term measures and medium-term reform strategy to mobilize additional revenues. - Taxes on businesses: - Current assessment: The business tax system in Belize is narrow-based. - Recommendation: Transform the business tax into a minimum tax at a uniform rate in the range of 1.5 percent for most businesses, to be credited against the excess of income tax over the minimum tax in future years. - Recommendation: Modify legislation to broaden the base for the business income tax to include capital gains and income from capital, taxed at 15 percent. - Recommendation: Eliminate many exemptions and loopholes and constrain discretionary power to extend additional exemptions. - Recommendation: Impose a business tax on foreign residents in Belize in line with taxes on residents’ income. - Personal income tax: - Current assessment: The system entails serious horizontal inequities. - Recommendation: Aggregate more types of household incomes, including that of professionals and self-employed. - Recommendation: Introduce more progressivity by adjusting the level of personal relief and reforming the rate structure. - Recommendation: Phase out deductions to be replaced by tax credits. - General sales tax (GST): - Concern: Continued erosion of the revenue base due to broad zero-rating. - Recommendation: Tax many goods currently exempted (whether imported or consumed domestically, including both output and business inputs) at the standard rate. - Recommendation: Conduct a thorough review of requirements to make the system more conducive to new businesses while protecting revenues. - Excises and customs duties: - Recommendation: Harmonize the tax system between domestic production and imports. - Recommendation: Increase excises on selected items, including cigarettes, beer, spirits, and soft drinks; introduce an excise on wine; convert specific excises into guaranteed ad valorem excises; introduce excises on mobile airtime and gaming. - Special regimes: - Recommendation: Phase out direct and indirect concessions for Commercial Free Zones (CFZ), Export Processing Zones (EPZ), and those under the Fiscal Incentives Act (FIA). - Recommendation: Avoid renewal of income tax holidays and dividends holidays for CFZ, EPZ, and FIA. - Recommendation: Target tax incentives to the business activity itself through income tax credits or accelerated tax provisions in the income tax code. - Tourism: - Recommendation: Bring hotels into the GST net at the standard rate and eliminate the current Hotel Tax. - Recommendation: Keep other tourism services in the GST net at the standard rate. - Recommendation: Impose other own-revenue sources on the tourism sector to finance the Belize Tourism Board (BTB) to compensate for loss of revenues. - Extractive industries: - Recommendation: Improve the bidding process in the oil sector to govern existing and future exploration rights. - Recommendation: Increase royalties in the minerals sector to capture a greater share from windfall of existing and future production. - Property taxes: - Recommendation: Reform to base taxes on market value country-wide, with assessments performed by a single, professional agency for both municipal and rural properties. - Expected benefit: Ensure regular reassessments of property value and improve reliability of the tax system. ### Box 2. Medium-Term Debt Strategy — diagnosis and recommended reforms - Mission: An IMF technical assistance (TA) mission visited Belize City and Belmopan from November 1–16, 2012 to diagnose institutional framework and assist in developing a debt management strategy and domestic public debt market. - Institutional diagnosis: - There is no comprehensive institutional framework for debt management. - Legal basis for debt management is fragmented among different sets of legislation. - The ministry of finance and economic development lacks a debt management unit responsible for strategy and analysis. - There is no documented Medium-Term Debt Management Strategy (MTDS). - Central bank manages data relatively well, but the cost and risks of the total public debt portfolio are not systematically assessed. - Risk exposures: - High share of foreign currency debt in the central government debt portfolio: 84 percent. - Three-month treasury bills account for 52 percent of the domestic debt, causing frequent interest rate resetting and exposure to rollover and interest rate risks. - Commencement of amortization of the U.S. 2038 bonds in 2019 and potential payouts to former owners of nationalized companies will increase future gross financing needs and government refinancing risk. - Recommended actions for active debt management: - Form a high-level National Debt Management Committee, with a robust middle-office function responsible for analyzing cost and risk of the public debt portfolio. - Submit a comprehensive Public Debt Management Act to parliament including debt management objectives, the government’s authority to borrow, and obligation to develop a MTDS. - Develop the domestic public debt market urgently, given potential additional liabilities to nationalized companies needing domestic currency payments. - Introduce a market-based auction system for treasury bonds. - Establish a comprehensive capital market act that governs securities transactions and businesses. - Authorities’ response and timeline: - Authorities plan to revamp the debt management framework in line with TA recommendations. - Authorities are committed to reform the debt management framework and fully implement the recommendations by end-2013. - Staff welcomes the progress and stands ready to provide further assistance upon request. - Although authorities do not envisage re-access to international capital markets in the foreseeable future, robust debt management institutions and an investor relations program are recommended as long-term goals. ### Box 3. Financial Sector Reform Agenda — progress and remaining priorities - Context: The 2011 Financial Sector Assessment Program (FSAP) identified weaknesses and challenges and recommended actions; authorities are using FSAP recommendations as the basis for reforms. - Banking sector: - New provisioning and loan classification requirements adopted at end-2011 raised prudential measures to international standards. - The revised Domestic Banking and Financial Institutions Act (BFIA) became effective January 2013 and established legal basis for consolidated supervision, strengthened rules to prevent high loan concentration and limit related party transactions. - Planned directives under BFIA: (i) corporate governance; (ii) internal controls; (iii) operational risks; and (iv) valuation of collateral. - Planned next step: Update the International Banking Act next year. - Credit unions: - Authorities have started work on amending the Credit Union Act with further progress expected in 2013. - Resolution of troubled/insolvent credit unions has progressed and is expected to be finalized by mid-2013. - Crisis management and bank resolution framework: - The revised BFIA strengthens bank resolution framework, including allowing appointment of a statutory administrator. - With Fund assistance in early 2012, procedures for Emergency Liquidity Assistance by the central bank and solvency support by the government were established and a Domestic Crisis Management Plan prepared. - Financial infrastructure: - Plans to establish a credit bureau are progressing: draft legislation expected to be passed by mid-year, with a bureau in place by end-2013, or early 2014. - Plans to develop the capital market and modernize the national payments system are underway; implementation of the latter will span the next three to four years. - Financial stability: - The central bank has established a Financial Stability Unit (FSU) comprised of representatives of the Research and Financial Sector Supervision departments. - The bank is developing the framework to draft its first financial stability report, to include macro prudential surveillance, enhancement of stress testing methodologies, and a contagion matrix to track interconnectedness among sectors. - Insurance and pensions: - A draft amendment to the Insurance Act to strengthen the autonomy of the Supervisor of Insurance, improve corporate governance, and require insurance companies to publish financial information is expected to be passed this year. - Authorities are preparing draft legislation to regulate private pensions. - Plans to improve supervision of international insurance companies have not progressed. - AML/CFT and supervision: - The central bank has developed and is in the process of implementing a risk-based offsite surveillance of banks, to be later adapted to other sectors. - Central bank autonomy: - Future amendments to the Central Bank Act could consider the autonomy of the central bank. *Source: Excerpt from IMF staff report _cr13227 (sections and boxes as provided).* ### Box 4. The Authorities’ Response to Past IMF Policy Recommendations ### Box 4. The Authorities’ Response to Past IMF Policy Recommendations ### Fiscal consolidation - Policy recommendation: Strengthen fiscal policy to rebuild macroeconomic buffers in the context of rollover risks and emerging contingencies. - Authorities’ response: Clear plan to manage contingent fiscal liabilities. - Assessment of consistency: Marginally consistent - Findings: - "The outturn of the fiscal year 2011/12 was slightly above the budget target, but was below the 2011 Article IV recommendation." - "The outcome for fiscal year 2012/13 falls short of the envisaged target." - "The authorities have outlined options for financing additional liabilities owed to former shareholders of nationalized companies." ### Financial sector reform - Policy recommendation: Monitor closely elevated credit risks in the financial system and implement the recommendations from the 2011 FSAP. - Assessment of consistency: Broadly consistent - Findings: - "Considerable progress has been made in implementing FSAP recommendations." - "The authorities are committed to revamp the International Banking Act and the Credit Unions Act with a scope of implementation by end-2013." - "Further efforts are required to enhance consolidated supervision and strengthen the still vulnerable banking system." ### Structural reforms - Policy recommendation: Remove key infrastructure bottlenecks and improve the environment for doing business to boost economic growth. - Assessment of consistency: Marginally consistent - Findings: - "Key infrastructure bottlenecks persist (e.g. land registry, port facilities), while doing business indicators and investor confidence remain low." *Box 4. The Authorities’ Response to Past IMF Policy Recommendations* ### 1. Public and publicly guaranteed debt ### 1. Public and publicly guaranteed debt ### Public debt stock and composition - Total debt (levels): 1,086 1,137 1,187 1,229 1,241 1,229 1,251 1,588 1,622 1,662 1,721 1,786 - Other public and publicly guaranteed external debt (levels): 709 674 685 848 424 038 373 534 - Central government (levels): 1,015 1,040 1,113 1,160 1,183 1,181 1,209 1,548 1,584 1,626 1,686 1,752 - Domestic debt (levels): 106 101 169 166 193 197 222 483 520 565 628 710 - External debt (levels): 910 939 945 995 991 985 987 1,065 1,064 1,061 1,058 1,042 - Multilateral (levels): 197 219 226 266 270 285 294 299 302 302 303 305 - Bilateral and export credit (levels): 163 173 172 174 171 167 162 157 153 150 146 144 - Commercial 1/ (levels): 550 547 547 555 550 533 531 609 609 609 609 593 - Total debt (percent of GDP): 79.6 84.9 85.3 83.0 78.6 75.1 73.5 89.5 87.8 86.3 85.5 84.8 - Other public and publicly guaranteed external debt (percent of GDP): 5.2 7.2 5.3 4.6 3.7 2.9 2.5 2.3 2.1 1.9 1.7 1.6 - Central government (percent of GDP): 74.5 77.7 80.0 78.4 74.9 72.2 71.0 87.3 85.7 84.4 83.7 83.2 - Domestic debt (percent of GDP): 7.8 7.5 12.1 11.2 12.2 12.0 13.0 27.2 28.1 29.3 31.2 33.7 - External debt (percent of GDP): 66.7 70.1 67.9 67.2 62.7 60.2 58.0 60.1 57.5 55.1 52.5 49.5 - Multilateral (percent of GDP): 14.5 16.4 16.2 17.9 17.1 17.4 17.3 16.9 16.3 15.7 15.0 14.5 - Bilateral and export credit (percent of GDP): 11.9 12.9 12.3 11.7 10.8 10.2 9.5 8.9 8.3 7.8 7.2 6.8 - Commercial 1/ (percent of GDP): 40.3 40.9 39.3 37.5 34.8 32.5 31.2 34.3 32.9 31.6 30.2 28.2 ### Key findings on public debt composition and trends - External debt declines from 66.7 percent of GDP to 49.5 percent of GDP over the period shown. - Domestic debt rises markedly to 33.7 percent of GDP by the final year. - Commercial creditors represent a large share of external debt (levels and percent of GDP). ### Flow of funds (sources and uses) - Sources of funds (percent of GDP) total: 8.1 6.6 5.6 6.4 5.5 4.5 5.1 4.9 7.6 7.5 8.0 8.5 - Primary balance (percent of GDP): 5.4 0.7 1.3 2.1 1.5 1.1 1.0 1.0 1.0 1.0 1.0 1.0 - Privatization proceeds (percent of GDP): 0.0 0.0 0.0 2.0 0.7 0.0 0.0 0.0 0.0 0.0 0.0 0.0 - Identified disbursements (percent of GDP): 2.8 5.8 2.3 3.6 4.1 3.9 2.0 3.0 0.8 0.4 0.2 0.2 - Multilateral identified disbursements: 0.9 2.6 1.4 1.7 1.6 2.4 1.9 1.4 0.8 0.4 0.2 0.2 - Bilateral and export credit identified disbursements: 2.1 2.1 0.7 0.8 0.7 1.6 0.1 0.0 0.0 0.0 0.0 0.0 - Commercial identified disbursements: -0.3 1.1 0.2 1.1 1.8 0.0 0.0 0.1 1.6 0.0 0.0 0.0 - Unidentified external borrowing (percent of GDP): 0.0 0.0 0.0 0.0 0.0 -0.9 0.6 0.8 1.3 1.7 1.7 1.7 - Unidentified domestic borrowing (percent of GDP): 0.0 0.0 0.0 0.0 0.0 0.3 1.5 0.1 4.5 4.5 5.0 5.7 - Use of funds — Debt service (percent of GDP): 8.0 6.6 5.6 6.4 5.5 4.5 5.1 4.9 7.6 7.5 8.0 8.5 - Interest payments (percent of GDP): 3.9 3.6 3.5 3.5 2.9 1.9 2.7 2.6 3.4 3.4 4.0 4.1 - Domestic interest (percent of GDP): 0.9 0.9 0.9 0.5 0.5 0.4 0.4 0.5 1.2 1.2 1.4 1.6 - External interest (percent of GDP): 3.0 2.7 2.6 3.0 2.5 1.5 2.2 2.1 2.3 2.2 2.6 2.5 - Principal repayments (percent of GDP): 4.1 2.9 2.1 2.9 2.6 2.6 2.4 2.3 4.2 4.1 3.9 4.4 - Domestic principal repayments 3/ (percent of GDP): 0.8 0.4 0.1 0.1 0.1 0.1 0.1 0.0 2.0 1.9 1.9 1.8 - Multilateral principal repayments (percent of GDP): 1.0 0.9 1.0 1.2 1.3 1.5 1.4 1.3 1.4 1.5 1.4 1.3 - Bilateral and export credit principal repayments (percent of GDP): 2.0 1.4 0.9 0.9 0.9 0.9 0.9 0.9 0.8 0.7 0.7 0.6 - Commercial, including parastatal (percent of GDP): 0.2 0.3 0.0 0.7 0.3 0.1 0.1 0.0 0.0 0.0 0.0 0.8 ### Assumptions (selected) - Nominal GDP (US$ millions): 1,364 1,339 1,392 1,481 1,579 1,637 1,703 1,773 1,849 1,926 2,014 2,105 - Nominal GDP growth rate (percent): 6-2 4 6 7 4 4 4 4 4 5 5 (as presented) - Real GDP growth rate (percent): 4 0 3 2 5 3 3 3 3 3 3 3 - Annual inflation (deflator, in percent): 3-2 1 4 1 1 2 2 2 2 2 2 - Assumed domestic borrowing rate (percent): 8.0 8.0 8.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 - Nominal external multilateral/bilateral borrowing rate (percent): 4.0 2.0 1.5 1.5 1.7 1.5 1.6 1.7 2.3 3.5 3.5 3.5 - Six-month LIBOR rate (percent) 4/: 3.0 1.1 0.5 0.5 0.7 0.5 0.6 0.7 1.3 2.5 2.5 2.5 - Spread over LIBOR rate (percent): 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 ### Memorandum items - Overall central government balance (calendar year, percent of GDP): 1.4 -2.9 -2.2 -1.4 -1.5 -0.8 -1.6 -1.6 -2.4 -2.4 -3.0 -3.1 - Implicit nominal interest rate (percent) 5/: 4.8 4.5 4.3 4.4 3.8 2.5 3.7 3.7 4.0 4.0 4.8 5.0 - Gross financing requirement (percent of GDP): 2.8 5.8 2.3 3.6 4.1 3.4 4.1 3.9 6.6 6.5 6.9 7.5 _Source: Belizean authorities; and Fund staff estimates and projections._ ### Footnotes and notable technical points - 1/ Amortization of the "Superbond" commences in 2019 according to the initial repayment terms. - 2/ Includes partial coupon payment of US$11.7 million (out of full amount US$23 million) on the "super-bond", paid on September 20, 2012. - 3/ Includes repayment of additional liabilities to the former owners of BTL and BEL (at mid-point valuation between the authorities' assessment and the claims of the former owners of the companies) and land claims in equal installments in 2016-2020. - 4/ Latest World Economic Outlook assumptions. - 5/ Interest on government debt in previous year divided by stock of debt. --- ### Annex I. Super-Bond 2.0 ### Summary of the debt exchange - Exchange timeline: offer launched February 15; exchange closed March 20, 2013. - Creditor Committee represented investors holding more than 62 percent of outstanding bonds; creditor support achieved: 86 percent (exceeded 75 percent collective action clause threshold). - Exchange took place outside the framework of a Fund program; characterized by close collaboration with the Creditor Committee. ### Outcomes and valuations - Staff calculations: NPV losses to bond holders around 29–31 percent (assumed exit yield of 9 to 10 percent). - Alternative discounting: using discount rate equal to Belize's projected medium-term nominal GDP growth rate of 4.5 percent, NPV reduction in public debt is about 20 percent. ### Restructuring financial terms - Principal haircut: Approximately US$530 million of new 2038 bonds will be issued. Original "super-bond" (approximately US$546 million) subject to a 10 percent face value haircut; overdue interest added to face value of new bond (approximately 7 percent of the original principal). Net face value haircut is about 3 percent. - Coupon rate reduction: step-up coupon of 5 percent through 2017 (for 4.5 years) and 6.767 percent thereafter, versus original 8.5 percent. - Maturity extension: final maturity February 2038 (original 2029); first amortization due August 2019. ### Legal and transparency provisions - New legal terms: bondholders’ committee engagement provisions, contingency account for trustee indemnification, principal reinstatement in event of future default, most favored creditor provision. - Government committed to improved data transparency, including "best effort" to begin to subscribe to the Special Data Dissemination Standard (SDDS). ### Cash-flow relief and limits - Cash-flow relief: US$47 million in 2013 (including missed interest payments) equal to 2.9 percent of GDP; about US$20 million (1.1 percent of GDP) per year from 2014 to 2017. - Total cash flow relief over remaining 16-year life of the super-bond: US$384 million. - Despite cash-flow relief, preliminary calculations suggest the debt exchange would reduce the debt-to-GDP ratio by around 8 percent in 2018; debt burden likely to remain high due to compensation liabilities and slow fiscal adjustment. --- ### Annex II. Additional and Contingent Liabilities ### Major contingent liabilities and valuations - Nationalization compensation for BTL and BEL is the largest share of additional liabilities. - Valuation ranges for BTL and BEL: about 6 percent of GDP (government valuation) to about 30 percent of GDP (claimants’ valuation). - DSA assumption: mid-point valuation for outstanding BTL/BEL nationalization compensation of approximately 17 percent of 2015 GDP including accrued interests, recognized at end-2015 and amortized in equal installments over 2016–2020. ### Rules for compensation and financing options - BTL compensation rule (Belize Telecommunications (Amendment) Act): payable in cash or Treasury Notes redeemable within five years; compensation bears interest at the rate paid by commercial banks in Belize on fixed deposits on date of acquisition. - BEL compensation: Belize Electricity (Amendment) Act does not specify period; authorities expect precedent of BTL (compensation period not to exceed five years; compensation bears accrued interests). - Potential financing sources to alleviate domestic financing pressure: - Accumulated BZ$75 million from sale of BTL shares in 2011. - Possible sales of BTL and BEL shares up to constitutional limit of 51 percent majority. - U.S. 2038 bond indenture option to issue maximum US$75 million of new bond if former owners agree. - Estimated annual dividends: BTL BZ$7 million and BEL BZ$0.4 million. - Aggregate mobilization of these financing sources could add up to approximately 11 percent of GDP. ### Other additional and contingent liabilities - Land acquisition claims since 1980: estimated about 3 percent of GDP (authorities claim they have been making interest payments). - Small arbitration award due to termination of airport concession: about 0.3 percent of GDP. - Arbitration awards pending enforcement estimated at about 4 percent of GDP (claims related to overpayment of taxes, nonobservance of accommodation agreement, and guarantees issued by the government). --- ### Annex III. Debt Sustainability Analysis (DSA) ### Main findings - The debt exchange provided near-term liquidity relief but modest impact on debt stock reduction (net haircut only 3 percent of face value due to addition of past overdue interest). - Fiscal balance modestly more favorable after exchange owing to reduced coupon rate from 8.5 percent to 5–6.8 percent. - Recognition of additional liabilities (mid-point valuation) would increase debt stock by 17 percent of GDP in 2015 under DSA assumptions. - Economic growth prospects: real output growth projected around 2.5 percent over the medium term; growth remains vulnerable to external shocks (including weather-related). - Policy implications: further fiscal consolidation, more robust debt management, and development of the domestic debt market are needed to address high public debt burden. ### DSA assumptions reiterated - DSA assumes government recognizes additional liabilities at end-2015, uses proceeds from sale of BTL shares (BZ$75 million), potential sales up to 51 percent, and annual dividends (BZ$7.4 million) in reducing debt burden; compensation amortized 2016–2020. *Source: IMF staff report content provided in the chapter "1. Public and publicly guaranteed debt" of the IMF country report.* ### 4. The country will need to rely heavily on domestic financing in the medium term, ### 4. The country will need to rely heavily on domestic financing in the medium term, ### Domestic financing, interest burden, and market development - Authorities may opt to issue new U.S. 2038 bonds of maximum US$75 million as part of the compensation. - The bulk of projected financing needs would be covered by domestic borrowing, as official disbursement is projected to gradually decline and no external commercial borrowing is expected within the projection horizon. - Nominal interest of domestic borrowing could be high (assumed 5 percent) and even higher should the supply of debt stock continue to rise. - Increased domestic financing warrants policy actions to develop the domestic public debt market; otherwise, illiquidity in the market with captive investors could distort market pricing and effective credit intermediation. ### Debt dynamics and baseline assessment - Under the baseline scenario: - Public debt would experience a hike to 90 percent of GDP in 2015, and remain high during the projection horizon. - Debt reduction is projected to be slow, owing to weak fiscal efforts under the baseline (1 percent of primary surplus in the medium term). - Public sector gross financing needs could increase to 7.6 percent of GDP in 2019 mainly due to maturing principal of the additional liabilities and high interest rate charged on domestic financing. - Beyond the projection horizon, financing needs would increase even more from 2019, when the amortization of the new bond starts. - The repeated debt exchange episodes may indicate the country’s current debt level is over the maximum sustainable debt level. - Maximum sustainable debt level range: 63–78 percent of GDP. - Recommended long-run debt level for emerging market economies: 49–58 percent of GDP. - Bound tests indicate vulnerability to shocks: - More than 80 percent of total public debt was denominated in foreign currency in 2012, making the debt profile particularly sensitive to an exchange rate shock. - A 30 percent real depreciation in 2014 would raise total debt to nearly 120 percent of GDP in 2015, combined with realization of additional liabilities. - Debt ratio is highly sensitive to shocks in growth, interest rate, and the primary balance. - Contingent liabilities shocks (19 percent of GDP) would cause a proportional increase in debt levels. The contingent liabilities shock includes: - (i) an additional amount in 2015 equivalent to the difference between the mid-point and the upper bound valuations of the additional liabilities associated with nationalized companies (of which (i) represents close to ¾ of the total contingent liabilities shock); - (ii) other ongoing disputes; and - (iii) potential recapitalization needs of a few banks, stemming from the generic/migration shocks in the authorities’ bank stress test. ### Projections and key fiscal/external statistics (selected figures preserved exactly as in source) - Public sector debt and related projections (percent of GDP): - Baseline: Public sector debt 2008–2018 excerpt: 79.6, 84.9, 85.3, 83.0, 78.6, 75.1, 73.5, 89.5, 87.8, 86.3, 85.5, 50.2 (table entries for 2008–2018). - o/w foreign-currency denominated: 71.9, 77.3, 73.2, 71.8, 66.4, 63.1, 60.5, 62.3, 59.6, 57.0, 54.3. - Identified debt-creating flows (selected line values): -6.7, 4.4, -3.0, -4.4, -3.7, -1.9, -1.3, 16.0, -1.2, -1.1, -0.7. - Primary deficit (percent of GDP): -5.4, -0.7, -1.5, -2.1, -1.5, -1.1, -1.0, -1.0, -1.0, -1.0, -1.0. - Revenue and grants (percent of GDP): 29.4, 26.1, 26.9, 27.7, 26.3, 26.3, 26.2, 25.9, 25.9, 25.8, 25.6. - Primary (noninterest) expenditure (percent of GDP): 24.0, 25.4, 25.4, 25.6, 24.8, 25.2, 25.1, 24.9, 24.9, 24.8, 24.7. - Gross financing need (percent of GDP): 2.5, 5.9, 3.9, 4.2, 4.1, 3.4, 4.1, 3.9, 6.6, 6.5, 7.0. - Average nominal interest rate on public debt (in percent): 4.8, 4.5, 4.5, 4.4, 3.8, 2.5, 3.7, 3.7, 4.0, 4.0, 4.8. - Real GDP growth (in percent) used in baseline: 3.8, 0.0, 2.7, 1.9, 5.3, 3.7, 2.6, 2.5, 2.5, 2.5, 2.5. ### Stress scenarios and bound tests (high-level outcomes) - External debt DSA Figure scenarios (external debt in percent of GDP): - Baseline and shock scenarios illustrated: interest rate shock, current account shock, combined shock, real depreciation shock (one-time real depreciation of 30 percent occurs in 2014). - Example outcome: with 30 percent depreciation scenario, external debt rises substantially in the projection period (figure labels show large increases; textual note: with 30 percent real depreciation in 2014, total debt would climb to nearly 120 percent of GDP in 2015). - Public debt DSA Figure scenarios (public debt in percent of GDP): - Shocks include growth shock, primary balance shock (PB shock), interest rate shock, combined shock, contingent liabilities shock (one-time 21 percent of GDP contingent liabilities in 2014 together with 30 percent depreciation in one scenario). - Example outcomes: combined shocks and contingent liabilities can push public debt markedly above baseline (figures cite scenario values such as baseline 86, growth shock 96, PB shock 93, i-rate shock 91, combined shock 95, real depreciation and contingent liabilities 114). ### Reserve adequacy, exchange rate, and current account assessment - Reserves and projections: - Gross international reserves stood at around US$286 million at end-2012. - Reserves are projected to decline by about 40 percent over the next five years to US$172 million at end-2017. - Traditional adequacy metrics: - Reserves are currently above adequacy benchmarks (three months of imports, 20 percent of broad money, full cover of short-term debt for a year). - Reserves are projected to fall below three months of imports in 2014 and below twenty percent cover of broad money in 2016. - By 2017 reserves reach 57 percent and 69 percent, respectively, of the adequate level (relative to the two mentioned benchmarks). - Risk-weighted reserve measures: - First risk-weighted measure: reserves stood at 86 percent in 2012 (below the lower bound adequacy threshold of 100–150 percent) and are expected to decline to 46 percent by 2017. - Second risk-weighted measure (SIDS-adjusted): current 57 percent ratio below the lower benchmark and projected decline to 30 percent by 2017. - External stability and exchange rate assessments: - Macroeconomic balance (MB) approach: projects external current account deficit of -5.4 percent of GDP with a medium-term norm of -5.1 percent of GDP; fiscal consolidation and moderate real depreciation would help align external stability. - External stability (ES) approach: Belize’s negative net foreign assets (NFA) position nearly -140 percent of GDP at end-2011; staff-calculated external current account deficit of -2.7 percent of GDP per year would reduce required NFA for financing to below -110 percent of GDP by 2023; a narrower deficit would be consistent with a gradual real depreciation of up to 9.2 percent. - Equilibrium real exchange rate (ERER) approach: suggests moderate 5.3 percent undervaluation of the Belize dollar at end-2012. *Source: IMF staff assessment and projections contained in the provided document.* ### 5. An assessment of external debt sustainability highlights vulnerabilities to Belize’s ### 5. An assessment of external debt sustainability highlights vulnerabilities to Belize’s external position ### Summary findings - External debt ratio is projected to gradually decline over the medium term to around 54 percent of GDP by 2018. - The debt trajectory is vulnerable to shocks, particularly nominal exchange rate devaluation and current account shocks. - Limited options for external financing and high gross financing needs pose additional risk to external sustainability. - The projected widening of the current account deficit would reduce reserves coverage to below 2 months of imports by 2017 and pose a challenge to maintaining the exchange rate peg. ### Vulnerability scenarios and projected debt responses - Under a 30 percent depreciation of domestic currency: - External debt would surge to 88 percent of GDP in 2014. - External debt would remain elevated at 79 percent of GDP in 2018. - Under a non-interest current account shock: - External debt would boost to around 68 percent of GDP over the medium-term horizon. - Gross financing needs: - 6.8 percent of GDP on average annually over the next 5 years. ### Assessment of the Real Exchange Rate Using CGER Methodologies (selected results; in percent of GDP, unless otherwise indicated) - Macroeconomic Balance Approach / Baseline: - Equilibrium external current account (CA): -1/-5.1 - Underlying CA balance: 2/-5.4 - CA elasticity to REER: 3/-0.38 - Implied REER adjustment (in percent, "+" appreciation): -0.9 - Macroeconomic Balance Approach / Sensitivity analysis (reducing NFA to below baseline 2017 level minus one fourth st.dev.): - Equilibrium external current account (CA): -5.1 - Underlying CA balance: -7.0 - CA elasticity to REER: -0.38 - Implied REER adjustment (in percent, "+" appreciation): -5.2 - External Sustainability Approach / Baseline (reducing NFA to below -110 percent of GDP by 2023): - Equilibrium external current account (CA): -2.7 - Underlying CA balance: [-1.9 -6.2] - CA elasticity to REER: -0.38 - Implied REER adjustment (in percent, "+" appreciation): Up to -9.2 - External Sustainability Approach / Sensitivity analysis (reducing NFA to below -100 percent of GDP by 2023): - Equilibrium external current account (CA): -1.7 - Underlying CA balance: [-1.9 -6.2] - CA elasticity to REER: -0.38 - Implied REER adjustment (in percent, "+" appreciation): Up to -12 Notes embedded in the CGER assessment: - 1/ Equilibrium external current account corresponds to a CA level that is consistent with a specific set of economic fundamentals. - The external sustainability approach assumes the medium/long-term real growth rate of 2.5 percent and inflation of 2 percent. - 2/ External current account in 2017 for MB approach and in 2013-23 for ES approach. - 3/ This elasticity is computed using the standard long-run real exchange rate elasticities for imports (0.92) and exports (-0.71), as well as the medium-term values of Belize’s exports and imports of goods and services (in percent of GDP). ### Reserves, exchange rate, and financing context - Exchange rate arrangement: Since 1976, the Belize dollar has been pegged to the U.S. dollar at the rate of BZ$2 per U.S. dollar. - The projected decline in reserves coverage to below 2 months of imports by 2017 would pose a challenge to maintaining the exchange rate peg. - Over the period 2013-2017, loan repayments of commercial banks and other private sector are assumed to exceed new disbursements, reversing in 2018 and thus explaining improvement in non-debt creating capital flows. *Source: _cr13227 - 5. An assessment of external debt sustainability highlights vulnerabilities to Belize’s* ### 13. With grant assistance from the CDB in 2010, GOB formulated a policy and strategic ### _cr13227 - 13. With grant assistance from the CDB in 2010, GOB formulated a policy and strategic ### Education sector policy and Education Sector Reform Project - With grant assistance from the CDB in 2010, GOB formulated a policy and strategic framework for the education sector, including a comprehensive education sector strategy. - In 2012, the CDB approved a loan to GOB of US$2.0 million (Education Sector Reform Project). - Objective of the project: to enhance learning outcomes across all levels of the education sector in the country. - Project components to support the Education Sector Strategy: - Institutional strengthening processes to underpin the success of the Education Sector Strategy. - Development of a comprehensive school location plan to guide infrastructural development in the short to medium term. ### Youth and Community Transformation Project (feasibility and possible support) - In 2011, the CDB approved a grant of US$280,000 to GOB to undertake a feasibility study for a proposed Youth and Community Transformation Project. - Aim: to contribute towards building human capital particularly among youth and children from poor communities in Belize City, as part of an attempt to reduce socially deviant behavior. - Given GOB’s priority on strategies to reduce crime and improve citizen security, and based on the feasibility study findings, the CDB may consider providing further support to implementation of the project. ### CDB loan transactions (US$ million) - Annual figures (2007 2008 2009 2010 2011 Proj.2012): - Net flows: 12.3 -6.6 4.9 -2.0 4.1 4.9 - Gross disbursements: 20.2 2.6 12.9 5.7 10.2 12.7 - Amortization: 3.9 4.2 4.2 4.3 4.3 5.9 - Interest and charges: 4.5 4.8 3.8 3.1 1.8 1.9 ### Statistical issues — assessment of data adequacy for surveillance - General: Data provision has some shortcomings, but is broadly adequate for surveillance. Most affected areas: national accounts, labor, and fiscal sector statistics. - Real sector: - Data accuracy/reliability affected by inadequate source data. - Statistical Institute of Belize (SIB) faces human and financial limitations for surveys and processing. - Lack of reliable data on expenditure components hampers estimation of national savings and domestic investment. - SIB plans: conduct a comprehensive business census in 2013; complete the Statistical Business Register; conduct annual surveys of establishments; strengthen capacity using administrative data from tax authorities and Customs Department; rebase GDP series. - Price and labor statistics: - Labor market statistics scarce and available at irregular intervals. - SIB plans to conduct the labor force survey twice a year going forward. - SIB developing new website with plans to make metadata on the CPI and other statistics available online. - Fiscal accounts: - Data on consolidated operations of the public sector are unavailable. - Priorities: prepare a comprehensive list of institutions comprising central government, general government, and public sector including extra budgetary units. - Difficulties persist in compilation of capital expenditure due to Capital II items becoming permanent funding allocations. - Current accounting practices follow neither a cash basis nor an accrual basis, contributing to inconsistent accounting and reporting of assets, liabilities, revenues, and expenses. - Domestic debt data recording is weak and prone to errors; further verification needed. - Monetary and financial statistics: - Data on financial soundness indicators of individual banks available quarterly. - Very limited data on non-bank financial institutions, especially the insurance sector. - Need to classify offshore banks as part of Other Financial Corporation’s (OFC) subsector. - Social Security Board (SSB) is not treated as part of the general government in contrast with the standard. - Plans ongoing to improve availability of statistics; central bank to publish FSIs of large credit unions soon. - Balance of payments: - Official grant and loan disbursements and repayments generally well recorded. - Strengthening inter-agency coordination between the MOF and CBB warranted. - Authorities compiled preliminary International Investment Position (IIP) statistics, which excludes off-shore financial sector. - Compilation of FDI data remains a challenge due to very low survey responses; frequency could be improved. ### Data standards, quality, and reporting - Participant in the General Data Dissemination System (GDDS) since September 27, 2006. - No data ROSC is available. - No fiscal data are being reported for publication in the Government Finance Statistics Yearbook or in the IFS. ### IMF Article IV consultation — key background and macro context (June 21, 2013) - March 2013: government completed exchange of its “super-bond” for new U.S. dollar denominated 2038 bonds, bringing substantial cash-flow relief (about US$130 million over the next 5 years). - Debt restructuring occurred amid prolonged legal disputes over nationalization of Belize Telemedia Limited (BTL) and Belize Electricity Limited (BEL); no agreement on compensation payments and legal dispute may take a few years. - 2012 macro outcomes and conditions: - Output growth in 2012 estimated at 5.3 percent. - Inflation averaged 1.4 percent. - External current account deficit widened to about 1.7 percent of GDP due to steep drop in oil exports and higher imports of fuel and electricity. - International reserve coverage estimated at 3.4 months of imports (up from 3 months in 2011), aided by strong FDI inflows in the sugar sector. - Unemployment at 16 percent. - Fiscal position: - Fiscal primary surplus for FY2012/13 expected to deteriorate to 1.3 percent of GDP compared to 2.3 percent of GDP in 2011; deterioration reflects decline in oil-related revenues and increase in wage bill despite robust GST growth. - Financial sector: - After two years of decline, credit to the private sector recovered modestly in 2012. - High non-performing loans (NPLs) in the banking system—20 percent of total loans at end-2012—and loan write-offs continue to constrain private sector credit growth (estimated at 1.1 percent) and erode banks’ net earnings. - Broad money grew by 5 percent, mostly driven by expansion in net foreign assets. - New provisioning and loan classification standards implemented by the central bank at end-2011 resulted in declining NPLs and improving provisioning. - Medium-term outlook and projections: - Output growth expected to moderate to about 2.5 percent in the medium term. - Primary surplus projected at 1 percent of GDP in FY13/14. - Public debt expected to decline to about 75 percent of GDP at end-2013, reflecting, in part, a net face value haircut of 3 percent from the recent debt exchange. - Government may face large financing needs over the medium term associated with compensation to former shareholders of nationalized companies, pending legal rulings. - External current account deficit projected to widen to about 1.9 percent of GDP owing to continued deterioration in crude oil exports and rising imports. - Reserve coverage expected to remain at around 3 months of imports by end-2013. ### Executive Board assessment — key recommendations and concerns - Directors congratulated authorities on strong economic performance and successful external debt exchange but noted substantial challenges and vulnerabilities remain. - Recommended actions: - Rebuild policy buffers, pursue active debt management, accelerate financial sector reform, and buttress resilience to external shocks. - Sustain momentum of fiscal consolidation while protecting spending in priority areas: infrastructure, internal security, and social programs. - Raise the primary surplus to levels consistent with debt sustainability via strong adjustment efforts, including moderating wage increases and broadening the base for the general sales tax. - Strengthen public financial management and implement tax reform that promotes growth and fairness. - Avoid earmarking of funds and put in place safeguards for public resources if used for creation of a specialized mortgage bank. - Take additional measures as necessary given uncertainties surrounding potential liabilities from nationalizations and other contingent liabilities to ensure fiscal sustainability. - Revamp debt management framework: develop a more robust debt management, strengthen institutional framework, build capacity to operationalize a medium-term debt management strategy, and explore options to develop the domestic debt market to mobilize domestic financing. - Continue financial sector reforms, maintain vigilance on high NPLs, closely monitor individual institutions, implement remaining recommendations of the 2011 FSAP, update crisis management plan, and strengthen bank restructuring and resolution framework with Fund TA. - Further strengthen the AML/CFT framework. - Advance structural reforms to tackle widening current account deficits and low international reserves: remove impediments to private investment, boost competitiveness and jobs, promote inclusiveness, and diversify exports and energy sources. ### Selected economic indicators (summary table highlights) - Annual percentage change: - GDP at constant prices: 2009 0.0, 2010 2.7, 2011 1.9, 2012 5.3, 2013 (Proj.) 2.5 - Nominal GDP (US$ millions): 2009 1,339.2; 2010 1,392.0; 2011 1,480.8; 2012 1,579.4; 2013 (Proj.) 1,636.9 - Gross domestic investment (percent of GDP): 2009 22.0; 2010 18.0; 2011 19.0; 2012 19.0; 2013 (Proj.) 19.5 - Gross national savings (percent of GDP): 2009 16.3; 2010 15.2; 2011 17.9; 2012 17.3; 2013 (Proj.) 17.6 - Consumer prices (end of period): 2009 -0.4; 2010 0.0; 2011 2.5; 2012 0.6; 2013 (Proj.) 2.0 - Credit to the private sector (annual % change): 2009 4.8; 2010 -3.6; 2011 -1.2; 2012 1.1; 2013 (Proj.) 2.1 - Money and quasi-money (M2, annual % change): 2009 5.8; 2010 -2.1; 2011 4.7; 2012 5.1; 2013 (Proj.) 3.8 - Central government (percent of GDP): - Revenue and grants: 2009 27.2; 2010 27.5; 2011 27.8; 2012 26.0; 2013 (Proj.) 26.4 - Current expenditure: 2009 24.7; 2010 24.1; 2011 24.1; 2012 22.0; 2013 (Proj.) 22.7 - Capital expenditure and net lending: 2009 3.7; 2010 5.1; 2011 4.7; 2012 4.6; 2013 (Proj.) 4.7 - Primary balance: 2009 2.4; 2010 1.8; 2011 2.3; 2012 1.3; 2013 (Proj.) 1.0 - Overall balance: 2009 -1.2; 2010 -1.7; 2011 -1.1; 2012 -0.6; 2013 (Proj.) -1.1 - External sector: - External current account (percent of GDP): 2009 -4.9; 2010 -2.8; 2011 -1.1; 2012 -1.7; 2013 (Proj.) -1.9 - Overall balance of payments (US$ millions): 2009 47.3; 2010 5.2; 2011 18.1; 2012 52.8; 2013 (Proj.) -10.0 - Public and publicly guaranteed debt (percent of GDP): 2009 84.9; 2010 85.3; 2011 83.0; 2012 78.6; 2013 (Proj.) 75.1 - Domestic debt (percent of GDP): 2009 … 7.5; 2010 12.1; 2011 11.2; 2012 12.2; 2013 (Proj.) 12.0 - External debt (percent of GDP): 2009 … 77.3; 2010 73.2; 2011 71.8; 2012 66.4; 2013 (Proj.) 63.1 - Gross international reserves (US$ millions): 2009 213.7; 2010 218.0; 2011 236.1; 2012 288.9; 2013 (Proj.) 272.5 - Reserves in months of imports: 2009 3.3; 2010 3.2; 2011 3.0; 2012 3.4; 2013 (Proj.) 3.1 ### Statement by Executive Director and advisor (June 21, 2013) — key points from authorities - Authorities thanked staff for the report and TA; emphasized usefulness of outreach for small states. - Noted successful debt restructuring of the Super Bond with staff calculations indicating NPV reduction of approximately 29-31percent, assuming an appropriate discount rate. - Authorities emphasize commitment to servicing the restructured Super bond, including willingness to include a clause of principal reinstatement in the highly unlikely event of a future default, and commitment to improving debt management. - Ongoing debt management reforms aim to improve back-office, mid-office, and front-office capacities. - Authorities highlight remaining uncertainty in the DSA due to timing and size of contingent liabilities from nationalizations (BTL and BEL); note staff selected the mid-point valuation for the DSA and that settlement through legal system may be at the earliest end-2015, though the earliest is not the most likely. - Authorities argue against immediately raising the primary balance to 3 percent, citing opportunity costs and the need to address barriers to growth (security risks, poor infrastructure, high crime) through fiscal outlays. - Authorities note NPLs have declined significantly and provisioning has improved; excluding one troubled bank, domestic banking sector’s NPL is approximately 6 percent. - Authorities continue to work on enhancing regulatory and supervisory frameworks, crisis management capacity, bank restructuring/resolution framework, and improving AML-CFT. *Source: IMF staff report and related materials contained in the provided content unit.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr13227.pdf_