Belize: Staff Concluding Statement of the 2018 Article IV Mission
IMF News, September 24, 2018
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- Published: September 24, 2018
Mission context and overarching assessment
- An IMF team led by Daniel Leigh visited Belize from September 11-20 to conduct the 2018 Article IV consultation discussions.
- Meetings included: the Honorable Mr. Patrick Faber, Acting Prime Minister; Amb. Joy Grant, Governor of the Central Bank of Belize; Mr. Joseph Waight, Financial Secretary; senior government officials; representatives of the opposition, private sector, and public sector unions.
- Core assessment:
- Economic recovery is strengthening.
- Significant progress toward debt reduction is being made.
- The Central Bank of Belize (CBB) has taken resolute actions to improve financial soundness.
- Key challenges: elevated public debt, a large external current account deficit, and international reserves just above 3 months of imports of goods and services.
- Policy priority: enhance growth and resilience to reduce debt to prudent levels and build reserves.
Recent economic developments and short-term outlook
- Real economy and labor:
- Real GDP grew by 1.4 percent in 2017.
- Growth in 2018Q2 estimated at 5.4 percent (y/y).
- Tourism arrivals up 17.1 percent in January–June 2018 compared with a year earlier.
- Unemployment rate declined to 9.4 percent in April 2018 from 9.7 percent six months earlier.
- Inflation was below 1 percent (y/y).
- External sector:
- Current account deficit narrowed to 7.6 percent of GDP in 2017 from 8.4 percent of GDP in 2016.
- International reserves are just above 3 months of imports of goods and services.
- Fiscal developments:
- Primary balance increased to a surplus of 1.3 percent of GDP in FY2017/18, excluding a one-off effect of a Caribbean Court of Justice (CCJ) ruling, implying a 3.2 percent of GDP turnaround from the FY2016/17 level.
- The adjustment in FY2017/18 occurred largely through a reduction of government investment; tax measures raised revenues but yielded less than anticipated.
- FY2018/19 budget raises the primary fiscal surplus further, to just above 2 percent of GDP, mainly via higher revenues (broadening GST base, higher fuel excises, higher import duties), supported by stronger tax administration and spending restraint.
- Prime Minister emphasized raising the primary fiscal surplus to achieve reduction in public debt to 60 percent of GDP over the long term.
- Financial sector:
- Domestic banks’ gross NPL-to-total loans ratio fell to 7.5 percent (1.4 percent net of provisions) at end-2017, from 10.4 percent (2.1 percent net of provisions) at end-2016.
- Bank profitability has improved.
- Banks affected by loss of correspondent banking relationships (CBRs) during 2015-16 have found some replacement CBRs and alternative transaction processing methods.
- CBB actions: dealt with a troubled offshore bank; conducted AML/CFT supervision of one domestic bank, three offshore banks, and two credit unions in 2018.
- Parliamentary amendments: prohibit issuance of bearer shares and require beneficial ownership to be held in Belize for International Business Corporations (IBCs).
- Footnote on CCJ ruling:
- In November 2017, the CCJ ruled that the government must pay a guaranteed debt contracted by Universal Health Services to a commercial bank creditor. This ruling implied a 2.5 percent of GDP increase in government debt.
Medium-term outlook and risks
- Growth and external outlook:
- Real GDP growth projected at 2.2 percent in 2018 and just below 2 percent in the medium term.
- Current account deficit projected to gradually narrow but remain significant.
- International reserves projected below 3 months of imports of goods and services over the medium term.
- Public debt:
- End-2017 public debt level: 94 percent of GDP.
- Reducing public debt to prudent levels and building buffers requires a fiscal stance stronger than the baseline (which assumes no fiscal adjustment beyond FY2018/19).
- Downside risks (substantial):
- Contested legacy claims, estimated at about 5 percent of GDP, could create large public and external financing needs.
- Reputational risks from potential financial misuse of offshore sector entities and governance concerns could weaken investor confidence and renew pressures on CBRs, weakening banks.
- External shocks: growth slowdown among main trading partners, higher international energy prices, and increasingly severe natural disasters associated with climate change.
- Such adverse developments could undermine public support for reforms and endanger debt sustainability.
- Upside scenario:
- Additional foreign direct investment (including linked to tourism expansion) and successful implementation of the Growth and Sustainable Development Strategy (GSDS) could raise growth.
Policies to raise growth and resilience (structural priorities)
- Improve the business climate (low fiscal cost, short- and long-term gains):
- Establish a Credit Bureau and collateral registry to ease access to credit.
- Accelerate and modernize procedures for starting a business.
- Amend labor legislation to allow greater flexibility in working hours.
- Increase support for technical training.
- Improve governance in customs and public procurement.
- Fight corruption: implement asset declaration regime for senior public officials; strengthen the independence and capacity of the Integrity Commission; bolster enforcement against perpetrators of corruption.
- Amplify support for crime prevention and juvenile rehabilitation, including community action programs.
- Build resilience to climate change and natural disasters:
- Implement National Climate Resilience Investment Plan and GSDS projects (robust roads, bridges, seawalls).
- Cost and prioritize resilience plans and develop an investment promotion strategy to increase access to grants and climate funds.
- Create a natural disaster reserve fund for immediate recovery following floods and hurricanes.
- Manage disaster risks cost-effectively through contingent lines of credit and optimized participation in regional insurance options; note that public and private assets are under-insured.
- Social safety nets:
- Reform social safety net programs (High School Subsidy Program, BOOST, Food Pantry, CCT Program) by increasing use of formal targeting mechanisms informed by an updated country poverty assessment to better reach the most vulnerable.
Building fiscal buffers (fiscal consolidation framework)
- Debt reduction target and required consolidation:
- Reducing government debt to below 60 percent of GDP in 10 years would require measures that gradually raise the primary surplus to about 4 percent of GDP from the current projected level of 2 percent of GDP.
- Revenue and expenditure measures:
- Revenue-side: broaden GST base by phasing out zero-rated items and exemptions; modernize and reinforce tax administration; increase the GST rate to the regional average over the medium term; more closely monitor activity in Commercial Free Zones.
- Expenditure-side: civil service and pension reforms to reduce large wage and social security bills and create space for priority spending. Specific measures include implementing a 2-5 replacement ratio to gradually reduce the number of public sector employees; limiting salary increments to the rate of inflation; making the public-sector pension plan contributory; and raising pensions in line with inflation.
- Complementary reforms:
- Reforms that increase potential growth would reduce the primary fiscal surplus needed to achieve targeted debt reduction and increase space for priority investments and social spending.
- A well-designed fiscal rule based on a debt anchor, underpinned by public consensus and enacted by Parliament, could support the fiscal consolidation effort (targeting reduction in public debt to 60 percent of GDP over the long term).
Further strengthening the financial system and AML/CFT framework
- Banking supervision and resolution:
- Strengthen regulations on provisioning, considering types of lending and minimum operational requirements for collateral.
- Conduct an asset quality review to assess banks’ capital buffers.
- Fortify the bank resolution legal framework with more effective early-intervention tools and greater operational autonomy for the CBB.
- Phase out CBB financing of government spending to prevent exchange rate and inflation pressure; replace with more regular government debt auctions.
- AML/CFT and offshore sector:
- Strengthen regulatory powers and capacity of the International Financial Services Commission (IFSC) to license, supervise, and enforce sanctions against licensed registered agents and financial services providers.
- Require a physical presence of IFSC-licensed institutions.
- Ensure up-to-date beneficial owner information is available and easily accessible without impediments.
- Develop CBB capacity for AML/CFT risk-based supervision of banks and impose strict and prompt sanctions when necessary.
- Conduct a study on the overall benefits as well as the costs and risks of the offshore center.
Closing
- The mission thanks the authorities for their hospitality, cooperation and willingness to engage in extensive and frank policy discussions.
Belize: Staff Concluding Statement of the 2018 Article IV Mission — September 24, 2018, IMF Communications Department.