Belize: Staff Concluding Statement of the 2020 Article IV Mission
IMF News, March 12, 2021
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- Published: March 12, 2021
Recent developments, outlook, and risks
- COVID-19 impact:
- Real GDP contracted by 14.1 percent in 2020.
- Tourist arrivals declined by 72 percent in 2020.
- Tourism accounts for around 60 percent of foreign exchange earnings and 40 percent of GDP.
- Belize secured vaccines for just about one-third of its population.
- Fiscal and external positions:
- Primary deficit rose from 1.4 percent of GDP in FY2019/20 to 8.3 percent in FY2020/21.
- Public debt rose from 98 percent of GDP in 2019 to 126 percent in 2020.
- International reserves increased from US$271 million (3.6 months of imports) in 2019 to US$346 million (4.3 months of imports) in 2020.
- Current account deficit narrowed owing to a sharp contraction in imports and lower repatriation of profits.
- Outlook:
- Real GDP projected to grow by 1.9 percent in 2021, 6.4 percent in 2022, and return to potential growth of 2 percent over the medium-term.
- Real GDP expected to regain its 2019 level only by 2025.
- Baseline projections: primary budget deficit falls gradually from 8.3 percent of GDP in FY2020/21 to 0.9 percent from FY2023/24 onwards.
- Public debt projected to rise to 133 percent of GDP in 2021, and fall gradually to 128 percent in 2031.
- International reserves projected to fall to below 3 months of imports and 100 percent of gross external financing needs starting in 2024.
- Risks:
- Substantial and tilted to the downside: intensification of the pandemic domestically and abroad, and natural disasters.
- Materialization of shocks would reduce activity, weaken revenue recovery, delay unwinding of pandemic expenditures, and accelerate reserve declines.
- Debt sustainability assessment:
- Public debt assessed as unsustainable in staff’s baseline scenario.
- Public sector gross financing needs projected to remain above DSA sustainability thresholds over the next 10 years.
Policies to restore debt sustainability and strengthen the currency peg
- Strategic objective:
- Target reduction of public debt to 60 percent of GDP by 2031 to improve reserve adequacy and strengthen the currency peg.
- Strategy requires ambitious, yet realistic, fiscal consolidation, growth-enhancing structural reforms, and debt restructuring.
- A. Balanced and sustained fiscal consolidation
- Near-term: maintain fiscal support to mitigate the socio-economic impact of the pandemic, then gradually unwind as the pandemic wanes.
- Medium-term fiscal strategy:
- Target public debt of 60 percent of GDP by 2031.
- Gradually increase the primary balance to 3 percent of GDP in FY2024/25 and keep at that level until FY2031/32.
- This implies a fiscal consolidation of 3.9 percentage points of GDP over the next four years relative to the baseline.
- Fiscal Responsibility Law (FRL) features proposed:
- (i) public debt anchor of 60 percent of GDP by 2031;
- (ii) gradual increase in the primary balance to 3 percent of GDP from FY2024/25 onwards;
- (iii) escape clause for major shocks triggered with approval by Parliament and a fiscal council;
- (iv) automatic correction mechanism triggered by large cumulative deviations from the primary fiscal balance target;
- (v) an independent fiscal council to produce unbiased forecasts and evaluate compliance.
- Policy measures for consolidation:
- Expenditure: reduce the wage bill and purchases of goods and services; prioritize infrastructure projects; establish a natural disaster reserve fund; increase targeted social spending.
- Revenue: reduce zero-rated GST items by taxing them at the standard GST rate; raise the standard GST rate to peer-country levels; tax the hotel sector at the standard GST rate instead of the 9 percent hotel tourist accommodation tax; lower the threshold for personal income tax exemption; increase excise taxes; enhance revenue and customs administration.
- Implementation challenges and contingencies:
- Limited implementation capacity, political pressures, and uncertainty about cyclical revenue recovery.
- Contingency plans should include further GST increases and larger cuts to nonpriority expenditure if the primary balance rise is weaker than expected.
- Public financial management (PFM) reforms:
- Modernize PFM including multi-year budgets, cash management, fiscal risk assessment, public investment management, and government account coverage.
- Ensure transparency and accountability in crisis-related spending, including publishing audit reports when available.
- B. Growth-enhancing structural reforms
- Priority reforms:
- Create a credit bureau and credit collateral registry to improve access to credit.
- Accelerate registration processes to lower barriers to entry and exit.
- Introduce labor market reforms for more flexible working hours and lower labor market rigidities.
- Reduce skill mismatches by improving education and technical training.
- Enhance road infrastructure by reprioritizing investment projects.
- Crime reduction:
- Provide adequate resources to law enforcement and social programs targeting at-risk youth to promote investment and tourism.
- Climate and disaster resilience (in line with 2018 Climate Change Policy Assessment):
- Elaborate a comprehensive Disaster Resilience Strategy that internalizes resilience into the macroeconomic framework.
- Focus areas:
- (i) invest in climate-resilient infrastructure (roads, bridges, seawalls);
- (ii) enhance financial resilience by establishing a natural disaster reserve fund of 1 percent of GDP, use contingent lines of credit, and participate in regional insurance mechanisms;
- (iii) improve post-disaster resilience by reforming social protection programs to scale up quickly after a disaster.
- C. Debt management and restructuring
- Authorities announced intention to approach external private sector creditors to seek a restructuring of the superbond to complement fiscal consolidation and structural reforms.
- D. Monetary and financial policies
- External position:
- Assessed as substantially weaker than warranted by medium-term fundamentals and desirable policies.
- Current account deficit remains higher than its estimated level of equilibrium.
- Reducing external imbalances requires restoring debt sustainability and limiting government financing by the Central Bank of Belize (CBB) over the medium term.
- Financial stability:
- Banking system entered the pandemic with abundant liquidity and strong capital buffers.
- Non-performing loans (NPLs) were 5.8 percent of total loans as of end-2020 (partly reflecting forbearance measures).
- Recommendations:
- Maintain loan classification and provisioning rules; phase out forbearance measures and loan deferrals as the pandemic recedes; strengthen prudential standards.
- Restrict dividend payments until pandemic impact on capital is known.
- Conduct a comprehensive third-party asset quality review when the economy recovers.
- Continue efforts to strengthen AML/CFT supervision and enforce sanctions for non-compliance.
- AML/CFT and international financial services (IFS) priorities:
- (i) conduct a cost-benefit analysis of the international business sector and deepen understanding of financial integrity risks of IFS practitioners;
- (ii) increase resources and capacity of the IFSC to license, regulate, and supervise IFS practitioners; impose dissuasive and proportionate penalties for breaches;
- (iii) legal reforms informed by a risk assessment to implement AML/CFT standards on virtual assets and VASPs;
- (iv) identify and sanction IFSC licensees falsely claiming to be licensed to provide virtual asset-related services;
- (v) ensure beneficial ownership information of legal persons and arrangements is accurate, up-to-date, and available in a timely manner.
Key projections and selected indicators (from Table 1)
- Population and social indicators:
- Area (sq.km.): 22,860
- Human development index (rank), 2017: 106
- Population (thousands), September 2020: 421.5
- Under-five mortality rate (per thousand), 2017: 14.2
- GDP per capita, (current US$), 2020: 3,917
- Unemployment rate (percent), September, 2020: 13.7
- Life expectancy at birth (years), 2017: 70.6
- Poverty (percent of total population), 2009: 42.0
- National income and prices (annual percentage changes, calendar year):
- GDP at constant prices: 2018: 2.9; 2019: 1.8; 2020: -14.1; 2021: 1.9; 2022: 6.4; 2023: 4.2; 2024: 2.0
- Consumer prices (average): 2018: 0.3; 2019: 0.2; 2020: 0.1; 2021: 1.0
- Central government (In percent of fiscal year GDP; fiscal year April to March):
- Revenue and grants: 2018: 31.4; 2019: 31.2; 2020: 27.7; 2021: 28.4; 2022: 29.8; 2023: 31.3
- Current non-interest expenditure: 2018: 24.8; 2019: 26.1; 2020: 26.2; 2021: 25.7
- Interest payment: 2018: 3.2; 2019: 2.5; 2020: 4.5; 2021: 4.1; 2022: 4.0
- Capital expenditure and net lending: 2018: 6.5; 2019: 9.9; 2020: 8.6; 2021: 7.2; 2022: 6.0
- Capital expenditure: 2018: 6.2; 2019: 9.7; 2020: 8.3; 2021: 6.8; 2022: 5.5
- Net lending: 2018: 0.4; 2019: 0.5
- Primary balance: 2018: 2.1; 2019: -1.4; 2020: -8.3; 2021: -6.4; 2022: -3.1; 2023: -0.9
- Overall balance: 2018: -1.0; 2019: -4.6; 2020: -10.8; 2021: -10.9; 2022: -7.3; 2023: -5.1; 2024: -5.0; 2025: -4.9
- Public debt (In percent of calendar year GDP):
- Public debt: 2018: 96.0; 2019: 97.5; 2020: 125.8; 2021: 133.0; 2022: 130.6; 2023: 128.5; 2024: 128.6
- Domestic debt: 2018: 27.8; 2019: 28.7; 2020: 39.4; 2021: 44.9; 2022: 47.3; 2023: 48.8; 2024: 51.0; 2025: 53.6; 2026: 56.5
- External debt: 2018: 68.2; 2019: 68.8; 2020: 86.5; 2021: 88.1; 2022: 83.4; 2023: 79.8; 2024: 77.6; 2025: 75.0; 2026: 72.1
- Principal payment: 2018: 7.7; 2019: 10.3; 2020: 10.7; 2021: 10.9; 2022: 10.8; 2023: 11.2; 2024: 11.6
- Domestic: 2018: 4.9; 2019: 3.9; 2020: 5.1; 2021: 6.7; 2022: 7.1; 2023: 7.0; 2024: 7.3; 2025: 7.6
- External: 2018: 2.2; 2019: 2.3; 2020: 2.6; 2021: 3.6; 2022: 3.7; 2023: 3.8
- Money and credit:
- Credit to the private sector: 2018: 5.8; 2019: 8.5; 2020: 6.3
- Money and quasi-money (M2): 2018: 5.7; 2019: 10.6
- External sector:
- External current account (percent of GDP): 2018: -8.1; 2019: -9.2; 2020: -8.0; 2021: -7.7; 2022: -7.4; 2023: -7.2
- Real effective exchange rate (+ = depreciation): 2018: -2.7
- Gross international reserves (US$ millions): 2018: 294; 2019: 278; 2020: 348; 2021: 360; 2022: 362; 2023: 345; 2024: 312; 2025: 285; 2026: 258
- In months of imports: 2019: 4.3; 2020: 3.4
- Memorandum items:
- Nominal GDP (BZ$ millions): 2018: 3,765; 2019: 3,839; 2020: 3,302; 2021: 3,399; 2022: 3,688; 2023: 3,920; 2024: 4,078; 2025: 4,243; 2026: 4,414
Source: IMF staff concluding statement of the 2020 Article IV mission (March 12, 2021).