Belize: Staff Concluding Statement of the 2022 Article IV Mission

IMF News, February 24, 2022

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Belize: Staff Concluding Statement of the 2022 Article IV Mission

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• Published: February 24, 2022

Context

• COVID-19 led to a 71 percent fall in tourist arrivals and a 16.7 percent contraction in real GDP in 2020.
• Fiscal revenues fell and pandemic-related expenditure rose, widening the fiscal deficit and increasing public debt to 133 percent of GDP in 2020; this was assessed as unsustainable in the 2021 Article IV consultation.
• Government presented a Medium-Term Recovery Plan (MTRP) in April 2021 aiming to reduce public debt to 85 percent of GDP in 2025 and 70 percent in 2030 through fiscal consolidation, growth-enhancing structural reforms, and debt restructuring.
• Key 2021 measures and operations:
  • FY2021 budget introduced fiscal consolidation projected to reduce government expenditure by 3.4 percent of GDP in FY2021 (cuts to public sector wages and purchases of goods and services).
  • Completed a debt-for-marine-protection swap: a subsidiary of The Nature Conservancy lent funds to Belize to buy back the superbond totaling US$553 million or 30 percent of GDP at a discounted price of 55 cents per dollar.
  • Commitments to increase marine conservation expenditure until 2041 and expand Biodiversity Protection Zones from 16 percent of ocean area to 30 percent by 2026.
  • The swap operation reduced Belize’s public debt by 12 percent of GDP in 2021.

Recent developments, outlook, and risks

• Economic activity and labor market:
  • Real GDP projected growth: 12.5 percent in 2021 and 6.5 percent in 2022.
  • Recovery led by construction, retail and wholesale trade, transport and communication, and tourism sectors.
  • Unemployment rate declined from 13.7 percent in the second half of 2020 to 9.2 percent in the second half of 2021.
• Inflation and prices:
  • End of year inflation rose to 4.9 percent in 2021 driven by higher international energy and food prices.
  • Projected inflation: 3.5 percent in 2022 and 2 percent over the medium term as commodity prices stabilize.
• Fiscal position:
  • Primary fiscal balance projected to increase from –8.5 percent of GDP in FY2020 to 1.5 percent of GDP in FY2021 due to higher revenues, lower current expenditure from consolidation, and lower capital expenditure.
  • Primary surplus projected to stabilize at 0.7 percent of GDP assuming FY2021 fiscal savings are preserved and no additional measures are implemented during FY2022-32.
• Debt dynamics and external position:
  • Public debt declined from 133 percent of GDP in 2020 to 108 percent in 2021 and projected to decline to 84 percent of GDP by 2032 due to continued primary surpluses.
  • Staff assessment: public debt would continue to be assessed as unsustainable in the absence of additional measures because it would remain above typical thresholds for sustainability over the next decade.
  • Gross international reserves increased from US$348 million (3.8 months of imports) in 2020 to US$420 million (3.9 months of imports) in 2021, partly due to the IMF’s SDR25.6 million allocation (authorities are keeping this as reserves).
  • External financing expected to become scarcer due to debt sustainability concerns, worsening reserve adequacy over time.
• Risks (substantial and tilted to the downside):
  • Escalation of the pandemic, emergence of vaccine resistant variants threatening tourism recovery.
  • Sudden tightening of global financial conditions raising cost of external financing.
  • Natural disasters given Belize’s high vulnerability to weather shocks and climate change.
  • Inflation risks from second-round effects and higher international energy and food prices.
  • Upside: further vaccination could strengthen immunity and growth.

Policies to restore debt sustainability and strengthen the currency peg

Overall objective: restore debt sustainability and strengthen the currency peg, with staff recommending reducing public debt to 60 percent of GDP by 2031.

A. Sustained Fiscal Consolidation

• Staff recommends reducing public debt to 60 percent of GDP by 2031 (a slightly more ambitious target than MTRP) to keep debt below 70 percent of GDP threshold for sustainability even under shocks.
• Required fiscal path:
  • Raise the primary balance to 3.5 percent of GDP by FY2024, in line with FY2021 budget speech plans, by preserving FY2021 deficit decline and implementing 2.8 percent of GDP of additional fiscal consolidation measures over three years.
  • Anchor plan in a credible medium-term fiscal strategy with clear targets and specific measures and prepare for adoption of a well-designed Fiscal Responsibility Law (FRL).
• Composition of additional consolidation (balanced revenue and expenditure measures):
  • Expenditure measures:
  • Consider increasing noninterest current expenditure in line with inflation between FY2022 and FY2024, which would reduce the fiscal deficit by 1.8 percent of GDP by FY2024.
  • Gradually raise social expenditure (healthcare, education, and targeted social programs) by 1 percent of GDP over four years.
  • Create a natural disaster contingency fund with adequate safeguards of 1 percent of GDP over four years (in line with 2018 Climate Change Policy Assessment advice).
  • Revenue measures (estimates by FY2024 where specified):
  • Broadening the GST base by taxing some non-necessity zero-rated items at the standard 12.5 percent rate and bringing the hotel sector into the GST could raise 1.5 percent of GDP.
  • Lowering the PIT exemption threshold and taxing some exempted sources of income could raise 0.2 percent of GDP.
  • Increasing excise taxes and fees on vehicle registrations and driver licenses could raise 0.1 percent of GDP.
  • Strengthening customs and tax administration could raise 0.2 percent of GDP.
• Contingency planning:
  • Prepare a menu of contingency measures in case public debt does not fall as planned, including raising the GST rate, broadening the tax base, taxing property and capital gains, cutting nonpriority expenditure, and restructuring public debt.
• Public Financial Management (PFM) modernization:
  • Continue initiatives on cash management, public debt, internal audit, technology, and procurement.
  • Strengthen multi-year budget preparations, fiscal risk assessment, public investment management, coverage of government accounts, and accounting and fiscal reporting to facilitate future FRL implementation.

B. Growth-Enhancing Structural Reforms

• Boost growth to reduce required fiscal consolidation:
  • Improve business environment: ease access to credit for SMEs via credit bureau and collateral registry, reduce entry barriers, enhance human capital, upgrade infrastructure, contain crime.
  • Reprioritize public expenditure to advance reforms.
• Climate change mitigation and adaptation:
  • Updated Nationally Determined Contribution (NDC) presents ambitious mitigation and adaptation plans for 2021-30 and significant estimated costs and financing gaps (especially for mitigation).
  • Adoption of a Disaster Resilience Strategy (DRS) would enhance access to financing from multilateral creditors, the Green Climate Fund, and The Conservation Fund; DRS should focus on structural, financial, and post-disaster resilience based on a consistent multi-year macro-fiscal framework.
  • Financial and post-disaster resilience: progress on infrastructure and habitat restoration has been stronger than on financial resilience due to limited fiscal space.
  • Legislation creating a natural disaster contingency fund exists but no funds allocated.
  • A contingent credit line with the IDB exists but is insufficient.
  • Need to expand insurance and contingent financing coverage and reform social protection to scale up quickly after disasters; advancing agenda requires reprioritizing expenditure.

C. Monetary and Financial Policies

• External position and currency peg:
  • External position strengthened in 2021 but remains weaker than justified by medium-term fundamentals and desirable policies.
  • Reserve adequacy projected to weaken over the medium term due to debt sustainability concerns.
  • External Balance Assessment indicates current account deficit is larger than its estimated equilibrium level.
  • Authorities and staff consider the currency peg a key macroeconomic anchor that should be preserved; restoring debt sustainability via fiscal consolidation and structural reforms is required to reduce external imbalances, lower current account deficit, enhance external financing access, improve reserve adequacy, and strengthen the peg.
  • Limiting government financing by the Central Bank is also necessary, in line with 2021 trends.
• Banking sector and financial stability:
  • Domestic banks well capitalized and NPLs manageable at 5.3 percent of loans, but forbearance measures introduced in 2020 partly mask underlying asset quality.
  • Forbearance measures have expired; Central Bank requested banks and credit unions to self-assess loan portfolios by end-February 2022 and will review and agree plans with each institution.
  • Any exceptional measures should be time-bound and targeted; financial institutions should resume regular classification and restructuring procedures as soon as possible.
  • Government increased Central Bank’s capital by more than 0.5 percent of GDP in FY2021.
  • Continue efforts to strengthen enforcement of AML/CFT requirements on banks.
• AML/CFT framework strengthening, especially in the IFS sector:
  • Authorities finalized first national assessment of money laundering and terrorist financing (ML/TF) risks and developed an action plan; intend to update both ahead of the 2023 mutual evaluation by the Caribbean Financial Action Task Force.
  • Policy priorities:
  • Centralize information on beneficial ownership under new legal framework for domestic and international corporations.
  • Deepen understanding of ML/TF risks inherent to the sector.
  • Increase resources and capacity of the Financial Services Commission (FSC).
  • Introduce legal reforms to implement AML/CFT standards on virtual assets and virtual asset service providers.

Key selected social and economic indicators (as presented)

• Area (sq.km.): 22,860
• Human development index (rank), 2017: 106
• Population (thousands), June 2021: 427.8
• Under-five mortality rate (per thousand), 2017: 14.2
• GDP per capita, (current US$), 2021: 4,281
• Unemployment rate (percent), April, 2021: 11.2
• Life expectancy at birth (years), 2017: 70.6
• Poverty (percent of total population), 2009: 42.0

Selected projections and historical indicators (annual percentage changes or percent of GDP as shown):

• GDP at constant prices: 2019: 2.0; 2020: -16.7; 2021: 12.5; 2022: 6.5; 2023: 2.4
• Consumer prices (end of period): 2019: 0.2; 2020: 0.3; 2021: 4.9; 2022: 3.5
• Consumer prices (average): 2019: 0.1; 2020: 3.2; 2021: 4.2; 2022: 2.3
• Central government revenue and grants: 2019: 31.5; 2020: 27.3
• Central government current non-interest expenditure: 2019: 25.9; 2020: 26.8; 2021: 23.4
• Interest payment: 2019: 3.4; 2020: 1.7; 2021: 2.8; 2022: 2.9
• Capital expenditure and net lending: 2019: 6.8; 2020: 8.9; 2021: 7.3
• Capital expenditure: 2019: 8.7; 2020: 6.4; 2021: 7.0
• Net lending: 2019: 0.4
• Primary balance: 2019: -1.3; 2020: -8.5; 2021: 1.5; 2022: 0.8; 2023: 0.7; 2024: 0.7
• Overall balance: 2019: -4.7; 2020: -10.2; 2021: -0.7; 2022: -2.0; 2023: -2.1; 2024: -2.2
• Public debt (percent of calendar year GDP): 2019: 96.3; 2020: 133.1; 2021: 108.3; 2022: 99.5; 2023: 97.0; 2024: 95.5; 2025: 94.0; 2026: 92.6; 2027: 91.2
  • Domestic debt: 2019: 28.4; 2020: 41.4; 2021: 35.7; 2022: 31.1; 2023: 29.8; 2024: 29.3; 2025: 29.2; 2026: 29.1
  • External debt: 2019: 68.0; 2020: 91.7; 2021: 72.6; 2022: 68.4; 2023: 67.3; 2024: 66.3; 2025: 64.8; 2026: 63.5; 2027: 62.0
• Principal payment (percent of GDP): 2019: 5.9; 2020: 8.3; 2021: 9.7; 2022: 7.1; 2023: 6.1; 2024: 5.7; 2025: 5.1; 2026: 4.5; 2027: 4.4
  • Domestic: 2019: 3.9; 2020: 5.3; 2021: 6.3; 2022: 4.6; 2023: 3.3; 2024: 2.2; 2025: 2.1
  • External: 2019: 3.0; 2020: 2.5
• Credit to the private sector (annual percent change): 2019: 5.8; 2020: 5.0; 2021: 4.8; 2022: 4.0
• Money and quasi-money (M2) (annual percent change): 2019: 10.6; 2020: 9.9
• External current account (percent of GDP) including official grants: 2019: -9.5; 2020: -8.1; 2021: -8.4; 2022: -8.2
• Real effective exchange rate (+ = depreciation): 2019: 0.0; 2020: -1.5
• Gross international reserves (US$ millions): 2019: 278; 2020: 348; 2021: 420; 2022: 421; 2023: 415; 2024: 409; 2025: 401; 2026: 393; 2027: 396
• In months of imports: 2019: 3.7; 2020: 3.8; 2021: 3.6
• Output gap (percent of potential output): 2019: 1.3; 2020: -16.5; 2021: -7.0; 2022: -1.9; 2023: -1.0; 2024: -0.6; 2025: -0.3; 2026: -0.1
• Nominal GDP (BZ$ millions): 2019: 3,891; 2020: 3,171; 2021: 3,683; 2022: 4,086; 2023: 4,280; 2024: 4,453; 2025: 4,633; 2026: 4,820; 2027: 5,015

Source: Belize: Staff Concluding Statement of the 2022 Article IV Mission, February 24, 2022, IMF Communications Department.

References

• Belize and the IMF
• IMF Policy Advice -- A Factsheet
• Mission Concluding Statements
• PRESS CENTER
• https://www.imf.org/en/home