Belize: Staff Concluding Statement of the 2023 Article IV Mission

IMF News, February 17, 2023

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Published: February 17, 2023

Recent developments and near-term outlook

Real GDP contracted by 13.4 percent in 2020, rebounded by 15.2 percent in 2021 and 11.6 percent in the first three quarters of 2022.
Key drivers of the rebound: retail and wholesale trade, tourism, and business process outsourcing.
Visitor arrivals reached 74 percent of pre-pandemic levels in 2022.
Unemployment rate fell from 10.2 percent in 2021 to 5.0 percent in the second half of 2022.
Inflation: 3.2 percent in 2021 and 6.3 percent in 2022, driven by higher global food and fuel prices despite fixed domestic diesel and regular gasoline pump prices since April 2022.
Real GDP growth projected at 11.4 percent in 2022 and 3.0 percent in 2023; output gap projected to close in 2023 and real GDP growth to stabilize at 2 percent over the medium term.
Average inflation projected to moderate to 4.1 percent in 2023 and 1.2 percent over the medium term.

Public debt, fiscal balances, and financing

Rebasing of national accounts reduced public debt to GDP ratio in 2020 from 133 percent (old GDP) to 101 percent (new GDP).
Public debt: 80 percent of GDP in 2021 following fiscal consolidation, the debt for marine protection swap with The Nature Conservancy, and strong GDP growth.
Primary balance increased from –6.4 percent of GDP in FY2020 to 1.4 percent in FY2021 due to strict expenditure containment (including a temporary 10 percent cut in public sector wages and suspension of wage increments during FY2021-23) and revenue recovery.
Public debt fell to 64.1 percent of GDP in 2022, led by expenditure containment, a material discount on PetroCaribe debt of US$129 million or 4.4 percent of GDP, and strong GDP growth.
Primary balance projected at 1.2 percent of GDP in FY2022 despite fuel tax cut and Hurricane Lisa costs; in an unchanged policies scenario, primary balance remains at 1.2 percent of GDP over the medium term and public debt falls to 53 percent of GDP by 2028 (assessed as sustainable, although with high near-term risks).
Current account deficit projected to rise to 8.5 percent of GDP in 2022 and to be financed by FDI and multilateral and bilateral loans; international reserves projected to remain above 3 months of imports during 2023-28.

Financial sector and external position

Domestic banks’ regulatory capital: 16.6 percent of risk weighted assets in 2022 (above minimum requirement but lower than pre-pandemic).
Nonperforming loans increased from 5 percent of gross loans in 2021 to 7 percent in 2022.
External current account norm estimated at –7.1 percent of GDP; cyclically adjusted current account is –8.2 percent of GDP, implying a gap of –1.1 percent of GDP.
International reserves projected to remain above 3 months of imports but below the ARA metric.
Recommendations: limit government financing by the Central Bank; Central Bank to remain vigilant, possible bank recapitalization in 2023 if loan quality continues to deteriorate; strengthen AML/CFT framework and supervision of banks to support correspondent banking relationships.

Key policy priorities and fiscal strategy

Gradually increase the primary balance to 2 percent of GDP from FY2025 onwards to lower public debt to below 50 percent of GDP by FY2028; requires preserving FY2021-22 fiscal savings and additional fiscal consolidation of 0.8 percent of GDP over three years.
Anchor consolidation in a medium-term fiscal strategy with clear targets and specific measures.
Expand expenditure on infrastructure by 0.8 percent of GDP from FY2025 onwards.
Increase targeted social spending by 0.5 percent of GDP from FY2025 (examples: expanding conditional cash transfer programs such as BOOST; subsidizing childcare); female labor force participation stood at 44 percent in October 2022.
Increase spending on crime prevention by 0.2 percent of GDP from FY2025 onwards.
Consolidation and priority spending to rely on revenue and expenditure measures.

Revenue, pension reform, and public financial management measures

Tax and revenue administration measures could raise 2.2 percent of GDP in additional revenue by FY2025:
- Taxing some zero-rated items at the standard 12.5 percent general sales tax rate could raise 1.6 percent of GDP.
- Standardizing personal income tax exemption thresholds could raise 0.2 percent of GDP.
- Raising fees on vehicle registrations and driver licenses, and increasing excises on fuel could raise 0.2 percent of GDP.
- Strengthening customs and tax administration (improving efficiency and autonomy of BTSD and information exchange with Customs) could raise 0.2 percent of GDP.
Reforming the Pension Plan for Public Officials (PPPO) would reduce government spending by 0.2 percent of GDP over three years and much more long term:
- PPPO deficit totaled 1.1 percent of GDP in FY2022 and is projected at 4.1 percent of GDP by 2072; present value of cumulated deficits estimated at 77.1 percent of GDP.
- Proposed reforms: gradually increase contribution rate to 10 percent, raise retirement age from 55 to 65, and reduce replacement rate from 67.5 percent to 50 percent; these would lower the PPPO’s long-run deficit by about two-thirds.
Recommend contingency revenue and expenditure measures if adverse shocks materialize or planned measures prove difficult to implement.
Further improvements needed in Public Financial Management: multi-year budget preparations, fiscal risk assessment, public investment management, coverage of government accounts, accounting and fiscal reporting, and internal audit; publish procurement contracts and beneficial ownership information.

Structural reforms, growth constraints, and climate resilience

Pre-pandemic growth averaged 2.1 percent in 2010-19, implying near zero real GDP per capita growth.
Constraints identified include high cost of finance, fiscal and debt sustainability risks, deficiencies in human capital, crime, natural disasters, and infrastructure gaps.
Measures to boost investment and FDI: enhance access to credit and FX, credit reporting act passed, establishment of credit bureau and collateral registry underway, promote formalization of MSMEs (electronic invoicing module, update Fiscal Incentives Act), assist MSMEs with business plans.
Building resilience to climate change through investments in infrastructure resilience, an early warning system, and coastal and ecosystem conservation; adopt a Disaster Resilience Strategy based on a multi-year macro-fiscal framework to enhance access to climate financing.
Improve rule of law and reduce ministerial discretion in business-related processes; continue digitalization projects (land and business registries, single investment window, digitalization of firms and government services).

Numeric highlights from Table 1 (selected social and economic indicators)

Area (sq.km.): 22,860
Human development index (rank), 2021: 123
Population (thousands), 2022: 444.8
Under-five mortality rate (per thousand), 2020: 11.7
GDP per capita, (current US$), 2022: 6,678
Unemployment rate (percent), October 2022: 5.0
Life expectancy at birth (years), 2019: 74.6
Poverty (percent of total population), 2018: 52

Selected projections and fiscal magnitudes (calendar year / fiscal year as labeled in source)

GDP at constant prices: 2020: -13.4; 2021: 15.2; 2022: 11.4; 2023: 3.0; medium-term: 2.0
Consumer prices (average): 2021: 3.2; 2022: 6.3; 2023: 4.1; medium-term: 2.5 then 1.6
Central government revenue and grants: 2020: 20.6; 2021: 23.1; 2022: 22.9; 2023: 23.0 (percent of fiscal year GDP)
Central government current non-interest expenditure: 2020: 20.3; 2021: 16.8; 2022: 16.0; 2023: 16.1 (percent of fiscal year GDP)
Primary balance (fiscal year): 2020: -6.4; 2021: 1.4
Overall balance (fiscal year): 2020: -7.7; 2021: -0.5; 2022: -0.6
Public debt (percent of calendar year GDP): 2020: 101.4; 2021: 80.1; 2022: 64.1; 2023: 60.4; 2024: 58.4; 2025: 56.9; 2026: 55.7; 2027: 54.5; 2028: 53.3
Domestic debt (percent of GDP): 2020: 31.6; 2021: 26.4; 2022: 22.3; 2023: 18.7; 2024: 16.5; 2025: 15.5; 2026: 15.6; 2027: 15.8
External debt (percent of GDP): 2020: 69.9; 2021: 53.7; 2022: 41.9; 2023: 41.7; 2024: 41.4; 2025: 40.2; 2026: 38.7; 2027: 37.7
External current account (percent of GDP): 2020: -6.1; 2021: -6.3; 2022: -8.5; 2023: -8.0; 2024: -7.8; 2025: -7.6; 2026: -7.4; 2027: -7.2; 2028: -7.0
Gross international reserves (US$ millions): 2020: 349; 2021: 415; 2022: 482; 2023: 491; 2024: 499; 2025: 506; 2026: 509; 2027: 514; 2028: 522
Reserves in months of imports: 2020: 3.4; 2021: 3.3; 2022: 3.7
Output gap (percent of potential output): 2020: -19.2; 2021: -8.9; 2022: -0.7; 2023: 0.13
Nominal GDP (BZ$ millions): 2020: 4,160; 2021: 4,983; 2022: 5,900; 2023: 6,325; 2024: 6,613; 2025: 6,851; 2026: 7,073; 2027: 7,303; 2028: 7,540

Risks and contingency considerations

Downside risks: sharp slowdown in advanced economies, climate-related disasters, further increases in food and fuel prices due to Russia’s invasion of Ukraine, and a sharper slowdown in domestic activity that could worsen banking sector vulnerabilities.
Bank sector risks: elevated NPLs and potential need for recapitalization for some institutions in 2023.
Contingency planning recommended if public debt does not decline as expected or if adverse shocks materialize.

Source: Belize: Staff Concluding Statement of the 2023 Article IV Mission (February 17, 2023).