Mission Concluding Statement 

Belize Staff Concluding Statement of the 2023 Article IV Mission

February 17, 2023

Washington, DC: An International Monetary Fund team led by Jaime Guajardo conducted discussions for the 2023 Article IV consultation with Belize during February 2-14. The team met with Mr. Christopher Coye, Minister of State; Mr. Joseph Waight, Financial Secretary; Mr. Kareem Michael, Governor of the Central Bank of Belize; and other senior government officials, representatives of the opposition, private sector, and public sector unions.

Recent Developments, Outlook, and Risks

Economic activity has rebounded strongly from the COVID-19 pandemic, while inflation has risen . The rebased national accounts show that, after contracting by 13.4 percent in 2020, real GDP rebounded by 15.2 percent in 2021 and 11.6 percent in the first three quarters of 2022, driven by retail and wholesale trade, tourism, and business process outsourcing. Visitor arrivals reached 74 percent of pre-pandemic levels in 2022 as COVID-19 restrictions eased amid vaccination efforts in Belize and source markets, while the unemployment rate fell from 10.2 percent in 2021 to 5.0 percent in the second half of 2022. Inflation increased to 3.2 percent in 2021 and 6.3 percent in 2022, driven by higher global food and fuel prices despite the fixing of domestic diesel and regular gasoline prices at the pump since April 2022.

Economic activity and inflation are projected to moderate going forward . Real GDP growth is projected at 11.4 percent in 2022 and 3.0 percent in 2023, as tourism activity returns to pre-pandemic levels and the business process outsourcing sector continues to develop. The output gap is projected to close in 2023, with real GDP growth stabilizing at 2 percent over the medium-term. Average inflation is projected to moderate to 4.1 percent in 2023 and 1.2 percent over the medium term, in line with the projected decline in global commodity prices and global inflation.

The government has achieved a large reduction in public debt . The rebasing of the national accounts led to a large reduction in the public debt to GDP ratio in 2020, from 133 percent of the old GDP to 101 percent of the new GDP. Public debt fell further to 80 percent of GDP in 2021, due to sizable fiscal consolidation, the debt for marine protection swap with The Nature Conservancy, and strong GDP growth. The 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 the suspension of wage increments during FY2021-23, and a strong recovery of revenue. [1] Public debt declined further to 64.1 percent of GDP in 2022 led by continued expenditure containment, a material discount on the debt owed to Venezuela under PetroCaribe of US$129 million or 4.4 percent of GDP, and strong GDP growth. [2]

The primary balance is projected to remain in surplus in FY2022 despite the fuel tax cut and costs arising from Hurricane Lisa . [3] The primary balance is projected to decline slightly to 1.2 percent of GDP in FY2022 due to the reinstatement of the 10 percent public sector wage cut in July 2022, the fuel tax cut to fix diesel and regular gasoline prices at the pump, and an increase in capital expenditures, including one-off spending related to Hurricane Lisa. This was partly offset by the recovery of other revenue and the containment of other expenditure. In an unchanged policies scenario, the primary balance is projected to remain at 1.2 percent of GDP over the medium term, with public debt falling to 53 percent of GDP by 2028. This level of public debt is assessed as sustainable, although with high near-term risks.

The current account deficit is projected to remain financed by foreign direct investment (FDI) and official loans, with international reserves remaining at manageable levels . The current account deficit is projected to rise to 8.5 percent of GDP in 2022 due to higher imports, larger profit repatriation, and lower remittances, partly offset by higher tourism receipts, and to fall gradually after as commodity prices decline and tourism recovers. These deficits are projected to be financed by FDI and multilateral and bilateral loans, with international reserves staying above 3 months of imports during 2023-28.

Risks to financial stability remain elevated due to legacies from the pandemic . Domestic banks’ regulatory capital—at 16.6 percent of risk weighted assets in 2022—is higher than the minimum requirement but lower than before the pandemic. Nonperforming loans (NPLs) increased from 5 percent of gross loans in 2021 to 7 percent in 2022 as the COVID-19 forbearance measures expired, but banks more exposed to the sectors most affected by the pandemic have experienced larger increases in NPLs.

Risks to the outlook remain tilted to the downside . While the risk of an intensification of the pandemic has receded, other risks have become more prominent, including a sharp slowdown in advanced economies and climate-related disasters, which could weaken the recovery of tourism. Further increases in food and fuel prices due to Russia’s invasion of Ukraine could exacerbate imported inflation, widen the current account deficit, and reduce international reserve buffers. A sharper slowdown in domestic economic activity could also exacerbate existing vulnerabilities in the banking sector.

Policy Priorities

Key policy priorities for Belize include gradually increasing the primary balance to 2 percent of GDP to lower public debt to below 50 percent of GDP by FY2028, which will require preserving the fiscal savings achieved in FY2021-22 and additional fiscal consolidation; raising expenditure on infrastructure, targeted social programs, and crime prevention, financed with additional revenues and expenditure reprioritization; implementing structural reforms to boost growth and make it more inclusive and resilient to natural disasters; and remaining vigilant to financial sector risks and improving the AML/CFT framework.

A. Fiscal Policy

Reducing public debt to below 50 percent of GDP by 2028 requires increasing the primary balance to 2 percent of GDP from FY2025 onwards . In an unchanged policies scenario, debt would fall to 53 percent of GDP by 2028, a level assessed as sustainable. However, reducing debt further to 50 percent of GDP would ensure that the debt-to-revenue ratio remains manageable; would provide ample buffers for climate-related disasters; would ensure that public debt remains below the 70 percent of GDP threshold for sustainability with high probability; and would strengthen the level of international reserves and the currency peg. Achieving this debt target requires gradually increasing the primary balance to 2 percent of GDP from FY2025 onwards, which would entail preserving the fiscal savings achieved in FY2021-22 and implementing additional fiscal consolidation of 0.8 percent of GDP over three years. Anchoring this plan in a medium-term fiscal strategy with clear targets and specific measures would enhance its credibility.

Expanding expenditure on infrastructure, targeted social programs, and crime prevention would boost growth and make it more inclusive and resilient to climate change and related disasters . Increasing infrastructure spending by 0.8 percent of GDP from FY2025 onwards would help enhance road connectivity, expand airport capacity, improve water and sewer systems, invest in renewable energy generation, and make infrastructure more resistant to storms and raising sea levels. Increasing targeted social spending by 0.5 percent of GDP from FY2025 would allow expanding conditional cash transfer programs such as BOOST, which support poor families and ensure that children attend school, and subsidizing childcare to increase female labor force participation, which stood at 44 percent in October 2022. These benefits can be appropriately targeted with the updated information on the vulnerable segments of the population from the 2022 Census. Increasing spending on crime prevention by 0.2 percent of GDP from FY2025 onwards would help strengthen law enforcement, enhance the use of technology to prevent and address crime, and support the youth at risk.

Fiscal consolidation and the increase of priority spending should rely on revenue and expenditure measures . Belize has ample space to raise revenues by broadening the tax base, raising excise taxes, and strengthening revenue administration. Moreover, reforming the Pension Plan for Public Officials (PPPO) could free resources that can be used for other priority spending. In particular,

• 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 in revenue. Standardizing personal income tax exemption thresholds could raise 0.2 percent of GDP in revenue, while raising fees on vehicle registrations and driver licenses, and increasing excises on fuel could raise another 0.2 percent of GDP. Strengthening customs and tax administration further, including by improving the efficiency and autonomy of the Belize Tax Service Department (BTSD) and facilitating information exchange between the BTSD and the Belize Customs and Excise Department, could raise another 0.2 percent of GDP in revenue.

• Reforming the PPPO would reduce government spending by 0.2 percent of GDP over three years and by much more in the long term. The PPPO is a non-contributory defined-benefits pension system with a low retirement age and high benefits. The PPPO deficit totaled 1.1 percent of GDP in FY2022 and is projected at 4.1 percent of GDP by 2072, with the present value of the cumulated deficits estimated at 77.1 percent of GDP. Gradually increasing the contribution rate to 10 percent, raising the retirement age from 55 to 65, and reducing the replacement rate from 67.5 percent to 50 percent, would lower the PPPO’s long-run deficit by about two-thirds. The sooner these reforms are implemented, the more gradual and less disruptive they can be.

The government should also prepare contingency plans . The materialization of adverse shocks could increase the fiscal deficit and public debt, while some measures discussed above may prove difficult to implement. In this context, it will be important to prepare contingency revenue and expenditure measures that could be implemented in case public debt does not decline as expected.

Further improvements in Public Financial Management systems and procedures are needed . Areas to strengthen include multi-year budget preparations, fiscal risk assessment, public investment management, coverage of government accounts, accounting and fiscal reporting, and internal audit. Progress in these areas would facilitate future adoption of fiscal rules. Publishing procurement contracts and beneficial ownership information of awardees would also ensure transparency and accountability.

B. Structural Reforms and Climate Change

Real GDP growth is projected to remain modest in the medium term without structural reforms . Growth was modest in the decade before the pandemic, averaging 2.1 percent in 2010-19 and implying near zero real GDP per capita growth. Vasilyev (2019) identified several constraints to growth in Belize, including the high cost of finance, risks of fiscal and debt sustainability, deficiencies in human capital, crime, natural disasters, and infrastructure gaps. [4] Many of these factors are still in place, which will likely constrain growth once the excess capacity in the economy is exhausted. Boosting medium term growth will require additional investment, including FDI.

Enhancing access to credit and FX would boost domestic investment and FDI . The authorities are adopting measures to ease the access to affordable credit for micro, small, and medium sized enterprises (MSMEs). They passed the credit reporting act and are working on the establishment of the credit bureau and collateral registry. They are also promoting the formalization of MSMEs by introducing an electronic invoicing module and updating the Fiscal Incentives Act. They are helping MSMEs prepare business plans and expect domestic banks to provide more credit once they finish repairing their balance sheets. As FX earnings return to pre-pandemic levels, ensuring predictable access to FX going forward would boost FDI and reduce uncertainty for foreign firms about their ability to repatriate profits.

Building resilience to climate change and related disasters would reduce volatility and boost growth . Belize is highly vulnerable to climate change and related disasters, including floods, droughts, hurricanes, sea level rise, and coastal erosion. Investments in (i) infrastructure resilience to storm and sea level rise; (ii) an early warning system; and (iii) coastal and broad ecosystem conservation would help to build resilience, especially in agriculture and tourism. Access to financing from multilateral creditors, the Green Climate Fund, and The Conservation Fund for resilience building initiatives could be enhanced with the adoption of a Disaster Resilience Strategy that focuses on improving structural, financial, and post-disaster resilience and is based on a multi-year macro-fiscal framework.

Further improvements to the rule of law are needed to reduce business uncertainty . While Belize has improved on third-party indicators of rule of law, further efforts are needed to strengthen the technical capacity of the judiciary and promote greater access to relevant legislation and judicial decisions. Several digitalization projects are underway, including the land and business registries, the single investment window, and the digitalization of firms and government services. However, the ministerial discretion allowed in several business-related processes generates uncertainty for doing business and should be gradually replaced for a more predictable and rules-based system.

C. Monetary and Financial Policies

Belize’s external position in 2022 is assessed as moderately weaker than the level warranted by fundamentals and desirable policies . Belize’s current account norm is estimated at –7.1 percent of GDP while the cyclically adjusted current account is –8.2 percent of GDP, implying a gap of –1.1 percent of GDP. International reserves are projected to remain above 3 months of imports and short-term external debt, but below the ARA metric. [5] Reducing the current account deficit and strengthening the level of reserves and the sustainability of the currency peg requires implementing additional fiscal consolidation and growth-enhancing structural reforms, as well as limiting government financing by the Central Bank.

The Central Bank must remain vigilant about risks in the financial sector . The Central Bank’s process for strengthening banks’ balance sheets and resolving problem loans after the pandemic has been well executed, with some banks placed under enhanced supervision. However, banks remain vulnerable to shocks and some institutions may require recapitalization in 2023 if the quality of their loan portfolios continues to deteriorate. The Central Bank has sufficient tools should it need to intervene but expects that the banks’ owners will inject the needed capital as they have done in the past. Insufficient capital and elevated NPLs could keep the growth in private sector credit low, with potential adverse feedback loops between economic activity and financial stability. Steps taken to facilitate enforcement actions against breaches of AML/CFT requirements should be taken forward.

Strengthening the AML/CFT framework and the supervision of banks would help bolster correspondent banking relationships. The authorities are updating the national risk assessment and the national AML/CFT strategy in preparation for the Mutual Evaluation by the Caribbean Financial Action Task Force in November 2023. Some steps have been taken to mitigate the financial integrity risks in the international financial sector, including hiring new staff by the Financial Services Commission, but more needs to be done with respect to AML/CFT supervision of trusts and company service providers. The authorities are working on a legal framework for restricting activities involving virtual assets. Efforts are also underway to secure new correspondent banking relationships to reduce risks of disruption of international financial transactions.