Belize: Staff Concluding Statement of the 2017 Article IV Mission
IMF News, June 16, 2017
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- Published: June 16, 2017
Mission and meetings
- IMF team led by Bert van Selm visited Belize from June 6-15 to conduct discussions for the 2017 Article IV consultation.
- Meetings held with: Honorable Mr. Dean Barrow, Prime Minister and Minister of Finance; Dr. Carla Barnett, Minister of State at the Ministry of Finance; Amb. Joy Grant, Governor of the Central Bank of Belize; Mr. Joseph Waight, Financial Secretary; other senior government officials, representatives of the opposition, private sector, and civil society.
Debt restructuring with private external bondholders
- Restructuring agreement concluded on March 15, 2017.
- Debt amount restructured: US$526 million, or about 30 percent of GDP.
- Interest rate reduced to 4.9375 percent (rate was set to step up from 5 to 6.767 percent in August 2017).
- Amended amortization schedule: principal repayments pushed back to 2030-34 (instead of starting semiannual installments in August 2019).
- Final maturity date moved forward from 2038 to 2034.
- Agreed terms reduced the NPV of the external bond debt by about 28 percent (based on the exit yield of 9.1 percent).
- Fiscal-anchor commitments to bondholders:
- Tighten the fiscal stance by 3 percentage points in 2017/18.
- Maintain a primary surplus of 2 percent of GDP for 2018/21.
- Monitoring mechanism: if 2018-21 primary surplus targets are missed, authorities will submit a report to the National Assembly and request an IMF technical assistance mission to (i) determine why the primary surplus target was missed; and (ii) recommend remedial measures.
- Authorities committed to publishing findings of any IMF technical mission and the annual Article IV consultation reports.
- If the primary surplus target is missed, interest payments on the bond become payable quarterly rather than semi-annually for the subsequent 12 months that the target is missed.
Recent economic developments and near-term outlook
- Output contracted by 0.8 percent in 2016 (continued slowdown in oil production; setbacks in agriculture including destruction of crops by Hurricane Earl).
- Current account deficit estimated at 9.4 percent of GDP in 2016.
- Unemployment increased to 11.1 percent in September 2016, from 10.2 percent a year earlier.
- December 2016 gross reserves: US$377 million, or about 4 months of import coverage.
- Banking sector (March 2017): consolidated gross NPL ratio 9.8 percent (2.2 percent net of provisions); reported capital adequacy ratio 23 percent.
- Private sector credit declined by 3 percent y/y in December 2016.
- Projections for 2017:
- Growth of 2½ percent (reflecting rebound in the primary sector and continued tourism growth).
- Current account deficit expected to narrow to 8 percent of GDP.
- Inflation projected to increase slightly to just over 2 percent in 2017.
Fiscal performance and 2017/18 budget
- 2016/17 outturn: fiscal deficit higher than budgeted.
- Budget targeted a primary surplus of 1 percent of GDP.
- Projected outturn: primary deficit of about 1 percent of GDP (owing to expenditure overruns and revenue shortfalls).
- Primary balance corresponds to an overall deficit of about 4 percent of GDP, excluding large BTL compensation payments (amounting to 5½ percent of GDP in 2016/17, financed by issuing domestic debt).
- 2017/18 budget aims to tighten fiscal stance by 4 percentage points of GDP.
- Budget approved in March aims for a primary surplus of 3 percent of GDP, corresponding to an overall budget close to balance (not including the large 2017/18 compensation payment for BTL).
- Revenue measures passed by parliament (expected to increase revenue by more than 2 percent of GDP):
- Higher excises on fuel, beer, sugary drinks, and construction materials.
- Higher import duties on selected products, including cigarettes.
- Increase in an environmental tax (a levy on most imported goods).
- Adjustments in the General Sales Tax (GST), including lowering the social exemption for household electricity use.
- Supported by tax administration changes to improve GST collections.
- Expenditure cuts targeted around 2 percent of GDP, mainly from reduced capital spending.
- Other financing notes:
- Financing from Venezuela under PetroCaribe expected to be smaller than in previous years.
- Sale of government shares in nationalized utility companies to domestic investors and issuance of domestic debt will contribute significantly to financing in FY2017/18.
Financial sector, CBRs, and stability risks
- Belize is recovering from the loss of Correspondent Banking Relationships (CBRs) over the last two years.
- Withdrawal of significant number of CBRs resulted in higher transaction and compliance costs, restricted access to financial services, and delays in remittances.
- Since mid-2016, affected banks have been able to reconnect to foreign banks, with no further losses of relationships.
- Key financial stability risks:
- Withdrawal of CBRs and low capital buffers in a major bank.
- Banking system vulnerabilities: NPLs still high; low capital buffers in some banks.
- Recommendation: raise provisioning requirements to 100 percent on loan losses (secured or not).
- Recommendation: conduct an asset quality review of all banks to assess real strength of capital buffers.
- AML/CFT and entity transparency:
- Authorities initiated a national risk assessment to identify money laundering and terrorism financing risks.
- Amendments introduced—expected to be adopted in July 2017—to make beneficial ownership available with registered agents for one type of companies registered in Belize.
- Urgent need: make beneficial ownership available and shared in a timely manner for all types of legal persons and arrangements created in Belize.
- Recommendation: CBB and the International Financial Services Commission should step up supervision based on risks to improve compliance of banks, financial services with no physical presence in Belize, and registered agents and trust services.
Medium-term outlook and risks
- Medium-term growth projected to average just under 2 percent.
- Drivers: declining productivity, competitiveness, public investment, and oil output.
- International reserves projected to decline to 2.5 months of imports over the medium term in the baseline scenario; negative shocks could push them below that level.
- Impact of expected shift in US policy mix likely limited:
- Main links to US economy: tourism and remittances.
- Appreciation of the US dollar could negatively impact external competitiveness given exchange rate peg to the US dollar.
- Downside risks (substantial):
- Contested legacy claims totaling about US$100 million or so (or 5½ percent of GDP) could create large public and external financing needs.
- Additional loss of CBRs could further weaken banks.
- External risks: loss of PetroCaribe financing; further decline in sugar prices after EU sugar reform in 2017; slower than expected recovery in agriculture; loss of tourism market share to Cuba.
- Upside scenario:
- Successful implementation of the Growth and Sustainable Development Strategy (GSDS) could help mitigate risks.
Policy priorities and recommended reforms
- Need for a comprehensive package beyond bond restructuring to address high debt and low growth.
- Public debt remains very high, at about 100 percent of GDP.
- Risk: repeated debt restructurings could undermine credibility and access to capital markets.
- Debt restructuring must be underpinned by credible and sustained fiscal consolidation and structural reforms to boost growth.
- Fiscal consolidation needed beyond 2017/18 measures:
- A primary surplus of 4-5 percent of GDP would need to be maintained over the medium term to put debt on a path towards 60 percent of GDP by 2025.
- Revenue-side reform options:
- Broaden the base of the GST (remove zero-rated items and streamline exemptions) and/or increase the GST rate from 12.5 percent to the regional average of 15 percent, each could yield about 1 percentage point of GDP.
- Expenditure-side reforms:
- Civil service reform to stabilize number of public employees and contain the wage bill.
- Make public sector pension plan contributory and adjust pensions in line with inflation.
- Fiscal rule recommendation:
- Adoption by parliament of a fiscal rule targeting 60 percent debt to GDP by 2025 to guide consolidation.
- Public Financial Management improvements:
- Enhance electronic tax filing and payment (less than 10 percent of registered taxpayers file or pay electronically in GST and Income Tax Departments).
- Strengthen internal and external controls, more transparent and efficient procurement practices.
- Stronger monitoring of government-supported entities and their payroll to generate savings on transfers.
- Timely production of audited government financial statements and their timely approval by parliament.
- Government financing and debt management:
- Phase out government financing by the Central Bank (CBB) and replace with financing using securities markets.
- More active debt management and more frequent auctions of government paper to generate interest savings.
- Structural reforms to raise long-term growth potential:
- GSDS should focus on raising productivity, especially in the export sector.
- Remove infrastructure bottlenecks to reduce transportation costs and strengthen trade competitiveness.
- Enhance labor productivity via improved education and health services.
- Build climate resilience through disaster risk mitigation and green energy projects.
- Translate GSDS into a concrete action plan with prioritization, cost estimates, realistic financing strategies, and close work with development partners.
- Business climate improvements:
- Room for improvement in starting a business, getting credit, protecting investors, trading across borders, and enforcing contracts.
- Enhance availability of credit to SMEs by broadening eligible collateral types and establishing a Credit Bureau.
Closing
- IMF team welcomed open and constructive dialogue with the authorities and thanked them for their hospitality.
IMF Communications Department, June 16, 2017