IMF staff concluding statement of the 2020 Article IV Mission in Belize

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WASHINGTON, USA – An International Monetary Fund (IMF) team led by Jaime Guajardo conducted discussions for the 2020 Article IV consultation with Belize between February 24 and March 10. The team met with John Briceño, prime minister; Ambassador Joy Grant, governor of the Central Bank of Belize; Christopher Coye, minister of state, Joseph Waight, financial secretary; and other senior government officials, representatives of the opposition, private sector, and public-sector unions.

Recent developments, outlook, and risks

Belize has been severely affected by the COVID-19 pandemic. Following a successful containment of the first wave of the pandemic, Belize experienced a large domestic outbreak starting in the summer of 2020, which has left the country with one of the highest numbers of cases and deaths per capita in the Caribbean. The pandemic also led to a 72 percent decline in tourist arrivals in 2020, which had a large impact on the economy as tourism accounts for around 60 percent of foreign exchange earnings and 40 percent of GDP. Social distancing and lockdowns also hurt activity in contact intensive sectors of the economy. As a result, real GDP contracted by 14.1 percent in 2020.

Belize’s fiscal and external positions worsened from already weak levels. The pandemic resulted in a sharp fall in revenue and a rise in expenditure aimed at combating the pandemic and supporting affected households and firms. This led to an increase in the primary deficit from 1.4 percent of GDP in FY2019/20 to 8.3 percent in FY2020/21, and a rise in public debt from 98 percent of GDP in 2019 to 126 percent in 2020. Public external debt also rose, while the net international investment position deteriorated.

However, the current account deficit narrowed owing to a sharp contraction in imports and lower repatriation of profits from foreign-owned business, which more than offset the fall in tourism receipts. This, together with higher external financing to the government, increased international reserves from US$271 million (3.6 months of imports) in 2019 to US$346 million (4.3 months of imports) in 2020. However, as noted below, reserve adequacy is projected to worsen over the medium term.

The recovery from the pandemic is projected to be protracted, with real GDP regaining its 2019 level only by 2025. Tourist arrivals are expected to remain subdued in 2021 given still high levels of COVID-19 cases in Belize’s main trading partners and stringent requirements on passengers returning to the US. Belize may also remain exposed to the pandemic as it has secured vaccines for just about one-third of its population. Tourist arrivals are expected to pick up in 2022 when vaccines are more widely available in advanced countries. As a result, real GDP is 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.

In a baseline scenario underpinned by current policies, the fiscal and external positions are projected to remain weak over the medium term. The primary budget deficit is projected to fall gradually from 8.3 percent of GDP in FY2020/21 to 0.9 percent from FY2023/24 onwards as revenues gradually revert to their pre-pandemic level and pandemic-related expenditures are scaled back. Public debt is projected to rise to 133 percent of GDP in 2021, and to fall gradually thereafter to 128 percent in 2031. The continued primary deficits and high public debt are expected to limit Belize’s access to external financing going forward and lead to a fall in international reserves to below 3 months of imports and 100 percent of gross external financing needs starting in 2024.

Public debt is assessed as unsustainable in staff’s baseline scenario. Public debt is projected to remain well above the thresholds for sustainability in the debt sustainability analysis (DSA) framework. Public sector gross financing needs are also projected to remain above the DSA thresholds for sustainability over the next ten years. Moreover, public debt and gross financing needs could increase further if prominent downside risks to the outlook materialize.

Risks to the outlook are substantial and remain tilted to the downside. A key risk is an intensification of the pandemic domestically and abroad. The continued spread of the virus in the US and Europe could delay the recovery of tourism, while continued spread in Belize could lead to more stringent social distancing and hurt activity in contact intensive sectors. Belize also remains highly vulnerable to natural disasters. Materialization of these shocks would reduce economic activity, weaken the recovery of revenues, delay the unwinding of COVID-19-related expenditures, and accelerate the decline in international reserves.

Policies to restore debt sustainability and strengthen the currency peg

Fiscal policy needs to strike a balance between supporting those affected by the pandemic and enabling a large public debt reduction over the medium term. In the near term, the authorities should maintain fiscal support to mitigate the socio-economic impact of the pandemic but should change course once the pandemic begins to wane. Beyond the immediate response to the crisis, the key policy imperative for Belize is to restore public debt sustainability and strengthen the currency peg. This will require a fine balancing act involving ambitious, yet realistic, fiscal consolidation, growth-enhancing structural reforms, and debt restructuring, all aimed at targeting reduction of public debt to 60 percent of GDP by 2031. Such strategy would also improve reserve adequacy and strengthen the currency peg.

Balanced and sustained fiscal consolidation

The authorities need to implement a medium-term fiscal strategy aimed at restoring debt sustainability, while preparing the ground for the future adoption of a Fiscal Responsibility Law (FRL) with explicit fiscal rules. In the near term, the authorities should maintain fiscal support to mitigate the socio-economic impact of the pandemic, which should be gradually unwound once the pandemic begins to wane. For the medium-term, the government needs to elaborate a fiscal strategy that targets a reduction of public debt to 60 percent of GDP by 2031 accompanied by a consistent and credible fiscal consolidation plan.

To enhance credibility, the authorities should publicly commit to this strategy. At the same time, efforts should be made to prepare the ground for the implementation of a well-designed FRL with explicit fiscal rules by introducing the necessary public financial management (PFM) reforms and seeking broad political support for the law.

Implementation of an FRL with explicit fiscal rules in the future would strengthen the commitment to restoring debt sustainability. This framework would make the debt reduction process transparent and predictable. Its key features could include: (i) a public debt anchor of 60 percent of GDP by 2031; (ii) a gradual increase in the primary balance to 3 percent of GDP from FY2024/25 onwards; (iii) an escape clause for major shocks, such as natural disasters, triggered with approval by Parliament and a fiscal council; (iv) an automatic correction mechanism to be triggered by large cumulative deviations from the primary fiscal balance target; and (v) an independent fiscal council that produces unbiased forecasts and evaluates compliance with fiscal rules.

Restoring debt sustainability requires a gradual and sustained increase in the primary balance. To strike a balance between the need to support those affected by the pandemic in the near term and enable a large public debt reduction over the medium term, the authorities should gradually increase the primary balance to 3 percent of GDP in FY2024/25 and keep at that level until FY2031/32, which relative to the baseline scenario, implies a fiscal consolidation of 3.9 percentage points of GDP over the next four years.

Fiscal adjustment should rely on both expenditure and revenue measures. With regard to expenditures, the authorities are appropriately focusing on reducing the wage bill and purchases of goods and services, both of which account for a larger share of GDP in Belize than in peer countries. Prioritizing infrastructure projects could also create savings.

Over time, the authorities should also set a natural disaster reserve fund to fund the response to natural disasters and increase targeted social spending. On revenues, the authorities should focus on reducing the number of zero-rated items of the general sales tax (GST), taxing them at the standard GST rate instead, and raising the standard GST rate to a level in line with peer countries. GST revenue could also be expanded by taxing the hotel sector at the standard GST rate instead of the 9 percent hotel tourist accommodation tax levied on room revenue administered by the Belize Tourism Board. Other options to mobilize revenues include lowering the threshold for exemption in the personal income tax, increasing excise taxes, and enhancing revenue and customs administration.

Executing this consolidation path will be challenging given limited implementation capacity, political pressures, and uncertainty about the cyclical recovery of revenue. Belize will need to demonstrate resolve and commitment in undertaking the adjustment needed to restore debt sustainability and market confidence. Moreover, the adjustment needed to reach the primary balance targets could be larger if the cyclical recovery of revenue is weaker than expected. In this context, it will be important to elaborate contingency plans in case the rise in the primary balance is not proceeding as expected, including further increases in the GST rate and larger cuts to nonpriority expenditure. A less ambitious fiscal consolidation effort will require larger efforts in other areas, while failure to restore debt sustainability would put the fiscal position and the currency peg at risk of disorderly adjustment.

PFM systems and procedures should be strengthened to make the rules-based fiscal framework more effective. A well-designed FRL with explicit fiscal rules requires modernizing the PFM systems and procedures, including multi-year budget preparations, cash management, fiscal risk assessment, public investment management, and coverage of government accounts. The authorities should also ensure transparency and accountability in crisis-related spending, including by publishing the audit reports when they become available.

  1. Growth-enhancing structural reforms

Belize needs to tackle long-standing structural barriers to growth and diversification. Priority areas include: (i) improving access to credit through the creation of a credit bureau and credit collateral registry; (ii) accelerating registration processes to lower barriers to entry and exit from the market; (iii) introducing labor market reforms that allow for more flexible working hours and lower labor market rigidities to help businesses adapt to changing market conditions; (iv) reducing skill mismatches by improving education and technical training; and (v) enhancing road infrastructure by reprioritizing investment projects.

Belize also needs to reduce crime to promote entrepreneurship. Reducing crime through the provision of adequate resources to law enforcement and social programs that keep at-risk youth away from crime would help promote domestic and foreign investment and enhance the attractiveness of the country among tourists.

Building resilience to climate change and natural disasters would lower output volatility and boost growth. In line with the recommendations of the 2018 Climate Change Policy Assessment, the authorities should elaborate a comprehensive Disaster Resilience Strategy, that internalizes resilience building into a credible macroeconomic framework, and focuses on three key areas: (i) investing in climate-resilient infrastructure, including in robust roads, bridges, and seawalls; (ii) enhancing financial resilience by establishing a natural disaster reserve fund of 1 percent of GDP to finance the immediate response to high frequency, low-severity natural disasters, and using contingent lines of credit and participation in regional insurance mechanisms for more severe events, and (iii) improving post-disaster resilience by reforming social protection programs to scale up quickly after a disaster.

Debt management and restructuring

The authorities have recognized the critical nature of their financial situation and are evaluating needed remedial measures. Complementing these measures, they recently announced the intention to approach their external private sector creditors to seek a restructuring of the superbond to complement the efforts to restore debt sustainability through balanced and sustained fiscal consolidation and growth-enhancing structural reforms.

Monetary and financial policies

Belize’s external position is assessed as substantially weaker than warranted by medium-term fundamentals and desirable policies. The current account deficit remains higher than its estimated level of equilibrium. Failure to address these imbalances increase the risk of disorderly external adjustment over the medium term.

Reducing external imbalances and strengthening the currency peg requires successful implementation of the strategy to restore debt sustainability. The authorities are strongly committed to the currency peg, which they see as a key anchor for macroeconomic stability. , Reducing external imbalances will require restoring debt sustainability, which would also lower the current account deficit and increase international reserves. Strengthening the currency peg also requires limiting government financing by the Central Bank of Belize (CBB) over the medium term.

Safeguarding financial stability remains a priority. The banking system entered the pandemic with abundant liquidity and strong capital buffers. Non-performing loans (NPLs) have remained manageable at 5.8 percent of total loans as of end-2020, although this partly reflects forbearance measures introduced by the CBB to mitigate the impact of the pandemic on the banking system. A slow recovery from the pandemic could accelerate the erosion in asset quality and increase NPLs, especially for banks exposed to vulnerable sectors such as tourism. In this context, the CBB should maintain loan classification and provisioning rules to appraise the banks’ potential credit losses as accurately as possible, phase out forbearance measures and loan deferrals by banks, and strengthen prudential standards as the pandemic recedes.

Dividend payments should be restricted until the full impact of the pandemic on banks’ capital is known. A comprehensive third-party asset quality review should be done when the economy recovers from the pandemic. Efforts to strengthen AML/CFT supervision of banks should continue and sanctions for non-compliance should be enforced.

The authorities must continue strengthening the AML/CFT framework and its implementation especially in the international financial services (IFS) sector to enhance financial integrity and prevent loss of CBRs. Policy priorities include: (i) conducting a cost-benefit analysis of the international business sector including by deepening the understanding of associated financial integrity risks of IFS practitioners, (ii) increasing the resources and capacity of the IFSC to properly license, regulate and supervise IFS practitioners, and imposing dissuasive and proportionate penalties when breaches are identified; (iii) legal reforms informed by a risk assessment to implement AML/CFT standards on virtual assets and VASPs; (iv) identifying and sanctioning IFSC licensees falsely claiming to be licensed to provide virtual asset-related services; and (v) ensuring that beneficial ownership information of legal persons and arrangements is accurate, up-to-date, and available in a timely manner.

The IMF Executive Board is expected to discuss Belize’s Article IV consultation in May 2021. The mission expresses its sincere thanks to the authorities and other Belizean stakeholders for their cooperation and candor during the discussions.

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