REPORT #400 September 2000

Produced by the Belize Development Trust

i. Belize is the only anglophone country in Central America.
It is small and ethnically diverse, with a sparsely distributed population of 240,000, and is nestled between the Mexican Yucatan peninsula and Guatemala. In spite of a substantial influx of poor people migrating from strife-torn Central American countries during the late 1980s to mid 1990s, substantial progress in the social conditions has been achieved in Belize. Nevertheless, Belize continues to be faced with major development challenges, in part due to its small size. Based on a 1996 survey, it was estimated that about 33% of the population remained below the poverty line, most of which lived in the southern rural districts of Toledo and Cayo. The Government estimates that the poverty situation has changed little during 1996-99. The poor are comprised mostly of indigenous Mayans, refugees and migrant agricultural workers from neighboring Central American countries, as well as small farmers and manufacturing workers.

ii. Since the last Bank CAS of November 1993, economic growth has declined from an average of over 9% a year during 1987-92 to around 3% during 1993-98. Coupled with rising annual population growth, per capita incomes have thus remained stagnant and unemployment has risen.
The underlying factors for this economic slowdown are an expansive fiscal policy which was compensated for by a tight monetary policy that has kept domestic interest rates high, and eroded the international competitiveness due to rising costs of labor, electricity and water. The central government savings (current revenue less current expenditure) declined from 2.7% of GDP in March 1994 to 0.6% of GDP in March 2000. The overall public sector deficits increased over the years and were largely financed by external borrowing, often on commercial terms, or by privatization proceeds. External debt of the public sector has increased rapidly in recent years. In addition, the constraints of a small economy, such as small production volumes, erosion of preferential market arrangements and limited economic diversification, susceptibility to natural disasters, oligopolistic structure in several markets, limited human resource and administrative capacity, and the high cost of public services have compounded the difficulties.

iii. In the midst of these difficulties, the Peoples United Party (PUP) came to power in August 1998 with an overwhelming parliamentary majority on an ambitious platform of economic growth, social development and poverty reduction.
After almost a two-year, nation-wide consultations with the civic society, the Government recently formulated a Five-year National Poverty Elimination Strategy and Action Plan (NPESAP) with support from the Caribbean Development Bank (CDB) and the UK Department for International Development (DFID). This CAS for the period 2001-2005, which builds on the NPESAP, was initiated in June 1999 and has been prepared following extensive consultations with the Government, key NGOs, private sector groups, and multilateral and bilateral agencies based in Belize.

iv. The overarching goal of the Government's development agenda is to reduce poverty from about 33% in 1999 to 28% by 2004.
As a first step in its commitment, the Government with DFID assistance plans to prepare a poverty update in late-2000. The following are the four main pillars of the Government's poverty reduction strategy:

Enhancing economic growth.
The gradual erosion of preferential market arrangements is projected to reduce real GDP growth by about 1-2% per year. The economy has responded, albeit to a limited extent, through diversification in tourism, financial services, garment manufacturing and shrimp farming. There is now a broad consensus in the country that sustaining a real GDP growth of 5% per year (per capita private consumption growth of about 3%) requires prudent macroeconomic management, in particular sustainable fiscal policy, trade liberalization, broadening the economic base, accelerating land titling and improving the regulatory framework in critical sectors that is conducive for private sector participation.

In this context, the Bank will be assisting the Government by providing policy advice based on reviews of public expenditures, including the prioritization of the public sector investment program;

Improving Access to and Quality of Social Services.
The rural population, particularly in the poorer districts of Toledo, Cayo and Stann Creek, has limited access to basic education, health services, safe water, sanitation, land and housing, and essential transport and telecommunication services. The Government strongly believes in the need for a multi-pronged approach to the problem, based on investment in education, health, land development and housing for the low-income groups, along with a facilitation of micro credits, and reform of safety net programs to improve their efficiency and effectiveness in terms of cost, outreach and targeting. The Bank's involvement in Primary Education and the Social Investment Fund has been critical in supporting Government policy in these areas. Follow-up operations in education and social protection along with a review of the social safety nets are envisaged in this CAS; Modernizing the State and Improving Governance. Over time, the public sector has become large with deteriorating systems of financial control and accountability and falling standards of quality of public services. The Government has embarked on an ambitious program of political reform and is encouraging more voice for diverse groups to ensure better targeting and effectiveness of social and economic investments and prevent corruption, money laundering and drug trafficking. In order to attract and qualified personnel, the Government has initiated the reform of the civil service and is strengthening public institutions, including decentralization to local agencies and communities. While the laws and mechanisms to deal with these problems are in place, there is a need for greater monitoring and enforcement capacity within the Government. The Bank has planned a Procurement and Financial Management Review in FY03 to provide needed advice in this area, which could be advanced in timing should the Government accelerate the pace of public sector reforms; and Environmentally Sustainable Development.

The main sources of growth in Belize - tourism, sugar, bananas, citrus, forestry and aquaculture - are based on natural resources. Using the natural capital in a sustainable manner is therefore critical. As detailed in the 1996 National Environmental Action Plan (NEAP), the poor are affected by inadequate land and waste management, water pollution, and natural disasters. Protection of historical sites in Belize is crucial for preserving the cultural heritage and the livelihood of the Mayans. As painfully reconfirmed by Hurricane Mitch in late 1998, natural disaster management is imperative because Belize lies in the hurricane belt and much of the coastal land is below sea level, thus prone to frequent flooding. The Bank is committed to financing critical road and drainage works which will enable small farmers to access the regional markets and reduce flooding in six rural areas through the proposed Roads and Municipal Drainage Project.

V. The Bank's Assistance Strategy.
Against this background, the Bank will seek close coordination and burden sharing within the overall efforts of the development community to maximize its value added and utilize its global knowledge. Since the last CAS, the Bank has had limited success in influencing successive governments in following a consistently prudent fiscal policy. Consequently, the Bank has identified a smaller program with emphasis on non-lending services, in particular to clarify its understanding of the difficult issues ahead of project preparation and to generate open discussion of such issues. Bank projects would be small, ranging between US$7-13 million per project, and well-focused to minimize risks. Further, the Bank will manage and mitigate these risks by monitoring, together with the IMF, the fiscal situation, helping strengthen project execution capacity, and maintaining an intensified portfolio monitoring effort.

Vi. The three triggers for the Base Case Lending Scenario are:
[a] satisfactory implementation of the Bank-financed projects as measured by realism and proactivity indices (para. 58); and [b] improvement in the macroeconomic management (by generating central government savings of at least 3% of GDP on a consistent basis and containing the ratio of external debt service to government revenues at no higher than 25%); and [c] move towards a regular monitoring of poverty and social conditions and increase the net enrollment rates in primary and secondary schools. Should the Government fail to comply with [a] or [b] or [c] as mentioned above, the Bank will move to a zero lending scenario by halting the preparation of pipeline projects until there is a demonstrable improvement in complying with the triggers. In such a scenario, the Bank would continue to engage the Government through non-lending activities and donor coordination.

vii. Risks.
Belize is a stable democracy. While the incumbent Government has an overwhelming majority in the Parliament and broad support in the local Town Boards, it faces three main risks over the medium term relating to external economic and natural shocks, macroeconomic management, and implementation capacity. First, although to a large extent Belize has successfully absorbed the erosion in preferential trade arrangements of its main agricultural exports since the late 1980s, it is likely to experience low growth or even a recession during this decade if there is further erosion in the said arrangements as well as a slowdown in the highly competitive tourism and garment industries due to further appreciation of the real exchange rate. Fortunately, Belize has good relationships with the European Union, the CDB and the IDB, and with bilateral donors, in particular the UK, Canada, the USA, and Taiwan, China, which stand ready to provide assistance during this economic transition and some of them have large programs, spread over several areas -- highways and roads, land and agricultural development, water and sewerage, power development, basic needs, huff icane reconstruction, disaster preparedness, environment. Second, fiscal performance may not improve or may even worsen, which could lead to higher external borrowing and difficulties in the availability of foreign exchange and counterpart funds for projects. The large current account deficit in the balance of payments, low foreign exchange reserves holding, and recent commercial borrowings by the Government coupled with financial sector vulnerabilities pose additional risks. Third, Belize has limited human resources capacity and the recently initiated changes in the civil service have to be well managed by the Government so as to maintain its capacity to implement policies and projects.

viii. Issues for Executive Directors' Discussion.
Given the above mentioned risks, are the Bank's triggers on fiscal deficits and project implementation identified in Section IV adequate for the lending scenarios? Does the resulting lending program and non-lending services for the next five years represent most appropriate role the Bank can perform to support the Government's development efforts? The Government would like to ensure the continuity of the Bank's support. Do the Bank instruments and program as spelled out in the CAS provide for flexibility in the Bank's response to a changing environment and the associated

Source: World Bank web site

1) A problem with Belize is a political oligarchy. Political geographical electoral reform is needed here.

2) The World Bank Report mentions reform of the civil service. I take that to mean 'out with the dead wood' and increases in educational levels for the bureaucracy. Minimum Bachelors Degrees required for the Belize Civil Service now that the local University is providing an academically educated source.

3) Belize is lacking in statistical numbers in all departments. Belize also is lacking in work performance, and ordinary quarterly and annual reports for each civil service department.

4) World Bank mentions the failure of successive governments to follow prudent fiscal policies.

5) Belize Government needs more SAVINGS. About $1700 million to be more appropriate. Recommended is a deposit of 3% of GDP by the World Bank. I presume that to mean an untouchable SAVINGS of Foreign Reserves until the goal of $1700 million is reached.

6) The external DEBT SERVICE should be no larger than 25 % the World Bank says of annual revenue. Currently, it is estimated to be 465% of annual revenue, but no one knows for sure because of SECRECY by the Ministry of Finance. I think 25 % is too large a trigger even as suggested by the World Bank, it should be about 12 % to 20% maximum.

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