REPORT #558 November 2002

Produced by the Belize Development Trust

IMF Concludes 2002 Article IV Consultation with Belize

On November 1, 2002, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Belize.


The current government came to office at the end of 1998 on a program to accelerate economic growth through tax cuts, government investment, expansionary monetary policy, and the provision of subsidized credit to the private sector through the state-owned Development Finance Corporation (DFC). While pursuing these policies, the authorities remain committed to maintaining the present exchange rate peg, which they consider a primary policy objective.

Growth accelerated to 11 percent in 2000 but declined to 5 percent in 2001 as a result of several hurricanes, terrorist attacks in the United States, and a shrimp-virus epidemic. Confidence was also affected by financing difficulties at the DFC and the continued widening of the central government deficit from 10 percent of GDP to 12 percent in FY 2001/02 (fiscal year ends March). The deficits were financed mainly through privatization receipts and external borrowing, mostly on commercial terms, while the DFC financed its lending operations through external commercial borrowing. As a result, public and publicly guaranteed external debt increased to 80 percent of GDP at end-2001, or 59 percent excluding publicly guaranteed debt. However, debt accumulation has slowed considerably since mid-2001, as the government financed its operations through a drawdown of deposits at the central bank and the DFC substantially reduced its new lending after suffering severe liquidity shortages. The continued expansionary fiscal stance and the expansionary monetary policy increased the liquidity overhang in the economy and created pressures in the foreign exchange market. With the rapid increase in imports resulting from public investment demand and a fall in exports due to various exogenous shocks, the current account deficit increased to 20 percent of GDP during 2001, leading to a fall in reserves and increasing the risk of severe balance of payments difficulties.

To reduce such a risk, contain the rapid increase in external debt obligations, and safeguard the exchange rate regime, the authorities have decided to implement corrective fiscal and monetary measures. They will reduce the government deficit to 5 percent of GDP during FY 2002/03, while the central bank tightened monetary policy in recent months. In addition, the authorities have placed an international bond to refinance short-term and high-cost external debt, further reducing pressure on the balance of payments, while refraining from any new net external financing of the budget. The government also intends to reorganize the DFC in light of its deteriorating loan portfolio and subject it to banking sector supervision.

Executive Board Assessment

Directors noted that economic growth in Belize fell sharply in 2001, due largely to exogenous shocks, while inflationary pressures remained moderate. Directors expressed concern at the deterioration in the fiscal and the external current account positions in 2001, which added to the external debt, created pressure on usable reserves and the exchange rate, and prompted the authorities to impose ad hoc exchange restrictions and introduce a multiple currency practice. An accommodative monetary policy led to large excess liquidity in the banking system. Against this background, Directors welcomed the policy shift announced by the authorities in April 2002, which seeks to sharply reduce the budget deficit in fiscal year 2002/03 and tighten monetary policy to forestall the emergence of serious balance of payments problems. Looking ahead, Directors urged the authorities to adhere to the sound macroeconomic policy stance they have chosen, and to push ahead with structural reforms.

Directors considered that the budget stance adopted for FY 2002/03 is consistent with medium-term fiscal sustainability. They expressed disappointment, however, that the deficit for the second quarter of the fiscal year exceeded the target. Directors urged the authorities to give high priority to monitoring budget implementation closely and to resist political pressures to spend more, thereby correcting the historical tendency toward slippages in implementation. In particular, the authorities should be rigorous in adhering to their commitment to disallow new extra-budgetary projects. Directors cautioned against instituting a national health insurance scheme that is not self-financing. In addition, the authorities should give priority to mobilizing tax revenue by taking further steps to boost tax collection, reduce exemptions, and strengthen the buoyancy of the tax system. Budget execution should be monitored closely on a quarterly basis.

Directors supported the authorities' decision to curtail sharply the operations of the DFC and to reorganize its management. They urged the authorities to carry out a thorough reorganization of the DFC, bar it from further external borrowing, and subject it to the supervision and prudential regulations applied to commercial banks.

Directors commended the authorities for their decisive action to mop up the excess liquidity in the banking system through an increase in the commercial banks' cash requirements and the placement of additional treasury securities, and urged them to be vigilant in maintaining a tight rein on monetary policy. They welcomed the harmonization of the commercial bank cash requirements and the action taken and proposed by the authorities to strengthen onshore and offshore banking supervision. They recommended further action to these ends and to increase the independence of the central bank. They suggested that technical assistance from the Fund and other donors for this purpose would be helpful. Directors also welcomed the recent measures taken to combat money laundering and the financing of terrorism, including the strengthening of the legal and regulatory framework and the establishment of a Financial Intelligence Unit.

In view of Belize's high and potentially problematic level of external public and publicly-guaranteed debt, Directors welcomed the authorities' decision to refrain from any further net external financing of the budget and strongly recommended that they abstain from using new external financing for purposes other than debt refinancing. In this context, they supported the recent placement of a bond for the purpose of retiring high-cost debt and refinancing short-term debt, noting that this has increased the usable reserves of the central bank and will reduce external interest payments.

Regarding trade policy, Directors welcomed the removal of the ministerial discretion to grant import duty exemptions, but noted that Belize still maintains extensive tax and duty exemptions, and 29 groups of goods under protectionist quantitative nontariff barriers. Directors recommended that these import restrictions be converted into tariffs to improve resource allocation, increase revenue, and reduce administrative costs.

Directors considered that the fixed exchange rate system has served Belize well, while helping to keep inflation low. They welcomed the steps taken by the authorities to begin integrating the parallel and official foreign exchange markets, but stressed that this makes the implementation of sound policies all the more urgent. In this context, Directors urged the authorities to persevere in the implementation of adjustment measures to avoid a widening of the gap between the parallel market rate and the official rate, which could render the peg unsustainable. Directors also recommended eliminating the restrictions imposed on the recently established foreign exchange trading houses in order to increase the efficiency and transparency of the market.

Directors expressed concern about the quality of Belize's statistical information, especially in the areas of national accounts and government finance statistics. They encouraged the authorities to seek technical assistance to improve the statistical database.


Belize: Selected Economic Indicators







(Annual percentage changes)


National income and prices


GDP at constant prices






Consumer prices (end of period)






Real effective exchange rate







(Annual changes in percent of liabilities to the private sector at beginning of period)


Money and credit


Credit to the private sector 1/






Money and quasi-money (M2)







(In percent of GDP)


Central government 2/


Primary balance






Overall balance






Central government borrowing requirement







External sector


External current account 3/






Public and publicly guaranteed external debt 4/







Debt service 5/






In percent of exports of goods and services






In percent of government current revenue






Sources: Belize authorities; and IMF staff estimates and projections.
1/ Comprises credit by commercial banks and the Development Finance Corporation.
2/ Fiscal year starts on April 1.
3/ Including official grants.
4/ End of period.
5/ Public external debt.

Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. This PIN summarizes the views of the Executive Board as expressed during the November 1, 2002 Executive Board discussion based on the staff report.

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