Under Article IV of the International Monetary Fund’s (“IMF”) articles of Agreement, the IMF holds annual bilateral discussions with member countries such as Belize on the state of its economy. The discussions on Belize’s economy ended on September 9, 2010 with the staff report (the “Report”) completed on October 4, 2010, the report became available to the public on January 14, 2011.
According to the IMF, the Belizean economy in past years has been vulnerable to adverse shocks mainly because of our high external debt, policy rigidities and reduced access to external financing. Furthermore since 2006, Belize’s economic growth has been lackluster and driven mostly by petroleum extraction and tourism related construction. In 2007, debt restructuring eased external debt service, but public debt stayed high and foreign reserves low, which limited Belize’s capacity to respond to external financial shocks.
Since early 2008, some progress has been made to reduce Belize’s exposure to external shocks and to strengthen its growth. The Belize government’s progress to date has been to tightening monetary policy including the banking regulatory frame work. Belize’s external position has also improved with foreign reserves increasing from 2.1 months of exports in 2008 to a projected 3.4 months of exports at the end of 2010. The IMF also commended the Government of Belize for their prudent macroeconomic management in the face of the global crisis and severe floods but at the same time it also noted the following:
· Economic output stagnated in 2009 due largely to weakening tourism and agriculture which suffered from the effect of floods in late 2008.
· While tax revenues remained stable, Belize’s public finances weakened substantially, namely the budget deficit declined to 1.5% of GDP in FY 09/10, due to lower grants and higher current spending (namely wages).
· The banking system is facing increased risk in recent years due to non performing loans (“NPLS”) which equalled to 20% of total loans in mid 2010. The increase in NPLS has been concentrated to 3 banks (2 domestic banks and 1 offshore bank). These three banks account for 40% of deposits in the banking system. However, the IMF also noted that deposits and credits in the banking system have remained broadly stable through June 2010.
· Social indicators have weaken, as per IMF assessment, poverty affected 40% of the population in 2009 up from 33% in 2000.
Belize’s nominal GDP is projected at 2.863 million at the end of 2010 and the economy is projected to grow by 2% in 2010. Despite the recent tax measures taken (namely the increase in the general sales tax from 10% to 12.5%) the budgeted fiscal deficit is projected to widen to 2.2% of GDP due largely to lower grant disbursements and increased expenditure. If current trends persist, the IMF projects that over the medium term, Belize’s economic growth would be restrained to 2.5% of GDP (below historical trends of approximately 4%) resulting in total external financing needs (budget deficit) in the range of 8.5% to 10% of GDP annually; there would be limited room in the public finances to redirect spending to social priorities and foreign reserves would decline to under 2 months of imports by end of 2019.
As an alternative to the present status quo, the IMF proposes a series of economic measures (the “active scenario”) which would raise Belize’s economic growth to 3.5% over the medium term and also lower external financing needs. These measures are based on sustaining a primary surplus (budget surplus) of 4.5% of GDP starting in 2011. Under the IMF’s active scenario public debt is projected to decline to 40% of GDP (currently slightly under 80%) and foreign reserves would further strengthen to 4 months on exports by the end of 2019.
However, the turnaround in key economic indicators would come at a cost to Belize. Salient features of the IMF’s active scenario include:
· Expenditure - Reducing and streaming the Government of Belize’s wage bill, limiting growth of the wage bill in non priority spending areas, eliminating generous benefits such as contributions to public officer’s pension scheme and moving to a dual pension contribution system.
· Revenue - the Government of Belize should give serious consideration to raising the general sales tax to 15% (in line with regional levels) or phase out the 2008 reduction in the fuel excise tax.
· Social Security – the Government of Belize should commence implementation of the latest actuarial report, to bring benefits paid in line with social security contributions by employers and employees (increasing social security contributions).
The Government of Belize has so far resisted the implementation of the recommendations under the IMF’s active scenario noting that it will be “difficult to implement give the political and social conditions.” With this said, Belize’s options to reduce the projected budget deficit are limited. and difficult. Difficult, considering that is there is a gradual decline in grants, our high public debt (in relation to GDP) limits access to external financing, public expenditure (namely the wage bill) remains high, barring the discover of the new oil fields, the economic contribution by the petroleum industry is expected to decline, starting in 2013.
It will be interesting to see which course of action the Government of Belize undertakes in the short to medium term. Wilfred Rhaburn, CPA
W. Rhaburn Consulting
63 Barrier Reef Drive
San Pedro Town
Ambergris Caye, BELIZE