Concluding Statement of IMF 2018 Article IV Mission

September 24, 2018

A Concluding Statement describes the preliminary findings of IMF staff at the end of an official staff visit (or ‘mission’), in most cases to a member country. Missions are undertaken as part of regular (usually annual) consultations under Article IV of the IMF's Articles of Agreement, in the context of a request to use IMF resources (borrow from the IMF), as part of discussions of staff monitored programs, or as part of other staff monitoring of economic developments.

The authorities have consented to the publication of this statement. The views expressed in this statement are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board. Based on the preliminary findings of this mission, staff will prepare a report that, subject to management approval, will be presented to the IMF Executive Board for discussion and decision.

An International Monetary Fund team led by Daniel Leigh visited Belize from September 11-20 to conduct the discussions for the 2018 Article IV consultation. The team met with the Honorable Mr. Patrick Faber, Acting Prime Minister; Amb. Joy Grant, Governor of the Central Bank of Belize; Mr. Joseph Waight, Financial Secretary; and other senior government officials, representatives of the opposition, private sector, and public sector unions.

Belize’s economic recovery is strengthening, the government is making significant progress toward debt reduction, and the Central Bank of Belize (CBB) has taken resolute actions to improve financial soundness. At the same time, public debt is elevated, the external current account deficit remains large, and international reserves are just above 3 months of imports of goods and services. In the view of the team, policies to enhance Belize’s growth and resilience are essential for addressing these challenges and for improving economic wellbeing. Reducing debt to prudent levels and building reserves requires additional fiscal consolidation alongside structural reforms that strengthen the business environment and promote inclusive economic growth. Additional steps to fortify regulatory oversight, bank resolution, and the anti-money laundering (AML) and combating the financing of terrorism (CFT) framework would support the recovery of correspondent banking relationships (CBRs) and strengthen investor confidence.

Recent Economic Developments and Outlook

Belize’s economic recovery is strengthening, supported by a favorable global environment. Real GDP grew by 1.4 percent in 2017, and recent data indicate an acceleration in economic activity, with growth in 2018Q2 estimated at 5.4 percent (y/y). Tourism arrivals were up 17.1 percent in January–June 2018 compared with a year earlier, reflecting economic expansion in Belize’s trade partners and an increased number of flights. The unemployment rate declined to 9.4 percent in April 2018 from 9.7 percent six months earlier, while inflation was below 1 percent (y/y). The current account deficit narrowed to 7.6 percent of GDP in 2017 from 8.4 percent of GDP in 2016, reflecting subdued imports and higher receipts from tourism.

The government delivered a significant fiscal adjustment in FY2017/18. The primary balance increased to a surplus of 1.3 percent of GDP in FY2017/18, excluding a one-off effect of a Caribbean Court of Justice (CCJ) ruling, implying a 3.2 percent of GDP turnaround from the FY2016/17 level. [1] The adjustment occurred largely through a reduction of government investment, which affected growth. Tax measures raised revenues, although their yield was lower than anticipated.

The FY2018/19 budget approved by Parliament raises the primary fiscal surplus further, to just above 2 percent of GDP. The planned adjustment is mainly through higher revenues. Measures include broadening the base of the General Sales Tax (GST) by removing zero-rated items, higher excises on fuel, and higher import duties on selected items, supported by stronger tax administration and spending restraint. In his budget speech, the Prime Minister underscored the importance of raising the primary fiscal surplus to achieve a reduction in public debt to 60 percent of GDP over the long term.

The financial sector is strengthening, supported by the authorities’ resolute actions to enhance financial soundness and reduce risks to CBRs. The overall domestic banks’ gross NPL-to-total loans ratio fell to 7.5 percent (1.4 percent net of provisions) at end-2017, from 10.4 percent (2.1 percent net of provisions) at end-2016, and bank profitability has improved. All banks affected by the loss of CBRs during 2015-16 have found some replacement CBRs and alternative ways of processing cross border transactions. The CBB took resolute action to deal with a troubled offshore bank. The CBB also conducted AML/CFT supervision of one domestic bank, three offshore banks, and two credit unions in 2018. Parliament adopted amendments to improve the transparency of International Business Corporations (IBCs), by prohibiting the issuance of bearer shares and by requiring beneficial ownership to be held in Belize.

The medium-term outlook remains challenging. Real GDP growth is projected at 2.2 percent in 2018 and just below 2 percent in the medium term, in line with recent trends. The current account deficit is projected to gradually narrow, but remain significant, reflecting structural weaknesses, with international reserves projected below 3 months of imports of goods and services over the medium term. A fiscal stance that is stronger than projected in the baseline scenario, which assumes no fiscal adjustment beyond FY2018/19, would be needed to reduce public debt from its end-2017 level (94 percent of GDP) to prudent levels over the medium to long term and build buffers against shocks.

Downside risks remain substantial. Contested legacy claims, estimated at about 5 percent of GDP, could lead to large public and external financing needs. Reputational risks from potential financial misuse of the offshore sector’s complex entities, and governance concerns, could weaken investor confidence and renew pressures on CBRs, which would weaken banks. These vulnerabilities would be exacerbated by a growth slowdown among Belize’s main trading partners, higher international energy prices, and increasingly severe natural disasters associated with climate change. Such adverse developments could undermine public support for the government’s reforms and endanger debt sustainability. On the upside, additional foreign direct investment, including in connection with the tourism industry’s expansion, and a successful implementation of the Growth and Sustainable Development Strategy (GSDS) could result in a sustained rise in growth.

Raising Economic Growth and Resilience

Policies to enhance Belize’s growth and resilience are essential for addressing these challenges and risks and for improving the economic wellbeing of all Belizeans.

Improving the business climate remains a central priority. Belize’s outlook of rising growth, especially in the agriculture, call-center, and tourism sectors, provides an opportunity to make progress on policies that will strengthen the recovery in the short term and raise long-term growth, without significant fiscal costs. Structural reform priorities include easing access to credit by establishing a Credit Bureau and collateral registry; accelerating and modernizing procedures for starting a business; amending labor legislation to allow greater flexibility in working hours; increasing support for technical training; improving governance in customs and public procurement; fighting corruption, including by implementing the asset declaration regime for senior public officials, strengthening the independence and capacity of the Integrity Commission, and bolstering enforcement against perpetrators of corruption; and amplifying support for crime prevention and juvenile rehabilitation, including community action programs.

Intensifying Belize’s ongoing efforts to build resilience to climate change and natural disasters would reduce economic volatility and raise growth over the medium term. Belize’s National Climate Resilience Investment Plan and GSDS prescribe resilience-building projects, such as more robust roads, bridges, and seawalls. Costing and prioritizing these plans and developing an investment promotion strategy to increase access to grants and climate funds is a priority. Belize also needs more self-insurance through a natural disaster reserve fund, to facilitate immediate recovery and response efforts following floods and hurricanes. Natural disaster risks should also be cost-effectively managed through contingent lines of credit and optimized participation in regional insurance options, as both public and private assets are under-insured.

To support the authorities’ poverty alleviation strategy, reforms to Belize’s social safety net are warranted. Belize already has a number of social safety net programs, such as the High School Subsidy Program, Building Opportunities for Our Social Transformation (BOOST), Food Pantry, and the Conditional Cash Transfer (CCT) Program. Increasing the use of formal targeting mechanisms, informed by an updated country poverty assessment, would increase the programs’ effectiveness at reaching the most vulnerable individuals, an important consideration given the distributional implications of fiscal and structural reforms.

Building Fiscal Buffers

Reducing public debt to prudent levels requires additional fiscal consolidation alongside structural reforms that enhance potential growth. Reducing government debt to below 60 percent of GDP in 10 years would require measures that gradually raise the primary surplus to about 4 percent of GDP from the current projected level of 2 percent of GDP. Revenue measures could include further broadening the base of the GST by phasing out zero-rated items and exemptions; modernizing and further reinforcing the efficiency of tax administration; increasing the GST rate to the regional average over the medium term; and more closely monitoring activity in Commercial Free Zones. In addition, civil service and pension reforms are needed to reduce Belize’s large wage and social security bills and create space for priority spending. Measures include implementing a 2-5 replacement ratio to gradually reduce the number of public sector employees; limiting salary increments to the rate of inflation; making the public-sector pension plan contributory; and raising pensions in line with inflation. Reforms that increase potential growth would reduce the primary fiscal surplus needed to achieve the targeted debt reduction and increase space for priority investments and social spending.

A well-designed fiscal rule based on a debt anchor could, if underpinned by a public consensus, support the fiscal adjustment. Rules that target a reduction in public debt to 60 percent of GDP over the long term have had success in putting debt on a clear downward path in several cases in the region (for example, in Grenada and Jamaica). In Belize, adoption by Parliament of such a fiscal rule could help guide the fiscal consolidation effort.

Further Strengthening the Financial System

The financial system should remain under tight supervision. Regulations on provisioning should be strengthened, taking into consideration the types of lending and minimum operational requirements for collateral. An asset quality review would help assess banks’ capital buffers. The bank resolution legal framework should be fortified, including with more effective tools that the CBB could deploy at an early juncture, with greater operational autonomy. CBB financing of government spending should be phased out to prevent risks of exchange rate and inflation pressure and be replaced by more regular government debt auctions.

Further steps are needed to strengthen the effectiveness of the AML/CFT framework and support the recovery of CBRs. The regulatory powers of the International Financial Services Commission (IFSC) should be strengthened, along with its capacity to properly license, supervise, and, when necessary, enforce sanctions against licensed registered agents and financial services providers. Requiring a physical presence of IFSC licensed institutions is essential. To further reduce money laundering and terrorism financing risks, the authorities should ensure that up-to-date beneficial owner information is made available and easily accessible without impediments. The CBB should further develop its capacity to conduct AML/CFT risk-based supervision of banks and impose strict and prompt sanctions when necessary. Conducting a study on the overall benefits as well as the costs and risks of the offshore center is warranted.

The mission thanks the authorities for their hospitality, cooperation and willingness to engage in extensive and frank policy discussions.

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[1] In November 2017, the CCJ ruled that the government must pay a guaranteed debt contracted by Universal Health Services to a commercial bank creditor. This ruling implied a 2.5 percent of GDP increase in government debt.

IMF prescribes bitter medicine for Belize

A Belize Press Office release says a recent International Monetary Fund (IMF) report shows “positive economic growth in Belize”, but that amounts to finding a silver lining in what is really a rather gloomy report card. The IMF report, which was done by an IMF delegation led by Daniel Leigh, followed a consultative process in the country from Sept. 11 to Sept. 24. Leigh and his delegation met with Acting Prime Minister Hon. Patrick Faber, H.E. Joy Grant, Governor of the Central Bank of Belize; Joseph Waight, Financial Secretary; senior government officials, representatives of the opposition, private sector and public sector unions, before concluding their exercise.

In its release, the IMF describes the report as preliminary findings of its staff, and stresses that the “views expressed in this statement are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board.” The release says that missions of the kind the IMF staff did are “undertaken as part of regular (usually annual) consultations under Article IV of the IMF’s Articles of Agreement, in the context of a request to use IMF resources (borrow from the IMF), as part of discussions of staff monitored programs, or as part of other staff monitoring of economic developments.”

The report said that “Belize’s economic recovery is strengthening, the government is making significant progress toward debt reduction, and the Central Bank of Belize (CBB) has taken resolute actions to improve financial soundness.” However, it said that “public debt is elevated, the external current account deficit remains large, and international reserves are just above 3 months of imports of goods and services.”

The IMF team concluded that our economic wellbeing depends on our “reducing debt to prudent levels” and that for us to build our reserves demand “additional fiscal consolidation alongside structural reforms that strengthen the business environment and promote inclusive economic growth.”

The report said we urgently need to build our “fiscal buffers”, and that we cannot keep operating with a high debt to GDP ratio of 94%.

The IMF team forwards a very tough prescription for the construction of these “fiscal buffers.” Leigh and his team say that government needs to reduce government debt “to below 60 percent of GDP in 10 years,” and to do this government must “raise the primary surplus to about 4 percent of GDP from the current projected level of 2 percent of GDP.”

The report says government can achieve this through “broadening the base of the GST by phasing out zero-rated items and exemptions; modernizing and further reinforcing the efficiency of tax administration; increasing the GST rate to the regional average over the medium term; and more closely monitoring activity in Commercial Free Zones.”

The IMF team says “civil service and pension reforms are needed to reduce Belize’s large wage and social security bills.” The IMF team calls for massive cutting of the public sector work force. Belize should implement “a 2-5 replacement ratio to gradually reduce the number of public sector employees,” the report says.

Pay cuts are in order too. Belize, the IMF team says, should also limit “salary increments to the rate of inflation,” make the “public-sector pension plan contributory,” and “raise pensions in line with inflation.”

But Belize shouldn’t be too wary about the bitter medicine because there are clear examples of success for countries that follow the “rules that target a reduction in public debt to 60 percent of GDP over the long term.” The IMF says there are “several cases in the region (for example, in Grenada and Jamaica)” where they have “had success in putting debt on a clear downward path,” with their prescription.

Amandala