February 25, 2022
An International Monetary Fund team led by Jaime Guajardo conducted discussions for the 2022 Article IV consultation with Belize between February 10 and 22. The team met with the Honorable Mr. John Briceño, Prime Minister; Mr. Kareem Michael, Governor of the Central Bank of Belize; Mr. Christopher Coye, Minister of State; Mr. Joseph Waight, Financial Secretary; and other senior government officials, representatives of the opposition, private sector, and public sector unions.
Context
The COVID-19 pandemic has had a severe impact on Belize . It led to a 71 percent fall in tourist arrivals and a 16.7 percent contraction in real GDP in 2020. The resulting fall in fiscal revenues and rise in pandemic-related expenditure widened the fiscal deficit and increased public debt to 133 percent of GDP in 2020, a level that was assessed as unsustainable in the 2021 Article IV consultation. To address this situation, the government presented a Medium-Term Recovery Plan (MTRP) in April 2021, which seeks to reduce public debt to 85 percent of GDP in 2025 and 70 percent in 2030 through the implementation of fiscal consolidation, growth-enhancing structural reforms, and debt restructuring.
Significant progress towards restoring debt sustainability was made in 2021 . In line with the MTRP, the FY2021 budget introduced sizable fiscal consolidation measures, including cuts to public sector wages and purchases of goods and services, which are projected to reduce government expenditure by 3.4 percent of GDP in FY2021. Belize also completed a debt for marine protection swap, under which a subsidiary of The Nature Conservancy lent funds to Belize to buy back the superbond (totaling US$553 million or 30 percent of GDP) at a discounted price of 55 cents per dollar. In exchange, Belize committed to increase expenditure on marine conservation until 2041 and expand its Biodiversity Protection Zones (coral reefs, mangroves, and fish spawning sites) from 16 percent of ocean area to 30 percent by 2026. This operation reduced Belize’s public debt by 12 percent of GDP in 2021.
Recent Developments, Outlook, and Risks
Economic activity is recovering strongly . Real GDP is projected to grow by 12.5 percent in 2021 and 6.5 percent in 2022, led by a rebound of activity in the construction, retail and wholesale trade, transport and communication, and tourism sectors. The unemployment rate also declined from 13.7 percent in the second half of 2020 to 9.2 percent in the second half of 2021. End of year inflation rose to 4.9 percent in 2021 driven by higher international energy and food prices but is projected to moderate to 3.5 percent in 2022 and 2 percent over the medium term as commodity prices stabilize.
The fiscal position has strengthened in line with the economic recovery and the fiscal consolidation measures implemented in FY2021 . The primary fiscal balance is projected to increase from –8.5 percent of GDP in FY2020 to 1.5 percent of GDP in FY2021, driven by a rise in revenues, a fall in current expenditure due to the consolidation measures implemented in FY2021, and lower capital expenditure. Going forward, the primary surplus is projected to stabilize at 0.7 percent of GDP assuming that the fiscal savings achieved in FY2021 are preserved over time and no additional measures are implemented during FY2022-32.
Debt dynamics have improved, but public debt would continue to be assessed as unsustainable in the absence of additional measures . Public debt declined from 133 percent of GDP in 2020 to 108 percent in 2021 and is projected to decline further to 84 percent of GDP by 2032 due to the continued primary surpluses. However, public debt would continue to be assessed as unsustainable in the absence of additional measures as it would remain above typical thresholds for sustainability over the next decade.
The external position strengthened in 2021 but is projected to weaken over the medium term . International reserves increased from US$348 million (3.8 months of imports) in 2020 to US$420 million (3.9 months of imports) in 2021, partly due to the IMF’s SDR25.6 million allocation, which the authorities are keeping as reserves. Going forward, external financing is expected to become scarcer due to debt sustainability concerns, which would worsen reserve adequacy over time.
Risks to the outlook are substantial and tilted to the downside . A key risk is an escalation of the pandemic, including through the emergence of new vaccine resistant variants that could derail the recovery of tourism. On the upside, further vaccination may strengthen immunity and growth. Another key risk is a sudden tightening of global financial conditions leading to higher cost of external financing. Natural disasters are also a key risk given Belize’s high vulnerability to weather shocks and climate change. Inflation could rise further because of second round effects and higher international energy and food prices.
Policies to restore debt sustainability and strengthen the currency peg
Belize’s key policy priorities continue to be restoring debt sustainability and strengthening the currency peg. This requires ensuring that the recent improvements in the fiscal position are preserved over time and implementing additional fiscal consolidation and growth-enhancing structural reforms , with the objective of reducing public debt to 60 percent of GDP by 2031.
A. Sustained Fiscal Consolidation
The authorities should capitalize on the recent decline in public debt and continue their efforts to reduce it further . Staff recommends reducing public debt to 60 percent of GDP by 2031—a slightly more ambitious target than the one in the MTRP—to ensure that it stays below the 70 percent of GDP threshold for sustainability even when the economy is hit by shocks. Reaching this target will require raising the primary balance to 3.5 percent of GDP by FY2024, in line with the plans in the FY2021 budget speech, by preserving the recent decline in the fiscal deficit and implementing 2.8 percent of GDP of additional fiscal consolidation measures over three years. Anchoring this plan in a credible medium-term fiscal strategy with clear targets and specific measures and preparing the ground for the adoption of a well-designed Fiscal Responsibility Law (FRL) would enhance the credibility of this strategy.
Additional fiscal consolidation should rely on both revenue and expenditure measures . Following the implementation of an expenditure-based fiscal consolidation package in FY2021, the authorities should consider a more balanced composition going forward, including both expenditure rationalization and revenue mobilization as follows:
- Expenditure . Given the increase in inflation and the fall in real wages and real purchases of goods and services, the authorities should consider increasing noninterest current expenditure in line with inflation between FY2022 and FY2024, which would reduce the fiscal deficit by 1.8 percent of GDP by FY2024. The authorities should also consider gradually raising social expenditure (healthcare, education, and targeted social programs) by 1 percent of GDP over four years and creating a natural disaster contingency fund with adequate safeguards of 1 percent of GDP over four years in line with the advice in the 2018 Climate Change Policy Assessment (CCPA).
- Revenue . Broadening the tax base and strengthening tax administration can increase revenues significantly: (i) broadening the general sales tax (GST) base by taxing some of non-necessity zero-rated items at the standard 12.5 percent rate and bringing the hotel sector into the GST could raise 1.5 percent of GDP in revenue by FY2024; (ii) lowering the PIT exemption threshold and taxing some exempted sources of income could raise 0.2 percent of GDP; (iii) increasing excise taxes and fees on vehicle registrations and driver licenses could raise by 0.1 percent of GDP; and (iv) strengthening customs and tax administration could raise 0.2 percent of GDP.
The authorities should prepare contingency plans in case public debt does not fall as planned . Implementing additional fiscal consolidation will be difficult given limited capacity and political pressures. Moreover, the required adjustment could be larger if revenues fall, some measures adopted in 2021 are reversed, or the economy is hit by adverse shocks. In this context, it will be important to prepare a menu of contingency measures, including raising the GST rate, broadening the tax base, taxing property and capital gains, cutting nonpriority expenditure, and restructuring public debt.
Efforts to modernize Public Financial Management (PFM) systems and procedures should continue . The authorities are implementing initiatives to strengthen public expenditure management, including on cash management, public debt, internal audit, and technology. They are also enhancing procurement to promote economies of scale and competitiveness among suppliers in the acquisition of all goods and services. Additional PFM areas that should be strengthened going forward include multi-year budget preparations, fiscal risk assessment, public investment management, coverage of government accounts, and accounting and fiscal reporting. Progress in these areas would facilitate future implementation of an FRL with explicit fiscal rules to strengthen the commitment to fiscal discipline.
B. Growth-Enhancing Structural Reforms
Belize also needs to continue implementing growth-enhancing structural reforms . Boosting growth through reforms that improve the business environment would reduce the amount of fiscal consolidation needed to restore debt sustainability. The authorities have streamlined the processes and reduced the time required to register property and new businesses. Improving the business environment further requires easing access to credit for SMEs through the launch of the credit bureau and collateral registry, reducing entry barriers for businesses, enhancing human capital, upgrading infrastructure, and containing crime. Advancing this agenda will require reprioritizing public expenditure.
The authorities have an ambitious climate change mitigation and adaptation agenda, but financing remains elusive . Belize’s updated Nationally Determined Contribution (NDC) presents the country’s ambitious plans on mitigation and adaptation for 2021-30, including protecting and restoring natural habitats, expanding the use of renewable energy, using drought tolerant crops, and enhancing infrastructure. The updated NDC also presents the estimated costs and financing gaps, which are significant, especially for mitigation.
Adoption of a Disaster Resilience Strategy (DRS) would enhance access to financing . Belize should continue seeking funding for its mitigation and adaptation plans from multilateral creditors, the Green Climate Fund, and The Conservation Fund. Access to financing would be enhanced with the adoption of a DRS that focuses on improving structural, financial, and post-disaster resilience, and is based on a consistent multi-year macro-fiscal framework.
Financial and post disaster resilience should be strengthened as advised in the 2018 CCPA . Belize has continued strengthening structural resilience by upgrading its infrastructure and restoring natural habitats, but there has been less progress strengthening financial and post disaster resilience due to the country’s limited fiscal space. While legislation creating a natural disaster contingency fund for frequent low severity events has been passed, no funds have been allocated to it. The government has a contingent credit line with the IDB to cover losses from more severe events, but it is insufficient. Belize needs to expand the coverage of insurance and other contingent financing, and reform social protection to scale up quickly after a disaster. Advancing this agenda will also require reprioritizing expenditure.
C. Monetary and Financial Policies
Although Belize’s external position strengthened in 2021, it remains weaker than justified by medium-term fundamentals and desirable policies . International reserve adequacy is projected to weaken over the medium term due to concerns about debt sustainability. Moreover, the External Balance Assessment indicates that the current account deficit is larger than its estimated equilibrium level.
In the absence of exchange rate flexibility, reducing external imbalances requires restoring debt sustainability . The authorities and staff consider the currency peg as a key macroeconomic anchor that should be preserved. In this context, reducing external imbalances requires restoring debt sustainability by implementing additional fiscal consolidation and growth-enhancing structural reforms, which would also lower the current account deficit, enhance access to external financing, improve reserve adequacy, and strengthen the currency peg. The latter also requires limiting government financing by the Central Bank, in line with the trends in 2021.
Domestic banks remain well capitalized and with low nonperforming loans (NPLs), but this could change as the expiration of the forbearance measures introduced in 2020 begins to impact their balance sheets . Regulatory capital remains well above minimum requirements, while NPLs remain manageable at 5.3 percent of loans. However, this partly reflects forbearance measures introduced in 2020. As these measures have now expired, the Central Bank has requested domestic banks and credit unions to self-assess their loan portfolio by end-February 2022. The Central Bank will review these self-assessments and agree on a plan going forward with each institution. In this context, it will be important that any agreed exceptional measures are time-bound and targeted, and financial institutions resume the regular classification and restructuring procedures as soon as possible. To support these efforts, the government increased the Central Bank’s capital by more than 0.5 percent of GDP in FY2021 despite its tight budget constraint. Efforts to strengthen enforcement of AML/CFT requirements on banks should continue.
The authorities must continue strengthening the AML/CFT framework and its implementation, especially in the international financial services (IFS) sector . The authorities have finalized their first national assessment of money laundering and terrorist financing (ML/TF) risks and have developed an action plan to strengthen their AML/CFT framework. They intend to update both in the coming months to strengthen ML/TF risks mitigation and be better prepared for the 2023 mutual evaluation by the Caribbean Financial Action Task Force. Policy priorities include: (i) centralizing information on beneficial ownership so that accurate and up-to-date data is easily accessible under the new legal framework for domestic and international corporations; (ii) deepening the understanding of the ML/TF risks inherent to the sector; (iii) increasing the resources and capacity of the Financial Services Commission (FSC); and (iv) introducing legal reforms to implement AML/CFT standards on virtual assets and virtual asset service providers.