Public Information Notice No. 05/136

Public Information Notice: IMF Executive Board Concludes 2005 Article IV Consultation with Belize

September 30, 2005

On September 14, 2005, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Belize.¹

Background

The Belizean economy grew by 4½ percent in 2004, mainly reflecting strong performance in the agriculture, fisheries, and tourism sectors. Inflation remained subdued at around 3 percent.

The overall fiscal deficit of the central government, however, widened to 8¾ percent of GDP in FY04/05 (April to March), from about 8⅓ percent of GDP in the previous year. The deficit was significantly larger than the authorities' target of 2¾ percent of GDP, with noninterest current expenditure exceeding budgeted levels by some 3 percent of GDP and substantial overruns in interest payments, mainly related to high costs of borrowing that reflected the sharp deterioration in Belize's external creditworthiness. Public finances were also burdened by the weak position of the Development Finance Corporation (DFC).

The balance of payment remained under significant pressure. Although the external current account deficit narrowed somewhat in 2004—to 18 percent of GDP from an average of 22 percent of GDP during 2001-03—it remained unsustainably high. Lower net loan disbursements in 2004 more than offset a marginal increase in capital inflows to finance investment projects, causing the capital account surplus to erode, and gross international reserves fell sharply. More recently, notwithstanding the authorities' success in refinancing several large debts with external commercial creditors, Belize's access to international capital markets has become more difficult, with marked reductions in assessments by rating agencies.

In response to growing pressure on the reserves of the central bank and increasing concerns regarding the risks to the balance of payments, the authorities announced in May a major adjustment program. This included fiscal measures aimed at reducing the FY05/06 deficit to less than 4 percent of GDP, mainly through tax increases and a curtailment of capital expenditure and civil service employment. In addition, the Central Bank of Belize tightened monetary policy to contain credit expansion.

Executive Board Assessment

While Directors welcomed Belize's low inflationary environment and continued strong growth performance, which reflect the robust expansion in the tourism, fisheries, and agricultural sectors, they expressed concern that Belize's fiscal and external current account deficits remain unsustainably high, resulting in substantial increases in the external public debt and a serious erosion of domestic and international confidence. Directors underscored the urgency of addressing these imbalances to safeguard the country's international reserves and ensure the sustainability of the pegged exchange rate system. They encouraged the authorities to mount a campaign to educate the public on the benefits of reform and the growing risks of inaction.

Directors welcomed the steps taken earlier this year to tighten fiscal and monetary policies, but were concerned that implementation delays and the emergence of new expenditure commitments would make it difficult to meet the authorities' fiscal targets for fiscal year 2005/06. Moreover, even if these targets are met, a significant external financing gap is still likely to emerge in 2006. Against this background, Directors called for greater efforts to reduce domestic demand, close the remaining financing gap, and restore confidence and Belize's creditworthiness.

Directors therefore urged the adoption of additional measures to boost fiscal revenue and rein in expenditure. They called for a reduction in tax holidays and exemptions to broaden the tax base and increase tax buoyancy. They encouraged the early introduction of a value added tax and the adoption of measures to ensure the pass-through of international oil price changes to domestic petroleum prices. Directors suggested that further expenditure cuts be explored in the areas of goods and services and capital spending, excluding essential social services.

Directors commended the authorities' efforts to improve governance and transparency, including the passage of fiscal transparency legislation and the decision to establish commissions of inquiry into the Development Finance Corporation (DFC) and the Social Security Board.

Directors welcomed the recent monetary policy measures aimed at tightening domestic liquidity conditions. They encouraged the authorities to monitor domestic liquidity closely and further tighten monetary conditions to support the balance of payments until an additional fiscal effort takes hold.

Directors welcomed the steps taken to improve financial supervision and prudential regulation, including extension of supervisory coverage to the DFC. However, they expressed concern with the lack of progress in resolving the DFC, which continues to be a drain on the public finances as a result of its deteriorating asset base. In order to stem further losses, Directors urged the authorities to halt operations of the DFC immediately and dispose of its assets in a transparent and orderly manner. Directors also emphasized the need to monitor actively commercial bank balance sheet vulnerabilities in light of rapid growth in credit to the private sector.

Directors noted that the balance of payments has come under increased strain as a result of adverse terms of trade shocks, including the rise in world oil prices. These shocks have compounded the severe pressures stemming from Belize's external debt service obligations. Directors agreed that in these circumstances the authorities' intention to approach external creditors to seek debt service relief is appropriate. However, Directors underlined the importance of engaging with external creditors in a transparent and equitable manner, and within the framework of a credible medium-term debt strategy. In this regard, a few Directors considered that a Fund-supported program would underpin Belize's efforts to bolster confidence and secure an agreement with external creditors. Directors also called for a strengthening of the debt database to help improve debt management.

Directors welcomed the unification of the foreign exchange market through the closure of the "cambios". They noted that Belize does not maintain exchange restrictions or multiple currency practices. However, Belize maintains non-tariff barriers and tax and duty exemptions that contribute to a misallocation of resources. Directors encouraged the authorities to phase out import restrictions in favor of tariffs and excises, noting that this will also strengthen revenue collection.

Directors commended the authorities for recent improvements in the quality and timeliness of publication of statistical information, and supported the authorities' request for technical assistance to facilitate participation in the General Data Dissemination System.