Public Information Notice No. 98/74

Public Information Notice: IMF Concludes Article IV Consultation with Belize

September 22, 1998

On August 28, 1998, the Executive Board concluded the Article IV consultation with Belize¹.

Background

Following a sharp weakening in performance in the early 1990s, the authorities have been adopting measures aimed at improving the fiscal and external positions. However, the actual fiscal adjustment achieved in 1993–1996 was modest, and the public sector’s recourse to credit from the central bank has remained high, contributing to pressures on the external reserve position. The authorities have sought to stem such pressures by tightening credit policy, increasing foreign borrowing on commercial terms, and introducing some exchange restrictions. In 1997, the fiscal imbalance widened again because of a rise in capital outlays, but the loss in international reserve was limited as the fiscal deficit was largely financed by external borrowing, including on commercial terms.

In 1997, real economic growth in Belize picked up to more than 3 percent on the strength of agriculture, agriculture-related manufacturing, and a recovery in fishing. Inflation has remained low, reflecting the exchange rate peg to the U.S. dollar and the openness of the economy. The external current account deficit widened towards 6 percent of GDP in 1997 (1 percent of GDP in 1996) mainly because of an increase in imports associated with the rise in public sector capital outlays and in economic growth. Export revenue grew only modestly as a strong performance of export volume of agriculture and agriculture-related products was offset by a fall in international prices. The capital account surplus increased in 1997 but was not sufficient to cover the current account deficit and the overall external position shifted to a small deficit (from a surplus of 3¼ percent of GDP in 1996). The stock of net international reserves stood at about US$51 million in mid-August 1998, with gross reserves equivalent to 1.7 months of imports of goods and nonfactor services.

Executive Board Assessment

Executive Directors noted that the fiscal measures adopted by the authorities in 1993–96 had made a start toward correcting Belize’s fiscal and external imbalances and had helped contain the weakening in the foreign reserve position and improve confidence. However, Directors were concerned that corrective measures were not sustained in 1997, when the fiscal deficit widened again and the public sector’s recourse to the central bank was large.

Directors observed that in the absence of a determined fiscal adjustment, the authorities have tightened credit policy, introduced foreign exchange restrictions, and increased public sector external indebtedness on commercial terms. They emphasized that those policies are not sustainable and could eventually undermine the present exchange rate peg. In this regard, they stressed the importance of strengthening without delay the fiscal and external positions on a sustained basis, refraining from borrowing on commercial terms or using proceeds from privatization to finance the deficit, and accelerating structural reforms to enhance economic efficiency.

Directors strongly supported the staff recommendation to implement sufficient measures to increase public savings, while allowing for an increase in expenditure on social and basic infrastructure. On the revenue side, there was a need to improve tax administration, broaden the base of the value-added tax and departure tax, and limit tax exemptions. On the expenditure side, Directors encouraged the authorities to freeze public service employment and limit wage adjustments strictly to those already considered in the budget, and introduce cost recovery schemes in health and education. Directors welcomed the authorities’ intention to use resources released by the debt reduction from bilateral sources for poverty alleviation programs.

Directors emphasized that credit policy will need to remain restrained and recommended the introduction of open-market operations to allow for some reduction of reserve requirements on bank deposits.

Directors stressed the importance of preserving a sound banking system by strengthening prudential regulations and supervisory oversight of the financial system. In this regard, Directors encouraged the authorities to move expeditiously to extend to the credit unions the supervisory and prudential principles and practices that now apply to banks.

Directors noted that the present exchange rate peg has served Belize well in maintaining price stability and improving investor confidence, and emphasized that maintenance of competitiveness in Belize hinges crucially on eliminating fiscal imbalances.

Directors commended the authorities for reducing both the maximum import duty and the import duty dispersion in the context of the CARICOM common external tariff agreement, and urged the authorities to eliminate promptly existing quantitative restrictions, replacing them with tariffs to help improve efficiency and widen the tax base. Directors stressed that structural actions are required to reduce existing impediments to private sector activity. They encouraged the authorities to streamline public procurement procedures and increase the transparency of government operations.