IMF Concludes 2009 Article IV Consultation With Belize

by Mike Godfrey, Tax-News.com, Washington

19 May 2009

The Executive Board of the International Monetary Fund (IMF) has concluded its Article IV consultation with Belize, noting a broadly favourable performance over the past few years, despite significant losses resulting from severe tropical storms. Belize has thus far proved relatively resilient to the global crisis, though it is expected to be vulnerable in 2009.

Belize, a small open economy with a narrow export base, remains vulnerable to exogenous shocks, according to the IMF. Since 2005, growth in the traditional sectors of the economy has decelerated, reflecting in part the impact of severe weather-related shocks during 2007–08. Starting in 2006, petroleum extraction has been a major factor contributing to growth, accounting for approximately 5% of GDP in 2008. A debt restructuring agreement in February 2007 provided a substantial reduction in the net present value of the debt owed to private creditors. Over the past year, a renewed commitment to prudent macroeconomic policies and to improving governance has elicited increased support from official creditors.

Macroeconomic performance was broadly favorable during 2008. Despite losses from two tropical storms, real GDP increased by about 3%. Domestic price inflation, which has been low historically, rose to nearly 10 percent by mid-2008, driven largely by food and fuel prices. By February 2009, inflation declined to 1.5%. The current account deficit widened sharply to 10% of GDP in 2008, reflecting a surge in FDI-related imports and higher prices of imported food and fuel. Gross international reserves of the Central Bank of Belize rose to USD166m at end-2008, the equivalent of two months of imports.

The accounts of the central government are estimated to have registered an overall surplus of 1.25% of GDP in FY 2008/09 (April–March). However, the underlying fiscal position has weakened, as recurrent expenditure has been growing rapidly at a time of rising dependence on volatile revenue sources, such as petroleum and grants. Belize’s financial system appears so far largely insulated from the global downturn. However, commercial bank credit to the private sector expanded rapidly in recent years, reaching the equivalent of 70% of GDP, and the nonperforming loan ratio doubled in 2008.

Belize’s economy is projected to decelerate in 2009 due to the global downturn. Real GDP growth is projected at 1%, reflecting the impact of declining tourism, remittances, and FDI inflows. Twelve-month inflation is projected to ease to 2.5% by year-end. The external current account deficit would contract significantly, as imports are projected to decline more than exports, mirroring an expected fall in private capital inflows. In FY 2009/10, the overall balance of the central government is projected to shift from a surplus to a deficit of 1.75% of GDP, on account of a budgeted increase in recurrent spending, while tax revenue is projected to increase at a slower pace.

In its Executive Board Assessment the IMF noted the following:

“Executive Directors welcomed the broadly favorable economic performance in 2008, and commended the authorities’ commitment to pursue sound macroeconomic and financial sector policies to manage near-term risks and reinvigorate growth potential over the medium term. Against the backdrop of the global downturn, they noted that Belize, as a small, open economy with a fixed exchange rate system, a low level of reserves, and a high debt level, remains vulnerable. Looking ahead, Directors welcomed the authorities’ aim to pursue a medium-term economic strategy centered on sustained fiscal consolidation, while strengthening their international reserve position and oversight of the financial sector.”

“Directors noted that the exchange rate peg has served Belize well, providing an important anchor for macroeconomic policies. They also noted the staff’s assessment that the exchange rate appears to be broadly in line with fundamentals. Directors emphasized that strong macroeconomic policies are necessary to underpin this exchange rate regime and help raise international reserves to a comfortable level. They also encouraged the authorities to access additional external financing to contain the risk of a sharper-than-anticipated external deterioration.”

“Directors agreed that a more cautious fiscal stance would help protect Belize’s external position and enhance public debt sustainability by lowering debt ratios over the medium term. They encouraged the authorities to restrain the growth in public expenditure, including through wage moderation, while boosting tax revenue aimed at raising the primary surplus and helping reduce the budget’s reliance on volatile revenue sources. At the same time, they considered as important protecting outlays for reconstruction and other investment, given their positive supply-side effects.”

“Directors underscored the need to ensure the medium-term financial viability of key public sector programs to help secure fiscal sustainability. They considered that the Social Security Board and the pension plan for civil servants should be reformed to put them on a sound financial footing. Directors agreed that the proposed extension of the National Health Insurance scheme should await adequate funding and that the mandate of the newly reactivated Development Finance Corporation needs to be clarified and financing identified to cover its operating costs. They considered that petroleum revenues should remain integrated in the budget, with related information published and subject to regular audits to ensure transparency.”

“Noting the increase in non-performing loans, Directors encouraged the authorities to further strengthen oversight of the financial system. They underscored the importance of developing contingency plans for the financial system and devising a framework for the provision of liquidity. Directors welcomed the strengthening of the Anti-Money Laundering legislation, and recommended that adequate resources be provided for the Financial Intelligence Unit to allow its implementation.”

“Directors endorsed the authorities’ focus on a development strategy to raise Belize’s medium-term growth potential, which should draw upon private sector as well as donor financing. They underscored that the public investment program should be consistent with the authorities’ prudent fiscal strategy. Directors commended the authorities’ commitment to good governance, the rule of law, and contract enforcement, which are important for improving the investment climate.”

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