Mission Concluding Statement 

Belize: Staff Concluding Statement of the 2024 Article IV Mission

February 27, 2024

Washington, DC: An International Monetary Fund team led by Jaime Guajardo conducted discussions for the 2024 Article IV consultation with Belize during February 12-22. The team met with Mr. John Briceño, Prime Minister; Mr. Christopher Coye, Minister of State; Mr. Joseph Waight, Financial Secretary; Mr. Kareem Michael, Governor of the Central Bank; and other senior government officials, representatives of the opposition, and private sector.

Recent Developments, Outlook, and Risks

Belize's economy has continued to perform well. After growing strongly by 17.9 percent in 2021 and 8.7 percent in 2022, real GDP is estimated to have continued to grow robustly by 4.5 percent in 2023 led by the expansion of the tourism, construction, retail and wholesale trade, transport, and business process outsourcing sectors. As a result, real GDP was 16 percent above pre-pandemic levels in 2023 and the unemployment rate declined from 14 percent in 2020 to 3.4 percent in 2023. The fiscal position also strengthened. Public debt fell from 103 percent of GDP in 2020 to 66 percent in 2023, driven by strong nominal GDP growth, a substantial improvement in the primary fiscal balance, a debt for marine protection swap with The Nature Conservancy, and a discount in Belize's Petrocaribe debt with Venezuela.

Real GDP growth is projected to moderate going forward. Growth is projected at 3.5 percent in 2024 and 2.5 percent from 2025 onwards as tourist arrivals return to pre-pandemic levels and the output gap closes. The unemployment rate is projected to stay at 3.4 percent over the medium term as the economy remains at full employment. Inflation, which fell to 4.4 percent in 2023 led by lower prices of transport and utilities partly offset by higher food inflation, is projected to decline further to 3.1 percent in 2024 and 1.3 percent over the medium term as commodity prices and global inflation moderate.

The fiscal position is projected to remain robust, but debt dynamics have become more difficult. The primary balance is projected to decline from 1.2 percent of GDP in FY2022 to 0.8 percent in FY2023 due to lower nontax revenues and grants, and higher expenditure on goods and services. Going forward, the primary balance is projected to increase to 1.0 percent of GDP from FY2024 onwards as capital expenditure moderates. However, the overall fiscal deficit is projected to rise from 0.6 percent of GDP in FY2022 to 1.4 percent in FY2023-25 due to higher interest payments on external debt. Public debt is projected to decline more slowly going forward given the projected moderation in growth and still high global interest rates, remaining above 50 percent of GDP over the next decade.

The financial soundness indicators strengthened in 2023 but remain weaker than before the pandemic. Between 2022 and 2023, the domestic banks' regulatory capital rose from 15.1 percent of risk weighted assets to 16.1 percent; nonperforming loans fell from 6.9 percent of total loans to 5.2 percent; and returns on assets rose from 0.3 percent to 1.5 percent. However, still high nonperforming loans, low capital buffers, and tight liquidity in some banks relative to the pre pandemic period are constraining private sector credit growth, which is likely to limit investment and real GDP growth going forward.

There are important risks to the outlook. While the risk of a sharp slowdown in the United States-Belize's main tourism source market-has receded, the risk of higher global food and fuel prices due to armed conflicts in Ukraine and the Middle East remains elevated, which could increase Belize's inflation and food insecurity. Global interest rates could stay high for longer, complicating debt dynamics despite the authorities' efforts to secure concessional financing. Belize remains vulnerable to climate-related disasters, which can cause severe damages to the agriculture, energy, and tourism sectors. An economic slowdown could also exacerbate existing vulnerabilities in the banking sector.

Policy Priorities

Belize's key policy priorities include reducing public debt to 50 percent of GDP by FY2030 by raising the primary fiscal balance to 2.0 percent of GDP from FY2025 onwards; increasing priority spending on logistics, utilities and energy infrastructure, targeted social programs, and crime prevention, financed with additional revenues and expenditure reprioritization; implementing structural reforms to boost growth and make it more inclusive and resilient to natural disasters; and remaining vigilant to financial stability risks.

1. Fiscal Policy

The authorities should capitalize on the large reduction in public debt achieved since 2020 and target a reduction of public debt to 50 percent of GDP by 2030. This target is in line with the debt level in emerging market economies with investment grade sovereign credit ratings and it would ensure that public debt stays below the 70 percent of GDP target in the authorities' 2021 Medium-term Recovery Plan with 95 percent probability given historical shocks. This requires implementing 1 percent of GDP of fiscal consolidation over two years to increase the primary balance to 2 percent of GDP from FY2025 onwards. Anchoring this plan in a medium-term fiscal strategy with clear targets and measures to achieve them and preparing the groundwork for the adoption of a well-designed Fiscal Responsibility Law (FRL) with specific fiscal rules would enhance its credibility.

Expanding spending in infrastructure, targeted social programs, and crime prevention would help mitigate the adverse effects of fiscal consolidation on vulnerable households, while boosting growth and making it more inclusive and resilient to climate shocks. This includes:

• Increasing infrastructure spending in logistics, utilities, and energy by 0.8 percent of GDP from FY2025 onwards to enhance road connectivity, improve the water and sewer systems, expand renewable energy generation and storage, build social housing, and make infrastructure more resilient to raising sea levels and natural disasters. These efforts also require strengthening public investment management by enhancing and harmonizing public investment strategies with sound costing and performance frameworks to guide future decisions; revising appraisal and selection processes and methods; strengthening oversight of major risks and coordination between public entities; and improving the follow-up and recording of existing liabilities and guarantees. Public Private Partnerships can help further expand and maintain infrastructure.
• Expanding targeted transfers to protect vulnerable households against food insecurity by 0.3 percent of GDP from FY2025 onwards. These transfers should be temporary and require the beneficiaries to take training and seek employment. The latest census can help target social spending better. These transfers should be also accompanied by an awareness campaign on food prices across retailers to enable more informed consumer selection.
• Introducing 0.2 percent of GDP in subsidies for childcare, after-school programs, and training for vulnerable women from FY2025 onwards to raise female labor force participation, which stood at 45.2 percent in 2023, well below the 71.5 percent for males.
• Raising spending to prevent and address crime by 0.1 percent of GDP starting in FY2025 to enhance the capacity of existing personnel and purchase equipment.

The recommended increase in the primary balance and the expansion in priority spending should be financed by revenue mobilization and expenditure reprioritization. Belize has space to increase revenue by broadening the tax base, raising excise taxes, rebalancing taxes on manufacturing to level the playing field, and strengthening revenue administration. On the expenditure side, reforming the Pension Plan for Public Officials (PPPO) could free up resources, depending on the depth and timing of the reforms. In particular,

• Tax policy measures could raise 2.0 percent of GDP in revenue by FY2025. The General Sales Tax (GST) has several items taxed at a zero rate, including non-prescription drugs, processed foods, utilities, appliances, household items, business inputs, and government purchases. Taxing some non-first necessity items at the 12.5 percent GST rate could raise 1.6 percent of GDP in revenue, while the expansion of targeted transfers would mitigate the impact on food insecurity. Standardizing personal income tax exemption thresholds could raise 0.2 percent of GDP, while raising excise taxes on fuel and fees on vehicle registrations and driver licenses could also raise 0.2 percent of GDP.
• Strengthening revenue administration could raise another 0.2 percent of GDP in revenue. This would include (i) creating a unified tax department to enhance efficiency and reduce costs, incorporating the collection of stamp duties and land taxes in the Belize Tax Service Department (BTSD), (ii) increasing tax arrears collection by improving the accuracy of tax accounts and developing enhanced standard operating procedures for arrears collection, (iii) ensuring greater autonomy on HR issues for BTSD, (iv) implementing a risk-based audit case selection, and (v) enacting the draft customs law.
• Reforming the PPPO could lower government spending by 0.1 percent of GDP over two years and cut the PPPO's long-run deficit by two-thirds. This includes gradually introducing a contribution rate of 10 percent; raising the retirement age from 55 to 65; and reducing the replacement rate from 67.5 percent to 50 percent. The sooner these reforms take place, the more gradual they can be.
• The government should also continue its successful campaign of securing concessional external financing to keep the interest bill at a manageable level.

The government should also have contingency plans in case public debt does not decline as expected. Adverse shocks may increase public debt, while some measures discussed above may prove difficult to implement. In this context, it will be important to have contingency measures that could be implemented promptly if public debt does not fall as expected, including taxing a larger share of zero-rated items at the 12.5 percent GST rate, raising the GST rate, and reducing nonpriority expenditure.

Further improvements to Public Financial Management systems and procedures are needed. Areas to strengthen include multi-year budget preparations, fiscal risk assessment, public investment management, coverage of government accounts, accounting and fiscal reporting, and internal audit. Progress in these areas would facilitate future implementation of an FRL with explicit fiscal rules to strengthen fiscal discipline and enhance the credibility of fiscal policy. Publishing procurement contracts and beneficial ownership information of awardees would ensure transparency and accountability.

2. Structural Reforms and Climate Change

Real GDP growth is projected to remain subdued over the medium term. Growth is projected at 2.5 percent over the medium term, just above population growth (2 percent). Previous studies have identified constraints to growth in Belize in the period before the pandemic, including risks to fiscal and debt sustainability, human capital deficiencies, crime, high costs of finance, infrastructure gaps, and natural disasters. Fiscal and debt sustainability risks have receded since then, but other factors are still at play and will likely constrain growth going forward. Raising medium term growth will require addressing these factors to boost physical and human capital.

Enhancing female labor force participation and the quality of education would boost employment. At 26.3 percentage points, Belize had one of the largest gaps in labor force participation rates between males and females in the region in 2023. Closing this gap could increase real GDP by over 20 percent in the long run. To address this issue, the authorities are piloting a subsidized daycare and training program in the Cayo district. Further expanding subsidized childcare and after-school programs as well as training for vulnerable households can significantly expand labor force participation, employment, and output over the long term. Enhancing the quality of education is another priority. Belize spends more on education than its peers and has high primary school enrollment rates. However, secondary school enrollment rates and educational outcomes could be improved. The authorities have recently increased the mandatory school age from 14 to 16; are eliminating copayments for vulnerable households to improve high school attendance; and are working with the Millennium Challenge Corporation on a project to train teachers and enhance the quality of education. Additional priorities to improve educational outcomes include expanding conditional cash transfers to further promote school attendance, improving schools' curriculums, retraining teachers, and expanding technical and "soft skill" vocational training programs.

Reducing crime would boost growth. Belize had the fourth largest homicide rate in Latin America and the Caribbean in 2016-19, about 60 percent over what could be expected by the country's GDP per capita. Recent efforts from the authorities in deterring crime have reduced homicide rates from 37.2 per 100,000 people in 2016-19 to 31.2 in 2021 and 21.2 in 2023. Further reducing crime in Belize to the Caribbean average could increase annual real GDP growth between 0.04 and 0.3 percent. Key policy priorities include enhancing the capacity of existing personnel, using cutting-edge technology to prevent and address crime, and expanding social and educational programs that support the youth at risk.

Easing access to affordable credit for micro, small and medium size enterprises (MSMEs) would boost investment. Lending rates have declined in the last 20 years but remain high. This reflects lack of competition and high operational costs in the banking system due to low population density and borrower riskiness, many of which are MSMEs. The authorities are incentivizing the formalization of MSMEs by providing tax incentives. Helping MSMEs prepare business plans and setting up a credit bureau and a collateral registry would also improve their access to credit.

Strengthening resilience to climate change and related disasters would reduce output volatility and boost growth. Belize is highly vulnerable to climate change and related disasters, particularly in the agriculture, energy, and tourism sectors. The authorities are enhancing resilience to climate change and natural disasters through investments in climate resilient crops and infrastructure. The main priority going forward is to implement a Disaster Resilience Strategy that focuses on improving structural, financial, and post-disaster resilience and is based on a multi-year macro-fiscal framework that incorporates climate change and related disasters. This would also improve access to climate finance. The authorities are also making efforts to reduce greenhouse gas emission by protecting the marine environment in line with the commitments under the blue loan, investing in renewable energy generation, and electrifying public transportation. However, significant financing gaps for mitigation initiatives remain.

3. Monetary and Financial Policies

Increasing the level of international reserves would strengthen the currency peg. International reserves are projected to remain above three months of imports and short-term external debt, but below the IMF's ARA metric.  Additional pressures on the level of reserves are also likely from 2032 onwards, when the repayment of the blue loan starts. Increasing the level of international reserves requires implementing additional fiscal consolidation and growth-enhancing structural reforms, as well as gradually reducing government financing by the Central Bank.

Gradually reducing central bank financing of the government would reduce excess liquidity and help develop the local capital market. The central bank holds more than half of the government's domestic public debt. Gradually reducing these holdings would give more investment opportunities to banks and the social security fund and reduce excess liquidity in the financial sector. While developing the domestic capital market will require a careful roadmap of structural reforms, introducing a market-based auction for Treasury Notes in conjunction with outreach to domestic investors to explain the government's plans for fiscal policy and the low risk of domestic currency denominated government securities would provide price signals across different maturities, help develop a market-oriented government securities yield curve and provide a benchmark for other public and private sector issued domestic currency denominated securities. This may raise domestic interest rates and lower incentives for capital outflows, allowing for a gradual removal of capital controls. The adverse impact of higher domestic interest rates on public finances would be mitigated by fiscal consolidation.

The Central Bank must remain vigilant to financial stability risks. Prompt actions by the Central Bank, including keeping vulnerable institutions under enhanced supervision and requesting preemptive recapitalizations, have helped reduce financial stability risks. However, vulnerabilities in some systemic institutions remain. The Central Bank should keep these institutions under enhanced supervision and request pre-emptive actions when necessary. The Central Bank also has appropriate tools in case it needs to intervene, including the provision of liquidity, the imposition of limits on the distribution of dividends, and an adequate bank resolution framework.