How to Fix the Belize Economy

By Richard S. Harrison, BSc Pharm, MBA

Published January, 2013

I. CURRENT STATUS

Belize is 31 years into Political Independence. It finds itself in a position where unemployment is over 18%, with an even higher unemployment among the young population….poverty is over 40%, as more and more the middle-class is being wiped out….GDP growth is below the Latin American average of 3-4% per annum….the weekly newspapers largest earnings from adverts come from notices selling off people’s hard-earned assets….many of the largest investors have gone into receivership, have closed down operations, or have been sold off at cents on the dollar to local and foreign sharks….a large percentage of working Belizeans are living from paycheck to paycheck, taking short-term loans at scalping interest rates from the many loan-shark services that have sprung up all over Belice….the municipal and central governments are having to take draconian measures to collect their tax revenues, including threat of jail time for hard working citizens….the Government of Belize can’t find the money to pay its debts and running all over the place to beg our foreign friends for debt forgiveness, lower interest rates and extended terms of payment….its budget hinges on life-support from Taiwan….the monopoly electricity distribution company has to resort to large debenture issues at relatively high interest rates to keep its operations going, while raising rates by almost 20% to pay for the expensive debenture credit ….the PM is running with palms open to beg Mexico for concessionary rates for its supply of electricity….the families take home less and less groceries every week, as the price of basic goods have been rising at an unprecedented pace, while real-income falls….the country broke its all-time record for violent crime in 2012, and the beginning of 2013 looks like it will be worse.

The bright spots in the economy are in primary commercial agriculture, tourism and crude petroleum exports. Indeed, had crude petroleum not been found in 2005, Belize would have already defaulted with all the consequences that come along with that….crude petroleum by 2010 accounted for over 30% of Belize’s export earnings….non-petroleum exports fell below their 2000 level.

II. EXPLAINING THE BRIGHT SPOTS

The crude petroleum industry, although it has been seeing a decline in production for the past two years, has been the life saver for the Belize macro-economy since 2006. This stroke of luck is a gift from the Almighty, which we are squandering with a formula for profit sharing that is lop-sided in the interest of the concession holders, and against the people of Belize, including the land owners. The only investors in this sector who has had luck so far, have paid for their investments many times over. With a favorable profit-sharing formula, supported by relatively high international market prices for crude….of course these investments will float high.

The tourism industry already accounts for over 30% of the Belize economy….they have enjoyed relative success….because our country has taken on tourism development loans in the hundreds of millions to develop infrastructure specifically for the tourism product….these loans are being shouldered by the general population. At the same time…they negotiated that their principal tax, the Hotel Tax, is funneled directly back into their industry via the BTB, to invest in marketing their product, to train and develop their employees, to administer their lobby and industry advocates. When you don’t have to develop your own infrastructure, most of your marketing is covered by getting back your taxes…your human resource development is largely subsidized…..of course you will float high.

The commercial agriculture primary sector includes the citrus, banana, sugar, rice, corn, beans, poultry, beef, farmed-shrimps and papaya investments. Most of the inputs for these industries are exempt from taxes….and most of the outputs from these industries are exempt or excepted from paying the GST consumption tax. At the same time, most of these industries enjoy monopoly status on the domestic market, which allows them to price very profitably. If you don’t pay taxes, neither on inputs nor on outputs, as does the other sectors of the economy….of course you will float high.

These three sectors are doing relatively well, because of their favorable arrangements in the economy. They carry less than their fair share of the burden, while the sectors that are not doing so well are the Quasimotos. The sharing of burden needs to be balanced, to be fair to all.

III. THE JOBS SCENARIO

Belize has an estimated 160,000 employable work force. With over 18% unemployment, Belize needs to create around 15,000 new jobs to ease unemployment to around 10%, over the next four years.

Crude petroleum, with all its export earnings, only provide for around 300 direct jobs….other transient jobs are provided in surveying, road building, water hauling, etc…..however the full time jobs created are minimal. If we were to get another stroke of luck in this sector, with new finds, we cannot realistically expect another 300 direct jobs over the next four years.

Tourism investments are operating at under 50% capacity……hence they can double their business without another dollar invested….with very minimal new jobs created in the aggregate. If they grow at 6% per annum, they will take another 5 years to fill the current carrying capacity. As tourism in Belize is still very seasonal, many of the available jobs are part-time, with many workers floating all over the country and paying rents, rather than settling in one place and investing in families and homes. Cruise tourism, which already accounts for a major and growing portion of tourism receipts, is very fragile….and can be acutely affected by crime, natural disasters and other risks that can create acute shocks on our economy and jobs.

We cannot realistically expect this sector to yield more than 2,000 new jobs over the next four years.

Commercial agriculture investments in the traditional sector of sugar, citrus and banana are trying to stay afloat….even with new investments in sugar, this sector cannot be expected to deliver more than 300 new direct jobs over the next four years. Investments in rice, corn, beans and beef are mostly mechanized with very low labor requirements, and cannot be expected to yield another 500 new direct jobs over the next four years, even if they grow at 10% per annum. The labor intensive papaya and shrimp industries are not expected to ramp up investments in Belize, mostly due to the poor investment climate, and cannot be expected to yield another 300 direct new jobs over the next four years.

The financial services sector in banking, credit unions and insurance can be expected to consolidate for greater efficiency over the next four years, and should not be expected to yield any new jobs over the next four years.

If the history of ICT in Belize can be used to predict what will happen over the next four years, even if miracles happen, that sector should not be expected to yield more than 2000 direct new jobs over the next four years.

Hence the best performers in Belize, given the current formula for the economy, can at maximum provide only around 5,000 of the 15,000 new jobs required.

IV. THE GOLDEN EGG
The sector which has the potential to generate the most new jobs in Belize, is the secondary industrial sector. This is the sector that transforms primary materials into value-added products for import-substitution on the domestic market and for export markets. This sector has seen many set backs with changes in government policy and laws that favor imports over domestic production. The industries in this sector are either in peril of closing their doors, or hanging on shoe-string budgets trying to stay afloat. The country should expect to continue to lose jobs in this sector, as long as policies and laws are not changed to favor production over importation. This is the sector that can yield the extra 10,000 new jobs that are required in the economy.

V. GENERAL STRATEGIES GOING FORWARD

i. To restructure the economy to make it more competitive for ALL production of goods and services to be profitable. This means bringing the costs of as many factors of production as possible, in line with costs in competitive countries. Particular attention should be given to bringing the pump price for fuel and electricity to the levels in the USA and Mexico, which are our two principal trading partners with which we maintain very large trade deficits.

ii. To push forward with the shift towards consumption taxes, and away from taxes on income. To meet our national requirements, a 10% GST across the board can suffice.

iii. To preserve collateral value for investments, by stopping the hemorrhage of capital assets values resulting from large scale bank defaults, foreclosures and distress auction sales that are based on laws drafted for a bustling economy. We need to acknowledge our depressed economy, and draft new financing conditions that allow for more people to keep what they have worked hard for….by requiring the financing institutions to do the same things for its clients….that the GOB is actively seeking from its creditors…..refinancing based on discounts on principal, longer terms and lower interest rates….especially for those customers that have paid their residential and business loans successfully for over 5 years.

iv. To fulfill what we pray for, an increase of industry….shift the economy towards a production-consumption economy and away from the existing importation-consumption economy. The Customs Tariff Law and other laws that currently give preference to imported finished products needs to be overhauled, to give preference for domestic production and export-oriented production.

v. To fulfill our constitution as describe in the preamble: recognise that men and institutions remain free only when freedom is founded upon respect for moral and spiritual values and upon the rule of law; require policies of state which protect and safeguard the unity, freedom, sovereignty and territorial integrity of Belize; which eliminate economic and social privilege and disparity among the citizens of Belize whether by race, ethnicity, colour, creed, disability or sex; which ensures gender equality; which protect the rights and opinions of the individual to life, liberty, basic education, basic health, the right to vote in elections, the right to work and the pursuit of happiness; which protect the identity of one individual, dignity and social and cultural values of Belizeans, including Belize’s indigenous peoples; which preserve the right of the individual to the ownership of private property and the right to operate private businesses; which prohibit the exploitation of man by man or by the state; which ensure a just system of social security and welfare; which protect the environment; which promote international peace, security and co-operation among nations, the establishment of a just and equitable international economic and social order in the world with respect for international law and treaty obligations in the dealings among nations….by creating a level playing field so that ALL Belizeans have a fair chance at achieving their dreams without fear or favor, build back the middle class by reducing taxes on personal income and broadening the base, by creating a tighter jobs market with lower unemployment so that workers can exercise more power in the labor market, by refinancing all workers home mortgages at 8% p.a. over 30 years via a Workers Bank of Belize, by reducing the cost of non-luxury bus transport, and by providing more direct budgetary support for secondary and tertiary education, culture and sports, and acute health care.

vi. To improve the efficiency of government services by eliminating quasi-government arrangements for services such as BAHA, Environment, Building Authority, Border Management, which only serve to extract more funds from businesses….like taxing on top of taxes for services which should be included in the general government budget. Government supported statutory bodies should not be allowed to charge for the services they provide. These only create more opportunities for graft and corruption.

vii. To fulfill our constitution as described in the preamble: respect the principles of social justice and therefore believe that the operation of the economic system must result in the material resources of the community being so distributed as to subserve the common good, that there should be adequate means of livelihood for all, that labour should not be exploited or forced by economic necessity to operate in inhumane conditions but that there should be opportunity for advancement on the basis of recognition of merit, ability and integrity, that equal protection should be given to children regardless of their social status, and that a just system should be ensured to provide for education and health on the basis of equality. Our ambition should be to create a low tax/high productivity balanced environment that will encourage large amounts of successful domestic and foreign investments within the framework described above. Any tax that is good for one, should be good for the other….and correct all the imbalances that put more burden on some, and less on others.

VI. SPECIFIC ACTIONS RECOMMENDED AND EXPECTED RESULTS

i. Lower GST from 12.5% to 10%, and charge across the board on all goods and services traded. GST is currently charged only on 35% of consumption, and total intake is around $270 million. This change will raise GST intake to around $600 million if 80% capture rate is achieved….and a lower rate charged across the board will balance the weight on the shoulder of everyone. This will increase GOB revenue from GST by $330 million.

ii. Remove all government revenues from fuel. GOB currently raises around $80 million from adding into the pump price. Only GST of 10% should be charged on fuel. The pump price of diesel should be around $6.50/gallon and premium around $7.00/gallon. A $20 million fund should be used to support this price, which should be pegged to the US agro-industrial belt average price per gallon, the same way how our dollar is pegged to the US dollar.

iii. Taxes on personal income over $18,000/annum should be fixed at 10%, with provisions to deduct some home construction and home improvement investments. A forced-savings of 5% should be placed on income earners below $18,000/annum to pool resources in the Workers Bank of Belize, owned by the contributing Belizean workers and used solely for the purpose of low and middle-income home construction and home improvement financing. Current taxes on personal income currently net GOB revenues of around $20 million per annum, charging 25% on income above $25,000/annum. This reduction in rate and broadening of the personal income tax base would reduce GOB income by around $10 million per annum. This is in line with growing and strengthening the purchasing power of the lower and middle-income families, especially in terms of their savings, investment and consumption potential.

iv. Business Tax should be reduced to 1% of sales for all businesses with sales over $80,000 per annum. Only this means of business tax reporting and assessment will be allowed, with no tax on declared profits allowed, which only serves to open loopholes for creative accounting. All entities doing business in Belize will pay this 1% rate, no exception nor exemption. There will be no export taxes. The current rate of business tax is 1.75%….with varying rates for some sectors, which creates unfair imbalances. By lowering this rate to 1% and expanding the scope of contributors, GOB revenues will be reduced by around $20 million per annum. Export oriented investments that cannot pay 1% of revenues towards the general good of the people should not be encouraged, as they are the primary cause for pollution and environmental effects that places a burden on our countries development.

v. The Customs Tariff Law should be overhauled to create home-court advantage for Belize-based investments. The average rate of import duty is around 9%, with customs revenues estimated at around $130 million. The average rate needs to be increased to 15%, so that revenues from customs duties rise to around $200 million. Only inputs for production of goods and services should be at ZERO rate….all other items imported, and which are not in our scope of interest to manufacture, should be assessed from 5% to 20%. Items that directly compete with our production should be assessed based on the bound-rate schedules allowed by our treaties.

vi. A Road-Maintenance Contribution should be introduced, charging at the time of licensing, $200 for private vehicles and $400 for commercial vehicles. This will net around $15 million, which will be dedicated to building and maintaining road and street infrastructure.

vii. The Environmental Tax will remain at 2% charged on ALL imports, no exception nor exemption. This fund of $26 million will be distributed by proportion according to population to the town and city councils for keeping our communities clean, in accordance with the Environmental Tax Act and the laws stated purpose for which it was created.

viii. To provide $20 million/year to a Competitive Education Fund, which will be used to provide direct support for education at all levels, for students studying at home and abroad. This will be awarded based on performance, national interest and bond of service to Belize that cannot be waived for anyone under any circumstances. It should be biased towards the attainment of “useful knowledge” in the sciences, arts and humanities.

ix. To provide $20 million/year to a National Health Fund, which will be used to upgrade all our health facilities and technologies to drastically improve the national health service provision.

x. To provide $20 million/year to a National Security Fund, which will be used to drastically upgrade all our safety and security apparatus and organizations, to preserve our freedom of association and all our personal and social liberties.

xi. To provide $20 million/year to a National Sports and Culture Fund, which will be used to foment sporting and cultural facilities and activities in all our communities, with bias towards those activities that promote “national happiness”.

xii. These actions in aggregate will net GOB an increase of around $217 million per annum. This will allow for paying down our debt to bring it to around 40% of GDP within ten years. This will allow us to keep our dignity and integrity as a nation among free nations…without mortgaging the future generations.

This article was written by Richard Harrison, Belizean investor in production and services businesses in Belize. He holds a Masters in Business Administration degree from Lancaster University.

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