Outlook for Belize weak, IMF says

By BBN Staff: The International Monetary Fund (IMF), this morning, released a statement following its recent 2017 Article IV mission to Belize calling the country’s medium-term financial outlook “weak” and making several recommendations to GOB, including raising the General Sales Tax (GST) and implementing further fiscal consolidation measures.

The IMF’s Article IV consultation took place from June 6-15. During their visit, IMF officials met with Prime Minister Dean Barrow;  Carla Barnett, Minister of State at the Ministry of Finance; Joy Grant, Governor of the Central Bank of Belize; Joseph Waight, Financial Secretary, and other senior government officials, representatives of the opposition, private sector, and civil society.

“The economy is expected to return to positive growth in 2017, but the medium term outlook remains weak. Public debt remains elevated, despite the cash flow relief and NPV gain from the recent debt restructuring agreement with private external bondholders; and the current account deficit is sizable. While the tightening of the fiscal stance in the context of the 2017-18 budget is welcome, in the view of the team, further fiscal consolidation is necessary to mitigate risks and put public debt on a clear downward path, and to facilitate external adjustment. Withdrawal of Correspondent Banking Relationships (CBRs) and low capital buffers in a major bank remain key risks to financial stability,” the IMF said.

According to the IMF, output is estimated to have contracted by 0.8 percent in 2016, reflecting a continued slowdown in oil production and setbacks in agriculture, including destruction of crops by Hurricane Earl. The current account deficit decreased slightly to an estimated 9.4 percent of GDP in 2016, while unemployment increased to 11.1 percent in September 2016, from 10.2 percent a year earlier. The external deficit reduced December 2016 gross reserves to US$377 million, or about 4 months of import coverage, the report said.

Growth is projected to average just under 2 percent in the medium-term, reflecting declining productivity, competitiveness, public investment, and oil output. The current account deficit is projected to slowly improve due to a gradual recovery in agriculture and growth in tourism, but would remain significant, reflecting structural weaknesses in the export sector. International reserves are projected to decline to 2.5 months of imports (US$250 M) over the medium term in the baseline scenario, and any negative shocks could push them below that level, the report added. The benchmark for exchange rate sustainability is minimum 3 months of import merchandise. Falling below the benchmark could result in a devaluation.

The IMF also pointed to outstanding arbitration settlements. “A number of contested legacy claims, for a total of about US$100 million or so (or 5½ percent of GDP), could lead to large public and external financing needs,” the IMF said.

Additional loss of corresponding banking relations (CBRs) is possible and could further weaken banks, it added. These vulnerabilities could be exacerbated by external risks, including a loss of PetroCaribe financing, a further decline in sugar prices after the EU sugar reform takes full effect in 2017, a slower than expected recovery in agriculture and the loss of tourism market share to Cuba. On the upside, a successful implementation of the Growth and Sustainable Development Strategy (GSDS) could help mitigate the above-mentioned risks, the IMF noted.

“While the recent restructuring of debt to private external bondholders provides meaningful cash flow relief, and the agreed fiscal tightening is a step in the right direction, the agreement is just one element of a more comprehensive package needed to lift Belize out of high debt and low growth,” the IMF said.

A primary surplus of 4-5 percent of GDP would need to be maintained over the medium term to put debt on a path towards 60 percent of GDP by 2025, the report said. On the revenue side, reform options include broadening the base of the General Sales Tax (by removing zero-rated items and streamlining exemptions), and/or increasing the GST rate from 12.5 percent to the regional average of 15 percent, each of which could yield about 1 percentage point of GDP. On the expenditure side, a civil service reform could help stabilize the number of public employees and contain the wage bill, the IMF recommended.

The IMF also made other recommendations including keeping the financial system under tight supervision, improving the legal framework for AML/CTF laws, and implementing electronic tax filing systems.