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Belize – Analysis of National Budget 2018

Posted: Tuesday, March 13, 2018. 9:45 am CST.

Richard Harrison: On Friday, March 9, the Prime Minister and Minister of Finance, Hon. Dean Barrow, presented the forecast estimates of the national budget for 2018-19….which he dubbed “Maintaining Steadiness; Consolidating Stability; Advancing Growth“. This is his tenth budget presentation since taking power in 2008.

His last budget presented in March 2017 was dubbed “Bouncing Back-A Bold Belizean Recovery”.

There are two principal observations to take away from the numbers presented for the past year:

1. The GOB overestimated revenues and grants by $80.2 million…which forced them to slash expenses by $36.4 million, almost half of which came from cutting capital II and capital III budgets….resulting in a gap of $43.8 million….far from bouncing back or bold recovery….they should stop giving these meaningless dubs to the budgets.

2. The primary surplus declared of 1.82% of GDP is less than the 2% required annually by bond-holders for the period 2018-20, which is a sign that GOB may be incapable of meeting the conditions….and may trigger the consequences outlined in the last refinancing agreement by the reading of next years budget.

“The agreement with the private external bondholders is anchored by fiscal adjustment. The Government has committed to bondholders to tighten the fiscal stance by 3 percentage points in Fiscal Year 2017/18 and to maintain a primary surplus of 2 percent of GDP for the subsequent 3 years. In addition, Belize would be required to submit a Report to the National Assembly if it fails to meet the primary surplus targets. We have also agreed to request technical assistance (TA) from the International Monetary Fund (IMF) to: i) identify the reasons for the missed primary surplus targets; and ii) recommend remedial measures. Belize has committed to publish the findings of any such IMF TA as well as the Annual Article IV Consultation Reports. Additionally, if the primary surplus target is missed, interest payments on the restructured bond will become due quarterly rather than semi-annually (for the subsequent 12 months that the target is missed).” ~ PM Barrow

Of great significance is that the three principal sources of revenues for GOB actually fell far below expectations….Taxes on Income and Profits (mostly the Business Tax) forecast at $270.8m will come in at $267m…Taxes on Goods and Services (mostly the General Sales Tax) estimated at $551.9m will come in at $534.8m…..and Taxes on International Trade and Transactions (Customs revenue on imports) estimated at $204m will come in at $160.6m. These reflect a general slowing down of the economy.

PM Barrow….you cannot take blood out of stone, Sir.

“Mr. Speaker, this projected outturn does not include the sum of $208 million paid as the final installment of the compensation for the acquisition of the BTL shares. In keeping with the guidelines in the IMF Government Financial Statistics reporting, these were properly posted as a Below-the-Line transaction and were not factored into the computations of the Primary and Overall Balances” ~ PM Barrow’s explanation for accounting of BTL related compensation…so does this mean that the call for a vote in the House of Representatives on whether to pay or not to pay was just a puppy show….even after paying $18.5 million in additional interest since the ruling in August 2016. Does this mean that we will hear no more about payments for BTL? And who are those private “Belizeans” that are buying the large amount of shares that the government is selling for BTL?

It is left to see whether bond holders will accept this “below the line” explanation, because if this were accounted for above the line the target of primary surplus for this fiscal year would not have been met.

The GOB proposes to increase taxation estimated at an additional $20.5 million from:

1. Charging GST of 12.5% on internet data

2. Eliminating subsidies for certain agricultural activities

3. Making GOB contracts, imports and purchases GST-rated instead of exempt

4. Applying GST of 12.5% to the operating expenses of Business Process Outsourcing companies

5. Adding excise tax to jet fuel and lubricating oils

6. Increasing the social fee charged on free zone trade on goods other than cigarettes, liquor and fuel from 2% to 3%.

7. Adding an unspecified social fee on inbound duty free merchandize at the PGIA.

These amount to under-the-belt blows to the telecommunications sector (especially to SMART), the BPO sector, the tourism sector, the agricultural sector, the free zones and airlines refuelling in Belize….but the lions share of this increase will come from Belizean tax payers, to whom most of these costs will be passed on….especially in the price of basic commodities such as rice, corn, beans, soybean, sorghum, beef, pork, chicken and eggs produced largely by the Mennonite community using mechanized farming.

The buds of the new industries of Belize are being plucked before they get a chance to bloom…..while no new industries are being created. The GOB should instead facilitate a more rapid expansion of the primary and secondary sectors, and push for a deal with Venezuela to pay our debts with food….at least in part.

The Fiscal Strategy Statement outlines the short-to-medium term tax strategy that the government plans to implement to stabilize and grow the economy. In broad terms, the GOB have finally agreed to implement, at least in part, what I have been suggesting for years….”The Government will make the tax system fairer by simplifying and broadening tax bases and eliminating exemptions”…..and “Structural reforms to make the economy more productive and competitive by removing trade barriers, monopolies and infrastructure bottlenecks. This includes creating a simpler and fairer tax system, and encouraging private credit.”

However, it is not only WHAT you do…but also HOW you do it…they plan to implement it in the wrong way….they are going for broader base of taxes first….but the elimination of taxes on fuel must come before that, to lower the cost of producing everything, BEFORE taxing it….otherwise there will be rapid escalation of prices and too high inflation in cost of living. This shows that the GOB financial and economic gurus do not know what they are doing and have no confidence in Belizeans….they are not ready to risk giving up the $90 million tax on fuel…without being sure that a broader base of tax will bring in excess of revenue over and above the investment needed to pay down the tax on fuel and give them the extra money they are looking for. The statement is not explicit….but a broader base of taxation, would have to be accompanied by lower rates, otherwise the economy will be put into a choke hold, worsening the already bad situation.

Not explicit in any of the statements, but with increasing evidence to point to, it would appear that one of the objectives of the GOB is to create a tax base that is increasingly non-Belizean… kind of like how the Arab states made all its tax revenues from oil and charged its citizens no taxes….last year they went after the departure tax, which is mostly paid by tourists…this year they are going after BPO’s, foreign airlines, free zone customers…in addition to Belizean taxpayers. The GOB needs to know that Belizeans want to pay their taxes…because this is what protects their right to make demands of government….just that the taxes should be fair and balanced across all shoulders, at rates that allow each tax payer to operate honestly and without the need for creative accounting and participation in corruption….that allow for optimal competitiveness and productivity in the economy to support increasing industry…and that raises the amount of taxes that the government needs to maintain a vibrant and sustainable macro-economy with low unemployment, low inflation and rising real incomes.

“The stable outlook balances the near-term improvement in the government’s ability to service its debt with the country’s still-high debt burden, vulnerability to external shocks, and monetary inflexibility. Failure to capitalize on the short-term fiscal benefits of the debt rescheduling over the next 12 months, combined with persistent low GDP growth, poor external liquidity, and high debt burden, could eventually weaken the government’s liquidity position, leading to downward pressure on the rating. On the other hand, a successful implementation of the fiscal measures, resulting in a consistent and significant debt reduction, and the Belizean institutions’ ability to promote higher GDP growth than in the recent past, as well as a higher local competiveness, could have a positive impact on the ratings over the long term.” ~ S&P, March 24, 2017.

The budget for 2018-19 is a far cry from ““Maintaining Steadiness; Consolidating Stability; Advancing Growth“….Belize is fast squandering the 2-year breathing space that the bond holders arranged for Belize at the last restructuring.

The Prime Minister and Minister of Finance should make a request to Taiwan to front end 4 years of budgetary support or $80 million, to pay down the most of the tax on fuel for a year…put that money into the hands of investors, consumers and savers which will serve like IV adrenaline in the economy….after which the GOB can broad base GST at 10%…as the first steps of a comprehensive fiscal reform strategy for optimal competitiveness and productivity….which are the only two ways to generate new wealth and GDP growth.

If he does that his government will have a hard time controlling the pace of growth of the economy….and overheating….instead of over cooling…will be our problem.

Because Belize is small….it can be ruined rapidly….but it can also be resuscitated rapidly if the damage is not too grave….and the damage would be much too grave if the consequences of not meeting the bond holders conditions are forced upon us.

2018-19 is a most critical year for Belize…

The views expressed in this article are those of the writer and not necessarily those of Breaking Belize News.

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


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