IMF says Belize revenue collection remains in line with budget targets

The Executive Board of the International Monetary Fund (IMF) concluded the Article IV Consultation with Belize. Real GDP growth reached 3.6 percent in 2014, up from 1.5 percent in 2013 and well above the five-year average of 2.9 percent. A rebound in agriculture, strong performances in tourism, electricity, construction and services offset the significant decline in oil-related activities. The fall in international oil and food prices pushed headline inflation (y/y) to -0.2 percent as of December 2014. Despite strong tourism receipts, falling exports and relatively strong imports widened the external current account deficit to 7.6 percent of GDP in 2014, up from 4.4 percent of GDP in 2013. PetroCaribe and other official disbursements continued to finance the current account deficit and help build international reserves (equivalent to 5 months of imports at end-December 2014).

The fiscal stance deteriorated significantly in FY 2014/15 (April-March). The primary fiscal balance recorded a deficit of 1.5 percent of GDP, down from a revised deficit of 0.2 percent of GDP in FY 2013/14 and well below the surplus of 1 percent of GDP envisaged in the FY 2014/15 budget.

Revenue collection remained in line with budget targets. Spending continued to grow well above budget targets. Financing of the fiscal deficit essentially came from a drawdown of PetroCaribe deposits and official external loans. Relatively strong GDP growth helped maintain public debt around 76 percent of GDP.

Private credit growth recovered and reached 4.7 percent in 2014, up from 3.5 percent in 2013, supported by strong real estate credit and loans to the sugar sector, while broad money grew by 7.9 percent. The banking system remained highly liquid. Non-performing loans (NPLs) declined to 15.7 percent at endDecember 2014, down from 17.6 percent at end-2013. The banking system's reported capital adequacy ratio (CAR) stayed above 21 percent. The termination of major correspondent banking relationships with Belizean banks has so far had a limited impact on the financial system and economic activity.

Growth over the short-to-medium term would hover around 2.5 percent, in line with the assessment made during the 2014 Article IV Consultation. Inflation would remain subdued owing to the exchange rate peg and moderate inflation in trading partners. However, the fiscal outlook could be worse due to excess spending. The primary fiscal balance would remain in deficit for a while as the political climate further exacerbates spending pressures and hinders revenue-enhancing reforms. Expansionary fiscal policies would increase imports in the context of modest growth of exports, widening the external current account deficit. International reserves could decline to uncomfortable levels, especially if compensation for the nationalized utilities is paid and repatriated.

IMF Executive Directors noted the recent improvement in economic activity, despite the significant deterioration in the fiscal stance and the widening external current account deficit. Belize's economic outlook is characterized by sluggish growth, weak fiscal stance, and external and financial sector vulnerabilities. They welcomed the settlement reached on one of the two nationalized companies but noted that significant contingent liabilities from these nationalizations remain, which could further raise the already elevated debt levels. Against this backdrop, Directors called for a concerted effort to reduce vulnerabilities, rebuild policy buffers, and accelerate medium-to-long term growth. Directors underscored the importance of prompt and credible fiscal efforts that would boost investor confidence and private investment. In this context, they urged the authorities to begin to progressively raise the primary balance to levels consistent with debt sustainability. This could be achieved by removing exemptions and zero-ratings from GST, building a stronger revenue administration that contains leakages, and limiting current spending, including through reform of the public officers' pension scheme.

Directors agreed that public sector reforms and stronger public financial management, especially internal controls, audits and procurement practices, would reduce low- quality spending and should not be delayed.

Directors welcomed the authorities new Growth and Sustainable Development Strategy (GSDS). In order to ensure credible implementation of the GSDS, Directors recommended that the authorities seek to tap into all available resources, domestic and external.

Domestic resources can be mobilized through enhanced domestic revenue collection and spending rationalization, which would create the fiscal space needed for greater investment in human capital. External resources can be mobilized through international partners and well-designed public private partnerships.