Unsustainable
IMF warns debt reduction path in Belize not enough
Belize is in the throes of recovering from the pandemic-induced economic downturn and is taking steps to get its debt back on a sustainable path, but the IMF warns that the target may not be met if the country’s authorities do not do more to pay down the debt and cut expenditure.<strong id="strong-1">.</strong>

BELIZE has reduce its public debt significantly in the past year, but the International Monetary Fund (IMF) said it still views the country’s liabilities as “unsustainable in the absence of additional measures.”

The country’s public debt declined from 133 per cent of gross domestic product (GDP) in 2020 to 111 per cent of GDP in 2021 due to the strong economic recovery, the smaller fiscal deficit, and the debt for marine protection swap, and is projected to fall to 85 per cent of GDP by 2032 in line with the continued primary surpluses, the IMF noted in its latest Article IV Consultation on Belize which was released earlier this week.

The fund also outlined that based on its assessment, Belize’s gross financing needs (GFN) are also projected to fall from 13.2 per cent of GDP in 2021 to below 10 per cent during 2022-32.

“However, staff would continue to assess Belize’s public debt as unsustainable in the absence of additional measures as it would remain above the 70 per cent of GDP threshold for sustainability over the next 10 years,” the fund said. It added that Belize’s ability to continue reducing its debt remains highly vulnerable to shocks to growth, interest rates, and the fiscal position.

What has Belize done so far about its debt?

The novel coronavirus pandemic has had a severe impact on Belize as it has had on most countries around the world. In Belize, the pandemic led to a 71 per cent drop in tourist arrivals and a 16.7 per cent decline in real GDP in 2020. The resulting fall in revenues and rise in pandemic-related expenditure widened the fiscal deficit to 10.3 per cent of GDP in its 2020 fiscal year and increased public debt to 133 per cent of GDP in 2020, a level that was assessed as unsustainable during the IMF’s 2021 Article IV consultation.

To address this situation, the new government, in office since November 2020, presented a Medium-Term Recovery Plan (MTRP) that seeks to lower public debt to 85 per cent of GDP in 2025 and 70 per cent in 2030 through the implementation of fiscal consolidation, growth-enhancing structural reforms, and debt restructuring. So far, the country has made encouraging progress towards restoring its debt sustainability.

In line with the MTRP, the Government introduced large fiscal consolidation measures in 2021, including a three per cent of GDP reduction in non-interest current expenditure, led by a 10 per cent cut in public sector wages, subsidies and current transfers (such as cash payments to households), and a 2.4 per cent of GDP cut to capital expenditure.

The Government also completed a model debt for marine protection swap with The Nature Conservancy (TNC), which reduced public debt by 12 per cent of GDP. Under this pathbreaking debt swap, a subsidiary of TNC lent funds to Belize to buy back the superbond (external debt with private creditors amounting to US$553 million or 30 per cent of GDP) at $0.55 per dollar. In exchange, Belize committed to spend US$4.2 million per year on marine conservation until 2041 and almost double its Biodiversity Protection Zones (coral reefs, mangroves, and fish spawning sites) from 16 per cent of ocean area to 30 per cent by 2026. It also established an endowment fund of US$23.5 million to fund marine conservation after 2041. These initiatives will also support the authorities’ efforts to strengthen resilience to natural disasters and climate change and reduce greenhouse gas emissions.

How is its economic recovery coming along?

Based on the data, economic activity in Belize is recovering strongly from the slump in 2020. The IMF in its assessment of Belize’s economy noted that real GDP expanded by 9.8 per cent in 2021 and is projected to grow by 5.7 per cent in 2022 and 3.4 per cent in 2023, led by the recovery of tourism. The expectation is that the war in Europe will not have a big impact on the country’s growth as most tourists to Belize are from the United States, though the IMF points out that tourism could be hurt by higher airfare and accommodation costs.

Still things are looking up in Belize. The unemployment rate declined from 13.7 per cent in 2020 to 10.2 per cent in 2021 and is projected to fall to 8.2 per cent in 2022. As for inflation, it increased sharply from 0.3 per cent in 2020 to 4.9 per cent in 2021 driven by higher global energy and food prices and is projected at 5.2 per cent in 2022 as the war in Ukraine and related economic sanctions keep global energy and food prices elevated, which is partly mitigated by the currency peg to the US dollar (BZ$2 = US$1), the recent caps on diesel and regular gasoline prices to be achieved by adjusting the specific taxes on these fuels, and subsidies to public transportation to limit the increase in tariffs.

What risks could derail the outlook?

Like everything, there are risks to the outlook and they are substantial and tilted to the downside A key risk is an intensification of the pandemic especially with the emergence of new vaccine resistant variants, which could derail the recovery of tourism and hurt activity in contact intensive sectors in Belize. On the upside, further vaccination may strengthen immunity and growth. About 52 per cent of Belize’s population is fully vaccinated (a fifth of which has received a booster) and 6.5 per cent has received one dose. The authorities aim to vaccinate 70 per cent of the population, but vaccination of children younger than 12 has not yet been approved and vaccine hesitancy remains a problem.

Another key risk is the de-anchoring of US inflation expectations, which could tighten global financial conditions and increase the cost of external financing for Belize, although the risk of capital outflows is mitigated by the limited access to the external capital markets. Natural disasters are also a key risk given Belize’s high vulnerability to weather shocks and climate change. Inflation could rise further because of second rounds effects and higher global energy and food prices stemming from the war in Ukraine and related economic sanctions.

WHAT RISKS COULD DERAIL THE OUTLOOK?

For one, the Belize is being encouraged to capitalise on the recent decline in the public dent and continue efforts to restore debt sustainability. The recommendation from the IMF is for the country to be more ambitious by targeting a reduction in public debt to 60 per cent of GDP by 2031. Recall the country’s current plan is to get debt down to 70 per cent of GDP by 2030.

To achieve the new target, the IMF recommends a gradual raising of the primary fiscal balance to 2.5 per cent of GDP by 2025 and keeping it at 2 per cent of GDP afterwards. In essence, it means paying down more on the debt each year to reduce it quickly. The fund argues that this can be achieved if Belize preserves the fiscal savings achieved last year and to ensure that the measures adopted to mitigate the rise in fuel prices are temporary, which would keep the primary balance at about 0.6 per cent of GDP over the medium term. Belizean authorities are also being advised of the need to cut public expenditure over three years.

On the revenue side, the IMF recommends broadening the tax base and strengthening tax administration which it calculates could raise revenue by two per cent of GDP over three years. It also recommends applying the General Sales Tax (GST) on a number of items — processed foods, non-prescription drugs, utilities, appliances, household items,

business inputs, and government purchases — at the standard 12.5 per cent, instead of keeping them zero-rated with projections that could raise 1.5 per cent of GDP in revenue by 2025. The country was also urged to standardising the Personal Income Tax exemption thresholds at BZ$20,000 which could add 0.2 of GDP in revenue, while raising excise taxes and fees on vehicle registrations and driver licences could add 0.1 per cent of GDP.

The country is also being pressed to prepare a menu of contingency measures that could be implemented if public debt does not fall as expected, including raising the GST rate, broadening the GST base and cutting non-priority expenditure beyond the recommendations above, taxing property and capital gains, and restructuring public debt. On the upside, the required fiscal adjustment could be smaller if the economy grows faster than anticipated.

Tourists snorkelling off the coast of Belize. The country last year completed a model debt for marine protection swap under which The Nature Conservatory loaned it funds to buy back US$533-m worth of bonds at $0.55 on the dollar in exchange for the country spending US$4.2-m each year to protect its marine environment.

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