General — 30 August 2006 — by Adele Ramos-Daly

Released Tuesday, August 29, 2006, the report highlights that ?Belize?s economy has reached a critical juncture.?

The report says, ?The Government has taken commendable steps in the last year and a half to begin correcting these imbalances, including through substantial fiscal adjustment and monetary tightening.?

It notes, however, that despite these efforts, Belize is still vulnerable, and the existing vulnerabilities, the IMF says, ?need to be addressed quickly to avert the risk of an external payments crisis, protect the country?s currency peg, and set the stage for a durable recovery of growth and employment.?

The report points to a series of belt-tightening policies, such as cuts in capital expenditures and measures to augment revenue.

Belizeans experienced these adjustments as tax hikes; curtailment of utility expenses; the wage bill, including the increment freeze, and other forms of austerity measures.

?The Central Bank of Belize (CBB) also took additional steps to contain the expansion of money and credit by channeling Social Security deposits to the Central Bank and increasing the cash and liquid assets reserve requirements by one percentage point each on three occasions,? the IMF report said.

The IMF report goes on to say, however, that, ?These steps alone are not yet sufficient to place the economy on a sustainable path.?

It added that, ?While bilateral financing, better-than-expected exports, and foreign direct investment are helping to close the foreign financing gap for the current year, international reserves remain very low, at less than one month of imports.?

A healthy level of international reserves equates to more than triple Belize?s existing levels. Such a buffer is recommended, for instance, in the event of natural disasters that would hamstring trade flows into and out of Belize.

Belize has real financing needs, but, according to the IMF, those needs remain high and hard to come by because of Belize?s high external debt.

Even if relief financing could be obtained, ?its high cost would worsen the debt dynamics and leave the economy vulnerable to adverse shocks.?

IMF notes that Belize has announced its decision to get debt service relief from foreign creditors to ease the pressures brought on by burdensome repayment schedules.

There must be a medium-term plan, the IMF says, but it points also to immediate action that it says should be taken:

International reserves: The report notes that steps must be taken to increase international reserves by containing demand and reducing balance of payments pressures. Such steps, the report says, are still justified because of very large financing needs next year and the importance of demonstrating policy commitment as creditors are being approached.

The budget: It also challenges GOB to realize a better-than-expected budget execution as reported for March through June, and to restrain spending.

It additionally tells GOB to ?resist pressures to dilute the GST base and remain prepared to adopt corrective actions should its revenue yield fall short of projections.?

Debt relief: ?On the assumption that debt service relief from private creditors will become available, this package could achieve the goals of filling the financing gaps, gradually reducing the public debt burden and replenishing international reserves,? the IMF stated. It also commended Belize on the move to make agreements with creditors.


Structural reforms: The report recommends further changes in the GST, specifically ?reorganization away from tax types and toward business processes and common functions such as taxpayer services, audit, and collection enforcement.?

It also called on GOB to streamline the system of fiscal incentives, including the elimination of business tax holidays under the Fiscal Incentives Act; terminate import duty exemptions for specific organizations; and convert import licenses into tariffs.

It furthermore urges GOB to substitute the revenue replacement duty on fuels with a specific excise tax, and establish an automatic adjustment mechanism for fuel prices.

Pension reform: ?The non-contributory pension plan for public servants (PSP) harbors substantial liabilities for the government budget in the future, and the authorities should consider a phase-out of the PSP for new entrants (who would still be covered by the general Social Security system) and parametric adjustments, such as introducing a contribution from beneficiaries, increasing the years of required service, and/or raising the retirement age.?

The report also speaks of a further strengthening of governance and transparency in order to control contingent liabilities, and commends attempts at greater dissemination of economic and fiscal data, particularly in the instances of the Social Security Board (SSB) and the Development Finance Corporation (DFC).

We note, however, that this level of reform was not voluntary, but only came after unprecedented public pressure for investigations and disclosures.

A notable IMF recommendation is that, ?To avoid further liabilities to the government, the DFC should be allowed to collect without interference on its loan portfolio.?

Recently, Government announced its plan to offer discounts and debt forgiveness for certain classes of debtors, but the IMF preliminary report did not comment on this offer or the relevance of this recommendation to such a proposal.

In concluding, the report cautions that, ?Even in the mission?s illustrative active policy scenario, international reserves would remain low and the debt burden high for several years, and substantial vulnerabilities and risks would persist in the event of adverse shocks.?

Interestingly, the discovery of oil and prospects for revenues from oil sales were not featured in the report as a major factor in Belize?s economic prognosis.

Ending with a hopeful note, the IMF preliminary report says, ?The [IMF] mission believes that the authorities – and more broadly the country – can rise to the challenge and achieve a return to sustainability and durable growth.?

A press release issued by the Government of Belize on the same day as the report said Andreas Bauer led the mission, and staff members of the Caribbean Development Bank and the Inter-American Development Bank also participated in the review meetings.

During their visit from August 17 to 29, 2006, the IMF team reportedly met with the Prime Minister and Minister of Finance, Hon. Said Musa; members of the Public Finance Committee; senior officials of the Ministry of Finance and the Central Bank of Belize; representatives of the commercial banks, the business community, Labor Department, and the Leader of the Opposition, Hon. Dean Barrow.

IMF Executive Director for Belize, Mr. Jonathan Fried, and Mrs. Yvette Alvarez, Advisor to the Executive Director, participated in the wrap-up meeting held Tuesday, GOB?s release said.

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