BELIZE CITY, Mon. Sept. 26, 2016–On September 21, the day on which Prime Minister and Minister of Finance Dean Barrow declared that Belize is experiencing a recession, the Executive Board of the International Monetary Fund (IMF) concluded its annual review of Belize, after which it is now calling for austerity measures, including a hike in the General Sales Tax—although some pundits argue that tax hikes are likely to worsen a recession.
Late last year, the Government increased the tax levy at the pumps, saying that the move had become necessary as a fiscal consolidation measure to strengthen public finances at the start of the new 2016 calendar year, and also to compensate for the decline in revenues linked to the decline in domestic crude oil production. The Government hoped to receive an extra $50 million this budget year (2016-2017) from that tax hike.
Last month, we asked Barrow about reports that the Government is contemplating an additional tax increase, through raising the rate of the General Sales Tax (GST).
In reply, he said that in a prior meeting with the unions, he had given an undertaking to the unions that there would be no tax increases before certainly the next budget year. Barrow added that this does not mean that there will be tax increases next year, but that if there will be any increase in the tax rate, it would have to come then.
The IMF’s Executive Board Assessment, released this evening, called for painful measures to be implemented to reverse the current financial and economic challenges facing Belize.
“[Belize’s] economic outlook has worsened further since the 2015 Article IV. GDP is projected to decline by 1.5 percent in 2016, in part due to the damage inflicted by Hurricane Earl, and average less than 2 percent in the medium-term, reflecting declining productivity, competitiveness and public investment,” the IMF said.
“Banking system’s weaknesses appear to have somewhat diminished, although the loss of correspondent banking relationships experienced by the largest banks is posing significant challenges for the economy,” the report said.
Banks in Belize have lost a significant number of correspondent banking relationships (CBRs), which has led to a significant increase in transaction costs and a winding down of deposits in international banks, the report conveyed.
It added that, “decisive policies are urgently needed to ensure macroeconomic stability and improve growth performance,” and went on to call for “additional measures, particularly raising the GST rate, reducing the public wage bill, reforming the pension plan for civil servants, and strengthening public financial management…”
The IMF noted that, “The economy of Belize is facing multiple challenges. GDP growth slowed to 1 percent in 2015 due to falling oil production and reduced output in the primary commodity sectors, and turned to negative 1.5 percent in the first half of 2016 relative to the same period in 2015.”
It added that, “The decline in oil and other commodity prices led to deflation in 2015, but the inflation rate turned positive in early 2016 owing to higher food prices and the hike in the fuel tax.”
In his Independence Day speech, Prime Minister and Minister of Finance Dean Barrow declared that Belize is experiencing a recession, but said that the country would recover.
Barrow said that “…we are experiencing a recession caused by the vagaries of the commodities cycle: agricultural sector disease, the drying up of our petroleum resources, and the crash in global prices. It is, of course, a recession made worse by Hurricane Earl. But it is also a recession from which, I must say at once, we will absolutely recover.”
He later added that “…by the start of the next fiscal year [which begins in April 2017]” Belize would return to GDP growth and financial system normalcy.
Foreign reserves threatened, debt spikes
For several months now, the Statistical Institute of Belize (SIB) has been reporting that apart from the shrinking of Belize’s GDP, earnings from Belize’s export, and particularly the country’s primary commodities, have been plummeting.
Meanwhile, the IMF notes that the payments which the Government has had to pay in consequence of the nationalization of Belize Telemedia Limited (BTL) and Belize Electricity Limited (BEL) have also compounded the situation. The one-off payment to the former owners of Belize Telemedia Limited (amounting to nearly $200 million), which the Government made a few months ago, has strained the Government’s finances.
The IMF report also pointed to a widening gap between the value of Belize’s exports and the value of Belize’s imports, for which it must pay in foreign currency, and primarily US dollars, and noted that this challenge, combined with remaining payments for nationalized companies and increased debt service, would reduce international reserves to uncomfortable levels.
It said that, “The shocks in the export sector have widened the current account deficit to 9.8 percent of GDP in 2015. Further decline in exports in the first half of 2016, combined with settling liabilities related to the two nationalized companies, reduced international reserves to 4.4 months of imports in late August 2016. Hurricane Earl, which hit Belize in early August, compounded the challenging economic environment.”
It added that, “On the positive side, the performance of the tourism sector in the first half of 2016 has been strong, and the unemployment rate declined from 10.1 percent in April 2015 to 8 percent in April 2016.”
Meanwhile, the Government’s fiscal position—the gap between what it earns and what it spends—has weakened, pushing the public debt higher, the IMF report explained.
The Government’s debt to GDP ratio has grown from 77.6% to 82.1% in 2015, according to the IMF reports. The country’s debt to GDP ratio is forecast to hit 99.9% in 2017, according to the data published by the IMF.
“In the absence of a radical change in policies, rigid current fiscal spending, particularly the public sector wage bill, would fuel high fiscal deficits and add to the already high debt burden,” the IMF said.
A mission team led by Jacques Bouhga-Hagbe visited Belize during May 11–25, 2016, to hold discussions in the context of the country’s 2016 Article IV Consultation, after which the IMF’s Executive Board reviewed the findings of the mission. The full staff report of the IMF consultation has not yet been released.