BELIZE 1. RECENT ECONOMIC PERFORMANCE. A. Overview

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1 cane production to 912,600 tns. By contrast, the production of oranges rose by 23.1% to 239,200 tns. The increased production of oranges reflected favourable climatic conditions, and natural cyclical factors. Increased application of inputs as part of a programme to improve farm management, also contributed to the increased production of oranges. Output from non-traditional agriculture including the production of papayas and output from the livestock sub-sector also rose. Real value-added from fishing was estimated to have increased by 8.3%. 1. RECENT ECONOMIC PERFORMANCE A. Overview Real output growth declined in 2005, slowing to around 2% compared with growth of about 5.1% in Growth was realised in the wholesale and retail trade, in fish output and in tourism activity, while lower output was registered with respect to agriculture, construction and manufacturing. Unemployment eased as a result of the growth in economic activity, while consumer prices increased on account of new taxes and increases in the international price of oil. An overall deficit was recorded on Central Government s fiscal accounts during the first half of FY 05/06 and represented an under-achievement of targets set under the budget for FY 05/06 as part of a self imposed fiscal adjustment programme. The outturn resulted largely from higher interest payments on public debt. Commercial bank credit declined, reflecting reduced credit to Central Government as well as the effect of tighter monetary controls. Net foreign assets of the banking system rose at the end of October 2005 relative to the position at the end of 2004 and reflected proceeds from two bonds issued in March B. Sectoral Performance Agriculture Due largely to a decline in sugar cane, grapefruits and banana output, real value added from agriculture forestry and hunting (excluding fishing) was estimated to have declined by 4.4% during Dry weather conditions resulted in a 5.4% contraction in the output of bananas to 74,000 tns and a 22.2% decrease in the sugar 40 The volume of agricultural commodities produced and exported grew strongly during the last decade despite severe exogenous shocks. However, since 2000 the performance of the agricultural sector has been mixed. While the production of oranges, which accounts for the largest acreage cultivated fell between 2000 and 2003, output grew strongly in 2004 and in Production of sugar cane which accounts for the second largest cultivated acreage, has fluctuated since The production of corn accounts for the third largest acreage cultivated and also fluctuated over the period, while the production of banana an export commodity grew strongly in 2003 after declining in 2001 and Fish production rebounded strongly in 2003 due mainly to increased output from shrimp farming which was affected by an epidemic pre In recent years, good outturns have been recorded with respect to other nontraditional crop production and livestock. Manufacturing Manufacturing in Belize continues to be largely based on agriculture and is dominated by the production of sugar and citrus concentrates. Value-added from manufacturing during 2005 was 1% lower than the performance in 2004, notwithstanding that the production of citrus concentrate expanded by 20% to 6 mn gallons and the production of rum expanded by 45.7% to 45,700 gallons.. The output of sugar, wheat flour, beer, cigarettes, soft drinks and batteries, among other products, declined, and more than offset the increase recorded in the production of citrus concentrate and rum. Sugar production contracted by 24.9% to 96,100 tns reflecting the decline in sugar cane output. Manufacturing activity grew by 11.4% during 2004 and largely reflected higher production of sugar and citrus products, albeit the impact on the economy was partly overshadowed by the softening of export prices. ANNUAL ECONOMIC REVIEW 2005

2 Tourism Tourism recorded modest gains with real valueadded in the hotel and restaurant industry estimated to have increased by 2.9%. Stay-over arrivals during 2005 amounted to 235,491, approximately 2% higher than arrivals during An active hurricane season contributed to weaker performance in the second half of the year reducing the overall performance for the year. During the first nine month of the year following more than four percent growth during the first half. Stay-over arrivals from the USA, the largest source of visitors to Belize, increased by 5.5% to 114,661. Visitors originating from Europe increased by 6.2% to 26,091, while arrivals from Canada rose by 9.7% to 9,954. Cruiseship arrivals declined by 6% to 800,331 passengers. Belize is an attractive tourism destination with a diversified range of attractions and its exposure has increased greatly in recent years. Stay over arrivals increased by just over 31% since 1998, to 218,500 in 2004 and the contribution of the hotels and restaurant sector to GDP grew from 3.1% in 1997 to 4.1% by Cruiseship passenger arrivals grew nearly sixty fold since 1998 to 851,400 passengers in Other Sectors Reflecting moderation in public sector construction activity as well as reduced lending for residential construction activity, real value-added from construction during 2005 was estimated to be 5.7% below the level recorded during the previous year. Wholesale and retail trade and transport and communication services were estimated to have expanded by 9.7% and 2.9% respectively. C. Prices, Wages and Employment The CPI increased by 4.2% at the end of November 2005 compared with the position at the end of November Prices for all sub-indices increased except for Clothing and Footwear which remained unchanged. The largest increases in the sub-indices were recorded for Transport and Communication (6.4%), Rent, Water Fuel and Power (5.4%), and Food, Beverages and Tobacco (4.9%). The CPI rose by 3.1% between November 2003 and November 2004 and 2.3% during the previous twelvemonth period. The higher rate of inflation during 2005 and 2004 was attributable to new taxes and increases in the international price of oil which were partially passed on to consumers. Public sector rates of pay were higher during the FY 2005/06 reflecting collective bargaining agreements. An 8% general wage increase was awarded to the civil servants in April From July 2005 automatic wage increments, which previously averaged between 3% and 5% per annum, were frozen for 12 months. Modest growth in economic activity has continued to generate new employment opportunities. During the 2000 Census, unemployment was recorded at 11.5%, while the labour force survey indicated unemployment of 9.3% during The labour force survey conducted during April 2005 showed a rate of unemployment of 11%, down from 11.6% registered a year earlier and 12.9% in The higher unemployment during 2005, 2004 and 2003 was as a result of new entrants into the labour force including migrants. The survey results of 2005 indicated that female unemployment (17.2%) was substantially higher than that pertaining to males (7.4%). During the year unemployment varied by district, but was highest in the district of Toledo (13.2%) and lowest in the District of Orange Walk (8.8%). D. Fiscal Policy and Debt Operations During the first three quarters of FY 05/06 (April 2005 to March 2006) preliminary data shows that the overall deficit for Central Government operations was reduced by nearly half to $33.3 mn from $63.8 mn during the corresponding period FY 04/05. The overall deficit for FY 04/05 amounted to $88.4 mn. On a calendar year basis an overall deficit of $57.9 mn (5.3% of GDP) was realised on Central Government s fiscal accounts during 2005, compared with a deficit of $62.7 mn registered during However a significantly better performance was anticipated in keeping with targets set under the budget for FY 05/06 as part of a self-imposed fiscal adjustment programme. The worse than expected performance resulted largely from higher interest payments on public debt which amounted to $86.4 mn, some 42.3% in excess of payments during Unplanned expenditure on goods and services also contributed to the under-performance. The outlay on goods and services rose by 19.8% to $45.1 mn and exceeded initial budgetary allocations. All other categories of current expenditure increased during the review period. Expenditure on wages and salaries grew by 6.4% to $110.6 mn, but was within budgetary allocations, which had allowed for increases under the collective bargaining ANNUAL ECONOMIC REVIEW

3 agreement. Capital expenditure amounted to $46.4 mn (4.3% of GDP) during 2005 compared with an outlay of $90.4 mn (8.7% of GDP) during While partly reflecting Governments attempts to restrain capital spending as part of its fiscal adjustment programme, the lower capital outlay also reflected a slowing-down in the implementation of projects. Approximately $268 mn in total revenue and grants was realised during the review period, which was 2.4% ($6.2 mn) higher than receipts during Current receipts amounted to $255.5 mn, some $24.5 mn higher than receipts during the previous year and partly reflected the new revenue measures announced in the budget for FY 05/06. These new measures included increases in various sales taxes, increases in excise taxes on beer, alcoholic beverages, soft drinks and tobacco products, and the closure of loopholes affecting the collection of real estate transaction taxes. Receipts from taxes on income and profit increased by $10.3 mn to $60.2 mn, and in part, reflected higher levels of real sector activity. Non-tax revenue receipts also increased during the period under review. Total public sector external debt stood at $927.6 mn (86.4% of GDP) at the end 2005 compared with $841 mn (80.7%) at the end of Central Government domestic debt remained relatively stable and amounted to $139.8 mn at the end of E. Financial Sector The broad money supply expanded by 6.6% to $665 mn at the end of 2005 relative to the position at the end of 2004, and in part reflected the growth in economic activity.. Net domestic credit from the banking system expanded by 4.2% to $705.2 mn. Credit to Central Government decreased by 11.16% to $77.5 mn, but that to the rest of the public sector grew by 30.6% to 30.7 mn. Credit to the private sector which received approximately 84.7% of net domestic credit from the banking system, increased by 5.5% to $597 mn. By comparison credit to the privated sector grew by 11.1% during The slower growth in loans to the private sector during 2005 was influenced by a decline in excess liquidity. The holding of excess liquid assets within the commercial banking system declined from 7.6% of deposit liabilities at the end of 2004 to 4.8% of deposit liabilities at the end of This largely reflected hikes in cash reserves requirements and shifts in some deposits originating from the Belize Social Security Board to the Central Bank. Weighted average lending rates increased by 0.3 percentage points to 14.3%, while the weighted average deposit rate increased by 0.2 percentage points to 5.4%. During the year under review, personal loans extended by commercial banks increased by 31.4% to $129.5 mn, accounting for the largest share of the increase in credit to the private sector. Increased lending was also recorded with respect to manufacturing, building and construction, and mining and exploration, while lending to the tourism, distribution, transport and utilities sectors declined. Lending to Agriculture contracted marginally, while credit to the banana industry increased substantially. The net foreign assets of the banking system increased from $42.6 mn at the end of 2004 to $67.4 mn at the end The increase in net foreign assets reflected proceeds from two bonds issues in March 2005 totalling $136.7 mn. A major share of the proceeds from the bond issues were set aside for the servicing of Belize s external debt. Since March, net foreign assets declined by $132.4 mn. External Public Debt (EPD) to GDP EPD to GDP (%) ANNUAL ECONOMIC REVIEW 2005

4 F. External Sector A deficit of $149.6 mn was estimated on the external current account during 2005, marginally higher than the deficit recorded during Merchandise imports increased from $480.8 mn in 2004 to $554.4 mn in 2005 cancelling out the positive effect of inflows accruing from merchandise exports which grew by $12.2 mn to $236 mn, resulting in a deterioration of the trade deficit. The services account was estimated to have improved by $54 mn to a net inflow of $141.5 mn boosted by an increase in inflows from tourism services. Net outflows on the income account amounted to $111.2 mn, compared with $113.5 mn during 2004 and largely reflected public sector debt service obligations. Net inflows from current transfers were estimated to have increased by $4.7 mn to $56.1 mn. debt service payments have become untenable. Total debt service as a percentage of Central Government current revenue exceeded 100% in 2004 compared with just over 42% in Approximately 39% of recurrent revenue was expended on interest payments in 2004, more than triple the quantum in Discretionary spending has thus been severely curtailed and the consequences could be debilitating to the social and economic progress of Belize given the critical role of Government in providing social services, economic infrastructure and establishing an appropriate enabling environment for economic activity. External current account deficits which averaged about 16.8% of GDP annually between 2001 and Net Foreign Assets (NFA) of the banking system NFA (Bz$mn) The external current account deficit was financed largely by direct foreign investments and through public sector external borrowing. An excess of financing during that period resulted in an increase in net international reserves of the Central Bank, but much of this is reserved for future debt service payments. 2. MAJOR POLICY ISSUES 2004, were financed mainly through substantial capital inflows related to major investment projects and through increased public sector indebtedness. In the face of increased risk perceptions, Belize s access to the international capital market has been severely curtailed and this has resulted in deteriorating borrowing conditions for the country. Access to external financing was only possible in the latter part of 2004 and in the early part of 2005 at much higher cost than was the case previously. Without further access to international borrowing, Belize will be unable to obtain the necessary foreign currency to meet its debt obligations given the low level of international reserves (less than eight weeks of imports at the end of October 2005) at the Central Bank. A. Macro-economic Adjustment Belize has recorded strong real output growth since 1997 averaging 6.3% annually up to This performance was led by the strong performance in the tourism, agriculture, manufacturing, and construction sectors. Current fiscal and external imbalances threaten to derail growth. Correcting fiscal imbalances in an orderly Efforts at correcting the fiscal and external manner has become extremely critical to Belize in imbalance confronting Belize are ongoing. Fiscal order to sustain and enhance social and economic measures contemplated in the budget for FY 05/06 development. Consecutively large fiscal deficits included increases in various sales taxes, increases averaging about 9.4% of GDP between 2000 and in excise taxes, cuts in current outlay and cuts in 2004 has pushed public debt (most of which is capital expenditure. These efforts were aimed at external), to very high levels. With total public reducing the fiscal deficit to around 3.5% of GDP. debt reaching 101.5% of GDP at the end of 2004, Further, the monetary authorities have attempted ANNUAL ECONOMIC REVIEW

5 44 to tighten monetary policy through increases in the cash reserve requirement and by seeking to channel funds from the Belize Social Security Board away from commercial banks and directly to the Central Bank. These fiscal and monetary measures appear to have begun to impact the rate of credit expansion. However, the measures appear insufficient to avert the complete erosion of reserves at the Central Bank, the economic and social consequences of which could be severe. To avert this, Belize is actively seeking to restructure it s debt as it is felt that there is very little scope for additional monetary and fiscal adjustments without creating severe contractions in output and risking the resurgence of social tensions. B. Terms of Trade Shocks and Loss of Preferential Market Access in Agriculture The Agriculture, forestry and fishing sector continues to occupy a central position in the economy of Belize contributing an average of 13.7% of GDP between 2000 and However, the fortunes of the Agriculture sector have been impacted by adverse movements in the terms of trade. Between 1995 and 2004, unit prices for exports declined by 30% for sugar, 34% for bananas, 40% for citrus products, and 51% for marine products. In sharp contrast that was not unexpected Belize s import price index has risen since 2002 owing to depreciation of the US dollar and a surge in energy prices. The competitiveness of key agricultural exports continues to decline. In the very near future Belize will face the reality of loss of preferential access for two of its major agricultural exports sugar and bananas. In 2004 about 45% of Belize sugar export entered the EU market under the Sugar Protocol of the ACP-EU Agreement. Under the protocol, Belize has been assigned a specific quota and the price has been guaranteed at between at three to four times the world market price. However in June 2005, the European Commission announced a proposal to slash the guaranteed price for sugar imports from the eighteen ACP countries by 39% over a four-year period on a phased basis commencing in In the case of bananas, Belize has sold more than 90% of its fruits to the UK as part of a duty-free ACP quota. Prior to the introduction of a new banana import regime in 2006, imports of bananas into the EU from non-acp countries faced a tariff of 75 per tns within a quota of 2,653,000 tns and a tariff of 680 outside of this quota, thus protecting ACP producers. The new EU banana import regime is expected to fully evolve during 2006 incorporating transitory arrangements in the earlier part of the year. ACP countries are expected to continue to have duty-free access to the EU market within a quota of 775,000 tns per annum, while non-acp fruit will face a tariff of 176 per tn with no quota restrictions. Unavailability of reliable data preclude precise quantification of the impact of the new regime on Belize s banana exports to the EU. However, there is concern that the new regime could impact adversely on exports earnings because of the reduced level of protection offered in the new arrangements. Unfortunately, the longstanding dispute over the EU banana import rules seems set to continue as some Latin American Governments had announced their intention to challenge the new banana regime at the WTO. In Belize response to the expected decline in the level of protection in sugar and bananas has galvanized action by both industries to reduce cost and increase their marketing effort. C. Tourism Growth Securing the continued growth of the sector will be a challenge, given fierce competition in the industry internationally. While tourism is still a growth industry internationally, the relative novelty of Belize as a tourist destination in the marketplace will be advantageous in securing an increased share of the industry. Efforts to improve standards in the industry and raise the profile of the destination need to be continued. Protecting the natural and historical environment is critical to the sustainability of Belize s tourism industry. While there are a number of regulations in place with respect to the protection of the environment, enforcement is less than satisfactory. D. Human Resource Development In the face of severe fiscal constraints the GOBZ has continued to recognise the fundamental strategic importance in equipping the labour force to meet the challenges of an increasingly competitive international economic environment in its fight to reduce poverty. GOBZ has continued to make significant attempts to improve access to education, particularly at the secondary and tertiary levels. Net enrollment in 2002 was estimated at 99.2% and at 60.4% at the primary and secondary levels respectively. 1 The proportion of total school enrollments at the secondary level increased from 13.7% (1995) to 18.6% (2002) while that at the tertiary level rose from 2.5% (1995) to 5.8% (2002). 2 During FY 04/05, more than 100 new classrooms were constructed which ANNUAL ECONOMIC REVIEW 2005

6 significantly increased access to primary and secondary education, while an additional 100 full tuition scholarships to the University of Belize were granted. While GOBZ has recorded much progress with respect to access to secondary and tertiary education, there are concerns with respect to the equitability of access. In 2002, it was estimated that three out of four secondary schools were in urban areas and that the proportion of school enrollment at the secondary level in the urban areas (23.7%) was almost twice that in the rural areas (12.8%). This occurred although the population distribution in urban and rural areas was similar and the level of poverty in the rural areas was almost twice that in the urban areas. At the tertiary level, it was estimated that in 2002 only 0.4% of the poorest quintile compared with 13.2% of the richest quintile was in receipt of tertiary education. 3 The equity issue is particularly important given the high level of poverty. The effectiveness of GOBZ s education policy is an important determinant of its success in reducing poverty, and will hinge critically on more focused targeting of the poor and more efficient use of budgetary resources. In the context of current budgetary constraints and GOBZ s intention to expand access at the secondary and tertiary levels, the efficiency issue will assume increasing importance. E. Poverty The 2002 Country Poverty Assessment (CPA) showed that 33.5% of the population in Belize were poor (unable to meet basic food and non-food costs), 10.8% of the population were indigent (not able to meet basic food cost). Poverty has persisted in Belize and worsened marginally from the situation in 1995 when the CPA revealed poverty of 33%, though the extent of the indigent population was estimated to be larger at 13.4%. This occurred despite real output growth averaging 6.4% over the period, significantly higher than population growth which averaged 2.7% annually between 1991 and The distribution of the poor by district varies significantly. The highest incidence of poverty was recorded in the Toledo district, while the lowest incidence was recorded in the Belize district (28.4%). In The Toledo district the incidence of poverty increased from 57.6% in 1995 to 79% in 2002, despite assistance from the donor community amounting to an estimated $30 mn since the late 70 s to foster economic and social development. Of the six districts, the poverty situation also worsened significantly in two others, while it improved significantly only in one. The 2002 CPA report released in June 2004 concluded that high levels of programme segregation and inadequate targeting of the poor and vulnerable have impeded the effective translation of propoor policies into actual practice. The CPA report recommends that the programmes to be included under the next National Poverty Elimination Strategy and Action Plan (NPESAP) be re-examined. Further challenges to poverty reduction in Belize may be imminent. Poverty levels are likely to deteriorate within the sugar and banana growing areas as the profitability of sugar and banana exports to the EU market is reduced. Belize s experience demonstrates that economic growth by itself is insufficient to ensure reduction in the level of poverty. Preparatory work towards the preparation of the NPESAP 2005 to 2010 has commenced. The NPESAP is to be designed to reduce extreme poverty in Belize by one half by the year 2015 in line with its commitments under the Millennium Declaration signed in September 2000 by 191 member countries of the United Nations General Assembly. Several potential interventions have been identified in a study of the Investment Sectors and Geographic Areas and Potential Intervention for the NPESAP. The Indicative financing for these proposals exceed $25 mn per annum. The fiscal constraint confronting Belize is likely to persist over the medium term. In seeking to correct fiscal and external imbalances, and soliciting support from the international community in that regard, poverty reduction needs to be factored into the programme in view of its importance for social cohesion to enable Belize to return to a high output growth path. 3. PUBLIC SECTOR INVESTMENT PROGRAMME Government s development objectives continue to focus on improving the quality of life of the people of Belize and on reducing poverty. In order to do this the Government has recognised the importance of correcting the fiscal and external imbalances which threaten to derail the social and economic progress made over the last two decades. Such adjustments have meant curtailing expenditure including aspects of its capital expenditure programme. While the revised budgeted capital expenditure for FY 05/06, at $66.7 mn (originally approved at $43.3 mn) was 5.6% higher than actual capital spending during FY ANNUAL ECONOMIC REVIEW

7 46 04/05, actual spending during FY 05/06 was likely to be significantly lower. The approved budget for domestically-funded expenditure (Capital II) was $80.8 mn for FY 05/06 compared with approved estimated of $52.3 mn for FY 04/05, while approved externally-funded capital expenditure (Capital III) was $32.9 mn for FY 05/06 compared with approved estimates of $35.2 mn for FY 04/05. The capital programme for FY 05/06 continued to place emphasis on social sector investments. Continuing its quest to support human resource development, much of the $17.9 mn (24.3% of the capital budget) in investments allocated to the Ministry of Education Culture, Youth and Sports comprised education related programmes. Proposed investments in that regard included a programme for the strengthening of the vocational and technical sector to be funded by the CDB with counterpart contribution from the GOBZ. The GOBZ has also demonstrated its continued commitment to poverty reduction by allocating $12.3 mn or 16.8% of its capital budget allocations to the Ministry of National Development. Expenditure contemplated under this allocation included that related to the Basic Needs Trust Fund (BNTF) ($3.1 mn) and the Social Investment Fund ($4.8 mn), and disaster preparedness ($1.3 mn), all contributed to by the CDB. Close to 45% of the allocation to the Social Investment Fund was expected to be funded by the GOBZ. Investments in health have also continued to feature prominently accounting for $5.2 mn or 7% of the capital budget. Just over one-half of this allocation was for health reform. Approximately $13.4 mn or 18.4% of capital spending was allocated for the development of economic infrastructure. Much of this planned spending was expected to go towards a number of small projects necessary to maintain and upgrade the road and drainage system to support economic activity. The larger of these projects amounting close to $7 mn was expected to be financed from external sources including KUWAIT and OPEC. In the context of the need to slow the rate of PSIP expenditure as part of the fiscal adjustment process, lack of implementation capacity is unlikely to be a major consideration in the short to medium term, given the substantial levels of PSIP expenditure which were undertaken in recent years. However, fiscal savings have deteriorated and were negative in FY 2004/05, implying some constraint as regards the availability of counterpart funding. Also, while GOBZ was able to undertake substantial investment in recent years, there were clearly implementation constraints in the case of specific projects, causing in some cases significant implementation delays. 4. MEDIUM-TERM ECONOMIC PROSPECTS With current fiscal and monetary adjustments aimed at correcting fiscal and external imbalances, and assuming that attempts to restructure public debt to an extent that would be sufficient to supplement these fiscal and monetary adjustments, growth in real output during 2006 is expected to slow but remain positive. Continued growth is anticipated in the tourism industry as the popularity of Belize continued to grow as a destination for both stay-over and cruiseship arrivals. The expected outturn within the agricultural sector is mixed. The citrus industry and fishing sub-sectors are likely to continue to do well. Higher output levels of sugar and bananas can be expected if improved weather conditions prevail during the year. Growth in earnings from these commodities could however fluctuate depending on the level of supply from other competitors. Banana earnings will be dictated by the new EU banana import regime that came into effect during 2006 and which will fully evolve during the year. The impact of this new regime on Belize s traditional agricultural exports will greatly influence the size of the industry beyond Earnings from sugar are also likely to be affected by changes in the guaranteed price paid by the EU to ACP producers for specified quotas. Slower growth in earnings from the export of bananas and sugar will adversely impact spending in the economy and activity in the retail and wholesale sector and other areas of non-traded sector activity. Strong growth in the livestock subsector and non-traditional crops is anticipated. Growth in construction activity is likely to be further subdued by public sector restraint of its capital expenditure programme as it attempts continue to reduce the overall fiscal deficit. Further tightening of commercial bank liquidity is likely to result in slower growth in lending for residential construction as well as for other activities. The fiscal outturn will depend on the success of attempts to correct fiscal imbalances and to restructure public debt. Success in that regard, combined with continued attempts at attracting non-commercial sources to finance the remaining ANNUAL ECONOMIC REVIEW 2005

8 portion of the fiscal deficit, may lead to sufficient Endnotes international reserves to support the current fixed exchange rate peg. 1 National Human Development Advisory Committee, Poverty Assessment Report, 2002, p.75. Net enrollment is the proportion of the relevant age group (for primary schools, 5 to 12 years; for secondary schools, 13 to 16 years) enrolled. 2 Op. Cit. p Op. Cit, p.74. ANNUAL ECONOMIC REVIEW