Belize 1. RECENT ECONOMIC PERFORMANCE A. Overview Output growth slowed in 2007, with preliminary data showing GDP expansion of 2%, compared with 5.6% during 2006. Preliminary data indicated a slowing in the rate of growth of consumer prices during 2007, with the average level of the all items index rising by about 2.5% in 2007, compared with a rise of 4.3% during 2006, with much of the increase in both years reflecting movements in the prices of food and fuels. With a need for hurricane damage rehabilitation as a result of the passage of hurricane Dean together with the prospect of general elections early in 2008, the level of public spending rose above budgeted levels after mid-2007, contributing to some deterioration in the public finances outturn that was partly offset by capital revenue from the sale of state assets, including land, and by grant inflows. Projections for FY 2007/08 suggested a small reduction in the recurrent account surplus from budgeted levels, a 40% rise in the overall deficit to about 1.4% of GDP from a budgeted 1%, and a decline in the primary balance to 2.8% of GDP from a budgeted 3.3%. Figure 1: GDP Growth and Inflation (% per annum) In the financial system, money supply growth was driven by increases in net foreign assets and in domestic credit to the private sector, as credit to government, both from commercial banks and the central bank, changed only marginally during the year. In external sector developments, revenue from merchandise exports declined by an estimated 11% despite a rise of nearly 60% in petroleum export earnings, while visitor spending rose marginally. The value of imports rose, mainly as a result of higher payments for fuel, lubricants, and industrial supplies. Partly reflecting these developments, the balance of payments current account deficit was estimated to have doubled to 4% of GDP from the 2006 level. During the fi r st quarter of 2007, the authorities successfully concluded an agreement with creditors for the restructuring of the public sector commercial external debt, extending maturities and reducing the cost of debt servicing. B. Sectoral Performance Agriculture Agriculture continued to be an important source of employment and incomes during 2007, although output and 50 CDB Annual Economic Review 2007 Belize
earnings mostly fell below 2006 levels. The following table (Table 1) shows production of major agricultural commodities, while Table 2 shows export earnings from the major goods-producing activities including agriculture. Agricultural production was adversely affected by a number of factors during 2007. Hurricane Dean, in August, damaged or disrupted agricultural production generally, and induced substantial spending on infrastructural rehabilitation, although the country was spared the full force of the storm. In addition, sugar production was further affected by significant foreign matter and debris in sugarcane deliveries, and by low sugarcane sucrose content; banana output was affected by plant disease and low unit export prices; and the bankruptcy of a large shrimp-producing aquaculture enterprise resulted in a sharp reduction in the output of marine products. Manufacturing, Mining and Quarrying Output in manufacturing, mining and quarrying is estimated to have expanded during the year, mainly reflecting the one-third rise in petroleum production from 796,962 barrels in 2006 to 1.048 mn barrels in 2007, most of which was exported, following the commencement of extraction operations in 2005. Sugar production declined, and output of garments fell by just over 50% with the effective closure, for competitiveness reasons, of an offshore assembly operation that had made a substantial contribution to the employment of women for more than 35 years. Some expansion of output in the construction sector, mainly related to private sector investment in real estate development, was evident during the year, although public sector activity remained low following high rates of expansion in the earlier years of the decade. Petroleum exploration by external private sector interests continued during the TABLE 1: PRODUCTION OF MAJOR DOMESTIC AGRICULTURAL COMMODITIES. Item 2006 2007 p Sugarcane deliveries (long tons) 1,169,387 1,163,319 Sugar (long tons) 110,578 94,610 Molasses (long tons) 40,477 46,408 Bananas (tonnes) 70,971 59,018 Citrus deliveries (boxes) 6,753,657 6,097,237 Citrus juices (000 ps) 36,004 33,608 Marine products (000 lbs) 17,593 6,790 of which shrimp (000 lbs) 15,922 5,439 Papayas (000 lbs) 76,004 72,943 p preliminary TABLE 2: EARNINGS FROM MERCHANDISE EXPORTS Item Earnings BZ$ million 2006 2007 Sugar 100.1 88.1 Molasses 6.3 5.8 Bananas 50.6 39.8 Citrus 120.1 106.1 Marine Products 86.0 42.2 Garments 36.6 18.8 Papayas 31.0 26.1 Petroleum 80.7 127.9 Other exports 30.3 25.6 Total 541.7 480.4 Belize CDB Annual Economic Review 2007 51
year, and the prospects for the discovery of additional petroleum deposits were reported to be good. Tourism Preliminary data show a decline of 1.6% to 814,634 in the number of tourist visitor arrivals during 2007, with cruise passenger arrivals falling by 2.5% to 575,655 reflecting a reduction of port calls by cruise ships as a result of the passage of Hurricane Dean through the Caribbean. At the same time, the number of stay-over arrivals rose 0.5% to 238,979. Total visitor expenditure was estimated to have risen by 2.7% during the year to BZ$ 507.5 mn. During the year the runway at the international airport was extended to allow use for transatlantic flights, and the airport access road was rerouted to accommodate the runway extension. At yearend work was about to start on a major road project to provide proper access to a rapidly expanding tourism resort area at Placencia, along the country s southern coast. The tourism industry has become the largest single contributor to incomes and employment in the country. Public Finances A further step in an ongoing programme to improve the management of the public finances was taken early in the year with the successful conclusion of an exercise to restructure the external commercial debt of the public sector. The authorities had been experiencing some difficulty in meeting debt service payments during the year, and expected to encounter greater difficulty in 2008 and beyond in the absence of restructuring. Under the arrangements, the outstanding commercial debt was replaced by a 22-year instrument maturing in 2029, repayable in semi-annual instalments beginning in 2019, with interest payable semi-annually at 4.25% per annum during 2007-9, at 6% during 2010-11, and at 8% for the remaining years of the bond. Offi c ial obligations to bilateral and multilateral creditors were not affected by the restructuring, nor were domestic obligations of the public sector. There was some slippage in public expenditure management during the year, refl e cting a need for some hurricane damage rehabilitation as well as increased spending in anticipation of general elections early in 2008. This slippage resulted in a small rise in the overall fiscal deficit and a reduction in the primary surplus, compared with budgeted levels, despite strong grant and capital revenue inflows. With more serious implications for the future, the authorities announced a civil service pay increase, and entered into contracts with medical services companies to provide medical and health services to the population under a developing national health insurance scheme, TABLE 3: SUMMARY PUBLIC FINANCES Budget 2008/09 BZ$ mn Full-year estimated BZ$ mn Total revenue and grants 678.5 708.1 (a) Current Revenue 650.9 661.6 (of which: Tax Revenue) (593.9) (586.6) (Non-tax Revenue) ( 57.0) (75.0) (b) Capital Revenue 10.1 19.5 (of which: Property Sales) (17.0) (c) Grants 17.5 27.0 Total Expenditure 703.2 743.3 Current Expenditure 585.2 600.9 Capital Expenditure 118.0 142.4 Current Account Surplus 65.7 60.7 (Overall Deficit) (24.7) (35.2) Primary Surplus (% of GDP) 3.3 2.8 Source: Ministry of Finance, Belize 52 CDB Annual Economic Review 2007 Belize
in both cases without full identification of the costs or the funding sources, and with the arrangements to take effect in the fiscal year beginning April 2008. These arrangements, together with the need to make service payments on the restructured debt during the year, could pose some fiscal and foreign exchange availability difficulty unless reversed or delayed, with the situation being further complicated by staff shortages at the technical level. Table 3 above shows the Central Government s budget for the 2007-08 fiscal year, together with outturn projections based on operations during the first three quarters to December 2007. Financial Sector Money supply growth in 2007 was driven by a rise in the net foreign assets of the financial system, occasioned by inflows from exports, grants, and loan disbursements, and by expansion in banking system credit to the private sector, as domestic credit to government remained largely unchanged during the year. As indicated earlier, the public finance deficit was financed by external loans and grants, and by sales of public assets, particularly land. The growth in money supply was reflected in increases in savings, time, and demand deposits of the business sector, although currency holdings by the public also increased. The increase in banking system credit to the private sector was concentrated in tourism, distribution, and real estate. Interest rates in the banking system drifted upwards slightly during the year (the weighted average deposit rate rose by 20 basis points to 6%, while the weighted average lending rate rose 10 basis points to 14.3%), with the weighted average interest rate spread of the commercial banks narrowing by 20 basis points to 8.3% in consequence of a small reduction in liquidity. 2. MAJOR POLICY ISSUES Fiscal Management The need for debt restructuring early in 2007 reflected major fiscal expansion in the recent past, fi n anced by high levels of domestic and external borrowing and by the sale of public assets, including public enterprises. High public spending led to unsustainable fiscal deficits and a depletion of external assets, leading to periods of queuing for foreign exchange, although the official exchange rate was not affected and the parallel market rate did not deviate significantly, or for extended periods, from the official rate. The situation was complicated by policy changes which allowed exporters to retain substantial portions of their export earnings, a practice which contributed to a reduction in the availability of foreign exchange to the general public. The inevitable drying-up of external funding and the reduced availability of domestic assets for sale encouraged the authorities to embark on a public finances reform programme, and over the three years to 2007, the overall fiscal deficit was reduced from over 10% to below 2% of GDP through a combination of expenditure restraint and revenue systems enhancement. While substantial changes were made to the laws and rules in order to specify strict procedures for managing public resources and assets, substantial discretion remained at the ministerial level, and no penalties were provided for breaches, thus making the arrangements ineffective. The period of high expenditure growth had been characterised by reduced reliance on civil service information systems; on civil service technical expertise; and on rules-based expenditure and public asset management and control systems, with the result that there is now need to rebuild technical fiscal management capacity; strengthen expenditure and asset management controls; and increase substantially the emphasis on transparency, accountability and good governance in the management of the public finances. CDB disbursed the first half of a US$25 mn policy-based loan during 2007 as part of the effort to restore viability to the public finances, accompanying the loan with technical assistance grants to improve institutional capacity in public financial management. The Bank also provided loan funding to upgrade the capacity of the Customs and Excise Department as part of the effort to raise revenue collections. Related to the fiscal management practices described above has been a departure from the traditional approach to government investment utilising the PSIP in conjunction with a formal mediumterm development programme and an associated debt management system that allows sustainable longerterm management of the public capital programme. The departure also included a shift from reliance on multilateral sources for project fi n ancing and on bilateral sources for official aid and towards commercial fi n ancing institutions with their associated lower level of concern in ensuring that loan funds are effectively utilised in building productive capacity. This approach, as occurred elsewhere in the Caribbean, contributed to the sharp increase in external debt without a concomitant expansion in productive sector assets or enhancement of institutional capacity. Development Finance The Belize Development Finance Corporation, once a vibrant public sector lending institution providing mortgage loans, student loans, and financing for small and medium-sized enterprises, had its operations overextended during the period of fiscal expansion, and accumulated both a large volume of housing assets Belize CDB Annual Economic Review 2007 53
that it has had difficulty in disposing of profitably as well as a substantially contaminated loan portfolio. The DFC has remained open to pursue debt collection operations and to satisfy contractual issues in relation to a funds-raising programme, but is not otherwise engaged in the provision of development fi n ance in Belize. One result is that there is need for an institution to perform the functions once performed by the DFC. Recent history suggests that such an institution will not function effectively if it remains under public sector control, although there is a clear need for a development orientation to influence its operations and for substantial injection of public funds to facilitate enterprise development for entrepreneurs who lack commercially bankable collateral, and to fund education and training for poor but otherwise eligible students. The authorities need to design and establish an institution which can be properly managed for growth and sustainability, but which is not as strongly focused on profits generation as a normal, privately-owned financial institution. Crime and Violence Violent crime, including murder; armed robbery; and marine piracy; has become a major threat to law and order and to social stability in Belize. While much of the criminal violence appears to be related to drug trafficking and international drug transshipment, there have been domestic spill-off effects in other areas. Not only have tolerance levels been eroded in interpersonal relations, but there has been an increasing drift in the direction of acceptance of bribery and fraud in commercial relations, including in the civil service. Achievement of the country s development objectives, including poverty elimination, is not consistent with the persistence of anti-social practices at their current level. Social Services There is general recognition of an urgent need to improve the supply and quality of social services, with particular attention to education, health and housing. Student performance at primary and secondary levels lags behind that in much of the rest of the Region, and there are issues with the quality of teacher training as well. In the area of health, the authorities have increasingly turned to domestic private medical service providers to meet health treatment requirements that cannot be satisfied in the main public institutions, and international referrals, many with public support, are commonplace. In the area of housing, there continues to be a shortage of suitable house lots, particularly for the lower-income members of the population. The search for employment has resulted in high demand for lots in the Belize City area; however, this general location is swampy, with a high water table, so that preparation for construction is expensive, the provision of proper road access is slower than the rate of settlement, and waste disposal (including sewage disposal) is a major continuing issue. Attention needs to be paid to township development in areas where it is easier to provide the prospect for a better quality of life in the foreseeable future. 3. MEDIUM TERM ECONOMIC PROSPECTS The announced intention of the new administration that took office in February 2008 to reintroduce prudent fiscal management, together with its emphasis on transparency and accountability, should be reflected in substantial re-engagement by the country development partners, including multilateral institutions. This is likely to mean some expansion in the PSIP and the emergence of a more coherent programme for achieving the country s development objectives, subject to the need, particularly in the early years, to pay careful attention to maintaining debt sustainability. The effort to address the gap in the fi n ancial system caused by the effective withdrawal of the DFC should result either in the establishment of a new institution, or in the arrangements which will see existing institutions offering most of the services which were in the past provided by the DFC, with particular attention to the financing of small enterprises and the provision of student loans. In addition, the programme of countrywide consultation on priorities to inform the preparation of the 2008-09 budget could play an important role in encouraging greater participation in public affairs by the population, improving the chances of developing a national consensus and contributing to social cohesion. This approach is likely to encourage private business investment, both domestic and foreign. In the short term, economic activity will be heavily influenced by tourism industry performance, which is likely to be somewhat weak, given the industry s dependence on the US market and the downturn in the US economy. Beyond the short term, however, activity is likely to grow as a result of the citrus industry s successful efforts to date in developing new export markets; some recovery in shrimp farming, refl e cting new investment in the industry; and the likelihood of new petroleum discoveries, based on recent exploration indications. Intensified tourism promotion and the absence of hurricane activity should also be reflected in increases in visitor spending; and activity is already underway to expand infrastructure serving the industry, and to improve the quality of the visitor experience in Belize City as well as in the more traditional resort areas. 54 CDB Annual Economic Review 2007 Belize