BELIZE 1. RECENT ECONOMIC PERFORMANCE

BELIZE 1. RECENT ECONOMIC PERFORMANCE A. Overview Output growth in 2006 was estimated at an annual rate of 2.5% during the first three quarters of 2006 compared with 2% growth during the whole of 2005. The growth resulted largely from increases in agricultural output, the production of electricity, and an increase in the value-added from the transport and communications sector. On the other hand, declines were recorded in fish output, construction, and in value-added from the hotels and restaurants sector. Fiscal performance continued to improve during April to October 2006, as reflected in an overall deficit of $17.2 mn compared with one of $32.2 mn during the corresponding period of the previous year. Growth in net domestic credit accelerated during 2006 due primarily to increased borrowing by Central Government from the Central Bank. The net foreign assets of the banking system increased from $65.7 mn at the end of 2005 to $87 mn at the end of October 2006, reflecting an overall surplus on the balance of payments. Fiscal performance continued to improve in 2006, as the authorities maintained the fiscal reform programme. During the period April to October the overall deficit on Central Government s operations declined by 50% compared with the corresponding period of 2005-06. Towards year end, significant effort went into a programme to restructure external commercial public sector debt. B. Sectoral Performance Agriculture During the first three quarters of 2006, agricultural production (excluding fishing) was estimated to have expanded by 8.8% in contrast to a small decline in 2005. Improved weather conditions contributed to a 34.2% increase in the output of sugarcane, the raw material for one of the country s major exports. On the other hand, following a record high output year in 2005 for oranges, another major export crop, there was a 22.4% decline in production, largely related to the natural crop cycle. Of the other export crops, banana production grew marginally (0.8%), while grapefruit production more than doubled. Valueadded from fishing was estimated to have declined by 22.3% partly as a result of a 21% drop in the production of farmed shrimp. The export price for farmed shrimp also declined, further reducing export receipts. Manufacturing, Mining and Quarrying Manufacturing, mining and quarrying activity contributed 9.5% to GDP during 2005. Excluding the extraction of petroleum, manufacturing activity was estimated to have declined by 4.9% in 2005 and by a further 1.3% during the first three quarters of 2006. Sugar production rose by 17.8% and was associated with the increase in sugarcane production, while the production of citrus concentrate declined by 15.7% during the first nine months of 2006 as a result of the decline in the output of oranges. The production of sugar and citrus concentrates dominates manufacturing activity. Among other manufacturing activity, the production of cigarettes and beer declined by 43.5% and 0.8% respectively, while soft drink production rose by 9.2%. The extraction of petroleum from the small oil find commenced in December 2005 Approximately 811,199 barrels of crude oil were extracted in 2006, most of which was exported to the US. Tourism Tourism has become the largest single contributor to employment and economic activity in Belize. In 2005, the hotels and restaurants sector contributed 5.4% to GDP; however, the total contribution of the tourism industry to GDP is thought to be well in excess of 10%. Value-added in the hotels and restaurants sector was estimated to have increased by 4.1% during 2005. Compared to the corresponding period of 2005, stay-over arrivals during the first nine months of 2006 34 CDB Annual Economic Review 2006 Belize

increased by 4.8%, while cruiseship arrivals declined by 23.7%. Given the spending characteristics of stay-over visitors, value-added from tourism increased despite the decline in cruise passenger arrivals. The decline in cruiseship arrivals was associated with continuously changing destination patterns as cruise lines seek to offer a varied experience to repeat traffic, and as they seek to minimise operational costs and maximise revenue. Other Sectors The supply of electricity and water was estimated to have increased by a third during the first nine months of 2006, following a marginal decline during 2005. The increase was due to an expansion in the domestic production of electricity following the commissioning of a new hydro plant late in 2005. Reflecting a fall in public sector construction as well as reduced lending for residential construction, real valueadded from the construction sector during 2005 was estimated at 3.4% below the level recorded during 2004. Construction activity continued to decline during the fi r st nine months of 2006, contracting by an estimated 4.7%. Following expansion in 2005, wholesale and retail trade, and transport and communication services, were estimated to have expanded by 7.6% and 6.4%, respectively, during the first three quarters of 2006. C. Prices, Wages and Employment Consumer prices continued to increase during 2006 above the average trend, largely reflecting the impact of new taxes and increases in the price of imported petroleum products. The consumer prices index (CPI) rose by 4.9% over the eight months to the end of August 2006 compared with the level at the end of August 2005. Increases were recorded in all sub-indices, with the largest increases recorded for the Transport and Communications sub-index (8.5%) and for the Rent, Water, Fuel and Power sub-index (6.4%). Following an 8% across the board wage increase which was awarded to civil servants in April 2005, wages grew more slowly during 2006, reflecting in part a one-year freeze on automatic wage increments for civil servants commencing in July 2005. The decline in unemployment was estimated to have continued during 2006 as a result of the growth in economic activity. The unemployment rate was recorded at 9.4% in 2006, down from 11% a year earlier, and 11.6% in 2004. D. Fiscal Policy and Debt Operations Belize has run high fiscal deficits between FY 2000/01 and FY 2004/05 averaging 10% of GDP. These deficits were unsustainable and the Government of Belize embarked on a programme of adjustment beginning in FY 2005/06 aimed at correcting the fiscal imbalance and the related external account imbalance. Consequently, the overall deficit on Central Government operations was reduced by more than one-half to $37.5 mn (3.4 % of GDP) during FY 2005/06, compared with a deficit of $88.4 mn (8.4% of GDP) during the previous fiscal year. Fiscal performance continued to improve during April to October 2006, as reflected in an overall deficit of $17.2 mn compared with one of $32.2 mn during the corresponding period of the previous year. A primary surplus of $29.5 mn was achieved during the sevenmonth period in FY 2006/07, compared with a surplus of $12.4 attained during the corresponding period of FY 2005/06. The improvement in the overall fiscal balance during the first seven months of FY 2006/07 was underpinned by a faster rate of increase in revenue and grant receipts compared with the rate of increase in expenditure. Recurrent receipts grew by 10.3% to $152 mn, and largely reflected higher collections of stamp duties, and taxes on income, profits, and on transactions. With respect to transactions taxes, the Sales Tax (which was set at 9% on the final sales value or value of import for most categories of goods) was replaced by the General Sales Tax in July 2006. The General Sales Tax, which is similar to a value-added tax, is levied at a rate of 10% and is applied to a broader range of goods and services than was the Sales Tax. Grant receipts rose more than six-fold to $6.2 mn, while capital revenue rose by more than 50% to $3.7 mn. The grant receipts largely reflected support from bilateral donors to assist Belize with its poverty programme, and to close its financing gap under its programme of adjustment. Total expenditure grew by 3.8% to $193.2 mn reflecting an increase in recurrent expenditure (3.7%) as well as in capital expenditure and net lending (4.3%). The increase in recurrent expenditure reflected increases in outlays on goods and services, interest payments, and transfers and subsidies. Notably, expenditure on wages and salaries declined, due to restraint in recruitment and in wage and salary adjustments. The reclassification of some expenditure items from wages and salaries to subsidies and transfers also influenced the change in the figures. The increase in capital expenditure and net lending followed significant declines in capital outlays in each of the preceding fi s cal years as part of the Belize CDB Annual Economic Review 2006 35

response to the need to cut expenditure. The huge fiscal deficits of previous years had resulted in the accumulation of a high level of Central Government outstanding debt which at the end of 2005 had reached $1,025.1 mn, equivalent to 92.3% of GDP. At the end of October 2006, Central Government outstanding debt amounted to $1,051.5 mn, 83.4% of which was due to external creditors. Despite the significant fi s cal adjustments over the past two fi s cal years, the mediumterm debt and fiscal outlook appeared unsustainable due to high debt servicing requirements; and during the course of the year the authorities secured the services of a firm of debt advisers to guide them through a process of consultation with external commercial creditors with a view to the restructuring of the external commercial debt. Both CDB and IDB have supported the reform efforts, and towards the end of the year each institution approved a policy-based loan of $25 mn to the Central Government. Financial Sector Broad Money Supply (M2) expanded by 9.4% to $727.3 mn during the first ten months of the year, in part reflecting growth in economic activity. Net domestic credit expanded by 12.7% during the same period to $794.6. By comparison, net domestic credit grew by 4.1% during 2005. The faster rate of growth in net domestic credit during 2006 largely reflected increased credit to Central Government from the Central Bank to facilitate external debt servicing. However, credit to the private sector, which amounted $657.5 mn at the end of October 2006, also, at 9.3%, grew more quickly compared with growth at 6.3% during 2005. The Central Bank of Belize continued to pursue policies directed towards a reduction in excess liquidity in 2006. Following a 1 percentage point increase in December 2005, commercial bank cash reserves requirement was increased by a further 1 percentage point in May 2006, and by a further 1 percentage point in September 2006 to 23%. External Sector A deficit of $29.2 mn was estimated on the external current account during the first three quarters of 2006, compared with a deficit of $117.9 mn recorded during the corresponding period of 2005. The reduction in the deficit was in part due to a reduction in the merchandise trade deficit and higher current transfers to residents. Increased exports of crude oil along with improved agricultural commodity prices led to a 30.5% increase in merchandise exports to $318.9 mn. There was also an increase in net travel receipts. On the capital and financial account, the net foreign assets held by commercial banks grew by $32.1 mn, while reserves at Central Bank of Belize grew by $4.1 mn, reflecting an overall improvement in the balance of payments position. 2. MAJOR POLICY ISSUES A. Financial sector developments The financial sector of the Belizean economy is comprised of banks and non-bank financial intermediaries. Five commercial banks dominate the system, accounting for assets in excess of $0.88 bn. The Belize stock exchange is still at an embryonic stage of development. Commercial banks tend to be risk-averse, and consequently have performed only a limited role in providing financing based on projected enterprise viability.. The Development Finance Corporation that was established to fill the financing void experienced by new and emerging businesses has floundered as a result of poor management, and is operations have been sharply curtailed. At year end, a Commission of Enquiry was examining its past operations. A similar enquiry had been held during the year into some aspects of lending by the Social Security Board. Effort was underway at year end to assess the possibility of establishing a successor institution to the DFC. B. Oil Production During 2005, there had been a small commercially viable oil find in the central western region of the country, with reserves estimated at about10 mn barrelsl. Extraction of oil started in 2006, and by August 2006, oil was being extracted at the rate of about 2,700 barrels a day. Of the over 480,000 barrels extracted up to the end of August, more than 80% was exported to the US, while the remainder was either exported by road to El Salvador or sold on the local market for immediate use. Up to August 2006, six other companies were issued oil exploration licences. These companies are at various stages of exploration, and some drilling could commence in 2007. The geology of Belize suggests a high probability for the existence of oil deposits. In the event that there are further substantial oil discoveries in Belize, the production base of the Belize economy could be dramatically altered over the medium to long term. In such a case, careful attention will need to be paid to the impact of this new industry on non-oil production. Prudent environmental management of all aspects of oil industry operations is also critical; and capacity will need to be developed to deal with undesired events 36 CDB Annual Economic Review 2006 Belize

associated with the industry, especially with respect to impact on natural fauna and flora in the interior of the country, and on the marine environment, especially given the importance of the tourism and fishing industries. 3. PUBLIC SECTOR INVESTMENT PROGRAMME The authorities recognise the urgent need to restore fi s cal and external balance as a precondition for sustained economic growth, and are continuing their efforts to reduce the fiscal deficit and to restructure debt in order to avoid disorderly adjustment in the economy. While capital expenditure in Belize has been reduced as part of fiscal consolidation efforts, the authorities recognise the need for continued public investment to facilitate growth and support poverty reduction and social cohesion efforts. Insufficient investments in critical infrastructure could reduce growth potential and prolong the period of adjustment necessary to correct fi s cal and external imbalances. Thus, it will be important for development partners to seek to make aid effective, and for the Belize authorities to ensure that the PSIP is sharply focused on critical development issues and that capital spending is efficient and effective. Capital expenditure and net lending was reduced from $137 mn in FY 2003/04 to $63.2 mn in FY 2004/05 and reduced further to $45.2 mn in FY 2005/06. Approved capital expenditure and net lending for FY 2006/07 amounted to $53.2 compared with approved capital expenditure and net lending of $66.7 mn for the previous fiscal year. Current and ongoing activity has been reduced to items of a critical nature, with the scope of some projects being reduced. The European Union (EU) has continued to support attempts in Belize to improve competitiveness in traditional export areas. EU grants under the Special Framework of Assistance (SFA) have supported efforts to improve the competitiveness of the banana industry and have funded irrigation and drainage works, the rehabilitation of banana plantations, disease management programmes, and rural development programmes among others. Assistance under the SFA was intended to cover a period of ten years, commencing with allocation year 1999. The allocations that make up the current Belize banana support programme (allocation years 1999 to 2004) amount to almost $22 mn, a significant part of which has not yet been disbursed. Substantial amounts of resources are still to be programmed with respect to the remaining allocation years. EU grant support is also envisaged to help Belize improve the competitiveness of the sugar industry. In that respect, Belize envisages receiving grant assistance of more that $50 mn from the EU over the period 2006-15 to support its sugar adaptation strategy, which is estimated to cost $140 mn. EU s contribution will finance a major part of the investments required for effi c iency improvements, agricultural diversification, socio-economic support, institutional strengthening, and feasibility studies. Other EU assistance to Belize has been provided by the European Development Fund (EDF). Under the 9th EDF allocation, at least $15 mn were allocated to Belize. The focus for the uses of these resources is rural development, and much of the resources is expected to be used to fund the Belize Rural Development Programme (BRDP) which became operational in January 2006 and is expected to continue its operation well into 2008. The overriding objective of the BRDP is to reduce poverty in Belize. Belize will require significant additional support from other bilateral and multilateral donors to address poverty effectively. The focus of the 10th EDF is poverty reduction through integrated rural development. The 10th EDF will also provide assistance to Belize to build institutional capacity to enable adequate response to globalisation and trade liberalisation. The IDB is expected to provide support to Belize in improving trade competitiveness and in enhancing sustainable tourism development though loans of $10 mn and $15 mn, respectively. Much of the externallyfunded road infrastructure projects which are ongoing or expected over the short to medium term are being funded by the Kuwait Fund for Arab Economic Development and the OPEC Fund for International Development. With respect to social services, lending from the IDB in respect of the Health Sector Reform Project is expected to continue, while resources aimed at strengthening the multi-sector response of Belize to HIV/AIDS will continue to be drawn from The Global Fund to Fight AIDS, Tuberculosis and Malaria. CDB support of Belize s PSIP over the medium term is likely to focus on road rehabilitation and critical social sector investments including interventions through the Basic Needs Trust Fund. 4. MEDIUM-TERM ECONOMIC PROSPECTS Growth in economic activity over the medium term is likely to be moderate, at around 3% per annum. This growth will in part be propelled by the mining and export Belize CDB Annual Economic Review 2006 37

of petroleum products, an activity which commenced in 2006. Growth is anticipated in the tourism industry over the medium term as the popularity of Belize continues to grow as a destination for stay-over visitors. The expected outturn within the agricultural sector is mixed. The citrus industry is likely to continue to do well despite the fall in the output of oranges during 2006. Higher output levels of sugar and bananas can be expected if weather conditions are favourable, and as attempts continue to improve effi c iency within these industries. Growth in earnings from commodity exports could, however, fluctuate depending on the level of supply from other competitors. With respect to citrus, prices are likely to remain high over the next two to three years as citrus growers in Florida continue to recover from the effects of hurricanes in 2005 and as citrus growers in Brazil recover from plant disease. Banana earnings will be dictated by the new EU banana import regime that came into effect during 2006, once supply arrangements fully evolve. Earnings from sugar will be adversely affected by changes in the guaranteed price paid by the EU to ACP producers for specified quotas. Strong growth in the livestock industry and in respect of non-traditional crops is anticipated, however fi s hing activity is likely to continue to decline due to lower farmed shrimp output, following the closure of operations of the largest producer during 2006. Growth in construction activity is likely to be subdued, given the current level of public sector construction activity. Further tightening of commercial bank liquidity is likely to result in slower growth in lending for residential construction as well as for other activities. Efforts at restraining the overall deficit are programmed to continue over the medium term. Based on the success of efforts during FY 2005/06 and during the first three quarters of FY 2006/07, the overall fiscal deficit is unlikely to exceed the targeted 3% of GDP during FY 2006/07, and should remain at or below that level over the medium term. Government revenue from the new oil industry could boost revenue performance during 2007 and could result in an improved fiscal current account balance. Recurrent receipts are likely to be boosted over the medium term by plans to improve efficiency in the collection of customs revenue through a process of systems upgrade. Full closure of the fiscal and external financing gaps over the medium term will depend initially on the success of attempts to restructure public debt, given the large contribution of current debt servicing costs to expenditure, and then subsequently on the ability to sustain economic growth and to maintain the revenue flow from that expansion. Success in the proposed debt restructuring operations, combined with intensification of the reform programme and continued development partner support, would help to improve investor confidence, and would likely result in greater levels of private investment, including fl o ws from abroad. 38 CDB Annual Economic Review 2006 Belize