The International Monetary Fund (IMF) is reporting that Belize has been severely affected by the coronavirus (COVID-19) pandemic, which has led to an economic contraction of 14.1 per cent in 2020.

In addition, there has been a 72 per cent decline in tourist arrivals in 2020, which had a large impact on the economy.

Tourism accounts for around 60 per cent of foreign exchange earnings and 40 per cent of gross domestic product (GDP).

In its 2020 Article IV consultation with Belize between February 24 and March 10, the IMF team, led by Jaime Guajardo, reports that Belize’s fiscal and external positions worsened from already weak levels.

According to the IMF mission team, “The pandemic resulted in a sharp fall in revenue and a rise in expenditure aimed at combating the pandemic and supporting affected households and firms.”

This led to an increase in the primary deficit from 1.4 per cent of GDP in FY2019/20 to 8.3 per cent in FY2020/21, and a rise in public debt from 98 per cent of GDP in 2019 to 126 per cent in 2020. Public external debt also rose, while the net international investment position deteriorated.

However, the current account deficit narrowed owing to a sharp contraction in imports and lower repatriation of profits from foreign owned business, which more than offset the fall in tourism receipts. This, together with higher external financing to the government, increased international reserves from US$271 million (3.6 months of imports) in 2019 to US$346 million (4.3 months of imports) in 2020.

Belize has one the worst COVID-19 situation in the Caribbean

The IMF assesses that Belize reserve adequacy is projected to worsen over the medium term. Following a successful containment of the first wave of the pandemic, Belize experienced a large domestic outbreak starting in the summer of 2020, which has left the country with one of the highest numbers of cases and deaths per capita in the Caribbean.

The pandemic also led to a 72 per cent decline in tourist arrivals in 2020, which had a large impact on the economy as tourism accounts for around 60 per cent of foreign exchange earnings and 40 per cent of GDP. Social distancing and lockdowns also hurt activity in contact intensive sectors of the economy, resulting in the 14.1 per cent contraction in the economy.

The recovery from the pandemic is projected to be protracted, with real GDP regaining its 2019 level only by 2025, as tourist arrivals are expected to remain subdued in 2021 given still high levels of COVID-19 cases in Belize’s main trading partners and stringent requirements on passengers returning to the US.

The IMF contended, “Belize may also remain exposed to the pandemic as it has secured vaccines for just about one-third of its population. Tourist arrivals are expected to pick up in 2022 when vaccines are more widely available in advanced countries. As a result, real GDP is projected to grow by 1.9 per cent in 2021, 6.4 per cent in 2022, and return to potential growth of two per cent over the medium-term.”

Public debt is assessed as unsustainable

The multilateral funding agency has assessed Belize’s public debt as unsustainable declaring that, “Public debt is projected to remain well above the thresholds for sustainability in the debt sustainability analysis (DSA) framework. Public sector gross financing needs are also projected to remain above the DSA thresholds for sustainability over the next 10 years. Moreover, public debt and gross financing needs could increase further if prominent downside risks to the outlook materialise.”

However, the IMF indicated that the country’s primary budget deficit is projected to fall gradually from 8.3 per cent of GDP in FY2020/21 to 0.9 per cent from FY2023/24 onwards, as revenues gradually revert to their pre-pandemic level and pandemic-related expenditures are scaled back. Public debt is projected to rise to 133 per cent of GDP in 2021, and to fall gradually thereafter to 128 per cent in 2031.

The continued primary deficits and high public debt are expected to limit Belize’s access to external financing going forward and lead to a fall in international reserves to below three months of imports and 100 per cent of gross external financing needs starting in 2024

Policies to restore debt sustainability and strengthen currency peg

In order to restore debt sustainability, the IMF is recommending that “fiscal policy needs to strike a balance between supporting those affected by the pandemic and enabling a large public debt reduction over the medium term. In the near term, the authorities should maintain fiscal support to mitigate the socio-economic impact of the pandemic but should change course once the pandemic begins to wane.”

Beyond the immediate response to the crisis, the IMF has identified the key policy imperative for Belize is to “Restore public debt sustainability and strengthen the currency peg. This will require a fine balancing act involving ambitious, yet realistic, fiscal consolidation, growth-enhancing structural reforms, and debt restructuring, all aimed at targeting reduction of public debt to 60 percent of GDP by 2031.”

Such a strategy, the IMF concluded, would also improve reserve adequacy and strengthen the currency peg.

See related article below:

• Belize burdened by Caribbean’s worst debt crisis