Sep 2016 Financial News

IMF paints bleak picture of economic performance in Belize

Sep 30, 2016

WASHINGTON, United States (CMC) — The International Monetary Fund (IMF) says Belize continues to face significant vulnerabilities and challenges driven by high public debt, large fiscal and external deficits, and declining international reserves.

The IMF, which concluded an Article IV consultation with Belize, said adverse weather conditions have also posed difficulties for the country, and is emphasising that decisive policies are urgently needed to ensure macroeconomic stability and improve growth performance.

The Washington-based financial institution said that gross domestic growth (GDP) slowed to one per cent in 2015 due to falling oil production and reduced output in the primary commodity sectors, and turned to negative 1.5 per cent in the first half of 2016 relative to the same period in 2015.

“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. The effective exchange rate appreciated sharply both in nominal and real terms, driven mostly by the strengthening of the US dollar to which the currency is pegged, reducing competitiveness,” the IMF said.

It said that the shocks in the export sector have widened the current account deficit to 9.8 per cent of GDP in 2015.

“Further decline in exports in the first half of 2016, combined with settling liabilities related to the two nationalised companies, reduced international reserves to 4.4 months of imports in late August 2016.

The IMF said that Hurricane Earl, which hit Belize in early August, compounded the challenging economic environment.

“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 per cent in April 2015 to 8.0 per cent in April 2016.

“The fiscal position has weakened, pushing the public debt higher. The overall fiscal deficit expanded to eight per cent of GDP in 2015.”

The IMF said the sharp deterioration was explained by a one-off payment related to the settlement of liabilities for one of the nationalised companies, although the structural deficit, which excludes one-off and cyclical factors, worsened as well on account of an increase in public sector wages and transfers and a large overrun in capital expenditure.

The IMF said that 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 banks have lost a significant number of correspondent banking relationships, which has led to significant increase in transactions costs and a winding down of deposits in international banks.”

But the IMF said that the economic outlook has worsened further since the last consultation and that GDP is projected to decline by 1.5 per cent in 2016, in part due to the damage inflicted by Hurricane Earl, and average less than two per cent in the medium term, reflecting declining productivity, competitiveness and public investment.

“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. Financing constraints would reduce public investment.

“The current account deficit would slowly improve due to a gradual recovery in major commodity exports, but would remain high, indicating a weak external position. This deficit, combined with remaining payments for nationalised companies and increased debt service, would reduce international reserves to uncomfortable levels,” the IMF said.

The financial institution stressed that placing public debt on a downward path is a key priority.

Source:
Jamaica Observer
Friday September 30, 2016

http://www.jamaicaobserver.com/business/IMF-paints-bleak-picture-of-economic-performance-in-Belize_75645