A POLICY RESPONSE TO BELIZE’S RECESSION

Over the period 2002 to 2006 Belize’s economic growth rate averaged 5.5% per annum.  This was directly attributed to an expansionary fiscal and monetary policy coupled with significant government spending.  Real economic output came to a slowdown in 2007 to 1.2% due to severe losses attributed to hurricane Dean.  By 2008 GDP growth was 3.6% which was good in light of the global economic slowdown; albeit it was accompanied in the last quarter with inflation of 9.6%, the highest levels in the last decade.  For the first two quarters of 2009 GDP growth has been negative.  The economy contracted by 2% in the first quarter and 1.3% in the second quarter.  This situation is therefore identified as a recession – when real GDP falls for two consecutive quarters.  Belize as a small and open economy is not immune to the exogenous shocks of the global economy.  Therefore, it was rather foolhardy for one to have expected that the global financial crisis would not have had an effect on our economy.  In anticipation of the global slowdown government ought to have created an appropriate policy response mechanism to ensure sustained demand.  However, aggregate demand is rather sluggish and an increase is a necessary condition to increase real output.

An appropriate policy response ought to have a two-prong approach to meaningfully address key areas, namely: consumer spending, investments, government spending and Belize’s trade balance – the last being the most important.  Due to the openness of the economy Belize’s trade policy is key to the medium term recovery efforts.  Current position indicates that the US economy has grown by some 3.5% up to third quarter in 2009.  As Belize’s largest trading partner it is expected that as that economy progresses on a path of recovery demand for our exports will likewise increase.  As this occurs supply-side constraints must be minimized at all cost.  This thus, requires less political intervention in the regulatory framework for some of the major export industries i.e. sugar and citrus.

The immediate and long-term implication of the current crisis requires that some key areas be explored to address trade policy formulation to direct trade patterns for goods, trade in services and foreign direct investments.  These must all be addressed within the ambit of a sustainable approach to our development that takes into account mitigating the effects of climate change.  In this light therefore, it is imperative that government examine the implications of the new multilateral framework under negotiations for the reduction of greenhouse gas emissions, as the goal of the impending conference on the Parties to the United Nations Framework Convention on Climate Change (UNFCCC).  The outcome of this gathering in Copenhagen in December would have serious implications for Belize’s long term development, as her vulnerability to climatic conditions is most evident.  Belize must be able to poise itself to access the required financial and technological resources needed to develop and trade environmental goods and services.

Belize’s trade strategy must create the opportunity for advancement in productive development, by creating new areas of comparative advantage, which are supported by continuous innovation and foreign direct investment.  Such an internationalization strategy must focus on the creation of a supporting environment to attract global value chains.  This can be undertaken in key areas such as tourism, with the establishment of flag ship properties. Government must take an active role in supporting the productive sector to take advantage of the market access into CARICOM and Central America.  The resent ratification by the Guatemalan Congress of the Partial Scope Agreement is a step in the right direction; although, the products to benefit under that agreement may require some revision.

The underlying key to achieving any successes in the medium term recovery efforts is the creation of a strong public-private partnership, where investors’ confidence is supported by meaningful Government interventions and not Government protection.  Also, a required imperative is low cost financing to the productive sectors.  Liquidity management through monetary policy implementation is a key role the Central Bank of Belize has to play in ensuring that the high levels of liquidity currently being experienced in the financial sector translates into lower lending rates.  Market based instruments for liquidity management is highly recommended, so as to reduce the interest rate spread between deposits and lending rates.  The Central Bank is task with ensuring that the banking sector functions at the required levels of efficiency in their operations.  The Central Bank does not dictate interest rates, but it does have at its disposal the tools required to manage prices (interest rates).  The current fixed rate of 3.25% per annum on Government Treasury Bills does not auger well for the development of active trading in Government securities, therefore it does not benefit the market or consumers.  Our Central Bank needs to act with some heighten interest in the execution of their mandated responsibility.

This short synopsis of a policy response is not the panacea to Belize’s current economic outlook, however strong macroeconomic policy can only be formulated and implemented if Government has the institutional capacity and commitment to fiscal discipline, good governance and respect for the rule of law.

Gwyneth Sydney Nah

11^th November 2009

Comments are welcomed at GwynethNah@gmail.com

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