2009/2010 BUDGET FOR BELIZE INTRODUCES NEW FUEL TAX

UNCLAS BELMOPAN 000123 DEPT FOR WHA/CEN (CHRISTOPHER ASHE),EEB E.O. 12958: N/A TAGS: ECON EFIN ETRD PGOV BH SUBJECT: 2009/2010 BUDGET FOR BELIZE INTRODUCES NEW FUEL TAX REF: 08BELMOPAN 336 -------------- Summary -------------- ¶1. On March 6, 2009, Prime Minister Dean Barrow presented his second budget for FY 2009/2010 to the National Assembly. After projections of a budget surplus in 2008/2009, the new budget will result in a deficit of 1.7% for the next fiscal year. This turnaround reflects an increase in the government's allocations to its infrastructure projects and decreased revenues from income and sales taxes. In response, the GOB will introduce a fuel tax of one Belize dollar (USD 0.50) per U.S. gallon. The new tax is expected to net BZD 32 million (USD 16),and will cover 50% of the government's initial budget shortfall. The remaining financing requirements will be met with loans and grants from foreign sources including the Inter-American Development Bank (IDB),Venezuela's Petrocaribe Loan Facility, and government of ROC/Taiwan. The introduction of a new tax highlights the government's cash flow issues and raises expectations that the higher fuel costs will place additional upward pressure on prices over the next few months. End Summary. -------------- The Budget - Overcoming the Challenges -------------- ¶2. On March 6, 2009, at a meeting of the House of Representatives, Prime Minister (PM) and Minister of Finance Dean Barrow introduced the GOB budget for FY 2009/2010. The budget was presented under the theme "overcoming the challenges and pursuing the opportunities". In his opening remarks he gave an overview of the economic developments for 2008 and boasted about his government's strong performance, despite significant economic setbacks. In 2008, the Belizean economy faced three major shocks: financial turmoil in the economies of its main trade partners, a slump in the price of crude oil, and two major natural disasters that by themselves caused an estimated BZD 132 (USD 66) million in damage. Despite this, the PM noted that the FY 2008/2009 budget was well-financed, with all initial projections indicating that there would be a surplus in the overall budget. ¶3. Notwithstanding the global financial slowdown and extensive flood damage, Barrow reported that the Belizean economy expanded, with the Gross Domestic Product (GDP) growth rate rising from 1.6% in 2007 to 3.8% in 2008, though this is expected to decline back to 2.5% in 2009. The petroleum, banana, and citrus sectors were the main economic drivers. In the trade account, exports grew by 8.7%, while imports rose by 22.4%. This has resulted in widening the trade deficit and tripling the current account deficit. Outstanding external debt at the end of 2008 stood at USD 954.1 million, representing 67.7% of GDP compared to 76.7% in 2007, while gross international reserves were USD 77.9 million. Total debt in 2008 represented 76.9% of GDP compared to 89.4% in 2007. ¶4. With original projections of a budget surplus of 1.27% in FY 2008/2009, the FY 2009/2010 budget forecasts a 1.8% reduction in total revenues, resulting primarily from a reduction in revenues from income and sales taxes, coupled with a 9.3% expansion in total expenditures, which includes a BZD 200 (USD 100) million economic stimulus package introduced earlier this year. This change will push the overall balance into a deficit of 1.7% of GDP. However, when we look at the primary balance, which does not take into account interest paid on servicing foreign debt, a surplus of 1.8% of GDP is still projected, though this is still a sharp contraction from the 4.1% primary surplus balance that existed in FY 2008/2009. This turnaround reflects an increase in the Government's allocations to its capital III projects, which consist of donor-financed capital expenditures. -------------- A New Tax -------------- ¶5. In fiscal year 2008/2009 the government introduced a petroleum surcharge tax (reftel) on producers, but low oil prices prevented the government from deriving the revenue it expected. Now, the GOB plans to introduce a new tax measure in order to help compensate for the negative budget balance. The new initiative will introduce a BZE 1.00 (USD .50) tax per gallon of fuel, and is expected to net an additional BZD 32.0 million (USD 16). The revenue from this tax will represent 50% of the government's initial financing shortfall. The remaining financing requirements will be provided in the form of loans and grants from foreign sources, including the IDB, Venezuela's Petrocaribe Loan Facility, and the government of ROC/Taiwan. -------------- The Stimulus Package -------------- ¶6. The FY 2009/2010 budget includes a stimulus package that was introduced by the PM earlier this year. According to the GOB, the package is aimed at "increasing employment, pumping money into the economy, and creating a rising tide designed to float all boats even in a time of recession." The USD 100 million package entails substantial government expenditures which will be financed primarily through concessionary loans (55%),grants (40%),and from government accounts. No tax rebates or incentives were introduced within the stimulus package. The package focuses on targeting priority sectors of the economy, including tourism, infrastructure upgrades especially highways and bridges, and urban renewal projects across the country. The package also provides for an initial recapitalization of the Development Finance Corporation, with the objective of addressing broader socio-economic challenges by providing affordable loans to the agriculture sector and students. -------------- Comment -------------- ¶7. Except for the oil sector, the Belize economy remains stagnant. However, revenue growth even this sector is now being threatened by low international prices. The cost of living and the unemployment rate remain high while tourism and investment inflows continue to be affected by the global economic downturn and consequently squeeze consumers' pocketbooks. The introduction of a new tax highlights the government's cash flow issues and raises expectations that the higher fuel costs will place additional upward pressure on prices over the next few months. Prior to the general election in February 2008, it was difficult for the previous government to borrow from foreign sources. It is still difficult for the new government to borrow externally but the confidence of the international lender/donor community seems to be on the rise. The GOB has benefited from the generosity of the government of ROC/Taiwan in the past and continues to negotiate with the Taiwan for additional support, although with lower expectations this year. ¶8. The next election is scheduled for three long years from now and therefore the UDP government may not be overly concerned about the public's growing frustration over the economy. The UDP is also fortunate that the opposition party is troubled by continuing weak leadership, in particular during the budget process. Reports indicate that key representatives in the People's United Party (PUP) chose not to participate in the GOB's pre-budget consultations, while other members were not invited. At least two PUP members did not participate in the National Assembly budget debate proceedings, prompting the Prime Minister to end the debate one day early. The PUP's failure to use this forum to express party priorities is viewed by many as a lost opportunity and a manifestation of a very "un-United" People's Party. End Comment. ¶9. Table I. The following table summarizes government's FY 2009/2010 budget (all figures are BZD millions) (BZD 2 = USD 1): - Budget Revised Est. - FY 09/10 FY 08/09 - -------------- -------------- Recurrent Revenue: - tax revenue 670.10 629.50 - non-tax revenue 81.20 80.51 Capital Revenue: 5.60 7.12 Grants: 50.50 105.10 - Total 807.40 822.20 Recurrent Expenditures: - salaries, etc. 276.60 260.00 - debt services 106.57 103.98 - pensions 43.91 46.00 - goods/services 262.70 236.73 Capital Expenditure: 169.90 139.30 -Total 859.68 786.00 Overall surplus/(deficit): -1.72% 1.27% Primary surplus/(deficit): 1.79% 4.90% DIFFILY