The ‘heavy-laden’ the Belizean Economy: The need to ‘do no more harm’

Business Perspective

The ‘heavy-laden’ the Belizean Economy: The need to ‘do no more harm’

It is certainly no secret that the Belizean economy—like most economies around the globe—is in a bad place. Having declined by more than 14%, it is no wonder that unemployment surged from 2019’s ten percent to roughly 30% last year. And for those who regularly follow the Statistical Institute of Belize (SIB)’s consumer price index (CPI) reports, headline inflation have been inching up each month this year (when compared to the same periods in 2020), with the latest release placing average prices at 2.5%.

In many instances, it is safe to say that Belize “imports” a lot of her inflation. As was seen recently with poultry prices when the world market prices for intermediate inputs—such as soybean meal and corn feed used to feed chicken—climb, it is only a matter of time before the effects reach our shores. This same reality is true for fuel. Looking beyond the ‘headline inflation’ for April 2021, it is not surprising to see that the prices for premium, regular, and diesel fuel have increased by 6.4%, 4.2%, and 19.5%, respectively, given the trends on the global market for the first four months of 2021.

To summarize things on the inflation side, the SIB wrote: “This overall change was the net effect of higher costs for food items, fuel, Liquefied Petroleum Gas (LPG), home rentals and personal care products, being partially offset by lower prices for hotel accommodations and men’s and women’s footwear.” Inflation—in some circles described as a type of implicit tax on (holding) money—has been empirically shown to have negative impacts on an economy. But that makes intuitive sense, right? As prices go up, the household’s spending power is reduced; thereby, forcing consumers to adjust accordingly. This latter point must be considered within that backdrop of a 30% unemployment rate, wherein household incomes (what’s left of them) are already depressed.

Of course, there are other “downside” risks, with the largest one of all being the yearly disquiet about natural disasters including hurricanes, floods, and even a repeat of drought conditions. As alluded to above, there is always the matter of possible large upswings in energy prices, as Belize, being a net importer of fuel would be hard hit by any such change. Finally, due to a mix of factors including logistical ones, there are continued concerns regarding supply-chain disruptions.

The upside, of course, would be a continued rise in the world prices for products exported by Belize. The Food and Agriculture Organization (FAO)’s “Food Price Index” for May 2021 has indicated an increase in commodity prices, with strong upticks in the prices of sugar.  It is also encouraging to note that the SIB is reporting that merchandise exports “for the period January to April 2021 totaled $126.5 million, up 12.8 percent or $14.4 million from the same period last year.” While the export figures have not returned to their 2019 levels ($139.7 million for the first four months in 2019), it is still promising to see some form of recovery over last year’s levels ($110 million).

On the Homefront: “Procyclicality”

It is, however, difficult to discuss the weights pressing down on the Belizean economy without discussing certain factors on the homefront. More specifically, two salient variables must come to the fore: The Government’s ongoing fiscal consolidative measures and the Public-Sector’s Joint Union’s response.

Regarding the former, it is hardly a debate in economic literature that recession-times cuts to public sector spending—which includes the cut to public-sector salaries—will have short-term “adverse” macroeconomic effects. The World Bank had worded this thought process as follows:

“There will always be a trade-off between the fiscal savings from wage bill reductions that could finance transfers to private sector households on the one hand and the impact these measures have on the families of public sector employees on the other. This is a difficult choice, but governments should err on the side of maintaining public sector employment and wages at pre-crisis levels, for the following reasons. …Public sector employees are among the few with relative job security, and curbing their household consumption ability could further suppress economic demand”—(World Bank’s “Governance COVID-19 Response: Managing the Public Sector Wage Bill during COVID-19” report).

Now, Belize—being a country with a pegged currency and an economy that relies on strategic imports (food, energy, medicine, intermediate inputs, and so on)—it is imperative that the “creation” of Belizean dollars be ‘backed’ by inflows of US dollars (foreign currency). However, in an environment where the tourism sector—which accounts for roughly 60% of Belize’s foreign currency inflows—has been so heavily hit by the COVID-19-induced global recession, the government must be circumspect in how it goes about “printing” money. While a full discussion on monetary policy is beyond the scope of this article, let it be suffice to say that the Government of Belize cannot—at least not without severe consequences—emulate the types of (Trillion dollar) stimulus packages that are being executed in jurisdictions such as the United States.

Consequently, as had happened to Latvia around the time of the Great Recession (2008/9), and as explained by Economists Jose Antonio Cordero in this 2009 paper “The IMF’s Stand-by Arrangements and the Economic Downturn in Eastern Europe: The cases of Hungary, Latvia, and Ukraine”, countries faced with the conditions above have limited options. In the case of Latvia, Cordero wrote:

“Maintaining the peg also prevents the government from allowing its currency to depreciate, which would not only stimulate growth but also adjust the current account, as exports become cheaper and imports more expensive. The preclusion of this policy option means that the only way to bring the current account deficit under control, with standard policy tools, is to shrink the economy. This reduces the current account deficit by reducing imports more quickly than exports fall.”

The use of Cordero’s quote is by no means an attempt to advocate for devaluation or dislodgement from the peg. Instead, it is used here to underscore a salient point: “The only way to bring the current account deficit under control—with the STANDARD POLICY TOOLS—is to shrink the economy.” Beyond mere “fiscal consolidation”, that is essentially the card on the table. Looked on from that vantage point that we’ll colorfully dub for the purposes of this article as the “Cordero Effect”, then without access to standard expansionary monetary and fiscal tools, then one could see why “procyclicality” has basically become the present policy mix. Of course, this would rightfully lead one to ask whether or not there are “Non-standard policy options”; however, again, that’s another topic for another article. However, this is also the reason why there was a Central Bank (Amendment) Act that government officials have already said will be targeted towards the exporters (those earning foreign currency).

On the Homefront: “Bureaucratic (in)efficiency”

Now, with the preceding—including the “Cordero Effect” in tow—we must add the recent industrial actions into the mix.

It is difficult to quantify whether the recent protests of the Joint Unions—a grouping comprised of the Association of Public Sector Senior Managers (APSSM), the Belize National Teachers’ Union (BNTU), and the Public Service Union (PSU)—have likewise had an adverse impact on the economy. This difficulty emerges for several reasons, not the least being the fact that statistically it would become challenging to disentangle the effects of the ongoing “Great Lockdown Recession”, the “drought watch” for part of 2021, and other ‘downside risks’ already discussed in the earlier sections of this article (see (Matta, Appleton, and Bleany, 2017 for detailed discussion on this matter).

Nonetheless, it is possible to discuss what we already know: That is, the longstanding positive correlation between “Regulatory Quality” and economic growth. The World Bank, since the mid-1990s, has been producing a Regulatory Quality Index (RQI) that looks at “the perceptions of the ability of the government to formulate and implement sound policies and regulations that permit and promote private-sector development”. The RQI, inter alia, looks at several factors including “bureaucratic inefficiency”.

As shown in Figure 1, Belize’s real GDP (economic output) moves in tandem with RQI. Actually, when the correlation is measured, it reveals a moderately positive (statistically significant) relationship between the two. This suggests that as one variable goes up, so does the other. The reverse is also true: As one goes down, so falls the other.

Why bring this up now? Well, for a couple reasons. Firstly, as far as the RQI goes, Figure 2 shows that Belize has not really been the paragon of regulatory quality—which, again, to be fair, measures more than just “bureaucratic (in)efficiency”. We have averaged well below the “World Median” for years, and the same is true when we are compared to our regional peers and countries of our income group.

Add to that a public-sector “go slow” or outright refusal to work due to industrial actions, and we find yet another variable fixing to slowdown an already stressed economy. Under the present circumstances, the level of inefficiency is at risk of increasing, leading to yet another “downside” risk being added to the mix.

In the End

To summarize, the Belizean economy is currently pressed down by multiple downside risks. Most of these risks are external (exogenous) factors, and include COVID-19, natural disasters and unwelcome changes to international prices.

Internally, the government—in the realm of keeping with “Standard Policy Tools”—is under the “Cordero Effect”. That is, implementing a policy mix that will virtually slow all non-export-oriented growth due to the need to narrow the current account deficit in the midst of limited access to fiscal and monetary levers.

And at the same time, the ongoing impasse has the potential of further reducing regulatory quality that is essential for private-sector development; thereby, adding more weights to the already heavy-laden Belizean economy.

Under these conditions, save for sudden upswings in Foreign Direct Investments (FDIs), a rally in the country’s export performance, or a suddenly strong recovery in tourism (not very likely), the outlook continues to look rather dim. Of course, “dim” as long as we keep with the standard route. There is need, however, for some “out of the box” thinking, but that’s a discussion for another week.