The remaining imbalances

2. Since the last Article IV consultation the authorities have tightened macroeconomic policies substantially. During FY05/06 (April-March), revenue measures and cuts in capital expenditures helped reduce the overall deficit of the central government to about 3½ percent of GDP from almost 9 percent of GDP in the previous year. The primary surplus rose to about 3 percent of GDP, implying a cumulative improvement of almost 9 percent of GDP since FY02/03. The Central Bank of Belize (CBB) also took additional steps to contain the expansion of money and credit by channeling social security deposits to the central bank and increasing the cash and liquid assets reserve requirements by one percentage point each on three occasions.

3. However, these steps alone are not yet sufficient to place the economy on a sustainable path. While bilateral financing, better-than-expected exports, and foreign direct investment are helping to close the foreign financing gap for the current year, international reserves remain very low at less than one month of imports.

Under current policies, the mission estimates on a preliminary basis that in 2007 Belize's net balance of payments financing needs will reach about 10 percent of GDP, and remain high thereafter at about 6 percent of GDP during 2008-11 and more than 10 percent during 2012-15. Foreign financing of this magnitude may not be forthcoming, given Belize's high external public debt burden; and, even if it could be obtained, its high cost would worsen the debt dynamics and leave the economy vulnerable to adverse shocks. At the same time, fully closing such large financing gaps through further fiscal and monetary tightening would not be feasible without severely disrupting economic activity.