Belize: Selected Issues

May2023 BELIZE SELECTEDISSUES IMFCountryReportNo.23/165 ThisSelectedIssuespaperonBelizewaspreparedbyastaffteamoftheInternationalMonetaryFundasbackgrounddocumentationfortheperiodicconsultationwiththemembercountry.ItisbasedoninformationavailableatthetimeitwascompletedonApril18,2023. TheIMF’stransparencypolicyallowsforthedeletionofmarket-sensitiveinformationandCopiesofthisreportareavailabletothepublicfrom InternationalMonetaryFundPublicationServicesPOBox92780Washington,D.C.20090Telephone:(202)623-7430Fax:(202)623-7201 E-mail:publications@imf.orgWeb:http://www.imf.orgPrice:$18.00perprintedcopy InternationalMonetaryFundWashington,D.C. ©2023InternationalMonetaryFund April18,2023 BELIZE SELECTEDISSUES PreparedByJaimeGuajardo,ThomasDowling,ShaneLowe,andRafaelMachadoParente ApprovedBy WesternHemisphereDepartment CONTENTS ANALYZINGINFLATIONDYNAMICSINBELIZE3 A.Introduction3 B.PrincipalComponentAnalysis(PCA)4 C.EstimatinganAugmentedPhilipsCurve6 D.Conclusions9References10 FIGURES 1.InflationDecompositioninCaribbeanPeggersversusFloaters5 2.TheImportanceoftheFirstGlobalFactorofInflation6 3.DriversofInflationandtheImportanceofUSInflation8 4.InflationProjectionsandContributions9 TABLE 1.PhillipsCurveEstimates7 REFORMINGBELIZE’SPENSIONPLANFORPUBLICOFFICIALS11 A.Introduction11 B.TheDemographicModel13 C.Wages,Pensions,andthePPPODeficit15 D.PensionReforms15 E.Conclusions18References19 BELIZE FIGURES 1.ProbabilityofDeathandLifeExpectancybyAge14 2.DistributionofPublicSectorRetireesbyAgeandDemographicRatio14 3.ReformstothePPPO17 4.EliminatingthePPPODeficitby204517 TABLE 1.IncreaseinWagesforWorkingOneExtraYear16 2INTERNATIONALMONETARYFUND ANALYZINGINFLATIONDYNAMICSINBELIZE ThischapterstudiesinflationdynamicsinBelizewiththegoalofquantifyingtheroleofexternalanddomesticfactorsintherecentinflationaryepisodeandprojectinginflationgoingforward.ThechapterfirstappliesaPrincipalComponentAnalysis(PCA)toinflationdataofseveralcountriesandfindsthatglobalfactorshavecontributedsubstantiallytoboththehistoricalvariationandtherecentsurgeinBelize’sinflation.AnestimatedPhillipscurvealsofindsthatexternalfactors,proxiedbyfoodandfuelpricesandUSinflation,havebeenakeydriverinthesurgeinBelize’sinflationduringthelasttwoyears.Goingforward,thePhillipscurveprojectsthatBelize’sinflationwillgraduallyfallto1.2percentoverthemediumtermascommoditypricesandglobalinflationdecline. A.Introduction 1.Belize’sinflationhasrisensignificantlysincemid-2021,inlinewithregionalpeers.Theincreaseininflationhaslikelybeenduetobothexternalanddomesticfactors.Externalfactorsincludedisruptionsinglobalvaluechains,highershippingcosts,andincreasedglobalfoodandfuelprices,particularlyin2022followingRussia’sinvasionofUkraine.Domesticfactorsincludeclosingoutputgapsaseconomicactivityrecoveredfromthepandemic,currencydepreciations,andhigherinflationexpectationsinsomecountries. HeadlineInflationinLatinAmericaandtheCaribbean LA5 Barbados Jamaica Belize TheBahamasTrinidadandTobago (Inpercent,yearonyear)14 12 10 8 6 4 2 0 Jan-16Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19Jul-19 Jan-20 Jul-20Jan-21 Jul-21 Jan-22 Jul-22 -2 Sources:HaverAnalyticsandIMFstaffcalculations. Note:LA5=simpleaverageofBrazil,Chile,Colombia,Mexico,andPeru. 2.ThischapterseekstoquantifytheroleofexternalanddomesticfactorsontherecentincreaseinBelize’sinflationandprojectinflationgoingforward.ItfirstappliesaPCAtotheinflationratesof68countriesduring2000-22toidentifyglobalfactorsdrivinginflationdynamicsacrosscountriesandestimatetheirimportanceforBelize.Tocomplementthisanalysis,thechapteralsoestimatesanaugmentedPhillipscurveusinglocalprojectionmethods,whichisusedtoanalyzethedriversoftherecentsurgeininflationandprojectinflationgoingforward. 3.GlobalfactorsexplainmostoftherecentsurgeininflationinBelizeandareprojectedtoreduceinflationgoingforward.ThePCAshowsthatglobalfactorsexplainover70percentofthehistoricalvariationinBelize’sinflationsince2000andnearlyalltheincreaseininflationbetweenJune2021andJune2022.ThePhillipscurvealsoshowsthatexternalfactors,proxiedbyglobalfoodandfuelpricesandUSinflation,explainmostofincreaseininflationsincemid-2021,andprojectsthatthesefactorswilllowerinflationinBelizeinthecomingyearsasUSinflationandglobalfoodandfuelpricesdecline. INTERNATIONALMONETARYFUND3 B.PrincipalComponentAnalysis(PCA) 4.ThecontributionofglobalfactorstoinflationvariationinBelizeisestimatedusingPCA.PCAmodelstransformmanycovaryingtimeseriesintoasmallernumberoforthogonalseries(sequencesofcommonorglobalfactors),inawaythateachsuccessivecommonfactorexplainsasmuchaspossibleoftheremainingvariationintheoriginaltimeseries.ThePCAmodelisappliedtothemonthlyyear-on-yearheadlineinflationratesof68countriesbetweenJanuary2000andAugust2022,standardizedwithmeanzeroandastandarddeviationofone.Regionalaggregatesarecalculatedusing2019populationweights. 5.Theinflationrateisdecomposedbetweenaglobalcomponentandanidiosyncraticcomponent.Foreachcountry𝑖�∈[1,2,…,68],inflationisdecomposedintoaglobalcomponent,whichtakesintoconsiderationcountry-specificloadingcoefficientsover