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IMF Executive Board Concludes 2019 Article IV Consultation with Curaçao and Sint Maarten

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Via IMF (Den Internationale Valutafond)

IMF Executive Board Concludes 2019 Article IV Consultation with Curaçao and Sint Maarten







April 1, 2020















WASHINGTON, DC
– the Executive Board of the International
Monetary Fund (IMF) concluded the Article IV consultation

[1]

with Curaçao and Sint Maarten, two autonomous constituent countries within
the Kingdom of the Netherlands, and considered and endorsed the staff
appraisal without a meeting.

[2]

These consultation discussions form part of the Article IV consultation
with the Kingdom of the Netherlands.

The analysis below reflects discussions with the Kingdom of the
Netherlands—Curaçao and Sint Maarten authorities in November 2019 and is
based on the information available as of March 3, 2020. It focuses on
Curaçao and Sint Maarten’s near and medium-term challenges and policy
priorities and was prepared before COVID-19 became a global pandemic and
resulted in unprecedented strains in global trade, commodity and financial
markets. It, therefore, does not reflect the implications of these
developments and related policy priorities. The outbreak has significantly
worsened the outlook and greatly amplified uncertainty and downside risks
around it. Staff is closely monitoring the situation and will continue to
work on assessing its impact and the related policy response in Curaçao and
Sint Maarten and globally.

Over the last few years, Curaçao and Sint Maarten have faced significant
challenges. Curaçao has been in a recession since 2016 mainly due to
continued spillovers from the Venezuela crisis, and real GDP contracted by
an estimated 2 percent in 2019. The unemployment rate increased to 21.2
percent in April 2019, among the highest in the region. The economy of Sint
Maarten was severely damaged by Hurricanes Irma and Maria in 2017 and
despite €550 million pledged by The Netherlands to support reconstruction,
rebuilding has been slow. Real GDP is estimated to have contracted by
almost 17 percent in 2017−18 as tourism plummeted, although the economy
rebounded strongly by an estimated 5 percent in 2019.

The fiscal position in Curaçao improved in the past two years, in part due
to implemented fiscal measures. The primary fiscal deficit declined from 2½
percent of GDP in 2017 to 1.3 percent of GDP in 2019, as the net operating
(current) deficit declined to 0.3 percent of GDP, due to measures to
increase revenue and contain expenditure. In Sint Maarten, the hurricanes
widened the primary fiscal deficit excluding Trust Fund operations to 4
percent of GDP in 2018, but it declined to 0.8 percent of GDP in 2019 on
account of economic recovery.

The external position of the Union worsened since 2016. The current account
deficit (CAD) widened from 15.2 percent of the union GDP in 2017 to an
estimated 21.8 percent of GDP in 2019 mainly because of a larger CAD in
Curaçao, where imports increased significantly due to spillovers from
Venezuela. Despite double-digit CADs, the pressure on international
reserves has been mild as they declined from 4.4 to 4.0 months of imports
of goods and services between 2017 and 2019.

Executive Board Assessment

[3]

The Union’s growth outlook is improving but remains fragile. After 4 years
of continuous recession, Curaçao’s real GDP is expected to remain flat in
2020 and grow by 1½ percent in 2021 as the agreement with the Klesch Group
is expected to revive the Isla refinery. However, growth would return to
substandard, around ½ percent, in the medium term reflecting persistent
structural challenges. In Sint Maarten, real GDP is expected to grow by 2.9
percent in 2020, gradually converging to 2 percent in the medium term as
the economy recovers from the effects of the devastating 2017 hurricanes.
The external positions in both Curaçao and Sint Maarten are weaker than
warranted by fundamentals and desired policy settings.

Downside risks are substantial. Curaçao’s outlook is vulnerable to setbacks
with reviving the refinery and to possible spillovers from financial system
fragilities. Delays in addressing these fragilities could heighten
uncertainty and lead to exchange rate pressures. The recovery in Sint
Maarten is vulnerable to delays in key projects such as airport
reconstruction and frequent changes in government that impede the
implementation of key reforms. Both countries remain vulnerable to a
slowdown in main trading partners.

Improving the functioning of the Union requires better policy frameworks,
stronger buffers and a consistent and credible macro framework based on
better data. A significant improvement in data availability and quality is
needed as current gaps hamper effective macroeconomic analysis and
surveillance. In both countries, the macro framework should incorporate a
gradual fiscal adjustment and be supported by strong broad-based structural
reforms to raise potential growth—this would be critical for improving
external sustainability. The framework should incorporate contingent
measures to address fiscal risks, e.g. costs of resolving financial system
vulnerabilities in Curaçao.

Both Curaçao and Sint Maarten would benefit from introducing a Fiscal
Responsibility Framework. It could incorporate a central government debt
ratio as a long-term anchor and operational rules calibrated to meet it.
Setting a relatively low debt target of 40 percent of GDP would provide
more fiscal space in the event of negative shocks. The framework should
contain clearly articulated escape clauses setting out circumstances
justifying deviations from targets while retaining sustainable policies.

Strong implementation of fiscal reforms will be key for maintaining the
sustainability of public finances. In Curaçao, signing the Growth Accord
with The Netherlands and implementing several measures are welcome steps
forward. The base of the planned general consumption tax should be
broadened to domestically produced goods in conjunction with a
comprehensive tax offset mechanism. In Sint Maarten, the sustainability of
public finances hinges on steady implementation of reforms, including
improving revenue administration, strengthening PFM and restoring financial
sustainability of the health sector. It will be important to secure
financing for these reforms to avoid delays.

The CBCS should strengthen its monetary policy to support the peg. The CBCS
should develop the policy rate communicating the stance of monetary policy
and be prepared to increase interest rates to prevent capital outflows. It
should use its certificates of deposit more vigorously to absorb the excess
liquidity. Over the longer term, the authorities should consider revising
the current standing subscription framework to allow the development of
domestic debt markets.

Risks in the financial sector need to be addressed as a matter of priority.
The authorities should develop a strategy for addressing financial sector
vulnerabilities with the objective of preserving financial stability while
minimizing fiscal costs. A thorough diagnostic of deposit takers, along
with a strategy to deal with any issue that may be identified, would help
support financial stability.

Significant strengthening of supervision and a complete overhaul of the
bank resolution framework are also urgently needed. The authorities should
be prepared to recapitalize the CBCS if costs related to monetary policy or
addressing financial system vulnerabilities reduce its capital buffer.

Broad structural reforms would be key to enhancing potential growth in both
countries. Strong efforts to improve the business environment, increase
labor market flexibility while fine-tuning safety nets and addressing
skills gaps are needed in both countries. Both countries should update
their tourism master plans and Sint Maarten would benefit from a
comprehensive disaster resilience strategy.

An across-the board improvement in the governance framework should be a key
priority in both countries. Vulnerabilities in the financial system point
to the need to strengthen governance in the financial sector. The CBCS
needs to complete its governance structure by appointing a President.
Increased efforts are required to strengthen the AML/CFT framework in both
countries. In the fiscal area, stronger internal controls and public
financial management are needed to reduce opportunities for corruption.
Both countries need to operationalize their integrity bodies.

It will be important to continue developing the capacity of public
institutions and enhance the quality of statistics. In Sint Maarten, the
authorities should enhance the capacity to absorb aid. In both countries,
data availability and quality need to be improved significantly for
effective surveillance.


Curaçao: Selected Economic and Financial Indicators,
2016–21

Area

444(km2)

Population, thousand (2017)

160

Percent of population below age 15 (2017)

18.7

Literacy rate, in percent (2010)

96.7

Percent of population aged 65+ (2017)

16.4

Life expectancy at birth, male (2016)

74.8

Infant mortality, over 1,000 live births (2016)

11.2

Life expectancy at birth, female (2016)

81.1

2016

2017

2018

2019

2020

2021

Prel.

Prel.

Est.

Proj.

Real economy (percent change)

Real GDP

-0.9

-1.7

-2.2

-2.0

0.0

1.5

CPI (12-month average)

0.0

1.6

2.6

2.6

3.7

2.9

Unemployment rate (percent)

13.3

14.1

13.4

19.0

19.0

18.1


General government finances (percent of GDP)

Net operating (current) balance, central government

-0.4

-2.1

-1.2

-0.3

-0.7

1.1

Primary balance, general government

-3.1

-2.5

-1.0

-1.3

-1.2

0.8

Overall balance, general government

-4.1

-3.5

-2.1

-2.4

-2.4

-0.4

Central government debt 1/

50.6

54.5

54.6

54.0

56.0

54.0

Balance of payments (percent of GDP)

Current account

-18.7

-21.9

-28.7

-20.8

-20.5

-19.1

Goods trade balance

-34.1

-33.5

-38.6

-33.9

-33.5

-35.5

Exports of goods

11.6

13.6

16.9

15.0

13.8

13.4

Imports of goods

45.7

47.1

55.5

48.9

47.3

48.8

Service balance

17.2

11.8

9.7

12.7

13.6

17.0

Exports of services

45.5

43.0

44.5

42.8

44.7

48.2

Imports of services

28.3

31.3

34.9

30.2

31.1

31.2

External debt (percent of GDP)

125.5

133.3

145.7

153.7

158.9

162.8

Memorandum items:

Nominal GDP (millions of U.S. dollars)

3,122

3,117

3,128

3,146

3,263

3,408

Per capita GDP (U.S. dollars)

19,473

19,478

19,714

19,908

20,668

21,587

Per capita GDP (percent change)

-1.8

0.0

1.2

1.0

3.8

4.4

Private sector credit (percent change)

2.4

2.5

2.2

Fund position

Curaçao is part of the Kingdom of the Netherlands and
does not have a separate quota.

Exchange rate

The Netherlands Antillean guilder is pegged to the U.S.
dollar at NAf 1.79 = US$1.

Sources: Data provided by the authorities; and IMF
staff estimates.

1/ Defined as balance sheet liabilities of the central
government except equities. Includes central government
liabilities to the social security funds.

 

Sint Maarten: Selected Economic and Financial
Indicators, 2016–21

Area

34 (km2)

Population, thousand (2018)

41

Percent of population below age 15 (2018)

20

Literacy rate, in percent (2011)

93.8

Percent of population aged 65+ (2018)

7.9

Life expectancy at birth, male (2016)

74.0

Infant mortality, over 1,000 live births (2010)

6.0

Life expectancy at birth, female (2016)

80.6

2016

2017

2018

2019

2020

2021

Prel.

Prel.

Est.

Proj.

Real economy (percent change)

Real GDP

0.4

-8.4

-8.5

5.0

2.9

2.5

CPI (12-month average)

0.1

2.2

2.9

0.7

2.5

2.2

Unemployment rate (percent)

8.7

6.2

9.9

9.1

8.7

8.4


General government finances (percent of GDP)

Primary balance excl. Trust Fund operations 1/

2.0

-2.9

-4.0

-0.8

-3.1

-2.3

Current balance (Authorities’ definition) 2/

1.0

-4.0

-5.3

-1.9

-1.4

-1.0

Overall balance

1.4

-3.6

-3.8

-1.6

1.3

4.9

Central government debt 3/

44.5

46.0

54.4

51.3

52.6

55.3

Balance of payments (percent of GDP)

Current account

-2.5

4.6

6.7

-24.8

-24.0

-17.0

Goods trade balance

-67.5

-63.0

-78.9

-75.3

-75.3

-74.7

Exports of goods

12.3

12.1

15.6

15.7

15.6

15.6

Imports of goods

79.8

75.1

94.4

91.1

90.9

90.2

Service balance

70.6

56.6

34.5

52.7

53.4

56.0

Exports of services

96.3

82.8

69.3

88.0

87.7

89.8

Imports of services

25.7

26.2

34.8

35.3

34.3

33.8

External debt (in percent of GDP)

236.0

267.1

266.3

265.0

255.4

252.8

Memorandum items:

Nominal GDP (millions of U.S. dollars)

1,072

1,014

954

1,009

1,064

1,115

Per capita GDP (U.S. dollars)

27,203

25,010

23,495

24,526

25,545

26,423

Per capita GDP (percent change)

-2.4

-8.1

-6.1

4.4

4.2

3.4

Private sector credit (percent change)

-1.6

-1.7

0.9

Fund position

Sint Maarten is part of the Kingdom of the Netherlands
and does not have a separate quota.

Exchange rate

The Netherlands Antillean guilder is pegged to the U.S.
Dollar at NAf 1.79 = US$1.

Sources: Data provided by the authorities; and IMF
staff estimates.

1/ Excludes capital expenditure and Trust Fund-financed
special projects.

2/ Revenue excl. grants minus interest income, current
expenditure and depreciation of fixed assets.

3/ The 2016 stock is based on financial statements.
Values in subsequent years are staff’s estimates and
are higher than under authorities’ definition.




[1]

Under Article IV of the IMF’s Articles of Agreement, the IMF holds
bilateral discussions with members, usually every year. A staff
team visits the country, collects economic and financial
information, and discusses with officials the country’s economic
developments and policies. On return to headquarters, the staff
prepares a report, which forms the basis for discussion by the
Executive Board.


[2]

The Executive Board takes decisions under its lapse of time
procedure when it is agreed by the Board that a proposal can be
considered without convening formal discussions.


[3]

At the conclusion of the discussion, the Managing Director, as
Chairman of the Board, summarizes the views of Executive Directors,
and this summary is transmitted to the country’s authorities. An
explanation of any qualifiers used in summings up can be found
here:

http://www.IMF.org/external/np/sec/misc/qualifiers.htm

.


IMF Communications Department
MEDIA RELATIONS

PRESS OFFICER: Randa Elnagar

Phone: +1 202 623-7100Email: MEDIA@IMF.org

@IMFSpokesperson








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