On July 30, 2014, the Executive Board of the International Monetary Fund concluded the 2014 Article IV consultation discussions with Curaçao and Sint Maarten, two autonomous countries within the Kingdom of the Netherlands, and considered and endorsed the staff appraisal without a meeting.1,2
After some initial slippages, both countries have brought their fiscal policies in compliance with the fiscal rules that had been agreed with the Netherlands in 2010 in exchange for significant debt relief. Curaçao in particular has decisively addressed the spending pressures related to its aging population, which were especially acute. This supported a gradual but steady reduction in the union’s current account deficit—the key economic vulnerability flagged by the 2011 Article IV Consultation discussions—though this remains large.
Curaçao's real GDP contracted by an estimated 0.5 percent in both 2012 and 2013 due to the needed fiscal adjustment, a continued decline in the international financial sector, and the slow global recovery, all combined with long-standing structural weaknesses. Sint Maarten has been recovering, growing by about 1 percent on average over 2012-13, thanks to the ongoing recovery in the United States (the source of 60 percent of its tourists) and the construction of the Simpson Bay causeway.
The improving global outlook and the recovery in tourism are expected to support economic activity in the near term, especially in Sint Maarten. Curacao’s economic activity will also benefit from the construction of a large new hospital. Growth should accelerate in the medium term, especially if structural bottlenecks hampering investment, innovation, and competitiveness are addressed.
Executive Board Assessment
In concluding the 2014 Article IV consultation with Curaçao and Sint Maarten, Executive Directors endorsed the staff’s appraisal, as follows:
The authorities of both countries have made important efforts to strengthen their underlying fiscal position. Looking forward, they should continue to gear fiscal policy toward supporting ongoing external adjustment and building buffers. Curaçao should reform the public sector pension system, achieve further efficiency gains in the public apparatus, and improve the governance of its public companies. For Sint Maarten, strengthening the tax administration to tackle declining tax compliance and fund its newly acquired functions is critical. The latter could also be bolstered by increased contributions to the budget by public companies. The next government after the coming elections should build on the current administration’s efforts to keep public wage developments in check, including by reviewing the existing indexation mechanisms. These policies would allow both countries to maintain public debt at sustainable levels despite important investment needs, and build buffers to respond to future shocks. Keeping public sector wage growth firmly in line with productivity is also important for its signaling effect on private sector wages.
The central bank should encourage prudent lending behavior and closely monitor banks’ deteriorating asset quality. Rather than resorting to bank-level credit ceilings, banks’ excess liquidity should be sterilized through a more aggressive use of certificates of deposits and further reserve requirement increases as appropriate. Over time, the existing limits and penalties on outward investment by pension funds should be removed. As planned, the central bank should divest its holdings of non-financial corporates’ bonds, and refrain from direct financing of non-financial companies in the future.
Significantly greater effort is needed in tackling structural impediments to growth and job creation. A dynamic private sector, which is the linchpin of sustained growth in the medium term, requires tackling the maze of permits and licenses, which has hampered investment and innovation, especially in Curaçao. Rigid labor laws and the system of welfare payments for unemployed should be reviewed, to shift emphasis from protecting jobs to protecting workers, facilitate needed cyclical adjustments in the workforce, and ensure adequate incentives and support for job search by the unemployed. Restrictions to hiring foreign workers should be removed, while at the same time ensuring that all workers (local and domestic) are afforded adequate labor conditions. These policies and reforms would also underpin the currency peg (which has provided both countries with a stable macroeconomic environment since 1971) via increased flexibility, competitiveness, and capacity to withstand shocks.
Finally, both governments should improve the statistical infrastructure and data—which are presently not adequate for effective macroeconomic analysis, surveillance, and policy response—through greater investment and, where appropriate, technical assistance.