Public Information Notice: IMF Concludes 2003 Article IV Consultation with the Kingdom of the Netherlands-Netherlands Antilles

June 13, 2003

Public Information Notices (PINs) are issued, (i) at the request of a member country, following the conclusion of the Article IV consultation for countries seeking to make known the views of the IMF to the public. This action is intended to strengthen IMF surveillance over the economic policies of member countries by increasing the transparency of the IMF's assessment of these policies; and (ii) following policy discussions in the Executive Board at the decision of the Board.The staff report (use the free Adobe Acrobat Reader to view this pdf file) for the 2003 Article IV consultation with the Kingdom of the Netherlands--Netherlands Antilles is also available.

On June 4, 2003, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with the Kingdom of the Netherlands—Netherlands Antilles.1


After a prolonged recession through the second half of the 1990s the Antillean economy has recently shown some important resilience. Resisting the adverse affects of the September 11, 2001 attacks and the U.S. recession on tourism, as well as economic difficulties in neighboring countries, the Antillean economy was able to register cumulative economic growth of some 0.8 percent over 2001 and 2002, in contrast to other countries in the region that experienced significant contractions. Strong performance of the Curacao tourism sector and of private investment were the main factors. For 2003, economic growth is projected at 0.5 percent on the back of the continuing rebound in tourism, expanded airlift capacity and higher consumption. These positive trends are, however, clouded by the sharp deterioration in the public finances.

With the exchange rate pegged to the U.S. dollar, the Netherlands Antilles have enjoyed low inflation, and with waning cost-push pressures related to higher energy costs and indirect tax increases, inflation has moderated to 0.5 percent in 2002. For 2003, inflation is projected to reach 2 percent in line with developments projected for the U.S. The external accounts have recently improved, largely reflecting trends in tourism and growth in the export free zone. Driven by strong inflows over 2001 and 2002, international reserves have reached a level of three months of imports.

The banking sector has shown some fragile signs of improvement, but high public debt and weak growth continue to pose a challenge to durable progress. The new fiscal framework with the Netherlands has provided some impetus to the international financial sector and more regulatory reforms are underway.

Past unsustained fiscal adjustment and weak growth have resulted in a rapidly increasing debt burden, now exceeding 75 percent of GDP. Problems in tax administration and the lifting of wage controls in the civil service, along with ongoing difficulties in controlling health care costs and the finances of extrabudgetary units and smaller islands contributed to a deterioration of the fiscal deficit to 5.3 percent in 2002. The associated financing needs were met by a large acceleration of bank lending after the ceiling on extending bank credit to the government was lifted.

Executive Board Assessment

Executive Directors agreed with the thrust of the staff appraisal. They were encouraged that the Antillean economy has weathered the difficult external environment of the past two years comparatively well, and is staging a modest recovery with low inflation. Directors observed, however, that large macroeconomic imbalances and continued structural weaknesses are clouding the prospects for higher sustainable growth going forward, and, in particular, expressed concern about the rapid rise in public debt to a critical level.

Against this background, Directors emphasized that the authorities face the urgent challenge of reversing the unsustainable accumulation of public debt and raising the economy's long-run growth potential. This will require expeditious and sizable fiscal adjustment, which will also be key to curtailing excessive credit growth, as well as the sustained implementation of a well-considered structural reform agenda to raise productivity and improve employment prospects.

Directors expressed concern about the significant increase in public spending envisaged in the 2003 budget, and called for an immediate fiscal tightening to avoid a further increase in the fiscal deficit from last year's level. Needed short-term fiscal savings can be achieved by implementing already identified savings in the health care system, completing the unification of tax collection agencies, and suspending the newly established Economic Development Fund.

Directors stressed that, over the medium term, further decisive action will be required to stem and reverse the rise in public debt. They shared the view that the authorities should aim for a sufficiently ambitious primary surplus target in order to reverse the unsustainable debt dynamics over the next few years. On the expenditure side, Directors urged the authorities to enhance budgetary discipline in extrabudgetary units and in the smaller islands, and saw room for further efficiency gains and savings in the health care system. On the revenue side, they agreed with the view that protecting revenue by broadening the tax base and strengthening tax administration should be given priority over the planned tax reform. Directors encouraged the authorities to adopt a binding and transparent medium-term fiscal framework, which would foster high-quality and durable adjustment over time.

Directors noted that the prevalence of funded pension systems places the Netherlands Antilles in a better position than other economies to weather population aging. Demographic developments, including the possible return of Antilleans currently residing abroad, could, nevertheless, pose additional costs, which will continue to warrant close monitoring. Directors encouraged the authorities to continue to limit the PAYG benefits to a basic pension only, and refrain from increasing the real value of these benefits. They noted that large government contribution arrears had led to a funding shortfall in the civil service pension fund (APNA), and urged the government to take steps to maintain its soundness.

Directors considered that the currency peg has served the Antillean economy well, but underscored the importance of curtailing credit growth to ensure the peg's continued credibility. They welcomed the reimposition of the limit on bank lending to the government, which will help address the root cause of recent monetary expansion, but stressed that this measure will need to be accompanied by fiscal retrenchment to prevent the emergence of arrears. Directors also welcomed the recent increased reliance on indirect monetary policy instruments.

Directors commended the authorities for strengthening supervisory capacity and enforcement in both onshore and offshore financial sectors. They stressed the need for continued vigilance and strong supervision, given the potential effects on the banking system of the weakened state of public finances and continued low economic growth. Directors welcomed the generally well-designed AML/CFT framework, and looked forward to its further extension, along with more frequent on-site inspections.

Directors saw the sustained implementation of structural reforms as key to attracting foreign investment and enhancing the economy's competitiveness and longer-term performance. Priority will need to be given to further labor market reform--particularly in the smaller islands--divestiture of public enterprises, and accelerated product market and trade reform. To enhance competition, Directors also highlighted the importance of establishing an independent regulatory agency, adopting a competition law, and reducing concentration in and deepening of the banking system.

Directors urged the authorities to make further efforts to improve the Antilles' statistical base to facilitate the assessment of economic developments and the design of policies.

It is expected that the next Article IV consultation with the Netherlands Antilles will be held on a 24-month cycle.

The Kingdom of the Netherlands-Netherlands Antilles: Selected Economic Indicators








Change in percent 2

Domestic Economy


Real GDP






Unemployment rate (in percent of labor force)3






Consumer prices (period average)






Money, credit, and interest rates


Broad money






Domestic credit






Interest rate on 12 month deposits (in percent)






Government bond yield (in percent)






Exchange rates


Exchange rate regime

Fixed exchange rate at 1.7895 NA guilder/U.S.

dollars since December 23, 1971.

Real effective exchange rate4







In percent of GDP2/

Public Finance


General government balance






Public debt






Balance of payments


Current account balance






Trade balance (goods and nonfactor services)






Official reserves (in millions of U.S. dollars)5






Official reserves (in months of merchandise imports)5







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

1Staff projections.


2Unless otherwise noted.


3Curacao only in 1998 to 2000.


4(+) = appreciation.


5Reserves of the central bank, excluding gold, end of period.

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. 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.


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