Public Information Notice: IMF Concludes Article IV Consultation with Netherlands Antilles

July 13, 1999

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

On June 7, 1999, the Executive Board concluded the Article IV consultation discussions with the Netherlands Antilles.1


Since the mid-1990s, the Antillean economy has been performing significantly below its potential, lagging behind trading partners and other Caribbean economies, as indicated by stagnating economic activity and a worrisome increase in unemployment. With the limited domestic resource base, the economy has suffered severely from the effects of several adverse external shocks which occurred during the past decade. The failure to tackle decisively ensuing large fiscal imbalances and to advance structural reforms to address rigidities in labor and product markets has hampered and lengthened the economy's adjustment process.

Budget deficits have been persistently exceeding available voluntary financing, but tight monetary controls have prevented monetization of deficits, and safeguarded the fixed exchange rate regime, which has contributed to low inflation. However, the accompanying buildup in arrears, mainly to the pension fund and external creditors, has been undermining good governance and private sector confidence. The external current account deficit decreased somewhat as the result of weakening economic activity and some recovery in tourism, but official reserves have remained low, at about two months of merchandise imports.

To deal with the fiscal and current account imbalances and restore growth, a comprehensive adjustment program was initiated in 1997, endorsed by the IMF staff and supported by financial assistance from the Netherlands. However, the program was not implemented as envisaged, and no adequate corrective action was taken to address further shortfalls in offshore profit taxes and non-tax revenues. As a result, the budget deficit remained high, at 3.3 percent of GDP in 1997, and arrears to the pension system and external creditors continued to accrue. Even so, progress was made in tackling several structural weaknesses of the budget. The tax system was improved with a shift toward indirect taxation and a successful self-assessment system for profit taxes, which improved collection and compliance. Divestiture of non-core activities of the government, streamlining of the civil service, and pension reforms were initiated. However, the extension of generous benefits and transitory subsidies to newly autonomous public entities, and some wage drift, largely offset the expenditure savings of these reforms.

Following the January 1998 elections, policy formulation and implementation have remained at a prolonged standstill. In an attempt to stimulate the economy, a new Economic Recovery Plan was initiated in late 1998, aimed at boosting investment in part through fiscal incentives. The plan failed to inspire confidence, though, largely because it was unclear how it would be financed and insufficiently coordinated between the central and island governments. It also lacked specificity in many areas. Without adjustment measures, the budget deficit is projected to double in 1999, which is likely to lead to serious cash flow difficulties for the public sector.

Progress in dealing with structural problems has been mixed. In the labor market, the rigid manner in which the maximum duration of the workweek has been reduced, has raised labor costs. In the financial sector, adequate supervision has maintained the soundness of the banking system, contributed to preventing money laundering, and has been instrumental in preparing the sector for the Y2K issue. Legislative initiatives underway in the offshore sector bode well for its recovery. Although the trade regime is generally liberal, trade liberalization has slowed down. Limited progress has continued toward privatization, the elaboration of a regulatory framework for utilities, and the improvement in public enterprise performance. The statistical database has been improving, but severe deficiencies remain.

Executive Board Assessment

Executive Directors noted that the failure to address fiscal imbalances and key structural problems had eroded confidence and contributed to the weakening of economic growth and the recent sharp increase in unemployment. In this context, Directors regretted that the 1996-97 adjustment effort, supported by the staff, had not been sustained. They noted that, on current policies, fiscal imbalances would widen rapidly during the remainder of 1999, and would result in a further accumulation of arrears.

Directors urged the authorities to take immediate and decisive steps to change course. They emphasized that re-establishing confidence and favorable growth prospects would require substantial and sustained fiscal adjustment. Directors stressed the need to take immediate deficit reducing measures. They considered that these measures should be front-loaded to halt the rapidly rising debt burden and to bring the deficit in line with available financing so that arrears accumulation, especially to the pension fund, could be avoided. This was essential for the restoration of good governance. It was also important to normalize relationships with external creditors.

Directors underscored the importance of addressing the structural weaknesses of the budget, building on efforts initiated in the 1996-97 program. They supported a continuation of the shift toward indirect taxation and strengthening of tax collection. Directors stressed the need to reinvigorate reforms on the expenditure side, in particular the reduction in civil service employment.

Directors commended the authorities for the tightening of monetary policy in 1998 and the steps taken to enhance the effectiveness of monetary management. They encouraged the central bank to pursue vigorously the strategy to develop market-based instruments, and to foster financial deepening and competition in domestic financial markets. Directors viewed the maintenance of the current exchange rate peg as appropriate.

Directors called on the authorities to make rapid progress in structural reforms. Promoting labor market flexibility and the sound development of the financial sector, accelerating privatization, and addressing the inefficiencies of utilities were seen to be essential to improve the outlook for employment and economic growth. They welcomed the authorities' commitment to combat money laundering and promote the development of the offshore sector.

Directors noted that, despite some progress, effective surveillance and policy design continued to be hampered by serious deficiencies of the Antillean statistical base, and urged the authorities to seek further improvements.

Netherlands Antilles: Selected Economic Indicators

  1995 1996 1997 1998

  Change in percent 1
Domestic Economy        
Real GDP 0.6 -0.6 -0.7 0.4
Unemployment rate (in percent of labor force)2 13.1 14.1 14.9 16.7
Consumer prices (period average) 2.8 3.4 3.1 1.2
Money, credit, and interest rates        
Broad money 6.2 -2.5 2.6 3.3
Domestic credit 0.4 5.1 -0.6 1.9
Interest rate on 12 month deposits (in percent) 3.6 3.6 3.5 3.6
Government bond yield (in percent) 8.3 8.3 9.0 7.8
Exchange rates  
Exchange rate regime Fixed exchange rate at 1.7895 NA guilder/U.S.dollar since December 23, 1971
Real effective exchange rate3 -4.3 3.4 5.5 0.8
  In percent of GDP1
Public Finance        
General government balance -4.3 -3.9 -3.3 -2.6
Public debt 60.2 60.9 61.4 64.5
Balance of payments        
Current account balance -0.7 -9.8 -3.8 -3.1
Trade balance (goods and nonfactor services) 1.1 -10.0 -3.2 -3.9
Official reserves (in millions of U.S. dollars)4 233 189 216 248
Official reserves (in months of merchandise imports)4 2.0 1.5 1.9 2.2

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

1Unless otherwise noted.        
2Curacao only in 1998.        
3(+) = appreciation.        
4Reserves 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. In this PIN, the main features of the Board's discussion are described.


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