IMF Executive Board Concludes 2005 Article IV Consultation with the Kingdom of the Netherlands—Netherlands Antilles

Public Information Notice (PIN) No. 06/37
March 30, 2006

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 March 8, 2006, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with the Kingdom of the Netherlands-Netherlands Antilles.1


So far during this decade, economic growth has been slow and unevenly distributed among the islands. Annual real GDP growth is estimated at around 1 percent in 2004 and 2005, driven by private consumption and public spending, while net exports have deteriorated. For 2006, growth is projected to accelerate to just below 2 percent, with a number of tourism related investment projects already in the pipeline, and household disposable income profiting from a cut in wage taxes. On the external side, tourism is expected to perform well, in line with steady income growth in the U.S. and improved attractiveness in European markets. However, with imports rising strongly the foreign contribution to GDP growth will remain negative. Uncertainties surrounding the outlook are high, as tourism flows have been volatile, and the issue of how to achieve sustainable public finances after the breakup of the federation has remained open.

With the exchange rate pegged to the U.S. dollar, inflation in the Netherlands Antilles has closely tracked the anchor country's price developments. Cost-push pressures related to higher oil prices are expected to subside, and inflation to moderate to below 3 percent in 2006.

Over the past four years, public finances have deteriorated, largely due to weak growth and higher public spending. After the lifting of wage controls, the wage bill increased, partly due to higher payments to the civil service pension fund. Health care cost have become a driver of public spending, and expenditures in the justice department have also risen. The general government deficit reached 6 percent of GDP in 2004. Budget balances have shown an improvement in 2005, however, this has largely been due to a one-off transfer of dividend taxes from the Netherlands, while underlying adjustment has been minor. The debt ratio is estimated at 86 percent of GDP in 2005.

The banking sector has shown resilience against the background of dismal economic growth. Profitability, provisioning and balance sheets in the banking sector have improved. The new agreement with the Netherlands on dividend taxation is expected to arrest the decline of the international financial industry. Supervision is being further strengthened.

Executive Board Assessment

Directors noted that, following referenda in favor of the dissolution of the federation, the Netherlands Antilles is at an important juncture, offering the possibility of a fresh start and of addressing social and economic problems in a more island-specific context. They urged the authorities to seize the opportunity provided by the new constitutional arrangements to lay the groundwork for macroeconomic stability and higher growth over the medium term.

Directors welcomed the improvement in near-term economic prospects, with growth projected to pick up moderately in 2006, driven by domestic demand, favorable tourism prospects, and related investment. At the same time, however, Directors noted that medium-term prospects remain comparatively weak, highlighting the importance of pursuing a set of cohesive policies to promote higher growth on a sustained basis—key to reducing unemployment and alleviating poverty. To this end, both sound public finances and structural reforms will be essential, along with well-targeted investment in infrastructure and human capital.

Directors stressed the need for a new approach to public finances. Noting the island economies' vulnerability to shocks, they recommended that fiscal policy be geared toward the accumulation of a contingency fund to act as a buffer against such shocks. The underlying fiscal adjustment planned for 2006 represents a desirable step forward in this direction, but more will be needed to make a dent in the high debt level. Directors noted that upfront adjustment would also help build credibility and confidence in a new commitment to fiscal prudence and thus called for a strengthening of the consolidation effort, with the aim of achieving an appreciable primary surplus in 2006, rising further in 2007. To this end, they saw scope for strengthened tax collection and stricter spending controls and encouraged the authorities to move ahead with health care and pension reforms, needed to secure fiscal sustainability over the medium term.

Directors observed that the high burden of public debt represents an obstacle to economic development. They were encouraged by the joint efforts of all parties involved to establish a sound financial starting position for the future countries of Curaçao and St. Maarten, as well as for the other islands, and to lay the foundations for well-managed macroeconomic policies. Against the background of consideration being given to debt reduction or debt-service relief, Directors stressed the importance of designing a fiscal framework with sufficiently strong incentives and mechanisms to ensure sustained fiscal discipline following the dissolution of the federation. In the meantime, Directors urged the authorities to swiftly implement planned measures to improve fiscal management, transparency, and accountability.

Directors observed that the long-standing peg to the U.S. dollar has anchored inflation expectations, but they highlighted the need for productivity-enhancing structural reforms to maintain competitiveness. Directors saw merit in forming a monetary union under the new constitutional arrangements, with a single independent central bank managing the peg in a resource-efficient way and within a framework of supportive fiscal arrangements.

Directors underscored the crucial importance of structural reforms in labor and product markets to raise income and employment on a sustained basis. In this context, they welcomed the investments in the tourism sector, and saw merit in well-targeted investment in infrastructure, education, and child-care facilities. They encouraged the authorities to engage social partners in a dialogue on the need for greater labor market flexibility. Improved governance of public firms, greater competition in product markets, and swift implementation of the OECD recommendations to improve the investment climate would all help attract much-needed productivity-raising investments. Directors also encouraged the authorities to lower external tariffs and become more closely associated with regional trade agreements.

Directors welcomed the authorities' responsiveness to the recommendations made in the Assessment of the Supervision and Regulation of the Financial Sector, including the strengthening of the AML/CFT framework, and called for the swift implementation of the remaining recommendations. They noted that banks' balance sheets have improved and that the banking sector remains highly profitable, despite weak economic growth. Directors underscored the importance of maintaining the high quality of banking supervision after the breakup of the federation and considered that supervision could usefully be centralized in a single central bank. They also stressed the importance of strengthened supervisory vigilance if financial markets have to adjust to public debt restructuring.

Directors called for further improvements in the statistical database to facilitate the assessment of economic developments and the design of policies.

Netherlands Antilles: Selected Economic Indicators

  2000 2001 2002 2003 2004 2005 2006
          prel proj proj

  (Change in percent 1/)

Domestic economy


Real GDP

-2.7 1.3 0.3 1.4 1.1 0.9 1.9

Unemployment rate (in percent of labor force)2/

13.2 14.6 14.6 15.3 15.0 16.3 15.8

Consumer Prices (period average)

5.0 1.7 0.4 1.9 1.5 3.1 2.8

Money, credit, and interest rates


Broad money

2.2 14.4 11.7 8.4 9.0 13.6 13.7

Domestic credit

4.7 3.0 10.1 5.4 11.4 10.0 14.7

Interest rate on 12 month deposit (in percent)

3.7 3.7 3.6 3.5 3.0 ... ...

Government bond yield (in percent)

8.8 9.0 8.2 6.7 7.1 ... ...

Exchange rates


Exchange rate regime


Real effective exchange 3/

2.5 0.0 -2.5 8.3 -6.5 ... ...
  (In percent of GDP 1/)

Public finance


General government balance

-1.8 0.2 -4.0 -4.4 -6.0 -2.7 -5.0

Public debt

64.2 65.2 71.2 80.5 83.1 85.7 84.4

Balance of payments


Current account balance

0.0 -5.7 -1.8 -0.3 -3.2 -2.5 -3.1

Trade balance (goods and nonfactor services)

-35.2 -38.6 -35.1 -33.9 -38.3 -37.1 -38.5

Official reserves (in millions of U.S. dollars) 4/

262.4 301.6 401.8 373.4 415.6 521.8 577.7

Official reserves (in months of merchandise imports) 4/

1.9 2.1 3.0 2.7 2.5 2.9 3.0

Sources: Data provided by the authorities; and IMF staff estimates.
1/ Unless otherwise noted.
2/ Curacao only in 1998 to 2000.
3/ (+)= appreciation.
4/ Reserves 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.


Public Affairs    Media Relations
E-mail: E-mail:
Fax: 202-623-6220 Phone: 202-623-7100