August 22, 2016
PRESS OFFICER: Bruno Pierre Silvestre
Phone: +1 202 623-7100Email: MEDIA@IMF.org
On July 27, 2016, the Executive Board of the International Monetary Fund (IMF) concluded the 2016 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
The currency union of Curaçao and Sint Maarten has important strengths, including a high level of development, good infrastructure, and relatively low public debt, however, preserving these going forward will require surmounting some critical challenges. GDP per capita is already at high-income country levels, but growth is lackluster and unemployment levels are high. The fiscal situation remains relatively stable, following the debt relief in 2010, but progress on necessary fiscal and structural reforms has been slow.
For several years now, both countries have experienced stagnant growth, trailing behind regional peers. Curaçao experienced modest growth in 2015 of 0.1 percent, reflecting a turnaround from the contraction of 1.1 percent in 2014. Growth in Curaçao mainly reflected an increase in investment (both public and private), driven largely by the construction of the new hospital and the upgrade of road infrastructure. Meanwhile, the economy of Sint Maarten expanded by 0.5 percent in 2015, a slowdown compared to the 1.5 percent recorded in 2014. The expansion in Sint Maarten’s GDP mainly reflected an increase in stay-over tourist arrivals, though at a slower pace than in 2014. With the exception of the recent expansion project at the Princess Juliana International Airport, there were no major private investment in 2015, underscoring the need to boost investor confidence.
Real GDP growth in 2016 is expected to reach 0.5 percent in Curaçao and 0.7 percent in Sint Maarten. For Curaçao, economic activity is projected to accelerate reflecting continued economic recovery in main trading partners (especially the U.S.) and a continuation of both private and public investment projects, mostly supported by the hospital construction. Higher growth in Sint Maarten reflects expectations for higher private spending, particularly in the tourism and transportation sectors, and a moderate increase of tourism flows.
Over the medium term, growth is expected to moderately pick up to 0.9 percent and 1.3 percent for Curaçao and Sint Maarten, respectively. The expansion in both countries will mainly depend on the implementation of structural reforms aimed at attracting more FDI, relaxing restrictions on hiring foreign labor, and reducing costs of doing business.
Executive Board Assessment
In concluding the 2016 Article IV consultation discussions with Curaçao and Sint Maarten, Executive Directors endorsed the staff’s appraisal, as follows:
The economic recovery and a stronger fiscal position have helped reduce near-term risks. Curaçao ended a three-year recession in 2015, despite the deterioration in macroeconomic conditions in Venezuela—one of the island’s main trading partners. Expansion in Sint Maarten’s economy continued into the fourth consecutive year, despite a modest deceleration. The Union’s external and fiscal imbalances have also declined, with favorable external conditions and the authorities’ fiscal consolidation efforts, but vulnerabilities to external shocks remain given its reliance on a narrow scope of products and markets.
However, risks to medium-term growth prospects remain to the downside. Continued low growth in the euro area could have serious economic repercussions for Curaçao and Sint Maarten through various channels, given that both islands remain heavily reliant on the euro area. Further disruptions in Venezuela could worsen Curaçao’s growth prospects and balance of payments if no alternative export markets are identified. Meanwhile, a loss of CBRs could hinder cross-border transactions, adding to the macroeconomic uncertainties. In addition, slow progress in implementing needed structural forms also poses an important downside risk to growth prospects going forward.
Unlocking growth through economic diversification and investment promotion is therefore imperative in this environment. In this respect, the authorities’ national development plans are an important step toward charting a clearer direction for strategic sectors and markets and removing impediments to private sector activity. Implementation of the plans is key, in particular, on decisive structural reforms to improve the labor market and doing business conditions, as well as energy sector reforms to diversify energy generation via renewable sources.
A sound medium term fiscal framework will help reinforce macro stability anchored by the fixed exchange rate. With the limited effective monetary and exchange rate policy instruments, given the fixed exchange rate regime, fiscal policy is the authorities’ only available option to cushion economic shocks. A sound medium term fiscal framework, equipped with clear objectives and targets and supported by a proven track record could improve credibility, bolster investor confidence, and promote investment.
In this regard, important structural fiscal reforms are needed to further strengthen fiscal discipline. In particular, weaknesses in tax administration and public financial management have been identified in both islands. Staff welcome the authorities’ efforts to strengthen tax administration to enhance revenue mobilization, improve taxpayer services, and increase tax compliance. These are important prerequisites for future tax policy reforms contemplated by the authorities. In addition, an action plan is greatly needed to ensure timely and decisive implementation of measures to strengthening public financial management, in line with PEFA assessment recommendations.
Strengthened financial supervision has become more important given increasing international scrutiny. The authorities are advised to strengthen risk-based financial supervision and effective implementation of cross-border tax information sharing, as well as AML/CFT frameworks in line with international standards. In a context of evolving regulatory requirements and enforcement landscape, Curaçao and Sint Maarten’s ability to strengthen transparency, including in Curaçao’s international financial center, will help reduce the perceived reputational risks. A stable financial sector is also critical to supporting economic growth and private sector activities.
Capacity building is needed to strengthen public institutions. Policy implementation has been greatly challenged by capacity issues in both islands, as in most other Caribbean small states. Investment in human capital development is critical to strengthening public institutions and improving productivity. Staff urge the authorities to engage with their international partners in seeking technical assistance to support capacity building.
Data provision should be improved to allow adequate surveillance. The statistical offices in both countries expressed concerns over lack of capacity, ability to hire qualified personnel, and delays in data submission from the private sector and government entities. While some efforts have been made to streamline data collection and digitalize surveys, staff highlights the need to allocate additional resources to increase personnel and obtain technical assistance to address shortcomings.
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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 Article IV consultations are concluded without a Board meeting when the following conditions apply: (i) there are no acute or significant risks, or general policy issues requiring Board discussion; (ii) policies or circumstances are unlikely to have significant regional or global impact; (iii) in the event a parallel program review is being completed, it is also being completed on a lapse-of-time basis; and (iv) the use of Fund resources is not under discussion or anticipated.
