2019 Article IV Consultation-Press Release and Staff Report; and Statement by the Executive Director for the Kingdom of the Netherlands-Curacao and Sint Maarten

Abstract

2019 Article IV Consultation-Press Release and Staff Report; and Statement by the Executive Director for the Kingdom of the Netherlands-Curacao and Sint Maarten

Context

1. Over the last few years, Curaçao and Sint Maarten have faced significant challenges. Curaçao has been grappling with a protracted decline in labor productivity and four years of continuous recession, exacerbated by spillovers from the deep crisis in Venezuela in the last few years. The economy of Sint Maarten was severely damaged by Hurricanes Irma and Maria in 2017 and despite €550 million committed by The Netherlands to support reconstruction, rebuilding has been slow, highlighting challenges stemming from the small size of the island and structural impediments.1 The reforms needed to address structural impediments to growth have been slow, in part due to political instability—since 2010, both countries have faced frequent changes in government, with the most recent elections in Sint Maarten in January 2020. Implementation of past Fund advice has been uneven (Annex I).

2. Despite these challenges, the monetary union of Curaçao and Sint Maarten has continued to deliver a stable exchange rate and low inflation rates (Box 1). Since the formation of the Union in 2010, there have been no major exchange rate pressures and inflation rates in both countries have been relatively low and highly correlated (Figure 1). The debt relief by The Netherlands in 2010 and subsequent fiscal supervision helped to contain government debt stocks, which remain lower than in most Caribbean peers.2 The foreign exchange inflows related to the debt relief supported the international reserves.3 The absence of monetary financing of the fiscal deficits and the rules-based fiscal system have been strong features of the Union, supporting the exchange rate peg to the U.S. dollar.

Figure 1.
Figure 1.

Curaçao and Sint Maarten: Regional Comparison 1/2/

Citation: IMF Staff Country Reports 2020, 094; 10.5089/9781513539362.002.A001

Sources: IMF World Economic Outlook; IMF Information Notice System; and IMF staff calculations.1/ Figure reports medians for 15 tourism-oriented Caribbean countries, and the subgroup of countries in the Eastern Caribbean Currency Union (ECCU). 10th to 90th percentile range (light shading) are for all tourism-oriented Caribbean countires.2/ 2019 values are Fund staff estimates.3/ Due to data availability, Caribbean-oriented comparators do not include ECCU countries.

Recent Economic Developments

A. Curaçao

3. Curaçao experienced four years of consecutive recession mainly due to continued spillovers from the Venezuela crisis (Table 1 and Figure 2). Despite robust growth in tourism, real GDP declined by 2.2 percent in 2018 as the Isla refinery, managed by the Venezuelan state-owned company (PDVSA), effectively stopped production in mid-2018 although it retained most employees (Annex II). GDP contracted by an estimated 2 percent in 2019 (Figure 2) as the low refinery utilization continued to spread to supporting sectors (e.g. port activities), more than offsetting the strong tourism performance. In late December, the authorities signed a binding Asset Purchase and Sale Agreement with the Klesch Group for the sale of Curaçao oil facilities comprising the refinery, the utilities plant, and the Bullen Bay transshipment terminal, with a takeover expected in the first half of the year pending finalizing of two remaining agreements. Inflation stood at 2.6 percent in 2019, in part driven by the tax measures introduced in September 2019. The unemployment rate increased steeply from 13.4 percent in 2018 to 21.2 percent in April 2019, among the highest in the region.4

Table 1.

Curaçao: Selected Economic and Financial Indicators, 2016–25

article image
Sources: Data provided by the authorities, and IMF staff estimates.

Defined as balance sheet liabilities of the central government except equities. Includes central government liabilities to the social security funds.

Figure 2.
Figure 2.

Curaçao and Sint Maarten: Real Sector Developments

Citation: IMF Staff Country Reports 2020, 094; 10.5089/9781513539362.002.A001

Sources: Authorities’ data, IMF WEO database, and IMF staff estimates.1/ 2019 is based on data for 2019H1 and IMF staff estimates.2/ The unemployment rate estimate is based on staffs assumption of unchanged labor force participation over 2017–19. The unemployment rate in 2018 was accompanied by a large drop in labor force participation, masking a significant decline in employment. The labor force participation rebounded in the April 2019 Labor Force Survey.3/ Latest data available over 2015–19.

4. Fiscal measures implemented in the past two years helped improve the fiscal position (Tables 2, 3 and Figure 3). As a response to the significant deviation from the fiscal rule in 2017, the authorities canceled wage indexation and tightened transfers, reducing the overall deficit to 2.1 percent of GDP in 2018, although the current fiscal balance fell short of the target under the fiscal rule.5 In 2019, the authorities introduced a 3:1 attrition rule in addition to the zero-indexation policy, strengthened expenditure controls and implemented short-term tax measures in September (increasing excises on alcohol and tobacco and raising the turnover tax on imported goods) in the framework of the Growth Accord with The Netherlands (Box 2). These measures and a windfall from the tax sharing system within the Kingdom of the Netherlands improved the net operating balance to -0.3 percent of GDP in 2019. In December 2019, the authorities passed legislation changing Curaçao’s tax regime from a worldwide tax system to a stricter territorial system and introducing several anti-avoidance measures (e.g. abolishing the special e-zone tax rate) in line with the OECD and EU requirements.

Table 2.

Curaçao: Government Operations, 2016–25 1/

(Millions of NAf unless otherwise indicated)

article image
Sources: Curaçao authorities; and IMF staff calculations.

The presentation follows the 2014 Government Finance Statistics Manual.

Consolidated table including the budgetary central government and social security funds (SVB).

Includes teacher salaries.

Mostly changes in deposits.

The denominator is the average of total revenue in the previous three years.

Defined as balance sheet liabilities of the central government except equities. Includes central government liabilities to the social security funds.

Table 3.

Curaçao: Government Operations, 2016–25 1/

(Percent of GDP unless otherwise indicated)

article image
Sources: Curaçao authorities; and IMF staff calculations.

The presentation follows the 2014 Government Finance Statistics Manual.

Consolidated table including the budgetary central government and social security funds (SVB).

Includes teacher salaries.

Mostly changes in deposits.

The denominator is the average of total revenue in the previous three years.

Defined as balance sheet liabilities of the central government except equities. Includes central government liabilities to the social security funds.

Figure 3.
Figure 3.

Curaçao and Sint Maarten: Fiscal Developments 1/

Citation: IMF Staff Country Reports 2020, 094; 10.5089/9781513539362.002.A001

Sources: Curaçao and Sint Maarten authorities; IMF WEO database, and IMF staff estimates.1/ Overall balance excluding Trust Fund‐related grant and expenditure.2/ From 2016, the Social Insurance Bank (SVB) is included in both revenue and expenditure.3/ Values for Sint Maarten and Curaçao show debt of central budgetary government.

Curaçao: Real GDP, Refinery Fee and Piloted Vessels

(Percent change)

Citation: IMF Staff Country Reports 2020, 094; 10.5089/9781513539362.002.A001

1/ based on data up until October 2019. Sources: Authorities’ data and IMF staff estimates.

Curaçao: Budgetary Central Government Operations

(Percent of GDP)

Citation: IMF Staff Country Reports 2020, 094; 10.5089/9781513539362.002.A001

Sources: Authorities’ data and IMF staff estimates.

B. Sint Maarten

5. Sint Maarten is gradually recovering from the devastating 2017 hurricanes (Table 4 and Figure 2). The economy is estimated to have contracted by a cumulative 16.9 percent in 2017–18 as tourism plummeted.6 The decline in stay-over tourism in 2018 (-56 percent y/y) was mitigated by a surge in construction activity supported by large private insurance payouts. While cruise tourism already has recovered to pre-hurricane levels, the stay-over tourism recovery has been slower than in other hurricane-affected regional peers. In November 2019, stay-over tourism reached about 60 percent of pre-hurricane levels, reflecting the slow progress of airport reconstruction (only using a third of its space) and the slow hotel room reconstruction (60 percent of the pre-hurricane level). However, compared to the even lower level in 2018, the growth in stay-over tourism in 2019 was significant and supported estimated GDP growth of 5 percent, although the broad recovery is constrained by slow project implementation. In December 2019, the authorities and the World Bank signed a US$72 million grant agreement for the airport terminal reconstruction project which aims to restore full service at the Princess Juliana International Airport in Sint Maarten.7 Average inflation is likely to have increased to 2.9 percent in 2018 but stood at only 0.5 percent (y/y) in the first three quarters of 2019 according to newly published data, likely due to lower oil prices.8 A Trust Fund-financed training program has supported employment after the hurricanes (Figure 2).

Table 4.

Sint Maarten: Selected Economic and Financial Indicators, 2016–25

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

Excludes Trust Fund (TF) grants and TF-financed special projects.

Revenue excl. grants minus interest income, current expenditure and depreciation of fixed assets.

The stock of debt in 2016 is based on financial statements. Values in subsequent years are staff’s estimates and are higher than the values under authorites’ definition.

Stay-over Tourist Arrivals 1/

(Index, Q1 2017=100)

Citation: IMF Staff Country Reports 2020, 094; 10.5089/9781513539362.002.A001

1/ Latest data available for 2019.Sources: Authorities’ data, Caribbean Tourism Organization, and IMF staff calculations.

6. After a significant worsening in 2017–18 caused by the hurricanes, the fiscal position improved in 2019 (Tables 56 and Figure 3). The primary fiscal deficit excluding Trust Fund operations declined from 4 percent of GDP in 2018 to 0.8 percent of GDP in 2019, as revenue excluding grants rebounded by 2 percent of GDP and current expenditure fell. Spending on the budgeted capital projects, including in the tax and public financial management (PFM) reforms, has been close to zero due to the late approval of the 2019 budget and a delay in external project financing. Staff estimates that government debt increased from 44½ to 51⅓ percent of GDP between 2016 and 2019.9

Table 5.

Sint Maarten: Government Operations, 2016–25

(Millions of NAf unless otherwise indicated)

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

Includes transfers to cover the deficit of funds not integrated into the central budget, such as those for social security/insurance.

Revenue excl. grants minus interest income, current expenditure and depreciation of fixed assets.

The denominator is the average of total revenue in the previous three years.

The stock in 2016 is based on financial statements. Values in subsequent years are staff’s estimates and are higher than ones under authorites’ definition.

From the CBCS monetary survey.

Table 6.

Sint Maarten: Government Operations, 2016–25

(Percent of GDP unless otherwise indicated)

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

Includes transfers to cover the deficit of funds not integrated into the central budget, such as those for social security/insurance.

Revenue excl. grants minus interest income, current expenditure and depreciation of fixed assets.

The denominator is the average of total revenue in the previous three years.

The stock in 2016 is based on financial statements. Values in subsequent years are staff’s estimates and are higher than ones under authorites’ definition.

From the CBCS monetary survey.

Sint Maarten: Real GDP and Tourism

(Index, 2016=100)

Citation: IMF Staff Country Reports 2020, 094; 10.5089/9781513539362.002.A001

Sources: Authorities’ data and IMF staff estimates.

Sint Maarten: Budgetary Central Government Operations

(Percent of GDP)

Citation: IMF Staff Country Reports 2020, 094; 10.5089/9781513539362.002.A001

Sources: Authorities’ data and IMF staff estimates.1/ Excludes Trust Fund (TF) grants and TF-financed special projects.

C. The Monetary Union

7. The external position of the Union worsened in the past two years (Table 7). The current account deficit (CAD) widened from 15.2 in 2017 to an estimated 21.8 percent of the union GDP in 2019, mainly because of a larger CAD in Curaçao, where imports increased significantly due to spillovers from Venezuela (Annex II). Despite double-digit CADs and the end of foreign exchange inflows related to the 2010 debt relief, the pressure on international reserves has been relatively mild as they declined from 4.4 to 4 months of imports of goods and services between 2017 and 2019. The pressure on reserves was cushioned in part by decumulation of substantial foreign assets of the private sector, with inflows in 2018:Q4–2019:Q3 reaching 12 percent of GDP. Staff estimated that external debt reached about 180 percent of union GDP in 2019, although about 40 percent of the stock is de facto intercompany debt, mitigating the risk.10 The external position of both Curaçao and Sint Maarten is assessed to be weaker than warranted by fundamentals and desired policy settings (Annex III), although issues with data availability and quality increases uncertainty about this assessment.

Table 7.

Curaçao and Sint Maarten: Balance of Payments, 2016–25

(Millions of U.S. dollars unless otherwise indicated)

article image
Sources: Centrale Bank van Curaçao en Sint Maarten, and IMF staff estimates.