Press release 2021-012
“HIGH FISCAL DEFICITS POSE RISK TO DEBT SUSTAINABILIY”
Multiannual plan crucial for restoring a balanced budget
Willemstad/Philipsburg – As in most countries in the world, the public finances in Curaçao and Sint Maarten deteriorated considerably in 2020 on the back of the COVID-19 pandemic. President of the Centrale Bank van Curaçao en Sint Maarten (CBCS) Richard Doornbosch stated in the CBCS 2020 Annual Report that in both countries the current budget deficit widened significantly in 2020 compared to 2019, due to a decline in government revenues combined with an increase in expenditures. In addition, the debt-to-GDP ratio rose significantly in both countries. Therefore, according to Doornbosch, having a multiannual plan to achieve a balanced budget is crucial for both countries to achieve sound public finances.
“In 2020, tax revenues dropped sharply in both Curaçao and Sint Maarten, while cyclical expenditures, including unemployment benefits, increased as economic activities shrank considerably. At the same time, both countries implemented discretionary measures including a payroll subsidy and other social transfers to vulnerable groups in society amid the coronavirus crisis,” Doornbosch explained. “The increase in expenditures in Curaçao also reflected transfers by the government related to the takeover of the preferential claim of the CBCS on Girobank N.V. At the end of 2020, the current budget deficit amounted to 14.0% of GDP in Curaçao and 10.9% of GDP in Sint Maarten.”
Doornbosch added that the debt-to-GDP ratio rose rapidly in 2020 due to a sharp increase in the public debt, driven primarily by the liquidity support that the two countries received from the Netherlands, combined with a deep contraction in nominal GDP. It is expected that, as the economies of Curaçao and Sint Maarten will not reach their pre-pandemic levels until 2024, high fiscal deficits will persist over the medium term making additional liquidity support from the Netherlands indispensable. However, this poses a risk to debt sustainability.
“Against this background, fiscal consolidation is crucial for both countries to achieve sound public finances,” Doornbosch stated. The path towards sound public finances should be designed carefully to prevent fiscal measures, especially when they are pro-cyclical, from hampering economic recovery. Overoptimistic assumptions should be avoided. “Hence, the countries should develop a plan to achieve a balanced budget over a period of about four years. This plan should include a multiannual budget with operational targets for the current budget balance, the primary balance, and the debt-to-GDP ratio as long-term anchor. In addition, public financial management must be strengthened while tax reforms are needed to broaden the tax base to raise revenue in the least growth-distorting way,” Doornbosch said.
The Netherlands has tied additional liquidity support to Curaçao and Sint Maarten to strict implementation of structural reforms and fiscal consolidation. The agreed upon structural adjustment program (“landspakket”) should benefit both countries by improving their competitiveness, promoting sustainable and inclusive economic growth, and strengthening resilience. According to Doornbosch, the decades-long experience with structural adjustment programs by the International Monetary Fund shows that there are at least three critical success factors that should be taken into account when designing and implementing a reform program. “First of all, the program will only succeed if strong ownership is taken by the governments of both Curaçao and Sint Maarten. Second, overoptimistic macro-economic assumptions should be avoided when designing the budgetary framework of the program. In the case of the landspakket of Curaçao and Sint Maarten, a multiannual budgetary framework is absent and should be established as soon as possible. Finally, the agenda should take into account the capacity constraints of both countries in setting the deadlines to achieve the agreed-upon actions and targets,” Doornbosch stated. He emphasizes the importance of prioritization of program objectives and conditions. He concluded that a constructive dialogue and cooperation between the Kingdom partners will prove the most effective way towards overcoming the COVID-19 crisis and embarking on a sustainable and inclusive growth path for Curaçao and Sint Maarten.
Willemstad, July 30, 2021
CENTRALE BANK VAN CURACAO EN SINT MAARTEN