Mission Concluding Statement 

Kingdom of the Netherlands – Sint Maarten: Staff Concluding Statement of the 2023 Article IV Consultations Mission

May 30, 2023

Washington, DC:

Sint Maarten is experiencing strong recovery growth led by tourism and investment, but the benefits of growth are slow to reach the rest of the economy. With narrowing fiscal and external deficits, the time is ripe to advance key fiscal and structural reforms, including medium-term investment planning and execution and streamlining business procedures. This small island economy has capacity limitations in key areas, especially in economic statistics and financial intelligence, which require adequate resourcing.

Economic Developments and Outlook [1]

Sint Maarten’s economy is seeing strong output growth, but improvement on other socio-economic dimensions remains subdued . The country is still rebuilding from devastating hurricanes in 2017, interrupted by a deep reversal during the pandemic. Sint Maarten grew an estimated 10 percent last year, despite supply chain and commodity price difficulties delaying major investment projects. Output per capita is expected to surpass pre-pandemic levels this year and pre-hurricane levels next year. Growth has been led by buoyant tourism arrivals and robust private and public investment. Yet formal employment growth has been mediocre and indications from social assistance and elsewhere suggest that growth has not lifted household economic conditions as much as expected.

Tourism is recovering quickly but will slow well before achieving pre-hurricane numbers. Stayover arrivals grew 50 percent in 2022, putting them substantially above their pre-pandemic levels. Hotel room inventory is higher now than before the pandemic and growing. This growth indicates investor optimism, but room stock is still more than 15 percent below pre-hurricane capacity, will recover slowly, and is expected to increasingly act as a bottleneck. Cruise arrivals are growing quickly from lower levels but are also expected to slow.

External imbalances have improved considerably while inflation remains below that of trade partners. The recovery in tourism has dramatically narrowed the current account deficit, down nearly twenty percent of GDP to an estimated 2.7 percent of GDP in 2022 and expected to reach balance in 2024. Tradable goods prices broadly tracked U.S. inflation with a sharp impact on energy prices, but a subdued housing sector kept inflation lower than expected at 3.8 percent. Inflation is expected to slow slightly this year then normalize quickly.

Parts of the economy are not seeing the same recovery.Formal employment rose by 5 percent last year but remained below even the 2020 average. Consumer credit growth is down and demand for cars is subdued. New requests for social assistance have slowed, but the number of beneficiaries has not begun to fall meaningfully. Together, these indicators suggest a job-poor recovery that is slow to reach households.

The Netherlands remains a key partner. The US$520 million, grant-financed Trust Fund for hurricane reconstruction remains the principal source of public investment and an important driver of growth. The Netherlands also provided key liquidity support through the pandemic, preventing the deeper recessions seen in other tourism-dependent Caribbean economies. The liquidity support came with a reform program (landspakket), which has yielded valuable technical assistance and important policy improvements in Sint Maarten, broadly in line with IMF advice.

Fiscal Reforms

Deficits have narrowed substantially, largely on wage bill under-execution, while debt is expected to decline. The overall fiscal deficit was 1 percent of GDP last year, down from 6 percent the previous year and smaller than the budgeted figure. The performance was driven by under-execution of the wage bill on sluggish hiring and goods and services, with support from buoyant growth-related revenues. The Government debt to GDP ratio is projected to decline by 7 percentage points by the end of the forecast horizon, which would put it in the bottom quintile of Caribbean economies. [2] In the baseline, pandemic-era liquidity loans falling due in October are refinanced as long-duration bullet loans. An annuity structure would result in additional reduction of debt to GDP, with the reduction in the debt stock partially offset by a reduction in GDP from compressed expenditures.

Policies should focus on reversing earlier compression of high-quality expenditures and moving forward with revenue reforms. Subsequent budgets should consider further increases in spending for improved public services, wages in key capacity areas, and transfers to clear outstanding domestic payment arrears to the pension fund and SZV. To raise domestic revenue, the authorities should focus on completing the cleansing of the tax database and ensuring that current tax payments are properly reconciled with taxpayers and tax types. Functional review of the Ministry of Justice is needed to ensure consistent job grading but should be aligned with hiring needs and offer competitive wages.

The government should continue steps to build public investment capacity. This year’s budget marked the first approval of public investment projects since the hurricanes, and an important step in capacity building. Trust fund execution is expected to be substantial through 2027, and large scale additional public investment risks hitting supply constraints in the construction sector. The current conjuncture presents an opportunity to establish strong public investment institutions, to step in over the medium term.

Sint Maarten has made important progress towards a medium-term budget. The 2023 budget contains4-year forecasts for headline revenues and expenditures as well as key subcomponents. The forecasts are based on macroeconomic projections by the IMF and recently introduced projections at the CBCS. This budget will help coordinate expectations across ministries and make space for multi-year capital project expenditure plans. Next steps in this process include strengthening the Ministry of Finance’s forecasting capacity and linking medium-term budgeting to key policy measures and budget discussions.

Progress on financial management and revenue administration is yielding dividends. The recent addition of six staff in the tax office has helped to ease staffing constraints and may be behind recent positive results. The authorities expect the rollout of the recently approved tax and financial management systems to underpin improvements in tax administration and expenditure management. Ongoing efforts to develop a debt management strategy – with technical support from the IMF – are welcome and could support future work on financing scenarios and capital expenditure plans.

Supply-side Reforms

Improvements to the ease of doing business would support growth. Meaningful progress has been made towards e-government, but processes need to be made end-to-end to realize efficiency gains and stimulate activity. Priority reforms are needed to reduce turn-around time for work permits, business licenses, and building permits. Initiatives to establish single-window transactions and increase coordination between government agencies are welcome and could benefit from a firmer timeline.

A lack of resources for the Financial Intelligence Unit (FIU) constrains the effectiveness of AML/CFT investigations and oversight. The FIU has made progress in updating laws and advancing key legislation. However, the FIU requires an expanded budget and competitive wages to attract and retain a full complement of staff. Dedicated financial crimes counterparts are needed on the law enforcement and prosecutorial side and integration with the FIU could be considered. The national risk assessment process, currently underway, will require sustained progress to conclude in advance of the 4 ^th round Mutual Evaluation scheduled for September 2024. Laws underpinning the establishment of a gaming authority and strengthening the FIU’s sanctioning authority are needed. The ultimate beneficial ownership registry, which was approved by legislation in 2019, should be prioritized.

Sint Maarten needs greater capacity in statistical compilation, despite important strides this year. Economic statistics are a critical underpinning of good policymaking. GDP compilation has rapidly improved in timeliness and reliability. Inflation statistics have improved in timeliness and further estimation improvements are underway. The pandemic-delayed census is in its final stages and results are expected by the end of the year. The statistics department is nevertheless understaffed and requires a sufficient budget and competitive pay to attract and retain high-skill staff.

The IMF mission would like to thank the authorities for their cooperation and the candid and constructive discussions that took place during May 3-10, 2022. Issues related to the Curaçao and Sint Maarten monetary union were further discussed in the mission to Curaçao and covered in the concluding statement of that mission.