Mission Concluding Statement 

Kingdom of the Netherlands – Sint Maarten: Staff Concluding Statement of the 2024 Article IV Consultations Mission

June 25, 2024

Washington, DC: GDP continues to recover thanks to strong stayover tourism and the reconstruction. Domestic imbalances have closed, with inflation declining towards 2 percent and the fiscal balance returning to a surplus in 2023, but the current account deficit remains high. An immediate solution is needed to resolve load shedding and, in the medium term, investments in renewable energy are strongly encouraged. Going forward, policies need to address long-standing structural challenges, including boosting medium-term growth, restoring the government’s competitiveness to recruit and retain talent, and dealing with mounting deficits in the healthcare insurance fund.

Economic Developments and Outlook

Sint Maarten has experienced a strong post-pandemic recovery led by stayover tourism and construction. GDP growth is estimated at 3.5 percent in 2023, following a sharp rebound of 13.9 percent in 2022, while high-frequency indicators point towards healthy growth rates across various sectors. Growth has been supported by accelerated reconstruction activity, funded with large disbursements from the Trust Fund, and by stayover tourism, which is outperforming regional peers, while cruise tourism is lagging. Formal labor recovery continues to lag growth, with the unemployment rate estimated at 8.6 percent in 2023 (still above the pre-Irma rate of 6.2 percent).

Domestic imbalances have significantly improved, while the external imbalance has recently widened. The fiscal outturn returned to a surplus in 2023, thanks to stronger revenues and spending under-execution. The revenue pickup was partly due to the processing of the tax filings backlog and the improved collection of arrears. The spending under-execution was due to the inability to fill public vacancies and the late disbursement of financing for public investment. Average headline inflation declined to 2.1 percent in 2023, in line with lower international oil prices. The current account deficit increased to almost 7 percent of GDP in 2023 from 3.6 percent in 2022 due to vigorous construction activity.

Growth would moderate in the medium term as both tourism recovery and the reconstruction taper off. Growth is expected to be 2.7 percent in 2024 and 3 percent in 2025, supported by a delayed recovery in cruise passengers towards pre pandemic levels. However, the near-term outlook is threatened by the load shedding (since June) which resulted from inadequate maintenance and underinvestment in electricity generation capacity. From 2026 onwards, growth is expected to gradually converge towards 1.8 percent over the medium term as the stimulus from the reconstruction peaked in 2023, and tourism growth becomes constrained by the island’s carrying capacity and ailing infrastructure, worsened by years of low public investment. Inflation is expected to remain broadly contained while remaining vulnerable to international price developments. The current account balance is envisaged to gradually converge to a surplus of 1 percent of GDP in the medium term as the reconstruction tapers off.

Risks are broadly balanced. External risks include an intensification of regional conflicts that leads to higher prices of energy and traded goods, hampering the timely completion of infrastructure projects, while positive developments and/or supply chain readjustment could support a normalization of international prices. A faster-than-expected disinflation progress and more resilient growth in trading partners could boost tourism. Tighter-than-expected global financial conditions could negatively impact foreign investment and growth. Domestic risks include the possibility of a prolonged energy crisis that affects growth prospects and climate-related shocks that could damage infrastructure and disrupt tourism. A lack of investment in infrastructure to adequately serve visitors could lead to a tourism slowdown.

Securing Long-term Fiscal Sustainability

The authorities remain committed to fiscal prudence. The 2024 draft budget is consistent with the fiscal rule and aims to enhance revenue mobilization, accelerate public investment by executing the proceeds from the 2023 loan from the Netherlands, and restore public employment to ensure service delivery and improve the government’s administrative capacity and overall efficiency. However, spending under-execution is likely to continue as recruitment efforts remain hindered by uncompetitive public wages, which are 10 percent lower than in 2012 in real terms. Available resources for public investment (carried forward from 2023) are also unlikely to be fully executed this year given severe capacity constraints.

Revenue mobilization measures are needed to help abate fiscal pressures. Over the medium term, revenue increases are needed to meet the golden fiscal rule while clearing arrears of about 4 percent of GDP with the Social Insurance Bank (SZV), servicing liquidity support and capital loans from the Netherlands, and restoring public wage competitiveness and service delivery. Sint Maarten’s tax collection—of about 14 percent of GDP—is at the median of regional peers, suggesting some room to boost revenues. Casinos are currently only subject to a small fee, their profits, turnover, and winnings are notable sources of untapped tax revenues. Enforcing the lodging tax on short-term rentals, and income and profit tax on the proceeds from such rentals, could generate revenues of about 1 percent of GDP. Additional revenues could be obtained by instituting a tourist levy at the airport; updating the price of land leases; adjusting the cost of vehicle registration by weight; introducing a ship register; adjusting the fees for work permits; enhancing the tax administration; and by digitizing and interfacing government’s systems.

Reforms are urgently required to address persistent healthcare deficits, currently cross-financed with pension funds. Health premiums and public transfers have been insufficient since 2010, leading to a cumulative deficit of the healthcare insurance funds of about 13 percent of GDP (as of 2022). More than one-half of the reserves of the old-age pension fund (about 10 percent of GDP as of 2022) have been used to cross subsidize growing deficits of the healthcare funds, endangering the sustainability of the system. Under unchanged policies, given population aging and rising healthcare and administrative costs, both healthcare and pension funds could have deficits by 2025, and the liquid reserves of the SZV could be depleted by 2027. Thereafter, sustaining the system would require annual government transfers of about 4.5 percent of GDP by 2030. The government envisages a set of reforms to preserve sustainability, including (i) the introduction of the new general health insurance to expand collection; and (ii) plans to contain costs by rationalizing benefits, extending the use of generic drugs, optimizing medical referrals, and greater emphasis on preventive care. With old-age dependency ratios rapidly increasing, additional measures will be required such as increasing contribution rates and the retirement age—which are currently broadly aligned with regional peers—or the introduction of out-of-pocket payments for health services, which is about 30 percent of healthcare costs in emerging markets on average.

Reforms to Boost Potential Growth

Reforms are needed to fully reap the benefits from tourism. The availability of short-term rentals (STRs) has rapidly increased after the pandemic and now accounts for about 40 percent of the available room inventory. This helps explain why the hotel room occupancy has been lackluster despite booming stayover tourism. STRs generate annual income of about 5 percent of GDP and compete with hotels with an unfair tax advantage, as they are not required to register, do not charge the lodging tax, and the owners are not subject to turnover or income tax. Sint Maarten has the highest tourism density among Caribbean islands (with about 30 visitors per local resident, 6 times the regional average). Public investment is urgently needed to ensure key infrastructure—such as water, electricity, and roads–is adequate. Increased spending on advertising and outreach, to a level that is comparable to regional competitors on relative terms, could help attract more high value-added visitors and improve stagnated daily spending per tourist.

Labor reforms are needed to boost potential growth and accelerate the labor market recovery. High rigidity in the labor market, absence of measures to formalize undocumented workers, and the government’s capacity constraints, contribute to project delays, lost tax revenues and slower growth. A rapidly aging population further compounds the need for urgent reforms. Further facilitating the issuance of work and residence permits for skilled migrants and training should be considered to alleviate acute skills mismatches in key sectors, support diversification and accelerate the labor market recovery.

Investments in resilient infrastructure made during the reconstruction are essential and need to be properly maintained. Sint Maarten is highly vulnerable to storms and cyclones with acute economic costs (for example, damages and losses from Hurricane Irma are estimated at about 255 percent of GDP). Given carbon emission trends, the frequency of hurricanes is expected to decrease but their intensity is likely to increase (as the average temperature on the island is projected to increase by 1.1 degrees Celsius by 2050, while precipitations would fall by about 4 percent). The Trust Fund’s investments in resilient infrastructure are very valuable as they helped the recovery from Irma and would result in higher GDP growth of about 0.5 to 0.8 percentage points in case of a future category 5 hurricane shock. These estimates highlight the urgency of proper maintenance going forward, particularly after the expiration of the Trust Fund at end-2028.

A new wave of public investment projects is indispensable to improve potential growth. With the airport well advanced in its reconstruction, and the Trust Fund set to expire in 2028, the country needs to prepare plans for a new wave of priority projects, taking advantage of available funding and technical expertise from the Netherlands. As recent blackouts have exposed the need to invest in energy generation, strong consideration should be given to investments in renewable energy projects that exploit natural endowments (particularly in solar) and ancillary investments to update the power plant and to store fuel.

The IMF mission would like to thank the authorities for their cooperation and the candid and constructive discussions that took place during June 17-21, 2024.