Press Release No. 24/330

IMF Executive Board Concludes 2024 Article IV Consultation Discussions with the Kingdom of the Netherlands—Curaçao and Sint Maarten

September 17, 2024

Washington, DC: On September 10, 2024, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation discussions[1] with the Kingdom of the Netherlands—Curaçao and Sint Maarten and endorsed the staff appraisal without a meeting on a lapse-of-time basis[2]. These consultation discussions form part of the Article IV consultation with the Kingdom of the Netherlands.

Context. Curaçao and Sint Maarten have continued to experience a vigorous post-pandemic recovery underpinned by strong stayover tourism, which is outperforming Caribbean peers. Headline inflation has declined rapidly led by international oil price developments, notwithstanding a recent uptick, while core inflation remains elevated. In both countries, current account deficits improved markedly from pandemic years but remain high. Fiscal positions remained strong and in compliance with the fiscal rule. The landspakket, the structural reform package agreed with the Netherlands in 2020, continues to guide both countries’ reform agenda.

Curaçao outlook. Growth is expected to accelerate in 2024 before gradually converging to its potential over the medium term. Stayover tourism supported by fiscal expansion is projected to drive economic growth at a robust 4.5 percent in 2024 due to new airlifts and further expansion in hotel capacity. Growth is then expected to moderate to reach 1.5 percent over the medium term, given subpar investment and productivity growth coupled with sustained population decline and beginning saturation in tourism flows, assuming no further reforms and diversification. Headline inflation is projected to decline mildly to 3.2 percent in 2024 from 3.5 percent in 2023, but to continue falling towards its steady state of around 2 percent by 2027 reflecting international price developments. Fiscal balances would be guided by the fiscal rule and debt would continue to decline, while surpluses narrow as investments return and social spending pressures mount. The current account deficit is expected to improve in the medium term but would remain elevated.

Sint Maarten outlook. Growth is expected to moderate in the medium term as 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 electricity load shedding (since June) and political instability. From 2026 onwards, growth is expected to gradually converge towards 1.8 percent as the stimulus from the reconstruction peters out, and tourism growth becomes constrained by the island’s carrying capacity and ailing infrastructure. Inflation is expected to remain broadly contained while remaining vulnerable to international price developments. Over the medium term, the government will continue to comply with the golden fiscal rule and capacity constraints will continue to weigh on public investment.

Monetary Union. Monetary policy is appropriately targeted towards maintaining the peg. Efforts to absorb excess liquidity should continue while closely monitoring developments in core inflation driven by tourism-related services. The financial sector is sound and risks to financial stability have substantially diminished as the CBCS advances its reform agenda. Banks are highly liquid and adequately capitalized and systemic risks are contained. Building on the CBCS’s strong progress in strengthening supervisory and regulatory capacity, and the recent resolution agreement for ENNIA, staff welcomes CBCS’s continued efforts in its reform agenda, including financial stability and crisis management.

Executive Board Assessment[3]

Curaçao

Curaçao’s economy successfully embraced the pivot towards tourism-led growth, giving rise to a strong near-term outlook. After losing key traditional industries, Curaçao quickly and successfully leveraged its tourism potential to grow, attract new hotels, and create jobs. While this is serving the economy well in the near term – growth is projected to accelerate to 4½ in 2024 – structural shifts have started to emerge, including a low-skilled, informal recovery of the labor market amidst low investment in non-tourist sectors. Growth is expected to moderate over the medium term given saturation in tourism flows, sustained population decline, and subpar investment. Notwithstanding the economy’s recent overperformance, inflation declined significantly and only reversed some of its gains recently on the back of higher international oil prices and unfavorable base effects. Inflation is expected to gradually converge towards its steady state rate of around 2 percent. Fiscal policy remains guided by the fiscal rule, albeit past surpluses are expected to unwind, allowing for the reversal of pandemic wage cuts and a return of public investments. The current account markedly improved thanks to lower oil prices but the deficit remains elevated.

Risks to the outlook are broadly balanced. Growth slowdown in major economies could negatively impact tourism receipts, while positive surprises could boost foreign demand. Domestically, a successful expansion of renewable energy and faster-than-expected development of hotel capacity and yachting marinas would boost growth, while delays in public investment and more persistent core inflation could dent tourist experience and competitiveness.

Efforts to safeguard recently created fiscal space are welcome. Overall surpluses in 2022 and 2023 helped reduce debt and granted access to favorable financing terms from the Netherlands. Safeguarding this space and avoiding procyclical impetus is warranted, including through more gradual unwinding of pandemic wage cuts in 2024, prudent liquidity management to repay a bullet loan in 2025, and general efforts to strengthen tax administration, review procurement and domestic arrears management, and streamline transfers to public entities. Ensuing room for maneuver could be used for priority investments, including for climate adaptation, guided by a medium-term fiscal framework steering towards the island’s debt anchor.

Healthcare and pension reforms are needed to lock in a sustainable expenditure path and mitigate medium-term fiscal risks. Growing health and old-age pension deficits, exacerbated by an aging population, pose risks to the sustainability of public finances. Recent initiatives to incentivize the use of generics and raise the pension age are commendable, and more needs to be done to put the system on a sustainable path. Staff sees a broad range of efficiency gains in health spending, including lowering pharmaceuticals and laboratory costs and enhancing primary care's gatekeeping role. Reforms on the revenue side, including broadening the contributor base and increasing co-payments, are politically more difficult.

Sustaining the positive growth momentum in the medium term requires investments in capital and labor and resolving existing growth bottlenecks. First, moving up the value chain with high-end resorts and complementary recreational activities would help sustain valuable income growth from tourism but requires scaling up investments in infrastructure and deregulating the transportation sector. Second, further investments in electricity grid and energy storage, as well as a revised pricing strategy, are needed to accompany the ongoing energy transition and reap its vast benefits, including lower fuel imports, emissions, and electricity prices. The envisaged floating offshore wind park for hydrogen production would be a game changer for the island. Boosting public investment to achieve these objectives, however, requires ramping up capacity in planning and execution. Third, to further stimulate growth and offset the sustained population decline, formal labor markets and skills would need to be strengthened. And fourth, continued improvements in the business climate in line with the landspakket’s economic reform pillar could help overcome decade-low productivity growth.

Important strides in reducing ML/FT vulnerabilities are welcome and could be built upon. The draft online gaming law, implementation of risk-based supervision, and a new law to address EU grey listing and enable automatic information exchange represent important strides in enhancing Curaçao’s defenses against ML/FT and related reputational risks. Curaçao can further improve upon these important accomplishments, including by passing and implementing the aforementioned legislations in a timely manner and enhancing coordination and monitoring across relevant agencies.

Sint Maarten

Near-term growth is strongly anchored but preserving the positive momentum hinges on investments to revamp an ailing infrastructure and improve tourism’s value added. The economic recovery is well underway, underpinned by tourism recovery and the reconstruction. GDP is expected to surpass its pre-Irma level in 2025. However, without investments to upgrade an ailing infrastructure, growth will falter as the island approaches its maximum carrying capacity. Strategies should continue to focus on enhancing tourist’s experience, differentiating from other Caribbean destinations, and improving tourism’s value added.

A comprehensive strategy is required to durably resolve the electricity crisis. Mobile electricity generators have been leased and efforts to replace old engines are underway. Once the immediate crisis is resolved, efforts should be devoted towards developing a detailed masterplan for the energy transition with targets, projects, costing, timeline, and a comprehensive assessment of ancillary investments. The Trust Fund could receive a new mandate, beyond 2028, to operate as a public investment agency in charge of planning, securing the financing, and implementing plans for the energy transition.

Revenue mobilization efforts are essential to ensure fiscal sustainability. Plans to lower tax rates, to make the country more competitive with neighboring islands, should be avoided as this would reduce government’s revenues and endanger fiscal sustainability. Instead, additional revenues are required to satisfy the fiscal rule, service loans with the Netherlands, raise public wages to attract and retain talent, increase transfers to cover public health costs, and clear public arrears with the SZV. Envisaged reforms to enhance the tax administration and to digitize and interface government systems should be complemented with plans to i) tax casinos’ profits, turnover, and winnings; ii) enforce the lodging tax on short-term rentals, and income and profit tax on the proceeds from such rentals; iii) update the price of land leases; and iv) institute a tourist levy at the airport.

Without reforms, the healthcare and pensions funds are unsustainable. Health premiums and government transfers are insufficient to cover health costs, which are being cross-financed with pension savings. With unchanged policies, given population aging and rising administrative costs, both health and pensions funds will run deficits by 2027, and the SZV would deplete its liquid assets by 2027. By 2030, the government would need to transfer about 4 percent of GDP per year to sustain the system. Reforms are urgently needed to contain health costs including: i) introducing the General Health Insurance, ii) rationalizing benefits, iii) extending the use of generics, iv) optimizing referrals, v) strengthening preventing care, and vi) adopting out-of-pocket payments. Given the rapid pace of population aging, additional measures such as increasing the contribution rates and linking the retirement age to life expectancy, should also be considered.

Strengthening the implementation of AML/CFT measures is necessary to increase effectiveness of the AML/CFT regime. Laws for an effective AML/CFT framework were approved but their implementation is lagging. UBO registration is yet to begin, while the investigation and prosecution of suspicious activities is lacking. Granting the FIU full independence to investigate and prosecute cases, and increasing its budget for recruitment and operations could strengthen the AML/CFT framework.

The Monetary Union of Curaçao and Sint Maarten

The current account deficit is expected to improve in the medium term but would remain elevated, while international reserves are expected to remain broadly stable. Large CADs in both countries are expected to improve and remain well-financed, leading to a stable and broadly adequate level of international reserves over the medium term. Curaçao’s external position is assessed to be weaker than implied by fundamentals and desired policy settings due to an elevated CAD and sustained appreciation of the real effective exchange rate, while that of Sint Maarten is considered in line with fundamentals and desired policy settings.

Monetary policy is appropriately targeted towards maintaining the peg. In line with global monetary policy tightening, the CBCS increased its benchmark rate during 2022-23 and has kept it unchanged since September 2023. Efforts to absorb excess liquidity should continue while closely monitoring developments in core inflation driven by tourism-related services. Even though credit growth declined further and reached negative territory in real terms amidst monetary tightening, the transmission mechanism of monetary policy remains weak. Structural factors include the absence of interbank and government securities markets. The continued increase in mortgages, the only credit component to display growth, was accompanied by a broadly stable loan-to-value ratio on aggregate, albeit more granular data is needed to monitor potential vulnerabilities. Further acceleration in mortgage credit could warrant introducing a macro prudential limit below the currently by banks self-imposed ratio.

The financial sector is sound and risks to financial stability have substantially diminished as the CBCS advances its reform agenda. Banks are highly liquid and adequately capitalized and systemic risks are contained. Near-term risks to financial stability have substantially diminished with the agreement for a controlled wind-down of ENNIA and the start of the restructuring process, as well as the CBCS’s continued improvements in supervision, regulation, and governance. Staff welcomes CBCS’s initiatives to establish a financial stability committee, further refine stress-testing, and enhance crisis management capacities, including lender of last resort and a deposit insurance scheme.

[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] The Executive Board takes decisions under its lapse-of-time-procedure when the Board agrees that a proposal can be considered without convening formal discussions.

[3] At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://www.IMF.org/external/np/sec/misc/qualifiers.htm.