Update Country Report Curaçao 15 Sep 2016

The IMF published its biennial Article IV consultation with Curaçao and Sint Maarten in August. The Fund noted improving economic conditions in both countries, which recorded modest growth in 2015, and made some advances towards fiscal consolidation, notwithstanding a challenging external environment. The IMF emphasised that both islands needed to make further progress on structural reforms, particularly in areas such as the labour market, taxation and the financial sector.

According to the IMF, GDP expanded by 0.1% in Curaçao and by 0.4% in Sint Maarten in 2015. These numbers are slightly lower than official estimates, which recorded growth of 0.3% and 0.5% respectively. Although mild, the expansion in Curaçao is notable for marking the end of a three-year recession, whereas in Sint Maarten economic activity eased compared with 2014, although the island has enjoyed four consecutive years of growth.

Diversification needed

Both islands are strongly dependent on tourism, particularly Sint Maarten, which is the smaller of the two and the less diversified. However, tourism has been affected by the severe economic crisis affecting Venezuela, which accounts for a large share of the islands' arrivals (especially to Curaçao, which is just off the Venezuelan coast). Venezuela is also an important trade partner, and this adds an element of balance-of-payments risk to Curaçao if substitute export markets are not found. Both islands run large structural current-account deficits, although these have eased somewhat in recent years owing to the fall in oil prices. They also share a degree of dependency on the euro area (especially the Netherlands) for trade, tourism and investment, and so could be affected in the event of an economic slowdown there.

Aside from tourism, Curaçao benefits from an energy sector (including the Isla oil refinery) and is an international financial centre. The IMF urged progress on reforms to boost financial supervision, transparency and crossborder sharing of tax information in order to reduce tax evasion, fraud and money-laundering, which have reputational impacts on the island. The Fund also recommended that both islands diversify their energy matrix, with increased usage of renewable sources to bring down high energy costs. It also urged greater progress on labour reform, in order to increase flexibility, as well as improving education and training, and eliminating restrictions on hiring foreign workers, given the skill shortages affecting the islands.

Ongoing progress on financial consolidation

Debt/GDP ratios are relatively high, given the size of the islands, but ongoing efforts towards fiscal consolidation appear to be on the right track. At end-2015 the debt stock stood at 44.3% of GDP in Curaçao and 36.5% of GDP in Sint Maarten, in the latter case a modest reduction from the end-2014 level. Both islands have a rules-based framework in conjunction with the Dutch Board for Financial Supervision, which evaluates budgets and offers recommendations. Although there have been complaints that the framework is too rigid and does not give much leeway for stimulus spending, the IMF recommended strengthening it to ensure fiscal and debt sustainability. This would include a primary-balance target consistent with a long-term debt anchor of 40% of GDP.

On the tax front, since the 2014 Article IV review, the IMF has recommended various changes to the tax framework, notably a move from the existing turnover tax into a value-added tax (VAT). Although there are still no plans to do so, there has been an improvement in tax collection. The Fund urged further progress on tax administration, and recommended that this be prioritised over any move towards the introduction of VAT. The issue of underperforming state-owned enterprises was also brought up, with emphasis on ensuring medium- to long-term sustainability and improvement of governance.

A weak but stable recovery

The recovery in both islands' economies should persist, even though performance has been weaker than in other Caribbean islands. Nevertheless, incomes per head are among the highest in the Western hemisphere, although numerous socio-economic problems persist, such as high levels of youth unemployment (estimated at 30% in Curaçao and 25% in Sint Maarten). In the longer term, improvements to the business environment will be necessary to attract much-needed investment that will help both islands to diversify further and provide new sources of potential growth.