The ongoing pandemic has increased the need for expansionary fiscal policy, and the government will have little recourse but to rely on Dutch financing to fund economic recovery efforts, as domestic sources of revenue generation will remain inadequate in the near term. Liquidity funding is tied to progress against specific reforms and fiscal goals set by the Netherlands-a condition of which Mr Pisas was highly critical during his election campaign earlier in 2021 but has not managed to modify owing to the lack of other fiscal options for the island. Conditions include adopting austerity measures in other areas of spending that are not urgent.

The seventh tranche of liquidity funding from the Netherlands will support countercyclical spending in the final quarter of 2021 and in early 2022. We expect the MFK government to continue making progress on implementing fiscal reforms that were introduced this year, which will ensure further liquidity support from the Netherlands throughout 2022. Although the MFK government is in a slightly stronger negotiating position than previous governments, it is unlikely to be able to drastically alter the underlying terms of Dutch financing.

Although we do not forecast fiscal balance and public debt, we expect fiscal consolidation over the forecast period to be weighed down by a gradual recovery in global tourism. According to the IMF, the primary fiscal deficit widened from 0.4% of GDP in 2019 to 14.9% of GDP in 2020, causing the national debt stock to reach 89.1% of GDP in 2020. The Fund forecasts that the national debt will exceed 100% of GDP in 2021 (up from 55% of GDP in 2019). Reining in non-emergency expenditure (such as on remuneration, hiring and appraisals) will prove difficult, bearing in mind the implications for political stability, which in turn will pose risks to fiscal adjustment.