Update Country Report Curaçao 10 May 2022

What's happened?

In mid-April the Colleges financieel toezicht (CFT, the financial supervision board) warned Curaçao's government that the draft 2022 budget would need to be revised, on the basis that some budgeted measures may not be achievable because the enabling legislation has not yet been put in place. We expect the revised budget to contain more clarity on fiscal reforms, including a proper timeline for the creation of a value-added tax (VAT) system.

Why does it matter?

Progress against these reforms should facilitate easier access to Dutch financing in the medium term. The CFT is concerned that the fiscal deficit-set at Naf162m (US$73.7m, or 2.5% of GDP) for 2022-does not take into account several planned expenses, such as full funding of the Curaçao Medical Centre (the island's main hospital). On a more positive note, the CFT pointed to an increase in tax collection, which should help the government to meet the budget's revenue targets. More than US$203.9m was collected in the first quarter, which is above the pre-pandemic level (for the same quarter of 2019).

However, beyond more effective tax collection, the CFT is concerned that several revenue-raising options outlined in the national package for 2022 have not yet been implemented via legislation. For example, the government pledged to freeze public-sector wages to cut costs, but the CFT has warned that the public-sector wage bill is approaching 2019 levels again, as a government salary cut of 12.5% that was implemented in the wake of the pandemic is being withdrawn and more workers are being taken on at higher rates. In addition, the government had discussed the aim of moving towards a full VAT system with the IMF, but this process has not yet reached legislative draft stage. A restructuring of the tax authority to improve efficiency in tax collection is also pending.

The government does not plan to finance the budget by issuing sovereign bonds in 2022 (the last bond issuance was in 2019) and will instead rely on regular Dutch financing and leftovers from previous tranches of performance-based liquidity support from the Netherlands. In late March the Dutch government agreed to an 18-month extension of the repayment schedule for an outstanding loan worth EUR448m (US$472m), which will free up much-needed resources to finance current spending. Repayments will now fall due from October 2023, rather than April 2022. Curaçao will also seek to increase its inflows of revenue during this extension window.

What next?

The government will revise the draft budget before resubmitting it to the CFT. The revised budget is likely to provide greater clarity on the public-sector wage freeze and include a timeline for creating a VAT proposal.