GREAT BAY – St. Maarten’s economy contracted by 1.5 percent in 2011, and inflation doubled to 4.6 percent, central bank President Dr. Emsley Tromp said in an address to parliament’s Central committee yesterday afternoon on the Central Bank’s 2011 annual report. In his report, Tromp notes that the higher inflation is due to higher international food and oil prices and to the increase in the turnover tax.
The economic downturn was reflected in decreased activities in the hotel and restaurant sector, in wholesale, retail and in stay over tourism. The latter category declined due to a decrease in timeshare capacity and in the number of incoming flights. Cruise tourism saw the numbers go up, but not as strongly as in 2010 and not in a way to mitigate the decreases in stay over.
The airport handled fewer passengers last year, and airport-related activities also declined. In the utilities sector electricity production decreased while water production increased. The financial services sector performed weakly, due to a decrease in the net income of local banks.
There was also a sliver of good news: the 2011 budget showed a 1.1 million guilders surplus, mainly due to the higher tariff for turnover tax. Revenue from wage taxes, transfer taxes and fuel excise also increased, while profit tax revenue declined.
The balance of payment of the monetary union (St. Maarten and Curacao) registered a deficit; net international reserves declined for the first time in eleven years. The average import-coverage decreased from 4 months to 3.7 months, still above the Central Bank’s target of 3 months.
The current account deficit increased last year, due to the end of the debt relief program.
Dr. Tromp was somber about the performance of Curacao and St. Maarten, close to two years after the countries became autonomous.
“After hardly two years and one completed budget cycle it appears that Curacao’s budget is not balanced, contrary to the projected surplus. This situation will probably continue if the weaknesses keep strengthening each other mutually. The availability of timely and reliable government data is not only essential for policy making but also for the investment climate. Unfortunately there now appears to be a big gap between the projections in the approved budget and the realization. This difference indicates a failing financial management system.”
Dr. Tromp said that Curacao needs to take measures as soon as possible to prevent that the government has to take unexpected compensating measures on a regular basis. This would create uncertainty and hamper economic growth. There is not a lot of space for higher taxes given the relatively high tax burden of 26 percent of gross domestic product.
The situation in St. Maarten is different. The tax burden is 23 percent of gross domestic product. But to broaden its income basis, St. Maarten needs to improve tax collection.
“A balanced budget can be maintained by improving the government’s cost efficiency,” he added.
The debt relief program gave the two countries a healthy financial starting position, but it was not the solution for the many social-economic problems. The ageing population causes higher costs for healthcare and old age pensions, especially in Curacao.
“The Social Insurance Bank in Curacao has indicated that if structural measures do not materialize in the short term, the fund for old age pensions will be exhausted by 2014,” Tromp noted.
St. Maarten and Curacao have to create a strong and stable environment that stimulates economic growth, the central Bank president said.
“The prospects for growth in 2012 remain weak due to the somber perspectives at our most important trade partners. The Central Bank has pointed out at several occasions that the investment climate is essential for St. Maarten and for Curacao.”
Tromp also stressed the importance of the education system. “It has to produce graduates that have the skills that are currently needed in the labor market.” Tromp lauded Curacao’s initiative to make education accessible to everyone.
“But it is a source of concern that no attention is given to the quality of the education.”
The 80/20-rule the parliament in Willemstad approved and that obliges companies to employ at least 80 percent locals on their staff met with criticism.
“That is not beneficial for these rigidities. Executing this measure without the necessary exemptions will make the labor market less flexible and weaken our competitive position.”
Tromp pleaded for an active social policy in both countries.
“Experiences in other countries have shown that this contributes to a permanent decrease of poverty. The governments must realize that initiatives to increase the tax burden to realize its policies can lead to a lower economic growth and to higher unemployment.”
Tromp said that the government in Curacao in particular has contributed to the current account deficit “by financing its budget deficit by eating into its bank balances.”
The Central Bank director noted that the small and open economies in St. Maarten and Curacao will always be confronted with higher imports due to higher oil and food prices.
“But protecting local prices against international price fluctuations will send the wrong signal to companies and consumers and lead to the incorrect allocation of resources. To achieve a structural improvement of the current account we have to take measures that improve our exports to counterbalance growing imports.”
One of the sectors Tromp has in mind is the financial services.
“This has always been an important pillar of Curacao’s economy in terms of high qualified employment and foreign currency revenue. The lobby organization for the international financial services sector, the government and the Central Bank need to join forces to create the conditions under which this sector is able to flourish once more.”
DP-MP Roy Marlin asked Tromp after his presentation whether the Central Bank was prepared to come with a proposal for this joint task force, and latter noted that he will approach Finance Minister Roland Tuitt with the idea.
Tromp said that the financial services sector was the number 1 pillar of the economy ten years ago and that it has now dropped to place six.
“The economy depends for 70 percent on tourism and that makes it vulnerable. It is necessary to diversify. Transportation and financial services are two of the sectors we have in mind for that.”