Sint Maarten is a small, tourism-centred economy recovering from successive deep shocks. In 2017, Hurricanes Irma and Maria hit the island, causing damage estimated at 238 per cent of GDP, including significant damage to the airport. While still rebuilding from the toll of the hurricanes, the novel coronavirus pandemic marked a second deep shock to the tourism industry as well as the people and businesses of Sint Maarten. Economic activity is estimated to have declined by a cumulative 24 per cent since 2016.

The issues facing the island nation has caused the a tripling of the country’s debt-to-GDP ratio since 2010. Government debt stood at about 20 per cent of GDP in 2010 following a round of the debt relief by The Netherlands but rose to 38 per cent in advance of the hurricanes in 2017 and the Covid-19 pandemic and was estimated at 60 per cent of GDP by end-2021. Before the hurricanes, this increase had been driven by government investment. Under the heavy shocks of the last five years, current expenditure has exceeded revenues, resulting in accelerated debt accumulation and minimal public investment outside of the hurricane relief trust fund.

However, since late last year, Sint Maarten has been seeing strong tourism recovery with only mild headwinds from the latest COVID-19 developments, implying an estimated growth of 8 per cent last year and an expectation of 7½ per cent growth this year, the IMF notes in its Article IV Consultation on Sint Maarten, the country which is part of the Kingdom of the Netherlands, but shares a small eastern Caribbean island with French-speaking St Martin. The forecast is for growth to slow to 5 per cent in 2023.

“Economic activity is expected to recover to pre-pandemic levels next year and to pre-hurricane levels by the end of the forecast horizon. External inflation pressures, exacerbated by the war in Ukraine, is forecast to raise annual inflation in 2022 to nearly 6 per cent.” That is double the 2.8 per cent inflation that the country recorded last year. Price increases are however expected to average 3.5 per cent in the country next year.

At the same time, the IMF pointed out that the outlook for Sint Maarten’s economy is subject to substantial risks including shocks to tourism demand from the pandemic or partner country growth as well as ever-present hurricane-risk.

“Downside risks cloud the outlook. Global price pressures are making a mark on the island and threatening real wages and the purchasing power of the most vulnerable.”

Disappointing investment execution, especially for the airport, a rebound in the economic consequences of the COVID-19 pandemic, spillovers from a slowdown in advanced economies, or another devastating hurricane season are key risks that could significantly derail recent gains, according to the IMF.

The recommendation is for fiscal efforts to be centred on a higher-quality consolidation. The country implemented a public wage bill freeze to help it through its issues, but the IMF is now indicatiing that the freeze could be eased in light of the inflation shock and should eventually be replaced by a comprehensive reform focused on productivity and competitive wages.

“Attention should be given to hiring key skill areas where positions are difficult to fill. Temporary relief to households, in addition to the gasoline excise tax reduction, should employ more targeted measures. These steps can be financed by needed base-broadening tax reforms including taxes on sharing-economy holiday rentals, internet consumer sales, and the gambling industry. Higher premiums and cost-cutting measures are urgently needed to put the social security and health insurance system on a sustainable financial footing and avoid becoming a fiscal burden in the medium-term.”

The IMF also called for increasing dynamism for businesses and workers and supporting green investment would help sustain the recovery. As the economy recovers from the pandemic, long run growth concerns return to the fore. Private sector dynamism would be supported by reducing barriers to new business and simplifying, centralising, and speeding up permitting. Barriers to formal work should be reduced by increasing flexibility to multiple jobs and seasonal work as well as easing hiring and firing restrictions. Green infrastructure investments would support growth while improving Sint Maarten’s living environment and global brand.

Curacao and Sint Maarten

According to the IMF, Curaçao and Sint Maarten need to calibrate their policies to support an inclusive recovery and improve resilience to climate change while safeguarding debt sustainability. A higher-quality fiscal consolidation, rooted in well-designed reforms while providing adequate resources for critical areas, is needed for both countries. The inflation shock calls for targeted and temporary support for the vulnerable.

“Both countries would benefit from developing medium-term fiscal frameworks, strengthening public financial management and governance and improving transparency. In Curaçao, rebalancing from current spending to productive investment would be key for supporting the recovery.”

In Sint Maarten, building resilience involves improving the quality of fiscal consolidation, reinforcing the social security and health insurance systems, and improving public investment management.

The agreements with The Netherlands provide a window of opportunity to tackle many long-standing structural challenges and to strengthen governance. At the Union level, strong implementation of financial sector reforms would help alleviate financial sector vulnerabilities.