THE International Monetary Fund (IMF) has called for Curacao and Sint Maarten to calibrate policies to support an inclusive recovery while, at the same time, improving resilience to climate change and safeguarding their debt sustainability.

The prodding comes in the IMF’s latest Article IV Consultation on the two Caribbean countries which form part of the Kingdom of the Netherlands.

Context

“Both Curaçao and Sint Maarten are recovering from major shocks,” the IMF said, adding, “Before the pandemic, Curaçao had been negatively affected by the closure of the refinery, one of its major economic pillars. Sint Maarten’s recovery from catastrophic 2017 hurricanes was incomplete. The pandemic led to the collapse of tourism in both countries. Comprehensive economic support measures put in place by the authorities and financed by The Netherlands were instrumental for protecting lives and livelihoods and helped to limit the economic fallout,” it continued.

“A strong rebound in tourism beginning in the second half of 2021 — one of the strongest results in the Caribbean — supported a nascent economic recovery of 4.2 per cent in Curaçao and an estimated growth of 8 per cent in Sint Maarten. Despite a substantial external current account deficit of the Union, the international reserves remained comfortable at 6.3 months of imports. The banking system withstood the shock from the pandemic with help from appropriate policies as it remains relatively well capitalized and liquid, although pockets of vulnerability remain,” the IMF noted. Despite highlight the recovery so far, the IMF was quick to point out that the outlook is subject to significant uncertainty and risks, including a slowdown in Curaçao and Sint Maarten’s main trading partners.

Curacao

The IMF in its assessment noted, “Since gaining its autonomy in 2010, Curaçao suffered multiple economic shocks. The economy shrank by 28 per cent in the past decade due in part to spillovers from Venezuela and the. Population and employment have been continuously declining since 2016 and unemployment remains elevated. The closure of the refinery poses questions about new sources of growth. Curaçao faces pervasive structural challenges including governance vulnerabilities.”

The closure of Curaçao’s 330,000-barrel per day Isla refinery, amid a payment dispute between then-operator Petroleos de Venezuela (PDVSA) and U.S. oil company ConocoPhillips has negatively impacted that country’s economy. PDVSA’s lease expired at the end of 2019 and subsequent attempts by the island’s government to recruit a successor stalled. In April, the Curacao state-owned Refineria di Kòrsou (RdK) said it was weighing bids from three parties to run the refinery and would select one by the middle of this year. It followed up that indication in June, saying it will begin negotiations with a seven-company consortium to take over management of the island’s oil refinery and storage terminal. RdK said Caribbean Petroleum Refinery, which it identified as a group of six U.S. and one Brazilian company, was selected from among three finalists to manage and run the facilities.

“No later than September 1st, 2022 an agreement should be reached and immediately after begin with the start-up of operations,” RdK said in a June 19, 2022 statement.

Caribbean Petroleum Refinery would employ more than 800 people and convert the facility to run on natural gas, RdK said. An oil-storage terminal at Bullenbaai on the central west coast of Curacao, “will be put into operation immediately”, it added. “Lingering effects from the closure of the refinery mean that growth is not yet broad-based and could delay full recovery to pre-pandemic levels to 2025-26.”

However, while issues with the operation of the refinery sort themselves out, the IMF acknowledged that the country’s “recovery from the pandemic is gaining momentum but is facing headwinds from inflation pressures driven by fuel, food and other import prices.”

Inflation in the country is expected to touch 7.2 per cent this year, double the level it was in 2018, before falling to 3 per cent in 2023.

Following a protracted recession, growth returned to Curacao in 2021 at 4.2 per cent, supported by a strong tourism recovery. “The hospitality sector is demonstrating resilience and is likely to support growth of about 6 per cent in 2022,” the IMF said as it pointed out that data show that stayover tourism in the fourth quarter of 2021 recovered to pre-pandemic levels, suggesting no lasting effect on the sector’s capacity, although the recovery of cruise arrivals is much slower. A relatively high vaccination rate helped to soften the economic consequences from the wave of the Omicron variant in early 2022 as stayover arrivals were at 92 per cent of the 2019 levels in the first 4 months of 2022. Despite the recovery in the hospitality sector, the IMF pointed out that private sector employment declined by 5½ per cent in 2021, in part driven by supply-side considerations including skill mismatches, although there was some recovery in the second half of the year. Unemployment which rose above 19 per cent in 2020, remains stubbornly high, and is expected to be 19.2 per cent at the end of this year. The IMF’s forecast is for it to fall to 16.6 per cent. The overall outlook for that country’s economy “is subject to significant uncertainty and risks”.

The multiple shocks led to a significant accumulation of government debt, leading to debt sustainability concerns. The debt ratio increased from 58 per cent of GDP in 2019 to 89 percent of GDP in 2021 on account of liquidity support from The Netherlands required to finance large fiscal deficits, borrowing for the Girobank resolution, and the decline in GDP. The Girobank resolution refers to the 2020 bailout of the bank, which was facing liquidity crisis, threatening to topple Curacao’s economy, forcing the Government to borrow 170 million guilders from the Dutch government to make payments to those whose funds were at risk. “The authorities will face significant financing needs in 2023 as all Covid-19-related liquidity support loans — 16 per cent of GDP — mature in October 2023, after being rolled over in April 2022 at a zero-interest rate.”