Published On: Fri, Jan 17th, 2020

The downside of the monetary union

Hilbert HaarBy Hilbert Haar

The St. Maarten Hospitality and Trade Association (SHTA) rightly sounded the alarm about Curacao’s intention to increase the foreign exchange license fee, warning that this could lead to a devaluation of the Antillean guilder and more expensive imports; all this to solve a 450 million guilders crisis caused by the Girobank disaster in Willemstad. If the higher fee is implemented, St. Maarten will be paying for a problem that was caused – according to the SHTA press statement – by poor management at the Girobank and poor oversight by the Central Bank.

The Central Bank said in a brief press statement that an increase in license fees does not equal a devaluation of the Antillean guilder. “An increase in the license fee will make the import of goods and services more expensive, but this is also the case when import duties or other taxes at the border are introduces or increased.”

The SHTA calls for reevaluating St. Maarten’s position on the monetary union with Curacao, urging responsible ministers to pay attention to what it labels as an existential threat.

Guess what. Our esteemed Social Economic Council already urged the government of St. Maarten to get the hell out of that monetary union more than seven years ago. If the proverbial you-know-what hits the fan we only have our own politicians to blame for their apathy and apparent disinterest in this subject.

SER St. MaartenOn February 28, 2013, the SER presented its advice ‘Sint Maarten stepping out of the monetary union’ to the government of St. Maarten. On September 18 of the same year, the SER sent a follow-up letter to Prime Minister Sarah Wescot-Williams that refers to this advice and describes “alarming balance of payments developments.”

So it’s not like out local decision makers were unaware of the risks linked to a monetary union with Curacao. The September-letter clarifies the problem: the union’s 2012 current account showed a deficit of 1,382 million guilders; St. Maarten’s current account for that year showed a surplus of 170 million and that of Curacao a deficit of 1,573 million. This shows that the problem is in Curacao, not in St. Maarten.

The SER pointed out in 2013 that in case confidence in the Antillean guilders is lost, the peg to the American dollar would become untenable in a matter of weeks. A well-prepared and organized move to dollarization would take at least a full year.

Back in 2012 the Central Bank partially financed the deficit with a decrease in its currency reserves of 277 million. This measure caused the reserves to fall below the generally accepted standard that these reserves must at least equal the value of three months of imports. The situation deteriorated further in 2013, but the government in Philipsburg did not take any meaningful action.

The SER stated in its September-letter that devaluation would have “devastating socio-economic consequences” – a sentiment echoed this week by the STHA.

Devaluation would not affect those who earn a dollar income, the SER observed, but earners of a guilders-salary would suffer from it. If members of the latter group paid their mortgage or rent in dollars they would get into financial problems. The only upside would be for businesses that earn their income in dollars and pay their expenditures in guilders: they would receive “a windfall profit.”

The SER-advice was loud and clear: immediately take action to organize the transition to dollarization, avoid negative price effects on consumer goods and find a solution for remaining Central Bank tasks. Furthermore the SER recommended accepting compliance with fiscal rules and benchmarks, taking measures to compensate for the loss of seigniorage and license fee revenues and maintaining sufficient reserves.

More than seven years later, the SER is, as far as I know, still waiting for a reaction from the government to this advice.

These days the monetary union is once more at the heart of a conflict between Curacao and St. Maarten – be it for entirely different reasons. But the potential result is the same: if St. Maarten fails to take action it will be paying for stuff that went horribly wrong in Curacao.

A few suggestions here for further action: St. Maarten should establish its own national bank together with – if necessary – a central bank. It should establish a correspondent relationship with a solid international bank and take ownership of the RBC branches in St. Maarten. All government receipts and payments should be handled by the national bank.

The SHTA asks in its press statement that the present and the incoming minister of finance and the parliament to be proactive and “address this additional potential blow to our fragile economy before it is too late.”

If the government handles this call for action the same way it handled the SER advice from 2013, we could all still be waiting for a reaction in 2027.


Relevant links:
Press Release SHTA
SHTA questions the survival of the monetary union between Curaçao and St. Maarten
Government-owned banks under pressure
CBCS cannot resolve Girobank-debacle without assistance from the Netherlands