Published On: Sun, Feb 17th, 2019

IMF: Political stability critical for business investment decisions

IMF headquarters

PHILIPSBURG – Cumbersome regulations, red tape, weak governance, antiquated tax and labor laws, skill mismatches, restrictive labor markets, high energy costs, infrastructure bottlenecks and political volatility are structural impediments to St. Maarten’s economic growth. This appears from the Article IV annual bilateral consultations between a team of the International Monetary Fund (IMF) and St. Maarten. The IMF Executive Board endorsed the staff appraisal of this consultation in its meeting of January 15, 2019.

Enhancing growth, productivity and competitiveness requires reducing the costs of business, streamlining and modernizing regulations, facilitating economic adjustments, attracting investments through an improved business environment, a resilient infrastructure and a more dynamic labor market, according to the report.

Interestingly, with the motion of no confidence on the table against Prime Minister Leona Romeo -Marlin – scheduled for handling this upcoming Friday – the IMF-report notes that “ensuring political continuity and political stability are critical factors for supporting business investment decisions.”

St. Maarten should improve its resilience against natural disasters, for instance by enforcing hurricane-resistance building standards and by regularly maintaining key infrastructure. “Developing a crisis recovery framework would minimize hurricane damage and enhance long-term economic growth,” according to the IMF-report.

The report marks damages sustained by Hurricanes Irma and Maria in September 2017 as over $2.7 billion – more than 250 percent of Gross Domestic Product (GDP). The gap between financial reconstruction needs (projected to be $2.3 billion) and identified public and private financial resources ($1.2 billion) persists, the report states and this could slow down the pace of recovery.

Of insurance claims totaling 1 billion Guilders ($558.6 million) two third was paid out by the end of September 2018. The re-investment of private insurance pay outs is however lower than projected.

While the IMF projects modest economic growth in 2019 of around 2 percent, it notes that weak growth and underlying vulnerabilities persist. In 2017, the economy contracted by 4.75 percent; cruise and stay over arrivals were down by 25 percent and the island’s stay over recovery was slower than at other hurricane-affected regional peers.

The government debt will remain a concern for years to come. At the end of 2017 public debt stood at 34.5 percent of GDP, but by September 2018 it reached the critical level of 40 percent. Payment arrears to pension fund APS and social and health insurer SZV were 136 million guilders (close to $76 million) – “more than twice the government’s liquidity position.”

If another hurricane were to hit the island in 2019, assuming that this would result in fiscal costs totaling 10 percent of GDP, the national debt profile would peak at 56 percent in 2020 and decline to 48 percent in 2023. But in a darker scenario that combines the impact of a hurricane with growth and interest rate shocks, the debt could increase to 63.75 percent in 2020 and decline to 59 percent in 2023.

“Without any adjustment on revenue and spending after 2018, the debt path will be unsustainable and rise to 49 percent in 2019 and reach 72 percent in 2023,” the IMF-report states.

The government’s Financial Recovery Plan (FRP) assumes the need for $410 million in loans over the period up to 2025 to finance capital expenditures and to stimulate the economy. To achieve a budget surplus in 2023 equaling 0.25 percent of GDP, the FRP envisions tax administration measures, tax reform geared towards increasing revenue, identifying cost cutting measures, settling payment arrears, and the improvement of financial management and government efficiency.

The FRP projects that government debt will peak at 66.5 percent of GDP but if it reaches its goal of a budget surplus in 2023, the debt to GDP ratio will fall from 46.5 percent in 2020 to 40 percent in 2023.

The IMF warns that this scenario is “sensitive to adverse shocks” and that the debt ratio could increase to 63.75 percent in 2020 due to a combination of low economic growth with the impact of natural disasters.

The IMF staff suggests four cost cutting measures in the report: rationalization of spending on goods and services, a hiring freeze and pension reform. The fourth suggesting is interesting: reducing the costs of politics by addressing the wages and benefits of high office holders.

The IMF-report also warns against the effects of slow progress with the strengthening of financial sector-oversight, frameworks for anti money laundering and the financing of terrorism and the as weak perceived governance of the Central Bank. “This could lead to further losses of correspondent banking relationships.”

The report furthermore notes that St. Maarten had made no progress with several recommendations the IMF made in its 2016 consultation-report: reducing the cost of energy, the establishment of an independent regulator for the energy sector and the replacement of the turnover tax with a value added tax system.

###

Related article:
Opinion piece: “A party for the happy few