Tuesday, December 6, 2011

Curaçao and Sint Maarten.IFM 2011

The two newly-autonomous countries within the Kingdom of the Netherlands face substantial challenges. Growth has been low, and unemployment is high. The current account deficit has widened to worrisome levels, increasing the vulnerability of the peg to the dollar and stimulating calls for dollarizing or dissolving the currency union. International reserves however have risen in recent years, and have been stable in 2011. Major data gaps significantly complicate diagnosis, but available indicators point to anemic competitiveness. Fiscal spending pressures are considerable.

Challenges: The key challenge is to develop and implement policies to mitigate external vulnerabilities, entrench fiscal soundness, and advance structural reforms to enhance competitiveness and growth. Given the scale of the current account deficit, frontloaded action will be needed to prevent pressures against the peg over the medium term.

Policy recommendations: Contain credit growth with monetary and macroprudential measures, including higher reserve requirements and gradual relaxation of the limits on foreign investment by domestic nonbank financial institutions to reduce the growth of bank deposits. Tighten fiscal policy primarily through expenditure measures to help contain the current account deficits. Substantially increase wage and price flexibility, cut red tape, and shift from direct to indirect taxes. The authorities broadly agreed with these recommendations, and in several areas policy responses are at an advanced stage of preparation.

IMF.Published:December 02, 2011.Series:Country Report No. 11/342.2011 Article IV Consultation - Staff Report; Informational Annex; and Public Information Notice on the  Executive Board Discussion