Central Bank confirms zero growth scenario and bleak outlook for 2012

POSTED: 08/28/11 10:07 PM

GREAT BAY – St. Maarten’s economy will most likely contract by 0.5 percent this year, Central Bank President dr. Emsley Tromp said at a press conference yesterday afternoon. At best, the economy will show zero growth. When the government wrote the 12011 budget, it assumed still 1.3 percent growth. The outlook for next year is equally moderate, Tromp said. The International Monetary Fund projects a 2 percent growth for the Caribbean region, but Tromp foresees no more than -0.6 percent growth for Curacao and 0.5 percent for St. Maarten.
As small and open economies we remain susceptible to changes in the world economy,” Tromp said, referring to sharp movements in oil and food prices. “An important lesson that can be drawn is that the new constitutional status alone is not a solution for all our institutional and economic challenges.”
The constitutional change did have an important advantage for St. Maarten: due to the debt relief program, the debt-to-GDP gross domestic product) ration dropped from a sky high 74 percent to 32 percent. While this figure refers to the former Netherlands Antilles, St. Maarten’s ratio is 24 percent. Though this is ten percentage points up from a year ago, it falls well within international accepted standards. “A ratio between 20 and 30 is good,” Tromp said.
In spite of these positive indicators, the prospects for 2011 are poor, Tromp said. Curacao’s economy will contract between 0.7 and 1.5 percent, while St. Maarten will grow with 00.5 percent at most, or not grow at all.
The International Monetary Fund’s 2 percent growth projection for the Caribbean region shows that St. Maarten and Curacao are lagging behind in the region. “To catch up we need to conduct policies that foster rapid and sustainable growth,” Tromp said, adding that well-targeted private investment is crucial to achieve this.
But it is unlikely that St. Maarten in particular will manage to catch up. “An expansion of 34 percent in private investment is needed to achieve a real GDP growth of 2 percent. It does not appear that we will reach these levels,” Tromp said.
The Central Bank president said that private investment growth requires an improved investment climate. “Macroeconomic stability, efficiently functioning markets and low administrative barriers are fundamental elements for an investment climate that fosters private investment. By addressing these areas St. Maarten and Curacao will become more competitive vis-a-vis the region. Unfortunately, in several of these areas we are moving in the opposite direction.”
Tromp mentioned specifically the lack of clarity about the future tax system as a stumbling block. “The tax system should be simple, more transparent, and more customer friendly, making it easier to administer and improving tax compliance.”
In the case of St. Maarten, Tromp said, “reform of the tax system and improvement of tax collection are imperative to increase the government’s revenue base. In Curacao reform is needed to make the tax system more conducive to economic growth. Although reform of the tax system was announced by both countries, its implementation has encountered delays. Moreover, the composition of the final tax package in the reform is still unclear.”
Tromp also addressed the importance of good public and corporate governance. “Recent experiences in Curacao underscore the importance of adherence to these principles by the government, in particular when it concerns state-owned enterprises.”
Tromp said that the government ought to stay away from the day-to-day management of state-owned companies. Instead, it should allow executive and supervisory boards “to execute their responsibilities without interference.”
Oil and food prices are expected to remain high, Tromp said, pointing out that St. Maarten and Curacao are very import-dependent and that higher prices on the international markets will worsen the countries’ net exports. “Therefore it is important for both countries to improve their export performance. Both countries need to diversify the tourism industry by tapping into new markets and by developing niche markets like culture, conferences and medical tourism.”
Tromp said that “skill deficiencies” in the tourism industry must be addressed to enable locals to work in the sector.
He mentioned the international financial services industry as “a potential pillar of the St. Maarten economy in terms of exports and high-skilled jobs creation.”
Another challenge is the monetary union between St. Maarten and Curacao. “Although the authorities of both countries have announces their intentions to create their own Central Bank, we still have to deal with the current reality of the union and the efforts necessary to defend the stability of the common currency. The authorities have to remain vigilant to pursue their domestic policies without jeopardizing currency stability. Given the anemic performance of the economies of Curacao and St. Maarten, changes in the economies of our main trading partners may have a disproportionate effect on our economies. The fact that the fiscal situation is in order is not a reflection of the policies pursued but rather the result of the debt relief program.”
At the end of his presentation, Tromp called for a focus on reaching consensus “through reconciliation of different views and opinions.”
“Unemployment, particularly among the youth is a major issue and concern is growing about recent increase in crime and violence. We need to take the right actions to reach sustainable economic growth levels that can lead to prosperity and well-being of all citizens of the new countries St. Maarten and Curacao.”

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