New Delhi : Sint Maarten is recovering from two profound shocks. Hurricanes in 2017 caused substantial damage, leaving activity still 8 percent below its 2016 level at the start of the pandemic. The outbreak induced another deep downturn for Sint Maarten’s tourism-focused economy, recording a cumulative 25 percent decline in economic activity since 2016.
Covid-19 has taken a heavy toll, but tourism and GDP growth have returned with a strong vaccination effort. Infection rates in Sint Maarten are in line with similar Caribbean countries, while the vaccination rate is one of the highest in the region. Tourists began returning in numbers last year, exceeding pre-pandemic levels for stayover arrivals by the fourth quarter while cruise arrivals rose to about half of 2019 levels. Growth is estimated to have turned positive last year at 8 percent and is expected to continue this year at 7½ percent.
The invasion of Ukraine has heightened inflation pressures. Inflation has risen to an average of 2.8 percent in 2021 from 0.7 percent in 2020. Prices in Sint Maarten are vulnerable to oil price shocks, while U.S. inflation is imported both through the trade channel and the fixed exchange rate. Inflation is expected to rise to an annual average of 5.9 percent this year, putting pressure on the most vulnerable.
The Netherlands has served as a critical backstop for financing while supporting important reforms. It provided emergency support after Hurricane Irma and established a recovery Trust Fund of about 50 percent of GDP. Since the beginning of the pandemic, Sint Maarten has received zero-interest loans of about 16 percent GDP for gross financing needs as well in-kind donations of vaccines, related medical services, and an emergency food program. This support was conditional on implementing significant adjustment measures and an agreement on a substantial reform agenda set out in the landspakket.
A Higher-Quality Consolidation
With a return to growth and the expiration of Covid-19 expenditure measures, Sint Maarten should transition to a high-quality fiscal consolidation. Government debt is expected to end the year at 63 percent, up from 38 percent before the hurricanes. Driven by a return to growth and a freeze on nominal wages, debt is expected to fall to about 60 percent by 2025, but subsequently stall. There is substantial scope to improve the quality of this consolidation while accommodating temporary measures to protect the most vulnerable from recent price pressures. An immediate elimination of the deficit, however, could pose risks to the recovery and consolidation quality.
Broadening the tax base and closing loopholes would reduce distortions and provide space to protect the most vulnerable. Key opportunities include extending hotel taxes to sharing economy rentals and taxing the gaming industry. Along with improved enforcement, these efforts would reduce distortions and ease pressures to accomplish consolidation on the expenditure side.
The policy response to inflation pressures from the war in Ukraine should be temporary and well-targeted. A reduction in gasoline taxes could be considered but more targeted policy options should also be on the table, including the food support program implemented during the pandemic. Any policy should be explicitly time limited and avoid creating a permanent policy instrument.
The wage reduction and nominal freeze has been important but should be replaced by a higher quality public compensation reform. Wage freezes can serve as an emergency fiscal response to a crisis but are blunt instruments that threaten fiscal effectiveness in the long term. The reduction in public sector compensation by 12.5 precent and subsequent freeze played a key role in containing fiscal risks and facilitating crisis support. The inflation shocks in 2021-22 lead to a substantially deeper fiscal adjustment in real terms than anticipated at the time the freeze was designed. The wage bill path could be eased to reduce the decline of real wage in the near-term but should be replaced by a comprehensive and tailored reform to public compensation in the medium-term to ensure competitive hiring across job types, particularly to meet skills shortages.
The current social security and health insurance policies pose risks to long-term fiscal consolidation. Reforms are needed to put the system on a sustainable path and avoid requiring central government support over the medium-term.
Sustained implementation of the reform program will put Sint Maarten in a strong position through the recovery. Staff are in broad agreement with the reforms outlined in the landspakket and implementation agendas and expect that their achievement will substantially improve the fiscal and growth outlook in Sint Maarten while putting debt on a favorable path. Ongoing good cooperation on the reform agenda would continue to support these reforms.
Forward-looking Fiscal Policy
Sint Maarten can benefit from continuing to develop a medium-term budget, including setting a fiscal anchor. A medium-term budget can play a vital role in coordinating expectations on the direction of fiscal policy. It also provides an opportunity to establish multi-year execution plans for large investment projects, aiding their design and ensuring consistency with larger fiscal goals, and to establish key fiscal anchors like a debt target.
An appropriate debt anchor would capture risks from future hurricanes under climate change. In the context of a medium-term fiscal plan, a debt target could be developed which reflects rising risks from hurricane damage. An illustrative simulation suggests that a target around 50-55 percent of GDP would keep debt below 70 percent of GDP in 90 percent of simulations over a ten-year period. Such a target would be consistent with debt anchors in the 50-60 range for other countries in the region.
The government should develop a strategy to strengthen public investment. With the bulk of immediate infrastructure investment expected to be executed by the NRPB, the current period presents an opportunity build for the future. Government investment was low before Hurricane Irma and negligeable afterwards, a substantial threat to growth in the long run. Work now to build public investment management processes and capacity would position Sint Maarten well for the expiration of the Trust Fund.
Strengthening public financial management (PFM) will be critical to improving expenditure and investment efficiency. There is room for improvement in the PFM system, including upgrading the financial information management system, improving budget classifications and chart of accounts, and adopting a treasury single account (TSA) system. Efficient and effective PFM will contain cost growth while improving the quality of service.
Supply-side Reforms and Better Data
Improving the business environment is key to establishing medium-term growth and boosting potential GDP. Recent efforts to facilitate online payments have been an important step. Establishing a single-window for business permits, streamlining the approval of work permits for high-skilled workers, increasing labor market flexibility, and reducing turn-around time of public procedures would help Sint Maarten promote dynamism and find new avenues for growth.
Future green infrastructure projects could complement private investment. Environmentally friendly improvements to public waste, wastewater, and energy infrastructure would improve economic efficiency while potentially increasing Sint Maarten’s tourism margins. Some efforts on these are already underway.
Significant additional capacity building is needed for data provision. Improvements in data availability, quality, and timeliness are needed as current gaps hamper effective macroeconomic analysis and policymaking. Important progress has been made to advance staffing levels and strengthen methodologies since the last Article IV consultation and this work should continue.
The IMF mission would like to thank the authorities for their cooperation and the candid and constructive discussions that took place during May 11-17, 2022. Issues related to the Curaçao and Sint Maarten monetary union will be further discussed in the upcoming mission to Curaçao and covered in the concluding statement after that mission.