Despite signs of a strong economic recovery in Curaçao, led by tourism, the staff at the International Monetary Fund (IMF) is recommending a review of the Dutch island’s policies to ensure sustained growth and mitigate the impact of external economic pressures associated with the Russia-Ukraine war.

The recommendations of IMF staff arise from a recent Article IV mission to the constituent country of the Kingdom of the Netherlands to monitor economic development.

“Curaçao is recovering from the coronavirus pandemic but faces multiple challenges, including strong inflation pressures stemming from the war in Ukraine. Policies need to be calibrated to support the inclusive recovery while achieving sustainability,” the IMF staff noted in their concluding statement.

Following a long recession, the Dutch-speaking territory recorded four per cent growth in 2021 as stay-over tourism recovered in the latter part of the year. The IMF pointed out that the growth in the tourism sector continued in this year on the back of “relatively high vaccination rates” which softened the economic impact of the Omicron wave. By April, stay-over arrivals had exceeded pre-pandemic levels.

However, the IMF staff report also highlighted some weaknesses in the economy including a contraction in formal private sector-led employment and an increase in inflation to 3.8 per cent.

In projecting growth for the current year, IMF staff noted, “Growth is likely to strengthen this year, although the outlook is clouded by the war in Ukraine. Continued recovery in the hospitality sector in conjunction with higher private investment and favourable employment dynamics this year would support growth of about 6.5 per cent.”

At the same, the report pointed out risks associated with external pressures could threaten Curacao’s growth prospects. In particular, it said that inflation could reach 6.8 per cent as the costs of imports, especially food and energy, continues to increase.

“This could disproportionally affect the vulnerable groups not covered by the existing social safety net and create a drag on the recovery as it erodes disposable income and increases costs of doing business,” IMF staff warned.

“A protracted war in Ukraine could keep energy and food prices elevated for an extended period, slowing growth and eroding purchasing power. Further supply chain disruptions and commodity price shocks could delay the recovery in investment,” they added.

Policy changes

To this end, IMF staff recommends that the authorities implement changes to address challenges to growth.

“Fiscal policies need better calibration to improve the quality of consolidation and avoid negative effects on growth. Budgeting adequate resources for structural reform implementation, protection of the vulnerable, and other critical areas will be key for improving quality of adjustment. Raising public investment from the currently low levels would increase employment, incentivise private investment, and support broad-based economic recovery and potential growth,” IMF staff wrote.

One major structural change the IMF staff report recommends is to the Government of Curacao’s wage freeze and employee attrition policies aimed at curbing spending and reducing public debt.

Following a visit from the IMF to Curacao in late 2021, the Curacao Chronicle reported that the Pisas Government had plans to freeze civil servants’ wages in order to keep budget expenditures under control.

But while the IMF staff believes the move could result in a reduction in public debt from 90 per cent of gross domestic product to 76 per cent in 2023, they instead suggest a complete overhaul of the public sector.

“Structural reform to modernise Curaçao’s civil service would work better than the current attrition and wage freeze policies. The three-to-one attrition policy was useful to reduce the overall government wage bill, but it has significant drawbacks as it is counterproductive in critical areas and reversible in non-critical areas. Both level and skill composition of government employment needs to be consistent with the effective delivery of public services,” the IMF staff report outlined.

In addition, the team from the IMF also encouraged continued reorganisation of the Dutch territory’s tax administration to include the introduction of a “fully fledged VAT (value-added tax)” that would redound to improved collection of revenue for the Government.

In light of inflationary pressures associated with the war in Eastern Europe, the staff report highlighted the need to improve the social safety net to better target and more effectively protect the vulnerable. In addition, with food prices expected to rise, it encouraged authorities in Curacao to maintain the food programme which was in place at the height of the pandemic.

Another recommendation: reforming health care and social security to ease the pressure on public finances.

“The cost of healthcare has been steadily rising in recent years, exerting pressure on the social security fund (SVB) and requiring higher budget transfers. Given the complexity of the health reform, prompt design and stakeholder consultations are the immediate priority. It will be important to provide the health sector with adequate resources to ensure health care continuity, especially in view of the inflation shock,” the IMF staff report outlined.

Diversification

While IMF staff expect that the tourism will continue to drive economic growth in Curacao, given the territory’s pipeline of new hotels, they also encouraged the authorities to explore developing new sectors. However, they noted that diversifying the economy would require substantial investment from both public and private sector.

In particular, the report suggests opportunities in the energy sector such as the development of a liquified natural gas (LNG) plant. The report also urged financial support for small and medium-sized enterprises.