WILLEMSTAD, PHILIPSBURG - According to the President of the Central Bank of Curaçao and St. Maarten (CBCS), Richard Doornbosch, the COVID-19 pandemic and related containment measures have taken a heavy economic toll on the monetary union of Curaçao and Sint Maarten in 2020. According to the latest estimates of the CBCS, real GDP contracted by an unprecedented 20.2% in Curaçao and 26.8% in Sint Maarten. Furthermore, inflation rose across the monetary union thereby eroding purchasing power. Average consumer prices increased by an estimated 2.7% in Curaçao and 1.2% in Sint Maarten.
Curaçao’s extraordinary real GDP contraction in 2020 was caused by both domestic and net foreign demand. Domestic demand shrank on the back of lower private spending, while public spending rose. In particular, private consumption recorded a sharp decline reflecting lower purchasing power due to the worsened labor market and labor compensation cuts moderated by government support measures. Meanwhile, private investments dropped as many construction projects were delayed or postponed amid the pandemic. The rise in public spending was supported by an increase in government consumption while investments went down. In addition, net foreign demand contributed negatively to GDP caused by a sharp decline in exports moderated by a lower import bill. A sectoral assessment shows that real value added shrank across all economic sectors but was most pronounced in the manufacturing, wholesale & retail trade, restaurants & hotels, transport, storage & communication, and construction sectors. By contrast, the public sector contributed positively to real GDP through the financial support provided to the most affected groups in society.
Real GDP fell dramatically in Sint Maarten in 2020 led by sizeable declines in domestic and net foreign demand. Net foreign demand plummeted as the severe decline in exports outweighed the drop in imports. Meanwhile, the decline in domestic demand stemmed from lower private and public spending. Private spending dropped on the back of lower private consumption caused by the lockdown that restricted mobility and the provision of goods & services, the worsened situation in the labor market, and cuts in labor compensation. However, the government support measures moderated the decline in private consumption. Private investment rose modestly supported primarily by the reconstruction of the airport. The decline in public spending was caused by lower public consumption, notably the outlays on wages & salaries, moderated by a modest increase in public investment, particularly the construction of a new hospital. An analysis by sector shows that real GDP shrank in all economic sectors except the utilities sector. The contraction was most pronounced in the restaurants & hotels sector. The public sector contributed, however, positively to GDP as a result of the financial support measures by the government amid the pandemic.
The pandemic and related containment measures also severely affected the public finances of Curaçao and Sint Maarten. In both countries, the deficit on the current budget is projected to widen significantly in 2020 compared to 2019 as a result of considerably lower revenues combined with higher expenditures. As a result of the sharp decline in economic activity, tax earnings in particular dropped, while spending on transfers & subsidies rose mainly by the financial support that the governments of Curaçao and Sint Maarten provided to the most affected groups in society. Due to the adverse effects of the pandemic on the public finances, the Kingdom Council of Ministers approved that Curaçao and Sint Maarten may deviate from the balanced budget rule as stipulated in the Kingdom Law of Financial Supervision for Curaçao and Sint Maarten in 2020. In the case of Sint Maarten, this exception was in fact prolonged, as the country was already allowed to deviate from this rule following Hurricane Irma in 2017. At the same time, both countries received liquidity support from the Netherlands to compensate for the loss of government income amid the pandemic and for the provision of financial support to the most affected groups in society. As the liquidity support was extended in the form 2-year zero-interest bullet loans, the debt-to-GDP ratio is estimated to rise to over 76% for Curaçao and 54% for Sint Maarten by the end of 2020.
The outlook for 2021 is surrounded by considerable uncertainties and downward risks. Real GDP growth is projected to recover in both Curaçao and Sint Maarten in 2021, although the level of GDP will still remain below the pre-COVID level. Meanwhile, the multi-annual budget projections of both countries indicate a significant financing need to cover the overall fiscal balance in the medium term. This is still excluding the rising deficits in the health and social insurance schemes due to lower contributions and higher demand for benefits because of the crisis, which should be covered by the governments. Hence, the debt-to-GDP ratio may further increase if a higher growth path is not achieved.
Apart from the structural reforms needed to create an attractive and competitive business climate, an efficient and effective government, and viable health and social insurance schemes, a policy program to boost economic recovery is urgently needed under these circumstances. This program should include quick wins that can create jobs in 2021 as well as a medium to long-term agenda for structural economic change directed at sustainable growth, employment, and use of resources. Broadening the export base, reducing the reliance on imports, and increasing the share of renewable energy sources are important elements of this change strategy. The persistent and timely implementation of such a program will facilitate the transition from liquidity support for the budget and COVID-19 support programs to a strong and resilient economy that is able to engage the challenges of the post-COVID era.