WILLEMSTAD – The deficit, together with excess liquidity in the banking system, poses risks for the Curaçao’s reserves, which have declined from 3.8 to 3.5 months of projected imports of goods and services between December 2018 and mid-May. The Central Bank of Curaçao and Sint Maarten is considering options for addressing the excess liquidity and has requested IMF technical assistance in this area. Fiscal adjustment would help reduce the external current account deficit although a strong structural reform is required to increase exports and reduce the deficit more durably. It is important to take steps to bolster medium-term external sustainability.
It is very important to follow through on economy-wide structural reforms to support potential growth and increase exports. Cumbersome regulations and red tape, e.g. lengthy permit processes, need to be addressed. The authorities’ plans to simplify and speed up administrative procedures for business and work permits should be implemented without delay. Procedures for terminating employment contracts appear cumbersome and costly and impede labor mobility and job growth. The authorities’ plans to promote “flexicurity” (a combination of labor market flexibility and adequate worker protection) could be a step in the right direction. Labor market mismatches need to be addressed through retraining, and improvements in educational and vocational training programs.
The authorities are planning to combine existing development institutions in Invest-Curaçao and capitalize it with privatization proceeds. This scheme would include two guarantee funds: one for uncollateralized parts of loans and another for equity. These funds, especially the equity guarantee fund, involve significant risks and would require proper risk management and strong supervision capable of assessing the risks. Considerable caution is warranted. If the authorities do proceed with setting up Invest-Curaçao, it would need to adhere to best practices of good governance and transparency.