Alberto Romero: At the beginning of a new century: the current economic and
financial situation in the Netherlands Antilles
Speech by Mr Alberto Romero, Executive Director Bank van de Nederlandse Antillen at the "Aruba
and Curaçao Tourism and Public Finances" seminar, 3 March 2001.
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Introduction
Ladies and gentlemen, good morning. I would like to thank the UNA for inviting me today to present to
you an overview of the economic and financial development of the Netherlands Antilles during the last
15 years.
Let me also express my appreciation for my friends of the Central Bank of Aruba that are here today
and that have accepted the invitation of the UNA to participate in this seminar. During the last decade
the cooperation between the Central Bank of Aruba and our Central Bank has grown to become one
of mutual respect for each other's work and there also exists a great desire between staff members of
both institutions to cooperate with each other, to share information and work closely together on topics
of common interests.
As you all know, our economy has been suffering from a severe recession since 1996. During the year
2000 only, the Antillean economy shrank as measured by the gross domestic product (GDP) by an
estimated 4.4%. This decline can be explained by a weak domestic demand, migration, new tax
measures, lay-off, all of which resulted in reduced private consumption. Private investment also
declined due to a lack of confidence in and uncertainty of the economic future of our country. In
addition, the difficult financial situation of the governments constrained further domestic public
expenditures.
All these factors contributed to a further lowering of the domestic spending and this is now reflected in
a depressed economy and a constantly shrinking GDP since 1996.
Going back to the last decade of the 20th century our real GDP recorded an average growth of only
0.7% as compared for instance to all developing economies which showed an average growth of 2.4
%. As an economist it is in a sense puzzling to see that, while the world economy has been expanding
during these past few years, and our major trading partners, the USA and Holland, are showing
remarkable positive overall economic performance, we do not seem to benefit from these
developments and are even falling behind in the region.
One would wonder as to what the main causes are for our poor performance, particularly if placed
within the context of new emerging international trade relations and a positive business environment.
Let me give you my views on the various internal weaknesses that have, to a great extent, hampered
economic growth in the Netherlands Antilles during the past few decades.
• In the first place the mounting disequilibrium in the fiscal balances of the governments as a
result of the weakened tax base and rising expenditures on wages, salaries and interest is a
main reason for the poor economic development;
• In the second place, and closely related to the fiscal imbalance, is the weak balance of
payments outcome. Given the openness of our economy, the medium to long term effects of
fiscal imbalances will unequivocally be reflected in imbalances in the current account of the
balance of payments;
• Thirdly the rigidity in the labor market and the related high general cost of doing business, to
a great extent have resulted in high unemployment. There is a simple law in economics that
has proven to be useful for policy-makers. Whenever the per unit labor cost rises above the
productivity level of labor, employment opportunities will shrink and unemployment will rise.
In addition the poor results in the educational field and inconsistent human resource training
programs have resulted in a high youth unemployment and massive migration of this
younger age-group of our community to Holland;
• The various attempts to modify, adapt and re-shape our tax structure has gradually raised
the tax burden on the islands of the Netherlands Antilles and this has resulted in additional
cost effects that is now spreading throughout the economy;
• The policies to correct perceived market failures in the past has caused our product market
to become rigid and, associated with this development, the price mechanism did not
correctly reflect the demand and supply situation in the various market segments;
• Finally the lengthy discussion between the two layers of government has practically
paralyzed the urgently needed efficient functioning of the decision making process.
Some of the above mentioned weaknesses, particularly those associated with high budget deficits,
triggered an unsustainable high public debt and as a consequence of this a financial crisis that started
originally in the public sector, but is now spreading throughout our society, creating a social and
economic crisis, accompanied by increasing poverty and a migrating population.
To address the topic of this seminar I have chosen to single out two main areas of risk that have
intensified due to the crisis in the public sector. I will first start with the consequences of the public
sector's financial situation for APNA's public pension scheme. In addition to the negative effects of the
imbalance in the public sector on the pension fund, we also see that the interest burden in the budgets
of the governments have magnified due to the uncontrollable debt situation.
Rationalizing the APNA pension scheme
Another important side-effect of the situation in government finances is the imbalance in the public
pension fund system (APNA) that I would like to discuss with you next.
Since 1998 the governments have focused their efforts on rationalizing and reforming the public sector
pension scheme. It is important to note that the cost savings efforts that the governments have
introduced into the pension scheme must be seen as important positive steps to bring the public
pension system more in line with private sector pension schemes. Despite the increasing criticism on
the foreseen reforms, one should have do bear in mind that the long term viability of the fund is at
stake if no reforms are undertaken now.
Various cost saving measures were implemented with the objective to balance the contribution of the
participants in the scheme on the one hand and to safeguard their pension benefits in the long run.
Some of the most important rationalization measures were:
• Raising the retirement age to 60 years;
• full pension rights will be obtained after 35 years of service for new participants in the
scheme instead of 30 years;
• the early retirement option for new participants into the fund was eliminated while a gradual
phasing out of this option for those that acquired this right prior to 1998 is being worked out;
• the inclusion of the AOV (old age pension) into the public pension scheme.
Due to all these amendments into the APNA scheme the total premium paid has abruptly been
reduced from 34% in the past to the current 16%. In addition this 16% premium scale has now been
changed into a so-called dynamic premium system, which was proposed by the management and
board of the APNA.
This dynamic premium scheme is based on the crucial assumption on the level of the funding ratio,
being the ratio between the liquid assets and the pension liabilities.
If the funding ratio at a given point in time becomes higher than 115% the dynamic contribution
scheme automatically adapts the total premium to be paid to the APNA by lowering it by 1% points
from 16%. If on the other hand the funding ratio falls below the 95% threshold, the total premium will
have to be raised by 2% points from the basis of 16%. With a funding ratio between 105% and 115%
the total premium can be maintained at its present level of 16%.
Based upon these assumptions made by APNA the present 16% dynamic premium scale is in the
short term at the safe end. Recently1 also an IMF panel of experts concluded that this premium
1
Special IMF mission that studied the pension scheme from January 29 to February 8, 2001
scheme could be maintained in the short term on condition that the actuarial assumption used in the
calculation of this new premium scheme be re-evaluated by an independent actuarial study.
Other important considerations however, should be studied in more detail in order to mitigate the
longer term risk to the public pension system. One of these risks factors is the modus operandi of all
island governments that together contribute to the premium system. In the past decade without any
exception all of the island governments and the general government were unable to meet the full
pension contribution and therefore forced the pensionfund management and board into renegotiating
and converting premium arrears into new interest bearing loans. It is also important and fair to state
that the governments were able to fully comply with the interest payments obligations to the fund.
One of the consequences of this payment attitude results in a forced annual or automatic 'investment'
of the APNA in government securities, and due to this development currently 45% of the balance
sheet assets of the public pension fund is made up of receivables from the governments. The
liquidation of these assets to comply with the short term pension obligations will become crucial at one
point in the future and this needs closer attention and monitoring of the APNA management and
board.
As long as there is certainty that these government securities can be readily and easily liquidated into
a secondary security market, there is no risk at all for the pensionfund obligations. The story becomes
more worrisome if the liquidation of these securities cannot easily be converted into cash. This should
be, in my view, the focal point in the discussions among the participants of the APNA pension scheme
in the coming years.
In the past some other possible solutions were brought forward for consideration to APNA and the
governments in order to safeguard the long term viability of this public pension scheme. Some of the
options discussed were:
• the opening up of the scheme for other non-governmental participants to reduce the risks of
over investment into one type of security;
• a further increase in the retirement age to e.g. 62 or 65 years to also better reflect the
lifeexpectancy on the islands;
• reorientation of the premium system from a "defined benefit" system into a "defined
contribution" system.
In my view these are important issues to be discussed in order to further rationalize the APNA pension
scheme in the future.
The relation public debt and interest payments.
The second important side effect of the consistently high budget deficits of the past is shown in an
increasing share of interest payments into the total public sector expenditures. This phenomenon is
also related to the aforementioned conversion of arrears to creditors (including APNA) into interest
bearing loans.
In 1986 for instance the interest payments in the budgets of the governments amounted to NAf 25.4
million or 7.9% as a share of the total public expenditure. The most recent data on the public sector
interest burden shows that for February of 2001 the total interest payment amounts to NAf.226.4
million or 15.6% of the total expenditures of the general government. This means that in a 15 years'
time-span the share of the interest payments in the total expenditures have doubled. This
development should be of great concern for policy makers on the islands for various reasons. Some of
these reasons are:
• If for instance the governments had been able to theoretically operate the public sector
without debts in the past 15 years, this would have generated savings of over 200 million
guilders in the year 2001 only;
• Furthermore, these 200 million guilders of interest savings would have generated in the
private sector billions of guilders of investments because of the fewer crowding out effects of
public expenditures than we are currently experiencing;
• The deterioration in public assets as a consequence of maintenance backlogs would have
been reversed if only part of the savings mentioned in this context would have been invested
in these assets;
• Finally we should imagine the positive effects that investment of these 200 million in savings
had generated in the educational field for the entire community.
I have given you just a few general remarks on the positive external effects that a more balanced and
responsible management of public funds would have generated in the past decades.
The focus on new economic areas of development for the future
Considering the fact that the real per capita income of the Netherlands Antilles and Aruba2 is more
than US$ 10.000 this situation does not put us in the range of the 'poor countries'. On the other hand
there seems to be a concern, particularly on the islands of the Netherlands Antilles, that the
distribution of this income is not equitable among all members of our community. According to some
studies done last year on the poverty situation on the islands of the Netherlands Antilles, there seems
to be an increasing poverty among our fellow countrymen and some of them regrettably have taken
the easy way out of poverty through migration to the Netherlands.
In the past 20 years the islands of the Netherlands Antilles have been hit by a number of external
shocks which are still having an important negative effect on the GDP of our country. I do not have to
repeat here the reasons for these external shocks nor will I dwell in detail on the background of the
external shocks, but recent estimates put the income effect of these external shocks at approximately
20% of GDP or over 800 million guilders. Particularly for well developed economies this type of severe
economic blows of this magnitude would have thrown them back for years in development if no
external assistance had been available. As an example the Latin-American debt crisis of the 80s is an
excellent reference point in time to illustrate how external shocks can severely hamper economic
development in larger and less vulnerable economies. Still, many countries in Latin America are slowly
recovering from these shock even today.
How have we reacted to these external shocks here since 1986? There is a number of ways that can
be given on how we are managing ourselves out of this crisis:
Migration as a social safety net:
During the last 5 years and estimated number of some 40.0003 persons from our islands (mainly from
Curaçao) left to Holland to secure a better future for their families.
The migration has dramatically affected the workplace, so much that it is one of the explanations for
the tempered decline in the unemployment rate. This migration makes it also more difficult to quickly
recover from the recession on the islands. For the year 2000 we estimate that the unemployment rate
declined from 15.5% to approximately 14.9%, in spite of the economic downturn. This is to a great
extent attributable to the migration effects.
Labor market flexibility:
Another important explanation for the structurally high unemployment rate is the rigidity problems the
labor market on the islands of the Netherlands Antilles. Under the program of economic recovery that
this government signed with the IMF on September 15, 2000 significant positive steps were
undertaken to increase flexibility in our markets. Most of the economic measures agreed upon with the
IMF are focused on enhancing labor market flexibility and improving the business climate.
For example, almost all measures related to the labor market are focussed on increasing the flexibility
for the employer to adjust capacity to market demand. Furthermore, the procedures for obtaining a
permit for establishing a business are being streamlined, and it was agreed to introduce more flexibility
in regulations on shop opening hours. Moreover, legislation on e-commerce and on the establishment
of economic zones (E-zones) has been adopted by parliament in order to promote business
development. In addition to these local efforts, several international organizations are involved in
assessing the business climate. The Foreign Investment Advisory Service (FIAS), a subsidiary of the
World Bank, is looking into the attractiveness of the Netherlands Antilles as a location to invest, while
the OECD has evaluated the legislation for the international financial and business services sector.
Furthermore, during a two-week mission in December 2000, the World Bank visited all the islands in
an effort to develop a long term economic growth strategy for the Netherlands Antilles.
Debt financing to pay for adjustments:
The third way we are trying to get out of the crisis is through debt refinancing. I have to clarify my
position on this by saying that this is not the correct way of resolving the crisis.
Since 19864 our governments have adopted the policy of adjustments through additional local
financing and accumulation of arrears. To a great extent this policy option explains the growing debt
and interest burden in the public sector budgets.
Coming back now to the more recent economic and financial situation, I can say the following. On the
fiscal front, a budget deficit of NAf.160 million (3.6% of GDP) is estimated for the year 2000.
Compared to 1999, government revenues have increased considerably due to more tax revenues.
This increase resulted from the rise of turnover tax rates and measures to improve the tax assessment
and collection. On the other hand, expenditures increased also, mainly because the government had
to pay part of the claims related to the Parker-guarantee to a foreign financial institution.
The NAf. 160 million budget deficit equals the target agreed upon with the IMF in the Memorandum of
Economic Policies, signed on September 15, 2000. This program, which has to be implemented
before the end of March 2001, contains a number of measures in various areas, such as the reduction
of the budget deficit, the flexibilisation of the labor and product markets, and trade liberalization.
Furthermore, the program contains targets for the level of credit extension and the foreign exchange
reserves. As a result of the agreement with the IMF, the Dutch government has made available a
substantial amount of liquidity support in 2000 (NAf. 110 million). The release of these funds is
conditional on the progress made in the implementation of the policy measures.
For 2001 no economic recovery is yet foreseen, as economic activity is expected to drop by 0.5%.
This decline is related to the drop in public expenditures in an effort to cut the budget deficit by 50%.
In addition to the decline in public expenditures, private consumption will drop further due to continued
migration, the reduction in the number of civil servants and the freeze on government salaries.
In contrast, private investment is expected to pick up in 2001. This increase is related to several large
investment projects in the tourism sector and at the Isla refinery. Contrary to domestic demand, foreign
demand is excepted to increase as a result of a recovery in stay-over tourism.
The inflation rate accelerated from 0.8% in 1999 to 5.1% in 2000, mainly due to the increase in
turnover tax rates. In addition to this domestic factor, the sharp increase in the oil price and the
increase in inflation at our main trading partners contributed to the higher price level.
The tourism industry is currently undergoing a difficult period. Stay-over tourism has been slow for
some time, and the spectacular increase in cruise tourism has not been able to compensate for this.
The decline in stay-over tourism particularly for Curaçao and Bonaire, is related to the weak Euro,
which makes our islands more expensive for European visitors. Fortunately, the average length of stay
and the average amount spent on the islands have increased slightly, dampening the effect of the
drop in the number of visitors.
The tourism industry in the Netherlands Antilles is expected to improve, as room capacity will be
restored in St. Maarten. The projections for Curaçao looks quite positive also, as a number of
investment projects are under way, like Brionplein Hotel, Kura Hulanda, Cornelisbaai, and Jan Thiel
Baai.
Furthermore, there are plans for tourism related projects at Caracasbaai and Blauw Baai, while the
Curaçao Ports Authority is considering a second mega-pier to accommodate the growth in cruise
tourism.
To conclude, we have to acknowledge that the Antillean economy has been going through a deep
recession during the past few years. The financial crisis with the government spread through the entire
economy, creating a social and economic crisis. The only way out of this negative spiral is to tackle the
financial problems of the government. The government has made considerable progress in the
implementation of the policy program agreed upon with the IMF, but some delays have surfaced
during the last two months. The reduction in the financial needs of the government, coupled with the
gradual restoration of confidence, will lay in my view a solid basis for sustainable economic growth.
Economic growth will create better prospects for jobs and an improvement of living standards.