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Social Economic Council advises immediate dollarization for St. Maarten due to mounting deficit

TUESDAY, 26 NOVEMBER 2013

PHILIPSBURG–The Social Economic Council SER has urged government in a follow up advice on dollarization to “immediately” take the necessary steps to plan and prepare for an orderly transition to the circulation of the United States dollar as “the single currency in St. Maarten.”

That advice from SER comes on the heels of the mounting current account deficit of the joint monetary union of Curaçao and St. Maarten as reported by the Central Bank of Curaçao and St. Maarten (CBCS). There is evidence also supplied by the bank that the deficit is primarily caused by Curaçao.

The SER advice, published on November 22 in the National Gazette, also urges government to take measures to avoid any negative price effects on consumer goods from the elimination of the Netherlands Antilles guilder.

From the point of view of risk aversion, SER emphasized that a well-prepared and organized move to dollarization “will probably take at least a full year.”

SER added that in a situation where confidence in the Netherlands Antilles guilder would be lost, “the peg to the dollar could become untenable in a matter of weeks. In other words, if and when the risk of devaluation becomes imminent, it will be far too late to dollarize.”

In a post-monetary union situation, St. Maarten would have to create or find an institution to execute the bank supervision task. Outsourcing of this task, or indeed cooperation with Kingdom partners Curaçao, Aruba and the Netherlands might very well be viable options, according to SER.

SER said that the choice for leaving the monetary union and dollarization “in no way implies criticism of the functioning of the Central Bank.”

Further, government also needs to find “an efficient solution” for the remaining Central Bank tasks, specifically supervision of the financial sector, as part of the transition plan.

Devaluation

Devaluation will have “devastating” socio-economic consequences. As the import component of the average basket of consumer goods is extremely high in our country, a given percentage of devaluation will mean almost the same percentage loss in purchasing power, or real income, for the consumer whose income is expressed in guilders, said SER.

Due to our already mixed dollar/guilder economy, devaluation would cause several deep disruptions in our economy. Those who earn a dollar income will be unaffected while a worker who earns an equivalent wage in guilders will suffer a loss from devaluation. Similarly, those who earn guilders and pay rent or mortgage payments in dollars will find themselves in financial problems. Conversely, businesses earning dollars while paying their expenses in guilders will receive a windfall profit.

Steps necessary

Government also has to “accept compliance” with fiscal rules and benchmarks. Those include rules and benchmarks implemented by the Committee for Financial Supervision CFT and measures to compensate for the loss of seigniorage and licence fee revenues. Government must find ways to maintenance of sufficient reserves in the event of external shocks as this is among the central concerns in the new dollarized situation.

SER “emphatically” requested government to make its position known on the content of the SER advice 2013-001, entitled “St. Maarten stepping out of the monetary union,” submitted to government on February 28.

The gist of that advice was for St. Maarten to leave the monetary union with Curaçao, and to adopt the US dollar as the sole legal tender in our country. The research and preparation of that advice took place in 2012.

Based on information that has become available since, SER has taken into account the recent deterioration in the external monetary situation and has “with renewed urgency” presented the follow-up letter of advice published in the National Gazette on November 22.

Current financial situation

The 2012 current account of the monetary union shows a deficit of NAf. 1,382 million, the third consecutive deficit of around NAf. 1.4 billion, according to the Central Bank of Curaçao and St. Maarten Annual Report.

For the first time however, if has not been possible to finance this deficit by way of foreign (direct) investments in our economy, or by external borrowing. Consequently, an important part of the current account deficit has been financed by a decrease in the official (currency) reserves of NAf. 277 million.

The internationally accepted minimum level of official reserves is expressed as the value of three months of imports. This level has been exceeded or maintained for many years. For the first time in 2012, the monetary union’s reserves fell below the three-month import coverage mark, and deteriorated further in 2013 based on CBCS’s Economy of Curaçao and St. Maarten in Charts 2010 – 2013 (June).

Persistence of the present trend will make the peg of the Netherlands Antilles guilder to the US dollar untenable. Devaluation of the guilder will become inevitable. In their 2011 Article IV consultation, the IMF expressed their serious concern about this scenario (IMF 2011, page 1, page 14), which in turn was reflected in the SER advice “Stepping out of the monetary union.”

Calculated separately, the balance on the current account of St. Maarten shows a surplus of NAf. 170 million. Curaçao registers a deficit of NAf. 1,573 million based on the CBCS 2012 balance of payments figures.

“Hence, the entire balance of payments current account deficit of the monetary union is caused by Curaçao, while the contribution of St. Maarten reduces the deficit somewhat,” SER pointed out.

The measures taken by the Central Bank (the 2012 credit freeze followed by a curtailed growth) to reduce money supply and thereby slow down imports, have “a very detrimental effect on the St. Maarten economy already. These measures, however, address a problem St. Maarten did not contribute to in any degree.”

Without the monetary union with Curaçao, St. Maarten would not have reduced its currency reserves, and would have been able to maintain them at a very safe level, said SER. Also lower levels of borrowing, or paying off of existing debt might have been possible as well.

The council added that the foreign currency that becomes available through foreign investments in St. Maarten or loans taken by St. Maarten could have been spent on imports caused by public or private investments or even for higher levels of consumption. “Instead, this part of our balance of payments is now used to finance Curaçao’s current account deficit, while our imports are curtailed.”

Source: The Daily Herald, St. Maarten

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