Financial preparation very
necessary for new status
BELAIR--“I strongly believe that thorough preparation with all the laws and institutions in place is crucial for a viable start as a country. Until this process is completed, assumption of the new constitutional status is bound to create more issues than it solves for St. Maarten,” Central Bank President Emsley Tromp told economic stakeholders Thursday.
Tromp was the guest speaker at the State of the Economy forum organised by Economic Affairs Commissioner Maria Buncamper-Molanus at the Belair Community Centre.
He added that the number of issues that must be addressed before St. Maarten could become a country was quite overwhelming, but they also created unique opportunities to correct the administrative, economic, and social ills on the island with broad technical and financial support from the Dutch government.
Addressing finance, he said that, based on the relatively few occasions St. Maarten had approached the Central Government for financial assistance, it appeared it had been able to bring expenditures in line with revenues.
“However, its budgetary process has been rather murky. The government has operated quite a few times without an approved budget for part of the year. Regular progress reports on the implementation of the budget have been absent. Budget audits have been delayed for years.”
Although the government is legally not allowed to borrow, St. Maarten has built up a considerable debt, sometimes created because of creative financing constructions. “I do not want to suggest that St. Maarten has a monopoly on weak fiscal discipline and deviation from the budget legislation. The other islands and even the Central Government also have failed in this area,” he said.
With country status, the island will be granted the “long desired authority” to borrow, but within strict limits. The maximum allowed outstanding debt will be bound to an interest burden rule, prescribing that the interest expenses in the budget may not exceed five per cent of the average revenues of the preceding three years.
“The debt relief and authority to borrow are bound by strict conditions and control that will substantially enhance fiscal discipline and transparency. First, the current account of the budget may not have a deficit and must be presented in a multi-annual framework,” he pointed out.
“Second, interest expenses may not exceed the 5% rule.
“Third, the recommendations of the Financial Position working group on improvement of the financial management and control must be implemented as planned.
“Fourth, the entire budgetary process, from preparation of the draft budget to the accountability of its implementation, is subject to supervision by an autonomous supervisory authority that will monitor whether the budget rules and other agreements are met, suggest corrective actions in case of deviations, and report its findings on a regular basis.”
Tromp said he fully subscribed to the idea of St. Maarten and Curaçao having one central bank for monetary, financial, and integrity supervision based on one set of laws after attaining their new status.
With a common central bank, economies of scale can be maintained with regard to the high cost of highly educated staff and modern information and communication infrastructure, he said. “Moreover, a common central bank will provide a larger common economic area with broader economic diversification, which may dampen the impact of a shock occurring on one of the islands.”
Given the current financial architecture, Curaçao probably will continue the current central bank, although its revenue base will shrink as a result of the division of the foreign exchange reserves with St. Maarten and the omission of income from the issuance of banknotes and currency transactions with banks in St. Maarten, Tromp explained.
“With respect to St. Maarten, it is the question whether it will be able to sustain a full-fledged central bank in a profitable way. The smallness of the economy simply hampers the generation of enough income to cover the operational cost. This means that the central bank will become dependent on government financing, which will undermine its independence and hence its credibility. In general, a central bank contributes to government revenues, not the other way around.”
Actually, St. Maarten does not need its own monetary policy. An own monetary policy and consequently an own central bank is needed only if you have your own currency, he said. “Because the US dollar is used so widely, official dollarisation is an efficient and feasible alternative. Hence, dollarisation eliminates the need for a central bank. In effect, you will elect to distribute the profit to the public at large rather than having it accrued to the central bank.”
Further, “St. Maarten’s economic development can be considered a success story. However, it is accompanied by increasing imbalances in the public domain, which will eventually undermine the sustainability of the current growth.”
The preparations for the new constitutional status provide a unique opportunity to address these imbalances effectively, helped by financial and technical support from the Dutch government, Tromp stated.
“An efficient and effective government apparatus, sound public finances, a stable monetary system, good governance, and adequate financial sector supervision are essential elements for building a viable and prosperous country. The road towards this goal is marred with obstacles and setbacks,” he said.
He warned, “You have to be careful not to devote too much energy to achieving the new status while neglecting to strengthen the foundation and create the institutional capacity to govern the new country. …The people of St. Maarten have proven resilient when the going gets tough, and I am convinced that they are tough enough to get going.”
