A solution in search of a problem: Curaçao policy response to the economic crisis

When a nation faces serious economic problems, the logical policy response to solve those problems has to be the result of a profound, and at the same time broad analysis of the underlying causes of those problems. One has to make the right diagnosis of those problems to come up with the appropriate policy response. Otherwise, a wrong policy response may aggravate those problem instead of solving them.

In the IMF parlance, one needs to engage in financial programming: Financial programming is a framework to analyze the current state of the economy, forecast where the economy is headed without policy intervention, and identify economic policies that can change the course of the economy, while taking the interdependencies between economic, fiscal and monetary policy into account.

In the case of Curacao, rather than analyzing the current state of the economy, since 10-10-10, successive governments have consistently been blindsided by their urge to please CFT, while focusing only on budgetary imbalances. The economic crisis that we are experiencing today therefore, is the result of gross negligence of our policymakers. Since 2012, I have warned of an impending economic crisis as a result of decisions and/or policy actions that have been taken in the past. If not timely addressed, I argued, the crisis may drag us in an economic abyss. 

 

In addition, I have warned that the existence of CFT has created a state of mental paralysis of our policymakers. Implicit in the law that instituted the CFT are a set of perverse incentives that render sound macro-economic policy making irrelevant. Sound macro-economic policy since 10-10-10 came to be defined as: meeting CFT demands to avoid an instruction from the Kingdom Council of Ministers (RMR). Hence, since 10-10-10 all macro-economic policies came to be seen or have been justified as “necessary to meet CFT demands”. Meeting the CFT demands became a goal in itself and thus gradually transformed from ‘necessary’ to ‘sufficient’ condition. This all at the expense of the social and economic situation.

 

We are now in 2019 with the economic crisis gaining momentum and yet our policymakers seem still to be blindsided by the CFT demands. We have to realize that our budgetary problems cannot be seen in isolation but rather are the result of our mistakes in the realm of social economic policy making. Given the nature and size of our current budget deficit, no sustainable solution is at hand without addressing the underlying economic problems.

 

The inflationary set of policies that the government has announced to address our economic ills will further deepen our economic crisis. They will erode the purchasing power of the consumer with all their economic (e.g., loss of jobs) and social consequences (e.g., increase in poverty, and brain drain by mid and high-level professionals leaving the island in search for employment elsewhere) without addressing the objective they want to achieve.

 

One should ask oneself: will a further increase in the sales tax improve our competitiveness in the international financial sector? Will an increase in excises and import duties reactivate the refinery through a new operator, willing to make the necessary investments in the refinery? Will the announced measures create the necessary and sufficient conditions to improve our airlift and hence strengthen the tourism sector? Will they lead to the reversal of the net foreign exchange outflow and hence improve the current account position of the balance of payments?

 

The answers to those questions serve to indicate that contrary to what the government purport to achieve with those set of measures, they will lead to further economic contraction, poverty and brain drain and eventually loss of government revenue and hence further budgetary disequilibrium.

 

The question becomes: if the announced set of measures are not the right ones, what then? What are the appropriate set of measures to be taken in the current state of the economy?

 

As argued before, our problem is the economy. For the appropriate solutions, the government should not be talking to the CFT but rather to those with the necessary understanding of and experience in financial programming. We are experiencing unusual economic problems that call for unusual, and comprehensive policy response. In this regard, while fiscal soundness is necessary it has to take a back-seat position. At the forefront of our economic agenda must be the reactivation of our economy.

 

Given the magnitude and urgency of the problems we are facing, a sustainable solution is only possible if we take a multi-annual approach. A policy of acquiescence toward CFT means draconian fiscal measures with far-reaching negative social and economic consequences.

 

Given the size of our economy, each percentage point growth will generate approximately Naf 17 million in additional tax revenues. This implies that with the current lackluster growth we cannot not grow out of this problem with current policies. 

 

This means that if the adjustment path may make compliance with the “Rijkswet Financiele Toezicht” impossible, we will have to come up with some form of accommodation on the Kingdom level to make this possible. Our future and sound macroeconomic policy cannot hinge on past decisions.

 

The appropriate policy response therefore should be: in the short run addressing our pressing economic problems to avoid an economic abyss and devise a medium to long run policy to improve the resiliency of our economy to achieve sound macro-economic policies.

Dr. Emsley Tromp is the former President of the Central Bank

 




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