Age Bakker (Cft): ‘’Terms of targeted instruction need to be met to get public finance back on track”
PHILLIPSBURG, WILLEMSTAD - The Kingdom Council of Ministers (Rijksministerraad) in its meeting on September 4, 2015 issued a targeted instruction to Sint Maarten. During its visit this week, the Board of financial supervision (Cft) discussed the specific terms of the instruction and the way in which they can be met with the Sint Maarten government. Until the terms of the instruction are met, Sint Maarten will not be able to issue any new debt for capital expenditures.
The Sint Maarten government has indicated it will take action to meet the terms of the instruction. This includes the implementation of the Strategy for Growth, a multi annual program aimed at structurally elevating Sint Maarten's economic development level and thereby structurally increase government income, settle payment arrears and compensate for past deficits.
Age Bakker (Cft): “We welcome this multi annual program which can provide a basis for meeting some of the terms of the targeted instruction, and which may provide the additional financial means needed for an adequate level of public services. However, in the opinion of the Cft, the expected results of the program may be overstated. More realistic assumptions are needed, before the Cft is able to advise that the terms of the instruction have been met, after which the Sint Maarten government will be allowed to borrow for capital expenditures. Therefore, some tough choices need to be made now.”
On September 23 and 24, 2015, the Cft met with the acting Governor, the Minister of Finance, the Council of Ministers and the Financial Committee of Parliament. The main topic of discussion was the targeted instruction and how its terms can be met before November 1, 2015.
The instruction obliges the Sint Maarten government to: 1) settle its payment arrears, 2) compensate for the deficits accumulated in 2010-2014, 3) amend the 2015 budget to include all costs related to the public pension scheme and the healthcare system, 4) implement the measures related to the retirement and healthcare system that have already been agreed upon in the Council of Ministers, and 5) reform both the pension scheme and the healthcare system. As long as criteria 1 to 4 have not been met, Sint Maarten will not be able to issue any new debt to make capital expenditures.
An analysis of the payment arrears with SZV and APS shows that both the healthcare and pension system need urgent reforms to attain financial sustainability in the near future. Although several plans have been proposed by the Council of Ministers to restructure both systems, the underlying legislation still needs to be adopted by Parliament. The government's plan to increase the pension age to 62 years needs to be implemented shortly as part of the terms of the instruction. Healthcare expenses are increasing rapidly, causing some SZV funds to reduce reserves to cover their deficits. Cost-cutting measures that were included in the 2015 budget, such as the exclusion of over-the-counter medicines, the introduction of a 10% deductable, and an increase of the salary threshold, are just a few examples of measures that have been approved but have not been executed yet. Urgent action is needed here.
Reform of Sint Maarten's public pension system is needed to attain long term financial sustainability. The final-pay pension scheme needs to be substituted by an average-pay scheme, as is best practice elsewhere. Without such reform, pension premiums would have to be increased to unrealistic levels, which would undermine Sint Maarten’s competitive position by adding to labor costs.
Strategy for Growth
The Cft supports the government’s plans to structurally strengthen the Sint Maarten economy and lay the foundations for sustainable public finances. The Strategy for Growth program can help to strengthen the tax base, so as to providing the financial means needed for an adequate level of public services. An improvement of the financial management, strengthening of the tax authority and improvement of tax compliance should underpin this strategy.
While the Cft supports the idea of the Strategy for Growth program, it questions the expected outcomes presented by the government of Sint Maarten. The expected accumulated additional government income over the period 2015-2018 needs to be realistic, taking recent economic growth figures of not only Sint Maarten but also its main trading partners into account. Therefore, additional measures are needed to meet the terms of the targeted instruction.