When a nation faces serious economic problems, the logical policy response to solve those problems has to emerge from a profound, and at the same time broad analysis of the underlying causes of those problems. One has to diagnose the problems correctly to come up with the appropriate policy response. As indicated by the calculation of the IMF of the baseline scenario, an incorrect policy response may aggravate rather than solve those problems.
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 Curaçao, rather than analyzing the current state of the economy, since 10-10-‘10, successive governments have consistently been blindsided by their urge to please College financieel toezicht (Cft) - while sound fiscal policy is a necessary, but not sufficient condition for sustainable economic growth - focusing only on budgetary imbalances. Therefore, the economic crisis that we are experiencing today is the result of gross negligence by our policymakers. As mentioned, since 2012, I have warned of an impending economic crisis as a result of decisions and/or policy actions taken in the past (the termination of the grandfather clause of the offshore tax rate, the expiration of the lease agreement with PdVSA, and the reversal of the net foreign exchange inflow) I have argued that if these problems are not addressed in a timely way, the crisis may drag us into an economic abyss.
Now in 2019, the economic crisis is gaining momentum, and yet our policymakers still seem blindsided by the Cft demands. We have to realize that our budgetary problems cannot be seen in isolation, but rather, as the result of our mistakes in the realm of social-economic policymaking. Given the nature and size of our current budget deficit, no sustainable solution is at hand without addressing the underlying economic problems.
The set of inflationary policies that the government has announced to address our economic ills will further deepen our economic crisis. These policies will erode the purchasing power of the consumer with all of the attendant consequences, both economic (e.g., loss of jobs) and social (e.g., increase in poverty, and brain drain by mid and high-level professionals leaving the island in search of employment elsewhere) without addressing the objective they want to achieve.
We must ask ourselves: will a further increase in taxes 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 indicate that contrary to what the government purports to achieve with the announced measures, these measures will lead to further economic contraction, poverty and brain drain, and eventually loss of government revenue creating further budgetary disequilibrium.
The question becomes: if the announced set of measures are not the right ones, what then? What are the appropriate measures to take given 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 an unusual and comprehensive policy response. While fiscal soundness is necessary, it has to take a back-seat position to the reactivation of our economy, which must be at the forefront of our economic agenda.
Given the magnitude and urgency of the problems we are facing, a sustainable solution is possible only if we take a multiannual 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 ANG 17 million in additional tax revenues (various IMF and CBCS Staff reports). This estimate implies that with the country’s current lackluster growth, we cannot grow out of this problem with current policies.
In other words, if the adjustment path makes compliance with the Rft impossible, then we will have to come up with some form of accommodation on the Kingdom level. Our future and sound macroeconomic policy cannot hinge on past decisions.
The threat and subsequent postponement of a Kingdom instruction once again served to bring home the awesome force Holland can project when it is unrestrained by rules or parliamentary oversight. The mere announcement of the possibility of an instruction has crippling effects on our economy. What was promised to be a tool to promote fiscal soundness came to be used as a weapon to extract concession from Curaçao.
Looking ahead, it is imperative for policymakers to put in place a credible economic policy to achieve fiscal consolidation and economic growth to avoid this climate of instability created by Holland.
In summary, the appropriate policy response to our current crisis therefore should be: Address our pressing economic problems in the short run to avoid falling into an economic abyss, and devise a medium- to long-run policy to improve the resiliency of our economy to achieve sound macro-economic policies.
