PHILIPSBURG:---The Board of financial supervision (Cft) appeals to Sint Maarten to approve the already much delayed 2019 budget. This approval is needed in order to obtain loans such as the loan for the recovery of the airport and to start with projects to structurally increase government income, such as the reform of the tax administration and the improvement of financial management. The key message of the CFT during this visit: translate plans into actions and tangible results.
Sint Maarten still does not have an approved 2019 budget. The Cft calls on Parliament to decide on the draft budget as soon as possible. A budget for 2019 will provide government with a legal basis for its intended expenditures and is a precondition to set in motion key projects and therefore needed loans. The CFT stresses the importance of a strengthened tax administration, which must lead to the much needed structural increase in government revenues. These future revenues can be used to carry out the necessary government tasks, solve the current payment arrears and lower the country’s debt.
The implementation of the new plan to improve financial management is delayed, while no significant progress has been made with the original plan during the past years. This lack of significant progress puts the agreement with Sint Maarten to obtain an unqualified auditors' report on the 2021 financial statements under pressure. Cft chairman Raymond Gradus: “The CFT urges to carry out the implementation of these important improvements without any further delay.”
Other matters that were discussed during the visit of the CFT are the 2019 budget performance, the preparation of the 2020 budget, liquidity support and the current status of the 2015 Kingdom Council instruction. To comply with this instruction, Sint Maarten has to compensate its past deficits, solve its payment arrears and make the country’s healthcare system and old-age provision sustainable. With regards to the latter, Sint Maarten has proposed to increase the AOV age from 62 to 65 years in 2020. The CFT advises Sint Maarten to start with the 2020 budgeting process so there will be a draft in the upcoming months and to include the increase of the AOV age. The CFT expresses its disappointment that the promised adjustment to the pension legislation has not been implemented yet. Further delay is highly undesirable.
The debt to GDP ratio of Sint Maarten is expected to rise from 37 to 51 percent in 2019. This increase is mainly due to the intended loan for capital expenditures, the loan for the recovery of the airport and liquidity support. The Cft will monitor the development of the debt to GDP ratio with the aim to keep it at a sustainable level.
In 2010, the Netherlands agreed to take over 70 percent of the outstanding debt of the former Netherlands Antilles. At the same time, the Kingdom Act financial supervision was adopted and the CFTwas founded to help the countries Sint Maarten and Curaçao in preventing the recurrence of an unsustainable debt position. As a result of the Kingdom Act, a low interest rate applies to the current outstanding debt and new capital investment loans. This interest is significantly lower than the interest rate in other Caribbean countries. Sint Maarten has thus more financial freedom to allocate funds to the needs of the people of Sint Maarten.
The Cft again requests the attention of the government for the completion of the financial statements of the previous years in order to complete the accountability process. The financial statements for 2013 and 2014 have been approved by Parliament, but still, need to be put into effect by the Governor. The 2015 and 2016 financial statements have not yet been submitted to Parliament and the financial statements of 2017 and 2018 still have to be prepared.
The Board of financial supervision Curaçao and Sint Maarten visited Sint Maarten from June 24th to 26th and held meetings with the Governor, the Minister of Finance, the Council of Ministers and the program manager for the reform of the tax administration.
• The draft budget 2019
Sint Maarten presented a revised draft budget for 2019 in February this year, followed by an amendment to the budget in May. The amendment was mainly needed due to further delay in the pension reform for civil servants and necessary costs for the justice department, which were not included in the revised budget. The current draft budget, including amendment, shows about 483,8 million guilders in expenses.
During the last couple of visits of the board, the Cft stressed the importance of expense cutting and income increasing measures. Sint Maarten put in the budget of 2019 an amount of 2.5 million guilders for cost savings and an amount of 3 million guilders for additional income generation. However, the budget does not explain how the government is going to enforce these measures. Since October 2018, the CFT advised to formulate these measures. Moreover, the pension reform, which was initially planned to be introduced on January 1st, 2019, is now projected to be enforced per August 2019. By delaying the introduction of this reform, Sint Maarten has forgone approximately 8 million guilders for 2019.
The process of obtaining an adopted budget for 2019 is taking longer than expected. The amended budget was submitted for approval by parliament on the 14th of May. As the Sint Maarten government also has stated, will further delay of the budget cause a hold up in many key areas, such as:
1. delays in the process of obtaining the much-needed loan for the airport. Importantly, unless the budget is approved, the critical funding for the airport reconstruction cannot be obtained.
2. delays in the investments needed for the major part of the projects to restructure the tax office and improve financial management.
Furthermore, the delay in the 2019 budgeting process also puts the effectiveness and efficiency of the 2020 budgeting cycle at risk as this process and the preparations by the different ministries should have already been started by now. And last but not least, seeing that we are halfway in 2019, having an approved budget is more than appropriate.
• Reform of the tax administration
The tax reform project was planned to commence in January 2019. We are now in June, and this project, with a total duration of 3 years, is thus delayed. During our previous meeting as board, we have stressed the importance of finalizing and implementing the plan in order to realize the increase in tax compliance for example in the amount of 7.5 million guilders that is included in the 2019 draft budget. The CFT emphasizes the need for speedy measures in order to achieve the goals set for 2019 and beyond. After all, this reform is needed to gain the much-needed budget balance soon and surplus on the budget in the near future in order to solve the payment arrears and lower the debt.
• Financial Management
With quite concern, we have noticed that little to no progress was made with regards to the improvement of financial management. To paint a clearer picture, in 2016 the Council of Ministers approved an improvement plan consisting of 12 projects to be finalized in 2018. Of these 12 projects, only 1 has been completed thus far.
A new financial management improvement plan has been approved by the Council of Ministers in April this year. As it is true that the major investments for this plan are linked to the approval of the 2019 budget, there are areas in this plan that can be started immediately. The Cft therefore advised to do a detailed analysis of what can be achieved in the short run. It is time for concrete plans and, more importantly, action.
We further emphasized that the financial management process encompasses every aspect of the budget cycle. Sound financial management also positively impacts the operations within all ministries. There is a direct relationship between financial management, government finances, and public service delivery.
The Cft and the Minister of Finance of Sint Maarten made the agreement that Sint Maarten will work towards a clean audit opinion on the 2021 financials. We expect that government will do all possible to ensure improvement in the quality of the financial statements and financial management.
• Financial statements
The importance of having timely and correct financial statements is also a repeated remark from the Cft. As stated before, there is still a lot of improvement to be made in this area. The budget and reporting cycle for the years 2013-2018 has not yet been completed. So, the last approved year report is of 2012.
o The financial statements for 2013 and 2014 need to be ascertained by the Governor.
o The 2015 and 2016 financial statements are pending adoption by Parliament.
o The 2017 financial statements still need to be finalized and audited, and
o The 2018 financial statements still have to be drafted.
According to the latest planning received from the Ministry of Finance, the 2017 financial statements will be presented to parliament in the third quarter of this year. The Cft stresses the importance of clearing up the backlog. Certified financial statements in a timely manner is of urgent importance for a clear and proper budget cycle.
• Budget performance 2018
The fourth quarterly report of 2018 shows a preliminary deficit of 90 million guilders, which is considerably lower than the budgeted deficit of 197 million. This favorable outcome is partially explained by higher tax income and lower personnel expenses. The income from wage tax, turnover tax and profit tax were all higher than budgeted. In 2018, the realization with respect to wage tax was 26 percent higher than budgeted. The higher level is a sign of the recovery of the Sint Maarten economy, and the effects of the hospitality projects from government and the World Bank.
In addition to the quarterly reports, the CFT receives monthly reports by the ministry of finance. The Cft commended the Minister of Finance for timely submitting these monthly reports but stressed that the other ministries also make use of these reports for their own monitoring.
• The debt position
At the start of 2019, the debt ratio for Sint Maarten was around 37 percent. In the 2019 budget, loans are planned for capital expenditures, the loans for the airport and for liquidity support from the Dutch government. Taking into account these proposed loans, the debt ratio is expected to increase to 51 percent. If the loans for the hospital are included this will rise to 56 percent. This week the Minister of Finance has raised his concerns in the parliament about this raising debt level. Due to the vulnerability of Sint Maarten’s economy, actions are needed to lower the debt level in the near future and implementing the tax program is therefore of upmost importance.
• The role and the task of the CFT
To understand the role and tasks of the CFT, we must first understand the historical context. In 2010, the Netherlands agreed to come up with a solution for the unsustainable debt of the Netherlands Antilles in order to give the countries Sint Maarten and Curacao a healthy financial starting position. Of the outstanding debt, the Netherlands took over 70 percent in the amount of 3.4 billion guilders. The remaining debt was converted in a loan with a low-interest rate. At the same time, the Kingdom Act on financial supervision (Rft) was adopted and the board of financial supervision, the CFT, was founded to prevent that the countries Sint Maarten and Curacao would again find themselves in an unsustainable debt position.
This is what the Cft works for. As the CFT we continuously provide recommendations to Sint Maarten to maintain a balanced budget and to keep the debt from rising again. A low Dutch interest rate applies for the current outstanding debt and new loans for capital investments. This interest is significantly lower than the interest rate in other Caribbean countries. While for some other countries in the Caribbean the interest payments can reach 25 percent of the income level of the public sector, the interest payment for Sint Maarten and Curacao are currently approximal 2.5 percent of income. In the Rft these interest payments are maximized to 5 percent, which is not binding yet. Importantly, while other countries have to spend money on interest, this money can be used to provide better services for the public. The Rft and also the recommendations of the Cft are thus without a doubt in the interest of the public.
• The 2015 instruction
In November 2018 Sint Maarten reported on how the country has complied with the Kingdom Council instruction up until now. The Cft issued an advice in December accompanying this letter at the request of the State Secretary of the Interior and Kingdom Relations. In this letter, the CFT advised the Kingdom Council to keep the instruction enforced but to also adjust the timespan and make additional agreements. Further agreements are still needed to be made, based on the Kingdom Council’s decision on the continuance of the instruction. The Cft is awaiting the communication about this and will contact the State Secretary.
As Sint Maarten is facing an aging society, measures should be taken to make health care and public pensions sustainable and pass them on to the next generation. As Sint Maarten is the only country in the Kingdom with a pension age lower than 65, Sint Maarten has proposed to increase the AOV age from 62 to 65 years in 2020. The Cft advised this change in order to increase the sustainability of the fund. The CFT expects government to take the necessary steps in order to meet this date.
• Closing comments
In our previous visit I have concluded my statements by calling for action. It is with profound concern that I must conclude that things are not moving at the desired speed. Overall, the country Sint Maarten is lacking progress. In our meeting with the Council of Ministers we have repeated the following urging requests:
o Pass the budget for 2019 as soon as possible and ensure that the cost-cutting and income increasing measures are defined and implemented among which the pension reform.
o Start with the 2020 budgeting process so there will be a draft in September and include an increase of the AOV age from 62 to 65 years.
o Take speedy steps in reforming the tax administration and improving financial management.
I seriously hope that the budget will pass this week and important projects are started, in the interest of the people of Sint Maarten.