PHILIPSBURG:— The Board of financial supervision (Cft) looks with interest forward to receiving the revised 2019 budget plus the plans to reform the tax authorities and get the financial management in order. The Cft discussed the revision of the budget with the Minister of Finance and made an appeal to finalize the plans in the short term.
Since the beginning of this year, Sint Maarten has been working on a revised budget for 2019. In line with earlier advice from the Cft, the budgeted expenses have been adjusted downwards, which resulted in a lower deficit. In order to turn the deficits into structural surpluses, Sint Maarten intends among others to reform the tax office and has drawn up a draft plan for this purpose. The Cft acknowledges the need to strengthen the tax office, so that tax compliance will increase, allowing for the government revenues to rise further. Cft has advised Sint Maarten to take the necessary steps so that the implementation can be started shortly. This advice also applies to the plan to improve financial management. In October, Sint Maarten promised to submit an improvement plan in the short term, which will lead to an unqualified auditors’ report on the 2021 financial statements.
Cft has called for short-term cost-saving measures for healthcare and pension expenditures. Cft expresses its disappointment since the promised adjustment of the pension legislation has not been implemented prior to January 1st, 2019. The legislation was presented to Parliament in time in 2018 and has nonetheless not yet led to decision-making. As regards to its payment arrears, it is important that Sint Maarten government reaches payment agreements with the most important creditors (SZV and APS), which in turn will have to be complied with.
Cft has again requested attention for the completion of the accountability process of the previous years. The financial statements for 2013 and 2014 have been submitted to Parliament in 2018, but have not yet been approved. The 2015 and 2016 financial statements have not yet been submitted to Parliament. The financial statements of 2017 and 2018 still have to be drawn up.
Figures for 2018 show a lower deficit than budgeted. This is mainly a result of higher revenues compared to the budget; especially tax revenues. The deficit is admittedly decreasing; nevertheless, Sint Maarten will need liquidity support for 2018 and 2019. Sint Maarten has requested the Netherlands for this liquidity support, which will increase the debt to GDP ratio. An intended loan for capital expenditures and possible other financing matters may also affect the course of the debt to GDP ratio. The Cft will monitor the development of the debt to GDP ratio with the aim to keep it at a sustainable level.
The Board of financial supervision Curaçao and Sint Maarten visited Sint Maarten from February 11th to 13th and held meetings with the Governor, the Minister of Finance, the Council of Ministers, the Council of Advice, the Director of the National Recovery Program Bureau and the Social and Health Insurance Agency (Uitvoeringsorgaan Sociale en Ziektekostenverzekering).
The draft budget 2019
Sint Maarten is in the process of presenting a revised draft budget 2019. The 2019 budget is planned for discussion in the meeting of the Kingdom Council of Ministers on the 22nd of March. The Cft was asked to advise the Kingdom Council before the 5th of March.
Based on the information yet provided, the projected regular income and expenditures for 2019 seem reasonable. I must add that although the quality of the budget has improved significantly, it does not fully meet all requirements.
Due to uncertainties regarding the financing of projects to be executed in the coming years, the capital expenditures budget raises some concerns. It is not yet clear which major projects will be funded through the capital budget and which projects will go through the Trust Fund. We have discussed this matter with the minister of finance and recommend the government to finalize the financing aspects of these projects. According to the Kingdom Act on financial supervision government’s loans must be submitted to the Cft for advice. Furthermore, all proposed loans and investments must be included in the budget. Therefore, we have advised the government of Sint Maarten to have a clear outline of the capital expenditures and the financing thereof.
Economic growth and debt
The IMF recently published their so-called article 4 consultation and made the following forecast. “In a scenario without any adjustment on the revenue and spending side after 2018, the debt path will be unsustainable, with the debt rising to 49 percent of GDP in 2019 and reaching 72 percent by 2023”. The IMF recommends income increasing measures for the coming years and to implement short as well as long term measures to ensure a balanced budget.
For 2019, the IMF and also CBCS projects an economic growth of more than two percent. This is based on the recovery of tourism industry and the strong investment for reconstruction. Thus far, we have taken notice of the reconstruction efforts and commend the Sint Maarteners for the progress made thus far. Tourism is picking up and the cruise and cargo results for 2018 were better than expected.
Liquidity support
Sint Maarten needs remaining liquidity support for the year 2018 and new support for the year 2019, due to budget deficits. This support, as well as other possible financing matters, will lead to an increase of the debt-to-GDP ratio. The Cft will monitor the development of the ratio, given the importance of maintaining a sustainable level.
Reform of the tax office
The financial recovery plan, which was presented last year, highlighted two major projects: the reform of the tax office and the financial management improvement plan. During the past years, the Cft has stressed the importance of improvement in both areas.
As also illustrated in the financial recovery plan, there is the need to increase the tax income to achieve a surplus on future budgets. This will make Sint Maarten no longer dependent on the current liquidity support and even lowering the debt to GDP ratio. Given the size of both projects mentioned it is advisable to properly evaluate the business case and we advised minister Geerlings to do so.
Financial Management
During the previous visit in October 2018, the Cft and the minister of finance made the agreement that Sint Maarten will work towards a unqualified audit opinion on the 2021 financials. The board has understood that the new improvement plan is to be approved by the council of ministers. However, financial management is more than just an unqualified audit opinion.
It is important for the government to invest in its staff and their resources and to make sure every minister and ministries understands the importance of having sound public finances. Therefore, as we understand, the financial management project will include specific training to improve the financial reporting in all the ministries.
Payment arrears
Part of the 2015 instruction was to reduce the payment arrears of the government. As disclosed in the draft budget 2019, Sint Maarten ended the year 2018 with around 150 million guilders in payment arrears, of which around USD 90 million to SZV and USD 40 million to APS. This is almost 15% of GDP! The Cft advised the government to make realistic formal settlement agreements with the relevant institutions and we agreed to be informed on this in due course.
Financial statements
The budget and reporting cycle for the years 2013-2017 has not been completed. Although the reports of the accountants, the Cft and audit chamber are published, the financial statements for 2013 and 2014 must still be approved by the Parliament and the financial statement for 2015 is not yet presented to parliament by government. The process towards getting the mentioned financial statements to parliament has taken a considerable amount of time and is in violation of local ordinance.
In addition, the Cft has not yet formally received the 2016 financial statements accompanied by the findings of the SOAB and the General Audit Chamber. We did take notice of the report by the audit chamber. Although the number of errors is becoming lower, there are still major shortcomings in financial management. For almost all items in the annual accounts, this has led to uncertainty on the correctness and the completeness of the amounts. According to the latest planning received, the 2017 financial statements will be presented to parliament in the second quarter of this year. In our meeting with the cabinet, we have advised cooperation by all ministries to ensure that this target is met as the deadline in the ordinance was the 31st of August 2018.
Budget performance 2018
The budget deficit for the first three quarters of 2018 amounted to 71.5 million guilders. Based on the report on the month of November the budget deficit until then was 87.6 million guilders. These are preliminary amounts, but it shows a much lower deficit, mainly because income is on a higher level than expected. That is positive news and Illustrates the increasing economic activity in Sint Maarten.
The 2015 targeted instruction from the Kingdom Council
In November 2018 Sint Maarten reported on the follow-up of the instruction. The Cft issued an advice accompanying this letter at the request of the State Secretary of the Interior and Kingdom Relations. Let me mention two points.
Healthcare system
With respect to the reform of the healthcare system, the Cft advises to strengthen the cost-cutting measures already in short term in order to reduce the current deficits and make the healthcare sector more financially sustainable. This morning we discussed this issue with SZV and they stressed the importance as well.
Pension reform and old age provision
The cost savings as a result of the pension reform for civil servants are included in the new draft budget 2019. This reform is set to be enforced on the first of May 2019. The proposed date is feasible only if the new pension scheme passes through parliament on a short term. The Cft express its disappointment that until present day, no decision has been made by parliament. The missed cost savings of not implementing this pension scheme as per January first amounts to several millions and this negative effect on the budget performance will increase if implementation is further delayed.
Furthermore, we discussed an increase of the AOV age from 62 to 65 years. Currently, Sint Maarten is the only country in the Kingdom were this age for the public pension scheme is not 65 or higher. The Cft advised this change in order to increase the sustainability of the public finance. In ageing society such reforms are necessary to keep the AOV and other public institutions affordable and available for the next generation.
In conclusion, the main message of our board is to go forward with the course that is set by the government and to speed up the process where possible also in the interest of the budget and the people of Sint Maarten.
Thank you for your attention.
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Source: St. Martin News Network http://www.smn-news.com/st-maarten-st-martin-news/31221-cft-swift-action-needed-towards-balanced-budget.html
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