Looking back at St. Maarten’s recent history “No one wants to stay on a leaking ship in the middle of the ocean”

St.maarten – More than twelve years ago, on January 28, 2004, current Minister of Finance Richard Gibson Sr. presented the Lionel B. Scott Memorial address at the Philipsburg Mutual improvement Association. Today, that speech puts the recent history of St. Maarten in perspective with a flurry of interesting data and observations.

By Richard Gibson Sr.

In his book “A Tale of Two cities” Charles Dickens opens his literary classic with the sentence: “It was the best of times, it was the worst of times”. The state of affairs of the Netherlands Antilles today, can be characterized as the “worst of times, but also the best of times.”

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The financial state of affairs of our country can be characterized as the worst of times, because never before in the annals of our history have our people been bending under the yoke of so much debt. The debt burden has grown to such levels that they virtually have become unmanageable on our own strength. A degree of resignation and hopelessness can be noted amongst the best and brightest of our country who are in the know. Solutions without external assistance are no longer possible.

The outstanding debt of our country as per the end of 1993 amounts to 4.6 billion guilders, which represents 95% of our Gross Domestic Product. To put this number in perspective it should be noted that debt sustainability, according to studies conducted by the United Nations, are manageable by low income countries, if their debt quota does not exceed 35% to 40% of GDP. The European Monetary Union maintains a debt quota norm of 60% of GDP for debt sustainability for European Countries. European countries are at a higher level of development than the Netherlands Antilles. The Netherlands Antilles in terms of its present level of development, hovers between that of low income countries and that of European countries. The debt quota norm of the Netherlands Antilles for debt sustainability is therefore at approximately 50% of GDP. The existing debt quota of the Netherlands Antilles today is at 95% of GDP. Double what is required for debt sustainability. In terms of its debt quota the Netherlands Antilles is a run-away train about to crash.

Debt sustainability is the ability of a government to make principal and interest payments on debts, without having to make any incisive adjustments to its income and expenditures patterns. To attain debt sustainability level the Netherlands Antilles must reduce its debt load from 4.6 billion to 2.3 billion guilders. A hole this deep, on our own strength, now appears impossible to fill.

How did we land in this apparent bottomless financial pit? Has this financial pit accelerated the desire of the islands for a new constitutional structure? Of course it has. No one wants to stay on board a leaking ship in the middle of the ocean, especially when its captain and crew are unable or unwilling to fix the leaks.

Ten years ago the perception that reigned was completely different. Ten years ago the Netherlands Antilles still enjoyed a broad base of goodwill amongst the citizens of all the islands. Evidence of this surfaced in the referenda held in 1993 and 1994 sponsored by the Central Government on all the islands of the Netherlands Antilles. In these referenda the people of the Netherlands Antilles overwhelmingly voted in favor of remaining part of the Netherlands Antilles. 90.66% of the people of Sint Eustatius voted in favor of remaining in the Netherlands Antilles; 89.65% of the people of Bonaire; 86.28% in Saba; 73.56% in Curacao and St. Martin came in last place with 59.48%.

At the time the referenda were held in 1993/1994 very little was known about the real debt burden of the Netherlands Antilles. In the campaigns accompanying the referenda no information on the status of the debts of the Netherlands Antilles was disseminated, nor was the debt load of the Netherlands Antilles an issue in these campaigns. There is no doubt in my mind that if the people of the Netherlands Antilles knew what we know today, that the outcome of the referenda in 1994, would have been completely different.

In 1994 the Netherlands Antilles had already substantially exceeded the level of debt sustainability and it was already known that government had to raise taxes substantially and cut expenditures drastically, to be able to make ends meet. This information, regrettably was either not known or kept under wraps. It was not addressed during the referenda campaigns.

It was generally known that income from the offshore industry had fallen drastically during the period 1986 – 1990. It was also known that the oil crisis during that time caused Venezuela to devaluate its Bolivar and that this devaluation caused the lucrative trade between Venezuela and Curacao that generated millions of guilders, to disappear overnight. Shell refinery as result of the same oil crisis had to redistribute its refining capacity worldwide and closed down in Curacao during this same period. With it millions of guilders went out the window. Shell was eventually replaced by the Venezuelan oil refining company PDVSA, however

PDVSA had to be granted a full and complete tax holiday, before it decided invest and restart the refinery in Curacao. All of these events, to the residents of the other islands, were seen as remote events that affected only the island of Curacao and not any of the other islands.

The full financial impact of these events were either not known or were not made public at that time. By the end of 1990 yearly tax income to the tune of 193 million guilders had disappeared from the coffers of government. In 13 years this translates into a whopping loss of income to the tune 2.5 billion guilders. No small, median income country can absorb such a loss, without a deep recession and incisive authority measures. No significant measures were taken by the government at that time to deal with this reality.

The Central government and the government of Curacao started to develop significant budget deficits that had to be financed. Budget deficits were financed by taking loans from the pension fund, by not paying SVB premiums, by making loans from local banks and by issuing bonds. As long as there was a source from which government could attract money they went ahead and did so, until those sources were exhausted. Bonds became the favorite tool to take money from Peter to pay Paul. When government needed money they sold bonds to the public and when the bonds had to be paid, they issued new bonds to pay off the old ones.

Every housewife knows that when your income reduces, you have to take steps to reduce your expenses with an equal amount or find ways to generate additional income. If not, you will not be able to make ends meet at the end of the month. You do not have to be a financial genius to figure out that you cannot increase your expenses, at the same time that your income has reduced drastically. This basic common sense rule appears to have been too difficult a concept for our government officials in Willemstad to understand, because they did just the opposite. Instead of reducing expenditures, they decided to increase expenditures in spite of the fact that a substantial part of their income had disappeared. In 1992 government increased salaries of civil-servants and teachers by 14%. At the same time government who preached equality, but did not practice it, was forced by a decision handed down by the court to respect the principle of equal pay for equal work and eliminate discrimination based on civil status. Personnel expenditures as a result skyrocketed to 306 million guilders. The overall expenses of government climbed from 502 million to 1.5 billion guilders. Part of the increase in expenditures can be attributed to increase in subsidies government decided to make available to government owned companies such as ALM.

It did not take too long after for government to realize that the party could not continue and that drastic measures no longer could be avoided. Government had to increase its income and reduce its expenses. To increase income government decided to introduce a consumption tax called turnover tax (BBO). This occurred after the 1993/1994 referenda and at a time that St. Martin’s economy had been devastated by successive hurricanes, starting with hurricane Luis in 1995. The introduction of the turnover tax in circa 1996 planted the seed firmly for Saint Martin to review the decision it took in 1994 to remain in the Netherlands Antilles. By 2000 Saint Martin organized a referendum and the people reversed their 1994 decision and decided to step out of the Netherlands Antilles. This did not occur solely because of the fact that the turnover tax legislation was adopted, but because it highlighted the following picture.
Source: Today SXM Looking back at St. Maarten’s recent history “No one wants to stay on a leaking ship in the middle of the oc ean”

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