Wednesday, September 24, 2008

Netherlands Antilles- a New Fiscal Framework

Proposed fiscal reforms of Netherlands Antilles;

Background: The promise of fiscal discipline and debt relief, under the agreement to dissolve the Netherlands Antilles, has boosted investor confidence and growth. Implementation of the dissolution agreement has begun, although the actual constitutional changes are now scheduled for January 2010. The new fiscal framework (a balanced budget, debt limits and supervision) is already in place in the BES islands (Bonaire, St. Eustatius, and Saba) and due to start in 2009 in Curaçao and St. Maarten. The authorities are pushing ahead with welcome reform proposals to improve: tax policy, labor markets, public enterprise finances, pensions, and healthcare.

Challenges: The immediate challenge is complete the transition phase expeditiously by finalizing important details, including the terms of debt relief. An ongoing challenge will be economic management in the absence of key macroeconomic policy tools—structural reforms will be crucial for improving competitiveness and maintaining external viability. The authorities will also need to address the strain on public finances from entitlement costs, and the impact of debt relief-related liquidity on financial sector balance sheets...

Debt cancellation of about 80 percent of total public debt as of December 31, 2005 by the Netherlands. Details of the coverage, schedule, and modality of debt relief remain to be finalized, and the actual operations have been delayed. Debt relief will be conditional on the establishment of a fiscal framework, applicable to the local government of each island, and including:
The introduction of medium-term budgeting;
• The establishment of a fiscal supervisor (chaired by a Dutch appointee) to supervise borrowing decisions, ensure that the fiscal rule (see below) is fully implemented, and advise responsible ministers.
A balanced current budget rule, with borrowing restricted to within-year cash management needs. Deviations will be allowed only in case of a disaster, with disaster relief subject to the approval of the fiscal supervisor.
• Borrowing caps for capital expenditure, limiting annual interest payments to five percent of the average total revenue of the preceding three years, with loans for investments to be approved by the fiscal supervisor only if budget implementation is in line with the fiscal rule.

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