Monetary union formed by Curaçao and Saint Martin:

Final stage or just the first step?

The Kingdom of The Netherlands was restructured as of 10 October 2010. The former island territories Curaçao and Saint Martin, that formerly belonged to the Netherlands Antilles, acquired an autonomous status within the Kingdom of The Netherlands, while the islands Bonaire, Saba and St Eustatius were integrated in the Netherlands.

This process is discussed in more detail in the article Multifaceted constitutional restructuring of the Dutch Kingdom and the preservation of trust in this edition.

This process also ended the currency area of the Netherlands Antilles Guilder. The islands Bonaire, Saba and St Eustatius are dollarised and the Central Bank of the Netherlands is now responsible for the financial supervision on these islands. Curaçao and Saint Martin on their turn form a monetary union. The new common currency is the Caribbean Guilder.

The aim of this article is twofold: in essence we want to address the by statute appointed role of the Central Bank of Curaçao and Saint Martin and to address the ongoing discussions concerning the monetary union that has been established between Curaçao and Saint Martin.

The former Central Bank of the Netherlands Antilles enjoyed an undoubted reputation in the way it had conducted monetary policy. This was evident from:

  1. Stability, price stability which manifested itself in a stable peg of the Netherlands Antilles Guilder to the United States dollar.
  2. Oversight, when it comes to the financial industry on the islands.
  3. Control, which forms a fundamental element crucial in safeguarding a healthy banking sector and thoroughly, complementing the oversight function when it comes to the financial industry.

The effectiveness of the monetary policy of the former Central Bank of the Netherlands Antilles was once again proven during and in the aftermath of the financial crisis in 2008. Except for pension funds that suffered from the stock exchange crashes, the financial sector was barely affected and was able to endure this shock.

Therefore, it is no wonder that Curaçao and Saint Martin, as new born countries, chose to continue this reputation. In addition to preserving the peg with the dollar of the United States at the same rate that prevailed for the Netherlands Antilles Guilder and preserving the board of directors of the former central bank, the charter of the new central bank exhibits great similarity with the old one, which signals tangible evidence of the continuation of the structures of the former Central Bank of the Netherlands Antilles by the newly created Central Bank of Curaçao and Saint Martin. Comparing the old and the new charter, it is obvious that a special effort was made to increase transparency and to strengthen the independence of the Central Bank.

The objectives of the Central Bank are currently explicitly given in article 3 of the charter of the Central Bank of Curaçao and Saint Martin, as follows:

1. The objectives of the Bank are:
    a.    Promoting stability of the currency of the two countries.
    b.    Promoting the health and soundness of the financial system of the countries.
    c.    Promoting safe and efficient payments in the countries.

2.    The countries shall bare responsibility for the harmonisation of their legislation, to facilitate the realisation of the objectives formulated in the Bank charter.

As for article 4 of the charter of the Central Bank of Curaçao and Saint Martin, we can read the following:
1.    The Bank determines monetary policy and is responsible for its implementation.

In article 5 of the charter of the Central Bank of Curaçao and Saint Martin, we can read the following:

  • The Bank serves as an advisor to the governments of both countries concerning the areas in which the Central Bank has jurisdiction. The Bank can be asked to give advice but it may also give advice without a prior request by the government.

Finally we can read in the considerations incorporated in the charter of the Central Bank of Curaçao and Saint Martin, the following statement:
There is one currency area that shares a common currency; this currency is pegged to the United States dollar.

The fiscal framework as adopted3 also favours the decision to form a monetary union by Curaçao and Saint Martin. Based on this fiscal framework, Curaçao and Saint Martin share the same set of fiscal rules and the same fiscal supervisory board. The fiscal rules establish a multi-annual golden rule, ie current public expenditures may not exceed current public revenues, while it is still possible to borrow to finance public capital investments.

Strict rules for the classification of public expenditures and revenues make it harder to circumvent this rule. In addition there is a ceiling for the interest burden which limits public debt and is intended to assure sustainable public finances. The supervisory board monitors compliance with these fiscal rules. This framework should ensure sound public finances and should prevent public finances from exerting any pressure on the monetary policy, allowing an independent monetary policy.

Despite the recent status of the monetary union of Curaçao and Saint Martin, and the safeguards as anchored in the charter of the new Central Bank of Curaçao and Saint Martin and the fiscal framework, the debate about a monetary union formed by Curaçao and Saint Martin is still ongoing. In this discussion, dollarisation of the economy of Curaçao is front and centre, which more or less implies that we have come full circle in the discussion regarding monetary policy and macro financial policy. Dollarisation of the economy of Curaçao is an issue that was previously raised both by the former Central Bank of the Netherlands Antilles4 and the Ministry of Finance of the Netherlands Antilles as an option for both Saint Martin and Curaçao after obtaining country status within the Kingdom of The Netherlands.

In the month of December of 2010, the Curaçao International Financial Services Association (CIFA) has asked its members their opinion on the dollarisation of the economy of Curaçao. As a consequence we have weighed some of the concerns and opportunities involved with the dollarisation of the economy and these conclusions we want to share in the following manner:

Internal perspective
A.    Strengths:
1.    Cost efficient.
2.    No monetary union with either Saint Martin or Curaçao.

B.    Weaknesses:
1.    Loss of margin for the local banking sector.

External perspective
A.    Opportunity:
1.    International pricing transparency6.
2.    Increase public budget discipline7.
3.    Increase of investor confidence (Foreign direct investments).

B.    Threat:
1.    Smaller scope of Central Bank monetary policies at hand.
2.    Inflation rate hike.
3.    Vulnerability to fluctuations of the United Stated Dollar.

We observe that the main drivers behind the continuing debate regarding more viable alternatives for the monetary union established between Curaçao and Saint Martin, are the divergent political paths versus convergent monetary and financial paths of the two countries.

Lingering doubts about the viability of a currency area this small remain. The islands Bonaire, Saba and St Eustatius represented less than ten per cent of gross domestic product of the former Netherlands Antilles, but as a consequence of the adoption of the US dollar as their official currency, the base for the new common currency of Curaçao and Saint Martin has become smaller. In addition, the difficulties faced by Saint Martin to comply with the fiscal rules increases the distrust towards Saint Martin’s ability to meet those rules.

Finally, the political wish for autonomy puts Curacao and Saint Martin on separate paths. Dollarising and consequently loosing full control of their monetary policy towards the Federal Reserve of the United States of America seems more attractive than a monetary union formed by Curaçao and Saint Martin, even though monetary policy autonomy by such a small currency jurisdiction may just be an illusion.

To conclude, we think that the ongoing discussion concerning the course Curaçao and Saint Martin need to take regarding their respective currencies and monetary policies is indeed a healthy one. But we need to recognise that the Central Bank of the Netherlands Antilles and now the newly created Central Bank of Curaçao and Saint Martin has to play a vital role in overseeing and controlling the financial industry. Any change in the monetary construction of the islands should not directly mean a lesser role for the Central Bank, even though the name of the institution may change over time.

Endnotes: 

  1. Onderlinge Regeling zoals bedoeld in artikel 38, eerste lid van het Statuut voor het Koninkrijk der Nederlanden regelende een Gemeenschappelijke Centrale Bank van Curaçao en Sint Maarten (Centrale Bank-statuut voor Curaçao en Sint Maarten)
  2. Onderlinge Regeling zoals bedoeld in artikel 38, eerste lid van het Statuut voor het Koninkrijk der Nederlanden regelende een Gemeenschappelijke Centrale Bank van Curaçao en Sint Maarten (Centrale Bank-statuut voor Curaçao en Sint Maarten)
  3. Regels voor het financieel toezicht op de landen Curaçao en Sint Maarten (Rijkswet financieel toezicht Curaçao en Sint Maarten)
  4. Recent economic developments and their repercussions for small and medium-sized enterprises in Curaçao, E.D. Tromp, October 21, 2009
  5. To dollarise of not to dollarise: the CBA’s point of view, J.R. Semeleer, 24 August, 2009
  6. Experiences with transitioning to fixed exchange rate regimes, M. O’Brien
  7. To dollarise of not to dollarise: the CBA’s point of view, J.R. Semeleer, 24 August, 2009
  8. Experiences with transitioning to fixed exchange rate regimes, M. O’Brien
  9. To dollarise of not to dollarise: the CBA’s point of view, J.R. Semeleer, 24 August, 2009

 

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