The Antilliaans Dagblad published an article on the remarkable announcement of the Central Bank of Curaçao on 11 March. and Sint Maarten (CBCS) that it closed the year 2020 with a loss. And that, according to his projections, the coming years up to and including 2024 will also be loss-making, in such a way that the total loss over the loss-making years will amount to 87.5 million guilders in total. This is remarkable, since the CBCS and not its predecessor, the Bank of the Netherlands Antilles (BNA), had to make a loss before.
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The CBCS attributes the losses to the low interest rates on the international capital market in connection with the corona crisis, causing lower investment returns from its foreign exchange (the main source of income). However, the CBCS statement of the losses raises questions. It is not the first time that the Central Bank in Willemstad has been confronted with low interest rates on the international capital market. Furthermore, whether or not to apply a correct remedy for the projected losses has implications for the countries of Curaçao and Sint Maarten: cumulative losses of the Central Bank may lead to the countries Curaçao and Sint Maarten having to pay additional capital in accordance with the Bank Statute, and it is then ultimately the taxpayer of those two countries who will then have to bear the losses.
Low interest rates on the international capital market are not there for the first time: even during the international financial crisis (2008 and after), the Central Bank (at that time still the Bank of the Netherlands Antilles, BNA) was confronted with extremely low interest rates, thus shows the historical development of the US Fed Funds Rate. Despite this, the BNA managed to make a profit in those years. For example, the profit for the BNA (corrected for the ‘license fee’, which still fell to the BNA as income in that period) in 2008 and 2009 amounted to 17.7 and 5.7 million guilders respectively. The contrast becomes even stronger when the comparison is taken into account for the fact that in the years 2008/2009 the average stock of the official foreign exchange stock was considerably – about 50 percent – lower than that in 2019/2020. For example, in 2008 and 2009 the average exchange rate was 1.8 and 2.1 billion guilders respectively, while for 2019 and 2020 it was about 3.4 and 4.3 billion respectively (according to figures on the CBCS website). With comparably low interest rates and a foreign exchange stock at the time of about 50 percent of the current foreign exchange stock, the BNA still – simply – wrote black figures, whereas the CBCS is now making a loss. This therefore requires the Central Bank to provide a sharper and deeper analysis of the causes of the (significant) losses realized in 2020 and projected (significant) losses for the next four years.
Correct insight into the causes of the losses is necessary in order to arrive at an appropriate remedy to “plug the leak”, without or with as few unwanted side effects as possible. For example, the CBCS proposes, among other things, that part of the extra revenues from an increase in the license fee for banks should accrue to the CBCS as income for a number of years. It has already been indicated in this newspaper that an increase in the license fee has quite a few problems: the IMF considers every official measure that leads to the difference between the buying and selling rate of foreign currency becoming greater than 2 percent. so-called ‘multiple currency practice’ (MCP). The IMF treaty also applies to the monetary union of Curaçao and Sint Maarten. In addition to these formal aspects, there are also economic aspects and effects. An increase in the license fee will lead to higher inflation, with all the consequences this entails for prices, purchasing power and the domestic economy. A shift and / or fall in demand also has consequences for the basis of government tax revenues. When the license fee is increased, there is also the risk of arbitrage, which means that payment flows abroad will look for a cheaper route, for example via Aruba, or on St. Maarten via the “French side”. Care must also be taken not to resort to the means of tariff increases too easily: once discovered, politicians will in the future be tempted to use them again.
The CBCS also suggests adjusting the risk profile of its investments, read: accepting a higher risk for its investments. The question is whether adjusting the risk profile of its investments will be beneficial in providing a structural solution for the projected losses. N. Of course, looking for higher returns cannot help but accept higher risks, but that is a way in which people can more often get their ‘fingers in the door’, in other words, you can be confronted with setbacks and losses in the investment income. Prudent investment policy does mean that only a small part of the investable capital with a higher risk profile can be invested. So with a sensible investment policy, an increase in the risk profile and thus the expected additional returns from investments will remain limited.
A Central Bank does not have a profit motive, but its mission is to perform public tasks, which are enshrined in law. Adequate performance of tasks inevitably entails costs, and it is important to limit these costs to “unavoidable” costs. It helps if good agreements have been made in advance about the financing of those costs, taking into account the income of the Central Bank. As long as profits are made and the CBCS proceeds to distribute profits, there is no cloud in the sky, but there is no guarantee that there will be no times when equity will have to be consumed due to losses. Accumulating losses of the Central Bank will ultimately mean that the countries of Curaçao and Sint Maarten will have to pay additional capital in accordance with the Bank Statute, something that they are not waiting for, given the difficult financial situation both countries are in anyway.
Rightly so that the CBCS is looking for ways to limit the loss. But the remedy to be applied must not lead to one problem being solved and another problem to arise elsewhere, and it must certainly not be the case that the remedy to be applied by the Central Bank concerns the use of instruments that do not exist there. are intended for and can work contrary to its own objectives. Finding the “right knobs to turn” starts with a good understanding of the causes of the problem, in this case the losses of the Central Bank. It is therefore very questionable whether a simple reference to “the low interest rates on the international capital market” will suffice.
