Giving insights into economic direction: CBCS developed new tool for medium-term forecasting

WILLEMSTAD/PHILIPSBURG - With the help of the IMF’s Caribbean Regional Technical Assistance Centre (CARTAC), the Centrale Bank van Curaçao en Sint Maarten (CBCS) has co-developed a Macro Foundations Framework Tool to produce medium-term forecasts of key macroeconomic variables and assess policy options. From now on, the CBCS will include a medium-term (five-year) outlook for Curaçao, Sint Maarten, and the monetary union in its Economic Bulletins for June and December.

“The aim of calculating these medium-term baseline forecasts is to provide insights into the most likely direction the monetary union and, specifically, the economies of Curaçao and Sint Maarten, are heading assuming unchanged current policies,” explained CBCS President, Richard Doornbosch. “Also, these forecasts allow us to identify possible macroeconomic imbalances such as a high deficit on the current account of the balance of payments or a high debt-to-GDP ratio and assess the impact of policies to address these imbalances.”

For example, the public finances of both countries are expected to improve over the medium- term with the surplus on the current budget of Curaçao increasing further, while Sint Maarten’s deficit will turn around into a surplus by the end of the forecast horizon. “However, vulnerabilities remain on the external front. Even though the deficit on the current account of the balance of payments is expected to narrow over the medium term, it remains elevated posing risks to its sustainability,” Doornbosch cautioned.

“Needless to say, the medium-term forecast gives only a sense of the direction the economies are heading but deviations from the baseline are very likely since Curaçao and Sint Maarten are small and open economies very vulnerable to shocks that cannot be predicted in advance,” he continued. “Therefore, it is also important to identify possible risks to the outlook and how these would impact the economy if materializing.”

Incorporating a medium-term perspective would help the countries achieve sound and sustainable public finances because usually there is a lag between policy action and its effects. “The current approach is rather short-term. For example, the multi-annual budgets are largely based on extrapolations of actual figures from previous years and lack macroeconomic fundamentals. With the Macro Foundations Framework Tool, the CBCS can assist the governments of Curaçao and Sint Maarten in the development of these medium-term budgets by providing robust baseline forecasts that serve as an input for the budget planning process and by calculating the macro-economic effects of policy intentions,” Doornbosch concluded.

The Economic Bulletin June 2023 is available on the CBCS website at https://www.centralbank.cw/publications/economic-bulletins/2023.