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PB2021-007 The Monetary Union Maintains a Robust Buffer Ensuring the Stability of the Guilder

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Press Release 2021-007

Willemstad/Philipsburg - The management of the monetary union of Curaçao and Sint Maarten’s gold reserves has been the subject of public discussion in recent days, following questions from Member of Parliament Cooper to the Minister of Finance of Curaçao about a potential gold sale. The CBCS is considering the possibility of replacing a limited part of the gold reserve with other assets to optimize the composition and effectiveness of the official reserves. The IMF is the global expert in this area, and it is for this reason that the CBCS has sought its assistance. The CBCS expects decision-making on this issue to be finalized around summer. With this press release, the CBCS wishes to emphasize that it will not take any decisions through which the stability of the guilder would not be guaranteed.

One of the CBCS’s main objectives is to promote the stability of the guilder’s value (Central Bank Statute, Article 3, paragraph 1a). To achieve this, the CBCS conducts monetary policy (Central Bank Statute, Article 4, paragraph 1) aimed at maintaining the guilder’s stability, which amounts to maintaining its fixed peg to the US dollar. To that end, the foreign exchange reserves must always be sufficient to guarantee unhindered transactions with foreign countries. The international standard applied by the CBCS to ensure an adequate level of foreign exchange reserves requires that the official foreign exchange reserves (i.e., the foreign exchange managed by the CBCS) must cover at least three-months’ worth of goods and services imports. The current coverage of 7.3 months is well above this standard. The main factors that have contributed to this high level of coverage are the sizeable foreign-exchange receipts as a result of the liquidity support provided by the Netherlands to Curaçao and St. Maarten and the capital restrictions introduced by the CBCS at the time of the outbreak of the COVID-19 crisis in March of 2020, to limit capital flight in connection with the high degree of uncertainty created by the crisis. The monetary union therefore maintains a robust buffer ensuring the stability of the guilder’s value.

Like the foreign exchange reserves, the gold reserve is part of the official reserves, but serves a different function. This is because the gold reserve acts as an ultimate buffer in the event of a large external shock to the economies of the monetary union, resulting in a rapid decline in foreign-exchange reserves. In the event of such an exceptional crisis affecting the balance of payments, the gold reserve would act as a guarantee for the Central Bank to attract foreign exchange in order to continue financing the necessary imports. Simultaneously, the governments would then need to design and implement structural economic adjustment programs that would allow the union to emerge from the crisis in a sustainable manner.

However, holding gold also involves a high level of market-price volatility, while in recent years the potential returns to be achieved through active gold investments have been quite low.

The CBCS is entrusted with managing the official reserves (Central Bank Statute, Article 9(1)). The aim of this management is threefold, in order of importance: 1) preserving the value of the reserves (minimizing the risk of investment loss); 2) maintaining liquidity (availability for international transactions at minimum cost); and 3) generating returns (income to cover the CBCS’s costs). The management of the official reserves is monitored by the internal investment committee, which meets at least six times a year. The Supervisory Board has its own Investment Oversight Committee meeting at least four times a year to discuss the management of the official reserves.

The CBCS regularly assesses the effectiveness of its official reserve management. In 2019, it was assisted in this assessment by the World Bank. Recently, the IMF was approached for the same purpose. The aim of this assessment is to identify ways to sustainably improve the returns generated from the management of the official reserves, while simultaneously enhancing the preservation of their value and liquidity. The gold reserve will also be included in the assessment. The outcome could therefore involve a recommendation to sell part of the gold held and invest the proceeds in yielding assets that nevertheless carry a prudentially low credit risk, resulting in less price volatility and higher returns to the Bank. Consequently, any potential gold sale would not change the total size of the official reserves. Nor would the assets fulfilling the “ultimate buffer function”—at present, only gold—change in size but only in their composition, as in addition to gold, these would then also include other prudentially low-risk assets. It may be noted that, compared to other central banks of comparable size, the CBCS holds a much larger share of gold in its official reserves.

Any such change in the composition of the official reserves due to a gold sale would not affect the peg of the guilder to the U.S. dollar. The stability of that peg would remain secure. An added advantage of changing the composition of the official reserves would be an improvement in the CBCS’s financial results. Curaçao and Sint Maarten would also benefit from such improved results, as that would reduce the chance of the countries having to cover any losses incurred by the CBCS (Central Bank Statute, article 34, paragraph 3). The fact is that the persistence of exceptionally low interest rates on the international financial markets is exerting great pressure on the returns obtained from the management of the official reserves, significantly reducing the CBCS’s revenues. For the year 2020, a loss was avoided by setting off the positive result of 2019. For the coming years, the CBCS is working on a strategic plan to prevent losses that would otherwise have to be borne by the countries. Changing the composition of the official reserves through the sale of gold is one potential element of that plan.

If it is chosen to change the composition of the assets serving as the ultimate buffer, this will be done in consultation with the Supervisory Board. Furthermore, in accordance with article 24 of the Bank Statute, such a change in the composition of the assets serving as the ultimate buffer would first be discussed with the ministers of Finance of the respective countries before any decision is made.

Willemstad, April 28, 2021


Last updated: 14.06.2021 13:06