IMF Executive Board Concludes Article IV Consultation Discussions with the Kingdom of the Netherlands—Aruba

June 15, 2017

On May 17, 2017, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation discussions [1] with the Kingdom of the Netherlands—Aruba, and considered and endorsed the staff appraisal without a meeting. [2]

Aruba is a small open economy with high living standards. Aruba’s per capita income, at about USD 24.1 thousand, is one of the highest in the Caribbean. Over 85 percent of the economy depends on tourism, making Aruba very vulnerable to external shocks. The fixed exchange rate regime against the U.S. dollar (unchanged at 1.79 florins to the dollar since 1986), supported by conservative fiscal, credit, and prudential policies, kept balances in check until late 2000s. Three recessions since the Global Financial Crisis and the government’s policy response to them have led to a rapid increase in public debt.

The economy entered a recession around mid-2015. Real GDP contracted by 0.5 and 0.2 percent in 2015 and 2016, respectively. Weakness in activity has been broad-based in 2016. Domestic demand contracted by 3.0 percent. Exports grew only 0.3 percent due to weak tourism and shrinking non-tourism exports. Imports contracted by 3.5 percent, reflecting weak demand, on the back of fiscal consolidation and weak tourism growth.

Inflation remains very low. The economy was in deflation in 2016—consistent with weak domestic demand, but also due to low energy prices. Inflation was also low over 2012-2015.

Fiscal consolidation has continued. The overall deficit, at 1.6 percent of GDP in 2015 and 2016, was a fraction of its level in 2014. The primary balance was at its second consecutive year of surplus in 2016. The improvement is the result of structural and one-off policies.

Public debt remains high. Elevated government deficits over 2010-2014—caused mainly by a double-dip recession and the government’s policy response to it—resulted in public debt reaching around 85 percent of GDP in 2016, broadly evenly split between foreign and domestic. Large interest payment obligations on debt—about 4½ percent of GDP in 2016—crowd out essential public spending, and the high level of debt limits the fiscal space for countercyclical policy.

International reserves have increased. Gross reserves have surpassed 4½ percent of GDP, which is about 5¾ months of imports and 40 percent of broad money.

Monetary policy was unchanged during 2015–16. The central bank (CBA) has kept the reserve requirement ratio—its main policy instrument—at 11 percent since 2010 given adequate international reserves, deflation, and weak GDP growth.

The banking system remains resilient. Banks maintain elevated capital buffers, have relatively low non-performing loans, and are profitable. Credit growth was 1.8 percent in 2016, up from -0.2 percent in 2015.

Aruba has a broad range of social safety nets. These include a universal healthcare, pensions, unemployment benefits, transport subsidies, and cash transfers to low-income families and single mothers. The 2017 budget included 1.2 percent of GDP of transfers to universal healthcare and 1.3 percent of GDP in cash transfers and various social programs.

Executive Board Assessment

Aruba’s growth is weak but expected to recover gradually. A temporary slowdown in tourism activity and fiscal consolidation have led to weak economic activity in Aruba since mid-2015. Going forward, the economy is expected to recover gradually, partly thanks to refinery-related investments and ongoing PPP investment projects.

Risks to the outlook are tilted to the downside. Delays in refinery-related investments remain a notable risk in the near term. A deepening crisis in Venezuela, also poses another downside risk to Aruba’s tourism. Over the medium term, a larger shift of U.S. tourists to Cuba could have negative implications for Aruba. On the upside, a possible U.S. fiscal expansion could spill over to Aruba’s tourism, mostly through increased demand for shared-economy services.

The authorities’ fiscal goals are appropriate. Based on current laws, the overall fiscal balance should improve and remain positive over the medium term. If these targets are met, public debt would be put on a downward path.

However, achieving the authorities’ fiscal targets would likely require additional fiscal measures. The size of the fiscal effort would depend on the strength of GDP growth, which remains uncertain. Staff recommends additional fiscal measures to help achieve the authorities’ goals. Past Fund advice has identified a few such measures. These include additional revenue efforts in the form of greater indirect tax collection. With regards to expenditure, a priority is to reduce wage-related expenses given the large size of the wage bill. Further measures to ensure that the health care system becomes self-financed should also be considered.

The monetary policy stance is appropriate. Given the projected low growth and inflation rate, as well as evidence of some slack in the economy, staff currently sees no need for monetary tightening. If, however, signs of overheating appear, the authorities should stand ready to tighten the monetary policy stance appropriately.

The external sector position has improved. The current account has improved and is stronger than the level that could be expected from Aruba’s fundamentals. International reserves are adequate to safeguard the currency peg. EBA-lite estimates suggest that the real effective exchange rate is weaker than implied by fundamentals. However, staff believes this assessment is mostly driven by large exchange rate and inflation swings in Venezuela. Excluding Venezuela, the real effective exchange rate is broadly in line with fundamentals (Appendix V). External debt has been declining in recent years.

Aruba’s potential growth should be boosted by structural reforms. A comprehensive labor market reform and development of sustainable skill-based immigration policies are needed to increase labor force participation and productivity. Ease of doing business should also be improved. The tourism sector could be further diversified through polices that would attract tourists from broader group of countries, including from Latin America. The expected reopening of the refinery is an important step towards economic diversification, and the authorities’ policies on developing the renewable energy sector and alternative sources of growth, such as a knowledge-based economy, are promising.


Table 1. Aruba: Selected Economic Indicators, 2013–2018

Basic Data, Social and Demographic Indicators

Area (sq. km)

180

Infant mortality (per thousand, 2016)

11.0

Population (thousands, 2016 est.)

110.6

Literacy rate (percent, 2015)

97.5

Population growth rate (percent, 2010-2015 annual average)

0.5

Percent of population below age 15 (2015)

19.4

Nominal GDP (millions of U.S. dollars, 2016)

2,668

Percent of population age 65+ (2015)

11.4

GDP per capita (thousands of U.S. dollars, 2016)

24.1

Life expectancy at birth (years, 2015)

75.4

Unemployment rate (percent, 2015)

7.3

Economic Indicators

2013

2014

2015

2016

2017

2018

Est.

Proj.

Real economy

(Percent change)

Real GDP

4.2

0.8

-0.5

-0.2

1.9

2.3

Real domestic demand

0.4

-2.3

-2.4

-3.0

6.1

5.1

Consumption

3.4

-2.1

-1.6

-3.7

1.6

2.4

Private

4.0

0.5

-4.4

-3.9

1.5

2.5

Public

1.9

-8.1

5.6

-3.2

1.7

2.2

Gross investment

-8.2

-2.9

-5.1

-0.7

20.5

12.5

Exports of goods and services

6.0

3.1

-0.1

0.3

2.5

1.5

Imports of goods and services

0.4

-1.5

-2.8

-3.5

8.1

5.3

Consumer prices

Period average

-2.4

0.4

0.5

-0.9

0.6

1.7

End-period

0.1

2.2

-0.9

-0.3

0.6

1.8

Central government operations

(Percent of GDP)

Revenues

24.7

23.6

26.3

26.5

27.6

26.2

Expenditures

29.1

30.3

27.7

27.5

28.1

27.7

Of which: capital

2.0

1.1

0.3

0.6

0.2

0.5

Overall balance

-6.4

-7.9

-1.6

-1.6

-0.8

-2.0

Primary Balance

-2.8

-3.9

2.5

2.9

3.7

2.3

Gross central government debt

74.0

81.9

82.5

86.3

86.2

85.6

Savings and investment

Gross investment

24.0

22.9

21.5

21.7

26.2

29.1

Of which: public

1.0

1.1

0.8

0.6

0.3

0.3

Foreign saving

12.8

5.1

-4.1

-7.0

4.6

10.6

Of which: public

-4.4

-6.7

-1.4

-1.0

-0.5

-1.5

Balance of payments

Current account balance

-12.8

-5.1

4.1

7.0

-4.6

-10.6

Oil

-8.0

-8.0

-2.1

-1.4

-3.6

-7.7

Non-oil

-4.8

2.8

6.2

8.3

-1.0

-2.9

FDI

8.6

9.1

-1.4

2.9

11.5

13.5

Gross foreign assets of central bank (millions of U.S. dollars)

666

693

828

949

1192

1437

Gross foreign assets of central bank (months of imports)

3.5

3.7

4.7

5.8

6.1

5.9

External debt

113.2

106.5

103.6

93.3

94.7

100.0

Monetary

(Millions of Aruban florins, unless otherwise indicated)

NFA of Banking System

1,131

1,173

1,516

1,778

2,212

2,663

NDA of Banking System

2,161

2,288

2,289

2,389

2,162

1,848

Credit to private sector (percent change)

5.3

4.2

-0.2

2.0

3.0

3.1

Broad money

3,292

3,461

3,805

4,166

4,375

4,511

Deposits (percent change)

3.0

2.6

2.0

9.7

5.0

3.1

Memorandum items

Nominal GDP (millions of Aruban florins)

4,621

4,743

4,818

4,775

4,820

4,970

Nominal GDP (millions of U.S. dollars)

2,581

2,649

2,692

2,668

2,693

2,777

Unemployment rate (percent)

7.6

7.4

7.3

…

…

…

Sources: Aruban authorities; and IMF staff estimates and projections.

 

[1] Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board

[2] The Executive Board takes decisions under its lapse-of-time procedure when the Board agrees that a proposal can be considered without convening formal discussions.

IMF Communications Department
MEDIA RELATIONS

PRESS OFFICER: Andrew Kanyegirire

Phone: +1 202 623-7100Email: MEDIA@IMF.org