Press Release: IMF Mission Statement on the 2007 Article IV Consultation with Aruba
December 4, 2007Press Release No. 07/281
Harm Zebregs, International Monetary Fund (IMF) mission chief to Aruba, made the following statement today at a press briefing in Oranjestad at the conclusion of an IMF staff mission to Aruba for the 2007 Article IV Consultation discussions:
"The purpose of the IMF mission was to assess recent developments in the Aruban economy and discuss economic policy issues. We met with a wide range of people from the private sector as well as the government. Based on what we have learned, the mission team will prepare its annual report on Aruba for discussion by the IMF Executive Board, tentatively scheduled for February 6, 2008. Already, however, we can summarize for you our basic conclusions, which will also be reflected in the concluding statement of the mission to be issued later this week.
"Aruba has made great strides since 1986, when it gained autonomy from the Kingdom of the Netherlands. Per capita income (in U.S. dollar terms) has more than tripled over the past 20 years making Aruba one of the most developed islands in the Caribbean. This impressive result has been achieved with the help of market-friendly policies that have fostered a stable macroeconomic environment and a rapid expansion of the tourism sector, now accounting for more than 50 percent of GDP. Equally important has been the openness of the economy as foreign investment and migrant workers have been key contributors to economic growth.
"However, the heavy dependence on tourism has rendered the economy vulnerable to external shocks. This was apparent in 2006 when GDP growth virtually stalled and the deficit in the non-oil current account sharply widened following a pronounced drop in tourist arrivals. The vulnerability of the economy has been aggravated by a steady increase in public debt from 39 percent of GDP in 2000 to 45 percent of GDP in 2006 as the result of an unfavorable fiscal trend during 2000-04.
"The tightening of macroeconomic policies since 2005 has been helpful in limiting a further increase in Aruba's external vulnerability. Progress has been made in consolidating the fiscal accounts, while monetary policy has been geared toward containing domestic credit growth. Together, these policies have helped to stem the rise in public debt and maintain a sufficient level of foreign exchange reserves.
"The task is now to implement policies that will support further fiscal consolidation and boost Aruba's growth potential. It is important, therefore, to adopt a strategy for keeping Aruba's public finances on a sustainable path and bolstering its growth potential. Key in this regard are maintaining macroeconomic stability, reducing public debt, strengthening public institutions and policy frameworks, and creating an economic environment that is conducive to investment and diversification.
"The near-term outlook is mostly favorable. Real GDP is projected to expand by about 2 percent in 2007 and 2008. The tourism sector is making a strong comeback and will, together with continued robust investment, be a key engine of growth in the near term. Inflation is projected to ease from slightly over 6 percent in 2007 to just under 4 percent in 2008 as the impact of the introduction of the turnover tax (BBO) and the increase in utility tariffs, gradually dissipates. The deficit in the non-oil current account is projected to decline to 8¼ percent of GDP in 2007 and 7½ percent of GDP in 2008. However, there are notable risks to this projection. In particular, a sharper or more prolonged slowdown in the United States could dampen growth in tourism receipts, while a larger-than-anticipated cascading effect of the BBO and further increases in the oil price could provide additional impetus to inflation.
"Maintaining macroeconomic stability in the near term will require continued consolidation of the fiscal accounts and an appropriately tight monetary policy. The planned fiscal consolidation entailed in the 2008 budget will reduce the burden on monetary policy to contain domestic demand growth, but the uncertain inflation outlook and the still considerable current account deficit suggest that monetary policy should remain on hold for now.
"As to medium-term fiscal sustainability, the government's plan to balance the budget by 2009 and reduce public debt to less than 40 percent of GDP needs to be supported by concrete measures. These include (i) taking immediate action to stem the losses of the health care coverage system AZV; (ii) rationalizing the civil service; (iii) making a greater effort to contain spending on goods and services; (iv) reforming the universal pay-as-you-go pension (AOV) to ensure it remains sustainable in the face of rapid population ageing.
"Bolstering Aruba's long-run growth potential will require creating the right conditions for private investment and expansion of high value added services. In recent years, Aruba's potential GDP growth has been predominantly driven by increases in the labor force. However, with a population density that is already exceeding 500 inhabitants per square kilometer, this growth model is bound to come under pressure at some point in the future. It is important therefore to develop a coherent and sustainable growth strategy. Such a strategy will need to be supported by additional tax reform―aimed at further simplification and greater reliance on indirect taxes―and by steps toward more efficient financial intermediation. These steps would need to include elimination of the credit ceilings and greater use of indirect monetary instruments.
"The IMF mission team would like to express their appreciation to the authorities for their open and constructive engagement and their warm hospitality."