## 1abwea2019001

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### Recent economic developments and fiscal position
- Overall deficit: increased by 1.4 percentage points to 3 percent of GDP in 2017; moderated to 2.2 percent of GDP in 2018, largely reflecting a sizable increase in revenues.
- Public debt: reached 84.5 percent of GDP in 2018; was 86.7 percent of GDP by end-2017 and about 42 percent in 2008.
- Real GDP growth: 2.3 percent in 2017; slowed to 1.2 percent in 2018.
- Unemployment rate: 8.9 percent in 2017.
- Inflation: rose to 3.6 percent in 2018 (mainly due to the mid-2018 turnover tax rate increase and oil prices).
- Current account balance: surplus declined to 1 percent of GDP in 2017 from 5 percent in 2016; registered a deficit of 0.5 percent of GDP in 2018.
- Gross official reserves: 4.9 months of imports at end-2017; nudged up to 5.1 months of imports in 2018.
- External debt: 102.5 percent of GDP in 2017; estimated 99.3 percent of GDP in 2018.
- Private sector credit: picked up, rising by close to 4 percent in 2017-18.

### Outlook and risks
- Short-term growth effect of fiscal consolidation: fiscal consolidation plan will lower real GDP growth to a projected 0.7 percent in 2019.
- Medium-term growth: expected to accelerate to about 1.1 percent, broadly in line with the historical average.
- Inflation forecast: projected to fall to 1.8 percent in 2019 as the base effect of the turnover tax rate hike disappears and oil prices decrease; projected to gradually rise towards 2.2 percent over the medium term.
- Current account and reserves:
  - Current account balance is projected to decline further in 2019 before gradually improving in the medium term.
  - Foreign reserves are foreseen to remain broadly stable at around 5 months of imports.
- Downside risks (skewed to the downside):
  - Deepening crisis in Venezuela leading to large immigrant and refugee inflows.
  - Cyclical downturn in the U.S. economy.
  - Short-term growth effects of Aruba’s fiscal consolidation greater than expected.
- Upside scenarios:
  - Implementation of structural reforms that boost potential growth.
  - Remote possibility: reopening of the refinery with associated investments and job gains.

### Fiscal policy assessment, authorities’ plans, and staff view
- Authorities’ actions and targets:
  - Agreement with the Netherlands in November 2018 pinned down fiscal targets for 2019 and the medium term.
  - 2019 target: financial balance of -0.5 percent of GDP (corresponding to an overall balance of 0 percent of GDP).
  - Authorities project a cumulative adjustment of 3.7 percent of GDP over 2018-22 under the assumption of nominal GDP growth of 1 percent per year.
- Authorities’ Central Government Fiscal Plan (percent of GDP, selected lines):
  - Total revenue: 2018 = 26.5; 2019 = 28.7; 2020 = 29.1; 2021 = 28.9; 2022 = 28.9
  - Tax revenue: 2018 = 23.6; 2019 = 25.3; 2020 = 25.5; 2021 = 25.4; 2022 = 25.3
  - Direct taxes: 2018 = 12.2; 2019 = 11.9; 2020 = 9.8; 2021 = 9.8; 2022 = 9.8
  - Indirect taxes: 2018 = 10.4; 2019 = 12.4; 2020 = 14.7; 2021 = 14.6; 2022 = 14.6
  - Overall Balance: 2018 = -2.3; 2019 = 0.0; 2020 = 0.7; 2021 = 1.0; 2022 = 1.4
  - Financial Balance (authorities’ definition): 2018 = -2.7; 2019 = -0.5; 2020 = 0.3; 2021 = 0.7; 2022 = 1.0
  - Nominal GDP (millions of Afl.): 2018 = 4,903.3; 2019 = 4,952.3; 2020 = 4,980.0; 2021 = 5,030.0; 2022 = 5,081.0
- Staff baseline and differences:
  - Staff projects a 2019 fiscal deficit of 0.8 percent of GDP (staff projects a higher fiscal deficit than the authorities).
  - Staff does not incorporate projected collection of sizable tax arrears due to lack of a concrete strategy.
  - Staff considers authorities’ assumption of 1 percent nominal GDP growth implausibly low in terms of implied real growth and/or inflation.
- Additional measures needed:
  - Staff finds additional measures of about 1.7 percent of GDP are needed to achieve authorities’ targets.
  - Staff’s additional adjustment package (2019-2024) = 1.7 percent of GDP composed of:
    - Revenue measures: 0.5 percent of GDP from indirect taxes (introduce VAT replacing other indirect taxes in 2021).
    - Expenditure measures: -1.2 percent of GDP composed of:
      - Personnel expenses: -0.4 percent of GDP from freezing the wage bill in real terms.
      - Interest: -0.4 percent of GDP from savings in interest payments.
      - Others: -0.4 percent of GDP from additional cuts in other current spending.

### Specific revenue and expenditure recommendations
- Revenues:
  - Large upfront revenue increase of 2.3 percent of GDP in 2019 mostly from indirect taxes:
    - Full-year impact of the mid-2018 turnover tax increase: +1.4 percent of GDP.
    - Increase in excise taxes on alcohol, tobacco, and cider in early 2019: +0.3 percent of GDP.
    - Introduction of an excise tax on sugary drinks in mid-2019: +0.3 percent of GDP.
  - Expected collection of tax arrears through improvements in tax administration: +1.2 percent of GDP.
  - Recommendation: introduce a value-added tax (VAT) with a uniform rate of 10 percent to replace current various indirect taxes.
  - Improve revenue administration and broaden excise bases.
- Expenditures:
  - Contain government wage bill: wage bill was more than 36 percent of total revenues in 2018; staff recommends comprehensive review and lasting measures.
  - Rationalize other current spending (6.4 percent of GDP) and protect capital spending.
  - Health care: consider preventive care, targeted user-fees, or reduce entitlements for non-essential treatments.
  - Education: improve quality and efficiency of public spending on education.
  - Authorities’ estimate of wage bill yield: a nominal reduction of the wage bill by an average of Afl. 3.0 million per year.

### Fiscal framework, debt management, and financing
- Develop a formal medium-term fiscal framework (MTFF) to enhance credibility and set medium-term measures.
- Consider a formal fiscal rule after adjustment to preserve sustainability.
- Finalize strategy for budget financing and debt management to avoid crowding out private sector credit or pressuring international reserves.
- Develop an asset-liability management framework to guide financing decisions and assess implications of alternative financing options.
- Authorities decided in 2019 to rely fully on domestic markets to meet gross financing needs; staff cautioned against crowding out private credit.

### Monetary policy and financial sector
- Monetary stance and supervision:
  - Monetary policy stance and financial sector supervision and regulation remain appropriate.
  - CBA’s policy decisions should remain data driven, balancing domestic and external stability considerations.
  - Tightening warranted if incoming data or expectations point to downward pressures on international reserves.
  - In absence of reserve pressures and should risks to growth surprise on the downside, the CBA could consider unwinding the increase in reserve requirement.
- Banking sector soundness:
  - Capital adequacy ratio (CAR) = 32 percent (double the regulatory minimum).
  - Tier 1 capital to risk-weighted assets: 24.5 (2018, preliminary).
  - NPLs to gross loans: 3.9 (2018).
  - ROA after taxes: 1.6 (2018).
  - ROE after taxes: 10.0 (2018).
  - Liquid assets to total assets: 29.8 (2018).
  - Excess reserves rose to almost 15 percent of GDP in 2018.
- Reserve requirement:
  - CBA increased reserve requirement ratio effective May 2019 from 11 percent to 12 percent of deposits.
  - Staff view: prudent given excess liquidity; CBA should be ready to tighten if reserve pressures emerge or stimulate activity if downside risks materialize.

### Structural challenges and policy priorities
- Tourism dependence and competitiveness:
  - About 87 percent of the economy depends directly or indirectly on tourism.
  - Aruba’s share of overall stay-over tourism in the Caribbean: around 16 percent.
  - U.S. tourists account for almost 70 percent of stay-over tourism.
  - Recommendation: maintain high-end tourism brand, diversify tourism sources beyond the U.S., focus on increasing spending per visitor through high quality services and adequate physical tourism infrastructure.
- Tourism empirical findings:
  - Panel evidence: a 10 percent increase in tourist arrivals per capita raises growth by about 0.3 percent.
  - Aruba-specific results: tourist arrivals per capita have diminishing marginal returns; quadratic term negative and significant, suggesting potential saturation.
  - Leakages: staff estimate an implied leakage rate of 56 percent from tourism to non-oil imports (bivariate regression, 1992-2017); historical leakage estimates include 58 percent (1979-1980 study) and first-order leakage around 40 percent.
  - All-inclusive tourism: tends to reduce local spending; Aruba has introduced a cap on the share of all-inclusive hotel rooms.
- Business climate, governance, and labor market reforms:
  - 64 percent of firms perceive current legislation as impeding job creation.
  - Labor market: recommend enhance flexibility, protect workers, consider replacing severance pay with unemployment insurance, strengthen vocational training.
  - Governance: almost 70 percent of respondents in a CBA survey agree there is corruption in public institutions; staff recommends a targeted anti-corruption strategy.
  - Authorities actions: e-Government platform, reduced time to issue business licenses from 8 weeks (2017) to 4 weeks (2019), modified immigration laws in 2018, establishing integrity institutions.
- Structural reform priorities:
  - Improve business climate and reduce red tape.
  - Enhance human capital and labor market flexibility.
  - Increase renewable energy use and energy efficiency.
  - Pursue FDI-attracting structural reforms.
- Data improvements:
  - Continue revising national accounts and compile deflators for expenditure components of GDP.
  - Seek CARTAC technical assistance and aim to be covered in Doing Business and Transparency International surveys.

### Public and external debt outlook, risks, and stress tests
- Public debt dynamics:
  - Gross central government debt: 84.5 percent of GDP in 2018 (table shows 86.7 in alternative table); projections include 84.5 in 2019, 83.8 in 2020, 82.5 in 2021, 80.8 in 2022, 78.9 in 2023, 77.0 in 2024.
  - Staff baseline: public debt projected to fall from about 85 percent of GDP in 2018 to 75 percent by 2024.
  - Staff projects primary balance of 3.7 percent of GDP over 2019-24 in baseline.
  - Staff finds additional adjustment of 3.7 percent of GDP over 2019-24 would significantly lower the debt ratio.
- Public gross financing needs:
  - Public gross financing needs: 2017: 7.6; 2018: 10.1; 2019: 9.1; 2020: 9.6; 2021: 11.5; 2022: 10.9; 2023: 11.3; 2024: 10.5/9.9 (table entries).
- External debt:
  - External debt (percent of GDP): 2018 = 99.3; 2019 = 97.5; 2020 = 95.4; 2021 = 94.9; 2022 = 94.5; 2023 = 94.0; 2024 = 93.6.
  - External debt remains largely long-term (92 percent in 2017).
  - Debt-stabilizing non-interest current account balance: deficit of 3.6 percent of GDP.
  - Forecasted non-interest current account averages near zero in baseline.
- Stress tests and scenarios:
  - Tests include Real Interest Rate Shock, External Financing Requirements, Real GDP Growth Shock, Primary Balance Shock, Real Exchange Rate Shock, Contingent Liability Shock, and Combined Shock.
  - Under shocks, gross nominal public debt and public gross financing needs show upward pressure; percentile bands illustrate predictive densities through 2024.

### Key statistics and selected indicators (as reported)
- Fiscal and macro:
  - Overall balance: -2.2 percent of GDP in 2018.
  - Primary Balance: 1.9 percent of GDP in 2018.
  - Gross central government debt: 84.5 percent of GDP in 2018.
- Growth and prices:
  - Real GDP: 1.2 percent in 2018.
  - GDP deflator (period average): 4.1 percent in 2018.
  - Consumer prices (period average): 3.6 percent in 2018.
- External sector:
  - Current account balance: -0.5 percent of GDP in 2018.
  - FDI: 4.6 percent of GDP in 2018.
  - Gross official reserves (millions of U.S. dollars): 1,043 in 2018; 1,095 projected in 2019 (as reported in the table).
  - Gross official reserves (months of next year's imports): 5.1 in 2018; 5.2 projected in 2019.
  - External debt: 99.3 percent of GDP in 2018.
- Basic data:
  - Area (sq. km): 180.
  - Population (thousands, 2017 est.): 110.8.
  - Literacy rate (percent, 2015): 97.5.
  - Population growth rate (percent, 2017): 0.4.
  - Nominal GDP (millions of U.S. dollars, 2017): 2,679.
  - GDP per capita (thousands of U.S. dollars, 2017): 24.2.
  - Life expectancy at birth (years, 2015): 75.4.
  - Unemployment rate (percent, 2017): 8.9.

### Key policy recommendations (from the report)
- Continue to adhere to the fiscal consolidation plan to put public debt on a firm downward trend, while minimizing potential adverse effects on growth.
- Identify additional reform measures to achieve Aruba’s fiscal targets; measures should involve a mix of revenue increases and expenditure restraint, and be prioritized, sequenced, equitable, and well-communicated.
- Introduce tax reform emphasizing broadening the base and shifting toward indirect taxation—a VAT could be introduced (recommended uniform rate of 10 percent in staff proposals).
- Rationalize the wage bill, improve efficiency of other public spending, and contain increasing healthcare costs.
- Protect capital spending and essential government services during consolidation; provide targeted social safety nets.
- Develop a formal medium-term fiscal framework; consider a formal fiscal rule to preserve sustainability.
- Finalize budget financing and debt management strategy and develop an asset-liability management framework.
- Maintain data dependency in monetary policy and be ready to tighten if downward pressures on international reserves arise.
- Bridge data gaps and continue statistical capacity improvements.

*KINGDOM OF THE NETHERLANDS—ARUBA STAFF REPORT FOR THE 2019 ARTICLE IV CONSULTATION DISCUSSIONS (IMF staff report excerpts).*

### 2.2 percent of GDP, from 3 percent in 2017, largely reflecting a sizable increase in revenues, but

### 1abwea2019001 - 2.2 percent of GDP, from 3 percent in 2017, largely reflecting a sizable increase in revenues, but

### Recent economic developments and fiscal position
- Overall deficit: increased by 1.4 percentage points to 3 percent of GDP in 2017; moderated to 2.2 percent of GDP in 2018, largely reflecting a sizable increase in revenues.
- Public debt: reached 84.5 percent of GDP in 2018; was 86.7 percent of GDP by end-2017 and about 42 percent in 2008.
- Real GDP growth: 2.3 percent in 2017; slowed to 1.2 percent in 2018.
- Unemployment rate: 8.9 percent in 2017.
- Inflation: rose to 3.6 percent in 2018 (mainly due to the mid-2018 turnover tax rate increase and oil prices).
- Current account balance: surplus declined to 1 percent of GDP in 2017 from 5 percent in 2016; registered a deficit of 0.5 percent of GDP in 2018.
- Gross official reserves: 4.9 months of imports at end-2017; nudged up to 5.1 months of imports in 2018.
- External debt: 102.5 percent of GDP in 2017; estimated 99.3 percent of GDP in 2018.
- Private sector credit: picked up, rising by close to 4 percent in 2017-18.

### Outlook and risks
- Short-term growth effect of fiscal consolidation: fiscal consolidation plan will lower real GDP growth to a projected 0.7 percent in 2019.
- Medium-term growth: expected to accelerate to about 1.1 percent, broadly in line with the historical average.
- Inflation forecast: projected to fall to 1.8 percent in 2019 as the base effect of the turnover tax rate hike disappears and oil prices decrease; projected to gradually rise towards 2.2 percent over the medium term.
- Current account and reserves: current account balance is projected to decline further in 2019 before gradually improving in the medium term; foreign reserves are foreseen to remain broadly stable at around 5 months of imports.
- Downside risks (skewed to the downside):
  - Deepening crisis in Venezuela leading to large immigrant and refugee inflows.
  - Cyclical downturn in the U.S. economy.
  - Short-term growth effects of Aruba’s fiscal consolidation greater than expected.
- Upside scenarios:
  - Implementation of structural reforms that boost potential growth.
  - Remote possibility: reopening of the refinery with associated investments and job gains.

### Fiscal policy assessment and recommendations
- Authorities’ actions:
  - Embarked on an ambitious fiscal adjustment program; agreement with the Netherlands in November 2018 pinned down fiscal targets for 2019 and the medium term.
  - Introduced a temporary package in mid-2018 by increasing the turnover tax rate and started implementing a series of fiscal measures beginning in 2019.
- Additional measures needed:
  - Additional adjustment should contain a mix of tax reforms and expenditure rationalization.
  - 2019 measures expected to deliver a large upfront increase in revenues; important to balance revenue increases and expenditure restraint in subsequent years.
  - Tax reform emphasis: broaden the base and shift toward indirect taxation—a VAT could be introduced.
  - Expenditure rationalization priorities: minimize adverse growth effects and protect capital spending and essential government services; rationalize the wage bill; improve efficiency of other public spending; contain increasing healthcare costs.
- Fiscal framework and debt management:
  - Further develop a formal medium-term fiscal framework to enhance credibility of the consolidation plan; eventually consider a formal fiscal rule to preserve sustainability.
  - Finalize strategy for budget financing and debt management to avoid crowding out private sector credit or unduly pressuring international reserves.
  - Develop an asset-liability management framework to guide financing decisions and assess implications of alternative financing options.

### Monetary policy and financial sector
- Monetary stance and supervision:
  - Monetary policy stance and financial sector supervision and regulation remain appropriate.
  - The CBA’s policy decisions should remain data driven, balancing domestic and external stability considerations.
  - Tightening warranted if incoming data or expectations point to downward pressures on international reserves.
  - In absence of reserve pressures and should risks to growth surprise on the downside, the CBA could consider unwinding the increase in reserve requirement.
- Banking sector: remains sound; banks enjoy healthy profits and are well-capitalized; liquid under a solid supervisory and regulatory framework.

### Structural challenges and policy priorities
- Tourism dependence and competitiveness:
  - About 87 percent of the economy depends directly or indirectly on tourism.
  - U.S. tourists account for almost 70 percent of stay-over tourism.
  - Recommendation: maintain high-end tourism brand, diversify tourism sources beyond the U.S., focus on increasing spending per visitor through high quality services and adequate physical tourism infrastructure.
- Structural reform agenda to boost growth and resilience:
  - Improve the business climate and reduce red tape.
  - Enhance labor market flexibility while protecting workers.
  - Enhance human capital.
  - Address governance vulnerabilities.
  - Increase renewable energy use and energy efficiency.
  - Pursue FDI-attracting structural reforms.
- Data improvements:
  - Continue revising national accounts and compile deflators for expenditure components of GDP.
  - CARTAC technical assistance could help.
  - Strive to be covered in key international surveys like Doing Business and Transparency International.

### Key statistics and selected indicators (as reported)
- Fiscal and macro:
  - Overall balance: -2.2 percent of GDP in 2018.
  - Primary Balance: 1.9 percent of GDP in 2018.
  - Gross central government debt: 84.5 percent of GDP in 2018.
- Growth and prices:
  - Real GDP: 1.2 percent in 2018.
  - GDP deflator (period average): 4.1 percent in 2018.
  - Consumer prices (period average): 3.6 percent in 2018.
- External sector:
  - Current account balance: -0.5 percent of GDP in 2018.
  - FDI: 4.6 percent of GDP in 2018.
  - Gross official reserves (millions of U.S. dollars): 1,043 in 2018; 1,095 projected in 2019 (as reported in the table).
  - Gross official reserves (months of next year's imports): 5.1 in 2018; 5.2 projected in 2019.
  - External debt: 99.3 percent of GDP in 2018.
- Basic data:
  - Area (sq. km): 180.
  - Population (thousands, 2017 est.): 110.8.
  - Literacy rate (percent, 2015): 97.5.
  - Population growth rate (percent, 2017): 0.4.
  - Nominal GDP (millions of U.S. dollars, 2017): 2,679.
  - GDP per capita (thousands of U.S. dollars, 2017): 24.2.
  - Life expectancy at birth (years, 2015): 75.4.
  - Unemployment rate (percent, 2017): 8.9.

### Key policy recommendations (from the report)
- Continue to adhere to the fiscal consolidation plan to put public debt on a firm downward trend, while minimizing potential adverse effects on growth.
- Identify additional reform measures to achieve Aruba’s fiscal targets; measures should involve a mix of revenue increases and expenditure restraint, and be prioritized, sequenced, equitable, and well-communicated.
- Enhance labor market flexibility, reduce the costs of doing business, and diversify further tourism sources to bolster inclusive growth, competitiveness, and resilience to shocks.
- Maintain data dependency in the conduct of monetary policy, carefully weighing the need to tighten should there be downward pressures on international reserves with that of supporting the economy if downside risks to growth materialize.
- Bridge data gaps to better inform policy-making.

*KINGDOM OF THE NETHERLANDS—ARUBA STAFF REPORT FOR THE 2019 ARTICLE IV CONSULTATION DISCUSSIONS*

### 1.8 percent in 2016, mainly supported by steady growth in mortgages (Figure 3). The latter is partly

### 1abwea2019001 - 1.8 percent in 2016, mainly supported by steady growth in mortgages (Figure 3)

### Outlook and Risks
- Growth projections:
  - Growth is projected at 0.7 percent in 2019, and 1.1 percent over the medium term.
  - Real tourism exports are expected to grow steadily at around 1.2 percent over the medium term.
  - Growth is expected to increase to 1.1 percent over the medium term, broadly in line with the historical average.
- Drivers and mitigating factors:
  - The fiscal consolidation plan will lower real GDP growth in 2019.
  - Continued strong growth in tourism from the U.S. will mitigate the consolidation’s effect.
  - Implementation of multiple large investment projects (including the airport, utilities, hospital, and hotels) in 2019 and subsequent years will support activity.
  - Implementation of energy saving technologies is expected to reduce oil imports for electricity generation.
- Inflation:
  - Inflation is projected to fall to 1.8 percent in 2019 as the base effect of the turnover tax rate hike disappears, and oil prices decrease.
  - Inflation is projected to gradually rise towards 2.2 percent over the medium term.
- External sector and reserves:
  - The current account balance is forecast to decline further in 2019 before gradually improving through the medium term and will remain high relative to regional peers.
  - Staff foresees a deficit of 1.7 percent of GDP in 2019, followed by shrinking deficits, and then a small surplus in the outer years.
  - This path is largely driven by high imports in 2019-21 associated with implementation of infrastructure projects.
  - By 2024, reserves would stand at around 5 months of imports, in line with regional peers.
- Labor market and regional spillovers:
  - Increased demand for foreign workers in the tourism sector will likely lead to positive spillovers for the rest of the region due to increased remittance outflows (Annex X).
- Risk assessment:
  - Risks to the outlook are tilted to the downside.
  - Aruba is susceptible to a possible downturn in the U.S. economy.
  - Risks from the crisis in Venezuela have largely materialized over the last few years (bilateral trade disruptions and sharp declines in Venezuelan tourist arrivals).
  - A worsening crisis in Venezuela that leads to sizable refugee inflows would put pressure on labor markets and infrastructure and may cause tourists to postpone plans or seek other destinations.
  - The planned fiscal consolidation would address important medium-term downside risks but could have greater-than-expected effects on growth in the near term.
  - On the upside, implementation of structural reforms and investments in energy-saving technologies and renewable energy would boost potential growth (Annex II, RAM).
  - A re-opening of the refinery is an upside possibility that could bring investments and employment gains.

### Authorities' Views
- The authorities broadly agreed with staff’s assessment of the outlook and risks.
- Observations by authorities:
  - Robust tourism growth has underpinned economic activity in 2017-18, and tourism is expected to continue playing a key role.
  - Multiple planned and ongoing investment projects are expected to boost the economy.
  - The authorities do not see a need to actively mitigate any adverse growth effects from their fiscal consolidation plan.
  - They acknowledged risks from the Venezuela crisis and noted effects from immigrants and refugees have been relatively limited so far.
  - They are discussing financing of their contingency plan with both the European Union and the United Nations High Commissioner for Refugees to prepare for a potential “mass influx” situation.
  - The reopening of the refinery is considered an upside risk; given high uncertainty, it has not been factored into the budget or forecasts.

### Policy Issues — Overview
- Key policy challenges:
  - (A) Continuing fiscal consolidation and underlying reforms to put public debt on a downward trajectory.
  - (B) Maintaining international reserve buffers and safeguarding financial stability.
  - (C) Removing structural impediments to sustained and inclusive growth.
  - (D) Bridging data gaps for effective policy making.

### A. Maintaining the Momentum on Fiscal Reform — Background
- Fiscal framework and targets under the new agreement with the Netherlands:
  - Fiscal targets set in terms of the “financial” balance, defined as the overall fiscal balance plus net acquisition of financial assets.
  - For 2019, the target was set at -0.5 percent of GDP; this corresponds to an overall balance of 0 percent of GDP.
  - A financial balance of 0.3 percent of GDP was set for 2020, increasing to 1.0 percent in 2022 and beyond.
  - These map into an overall balance of 0.7 percent and 1.4 percent of GDP, respectively.
- 2019 approved budget:
  - The 2019 approved budget is in line with the authorities’ target and envisions sizable tightening.
  - It foresees a balanced budget, 2.3 percentage points of GDP tighter than the 2018 outcome.
  - The adjustment comes mainly from the revenue side.

### A. Maintaining the Momentum on Fiscal Reform — Revenues
- Revenue measures and impacts (2019):
  - The large upfront revenue increase of 2.3 percent of GDP would come mostly from indirect taxes:
    - Full-year impact of the mid-2018 turnover tax increase: +1.4 percent of GDP.
    - Increase in excise taxes on alcohol, tobacco, and cider in early 2019: +0.3 percent of GDP.
    - Introduction of an excise tax on sugary drinks in mid-2019: +0.3 percent of GDP.
  - Direct tax revenues are expected to decline by 0.4 percent of GDP as a result of:
    - Early 2019 simplifications to the personal income tax: -0.3 percent of GDP.
    - Reform of property taxes: +0.3 percent of GDP.
  - Expected collection of tax arrears through improvements in tax administration: +1.2 percent of GDP.
  - Base effects: -1.6 percent of GDP.

### A. Maintaining the Momentum on Fiscal Reform — Expenditures
- Expenditure-side adjustments:
  - Savings are expected from reductions in transfers to the General Health Insurance (AZV) and in capital spending.
  - These savings are fully offset by increased spending elsewhere in the budget, leading to zero adjustment from the expenditure side.

*Source: IMF staff report excerpt (KINGDOM OF THE NETHERLANDS—ARUBA).*

### 2.22 percent. This is due to slightly different nominal GDP estimates for 2018.

### 1abwea2019001 - 2.22 percent. This is due to slightly different nominal GDP estimates for 2018.

### Fiscal adjustment plan and authorities' projections
- Authorities project a cumulative adjustment of 3.7 percent of GDP over 2018-22 under the assumption of nominal GDP growth of 1 percent per year.
- Revenue-side plans: boost tax revenues including broadening the tax base via a shift from direct to indirect taxation.
- Expenditure-side plans: savings mainly from reductions in the wage bill, transfers to AZV, capital spending, and goods and services; partly offset by increases in other current expenses and interest payments.
- Authorities built zero budget transfers to AZV in their 2019 budget and beyond after raising the BAZV tax rate in mid-2018.
- Authorities’ Central Government Fiscal Plan, 2019-2022 (percent of GDP, selected lines):
  - Total revenue: 2018 = 26.5; 2019 = 28.7; 2020 = 29.1; 2021 = 28.9; 2022 = 28.9
  - Tax revenue: 2018 = 23.6; 2019 = 25.3; 2020 = 25.5; 2021 = 25.4; 2022 = 25.3
  - Direct taxes: 2018 = 12.2; 2019 = 11.9; 2020 = 9.8; 2021 = 9.8; 2022 = 9.8
  - Indirect taxes: 2018 = 10.4; 2019 = 12.4; 2020 = 14.7; 2021 = 14.6; 2022 = 14.6
  - Nontax revenue: 2018 = 2.9; 2019 = 3.4; 2020 = 3.6; 2021 = 3.5; 2022 = 3.5
  - Total Expenditure: 2018 = 28.7; 2019 = 28.7; 2020 = 28.4; 2021 = 27.9; 2022 = 27.5
  - Expense: 2018 = 27.7; 2019 = 28.1; 2020 = 27.9; 2021 = 27.4; 2022 = 27.0
  - Wages: 2018 = 7.7; 2019 = 7.7; 2020 = 7.6; 2021 = 7.4; 2022 = 7.3
  - Interest: 2018 = 4.2; 2019 = 4.7; 2020 = 4.6; 2021 = 4.6; 2022 = 4.5
  - Transfer to General Health Insurance (AZV): 2018 = 0.4; 2019 = 0.0; 2020 = 0.0; 2021 = 0.0; 2022 = 0.0
  - Net acquisition of non-financial assets: 2018 = 1.0; 2019 = 0.7; 2020 = 0.5; 2021 = 0.5; 2022 = 0.5
  - Overall Balance: 2018 = -2.3; 2019 = 0.0; 2020 = 0.7; 2021 = 1.0; 2022 = 1.4
  - Financial Balance (authorities’ definition): 2018 = -2.7; 2019 = -0.5; 2020 = 0.3; 2021 = 0.7; 2022 = 1.0
  - Nominal GDP (millions of Afl.): 2018 = 4,903.3; 2019 = 4,952.3; 2020 = 4,980.0; 2021 = 5,030.0; 2022 = 5,081.0
- Authorities’ financial balance definition: overall fiscal balance plus net acquisition of financial assets.
- GDP figures are based on the 2019 budget document and the authorities' assumptions of one percent nominal growth for 2019 and beyond.

### Staff baseline, projections, and differences with authorities
- Staff built a baseline scenario using available and quantifiable information on authorities’ plans and adjusted assumptions:
  - For 2019, baseline incorporates authorities’ expenditures as in the budget but builds in higher transfers to AZV based on AZV’s deficit projections.
  - On revenues, baseline incorporates income and property tax reform effects, tax increases on tobacco, alcohol, and cider, and the new tax on sugary drinks, but estimates a lower yield for the full-year impact of the mid-2018 turnover tax increase than the authorities.
  - Baseline does not incorporate projected collection of sizable tax arrears due to lack of a concrete strategy.
- Staff projects a higher fiscal deficit than the authorities: staff projects a 2019 fiscal deficit of 0.8 percent of GDP (chart reference).
- Over the medium term, staff projects deficits larger than the authorities’ targets despite staff’s higher nominal GDP growth path, largely due to staff’s higher expenditure projections and skepticism about the authorities’ plan to reduce the wage bill by an average of 3.0 million Aruban Florins per year.
- Staff notes authorities’ assumption of nominal GDP growth of 1 percent over the medium term "implies implausibly low real GDP growth and/or inflation."

### Additional measures needed and recommended composition
- Staff finds additional measures of about 1.7 percent of GDP are needed to achieve authorities’ targets.
- Recommended approach: mix of expenditure and revenue measures while protecting growth-friendly expenditure and capital spending; prioritize and sequence reforms; identify and execute a few easy-to-implement measures first; ensure reforms are equitable, transparent, and well-communicated.
- Staff’s additional adjustment package (2019-2024) amounts to 1.7 percent of GDP composed of:
  - Revenue measures: 0.5 percent of GDP from indirect taxes (introduction of VAT replacing other indirect taxes in 2021).
  - Expenditure measures: -1.2 percent of GDP composed of:
    - Personnel expenses: -0.4 percent of GDP from freezing the wage bill in real terms.
    - Interest: -0.4 percent of GDP from savings in interest payments from additional fiscal measures.
    - Others: -0.4 percent of GDP from additional cuts in other current spending.

### Specific revenue and expenditure recommendations
- Revenues:
  - Scope to increase tax revenues through indirect taxes.
  - Recommendation: introduce a value-added tax (VAT) with a uniform rate of 10 percent to replace current various indirect taxes.
  - Improve revenue administration.
  - Other recommendations: broaden the base for excises on alcohol and tobacco while increasing rates for petroleum products.
- Expenditures:
  - Contain government wage bill: it was more than 36 percent of total revenues in 2018; staff recommends a comprehensive review to understand main drivers (compensation vs. employment) and implement lasting measures.
  - Rationalize other current spending (6.4 percent of GDP): includes education wage subsidies, PPP fees, subsidies to public transportation, transfers to social programs, and cash transfers to low income individuals; staff proposes review for efficiency enhancement and better targeting.
  - Healthcare: consider preventive care, targeted user-fees for certain services, and/or reduce entitlements for non-essential treatments; if recent health sales tax increase is reversed, replace with an equal-revenue measure.
  - Education: much room to improve quality of public spending on education; efficiency frontier analysis shows secondary education outcomes do not reflect high level of spending.

### Growth implications and sequencing
- Envisaged fiscal consolidation is sizable but not likely to be a major drag on growth over the medium term; expected adverse short-term growth effects.
- Empirical estimates: cost to real GDP over 4-5 years from higher consumption taxes or lower government consumption of 1 percent of GDP is estimated to be close to zero; on impact, multipliers are larger.
- Exception: multiplier for public infrastructure spending tends to be large.
- Staff recommends providing targeted and effective social safety nets during adjustment.
- If authorities implement staff’s recommended measures (introducing VAT and rationalizing wage bill and other spending) and close the 1.7 percent of GDP fiscal gap gradually, growth would be marginally lower over the near term than in the baseline (active scenario in text tables).
- Structural reforms to boost growth would support fiscal consolidation over the medium term.
- Staff suggests contingency planning: while adhering to targets, consider changing composition of adjustment in short term to preserve capital and social spending if adverse growth effects are larger than expected.

### Fiscal framework, debt management, and financing
- Staff advocates developing a robust medium-term fiscal framework (MTFF) to:
  - Strengthen multi-year fiscal discipline and account for short- and medium-term impacts of policies.
  - Facilitate setting of medium-term fiscal measures.
  - Provide early warning signals about fiscal sustainability and risks.
- Broadening fiscal data coverage beyond central government recommended for a complete assessment of government impact and risks.
- After adjustment, consider a formal fiscal rule to safeguard sustainability.
- Establish a unit to improve macro-fiscal analysis.
- Coordination needed across agencies for budget financing and debt management:
  - In 2019 authorities decided to rely fully on domestic markets to meet gross financing needs and prefer to continue to do so.
  - Staff cautioned domestic issuance should avoid crowding out private sector credit or unduly pressuring central bank foreign reserves.
  - Staff emphasized an asset-liability management framework to clarify desired government-debt portfolio, capture cost-risk tradeoffs, provide predictability to the financial system, and minimize macro-financial risks.

### Preserving reserve buffers and financial stability
- Central Bank of Aruba (CBA) increased reserve requirement ratio effective May 2019 from 11 percent to 12 percent of deposits.
  - Rationale: increase international reserve coverage relative to IMF’s risk-weighted ARA metric and to stem potential forward-looking pressures from the government’s decision to finance all of 2019’s borrowing needs domestically.
- Staff assessment: external position broadly in line with fundamentals; 2018 current account balance close to estimated norm though fiscal balance remained below desired value.
- Florin appears roughly fairly valued on various metrics, including the EBA-lite; current valuation does not appear to hinder competitiveness.
- Banking sector soundness indicators:
  - Capital adequacy ratio (CAR) = 32 percent (double the regulatory minimum).
  - Banks have liquidity buffers largely surpassing regulatory requirements.
  - Excess reserves rose to almost 15 percent of GDP in 2018.
  - Non-performing loans are declining; loan-to-value ratios on mortgages set at safe levels.
  - Banks enjoy healthy profits and sizable interest rate margins, reflecting in part weak competition.
  - High CAR may also indicate anemic demand or lack of viable business projects; banks are flushed with excess liquidity and credit growth is relatively modest.
- CBA’s measure of excess reserves excludes prudentially required reserves (note from source).

### Authorities’ views
- Authorities emphasize importance of achieving fiscal targets to put debt on a sustainable path and reaffirm commitment to fiscal reforms.
- Authorities agreed with staff on effective prioritization and sequencing.
- Authorities prefer emphasis on strengthening the budget process now rather than immediately adopting a formal fiscal rule, though they see merit in eventually considering a fiscal rule.
- Authorities reported good progress in developing a medium-term debt management strategy and noted enhanced capacity and IMF technical assistance may be required to move to a medium-term budget framework.

*Source: IMF staff report content provided in the PDF chapter/section.*

### 1.3 percentage points of GDP lower over 2010-2018.

### 1abwea2019001 - 1.3 percentage points of GDP lower over 2010-2018.

### Financial sector oversight, AML/CFT, and reserves
- The CBA has shifted to a risk-based approach to supervision from a compliance-oriented one.
- Aruba was removed from the FATF and Caribbean FATF follow-up process in 2014; preparations are ongoing for the 2020 CFATF assessment under revised FATF standards.
- Aruban banks have not been affected to date by the withdrawal of Correspondent Banking Relationships in the Caribbean.
- Aruba was recently moved to the European Union tax haven blacklist due to unmet tax reform commitments; legislative amendments were approved by parliament on April 4, 2019 to meet commitments.
- Foreign exchange reserves:
  - Reserves are currently adequate to safeguard the peg but should be increased over the medium term to maintain foreign exchange reserve ratios in the recommended range.
  - Reserves are well-above levels suggested by simple metrics and only slightly below the floor of the recommended range of 100-150 percent of the Fund’s risk-weighted measure, the ARA metric.
  - If applied to 2018, a 12 percent required reserve ratio would still imply excess liquidity above 14 percent of GDP.

### Monetary policy guidance
- Monetary policy should remain data dependent.
- The CBA’s move to raise banks’ reserve requirement is considered prudent given excess liquidity.
- The CBA should be ready to:
  - Tighten policy if incoming data or expectations point to downward pressures on international reserves.
  - Stimulate activity (including possible unwinding of the reserve requirement increase) if downside risks materialize and growth effects of fiscal consolidation are larger than anticipated.

### Unlocking potential for high and sustained growth
- Tourism sector:
  - Aruba’s share of overall stay-over tourism in the Caribbean has been the third largest at around 16 percent.
  - Empirical analysis shows tourist arrivals have a positive effect on growth but identifies an “exhaustion” effect, implying diminishing returns from additional tourists.
  - Factors contributing to diminishing returns: very high tourism density, limited undeveloped land, need for foreign labor, infrastructure pressures, and leakages through imports and foreign labor remittances.
- Authorities’ diversification strategy:
  - Focus on renewable energy and the “promising sectors” initiative emphasizing digitalization, technology in agriculture, knowledge-based economy, and niche tourism products.
- Staff views on tourism and diversification:
  - Maintain high-end tourism brand and focus on increasing spending per visitor through high quality services and infrastructure.
  - Strengthen tourism linkages with the local economy to minimize leakages.
  - Diversify tourism sources including to Latin American countries (besides Venezuela).
  - Explore medical tourism opportunities as health care system expands and modernizes.
  - Support “promising sectors” initiative but be mindful of potential fiscal costs and contingent liabilities.
  - Address structural impediments related to business environment, governance, and labor markets (¶s 36–39).

### Business climate, governance, and labor market reforms
- Business climate:
  - A recent business survey reveals that 64 percent of firms perceive current legislation as impeding job creation and a thriving economy.
  - About 70 percent of firms view Establishment of Businesses and Permits and Licensing ordinances as creating unnecessary red tape.
  - Reinvigorated reforms are needed to stimulate investment, productivity, and growth.
- Governance and corruption:
  - Preliminary CBA survey on perceived corruption: almost 70 percent of respondents agree there is corruption in public institutions in Aruba.
  - CBA plans a follow-up survey in November 2019 and authorities are preparing an anti-corruption strategy.
  - Staff recommends the anti-corruption strategy include identification of core challenges, targeted measures, timeline with performance targets, implementation infrastructure and budget allocation.
- Labor market:
  - Labor market regulations are rigid; termination procedures are cumbersome and costly.
  - Policy recommendation: protect the worker—not the job—and bolster human capital.
  - Consider replacing severance pay with an unemployment insurance program.
  - Strengthen vocational training and align education curricula with private sector needs.
  - Reverse brain-drain by fostering conditions to encourage skilled Arubans working abroad to return.
- Authorities’ reform actions:
  - Introducing an “e-Government” platform to digitize key government administrative procedures and a digital “one stop shop” for licensing.
  - Modified immigration laws in 2018 to facilitate employment of non-residents with bachelor’s degree and higher.
  - Establishing a Bureau of Integrity, Integrity Chamber, and a Corporate Governance Code.

### Data quality and statistical capacity
- Data gaps hinder policy-making and transparency; areas needing upgrading include labor statistics, public finances, and public debt.
- Good progress in revising national accounts; deflators for expenditure components of GDP need to be prepared.
- Staff encouraged seeking CARTAC technical assistance.
- Aim to be covered in World Bank Doing Business, Worldwide Governance Indicators, and Transparency International Corruption Perceptions Index.

### Staff appraisal: outlook, risks, and fiscal policy
- Outlook:
  - Economic recovery continues but at a slowing pace.
  - Recovery supported by strong tourism growth from the U.S. and expected large investment projects in 2019 and subsequent years.
- Risks to outlook:
  - Skewed to the downside: deepening crisis in Venezuela with large immigrant/refugee inflows; cyclical downturn in the U.S.; larger-than-expected short-term growth effects of fiscal consolidation.
  - Upside: structural reforms boosting potential growth; remote possibility of refinery reopening.
- Fiscal stance and recommendations:
  - Authorities are making good progress on fiscal reform; encouraged to sustain reform momentum to keep public debt ratio on a downward path.
  - Additional adjustment required: mix of tax reforms and expenditure rationalization.
  - 2019 fiscal measures expected to deliver a large upfront increase in revenues; important to balance revenue increases with expenditure restraint in subsequent years.
  - Tax reform could emphasize broadening the base and shifting toward indirect taxation—a VAT could be introduced.
  - Expenditure rationalization priorities: rationalize the wage bill, improve efficiency of other public spending, and contain increasing healthcare costs.
  - Develop a formal medium-term fiscal framework; consider a formal fiscal rule to preserve sustainability.
  - Finalize strategy for budget financing and debt management to avoid crowding out private credit or pressuring international reserves; develop asset-liability management framework.
- Monetary and financial sector assessment:
  - Monetary policy stance and financial sector supervision and regulation remain appropriate.
  - Banks remain sound and liquid under a solid supervisory and regulatory framework.
- External position:
  - Aruba’s external position is broadly in line with fundamentals.
  - Medium-term current account expected to improve due to increasing tourism and continued fiscal consolidation.
  - International reserves are adequate to safeguard the peg but should be raised over the medium term.

### Selected key statistics and projections (preserve original values)
- Tourism share in Caribbean stay-over tourism: around 16 percent.
- Reserve requirement ratio (recent CBA announcement): 12 percent.
- Excess liquidity if 12 percent RR applied to 2018: above 14 percent of GDP.
- Area (sq. km): 180
- Population (thousands, 2017 est.): 110.8
- Literacy rate (percent, 2015): 97.5
- Population growth rate (percent, 2017): 0.4
- Percent of population below age 15 (2017): 18.4
- Nominal GDP (millions of U.S. dollars, 2017): 2,679
- GDP per capita (thousands of U.S. dollars, 2017): 24.2
- Unemployment rate (percent, 2017): 8.9
- Real GDP growth: 2017 = 2.3; 2018 = 1.2; 2019 = 0.7; 2020 = 1.0; 2021 = 1.1; 2022 = 1.1; 2023 = 1.1; 2024 = 1.1
- Consumer prices (period average): 2018 = 3.6; 2019 = 1.8; 2020 = 2.0; 2021 = 2.1; 2022 = 2.2; 2023 = 2.2; 2024 = 2.2
- Central government revenues (percent of GDP): 2018 = 25.4; 2019 = 25.7; 2020–2024 = 27.0 each year
- Central government expenditures (percent of GDP): 2018 = 28.4; 2019 = 27.9; 2020 = 27.9; 2021 = 28.0; 2022 = 27.9; 2023 = 27.8; 2024 = 27.6
- Overall balance (percent of GDP): 2018 = -3.0; 2019 = -2.2; 2020 = -0.8; 2021 = -1.0; 2022 = -0.9; 2023 = -0.8; 2024 = -0.6
- Primary Balance (percent of GDP): 2018 = 1.7; 2019 = 1.9; 2020–2024 = 3.7 each year
- Gross central government debt (percent of GDP): 2018 = 86.7; 2019 = 84.5; 2020 = 83.8; 2021 = 82.5; 2022 = 80.8; 2023 = 78.9; 2024 = 77.0
- Gross official reserves (millions of U.S. dollars): 2018 = 922; 2019 = 995; 2020 = 1,043; 2021 = 1,095; 2022 = 1,103; 2023 = 1,097; 2024 = 1,103
- Gross official reserves (months of next year's imports): 2018 = 4.9; 2019 = 5.5; 2020 = 4.9; 2021 = 5.1; 2022 = 5.2; 2023 = 5.1; 2024 = 5.0
- Current account balance (percent of GDP): 2018 = 1.0; 2019 = -0.5; 2020 = -1.7; 2021 = -1.2; 2022 = -0.9; 2023 = -0.5; 2024 = 0.1
- Central Bank Net Foreign Assets (millions of U.S. dollars): 2018 = 921; 2019 = 993; 2020 = 1,042; 2021 = 1,094; 2022 = 1,097; 2023 = 1,102; 2024 = 1,106
- Financial soundness indicators (selected, 2018 unless noted):
  - Tier 1 capital to risk-weighted assets: 24.5 (2018, preliminary)
  - NPLs to gross loans: 3.9 (2018)
  - ROA after taxes: 1.6 (2018)
  - ROE after taxes: 10.0 (2018)
  - Liquid assets to total assets: 29.8 (2018)

*Source: 1abwea2019001 - 1.3 percentage points of GDP lower over 2010-2018.*

### Annex I. Implementation of the Recommendations of the 2017

### Annex I. Implementation of the Recommendations of the 2017 Article IV Consultation Discussions

### Fiscal Policy: implementation and status
- Broaden the tax base and simplify the tax system with more reliance on indirect taxation, including higher sales taxes.
  - The government increased the turnover tax in mid-2018, and, in early 2019, simplified the personal income tax system and carried out reforms to property taxes.
  - The authorities will implement indirect tax reforms by mid-2019.
- Reduce wage-related expenses, slow wage drift from automatic raises and promotions for time in grade, and modify public sector workers’ benefits and allowances.
  - The authorities introduced some measures to reduce wage-related expenses.
- Ensure the universal health care system (AZV) becomes self-financed; introduce means-tested user fees and the BAZV tax rate.
  - The government raised sales taxes ear-marked to the health system (BAZV tax).
  - The government is reviewing the legal framework and undertaking a cost analysis to introduce structural measures.
- Set fiscal targets in nominal (Florin) terms rather than as percent of GDP.
  - As per the agreement with the Netherlands, fiscal targets are to remain denominated in percentages of GDP in the near term.
- Social programs should be means-tested and audited regularly.
  - Public assistance programs are all means-tested.
  - They are subjected to periodic audits on their legality and effectiveness by the public accountant agency.
- Improve overall public financial management (PFM).
  - CARTAC technical assistance on PFM is in the pipeline.

### Structural policies: progress and initiatives
- Labor market reform and skill-based immigration policies to increase participation and productivity.
  - Government intends to introduce an integrated, sustainable skill-based immigration system focused on education, integration, and financial implications.
  - Ongoing initiatives: National Action Plan on Youth Employment; initiative to (re)educate and provide guidance to teenage/single mothers to enter the labor force.
  - Upcoming initiatives under evaluation: introduction of part time work.
- Ease of doing business improvements.
  - The e-government project is expected to help.
  - Time to issue business licenses reduced from an average of 8 weeks in 2017 to 4 weeks in 2019.
- Tourism sector diversification and infrastructure.
  - Increase in airlift has helped attract tourists from other countries.
  - Airport Authority is carrying out a US$250 million expansion of the international airport.

### Risk Assessment Matrix: key risks, likelihoods, horizons, impacts, and policy responses
- Weaker-than-expected global growth (US: Relative likelihood Medium; Time Horizon ST, MT; Impact High)
  - Aruba’s economy is highly exposed to the US—its main tourism export market and trading partner.
  - Policy responses:
    - Further diversify tourism export markets.
    - Advance structural and labor market reforms.
    - Improve the business environment for private investment.
    - Build fiscal space.
- Weaker-than-expected global growth (Europe: Relative likelihood High; Time Horizon ST, MT; Impact High)
  - Exposure to Europe is much less than to the US.
  - Policy responses: see US entry above.
- Sharp tightening of global financial conditions (Market expectation of tighter U.S. monetary policy / Sustained decline in risk appetite)
  - Relative likelihood Low / Medium; Time Horizon ST; Impact Medium
  - Policy response: Strengthen fiscal consolidation to reduce the debt burden and interest payments.
- Large swings in energy prices
  - Relative likelihood Medium; Time Horizon ST, MT; Impact High
  - Aruba is highly dependent on imported fuel.
  - Policy response: Expedite investments in renewable energy and energy saving technology.
- Reduced financial services by correspondent banks
  - Relative likelihood Low; Time Horizon ST; Impact High
  - Aruba has very few banks; one or two affected banks could heavily weigh on credit provision.
  - Policy response: Enhance financial supervision and enforcement of AML/CFT framework.
- Venezuela’s crisis
  - Relative likelihood Medium; Time Horizon ST; Impact High
  - Risk: higher inflow of refugees.
  - Policy response: Seek support from the Netherlands and the international community.
- New renewable energy projects and infrastructure investments
  - Relative likelihood Low; Time Horizon MT; Impact Medium
  - Potential benefits: lower production costs, higher tourism exports, potential growth.
  - Policy responses:
    - Accelerate diversification of tourism export markets.
    - Strengthen implementation of the ongoing renewable energy program.

(Note: “Short term” = within 1 year; “medium term” = within 3 years. Relative likelihood: “low” <10 percent, “medium” 10–30 percent, “high” 30–50 percent.)

### External Sector Assessment: position, valuations, and reserves
- Overall assessment
  - Aruba’s external position is broadly in line with fundamentals and international reserves are largely adequate but should be increased in the medium term to increase buffers against future external shocks.
  - Aruba’s lack of exposure to hurricanes implies less need for reserves than most other Caribbean economies.
  - Against the U.S. (about 75 percent of gross flows), the Florin appears to be fairly valued.
- Current account analysis (2018 and EBA-lite results)
  - Current account (2018): -0.5
  - Cyclically adjusted current account: -0.6
  - Multilaterally consistent current account norm: -0.9
  - Current Account Gap (2018; percent of GDP): 0.3
  - Total policy gaps' impacts: -1.0
  - Residual: 1.3
  - Real exchange rate gap (2018; percent): -0.4%-9.7%-3.2%
  - Real exchange rate elasticity (percent): -0.6
  - Conclusion: EBA-lite suggests Aruba’s estimated current account deficit of 0.5 percent of GDP is broadly in line with fundamentals.
- Short- and medium-term outlook for the current account
  - Short term: current account expected to deteriorate slightly due to increased FDI and infrastructure investment; import demand has increased faster than export earnings because of investment projects (airport, hospital modernizations, hotel projects).
  - Medium term: current account expected to improve to a slightly positive value as tourism exports increase, fiscal consolidation continues, and fuel oil imports are reduced.
- Exchange rate and competitiveness
  - After many years of real depreciation, the Florin appreciated in 2018.
  - EBA-lite IREER approach suggests the Florin is undervalued by around 10 percent, largely due to exchange rate and inflation swings in Venezuela.
  - Relative to the U.S., Aruba’s real effective exchange rate is roughly fairly valued.
  - Tourism costs (Week at the Beach index) are slightly lower than the regional average, mitigating competitiveness concerns.
- Reserves adequacy
  - International reserves in 2018 were above traditional measures of reserve adequacy but slightly below the floor of IMF’s risk-weighted ARA metric.
  - Reserves increased by 0.8 percent of GDP in 2018, slightly above staff’s medium-term recommendation that reserves grow broadly in line with GDP.
  - Staff advised authorities to accumulate more reserves over the medium term if the policy mix allows without damaging growth.
  - Using the SIDS measure (Mwase, 2012), Aruba’s reserves are only 70 percent of the suggested level, though the measure may not be fully applicable to Aruba given its characteristics.

### Public Debt Sustainability Analysis: baseline, risks, and realism
- Baseline scenario
  - Public debt projected to fall from about 85 percent of GDP in 2018 to 75 percent by 2024.
  - Gross financing needs are estimated to be around 9.9 percent of GDP in 2024.
  - Baseline reflects government consolidation efforts beginning in 2014 and assumes continuation of debt stabilization and reduction efforts.
  - Under staff’s baseline forecast the primary balance will be sufficiently high to begin reducing the overall debt stock.
- Risk assessment
  - Aruba’s debt ratio significantly exceeds the emerging market debt burden benchmark of 70 percent of GDP throughout the baseline scenario.
  - Gross financing needs are 9 percent of GDP in 2019 and remain high over the forecast horizon.
  - Public debt stock has a medium risk profile, mitigated by low spreads to risk-free bonds, modest near-term refinancing needs, and a low share of short-term maturity debt.
  - Authorities plan to reduce peak refinancing needs by increasing weighted average maturity via longer-term issuance and debt swaps.
  - Major risk: high total external financing needs, which also increase reserves and have mixed impacts on stability.
- Realism of baseline assumptions
  - Baseline assumptions are consistent with past performance and the government’s fiscal consolidation commitment.
  - Staff assumes some contractionary effects from consolidation and expects Aruba’s real GDP growth will pick up over the medium term to about 1.1 percent.
  - Given Aruba’s sizable debt burden and financing needs, the primary balance is expected to exceed its debt-stabilizing level of 1.7 percent of GDP over the projection period by a significant margin.

*Source: Annex I–IV, IMF staff report excerpts.*

### 3.7 percent of GDP over 2019-24 to significantly lower the debt ratio. Enacting additional fiscal

### 1abwea2019001 - 3.7 percent of GDP over 2019-24 to significantly lower the debt ratio. Enacting additional fiscal

### Fiscal consolidation and realism of adjustments
- Staff baseline: projected primary balance of 3.7 percent of GDP over 2019-24.
- Staff assessment: these forecasted adjustments are large but within a normal historical range per the DSA’s realism module.
  - Staff’s projected maximum 3-year adjustment in the primary balance over the forecast period has a percentile rank of 28 among all advanced and emerging surveillance economies with debt greater than 60 percent of GDP.
  - The 3-year average level of projected primary balance is in the 26th percentile.
- Authorities’ fiscal targets: tighter than staff baseline.
  - Under the authorities’ fiscal plan, the peak 3-year adjustment in the primary balance would be near the 20th percentile of realized outcomes (i.e., slightly less likely to be realized).
- Staff view: low oil prices, small multipliers, and robust near-term U.S. growth make the period an opportune time for Aruba to engage in fiscal reforms.
- Policy implication: Enacting additional fiscal consolidation measures would further reduce debt sustainability concerns.

### Public sector debt projections (selected indicators)
- Nominal gross public debt:
  - 2017: 66.7
  - 2018: 86.7
  - 2019: 84.5
  - 2020: 83.8
  - 2021: 82.5
  - 2022: 80.8
  - 2023: 79.0
  - 2024: 77.0 and 75.0 (table shows projection to 75.0)
- Public gross financing needs (percent of GDP):
  - 2017: 7.6
  - 2018: 10.1
  - 2019: 9.1
  - 2020: 9.6
  - 2021: 11.5
  - 2022: 10.9
  - 2023: 11.3
  - 2024: 10.5 and 9.9 (table shows 9.9 in one column)
- Real GDP growth (percent):
  - 2017: -0.8
  - 2018: 2.3
  - 2019: 1.2
  - 2020–2024: 0.7, 1.0, 1.1, 1.1, 1.1, 1.1 (various table rows show consistent 1.1 for 2021–2024)
- Inflation (GDP deflator, percent):
  - 2017: 1.1
  - 2018: -1.5
  - 2019: 4.1
  - 2020–2024: 1.2, 1.7, 2.2, 2.2, 2.2, 2.2
- Nominal GDP growth (percent):
  - 2017: 0.3
  - 2018: 0.8
  - 2019: 5.4
  - 2020–2024: 1.9, 2.8, 3.3, 3.3, 3.4, 3.4
- Effective interest rate (percent):
  - 2017: 5.6
  - 2018: 5.6
  - 2019: 5.0
  - 2020–2024: 5.5, 5.9, 5.8, 5.7, 5.7, 5.7

### Debt dynamics contributions and cumulative change (selected)
- Change in gross public sector debt (cumulative, percent of GDP): -9.5 over projection horizon (table cumulative shows -9.5).
- Identified debt-creating flows (cumulative): -9.5.
- Primary deficit (percent of GDP), annual and cumulative:
  - Annual series shows primary deficit in some years and consistent primary balance of -3.7 in projection years; cumulative primary balance projection: -22.3.
  - Primary (noninterest) revenue and grants cumulative: 162.2 (percent of GDP over projection horizon).
  - Primary (noninterest) expenditure cumulative: 139.9.
- Automatic debt dynamics (contribution, cumulative): 12.8.
  - Interest rate/growth differential (same as automatic debt dynamics) cumulative: 12.8.
  - Of which: real interest rate cumulative: 17.6.
  - Of which: real GDP growth cumulative: -4.8.
- Residual, including asset changes (cumulative): 0.0 for projections (table shows residual 0.0).

### Risk assessment and stress tests (public and external DSA highlights)
- Public DSA heat map: scenarios and stress tests consider Real Interest Rate Shock, External Financing Requirements, Real GDP Growth Shock, Primary Balance Shock, Real Exchange Rate Shock, Contingent Liability Shock, and Combined Shock.
- Stress-test outcomes (selected scenarios):
  - Under macro-fiscal stress tests, gross nominal public debt and public gross financing needs are shown for baseline and shocks through 2024; figures indicate upward pressure under shocks.
  - Percentile bands illustrate predictive densities of gross nominal public debt across 2019–2024.
- External DSA baseline:
  - External debt was around 99 percent of GDP in 2018.
  - Staff expects a decline of around 6 percentage points of GDP by 2024, reaching 93.6 percent of GDP by 2020 (noted as the lowest level since 2009).
  - Drivers of external debt decline: positive non-interest current account surplus averaging 1 percent of GDP over the forecast horizon, equity foreign direct investment, and a decrease in government external debt.
  - External debt is still expected to exceed exports for the duration of the forecast horizon.
- External debt risk assessment:
  - External debts are primarily long-term (92 percent in 2017).
  - Banking sector debts make up a small share of net outstanding external debt.
  - Debt-stabilizing non-interest current account balance: deficit of 3.6 percent of GDP.
  - Forecasted non-interest current account averages near zero—helps reduce external debt under baseline and small shocks.
  - Large current account shocks could return external debt to higher post-GFC levels.

### External debt quantitative table (selected figures from Table 1)
- Baseline: External debt (percent of GDP)
  - 2014: 106.5
  - 2015: 103.6
  - 2016: 106.3
  - 2017: 102.5
  - 2018: 99.3
  - 2019: 97.5
  - 2020: 95.4
  - 2021: 94.9
  - 2022: 94.5
  - 2023: 94.0
  - 2024: 93.6
- Change in external debt (selected): 2014: -6.7; 2015: -2.9; 2016: 2.7; 2017: -3.7; 2018: -3.2; cumulative and projection year changes shown in table.
- Current account deficit, excluding interest payments (percent of GDP): 2014: 3.7; 2015: -5.6; 2016: -6.4; 2017: -2.8; 2018: -1.2; projections include -0.1, -0.5, -0.8, -1.1, -1.7, -1.8; debt-stabilizing p = 3.6.
- Net foreign direct investment, equity (percent of GDP): 2014: 16.9; 2015: 3.4; 2016: 2.8; 2017: 1.7; 2018: 3.4; projections: 4.1, 3.6, 2.1, 2.1, 2.1.
- External debt-to-exports ratio (percent): 2014: 123.0; 2015: 114.3; 2016: 120.6; 2017: 119.2; 2018: 110.5; projections around 108.3, 105.9, 105.8, 105.9, 105.9, 105.9.
- Gross external financing need (in billions of US dollars): series shows 1.0, 0.7, 0.7, 0.7, 0.8, 0.8, 0.8, 0.8, 0.8, 0.8, 0.8; in percent of GDP examples: 38.2, 26.9, 25.1, 27.8, 26.7, 27.6, 26.5, 25.9, 25.4, 24.7, 24.4.

### Scenarios and sensitivity tests illustrated
- Alternative scenarios shown: Baseline; Historical; Constant Primary Balance.
  - Baseline primary balance: 3.7 in projection years.
  - Historical scenario primary balance: 3.7 then -0.8 in projection years (table shows historical Primary Balance 3.7, -0.8, -0.8, -0.8, -0.8, -0.8).
  - Constant Primary Balance scenario keeps Primary Balance at 3.7 across projection years.
- External DSA bound and shock tests include:
  - Interest Rate Shock, Current Account (CA) Shock, Growth Shock, Real Depreciation Shock (one-time real depreciation of 30 percent in 2020), Combined Shock.
  - Baseline vs. Historical vs. Shock projections illustrated with baseline and scenario averages (e.g., Historical 117 vs Baseline 94; Combined shock 137 vs Baseline 94).

*Source: IMF staff (as presented in the provided content).*

### Annex VI. Authorities’ Fiscal Measures

### Annex VI. Authorities’ Fiscal Measures

### A. Taxes
- The authorities implemented a series of fiscal measures in 2018–19 as a first step towards addressing Aruba’s fiscal challenges and putting high debt on a sustainable path.
- Temporary crisis package (mid-2018):
  - Turnover tax rate increased from 3.5 percent to 6 percent.
  - The 2.5 percentage points increase are allocated for:
    - payment of PPP projects: 1.5 percentage points;
    - payment of the medical costs of the health care system: 1 percentage point.
- Phase 1 measures (effective January 1, 2019):
  1. Withholding and income tax rate:
     - Prior system: progressive income tax rate, divided between two groups and including 14 tax brackets (with rates from 7 percent to 58.95 percent).
     - Reformed system: income tax rates reduced to five brackets in one group with rates from 0 to 52 percent.
  2. Property tax rate:
     - Prior rate: 0.4 percent of the registered value minus a tax-free amount; applied to everyone.
     - Reformed system: a proportional rate introduced depending on the value of the property and whether the taxpayer is a resident of Aruba or not.
     - Tax rate for both commercial properties and non-residents: 0.6 percent of the property value.
  3. Excise, import duty:
     - Excises on distilled alcohol increased by 44 to 50 percent (depending on volume).
     - Import taxes on wine raised by around 8.25 percent.
     - Excises on cider (pear, apple, pineapple, honey) rose by 333 percent and other ciders by 188 percent.
     - Tariff on tobacco products changed from 57 percent ad valorem to Afl. 211 per kg.
     - As per July 1st, a new excise on sugary drinks will be introduced.
- Phase 2-4 reforms (to be implemented sequentially over this year and next):
  - Phase 2 (July 2019): indirect taxes, BBO and import duties.
  - Phase 3 (January 2020): corporate income tax, dividend withholding tax, and the personal income tax.
  - Phase 4 (July 2020): tourist industry taxes.

### B. Wage Bill
- Instruments planned to contain the wage bill:
  - restricting hiring;
  - limiting contract renewal;
  - eliminating the automatic system for periodic raises;
  - reducing overtime costs;
  - instituting early retirement.
- Authorities’ estimate of expected yield:
  - a nominal reduction of the wage bill by an average of Afl. 3.0 million per year.

*Annex VI. Authorities’ Fiscal Measures — IMF (excerpt).*

### Annex X. Tourism, Growth, and the Balance of Payments

### Annex X. Tourism, Growth, and the Balance of Payments

### Tourism density and overview
- Tourism direct and indirect contribution to both GDP and employment estimated at around 87 percent.
- Aruba has the third largest market share for the number of stay-over tourists in the tourism-dependent Caribbean.
- Relative to its population, Aruba’s number of stay-over-visitors is the highest among its peers—more than twice as large as the second highest in 2017, the Bahamas.
- Aruba has the smallest land area in the comparison, making tourism arrivals per square meter the highest.

### A. Tourism Impact on Growth — empirical findings
- Negative externalities from too many tourists ("over-tourism") can include: pressures on infrastructure; damage to the environment; alienation of the local population; threats to culture and heritage; and degradation of the tourist experience.
- Panel evidence for the tourism-dependent Caribbean (1995-2017):
  - Dependent variable: five-year average GDP growth.
  - Model includes tourist arrivals per capita and a quadratic term to capture over-tourism effects.
  - Estimate: a 10 percent increase in tourist arrivals per capita raises growth by about 0.3 percent.
  - The coefficient for the quadratic representation of tourist arrivals per capita is negative but not significant, suggesting the tourism-dependent Caribbean has not reached a point where the number of tourists has a negative growth impact.
- Aruba-specific time-series analysis (1990-2017):
  - Tourist arrivals per capita has a positive effect on growth, but the quadratic term is negative and significant, suggesting Aruba may have reached a saturation point with diminishing marginal returns to additional tourists.
  - Implication: limited gains from further increases in tourist numbers for Aruba, though higher spending per visitor remains a policy lever.
- Pricing and market positioning:
  - Previous empirical studies show price increases lead to a decline in tourist arrivals, except for high-end tourism destinations.
  - Higher-end destinations were defined as countries with more than 30 percent 4-5-star hotels and GDP per capita above 15,000 U.S. dollars.
  - Aruba has a reputation as a high-end destination, implying visitors may be less sensitive to price increases.
  - Policy implication: focus on maintaining high-end brand through high quality services and physical tourism infrastructure to increase gains from current tourism levels.

- Regression table (panel for tourism-dependent Caribbean, dependent = 5 year average GDP growth):
  - Initial GDP: -3.90* (0.60), -4.88* (1.09), -4.90* (1.33)
  - Population growth: 0.54*** (0.27), 0.52** (0.22), 0.51** (0.23)
  - Investment/GDP: 2.82** (1.19), 2.70** (1.23), 2.69** (1.32)
  - Government spending/GDP: -2.27 (1.85), -2.38 (1.65), -2.83 (1.65)
  - Inflation: -0.28* (0.08), -0.22** (0.09), -0.22** (0.10)
  - Tourist arrivals/capita: 3.30* (1.04), 3.34** (1.39)
  - Tourist arrivals/capita^2: -0.05 (0.64)
  - Adjt. R^2: 0.56, 0.6, 0.59
  - Note: * denotes significant at 1 percent level, ** 5 percent level and *** significant at 10 percent level. Standard errors in parentheses.

- Regression table (Aruba: y = GDP growth):
  - Tourist arrivals/capita^2: 21.26** (8.63), 22.32*** (11.06)
  - Tourist arrivals/capita^2 (quadratic): -1.08** (0.48), -1.10*** (0.60)
  - Dummy 2009: -7.04* (0.88), -9.37* (2.53)
  - Adjt. R^2: 0.77, 0.31
  - Note: In model (1), y = 5 year moving average. In model (2), y = annual growth rate. * denotes significant at 1 percent level, ** 5 percent level and *** significant at 10 percent level. Standard errors in parentheses.

### B. Tourism Impact on the Balance of Payments — leakages and externalities
- Leakages reduce tourism's net benefits: direct, indirect, and induced tourism spending can increase imports, lead to outflows of investment income (international chains), overseas promotional expenditures, and outward remittances if foreign labor is used.
- Aruba has the highest share of imports in GDP among the tourism-dependent Caribbean countries.
- Historical leakage estimates:
  - 1979-1980 study estimated the leakage rate from tourism in Aruba at 58 percent (for each dollar of tourism receipt 58 cents flows out).
  - First-order leakage amounts to around 40 percent; first-round leakage was found to be lower within the hotel industry than in other industries.
- Staff analysis (bivariate regression, 1992-2017):
  - A one percent increase in tourism exports increases the demand for non-oil imports by 0.4 percent, on average.
  - Implied leakage rate from this estimate: 56 percent.
  - There is large uncertainty around this estimate; data indicate tourism exports have accelerated faster than imports, suggesting the leakage rate may have decreased over time.
- All-inclusive tourism effects:
  - Evidence that all-inclusive tourists on average spend less money in the local economy relative to other tourist types.
  - All-inclusive tourists spend much time within the resort and make fewer excursions and purchases; all-inclusive hotels with foreign ownership can lead to profits being redistributed outside the local economy.
  - Aruba has introduced a cap on the share of all-inclusive hotel rooms.
- Leakages through remittances:
  - Aruba's outflow of workers remittances is consistently higher than inflows, unlike a majority of other tourism-dependent Caribbean countries.
  - Outflows of remittances in Aruba are at a relatively low level of 2.8 percent of GDP.
  - There is a strong correlation between tourism exports and outflows of remittances, implying increased tourism also increases leakages through workers remittances.

*Annex X. Tourism, Growth, and the Balance of Payments (from IMF staff report).*

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_Source: https://www.imf.org/-/media/files/publications/cr/2019/1abwea2019001.pdf_