## 1abwea2021001

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### Real Sector Developments — Pre-COVID
- Real GDP growth softened to 0.4 percent in 2019; projected to firm at about 1 percent in the medium term.
- Inflation decreased to 3.6 percent at end-2019 from 4.5 percent at end-2018; projected to converge to 2 percent.
- Unemployment rate declined to 5.2 percent in 2019 despite increased labor force participation.
- Per capita real GDP in 2019 was about 14 percent below its 2007 level.
- Current account surplus of 2.5 percent of GDP in 2019 (after a deficit of 0.5 percent of GDP in 2018) driven by improved services/tourism receipts.
- Foreign reserves: stock at 30 percent of GDP and 88 percent of the ARA metric at end-2019; reserves increased to 7.5 months of next year imports at end-2019 compared to 5.3 in 2018 (import compression noted).
- External debt fell by 2.3 percentage points to 89 percent of GDP in 2019.
- Authorities implemented fiscal consolidation under the 2018 agreement with the Netherlands; turnover tax rate increased and fiscal measures began in 2019.
- Implementation of structural reforms (new growth engines, renewable energy) proceeded but slowed amid COVID-19; second phase of fiscal reform delayed.

### COVID-19 shock: impact and emergency response
- Tourism dependence and shocks:
  - Tourism direct and indirect contribution to GDP and employment estimated at around 90 percent.
  - International tourism arrivals dropped by 67 percent in 2020.
  - Stay-over tourism recovered to about 43 percent of its 2019 level as of December 2020; cruises have not resumed.
- Macroeconomic outcomes 2020:
  - Real output contracted by 25½ percent in 2020.
  - Inflation turned negative to -3.1 percent as of end-2020.
  - Unemployment rate estimated to have increased to about 14 percent in 2020.
  - Net travel receipts slumped by 54 percent during the first three quarters of 2020 versus same period in 2019; exports of goods and services contracted by 42 percent.
  - Imports compressed by 24 percent; income account improved (lower outflows of dividends, distributed profits, remittances).
  - Foreign reserves increased to 47 percent of GDP (due to drop in imports, government external financing, and central bank foreign exchange measures).
  - External debt rose to above 130 percent of GDP due to COVID-related official external borrowing.
- Emergency fiscal package (2020) — total 13.3 percent of GDP, including:
  - Temporary income support of Afl. 950/month (half of the minimum wage) to affected workers.
  - Wage subsidies to employers maintaining employment links.
  - Quarterly liquidity assistance to SMEs.
  - Financial support to the General Health Insurance (AZV) and Social Security Bank (SVB).
  - Food assistance to vulnerable households.
- Fiscal outcomes 2020:
  - Fiscal position moved from a small surplus in 2019 to a large deficit of about 17 percent of GDP in 2020 (initial 2020 budget surplus was 0.3 percent of GDP).
  - Total revenues fell by about 24 percent in 2020.
  - Central government gross debt ratio increased by 45 percentage points to about 117 percent of GDP in 2020.
- External support and central bank measures:
  - Netherlands provided three tranches of budgetary liquidity support amounting to 9.4 percent of GDP (Afl. 414 million, equivalent to US$231.2 million) in 2020 as 2-year interest-free loans; support conditional on implementing a structural reform program and establishing the Caribbean Reform and Development Body (COHO).
  - Central Bank of Aruba (CBA) measures included lowering reserve requirement from 12 to 7 percent, cutting minimum capital adequacy ratio from 16 to 14 percent, decreasing prudential liquidity ratio (PLR) from 18 to 15 percent, increasing maximum loan-to-deposit ratio from 80 to 85 percent, stopping new foreign exchange licenses related to outgoing capital transactions, and standing ready to take further measures to preserve the peg.
- Financial sector response:
  - Private credit growth fell from 6.6 percent (y/y) in 2019 to 0.5 percent (y/y) in 2020; estimated credit reached 79 percent of GDP in 2020 (compared to 58 percent in 2019), making the credit-to-GDP gap positive.

### Outlook and projections (baseline)
- Short-run:
  - 2021: Tourism arrivals expected to remain broadly the same as in 2020 (67 percent below pre-pandemic levels).
  - 2021: Real GDP growth projected about 5 percent.
  - 2022: Real GDP growth expected to accelerate to 12 percent driven by resuming tourism arrivals, returning investment, and healthy private consumption.
- Medium-term:
  - Convergence to pre-pandemic real GDP levels expected by 2024.
  - Inflation expected to return to positive territory but remain below 3 percent in the medium term.
- External sector:
  - Current account expected to remain in deep deficit in 2021, gradually improving to a small surplus by 2025 as tourism normalizes.
  - Financial account projected to record net inflows driven by continued financial support from the Netherlands through 2021 and resuming FDI in the medium term.
  - Net buildup of reserves expected in 2021 as government foreign financing outweighs persistent CA deficits; marginal reserve buildups thereafter.
  - Total external debt projected to decrease slowly to below 120 percent of GDP in the medium term (from 132 percent in 2021) but remain significantly above pre-COVID levels.
- Fiscal outlook:
  - 2021 budget deficit proposed at 18.6 percent of GDP, reflecting continued decline in tax revenues and continued expenditure support of about 11.6 percent of GDP.
  - Overall deficit expected to narrow gradually to 1 percent of GDP over the medium term as temporary measures unwind and structural reforms resume.
  - Public debt projected to peak in 2021 at about 130 percent of GDP, declining to 96 percent of GDP by 2026.
  - Fiscal adjustment needed to restore debt sustainability is sizable; partly mitigated by potential refinancing/restructuring and possible conversion of some Dutch loans into grants.

### Near-term fiscal stance, 2021 budget, and support measures
- Policy stance:
  - Near-term fiscal stance is appropriate given the still depressed economy and availability of budget financing.
  - Priority: continued provision of essential lifelines to affected households and businesses despite severely limited fiscal room.
- 2021 budgeting and measures:
  - Government budgeting a further decrease in revenues underpinned by continued economic weakness and the reduction in income and payroll taxes implemented in January as part of the previously announced structural shift from direct to indirect taxation.
  - Costly wage subsidies will be gradually phased out and replaced with a new unemployment scheme starting in April 2021.
  - Projected financing needs are fully covered, including through continued budgetary financing by the Dutch government, which will also cover external debt repayments of Afl.177 million (4 percent of GDP).
- Key fiscal support measures and amounts (2020; 2021 proposed; 2021 budget support totals) — Source: Aruba's Ministry of Finance:
  - Wage subsidy/unemployment scheme: 7.4; 6.2; 6.1
  - FASE (income support to unemployed individuals): 1.2; 0.9; 0.9
  - SMEs support: 0.7; 0.6; 0.9
  - SVB: 1.2; 0.2; 1.9
  - AZV: 2.8; 2.5; 1.8
  - Total: 13.3; 10.4; 11.6

### Medium-term consolidation, revenue measures, and debt management
- Consolidation strategy:
  - Once recovery is entrenched, priority should be return to pre-crisis fiscal path via a credible, growth-friendly and inclusive medium-term consolidation plan consistent with remaining three phases of previously announced fiscal reforms to restore debt sustainability while preserving essential social and capital spending.
  - Careful pacing required to gradually withdraw support without disrupting recovery and avoid premature tightening in 2022.
  - Prepare contingency plan if current conditions persist, including extension of some fiscal support into 2022 if additional financing can be identified.
- Revenue and equity-enhancing options:
  - Strengthen progressivity of the personal income tax (PIT) schedule and restrain ineffective PIT deductions and credits, including by taxing interest, dividends and capital gains.
  - Consider wealth taxes to reduce wealth inequality and improve progressivity.
  - Accelerate preparatory work for introduction of a VAT consistent with previous FAD advice; VAT planned for 2023.
  - Use VAT design to minimize regressivity: adopt a broad base and limit exemptions, set a threshold to keep small businesses off the tax roll, include e-commerce.
  - Exploit excises and environmental taxes to promote a healthier population and greener recovery.
- Containing the wage bill:
  - Wage bill accounts for 27 percent of primary spending.
  - Temporary cut in public salaries helped reduce spending pressures but may not be sustainable; regression analysis indicates central government employees earn 40 percent more than counterparts in the private sector (SVB 2018 data); Labor Force Survey data yield a premium on average at least 22 percent and as high as 34 percent.
  - Recommended actions: conduct a functional review to facilitate reallocation of workers and implement a communication plan to broaden awareness of public sector wage premium.
- Debt management:
  - Revise debt management strategy to reflect heightened financing risks.
  - Authorities issued Afl- and US$-denominated bonds (3.9 percent of GDP) domestically in 2020.
  - Recommendation: adopt an integrated asset-liability management strategy (with CARTAC support) to guide financing decisions and assess alternative financing implications.

### Monetary, financial sector, and reserves
- External position and reserves:
  - Aruba’s external position in 2020 was weaker than level implied by medium-term fundamentals and desirable policies.
  - REER assessed as overvalued based on IMF’s EBA-lite current account model; high uncertainty due to lack of full-year 2020 data and COVID-19 shock.
  - Foreign reserves currently adequate to preserve the peg; further buildup recommended in outer years, especially if relaxation of capital flow restrictions results in FX outflows.
- Monetary and capital flow measures:
  - Temporary monetary easing (reduction of reserve requirements) was appropriate and should be maintained unless downward pressure on international reserves materializes.
  - Halting issuance of new FX licenses in March 2020 limited outgoing capital transactions; controls introduced alongside the halt give rise to new exchange restrictions under Article VIII and should be removed as soon as possible.
  - Controls introduced include prohibition on payment/transfer of dividends to non-resident shareholders, restriction on repayment and interest payments of loans below relevant thresholds obtained after March 17, 2020, and prohibition on payment of management fees to affiliated companies.
- Banking sector soundness and macroprudential measures:
  - Relaxation of macroprudential requirements amplified loss absorption capacity and supported credit provision; temporary dividend payout restrictions applied.
  - Banking system capitalization: 2.5 times the minimum level (14 percent of risk-weighted assets).
  - Prudential liquidity: 33.7 percent (above minimum prudential ratio of 15 percent of total net assets).
  - Liquid assets cover two-thirds of short-term liabilities.
  - NPLs increased from 3.2 percent at end-2019 to 5 percent at end-2020 but remain moderate.
  - July 2020 CBA stress test indicates banking sector is highly resilient.
  - Profitability eroded: system’s ROE fell from 8.1 percent in 2019 to 3.3 percent in 2020 (2.2 percent as of end-2020).
  - Staff estimates: in 2021 NPLs could reach 10 percent assuming baseline unemployment rate of 20 percent.
  - CBA stress-tests: it would take an NPL rate of up to 25 percent of gross loans for banks’ capital to fall below regulatory minimum of 14 percent.
  - Recommendations: CBA should closely monitor NPLs, watch for liquidity risks, engage with banks for early intervention, and avoid premature tightening.

### Structural reforms, diversification, and social policy
- Diversification and Master Plan:
  - COVID-19 highlighted need to diversify economy; authorities developed “The Master Plan” with a 3-year planning horizon and 95 pilots.
  - High-impact “accelerator” projects include labor market and tax reforms, reduction of red tape, introduction of e-Government, and strengthening legislative capacity.
  - Recommended diversification toward renewable energy and ICT to contain tourism-related output volatility and create jobs.
- Tourism strategy:
  - Shift to lower density tourism models to reduce permanent scarring and environmental externalities.
  - Promote Aruba as a destination for remote work and leverage digital resources for touchless services and contact tracing.
  - Invest in healthcare infrastructure to support accreditation of healthcare facilities.
- Labor market and inclusion:
  - Female participation rate in 2019 was 60 percent compared to 70 percent for males.
  - Youth unemployment was 16 percent in 2019.
  - Reform priorities: comprehensive labor-market reform, retraining/upskilling, link education and vocational training to skill demand, and measures to boost female participation.
- Social protection reforms:
  - Replace passive income support with active labor market programs (retraining, upskilling, job search assistance) as labor market recovers.
  - Master Plan includes policies to foster women’s labor force participation via funding, micro loans, IT training, and childcare options.
- Climate and energy commitments:
  - Reduce CO2 emissions by at least 45 percent between 2010 and 2030.
  - Strive for climate neutrality by 2050.
  - Increase energy efficiency and the share of renewable energy from approximately 20 percent in 2020 to 35 percent by 2024 and 50 percent by 2030.
  - Reduce the use of heavy fuel oil for electricity production.

### Risks, scenarios, and stress tests
- Predominantly downside and exceptionally high risks centered on pandemic evolution.
- Major risks and policy responses (selected):
  - Unexpected shift in COVID-19 pandemic: Direction Down; Relative likelihood Medium; Impact High. Policy response: Expedite vaccination; leverage technology for health and safety protocols.
  - Hysteresis in the domestic economy: Direction Down; Relative likelihood High; Impact High. Policy response: Maintain social assistance programs and temporary support for firms; address employment and labor market frictions.
  - Sharp rise in risk premia: Direction Down; Relative likelihood Medium; Impact High. Policy response: Carefully calibrate withdrawal of policy support; closely monitor financial vulnerability; devise a credible fiscal consolidation plan.
  - New renewable energy projects and reopening of the Refinery: Direction Up; Relative likelihood Low; Impact Medium. Policy response: Strengthen implementation of renewable energy program; accelerate diversification.
- Fiscal stress-test scenarios (selected impacts):
  - Growth shock (one standard deviation shock, 8.6 percent to real GDP growth for two consecutive years starting in 2022) would raise public debt to 146 percent of GDP in 2023 before declining to 130 percent by 2026; GFNs during 2022–23 will exceed the benchmark of 15 percent of GDP.
  - Real interest rate shock (increase by 384bps over 2022–26): debt ratio increases by 5.5 percentage points relative to the baseline.
  - Real exchange rate shock (nominal depreciation 5 percent over 2022–26): debt ratio increases by 3.1 percentage points relative to the baseline.
  - Combined macro-fiscal shock: Debt ratio rises to 147 percent of GDP in 2026; GFNs average 19.9 percent of GDP; debt service-to-revenue ratio jumps to 76 percent.
- External debt stress tests:
  - One-time real exchange rate depreciation of 30 percent in 2021 would make external debt peak at 146.8 percent of GDP in 2021 before declining to 130.7 percent by 2026.
  - Combined shock (permanent 1/4 standard deviation shocks to real interest rate, growth rate, and current account balance) yields external debt-to-GDP ratio of 133 percent in 2026.

### Key indicators and selected projections (preserve exact figures)
- Demographics and macro:
  - Area (sq. km): 180
  - Population (thousands, 2020q3): 111.9
  - Literacy rate (percent, 2018): 97.8
  - GDP per capita (thousands of U.S. dollars, 2019): 29.9
- Real GDP (percent change): Average 1996-2019: 1.0; 2019: 0.4; 2020: -25.5; 2021: 5.0; 2022: 12.0; 2023: 7.5; 2024: 6.3; 2025: 1.6; 2026: 1.4
- CPI (average): 2019: 3.6; 2020: 3.9; 2021: -1.3; 2022: 0.1; 2023: 2.0; 2024: 3.2; 2025: 3.3; 2026: 2.7
- Fiscal (central government, percent of GDP):
  - Revenues 2019: 23.7; 2020: 24.4; 2021: 21.6; 2026: 24.6
  - Expenditures 2019: 22.9; 2020: 40.6; 2021: 39.7; 2026: 23.5
  - Overall balance 2019: 0.3; 2020: -17.0; 2021: -18.6; 2024: -1.0; 2026: 0.7
  - Gross central government debt 2019: 72.2; 2020: 117.0; 2021: 130.3; 2026: 96.2
- Savings, investment, and external:
  - Gross investment 2019: 21.1; 2020: 11.3; 2021: 11.9; 2024: 21.7
  - Current account balance (percent of GDP) 2019: 2.5; 2020: -16.3; 2021: -13.7; 2025: 0.6; 2026: 1.3
  - External debt (percent of GDP) 2019: 91.3; 2020: 89.0; 2021: 131.2; 2026: 121.1
- Balance of payments and reserves (selected):
  - Gross official reserves (millions of U.S. dollars): 2019: 299; 2020: 599; 2021: 91; 2026: 1,363
  - Gross official reserves (months of next year's imports): 2019: 5.3; 2020: 7.5; 2021: 8.6; 2026: 6.3
  - Services credits (millions of U.S. dollars): 2019: 2,431; 2020: 1,223; 2021: 1,297; 2026: 3,007
  - Tourism exports (millions of U.S. dollars): 2019: 2,094; 2020: 942; 2021: 971; 2026: 2,529
- Financial sector indicators (selected, 2020):
  - Regulatory Tier I capital to risk-weighted assets, 2020: 27.5
  - NPLs to gross loans, 2020: 5.0
  - ROA after taxes, 2020: 0.5
  - ROE after taxes, 2020: 3.3
  - Liquid assets to total assets, 2020: 33.7
  - Loans to deposits, 2020: 66.9

### Staff appraisal and policy priorities (overarching)
- Continue policy support while recovery remains tepid to avoid premature retrenchment.
- Strictly prioritize spending and mobilize revenue; target expenditure to households and businesses in immediate need and improve overall spending efficiency.
- Improve tax compliance to broaden the tax base and distribute the tax burden more fairly.
- Maintain accommodative monetary and macroprudential policies; increase foreign reserves over the medium term.
- Monitor banking sector risks closely and adopt Basel II.
- Implement comprehensive structural reforms to diversify the economy, including:
  - Shifting to lower density tourism models to reduce permanent scarring and environmental externalities.
  - Labor market reforms to foster flexibility and boost potential growth.
  - Strengthening links between education, training, and skill demand and broadening access to digital infrastructure.
  - Continue policies that tackle inequality and strengthen resilience to climate risks.
  - Advance anti-corruption and AML/CFT measures to improve the business environment.

*Source: IMF staff report — 1. Real Sector Developments (content unit 1abwea2021001).*

### 1. Real Sector Developments ____________________________________________________________________________ 30

### 1. Real Sector Developments

### Pre-COVID: A slow-paced recovery
- Real GDP growth softened to 0.4 percent in 2019; projected to firm at about 1 percent in the medium term.
- Inflation decreased to 3.6 percent at end-2019 from 4.5 percent at end-2018; projected to converge to 2 percent.
- Unemployment rate declined to 5.2 percent in 2019 despite increased labor force participation.
- Per capita real GDP in 2019 was about 14 percent below its 2007 level.
- Current account surplus of 2.5 percent of GDP in 2019 (after a deficit of 0.5 percent of GDP in 2018) driven by improved services/tourism receipts.
- Foreign reserves: stock at 30 percent of GDP and 88 percent of the ARA metric at end-2019; reserves increased to 7.5 months of next year imports at end-2019 compared to 5.3 in 2018 (import compression noted).
- External debt fell by 2.3 percentage points to 89 percent of GDP in 2019.
- Authorities implemented fiscal consolidation under the 2018 agreement with the Netherlands; turnover tax rate increased and fiscal measures began in 2019.
- Implementation of structural reforms (new growth engines, renewable energy) proceeded but slowed amid COVID-19; second phase of fiscal reform delayed.

### COVID-19: The unprecedented shock
- Aruba is highly tourism-dependent: tourism direct and indirect contribution to GDP and employment estimated at around 90 percent.
- International tourism arrivals dropped by 67 percent in 2020; stay-over tourism recovered to about 43 percent of its 2019 level as of December 2020; cruises have not resumed.
- Real output contracted by 25½ percent in 2020.
- Inflation turned negative to -3.1 percent as of end-2020.
- Unemployment rate estimated to have increased to about 14 percent in 2020.
- Net travel receipts slumped by 54 percent during the first three quarters of 2020 versus same period in 2019; exports of goods and services contracted by 42 percent.
- Imports compressed by 24 percent; income account improved (lower outflows of dividends, distributed profits, remittances).
- Despite current account deterioration, foreign reserves increased to 47 percent of GDP (due to drop in imports, government external financing, and central bank foreign exchange measures).
- External debt rose to above 130 percent of GDP due to COVID-related official external borrowing.
- Authorities approved an emergency fiscal package of 13.3 percent of GDP with targeted measures including:
  - Temporary income support of Afl. 950/month (half of the minimum wage) to affected workers.
  - Wage subsidies to employers maintaining employment links.
  - Quarterly liquidity assistance to SMEs.
  - Financial support to the General Health Insurance (AZV) and Social Security Bank (SVB).
  - Food assistance to vulnerable households.
- Fiscal consolidation planned for 2020 postponed; wage cuts of 12.6 percent for public employees and 25 percent for ministers and parliamentarians used to finance measures; savings target Afl. 5 million/month in healthcare spending by AZV.
- Fiscal position moved from a small surplus in 2019 to a large deficit of about 17 percent of GDP in 2020 (initial 2020 budget surplus was 0.3 percent of GDP).
- Total revenues fell by about 24 percent in 2020.
- Central government gross debt ratio increased by 45 percentage points to about 117 percent of GDP in 2020.
- Netherlands provided three tranches of budgetary liquidity support amounting to 9.4 percent of GDP (Afl. 414 million, equivalent to US$231.2 million) in 2020 as 2-year interest-free loans; support conditional on implementing a structural reform program and establishing the Caribbean Reform and Development Body (COHO).
- Central Bank of Aruba (CBA) measures:
  - Lowered reserve requirement on commercial bank deposits from 12 to 7 percent.
  - Cut minimum capital adequacy ratio from 16 to 14 percent.
  - Decreased prudential liquidity ratio (PLR) from 18 to 15 percent; planned increase from 18 to 20 percent for January 2021 suspended.
  - Increased maximum allowed loan-to-deposit ratio from 80 to 85 percent.
  - Stopped granting new foreign exchange licenses related to outgoing capital transactions and stood ready to take further measures to preserve the peg.
- Private credit growth fell from 6.6 percent (y/y) in 2019 to 0.5 percent (y/y) in 2020; estimated credit reached 79 percent of GDP in 2020 (compared to 58 percent in 2019), making the credit-to-GDP gap positive.

### Outlook: Protracted weakness subject to exceptional risks
- 2021 projection:
  - Tourism arrivals expected to remain broadly the same as in 2020 (67 percent below pre-pandemic levels).
  - Real GDP growth projected about 5 percent in 2021.
  - Private consumption subdued by increased debt burdens; planned replacement of costly wage subsidies with unemployment benefits likely to trigger layoffs.
- 2022 projection:
  - Real GDP growth expected to accelerate to 12 percent in 2022 driven by resuming tourism arrivals, returning investment, and healthy private consumption.
- Medium-term:
  - Convergence to pre-pandemic real GDP levels expected by 2024.
  - Inflation expected to return to positive territory but remain below 3 percent in the medium term.
- External sector:
  - Current account expected to remain in deep deficit in 2021, gradually improving to a small surplus by 2025 as tourism normalizes.
  - Financial account projected to record net inflows driven by continued financial support from the Netherlands through 2021 and resuming FDI in the medium term.
  - Net buildup of reserves expected in 2021 as government foreign financing outweighs persistent CA deficits; marginal reserve buildups thereafter.
  - Total external debt projected to decrease slowly to below 120 percent of GDP in the medium term (from 132 percent in 2021) but remain significantly above pre-COVID levels.
- Fiscal outlook:
  - 2021 budget deficit proposed at 18.6 percent of GDP, reflecting continued decline in tax revenues and continued expenditure support of about 11.6 percent of GDP.
  - Overall deficit expected to narrow gradually to 1 percent of GDP over the medium term as temporary measures unwind and structural reforms resume.
  - Public debt projected to peak in 2021 at about 130 percent of GDP, declining to 96 percent of GDP by 2026.
  - Fiscal adjustment needed to restore debt sustainability is sizable; partly mitigated by potential refinancing/restructuring and possible conversion of some Dutch loans into grants.
- Risks:
  - Predominantly downside and exceptionally high, centered on pandemic evolution.
  - Domestic risks: pandemic-related economic scarring, high implementation risks to fiscal adjustment, possible rise in risk premia exposing financial vulnerabilities and negative feedbacks across households, corporates, financials, and government.
  - Upside: faster-than-expected vaccine rollout and resumption of refinery activity could hasten recovery and medium-term growth.

### Authorities’ views
- Central Bank of Aruba (CBA) expects tourism credits to rebound more strongly in 2021H2 due to higher tourism arrivals and spending per tourist, absent significant pandemic resurgence.
- CBA expects private consumption to be negatively affected by high unemployment and subdued income, with no contribution to GDP growth in 2021.
- Ministry of Finance projects stronger growth for 2022 supported by the government’s plan to inoculate 85 percent of the population by end-June 2021.

### Near-term policy priorities: Saving livelihoods while balancing risks — A. Fiscal Policy
- COVID-related policy support measures were instrumental to preserve incomes and should not be withdrawn until the economy is self-sustainable.
- Supporting the recovery without exacerbating debt sustainability risks will require:
  - Additional financing support at favorable terms in the near term.
  - Agility to adapt policies quickly in a highly uncertain environment.

*Source: IMF staff report — 1. Real Sector Developments*

### 19.      The near-term  fiscal stance is appropriate given the still depressed economy and

### 1abwea2021001 - 19.      The near-term  fiscal stance is appropriate given the still depressed economy and

### Near-term fiscal stance and 2021 budget
- The near-term fiscal stance is appropriate given the still depressed economy and availability of budget financing.
- Priority: continued provision of essential lifelines to affected households and businesses despite severely limited fiscal room.
- For 2021:
  - The government is budgeting a further decrease in revenues underpinned by continued economic weakness and the reduction in income and payroll taxes implemented in January as part of the previously announced structural shift from direct to indirect taxation (Annex I).
  - On the expenditure side, some support will be maintained throughout the year, but costly wage subsidies will be gradually phased out and replaced with a new unemployment scheme starting in April.
  - This will allow maintaining a similar level of emergency spending on these schemes in 2021 despite the longer span of assistance provided (12 vs. 9 months) and the expected increase in the unemployment rate, which could reach 20 percent in the authorities’ projections.
  - Projected financing needs are fully covered, including through continued budgetary financing by the Dutch government, which will also cover external debt repayments of Afl.177 million (4 percent of GDP).

### Key fiscal support measures and amounts (2020 and 2021)
- Wage subsidy/unemployment scheme: 7.4; 6.2; 6.1
- FASE (income support to unemployed individuals): 1.2; 0.9; 0.9
- SMEs support: 0.7; 0.6; 0.9
- SVB: 1.2; 0.2; 1.9
- AZV: 2.8; 2.5; 1.8
- Total: 13.3; 10.4; 11.6
- Source: Aruba's Ministry of Finance.

### Fiscal prioritization and revenue mobilization
- Fiscal constraints imply strict prioritization of spending and revenue mobilization.
- Expenditure guidance:
  - Target support to households and businesses in immediate need.
  - Strive to improve the efficiency of total spending.
  - Caution: continued cuts to AZV spending amidst the pandemic risk exacerbating its human and economic toll; consider a structural reform to enhance healthcare sustainability.
- Revenue guidance:
  - Implement measures to improve tax compliance to broaden the tax base and distribute the tax burden more fairly.
  - Accelerate preparatory work for introduction of a VAT consistent with previous FAD advice to offset revenue shortfalls from reduction in direct taxes.
  - Note: tax-reducing measures were frontloaded while VAT introduction is currently planned for 2023.
- Package view: these measures are intended as one package to improve overall tax system efficiency and boost compliance.

### Medium-term consolidation and contingency planning
- Once recovery is entrenched, priority should be return to pre-crisis fiscal path.
- Need a credible, growth-friendly and inclusive medium-term consolidation plan consistent with remaining three phases of previously announced fiscal reforms to restore debt sustainability while preserving essential social and capital spending.
- Careful pacing required to gradually withdraw support without disrupting recovery and avoid premature tightening in 2022.
- Government should prepare contingency plan if current conditions persist, including extension of some fiscal support into 2022 if additional financing can be identified.

### Options to enhance revenue while protecting vulnerable groups
- Strengthen progressivity of the personal income tax (PIT) schedule and restrain ineffective PIT deductions and credits, including by taxing interest, dividends and capital gains.
- Consider wealth taxes to reduce wealth inequality and improve progressivity.
- Use VAT design to minimize regressivity, e.g.:
  - adopt a broad base and limit exemptions to allow a low uniform rate,
  - set a threshold to keep small businesses off the tax roll,
  - include e-commerce within the taxable base to cope with an increasingly digitalized economy after the pandemic.
- Exploit excises and environmental taxes to promote a healthier population and greener recovery.

### Containing the wage bill
- Wage bill accounts for 27 percent of primary spending.
- Temporary cut in public salaries helped reduce spending pressures but may not be sustainable.
- Additional and more permanent measures needed to compress the wage bill on a sustainable basis.
- 2019 FAD TA highlighted scope to lower public wages by reducing supplements and the impact of wage drift.
- Recommended actions:
  - Conduct a functional review to facilitate reallocation of workers across departments and sustain wage adjustment impact without compromising service delivery.
  - Implement a communication plan to broaden awareness of the public sector wage premium to support reform momentum.
- Evidence: regression analysis based on SVB data for 2018 (2019 FAD CD mission) indicates central government employees earn 40 percent more than counterparts in the private sector; Labor Force Survey data yielded a premium on average at least 22 percent and as high as 34 percent.

### Social safety net reform and labor market policies
- As labor market picks up, replace direct income support with active labor market programs.
- Recommended programs: retraining, upskilling, job search assistance to move workers into formal market, especially in new and expanding sectors such as digital services.
- Reform goal: shift from passive income support to active schemes that incentivize stable, formal sector employment while providing support to low earners; expected outcomes include higher labor participation, boosted productivity, fiscal savings, and greater resilience against future downturns.

### Fiscal planning framework and institutions
- Current budget preparation process is fragmented, excessively decentralized, and lacks clear prioritization mechanisms for medium-term fiscal objectives.
- Adopt a well-designed medium-term budget framework (MTBF), in line with FAD/CARTAC TA recommendations, to:
  - strengthen fiscal planning,
  - achieve multi-year fiscal discipline,
  - enhance costing of policies,
  - improve predictability of budget process.
- Requires refining consistency between annual budget and macro-fiscal aggregates.
- Ministry of Finance is working with CARTAC to better link macro and fiscal projections; once framework is strengthened, consider a formal fiscal rule to guide convergence to sustainable public debt levels.

### Debt management strategy
- Revise debt management strategy to reflect heightened financing risks.
- Authorities issued several Afl- and US$-denominated bonds (3.9 percent of GDP) domestically to meet 2020 financing needs.
- Risks:
  - Domestic financing of persistent deficits could be detrimental to private sector credit.
  - Dutch liquidity support created bunching of maturities in 2022/23, substantially increasing refinancing risks.
- Recommendation: adopt an integrated asset-liability management strategy (with CARTAC support) to guide financing decisions, desired government debt composition, and assess alternative financing implications.

### Authorities’ views (fiscal)
- Authorities reiterated commitment to comply with conditions for further Dutch government support.
- Work on introducing an MTBF has started with the 2021 budget per agreement with the Dutch government, but full implementation depends on institutional capacity and regulatory changes.
- Ministry of Finance acknowledged heightened financing risks in 2022 and 2023; repayment of loans under current terms would be challenging given high gross financing needs and could require recourse to other financing at less favorable terms.

### Monetary and financial policies — external position and reserves
- Aruba’s external position in 2020 was weaker than level implied by medium-term fundamentals and desirable policies.
- Preliminary staff assessment: REER assessed as overvalued based on IMF’s EBA-lite current account model (Annex V), with high uncertainty due to lack of full-year 2020 data and COVID-19 shock.
- Gradual normalization of tourism balance and resumption of fiscal consolidation should help close gap in medium term.
- Foreign reserves currently adequate to preserve the peg; further buildup recommended in outer years, especially if relaxation of capital flow restrictions imposed in 2020 results in FX outflows.

### Monetary policy and capital flow management
- Temporary monetary easing (precautionary reduction of banks’ reserve requirements) was appropriate and should be maintained to support recovery unless downward pressure on international reserves materializes.
- Halting issuance of new FX licenses in March 2020 limited outgoing capital transactions and constitutes a capital flow management measure (CFM); this measure should be unwound as soon as economic conditions stabilize to minimize adverse effects.
- Several controls introduced alongside the halt give rise to new exchange restrictions (ERs) under Article VIII (see Informational Annex) and should be removed as soon as possible.
- Controls introduced include:
  - prohibition on actual payment and/or transfer of dividends to non-resident shareholders, and of net income from other investment;
  - restriction on repayment and interest payments of loans below relevant thresholds obtained after March 17, 2020;
  - prohibition on payment of management fees to affiliated companies.

### Macroprudential measures and banking sector soundness
- Relaxation of macroprudential requirements (temporary reduction in minimum capital adequacy and liquidity ratios, increase in maximum loan-to-deposit ratio) amplified loss absorption capacity and supported credit provision.
- Relaxation of capital ratio accompanied by temporary dividend payout restrictions by banks and insurance companies to limit opportunistic behavior.
- Banking system capitalization: 2.5 times the minimum level (14 percent of risk-weighted assets).
- Prudential liquidity: 33.7 percent (above minimum prudential ratio of 15 percent of total net assets).
- Liquid assets cover two-thirds of short-term liabilities.
- NPLs increased from 3.2 percent at end-2019 to 5 percent at end-2020 but remain moderate.
- July 2020 CBA stress test indicates banking sector is highly resilient.
- Insurance companies and pension funds: coverage ratio above minimum requirement, but concentration risks due to locally oriented portfolios.
- Large loan concentration may reflect lack of bankable projects outside tourism.

### Risks to banking sector and recommendations
- Longer and deeper economic deterioration could force banks to use liquidity buffers; NPLs could rise significantly once fiscal support is lifted.
- Profitability eroded: system’s ROE fell from 8.1 percent in 2019 to 3.3 percent in 2020 (2.2 percent as of end-2020), reflecting cautious provisioning in line with international financial reporting standards.
- Staff estimates: in 2021 NPLs could reach 10 percent assuming baseline unemployment rate of 20 percent.
- CBA stress-tests: it would take an NPL rate of up to 25 percent of gross loans for banks’ capital to fall below regulatory minimum of 14 percent.
- CBA should closely monitor NPLs, watch for liquidity risks, engage with banks for early intervention, and avoid premature tightening that could weaken financial system.

### Financial sector oversight, AML/CFT, and digital inclusion
- CBA continued strengthening financial sector oversight: risk-based supervision implemented for credit institutions, insurance companies, and pension funds; enhanced prudential framework and market conduct oversight; moved towards adoption of Basel II and expects to implement Pillar 1 in 2021.
- Aruba improving AML/CFT framework ahead of fourth round CFATF Mutual Evaluation but additional measures needed:
  - Enhance understanding of ML/TF risks,
  - Upgrade AML/CFT ordinance in line with FATF standards,
  - Strengthen confiscation framework.
- Pandemic accelerated adoption of digital banking and payments, increasing financial inclusion, but Aruba lags high-income countries on digital and mobile financial services adoption.
- Limited access to savings accounts indicates at least half of households have no financial buffers.
- CBA developed a roadmap for strengthening digital financial inclusion by 2030.

### Authorities’ views (monetary/financial)
- CBA considering exit strategy from FX measure introduced in March 2020; plans to gradually remove it later in the year, subject to incoming data on reserve adequacy and external developments.
- Ample excess liquidity in banking sector would absorb any tightening if reserve requirement increased when measure is lifted.
- CBA notes ample capital and liquidity buffers cushion potential NPL pickup; banks’ forward-looking provisioning in line with IFRS9 explains decline in profitability.
- CBA is implementing Basel II capital framework to further strengthen regulatory framework.

### Structural reforms and diversification
- COVID-19 highlighted need to diversify economy.
- Authorities developed “The Master Plan” with a 3-year planning horizon identifying policy priorities for post-pandemic recovery and long-term resilience.
- High-impact “accelerator” projects include labor market and tax reforms, reduction of red tape, introduction of e-Government, and strengthening legislative capacity.
- Advance these reforms expeditiously while fostering activity of the Free Zone to accelerate export diversification.
- Diversification toward renewable energy and ICT recommended to contain tourism-related output volatility, provide a more stable path for equitable growth, and create job opportunities for Arubans.

*International Monetary Fund*

### 39.      Shifting to lower density tourism models would help reduce permanent scarring to the

### 1abwea2021001 - 39.      Shifting to lower density tourism models would help reduce permanent scarring to the

### Tourism strategy and near-term growth
- Tourism will remain Aruba’s main growth engine in the near-term given limited scope for immediate economic diversification.
- Policy direction:
  - Shift to lower density tourism models to reduce permanent scarring to the industry and decrease negative environment externalities.
  - Promote Aruba as a destination for remote work to reduce health risks associated with mass tourism and embed social distancing rules with positive environment externalities.
  - Leverage digital resources to support touchless service delivery, share information, enhance contact tracing, and promote digitally self-guided tourism consistent with social distancing norms.
  - Invest in healthcare infrastructure and capacity building of medical personnel to support the accreditation of healthcare facilities.

### Social protection, inequality, and climate resilience
- Pandemic response prioritized vulnerable groups through unemployment relief, support to SMEs, funding for social insurance, and food programs.
- The Master Plan includes policies to foster women’s labor force participation via dedicated funding and micro loans, IT training, and childcare options.
- Following technical advice from the World Bank, authorities are striving to develop agriculture to support food security and resilience to climate risks.
- Authorities’ energy and climate commitments:
  - Reduce CO2 emissions by at least 45 percent between 2010 and 2030.
  - Strive for climate neutrality by 2050.
  - Increase energy efficiency and the share of renewable energy from approximately 20 percent in 2020 to 35 percent by 2024 and 50 percent by 2030.
  - Reduce the use of heavy fuel oil for electricity production.
- The Refinery is negotiating contracts to convert part of the brownfield site into an LNG storing facility.

### Structural reforms and business environment
- Key reform areas:
  - Simplify and reduce regulatory and administrative burden; advance the e-Government framework.
  - Improve access to financial resources, particularly for SMEs.
  - Work with the private sector through regular dialogue to identify reforms while being mindful of related fiscal costs and contingent liabilities.
  - Governance, AML/CFT, and anti-corruption reforms to improve the business climate and anti-corruption framework.
- Recommendations:
  - Support promising exports by developing sector-specific infrastructure.
  - Accelerate introduction of a value-added tax (VAT) to offset revenue shortfalls from recent reductions in direct taxes while protecting the vulnerable and improving efficiency.

### Labor market, skills, and inclusion
- Labor market statistics and challenges:
  - Female participation rate in 2019 was 60 percent compared to 70 percent for males.
  - Youth unemployment was 16 percent in 2019.
- Reform priorities:
  - Comprehensive labor-market reform to strengthen work incentives (including for women), foster mobility, improve flexibility, and integrate migrants.
  - Reduce labor market regulation rigidities to lower unit labor costs and improve external competitiveness for export diversification.
  - Retraining and upskilling to support labor reallocation to new sectors and reduce long spells of unemployment as unskilled workers could be left behind by the move towards more technology-intensive work.
  - Link education and vocational training to skill demand to reduce the long-term impact of COVID-19 and alleviate inequalities.

### Productivity and potential growth
- Observations:
  - Both labor productivity and total factor productivity (TFP) have declined since 2000.
  - Real growth is projected to converge to a potential of about 1½ percent in the medium term (Annex VI).
- Policy actions to boost potential growth:
  - Increase secondary education enrollment and spending efficiency.
  - Invest in technology and accelerate digital financial inclusion for efficient allocation of capital.
  - Enhance labor market flexibility and reform the social safety net (¶24) to incentivize labor force participation.
  - Strengthen general infrastructure and support sector-specific infrastructure for promising exports.

### Anti-corruption, governance, and transparency
- Findings:
  - Annual surveys by the CBA indicate widespread perception of corruption in Aruba.
- Recommendations:
  - Bring anti-corruption legal framework into line with the United Nations Convention Against Corruption by establishing codes of conduct and a robust asset declaration system for senior public officials.
  - Enhance governance and capacity of the Integrity Bureau.
  - Improve coordination and capacity of law enforcement agencies to pursue corruption cases and confiscate ill-gotten proceeds.
  - Implement high standards of governance and transparency of COVID emergency spending through published audits and publication of details of successful bidding entities and their beneficial owners.
- Integrity Bureau actions:
  - Recruiting key staff and developing a legislative framework incorporating complaints and enforcement mechanisms, a code of conduct for public servants, and education of public workers about integrity enforcement and risks.
  - Developing a procurement ordinance to improve transparency and establish an e-procurement system.

### Financial sector and monetary policy
- Recent policy response:
  - Multi-pronged fiscal package provided temporary income support, wage subsidies, liquidity assistance, and tax deferral measures.
  - Central Bank (CBA) eased monetary and macroprudential policies and injected liquidity in the banking sector.
- Current assessments and guidance:
  - Non-performing loans (NPLs) were contained at 5 percent at end-2020.
  - Provisions for deteriorating asset quality are affecting profits; NPLs could rise significantly once fiscal support is lifted.
  - Banks are liquid and well-capitalized; continued CBA vigilance is appropriate.
  - Adoption of Basel II would further improve financial sector resilience.
  - Monetary and macroprudential policies should remain accommodative to support the recovery.
  - Current level of foreign reserves is adequate but should be increased over the medium term given high uncertainty about resumption of tourism receipts.
  - CBA is encouraged to remove the recently imposed capital flow management measure once economic conditions normalize.
  - Staff does not recommend approval of new exchange restrictions as conditions for approval are not met.
  - Premature tightening of macroprudential policies should be avoided to prevent adverse macro-financial feedback effects.
  - Enhance debt management strategy to mitigate refinancing risks arising from the bunching of maturity in 2022/23 when the loans received from the Netherlands come due under current terms.

### Fiscal policy and medium-term consolidation
- Short-term stance:
  - Extension of fiscal support in 2021 is appropriate; prepare a contingency plan including potential extension into 2022 if additional financing sources can be identified.
- Fiscal consolidation needs:
  - Over the medium-term, Aruba will need a substantial and sustained fiscal consolidation to restore sustainability and rebuild fiscal buffers.
  - A credible, growth-friendly and inclusive medium-term consolidation plan is essential to set public debt on a firm downward trajectory.
- Key consolidation elements:
  - Enhance the tax system to raise revenues while minimizing distortions and protecting vulnerable groups.
  - Contain the public wage bill.
  - Reform the social safety net.
- Fiscal framework improvements:
  - Adopt a well-designed medium-term budget framework for multi-year discipline.
  - Enhance debt management strategy to guide financing decisions.

### Staff appraisal — overarching recommendations
- Continue policy support while recovery remains tepid to avoid premature retrenchment.
- Strictly prioritize spending and mobilize revenue; target expenditure to households and businesses in immediate need and improve overall spending efficiency.
- Improve tax compliance to broaden the tax base and distribute the tax burden more fairly.
- Maintain accommodative monetary and macroprudential policies; increase foreign reserves over the medium term.
- Monitor banking sector risks closely and adopt Basel II.
- Implement comprehensive structural reforms to diversify the economy, including:
  - Shifting to lower density tourism models to reduce permanent scarring and environmental externalities.
  - Labor market reforms to foster flexibility and boost potential growth.
  - Strengthening links between education, training, and skill demand and broadening access to digital infrastructure.
  - Continue policies that tackle inequality and strengthen resilience to climate risks.
  - Advance anti-corruption and AML/CFT measures to improve the business environment.

*Source: Content unit 1abwea2021001*

### 55.      It is recommended that the next Article IV consultation discussions with Aruba take

### 1abwea2021001 - 55.      It is recommended that the next Article IV consultation discussions with Aruba take

### Recommendation
- It is recommended that the next Article IV consultation discussions with Aruba take place on a 24-month cycle.

### Key Economic Indicators and Projections (selected)
- Area (sq. km): 180
- Population (thousands, 2020q3): 111.9
- Literacy rate (percent, 2018): 97.8
- Population growth rate (percent, 2016-20 average): 0.5
- Percent of population below age 15 (2019): 17.2
- Nominal GDP (millions of U.S. dollars, 2019): 3,342
- GDP per capita (thousands of U.S. dollars, 2019): 29.9
- Unemployment rate (percent, 2019): 5.2
- Life expectancy at birth (years, 2018): 76.2
- Percent of population age 65+ (2019): 15.2

- Real GDP (percent change):  
  - Average 1996-2019: 1.0  
  - 2016: 0.5  
  - 2017: 2.3  
  - 2018: 1.2  
  - 2019: 0.4  
  - 2020: -25.5  
  - 2021: 5.0  
  - 2022: 12.0  
  - 2023: 7.5  
  - 2024: 6.3  
  - 2025: 1.6  
  - 2026: 1.4

- CPI (average):  
  - 2016: 2.4  
  - 2017: -0.9  
  - 2018: -1.0  
  - 2019: 3.6  
  - 2020: 3.9  
  - 2021: -1.3  
  - 2022: 0.1  
  - 2023: 2.0  
  - 2024: 3.2  
  - 2025: 3.3  
  - 2026: 2.7

### Fiscal Outlook (central government, percent of GDP)
- Revenues:  
  - Average 1996-2019: 23.1  
  - 2016: 23.7  
  - 2017: 22.0  
  - 2018: 22.6  
  - 2019: 23.7  
  - 2020: 24.4  
  - 2021: 21.6  
  - 2022: 21.7  
  - 2023: 23.7  
  - 2024: 24.0  
  - 2025: 24.4  
  - 2026: 24.6

- Expenditures:  
  - Average 1996-2019: 25.5  
  - 2016: 24.5  
  - 2017: 24.9  
  - 2018: 23.7  
  - 2019: 22.9  
  - 2020: 40.6  
  - 2021: 39.7  
  - 2022: 28.1  
  - 2023: 26.1  
  - 2024: 24.6  
  - 2025: 23.9  
  - 2026: 23.5

- Of which: capital (percent of GDP):  
  - Average 1996-2019: 1.3  
  - 2016: 0.6  
  - 2017: 0.1  
  - 2018: 0.9  
  - 2019: 0.5  
  - 2020: 0.8  
  - 2021: 0.5  
  - 2022: 0.5  
  - 2023: 0.5  
  - 2024: 0.5  
  - 2025: 0.5  
  - 2026: 0.4

- Overall balance (percent of GDP):  
  - Average 1996-2019: -2.6  
  - 2016: -1.5  
  - 2017: -3.0  
  - 2018: -2.0  
  - 2019: 0.3  
  - 2020: -17.0  
  - 2021: -18.6  
  - 2022: -6.9  
  - 2023: -2.8  
  - 2024: -1.0  
  - 2025: 0.0  
  - 2026: 0.7

- Primary balance (percent of GDP):  
  - Average 1996-2019: 0.0  
  - 2016: 2.6  
  - 2017: 1.0  
  - 2018: 1.9  
  - 2019: 4.2  
  - 2020: -11.7  
  - 2021: -13.0  
  - 2022: -0.6  
  - 2023: 3.0  
  - 2024: 4.5  
  - 2025: 5.4  
  - 2026: 5.8

- Gross central government debt (percent of GDP):  
  - Average 1996-2019: 55.2  
  - 2016: 75.4  
  - 2017: 75.8  
  - 2018: 75.0  
  - 2019: 72.2  
  - 2020: 117.0  
  - 2021: 130.3  
  - 2022: 121.4  
  - 2023: 112.7  
  - 2024: 104.0  
  - 2025: 99.9  
  - 2026: 96.2

### Savings, Investment, and External Sector (percent of GDP unless indicated)
- Gross investment:  
  - Average 1996-2019: 27.0  
  - 2016: 20.6  
  - 2017: 20.6  
  - 2018: 21.6  
  - 2019: 21.1  
  - 2020: 11.3  
  - 2021: 11.9  
  - 2022: 17.3  
  - 2023: 19.5  
  - 2024: 21.7  
  - 2025: 21.4  
  - 2026: 21.5

- External saving (percent of GDP):  
  - Average 1996-2019: 0.3  
  - 2016: -4.6  
  - 2017: -1.0  
  - 2018: 0.5  
  - 2019: -2.5  
  - 2020: 16.3  
  - 2021: 13.7  
  - 2022: 3.8  
  - 2023: 1.9  
  - 2024: 0.7  
  - 2025: -0.6  
  - 2026: -1.3

- Domestic saving (percent of GDP):  
  - Average 1996-2019: 26.7  
  - 2016: 25.1  
  - 2017: 21.5  
  - 2018: 21.1  
  - 2019: 23.7  
  - 2020: -5.0  
  - 2021: -1.7  
  - 2022: 13.5  
  - 2023: 17.7  
  - 2024: 21.0  
  - 2025: 22.0  
  - 2026: 22.8

- Current account balance (percent of GDP):  
  - Average 1996-2019: -0.3  
  - 2016: 4.6  
  - 2017: 1.0  
  - 2018: -0.5  
  - 2019: 2.5  
  - 2020: -16.3  
  - 2021: -13.7  
  - 2022: -3.8  
  - 2023: -1.9  
  - 2024: -0.7  
  - 2025: 0.6  
  - 2026: 1.3

- External debt (percent of GDP):  
  - 2016: 95.7  
  - 2017: 95.0  
  - 2018: 90.0  
  - 2019: 91.3  
  - 2020: 89.0  
  - 2021: 131.2  
  - 2022: 132.3  
  - 2023: 128.6  
  - 2024: 125.6  
  - 2025: 122.7  
  - 2026: 121.1

### Balance of Payments (selected, millions of U.S. dollars)
- Gross official reserves (millions of U.S. dollars):  
  - 2016: 606.7  
  - 2017: 937  
  - 2018: 922  
  - 2019: 299  
  - 2020: 599  
  - 2021: 91  
  - 2022: 1,151  
  - 2023: 1,189  
  - 2024: 1,239  
  - 2025: 1,293  
  - 2026: 1,363

- Gross official reserves (months of next year's imports):  
  - 2016: 2.5  
  - 2017: 5.5  
  - 2018: 4.9  
  - 2019: 5.3  
  - 2020: 7.5  
  - 2021: 8.6  
  - 2022: 7.3  
  - 2023: 6.7  
  - 2024: 6.2  
  - 2025: 6.2  
  - 2026: 6.3

- Current account balance (millions of U.S. dollars):  
  - 2016: 136  
  - 2017: 30  
  - 2018: -148  
  - 2019: 5  
  - 2020: -401  
  - 2021: -353  
  - 2022: -112  
  - 2023: -61  
  - 2024: -24  
  - 2025: 22  
  - 2026: 51

- Goods (millions of U.S. dollars):  
  - 2016: -854  
  - 2017: -989  
  - 2018: -1,037  
  - 2019: -1,073  
  - 2020: -733  
  - 2021: -750  
  - 2022: -1,006  
  - 2023: -1,137  
  - 2024: -1,276  
  - 2025: -1,357  
  - 2026: -1,429

- Services credits (millions of U.S. dollars) and tourism exports:  
  - Services credits 2016: 2,060; 2017: 2,171; 2018: 2,363; 2019: 2,431; 2020: 1,223; 2021: 1,297; 2022: 1,944; 2023: 2,310; 2024: 2,641; 2025: 2,841; 2026: 3,007  
  - Tourism exports 2016: 1,747; 2017: 1,843; 2018: 2,022; 2019: 2,094; 2020: 942; 2021: 971; 2022: 1,589; 2023: 1,924; 2024: 2,226; 2025: 2,387; 2026: 2,529

### Monetary and Financial Sector (selected)
- Net foreign assets of monetary system (millions of Aruban florins):  
  - 2016: 1,778  
  - 2017: 1,685  
  - 2018: 1,776  
  - 2019: 1,713  
  - 2020: 2,056  
  - 2021: 2,160  
  - 2022: 2,466  
  - 2023: 2,735  
  - 2024: 3,003  
  - 2025: 3,133  
  - 2026: 3,245

- Broad money (M2, millions of Aruban florins):  
  - 2016: 4,168  
  - 2017: 4,240  
  - 2018: 4,378  
  - 2019: 4,569  
  - 2020: 4,792  
  - 2021: 5,034  
  - 2022: 5,748  
  - 2023: 6,375  
  - 2024: 7,000  
  - 2025: 7,304  
  - 2026: 7,564

- Credit to private sector (percent change):  
  - 2016: 5.3  
  - 2017: 1.7  
  - 2018: 3.8  
  - 2019: 3.6  
  - 2020: 6.6  
  - 2021: 0.5  
  - 2022: 2.1  
  - 2023: 14.2  
  - 2024: 10.9  
  - 2025: 9.8  
  - 2026: 4.3

- Financial Soundness Indicators (selected, percent):  
  - Regulatory Tier I capital to risk-weighted assets, 2020: 27.5  
  - NPLs to gross loans, 2020: 5.0  
  - ROA after taxes, 2020: 0.5  
  - ROE after taxes, 2020: 3.3  
  - Liquid assets to total assets, 2020: 33.7  
  - Loans to deposits, 2020: 66.9

### Scenario / Baseline Outlook (medium-term)
- Baseline scenario projections (2016–2026) highlight:  
  - Real GDP rebounds from -25.5 percent in 2020 to 5.0 percent in 2021 and 12.0 percent in 2022, then moderates to 7.5 percent in 2023 and 6.3 percent in 2024.  
  - Overall fiscal balance deepens sharply in 2020 to -17.0 percent of GDP and -18.6 percent of GDP in 2021 before improving to -6.9 percent of GDP in 2022 and reaching a surplus of 0.7 percent of GDP in 2026.  
  - Gross central government debt rises to 130.3 percent of GDP in 2021 before declining to 96.2 percent of GDP by 2026.  
  - Current account swings from -16.3 percent of GDP in 2020 to -13.7 percent in 2021 and improves to 1.3 percent of GDP by 2026.

### Fiscal and Policy Notes / Implementation of Past Fund Advice
- Fiscal Policy recommendations and implementation status (selected):
  - Continue the fiscal consolidation plan to put public debt on a firm downward trend while creating space for growth-friendly expenditure, protecting capital spending, minimizing potential adverse effects on growth, and ensuring effective social safety nets. — Implementation status: Postponed. The fiscal consolidation planned to take place in 2020 has been appropriately postponed due to COVID-19. The remaining three phases of the planned tax reform have been put on hold but an “all in” tax reform shift from direct to indirect taxes is planned for 2023.
  - Identifying additional revenue and expenditure measures to achieve fiscal targets. Broaden the base for excises on alcohol and tobacco while increasing rates for petroleum products. — Implementation status: Postponed.
  - Introducing a value-added tax (VAT) to replace the current various indirect taxes. — Implementation status: Partial progress. An IMF TA mission was conducted in

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

### 2018. The authorities plan to introduce a VAT in  2023, in

### 1abwea2021001 - 2018. The authorities plan to introduce a VAT in  2023, in

### Fiscal reform implementation and fiscal framework
- Undertake a review of the wage bill. Status: Partial progress. An IMF TA mission was conducted in 2019.
- Reduction of the public wage bill: introduced in the Master Plan and reform package agreed with the Netherlands; no specific reform measures adopted to date besides cuts in wages of public employees, ministers and parliamentarians used to finance emergency assistance schemes (¶9).
- Develop and formalize a medium-term fiscal framework and consider adoption of a fiscal rule. Status: Partial progress. Fiscal policy formulation continues to be done one year at a time. IMF/CARTAC TA mission on strengthening fiscal planning conducted in October 2020, followed by a CARTAC TA mission on refining projection of macro and fiscal variables.
- Finalize strategy for budget financing and debt management. Status: Ongoing. CARTAC mission on debt management is in the pipeline.
- The authorities plan to introduce a VAT in 2023, in line with TA recommendations.

### Fiscal consolidation needs and debt projections
- Aruba faces high public debt that could jeopardize medium-term debt sustainability and growth prospects; fiscal accommodation for COVID-19 must be compensated by high primary surpluses over a long period.
- Gross public debt trajectory:
  - 72 percent of GDP in 2019
  - 117 percent of GDP in 2020 (estimated)
  - Peak at 130 percent of GDP in 2021
  - Gradually declining to about 96 percent of GDP by 2026
- Public debt service-to-revenue ratio: would amount to 50 percent in 2021 and remain high over the medium term.
- Historical context: debt-to-GDP increased from about 40 percent in 2008 to 75.8 percent in 2017, driven mainly by a deteriorating primary balance and successive fiscal deficits.
- Required consolidation scenario: a cumulative primary adjustment of about 15 percent of GDP, starting in 2022, will be needed to reduce the debt-to-GDP ratio to its 2019 level by 2037.
  - This implies increasing the primary surplus to 6 percent of GDP in the medium term and maintaining this level through the end of the forecasting horizon.
- Policy implication: achieving debt sustainability and restoring fiscal space will require further adjustment complemented by a comprehensive and sustained package of structural reforms; monitor implementation risks to minimize revenue shortfalls and overspending.

### Monetary and financial policies
- Maintain data-dependent monetary policy. Status: Ongoing.
  - The CBA responded to the COVID-19 shock with cuts to the reserve requirement, minimum capital adequacy ratio, and the prudential liquidity ratio to support the economy.
- Complete AML/CFT national risk assessment, update AML/CFT state ordinance, and prepare for 4th round AML/CFT assessment by CFATF. Status: Ongoing.
  - Authorities completed the AML/CFT National risk assessment and tabled an updated AML/CFT ordinance to Parliament.
  - Several working groups, led by the National AML/CFT Committee, are preparing for a 4th round of mutual evaluation by CFATF, scheduled for November 2021.

### Structural reforms and labor market
- Enhance labor market flexibility; address youth and female unemployment. Status: Ongoing.
  - More flexible labor laws are a priority in the recovery master plan and included as a condition for the loan from the Netherlands.
  - 2016 Civil Code changes already allowed employers to unilaterally modify an employment contract under certain conditions.
  - Authorities revised procedures to terminate employment contracts to shorten duration from 4 to 2 months and are currently implementing them.
  - A working group is assessing plans to replace severance pay with unemployment insurance; new legislation expected in 2021.
  - Government working on a National Action Plan for Youth Employment broadened to other demographic groups during the pandemic.
  - Departments introduced programs to (re)educate and help teenage/single mothers enter the labor force; pilot to accommodate youth in social assistance jobs; Steering committee aligning job creation with recovery masterplan.
  - 2018 modification of immigration laws helped attract more high skilled professionals; January–September 2020: country received 166 employment applications from non-residents, which were granted with exemptions.
  - District297 platform went live in 2020 to connect the Aruban diaspora and encourage return.
- Reduce costs of doing business, improve governance, diversify economy beyond tourism, bolster competitiveness, attract FDI, focus on renewable energy and energy efficiency. Status: Ongoing.
  - April 2019 economic policy 2019-2022 presented with vision to improve investment climate and identify six promising sectors.
  - Promotion plan targeting specific markets to minimize cost; promotion to begin in July 2021.
  - New website to assist entrepreneurs and guide business start and permits/licenses expected in 2021Q1.
  - Core Team Red working on mapping licensing processes to assess red tape and possibilities to digitize.
  - e-Government Road Map in implementation; interoperability platform to go live in 2021.
- Maintain a high-end tourism brand, diversify tourism base, find new tourism niches, maximize spending per visitor through high-quality services and infrastructure, strengthen tourism linkages with local economy. Status: Ongoing. Authorities began implementing a “High-Value Low-Impact” model for tourism growth pre-pandemic.
- Improve quality of public spending on education to improve outcomes. Status: Postponed.

### COVID-19 pandemic: chronology, containment, and health system
- First COVID-19 infection registered on March 13, 2020.
- Aruba had three contagion waves:
  - First wave peaked on April 6, 2020 with 69 active cases; fully contained by May 28; zero active infections until June 28.
  - Second wave (August–October) spiked on September 16 with 1630 active cases; most contagious.
  - Third wave (November–January) peaked at 624 active cases on January 13, 2021.
- Containment measures and mobility:
  - Measures included shelter-in-place, compulsory dusk-to-dawn curfew, travel restrictions, suspension of non-vital government work, closures of schools and non-essential business activities, and limits on social gatherings.
  - Daily flights’ passenger capacity remained below 200 from March 30 to May 25, 2020 when borders were closed, except for humanitarian flights.
- Reopening timeline:
  - Relaxation began on May 4, 2020 with Level 1 (max 25 persons) and progressed to Level 2 (May 18–May 31, max 50 persons) and Level 3 (June 1–June 14, max 125 persons); June 1 marked wider reopening of services.
  - Borders started gradual reopening on July 1; opened initially to Europe, Canada, Caribbean; July 10 allowed visitors from USA.
  - Airport screening: temperature checks, short interviews, flow control; rapid test at airport with result within 45 minutes for suspected cases.
  - Compulsory insurance required for all visitors to cover COVID-19 related protocols and procedures.
  - Reinstated containment measures on August 4 amid second wave; mandatory curfew restarted on August 4.
  - Second re-opening in September–October; travelers given option to take PCR test upon arrival on September 24.
  - October 22: government relaxed measures, replaced curfew with “area prohibition” in beach zones; bars/nightclubs/rum-shops remained closed.
  - November 19: Netherlands changed Aruba’s COVID-19 risk classification from “code orange” to “code yellow”.
  - All domestic and travel restrictions lifted in early December, subject to strict health and safety protocols; requirement starting in March 2021 to present health passports for travelers entering Aruba.
- Epidemiological and healthcare metrics as of March 16, 2021:
  - 8,482 infected—7.5 percent of its population (highest per capita infection rate in the Caribbean region).
  - 8,094 persons recovered.
  - 308 persons actively infected (0.27 percent of the population).
  - Hospital capacity: 207 non-ICU hospital beds and 22 ICUs. Note: Apart from the ICU, the hospital has 207 beds, including 149 regular care beds and 58 beds for the pediatrics, neonatal, maternity and obstetrics wards. The ICU unit includes 12 permanent beds and additional 10 regular nursing care beds that can be set up as ICU beds (including respiration equipment).
  - 36 hospitalized COVID-19 patients, of whom 11 are in intensive care.
  - Voluntary COVID-19 immunization began in February 2021; priority to healthcare workers, seniors, and individuals with chronic diseases; the Netherlands assisted by equipping Aruba with necessary cooling equipment.

### Impact on confidence, employment, and social outcomes
- Business and consumer confidence:
  - Business perception index (BPI) started declining in 2020Q1 driven by deterioration of future expectations; dropped further in 2020Q2-3 though future expectations improved.
  - Share of businesses planning to hire labor declined by 14.5 percent in 2020Q3 compared to 2019Q4.
  - Share of businesses expecting to cut jobs increased by 13.4 percent.
  - Consumer confidence reached a historical low of 91.8 in 2020Q3, driven by concerns about economic conditions (87 percent), government finance (84 percent), job security (72 percent), personal health (71 percent), and household finance (60 percent).
  - World Food Program survey: 80 percent of respondents reported a loss of jobs or reduced salaries.

### Banking sector resilience and risks
- Banks remained resilient and compare well regionally but risks have increased.
  - Compared to ECCU banks, Aruba banks hold more capital, have lower NPLs, and enjoy a similar return on assets.
  - Recent rise in private sector credit to GDP and NPLs points to increased balance sheet risks and requires close monitoring.
- Selected banking indicators (preserve exact figures as presented):
  - Aruba 2019: Credit to GDP 58, Capital adequacy 31.2, NPL ratio 1.3, Return on assets 8.1 (table formatting in source).
  - Aruba 2020: 79, 33.5, 5.0, 0.5, 3.3 (table formatting in source).
  - ECCU 2019: 44, 19.9, 10.1, 1.4, 19.7 (table formatting in source).
  - ECCU 2020**: 58, 21.2, 11.2, 1.1, 13.1 (table formatting in source).
  - Note: *ROA and ROE are after taxes; ** Based on 2020Q1 for NPL and 2020Q3 for other indicators.
- Credit cycle and balance sheet soundness (selected quarterly series and levels as reported):
  - Credit/GDP (%) by quarter: 2018Q4 56.3; 2019Q1 55.1; 2019Q2 56.8; 2019Q3 57.4; 2019Q4 57.5; 2020Q1 78.0; 2020Q2 79.0; 2020Q3 79.9; 2020Q4 78.9.
  - Change in credit / GDP ratio (pp, annual): 2018Q4 0.0; 2019Q1 0.8; 2019Q2 1.9; 2019Q3 1.5; 2019Q4 1.2; 2020Q1 22.9; 2020Q2 22.1; 2020Q3 22.5; 2020Q4 21.4.
  - Growth of credit / GDP (%, annual): 2018Q4 -0.1; 2019Q1 1.4; 2019Q2 3.5; 2019Q3 2.7; 2019Q4 2.1; 2020Q1 41.5; 2020Q2 39.0; 2020Q3 39.3; 2020Q4 37.1.
  - Deposit-to-loan ratio (%): 2018Q4 146.2; 2019Q1 143.9; 2019Q2 142.5; 2019Q3 137.9; 2019Q4 146.4; 2020Q1 146.6; 2020Q2 146.8; 2020Q3 143.5; 2020Q4 149.5.
  - Liquid assets to total assets (%): 2018Q4 29.8; 2019Q1 28.7; 2019Q2 27.6; 2019Q3 26.5; 2019Q4 29.3; 2020Q1 29.7; 2020Q2 32.5; 2020Q3 31; 2020Q4 33.7.
  - Minimum liquid assets to total assets (%): 2018Q4 16; 2019Q1 18; 2019Q2 18; 2019Q3 18; 2019Q4 18; 2020Q1 15; 2020Q2 15; 2020Q3 15; 2020Q4 15.
  - Capital adequacy ratio (%): 2018Q4 32.1; 2019Q1 32.4; 2019Q2 31.9; 2019Q3 33.3; 2019Q4 31; 2020Q1 31.7; 2020Q2 31.9; 2020Q3 32; 2020Q4 33.5.
  - Minimum CAR (%): 2018Q4 16; 2019Q1 16; 2019Q2 16; 2019Q3 16; 2019Q4 16; 2020Q1 14; 2020Q2 14; 2020Q3 14; 2020Q4 14.
  - ROA: 2018Q4 0.5; 2019Q1 0.5; 2019Q2 0.5; 2019Q3 0.4; 2019Q4 -0.1; 2020Q1 0.3; 2020Q2 -0.1; 2020Q3 -0.1; 2020Q4 0.4.
  - ROE: 2018Q4 2.7; 2019Q1 2.9; 2019Q2 2.9; 2019Q3 2.5; 2019Q4 -0.5; 2020Q1 2.1; 2020Q2 -0.6; 2020Q3 -0.8; 2020Q4 2.2.
  - NPL ratio: 2018Q4 3.9; 2019Q1 3.7; 2019Q2 2.9; 2019Q3 2.8; 2019Q4 3.2; 2020Q1 2.9; 2020Q2 3.7; 2020Q3 4.1; 2020Q4 5.
  - NPL ratio change (%, annual): 2018Q4 -2.5; 2019Q1 -7.5; 2019Q2 -27.5; 2019Q3 -24.3; 2019Q4 -23.1; 2020Q1 -21.6; 2020Q2 27.6; 2020Q3 46.4; 2020Q4 66.7.
- CBA stress tests indicate the banking system has sufficient capital buffers to withstand a significant increase in NPL rates, but the impact of labor market developments on asset quality needs careful monitoring.
- Regression analysis note: unemployment rate is a significant predictor of the NPL rate: a one percent increase in unemployment rate could raise the NPL rate by 0.7-1.4 percent based on the specified model (Yt = at + b1 Yt-1 + b2 U1,t + et, where Yt = NPLt/(1-NPLt) and Ut is the unemployment rate).

### Statistics and data quality
- Bridging data gaps to better inform policy decisions. Status: Ongoing. Two CARTAC missions conducted in 2019 and 2020 to improve quality of national accounts statistics.

*Prepared by IMF staff; content as presented in the source document.*

### 4.      While sizeable, the drag on growth from the envisaged fiscal consolidation should be

### 1abwea2021001 - 4.      While sizeable, the drag on growth from the envisaged fiscal consolidation should be

### Fiscal consolidation, multipliers, and social protection
- The assumed fiscal adjustment is large relative to Aruba’s historical experience and international comparison.
- Aruba’s historical data suggest small medium-term fiscal multipliers, partly due to strong “leakages” related to the open nature of the economy.
- Public infrastructure spending multipliers tend to be large in small states.
- Policy recommendations:
  - Accompany the adjustment process with an effective social safety net targeted to protect the most vulnerable.
  - Preserve public investment in critical infrastructure while ensuring its efficiency.

### Risk Assessment Matrix — summary of major risks, directions, likelihoods, impacts, and policy responses
- Unexpected shift in the COVID-19 pandemic
  - Direction: Down
  - Relative likelihood: Medium
  - Impact: High
  - Risk: Setbacks in vaccine deployment or effectiveness, new virus strains, or vaccine hesitancy continue limiting tourist arrivals, worsening output, fiscal and external balances.
  - Policy response: Expedite vaccination; leverage technology for health and safety protocols (mobility tracing apps, digital health passports, hands-free and crowding control technologies).
- Faster recovery from the pandemic or behavioral adjustment
  - Direction: Up
  - Relative likelihood: Medium
  - Impact: High
  - Policy response: Faster phase-out of COVID-19 related support measures.
- Oversupply and volatility in the oil market
  - Direction: Up
  - Relative likelihood: Medium
  - Impact: Medium
  - Note: Adoption of renewable energy and improved energy efficiency in last 5 years reduced fuel imports by half.
  - Policy response: Continue development of renewable energy and energy saving technologies.
- Intensified geopolitical tensions and security risks
  - Direction: Down
  - Relative likelihood: High
  - Impact: Medium
  - Risk: Disorderly migration from Venezuela or higher commodity prices could put further pressure on tourism and the wider economy.
  - Policy response: Diversify tourism and product markets.
- Higher frequency and severity of natural disasters related to climate change
  - Direction: Down
  - Relative likelihood: Medium
  - Impact: Low
  - Note: Aruba is outside the (frequent) hurricane zone but vulnerable to increased frequency/severity of disastrous events.
  - Policy response: Invest in resilient infrastructure; secure access to contingent credit facilities; include natural disaster clauses in new debt instruments; diversify the economy.
- Hysteresis in the domestic economy
  - Direction: Down
  - Relative likelihood: High
  - Impact: High
  - Risk: Bankruptcies, lower labor force participation, and obstacles to resource reallocation delay recovery and worsen poverty and inequality.
  - Policy response: Maintain social assistance programs and temporary support for firms; address employment and labor market frictions.
- Sharp rise in risk premia exposing financial vulnerabilities
  - Direction: Down
  - Relative likelihood: Medium
  - Impact: High
  - Risk: Higher risk premia generate debt service and refinancing difficulties for leveraged firms, households, and the government.
  - Policy response: Carefully calibrate withdrawal of policy support; closely monitor financial vulnerability; devise a credible fiscal consolidation plan.
- New renewable energy projects and reopening of the Refinery
  - Direction: Up
  - Relative likelihood: Low
  - Impact: Medium
  - Effects: Lower production costs, imports, and vulnerability to oil price volatility; investment and job gains; higher productivity and potential growth.
  - Policy response: Strengthen implementation of ongoing renewable energy program; accelerate diversification of the economy.

### External Sector Assessment (2020) — current account, REER, and reserve adequacy
- Current Account (2020)
  - Aruba is highly dependent on tourism, with tourism accounting for nearly 63 percent of GDP.
  - The current account surplus averaged 2.3 percent of GDP over the past five years pre-COVID.
  - 2020 projected current account: deficit of 16.3 percent of GDP due to near shutdown of tourism receipts; contraction of tourism-related imports and reduced income outflows partially offset the collapse.
  - Adjusted (for cycle and COVID-related temporary shock) 2020 adjusted CA: -4.0 percent of GDP.
  - Multilaterally consistent cyclically adjusted CA norm: -1.6 percent of GDP.
  - CA Gap: -2.4 percent of GDP.
  - Policy gaps contribute 9.6 percentage points to the model-estimated current account gap, driven almost entirely by large reserve accumulation in 2020, partially offset by a negative fiscal policy gap.
- Net International Investment Position and external debt (end-2019)
  - NIIP: -85.6 percent of GDP at end-2019 (about 10 percentage points stronger than end-2018 at -95.3 percent of GDP).
  - Gross external debt to GDP ratio: 89 percent of GDP at end-2019 (fell by 2.3 percentage points compared to end-2018).
- Real Effective Exchange Rate (REER)
  - REER during 2020: 2.8 percent above its 2018 average, but 1.4 below the average in 2019.
  - Using standard elasticities, EBA-lite methodology suggests a REER overvaluation of 5.7 percent by end-2020.
  - The EBA-Lite REER regression approach indicates a wider REER gap of 20.6 percent.
  - Caution: REER model has limitations in capturing recent volatility and sizable but temporary current account deficits.
- Reserve Adequacy
  - As of September 2020, international reserves: US$1,225 million, or about 50 percent of GDP (year-to-date increase of US$228 million).
  - Reserve coverage in 2020 and 2021 estimated to exceed all adequacy metrics due to substantial external support from the Netherlands.
  - Over the medium term (2023-2026), reserves are expected to fall on average to slightly below 90 percent of the risk weighted ARA metric and below the IMF’s recommended band of 100-150 percent of the risk weighted ARA metric.
  - Reserves are projected to cover over six months of next year’s imports in the near term.
  - Policy recommendation: Some reserve build-up in the outer years is advised to maintain reserve coverage and safeguard the peg; steady implementation of pro-growth structural reforms and government foreign financing of the budget deficit would support reserve accumulation.

### Growth accounting and potential output (1995–2025 outlook)
- Growth performance (1995-2019)
  - Aruba’s real GDP grew on average at 1 percent per year during 1995-2019.
  - 1995–2007: 2.3 percent average output growth.
  - 2008–2019: period of economic decline, by 0.3 percent on average.
  - Growth in all but three years (2000, 2015, and 2017) was driven by capital formation and employment growth; TFP contribution was negative.
- TFP and structural reforms
  - Persistent decline in total factor productivity (TFP) has been dragging the economy despite healthy growth in employment and the capital stock.
  - Negative TFP contribution may reflect structural impediments, measurement errors, changes in labor/capital quality, and undercoverage of the informal economy.
  - The authorities’ Master plan identifies 95 pilots to boost growth with priorities including:
    - Flexibilization of labor markets; alignment of public sector workforce legal position with private sector peers; reduction of labor costs.
    - Introduction of unemployment insurance and simplification of labor procedures.
    - Investment in education and continued training to enhance human capital quality.
    - Reduction of red tape, improvement of process efficiencies, enhancement of legislative capacity and regulatory innovation.
    - Digitalization initiatives (e-government, national digital ID, secure digital platform for data sharing, one-stop-shop for entrepreneurs).
  - If these reforms are steadily implemented, TFP is expected to reverse its negative trend and positively contribute to economic growth in 2021–2025.
- Potential output estimates
  - Potential output grew by 1 percent on average over 1995-2019.
  - Potential growth by sub-period: 2.1 percent in 1995–2007 and -0.2 percent from 2008–2019.
  - Implementation of the structural agenda is expected to bring potential growth to the average of 1.6 percent in 2021-2026.
  - The HP filter produces very similar results.

*KINGDOM OF THE NETHERLANDS—ARUBA, INTERNATIONAL MONETARY FUND*

### 5.      Finally, we estimate the pandemic impact on the potential output in the medium-term

### 5.      Finally, we estimate the pandemic impact on the potential output in the medium-term

### Pandemic impact on real output and long-term losses
- Real output returns to its 2019 level only in 2025.
- Compared to pre-pandemic projections (as of the October 2019 World Economic Outlook), Aruba’s real output losses from COVID-19 amount to Afl. 5,626 million.
- Assuming a real interest rate of 3 percent, the net present value of these output losses over the next 30 years will amount to Afl. 4,654 million, or about 135 percent of 2019 real GDP.

### Potential growth and factor decomposition (periods and contributions)
- Table of potential growth and contributions (Potential growth / Labor / Capital / TFP):
  - 1995-2007: 2.1 / 1.6 / 2.3 / -1.8
  - 2008-2019: -0.2 / 0.3 / 1.0 / -1.5
  - 1995-2019: 1.0 / 1.0 / 1.7 / -1.6
  - 2020-2026: 0.6 / 0.6 / 0.3 / -0.3
  - 2021-2026: 2.0 / 0.7 / 0.3 / 1.0

### Public debt developments and vulnerabilities
- Public debt dynamics and fiscal context:
  - Central government debt rises from 72 percent of GDP in 2019 to 117 percent in 2020, peaks in 2021 at 130 percent of GDP, and gradually declines to about 96 percent of GDP by 2026 under the baseline.
  - Gross financing needs (GFNs) are expected to remain elevated at around 14 percent of GDP over 2021–26 (general statement earlier) and, under baseline projections, peak in 2022 at 25 percent of GDP and gradually decline to an average of about 8.8 percent of GDP over 2023-26.
  - Total external debt is projected to peak at 132 percent of GDP in 2021 and gradually decrease over the medium term while remaining well above pre-COVID levels.
  - Public debt ratio significantly exceeds the emerging market debt burden benchmark of 70 percent of GDP over the projection horizon.
- 2020 shock drivers:
  - A sharp GDP contraction projected at 25.5 percent in real terms in 2020.
  - Deterioration of the primary deficit to 11.7 percent of GDP in 2020 resulted in a sharp increase in the public debt ratio to 117 percent of GDP.
- Debt profile:
  - Domestic debt accounts for about 49 percent of total gross public debt and stood at 35 percent of GDP at end-2019.
  - External debt amounted to 37 percent of GDP at end-2019.
  - Debt profile dominated by medium- and long-term maturities, which mitigates some sustainability risks.

### Baseline macroeconomic and fiscal assumptions (selected)
- From 2021, the economy projected to gradually recover and expand at 5 percent of GDP, with average annual GDP growth of 5.7 percent over the forecast horizon.
- Inflation is expected to remain low.
- Overall deficit: widened to 17 percent of GDP in 2020; expected to remain high at 18.6 percent of GDP in 2021.
- Deficit path: expected to decline over the medium-term to 1 percent of GDP by 2024 before turning positive, corresponding to a primary surplus of about 5.4 percent of GDP.
- Primary deficit projected to reach 13 percent of GDP in 2021 and gradually decline to turn positive thereafter, exceeding the debt stabilizing primary balance of 1.7 percent of GDP by 2023.

### Financing assumptions and liquidity support
- More than half of GFNs in 2021 are expected to be financed by continued liquidity support from the Dutch government, which also agreed to cover external debt repayments in 2021-22 amounting to Afl. 523 million.
- Beyond 2021, about half of GFNs are assumed to be met through domestic borrowing, with external borrowing covering the remaining part.

### Shocks and stress tests (summary)
- Debt dynamics and GFNs remain vulnerable to macroeconomic risks.
- Shocks to baseline macroeconomic variables further worsen the debt path and increase GFNs, with the debt ratio remaining well above the high-risk MAC-DSA benchmarks for emerging market economies.
- Staff simulated stress tests including a primary balance shock (description truncated in source).

*Source: STAFF REPORT FOR THE 2021 ARTICLE IV CONSULTATION DISCUSSIONS—INFORMATIONAL ANNEX (KINGDOM OF THE NETHERLANDS—ARUBA), March 31, 2021.*

### 4.9 percentage points (a half standard deviation) relative to the baseline over the  projection

### 1abwea2021001 - 4.9 percentage points (a half standard deviation) relative to the baseline over the  projection

### Fiscal stress scenarios and impacts
- Baseline projection: public debt increasing to 107 percent of GDP by 2026 (10.7 percentage points of GDP higher than in the baseline). GFNs would average 14.6 percent of GDP over the projection horizon.
- Growth shock:
  - A one standard deviation shock (8.6 percent) to real GDP growth, for two consecutive years starting in 2022, would raise public debt to 146 percent of GDP in 2023 before gradually declining to 130 percent by 2026.
  - GFNs during 2022–23 will exceed the benchmark of 15 percent of GDP for emerging economies and slightly return to below the threshold by 2026, averaging 11.5 percent of GDP.
  - Debt service would absorb about 61.5 percent of total revenues in 2026.
- Real interest rate shock:
  - Real interest rate increased by 384bps over 2022–26.
  - Debt ratio increases by 5.5 percentage points relative to the baseline.
- Real exchange rate shock:
  - Nominal exchange rate depreciates by 5 percent over 2022–26.
  - Debt ratio increases by 3.1 percentage points relative to the baseline.
- Combined macro-fiscal shock (growth, inflation, primary balance, exchange rate depreciation, increase in real interest rate):
  - Debt ratio rises to 147 percent of GDP in 2026.
  - GFNs average 19.9 percent of GDP, exceeding the benchmark of 15 percent.
  - Debt service-to-revenue ratio jumps to 76 percent, 28 percentage points higher than in the baseline.
  - Debt-to-GDP ratio enters a modest decreasing trend due to the long-term impact on debt service.

### Risk assessment and policy implications
- Heat map findings:
  - Heightened risks from debt level and high financing needs even in the baseline scenario.
  - Risks mitigated somewhat by the low share of short-term debt.
  - Fan charts reflect very high uncertainty surrounding the public debt trajectory over the medium term.
- Overall risk assessment:
  - Aruba’s debt ratio significantly exceeds the 70 percent of GDP benchmark for emerging market economies throughout the projection horizon.
  - GFNs average 14 percent of GDP and remain significantly larger than their pre-COVID-19 level.
  - Risks to debt sustainability are high but partly mitigated by the sizable share of obligations to the Dutch government and the possibility of refinancing and/or restructuring those loans, including converting some of them into grants.
  - Implementing substantial and sustained fiscal consolidation over the medium term will be necessary to put public debt on a firm downward path, with limited scope for deviations from the established consolidation path.

### External debt: levels, projections, and vulnerabilities
- Recent developments:
  - External debt estimated to have increased to 131 percent of GDP at end-2020 from 89 percent of GDP in 2019.
  - Surge triggered by a rise in central government borrowing and a drop in nominal GDP as a result of COVID-19.
  - Most external debt has long-term maturity, is denominated in U.S. dollars, and is held by the central government, private firms, and commercial banks.
- Projections and scenarios:
  - Under the baseline, external debt peaks at 132 percent of GDP in 2021 and declines gradually to about 120 percent of GDP by 2026.
  - If the government increases reliance on external borrowing, external debt may rise above the current baseline.
  - Stress test: an increase in the current account excluding interest payments by half a standard deviation in each year from 2021 onwards would raise external debt to 143.8 percent of GDP in 2026.
  - One-time real exchange rate depreciation of 30 percent in 2021 would make external debt peak at 146.8 percent of GDP in 2021 before declining to 130.7 percent of GDP by 2026.
  - Combined shock (permanent ¼ standard deviation shocks to real interest rate, growth rate, and current account balance) yields external debt-to-GDP ratio of 133 percent in 2026.

### Debt dynamics, financing needs, and selected indicators
- Public debt and financing indicators (selected figures from DSA tables and charts):
  - Nominal gross public debt: 69.9 (2019), 72.2 (2020), 117.0 (2021), 130.3 (2022), 121.4 (2023), 112.7 (2024), 103.9 (2025), 99.9 (2026), 96.2 (projection year series shown).
  - Public gross financing needs: 8.8 (2019), 4.4 (2020), 23.7 (2021), 24.6 (2022), 25.0 (2023), 11.3 (2024), 9.4 (2025), 8.1 (2026), 6.2 (projection series).
  - Net public debt: 68.9 (2019), 71.2 (2020), 115.6 (2021), 129.0 (2022), 120.2 (2023), 111.6 (2024), 102.9 (2025), 98.9 (2026), 95.2 (projection series).
  - Real GDP growth (percent): 0.8 (2019), 0.4 (2020), -25.5 (2021), 5.0 (2022), 12.0 (2023), 7.5 (2024), 6.3 (2025), 1.6 (2026), 1.4 (projection series).
  - Inflation (GDP deflator, percent): 1.8 (2019), 3.9 (2020), -1.3 (2021), 0.1 (2022), 2.0 (2023), 3.2 (2024), 3.3 (2025), 2.7 (2026), 2.1 (projection series).
  - Effective interest rate (percent): 5.4 (2019), 5.3 (2020), 5.4 (2021), 5.0 (2022), 5.5 (2023), 5.4 (2024), 5.3 (2025), 5.4 (2026), 5.3 (projection series).
  - Change in gross public sector debt (cumulative): 2.9 (2019), -2.8 (2020), 44.8 (2021), 13.4 (2022), -8.9 (2023), -8.7 (2024), -8.8 (2025), -4.0 (2026), -3.8 (projection series), cumulative -20.8.
  - Identified debt-creating flows (cumulative): 2.4 (2019), -3.5 (2020), 43.0 (2021), 12.9 (2022), -9.3 (2023), -9.1 (2024), -9.1 (2025), -4.3 (2026), -4.1 (projection series), cumulative -23.0.
  - Primary deficit: 0.9 (2019), -4.2 (2020), 11.7 (2021), 13.0 (2022), 0.6 (2023), -3.0 (2024), -4.5 (2025), -5.4 (2026), -5.8 (projection series), cumulative -5.1.
  - Primary (noninterest) revenue and grants: 23.1 (2019), 23.7 (2020), 24.4 (2021), 21.6 (2022), 21.7 (2023), 23.7 (2024), 24.0 (2025), 24.4 (2026), 24.6 (projection series), cumulative 140.0.
  - Primary (noninterest) expenditure: 24.0 (2019), 19.6 (2020), 36.0 (2021), 34.6 (2022), 22.3 (2023), 20.6 (2024), 19.5 (2025), 19.1 (2026), 18.8 (projection series), cumulative 134.9.
- External debt and dynamics (selected figures):
  - External debt-to-GDP: 101.3 (2014), 94.3 (2015), 95.0 (2016), 90.0 (2017), 91.3 (2018), 89.0 (2019), 131.2 (2020), 132.3 (2021), 128.6 (2022), 125.6 (2023), 122.7 (2024), 121.1 (2025), 119.7 (2026).
  - Debt-stabilizing non-interest current account: -0.4 (value shown as debt-stabilizing).
  - Change in external debt (selected): 42.1 (2020), 1.1 (2021), -3.6 (2022), -3.1 (2023), -2.9 (2024), -1.6 (2025), -1.4 (2026).
  - External debt-to-exports ratio (in percent): 123.0 (2014), 114.3 (2015), 120.9 (2016), 120.6 (2017), 114.4 (2018), 116.1 (2019), 243.1 (2020), 243.8 (2021), 184.8 (2022), 169.8 (2023), 160.1 (2024), 153.7 (2025), 148.9 (2026).
  - Gross external financing need (in billions of US dollars): 1.0 (2014), 0.7 (2015), 0.7 (2016), 0.7 (2017), 0.8 (2018), 0.7 (2019), 1.2 (2020), 1.2 (2021), 1.1 (2022), 1.1 (2023), 1.2 (2024), 1.2 (2025), 1.2 (2026).
  - Gross external financing need (in percent of GDP): 36.2 (2014), 24.4 (2015), 22.4 (2016), 24.2 (2017), 24.4 (2018), 20.0 (2019), 50.1 (2020), 48.0 (2021), 36.7 (2022), 34.2 (2023), 32.3 (2024), 31.1 (2025), 30.0 (2026).

### Stress-test methodology notes (selected)
- Real interest rate shock defined as increase by the difference between the average real interest rate level over projection and maximum real historical level.
- External debt (gross, public and private) includes government, central bank, commercial banks, other sectors, and intercompany lending.
- Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and current account balance in some combined shock scenarios.
- One-time real depreciation of 30 percent occurs in 2021 for the real depreciation shock scenario.

### Supplementary developments (staff report, April 12, 2021)
- COVID-19 context:
  - One year into the pandemic Aruba enduring its fourth wave; active cases about 0.5 percent of the population.
  - Total infection rate (including visitors) reached 8.6 percent.
  - Vaccinations: almost 20 percent of the population vaccinated, about 9 percent having received the second dose.
- Fiscal support and political developments:
  - On March 29, the Dutch government approved the fifth tranche of budgetary financial support amounting to about 5 percent of GDP (Afl. 237 million) in the form of 2-year interest-free loans.
  - The Aruban government resigned on March 30; early elections scheduled for June 25; incumbent government to remain in caretaking status without significant policy changes.
  - The Netherlands stated that cooperation on financial support and other issues will not change due to the resignation.
- Staff appraisal:
  - Fifth tranche of financial support ensures undisrupted provision of public services and emergency fiscal support in Q2.
  - Despite increased uncertainty, continuity of previously announced policies and continued cooperation with the Netherlands do not alter the thrust of staff analysis and appraisal.

*Source: IMF staff report and accompanying DSA tables and figures (supplementary information, prepared by Western Hemisphere Department, April 12, 2021).*

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_Source: https://www.imf.org/-/media/files/publications/cr/2021/english/1abwea2021001.pdf_