## tarea2025030-print-pdf ## Source details **Canonical URL:** [tarea2025030-print-pdf](https://www.imf.org/-/media/files/publications/tar/2025/english/tarea2025030-print-pdf.pdf) ## Other formats - [Markdown version](/-/media/files/publications/tar/2025/english/tarea2025030-print-pdf.pdf.md) - [Structured JSON version](/-/media/files/publications/tar/2025/english/tarea2025030-print-pdf.pdf.json) --- ### Mission background, stakeholders, and objectives - Request from Aruba’s Minister of Finance and Culture, Mrs. Xiomara Maduro, in June 2024. - Virtual engagements: August 29 until November 1, 2024; in-person mission: November 5-12, 2024. - Mission team: Mmes. Lesley Fisher (CARTAC) and Sophia Whyte-Givans (FAD); Messrs. Marcos Poplawski-Ribeiro (head) and Ervin Prifti (both from FAD). - Additional IMF support: Mr. Marco Arena, Mrs. Olga Bespalova, Mrs. Shelley Li, Mrs. Viviane Passarani. - Presentations and meetings with senior Aruban and Kingdom of the Netherlands officials and domestic institutions (Prime Minister, Governor, Minister of Finance, Ministry of Finance officials, Central Bank staff, CAft, Aruba Tourism Authority, Aruba Bankers Association, Budget Commission of Parliament; virtual coordination with Dutch drafting/negotiation team). - Mission objectives: - Support design of a new fiscal rule for Aruba. - Enhance public debt sustainability and integrate a new law as part of a Protocol with the Kingdom of the Netherlands. ### Executive summary — key findings and context - Fiscal vulnerability and debt history: - Central government debt rose by more than 30 percentage points of GDP since the GFC; debt in 2019 was above 70 percent of GDP. - COVID‑19 led to gross central government debt reaching 112.3 percent of GDP in 2020. - Post‑2020 debt fell below 80 percent of GDP in 2023 through fiscal tightening and a revised fiscal rule targeting a minimum annual overall surplus of 1 percent of GDP and reducing public debt to 50 percent of GDP by 2040. - Two primary objectives under discussion for a new Consensus Kingdom Act: - Reformulate Aruba's fiscal rules and introduce a preferential capital loans facility. - Restructure the Dutch liquidity support loan by reducing the interest rate to below 3.5 percent and refinance part of Aruba’s external debt. - IMF CD mission supports design of fiscal rules and PFM improvements to enhance credibility. ### Main policy recommendations (high-level) - Simplify fiscal rules: establish only one or two fiscal rules; remove wage bill ceiling and windfall allocation provisions. - Set a central government debt anchor at 50 percent of GDP, targeted to be achieved by 2035. - Current constraint: debt level of 70.8 percent of GDP (end-2024 projection). - Operational rule options: - Primary balance rule: simulations indicate required target primary surplus between 3.1 and 3.7 percent of GDP to reach the 50 percent anchor by 2035 depending on convergence profile. - Expenditure rule: alternative that limits primary expenditure growth; advantageous for budget and cash management though may require higher fiscal effort. - Fiscal rule design elements: - Well-defined escape clauses for extraordinary circumstances. - Clear correction mechanism to address deviations. - Establish a national fiscal council. - Strengthen PFM and MTFF anchored by the debt target. - Improve transparency, publish budget and fiscal process documents, and strengthen Directorate of Finance capacity. ### Responsibilities and timelines (selected) - Ensure consistency between operational targets and the medium-term debt anchor — MoF — Short Term. - Establish a correction mechanism — MoF — Short Term. - Enhance MTFF with binding aggregate and individual fiscal ceilings — FPB, Treasury, DOF, Tax Department — Short Term. - Clarify effective date for transitional fiscal rules provisions — Legal Department, DOF — Short term. - Enshrine fiscal transparency on DoF website — Legal Department, FPB, DOF — Medium Term. - Strengthen fiscal risk analysis and produce a comprehensive fiscal risk statement — FPB, Treasury, DOF — Short Term. - Introduce a home-grown fiscal council — DOF, Legal Department, Parliament — Medium Term. - Address backlog in annual financial statements, audit, and national accounts up to 2024 — DOF, Court of Audit, CBS, CAD — Short Term. - Maintain annual financial statements and national accounts updated from 2024 onwards — DOF, Court of Audit, CAD, CBS — Short Term. - Introduce a contingency reserve and explore contingent financing/parametric insurance (CCRIF SPC) — FPB, Treasury, DOF — Medium Term. - Short-term defined as 12 months; Medium-term defined as 24 months. ### Debt simulations — methodology and core assumptions - Stochastic simulation framework using annual data 1996–2023; 1,000 stochastic paths drawn from estimated joint shock distribution. - Primary balances via fiscal reaction function estimated for emerging market economies. - Three explicit simulation assumptions: - Augmentation of public debt from contingent liabilities of 4 percent of GDP accumulated over the next six years (stock-flow adjustments ~0.67 percent of GDP per year). - Ratio of foreign-to-total debt set at 58.8 percent. - 5-year moving average of primary balances constrained not to exceed 5 percent of GDP. - Climate-change risks excluded from simulations. - Analysis conducted at the Central Government level. ### Debt simulation findings and probabilities - Estimated medium-term debt anchor: around 50 percent of GDP. - Starting from anchor (~50 percent), high probability of remaining below 70 percent debt limit through 2031 under sizable but plausible shocks; median trajectory stable then declines by end of six years. - Starting from actual level 70.8 percent of GDP (end-2024 projection): - Median trajectory reaches 62 percent of GDP by 2031. - Approximately a 65 percent chance debt-to-GDP remains below 70 percent in 2031 (starting from 70.8 percent with baseline assumptions). - Determinants of slow decline: r>g and high weight of interest payments. - Sensitivity to fiscal stance: - Reducing the primary-balance average path from 5 percent to 3 percent of GDP lowers probability of remaining below 70 percent by 10 percentage points (from 65 percent to 55 percent in the baseline starting-from-current-level scenario). ### Table 2 (selected entries summarized) - Initial Debt Level 46.5 (anchor); Maximum Primary Surplus on a 5-year average = 3; Average Primary Balance over 2009-19 = -0.5; Probability under debt upper limits: 50 -> 65; 70 -> 89. - Initial Debt Level 50.4 (anchor); Maximum Primary Surplus on a 5-year average = 5 (baseline); Average Primary Balance over 2009-19 = -0.5; Probability under debt upper limits: 50 -> 69; 70 -> 90. - Initial Debt Level 70.8 (current); Maximum Primary Surplus on a 5-year average = 3; Average Primary Balance over 2009-19 = -0.5; Probability under debt upper limits: 50 -> 18; 70 -> 55. - Initial Debt Level 70.8 (current); Maximum Primary Surplus on a 5-year average = 5 (baseline); Average Primary Balance over 2009-19 = -0.5; Probability under debt upper limits: 50 -> 28; 70 -> 65. ### Deterministic primary-balance exercises and calibration - Simplified law of motion: dt = ((1 + i*)/(1 + l*)) dt-1 − pbt, with i* = 6.5 percent and l* = 3.4 percent. Initial debt = 70.8 percent of GDP. Target debt = 50 percent of GDP. - IMF projection-based primary-balance path: - Primary balance: 6.4 percent of GDP in 2024; 5.7 percent of GDP in 2025; converging to 4.3 percent of GDP by 2029. - Under this path, debt ratio reaches 50.1 percent by 2031. - Required primary balances to achieve anchor by 2035 (depending on adjustment duration): - One-shot / 1-year adjustment: required primary balance up to 3.7 percent of GDP. - 3-year adjustment: required primary balance within the 3.7–3.1 percent of GDP range. - 5-year adjustment: required primary balance down to 3.1 percent of GDP. - Corresponding overall balances range between -0.6 percent of GDP and -0.1 percent of GDP depending on adjustment period. - Importance of pre-specified correction mechanisms to compensate undershoots. ### Correction mechanisms and escape clauses - Two types: - Ad hoc correction: recalibration using updated starting values or extended horizon. - Correction mechanism: pre-specified automatic adjustment (e.g., cut real primary expenditure by 1 percent of GDP if dt-1 > dt-2). - Five recommended design elements for escape clauses: - Clear definition of fiscal shocks in objective/verifiable terms. - Validation procedure for triggering escape clause. - Competent certifier body with capacity to evaluate and extend suspension. - Regular reporting during suspension outlining return path. - Sunset clause for expiration of suspension. - Jamaica example: Auditor-General validation criterion of fiscal impact ≥ 1.5 percent of GDP used in escape clause activation. ### Expenditure-rule rationale, simulations, and outcomes - Advantages of expenditure rules: - Allow automatic stabilizers to function when expenditure target is a cap tied to potential GDP or long-term growth. - Permit revenue fluctuations without forcing immediate spending adjustments. - Simpler monitoring and enforcement focused on growth rate of government spending. - Three simulated expenditure-rule types: 1. Convert primary balance rule into an expenditure rule converging to 50 percent debt by 2035. 2. Ad hoc cap on real and nominal primary expenditure growth (e.g., nominal growth limited to inflation, real constant). 3. Expenditure rule with built-in correction mechanism (e.g., cut primary expenditure by 1 percent of GDP if debt increased prior year). - Illustrative constant-real-expenditure rule implies higher fiscal effort and steeper debt decline than baseline paths to 50 percent by 2035. - Effectiveness depends on accuracy/volatility of revenue and GDP projections; Aruba’s revenues largely tourism-dependent and thus volatile. - Recommendation: realistic and regularly updated revenue forecasts; recalibrate expenditure rules if revenues persistently disappoint. ### Legal framework, fiscal rule coverage, and supervision - Aruba’s legal layers: Charter of the Kingdom; Aruban Constitution; National Ordinances/laws. - Key PFM laws: Accountability Law of 1989 and Financial Supervision Law (LAft) of 2015 (amended 2023). - LAft features: - Article 14 operational rule; 2018 Protocol targets and 2023 amendments introduced minimum fiscal surplus 1 percent of GDP from 2023, public wage bill ≤ 10 percent of GDP in 2027, debt-to-GDP ≤ 50 percent in 2040. - CAft monitors compliance and advises Council of Ministers of the Kingdom. - LAft defines collective sector coverage; collective sector includes SVB and AZV per GFS Manual 2014. - Identified inconsistencies between Accountability Act (1989) and LAft; recommendation to consolidate or repeal and replace. ### PFM pre-requisites and institutional recommendations - Operational and institutional priorities: - Enhance MTFF and adopt binding aggregate and individual fiscal ceilings. - Strengthen fiscal risk analysis and produce comprehensive fiscal risk statement. - Establish Cash Management Committee and regular fiscal policy meetings. - Improve transparency by publishing all budget and fiscal reports on MoF website. - Integrate tax policy and revenue collection strategies to adhere to fiscal rule. - Address AFS, audit, and national accounts backlog up to 2024; maintain from 2024 onwards. - Introduce contingency reserve and explore contingent financing/parametric insurance (CCRIF SPC). - Conduct comprehensive gap assessment for capacity to implement new fiscal rules. - Legal recommendations: - Enact new GOA PFM Law and legislate the MTFF. - Make greater use of State Decrees for operational flexibility. - Improve escape clause design in supervision legislation and successor PFM Law. - Introduce home-grown fiscal council and abandon the current definition of “windfalls”. - Clarify transitional provisions and effective dates for coverage and implementation. - Transition and sequencing: - Implement transitional period between adoption and implementation to allow capacity building and consolidation of coverage. - Align implementation with budget cycle and accounting reforms. - Use State Decrees for operational measures; avoid hardwiring complexity into law. ### MTFF, forecasting, and staffing gaps - MTFF status: "very embryonic"; MTBF exists with 4-year forecasts but no credible MTFF guided by debt-to-GDP anchor. - Budget and Fiscal Policy Division understaffed: "just one of its members responsible for technical forecasting" — recommendation to add "at least one more economist." - Forecast practices and models: - ATA’s Tourism Impact Model: historical data from "1986"; assumption that "a 1 percent increase in tourism results in 0.6 percent growth in nominal GDP." - MARUBA model limited by national accounts data last available "2019"; planned rebasing potentially in "2025". - Forecast reconciliation absent; recommendation to reconcile GDP, debt, revenue, expenditure, fiscal balance. - Revenue forecasting misalignment: Tax Department 2-year forecasts vs Budget and Fiscal Affairs Unit 4-year forecasts; recommendation for consultation and policy directive. ### Fiscal risk, SOEs, contingency reserves, and transparency - Fiscal risk assessment at aggregate level; recommendation to adopt likelihood-by-severity matrix (5x5 Likert scale 1–5). - SOE coverage and risks: - SOE Health-check Tool evaluated "32 entities" for "2017–2022". - "Forty-two percent" of financial statements missing for 2017–2022; for "2019–2022" missing was "59.1". - SOE fiscal risks not included in budgetary risks; SOEs can borrow without Minister of Finance approval; recommendation to legislate oversight, standardize accounting, require timely reporting, and consider reintegration of some SOEs. - Contingency reserve guidance: - Contingency percentage range suggested "between 1 and 5 percent" of the budget. - Contingency fund access rules and triggering criteria should be specified; Article 2(4) of Accountability Law allows exigent allocations but lacks immediacy. - Explore multilateral contingent financing and CCRIF SPC subscription. - Fiscal transparency and reporting compliance: - Quarterly implementation/execution reports required and generally produced. - Annual financial statements backlog: latest audited annual financial statement is fiscal year "2019"; AFS for "2020" submitted for audit; AFS for "2021" not completed at mission time. - Certification deadlines: Certified annual financial statements to be submitted "by August 31" (Accountability Law Article 45); CBS reporting deadline "September 1" (GOA 2015; Article 22.1). - Recommendation: use cash basis for fiscal-rule reporting until accrual capacity is established; configure IFMIS accordingly. ### Institutional capacity and recommended sequencing - Significant human resource capacity risk; reliance on consultants unsustainable. - Priority areas: attract and upskill staff; invest in ICT and IFMIS with phased implementation; institutionalize knowledge via manuals and SOPs. - Conduct comprehensive gap analysis to inform capacity development plan and transitional provisions; sequence reforms parallel to capacity building. ### Key statistics and dates (extracted) - Debt peaks and levels: - Central government debt in 2019: around 70 percent of GDP. - Gross central government debt in 2020: 112.3 percent of GDP. - Debt level: 70.8 percent of GDP (end-2024 projection). - Target debt anchor: 50 percent of GDP (aimed by 2035 per recommendation; LAft provision targeted 50 percent by 2040). - Simulation and parameter values: - Contingent liabilities augmentation: 4 percent of GDP over 6 years (~0.67 percent of GDP per year). - Ratio foreign-to-total debt: 58.8 percent. - Maximum 5-year average primary balance capped at 5 percent of GDP in baseline. - Deterministic exercise parameters: i* = 6.5 percent; l* = 3.4 percent. - IMF primary balance path: 6.4 percent of GDP in 2024; 5.7 percent of GDP in 2025; converging to 4.3 percent of GDP by 2029; debt reaches 50.1 percent by 2031 under this path. - Legal and reporting dates: - CAft must receive approved budget no later than December 15 each year. - Fiscal year: January 1 to December 31. - Minister compiles reports within two months and submits to the Court of Audit by June 1 (Accountability Law procedures). - Court of Audit submits report within twelve weeks or by September 1. - CAD fully compliant audit expected for fiscal year "2026". - Ministry of Interior Affairs of the Kingdom indicated "May 1, 2025" as date for the new proposal (separate from implementation date). *IMF staff analyses.* ### PREFACE _______________________________________________________________________ 7 ### PREFACE ### Mission background and composition - Request from Aruba’s Minister of Finance and Culture, Mrs. Xiomara Maduro, in June 2024. - Virtual engagements from August 29 until November 1, 2024; in-person mission from November 5-12, 2024. - Mission team: Mmes. Lesley Fisher (CARTAC) and Sophia Whyte-Givans (FAD); Messrs. Marcos Poplawski-Ribeiro (head) and Ervin Prifti (both from FAD). - Additional IMF support: Mr. Marco Arena (IMF Mission Chief for Aruba), Mrs. Olga Bespalova (IMF Desk for Aruba), Mrs. Shelley Li (research assistant), Mrs. Viviane Passarani (FAD). ### Stakeholder engagements - Presentations to: Prime Minister Her Excellency Ms. Evelyn Wever-Croes; Governor His Excellency J.A. Alfonso Boekhoudt; Minister of Finance and Culture. - Meetings with Ministry of Finance officials: Mr. Nilo Swaen; Mrs. Mildred G.M. Schwengle; Mr. Derrick Werleman; Mrs. Jo-Ann Kock; Mrs. Yshela Geerman; Mr. Louis Paris. - Meetings with Central Bank of Aruba: Mr. Prakash Mungra; Mr. Ryan R. Peterson; Mrs. Miriam Gonzalez; Mr. Giancarlo Croes. - Meetings with Ministry of General Affairs legal staff: Mr. George Croes; Mrs. Jancis Tromp; Mrs. Mariska Koolman. - Engagements with Ministry of Tourism, Boards of financial supervision (CAft), Aruba Tourism Authority, Aruba Bankers Association. - Hearing with Budget Commission of Aruba’s Parliament, including Mr. Miguel Mansur. - Virtual coordination with Dutch drafting/negotiation team: Mrs. Inge Mulders and other representatives of the Ministry of Internal and Kingdom Affairs of the Netherlands and Ministry of Finance of the Netherlands. ### Mission objectives - Support design of a new fiscal rule for Aruba. - Enhance public debt sustainability and integrate a new law as part of a Protocol with the Kingdom of the Netherlands. ### Acknowledgements - The mission expresses appreciation for cooperation from Aruban and Netherlands authorities and IMF support staff listed above. --- ### Executive Summary — Key findings and context - Aruba faces economic vulnerabilities due to reliance on tourism and external factors; vulnerabilities intensified in decade after the 2008 Global Financial Crisis. - Central government debt rose by more than 30 percentage points of GDP in the decade after 2008, with debt in 2019 above 70 percent of GDP. - COVID‑19 led to gross central government debt reaching 112.3 percent of GDP in 2020. - Post‑2020 reduction in public debt driven by fiscal tightening and a revised fiscal rule targeting a minimum annual overall surplus of 1 percent of GDP and reducing public debt to 50 percent of GDP by 2040. - Two primary objectives under discussion for a new Consensus Kingdom Act: - Reformulate Aruba's fiscal rules and introduce a preferential capital loans facility. - Restructure the Dutch liquidity support loan by reducing the interest rate to below 3.5 percent and refinance part of Aruba’s external debt. - IMF CD mission requested to support design of new fiscal rules and PFM improvements to enhance credibility of Aruba’s fiscal framework. ### Main policy recommendations and analytical conclusions - Simplify existing fiscal rules; establish only one or two fiscal rules and remove provisions related to the wage bill ceiling and allocation of windfall revenues. - Recommend a central government debt anchor set at 50 percent of GDP, targeted to be achieved within a decade by 2035. - Current economy constrained by a debt level of 70.8 percent of GDP. - Continued fiscal efforts per IMF's 2024 baseline projections are crucial to sustain debt reduction toward the anchor. - Extending the timeline beyond 2035 increases uncertainty given risks from climate change, demographic shifts, and PFM capacity delays. - Operational rule options analyzed: - Primary balance rules: baseline simulations suggest a target primary surplus between 3.1 and 3.7 percent of GDP, depending on the timeline for achieving the debt anchor (2035) and the convergence duration toward the fixed primary surplus target. - Expenditure rules: an alternative that limits expenditures (the fiscal component most directly managed through budget and cash management). A primary balance rule has the advantage of incentivizing revenue collection and coordination across Ministry of Finance departments. - Fiscal rule design elements recommended: - Well-defined escape clauses for extraordinary circumstances. - A clear correction mechanism to address deviations from rule limits. - Establishment of a national fiscal council that could come into effect in the coming months, or once the debt anchor is achieved and certain Kingdom Act provisions lapse. - Strengthen Medium-Term Fiscal Framework (MTFF) anchored by the debt target to align short-term budgets with long-term objectives. - Assess and strengthen institutional capacity of the Directorate of Finance for effective implementation of the fiscal rule. - Review legal framework and establish transitional arrangements aligned with the budget cycle and PFM requirements. - Enhance transparency and publication of budget and fiscal process documents to improve credibility with creditors and reduce borrowing costs. --- ### Recommendations — responsibilities and timelines (selected) - Ensure consistency between operational targets of the fiscal rule and the medium-term debt anchor — MoF — Short Term. - Establish a sound correction mechanism to guide transition/return to fiscal rule targets in case of temporary deviations — MoF — Short Term. - Enhance the MTFF, including by adopting binding aggregate and individual fiscal ceilings — FPB, Treasury, DOF, Tax Department — Short Term. - Clarify effective date for transitional fiscal rules provisions in legal framework (coverage of general government and public sector) — Legal Department, DOF — Short term. - Enshrine fiscal transparency for easy and direct public access on DoF website — Legal Department, FPB, DOF — Medium Term. - Strengthen fiscal risk analysis and produce a more comprehensive fiscal risk statement — FPB, Treasury, DOF — Short Term. - Make greater use of State Decrees to innovate and allow flexibility to adapt to changes — Legal Department, DOF — Short Term. - Introduce a home-grown fiscal council — DOF, Legal Department, Parliament — Medium Term. - Improve transparency by reporting on performance against fiscal rule and publishing all budget and fiscal reports on MoF website — FPB, DOF, Court of Audit — Short Term. - Integrate tax policy and revenue collection strategies to adhere to the fiscal rule — Tax Department, FPB, DOF — Short Term. - Address backlog in annual financial statements, audit, and national accounts up to 2024 — DOF, Court of Audit, CBS, CAD — Short Term. - Maintain annual financial statements and annual national accounts updated from 2024 onwards — DOF, Court of Audit, CAD, CBS — Short Term. - Introduce a contingency reserve to address fiscal shocks — FPB, Treasury, DOF, Legal Department — Short Term. - Explore contingent financing instruments and parametric insurance with multilaterals and CCRIF SPC — FPB, Treasury, DOF — Medium Term. - Improve coordination and reinforce liquidity management by establishing a cash management committee and regular fiscal policy meetings — Treasury, FPB, DOF — Medium Term. - Conduct a comprehensive gap assessment vis-à-vis capacity to implement the new fiscal rules framework — DOF, Department of Human Resources — Medium Term. Notes: - Acronyms of entities are listed in the report’s abbreviations. - Short-term defined as a horizon of 12 months; Medium-term defined as a horizon of 24 months. *IMF staff analyses.* ### 1. In the decade following the global financial crisis (GFC), Aruba's central government debt ### tarea2025030-print-pdf - 1. In the decade following the global financial crisis (GFC), Aruba's central government debt ### Background and recent debt evolution - In the decade following the global financial crisis (GFC), Aruba's central government debt steadily increased, remaining at around 70 percent of GDP in 2019. - The rise in public debt exceeded 30 percentage points of GDP since the GFC and until 2019 and is attributed to a volatile primary balance and growing cost of debt servicing. - The COVID-19 pandemic led to a peak public debt of 112.3 percent of GDP in 2020, driven by low revenue mobilization, heightened spending needs, and a dramatic contraction in GDP. - With a recovery in tourism and reduced pandemic-related expenditures since 2021, the debt-to-GDP ratio fell below 80 percent in 2023 through enhanced revenue measures and expenditure controls. ### Fiscal framework, supervisory arrangements, and reforms - Aruba agreed with the Netherlands on a protocol of financial supervision under the Charter for the Kingdom (Statuut voor het Koninkrijk der Nederlanden), leading to reforms to fiscal rules in 2015, with further adjustments in 2018 and 2023. - Key elements of LAft (National Ordinance Aruba Temporary Financial Supervision) and subsequent protocols: - Operational rule established by Article 14 of the LAft; initial 4-year overall balance trajectory for 2015–2018 set at -3.7, -2, -0.5, and 0.5 percent of GDP, respectively. - 2018 Protocol (amendments) included: overall balance targets for years 2019-21 of -0.5, 0.5, and 1 percent of GDP, respectively; debt-to-GDP ratio target of 70 percent of GDP by 2027 and 50 percent of GDP by 2039; personnel costs reduction of Aruban Florins (AWG) 479 million by 1 January 2019; spending of windfall revenues split equally between debt reduction and investments; compensation rules for structural and incidental setbacks. - The Council of Ministers of The Kingdom granted temporary deviations from budgetary norms in 2020, 2021 and 2022 due to COVID-19; the 2018 Protocol was extended until December 31, 2023. - Interest-free COVID-19 loans of AWG 916 million were refinanced and converted into a 20-year amortized loan at 6.9 percent in October 2023. - In June 2024, Aruba and the Netherlands signed an administrative agreement to reduce the interest rate on the COVID loans from 6.9 percent to 5.1 percent for up to two years; after the Kingdom Act comes into effect, the interest rate will be reduced to the yield on Dutch government bonds plus 20 basis points. - LAft amended in December 2023: new budgetary norms include a fiscal surplus of minimum 1 percent of GDP from 2023 onwards, a public wage bill of no more than 10 percent of GDP in 2027, and a debt-to-GDP ratio of maximum 50 percent in 2040. - Oversight: Aruba Financial Supervision Board (CAft) monitors compliance with LAft and can advise the Council of Ministers of the Kingdom for intervention if fiscal targets are not met. ### Objectives and analytical scope of the report - Objective 1: Explore options for fiscal rule designs considering Aruba’s macro-fiscal context, focusing on: - Evaluating likelihood of achieving a debt anchor of 50 percent of GDP across alternative convergence horizons, including the existing rule timeframe. - Assessing potential debt dynamics in the medium term, accounting for projected macroeconomic drivers and likely future shocks. - Proposing operational rules to guide attainment of the debt anchor through alternative fiscal paths (primary balance or expenditure ratio operational targets). - Objective 2: Recommend essential public financial management (PFM) foundations to establish a credible and effective new fiscal rule, assessing current PFM institutions and providing international examples and best practices for legal provisions such as escape clauses. ### Key findings and policy recommendations - Simplify fiscal rules while aligning with international good practices. - Establish a clear debt anchor set at 50 percent of GDP, aimed for achievement by 2035. - Simulations were conducted to explore numerical operational rules using either the primary balance or the expenditure ratio to GDP as targets. - Strengthen PFM foundations: - Further develop a Medium-Term Fiscal Framework (MTFF) to align fiscal plans with economic objectives and embed MTFF in a strong legal framework. - Introduce escape clauses and correction mechanisms to address deviations and facilitate return to fiscal discipline while preserving flexibility for external shocks. - Enhance transparency, coordination, and communication during fiscal policy formulation. - Ensure timely preparation of high-quality year-end financial statements to support accountability and decision-making. - Establish a national fiscal council to oversee implementation of the new fiscal rules and ensure accountability, especially if local supervisory legislation is replaced by a Kingdom Law. ### International experience and fiscal rule design principles - Fiscal anchors should be stock variables (e.g., gross or net debt) linked to fiscal sustainability but used as medium-term guides; operational limits should be flow variables (primary balance or government expenditure) under authorities’ direct control. - As of 2021, about 105 countries adopted at least one type of fiscal rule; 85 include an explicit cap on gross public debt. - Approximately 70 percent of countries with fiscal rules combine a debt rule with operational limits on annual budget aggregates. - Well-designed fiscal rules balance simplicity, flexibility (via correction mechanisms and escape clauses), and enforceability; too much complexity reduces implementability and credibility. - Aruba’s existing fiscal rule is characterized as overly determined, imposing restrictions across three fiscal dimensions and limiting maneuverability in unexpected shocks. - Recommendation to strengthen correction mechanism to ensure gradual return to rule limits; broaden monitoring focus to forward-looking debt trajectories and macroeconomic assumptions. - Independent monitoring and transparency—e.g., via a fiscal council—are effective reputation-based incentives for compliance beyond formal enforcement. ### Simulation approach and scope - Simulation exercises use Eyraud and others (2018b)’s fiscal rule toolkit. - Analysis objectives of simulations: - Estimate a medium-term debt anchor that provides sufficient buffers against future shocks. - Analyze sensitivity of the estimated anchor to changes in authorities’ fiscal stance. - Estimate likelihood of debt remaining below the upper debt limit under alternative fiscal stance scenarios and starting debt values. - Analysis is conducted at the Central Government (CG) level due to lack of data at the collective sector level. _Source: IMF, World Economic Outlook database; and IMF staff calculations._ ### 17. The estimated debt anchor and the range that Aruba’s debt ratio might take in the ### The estimated debt anchor and the range that Aruba’s debt ratio might take in the following six years ### Methodology and key assumptions - Public debt dynamics identity links future debt to current debt, the primary balance, and macro variables (GDP growth, domestic and external real interest rates, exchange rate depreciation, terms of trade gap to GDP ratio, and foreign loan disbursements). - Baseline paths for macro variables projected using annual data from 1996 to 2023; a joint distribution of shocks is estimated and 1,000 stochastic paths are drawn from that distribution to generate debt-ratio bands. - Primary balances are computed via a fiscal reaction function estimated using data specific to emerging market economies. - Three explicit assumptions in simulations: - An augmentation of public debt owing to contingent liabilities of 4 percent of GDP accumulated over the next six years (driven mostly by an assumption of positive stock-flow adjustments amounting to close to 0.67 percent of GDP per year). - The ratio of foreign-to-total debt is set at 58.8 percent (last data point available from Aruba’s national accounts). - The 5-year moving average of primary balances is set to not exceed 5 percent of GDP (implying a downward correction from recent surpluses above 6 percent of GDP). Given interest payments amount to around 4 percent of GDP, a primary surplus of 5 percent should broadly equate to an overall surplus of 1 percent. - Climate-change risks are not included in the simulations. ### Main findings and projected ranges - Estimated medium-term debt anchor: around 50 percent of GDP, consistent with current fiscal-rule provisions. - From a hypothetical start at the anchor (~50 percent of GDP), Aruba could remain below a 70 percent debt limit with high probability through 2031 under sizable but plausible shocks; the median debt trajectory is stable early and falls by end of the six-year period. - Starting from the actual level of 70.9 percent of GDP in 2024 (paragraph 20) / 70.8 percent of GDP as of end-2024 projection (paragraph 26), results indicate: - Median trajectory starting from 70.8 percent reaches 62 percent of GDP by 2031. - There is approximately a 65 percent chance that the debt-to-GDP ratio remains below the 70 percent limit in 2031 when starting from the current level estimated for 2024 (paragraph 20; Table 2 summary). - The slow decline in debt, despite considerable fiscal effort, reflects r>g (negative differential between the real interest rate growth rate and the real economic growth) and the high weight of interest payments. ### Probabilities and sensitivity (Table 2 highlights) - Table 2 (horizon = 6 years from 2025; stock-flow adjustment assumed = 4 percent of GDP over the 6-year horizon) key entries: - Initial Debt Level 46.5 (anchor); Maximum Primary Surplus on a 5-year average = 3; Average Primary Balance over 2009-19 = -0.5; Probability under two debt upper limits: 50 -> 65; 70 -> 89. - Initial Debt Level 50.4 (anchor); Maximum Primary Surplus on a 5-year average = 5 (baseline); Average Primary Balance over 2009-19 = -0.5; Probability under two debt upper limits: 50 -> 69; 70 -> 90. - Initial Debt Level 70.8 (current); Maximum Primary Surplus on a 5-year average = 3; Average Primary Balance over 2009-19 = -0.5; Probability under two debt upper limits: 50 -> 18; 70 -> 55. - Initial Debt Level 70.8 (current); Maximum Primary Surplus on a 5-year average = 5 (baseline); Average Primary Balance over 2009-19 = -0.5; Probability under two debt upper limits: 50 -> 28; 70 -> 65. - Sensitivity to fiscal stance: - Reducing the primary-balance average path by two percentage points (from 5 percent to 3 percent of GDP) lowers the probability of remaining below the 70 percent debt limit by 10 percentage points (from 65 percent to 55 percent in the baseline starting-from-current-level scenario). ### Deterministic primary-balance rule exercises and calibration - Simplified law of motion used: dt = ((1 + i*)/(1 + l*)) dt-1 − pbt, with i* = 6.5 percent and l* = 3.4 percent (nominal interest and growth rates fixed). Initial debt = 70.8 percent of GDP (end-2024 projection). Targeted debt = 50 percent of GDP. Exercise abstracts from macro shocks, contingent liabilities, and stock-flow adjustments. - IMF projection-based primary-balance path: - Primary balance starts at 6.4 percent of GDP in 2024, moves to 5.7 percent of GDP in 2025, and converges to 4.3 percent of GDP by 2029. - Under this path, the debt ratio reaches 50.1 percent by 2031. - Importance of adherence: failing to achieve the envisaged primary balance in a given year compromises the timeline to the debt ceiling unless a correction mechanism is implemented. ### Correction mechanisms and rule design - Distinction: - Ad hoc correction: recalibrate framework using updated starting values for the primary balance and determine required fiscal adjustment or extend the adjustment horizon. - Correction mechanism: pre-specified, automatic adjustment rule that triggers fiscal response when deviations occur. - Example correction mechanism for a primary-balance rule: - If public debt-to-GDP exceeds the previous year's level (dt-1 > dt-2), an automatic adjustment in real primary expenditure by 1 percent of GDP could be triggered to strengthen the primary balance in the following year. - The framework used in deterministic exercises assumes perfect foresight (likelihood = 1); in reality, shocks (e.g., natural disasters) would require adjustments or horizon extensions, potentially via escape clauses or correction mechanisms. ### Alternative convergence horizons and required primary balances - Convergence horizons considered: 2035 (alternative) and 2040 (current LAft provision). - Adjustment types analyzed: - One-shot adjustment (primary balance adjusts once and remains constant thereafter). - 3-year adjustment (primary balance gradually adjusts over 3 years). - 5-year adjustment (primary balance gradually adjusts over 5 years). - Required primary balances to achieve the anchor by 2035: - Required primary balance ranges between 3.7 percent and 3.1 percent of GDP depending on the adjustment period (1 to 5 years). - Corresponding overall balances vary between -0.6 percent of GDP and -0.1 percent of GDP, depending on adjustment period. - A longer adjustment period allows a smoother transition and requires lower constant primary-balance targets thereafter to reach the same convergence horizon. - Any undershoot in the primary-balance path would require a correction mechanism to compensate with additional primary surplus in subsequent years to maintain the convergence timetable. *Sources: Aruban authorities and IMF staff calculations.* ### 33. Figure 8 shows results for a convergence horizon towards the debt anchor by 2040—i.e., ### tarea2025030-print-pdf - 33. Figure 8 shows results for a convergence horizon towards the debt anchor by 2040—i.e., ### Convergence to the debt anchor by 2040 - Targeted primary balance ranges between 3.2 percent of GDP and 2.6 percent of GDP, depending on the adjustment period among 1, 3, and 5 years. - The corresponding constant overall balance ranges between -1 percent and – 0.7 percent. - With a longer adjustment time, a smaller fiscal effort is required to steer debt to its anchor. ### Conclusions on convergence horizons and fiscal-rule choice - Reducing debt to its target level by 2035 appears feasible; committing to a shorter time frame could: - Send a stronger signal regarding fiscal discipline. - Potentially boost confidence and lower borrowing costs for the government of Aruba. - Increase flexibility to facilitate diversification and promote growth-enhancing investments. - If a primary balance operational rule is chosen: - Paths and calibration of transition to a constant target can be set in various ways. - The government should adopt operational targets that allow reaching the debt anchor within the defined horizon while providing flexibility for other fiscal goals. - Choice between primary or overall balance rules involves: - Communication considerations and whether interest payments are integrated into the fiscal target. - The primary balance rule is sufficient to guarantee debt sustainability and avoids targeting volatile interest payments. ### Expenditure-rule rationale and design options - Advantages of expenditure rules: - Allow automatic stabilizers to work more effectively when the expenditure target is a cap or growth limit tied to potential GDP or long-term growth. - Permit revenues to fluctuate naturally with the cycle without forcing immediate spending adjustments. - Prevent excessive spending during booms and reduce procyclicality. - Simpler to monitor and enforce, focusing on growth rate of government spending. - By capping expenditure growth, help ensure spending does not outpace revenue growth long term, supporting debt sustainability. - Three simulated expenditure rules for Aruba: 1. Convert the primary balance rule (Equation (1)) into an expenditure rule by imposing convergence of debt to the 50 percent anchor by 2035. 2. An ad hoc expenditure rule capping growth rate of real and nominal primary expenditure (e.g., nominal growth limited to inflation, real expenditure constant). 3. An expenditure rule with an inbuilt correction mechanism (automatic adjustment if debt deviates from declining path). ### Results from expenditure-rule simulations - Derived implied expenditure rule (NIE = Revenues - pb*): the difference between projected fiscal revenues and the primary balance path that leads debt to the 50 percent anchor by 2035. - Illustrative constant-real-expenditure rule: - Limits nominal primary expenditure growth to the inflation rate while real primary expenditure remains constant. - Implies a higher fiscal effort and a steeper decline in debt compared to paths leading to 50 percent of GDP by 2035. - Top-right chart shows a decline in nominal primary expenditure as share of GDP (incorporating inflation and positive real growth). - Parameters can be fine-tuned (e.g., allow nominal primary expenditure to grow by inflation rate plus half of real output growth). - Illustrative correction-mechanism expenditure rule: - Example calibration: set primary expenditure to fall by 1 percent of GDP in a year if debt in the previous year increased (d_t-1 > d_t-2), deviating from planned declining trajectory. - If debt increases to 80 percent in 2025, the correction implies primary expenditure will contract by 1 percent of GDP in 2026. - Result: debt trajectory is put back on a downward trend, but convergence horizon to the debt anchor is longer than initially planned. ### Conclusions from the expenditure-rule simulations - An expenditure rule can allow automatic stabilizers to function effectively. - Defining rules in terms of primary expenditure growth rate may enable countercyclical policy during downturns and expansions, enhancing fiscal sustainability and economic resilience. - The effectiveness of expenditure rules depends critically on the accuracy and volatility of revenue and GDP projections and outturns. - Given Aruba's fiscal revenues largely stem from the tourism sector, which can be volatile, realistic and regularly updated revenue forecasts are essential. - If revenues keep surprising on the downside, expenditure rules would need recalibration to assure reaching the debt anchor in the requested horizon. - Note: in Aruba, fiscal revenues show smaller volatility than government spending over the last 15 years. ### Recommendations from the simulations - Independently of the fiscal rule chosen, factor in: a. Ensure consistency between operational targets of the fiscal rule and the medium-term debt anchor. b. Establish a sound correction mechanism to guide transition or return to fiscal-rule targets in case of temporary deviations of the debt path. c. Over time, if downside fiscal risks materialize, adjust the fiscal rule to ensure reaching the debt anchor at the planned horizon. ### Developing supporting budget institutions — legal framework and institutional arrangements - Aruba’s three main layers of legal fiscal framework: - Charter of the Kingdom of the Netherlands; - Aruban Constitution; - National Ordinances or laws. - Operational PFM laws evaluated: the Accountability Law of 1989 (Comptabiliteitsverordening) and the Financial Supervision Law of 2015 (Landsverordening Aruba Tijdelijk Financieel Toezicht or LAft). - Accountability Law of 1989: - Focused on budget management, financial statements, role of the Minister of Finance, and roles of the Directorate of Finance (DOF). - Ministries responsible for their own budget and financial administration and must share previous financial year statements with the Minister of Finance before April 1. - Minister of Finance compiles reports within two months and submits to the Court of Audit by June 1. - Central Audit Office conducts audits between April 1 and June 1 and certifies. - Court of Audit submits report within twelve weeks, or by September 1; Minister of Finance tables audited financial statements and audit report to Parliament no later than September 1. - No accounting standards in legal instruments for audit of central government financial statements; a new State Decree on accounting standards will be enacted in the coming year. - Differences between the 1989 Accountability Law and the LAft: - 1989 law had an annual perspective and allowed some delegation and limited discretion (e.g., opening bank accounts, exceeding budget ceilings under procedures). - LAft removed some discretion and forms the basis of PFM arrangement between the Kingdom and the Government of Aruba. - LAft (Financial Supervision Law, first enacted August 31, 2015 and amended in 2023): - Defines the collective sector (State/central government; statutory bodies implementing social and national insurance; statutory bodies depending on collective levies for more than 50 percent of income). - Collective sector encompasses SVB and AZV and statutory bodies receiving majority of their operating revenue from CG. - Central government consists of 8 ministries (listed for 2024). - SVB and AZV are social security funds and should be categorized as part of general government per Government Finance Statistics Manual 2014. - Supervision and CAft: - LAft establishes the financial supervision board (College Aruba financieel toezicht or CAft). - CAft governance and responsibilities include providing opinions on draft and approved budgets when required by the Minister of Finance. - CAft must receive the approved budget for the fiscal year no later than December 15 each year or report non-compliance to the Kingdom of the Netherlands. - If no budget is adopted by the beginning of the new financial year, the previous year’s budget becomes the preliminary budget for the fiscal year. - Fiscal year definition: - The fiscal year or service year in Aruba is January 1 to December 31 of each year (calendar year = fiscal year). *IMF Technical Assistance Report | Excerpts from the provided content unit* ### 50. Budget flexibility is implied in Article 14.2 of the LAft. If there is a need for additional ### Budget flexibility is implied in Article 14.2 of the LAft. ### Budget flexibility and windfalls - Article 14.2 implies budget flexibility to finance additional expenditure through reallocations from areas where less expenditure is needed; these reallocations “in principle, cannot exceed the aggregate budgetary envelope in that particular year.” - No legislated budget flexibility mechanisms set out the rules; examples cited include: - a virement provision preventing movement from personnel costs or capital expenditure; - a reallocation provision allowing movement within the same budget line, within the same ministry, or across ministries. - Flexibility provides discretion but should be accompanied by guidance to avoid abuse. - The LAft refers to “windfalls” without a legal definition; a “windfall” is described as a surplus above the fiscal balance target (i.e., 1 percent of GDP). - The provision states: “in the event of a surplus lower than the minimum financial surplus, [referred to in the fiscal balance rule] the expenditure windfalls in relation to the adopted budget shall accrue 100 percent to the debt reduction.” - The expenditure windfall provision creates a perverse incentive for the GOA to use the expenditure budget to meet the fiscal surplus target; Article 14.2.g reinforces this by instructing compensatory measures “to compensate structural setbacks structurally and incidental setbacks incidentally or structurally.” - Consequence: given fixed revenue projections and limited intra-year revenue effort, the fiscal balance rule can be interpreted effectively as an expenditure rule at the outcome level. ### Public debt management, PPPs, and SOEs - Accountability requirements for public debt management are outlined in the LAft; Article 15 recognizes the requirement to raise debt with the caveat that the Minister of Finance ensures inclusion in the adopted Budget. - This debt-raising requirement applies to the collective sector and excludes other statutory bodies, such as state-owned enterprises (SOEs). - Article 27a bans the creation of public private partnerships (PPPs) and their associated financial commitments. - International good practice: the Minister of Finance should be responsible for all public finances and typically approve borrowing by SOEs or statutory bodies that may require guarantees or create contingent liabilities. - In Aruba, there is no overarching fiscal governance framework for SOEs; incorporation of SOEs is governed by various articles of association, deeds of incorporation, and statutes, particularly Landsverordening (LVO), which allow the Minister to incorporate SOEs. ### Inconsistencies between the Accountability Act and the LAft - Consideration is recommended to either consolidate the two ordinances into one updated PFM ordinance to remove outdated provisions and conflicting information, or to repeal and replace them with a new ordinance. - Article 38 of the Accountability Act requires companies and institutions incorporated through national ordinance to submit annual financial statements to the Minister of Finance within three months of the close of their fiscal year—i.e., before April 1. - This supervisory authority over general financial policy was established in the Accountability law but contained many exceptions that diluted the Minister of Finance’s authority. ### PFM issues related to the design of the fiscal rule - IMF guidance (Eyraud and others, 2018b) recommends a three-step rule selection process applicable to Aruba: (i) identify rules that minimize trade-offs; (ii) take into account country preference; (iii) consider multiple rules. - Fiscal rules should be considered collectively rather than individually; better-designed rules have: - a fiscal anchor linked to fiscal/debt sustainability; - one or more operational rules on fiscal aggregates; - short-term operational rules linked to debt dynamics that are “under the direct control of the government.” - Multiplicity of fiscal rules should be limited because redundancy and inconsistency can undermine credibility; this is currently an issue in Aruba. - Overlaps in fiscal targets occur where the same fiscal aggregates are constrained in different ways. Examples in Article 14: - Item 14.1.d discusses the collective sector’s new debt ceiling for refinancing with capital expenditure as an input to the debt target in 14.1.c; - Item 14.1.b includes a target on the output of the fiscal balance target; - Article 14.2.a includes a collective sector wage bill rule, which is also an expenditure component of the fiscal balance. ### Escape clauses: design, current gaps, and regional examples - The escape clause is an important design feature and necessary risk mitigation measure for fiscal shocks; Aruba is a SIDS in the Caribbean outside the hurricane belt but still faces higher hurricane risk than earthquake risk. - Given climate change, Aruba should enhance fiscal risk management; an escape clause can pause adherence to fiscal rules for disasters (e.g., rapid sea-level rise or pandemic). - Aruba’s current fiscal rule contains escape clauses (Articles 14 and 23), but parameters need improvement: - The Minister of Finance may deviate in agreement with the COM and the Kingdom’s government, but there are no criteria for validating deviations and no verifier body specified. - Box 2: Five key design elements for an escape clause (regionally derived): - Establish what constitutes a fiscal shock in clear, simple, objective, and verifiable terms; - Validate the need to trigger the escape clause to suspend the fiscal rules; - Ensure that there is a competent body with capacity to evaluate and certify if the criteria for the escape clause have been satisfied, as well as to extend the suspension, if needed; - Require regular reporting during suspension of the fiscal rules to demonstrate how the fiscal path will be returned to—i.e., adjustment or correction mechanisms; - Include a sunset clause provision for the natural expiration of the suspension of fiscal rules. - Jamaica example (Box 3): - Since 2014, Jamaica reduced its debt by 57.3 percentage points, from 130.6 percent of GDP at the end of fiscal year 2014/15 to 73.3 percent of GDP at the end of fiscal year 2023/24, facilitated by a 2014 fiscal rule with escape clauses. - The Jamaican FAA Act specifies objective criteria and validation procedures, including Auditor-General validation that the estimated fiscal impact is equal to or greater than one and a half per cent of gross domestic product, and roles for the Planning Institute of Jamaica and the Bank of Jamaica in certifying occurrences. ### Fiscal council roles, transition, and PFM prerequisites for fiscal rule implementation - Fiscal councils are important complements to fiscal rules and should be independent, non-partisan, and preferably have a legal mandate to: - assess fiscal plans and performance; - evaluate macroeconomic and budgetary forecasts; - monitor the implementation of fiscal rules; and - cost government measures. - In 2021, there were 51 fiscal councils worldwide; only 10 were established in countries belonging to the Americas. - Grenada’s FROC and Fiscal Resilience Act (FRA) 2023 provide a regional model: Section 12 codifies responsibilities, written assessments of compliance, powers to request information from the Ministry of Finance, and specific provisions on composition, tenure, meetings, and costs. - Transition planning for Aruba: - The current fiscal council, the CAft, will monitor and oversee the new fiscal rules’ regime; legislation should include a sunset clause for the CAft and provide for knowledge transfer and an overlap period to avoid loss of institutional knowledge. - PFM strengths that support a numerical fiscal rule: - Detailed budget calendar for the 2025 financial year with key submission and reporting dates; - Legal framework articulated in the Accountability Law of 1989 and the Financial Supervision Law of 2015 (LAft); - Integrated debt and cash management in the Treasury; staff competency in budget formulation; - MARUBA forecasting model producing consistent nominal GDP forecasts informed by the macro-model commission (DOF, ATA, CBA); - Various budget reports tabled in Parliament; recent introduction of a medium-term budget framework (MTBF); collection of SOE data for fiscal risk analysis. - PFM gaps that could weaken a fiscal rule (Table 3 summary): - Clear fiscal objectives and rules: practice in Aruba described as “Unclear, complex, and inflexible fiscal rules”; - Accurate macro-fiscal forecasts: “Significant deviations in forecasts” and “No forecast error analysis”; - Credible budgeting over the medium term: only recent introduction of medium-term budgeting; - Top-down and comprehensive budget process: practice is “Bottom-up budgeting without aggregate or individual budget ceilings provided”; - Fiscal rule not acting as a binding constraint: authorities could deviate if revenue does not materialize or if cash is constrained. - Medium-Term Fiscal Framework (MTFF) role: - A legislated MTFF can be a binding instrument to guide fiscal policy and support fiscal rule implementation. - MTFF components include: - realistic revenue projections; - expenditure projections at an aggregate level reflecting unchanged policies and macroeconomic projections; - a fiscal balance informed by the fiscal rule; - financing assumptions that generate a corresponding debt trajectory. - For transparency and accountability, the MTFF should be tabled in Parliament. *IMF Technical Assistance Report | Extracts from pages 37–42* ### 68. Although the Budget and Fiscal Policy Division produces a MTBF with 4-year forecasts, ### Although the Budget and Fiscal Policy Division produces a MTBF with 4-year forecasts, ### Current MTFF and MTBF status - The current MTFF is described as "very embryonic in Aruba." - The Budget and Fiscal Policy Division produces a MTBF with 4-year forecasts, but "there is no credible MTFF guided by the fiscal anchor (debt to GDP)." - An enhanced MTFF would provide the GOA discretion to set binding ceilings on expenditure categories over the medium term that satisfy the debt to GDP trajectory and guarantee a fiscal constraint. - Figure 15 illustrates the components of a medium-term expenditure framework, which includes a MTFF and a MTBF. ### Credible fiscal policy formulation and process - Credible fiscal policy formulation requires iterations of the potential fiscal path to achieve the fiscal rule and scenario analysis: - Model optimistic (high growth), pessimistic (low growth) and likely scenarios. - Discuss scenarios in a fiscal policy coordinating committee before selecting the most credible option. - Translate fiscal rule into specific revenue and expenditure policies (Box 4). - Once a path is decided: - Determine an aggregate binding expenditure ceiling. - Break down into departmental spending ceilings based on policy priorities agreed by the Council of Ministers. ### Forecasting capacity and staffing - The Budget and Fiscal Affairs Division is understaffed, with "just one of its members responsible for technical forecasting." - It is essential to strengthen this unit "with at least one more economist" to: - Help model fiscal shocks. - Update the model with assumptions. - Maintain the fiscal database. - Box 5 outlines roles of a macro-fiscal unit, including: - Macroeconomic forecasting for GDP, inflation, exchange rates, interest rates. - Preparing the MTFF and fiscal forecasts. - Revenue forecasting, expenditure forecasting, debt projections and sustainability analysis, fiscal policy analysis, fiscal risk analysis, monitoring macroeconomic developments, and monitoring the fiscal framework. ### Forecast errors, models, and tourism dependence - Forecast errors are needed to enhance the credibility of the MTFF and the identification of the fiscal path. - Aruba relies on "70 percent" of its economic activity from tourism; GDP forecasts should closely follow tourism forecasts. - ATA’s Tourism Impact Model: - Provides reliable nominal GDP forecasts based on 4 indicators—tourism receipts, stayover arrivals, cruise stayover arrivals, and revenue per available room. - Is populated with historical data from "1986". - Performs regular forecast error analyses. - Assumes that "a 1 percent increase in tourism results in 0.6 percent growth in nominal GDP." - Assumes slower growth in tourism based on caps in hotel expansions and other constraints. - The MARUBA model (Ministry of Economic Affairs) informs Fiscal Policy and Budget division forecasts but is limited by outdated national accounts data, with the most recent information dating from "2019". - There is "no forecast reconciliation of key macro-fiscal variables including GDP, debt, revenue, expenditure, and the fiscal balance." Forecast reconciliations are recommended as a credibility-enhancing exercise. - The rebasing of GDP, potentially expected for "2025", has implications for assumptions and forecasts and offers an opportunity to implement good practices. ### Fiscal primary balance, debt, and windfalls - Greater precision and coordination are required when forecasting the fiscal primary balance as an operational target for reducing debt (Figure 16). - Consistent debt reduction requires: - A credible MTFF based on a stable fiscal primary balance. - Binding aggregate expenditure ceilings. - Corresponding revenue efforts to achieve the primary balance target. - Forecast errors on the overall balance can create "windfalls" (i.e., any overall balance above the "1 percent of GDP" surplus target). - The fiscal rule stipulates that "50 percent" of such windfalls be used to pay off debt, and the other "50 percent" be used towards capital spending. ### Budget ceilings, preparation, and calendar - The lack of a binding aggregate expenditure ceiling limits the effectiveness of the MTFF. - Line ministries are requested to provide multi-annual projections but are not provided with separate recurrent or capital spending ceilings. - Absence of binding budget ceilings allows spending estimates to be changed at least twice a year during supplementary budgets. - Figure 17 compares projected and realized spending between 2019 and 2024, demonstrating volatility and quantifying expenditure forecast errors; forecast errors persist even excluding COVID volatility. - The DOF is not implementing a top-down strategic budget process determined by the MoF; a strategic phase should be based on a fiscal anchor (debt target) and multi-year macroeconomic forecasts. ### Revenue forecasting practices and misalignment - Revenue forecasts could be improved; robust tourism growth contributed to a sharp post pandemic recovery in fiscal revenues. - In Aruba, tax revenues consist primarily of wage tax, profit tax, turnover tax and various tourism levies collected by the tax department. - Current practice: forecasts are prepared for two forward years and based on t-2. Example: the forecast for "2026" is based on "2024" forecasts, since "2025" numbers are not available. - Inputs are shared in March each year with the Budget and Fiscal Affairs Unit, which extrapolates a four-year time series. - Misalignment between the Tax Department 2-year forecasts and the Budget and Fiscal Affairs Unit 4-year forecasts contributes to revenue forecast errors in Figure 18. - Recommendation: the 4-year forecasts of the Budget and Fiscal Affairs Unit should be prepared in consultation with the Tax Department. - A policy directive is needed to homogenize forecasting practices and capacity building in revenue forecasting is required for all staff involved. ### Budget execution, cash coordination, and committees - GOA produces quarterly budget execution reports tracking components of the fiscal balance rule and the debt to GDP rule for general government. - General government expenditure is determined bi-annually; fiscal balance components are disaggregated by GOA/central government and other entities. - Quarterly reports present five-year trends for revenues and expenditures, year-over-year for each quarter, and statements on seasonality for revenues. - Budget execution is impacted by lack of technical coordination among units within the MoF and between MoF and other government entities. - There is currently "no cash coordination at the technical level" among key departments within the MoF. - Line ministries are not producing liquidity plans to be submitted to MoF. - A weekly Cash Management Committee is recommended, composed at minimum of: - DoF (Budget and Fiscal Affairs, Financial Accounting, Treasury as the Secretariat, or co-chair), DoT, Economic Affairs (DEACI), and Customs Department. - The committee should have Terms of Reference specifying membership, quorum, outputs, and an escalation mechanism; minutes should be circulated. ### Fiscal risk analysis and framework - Fiscal risk analysis is key to strengthening fiscal planning; fiscal risks include macroeconomic shocks, SOE fiscal risks, contingent liabilities, financial sector, and climate fiscal risks. - Potential fiscal risks should be identified and quantified in a fiscal risk statement (FRS). - Uncertainty can be mitigated by disclosing assumptions, providing sensitivity analysis, alternative scenarios, and probabilistic methods (confidence intervals, fan charts). - Fiscal risk analysis in Aruba is at a developmental stage: - DOF includes a summary of risks in its budget documentation for fiscal year "2025". - Four risks identified: institutional, economic, legal, and operational. - Only macroeconomic indicators are identified in the risk matrix (deviations in macroeconomic forecasts and inflation). - SOE fiscal risks are not included, possibly due to budget coverage (central government). - New methodologies such as growth-at-risk are noted (Annex V of IMF (2023)). - The presented risk matrix does not comply with international best practice. A recommended start is a likelihood by severity matrix: - Use a 5x5 matrix with Likert scale scoring from "1 to 5" (Figure 19). - Scores inform risk treatment: risk avoidance, risk reduction, risk retention, risk spreading, or risk transfer. - The IMF’s Fiscal Risk Assessment Tool (FRAT) is noted as a simple tool to support the risk matrix. ### Institutional recommendations and governance - Establish a fiscal policy committee to coordinate regular assumptions affecting the MTFF: - Committee ideally chaired by head of fiscal policy and budget division or head of treasury; scheduled monthly. - Members formally appointed by the Minister and to include Budget Unit, Treasury, Tax Policy, ATA, CBA, Central Accounting Department, and Department of Economic Affairs. - Develop and share Terms of Reference with all members. - Decisions could be escalated to the Director of Fiscal Policy and Budget; the Minister should be regularly briefed on emerging fiscal pressures and non-adherence to the fiscal rule. - Improve forecasting governance: - Conduct regular forecast reconciliations across GDP, debt, revenue, expenditure, and fiscal balance. - Strengthen the Budget and Fiscal Affairs Division staffing by adding "at least one more economist." - Align forecasting practices between Tax Department and Budget and Fiscal Affairs Unit via a policy directive and capacity building. - Implement binding aggregate expenditure ceilings and break them into departmental recurrent and capital ceilings to improve credibility and limit in-year supplementary budget changes. - Improve cash coordination and reinstate/expand the Cash Management Committee with clear TORs and circulated minutes. - Build capacity for a formal FRS using risk matrices, probabilistic methods, and tools such as the IMF’s FRAT. *Source: IMF Technical Assistance Report (tarea2025030-print-pdf).* ### 85. The fiscal risk assessment prepared by the GOA does not evaluate each risk. Rather, the ### Fiscal risk assessment, SOEs, contingency reserves, transparency, and institutional capacity ### Fiscal risk assessment approach - The GOA’s fiscal risk assessment evaluates the type of risk at an aggregate level rather than evaluating each risk individually (Table 4). - The next budget uses a simple likelihood by severity matrix approach to prioritize risks based on their impact. - Example: the wage bill fiscal rule is not specified as the binding constraint on GOA’s ability to attract qualified staff; projects from the Dutch Country Package are cited as directly impacting institutional weaknesses. - Table 4 categories (as presented): Institutional (Likelihood: High), Economic (Medium), Legal (High), Operational (High). Manifestations include delays in preparation of budget execution reports and annual financial statements; deterioration of the balance and debt; and weaknesses in internal control and risk management. ### SOE fiscal risks and governance - Fiscal risks from SOEs are not included as budgetary risks despite IMF CARTAC technical assistance in 2024 (Whyte-Givans, van Schaik, and Gallardo, 2024). - SOE Health-check Tool (HCT) evaluated 32 entities for 2017–2022. - "Forty-two percent of financial statements were missing for that six-year period." - "For the four years 2019–2022, the percentage of financial statements missing was 59.1." - Consequences: - DOF lacked full access to SOE financial statements and full visibility on compliance with timely submission requirements. - Important fiscal risks for liquidity, profitability, and solvency among evaluated SOEs; some entities require GOA capital injections for solvency. - Current SOE legal and oversight features: - SOEs are not required by statute to report to the Minister of Finance on financial matters. - SOEs can borrow without referring to the Minister of Finance, limiting visibility of public sector debt and contingent liabilities. - Six specific reform recommendations from Whyte-Givans, van Schaik, and Gallardo (2024): - (i) Enact, through legislation, a clear separation between policy oversight and financial oversight. - (ii) Standardize accounting standards. - (iii) Establish capacity in the DOF for monitoring of financial reporting compliance. - (iv) Sanction entities that do not comply and require support from central government. - (v) Request technical assistance from the IMF’s Statistical Department to develop a complete institutional table. - (vi) Rationalize SOEs, on completion of institutional table, and reintegrate some SOEs back to central government. - Suggested institutional placement: vest SOE institutional responsibility within DOF in a division or section that also manages macro-fiscal functions. - GOA plans to include SOE HCT results in annual financial reports going forward. ### Contingency reserves and climate funds - Contingency reserves mitigate unexpected fiscal shocks; many countries set a contingency percentage between "1 and 5 percent" of the budget initially. - Contingency fund design principles: - Not typically allocated until an emergency/shock materializes; appropriated by Parliament in an adjustment budget. - Rules for access must be clearly specified in decrees or ordinances to trigger access during a qualifying event. - Contingency fund can reduce the need to resort to an escape clause; clear fiscal rules should indicate impact size needed for an escape clause and validation by a competent authority. - Legal framework for exigent expenditures: - Articles 15 and 16 of the Accountability Law allow the Minister to receive allocations for exigent expenditure from contingencies item in Article 2(4) under MOF budget if urgency exists. - Article 2(4) authorization does not provide immediate liquidity; timeliness of allocations post-disaster is paramount. - Article 2(4) could be enhanced in a new PFM law or expanded into a contingency fund. - Constraints and mitigation options: - Lack of a borrowing relationship with multilateral development partners is a key constraint for mitigation strategies; the Kingdom of the Netherlands holds borrowing relationships with multilaterals. - Multilateral debt instruments have contingent clauses that can defer payments or allow reallocation to disaster response. - Opportunity for international risk pooling—example: subscription to CCRIF SPC for excess rainfall or tropical cyclone. ### Institutional and statistical coverage of fiscal rules - Aruba’s current fiscal rule applies to the central government and the collective sector, with no clear criteria for classification of the collective sector. - Interpretation issue: surpluses from AZV (general health insurance) and SVB (social insurance) funds were considered for splitting—50 percent to public debt repayment and 50 percent to public investment—but legal framework governing these funds prohibits their surpluses from being used for debt repayment. - Recommendation: fiscal rule should ideally extend to the general government and, over time, encompass the broader public sector. - Including SOEs in the fiscal rule: - Would increase complexity and raise compliance concerns given sparse data. - Consider extending rule analysis to SOEs only once MoF can include their debt in a debt sustainability analysis and recalibrate numerical rules. - Figure 20 (phased widening of coverage) referenced as illustrating phased approach for widening fiscal reporting boundary. ### Fiscal transparency, financial reporting, and accounting basis - Key budget documents (e.g., explanation of the budget law including attachments, Fall Note, Spring Note, two budget amendments, May note/fiscal strategy statement) are produced by DOF but are not transparently published nor easily located by the public; publication is at the Minister’s discretion. - Compliance and timing: - Quarterly implementation/execution reports required by Article 17 of the LAft; to be published by the Minister of Finance on behalf of COM no later than 6 weeks after quarter end. - Central Bureau of Statistics (CBS) mandated to report on expenditure, revenue, deficit, and debt for the collective sector for the previous year by September 1 each year (GOA 2015; Article 22.1). - Annual financial reporting required; certified annual financial statements (annual accounts) to be submitted by the Minister of Finance by August 31 of each year (Accountability Law Article 45). - Compliance status: - At mission time, annual accounts for 2021 had not been completed. - Most recent audited annual financial statement pertains to fiscal year 2019. - Quarterly reporting compliance has been achieved; significant gap exists in annual financial statements compliance. - Accounting basis: - Aruba is implementing partial accrual accounting: accrual on expenditure side and cash on revenue side. - The law is accrual-based, but practice has never been fully compliant. - Good practice recommended: implement cash accounting fully, address audit concerns, then transition to accrual. - Recommendation: use cash basis for fiscal rule reporting until backlog and capacity constraints are addressed and capacity to prepare accrual accounts annually and on time exists. - Software/IFMIS should be configured to enable cash accounting until accrual capacity is available. ### Audits and certification - DOF recognizes importance of timely financial reporting and certified audits. - A Consultant has been hired for a two-year period to eliminate the annual financial statement (AFS) backlog; the AFS for 2020 has been submitted for audit. - DOF plans to integrate SOE HCT analysis in all financial statements from 2020 onwards. - CAD (Central Audit Department) constraints: - CAD is not adequately resourced to meet legislated responsibilities. - Agreement with the Kingdom of the Netherlands to have a fully compliant audit of financial statements for fiscal year 2026. - CAD has conducted simulated audits yielding unqualified opinions. - Amendments to the Accountability Law and proposed accrual-based accounting standards will state that CAD audits financial statements and that if CAD lacks capacity, the Minister of Finance should provide resources to procure external auditors. - Certification of audits is critical for fiscal rules. ### Institutional capacity - Significant human resource capacity risk across PFM workstream; reliance on consultants (in CAD and Financial Accounting) is unsustainable. - Risk of backlog recurrence when consultants leave. - Country Package (Dutch initiative) should be implemented gradually and coordinated with other international support to avoid burdening Aruba’s resource-constrained system. - Priority capacity and investment areas: - Attract skilled workers and upskill existing staff. - Make critical investments in ICT (software and hardware) to support digital transition. - Financial Accounting Unit specific needs: - Capacity enhancement and fulfillment of vacant management positions. - Certified accountants. - Capacity building, knowledge retention, institutionalization via manuals and standard operating procedures. - Manage IFMIS replacement carefully with phased implementation and capacity building to avoid compounding backlogs. - Recommendation: conduct comprehensive gap analysis for implementation of new fiscal rules to develop a capacity development plan; sequence reforms parallel to capacity building; prefer institutionalization over outsourcing; use gap analysis to inform transitional provisions and effective date for fiscal rules in successor LAft or new PFM Act. ### Key statistics and dates (as presented) - SOE HCT evaluated "32 entities" for "2017–2022". - "Forty-two percent" of financial statements missing for 2017–2022. - For "2019–2022", percentage missing was "59.1". - Contingency fund initial percentage range suggested: "between 1 and 5 percent". - Latest audited annual financial statement: fiscal year "2019". - AFS for "2020" submitted for audit; AFS for "2021" not yet completed at mission time. - Certified annual financial statements to be submitted "by August 31" (Accountability Law Article 45). - CBS reporting deadline: "September 1" each year (GOA 2015; Article 22.1). - CAD fully compliant audit expected for fiscal year "2026". *Source: IMF Technical Assistance Report (excerpts provided).* ### 106. In terms of PFM pre-requisites to implement the fiscal rule, Aruba should: ### In terms of PFM pre-requisites to implement the fiscal rule, Aruba should: ### PFM pre-requisites (operational and institutional) - Enhance the MTFF, including by adopting binding aggregate and individual fiscal ceilings. - Strengthen fiscal risk analysis and improve on the existing fiscal risk statement. - Improve coordination and reinforce liquidity management by establishing a cash management committee and regular fiscal policy meetings. - Improve transparency by reporting on performance against fiscal rule and publishing all budget and fiscal reports on MoF website. - Integrate tax policy and revenue collection strategies to adhere to the fiscal rule. - Address backlog in annual financial statements, audit, and backlog in national accounts up to 2024. - Maintain annual financial statements as well as annual national accounts updated from 2024 onwards. - Use a contingency reserve to address fiscal shocks. - Explore contingent financing instruments and parametric insurance with multilaterals and CCRIF SPC. - Conduct a comprehensive gap assessment vis-à-vis capacity to implement the new fiscal rules framework. ### Legislation (PFM law and legal design considerations) - Enact an entirely new GOA PFM Law. - Legislate a MTFF through the GOA PFM Law. - Make greater use of State Decrees, for example, to innovate and allow flexibility to adapt to changes. - Improve the escape clause in the new Supervision Legislation and successor GOA PFM Law. - Introduce a home-grown fiscal council. - Abandon the definition of surplus “windfalls”. - Enshrine fiscal transparency to allow easy and direct public access on DoF website. - Clarify transitional provisions in the legal framework on effective date of fiscal rules provisions to address, for example, coverage of general government and the public sector. - Maintain the contingency provision in the 1989 Law and strengthen it through a State Decree. - Introduce provisions for fiscal resilience to disasters in the legal framework. ### Principles for law and transition - Home-grown measures are more sustainable; guiding principles for the fiscal rules can be articulated in the Kingdom Law and translated to the local law. - Use State Decrees and other instruments for operational practices; avoid hardwiring the law with overly complex provisions to preserve simplicity, clarity, transparency, and flexibility. - Implement a transitional period between adoption and implementation of the proposed new fiscal rules framework to allow for capacity building within the MOF and widening of the consolidation boundary for coverage. - Align implementation with the budget cycle and with accounting reforms, including transition to accrual accounting and consolidation of SOEs. - Note: The Ministry of Interior Affairs of the Kingdom has indicated that May 1, 2025, is the date for the new proposal and this is separate from the implementation date; this is the timeline for Budget submissions for fiscal year 2025, articulated in the May letter. ### Use of contingency and insurance - Maintain a contingency reserve to address fiscal shocks. - Explore contingent financing instruments and parametric insurance with multilaterals and CCRIF SPC. ### Capacity and gap assessment - Conduct a comprehensive gap assessment vis-à-vis capacity to implement the new fiscal rules framework. ### Transition accounting and coverage - Address backlog in annual financial statements, audit, and national accounts up to 2024. - Maintain annual financial statements and annual national accounts updated from 2024 onwards. ### Legislative timing and transitional clarity - Clarify transitional provisions in legal framework on effective date of fiscal rules provisions to address coverage (general government and the public sector). - Maintain and strengthen contingency provision in the 1989 Law via State Decree. ### Final source attribution *IMF Technical Assistance Report — excerpts from chapter on PFM pre-requisites and fiscal rules for Aruba.* --- _Source: https://www.imf.org/-/media/files/publications/tar/2025/english/tarea2025030-print-pdf.pdf_