## _cr10334 - 2014. However, the government emphasized cuts in the size of the civil service and

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### I. Context and Recent Developments
- Aruba: small, open economy with high living standards and stability-oriented macro policies.
- Real GDP growth 2003–07 averaged 3 percent per year.
- Central government deficit averaged 1.7 percent of GDP in the 10 years prior to the crisis; public debt 40–45 percent of GDP.
- Since 2008 adverse external shocks:
  - Tourism dependency: between two-thirds and three-quarters of the economy depend on tourism.
  - Oil refinery shut in July 2009; more than 2,000 jobs (~5 percent of workforce) linked to refinery; owner announced resumption (year implied).
  - Real GDP contracted by 7½ percent in 2009; unemployment rose to 11.3 percent.
- Government fiscal response:
  - New government (Oct 2009) halved the business turnover tax (BBO) from 2010; BBO accounted for almost 20 percent of tax revenue in 2008, or close to 4 percent of GDP.
  - Increased social transfers and initiated social dialogue with labor and employers.
- Monetary policy changes:
  - Central bank previously used an annual credit ceiling under the peg to the U.S. dollar.
  - Banks cut lending in the downturn; central bank abolished the credit ceiling and moved to an unremunerated reserves requirement.
- External position and reserves:
  - End-2009 official reserves covered about 5½ months of imports and 100 percent of short term debt by residual maturity.
  - Total external debt >90 percent of GDP; much is FDI-related intra-company lending.
  - Non-resident deposits with Aruban banks somewhat more than 10 percent of GDP and were stable during the crisis.

### II. Macroeconomic Outlook
- Near-term projections:
  - 2010: GDP projected to contract by 2 percent; GDP excluding refining expected to stagnate.
  - 2011: GDP projected to surge temporarily to 7 percent as refinery returns; GDP excluding refining projected to expand by more than 3 percent.
  - Inflation projected subdued in 2010.
- Drivers and risks:
  - Recovery supported by tourism pickup and refinery re-opening.
  - Risks mainly relate to tourism and construction; two-thirds of tourists come from the United States.
- Long-term growth:
  - IMF staff estimate long-term potential annual real growth at about 1½ percent.
  - Authorities focus on upgrading tourism facilities, improving infrastructure, and energy-efficiency.

### III. Policy Discussions — Restoring Sustainability of the Public Finances
- Underlying fiscal pressures:
  - Main pension and health schemes accumulated sizeable financial imbalances; APFA had a large actuarial deficit; AZV required transfers exceeding 3 percent of GDP in 2009.
  - One-off windfalls (e.g., payment of more than 4 percent of GDP in 2008 from the Dutch government) masked weaknesses.
- Fiscal outcomes and projections:
  - Overall fiscal deficit for 2010 projected slightly above 4 percent of GDP; without a one-off tax settlement with the oil refinery (yielding more than 4½ percent of GDP) it would have been much higher.
  - Cyclically weak revenue collection exacerbates the shortfall.
- Social dialogue reforms:
  - APFA: compute pension claims on average career wages instead of final wages; increase retirement age from 55 to 60 years; calculate APFA pensions net of AOV claims — expected to significantly improve APFA’s position.
  - AOV: cash-flow deficit since 2009; increase in premium income agreed will postpone need for government transfers from 2013 to 2014; statutory retirement age is 60 years.
  - AZV: premiums insufficient since 2001; transfers exceeded 3 percent of GDP in 2009 (cash basis); premium increase under social dialogue reduces funding shortfall to about 2 percent of GDP; further reforms suggested (co-payments, increased competition, stronger expenditure controls).
- Fiscal adjustment considerations:
  - Government emphasized expenditure measures: cuts in size of civil service and investments in infrastructure to stimulate growth; preference to consider revenue measures later.

### Social dialogue measures and short-term impact
- Agreed August measures reduce longer-term risks but yield limited short-term fiscal savings.
- Agreed tax and transfer measures:
  - Keep BBO at its 2010 level instead of eliminating in 2011.
  - Raise excise taxes modestly.
  - Introduce a tax allowance for the working poor.
  - Increase transfers for welfare recipients and increase wages for civil servants.
- IMF staff estimate: measures reduce underlying fiscal deficit by 2–2½ percent of GDP (excludes some expansionary measures difficult to cost).

### Fiscal outlook and Aruba’s fiscal adjustment need
- IMF staff projections:
  - Fiscal deficit of almost 7 percent of GDP for 2011.
  - Without further consolidation, underlying medium-term shortfall of 6–6½ percent of GDP.
- Debt and financing risks:
  - Public debt would increase to about 65 percent of GDP by 2015, raising interest burden.
  - Excess liquidity currently supports demand for government paper.
  - Government’s bank deposits of 6½ percent of GDP (largely from 2008 hotel sale receipts) available to cover financing needs.
  - From 2012, significant amortizations on commercial external debt could complicate roll-overs.
- Government commitment:
  - Reduce deficit by about 1½ percentage points of GDP per year in 2012–14.
  - Implies deficit somewhat above 3 percent of GDP in 2013 and below 2 percent of GDP by 2014.
  - With this path public debt estimated to stabilize around 52 percent of GDP.
- IMF staff alternative:
  - Target deficit below 1 percent of GDP by 2013, corresponding to a primary surplus of 2¼ percent of GDP.
  - Implies fiscal effort of about 5½ percent of GDP starting in 2011 beyond social dialogue initiatives.
  - Staff recommended stretching consolidation over two to three years given fragile recovery.

### Options for fiscal adjustment
- Authorities’ growth-focused strategy:
  - Infrastructure program envisaged for 2011–13 (road construction, relocation of commercial port), financed largely by government enterprises or PPPs with no central government budget burden; staff cautioned on uncertain returns and contingent liabilities.
- Authorities’ preference for expenditure cuts:
  - Potential reductions:
    - Public sector wage bill: hiring freeze; reduce workforce by natural attrition; consider privatizations (e.g., trash collection). Note: public sector wage bill modest regionally.
    - Goods and services: increased from <4 percent of GDP in 2008 to >5 percent of GDP.
    - Health care: further premium increases could eliminate need for government transfer to AZV (projected about 2 percent of GDP for 2011).
- Feasibility:
  - Staff estimate feasible expenditure cuts amount to at most 3 percent of GDP within a reasonable time frame; below authorities’ estimated need of 4½ percent and staff’s need of 5½ percent.
  - Footnote assumption: savings ~2 percent of GDP from AZV, and ~½ percent of GDP each from public sector wage bill and goods and services.
- Revenue-side:
  - On unchanged policies, Aruba’s tax revenues projected at about 18 percent of GDP going forward vs. regional average ~25 percent of GDP.
  - Only about half of Aruba’s tax revenues are indirect taxes, vs. regional average almost two-thirds.
- Tax reform principles:
  - (i) raise sufficient revenue; (ii) be growth-friendly, fair and transparent; (iii) trigger high compliance with low administrative costs.
  - VAT as key option:
    - Could replace BBO and avoid cascading effects.
    - VAT burden largely borne by nonresidents; could exempt small businesses to limit administration.
    - International experience: VAT introduction requires at least 1½–2 years of preparation.
    - IMF staff encouraged technical expertise (for example, CARTAC).
  - Authorities agreed structural shift to more indirect taxation desirable; tri-partite working group to report by April 2011. Initial preference for raising excise taxes or higher import duties.

### Enhancing the effectiveness of monetary policy
- Monetary framework:
  - Anchor: peg to the U.S. dollar.
  - Until end-2009: credit ceiling, limit on net foreign asset position, de-facto capital control.
- Experience with credit ceiling:
  - Pros: confidence in peg, low dollarization (17 percent of deposits at end-2009), prevented unsustainable credit booms, contained inflation.
  - Cons: discouraged competition; oligopolistic banking with large interest spreads and high fees; during downturn banks’ average lending rates ~11 percent in 2009 while lending volumes contracted.
- Reform of instruments:
  - Central bank eliminated credit ceiling end-2009; replaced with unremunerated reserves requirement.
  - Staff welcome; expected to spur competition and more efficient monetary policy; transition requires careful management.
- Operational guidance:
  - Monetary policy should remain accommodative short-term.
  - Required reserves set well below actual deposits, creating substantial excess liquidity; buffers should remain while credit demand depressed.
  - Central bank should clarify it no longer restricts credit growth; some banks misinterpreted communiqués referencing “targeted credit growth.”
- Promoting competition and entry:
  - Staff encouraged temporary relaxation of entry rules for reputable foreign banks subject to consolidated supervision.
- Contingency for tighter policy:
  - Central bank prepared to use reserves requirement rapidly if pressure on foreign reserves emerges.
  - Modest remuneration of large mandatory reserves could address banks’ cost concerns if affordable for the central bank.
  - Rapid introduction of certificates of deposit could be problematic given lack of liquid interbank market.

### Safeguarding financial stability
- Prudential framework and resilience:
  - Conservative regulatory requirements and high profitability helped weather recession.
  - Prudential requirements:
    - Capital adequacy: 14 percent of risk-weighted assets.
    - Liquidity: 15 percent of assets excluding goodwill.
  - Nonperforming loans expected to rise for 6–12 months but at modest pace.
  - Banks have ample capital cushions, continued profitability, and large excess liquidity buffers.
- Pension funds:
  - Progress under recovery plans; some coverage ratios fell below 100 percent due to investment losses.
- Supervisory implications:
  - Absence of credit ceiling may lead to aggressive lending and deterioration in lending standards; supervisors should enhance forward-looking stress tests.
- Offshore banking:
  - Small but poses reputational risk; off-shore banks should operate only if central bank can monitor and enforce rules; central bank stepped up efforts to ensure sufficient physical presence of all off-shore banks.

### Structure of the financial system (key points)
- Financial sector assets: 184 percent of GDP.
- Commercial banks hold >50 percent of total assets.
- Offshore banks: two with assets amounting to 12 percent of GDP; limited physical presence; serve nonresidents only.
- Pension sector:
  - APFA assets: 37 percent of GDP.
  - APFA and insurance companies together hold 17 percent of GDP in government securities.
- Banking liabilities: resident deposits account for 78 percent of liabilities; holdings of public debt low (2.5 percent of GDP).

### Staff appraisal (summary)
- Economy gradually recovering from recession triggered by tourism decline and temporary refinery closure (July 2009).
- Recovery slow and pre-crisis growth rates difficult to achieve due to lower U.S. consumption prospects and limits to tourism expansion.

### Article IV timing
- Next Article IV consultation discussions with Aruba envisaged in 24 months time.

### Real sector developments and projections (selected series)
- Real GDP growth (actuals and projections): 2007: 1.4; 2008: 0.7; 2009: -7.7; 2010: -2.2; 2011: 7.1; 2012: 2.0; 2013: 1.4; 2014: 1.5; 2015: 1.5.
- GDP excl. refinery 1/: 2007: 1.2; 2008: 0.3; 2009: -4.8; 2010: 0.2; 2011: 3.2; 2012: 2.5; 2013: 1.6; 2014: 1.7; 2015: 1.7.
- CPI (period average): 2007: 5.4; 2008: 9.0; 2009: -2.1; 2010: 2.2; 2011: 2.5; 2012: 3.1; 2013: 3.1; 2014: 3.0; 2015: 3.0.
- GDP per capita (U.S. dollars): 2007: 25,022; 2008: 26,511; 2009: 24,573; 2010: 23,668; 2011: 25,538; 2012: 26,398; 2013: 27,186; 2014: 27,999; 2015: 28,841.
- Population (mid-year): 2007: 104,006; 2008: 105,287; 2009: 106,749; 2010: 108,243; 2011: 109,867; 2012: 111,515; 2013: 113,187; 2014: 114,885; 2015: 116,608.
- Unemployment series: 2007: 7.1; 2008: 6.9; 2009: 11.3.

### Fiscal developments, balances, and public debt (selected)
- Primary balance (without measures, percent of GDP): 2007: 0.1; 2008: 6.0; 2009: -0.9; 2010: -1.2; 2011: -3.9; 2012: -3.2; 2013: -3.0; 2014: -3.1; 2015: -3.2.
- Revenues (total, percent of GDP): 2007: 22.2; 2008: 27.3; 2009: 24.0; 2010: 24.6; 2011: 20.7; 2012: 21.1; 2013: 21.1; 2014: 21.1; 2015: 21.1.
- Expenditures (total, percent of GDP): 2007: 22.1; 2008: 21.4; 2009: 24.9; 2010: 25.8; 2011: 24.6; 2012: 24.3; 2013: 24.1; 2014: 24.1; 2015: 24.3.
- Transfers to AZV (percent of GDP): 2007: 2.6; 2008: 2.5; 2009: 2.8; 2010: 2.8; 2011: 2.1; 2012: 2.1; 2013: 2.2; 2014: 2.3; 2015: 2.4.
- Overall balance (including transfers to AZV, percent of GDP): 2007: -2.3; 2008: 3.7; 2009: -3.5; 2010: -4.1; 2011: -6.7; 2012: -6.1; 2013: -6.1; 2014: -6.2; 2015: -6.3.
- Gross central government debt (percent of GDP): 2007: 45.9; 2008: 41.0; 2009: 47.3; 2010: 50.9; 2011: 52.1; 2012: 54.4; 2013: 57.2; 2014: 60.9; 2015: 64.6.
- Net central government debt (percent of GDP): 2007: 41.7; 2008: 35.1; 2009: 40.8; 2010: 45.1; 2011: 47.9; 2012: 51.8; 2013: 55.6; 2014: 59.3; 2015: 63.1.

### Monetary sector, central bank, and liquidity (selected)
- Net foreign assets (millions of Aruban florins): 2006: 60; 2007: 86; 2008: 108; 2009: 115; 2010: 120; 2011: 122.
- Reserve money (millions of florins): 2006: 488; 2007: 537; 2008: 819; 2009: 870; 2010: 935; 2011: 981.
- Money supply (M2, millions of florins): 2006: 2,484; 2007: 2,566; 2008: 2,990; 2009: 3,171; 2010: 3,403; 2011: 3,810.
  - Credit to private sector (yoy percent): 2006: 4.9; 2007: 4.0; 2008: 4.2; 2009: -0.7; 2010: 3.0; 2011: 10.0.
  - Deposits (yoy percent): 2006: 2.8; 2007: 17.5; 2008: 6.7; 2009: 7.7; 2010: 12.6.
- Government deposits at central bank (percent of GDP): 2006: 0.6; 2007: 0.4; 2008: 2.0; 2009: 2.1; 2010: 1.9; 2011: 1.5.

### Commercial banks and financial soundness (selected)
- Financial Soundness Indicators (selected):
  - Tier 1 capital to risk weighted assets: 2007: 7.2; 2008: 8.3; 2009: 10.6.
  - Tier 1 and Tier 2 to risk weighted assets: 2007: 13.0; 2008: 14.7; 2009: 17.9.
  - NPLs/gross loans: 2007: 6.7; 2008: 6.9; 2009: 7.8.
  - ROA before taxes: 2007: 4.1; 2008: 3.0; 2009: 2.6.
  - ROE before taxes: 2007: 50.2; 2008: 32.4; 2009: 25.2.
  - Liquid assets/total assets: 2007: 29.0; 2008: 34.7; 2009: 30.1.
  - Loans/deposits: 2007: 74.7; 2008: 69.4; 2009: 67.0.
- NPLs net of allocated provisions/gross loans: 2007: 4.0; 2008: 3.9; 2009: 4.2.

### External sector, balance of payments, and reserves (selected)
- Current account balance (percent of GDP): 2007: -3.8; 2008: -5.4; 2009: 6.1; 2010: -1.2; 2011: -2.6; 2012: -3.5; 2013: -3.2; 2014: -3.2; 2015: -3.2.
- Trade balance (percent of GDP): 2007: -6.2; 2008: -17.8; 2009: -18.4; 2010: -29.9; 2011: -12.7; 2012: -11.4; 2013: -11.4; 2014: -11.4; 2015: -11.4.
- Gross official reserves (US$ million): 2007: 465; 2008: 701; 2009: 701; 2010: 729; 2011: 742; 2012: 770; 2013: 810; 2014: 844; 2015: 878.
  - Reserves (months of non-oil imports of following year): 2007: 3.5; 2008: 5.8; 2009: 5.7; 2010: 5.4; 2011: 5.3; 2012: 5.3; 2013: 5.3; 2014: 5.3; 2015: 5.3.
- External debt (percent of GDP): 2007: 87.4; 2008: 83.9; 2009: 89.5; 2010: 89.7; 2011: 82.0; 2012: 80.5; 2013: 79.6; 2014: 78.8; 2015: 78.0.

### Key macro and social indicators (selected)
- Area (sq. km): 180.
- Population (thousands, estimate 2010): 108.
- GDP (millions of U.S. dollars): 2,562.
- GDP per capita (thousands of U.S. dollars): 24.
- Unemployment (2009, percent): 11.
- Infant mortality (per thousand): 13.3; Literacy rate (percent): 97.3; Percent of population below age 15: 18.8; Percent age 65+: 10.9; Life expectancy at birth (years): 75.1.

### Appendix I. Public Sector Debt (selected projections and assumptions)
- Baseline public sector debt (percent of GDP): 2005: 45.8; 2006: 46.4; 2007: 45.9; 2008: 41.0; 2009: 47.3; 2010: 50.9; 2011: 52.1; 2012: 53.0; 2013: 53.0; 2014: 52.4; 2015: 51.8.
- Debt-stabilizing primary balance: 0.8 (percent of GDP).
- Change in public sector debt (percent of GDP): 2005: 2.7; 2006: 0.6; 2007: -0.5; 2008: -4.9; 2009: 6.2; 2010: 3.6; 2011: 1.3; 2012: 0.9; 2013: 0.0; 2014: -0.6; 2015: -0.6.
- Gross financing need (percent of GDP): 2005: 8.5; 2006: 9.8; 2007: 8.4; 2008: 4.0; 2009: 8.6; 2010: 9.1; 2011: 12.5; 2012: 12.9; 2013: 12.5; 2014: 9.5; 2015: 7.6.
- Scenario with no policy change (percent of GDP): 2010: 50.9; 2011: 58.5; 2012: 63.5; 2013: 69.4; 2014: 76.3; 2015: 83.4.
- Key macro assumptions:
  - Real GDP growth (percent): 2009: -7.7; 2010: -2.2; 2011: 7.1; 2012: 2.0; 2013: 1.4; 2014: 1.5; 2015: 1.5.
  - Average nominal interest rate on public debt (percent): 2010: 5.9; 2011: 6.0; 2012: 5.9; 2013: 6.0; 2014: 6.1; 2015: 6.3.
  - Inflation rate (GDP deflator, percent): 2010: 1.7; 2011: 2.3; 2012: 2.9; 2013: 3.1; 2014: 3.0; 2015: 3.0.
  - Nominal appreciation: 0.0 in years shown.

### Update since Staff Report (information available since SM/10/270)
- Refinery resumption postponed to January 2011 (from November 2010).
- Staff revised projected real GDP growth 2010 to -3.2 percent (from -2.2 percent) and 2011 to 8.1 percent (from 7.1 percent).
- Real GDP growth excluding refining projections unchanged at 0.2 percent (2010) and 3.2 percent (2011).
- Central bank cut its advance rate to 1 percent (from 3 percent) in early October.
- Central bank clarified it no longer targets credit growth and explained the unremunerated reserves requirement framework.

### Executive Board assessment and policy advice (selected)
- Directors encouraged development of a medium-term fiscal adjustment program to ensure debt sustainability and shock-absorption space.
- Commended pension and health reforms in social dialogue but noted limited short-term budgetary impact.
- Welcomed authorities’ intent to strengthen fiscal position through expenditure cuts and noted some revenue measures would be needed.
- Identified tax reform, potentially including a VAT, as key to balance fiscal constraints and social priorities; encouraged seeking technical assistance (e.g., CARTAC).
- Agreed the peg to the U.S. dollar has served Aruba well; welcomed switch from credit ceiling to unremunerated reserves requirement but noted transition risks.
- Warned absence of a credit ceiling could deteriorate lending standards and increase supervision challenges.
- Called on authorities to eliminate tax on foreign exchange transactions (an unapproved exchange restriction under Article VIII).
- Encouraged greater competition in financial sector by temporarily relaxing some entry barriers for foreign banks, with close cooperation with home supervisors.

### Monetary policy and financial sector (selected)
- Objective: maintain relative price stability via fixed florin–U.S. dollar peg.
- Until 2009 main instrument was credit ceiling; since January 2010 moved to unremunerated reserve requirement.
- Central bank increased required liquidity and solvency ratios and introduced IMF-model stress testing; second stress test conducted in September 2010.
- Central bank established separate integrity unit for AML/CFT supervision.
- Financial sector in solid condition; competition modest and interest differentials remain high despite weak credit demand.

*Source: IMF staff report excerpt contained in the provided content unit.*

### 2014. However, the government emphasized cuts in the size of the civil service and

### _cr10334 - 2014. However, the government emphasized cuts in the size of the civil service and

### I. Context and Recent Developments
- Aruba is a small, open economy with one of the highest living standards in the Caribbean and a history of stability-oriented macroeconomic policies.
- In 2003–07, real GDP growth averaged 3 percent per year, boosted by tourism and foreign direct investment.
- The central government deficit averaged 1.7 percent of GDP in the past 10 years prior to the crisis; public debt was contained at 40–45 percent of GDP.
- Since 2008, adverse external shocks have had large effects:
  - Tourism declined after the global downturn; between two-thirds and three-quarters of the economy are estimated to depend on tourism.
  - Aruba’s oil refinery shut down operations in July 2009; more than 2,000 jobs, about 5 percent of the workforce, were directly or indirectly linked to the refinery. The refinery owner announced resumption of operations from November (year implied in source).
  - Real GDP contracted by 7½ percent in 2009; unemployment rose to 11.3 percent.
- Government fiscal response:
  - Upon taking office in October 2009, the new government cut the business turnover tax (BBO) in half from 2010. The BBO accounted for almost 20 percent of tax revenue in 2008, or close to 4 percent of GDP.
  - The government increased social transfers and initiated a social dialogue with labor unions and employers.
- Monetary policy constraints and changes:
  - The central bank previously used an annual credit ceiling in the context of a fixed exchange rate to the U.S. dollar.
  - In the downturn, commercial banks cut lending while maintaining high interest margins.
  - The central bank abolished the credit ceiling at the beginning of this year and moved to an unremunerated reserves requirement.
- External position and reserves:
  - Real effective exchange rate (core prices) depreciated slightly in recent years; Aruba’s market share in Caribbean tourism held up.
  - At end-2009, official reserves covered about 5½ months of imports and 100 percent of short term debt by residual maturity.
  - Total external debt is more than 90 percent of GDP; much is FDI-related intra-company lending. Deposits of non-residents with Aruban banks amount to somewhat more than 10 percent of GDP and were stable during the crisis.

### II. Macroeconomic Outlook
- Near-term projections and dynamics:
  - 2010: GDP is projected to contract by 2 percent. GDP excluding refining is expected to stagnate.
  - 2011: Overall GDP growth is projected to surge temporarily to 7 percent as the refinery returns to full capacity. GDP excluding refining is projected to expand by more than 3 percent.
  - Inflation is projected to remain subdued in 2010.
- Drivers and risks:
  - Recovery supported by a pick-up in tourism and the re-opening of the refinery.
  - Risks are broadly balanced and relate primarily to prospects for tourism and construction activity; two-thirds of tourists come from the United States.
- Long-term growth assessment:
  - IMF staff estimate Aruba’s long-term potential annual real growth rate at about 1½ percent.
  - The authorities and staff agreed the pre-crisis growth model appears unsustainable given lower expected U.S. consumption growth and space constraints for tourism expansion.
  - Government strategy focuses on upgrading tourism facilities, improving infrastructure, and moving to more energy-efficient production.

### III. Policy Discussions — Restoring Sustainability of the Public Finances
- Underlying fiscal pressures:
  - Main pension and health care schemes accumulated sizeable financial imbalances over time, reflecting in part population ageing.
  - The defined-benefit pension fund for civil servants (APFA) accrued a large actuarial deficit; AZV required increasing transfers from the central government, exceeding 3 percent of GDP in 2009.
  - One-off windfall receipts (e.g., a payment of more than 4 percent of GDP in 2008 from the Dutch government) have camouflaged underlying fiscal weaknesses.
- Fiscal outcomes and projections:
  - The overall fiscal deficit for 2010 is projected at slightly above 4 percent GDP, though it would have been much higher without a one-off tax settlement with the oil refinery (yielding more than 4½ percent of GDP).
  - Cyclically weak revenue collection exacerbates the fiscal shortfall.
- Social dialogue outcomes and reforms:
  - APFA (Algemeen Pensioenfonds Aruba):
    - Previously structurally underfunded due to generous benefits (70 percent of the final wage) and early retirement age (55 years).
    - Entitlement reforms agreed in the social dialogue include: computation of pension claims on the basis of average career wages instead of final wages; increase in the retirement age from 55 to 60 years; and calculation of APFA pensions net of AOV pension claims. These reforms will significantly improve APFA’s financial position.
  - AOV (Algemeen Ouderdomspensioen Verzekering):
    - Running a cash-flow deficit since 2009 but still drawing down reserves accumulated in previous years.
    - Increase in premium income agreed in the social dialogue will postpone the need for government transfers from 2013 to 2014.
    - Statutory retirement age is 60 years.
  - AZV (Algemene Ziektekosten Verzekering):
    - Since its introduction in 2001, premiums have been insufficient to cover expenditures, resulting in transfers exceeding 3 percent of GDP in 2009 (cash basis).
    - The funding shortfall is expected to fall to about 2 percent of GDP as a result of the premium increase agreed in the social dialogue.
    - Further reforms needed: options include introduction of co-payments, increasing competition between health care providers by relaxing entry restrictions, and strengthening expenditure controls.
- Fiscal adjustment considerations:
  - Long-standing structural pressures and recent permanent fiscal loosening imply a need to restore sustainability of public finances.
  - Policy options include revenue measures (which the government preferred to consider at a later stage) and expenditure measures (the government emphasized cuts in the size of the civil service and investments in infrastructure to stimulate growth).

*Source: IMF staff report excerpt contained in the provided content unit.*

### 10.      In a first round of the social dialogue, participants agreed in August on steps

### _cr10334 - 10.      In a first round of the social dialogue, participants agreed in August on steps

### Social dialogue measures and short-term impact
- Participants agreed in August on steps that reduce longer-term risks to the public finances but yield limited fiscal savings in the short-term.
- Important measures were agreed that improve the financial health of Aruba’s health care and pension schemes (Box 4).
- Agreed tax and transfer measures:
  - Keep the business turnover tax rate at its 2010 level instead of eliminating it in 2011 as originally planned.
  - Raise excise taxes by modest amounts.
  - Introduce a tax allowance for the working poor.
  - Increase transfers for welfare recipients and increase wages for civil servants.
- IMF staff estimate: the measures agreed in the social dialogue reduce the underlying fiscal deficit by 2–2½ percent of GDP.
  - This estimate excludes some expansionary measures difficult to cost, such as reduced import duties on green products.

### Fiscal outlook and Aruba’s fiscal adjustment need
- IMF staff projections:
  - Fiscal deficit of almost 7 percent of GDP for 2011.
  - In the absence of further consolidation measures, an underlying medium-term shortfall of 6–6½ percent of GDP.
- Risks and financing context:
  - Public debt would increase to about 65 percent of GDP by 2015, triggering a rapid increase in the government’s interest burden.
  - Excess liquidity in Aruba’s financial system currently supports demand for government paper.
  - Government’s bank deposits of 6½ percent of GDP (much related to hotel sale receipts obtained in 2008) can be drawn down to cover financing needs.
  - Once private sector demand for credit recovers, the government would compete for funds.
  - Attracting or rolling-over external funding could become difficult, in particular from 2012 when significant amortizations on the government’s commercial external debt are falling due.
- Government commitment:
  - Reduce the deficit by about 1½ percentage points of GDP per year in 2012–14.
  - Implies a deficit of somewhat above 3 percent of GDP in 2013 and of below 2 percent of GDP by 2014.
  - With this path, public debt is estimated to stabilize at around 52 percent of GDP.
  - The measures needed to achieve this adjustment remain to be specified.
- IMF staff alternative recommendation:
  - Target a deficit of below 1 percent of GDP by 2013, corresponding to a primary surplus of 2¼ percent of GDP.
  - This implies a fiscal effort of about 5½ percent of GDP, starting in 2011, beyond initiatives announced in the social dialogue.
  - Given debt is not yet excessive and recovery is fragile, staff recommended stretching consolidation over two to three years.
  - Authorities were reluctant to adopt the more ambitious path, partly due to more optimistic growth views.

### Options for fiscal adjustment
- Authorities’ growth-focused strategy:
  - Infrastructure investment program envisaged for 2011–13 (road construction and relocation of commercial port).
  - Financing envisaged largely from government owned enterprises or private sector through PPPs, with no financial burdens for the central government budget.
  - Government view: program would boost activity and remove bottlenecks that impede long-term growth.
  - Staff caution: returns uncertain; contingent fiscal liabilities should be minimized and monitored carefully.
- Authorities’ preference for expenditure cuts:
  - Areas identified for potential reductions:
    - Public sector wage bill: hiring freeze; reduce workforce by natural attrition; consider privatization of some activities (e.g., trash collection). Note: public sector wage bill is already modest in regional comparison.
    - Spending on goods and services: increased from less than 4 percent of GDP in 2008 to more than 5 percent.
    - Health care: further premium increases could eliminate the need for a government transfer to AZV (projected at about 2 percent of GDP for 2011).
- Feasibility of expenditure-only adjustment:
  - Staff estimate: feasible expenditure cuts within a reasonable time frame amount to at most 3 percent of GDP.
  - This is below the authorities’ estimated need of 4½ percent and staff’s estimated need of 5½ percent.
  - Footnote: assumes savings of close to 2 percent of GDP from AZV, and about ½ percent of GDP each from public sector wage bill and goods and services.
- Revenue-side considerations:
  - On unchanged policies, Aruba’s tax revenues projected at about 18 percent of GDP going forward, compared to a regional average of about 25 percent of GDP across 15 other Caribbean countries.
  - Only about half of Aruba’s tax revenues result from indirect taxes, versus a regional average of almost two-thirds.
- Principles for tax reform suggested by staff:
  - (i) raise sufficient revenue; (ii) be growth-friendly, fair and transparent; (iii) trigger high taxpayer compliance with low administrative costs.
  - A comprehensive reform could also help lower high income tax rates, eliminate nuisance taxes such as Aruba’s foreign exchange tax, and protect real income levels of the poor when combined with targeted social spending.
- VAT as a key reform option:
  - A VAT could replace the BBO and avoid BBO’s distortionary cascading effects.
  - VAT burden would be borne to a significant degree by nonresidents, restraining impact on Arubans’ purchasing power.
  - To limit administrative costs, the VAT could exempt small businesses.
  - International experience suggests VAT introduction requires at least 1½–2 years of careful preparation.
  - IMF staff encouraged seeking technical expertise (for example, CARTAC).
- Authorities’ stance on tax structure:
  - Agreed a structural shift to more indirect taxation is desirable.
  - A tri-partite working group will analyze reform options and report by April 2011.
  - Authorities expressed initial preference for raising excise taxes (real value eroded from more than 4 percent of GDP in the early 1990s to less 2½ percent of GDP) or possibly higher import duties.

### Enhancing the effectiveness of monetary policy
- Monetary framework context:
  - Monetary policy anchored by the long-standing peg with the U.S. dollar.
  - Until end-2009, policy conducted with blunt instruments: ceiling on banks’ annual increase in lending to the private sector, limit on banks’ net foreign asset position, and a de-facto capital control obliging banks to transfer excess foreign assets to the central bank.
- Experience with the credit ceiling:
  - Pros:
    - Confidence in the peg was high; low degree of dollarization in banking system (17 percent of deposits at end-2009).
    - Unsustainable credit booms were prevented and underlying inflation remained contained.
  - Cons:
    - Discouraged competition, sustaining an oligopolistic banking system with large interest rate spreads and outsized fee revenues.
    - During the downturn the central bank lacked an instrument to stimulate lending: in 2009, banks’ average lending rates remained virtually unchanged at 11 percent while lending volumes contracted; banks placed a third of their funds in low-yielding central bank deposits or foreign assets.
- Reform of instruments:
  - Central bank eliminated the credit ceiling at end-2009 and replaced it with an unremunerated reserves requirement as the key policy instrument.
  - Staff welcomed the overhaul; expected to spur competition and allow more efficient conduct of monetary policy.
  - Transition and risks require careful management.
- Short-term stance and operational guidance:
  - Staff and authorities agreed monetary policy should remain accommodative in the short-term.
  - Required reserves are set well below commercial banks’ actual deposits at the central bank, creating substantial excess liquidity; these buffers should remain while credit demand is depressed.
  - Staff encouraged the central bank to clarify it no longer restricts credit growth; some banks misunderstood communiqués mentioning “targeted credit growth” as if the credit ceiling remained in effect.
- Promoting competition and entry:
  - Staff encouraged exploring temporary relaxation of rules that impede new competitors, noting requirements for a non-negative net foreign asset position and conservative loan-to-deposit ratios could impede foreign banks from setting up Aruban subsidiaries.
  - Central bank willing to consider temporary waivers if subsidiaries are owned by reputable international parent banks subject to comprehensive consolidated supervision.
- Contingency for tighter policy:
  - Central bank agreed tightening may become necessary once credit demand rebounds.
  - If pressure on foreign reserves emerges, the central bank must be prepared to use the reserves requirement rapidly and fully.
  - Concerns that a large increase in mandatory reserves could be costly for banks could be addressed by modest remuneration, if within central bank means.
  - Rapid introduction of certificates of deposits could be problematic given absence of a liquid interbank market and potential negative repercussions on the central bank’s financial position.
  - Over the longer-term, development of market-based monetary instruments remains an important objective.

### Safeguarding financial stability
- Banking sector resilience and prudential framework:
  - Conservative regulatory requirements and high underlying profitability helped the banking system weather the recession without major strains.
  - Prudential requirements:
    - Capital adequacy: 14 percent of risk-weighted assets.
    - Liquidity: 15 percent of assets excluding goodwill.
  - Nonperforming loans expected to increase for another 6–12 months but at a relatively modest pace.
  - Banks have ample capital cushions, continued profitability, and large buffers of excess liquidity to satisfy lending demand when activity picks up.
- Pension funds and recovery plans:
  - Progress made in restoring financial soundness to corporate defined-benefit pension funds under recovery plans.
  - In the wake of the recession, coverage ratios of some funds fell below 100 percent due to investment portfolio losses.
- Supervisory implications of monetary reform:
  - Central bank’s new monetary framework may increase prudential regulation and supervision challenges.
  - Absence of a credit ceiling could result in more aggressive lending and potential deterioration in lending standards.
  - Supervisors need to monitor developments, institutions’ strategies/actions, and enhance forward-looking stress tests.
- Offshore banking and reputational risk:
  - Aruba’s off-shore financial sector is small but carries potential reputational risk.
  - Off-shore banks should operate only insofar as the central bank can monitor activities and enforce prudential rules.
  - Central bank has stepped up efforts to ensure sufficient physical presence of all off-shore banks to permit effective supervision; noncompliance could trigger directives, penalties, or license revocation.

### Structure of the financial system (Box 5—key points)
- Financial sector size and composition:
  - Financial sector assets of 184 percent of GDP.
  - Commercial banks dominate with more than half of total assets.
  - Remaining sector divided among pension funds, insurance funds and bank-like institutions.
- Banking characteristics:
  - Four commercial banks are foreign owned and largely funded by resident deposits, which account for 78 percent of liabilities.
  - More than half of assets are loans to the private sector.
  - Holdings of public debt are low (only 2.5 percent of GDP).
- Offshore banks:
  - Two offshore banks with assets amounting to 12 percent of GDP.
  - Limited physical presence and engaged only in banking activities with nonresidents.
- Pension funds:
  - Pension sector dominated by the civil service pension fund (APFA) with assets of 37 percent of GDP.
  - APFA and insurance companies hold together 17 percent of GDP in government securities.

### Staff appraisal (summary)
- Aruba’s economy is gradually recovering from a severe recession triggered by external shocks (decline in tourism and temporary closure of oil refinery in July 2009).
- Recovery is slow and gradual; pre-crisis growth rates will be difficult to achieve due to lower expected U.S. consumption growth and limits to further quantitative expansion of tourism.

*Source: IMF staff and Aruban authorities (extract from the provided document).*

### 31.      Serious fiscal challenges need to be addressed. Aruba’s health care and pension

### 31.      Serious fiscal challenges need to be addressed. Aruba’s health care and pension

### Fiscal position and structural liabilities
- Aruba’s health care and pension schemes have long been structurally underfunded, giving rise to sizeable fiscal liabilities.
- Recent tax cuts, notably the halving of Aruba’s business turnover tax, and spending increases to combat the recession have further contributed to a large underlying fiscal deficit.
- If unaddressed, this would put public debt on an unsustainable path.
- Reforms agreed in the context of the social dialogue between the government, labor unions and employers enhance the soundness of Aruba’s pension and health care schemes and reduce longer-term downside risks to the fiscal outlook; however, their short-term budgetary impact is limited.

### Medium-term fiscal adjustment program (staff recommendation)
- Staff encourages the authorities to develop a medium-term fiscal adjustment program to safeguard the sustainability of the public finances.
- The program should aim to put public debt as a share of GDP on a declining path even under cautious assumptions about future growth.
- Objectives of the program:
  - Limit the government’s interest expenditures.
  - Maintain access to domestic and external financing at attractive rates.
  - Leave some room for maneuver in case Aruba is again affected by external shocks as in 2001/02 and in 2009.

### Expenditure and revenue measures; tax reform
- Staff agrees with the authorities’ intention to achieve a large part of the needed fiscal adjustment through expenditure cuts.
- However, recourse to some revenue measures seems unavoidable in view of the size of the fiscal shortfall.
- Staff recommends considering a tax reform that balances fiscal constraints with social priorities.
- A key component could be a value-added tax designed to fit Aruba’s specific needs.
- Should the authorities decide to pursue such a reform, staff encourages the authorities to seek technical assistance based on international best practices, for example by joining CARTAC.

### Monetary policy framework change
- The central bank’s switch from a credit ceiling to an unremunerated reserves requirement as key policy tool is welcome and should allow for a more efficient conduct of monetary policy going forward.
- The transition to the new monetary arrangement and the associated risks need to be managed carefully.
- As long as credit conditions remain depressed, the central bank should continue to leave excess liquidity in the market.
- Once demand for credit rebounds, the central bank needs to be prepared to use the reserves requirement to the full extent needed, with a view to protecting the central bank’s foreign reserves position and safeguarding the currency peg.

### Prudential regulation and supervision
- Challenges to prudential regulation and supervision will likely increase with the new monetary policy framework.
- The absence of a credit ceiling may result in more aggressive lending, which, in turn, could trigger a deterioration in banks’ lending standards.
- Supervisors will need to monitor market developments closely as well as the strategies and actions of individual institutions.

*Source: IMF staff assessment as provided in the content unit.*

### 36.      It is currently envisaged that the next Article IV consultation discussions with

### _cr10334 - 36.      It is currently envisaged that the next Article IV consultation discussions with

### Article IV timing
- It is currently envisaged that the next Article IV consultation discussions with Aruba will be held in 24 months time.

### Real sector developments and projections
- Real GDP growth (actuals and projections): 2007: 1.4; 2008: 0.7; 2009: -7.7; 2010: -2.2; 2011: 7.1; 2012: 2.0; 2013: 1.4; 2014: 1.5; 2015: 1.5.
- Real domestic demand: 2007: 2.1; 2008: 0.5; 2009: -8.7; 2010: 1.1; 2011: 6.5; 2012: 2.0; 2013: 0.9; 2014: 1.5; 2015: 1.5.
  - Consumption: 2007: 3.2; 2008: -0.8; 2009: -3.0; 2010: 2.1; 2011: 1.6; 2012: 1.6; 2013: 1.4; 2014: 1.5; 2015: 1.5.
    - Private consumption: 2007: 6.5; 2008: -1.7; 2009: -5.6; 2010: -0.4; 2011: 4.1; 2012: 2.0; 2013: 1.5; 2014: 1.5; 2015: 1.5.
    - Public consumption: 2007: -4.8; 2008: 1.6; 2009: 4.0; 2010: 8.1; 2011: -3.9; 2012: 0.6; 2013: 1.2; 2014: 1.4; 2015: 1.4.
  - Gross investment: 2007: 0.1; 2008: 3.1; 2009: -19.5; 2010: -1.3; 2011: 18.1; 2012: 3.0; 2013: 0.1; 2014: 1.6; 2015: 1.6.
    - Private investment: 2007: 0.7; 2008: 2.1; 2009: -20.6; 2010: 0.0; 2011: 18.5; 2012: 3.0; 2013: 0.0; 2014: 1.7; 2015: 1.7.
    - Public investment: 2007: -14.4; 2008: 28.4; 2009: 3.3; 2010: -22.2; 2011: 10.0; 2012: 2.5; 2013: 1.2; 2014: 1.0; 2015: 1.0.
- Exports of goods and services: 2007: 3.7; 2008: 7.1; 2009: -13.5; 2010: -5.4; 2011: 11.6; 2012: 1.9; 2013: 1.9; 2014: 1.6; 2015: 1.6.
- Imports of goods and services: 2007: 4.1; 2008: 5.5; 2009: -13.6; 2010: -0.5; 2011: 9.8; 2012: 2.0; 2013: 1.2; 2014: 1.7; 2015: 1.7.
- Tourism exports and non-tourism exports (oil) detailed paths:
  - Tourism exports: 2007: 14.8; 2008: 5.6; 2009: -6.3; 2010: 1.2; 2011: 2.1; 2012: 1.8; 2013: 2.0; 2014: 1.6; 2015: 1.6.
  - Non-tourism exports (oil): 2007: -11.3; 2008: 9.5; 2009: -25.6; 2010: -19.4; 2011: 36.8; 2012: 2.0; 2013: 1.8; 2014: 1.7; 2015: 1.7.
- GDP excl. refinery 1/: 2007: 1.2; 2008: 0.3; 2009: -4.8; 2010: 0.2; 2011: 3.2; 2012: 2.5; 2013: 1.6; 2014: 1.7; 2015: 1.7.
- CPI (period average): 2007: 5.4; 2008: 9.0; 2009: -2.1; 2010: 2.2; 2011: 2.5; 2012: 3.1; 2013: 3.1; 2014: 3.0; 2015: 3.0.
- Core CPI (average): 2007: 3.0; 2008: 3.3; 2009: 1.8; 2010: 1.5; 2011: 2.2; 2012: 3.0; 2013: 3.0; 2014: 3.0; 2015: 3.0.
- GDP per capita (U.S. dollars): 2007: 25,022; 2008: 26,511; 2009: 24,573; 2010: 23,668; 2011: 25,538; 2012: 26,398; 2013: 27,186; 2014: 27,999; 2015: 28,841.
- Population (mid-year): 2007: 104,006; 2008: 105,287; 2009: 106,749; 2010: 108,243; 2011: 109,867; 2012: 111,515; 2013: 113,187; 2014: 114,885; 2015: 116,608.
- Unemployment (2009, percent): 11; Unemployment series: 2007: 7.1; 2008: 6.9; 2009: 11.3.

### Fiscal developments, balances, and public debt
- Central government operations (without measures) — Primary balance: 2007: 0.1; 2008: 6.0; 2009: -0.9; 2010: -1.2; 2011: -3.9; 2012: -3.2; 2013: -3.0; 2014: -3.1; 2015: -3.2 (percent of GDP).
  - Revenues (total): 2007: 22.2; 2008: 27.3; 2009: 24.0; 2010: 24.6; 2011: 20.7; 2012: 21.1; 2013: 21.1; 2014: 21.1; 2015: 21.1.
  - Expenditures (total): 2007: 22.1; 2008: 21.4; 2009: 24.9; 2010: 25.8; 2011: 24.6; 2012: 24.3; 2013: 24.1; 2014: 24.1; 2015: 24.3.
  - Transfers to AZV: 2007: 2.6; 2008: 2.5; 2009: 2.8; 2010: 2.8; 2011: 2.1; 2012: 2.1; 2013: 2.2; 2014: 2.3; 2015: 2.4.
- Overall balance (including transfers to AZV): 2007: -2.3; 2008: 3.7; 2009: -3.5; 2010: -4.1; 2011: -6.7; 2012: -6.1; 2013: -6.1; 2014: -6.2; 2015: -6.3.
- Gross central government debt (percent of GDP): 2007: 45.9; 2008: 41.0; 2009: 47.3; 2010: 50.9; 2011: 52.1; 2012: 54.4; 2013: 57.2; 2014: 60.9; 2015: 64.6.
- Net central government debt (percent of GDP): 2007: 41.7; 2008: 35.1; 2009: 40.8; 2010: 45.1; 2011: 47.9; 2012: 51.8; 2013: 55.6; 2014: 59.3; 2015: 63.1.
- With government-announced measures (deficit path announced by the government):
  - Primary balance (with measures): ... -1.8 -0.1 1.4 1.5 (table ellipses indicate not shown for earlier years in the source).
  - Overall balance (with measures): ... -4.7 -3.2 -1.7 -1.7.
  - Gross central government debt (with measures): ... 53.0 53.0 52.4 51.8.
  - Net central government debt (with measures): ... 50.4 51.3 50.9 50.3.
- Table 3 (operations of the central government, 2007–12) details tax composition and expenditure composition:
  - Total revenue 2007–2012: 22.2; 27.3; 24.0; 24.6; 20.7; 21.1.
  - Tax revenue 2007–2012: 18.9; 19.6; 20.1; 21.8; 17.5; 18.3.
    - Income and profit: 6.7; 7.1; 7.3; 6.5; 6.7; 6.8.
    - Commodities: 6.0; 5.5; 5.4; 5.2; 5.6; 6.1.
    - Turnover (B.B.O.): 2.8; 3.4; 3.7; 6.6; 1.6; 1.5.
  - Total expenditure and net lending 2007–2012: 22.1; 21.4; 24.9; 25.8; 24.6; 24.3.
    - Current expenditure 2007–2012: 20.4; 19.3; 22.2; 23.9; 22.6; 22.3.
      - Wage related costs 2007–2012: 11.3; 10.9; 12.4; 13.4; 13.0; 12.8.
    - Capital expenditure 2007–2012: 1.2; 1.6; 1.8; 1.4; 1.5; 1.4.
  - Interest 2007–2012: 2.4; 2.3; 2.6; 2.8; 2.8; 2.9.
- Public debt composition (2006–09): Gross debt 2006: 46.4; 2007: 45.9; 2008: 41.0; 2009: 47.3 (percent of GDP).
  - Domestic debt 2009: 24.1; foreign debt 2009: 23.1 (percent of GDP).
  - Negotiable domestic debt (2009): Government bonds 13.1 (percent of GDP).

### Monetary sector, central bank, and liquidity
- Central Bank Survey (2006–11 projections): Net foreign assets (NFA): 2006: 60; 2007: 86; 2008: 108; 2009: 115; 2010: 120; 2011: 122 (units: millions of Aruban florins in table headings for central bank survey).
- Reserve money (2006–11): 2006: 488; 2007: 537; 2008: 819; 2009: 870; 2010: 935; 2011: 981 (millions of florins).
- Monetary survey (2006–11): Money supply (M2): 2006: 2,484; 2007: 2,566; 2008: 2,990; 2009: 3,171; 2010: 3,403; 2011: 3,810 (millions of florins).
  - Credit to the private sector (year-on-year percent change): 2006: 4.9; 2007: 4.0; 2008: 4.2; 2009: -0.7; 2010: 3.0; 2011: 10.0.
  - Deposits (year-on-year percent change): 2006: 2.8; 2007: 17.5; 2008: 6.7; 2009: 7.7; 2010: 12.6.
  - Money multiplier (memorandum): 2006: 5.1; 2007: 4.8; 2008: 3.7; 2009: 3.6; 2010: 3.6; 2011: 3.9.
- Government deposits at central bank (percent of GDP): 2006: 0.6; 2007: 0.4; 2008: 2.0; 2009: 2.1; 2010: 1.9; 2011: 1.5.

### Commercial banks and financial soundness
- Bank asset and liability composition highlights (2001–09 charts in source):
  - Composition of bank assets (percent of total): foreign assets; reserves at Central Bank; credit to government; credit to private sector (series presented in figures).
  - Composition of bank liabilities (percent of total): resident private deposits; government deposits; non-resident deposits; capital.
  - Composition of credit to private sector (percent of GDP): mortgages; enterprise loans; individual loans.
- Interest rates and margins (2001–09): Margins, loan and deposit rates series shown in figures.
- Financial Soundness Indicators, selected (2007–09):
  - Tier 1 capital to risk weighted assets: 2007: 7.2; 2008: 8.3; 2009: 10.6.
  - Tier 1 and Tier 2 capital to risk weighted assets: 2007: 13.0; 2008: 14.7; 2009: 17.9.
  - NPLs/gross loans: 2007: 6.7; 2008: 6.9; 2009: 7.8.
  - ROA before taxes: 2007: 4.1; 2008: 3.0; 2009: 2.6.
  - ROE before taxes: 2007: 50.2; 2008: 32.4; 2009: 25.2.
  - Liquid assets/total assets: 2007: 29.0; 2008: 34.7; 2009: 30.1.
  - Loans/deposits: 2007: 74.7; 2008: 69.4; 2009: 67.0.
- Table 8 (financial soundness): NPLs net of allocated provisions/gross loans: 2007: 4.0; 2008: 3.9; 2009: 4.2.

### External sector, balance of payments, and reserves
- Current account balance (percent of GDP): 2007: -3.8; 2008: -5.4; 2009: 6.1; 2010: -1.2; 2011: -2.6; 2012: -3.5; 2013: -3.2; 2014: -3.2; 2015: -3.2.
  - Oil sector current account (percent of GDP): 2007: 1.7; 2008: -2.2; 2009: 5.6; 2010: -1.4; 2011: 2.4; 2012: 1.0; 2013: 1.0; 2014: 1.0; 2015: 1.0.
  - Free zone current account (percent of GDP): 2007: 0.1; 2008: -0.2; 2009: -0.3; 2010: 0.0.
  - Rest of economy current account (percent of GDP): 2007: -5.6; 2008: -3.1; 2009: 0.8; 2010: 0.1; 2011: -5.1; 2012: -4.5; 2013: -4.3; 2014: -4.3; 2015: -4.2.
- Trade balance (percent of GDP): 2007: -6.2; 2008: -17.8; 2009: -18.4; 2010: -29.9; 2011: -12.7; 2012: -11.4; 2013: -11.4; 2014: -11.4; 2015: -11.4.
  - Exports (percent of GDP): 2007: 103.4; 2008: 132.7; 2009: 56.1; 2010: 10.9; 2011: 117.1; 2012: 116.7; 2013: 116.7; 2014: 116.7; 2015: 116.7.
  - Imports (percent of GDP): 2007: 109.6; 2008: 150.5; 2009: 74.5; 2010: 40.8; 2011: 129.8; 2012: 128.1; 2013: 128.0; 2014: 128.0; 2015: 128.0.
- Financing and capital flows:
  - Capital and financial account (percent of GDP): 2007: 5.3; 2008: 14.0; 2009: -4.4; 2010: 2.3; 2011: 3.1; 2012: 4.5; 2013: 4.5; 2014: 4.3; 2015: 4.2.
  - FDI (net, percent of GDP): 2007: -4.8; 2008: 6.9; 2009: 3.1; 2010: 3.8; 2011: 4.3; 2012: 2.6; 2013: 1.6; 2014: 1.5; 2015: 1.5.
- Gross official reserves (millions of U.S. dollars): 2007: 465; 2008: 701; 2009: 701; 2010: 729; 2011: 742; 2012: 770; 2013: 810; 2014: 844; 2015: 878.
  - Gross official reserves (months of non-oil imports of following year): 2007: 3.5; 2008: 5.8; 2009: 5.7; 2010: 5.4; 2011: 5.3; 2012: 5.3; 2013: 5.3; 2014: 5.3; 2015: 5.3.
- External debt (percent of GDP): 2007: 87.4; 2008: 83.9; 2009: 89.5; 2010: 89.7; 2011: 82.0; 2012: 80.5; 2013: 79.6; 2014: 78.8; 2015: 78.0.

### Key macro and social indicators (selected)
- Area (sq. km): 180.
- Population (thousands) 1/: 108 (estimate, 2010).
- GDP (millions of U.S. dollars) 1/: 2,562.
- GDP per capita (thousands of U.S. dollars) 1/: 24.
- Unemployment (2009, percent): 11.
- GDP per capita (Aruban florins): 2007: 44,790; 2008: 47,455; 2009: 43,986; 2010: 42,366; 2011: 45,712; 2012: 47,253; 2013: 48,662; 2014: 50,119; 2015: 51,626.
- Social indicators: Infant mortality (per thousand): 13.3; Literacy rate (percent): 97.3; Percent of population below age 15 (percent): 18.8; Percent of population age 65+ (percent): 10.9; Life expectancy at birth (years): 75.1.

*Sources: Aruban authorities; WEO; Central Bank of Aruba; and IMF staff estimates and projections.*

### Appendix I. Public Sector Debt

### Appendix I. Public Sector Debt

### Public sector debt projections and key figures (2005–2015)
- Baseline: Public sector debt (percent of GDP) by year:
  - 2005: 45.8
  - 2006: 46.4
  - 2007: 45.9
  - 2008: 41.0
  - 2009: 47.3
  - 2010: 50.9
  - 2011: 52.1
  - 2012: 53.0
  - 2013: 53.0
  - 2014: 52.4
  - 2015: 51.8
- Debt-stabilizing primary balance: 0.8
- Of which foreign-currency denominated (percent of GDP) by year:
  - 2005: 20.6
  - 2006: 21.5
  - 2007: 21.1
  - 2008: 20.9
  - 2009: 23.1
  - 2010: 24.8
  - 2011: 24.3
  - 2012: 24.6
  - 2013: 24.9
  - 2014: 25.1
  - 2015: 25.3
- Change in public sector debt (percent of GDP) by year:
  - 2005: 2.7
  - 2006: 0.6
  - 2007: -0.5
  - 2008: -4.9
  - 2009: 6.2
  - 2010: 3.6
  - 2011: 1.3
  - 2012: 0.9
  - 2013: 0.0
  - 2014: -0.6
  - 2015: -0.6

### Identified debt-creating flows and fiscal balances
- Identified debt-creating flows (4+7+12), percent of GDP:
  - 2005: 1.2
  - 2006: -0.8
  - 2007: -0.9
  - 2008: -6.8
  - 2009: 6.9
  - 2010: 4.3
  - 2011: 2.3
  - 2012: 2.3
  - 2013: 0.9
  - 2014: -0.6
  - 2015: -0.6
- Primary deficit (after measures) 10/ (percent of GDP):
  - 2005: 1.0
  - 2006: -1.4
  - 2007: -0.1
  - 2008: -6.0
  - 2009: 0.9
  - 2010: 1.2
  - 2011: 3.9
  - 2012: 1.8
  - 2013: 0.1
  - 2014: -1.4
  - 2015: -1.5
- Revenue and grants (percent of GDP):
  - 2005: 21.9
  - 2006: 22.7
  - 2007: 22.2
  - 2008: 27.3
  - 2009: 24.0
  - 2010: 24.6
  - 2011: 20.7
  - 2012: 21.8
  - 2013: 22.5
  - 2014: 23.3
  - 2015: 23.4
- Primary (noninterest) expenditure (percent of GDP):
  - 2005: 22.9
  - 2006: 21.3
  - 2007: 22.1
  - 2008: 21.4
  - 2009: 24.9
  - 2010: 25.8
  - 2011: 24.6
  - 2012: 23.6
  - 2013: 22.6
  - 2014: 21.9
  - 2015: 21.9

### Automatic debt dynamics and contributions
- Automatic debt dynamics (percent of GDP) by year:
  - 2005: 0.2
  - 2006: 0.5
  - 2007: -0.8
  - 2008: -0.8
  - 2009: 6.0
  - 2010: 3.1
  - 2011: -1.6
  - 2012: 0.5
  - 2013: 0.8
  - 2014: 0.8
  - 2015: 0.9
- Contribution from interest rate/growth differential (percent of GDP) — identical to automatic dynamics in table:
  - 2005: 0.2
  - 2006: 0.5
  - 2007: -0.8
  - 2008: -0.8
  - 2009: 6.0
  - 2010: 3.1
  - 2011: -1.6
  - 2012: 0.5
  - 2013: 0.8
  - 2014: 0.8
  - 2015: 0.9
- Of which contribution from real interest rate (percent of GDP):
  - 2005: 1.0
  - 2006: 1.0
  - 2007: -0.2
  - 2008: -0.5
  - 2009: 2.6
  - 2010: 2.1
  - 2011: 1.7
  - 2012: 1.5
  - 2013: 1.5
  - 2014: 1.6
  - 2015: 1.6
- Of which contribution from real GDP growth (percent of GDP):
  - 2005: -0.8
  - 2006: -0.5
  - 2007: -0.6
  - 2008: -0.3
  - 2009: 3.4
  - 2010: 1.0
  - 2011: -3.3
  - 2012: -1.0
  - 2013: -0.7
  - 2014: -0.8
  - 2015: -0.7
- Contribution from exchange rate depreciation 4/: 0.0 in all years shown
- Other identified debt-creating flows: 0.0 in all years shown
  - Privatization receipts (negative): 0.0 in all years shown
  - Recognition of implicit or contingent liabilities: 0.0 in all years shown
  - Other (e.g., bank recapitalization): 0.0 in all years shown
- Residual (Asset Changes) (2-3) 5/ (percent of GDP) by year:
  - 2005: 1.5
  - 2006: 1.5
  - 2007: 0.4
  - 2008: 1.9
  - 2009: -0.6
  - 2010: -0.7
  - 2011: -1.0
  - 2012: -1.4
  - 2013: -0.9
  - 2014: 0.0
  - 2015: 0.0

### Ratios, financing needs, and scenarios
- Central Government debt-to-revenue ratio (percent) by year:
  - 2005: 209.5
  - 2006: 204.2
  - 2007: 207.0
  - 2008: 150.2
  - 2009: 196.6
  - 2010: 207.1
  - 2011: 251.8
  - 2012: 243.6
  - 2013: 235.4
  - 2014: 225.1
  - 2015: 221.4
- Gross financing need 6/ (percent of GDP) by year:
  - 2005: 8.5
  - 2006: 9.8
  - 2007: 8.4
  - 2008: 4.0
  - 2009: 8.6
  - 2010: 9.1
  - 2011: 12.5
  - 2012: 12.9
  - 2013: 12.5
  - 2014: 9.5
  - 2015: 7.6
- Gross financing need in billions of U.S. dollars by year:
  - 2005: 0.2
  - 2006: 0.2
  - 2007: 0.2
  - 2008: 0.1
  - 2009: 0.2
  - 2010: 0.2
  - 2011: 0.4
  - 2012: 0.4
  - 2013: 0.4
  - 2014: 0.3
  - 2015: 0.3
- Scenario with key variables at their historical averages (percent of GDP):
  - 2010: 50.9
  - 2011: 49.4
  - 2012: 47.4
  - 2013: 46.0
  - 2014: 45.5
  - 2015: 45.1
- Scenario with no policy change (constant primary balance) in 2010-2015 (percent of GDP):
  - 2010: 50.9
  - 2011: 58.5
  - 2012: 63.5
  - 2013: 69.4
  - 2014: 76.3
  - 2015: 83.4

### Key macroeconomic and fiscal assumptions underlying the baseline
- Real GDP growth (in percent) by year:
  - 2005: 2.0
  - 2006: 1.1
  - 2007: 1.4
  - 2008: 0.7
  - 2009: -7.7
  - 2010: -2.2
  - 2011: 7.1
  - 2012: 2.0
  - 2013: 1.4
  - 2014: 1.5
  - 2015: 1.5
- Average nominal interest rate on public debt (in percent) 8/ by year:
  - 2005: 4.9
  - 2006: 5.5
  - 2007: 5.6
  - 2008: 5.4
  - 2009: 5.8
  - 2010: 5.9
  - 2011: 6.0
  - 2012: 5.9
  - 2013: 6.0
  - 2014: 6.1
  - 2015: 6.3
- Average real interest rate (nominal rate minus change in GDP deflator, in percent) by year:
  - 2005: 2.6
  - 2006: 2.4
  - 2007: -0.4
  - 2008: -1.1
  - 2009: 5.8
  - 2010: 4.3
  - 2011: 3.7
  - 2012: 3.0
  - 2013: 3.0
  - 2014: 3.1
  - 2015: 3.2
- Nominal appreciation (increase in US dollar value of local currency, in percent): 0.0 in years shown
- Inflation rate (GDP deflator, in percent) by year:
  - 2005: 2.3
  - 2006: 3.1
  - 2007: 6.0
  - 2008: 6.5
  - 2009: 0.0
  - 2010: 1.7
  - 2011: 2.3
  - 2012: 2.9
  - 2013: 3.1
  - 2014: 3.0
  - 2015: 3.0
- Growth of real primary spending (deflated by GDP deflator, in percent) by year:
  - 2005: -15.9
  - 2006: -5.6
  - 2007: 5.0
  - 2008: -2.7
  - 2009: 7.7
  - 2010: 1.3
  - 2011: 2.0
  - 2012: -2.3
  - 2013: -2.7
  - 2014: -1.7
  - 2015: 1.6

### Table notes and methodological definitions (selected)
- 1/ Indicate coverage of public sector, e.g., general government or nonfinancial public sector. Also whether net or gross debt is used.
- 2/ Automatic debt-dynamics formula: [(r - p(1+g) - g + ae(1+r)]/(1+g+p+gp)) times previous period debt ratio, with r = interest rate; p = growth rate of GDP deflator; g = real GDP growth rate; a = share of foreign-currency denominated debt; and e = nominal exchange rate depreciation (measured by increase in local currency value of U.S. dollar).
- 3/ The real interest rate contribution is derived from the denominator in footnote 2/ as r - π (1+g) and the real growth contribution as -g.
- 4/ The exchange rate contribution is derived from the numerator in footnote 2/ as ae(1+r).
- 5/ For projections, this line includes exchange rate changes.
- 6/ Gross financing need defined as public sector deficit, plus amortization of medium and long-term public sector debt, plus short-term debt at end of previous period.
- 7/ The key variables include real GDP growth; real interest rate; and primary balance in percent of GDP.
- 8/ Derived as nominal interest expenditure divided by previous period debt stock.
- 9/ Assumes that key variables (real GDP growth, real interest rate, and other identified debt-creating flows) remain at the level of the last projection year.
- 10/ Assumes the government follows the deficit path announced in the 2010 budget submission.

*Source: Table 1A. Aruba: Public Sector Debt Sustainability Framework, 2005–15 (percent of GDP, unless otherwise indicated).*

### 1.      This statement provides information that has become available since the Staff

### This statement provides information that has become available since the Staff Report (SM/10/270)

### Update since Staff Report
- The information does not alter the thrust of the staff appraisal.
- The resumption of operations at Aruba’s oil refinery has been postponed and is now envisaged for January 2011 rather than November 2010.
- This delay triggers a downward revision of staff's projected real GDP growth rate for 2010 to -3.2 percent (from -2.2 percent) and an upward revision for 2011 to 8.1 percent (from 7.1 percent).
- Projections for real GDP growth excluding refining remain unchanged at 0.2 percent (2010) and 3.2 percent (2011).
- The central bank cut its advance rate to 1 percent (from 3 percent) in early October.
- The central bank clarified that it no longer targets credit growth and explained its new monetary policy framework based on an unremunerated reserves requirement as the key policy tool.

### Economic context and near-term outlook
- Aruba is a small, open economy with high living standards in the Caribbean.
- Since 2008 adverse external shocks: tourism declined and the oil refinery closed temporarily in July 2009.
- Real GDP contracted by 7½ percent in 2009.
- Unemployment increased sharply to 11.3 percent.
- A gradual recovery is underway but diminished prospects for further tourism expansion dampen growth outlook.

### Fiscal developments, social dialogue, and reforms
- The government loosened fiscal policy in response to the slump, using primarily permanent measures that created a large underlying deficit.
- Upon taking office at end-October 2009, the government halved the business turnover tax starting in 2010.
- The social dialogue (government, employers, unions) produced an agreement in August 2010 with measures that:
  - Improve the financial health of Aruba’s main pension and health care schemes.
  - Yield limited fiscal savings in the short-term but reduce longer-term risks to public finances.
- The government announced a path to bring the fiscal deficit below 2 percent by 2014, but measures to achieve this remain to be specified.
- Agreed measures from Social Dialogue (summarized in authorities’ statement):
  - Raise pension age for APFA from 55 to 60 years.
  - Compute APFA benefits on average career wages rather than final wage.
  - Compute APFA claims net of AOV-pension claims.
  - Recovery plan for APFA until 2019 to restore solvency.
  - Increase premium income for AOV; further review of pensionable age.
  - Introduce obligatory second pillar pension for private sector (contributions split between employers and employees).
  - Increase AZV premium by 2 percent, equally shared between employers and employees.
  - Hiring freeze for civil servants (except teachers and public order staff).
  - Delay planned cancellation of the business turnover tax and address it in broader tax reform.
  - Increase excise taxes on demerit goods to achieve the 2009 price level.
  - Tax settlement with Valero includes a provision that as of 2012 Valero will pay a minimum of $10 million yearly in corporate tax.

### Executive Board assessment and policy advice
- Directors encouraged development of a medium-term fiscal adjustment program to ensure public debt sustainability and space to react to external shocks.
- Directors commended pension and health care reforms agreed in the social dialogue but noted limited short-term budgetary impact.
- Directors welcomed authorities’ intent to strengthen fiscal position through expenditure cuts and considered some revenue measures would also be needed.
- A tax reform, potentially including a value-added tax, was identified as a key component to balance fiscal constraints and social priorities.
- Directors encouraged seeking technical assistance, for example by joining CARTAC.
- Directors agreed the peg to the U.S. dollar has served Aruba well.
- Directors welcomed the switch from a credit ceiling to an unremunerated reserves requirement as the key monetary policy tool and noted the transition and attendant risks need to be managed carefully by the central bank.
- Directors warned that the absence of a credit ceiling could lead to deterioration in banks’ lending standards and increase prudential supervision challenges.
- Directors called on the authorities to eliminate the tax on foreign exchange transactions, which constitutes an unapproved exchange restriction under Article VIII of the Fund’s Articles of Agreement.
- Directors encouraged fostering greater competition in the financial sector by temporarily relaxing some barriers to entry for foreign banks, provided close cooperation is established with home country supervisors.

### Monetary policy and financial sector
- Monetary policy objective: maintain relative price stability through preservation of a fixed exchange rate of the florin with the U.S. dollar.
- Until 2009 the central bank's main instrument was a ceiling on credit growth; as of January 2010 it moved to an unremunerated reserve requirement.
- The central bank has adapted communication to market participants to clarify the change in policy.
- The central bank increased required liquidity and solvency ratios and introduced stress testing using IMF models in 2009; a second stress test was conducted in September 2010.
- The central bank set up a separate integrity unit within the supervision department to enhance integrity supervision, including AML/CFT.
- Financial sector remains in solid conditions; competition is modest and interest rate differentials remain very high despite lack of credit demand.

### Selected economic and social indicators (key figures extracted)
- Real GDP: 2006 1.1, 2007 1.4, 2008 0.7, 2009 -7.7, 2010 -2.2 (staff projection revised to -3.2 in update), 2011 7.1 (staff projection revised to 8.1 in update)
- Domestic demand: 2006 3.3, 2007 2.1, 2008 0.5, 2009 -8.7, 2010 1.1, 2011 6.5
  - Consumption: 2006 1.4, 2007 3.2, 2008 -0.8, 2009 -3.0, 2010 2.1, 2011 1.6
  - Investment: 2006 7.1, 2007 0.1, 2008 3.1, 2009 -19.5, 2010 -1.3, 2011 18.1
- CPI (period average): 2006 3.6, 2007 5.4, 2008 9.0, 2009 -2.1, 2010 2.2, 2011 2.5
- Unemployment rate (percent): 2006 9.3, 2007 7.1, 2008 6.9, 2009 11.3
- Gross national saving (percent of GDP): 2006 33.0, 2007 29.4, 2008 28.2, 2009 35.5, 2010 29.0, 2011 30.5
- Gross investment (percent of GDP): 2006 34.5, 2007 33.2, 2008 33.6, 2009 29.4, 2010 30.2, 2011 33.1
- Central government overall balance (percent of GDP): 2006 -1.0, 2007 -2.3, 2008 3.7, 2009 -3.5, 2010 -4.1, 2011 -6.7
- Primary balance (percent of GDP): 2006 1.4, 2007 0.1, 2008 6.0, 2009 -0.9, 2010 -1.2, 2011 -3.9
- Gross debt (percent of GDP): 2006 46.4, 2007 45.9, 2008 41.0, 2009 47.3, 2010 50.9, 2011 52.1
- Net debt (percent of GDP): 2006 42.1, 2007 41.7, 2008 35.1, 2009 40.8, 2010 45.1, 2011 47.9
- Central bank deposit rate (30 day) (As of end-June for 2010): 2006 2.4, 2007 2.6, 2008 0.5, 2009 0.1, 2010 0.1
- Government t-bill yield (As of end-June for 2010): 2006 4.5, 2007 4.8, 2008 2.3, 2009 0.6, 2010 0.3
- Trade balance (percent of GDP): 2006 -4.9, 2007 -6.2, 2008 -17.8, 2009 -18.4, 2010 -29.9, 2011 -12.7
- Current account (percent of GDP): 2006 -1.5, 2007 -3.8, 2008 -5.4, 2009 -6.1, 2010 -1.2, 2011 -2.6
  - Oil (percent of GDP): 2006 13.0, 2007 1.7, 2008 -2.2, 2009 5.6, 2010 -1.4, 2011 2.4
  - Non-oil (percent of GDP): 2006 -14.4, 2007 -5.5, 2008 -3.3, 2009 0.5, 2010 0.1, 2011 -5.1
- Non-oil FDI (percent of GDP): 2006 6.5, 2007 6.1, 2008 6.9, 2009 3.0, 2010 2.7, 2011 3.8
- Exports of goods and services: 2006 206.2, 2007 161.6, 2008 193.4, 2009 118.3, 2010 74.1, 2011 77.0
- Imports of goods and services: 2006 197.7, 2007 145.9, 2008 190.9, 2009 106.5, 2010 69.1, 2011 66.9
- Net oil exports (millions of US$): 2006 66, 2007 16, 2008 153, 2009 27, 2010 269, 2011 0, 500 (as listed in source)
- Official reserves (US$ million): 2006 408, 2007 465, 2008 701, 2009 701
- Credit to the private sector (percent annual change): 2006 4.9, 2007 4.0, 2008 4.2, 2009 -0.7
- Deposits (percent annual change): 2006 2.2, 2007 2.8, 2008 17.5, 2009 6.7
- Florin per U.S. dollar: 1.79 for 2006, 2007, 2008, 2009
- Real effective rate (2000=100): 2006 97.1, 2007 101.0, 2008 99.5, 2009 100.7

*Source: IMF staff report and Public Information Notice on the 2010 Article IV consultation discussions with the Kingdom of the Netherlands—Aruba.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2010/_cr10334.pdf_