## _cr13258

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---

### Recent economic developments
- Aruba is a highly open, tourism-dependent economy with over eighty percent of the economy depending directly or indirectly on tourism; Aruba is the second highest tourism-dependent country in the world.
- Fixed exchange rate against the USD unchanged since 1971; currency fixed at 1.79 per US$1 since January 1, 1986.
- Two major shocks in the last four years:
  - Global financial crisis that hit tourism in 2009.
  - Shutdown of oil refining by Valero twice for a total of 27 months during 2009-12.
- Real output and labor market:
  - Real output plunged by a cumulative 15 percent during 2009-10; took a second dip in 2012 by close to 1¼ percent.
  - Output remains 12 percent below its pre-crisis level.
  - Unemployment was 9½ percent at end-2012.
- External sector and reserves:
  - Non-oil current account balance improved since mid-2000, reaching a balanced position in 2012.
  - Overall current account volatile due to oil sector: double-digit deficits in 2010-11; a surplus of 5 percent of GDP in 2012 partly due to a one-time sale of inventories by Valero.
  - Both external debt and net IIP position deteriorated in recent years; 90 percent of external debt is long-term, mostly owed to parent companies.
  - Gross international reserves around 5 months of non-oil imports during recent turbulence.

### Outlook and risks
- Staff projection for 2013:
  - Real output growth of 2.3 percent.
  - A two percent deflation projected in 2013.
  - Water and electricity tariff rates reduced by 33 and 16 percent, respectively in August and November 2012.
  - Overall CA balance (in absence of oil exports) projected to show a deficit of 9½ percent of GDP in 2013.
- Medium-term baseline:
  - Real GDP expected to reach its pre-crisis level only in 2018.
  - Tourism exports growth expected around 2 percent.
  - Overall CA deficit expected to narrow but remain sizable due to income and transfer outflows and oil trade deficits.
- Risks:
  - Short-term risks tilted to the downside: renewed slowdown in the global economy (particularly the US) and exposure to higher oil prices.
  - Medium-term risks balanced in the Risk Assessment Matrix.
  - Conservative baseline assumes Valero’s refining operation stays inactive; resumption would boost growth and the CA balance.
  - Potential upside from wind and solar investments if they reduce electricity costs or enable exports to South America.
  - Downside risks include failure to rein in AOV financial deficits and further delays in investment projects.

### Fiscal policy — background, current stance, and vulnerabilities
- Recent deterioration:
  - Overall fiscal balance widened to a deficit of 8½ percent of GDP in 2012 (preliminary).
  - Public debt reached 67 percent of GDP at end-2012.
  - Drivers of deterioration: halving of the business turnover tax (BBO) rate, rising public sector wage bill, and spending on goods and services.
- Financing and liquidity:
  - A 10-year bond of 253 million USD issued at a coupon of 4.6 percent in September 2012; 6 times over-subscribed.
  - Government deposits substantially eroded despite the bond issuance.
  - Excess liquidity in the banking sector; domestic financing at current levels not likely to be a problem.
- Authorities’ 2013 draft budget:
  - Aim to nearly halve the deficit to 4½ percent of GDP through higher dividend payments from state-owned enterprises, containment of wage and other current expenditures, and an optimistic growth outlook of 5½ percent in real terms.
  - Staff assessment: reduction to 6 percent of GDP in 2013 is feasible with staff’s growth assumptions and identified measures; parliamentary elections in September pose downside risks.
- Medium-term fiscal pressures not in baseline:
  - AOV financial deficits estimated to add around 1 percent of GDP annually to the fiscal deficit beginning in 2014.
  - Annual fiscal costs from PPP projects under discussion may amount up to another 1 percent of GDP starting in 2016.
- Financing needs and debt path:
  - Financing needs in 2013 estimated to reach 11 percent of GDP.
  - Public debt projected to rise to 72 percent of GDP in 2013 under staff’s assessment of the authorities’ plan.
  - Under the baseline, public debt projected to pass 80 percent of GDP in 2017.

### Staff recommendations on fiscal consolidation
- Short-term (2013):
  - Reduce the overall deficit to 6 percent of GDP relying on measures to reduce wage-related and goods and services expenditure.
- Medium-term (2014-18):
  - Consolidation of about 8 percent of GDP to reach a small surplus and bring public debt to below 60 percent of GDP by 2018.
- Composition and implementation:
  - Both expenditure and revenue measures needed; expenditure measures should lead given a large wage bill (wage bill is 74 percent of tax revenue) and sizable subsidies.
  - Revenue options: increase current indirect taxes (e.g., raising the BBO back to 3 percent or raising it from 1.5 percent), excise taxes, import duties, or adopt a VAT tailored to Aruba’s needs.
  - Adoption of a VAT requires technical assistance and long preparatory time; immediate start of preparations recommended if chosen.
  - Little room to increase income and profit tax rates (already the highest in the region); emphasis on improving collection and reducing exemptions.
- Macroeconomic impact:
  - Fiscal multipliers for Aruba cannot be computed with available data; estimates for similar very open economies indicate small multipliers, particularly for current expenditure and tax measures.
  - Historical precedent: Aruba reduced debt from 60 to 40 percent of GDP during 1993-99.
- Specific liabilities to contain:
  - Put a limit on the size of PPP-related expenditure commitments.
  - AOV reforms options include: (i) raising statutory retirement age from 60 years; (ii) increasing pension contribution rates; (iii) reducing pension benefits; emphasis on raising the retirement age given current payroll taxes and moderate replacement rate.

### Staff vs. Authorities’ fiscal scenarios (selected figures, percentage points of GDP; government debt percent of GDP)
- Fiscal consolidation during 2014-18:
  - Revenue: Baseline -0.6; Authorities' plan 0.8; Staff's proposal 2.9
  - Primary expenditure: Baseline 2.6; Authorities' plan 4.7; Staff's proposal 4.8
  - Interest: Baseline -0.9; Authorities' plan 0.5; Staff's proposal 0.2
  - Total: Baseline 1.1; Authorities' plan 6.0; Staff's proposal 7.9
  - Government debt at end-2018 (percent of GDP): Baseline 83.0; Authorities' plan 61.0; Staff's proposal 58.0
- Staff medium-term consolidation mix (Box 3 — estimated savings, percentage points of GDP compared to staff's projected 2013 outcome):
  - Indirect taxes: 3.0
  - Wages: 2.0
  - Goods and services: 0.7
  - Transfers and subsidies: 2.0
  - Savings from lower interest expenditure: 0.2
  - Total: 7.9
- Fiscal path required (Box 3):
  - Reach an overall balanced budget in 2015.
  - Ensure surpluses of 1 percent of GDP on average thereafter to reach debt target.

### Monetary and financial sector policies
- Monetary stance and tools:
  - Reserve requirement (RR) left unchanged at 11 percent since January 2010.
  - Restrictions on capital mobility allow some room for monetary policy action despite the pegged exchange rate.
- Banking sector indicators (end-2012):
  - Credit growth decelerated to around 3 percent.
  - Excess liquidity of the banking system almost 9 percent of GDP.
  - Aggregate capital adequacy ratio (CAR) at 19½ percent (regulatory minimum: 14 percent).
  - Nonperforming loans ratio has come down substantially since 2010; profitability recovering.
- Authorities’ actions and frameworks:
  - Stress tests show CAR remains above regulatory minimum even under severe credit shock.
  - Steps to enhance AML/CFT framework; Aruba has requested removal from FATF and CFATF follow-up processes.
  - Introduced a multi-tier monitoring system for international reserves in September 2012 with four thresholds; policy responses triggered when reserves fall below thresholds:
    - Thresholds described as: (i) 35% of exports, 10% of broad money and 95% of short-term debt coverage; (ii) 3-month of CA payments coverage; (iii) 100% of short-term debt in remaining maturity coverage; and (iv) 20% of broad money coverage.
- Staff views:
  - With slack and projected deflation, an accommodative monetary stance remains appropriate.
  - Projects subdued credit growth in near-term due to weak demand and tight credit standards.
  - If credit demand picks up, authorities should be ready to mop up excess liquidity by increasing the RR.
- Authorities’ intentions:
  - No near-term change in monetary policy.
  - Considering legal changes to allow the CBA to hold government papers of more than 6 months maturity as a first step toward open market operations.
  - Considering options to increase competition (including allowing an additional banking player) and introducing a law to cap interest rates on consumer loans.

### Structural policies, competitiveness, and external stability
- Tourism and competitiveness:
  - Aruba maintained competitiveness in tourism despite shocks; growth in visitors’ nights and recovery in revenue per room.
  - U.S. accounts for 60 percent of tourists; scope for further diversification.
  - Aruba’s reputation as a “high-end” destination and predominance of time-share stay-over visitors provide revenue stability.
- External position assessments:
  - CPI-based REER relatively stable; CGER-based estimates show no major misalignment.
  - External sustainability approach (stabilizing NFA at end-2012 level of -123 percent of GDP) shows an overvaluation of around 8 percent; macroeconomic balance approach and equilibrium REER show a small undervaluation.
  - Staff notes stabilizing NFA at high levels while maintaining sizable CA deficits poses stability and financing risks.
- Structural constraints:
  - Labor market highly regulated; lay-off process tedious with hefty severance pay and court settlements favoring employees.
  - New labor law eases some restrictions but tightens others relevant for tourism (temporary workers, overtime).
  - High costs of doing business due to licensing requirements (3 to 6 months), unclear rules, multiple government departments.
  - Banks impose fees for many financial transactions, making access to finance costly.
- Staff recommendations:
  - Maintain price and structural competitiveness.
  - Increase flexibility in the labor market and reduce costs of doing business to aid adjustment and diversification.
  - Availability of diversification options depends on maintaining competitiveness.
- Authorities’ view:
  - Emphasize non-price attributes (multilingual population, high standards of living, safety and security, Dutch legal system, modern cruise port facilities).
  - Expect Aruba Investment Agency (one-stop shop) to ease business set-up procedures.

### Sustaining long-term growth potential: demographics, productivity, and new pillars
- Growth and productivity:
  - Output growth slowed in the last decade; declining productivity as reliance on labor-intensive, low-tech tourism increased and refining and construction declined.
- Access to credit and enterprise finance:
  - Credit growth to enterprises low; banks cite shortage of credit-worthy borrowers due to lack of initial capital, documentation, limited profitable opportunities, high risks, and legal challenges with loan recovery.
  - Government and private initiatives to educate population about financial management and small business setup.
- Demographics:
  - Absent new migration, working-age population will decline from 56 to 45 percent by 2030.
  - With unchanged productivity, considerable labor migration needed to support current potential growth of 1½ - 2 percent beyond 2015.
  - Large migration would put pressure on housing, infrastructure, health and education services.
- Renewable energy and other pillars:
  - Wind energy currently supplies 15 percent of total energy needs; a second windmill park planned next year could raise the ratio to 25 percent.
  - Government strategy: increase renewable energy dependence; turn Aruba into a gateway between South America, the U.S. and Europe for commerce and investment; establish research laboratories.
  - TNO established a Caribbean Branch Office in Aruba in 2011.
  - Staff cautions renewable energy faces challenges: shortage of skilled labor, large upfront investment, and technical issues for large-scale wind integration (storage and stabilization given grid isolation).
  - Staff advises financing renewable projects through FDI and pacing them to preserve external sustainability and keep debt servicing manageable.
- Hydrocarbon exploration:
  - Government signed a production sharing contract with REPSOL in December for oil and gas exploration; REPSOL plans 3D mapping in early 2014.
  - If gas reserves are found, production would begin only in the long run.
- Authorities’ view:
  - Sanguine about renewable energy prospects and see potential to catalyze Aruba’s role as a gateway to South America in knowledge- and technology-intensive sectors.
  - Partnership with the Carbon War Room mentioned; authorities view increasing renewable energy share to 100 percent in the long run as achievable, while acknowledging technical challenges.

### Valero refinery impact and recent developments (Box 1 summary)
- Valero refines heavy crude; profitability depends on price differential between heavy and light crude and cost of fuel oil used in refining.
- Operational timeline:
  - Shutdown for 18 months (July 2009 - December 2010); resumed in 2011; suspended indefinitely in March 2012.
  - Workforce reductions: payroll employees from 639 to 574, sub-contractors from 1470 to 385 between end-2011 and July 2012; further reductions left fewer than 100 on payroll by November 2012.
  - May 2012: Valero accepted a USD 350 million purchase offer from Petro China Company; deal put on hold pending elections in Venezuela.
  - September 2012: Valero announced it would stop refining and shift to storage and transshipment.
- Economic impact:
  - As of 2011, Valero’s direct and indirect share in GDP was 7½ percent.
  - Shutdown had sizable impact on growth and current account developments in 2012.
  - For 2013 main impact expected through higher unemployment and possibly lower consumption; fiscal impact likely small because Valero committed to pay USD 10 million in annual corporate income taxes to the government.
- Uncertainty over resumption depends on finding a strategic partner and heavy crude price developments.
- Valero exploring alternative options, including installing an LNG terminal and a waste-to-energy unit.

### Recent pension and health care reforms (Box 2 summary)
- APFA (civil servants pension fund):
  - Recovery plan in 2009-10 recognizing shortfall; committed to additional annual contributions until coverage ratio reaches 100 percent.
  - Benefit reforms: change from final wage to average wage calculation; netting out AOV pensions from benefits; increase retirement age from 55 to 60 years.
- AOV (general old age pension):
  - AOV has run deficits since 2009; measures include increasing cap on pensionable income, changing benefits base from gross to net, individualized premium contributions, and incentives to postpone retirement beyond mandatory age of 60.
  - Reserves projected to be depleted in 2013; starting 2014 the burden of covering deficits will fall on the budget.
- Mandatory general pension for private sector:
  - Introduced in 2012; contributions set to gradually increase to 6 percent in 2014.
- AZV (general health care system):
  - Runs large deficits; more than 30 percent of its spending covered by transfers from the central budget.
  - Measures include increasing premium rate by 2 percentage points and caps on spending through lump-sum agreements.
  - Projections suggest health care costs will increase; containing budget transfers likely to create arrears.
  - Aruba’s public spending on health care as percent of GDP is one of the highest in the region.

### Data, reporting, and institutional timing
- Article IV consultations:
  - Discussions for the 2013 Article IV consultation held in Oranjestad from April 15 to 26, 2013.
  - Executive Board concluded the 2013 Article IV consultation on June 26, 2013 and endorsed the staff appraisal on a lapse-of-time basis.
  - Consultations conducted on a 24-month cycle; next discussions envisaged in 24 months.
- Data adequacy:
  - General: Data provision adequate for surveillance.
  - National accounts published for 1995 through 2011; expenditure-side inventories data lacking.
  - Government finance statistics prepared and published regularly but not reported to STA; presentation and disaggregation issues identified (e.g., “items not identified elsewhere” up to 3 percent of GDP).
  - CBA reports quarterly BOP and annual IIP; monthly reserve position published with one-month lag.
  - Areas needing improvement: make external debt data consistent with BOP flows; report maturity schedules on private sector external debt.
- Data reporting table (selected latest observations and frequency as of April 16, 2013):
  - Exchange Rates: Date of Latest Observation: Current; Frequency: M; Publication: D and M
  - International Reserve Assets: Date of Latest Observation: 2/13; Date Received: 4//13; Frequency: M
  - Consumer Price Index: Date of Latest Observation: 12/12; Date Received: 4/13; Frequency: M
  - Revenue, Expenditure, Balance and Composition of Financing—General Government: Date of Latest Observation: 2012; Date Received: 4/13; Frequency: Q
  - GDP/GNP: Date of Latest Observation: 2012; Date Received: 4/13; Frequency: A
  - International Investment Position: Date of Latest Observation: 2011; Date Received: 4/13; Frequency: A

### Executive Board assessment — key recommendations (condensed)
- Macroeconomic recovery and risks:
  - Aruba recovering slowly; real GDP projected to reach pre-crisis level only in 2018.
  - Downside near-term risks due to high dependence on tourism and oil imports.
- Fiscal policy:
  - Immediate priority: put fiscal deficit on a downward path.
  - Reduction of overall deficit to 6 percent of GDP in 2013 appropriate; resist election-year expenditure pressures.
  - Medium term: ambitious consolidation of around 8 percent of GDP during 2014-18 to bring debt below 60 percent of GDP.
  - Contain fiscal pressures from AOV and PPPs via further pension reforms and limits on PPP commitments.
- External competitiveness and structural reforms:
  - Strengthen competitiveness via market diversification (U.S. accounts for 60 percent of tourists), higher labor market flexibility, and more enabling business conditions.
- Monetary policy and banking sector:
  - Accommodative stance appropriate given slack, projected deflation, and subdued credit growth.
  - If credit demand picks up, mop up excess liquidity by increasing the reserve requirement.

### Selected economic indicators (key figures, 2010–14)
- Real economy (Percent change)
  - Real GDP: 2010: -3.6; 2011: 3.7; 2012: -1.2; 2013: 2.3; 2014: 3.0
  - Real domestic demand: 2010: -4.0; 2011: 1.7; 2012: -1.7; 2013: -1.5; 2014: 2.6
  - Consumption: 2010: -0.9; 2011: 1.8; 2012: 1.6; 2013: 1.3; 2014: 1.7
    - Private: 2010: -0.3; 2011: 3.9; 2012: 0.5; 2013: 1.6; 2014: 1.6
    - Public: 2010: -2.4; 2011: -3.2; 2012: 4.5; 2013: 0.7; 2014: 1.8
  - Gross investment: 2010: -10.8; 2011: 1.5; 2012: -10.2; 2013: -9.5; 2014: 5.7
  - Exports of goods and services: 2010: -10.2; 2011: 14.4; 2012: -5.3; 2013: 3.7; 2014: 2.2
  - Imports of goods and services: 2010: -9.0; 2011: 8.8; 2012: -5.0; 2013: -1.7; 2014: 1.8
- Consumer prices (Percent change)
  - Period average: 2010: 2.1; 2011: 4.4; 2012: 0.6; 2013: -1.5; 2014: 1.5
  - End-period: 2010: -0.7; 2011: 6.1; 2012: -3.7; 2013: 0.7; 2014: 2.3
- Central government operations (Percent of GDP)
  - Revenues: 2010: 27.7; 2011: 21.4; 2012: 22.3; 2013: 23.6; 2014: 23.0
  - Expenditures: 2010: 31.3; 2011: 29.3; 2012: 30.9; 2013: 29.7; 2014: 29.4
    - Capital: 2010: 1.1; 2011: 1.2; 2012: 1.7; 2013: 0.9; 2014: 1.0
  - Overall balance: 2010: -3.6; 2011: -7.8; 2012: -8.5; 2013: -6.2; 2014: -6.4
  - Gross central government debt: 2010: 55.9; 2011: 61.2; 2012: 67.0; 2013: 72.3; 2014: 75.0
- Savings and investment (percent of GDP)
  - Gross investment: 2010: 31.0; 2011: 32.6; 2012: 29.7; 2013: 27.0; 2014: 29.0
  - Foreign saving: 2010: 18.3; 2011: 9.6; 2012: -4.9; 2013: 9.4; 2014: 9.0
  - Domestic saving: 2010: 12.7; 2011: 23.0; 2012: 34.6; 2013: 17.6; 2014: 20.0
- Balance of payments
  - Current account balance: 2010: -18.3; 2011: -9.6; 2012: 4.9; 2013: -9.4; 2014: -9.0
    - Oil: 2010: -18.8; 2011: -1.7; 2012: 5.0; 2013: -7.8; 2014: -7.4
    - Non-oil: 2010: 0.5; 2011: -8.0; 2012: -0.1; 2013: -1.6; 2014: -1.6
  - FDI: 2010: 6.5; 2011: 18.2; 2012: -5.6; 2013: 3.4; 2014: 5.1
  - Gross foreign assets of central bank (millions of U.S. dollars): 2010: 724; 2011: 712; 2012: 787; 2013: 820; 2014: 860
  - Gross foreign assets of central bank (months of non-oil imports of following year): 2010: 5.1; 2011: 4.9; 2012: 5.2; 2013: 5.1; 2014: 5.1
  - External debt (percent of GDP): 2010: 101.7; 2011: 114.5; 2012: 104.8; 2013: 109.5; 2014: 107.8
- Monetary (millions of local currency)
  - NFA: 2010: 1,309; 2011: 1,286; 2012: 1,342; 2013: 1,400; 2014: 1,432
  - NDA: 2010: 1,845; 2011: 1,873; 2012: 2,077; 2013: 2,121; 2014: 2,278
    - Credit to private sector (year-on-year percent change): 2010: 1.2; 2011: 3.5; 2012: 2.8; 2013: 3.1; 2014: 4.0
  - Broad money: 2010: 3,155; 2011: 3,159; 2012: 3,419; 2013: 3,521; 2014: 3,710
    - Deposits (year-on-year percent change): 2010: -0.3; 2011: -0.1; 2012: 8.2; 2013: 3.0; 2014: 5.3
- Memorandum items:
  - Nominal GDP (millions of Aruban florins): 2010: 4,279; 2011: 4,566; 2012: 4,555; 2013: 4,613; 2014: 4,860
  - Nominal GDP (millions of U.S. dollars): 2010: 2,391; 2011: 2,551; 2012: 2,544; 2013: 2,577; 2014: 2,715

*Source: KINGDOM OF THE NETHERLANDS—ARUBA, INTERNATIONAL MONETARY FUND (excerpts).*

### INTRODUCTION __________________________________________________________________________________  4

### INTRODUCTION

### Recent Economic Developments
- Aruba is a highly open, tourism-dependent economy with over eighty percent of the economy depending directly or indirectly on tourism; Aruba is the second highest tourism-dependent country in the world.
- The fixed exchange rate against the USD has been unchanged since 1971 and, together with conservative fiscal, credit and prudential policies, supported low inflation and macroeconomic stability until recent shocks.
- Aruba has investment grade ratings from S&P and Fitch, reflecting prudent management, political stability, and high social development.
- Two major shocks in the last four years:
  - The global financial crisis that hit tourism in 2009.
  - The shutdown of oil refining by Valero Aruba Refinery twice for a total of 27 months during 2009-12.
- Real output:
  - Plunged by a cumulative 15 percent during 2009-10.
  - Took a second dip in 2012 by close to 1¼ percent.
  - Output remains 12 percent below its pre-crisis level; recovery slower than others in the Caribbean region.
- Labor market: Unemployment was 9½ percent at end-2012.
- External sector:
  - Non-oil current account (CA) balance improved since mid-2000, reaching a balanced position in 2012.
  - Overall CA showed volatility due to oil sector developments: double-digit deficits in 2010-11; a surplus of 5 percent of GDP in 2012 partly due to one-time sale of inventories by Valero.
  - Both external debt and net IIP position deteriorated in recent years; 90 percent of external debt is long-term, mostly owed to parent companies (low roll-over risk).
  - Gross international reserves around 5 months of non-oil imports during recent turbulence.

### Outlook and Risks
- Staff projection for 2013:
  - Real output growth of 2.3 percent.
  - A two percent deflation is projected in 2013 reflecting large utility price reductions in late 2012, and declining food and energy prices.
  - Water and electricity tariff rates were reduced by 33 and 16 percent, respectively in August and November 2012.
  - Overall CA balance (in absence of oil exports) projected to show a deficit of 9½ percent of GDP in 2013.
- Short- and medium-term trajectory:
  - Under the baseline, real GDP expected to reach its pre-crisis level only in 2018.
  - Tourism exports growth expected around 2 percent; gaps in investment and non-tourism exports left by Valero’s closure will linger.
  - Overall CA deficit expected to narrow in the medium term but remain sizable due to income and transfer outflows and oil trade deficits.
- Risks:
  - Short-term risks tilted to the downside: renewed slowdown in the global economy (particularly the US) and exposure to higher oil prices from geopolitical events.
  - Medium-term risks considered balanced in the Risk Assessment Matrix.
  - Conservative baseline assumes Valero’s refining operation stays inactive; resumption (if a strategic buyer emerges and heavy crude prices permit profitability) would boost growth and the CA balance.
  - Potential upside from investments in wind and solar energy if they reduce electricity costs or enable exports to South America.
  - Downside risks include failure to rein in financial deficits of the AOV and further delays in investment projects.
- Authorities’ view:
  - Broad agreement with staff’s analysis; recovery seen as gradual due to the loss of oil refining.
  - Political/policy uncertainties in Venezuela viewed as carrying both negative (lower tourist flows) and positive (higher investment flows) risks; to date, staff considers negative spillovers limited.

### Rebuilding Policy Space, Supporting Recovery — Fiscal Policy: Ambitious Consolidation Needed
Background and recent fiscal developments
- Overall fiscal balance widened sharply from pre-crisis low deficits to a deficit of 8½ percent of GDP in 2012 (preliminary data).
- Public debt reached 67 percent of GDP at end-2012.
- Deterioration drivers: halving of the business turnover tax (BBO) rate, rising public sector wage bill, and spending on goods and services.
- Authorities undertook reforms addressing pension and health-related expenditure, including introducing a mandatory general pension scheme, and collected tax arrears, but these were insufficient to contain the deficit widening.
- Financing and liquidity:
  - A 10-year bond of 253 million USD was issued at a coupon of 4.6 percent in September 2012 and was 6 times over-subscribed.
  - Government deposits have been substantially eroded despite the bond issuance.
  - With excess liquidity in the banking sector, maintaining the current level of domestic financing is not likely to be a problem.
- 2013 budget plans:
  - Authorities’ 2013 draft budget aims to nearly halve the deficit to 4½ percent of GDP through higher dividend payments from state-owned enterprises, containment of wage and other current expenditures, and an optimistic growth outlook of 5½ percent in real terms.
  - Staff assessment: With staff’s growth assumptions and identified measures, a reduction of the deficit to 6 percent of GDP in 2013 is feasible but requires vigilance; parliamentary elections in September pose downside risks.
- Medium-term fiscal outlook:
  - Under the baseline, annual interest payments of the order of 4 percent of GDP will keep headline deficits elevated.
  - Public debt projected to pass 80 percent of GDP in 2017 under the baseline; this level risks unsustainability if shocks materialize.
  - Additional pressures not included in the baseline:
    - AOV financial deficits estimated to add around 1 percent of GDP annually to the fiscal deficit beginning in 2014 due to depletion of reserve assets.
    - Annual fiscal costs from PPP projects that have been signed or are under discussion may amount up to another 1 percent of GDP starting in 2016.
  - Financing needs in 2013 estimated to reach 11 percent of GDP; public debt projected to rise to 72 percent of GDP in 2013 under staff’s assessment of the authorities’ plan.

Staff recommendations and analysis
- Ambitious consolidation and strong implementation are needed to reverse unsustainable fiscal dynamics given Aruba’s external shock exposure, narrow economic base, fixed exchange rate, and sizable interest burden.
- Short-term recommendation for 2013: reduce the deficit to 6 percent of GDP relying on measures to reduce wage-related and goods and services expenditure.
- Medium-term recommendation: consolidation of about 8 percent of GDP to reach a small surplus and bring public debt to below 60 percent of GDP.
- Composition of consolidation:
  - Both expenditure and revenue measures will be needed; expenditure measures should lead given a large wage bill (wage bill is 74 percent of tax revenue) and sizable subsidies.
  - Revenue options include increasing current indirect taxes (e.g., the BBO at 1.5 percent — Aruba has the lowest consumption tax rate compared to peers), excise taxes, and import duties, or adopting a value-added tax (VAT) tailored to Aruba’s needs.
  - Adoption of a VAT will likely require technical assistance and long preparatory time; authorities would need to start preparations immediately if chosen.
  - Little room to increase income and profit tax rates (already the highest in the region), so improving collection (reducing exemptions to foreign investors, intensifying arrears collection) is emphasized.
- Macroeconomic impact:
  - Staff notes fiscal multipliers for Aruba cannot be computed with available data, but estimates for similar very open economies indicate small multipliers, particularly for current expenditure and tax measures; thus recommended consolidation is not likely to be a major drag on recovery.
  - Historical precedent: Aruba reduced debt from 60 to 40 percent of GDP during 1993-99 within a similar timeframe, though growth dynamics were more favorable then.
- Specific liabilities to contain:
  - For PPPs: staff recommends putting a limit on the size of PPP-related expenditure commitments.
  - For AOV: possible reforms include (i) raising the statutory retirement age from 60 years; (ii) increasing pension contribution rates; and (iii) reducing pension benefits. Given current payroll taxes and moderate replacement rate, focus should be on raising the retirement age.

### Staff vs. Authorities’ Fiscal Scenarios (selected figures from analysis)
- Fiscal consolidation during 2014-18 (in percentage points of GDP) — comparison of Baseline, Authorities' plan, and Staff's proposal:
  - Revenue: Baseline -0.6; Authorities' plan 0.8; Staff's proposal 2.9
  - Primary expenditure: Baseline 2.6; Authorities' plan 4.7; Staff's proposal 4.8
  - Interest: Baseline -0.9; Authorities' plan 0.5; Staff's proposal 0.2
  - Total: Baseline 1.1; Authorities' plan 6.0; Staff's proposal 7.9
  - Government debt at end-2018 (percent of GDP): Baseline 83.0; Authorities' plan 61.0; Staff's proposal 58.0
  - Note: Authorities' plan targets a balanced budget starting 2016; Baseline reflects only measures announced in the authorities' Financial Economic Memorandum of December 2012.

*Source: INTRODUCTION, KINGDOM OF THE NETHERLANDS—ARUBA, INTERNATIONAL MONETARY FUND*

### 17.      The authorities broadly agreed with the need for fiscal consolidation, but had yet to

### _cr13258 - 17.      The authorities broadly agreed with the need for fiscal consolidation, but had yet to

### Fiscal policy: consolidation plans, measures, and institutions
- Authorities plan to achieve a balanced budget in 2016 largely relying on expenditure cuts; some measures are subject to discussions in the Social Dialogue.
- Authorities do not see room for increasing the BBO rate due to concerns for reduced purchasing power.
- Authorities see scope for increasing import duties, excise taxes and levies.
- Authorities are optimistic about revenue boosts from:
  - collection of corporate tax arrears;
  - introduction of the ASYCUDA customs administration system.
- Anticipated savings in interest costs through debt refinancing arrangements with the Netherlands are contingent on:
  - Aruba ensuring sustainable public finances;
  - introducing a fiscal rule; and
  - establishing a Fiscal Council.
- Authorities are considering various fiscal-rule options to be implemented in the longer-run together with a Fiscal Council, including:
  - nominal expenditure ceilings; and
  - debt rules.
- Staff and authorities agreed that, prior to adoption of any fiscal rule, budgetary and fiscal monitoring infrastructure needs substantial improvement, including:
  - timely budget preparation;
  - multi-year planning; and
  - regular submission of budgetary executions to the parliament.

### Monetary and financial sector policies: maintain stability
- Monetary policy stance and tools:
  - Reserve requirement (RR) left unchanged at 11 percent since January 2010.
  - Restrictions on capital mobility allow some room for monetary policy action despite the pegged exchange rate.
- Recent developments and indicators:
  - Credit growth decelerated in 2012 to around 3 percent.
  - Excess liquidity of the banking system at end-2012 stood at almost 9 percent of GDP.
  - Aggregate capital adequacy ratio (CAR) stood at 19½ percent at end-2012 (regulatory minimum: 14 percent).
  - Preliminary data show the nonperforming loans ratio has come down substantially since 2010; profitability indicators recovering.
- Authorities’ actions:
  - Stress tests show CAR remains above regulatory minimum even under severe credit shock.
  - Steps taken to enhance AML/CFT framework; Aruba has requested removal from FATF and CFATF follow-up processes (to be considered by FATF in June and CFATF in November).
  - Introduced a multi-tier monitoring system for international reserves in September 2012 with four thresholds; policy responses are triggered when actual reserves fall below thresholds.
    - The four thresholds are described as: (i) 35% of exports, 10% of broad money and 95% of short-term debt coverage; (ii) 3-month of CA payments coverage; (iii) 100% of short-term debt in remaining maturity coverage; and (iv) 20% of broad money coverage.
- Staff views and recommendations:
  - With slack and projected deflation, an accommodative monetary stance remains appropriate.
  - Staff projects subdued credit growth in the near-term due to weak demand and tight credit standards.
  - If credit demand picks up, authorities should be ready to mop up excess liquidity by increasing the RR.
  - Staff welcomes the strengthened reserve-monitoring framework.
- Authorities’ intentions:
  - No near-term change in monetary policy.
  - Considering legal changes to allow the CBA to hold government papers of more than 6 months maturity as a first step toward open market operations.
  - Considering options to increase competition (including allowing an additional banking player) and introducing a law to cap interest rates on consumer loans.

### Structural policies: competitiveness and external stability
- Tourism and competitiveness:
  - Aruba has maintained competitiveness in tourism despite shocks; market share in the Caribbean held up with growth in visitors’ nights and recovery in revenue per room.
  - Aruba’s reputation as a “high-end” destination and predominance of time-share stay-over visitors provide revenue stability.
  - U.S. accounts for 60 percent of tourists; scope for further diversification.
- External position and exchange rate assessment:
  - CPI-based REER has remained relatively stable; CGER-based estimates show no major misalignment.
  - External sustainability approach, stabilizing Aruba’s NFA at its end-2012 level (-123 percent of GDP), shows an overvaluation of around 8 percent.
  - The macroeconomic balance approach and equilibrium REER show a small undervaluation.
  - Staff notes that stabilizing NFA at high levels while maintaining sizable CA deficits poses stability and financing risks.
- Structural competitiveness constraints:
  - Labor market is highly regulated; lay-off process is tedious with hefty severance pay and court settlements favoring employees.
  - Newly-enacted labor law eases some restrictions (e.g., layoffs above retirement age) but places more restrictions on hiring temporary workers and overtime—relevant for tourism.
  - Costs of doing business are high due to licensing requirements that can take between 3 to 6 months, unclear rules and involvement of multiple government departments.
  - Banks impose fees for many financial transactions, making access to finance costly and cumbersome.
- Staff recommendations:
  - Maintain both price and structural competitiveness to ensure steady recovery.
  - Increase flexibility in the labor market and reduce costs of doing business to aid adjustment and diversification.
  - Availability of diversification options depends on maintaining competitiveness.
- Authorities’ view:
  - Authorities consider Aruba’s non-price attributes (multilingual population, high standards of living, safety and security, Dutch legal system, modern cruise port facilities) as strong sources of competitiveness.
  - Expectation that the Aruba Investment Agency (a one-stop shop) will ease business set-up procedures.

### Sustaining long-term growth potential: demographics, productivity, and new pillars
- Growth and productivity trends:
  - Output growth slowed in the last decade, reflecting declining productivity as reliance on labor-intensive, low-tech tourism increased and refining and construction declined.
- Access to credit:
  - Credit growth to enterprises has been low; banks cite shortage of credit-worthy borrowers due to lack of initial capital, documentation, limited profitable opportunities, high risks, and legal challenges with loan recovery.
  - Government and private sector initiatives aim to educate the population about basic financial management and small business setup.
- Demographic headwinds:
  - Absent new migration, working-age population will decline from 56 to 45 percent by 2030.
  - Authorities’ simulations show that, with unchanged productivity, considerable labor migration is needed to support current potential growth of 1½ - 2 percent beyond 2015.
  - Large migration would put pressure on housing, infrastructure, health and education services.
- Renewable energy as a growth pillar:
  - Government strategy: (i) increase dependence on renewable energy; (ii) turn Aruba into a gateway between South America, the U.S. and Europe for commerce and investment; (iii) establish research laboratories.
  - Wind energy currently supplies 15 percent of total energy needs; a second windmill park planned next year could raise the ratio to 25 percent.
  - Netherlands Organization for Applied Scientific Research (TNO) established a Caribbean Branch Office in Aruba in 2011 for education and research.
- Staff views and recommendations:
  - Urgent labor market reforms are needed to increase participation and productivity (e.g., raising mandatory general retirement age; better-targeting social benefits).
  - Even with reforms, demographics likely imply reliance on migrant workers; a sustainable migration policy within social dialogue is desirable.
  - Renewable energy offers potential but faces challenges: shortage of skilled labor, large upfront investment, and technical issues for large-scale wind integration (storage and stabilization given grid isolation).
  - Staff advises financing renewable projects through FDI and pacing them to preserve external sustainability and keep debt servicing manageable.
- Authorities’ views:
  - Authorities are sanguine about renewable energy prospects and see it catalyzing Aruba’s role as a business gateway to South America in knowledge- and technology-intensive sectors.
  - They recognize skilled-labor constraints and see scope to bring back Aruban engineers from abroad.
  - Authorities mentioned partnership with the Carbon War Room and view increasing renewable energy share to 100 percent in the long run as achievable, while acknowledging technical challenges.
- Hydrocarbon exploration:
  - Government signed a production sharing contract with REPSOL in December for oil and gas exploration, development and production.
  - REPSOL concluded 2D seismological mapping in the continental seabed and plans 3D mapping in early 2014.
  - If gas reserves are found, production would begin only in the long run.

*Source: KINGDOM OF THE NETHERLANDS—ARUBA, INTERNATIONAL MONETARY FUND (excerpts).*

### 36.      Aruba is recovering slowly from recent shocks. Two major shocks in the last four years,

### _cr13258 - 36.      Aruba is recovering slowly from recent shocks. Two major shocks in the last four years,

### Macroeconomic overview and recovery
- Aruba experienced a deeper recession than most other Caribbean countries following two major shocks in the last four years: the global financial crisis and the shutdown of oil refining by Valero.
- Tourism rebounded quickly, but Valero’s shutdown created harder-to-fill gaps in investment and non-tourism exports.
- Real GDP is projected to reach its pre-crisis level only in 2018.

### Near-term risks and medium-term prospects
- Downside risks dominate in the near-term:
  - High dependence on tourism and oil imports exposes Aruba to renewed global weakness and higher oil prices.
- Medium-term upside potential:
  - Resumption of oil refining by Valero.
  - Large scale investment in renewable energy.

### Fiscal policy — immediate priorities
- Rebuilding fiscal space is an immediate priority given limited exchange rate policy options.
- Authorities’ countercyclical measures (cuts in the BBO rate and higher current expenditure) have rapidly increased central government’s deficit and debt.
- Staff recommendation:
  - Reduce the overall deficit to 6 percent of GDP in 2013.
  - Resist possible expenditure pressures during the election year to ensure this outcome.

### Fiscal policy — medium-term consolidation
- Without additional measures, central government fiscal deficits will remain elevated, posing risks to public debt sustainability.
- Financial deficits of the AOV and payments for the PPP are likely to further widen the deficit beginning as early as 2014.
- Staff recommendation:
  - Undertake a consolidation of around 8 percent of GDP during 2014-18 to bring debt down to below 60 percent of GDP.
  - Implement further pension reforms and put a limit on the size of PPP-related expenditure commitments to contain fiscal pressures from AOV and PPP liabilities.

### Competitiveness and external position
- Competitiveness in tourism has been maintained through recent shocks.
- Non-oil current account balance improved in line with strong tourism performance and initiatives to diversify source markets.
- Market concentration risk: the US accounts for 60 percent of tourists; staff sees further scope for market diversification.
- To mitigate risks from a large negative IIP position and elevated financing requirements, Aruba needs stronger price and structural competitiveness through:
  - Higher flexibility in the labor market.
  - More enabling business conditions.

### Monetary and financial sector stance
- The accommodative monetary policy stance is appropriate given slack in the economy, projected deflation, and subdued credit growth.
- Banking system excess liquidity has increased substantially since mid-2012.
- If credit demand picks up (a very low risk at this point), authorities would need to mop up excess liquidity by increasing the RR.

### Institutional timing
- Next Article IV consultation discussions with Aruba are envisaged to be held in 24 months time.

### Box 1 — Valero Oil Refinery: recent developments and economic impact
- Valero refines heavy crude; profitability depends on (i) the price differential between heavy and light crude; and (ii) the cost of fuel oil used in refining.
- Rising prices of heavy crude and fuel oil since mid-2000 have caused repeated Valero shutdowns.
- Timeline and operational changes:
  - Shutdown for 18 months (July 2009 -December 2010); resumed in 2011; suspended indefinitely in March 2012.
  - Workforce reductions: payroll employees from 639 to 574, sub-contractors from 1470 to 385 between end-2011 and July 2012.
  - In May 2012 Valero accepted a USD 350 million purchase offer from Petro China Company; the deal was put on hold pending elections in Venezuela.
  - In September 2012 Valero announced it would stop refining and shift to storage and transshipment; workforce reduced further in November, leaving fewer than 100 people on its payroll.
- Economic impact:
  - As of 2011, Valero’s direct and indirect share in GDP was 7½ percent.
  - The refinery’s shutdown had a sizable impact on growth and current account developments in 2012.
  - For 2013, the main impact is expected through higher unemployment and possibly lower consumption; the opening of the Ritz Carlton in November 2013 may attenuate unemployment effects.
  - Fiscal impact likely to be small because Valero committed to pay USD 10 million in annual corporate income taxes to the government.
- Uncertainty over resumption depends on finding a strategic partner and developments in heavy crude prices.
- Valero is exploring alternative business options, including installing a liquefied natural gas terminal and a waste to energy unit.

### Box 2 — Recent reforms in pension and health care schemes
- APFA (civil servants pension fund) reforms:
  - In 2009-10, authorities developed a recovery plan recognizing a shortfall in coverage of pension liabilities and committed to additional annual contributions until the coverage ratio reaches 100 percent.
  - Benefit reforms included: (i) changing basis for calculations from final wage to average wage; (ii) netting out AOV pensions from benefits; and (iii) increasing retirement age from 55 to 60 years.
- General old age pension (AOV) reforms:
  - Due to population aging, AOV has run deficits since 2009.
  - Government measures: (i) increased the cap on pensionable income; (ii) changed benefits base from gross to net income; (iii) individualized premium contributions; and (iv) introduced incentives to postpone retirement beyond mandatory age of 60.
  - These measures proved insufficient to reverse the worsening of the AOV balance. Its reserves are now projected to be depleted in 2013, meaning that starting 2014 the burden of covering deficits will fall on the budget.
- Mandatory general pension for private sector:
  - Introduced in 2012, with contributions set to gradually increase to 6 percent in 2014.
  - In the longer term expected to ensure a higher replacement rate for total pensions and reduce pressures on AOV.
- General health care system (AZV) reforms:
  - AZV runs large deficits and more than 30 percent of its spending has to be covered by transfers from the central budget.
  - Government measures included increasing the premium rate by 2 percentage points and introducing caps on spending through lump-sum agreements with providers.
  - Recent AZV projections suggest health care costs will be increasing; simply containing budget transfers will most likely create arrears in the health care sector.
  - Going forward, more reforms are necessary to increase revenues and contain costs by shifting part of the costs to beneficiaries.
  - Regional comparison shows that Aruba’s public spending on health care as percent of GDP is one of the highest in the region.

*International Monetary Fund — KINGDOM OF THE NETHERLANDS—ARUBA*

### Box 3. Aruba—Medium-Term Fiscal Consolidation: How Much and How?

### Box 3. Aruba—Medium-Term Fiscal Consolidation: How Much and How?

### How Much?
- Empirical finding cited: Greenidge et al. (2012) find that at 55-56 percent of GDP the debt’s effect on economic growth turns from positive to negative.
- Staff judgment: For small island economies like Aruba, a lower debt threshold is prudent because of higher risk premia on interest rates and lower potential growth.
- Policy target: Staff considers a reduction in the public debt below 60 percent of GDP by 2018 as an appropriate target.
- Rationale for target:
  - Rebuild fiscal space lost after the crisis to address contingent liabilities, particularly ageing and health care related cost pressures.
  - Lower government financing risks.
  - Boost the economy’s resilience to shocks and improve growth prospects.

### How?
- Fiscal path required:
  - Reach an overall balanced budget in 2015.
  - Ensure surpluses of 1 percent of GDP on average thereafter to enable Aruba to reach the debt target.
- Mix of measures: A combination of expenditure- and revenue-side measures is needed.
- Estimated savings/contributions from identified measures (in percentage points of GDP, compared to staff's projected 2013 outcome):
  - Indirect taxes: 3.0
  - Wages: 2.0
  - Goods and services: 0.7
  - Transfers and subsidies: 2.0
  - Savings from lower interest expenditure (from improving underlying balance): 0.2
  - Total: 7.9
- Specific policy measures and expected effects:
  - Gradual reduction in wage-related costs to their 2009 levels → savings of around 2 percent of GDP.
  - Reduce spending on goods and services by raising the efficiency of public spending; contain and reduce transfers and subsidies → combined savings of around 2½ percent of GDP.
  - Raise more revenues from indirect taxes. Introduction of a VAT is a potential measure but requires proper preparation. Near-term measures could include:
    - Raising the rate of the turnover tax (BBO) back to its original level of 3 percent.
    - Increasing excise taxes.
    - These near-term indirect tax measures could contribute substantially (up to 3 percent of GDP) to consolidation efforts.
  - Steady implementation of the above measures will gradually improve the underlying balance and generate savings from lower interest expenditure to the tune of 0.2 percent of GDP.

### Risk Assessment (selected items from the Risk Assessment Matrix)
- Short-term risks:
  - Downside: Fiscal policy shock in the US, and stalled or incomplete recovery of Euro area policy commitments
    - Relative Likelihood: Low/Medium
    - Impact if Realized: High
    - Note: Aruba’s tourism and economy is highly dependent on developments in the global economy, particularly the US.
  - Downside: Global oil shock triggered by geopolitical events
    - Relative Likelihood: Low
    - Impact if Realized: Medium
    - Note: Aruba is entirely dependent on imported oil for domestic consumption.
- Medium-term risks:
  - Upside: Further reduction in electricity prices through wind and solar energy
    - Relative Likelihood: Medium
    - Impact if Realized: Medium
    - Note: Would affect production costs, exports of tourism, investment and real GDP.
  - Upside: Valero resuming refining operations
    - Relative Likelihood: Medium
    - Impact if Realized: Medium/High
    - Note: Impact on real GDP and employment likely medium; impact on the current account likely high.
  - Downside: Investment projects further delayed or postponed
    - Relative Likelihood: Low
    - Impact if Realized: Low
    - Note: Medium-term recovery relies modestly on a boost in private investment.
  - Downside: Failure to put the PAYG pension system on a sustainable footing
    - Relative Likelihood: Medium
    - Impact if Realized: Medium/High
    - Note: Fiscal deficits will rise by 1 percent of GDP annually beginning in 2014 if this occurs.

*Source: Box 3. Aruba—Medium-Term Fiscal Consolidation: How Much and How? (IMF staff report).*

### 1.79 per US$1 since January 1, 1986. Prior to

### _cr13258 - 1.79 per US$1 since January 1, 1986. Prior to

### Exchange rate and foreign exchange restrictions
- Aruba’s currency has been fixed at 1.79 per US$1 since January 1, 1986.
- Prior to that, Aruba’s currency was called the Antillean florin, which maintained a peg against the US dollar (1 US$ = ANG 1.79) since 1971.
- Aruba maintains an unapproved foreign exchange restriction arising from the foreign exchange tax on payments by residents to non-residents (1.3 percent of the transaction value).

### Article IV consultation timing
- Discussions for the 2013 Article IV consultation were held in Oranjestad from April 15 to 26, 2013.
- The staff report for the 2010 Article IV Consultation (IMF Country Report No. 10/270, October 7, 2010) was considered by the Executive Board on October 20, 2010.
- Consultations with Aruba are conducted on a 24-month cycle.
- On June 26, 2013, the Executive Board concluded the 2013 Article IV consultation with the Kingdom of the Netherlands—Aruba and endorsed the staff appraisal on a lapse-of-time basis.

### Statistical issues — assessment of data adequacy for surveillance
- General: Data provision is adequate for surveillance.
- Real sector
  - Real sector data compiled by the Central Bureau of Statistics (CBS).
  - CBS has published national accounts data for 1995 through 2011.
  - On the expenditure side, data on changes in inventories are lacking.
  - Data on imports and exports of goods and services do not match BOP statistics, reflecting different methodological approaches and raw sources.
  - CPI data are compiled and published on a monthly basis.
- Government accounts
  - Government finance statistics are prepared and published on a regular basis, but not reported to STA.
  - Presentation issues identified:
    - A residual expenditure category “items not identified elsewhere” that can amount to 3 percent of GDP should be disaggregated.
    - Below-the-line financing does not add up to the fiscal deficit without further adjustments.
    - Each financing category has a component “other” (in addition to disbursements and amortizations) whose nature is not clear.
    - The authorities combine commercial bank financing and central bank financing into one aggregate category “net recourse to the monetary system”; this item should be disaggregated.
- External sector
  - The CBA reports quarterly balance of payments and an annual international investment position (IIP) statistics.
  - Monthly data on the official reserve position are published with a lag of one month.
  - A breakdown in holdings of gold and foreign currency is provided.
  - Data on foreign liabilities of the monetary sector—including a breakdown by maturity and instrument—and the central government are published on a quarterly basis, with a lag of about one quarter.
  - A debt survey covering both public and private sectors provides information on the amount, currency denomination of foreign debt outstanding, as well as on disaggregation by instrument and amortization payments coming due.
  - Areas requiring improvement:
    - Making external debt data consistent with debt flows in the balance of payments.
    - Report maturity schedules on private sector external debt.
- Monetary accounts
  - The CBA’s methodology for compiling monetary statistics is broadly consistent with the IMF’s Monetary and Financial Statistics Manual 2000 (MFSM).
  - The CBA reports monetary data to STA on a timely basis using Standardized Report Forms developed by STA.

### Data reporting table (as of April 16, 2013) — frequency and data quality notes (selected)
- Exchange Rates: Date of Latest Observation: Current; Date Received: Current; Frequency of Data: M; Frequency of Reporting: M; Frequency of Publication: D and M
- International Reserve Assets and Reserve Liabilities of the Monetary Authorities /1: Date of Latest Observation: 2/13; Date Received: 4//13; Frequency: M; Data Quality—Methodological Soundness: M; Data Quality—Accuracy and Reliability: M
- Reserve/Base Money: 2/13; 4/13; M; M; M
- Broad Money: 2/13; 4/13; M; M; M
- Central Bank Balance Sheet: 2/13; 4/13; M; M; M
- Consolidated Balance Sheet of the Banking System: 2/13; 4/13; M; M; M
- Interest Rates /2: 2/13; 4/13; M; M; M
- Consumer Price Index: 12/12; 4/13; M; M; M
- Revenue, Expenditure, Balance and Composition of Financing /3—General Government /4: 2012; 4/13; Q; N/A; Q
- Revenue—Central Government: 2/13; 4/13; M; N/A; M
- Stock of Central Government Debt /5: Q4/2012; 4/13; Q; N/A; Q
- External Current Account Balance: Q4/2012; 5/13; Q; A; Q
- Exports and Imports of Goods and Services: Q4/2012; 5/13; Q; A; Q
- GDP/GNP: 2012; 4/13; A; N/A; A
- Gross External Debt: 2012; 4/13; A; N/A; A
- International Investment Position: 2011; 4/13; A; A; A

Notes from table:
- 1/ Includes reserve assets pledged or otherwise encumbered.
- 2/ Both market-based and officially determined, including discount rates, money market rates, rates on treasury bills, notes and bonds.
- 3/ Includes foreign, domestic bank, and domestic nonbank financing.
- 4/ General government consists of the central budget and the Development Fund of Aruba. Composition of financing published only annually.
- 5/ Including by domestic and foreign holders and instruments.
- 6/ Daily (D); weekly (W); monthly (M); quarterly (Q); annually (A); irregular (I); and not available (NA).

### Press Release highlights — IMF Executive Board Concludes 2013 Article IV Consultation (Press Release No. 13/303, August 9, 2013)
- Aruba is a highly open economy with over eighty percent of the economy depending directly or indirectly on tourism, making Aruba the second highest tourism-dependent country in the world.
- The long-standing fixed exchange rate against the US Dollar, supported by conservative fiscal, credit and prudential policies, has provided macroeconomic stability by maintaining low inflation and keeping imbalances checked until recent shocks.
- Major shocks in the last four years:
  - The global financial crisis, which hit Aruba’s tourism sector in 2009.
  - The shutdown of Valero oil refinery for a total of 27 months during 2009-12 reflecting poor profitability.
- Developments and near-term outlook:
  - Tourism rebounded quickly, partly thanks to aggressive market diversification efforts.
  - Real GDP took a second dip in 2012 by close to 1¼ percent after increasing by 3¾ percent in 2011.
  - Output remains 12 percent below its pre-crisis level, with recovery slower than others in the Caribbean region.
  - The non-oil current account balance improved since mid-2000, reaching a balanced position in 2012.
  - The overall current account recorded a surplus of 5 percent of GDP in 2012.
  - The fiscal position worsened significantly; preliminary data suggests the overall fiscal balance recorded a deficit of 8½ percent in 2012.
  - Fiscal consolidation is appropriately planned to start in 2013.
  - In 2013, real output is projected to grow by 1¼ percent.
  - A two percent deflation is projected in 2013 reflecting large utility price reductions in late 2012, and declining food and energy prices.
  - The current account balance is projected to record a deficit of 9½ percent of GDP in 2013 due to the loss of oil exports.

### Executive Board assessment — key observations and policy recommendations
- Macroeconomic recovery and risks
  - Aruba is recovering slowly from recent shocks; real GDP projected to reach its pre-crisis level only in 2018.
  - Downside risks dominate in the near-term due to high dependence on tourism and oil imports.
  - Medium-term upsides include resumption of oil refining by Valero and large scale investment in renewable energy.
- Fiscal policy
  - Putting the fiscal deficit on a downward path is an immediate policy priority.
  - A reduction of the overall deficit to 6 percent of GDP in 2013 is appropriate.
  - Directors recommend resisting possible expenditure pressures during the election year.
  - In the medium term, ambitious fiscal consolidation of around 8 percent of GDP during 2014-18 is appropriate to bring debt down to below 60 percent of GDP.
  - To contain fiscal pressures from financial liabilities of the AOV and PPPs, implement further pension reforms and put a limit on the size of the PPP-related expenditure commitments.
- External competitiveness and structural reforms
  - Strengthen external competitiveness through further market diversification (U.S. accounts for 60 percent of tourists) and through higher flexibility in the labor market and more enabling business conditions.
  - Ward off risks from a large negative net international investment position and elevated financing requirements.
- Monetary policy and banking sector
  - The accommodative monetary policy stance is appropriate given slack in the economy, projected deflation, and subdued credit growth.
  - The banking system’s excess liquidity has increased substantially since mid-2012.
  - If credit demand picks up, the authorities would need to mop up excess liquidity by increasing the reserve requirement.

### Aruba — Selected Economic Indicators, 2010–14 (key figures)
- Real economy (Percent change)
  - Real GDP: 2010: -3.6; 2011: 3.7; 2012: -1.2; 2013: 2.3; 2014: 3.0
  - Real domestic demand: 2010: -4.0; 2011: 1.7; 2012: -1.7; 2013: -1.5; 2014: 2.6
  - Consumption: 2010: -0.9; 2011: 1.8; 2012: 1.6; 2013: 1.3; 2014: 1.7
    - Private: 2010: -0.3; 2011: 3.9; 2012: 0.5; 2013: 1.6; 2014: 1.6
    - Public: 2010: -2.4; 2011: -3.2; 2012: 4.5; 2013: 0.7; 2014: 1.8
  - Gross investment: 2010: -10.8; 2011: 1.5; 2012: -10.2; 2013: -9.5; 2014: 5.7
  - Exports of goods and services: 2010: -10.2; 2011: 14.4; 2012: -5.3; 2013: 3.7; 2014: 2.2
  - Imports of goods and services: 2010: -9.0; 2011: 8.8; 2012: -5.0; 2013: -1.7; 2014: 1.8
- Consumer prices (Percent change)
  - Period average: 2010: 2.1; 2011: 4.4; 2012: 0.6; 2013: -1.5; 2014: 1.5
  - End-period: 2010: -0.7; 2011: 6.1; 2012: -3.7; 2013: 0.7; 2014: 2.3
- Central government operations (Percent of GDP)
  - Revenues: 2010: 27.7; 2011: 21.4; 2012: 22.3; 2013: 23.6; 2014: 23.0
  - Expenditures: 2010: 31.3; 2011: 29.3; 2012: 30.9; 2013: 29.7; 2014: 29.4
    - Of which: capital: 2010: 1.1; 2011: 1.2; 2012: 1.7; 2013: 0.9; 2014: 1.0
  - Overall balance: 2010: -3.6; 2011: -7.8; 2012: -8.5; 2013: -6.2; 2014: -6.4
  - Gross central government debt (percent of GDP): 2010: 55.9; 2011: 61.2; 2012: 67.0; 2013: 72.3; 2014: 75.0
- Savings and investment (percent of GDP)
  - Gross investment: 2010: 31.0; 2011: 32.6; 2012: 29.7; 2013: 27.0; 2014: 29.0
  - Foreign saving: 2010: 18.3; 2011: 9.6; 2012: -4.9; 2013: 9.4; 2014: 9.0
  - Domestic saving: 2010: 12.7; 2011: 23.0; 2012: 34.6; 2013: 17.6; 2014: 20.0
- Balance of payments
  - Current account balance: 2010: -18.3; 2011: -9.6; 2012: 4.9; 2013: -9.4; 2014: -9.0
    - Oil: 2010: -18.8; 2011: -1.7; 2012: 5.0; 2013: -7.8; 2014: -7.4
    - Non-oil: 2010: 0.5; 2011: -8.0; 2012: -0.1; 2013: -1.6; 2014: -1.6
  - FDI: 2010: 6.5; 2011: 18.2; 2012: -5.6; 2013: 3.4; 2014: 5.1
  - Gross foreign assets of central bank (millions of U.S. dollars): 2010: 724; 2011: 712; 2012: 787; 2013: 820; 2014: 860
  - Gross foreign assets of central bank (months of non-oil imports of following year): 2010: 5.1; 2011: 4.9; 2012: 5.2; 2013: 5.1; 2014: 5.1
  - External debt (percent of GDP): 2010: 101.7; 2011: 114.5; 2012: 104.8; 2013: 109.5; 2014: 107.8
- Monetary (millions of local currency, unless otherwise indicated)
  - NFA: 2010: 1,309; 2011: 1,286; 2012: 1,342; 2013: 1,400; 2014: 1,432
  - NDA: 2010: 1,845; 2011: 1,873; 2012: 2,077; 2013: 2,121; 2014: 2,278
    - Credit to private sector (year-on-year percent change): 2010: 1.2; 2011: 3.5; 2012: 2.8; 2013: 3.1; 2014: 4.0
  - Broad money: 2010: 3,155; 2011: 3,159; 2012: 3,419; 2013: 3,521; 2014: 3,710
    - Deposits (year-on-year percent change): 2010: -0.3; 2011: -0.1; 2012: 8.2; 2013: 3.0; 2014: 5.3
- Memorandum items:
  - Nominal GDP (millions of Aruban florins): 2010: 4,279; 2011: 4,566; 2012: 4,555; 2013: 4,613; 2014: 4,860
  - Nominal GDP (millions of U.S. dollars): 2010: 2,391; 2011: 2,551; 2012: 2,544; 2013: 2,577; 2014: 2,715

*Source: Aruban authorities; and IMF staff estimates and projections.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr13258.pdf_