Public Information Notice: IMF Concludes 2001 Article IV Consultation with the Kingdom of the Netherlands-Aruba

September 7, 2001

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

On August, 22, 2001, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with the Kingdom of the Netherlands-Aruba.1


After an investment boom in the tourism sector and upgrades in the oil refinery that supported output growth of 10 percent per year through the mid-1990s, growth declined to a more sustainable level, reaching 4.5 percent in 1999. From mid-2000, output and demand growth have moderated, largely reflecting external developments and tight monetary policy. The most likely prospect for 2001 is a further deceleration in growth to about 1½ percent, caused by the ongoing deterioration in the external environment. Price inflation accelerated from 2.3 percent in 1999 to 4 percent in 2000, owing mainly to imported fuel costs, but also to rapid domestic credit expansion and government consumption outlays. The persistence of an inflation differential vis-à-vis the United States has led to a steady appreciation of the bilateral real exchange rate against the U.S. dollar and some erosion of competitiveness.

Following fiscal consolidation efforts and a virtually balanced budget in 1998, public finances in 1999 and 2000 showed a deteriorating trend, with recurrent liquidity shortages and an accumulation of arrears in 2000. A deficit of 0.3 percent of GDP reopened in 1999 and widened to 0.8 percent in 2000. Despite plans to freeze public employment and contain wages, labor costs increased, while spending on goods and services also rose substantially--encroaching on capital spending, which has remained low. On the revenue side, tax collections in 1999 and 2000 were temporarily boosted by special measures. In 2001 the deficit is expected to widen to about 2½ percent of GDP, reflecting the cost of the universal coverage health system (AZV) introduced in January 2001, increased public employment, and subdued revenue as the tax windfall from the temporary measures fades away.

Since beginning its operations in 1986, the Central Bank of Aruba (CBA) has successfully preserved the fixed exchange rate to the U.S. dollar--its primary monetary policy objective--supported by a strong foreign reserve position. However, despite efforts to liberalize the monetary policy framework, the array of policy instruments has remained essentially limited to credit limits, moral suasion, and liquidity reserve requirements. Following a relaxation of the credit ceiling in 1999 and an ensuing surge in credit growth, the CBA returned to a tight monetary stance in 2000, curbing broad money growth and shoring up reserves by reimposing strict constraints on bank credit expansion. As a consequence, the reserve position strengthened to 150 percent coverage of base money and the net foreign assets of the monetary system are within the CBA confidence margin of 5-6 months of non-oil imports.

Executive Board Assessment

Executive Directors agreed with the thrust of the staff appraisal. They commended the authorities for the positive performance of the Aruban economy over the past decade. Directors noted that the economy's sustained expansion had been underpinned by growth-oriented economic policies and accompanied by low inflation and financial stability.

Looking ahead, Directors agreed that the challenge now was to diversify economic activity while consolidating Aruba's position in the tourism market, so as to minimize vulnerability to external shocks and output volatility. Directors emphasized that success in this direction would hinge on policies that strengthen financial stability and attract domestic and foreign savings. These policies should be geared to increasing the public sector's contribution to national savings; reinforcing financial safeguards and the monetary policy framework, coupled with a sequenced liberalization of remaining credit and capital restrictions; and improving transparency and promoting entrepreneurship.

Directors agreed that the authorities' objective of eliminating the budget deficit was appropriate and should be complemented by a modest surplus over the medium term. Directors expressed concern at the deterioration of the budgetary position and urged the authorities to address existing fiscal imbalances without delay. They stressed that it was essential to contain current spending, notably on payroll costs, and restore budgetary discipline, particularly by eliminating payment arrears. Directors also encouraged the authorities to limit the strain on the budget from the public health system by tightening entitlements, introducing co-payments and deductibles, and increasing contribution rates, if necessary. They welcomed the ongoing review of the public employees' pension fund (APFA) and called for a revision of pension entitlements with a view to ensuring the pension system's financial viability.

Directors encouraged the authorities to strengthen budgetary management procedures, and supported the authorities' intentions to reform the tax system and its administration. Directors agreed with the authorities' objectives to simplify the tax system, curtail special tax treatments, and increase reliance on indirect taxes. They suggested that the authorities consider introducing a broad-based consumption tax.

Directors commended the authorities for their prudent management of monetary policy as demonstrated by the credibility of the peg of the Aruban florin to the U.S. dollar, supported by a strong reserves position. Directors considered that the tight monetary policy stance adopted by the Central Bank of Aruba in early 2000 was appropriate and should be maintained until demand pressures abate--a development that was already underway. They endorsed the authorities' efforts to introduce flexibility in the monetary policy framework, and further liberalize external capital transactions. Directors considered that the gradual elimination of remaining credit and capital balance restrictions should be implemented in parallel with measures to strengthen the liquidity and prudential requirements on the banking system, and with reinforced supervision.

Directors observed that Aruba had made substantial progress in strengthening the regulatory and supervisory framework for onshore and offshore financial activities, including in the area of fighting crime related to international financial transactions. They also welcomed the agreement reached with the OECD on harmful tax practices. The authorities were encouraged to sustain the pace of reforms in the supervisory area through prompt passage of the necessary legislation regarding the regulation of company service providers in the offshore sector.

Directors encouraged the authorities to advance the pace of privatization, particularly in telecommunications, in order to boost private investment and improve productivity and competitiveness. Plans to grant operational autonomy to the Aruban Tourism Agency (ATA) and include the private sector in its management were welcomed.

Directors urged the authorities to intensify their efforts to improve the statistical base, and noted that progress in this area was essential to increase transparency, facilitate economic decision making, and allow effective surveillance. In particular, Directors emphasized the importance of providing timely budgetary data, economic activity and labor market indicators, and national accounts in accordance with standard international methodologies.

Kingdom of the Netherlands-Aruba: Selected Economic Indicators

  1997 1998 1999 2000

  (Percent change)
Real economy        
Real GDP 4.1 3.0 4.5 2.5
Nominal GDP 7.2 4.9 6.9 6.6
Tourist earnings 8.9 9.2 8.0 6.2
Inflation (period average)        
CPI (Aruba) 3.0 1.9 2.3 4.0
Real exchange rate index (1995=100)1 100.9 101.2 101.3 102.1
  (In millions of U.S. dollars)
Balance of payments        
Current account -196 -19 -327 283
(In percent of GDP) -11.9 -1.1 -17.1 14.4
Non-oil current account -17 -13 19 19
(In percent of GDP) -1.0 -0.8 1.0 1.0
Financial and capital account 180 69 338 -305
Errors and omissions -3 1 -8 7
Change in reserves (- = increase)2 18 -51 -3 15
  (Percent change)
Monetary aggregates        
Net foreign assets -9.2 40.5 3.3 -7.2
Net domestic assets 11.1 1.9 14.4 7.1
Quasi-money 3.7 11.7 11.8 3.0
  (In percent of GDP)
Public finances central government        
Balance -1.5 0.0 -0.3 -0.8
External debt 10.1 11.4 10.0 10.6
Domestic debt 15.7 14.4 12.4 11.5
U.S. dollar The Aruban florin is pegged to the U.S. at Af. 1.79=US$1
SDR (end of period) 2.42 2.52 2.46 2.33

Sources: Data provided by the Aruban authorities; and IMF staff estimates.

1Relative to the U.S. dollar. CPI based. Period average.
2Including gold, excluding revaluation differences.

1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. This PIN summarizes the views of the Executive Board as expressed during the August, 22, 2001 Executive Board discussion based on the staff report.


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