Public Information Notice: IMF Executive Board Concludes 2007 Article IV Consultation with the Kingdom of the Netherlands - Aruba

February 15, 2008

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.

Public Information Notice (PIN) No. 08/17
February, 15 2008

On February 8, 2008, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with the Kingdom of the Netherlands—Aruba.1


Aruba—pursuing open, market-friendly policies—continues to do well as one of the most developed islands in the Caribbean. Currently, the economy is on the rebound helped by a recovery in tourism, on which the economy is heavily dependent. A decline in tourist arrivals led to a slowdown in real GDP growth to 0.6 percent in 2006, but the deceleration proved to be temporary, and arrivals picked up again in the last quarter of 2006. The rebound in tourism continued in 2007, while activity in the construction and utility sectors was also robust.

Inflation has accelerated owing to one-off supply shocks. After broadly following changes in the U.S. Consumer Price Index (CPI) for several years, inflation in Aruba almost tripled from 2.5 percent year-on-year in December 2006 to 7.3 percent in October 2007. The acceleration is largely due to the introduction of a turnover tax in January 2007, which is estimated to have contributed 3 percentage points to CPI inflation in 2007.

There are signs that the labor market is tightening amid a further expansion of the tourist sector. The unemployment rate is estimated to have dropped from 6.9 percent in 2000 to 3.8 percent at present. Wage pressures have been contained, however, by a large inflow of low-skilled migrant workers. This influx has helped Aruba maintain its international competitiveness.

Following the rebound in tourism, the deficit in the non-oil current account balance has begun to narrow again, coming in at 6 percent of GDP in the year ending in June 2007. The deficit had widened sharply to over 13 percent of GDP in 2006, as a result of declining tourism revenue, increasing workers' remittances, and strong investment activity. Capital inflows have increased sharply as a result of increased investment activity. Foreign direct investment inflows more than doubled in 2006, reaching 13½ percent of GDP, though preliminary estimates indicate a slowdown in inflows in the first half of 2007.

The authorities have tightened macroeconomic policies to stem the rise in public debt and maintain a sufficient level of foreign exchange reserves. After a jump to an unusually large fiscal deficit (including losses of the general health insurance, AZV) of 8½ percent of GDP in 2004, the deficit narrowed to 2½ percent of GDP in 2006. The 2007 central government budget envisioned a further decline to 1½ percent of GDP but, because of renewed financial problems at the AZV, staff estimates a fiscal deficit of 2 percent of GDP in 2007. The monetary authorities have tightened credit ceilings and reserve requirements of commercial banks, contributing to a slowdown in the growth of real money balances.

Staff estimates real GDP to have expanded by about 2 percent in 2007 and to continue at this pace in 2008. The recovery in the tourist sector, together with continued robust investment, stands to be a key engine of growth in the near term. Average inflation is projected to ease from slightly more than 6 percent in 2007 to just below 4 percent in 2008 as the impact of the one-off supply shocks gradually dissipates. The deficit in the non-oil current account is projected to decline to about 8 percent of GDP in 2007 and 6¾ percent of GDP in 2008. The main risks to the outlook are a more pronounced and protracted slowdown in the U.S. economy and a further increase in oil prices. It is also possible that the full impact on inflation of the turnover tax will take longer to materialize, which, together with further increases in the oil price and signs of tightness in the labor market, could provide additional impetus to inflation.

Executive Board Assessment

Executive Directors commended the authorities' promotion of an open economy and continued pursuit of market-friendly policies, which have fostered economic growth and stability. Directors noted that the outlook remains broadly favorable, although, given the heavy dependence on tourism and increasing public debt, the economy remains vulnerable to external shocks. Reducing this vulnerability will hinge on maintaining sustainable public finances and boosting economic growth.

Directors considered that, in the near term, maintaining macroeconomic stability will require further fiscal consolidation and an appropriately tight monetary policy. In order to meet this objective, they recommended prompt action to address the renewed financial problems of the general health insurance and, if needed, offsetting savings in current expenditure.

Directors supported the authorities' intention to keep monetary policy on hold until there are clear signs that inflationary pressures are abating. They welcomed plans to eliminate the credit ceilings and gradually increase the use of indirect monetary instruments.

Directors agreed that the peg of the florin to the U.S. dollar has served Aruba well and provides an effective nominal anchor. They considered the current exchange rate to be at a competitive level. Directors urged the authorities to eliminate the tax on foreign exchange transactions, which detracts from the investment climate and constitutes an unapproved exchange restriction under Article VIII of the Fund's Articles of Agreement.

Directors welcomed the authorities' plan for medium-term fiscal consolidation, and noted that additional measures to lower the growth of personnel costs and strengthen spending controls over goods and services would help achieve this objective. They observed that encouraging progress has been made in reforming the civil service pension fund, and underscored the importance of ensuring the financial soundness of the universal pay-as-you-go pension system in the face of rapid population ageing.

Directors welcomed improvements in Aruba's policy frameworks and public institutions, and encouraged the authorities to strengthen them further, including by advancing plans for increasing fiscal discipline through changing the budget law, improving fiscal management, and enhancing the fiscal framework. Recognizing that, in practice, the central bank enjoys a high degree of operational independence, Directors, nonetheless, viewed that formally establishing this principle in the central bank law would safeguard against undue interference. They noted that improving Aruba's statistical base would support more effective policymaking.

Directors looked forward to the development of a sustainable growth strategy and further improvements in the environment for private investment and diversification. In this regard, they welcomed recent tax reforms, and underscored the value of further simplification and greater reliance on indirect taxes.

Directors considered the financial system to be generally sound. They noted that the large exposure of commercial banks to the tourist sector warrants continued supervisory vigilance, and recommended that the central bank consider employing stress tests to gain additional insight in the banking sector's capacity to withstand large shocks.

Aruba: Selected Economic Indicators

          Est. Proj.
  2003 2004 2005 2006 2007 2008

  (Percent change)

Real economy


Real GDP

1.5 7.5 1.0 0.6 2.1 2.1

Nominal GDP

5.1 9.9 4.4 4.2 8.2 5.9

Real final consumption

1.7 1.9 2.1 2.0 1.3 1.3

Fixed gross capital formation

7.2 3.9 18.3 6.0 3.7 2.8

Real exports

-2.4 10.0 6.9 -4.3 3.8 3.7

Real imports

2.5 2.3 14.6 -0.1 1.7 2.4

Inflation and exchange rate



3.7 2.4 3.4 3.6 6.1 3.8

Real exchange rate index (2000=100) 1/

100.1 98.5 100.7 98.9 99.4 98.8
  (In millions of U.S. dollars)

Balance of payments


Current account

-157.8 54.1 -208.8 -65.0 2.7 36.8

(In percent of GDP)

-7.8 2.4 -9.0 -2.7 0.1 1.3

Non-oil current account

-193.9 -136.2 -176.0 -316.5 -208.6 -186.3

(In percent of GDP)

-9.6 -6.1 -7.6 -13.1 -8.0 -6.7

Financial and capital account

96.2 -57.3 179.5 120.2 -19.3 -17.9

Errors and omissions

25.3 4.7 7.2 -0.2 5.4 0.0

Changes in reserves (-=increase) 2/

36.3 -1.6 22.2 -55.1 0.0 -27.9
  (Percent change)

Monetary aggregates


Net foreign assets

-8.8 3.1 -9.1 8.9 -3.1 5.4

Net domestic assets

18.1 3.2 12.4 0.7 7.8 5.8


7.7 3.4 10.4 -1.7 4.9 5.7
  (In percent of GDP)

Public finances central government


Balance 3/

1.9 -8.6 -3.0 -2.6 -2.0 -1.6

External public debt

20.0 21.0 20.6 21.5 20.9 20.5

Domestic public debt

20.8 25.8 28.8 27.3 28.1 27.3

U.S. dollar

The Aruban florin is pegged to the U.S. dollar at Af. 1.79=US$1

SDR (end of period)

2.7 2.8 2.6 2.7 2.8 ...

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

1/ Trade-weighted, CPI based. End of period.

2/ Including gold, excluding revaluation differences.

3/ Including the health care fund (AZV).

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.


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