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

May 27, 1997

Public Information Notices (PINs) are issued, (i) at the request of a member country, following the conclusion of the Article IV consultation for countries seeking to make known the views of the IMF to the public. This action is intended to strengthen IMF surveillance over the economic policies of member countries by increasing the transparency of the IMF's assessment of these policies; and (ii) following policy discussions in the Executive Board at the decision of the Board.

The IMF Executive Board on May 19, 1997 concluded the 1997 Article IV consultation(1) with Aruba.


For 1996, Aruba's economic growth is estimated at 4 percent, with inflation just over 3 percent, and negligible unemployment. The moderation of growth from average annual rates of about 5 percent during the 1990s reflects both the moderate appreciation of the real exchange rate over the preceding years and a government decision to limit new construction, given nearly full employment and the island's limited physical resources. Earlier growth rates, based primarily on rapid expansions of the tourism sector, had given rise to a significant population increase, surging housing demand, and incipient inflationary pressures.

While Aruba's public finances moved into deficit over the past two years, with a borrowing requirement of 0.5 percent of GDP in 1995 and 1.5 percent of GDP in 1996, government indebtedness excluding loan guarantees is comparatively modest at just over 30 percent of GDP. The government is aiming to hold its borrowing requirement to 2 percent of GDP in 1997 and to achieve a balanced budget in 1998 and beyond.

The consolidation of Aruba's public health insurance funds into a single payer system providing universal coverage is scheduled for completion in 1997. The system, financed by wage-based contributions and targeted to improve administrative efficiency and cost controls, will allow individuals to purchase supplementary insurance in the private market. At this time, the benefits level under the plan has not been set.

The net foreign reserves of the banking system, underpinning the peg of the Aruban florin to the U.S. dollar, decreased by Af. 62 million to Af. 427 million (equivalent to four months of imports) during 1996, in large part as a consequence of the government's purchase of a hotel from foreign investors. There was strong credit growth in 1996 reflecting both government and household borrowing. Nonetheless, given the decline in net foreign assets, broad money increased by just 3 percent in 1996.

The monetary authorities suspended credit ceilings on individual banks at the beginning of 1997 in support of improved efficiency in the allocation of credit. The authorities have also taken important initiatives in recent years to modernize prudential supervision and banking regulation. Further steps in these areas are planned for 1997.

Restrictions on external current transactions were eliminated and capital controls were eased further in January 1997, as part of the continuing liberalization of Aruba's exchange and trade policies. The deficit on Aruba's non-oil external current account narrowed markedly in recent years, falling to 1 percent of GDP in 1996. The improvement stemmed from a strengthening of service and income receipts, reflecting the performance of the tourism sector, along with higher interest earnings on foreign investments.

For 1997 and beyond, with commercial investment strongly limited by the moratorium on the construction of new tourist facilities, economic growth in Aruba will depend on increased capacity utilization, moves to further upgrade the quality of tourism, and the diversification of the economy. Real GDP growth is projected by the IMF staff at 4 percent in 1997, with inflation at 3 to 3½ percent and a deficit in the non-oil (onshore) external current account equivalent to 0.9 percent of GDP.

Aruba: Selected Economic Indicators

  1993 1994 1995 1996 1/

  In percent
Domestic Economy  
Change in real GDP 1.8 5.7 5.5 4.0
Unemployment rate 0.5 0.5 0.7 0.6
Change in consumer prices (end of period) 6.4 4.7 3.1 3.2
  In millions of U.S. dollars 2/
External Economy  
Exports, f.o.b. 1,209 1,357 1,347 1,736
Imports, f.o.b. 1,396 1,439 1,597 2,043
Current account balance 22 60 -15 -74
Direct Investment -9 -60 -1 84
Portfolio investment -4 -10 -17 -6
Capital account balance 7 7 15 28
Gross official reserves 200 196 242 215
Current account balance (in percent of GDP)

of which: non-oil sector









Change in real effective exchange rate (in percent) 3/ 2.2 3.6 0.5 0.3
  In percent of GDP 2/
Financial variables  
General government balance 0.9 0.2 -0.5 -1.5
Change in broad money (in percent) 6.4 12.6 5.6 2.9
Interest rate (in percent) 4/ 6.5 6.1 6.2 6.4

1/ IMF staff estimates.
2/ Unless otherwise noted.
3/ (+) = appreciation.
4/ 12-month time deposits.

Executive Board Assessment

Executive Directors commended Aruba on the strong economic growth and moderate inflation that had been achieved over the past decade, and on the sound macroeconomic policy that had underpinned that performance. Directors noted that the key challenge facing Aruba now was to ensure continued growth in per capita GDP, while avoiding overheating. Directors, therefore, welcomed the government's intention to foster productivity growth by emphasizing quality in the tourist sector, and by diversifying the economy.

Directors observed that the continuation of stability-oriented fiscal and monetary policies would also be essential to facilitate economic growth. Directors accordingly commended the prudent fiscal policy followed in Aruba. They welcomed that the supplementary budget for 1997 aimed at containing the government's borrowing requirement to 2 percent of GDP. They also encouraged the authorities to pursue their objective of returning to near budgetary balance in the next two years. To that end, further measures to restrain public expenditure would be needed in 1997 and the medium term. They should include an enduring reduction in public sector employment and wage restraint. In that connection, some Directors stressed that due regard would need to be paid to retaining quality personnel. Directors thought it advisable to review some large investment projects. Directors also encouraged the Aruban authorities to improve tax administration with a view to increasing the buoyancy of public revenue, and to undertake a study of the structure of the tax system.

Directors agreed that the peg of the florin to the U.S. dollar had served Aruba well. They noted that the central bank had skillfully managed the monetary and banking system in a very open environment. The suspension of direct credit controls as of January 1997 was a welcome step toward allowing greater play for market forces in determining the allocation of credit. It will be crucial to monitor developments under the new system closely to forestall an excessive expansion of monetary and credit aggregates. Directors also said that they understood the authorities' wish to move cautiously to a more fully market-oriented system of monetary control.

Directors noted that important steps had already been taken to modernize the prudential supervision and regulation of the banking system. They observed that the central bank appeared to have the information and regulatory instruments it needed to detect and correct emerging financial problems in individual institutions before they adversely affected the system as a whole. The priority now was to enact the laws and regulations to provide a comprehensive legal framework for supervision that would formalize the methods already used in practice.

Directors commended Aruba on its generally liberal trade policy. On other structural issues, Directors welcomed the government's intention to resell a major hotel without a loan guarantee and to use the proceeds to replenish Aruba's foreign exchange reserves. With respect to the national airline, Directors urged the authorities to eschew any further financial commitments and allow market forces to fill the demand for air transport.

Directors welcomed the efforts at data improvement and called for further improvement in the statistical base, especially trade data, in order to facilitate the formulation, implementation, and surveillance of macroeconomic policies.

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 directors, and this summary is transmitted to the country's authorities. In this PIN, the main features of the Board's discussion with Aruba are described.


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