IMF Executive Board Concludes Article IV Consultation Discussions with the Kingdom of the Netherlands—Aruba

IMF News, June 15, 2017

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IMF Executive Board Concludes Article IV Consultation Discussions with the Kingdom of the Netherlands—Aruba

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• Published: June 15, 2017

Overview

• On May 17, 2017, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation discussions with the Kingdom of the Netherlands—Aruba, and considered and endorsed the staff appraisal without a meeting.
• Aruba is a small open economy highly dependent on tourism, with over 85 percent of the economy depending on tourism.
• Aruba’s per capita income is about USD 24.1 thousand.

Recent Economic Developments

• Growth and demand
  • Real GDP: contracted by 0.5 percent in 2015 and by 0.2 percent in 2016.
  • Real domestic demand: contracted by 3.0 percent in 2016.
  • Exports of goods and services: grew 0.3 percent in 2016.
  • Imports of goods and services: contracted by 3.5 percent in 2016.
  • Credit growth: 1.8 percent in 2016, up from -0.2 percent in 2015.
• Inflation
  • Period average consumer prices: deflation in 2016 consistent with weak domestic demand and low energy prices.
  • Consumer prices end-period: -0.3 percent in 2016; period average 0.1 percent in 2015.
• Employment and social programs
  • Unemployment rate: 7.3 percent (2015).
  • Aruba’s social safety nets include universal healthcare, pensions, unemployment benefits, transport subsidies, and cash transfers to low-income families and single mothers.
  • The 2017 budget included 1.2 percent of GDP of transfers to universal healthcare and 1.3 percent of GDP in cash transfers and various social programs.

Fiscal Position and Public Debt

• Fiscal balances
  • Overall deficit: 1.6 percent of GDP in 2015 and 2016 (noted in narrative); table reports overall balance as -0.8 percent in 2015 and -2.0 percent in 2016.
  • Primary balance: in surplus for the second consecutive year in 2016.
  • Revenues: 26.3 percent of GDP (2015) and 26.5 percent of GDP (2016).
  • Expenditures: 27.7 percent of GDP (2015) and 27.5 percent of GDP (2016).
  • Capital expenditure: 0.2 percent of GDP (2015).
• Public debt
  • Gross central government debt: around 85 percent of GDP in 2016; table reports 82.5 percent (2015) and 86.3 percent (2016).
  • Debt composition: broadly evenly split between foreign and domestic.
  • Interest payments on debt: about 4½ percent of GDP in 2016.
• Fiscal consolidation
  • Fiscal consolidation continued into 2015–16, driven by structural and one-off policies.
  • Staff notes that achieving the authorities’ fiscal targets would likely require additional fiscal measures; size of effort depends on GDP growth strength.

Monetary Policy and Banking System

• Exchange rate and reserves
  • Fixed exchange rate regime against the U.S. dollar at 1.79 florins to the dollar (unchanged since 1986).
  • Gross foreign assets of central bank: 828 (2015), 949 (2016) millions of U.S. dollars; projections 1192 (2017) and 1437 (2018).
  • Gross reserves surpassed 4½ percent of GDP, about 5¾ months of imports and 40 percent of broad money.
• Monetary policy stance
  • Central bank reserve requirement ratio: 11 percent since 2010.
  • Staff assessment: monetary policy stance appropriate given low growth and inflation; no need to tighten currently but be ready to tighten if overheating appears.
• Banking system health
  • Banks maintain elevated capital buffers, relatively low non-performing loans, and are profitable.

External Sector

• Current account and external debt
  • Current account balance: -4.6 percent of GDP in 2016 (table); narrative notes improvement and stronger than level implied by fundamentals.
  • External debt: declining in recent years; table reports external debt 103.6 (2015) and 93.3 (2016) percent of GDP.
• External position assessment
  • International reserves adequate to safeguard the currency peg.
  • EBA-lite estimates suggest the real effective exchange rate is weaker than implied by fundamentals; excluding Venezuela, the real effective exchange rate is broadly in line with fundamentals.
• Foreign direct investment
  • FDI: 11.5 percent of GDP (2015) and 13.5 percent of GDP (2016).

Outlook and Risks

• Growth outlook
  • Staff projects gradual recovery: Real GDP projections in table—1.9 percent (2017) and 2.3 percent (2018).
  • Recovery to be supported by refinery-related investments and ongoing PPP investment projects.
• Risks to outlook
  • Downside risks: delays in refinery-related investments; a deepening crisis in Venezuela posing downside risk to tourism; medium-term risk from a larger shift of U.S. tourists to Cuba.
  • Upside risk: possible U.S. fiscal expansion could boost Aruba’s tourism through increased demand for shared-economy services.

Structural Challenges and Reform Priorities

• Labor market and immigration
  • Need for comprehensive labor market reform and development of sustainable skill-based immigration policies to increase labor force participation and productivity.
• Business environment and tourism diversification
  • Improve ease of doing business.
  • Diversify tourism sources, including from Latin America.
• Energy and diversification
  • Reopening of the refinery important for diversification.
  • Authorities’ policies on renewable energy and development of a knowledge-based economy are promising.
• Fiscal structural measures suggested by staff
  • Additional revenue efforts, including greater indirect tax collection.
  • Reduce wage-related expenses given large size of the wage bill.
  • Ensure the health care system becomes self-financed.

Key Statistics (selected, as reported)

• Area (sq. km): 180
• Population (thousands, 2016 est.): 110.6
• GDP per capita (thousands of U.S. dollars, 2016): 24.1
• Nominal GDP (millions of U.S. dollars, 2016): 2,668
• Real GDP growth: 4.2 (2013); 0.8 (2014); -0.5 (2015); -0.2 (2016); 1.9 (2017 proj.); 2.3 (2018 proj.)
• Real domestic demand growth: 0.4 (2013); -2.3 (2014); -2.4 (2015); -3.0 (2016); 6.1 (2017 proj.); 5.1 (2018 proj.)
• Consumer prices period average: -0.9 (2013); 0.6 (2014); (end-period) 0.1 (2015); -0.3 (2016)
• Revenues (percent of GDP): 24.7 (2013); 23.6 (2014); 26.3 (2015); 26.5 (2016)
• Expenditures (percent of GDP): 29.1 (2013); 30.3 (2014); 27.7 (2015); 27.5 (2016)
• Gross central government debt (percent of GDP): 74.0 (2013); 81.9 (2014); 82.5 (2015); 86.3 (2016)
• Interest payment obligations on debt: about 4½ percent of GDP in 2016
• Gross foreign assets of central bank (millions of U.S. dollars): 666 (2013); 693 (2014); 828 (2015); 949 (2016)
• Gross foreign assets of central bank (months of imports): 3.5 (2013); 4.7 (2014); 5.8 (2015); 5.9 (2016)
• External debt (percent of GDP): 113.2 (2013); 106.5 (2014); 103.6 (2015); 93.3 (2016)

Source: IMF Executive Board press release—IMF Executive Board Concludes Article IV Consultation Discussions with the Kingdom of the Netherlands—Aruba (Press Release No. 17/223, June 15, 2017).

References

• Kingdom of the Netherlands-Aruba and the IMF
• IMF Policy Advice -- A Factsheet
• Press Releases
• PRESS CENTER
• https://www.imf.org/en/home