IMF Executive Board Concludes 2019 Article IV Consultation with the Kingdom of the Netherlands-Aruba

June 5, 2019

On May 22, 2019, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation discussions [1] with the Kingdom of the Netherlands—Aruba and considered and endorsed the staff appraisal without a meeting.

Aruba’s economic recovery continued last year, albeit at a slower pace than 2017. Following a contraction in 2015 and a modest rebound in 2016, real GDP expanded by 2.3 percent in 2017 on the back of strong public consumption and buoyant tourism growth. However, growth is estimated to have slowed to 1.2 percent in 2018, largely because of weaker public consumption, a slight delay in the implementation of key investment projects, and a pick-up in import growth. Inflation rose to 3.6 percent in 2018 from negative figures in 2016-17. The current account balance deteriorated to -0.5 percent of GDP in 2018, while foreign reserves remained broadly stable at 5.1 months of imports. The overall fiscal deficit in 2018 is estimated to have declined to 2.2 percent of GDP, from 3 percent in 2017, largely reflecting a sizable increase in revenues, but public debt remained high, reaching 84.5 percent of GDP in 2018. The banking sector remains sound and banks enjoy healthy profits and are well-capitalized.

Facing a deteriorating fiscal position, the Aruban authorities embarked on an ambitious fiscal adjustment program which formed the basis of a new agreement with the Netherlands, made in November 2018. The agreement pinned down fiscal targets for 2019 and the medium term. The authorities introduced a temporary package in mid-2018 by increasing the turnover tax rate and have started to implement a series of fiscal measures beginning in 2019, as a first step toward addressing the country’s fiscal challenges and putting high debt on a sustainable path.

The economic outlook is broadly positive. The fiscal consolidation plan—while essential to put public debt on a downward trajectory—will lower real GDP growth to a projected 0.7 percent in 2019. However, this effect will be mitigated by continued strong growth in tourism from the U.S., and the implementation of multiple large investment projects in 2019 and subsequent years. Over the medium term, growth is expected to accelerate to about 1.1 percent, broadly in line with the historical average. Inflation is projected to fall to 1.8 percent in 2019 as the base effect of the turnover tax rate hike disappears, and oil prices decrease, before gradually rising towards 2.2 percent over the medium term. The current account balance is projected to decline further in 2019 before gradually improving in the medium term while foreign reserves are foreseen to remain broadly stable at around 5 months of imports.

Executive Board Assessment [2]

Aruba’s economic recovery continues, although at a slowing pace. Following negative growth in 2015 and a modest pick-up in 2016, output has gained momentum over the past two years supported by strong growth in tourism from the U.S., which more than compensated for declining tourism from Venezuela. The economic recovery is foreseen to continue, underpinned by buoyant tourism activity and the coming on stream of multiple large investment projects in 2019 and subsequent years.

Risks to the outlook are skewed to the downside. A deepening crisis in Venezuela that leads to large immigrant and refugee inflows would put pressure on Aruba’s infrastructure, labor markets, and tourism. Aruba is also vulnerable to a cyclical downturn in the U.S. economy and the short-term growth effects of Aruba’s fiscal consolidation may turn out greater than expected. On the upside, the implementation of needed structural reforms would boost potential growth and, although a remote possibility, the reopening of the refinery could bring associated investments and job gains.

The authorities are making good progress in implementing their fiscal reform agenda. They are encouraged to sustain reform momentum to keep the public debt ratio on a downward path. Reforms should be prioritized, sequenced, equitable, and well-communicated to ensure their durability. Attention should be given to ensuring that social safety nets remain effective and adverse growth effects remain manageable.

Additional measures are needed to achieve the authorities’ fiscal targets. The additional adjustment should contain a mix of tax reforms and expenditure rationalization. The fiscal measures in 2019 are expected to deliver a large upfront increase in revenues but it will be important to strike a balance between revenue increases and expenditure restraint in subsequent years. Tax reform efforts could follow previous IMF advice and emphasize broadening the base and shifting toward indirect taxation—a VAT could be introduced in this regard. Expenditure rationalization should minimize adverse growth effects and protect capital spending and essential government services. The priorities are to rationalize the wage bill, improve the efficiency of other public spending, and contain increasing healthcare costs.

Having a robust fiscal framework is paramount. It is essential to further develop a formal medium-term fiscal framework to enhance the credibility of the consolidation plan. Eventually, a formal fiscal rule could be considered to preserve sustainability.

The strategy for budget financing and debt management needs to be finalized. Financing should avoid crowding out private sector credit or unduly pressuring international reserves. It is crucial to develop an asset-liability management framework to guide financing decisions, including the desired composition of the government-debt portfolio, and to help assess implications of alternative financing options.

The monetary policy stance and financial sector supervision and regulation remain appropriate. The CBA’s policy decisions should remain data driven, balancing domestic and external stability considerations. Tightening is warranted if incoming data or expectations point to downward pressures on international reserves. In the absence of such pressures and should risks to growth surprise on the downside, the CBA could consider unwinding the increase in reserve requirement. Banks remain sound and liquid under a solid supervisory and regulatory framework.

Aruba’s external position is broadly in line with fundamentals. In the medium term, the current account is expected to improve due to increasing tourism and continued fiscal consolidation. International reserves are adequate to safeguard the peg but should be raised over the medium term to maintain sufficient coverage.

Aruba should maintain its high-end tourism brand and diversify tourism sources. The “exhaustion effect” necessitates a focus on increasing spending per visitor, including through offering high quality services and adequate physical tourism infrastructure. Diversification of tourism sources beyond the U.S. would reduce concentration risks.

There is a pressing need to address structural challenges. The authorities are making efforts to diversify the economy including through the “promising sectors” initiative. To maximize the benefits of such efforts, Aruba will need to pursue structural reforms that: improve the business climate and reduce red tape; foster labor market flexibility while protecting workers; enhance human capital; and address governance vulnerabilities—though welcome efforts in this area are already underway. Increasing renewable energy use and energy efficiency and FDI-attracting structural reforms would further boost competitiveness.

Bridging data gaps would make policy-making more effective. Good progress has been made in revising the national accounts. Efforts need to continue with a focus on compiling deflators for the expenditure components of GDP. CARTAC technical assistance could help in this regard. Aruba should strive to be covered in key international surveys like Doing Business and Transparency International.

 

Table 1. Aruba: Selected Economic Indicators, 2014–2020

Basic Data, Social and Demographic Indicators

Area (sq. km)

180

Population (thousands, 2017 est.)

110.8

Literacy rate (percent, 2015)

97.5

Population growth rate (percent, 2017)

0.4

Percent of population below age 15 (2017)

18.4

Nominal GDP (millions of U.S. dollars, 2017)

2,679

Percent of population age 65+ (2017)

13.4

GDP per capita (thousands of U.S. dollars, 2017)

24.2

Life expectancy at birth (years, 2015)

75.4

Unemployment rate (percent, 2017)

8.9

Economic Indicators

Average

Est.

Projections

1996-2017

2014

2015

2016

2017

2018

2019

2020

(Percent change)

Real economy

Real GDP

1.0

0.9

-0.4

0.5

2.3

1.2

0.7

1.0

GDP deflator

2.4

1.8

2.0

-1.8

-1.5

4.1

1.2

1.7

Consumer prices

Period average

2.3

0.4

0.5

-0.9

-0.5

3.6

1.8

2.0

End-period

1.5

2.2

-0.9

-0.3

-0.3

4.6

0.6

2.8

(Percent of GDP)

Central government operations

Revenues

23.8

23.6

26.3

26.6

25.4

25.7

27.0

27.0

Expenditures

26.6

31.4

27.9

28.2

28.4

27.9

27.9

28.0

Of which: capital

1.4

1.1

0.3

0.6

0.1

1.0

0.6

0.6

Overall balance

-2.8

-7.9

-1.6

-1.6

-3.0

-2.2

-0.8

-1.0

Primary Balance

-0.9

-3.9

2.5

2.9

1.7

1.9

3.7

3.7

Gross central government debt

55.7

81.6

81.3

84.4

86.7

84.5

83.8

82.5

Savings and investment

Gross investment

28.1

22.9

21.5

23.0

23.4

22.7

24.5

24.1

Of which: public

1.4

1.1

0.8

1.1

0.8

1.2

0.8

0.8

External saving

0.5

5.1

-4.2

-5.0

-1.0

0.5

1.7

1.2

Domestic saving

27.6

17.8

25.7

28.1

24.4

22.2

22.8

22.9

Balance of payments

Current account balance

-0.6

-5.1

4.2

5.0

1.0

-0.5

-1.7

-1.2

FDI

2.4

9.2

-1.4

1.1

3.0

3.4

4.6

4.1

Gross official reserves (millions of U.S. dollars)

565.6

693

828

937

922

995

1,043

1,095

Gross official reserves (months of next year's imports)

2.5

3.9

4.9

5.5

4.9

5.1

5.2

5.4

External debt

99.7

106.5

103.6

106.3

102.5

99.3

97.5

95.4

(Millions of Aruban florins, unless otherwise indicated)

Monetary

NFA of Banking System

956

1,173

1,516

1,778

1,685

1,776

1,876

1,982

NDA of Banking System

1,696

2,288

2,289

2,390

2,555

2,601

2,584

2,601

Credit to private sector (percent change)

5.3

4.2

-0.2

1.8

3.8

3.6

3.4

3.3

Broad money

2,652

3,461

3,805

4,168

4,240

4,377

4,459

4,582

Deposits (percent change)

9.2

4.4

16.3

10.1

7.5

0.8

1.9

2.8

Memorandum items

Nominal GDP (millions of Aruban florins)

4,038

4,743

4,818

4,756

4,795

5,053

5,148

5,290

Nominal GDP (millions of U.S. dollars)

2,256

2,649

2,691

2,657

2,679

2,823

2,876

2,955

Unemployment rate (percent)

8.0

7.5

7.3

7.7

8.9

…

…

…

Sources: Aruban authorities and IMF staff estimates and projections.

Note: Real and nominal GDP data reported in this table over 2010-2017 reflect the latest data compiled and published by the Central Bank of Aruba (CBA). The Aruba Central Bureau of Statistics has made good progress on the revision of the national accounts.


[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.

[2] The Executive Board takes decisions under its lapse-of-time procedure when the Board agrees that a proposal can be considered without convening formal discussions.

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