IMF Executive Board Concludes 2021 Article IV Consultation Discussions with the Kingdom of the Netherlands—Aruba

IMF News, April 21, 2021

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Published: April 21, 2021

COVID-19 impact and near-term developments

COVID-19 caused Aruba’s deepest recession in history with tourism coming to a complete halt during 2020Q2.
Real GDP is estimated to have shrunk by 25.5 percent in 2020, with considerable strain to the labor market and business sector.
The Central Bank of Aruba (CBA) eased monetary and macroprudential policies, supporting private credit despite the deep output contraction.
A multi-pronged fiscal package provided temporary income support, wage subsidies, liquidity assistance, and tax deferral measures, helping contain bankruptcies and unemployment.
The fiscal balance moved from a small surplus in 2019 to a deficit of 17 percent of GDP in 2020.
Public debt increased from 72 to 117 percent of GDP as a result of the large deficit and deep GDP contraction.

Projections and risks

Real GDP growth in 2021 is expected at about 5 percent, supported by Aruba’s favorable testing capacity and vaccination prospects compared to other Caribbean countries.
The economy is only expected to reach the pre-COVID level of real GDP in 2025.
The fiscal deficit is expected to remain elevated in 2021, reflecting continued expenditure support and persisting weakness in tax revenues.
Public debt will peak at about 130 percent of GDP in 2021 and gradually decline thereafter.
Downside risks are predominant and primarily stem from the uncertain evolution of the pandemic.
Implementation risks to the needed fiscal adjustment and risks to debt sustainability are high, but are partly mitigated by the sizable share of obligations to the Dutch government.

Executive Board assessment of policy response

The authorities’ swift policy response helped contain the human and economic damage.
Policy support remains critical; extending fiscal support in 2021 is judged appropriate given continuing economic weakness and elevated risks.
Authorities are encouraged to prepare a contingency plan if current conditions persist, including the extension of some fiscal support into 2022 if additional financing sources can be identified.
Premature retrenchment could hurt the recovery and impose larger costs on the economy.

Fiscal strategy and recommendations

Strict prioritization of spending and revenue mobilization is necessary as recovery takes hold to contain debt sustainability risks.
Expenditure measures should be targeted to households and businesses in immediate need within a generalized effort to improve the efficiency of total spending.
Measures to improve tax compliance would broaden the tax base while more fairly distributing the tax burden.
The introduction of a value-added tax (VAT) should be accelerated to offset revenue shortfalls from recent reductions in direct taxes while protecting the vulnerable.
Over the medium-term, Aruba will need substantial and sustained fiscal consolidation to restore sustainability and rebuild fiscal buffers.
Key elements of a credible, growth-friendly and inclusive medium-term consolidation plan include:
- (i) enhancing the tax system to raise revenues while minimizing distortions and protecting vulnerable groups;
- (ii) containing the public wage bill; and
- (iii) reforming the social safety net.
Strengthening the fiscal policy framework via a well-designed medium-term budget framework and enhancing debt management strategy is recommended to mitigate refinancing risks arising from the bunching of maturity in 2022/23 when loans received from the Netherlands come due under current terms.

Monetary policy, reserves, and financial sector

Monetary and macroprudential policies should remain accommodative to support the recovery.
The current level of foreign reserves is considered adequate, but should be increased over the medium term given high uncertainty about the resumption of tourism receipts.
The CBA is encouraged to remove the recently imposed capital flow management measure once economic conditions normalize; staff does not recommend approval of the new exchange restrictions as conditions for approval are not met.
Premature tightening of macroprudential policies should be avoided to prevent adverse macro-financial feedback effects.
Banks are liquid and well-capitalized; non-performing loans (NPLs) were contained at 5 percent at end-2020.
Provisions for deteriorating asset quality are affecting profits and NPLs could rise significantly once fiscal support is lifted; close monitoring and early intervention are essential.
Adoption of Basel II would further improve financial sector resilience.

Structural reform priorities

Comprehensive structural reforms are key to diversifying the economy and boosting potential growth.
In the short-term, shifting to lower density tourism models would help reduce permanent scarring and decrease negative environmental externalities.
Labor market reforms to foster flexibility would boost potential growth and improve external competitiveness.
Strengthening the link between education, training, and skill demand and broadening access to digital infrastructure will reduce long-term COVID-19 impacts, particularly for unskilled and vulnerable workers.
Policies to tackle inequality and strengthen resilience to climate risks should be continued.
Structural reforms to improve the business environment, including anti-corruption and AML/CFT measures, are recommended.

Key statistics and selected economic indicators (as presented)

Area (sq. km): 180
Population (thousands, 2020q3): 111.9
Literacy rate (percent, 2018): 97.8
Population growth rate (percent, 2016-20 average): 0.5
Percent of population below age 15 (2019): 17.2
Nominal GDP (millions of U.S. dollars, 2019): 3,342
Percent of population age 65+ (2019): 15.2
GDP per capita (thousands of U.S. dollars, 2019): 29.9
Life expectancy at birth (years, 2018): 76.2
Unemployment rate (percent, 2019): 5.2

Real GDP (percent change): 2019: 0.4; 2020: -25.5; 2021: 5.0; 2022: 12.0
GDP deflator (percent change): 2019: 3.9; 2020: -1.3; 2021: 0.1; 2022: 2.0
Consumer prices, period average (percent change): 2019: 3.6; 2020: -3.1; 2021: 1.3; 2022: 2.5

Central government revenues (percent of GDP): 2019: 23.7; 2020: 24.4; 2021: 21.6; 2022: 21.7
Central government expenditures (percent of GDP): 2019: 22.9; 2020: 40.6; 2021: 39.7; 2022: 28.1
Central government overall balance (percent of GDP): 2019: 0.3; 2020: -17.0; 2021: -18.6; 2022: -6.9
Primary balance (percent of GDP): 2019: 4.2; 2020: -11.7; 2021: -13.0; 2022: -0.6
Cyclically adjusted primary balance (percent of potential GDP): 2019: 4.1; 2020: -4.8; 2021: -7.7

Gross central government debt (percent of GDP): 2019: 72.2; 2020: 117.0; 2021: 130.3; 2022: 121.4

Gross investment (percent of GDP): 2019: 21.1; 2020: 11.3; 2021: 11.9; 2022: 17.3
External saving (percent of GDP): 2019: -2.5; 2020: 16.3; 2021: 13.7; 2022: 3.8
Domestic saving (percent of GDP): 2019: -5.0; 2020: -1.7; 2021: 13.5

Current account balance (percent of GDP): 2019: -16.3; 2020: -13.7; 2021: -3.8
Oil (percent of GDP): 2019: -4.5; 2020: -4.6
Non-oil (percent of GDP): 2019: 7.0; 2020: -12.5; 2021: -9.1
FDI (percent of GDP): 2019: -4.0; 2020: 4.4; 2021: 3.3

Gross official reserves (millions of U.S. dollars): 2019: 999; 2020: 1,151; 2021: 1,189; 2022: 1,239
Gross official reserves (months of next year's imports): 2019: 7.5; 2020: 8.6; 2021: 7.3; 2022: 6.7
External debt (percent of GDP): 2019: 89.0; 2020: 131.2; 2021: 132.3; 2022: 128.6

NFA of Banking System (millions of Aruban florins): 2019: 1,713; 2020: 2,056; 2021: 2,160; 2022: 2,466
NDA of Banking System (millions of Aruban florins): 2019: 2,857; 2020: 2,736; 2021: 2,875; 2022: 3,282
Credit to private sector (percent change): 2019: 6.6; 2020: 14.2
Broad money (millions of Aruban florins): 2019: 4,569; 2020: 4,792; 2021: 5,034; 2022: 5,748
Deposits (percent change): 2019: 8.0; 2020: 4.3; 2021: 5.1

Memorandum items:
- Nominal GDP (millions of Aruban florins): 2019: 5,982; 2020: 4,399; 2021: 4,621; 2022: 5,277
- Nominal GDP (millions of U.S. dollars): 2019: 2,458; 2020: 2,582; 2021: 2,948
- Unemployment rate (percent): 2019: 14.0

IMF Communications Department, Press Release No. 21/110, April 21, 2021.

IMF Executive Board Concludes 2021 Article IV Consultation Discussions with the Kingdom of the Netherlands—Aruba

Source details

Other formats

Bibliographic details

COVID-19 impact and near-term developments

Projections and risks

Executive Board assessment of policy response

Fiscal strategy and recommendations

Monetary policy, reserves, and financial sector

Structural reform priorities

Key statistics and selected economic indicators (as presented)

References