Kingdom of the Netherlands—Aruba: Staff Concluding Statement of the 2023 Article IV Mission
IMF News, June 5, 2023
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- Published: June 5, 2023
Economic rebound and recent performance
- Real GDP grew by 27.6 percent in 2021 and is estimated to have expanded by 7.3 percent in 2022.
- Tourism recovery drove the rebound in activity and increased the current account surplus.
- Inflation was 4.9 percent in April (driven by imported energy and food prices and increases of electricity and water tariffs in August 2022).
- Unemployment rate decreased to 6.6 percent in June 2022 and appears to have fallen further in subsequent months.
- Banking sector: well-capitalized, liquid, and profitable; credit growth has been slow.
- Foreign reserves: 7.3 months of total imports at end-2022.
Outlook and risks
- Growth projections:
- Real GDP projected to slow to 2.3 percent in 2023.
- Medium-term growth projected at 1.1 percent.
- Inflation projected to decelerate to 3.2 percent by end-2023.
- Fiscal and external projections:
- Fiscal balance expected to display a surplus in 2023 and over the medium term.
- Central government debt projected to fall to 71 percent of GDP by 2028.
- Foreign reserve coverage projected to remain at around 7.1 months of total imports by 2028.
- Downside risks highlighted:
- Steeper-than-expected global slowdown (especially in the U.S.) reducing tourist arrivals.
- Geopolitical fragmentation disrupting tourism or supply chains and raising commodity prices.
- Climate change risks (rising sea levels and more volatile weather events).
- Domestic risk from insufficient implementation of needed fiscal adjustment.
Fiscal position and recommendations
- Fiscal performance:
- Fiscal deficit declined to 0.5 percent of GDP in 2022 from 16.2 percent of GDP in 2020.
- Central government debt declined from 112.3 percent of GDP in 2020 to 90.7 percent of GDP at end-2022.
- Fitch upgraded Aruba’s long-term foreign debt rating from BB to BB+ in March 2023 (noted as due to post-pandemic economic and fiscal rebound).
- Short-term fiscal policy:
- The 2023 budget’s envisaged government expenditure envelope is judged appropriate: plan to keep nominal current expenditure at last year’s level while introducing tax measures to increase revenue.
- Authorities encouraged to quickly introduce remaining planned tax reforms and to prepare a contingency plan to reduce spending if revenue falls short.
- Medium-term fiscal strategy:
- Authorities’ objective: maintain a fiscal surplus while creating space for greater public investment.
- Mission assessment: recently implemented tax measures are not sufficient to achieve fiscal targets; further measures needed to increase revenue mobilization and scale back recurrent spending.
- Revenue options: introduce a broad-based value-added tax to replace the current indirect tax system; strengthen tax compliance.
- Expenditure measures: contain the wage bill, reprioritize spending on goods and services, streamline transfers and subsidies, and reallocate from current spending to growth-enhancing public investment.
- Planned World Bank Public Expenditure Review would help inform these efforts.
- Fiscal framework and debt management:
- Strengthening the medium-term fiscal policy framework with a debt anchor and pre-determined escape clauses is recommended.
- Develop a sound debt management strategy in parallel.
Pension and long-term fiscal risks
- Pension outlook:
- Without further reforms, the pension system is expected to run deficits starting in around five to six years.
- Pension reserve projected to be depleted by the mid-2030s despite efforts to improve the AOV financial situation.
- Recommended reforms:
- Further increase the contribution rate and/or reduce the replacement ratio to bolster solvency.
Financial sector policy and supervision
- Reserve requirements:
- Reserve requirement ratio increased to 25.5 percent (from 7 percent in March 2020), which has locked up liquidity; mission encouraged the Central Bank of Aruba (CBA) to reduce the reserve requirement ratio over time given declining inflation and adequate foreign reserves.
- Financial stability and macroprudential policy:
- Overall financial stability risk assessed as low, but rising real estate lending to households raises potential concerns.
- Recommended actions: close monitoring of underwriting standards; consider caps on loan-to-value and debt service-to-income ratios; develop a comprehensive macroprudential policy framework supported by better, more granular, timely data (including on non-bank financial institutions).
- Regulatory and supervisory strengthening:
- Mission welcomes CBA’s risk-based supervision and annual stress tests but recommends:
- A more structured approach to liquidity and solvency stress testing tied to macroeconomic scenarios.
- Adoption of Basel II international standards to enhance monitoring and management of financial sector risks.
Structural reforms, governance, and AML/CFT
- Structural priorities to boost potential growth:
- Increase value added of tourism and enhance non-tourism activities.
- Ease of doing business: remove obstacles, reduce red tape, stimulate entrepreneurship; note: “Business Policy Guidelines” and digital transition efforts seen as steps in the right direction.
- Labor market reforms: promote participation and hiring, address skills gaps, enhance productivity; promote greater labor market flexibility (such as reducing costs of dismissals) and introduce an unemployment insurance program; strengthen vocational training and improve education outturns to address skills mismatches and lessen gender gaps.
- Governance:
- CBA survey indicates a widespread perception of corruption.
- Recommendations: align framework with the United Nations Convention Against Corruption; improve capacity of the Integrity Bureau; implement codes of conduct for public servants; implement robust asset declaration requirements for senior public servants.
- AML/CFT and tax transparency:
- Commends efforts reflected in the 2022 CFATF mutual evaluation on AML/CFT; recommends continued strengthening of technical compliance and effectiveness, especially supervision of non-profits and non-financial business providers.
- Recommends establishment of a gaming authority for licensing and vetting, and a regulatory framework for licensing virtual asset service providers in accordance with FATF standards.
- Implement legal framework for beneficial ownership information held by the Chamber of Commerce and legal persons; strengthen law enforcement capacity to pursue money laundering and other financial crimes.
- Steps to increase tax information sharing and resolve issues related to implementation of OECD standards on tax transparency and exchange of information are essential.
Climate resilience and public investment
- Climate vulnerability:
- Aruba is a flat island with a substantial share of houses, primary infrastructure, and tourism assets near sea level; even modest sea-level rise will greatly affect the economy.
- Recommended actions:
- Develop a concrete action plan under the National Climate Resilience Council to prioritize infrastructure investments that improve physical resilience of low-lying areas.
- Identify concrete financing sources for these projects and define how they fit within the medium-term fiscal framework.
- Ongoing initiatives noted: climate risk profile assessment, planned costing of climate change adaptation needs, and development of a national climate resilience strategy.
Key economic indicators (selected)
- Basic data and social indicators:
- Area (sq. km): 180
- Population (thousands, 2022q2): 107.4
- GDP per capita (thousands of USD, 2020): 32.8
- Nominal GDP (millions of USD, 2020): 3,521
- Literacy rate (percent, 2020): 98.0
- Life expectancy at birth (years, 2021): 74.6
- Percent of population below age 15 (2021): 16.8
- Age 65+ (2021): 15.5
- Population growth rate (percent, 2018-22 average): -0.2
- Unemployment rate (percent, 2020): 6.6
- Selected macro aggregates and changes (2020–2023):
- Real GDP percent changes: 2020: -24.0; 2021: 27.6; 2022: 7.3; 2023 (proj.): 2.3
- Real domestic demand percent changes: 2020: -12.2; 2021: 7.9; 2022: 0.4; 2023 (proj.): 0.2
- Exports of goods and services percent changes: 2020: -44.1; 2021: 54.4; 2022: 29.8; 2023 (proj.): 4.2
- Imports of goods and services percent changes: 2020: -26.9; 2021: 15.1; 2022: 18.3; 2023 (proj.): 1.6
- GDP deflator percent changes: 2020: -5.0; 2021: 5.7; 2022: 3.2
- Consumer prices (period average) percent changes: 2020: -1.3; 2021: 0.7; 2022: 5.5; 2023 (proj.): 4.5
- Central government underlying balance (percent of GDP) 2020: -16.2; 2021: -9.2; 2022: -0.5; 2023 (proj.): 0.8
- Revenues (percent of GDP): 2020: 24.0; 2021: 19.7; 2022: 21.4; 2023 (proj.): 22.8
- Expenditures (percent of GDP): 2020: 40.2; 2021: 28.9; 2022: 21.8
- Gross central government debt (percent of GDP): 2020: 112.3; 2021: 101.8; 2022: 90.7; 2023 (proj.): 85.4
- Current account balance (percent of GDP): 2020: -12.4; 2021: 2.7; 2022: 11.2; 2023 (proj.): 7.4
- Gross official reserves (USD millions): 2020: 1,234; 2021: 1,534; 2022: 1,564; 2023 (proj.): 1,574
- Gross official reserves (months of next year’s imports): 2020: 7.6; 2021: 7.2; 2022: 7.3 (end-2022 noted in text); 2023 (proj.): 7.2
- External debt (percent of GDP): 2020: 132.9; 2021: 119.0; 2022: 89.6; 2023 (proj.): 85.9
- Credit to private sector (percent change): 2020: -1.4; 2021: 1.7; 2022: 3.1
- Broad money (millions of Aruban florins): 2020: 4,797; 2021: 5,366; 2022: 5,546; 2023 (proj.): 5,854
- NFA of Banking System (millions of Aruban florins): 2020: 2,056; 2021: 2,885; 2022: 3,112; 2023 (proj.): 3,154
- NDA of Banking System (millions of Aruban florins): 2020: 2,741; 2021: 2,481; 2022: 2,435; 2023 (proj.): 2,701
- Nominal GDP (millions of Aruban florins): 2020: 4,581.3; 2021: 5,555.6; 2022: 6,303.0; 2023 (proj.): 6,655.3
- Nominal GDP (millions of U.S. dollars): 2020: 2,559.4; 2021: 3,103.7; 2022: 3,521.2; 2023 (proj.): 3,718.0
- Unemployment rate (percent, 2022H1): 8.6
Kingdom of the Netherlands—Aruba: Staff Concluding Statement of the 2023 Article IV Mission