IMF Executive Board Concludes 2023 Article IV Consultation with the Kingdom of the Netherland—Aruba

IMF News, July 27, 2023

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Real GDP grew by 27.6 percent in 2021 and further expanded by 7.3 percent in 2022, driven by recovery of tourist arrivals after pandemic restrictions were lifted.
Inflation moderated and was 4.9 percent in April, driven by imported energy and food prices and increases of electricity and water tariffs in August 2022.
The unemployment rate decreased to 6.6 percent by June 2022 and appears to have fallen further in subsequent months.
The banking sector remains well-capitalized, liquid, and profitable. Banks lent slowly in 2022, with lending picking up in early 2023.
The strong tourism recovery contributed to improving external and fiscal positions. Public debt has declined.

The economy is expected to grow at a moderate pace in 2023 as the post-pandemic rebound in tourist arrivals wanes.
Inflation is projected to decelerate with slowing domestic demand and lower international commodity prices.
The overall fiscal balance is expected to display a surplus in 2023 and over the medium term, reducing central government debt to 71 percent of GDP by 2028.
The current account surplus is projected to narrow over the medium term as tourism growth moderates, averaging 8.1 percent of GDP.
Foreign reserves are expected to remain adequate at around 7.9 months of total imports by 2028.
Risks are tilted to the downside: a steeper-than-expected global slowdown (especially in the U.S.) could reduce tourist arrivals; climate change (rising sea levels and more volatile weather events); and domestically, insufficient fiscal adjustment could raise financing needs and slow debt reduction.

The planned tightening of fiscal policy in 2023 is appropriate given the strength of the recovery. The plan to keep nominal current expenditure at last year’s level while introducing tax measures to increase revenues is expected to improve the fiscal position.
Authorities are encouraged to quickly introduce their remaining agenda for tax reform to ensure the 2023 fiscal target can be comfortably met. A contingency plan should be developed to activate if revenue inflows fall below budget assumptions.
Fiscal surpluses will be needed over the medium term. Recommendations include:
- Introduce a broad-based value-added tax to replace the current indirect tax system.
- Improve tax compliance.
- Contain the wage bill, reprioritize spending on goods and services, and streamline transfers and subsidies to create fiscal space for an improved social safety net and increased capital spending.
- Undertake the planned public expenditure review (by the World Bank) to inform these efforts.
- Tackle long-term fiscal risks related to the pension system by increasing the contribution rate and/or reducing the replacement rate.

Strengthen the medium-term fiscal policy framework to anchor debt reduction: implement a well-designed medium-term budget framework guided by a debt anchor and pre-determined escape clauses for unexpected events.
Adopt a sound debt management strategy to mitigate macro-financial risks.

The Central Bank of Aruba (CBA) is encouraged to reduce the reserve requirement rate over time, given declining inflation and adequate foreign reserves, to avoid disincentivizing financial intermediation deepening.
The CBA should remain vigilant to financial vulnerabilities:
- Closely monitor underwriting standards of real estate lending.
- Formally introduce caps on loan-to-value and debt service-to-income ratios for borrowers.
- Further develop a comprehensive macroprudential policy framework, supported by better, more granular, timely data including on non-bank financial institutions.
- Adopt a more structured approach to liquidity and solvency stress testing tied to a range of macroeconomic scenarios.
- Move quickly to adopt Basel II international standards.

There is scope to improve AML/CFT and international tax transparency frameworks by strengthening technical compliance and effectiveness of the AML/CFT framework and resolving implementation issues related to OECD standards on the exchange of tax information.

Supply-side reforms are needed to raise potential growth: increase the value added of tourism, remove obstacles to doing business, promote labor market flexibility, boost productivity, and lessen gender gaps in the labor market.
Governance improvements are encouraged to align with the United Nations Convention Against Corruption: improve Integrity Bureau capacity, establish codes of conduct for public servants, and require detailed asset declarations from senior public servants.
Increasing resilience to climate change is a priority: develop a concrete action plan for adaptation to prioritize infrastructure investments for low-lying areas, incorporate these investments into the medium-term fiscal framework, accelerate costing of adaptation needs, and develop a national climate resilience strategy.

Substantial revisions to 2018–19 GDP point to potential measurement problems in the National Accounts data and represent an important capacity development need.

Selected macro indicators (percent change and percent of GDP)

Real GDP: 27.6 percent (2021); 7.3 percent (2022); 2.3 percent (2023 projection)
Consumer Prices, period average: 5.5 (2022); 4.5 (2023 projection)
Central Government Revenues (percent of GDP): 19.7 (2021); 21.4 (2022); 22.8 (2023 projection)
Central Government Expenditures (percent of GDP): 28.9 (2021); 21.8 (2022); 22.0 (2023 projection)
Overall Balance (percent of GDP): -0.5 (2022)
Gross Central Government Debt (percent of GDP): 101.8 (2021); 90.7 (2022); 85.4 (2023 projection)
Gross Investment (percent of GDP): 19.0 (2022); 16.7 (2023 projection)
Current Account Balance (percent of GDP): 11.2 (2021); 7.5 (2022); 8.1 (medium-term average projection reported in text)
Gross Official Reserves (USD millions): 1,234 (2021); 1,534 (2022); 1,564 (2023); 1,576 (projection in Table)
Gross Official Reserves (months of next year’s imports): 7.6 (2020); 7.2 (2021)
External debt (percent of GDP): 132.9 (2021); 119.0 (2022); 102.3 (2023); 85.9 (projection in Table)

Source: IMF Executive Board press release and staff report findings, July 27, 2023.