{
  "title": "Kingdom of the Netherlands-Aruba: Concluding Statement of the 2010 Article IV Consultation Mission",
  "publication": "IMF News, September 8, 2010",
  "sourceUrl": "https://www.imf.org/en/news/articles/2015/09/28/04/52/mcs090810",
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  "summary": "Describes the preliminary findings of IMF staff at the conclusion of certain missions (official staff visits, in most cases to member countries).",
  "publishDate": "2010-09-08",
  "sections": [
    {
      "heading": "A gradual economic recovery",
      "content": "- Aruba is a small, open economy with a long-standing peg to the U.S. dollar and annual credit ceilings set by the central bank.\n- Recent shocks and outcomes:\n  - Tourism declined following the global downturn.\n  - Aruba’s oil refinery temporarily closed in July 2009; refinery contributed about 5 percent to employment.\n  - Real GDP contracted by 7½ percent in 2009.\n  - Unemployment increased to more than 11 percent.\n- Near-term projections and drivers:\n  - Real GDP (excluding refining) is projected to stagnate this year due to weak private consumption and investment.\n  - In 2011, overall GDP growth is projected to surge temporarily to 7 percent reflecting private demand recovery, hotel and infrastructure investment, and the re-opening of the refinery.\n  - IMF staff estimates long-term potential annual real growth at about 1½ percent.\n- External position and reserves:\n  - The real effective exchange rate (core prices) has depreciated slightly; Aruba’s Caribbean tourism market share has held up well.\n  - At end-2009, the central bank’s gross reserves covered about 5½ months of imports and 100 percent of short term debt by residual maturity.\n  - Aruba’s total external debt is elevated at more than 90 percent of GDP, but risks are viewed as contained due to limited short-term and/or portfolio funding."
    },
    {
      "heading": "The fiscal outlook",
      "content": "- Structural fiscal pressures and recent measures:\n  - Recent tax cuts, including a halving of the business turnover tax, and spending pressures have contributed to a large underlying fiscal deficit.\n  - Health care and pension schemes are structurally underfunded and constitute a large current and future liability.\n  - A “social dialogue” with business and labor has produced measures to enhance pension and health scheme soundness (pending parliamentary approval).\n- Reforms from the social dialogue (expected effects):\n  - Premium hikes to the universal health care system (AZV) and the general pay-as-you-go pension scheme (AOV) to reduce/delay government transfers.\n  - APFA entitlement reforms: compute pension claims on average career wages instead of final wages; increase retirement age from 55 to 60 years; calculate APFA pensions net of AOV claims — improving APFA’s long-term financial position.\n- Fiscal projections and risks:\n  - IMF staff projects an overall fiscal deficit of about 4 percent of GDP this year, with revenues boosted by a one-off tax settlement payment from the refinery.\n  - In 2011, the deficit is projected to increase to nearly 7 percent of GDP.\n  - Without corrective measures, the deficit would hover between 6 and 6½ percent of GDP in subsequent years, bringing public debt to about 65 percent of GDP by 2015, from 41 percent of GDP in 2008.\n  - Rising public debt would imply a significantly higher interest burden and could complicate attracting external funding once private credit demand recovers.\n- Government intentions:\n  - The government intends to reduce the deficit by about 1½ percentage points of GDP per year in 2012-14, implying a deficit somewhat below 2 percent of GDP by 2014 and public debt around 52 percent of GDP by end-2015. Specific policy measures to achieve this have yet to be specified."
    },
    {
      "heading": "Options for fiscal adjustment and tax reform",
      "content": "- IMF staff recommendation:\n  - Target a deficit of below 1 percent of GDP over the medium-term, corresponding to a primary surplus of 2¼ percent of GDP.\n  - This implies a fiscal effort of about 5½ percent of GDP beyond initiatives announced in the social dialogue.\n- Speed and composition:\n  - Stretch implementation of required consolidation over two to three years aiming for long-term sustainable fiscal position by 2013.\n  - Adjustment can be achieved through expenditure and revenue reforms; government prefers some expenditure cuts and promotion of growth-enhancing investments.\n- Limits on expenditure-side savings:\n  - Public spending is tilted heavily towards wages, limiting rapid savings.\n  - AZV offers savings potential of about 2 percent of GDP if premia were increased or costs lowered to eliminate government transfers.\n  - Spending on goods and services amounts to around 5 percent of GDP (compared to 4 percent in 2007), offering some room but not enough alone.\n- Revenue-side considerations:\n  - On unchanged policies, Aruba’s tax revenues are projected at about 18 percent of GDP going forward.\n  - Regional comparison: regional average about 25 percent of GDP across 15 other Caribbean countries.\n  - Only about half of Aruba’s tax revenues result from indirect taxes, compared to a regional average of almost two-thirds.\n- Tax reform principles and steps:\n  - Reform should: (i) raise sufficient revenue, (ii) be growth-friendly, fair and transparent, and (iii) trigger high taxpayer compliance with low administrative costs.\n  - Objectives could include lowering currently high income tax rates, eliminating nuisance taxes, and protecting real income levels of the poor.\n  - Installation of a three-partite commission to study reform options in the context of the social dialogue is a positive step.\n- Value-added tax (VAT) option:\n  - A VAT could avoid the distortionary cascading effects of the business turnover tax.\n  - To limit administrative costs, VAT could exempt small businesses.\n  - VAT introduction would require careful preparation of at least 1½-2 years.\n  - IMF staff encourages seeking technical expertise oriented on international best practices, e.g., by joining CARTAC.\n- Interim revenue options:\n  - Increasing excise taxes is a possible interim option; excise receipts have fallen to less than 2½ percent of GDP from more than 4 percent in the early 1990s (with only a modest increase agreed in the social dialogue)."
    },
    {
      "heading": "Enhancing the effectiveness of monetary policy",
      "content": "- Historical framework:\n  - Until end-2009, monetary policy relied on annual ceilings on banks’ private sector lending increases, complemented by a regulation requiring banks to maintain a non-negative net foreign asset position below 10 percent of their liabilities.\n- Assessment of the credit ceiling:\n  - Pros: supported the peg, prevented unsustainable credit booms, contained underlying inflation.\n  - Cons: discouraged bank competition, sustained large interest rate spreads and fee revenues, and provided no tool to spur credit during downturns.\n- Recent policy toolkit changes:\n  - Credit ceiling eliminated in January 2010 and replaced by an unremunerated reserves requirement as the key monetary policy instrument.\n  - The reserves requirement is currently set well below a level that would restrict banks.\n- Short-term guidance:\n  - While credit conditions remain depressed, IMF staff recommends signaling monetary easing and encouraging banks to compete for lending.\n  - Central bank should continue to leave excess liquidity in the banking system and emphasize it no longer targets credit growth.\n  - To foster competition, consider temporary waivers to some prudential rules to facilitate opening banking subsidiaries in Aruba, provided reputable international parents and comprehensive consolidated supervision exist.\n- Exit strategy and reserve protection:\n  - Monetary tightening will be necessary once credit demand rebounds; monetary policy should prioritize protecting foreign reserves to safeguard the peg.\n  - If pressures on reserves emerge, the central bank should be prepared to use the reserves requirement rapidly and fully.\n  - Concerns about large increases in mandatory reserves could be addressed by modest remuneration within the central bank’s means.\n  - Rapid introduction of certificates of deposit may be problematic given absence of a liquid interbank market and potential negative repercussions on the central bank’s financial position."
    },
    {
      "heading": "Safeguarding financial stability",
      "content": "- Banking sector condition:\n  - Despite the downturn, Aruba’s banking system has remained profitable with capital buffers ample in international comparison, supported by conservative capital and liquidity requirements.\n  - Nonperforming loans have increased significantly, particularly in commercial real estate and unsecured corporate lending, but are almost fully provisioned.\n- Other financial sector concerns:\n  - Coverage ratios of some private defined-benefit pension funds have fallen below 100 percent due to investment losses; recovery plans show good progress.\n- Supervisory implications of the new monetary framework:\n  - Removal of the credit ceiling may lead to more aggressive lending and potential deterioration of lending standards.\n  - Supervisors need close monitoring of market developments and individual institution strategies.\n  - Enhancing the forward-looking character of central bank stress tests is recommended.\n- Offshore sector:\n  - Aruba’s offshore financial sector is small but carries reputational risk.\n  - Offshore banks should be permitted only if the central bank can monitor activities and enforce prudential rules.\n  - Requesting a material physical presence of licensed offshore banks in Aruba is crucial."
    },
    {
      "heading": "Data, transparency, and other issues",
      "content": "- Macroeconomic information:\n  - Compiled and published macroeconomic information is generally sufficient for surveillance but some improvements are needed.\n  - Medium-term macroeconomic projections would provide a more comprehensive framework for fiscal and monetary analysis.\n- Data consistency and gaps:\n  - Discrepancies between national accounts, balance of payments data, and external debt statistics should be eliminated.\n  - Data on the maturity of private sector external debt would facilitate computation of reserve adequacy ratios.\n\nKingdom of the Netherlands-Aruba: Concluding Statement of the 2010 Article IV Consultation Mission, Oranjestad, September 8, 2010.\n\n---\n\n\n References\n\n- Kingdom of the Netherlands-Aruba and the IMF\n- Mission Concluding Statements\n- PRESS CENTER\n- Article IV\n- https://www.imf.org/en/home\n\nSource: https://www.imf.org/en/news/articles/2015/09/28/04/52/mcs090810"
    }
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    "Published: September 8, 2010",
    "Aruba is a small, open economy with a long-standing peg to the U.S. dollar and annual credit ceilings set by the central bank.",
    "Recent shocks and outcomes:",
    "Near-term projections and drivers:",
    "External position and reserves:",
    "Structural fiscal pressures and recent measures:",
    "Reforms from the social dialogue (expected effects):",
    "Fiscal projections and risks:",
    "Government intentions:",
    "IMF staff recommendation:",
    "Speed and composition:",
    "Limits on expenditure-side savings:",
    "Revenue-side considerations:",
    "Tax reform principles and steps:",
    "Value-added tax (VAT) option:",
    "Interim revenue options:",
    "Historical framework:",
    "Assessment of the credit ceiling:",
    "Recent policy toolkit changes:",
    "Short-term guidance:",
    "Exit strategy and reserve protection:",
    "Banking sector condition:",
    "Other financial sector concerns:",
    "Supervisory implications of the new monetary framework:",
    "Offshore sector:",
    "Macroeconomic information:",
    "Data consistency and gaps:",
    "[Kingdom of the Netherlands-Aruba and the IMF](http://www.imf.org/external/country/ABW/index.htm)",
    "[Mission Concluding Statements](https://www.imf.org/en/news/searchnews)",
    "[PRESS CENTER](http://presscenter.imf.org/)",
    "[Article IV](https://www.imf.org/external/pubs/ft/aa/aa04.htm)",
    "[https://www.imf.org/en/home](https://www.imf.org/en/home)"
  ],
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