On May 17, 2017, 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.
[2]
Aruba is a small open economy with high living standards. Aruba’s per
capita income, at about USD 24.1 thousand, is one of the highest in the
Caribbean. Over 85 percent of the economy depends on tourism, making
Aruba very vulnerable to external shocks. The fixed exchange rate
regime against the U.S. dollar (unchanged at 1.79 florins to the dollar
since 1986), supported by conservative fiscal, credit, and prudential
policies, kept balances in check until late 2000s. Three recessions
since the Global Financial Crisis and the government’s policy response
to them have led to a rapid increase in public debt.
The economy entered a recession around mid-2015. Real GDP contracted by
0.5 and 0.2 percent in 2015 and 2016, respectively. Weakness in
activity has been broad-based in 2016. Domestic demand contracted by
3.0 percent. Exports grew only 0.3 percent due to weak tourism and
shrinking non-tourism exports. Imports contracted by 3.5 percent,
reflecting weak demand, on the back of fiscal consolidation and weak
tourism growth.
Inflation remains very low. The economy was in deflation in
2016—consistent with weak domestic demand, but also due to low energy
prices. Inflation was also low over 2012-2015.
Fiscal consolidation has continued. The overall deficit, at 1.6 percent
of GDP in 2015 and 2016, was a fraction of its level in 2014. The
primary balance was at its second consecutive year of surplus in 2016.
The improvement is the result of structural and one-off policies.
Public debt remains high. Elevated government deficits over
2010-2014—caused mainly by a double-dip recession and the government’s
policy response to it—resulted in public debt reaching around 85
percent of GDP in 2016, broadly evenly split between foreign and
domestic. Large interest payment obligations on debt—about 4½ percent
of GDP in 2016—crowd out essential public spending, and the high level
of debt limits the fiscal space for countercyclical policy.
International reserves have increased. Gross reserves have surpassed 4½
percent of GDP, which is about 5¾ months of imports and 40 percent of
broad money.
Monetary policy was unchanged during 2015–16. The central bank (CBA)
has kept the reserve requirement ratio—its main policy instrument—at 11
percent since 2010 given adequate international reserves, deflation,
and weak GDP growth.
The banking system remains resilient. Banks maintain elevated capital
buffers, have relatively low non-performing loans, and are profitable.
Credit growth was 1.8 percent in 2016, up from -0.2 percent in 2015.
Aruba has a broad range of social safety nets. These include a
universal healthcare, pensions, unemployment benefits, transport
subsidies, and cash transfers to low-income families and single
mothers. The 2017 budget included 1.2 percent of GDP of transfers to
universal healthcare and 1.3 percent of GDP in cash transfers and
various social programs.
Executive Board Assessment
Aruba’s growth is weak but expected to recover gradually. A temporary
slowdown in tourism activity and fiscal consolidation have led to weak
economic activity in Aruba since mid-2015. Going forward, the economy
is expected to recover gradually, partly thanks to refinery-related
investments and ongoing PPP investment projects.
Risks to the outlook are tilted to the downside. Delays in
refinery-related investments remain a notable risk in the near term. A
deepening crisis in Venezuela, also poses another downside risk to
Aruba’s tourism. Over the medium term, a larger shift of U.S. tourists
to Cuba could have negative implications for Aruba. On the upside, a
possible U.S. fiscal expansion could spill over to Aruba’s tourism,
mostly through increased demand for shared-economy services.
The authorities’ fiscal goals are appropriate. Based on current laws,
the overall fiscal balance should improve and remain positive over the
medium term. If these targets are met, public debt would be put on a
downward path.
However, achieving the authorities’ fiscal targets would likely require
additional fiscal measures. The size of the fiscal effort would depend
on the strength of GDP growth, which remains uncertain. Staff
recommends additional fiscal measures to help achieve the authorities’
goals. Past Fund advice has identified a few such measures. These
include additional revenue efforts in the form of greater indirect tax
collection. With regards to expenditure, a priority is to reduce
wage-related expenses given the large size of the wage bill. Further
measures to ensure that the health care system becomes self-financed
should also be considered.
The monetary policy stance is appropriate. Given the projected low
growth and inflation rate, as well as evidence of some slack in the
economy, staff currently sees no need for monetary tightening. If,
however, signs of overheating appear, the authorities should stand
ready to tighten the monetary policy stance appropriately.
The external sector position has improved. The current account has
improved and is stronger than the level that could be expected from
Aruba’s fundamentals. International reserves are adequate to safeguard
the currency peg. EBA-lite estimates suggest that the real effective
exchange rate is weaker than implied by fundamentals. However, staff
believes this assessment is mostly driven by large exchange rate and
inflation swings in Venezuela. Excluding Venezuela, the real effective
exchange rate is broadly in line with fundamentals (Appendix V).
External debt has been declining in recent years.
Aruba’s potential growth should be boosted by structural reforms. A
comprehensive labor market reform and development of sustainable
skill-based immigration policies are needed to increase labor force
participation and productivity. Ease of doing business should also be
improved. The tourism sector could be further diversified through
polices that would attract tourists from broader group of countries,
including from Latin America. The expected reopening of the refinery is
an important step towards economic diversification, and the
authorities’ policies on developing the renewable energy sector and
alternative sources of growth, such as a knowledge-based economy, are
promising.