## 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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## Bibliographic details
- Published: April 21, 2021

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### 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.*

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## References

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- [Questions & Answers](https://www.imf.org/en/About/FAQ/imf-response-to-covid-19)
- [Kingdom of the Netherlands-Aruba and the IMF](http://www.imf.org/external/country/ABW/index.htm)
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_Source: https://www.imf.org/en/news/articles/2021/04/21/pr21110-aruba-imf-exec-board-concludes-2021-art-iv-consultation-discussions-with-aruba_