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Kingdom of the Netherlands—Aruba: Staff Concluding Statement of the 2023 Article IV Mission
June 5, 2023
A Concluding Statement describes the preliminary findings of IMF staff at the end of an official staff visit (or ‘mission’), in most cases to a member country. Missions are undertaken as part of regular (usually annual) consultations under Article IV of the IMF’s Articles of Agreement, in the context of a request to use IMF resources (borrow from the IMF), as part of discussions of staff monitored programs, or as part of other staff monitoring of economic developments.
The authorities have consented to the publication of this statement. The views expressed in this statement are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board. Based on the preliminary findings of this mission, staff will prepare a report that, subject to management approval, will be presented to the IMF Executive Board for discussion and decision.
Washington, DC: An International Monetary
Fund (IMF) staff team, led by Mr. Takuji Komatsuzaki, visited Oranjestad
during May 22–June 2 to hold discussions on the 2023 Article IV
consultation with the Aruban authorities. At the end of the consultation
discussions, the mission issued the following statement, which summarizes
its main conclusions and recommendations.
A strong bounce back from the pandemic
1.Economic activity rebounded strongly as the
pandemic effects waned. Real GDP grew by 27.6 percent in 2021 and
is estimated to have further expanded by 7.3 percent in 2022. This reflects
a strong recovery of tourist arrivals following the lifting of the
restrictions introduced during the pandemic. Inflation has moderated
somewhat and was 4.9 percent in April, driven by imported energy and food
prices and the increases of electricity and water tariffs in August 2022.
The unemployment rate decreased to 6.6 percent in June 2022 and appears to
have fallen further in subsequent months. The banking sector remains
well-capitalized, liquid, and profitable although credit growth has been
slow. The strong tourism recovery increased the current account surplus
while foreign reserves remain adequate at 7.3 months of total imports at
end-2022.
2.The fiscal balance has improved but public debt
remains high. The fiscal deficit declined to 0.5 percent of GDP in
2022, from 16.2 percent of GDP in 2020. This reflects a combination of
higher revenue—boosted by the economic recovery—and the rollback of
pandemic-related spending measures. Central government debt declined from a
peak of 112.3 percent of GDP in 2020 to 90.7 percent of GDP at end-2022.
Aruba’s long-term foreign debt rating has been upgraded from BB to BB+ by
Fitch in March 2023, on account of the post-pandemic economic and fiscal
rebound.
Moderate positive outlook with high uncertainty
3.The economy is projected to grow at a moderate
rate in 2023 and over the medium term. Real GDP growth is projected
to slow to 2.3 percent in 2023, as the post-pandemic rebound in tourist
arrivals wanes. Over the medium term, growth is projected at 1.1 percent.
Inflation will decelerate to 3.2 percent by end-2023 due to slowing
domestic demand and lower international commodity prices. The fiscal
balance is expected to display a surplus in 2023 and over the medium term,
reducing the 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. Foreign reserve coverage is projected to remain
at around 7.1 months of total imports by 2028.
4.
Risks to the outlook are tilted to the downside.
A steeper-than-expected global slowdown, especially in the U.S., could
reduce tourist arrivals. Similarly, geopolitical fragmentation could
disrupt tourism, impact supply chains, or increase commodity prices which
would lower growth and increase inflationary pressures. Climate change is
an ever-present risk through both rising sea-levels and more volatile
weather events. Domestically, risks to the outlook mainly stem from an
insufficient implementation of the needed fiscal adjustment.
A continued need for fiscal consolidation
5.The envisaged government expenditure envelope in
the 2023 budget is appropriate. The plan to keep nominal current
expenditure at last year’s level while introducing several tax measures to
increase revenue collections will further improve the country’s fiscal
position. The authorities are encouraged to quickly introduce the remaining
planned tax reforms in order to underpin their 2023 fiscal target. A
contingency plan to reduce spending would help prevent adverse effects on
the fiscal accounts in case revenue collection falls below budgeted.
6.The mission welcomes the authorities’ medium-term
fiscal objective to maintain a fiscal surplus while making space for
greater public investment. Based on the mission’s assessment, the
recently implemented tax measures are not sufficient to achieve the
authorities’ fiscal targets and further measures will be required to
increase revenue mobilization and scale back recurrent spending. Additional
revenue could be generated through introducing a broad-based value-added
tax to replace the current indirect tax system and strengthening tax
compliance. On the expenditure side, containing the wage bill,
reprioritizing spending on goods and services, streamlining transfers and
subsidies, and reallocating from current spending to the growth-enhancing
public investment would all help. The planned Public Expenditure Review
that will be undertaken by the World Bank would help inform these efforts.
7.
Long-term fiscal risks stemming from the pension system need to be
addressed.
In the absence of further reforms, the pension system is expected to run
deficits starting in around five to six years and its reserve will be
depleted by the mid-2030s. This is despite efforts to improve the financial
situation of the general old-age pension fund (AOV). There is a need,
therefore, to further increase the contribution rate and/or reduce the
replacement ratio to bolster the solvency of the system.
8.Strengthening the medium-term fiscal policy
framework would help prioritize spending and anchor the path for debt
reduction. A well-designed medium-term budget framework—guided by a
debt anchor and pre-determined escape clauses that apply in extraordinary
situations—would help crystalize trade-offs, shape strategic priorities,
anchor expectations, and guide the development of the annual budget in a
manner consistent with the government’s broader macro-fiscal objectives. It
would also allow the authorities to communicate their medium-term plans
more effectively. Developing a sound debt management
strategy in parallel to the medium-term budget framework would lessen
macroeconomic and financial stability risks.
Supporting intermediation and sustaining financial resilience
9.
The mission encouraged the Central Bank of Aruba (CBA) to reduce the
reserve requirement ratio over time.
The increase in the reserve requirement ratio to 25.5 percent (from 7
percent in March 2020) has locked up liquidity and, alongside the
withdrawal of fiscal support, has moderated aggregate demand pressures.
With inflation now is declining and foreign reserves are at adequate
levels, there is scope to lower reserve requirements over time to avoid
disincentivizing a deepening of financial intermediation.
10.The CBA needs to remain vigilant to
vulnerabilities in the financial system. While the overall
financial stability risk is low, the increase in real estate lending to
households raises potential concerns over risk management practices by
lenders and the growing debt burden being taken on by households. Close
monitoring of underwriting standards is warranted. Setting a cap on the
loan-to-value and debt service-to-income ratio for borrowers could be a
useful macroprudential tool to forestall an increase in risks to financial
stability. More broadly, developing a comprehensive macroprudential policy
framework, with accompanying tools, should help mitigate and manage
vulnerabilities. Implementing such a framework would need to be supported
by better, more granular, timely data, including on non-bank financial
institutions.
11.The CBA is encouraged to further strengthen the
financial regulatory and supervisory framework. The mission welcomes
the CBA’s efforts to conduct risk-based supervision of the financial
system, including thorough annual stress tests. However, further efforts
are needed to enhance the financial stability framework. In particular, a
more structured approach to liquidity and solvency stress testing that is
firmly tied to a range of underlying macroeconomic scenarios would be
valuable. Adopting the Basel II international standards would be also
beneficial for enhancing monitoring and management of financial sector
risks.
Addressing supply-side constraints to growth
12.Comprehensive structural reforms are needed to
boost potential growth. Policies to increase the value added of
tourism, Aruba’s main growth engine, and to enhance non-tourism activities
are both critical to support medium-term inclusive growth and enhance
resilience. In this regard, key priorities include:
-
Ease of doing business. Reforms to remove obstacles to doing
business, reduce red tape, and stimulate entrepreneurship will be
important. The recently introduced “Business Policy Guidelines” and the
efforts to enhance transition to the digital economy are steps in the
right direction. -
Labor market reforms. Policies that promote labor market
participation and hiring, address skills gaps, and enhance productivity
are key to supporting economic activity and job creation over the
medium term. The authorities should promote greater labor market
flexibility such as the reduction of costs of dismissals while
introducing an unemployment insurance program. Additionally, there is a
need to strengthen vocational training and improve education outturns.
Doing so would help address skills mismatches, boost productivity, and
lessen gender gaps in the labor market.
13.Addressing governance issues is essential to
strengthen the business environment.
-
Governance. The recent CBA survey continues to indicate a
widespread perception of corruption in Aruba. To address governance
issues, the authorities are encouraged to bring the framework in line
with the United Nations Convention Against Corruption, including
improving the capacity of the Integrity Bureau and implement codes of
conduct for public servants. Implementing robust asset declaration
requirements for senior public servants will also assist in detecting
corruption and support efforts at investigating, prosecuting, and
confiscating of the proceeds of these crimes. -
AML/CFT framework. Efforts to enhance the country’s AML/CFT
framework—reflected in the 2022 Caribbean Financial Action Task Force
(CFATF)’s mutual evaluation on AML/CFT—are commendable. The
authorities should continue strengthening technical compliance and the
effectiveness of the AML/CFT framework, especially in the supervision
of non-profits and non-financial business providers, including the
establishment of a gaming authority entrusted with the licensing and
vetting of management, shareholders and ultimate beneficial owners and
the establishment of a regulatory framework for the licensing of
virtual asset service providers in accordance with FATF standards. The
authorities should also implement the legal framework related to
beneficial ownership information held by the Chamber of Commerce and
legal persons as well as strengthen law enforcement’s capacity to
pursue money laundering and other financial crimes. -
Tax Transparency. Steps to increase tax information sharing and
resolve issues related to the implementation of the OECD standards on
the tax transparency and exchange of information are essential to
improve international tax cooperation and tackle tax evasion.
14.Enhancing resilience to climate change is a
priority to ensure sustainable growth. Aruba is a flat island and
a substantial share of houses, primary infrastructure, and tourism assets
are located near sea level. Therefore, the economy will be greatly affected
by even a modest rise in the sea level. In this regard, the authorities are
encouraged to develop a concrete action plan— under the auspices of the
National Climate Resilience Council—to prioritize infrastructure
investments that directly improve the physical resilience of low-lying
areas. This should include identifying concrete financing sources for these
projects and defining how they would fit within the overall medium-term
fiscal framework. The ongoing climate risk profile assessment, the planned
costing of climate change adaptation needs, and the development of a
national climate resilience strategy are steps in the right direction.
The IMF team is grateful to the authorities and a broad range of public
and private sector counterparts for their warm hospitality,
cooperation, and constructive discussions.
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|
Area (sq. km) |
180 |
Literacy rate (percent, 2020) |
98.0 |
|||||||||
|
Population |
107.4 |
Percent of population |
16.8 |
|||||||||
|
Population growth rate |
-0.2 |
Percent of population |
15.5 |
|||||||||
|
Nominal GDP |
3,521 |
Life expectancy at birth |
74.6 |
|||||||||
|
GDP per capita |
32.8 |
|||||||||||
|
Unemployment rate (percent, 2020) |
6.6 |
|||||||||||
|
Est. |
Proj. |
|||||||||||
|
2020 |
2021 |
2022 |
2023 |
|||||||||
|
(Percent change) |
||||||||||||
|
Real economy |
||||||||||||
|
Real GDP |
-24.0 |
27.6 |
7.3 |
2.3 |
||||||||
|
Real domestic demand |
-12.2 |
7.9 |
0.4 |
0.2 |
||||||||
|
Consumption |
-8.9 |
7.7 |
0.4 |
2.6 |
||||||||
|
Private |
-10.3 |
12.3 |
7.3 |
2.3 |
||||||||
|
Public |
-5.1 |
-3.6 |
-19.5 |
3.5 |
||||||||
|
Gross investment |
-23.7 |
8.8 |
0.5 |
-9.1 |
||||||||
|
Private |
-24.5 |
8.3 |
-0.9 |
-8.6 |
||||||||
|
Public |
11.9 |
22.0 |
36.0 |
-19.1 |
||||||||
|
Exports of goods and services |
-44.1 |
54.4 |
29.8 |
4.2 |
||||||||
|
Imports of goods and services |
-26.9 |
15.1 |
18.3 |
1.6 |
||||||||
|
GDP deflator |
-0.9 |
-5.0 |
5.7 |
3.2 |
||||||||
|
Consumer prices |
||||||||||||
|
Period average |
-1.3 |
0.7 |
5.5 |
4.5 |
||||||||
|
End-period |
-3.1 |
3.6 |
5.7 |
3.2 |
||||||||
|
(Percent of GDP) |
||||||||||||
|
Central government operations |
||||||||||||
|
Underlying balance 1/ |
-16.2 |
-9.2 |
-0.5 |
0.8 |
||||||||
|
Revenues |
24.0 |
19.7 |
21.4 |
22.8 |
||||||||
|
Expenditures |
40.2 |
28.9 |
21.8 |
22.0 |
||||||||
|
Of which:capital |
0.8 |
0.3 |
0.4 |
0.3 |
||||||||
|
Overall balance |
-16.2 |
-9.2 |
-0.5 |
0.8 |
||||||||
|
Primary Balance |
-11.1 |
-4.8 |
3.4 |
4.5 |
||||||||
|
Gross central government debt |
112.3 |
101.8 |
90.7 |
85.4 |
||||||||
|
Savings and investment |
||||||||||||
|
Gross investment |
22.7 |
20.8 |
19.0 |
16.8 |
||||||||
|
Private |
21.9 |
20.1 |
18.1 |
16.0 |
||||||||
|
|
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|
Of which: public |
0.8 |
0.8 |
1.0 |
0.8 |
||||||||
|
External saving |
12.4 |
-2.7 |
-11.2 |
-7.4 |
||||||||
|
Domestic saving |
10.3 |
23.5 |
30.2 |
24.2 |
||||||||
|
Private |
25.7 |
32.4 |
30.3 |
23.1 |
||||||||
|
Of which: public |
-15.4 |
-8.8 |
-0.1 |
1.1 |
||||||||
|
Balance of payments |
||||||||||||
|
Current account balance |
-12.4 |
2.7 |
11.2 |
7.4 |
||||||||
|
Oil |
-3.7 |
-6.1 |
-8.5 |
-6.3 |
||||||||
|
Non-oil |
-8.7 |
8.8 |
19.7 |
13.7 |
||||||||
|
FDI |
5.5 |
4.5 |
4.1 |
3.9 |
||||||||
|
Gross official reserves (USD millions) |
1,234 |
1,534 |
1,564 |
1,574 |
||||||||
|
Gross official reserves (months of next year’s imports) |
7.6 |
7.6 |
7.3 |
7.2 |
||||||||
|
External debt |
132.9 |
119.0 |
89.6 |
85.9 |
||||||||
|
(Millions of Aruban florins, unless otherwise indicated) |
||||||||||||
|
Monetary |
||||||||||||
|
NFA of Banking System |
2,056 |
2,885 |
3,112 |
3,154 |
||||||||
|
NDA of Banking System |
2,741 |
2,481 |
2,435 |
2,701 |
||||||||
|
Credit to private sector (percent change) |
0.3 |
-1.4 |
1.7 |
3.1 |
||||||||
|
Broad money |
4,797 |
5,366 |
5,546 |
5,854 |
||||||||
|
Deposits (percent change) |
4.6 |
18.2 |
7.6 |
5.6 |
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|
Memorandum items |
||||||||||||
|
Financial balance in percent of GDP (Authorities’ concept) |
-16.5 |
-9.4 |
-0.7 |
0.5 |
||||||||
|
Nominal GDP (millions of Aruban florins) |
4,581.3 |
5,555.6 |
6,303.0 |
6,655.3 |
||||||||
|
Nominal GDP (millions of U.S. dollars) |
2,559.4 |
3,103.7 |
3,521.2 |
3,718.0 |
||||||||
|
Unemployment rate (percent, 2022H1) |
8.6 |
8.8 |
6.6 |
… |
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IMF Communications Department
MEDIA RELATIONS
PRESS OFFICER: Randa Elnagar
Phone: +1 202 623-7100Email: MEDIA@IMF.org
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