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Summary of the 2017 Article IV Consultation with the Kingdom of the Netherlands—Aruba

Core Content

The 2017 Article IV consultation with Aruba, part of the Kingdom of the Netherlands, was conducted by the IMF to assess the economic developments and policies of the territory. The consultation focused on key areas including fiscal policy, monetary policy, the external sector, and structural reforms. The findings and recommendations were aimed at supporting Aruba's economic recovery and long-term sustainability.

Main Economic Indicators

• Economic Structure: Aruba is a small open economy with high living standards. Per capita income is around USD 24.1 thousand, one of the highest in the Caribbean. Over 85% of the economy depends on tourism, making it highly vulnerable to external shocks.
• Exchange Rate: Aruba maintains a fixed exchange rate against the U.S. dollar at 1.79 florins to the dollar since 1986.
• GDP Trends: Real GDP contracted by 0.5% in 2015 and 0.2% in 2016. It is projected to grow by 1.9% in 2017 and stabilize at 1.75% in the medium term.
• Fiscal Balance: The overall fiscal deficit was 1.6% of GDP in 2015 and 2016, down from 2014 levels. The primary balance was in surplus in 2016, marking the second consecutive year of improvement.
• Public Debt: Public debt reached 85% of GDP in 2016, with large interest payments crowding out essential public spending. The high level of debt limits fiscal space for countercyclical measures.
• International Reserves: Gross reserves surpassed 4.5% of GDP, equivalent to about 5.75 months of imports and 40% of broad money.
• Unemployment: The unemployment rate has been declining but is not a reliable indicator of economic slack due to demographic factors and outmigration.

Key Findings and Risks

• Economic Outlook: Economic activity is expected to recover gradually, supported by refinery-related investments and ongoing public-private partnership (PPP) projects. However, risks are tilted to the downside.
• Downside Risks:
  • Delays or cancellations of refinery-related investments.
  • Deepening economic crisis in Venezuela, which affects a major tourist market.
  • A significant increase in global oil prices could negatively impact domestic demand.
  • A larger shift of U.S. tourists to Cuba may affect Aruba's tourism sector.
• Upside Risks:
  • A U.S. fiscal expansion could boost demand for shared-economy services, positively affecting tourism.

Fiscal Policy

• Fiscal Targets: The authorities have set appropriate fiscal targets, but achieving them may require additional measures, especially if growth remains weak.
• Recommendations:
  • Additional revenue efforts, particularly in indirect tax collection.
  • Reduction of wage-related expenses.
  • Ensuring the healthcare system becomes self-financed.
• Fiscal Consolidation: Continued fiscal consolidation has improved the fiscal balance, but public debt remains a concern.

Monetary Policy

• Monetary Stance: The monetary policy stance is appropriate, and the central bank has maintained the reserve requirement ratio at 11% since 2010.
• Banking System: The banking system remains resilient, with elevated capital buffers, low non-performing loans, and profitability. Credit growth increased to 1.8% in 2016.

External Sector

• Current Account: The current account balance turned into a surplus of 7.0% of GDP in 2016, stronger than expected based on fundamentals.
• Exchange Rate: EBA-lite estimates suggest the real effective exchange rate is undervalued by about 17%, largely due to Venezuela's economic conditions. Excluding Venezuela, the exchange rate is broadly in line with fundamentals.
• External Debt: External debt has been declining, with a projected further decrease in 2017 due to domestic financing of the fiscal deficit and rollover of some external debt.

Structural Reforms and Growth

• Potential Growth: Structural reforms are necessary to boost potential growth. These include labor market reforms, improving the business climate, and developing a knowledge-based economy.
• Tourism Diversification: Efforts to diversify the tourism sector by attracting visitors from a broader range of countries, including Latin America, are recommended.
• Refinery Investment: The reopening of the Aruban refinery in 2019 is expected to contribute about 6% of GDP through job creation, increased consumption, and production activities.

Summary of Staff Appraisal

• Growth: Weak but expected to recover gradually, supported by refinery investments and PPP projects.
• Fiscal Policy: Appropriate but requires additional measures to meet targets and reduce public debt.
• Monetary Policy: Appropriate and stable, with the central bank maintaining a conservative stance.
• External Sector: Improved, with current account surplus and adequate international reserves.
• Structural Reforms: Needed to enhance potential growth and economic diversification.

Key Policy Recommendations

• Fiscal Reforms: Implement additional revenue measures and reduce wage-related expenses.
• Structural Reforms: Prioritize labor market reforms, improve the business climate, and develop the renewable energy sector.
• Economic Diversification: Focus on diversifying the tourism sector and developing alternative sources of growth.
• Social Safety Nets: Maintain existing social safety nets, including healthcare, pensions, and cash transfers to low-income families and single mothers.

Conclusion

The IMF endorsed the staff appraisal and supported the authorities' fiscal and structural policy goals. While the economic outlook is cautiously optimistic, the risks remain significant, particularly related to external factors. Continued fiscal discipline, structural reforms, and investment in diversification are essential for long-term economic stability and growth.