Consultations with Three Countries Launch New IMF Series


Aruba. Background. Executive Board Assessment. Belize. Background. Executive Board Assessment. Tunisia. Background. Executive Board Assessment.


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The IMF Executive Board on May 19, 1997, concluded the 1997 Article IV consultation with Aruba.


For 1996, Aruba's economic growth is estimated at 4 percent, with inflation just over 3 percent, and negligible unemployment. The moderation of growth from average annual rates of about 5 percent during the 1990s reflects both the moderate appreciation of the real exchange rate over the preceding years and a government decision to limit new construction, given nearly full employment and the island's limited physical resources. Earlier growth rates, based primarily on rapid expansions of the tourism sector, had given rise to a significant population increase, surging housing demand, and incipient inflationary pressures.

While Aruba's public finances moved into deficit over the past two years, with a borrowing requirement of 0.5 percent of GDP in 1995 and 1.5 percent of GDP in 1996, government indebtedness excluding loan guarantees is comparatively modest at just over 30 percent of GDP. The government is aiming to hold its borrowing requirement to 2 percent of GDP in 1997 and to achieve a balanced budget in 1998 and beyond.

The consolidation of Aruba's public health insurance funds into a single-payer system providing universal coverage is scheduled for completion in 1997. The system, financed by wage-based contributions and targeted to improve administrative efficiency and cost controls, will allow individuals to purchase supplementary insurance in the private market. At this time, the benefits level under the plan has not been set.

The net foreign reserves of the banking system, underpinning the peg of the Aruban florin to the U.S. dollar, decreased by Af. 62 million to Af. 427 million (equivalent to four months of imports) during 1996, in large part as a consequence of the government's purchase of a hotel from foreign investors.

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There was strong credit growth in 1996 reflecting both government and household borrowing. Nonetheless, given the decline in net foreign assets, broad money increased by just 3 percent in 1996.

The monetary authorities suspended credit ceilings on individual banks at the beginning of 1997 in support of improved efficiency in the allocation of credit. The authorities have also taken important initiatives in recent years to modernize prudential supervision and banking regulation. Further steps in these areas are planned for 1997.

Restrictions on external current transactions were eliminated and capital controls were eased further in January 1997, as part of the continuing liberalization of Aruba's exchange and trade policies. The deficit on Aruba's non-oil external current account narrowed markedly in recent years, falling to 1 percent of GDP in 1996. The improvement stemmed from a strengthening of service and income receipts, reflecting the performance of the tourism sector, along with higher interest earnings on foreign investments.

For 1997 and beyond, with commercial investment strongly limited by the moratorium on the construction of new tourist facilities, economic growth in Aruba will depend on increased capacity utilization, moves to further upgrade the quality of tourism, and the diversification of the economy. Real GDP growth is projected by the IMF staff at 4 percent in 1997, with inflation at 3 to 3!/2 percent and a deficit in the non-oil (onshore) external current account equivalent to 0.9 percent of GDP.

Executive Board Assessment

Executive Directors commended Aruba on the strong economic growth and moderate inflation that had been achieved over the past decade and on the sound macroeconomic policy that had underpinned that performance. Directors noted that the key challenge facing Aruba now was to ensure continued growth in per capita GDP, while avoiding overheating. Directors, therefore, welcomed the government's intention to foster productivity growth by emphasizing quality in the tourist sector and by diversifying the economy.

Directors observed that the continuation of stability-oriented fiscal and monetary policies would also be essential to facilitate economic growth. Directors accordingly commended the prudent fiscal policy followed in Aruba. They welcomed that the supplementary budget for 1997 aimed at containing the government's borrowing requirement to 2 percent of GDP. They also encouraged the authorities to pursue their objective of returning to near budgetary balance in the next two years. To that end, further measures to restrain public expenditure would be needed in 1997 and the medium term. They should include an enduring reduction in public...

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