OREANDA-NEWS. On April 8, 2015, the Executive Board of the International Monetary Fund (IMF) concluded the 2015 Article IV consultation with the Kingdom of the Netherlands—Aruba, and considered and endorsed the staff appraisal without a meeting.

Aruba is a small, open economy with one of the highest living standards in the Caribbean. Over 85 percent of the economy depends on tourism, making Aruba the third-most tourism-dependent country in the world. This marked dependence on external economic conditions is a key reason why Aruban growth volatility has been among the highest in the region. However, the long-standing fixed exchange rate regime against the US dollar, supported by prudent policies, has kept imbalances in check until recent years.

Aruba has been recovering from a severe double-dip recession. The economy faced two major shocks over the past five years: the global financial crisis and shutdown of the Valero oil refinery in 2012. After a strong recovery in 2013 with growth reaching 4.75 percent, the pace of activity moderated in 2014. Despite a rebound in tourism, the loss in momentum reflected a broad-based contraction in domestic demand due to fiscal policy uncertainty and investment delays.

Although external imbalances have improved recently, they remain elevated. The current account (CA) deficit is estimated to have narrowed to 7.5 percent of GDP in 2014, mostly reflecting strong tourism growth. External debt decreased to 105 percent of GDP and roll-over risks are mitigated as 90 percent of the debt is long term.

After worsening sharply over 2008-2012, the fiscal deficit narrowed to 5.25 percent of GDP in 2014. In particular, the overall fiscal balance deteriorated markedly by 11 percentage points of GDP over 2008-2012, reflecting the reduction in the business turnover tax (BBO), increasing wage-related expenditures, and a structural decline in output growth. To address these fiscal challenges, the authorities undertook major entitlement reforms in 2014. Specifically, the general (AOV) and public administration (APFA) pensions as well as the health care system (AZV) were all reformed. While these reforms, together with expenditure restraint, yield important savings, public debt nonetheless surpassed 80 percent of GDP in 2014.

In 2015, growth is projected to rise to 2.25 percent. The tourism sector—the mainstay of the Aruban economy—is envisaged to grow, albeit at a slower rate. Moreover, domestic demand is slated to recover notably amid subsiding policy uncertainty and as key public-private partnership projects move forward. Despite lower global oil prices, the energy tariff increase and the introduction of the health-care levy in late 2014, is expected to raise the inflation rate to .75 percent in 2015. Although the CA balance is projected to register a deficit, buoyant tourism exports would help reduce its size to –3.5 percent of GDP in 2015.