Aruba-Netherlands protocols make an important contribution to improving government finances

Published by Economisch Bureau Amsterdam on

In May 2015, Aruba and the Netherlands made agreements on the introduction of supervision of Aruba’s public finances, after which a national ordinance on financial supervision of Aruba, called the Landsverordening Aruba financieel toezicht (LAft), came into effect in the same year and the Board of financial supervision Aruba (CAft) was established. Since then, agreements have been made through protocols on the continuation of financial supervision and on new, adjusted rules for Aruba’s public finances.

Amsterdam Bureau for Economics investigated the effectiveness and efficiency of these protocols and financial supervision.

Since the introduction of financial supervision, Aruba’s debt ratio has been on a downward trend – with the exception of the first year of the corona crisis. Aruba’s personnel costs also showed a downward trend. Aruba complied with the financial rules of the Protocols; when deviations from the rules were made, this was with the approval of the Kingdom Council of Ministers.

Aruba’s financial management is not in order and is weak; which does not fulfill a precondition for healthy public finances. This can still be met with the activities undertaken in this area in the context of the country package.

Financial supervision in Aruba has contributed to the socio-economic development of the country: without financial supervision, public finances would have developed more unfavorably and higher interest costs would have been at the expense of other productive public expenditure and investments. However, financial rules can have a procyclical, and therefore unfavorable, effect on socio-economic development. Financial supervision makes an important contribution to transparency with regard to public finances. This allows Aruba’s parliament to implement budget law more effectively. It also contributes to the functioning of democratic institutions.

The agreements regarding the details of the subscription by the Netherlands to money loans from Aruba have not been realized. As a result, Aruba was not able to enjoy any interest benefits. If the Netherlands had subscribed to money loans from Aruba, Aruba’s debt ratio could have been 21 percentage points lower, which would have made an important contribution to sustainable government finances.

Areas for improvement that can contribute to higher effectiveness and efficiency of financial supervision in Aruba are:

  • Developing a supervisory regime and a framework of rules that provides optimal coherence between a debt anchor for the medium and long term, budgetary rules and expenditure rules for the short term, and room for policy aimed at socio-economic development. The current nominal rules must also be revised, such as the nominal decrease in personnel costs and the rules for the financing balance that imply a nominal decrease in debt. In the longer term, the application of nominal rules may have a negative impact on investments and necessary socio-economic expenditure.
  • Implement with priority the agreements made in the Aruba country package on improving financial management.
  • Sound public finances and structurally sound socio-economic development go hand in hand. This relationship must be explicitly taken into account when designing and deploying policy instruments.

Read the entire report by Amsterdam Bureau for Economics on the Aruba-Netherlands protocols here (in Dutch).

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