Public Information Notice No. 13/69

Public Information Notice: IMF Executive Board Concludes 2013 Article IV Consultation with Vanuatu

June 21, 2013

On June 7, 2013, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Vanuatu.¹

Background

Economic activity is gradually turning around after slowing growth mainly due to a decline in construction and tourism in 2011. Output growth in 2012 is estimated at around 2¼ percent on the back of a recovery in tourism. Inflation remained low, at 0.8 percent year on year in December 2012. The balance of payments remains sound. The current account deficit has narrowed to 6¼ percent of GDP in 2012, and was more than covered by foreign direct investment inflows and official grants. Official reserves continued to rise to $182 million, with coverage of prospective imports rising to 7 months. The fiscal deficit is estimated at 1½ percent of GDP in 2012, largely due to the authorities’ efforts at controlling expenditure. Public debt remains low, at 21½ percent of GDP.

The authorities have maintained prudent macroeconomic and financial policies. They have protected external and fiscal policy buffers, as well as macroeconomic stability. Furthermore, they have made efforts to raise additional revenue through administrative improvements. The Reserve Bank of Vanuatu (RBV) has also stepped up supervision of the banking system to address credit and foreign exchange risks.

In 2013, continued growth in tourism and some private sector investment projects are forecast to raise output growth to 3¼ percent, and inflation is expected to pick up moderately to 1¾ percent year on year, as demand pressures increase. The overall balance of payments is projected to remain in surplus. The budget targets zero net domestic financing and net repayments of external debt. It also envisages rising revenues on account of higher growth and improved compliance, and a significant increase in grants. In the medium term several donor-supported investment projects are scheduled to be implemented in the next few years, boosting output growth to 4¾ percent by 2015. Domestic risks arise from limited capacity, which could affect the execution of planned projects. A key external risk stems from possibly weaker-than-anticipated activity in the region which might adversely affect tourism. On the upside, a decisive push for further structural reforms could boost confidence and private sector investment.

Executive Board Assessment

They commended the authorities’ prudent policies, which have fostered macroeconomic stability and resilience to shocks. Looking ahead, Directors considered that Vanuatu needs to maintain strong policy buffers while investing in infrastructure, enhancing public service delivery, and improving the business environment.

Directors agreed that spending needs, particularly in infrastructure and social services, will put pressure on the fiscal position. They welcomed the authorities’ plans to strengthen tax administration and their consideration of new revenue measures, underscoring the advantages of an income tax, among the various options, in terms of revenue yield and distributional impact. Directors emphasized the need to accelerate the reform of government business enterprises, which is necessary to improve governance and reduce fiscal risks.

Directors noted that public and external debt remain low. They encouraged the authorities to maintain their conservative approach to debt management, supporting their intention to seek external financing only on concessional terms. Prospective financing pressures can be alleviated by appropriately phasing public projects and partnering with the private sector.

Directors concurred that the exchange rate peg has served Vanuatu well, and remains an appropriate anchor for monetary policy. They encouraged the Reserve Bank of Vanuatu to monitor monetary conditions closely as economic growth picks up, and tighten the policy stance if needed.

Directors commended the authorities’ cautious financial sector policies and noted that banks remain well capitalized despite a rise in nonperforming loans. To address emerging risks, Directors saw merit in further strengthening supervision and introducing regulation to limit banks’ open foreign exchange positions. Liquidity and credit risks also warrant close attention. Directors welcomed steps in establishing an anti money laundering framework, but encouraged the authorities to speed up progress to address gaps in implementation and enforcement.

Directors noted Vanuatu’s considerable growth potential, especially in tourism and agriculture. Realizing this potential will require a new round of structural reforms, including increasing the effectiveness of the civil service, promoting competition in key sectors, and improving access to land. Such measures would lower business costs and help mitigate external risks.