Press Release No. 19/127

IMF Staff Concludes 2019 Article IV Mission to Vanuatu

April 29, 2019

• IMF staff projects growth at around 3.4 percent in 2019, driven by recovery in tourism and agriculture, and continued support from infrastructure construction.
• Domestic revenues exceed government-funded spending. When infrastructure projects financed on concessional terms by development partners are taken into account, there will be an overall government deficit.
• New approaches and policies for economic diversification in the agriculture and tourism sectors are welcome.

An International Monetary Fund (IMF) staff team led by Mr. Dirk Muir visited Port Vila during March 27–April 9, 2019 to hold discussions on the 2019 Article IV consultation. At the conclusion of the visit, Mr. Muir issued the following statement:

“Four years after Cyclone Pam struck Vanuatu causing extensive damages, reconstruction is near completion with full recovery in sight. The authorities are now more focused on implementing their broader development plans that were slowed by the recovery process, which will require government budgetary discipline and further reforms to maintain debt sustainability over the medium term. The authorities should continue their constructive engagement with their development partners for technical assistance, capacity development, and concessional and grant-based funding.

“Real GDP growth should average 3.2 percent per year from 2018 to 2020. Despite challenges from cyclones and the volcanic eruptions alongside weaker prices for its agricultural exports, construction remains a main driver, sustained by development-partner-funded infrastructure projects. Tourism receipts grew 4.3 percent in 2017, the strongest since Cyclone Pam, and that strength should continue based on private sector investment and the Shared Vision 2030 plan involving the tourism and air travel sectors.

“The current account temporarily shifted to a surplus of 3.5 percent of GDP in 2018, driven by significant growth in economic citizenship program revenues and remittances from seasonal worker programs in Australia and New Zealand. It is expected to revert to deficit in 2019, starting around 2.3 percent of GDP, and deteriorating towards 5 percent of GDP in the medium term. This will be the result of higher imports from airplane orders by Air Vanuatu as part of the Shared Vision 2030 plan. Positive offsets come from stronger tourism receipts from the Shared Vision 2030 plan and the conclusion of Bauerfield Airport renovation and high remittances from Australia and New Zealand.

“Vanuatu is expected to graduate from LDC status in 2020, but without a major impact on its growth trajectory. It is expected that after graduation, Vanuatu’s relationships with its development partners will remain strong, as most development partners conduct their funding decisions based primarily on development needs and debt sustainability. Where Vanuatu may face challenges is the reduction of preferential market access for exports. The government has ongoing efforts to find alternative means of preferential access such as the “PACER plus” free trade agreement with Australia, New Zealand and other Pacific island states, and the bilateral free trade agreement with New Caledonia.

“Monetary policy remains appropriately accommodative, after some tightening in mid-2018 as CPI inflation peaked at 2.9 percent because of the VAT increase. Inflation should moderate in the medium term to 2.6 percent as the Reserve Bank’s policy of a stable exchange rate peg allows it to import low inflation from its major trading partners, Australia and New Zealand.

“The fiscal position in 2018 was strong, but primarily from the windfall revenues from Vanuatu’s economic citizenship programs. Going forward, IMF staff expects the government to maintain the balance between domestic revenues and government-funded spending.  Once the forecasted concessional lending from development partners to finance infrastructure projects is included this will increase Vanuatu’s debt obligations. The government should complete its tax reforms to buttress its revenue base, reduce pressure on its debt, and allow it to continue to build buffers in advance of potential natural disasters.

“Natural disasters are not the only risk, as weaker-than-expected global growth and global trade tensions could lower remittances, development partner funding, export demand and tourism. On the upside, the Shared Vision 2030 plan may bolster tourism growth more than expected, and remittances and consumption could be even higher from the expanded seasonal work programs in Australia and New Zealand. More rapid accumulation of government debt, with increased interest payments crowding out other government spending, is the main downside domestic risk.

“The team would like to express its appreciation to the authorities for their excellent cooperation and warm hospitality during its visit. The IMF Executive Board is expected to discuss the 2019 Article IV consultation in June 2019.”