IMF Executive Board Concludes 2019 Article IV Consultation with Vanuatu
June 13, 2019
On June 5, 2019, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [1] with Vanuatu.
Four years after Cyclone Pam struck Vanuatu causing extensive damages, reconstruction is near completion with full recovery in sight. Real GDP growth reached 4.4 percent in 2017 and stayed strong, if somewhat softer, at 3.2 percent in 2018. There was a current account surplus in 2018 of 3.5 percent of GDP, driven by windfall revenues from economic citizenship programs, despite still-strong demand for imports for development-partner-financed projects. Consequently, there was also a fiscal surplus of 4.8 percent of GDP.
Going forward real GDP growth in 2019 will be slightly higher at 3.4 percent because of some delayed private investment but will ease to 2.9 percent as there are fewer projects financed by development partners, and tourism and agricultural diversification become the primary growth drivers. Vanuatu will graduate from LDC status in 2020, with little expected impact on their growth trajectory. Vanuatu is also are expected to implement the “PACER plus” free trade agreement with Australia, New Zealand and eight other Pacific island small states.
Modest fiscal and current account deficits are expected in 2019, at 3.2 and 1.2 percent of GDP, respectively. The deficits will widen thereafter, reflecting spending on new infrastructure projects financed more by concessional lending than grants and decreased revenues from Vanuatu’s economic citizenship programs. The current account deficit will face further pressure from imports of airplanes for the new Shared Vision 2030 plan for air travel and tourism, jointly carried out by the Vanuatu Tourism Office, Air Vanuatu and the airports authority.
Monetary policy has maintained inflation within its 0 and 4 percent range using its pegged exchange rate regime to import low foreign inflation and used its statutory reserve deposit requirements and open market operations to overcome any domestic pressures, such as the increase in 2018 of the VAT rate. The monetary policy stance is projected to remain neutral going forward. The financial sector is generally sound, but there exists ample room to support financial inclusion, as reflected by the new National Financial Inclusion Strategy 2018–23.
Executive Board Assessment [2]
Executive Directors welcomed the recovery from Cyclone Pam and the authorities’ focus on broader development objectives to improve living standards and long‑term growth. The high exposure to natural disasters remains a key risk to the outlook, and Directors underscored the need for additional efforts to build adequate fiscal buffers, strengthen governance, and to enhance disaster resilience. The authorities should continue constructive engagement with their development partners for technical assistance, capacity development, and financing.
Directors stressed the need for continued fiscal discipline. They noted that the long pipeline of development projects is likely to put upward pressure on debt ratios. To safeguard debt sustainability, the government should prioritize infrastructure investment and engage in further fiscal reform, including introducing corporate and personal income taxes while removing inefficient taxes, reducing reliance on revenues for the economic citizenship programs. Directors noted that this would allow the authorities to lower the public-and publicly-guaranteed-debt-to- GDP target to 50 percent.
Directors considered the monetary policy stance to be appropriate as inflation is expected to stay near the middle of the 0‑4 percent target band. They recognized that excess liquidity in the system may be reducing monetary policy effectiveness and should be closely monitored.
Directors agreed that the authorities’ strategy should be underpinned by diversification in agriculture and tourism. Directors noted that the diversification strategy should be complemented by improvements in the business environment to help trigger private investment and enhance competition and productivity.
Directors commended Vanuatu for its removal from the FATF grey list and recommended that the financial sector’s regulatory and legal frameworks be further strengthened to account also for increasing fintech use. Together with ongoing progress in enforcing the AML/CFT framework, this should help maintain correspondent banking relationships. Directors also noted that the National Financial Inclusion Strategy 2018–2023 should help improve access to finance and inclusion more generally.
Directors noted that the national disaster planning framework has been improved substantially in recent years. Directors viewed the proposed Disaster Risk Management Act with its national emergency fund as an opportunity to establish a multi‑year fund with consistent government funding.
Directors recognized that, with limited administrative capacity, Vanuatu is vulnerable to corruption from gaps in governance. To address these vulnerabilities, they suggested further strengthening the Reserve Bank of Vanuatu’s autonomy, in line with recommendations from the IMF’s 2016 Safeguards Assessment and strengthening fiscal governance by completing the Government Business Enterprises Act and the Tax Administration Act.
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Population (2017): 278,726 IMF quota: SDR 23.8 million (0.01 percent of total) Main products and exports: Coconut oil, copra, kava, beef Key export markets: New Zealand, Australia, Japan |
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Per capital DGP (2017): US$3,356 Literacy rate (2012): 83.4 percent |
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2014 |
2015 |
2016 |
2017 |
2018 |
2019 |
2020 |
2021 |
|
|
Est. |
Projections |
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|
Output and prices (annual percent change) |
||||||||
|
Real GDP |
2.3 |
0.2 |
3.5 |
4.4 |
3.2 |
3.4 |
3.0 |
2.8 |
|
Consumer prices (period average) |
0.8 |
2.5 |
0.8 |
3.1 |
2.9 |
2.0 |
2.2 |
2.3 |
|
Consumer prices (end period) |
1.1 |
1.5 |
2.1 |
3.3 |
2.6 |
2.6 |
2.2 |
2.5 |
|
Government finance (in percent of GDP) |
||||||||
|
Total revenue |
23.5 |
31.9 |
30.8 |
34.8 |
35.5 |
27.9 |
28.0 |
28.0 |
|
Taxes |
17.4 |
16.3 |
16.3 |
17.1 |
17.9 |
17.7 |
17.7 |
17.7 |
|
Other revenue |
2.0 |
3.9 |
6.2 |
7.1 |
11.9 |
4.9 |
4.7 |
4.5 |
|
Grants |
4.1 |
11.8 |
8.3 |
8.4 |
5.6 |
5.8 |
5.8 |
5.7 |
|
Expenditure |
27.0 |
39.3 |
34.7 |
35.7 |
30.7 |
31.1 |
31.6 |
32.0 |
|
Expense 1/ |
21.8 |
23.1 |
24.8 |
26.9 |
24.6 |
25.8 |
25.9 |
25.9 |
|
Acquisition of nonfinancial assets 1/ |
5.1 |
16.1 |
9.9 |
8.8 |
6.1 |
5.3 |
5.7 |
6.1 |
|
Net lending (+)/borrowing (-) |
-3.5 |
-7.3 |
-3.9 |
-0.9 |
4.8 |
-3.2 |
-3.6 |
-4.0 |
|
Public and publicly-guaranteed debt (end of period) |
26.1 |
35.9 |
46.4 |
53.2 |
52.4 |
52.9 |
53.9 |
55.3 |
|
Domestic |
6.6 |
8.7 |
10.1 |
9.4 |
7.3 |
6.9 |
6.4 |
6.1 |
|
External |
19.5 |
27.1 |
36.2 |
43.8 |
45.2 |
46.0 |
47.5 |
49.2 |
|
Money and credit (annual percentage change) |
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|
Broad money (M2) |
8.6 |
11.4 |
10.6 |
9.3 |
12.6 |
10.7 |
4.8 |
6.0 |
|
Net foreign assets |
-14.5 |
71.6 |
46.5 |
11.0 |
36.5 |
12.2 |
3.1 |
5.0 |
|
Domestic credit |
9.4 |
-8.0 |
-1.3 |
2.3 |
-2.3 |
5.8 |
5.2 |
5.4 |
|
Of which: Credit to private sector |
9.0 |
1.4 |
1.3 |
4.7 |
3.0 |
4.1 |
4.1 |
4.1 |
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Interest rates (in percent, end of period) 2/ |
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|
Deposit rate (vatu deposits) |
2.3 |
2.3 |
1.6 |
1.4 |
1.4 |
… |
… |
… |
|
Lending rate (vatu loans) |
10.0 |
10.0 |
9.9 |
10.3 |
10.3 |
… |
… |
… |
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Balance of payments (in percent of GDP) |
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Current account |
6.2 |
-1.6 |
0.5 |
-6.5 |
3.5 |
-1.2 |
-5.4 |
-4.8 |
|
Trade balance |
-25.3 |
-35.6 |
-33.6 |
-29.1 |
-30.3 |
-30.4 |
-34.0 |
-32.8 |
|
Exports of goods |
7.8 |
5.1 |
6.2 |
6.9 |
6.4 |
6.1 |
6.1 |
6.0 |
|
Imports of goods |
-33.1 |
-40.7 |
-39.8 |
-35.9 |
-36.7 |
-36.5 |
-40.0 |
-38.8 |
|
Tourism receipts |
31.6 |
27.5 |
23.5 |
19.3 |
22.6 |
24.7 |
25.5 |
24.2 |
|
Capital and financial account |
25.1 |
41.0 |
35.7 |
15.9 |
7.9 |
6.5 |
6.4 |
6.4 |
|
Of which: Foreign direct investment |
5.4 |
5.3 |
4.4 |
3.7 |
4.3 |
4.2 |
4.0 |
3.8 |
|
Overall balance |
1.2 |
11.3 |
3.3 |
11.8 |
11.4 |
5.2 |
1.0 |
1.6 |
|
Gross international reserves (in millions of U.S.$) |
179.2 |
266.3 |
292.7 |
396.4 |
502.4 |
552.0 |
562.3 |
579.0 |
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(in months of prospective G&S imports) |
5.2 |
6.4 |
7.5 |
10.1 |
12.0 |
13.0 |
11.8 |
11.8 |
|
External debt service (in percent of GNFS exports) |
2.0 |
2.1 |
2.1 |
2.3 |
5.1 |
4.1 |
3.6 |
3.9 |
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Exchange rates 3/ |
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Vatu per U.S. dollar (period average) |
96.9 |
107.0 |
109.3 |
107.8 |
108.5 |
… |
… |
… |
|
Vatu per U.S. dollar (end of period) |
102.5 |
109.6 |
113.1 |
106.5 |
112.3 |
… |
… |
… |
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Memorandum items: |
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Nominal GDP (in billions of vatu) |
79.1 |
82.8 |
87.3 |
94.9 |
100.7 |
106.3 |
112.0 |
118.0 |
|
Nominal GDP (in millions of U.S. dollars) |
817 |
774 |
798 |
880 |
928 |
947 |
998 |
1,051 |
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Sources: Vanuatu authorities; and IMF staff estimates and projections. 1/ Does not include consumption of fixed capital (depreciation). 2/ Weighted average rate of interest for total bank deposits and loans. 3/ The vatu is officially pegged to an undisclosed basket of currencies. |
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[1] Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.
[2] At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country’s authorities. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm .
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