IMF Executive Board Concludes 2021 Article IV Consultation with Vanuatu
September 14, 2021
Washington, DC: The Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [1] with Vanuatu.
The COVID-19 pandemic and major natural disasters hit the Vanuatu economy severely in 2020. Due to the authorities’ decisive measures, Vanuatu has had no domestic transmission of COVID-19. However, the border closure dealt a heavy blow to tourism. Infrastructure projects have also been delayed. In addition, Tropical Cyclone Harold and a volcanic eruption in Tanna Island caused extensive damage the first half of 2020. Notwithstanding the authorities’ policy responses, the reduction in travel receipts led to severe economic contraction. Strong receipts of the Economic Citizenship Programs (ECP) and donor support have helped mitigate the impact of the pandemic on fiscal and external balances.
After a severe contraction in 2020, real GDP growth is expected to rise to 1.2 percent in 2021. Agricultural production and remittance income from seasonal workers will help to support a return to positive growth in 2021. Growth will also be supported by construction activity, despite delays which will push several large infrastructure projects into 2022. Tourism related sectors are expected to contract further in 2021 due to the extended border closure and are expected to start a gradual recovery beginning in 2022.
Risks to the outlook are substantial and tilted to the downside. A worsening of the pandemic requiring longer border closure would adversely impact economic activity. ECP revenues could fall sharply amid growing concerns on AML/CFT risks to ECP under the recent loss of the key correspondent banking relationship. Further deterioration of banks’ asset quality could erode the soundness of Vanuatu’s financial system. Lack of transparency and effective supervision framework for state enterprises could negatively affect the business environment and fiscal management. Issues concerning AML/CFT and EU blacklisting related to tax transparency could accelerate de-risking by foreign firms and impede foreign direct investment (FDI). An ever-present downside risk relates to further natural disasters.
Executive Board Assessment [2]
Executive Directors commended the authorities for their decisive actions to prevent a local outbreak of the pandemic, and for prudent policy management which has helped maintain macro-financial stability despite the challenges from the pandemic and natural disasters. Directors emphasized that front-loading the vaccination strategy with support of development partners should be a priority to help support the recovery.
Directors concurred with the need for maintaining fiscal support over the near term, anchored on a credible medium-term fiscal consolidation strategy. They stressed that the support should be well targeted and complemented by improvements in public expenditure and investment management. Directors underscored that a fiscal strategy based on domestic revenue mobilization, including the introduction of personal and corporate income taxes, would both allow the authorities to reduce the reliance on revenues from the Economic Citizenship Program (ECP) and provide resources for investment in climate resilient infrastructure and other development needs. Directors urged the authorities to further manage fiscal risks by minimizing the contingent liabilities of SOEs, including of the state-owned airline.
Directors agreed that monetary policy should remain accommodative until the recovery is entrenched. Close monitoring of inflationary pressures is warranted. Directors emphasized that the authorities should remain vigilant of developments in the banking sector and continue to strengthen supervisory frameworks. They encouraged the authorities to establish crisis management and resolution frameworks and to improve the collateral asset recovery environment for liquidation of non-performing loans. Directors noted that digitalization could advance financial inclusion, but challenges remain.
Directors underscored the importance of improving governance, reducing corruption, and bolstering Vanuatu’s risk profile, to mitigate risks stemming from weak due diligence of the ECP and the loss of correspondent banking relationships (CBRs). Directors urged the authorities to further strengthen legal frameworks and the institutional capacity pertaining to AML/CFT, tax transparency, and central bank autonomy and governance. They also underscored the need for the authorities to establish supervisory frameworks for the state‑owned enterprises and enhance their transparency.
Directors agreed that economic diversification and development of quality infrastructure is essential for sustained and inclusive growth. They also underscored the need for improving Vanuatu’s resilience to natural disasters and climate change and welcomed the operationalization of the Disaster Risk Management Act and the ongoing review of the National Adaptation Plan for Action. Noting Vanuatu’s limited capacity, Directors encouraged the authorities to continue to benefit from technical assistance by the Fund and development partners.
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Table 1. Vanuatu: Selected Economic Indicators, 2018–23 |
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Population (2020): 301,695 |
Per Capita GDP (2020): US$ 3,090 |
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IMF quota: SDR 23.8 million (0.01 percent of total) |
Literacy rate (2018): 87.5 percent |
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Main products and exports: Kava, coconut oil, copra, cocoa, beef |
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Key export markets: New Caledonia, Australia, New Zealand |
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2018 |
2019 |
2020 |
2021 |
2022 |
2023 |
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Estimates |
Projections |
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Output and prices (annual percent change) |
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Real GDP |
2.9 |
3.9 |
-6.8 |
1.2 |
3.0 |
4.1 |
|
Consumer prices (period average) |
2.4 |
2.7 |
5.7 |
5.4 |
2.6 |
2.3 |
|
Consumer prices (end period) |
1.9 |
3.5 |
7.0 |
3.9 |
2.3 |
2.2 |
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Government finance (in percent of GDP) |
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Total revenue |
39.5 |
38.5 |
44.2 |
40.6 |
34.2 |
32.1 |
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Taxes |
18.4 |
17.6 |
14.6 |
16.1 |
16.5 |
17.0 |
|
Other revenue |
12.0 |
13.9 |
16.0 |
11.2 |
9.7 |
8.7 |
|
Grants |
9.2 |
7.0 |
13.6 |
13.2 |
8.0 |
6.4 |
|
Expenditure |
33.3 |
31.8 |
44.4 |
44.0 |
38.3 |
36.1 |
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Expense |
26.9 |
28.5 |
37.8 |
36.4 |
29.6 |
29.0 |
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Net acquisition of non financial assets |
6.4 |
3.3 |
6.6 |
7.6 |
8.7 |
7.1 |
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Net lending (+)/borrowing (-) |
6.3 |
6.7 |
-0.1 |
-3.5 |
-4.1 |
-4.0 |
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Public and publicly-guaranteed debt (end of period) |
49.2 |
46.1 |
50.1 |
47.5 |
50.2 |
51.4 |
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Domestic |
7.3 |
6.1 |
9.3 |
8.0 |
6.7 |
5.7 |
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External |
41.9 |
40.1 |
40.8 |
39.4 |
43.5 |
45.8 |
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Money and credit (annual percentage change) |
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Broad money (M2) |
-0.5 |
9.2 |
5.3 |
-3.0 |
3.8 |
6.0 |
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Net foreign assets |
39.0 |
24.2 |
16.9 |
0.0 |
5.2 |
6.3 |
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Domestic credit |
-4.4 |
-6.4 |
-9.5 |
-6.8 |
-1.3 |
1.6 |
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Of which: Credit to private sector |
1.2 |
0.4 |
1.5 |
-3.2 |
0.8 |
1.8 |
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Interest rates (in percent, end of period) 1/ |
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Deposit rate (vatu deposits) |
1.2 |
0.8 |
0.7 |
… |
… |
… |
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Lending rate (vatu loans) |
0.0 |
0.0 |
0.0 |
… |
… |
… |
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Balance of payments (in percent of GDP) |
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Current account |
12.2 |
16.0 |
3.3 |
-6.9 |
-8.0 |
-5.7 |
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Trade balance |
-26.2 |
-29.5 |
-23.5 |
-23.3 |
-24.3 |
-26.1 |
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Exports of goods |
6.9 |
4.9 |
5.2 |
5.3 |
5.4 |
5.4 |
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Imports of goods |
-33.1 |
-34.4 |
-28.7 |
-28.5 |
-29.7 |
-31.5 |
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Travel receipts |
32.3 |
29.8 |
7.2 |
0.6 |
4.4 |
11.3 |
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Capital and financial account |
-16.0 |
-6.5 |
3.5 |
11.4 |
9.4 |
7.9 |
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Of which: Foreign direct investment |
3.9 |
2.7 |
2.6 |
2.9 |
3.0 |
2.9 |
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Overall balance |
2.7 |
9.8 |
10.9 |
4.5 |
1.4 |
2.2 |
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Gross international reserves (in millions of U.S. dollars) |
420.6 |
511.6 |
613.6 |
658.2 |
673.0 |
697.7 |
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Gross international reserves (in months of prospective G&S imports) |
9.6 |
13.3 |
15.3 |
14.7 |
13.3 |
11.8 |
|
External debt service (in percent of GNFS exports) |
4.0 |
6.7 |
18.7 |
31.5 |
11.1 |
7.8 |
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Exchange rates 2/ |
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Vatu per U.S. dollar (period average) |
108.5 |
115.6 |
109.1 |
… |
… |
… |
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Vatu per U.S. dollar (end of period) |
112.3 |
114.3 |
108.0 |
… |
… |
… |
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Memorandum items: |
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Nominal GDP (in billions of vatu) |
100.8 |
107.2 |
101.7 |
107.0 |
112.6 |
119.8 |
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Nominal GDP (in millions of U.S. dollars) |
928 |
928 |
932 |
999 |
1,060 |
1,127 |
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Sources: Vanuatu authorities; and IMF staff estimates and projections. |
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1/ Weighted average rate of interest for total bank deposits and loans. |
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2/ 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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