How Vanuatu Can Return to Sustainable Growth After Airline Bankruptcy
November 25, 2024
After economic shocks, it’s time for this small Pacific island nation to proceed with bold reforms and policy decisions. Support from global institutions and bilateral partners will be crucial in this effort.
Vanuatu, the Pacific archipelago nation of about 350,000 people between Australia and Fiji, finds itself at a crucial crossroads.
The IMF’s recent staff report on Vanuatu reveals an economy grappling with a series of shocks: two destructive tropical cyclones last year; the fallout from the effective bankruptcy of its national airline, Air Vanuatu; and the challenges brought about by declining proceeds from its Economic Citizenship Program, or ECP, the nation’s citizenship-by-investment plan.
The current headwinds are not new, but rather, long-term adverse risks that finally have materialized. Air Vanuatu’s financial and operational weaknesses preceded the pandemic and culminated with the company’s bankruptcy in May 2024—a blow to the island's connectivity and tourism industry, as well as its domestic and international labor mobility and cargo networks.
Likewise, the severe challenges to financial integrity and dependence on unsustainable proceeds created by the ECP have long been in the making amid governance deficiencies and have now resulted in a significant decline of fiscal revenue (to 5 percent of GDP in 2023 from 14 percent in 2020). This year, annual real GDP growth for Vanuatu is expected to be only around 1 percent, and its current account deficit will likely widen to about 7.5 percent of GDP, although there is significant uncertainty to these forecasts.
These shocks have crystallized in Vanuatu amid other brewing risks, and debt sustainability has deteriorated, leaving public and externally held debt at a high risk of distress. Moreover, despite solid bank profitability and capital levels, one in five bank loans are deemed by their lenders to be in trouble.
These shocks and risks underscore the immediate need for a decisive turnaround in policymaking in Vanuatu. There is pressing demand to address risks to growth and stability, and then to redouble efforts to rebuild buffers and tackle structural issues with policy reforms.
The recently completed bankruptcy of Air Vanuatu has allowed the resumption of some limited domestic air connectivity, and has opened the door to establish a new airline. Now is the time to proceed with bold reforms and policy decisions and Vanuatu needs to:
- Embark on fiscal consolidation, reduce the dependence on ECP revenue, reinforce the country’s medium-term fiscal position and buffers, such as by establishing more robust revenue sources, and improve public financial management;
- Tackle the issue of outstanding nonperforming bank assets and adopt enhanced safeguards against financial vulnerabilities, and bolster governance and financial integrity;
- Enact and implement the Government Business Enterprise Act (designed to bring transparency into the management and financial performance of Vanuatu’s other state-owned enterprises); and
- Reprioritize structural issues such as labor shortages, education and the nation’s skills drain, while strengthening resilience against climate change.
These priorities are not just aimed at weathering the current storm but also put in place the policies required to build a more stable and sustainable economic structure for the country in the years to come.
Vanuatu's road forward is challenging, but with targeted policies and a commitment to reform, the nation can deliver a brighter, more stable future that is promising for its citizens. But Vanuatu will also need continued international support to overcome these major challenges. The assistance found in partnerships with global institutions like the IMF, multilateral development banks, and regional alliances and bilateral partners, will play a pivotal role in providing the expertise, resources, and financial support necessary for Vanuatu to achieve its economic goals. Together, we can ensure that Vanuatu not only survives these turbulent times but thrives in the years to come.
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Evan Papageorgiou is the IMF’s mission chief to Vanuatu, and Maria Gonzalez is an assistant director in the Asia-Pacific Department.