Via IMF (Den Internationale Valutafond)

On June 5, 2019, the Executive Board of the
International Monetary Fund (IMF) concluded the Article IV consultation


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

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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


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.

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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

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.