Public Information Notice: IMF Concludes Article IV Consultation with Vanuatu

September 5, 2000

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

On August 1, 2000, the Executive Board concluded the Article IV consultation with Vanuatu.1


In the two years following the last Article IV consultation discussions Vanuatu has faced a variety of economic challenges. After a 6 percent increase in 1998, real GDP fell by 2½ percent in 1999, reflecting unfavorable weather and delays in major infrastructure projects. At the same time, CPI inflation slowed to 2¾ percent from 31/3 percent a year earlier, as the one-time effects of the introduction of a VAT in 1998 wore off and economic activity remained weak. The current account balance shifted into deficit in 1999, reflecting a decline in exports of agricultural commodities and reduced tourism, which were partially offset by higher foreign direct investment in the coconut sector and a drawdown of net foreign assets by commercial banks. As a result, gross reserves fell by US$1½ million and stood at US$422/3 million by end-1999, covering 62/3 months of imports.

The foreign exchange market has experienced intermittent pressures during the past two years: first, in mid-1998, following the withdrawals of retirement savings from the Vanuatu National Provident Fund (VNPF), and then in late 1999-early 2000, after the most recent change in government. The authorities contained pressures during the first episode by raising interest rates, and engineered an effective devaluation of the vatu by changing the weights of the undisclosed basket of currencies to which it was linked. During the later episode, the authorities responded by reintroducing, in February 2000, regulations restricting access to foreign exchange for capital transactions that had been removed in October 1999, to reduce the outflow of reserves. Although the trade-weighted real effective exchange rate (REER) depreciated from 1997-98 to1999, the tourism-weighted REER appreciated strongly over this period, and both measures appreciated from end-1999 through early 2000.

Monetary conditions, which were tightened following the VNPF crisis in mid-1998, were relaxed somewhat during the latter half of 1999 as activity weakened. Nominal interest rates, which had risen sharply in mid-1998, declined through the course of 1999 as the Reserve Bank expanded liquidity by repurchasing Reserve Bank notes, and private sector credit grew modestly. Total broad money fell 9 percent, reflecting the decline in commercial bank net foreign assets.

Several changes have also been made in the framework for conducting monetary policy during the last two years. To absorb the liquidity injected by the withdrawals from the VNPF and aid the sale of government bonds, in early 1998 the authorities replaced the 10 percent statutory reserve requirement (SRR) with a 16 percent prescribed reserve asset requirement (PRA), toward which the banks could count their holdings of government bonds. Around the same time the Reserve Bank of Vanuatu (RBV) began issuing its own notes. In late 1998, a repurchase facility, covering short-term government bonds and RBV notes, was introduced for more efficient liquidity management. In April 1999, the RBV introduced a 16 percent liquid asset ratio requirement for prudential purposes, abolished the PRA, and raised the SRR, which was reintroduced in late 1998, to 10 percent of average vatu deposits plus 50 percent of foreign currency demand deposits.

The fiscal deficit in 1999 was smaller than budgeted, despite a decline in tax revenue, due to the economic slowdown, reflecting delays in infrastructure projects and tighter controls on current expenditure. A decline in tax revenue, equivalent to about 1 percent of GDP, was more than offset by a reduction in current expenditure and a 4¾ percent of GDP shortfall in spending on infrastructure projects, reflecting delays in implementation. Accordingly, the overall budget deficit fell to 1½ percent of GDP in 1999 from 11¼ percent of GDP in 1998 and was about 4½ percent of GDP less than budgeted.

Activity in the offshore financial center remained weak in 1999. Much of this weakness may have followed allegations of money laundering levied against some offshore institutions, which led several major international banks to ban U.S. dollar transactions with Vanuatu. Some of these banks have since resumed U.S. dollar transactions with certain institutions. A mission from the Asia-Pacific Group of the Financial Action Task Force (FATF) visited Vanuatu in early 2000 to assess the country’s efforts to combat money laundering, and in July the Reserve Bank issued a notice requiring banks to tighten their internal procedures against money laundering in response to the assessment.

Since 1997, the government has been engaged in implementing a wide range of economic reforms under the Comprehensive Reform Program (CRP)—with the support of the Asian Development Bank (AsDB) and bilateral donors—to provide much needed institutional strengthening, accountability, and transparency to the public sector. While significant progress has been achieved, much of the program remains to be completed. However, progress in implementation has slowed since mid-1999, and the release of the second tranche of the AsDB loan supporting the CRP has been delayed due to delay in implementing some of the accompanying conditionalities of the loan.

Executive Board Assessment

Executive Directors commended the authorities for preserving macroeconomic stability over the past two years, and in particular for keeping inflation low and maintaining a reasonable level of international reserves. Directors also welcomed the progress made thus far under the Comprehensive Reform Program (CRP) supported by the Asian Development Bank, but stressed that important challenges remain. While acknowledging that the economy appears to be recovering from the 1999 recession, they emphasized that the fiscal position is difficult and the balance of payments remains fragile. Therefore, they stressed the need to monitor economic events closely and to broaden and deepen structural reforms. Directors also noted that, given Vanuatu’s limited implementation capacity for structural and macroeconomic policies, technical assistance from multilateral organizations and donors would continue to be crucial.

Directors observed that the prospects for sustained growth over the medium term depend on further structural and fiscal reforms. While endorsing the authorities’ plans to increase spending for health and education, they noted that a significant fiscal gap could develop in the absence of continued efforts at expenditure control and new revenue measures. Directors urged the authorities to use their planned review of the tax system to broaden the tax base, which could allow a further reduction in import duties. They also encouraged the authorities to pursue their plans to further rationalize government employment and control the wage bill, and to establish appropriate regulation for the privately-owned utility monopolies, as a way of promoting competitiveness and improving the investment environment by reducing business costs.

Directors welcomed the introduction of new indirect instruments to conduct monetary policy, and they generally considered that the current stance of the exchange rate is appropriate. A few Directors noted the advantages of making the exchange rate regime more transparent, and suggested that the authorities keep the exchange rate under review.

As for the financial sector, Directors welcomed the measures already taken to counter money laundering, and encouraged the authorities to continue their efforts. They considered that the coordination of supervision between the Reserve Bank and the Financial Services Commission needs improvement, to give the authorities comprehensive knowledge of both the onshore and offshore financial sectors. Directors also stressed the importance of bringing the relevant legislation and institutions to combat money laundering up to international standards. In that connection, they encouraged the authorities to seek technical assistance.

While acknowledging that progress has been made since the last consultation, Directors stressed that Vanuatu’s economic statistics still have important weaknesses, particularly in the national and external sector accounts. They urged the authorities to address those data issues complicating the assessment of the balance of payments.

Vanuatu: Selected Economic Indicators

  1997 1998 1999 2000
      Est. Proj.

Output and prices (Annual percentage change)
Real GDP 1/ 0.6 6.0 -2.5 4.0
Nominal GDP 1/ 2.2 8.4 0.7 6.0
Consumer prices (period average) 2.8 3.3 2.8 2.0
Government finance (In percent of GDP)
Revenue and grants 26.9 25.8 26.4 24.8
Total expenditure 27.7 36.9 27.7 32.9
Overall balance -0.8 -11.2 -1.4 -8.1
Money and credit (end of period) (Annual percentage change)
Broad money (M2) -0.3 12.6 -9.2 6.7
Net foreign assets -1.4 12.7 -18.6 6.9
Domestic credit -1.3 22.2 11.1 6.1
Credit to private sector -2.0 10.6 14.6 6.1
Balance of payments (In millions of U.S. dollars unless otherwise noted)
Exports, f.o.b. 35.3 33.9 25.3 31.7
Imports, f.o.b. -80.9 -76.4 -77.2 -82.7
Current account balance 2/ 2.2 26.9 -10.5 1.6
(In percent of GDP) 2/ 1.0 12.5 -4.9 0.7
Overall balance -2.4 9.1 -1.9 -2.0
External Indicators        
Gross official reserves (end of period)        
In millions of U.S. dollars 37.0 44.3 42.7 38.8
In months of imports 3/ 6.1 7.3 6.7 5.7
External debt        
External debt/GDP 4/ 19.5 25.4 29.9 32.2
External debt-service ratio 5/ 0.3 0.2 0.4 0.5
Exchange rates (period average)        
Vatu per U.S. dollar (period average) 115.9 127.5 129.1 ...
Real effective exchange rate 5/ 108.0 106.5 103.0 ...

Sources: Data provided by the Vanuatu authorities; and IMF staff estimates.

1/ GDP data for 1997–99 are official estimates.
2/ Current account data are official estimates provided by the authorities.
3/ Imports for domestic consumption; i.e., excludes imports for reexports.
4/ Medium- and long-term public debt only.
5/ In percent of exports of goods and services.
6/ Period average; 1990=100.

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. 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. In this PIN, the main features of the Board’s discussion are described.


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