Public Information Notice: IMF Concludes Article IV Consultation with Vanuatu

September 16, 1998

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 5, 1998, the Executive Board concluded the Article IV consultation with Vanuatu1.


Vanuatu’s real GDP growth slackened during 1996-97, as the impact of increased agricultural production and tourism was more than offset by a slowdown in the pace of industrial expansion. The external current account performance improved, reflecting buoyant exports and tourism receipts as well as restrained imports, but there were increasing private capital outflows. Thus, official reserves declined from the equivalent of 7½ months of imports at end-1995 to 6 months at end-1997.

The external reserves position weakened further during the first four months of 1998, to about 3½ months of projected imports. This was caused in large part by the impact of the last government’s decision to permit unconditional withdrawal of retirement savings by members of the Vanuatu National Provident Fund (VNPF). Other factors were delays in shipment of copra exports, and a drop in foreign demand for beef and timber.

The Reserve Bank of Vanuatu (RBV) partially offset the monetary effect of the large liquidity injection resulting from the VNPF payouts by replacing the 10 percent statutory reserve requirement with a prescribed asset ratio on vatu deposits of 16 percent from end-March 1998. To reinforce the tight monetary stance, the RBV increased its base lending rate by 5 percentage points in mid-May. This action has had a positive impact on the reserves position, with official reserves increasing markedly.

In April 1998, the authorities embarked on an ambitious structural adjustment program called Comprehensive Reform Program (CRP)—under the auspices of the Asian Development Bank—aimed at improving governance, public sector reform, and strengthening growth prospects. The reform agenda also includes the rehabilitation of the state-owned financial institutions and introduction of proper supervision of banks.

Under the CRP, fiscal policy has a reform-oriented cast. The 1998 budget incorporates a fundamental restructuring of the tax system, including the introduction of a value-added tax. 1998 expenditures are sharply higher because of increased spending on the social sectors and investment, severance pay and re-training costs for workers laid off in the rightsizing exercise, and assistance for the VNPF payouts. As a result of these higher expenditures, the fiscal deficit is expected to rise to about 13 percent of GDP in 1998 from 3/4 percent in 1997. Except for the VNPF payouts, the deficit is to be financed through identified concessional foreign borrowing. However, the authorities envisage that the budget deficit will be sharply reduced in 1999 and a budget surplus would be achieved in 2000.

Executive Board Assessment

Executive Directors noted that a combination of political instability, weak governance, and policy errors had a negative impact on Vanuatu’s economic performance since 1996. Directors stressed that mutually reinforcing financial policy adjustments and structural reforms would be essential to turn that situation around and achieve higher growth and a secure external reserves position over the medium term. In that regard, they commended the authorities for embarking on a structural adjustment program, under the auspices of the Asian Development Bank (AsDB), aimed at improving governance, public sector reform, and growth prospects. Directors, however, noted that the authorities’ implementation capacity for structural and macroeconomic policies was limited and considered that technical assistance from multilateral organizations and donors would be crucial.

Directors stressed that the conduct of monetary policy would need to be consistent with the authorities’ external reserves and exchange rate objectives. Noting that the failure to fully mop up excess liquidity had contributed to a deterioration of the external reserves position in the first quarter of 1998, and that further demand and inflation pressures were likely to emerge in the second half of the year, Directors urged the authorities to take early steps to strengthen monetary management. In particular, they pointed to the need to expedite the introduction of indirect monetary instruments, which would enhance flexibility in the conduct of monetary policy. In that regard, Directors welcomed the reestablishment of the Monetary Forecasting Committee.

Directors regretted the previous government’s decision to permit premature withdrawal of retirement savings from the Vanuatu National Provident Fund, which had spurred devaluation expectations. They agreed that competitiveness considerations did not call for a devaluation at the present stage, and supported the substantial increase in the base lending rate of theReserve Bank of Vanuatu in mid-May to defend the current exchange rate parity and rebuild foreign reserves. Directors encouraged the authorities to eliminate the restriction on forward contracts and seek the removal of the capital controls imposed by the banks once the machinery for stronger monetary management was fully functioning.

Directors welcomed the fiscal reform measures included in the 1998 budget and the establishment of a medium-term framework for fiscal policy. In particular, the introduction of a value-added tax and reorientation away from foreign trade-related taxes, the civil service reform, and the initiatives to strengthen tax administration and expenditure control were important factors for strengthening the structure of the public finances over the medium term. Directors also welcomed the authorities’ intention to install greater fiscal transparency and accountability.

Directors welcomed the authorities’ intention to improve development-related outlays. While noting the substantial external financing available for FY 1998, they pointed to the risks posed by the up-front increase in expenditures, before the gains from the fiscal reforms that would accommodate those expenditures in the future had been firmly established. Given the significant risk of a revenue shortfall in the near term, Directors underscored the need for vigilance, and urged the authorities to stand ready to take prompt corrective steps if needed.

Directors welcomed the authorities’ intention to restructure the state-owned financial institutions, and emphasized that adequate safeguards and incentives to promote prudent lending needed to be put in place promptly. They stressed the need to speed up the adoption of the revised banking legislation, which would facilitate effective supervision of the domestic and offshore banks.

Vanuatu: Selected Economic Indicators

  1994 1995 1996 1997 1998

Output and prices (Percent change)
Real GDP1 1.3 3.8 3.5 2.7 ...
Consumer prices (period average) 2.3 2.2 0.9 2.8 2.8 2
Government finance (In percent of GDP)
Revenue and grants 25.2 26.7 23.6 23.3 27.8 3
Total expenditure 26.9 29.5 25.4 24.0 41.1 3
Overall fiscal balance -1.6 -2.7 -1.8 -0.7 -13.3 3
Money and Credit (end of period) (12-month change in percent of beginning of period broad money)
Total broad money 3.5 11.4 11.1 -0.3 6.7 2
Net foreign assets -5.2 12.0 5.9 -1.1 0.2 2
Net domestic assets 8.7 -0.6 5.2 0.9 6.6 2
Credit to private sector 2.4 2.1 2.6 -0.6 0.3 2
Balance of payments (In millions of U.S. dollars)
Exports, f.o.b. 25.0 28.3 30.1 35.3 6.3 2
Imports, f.o.b. -74.6 -79.4 -81.4 -78.5 ...
Current account balance4 -7.6 -5.0 -1.4 5.5 ...
(In percent of GDP) -3.6 -2.1 -0.5 2.2 ...
Overall balance5 -2.2 5.1 -4.6 -6.8 -11.8 2
External Indicators  
Gross official reserves (end of period)  
In millions of U.S. dollars 43.6 48.5 44.0 37.0 25.4 6
In months of imports7 7.4 7.6 6.7 5.9 3.5 6
External debt (percent of GDP, end of period)8 16.5 18.4 17.1 18.7 ...
Debt-service ratio (percent of current receipts) 0.8 0.9 0.7 0.6 ...
Real effective exchange rate (percent change)9 -0.2 -1.5 -1.4 3.6 5.0 2

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

1 Figure for 1997 is IMF staff estimate.
2 January-March, 1998.
3 Budget.
4 Excluding private transfers.
5 Changes in net foreign assets of the monetary authorities.
6 At end-March, 1998.
7 Imports for domestic consumption; i.e. excludes imports for re-exports.
8 Medium- and long-term public debt only.
9 Period average, trade

1Under 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 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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