Press Release No. 16/362

IMF Staff Concludes 2016 Article IV Mission to Vanuatu

July 26, 2016

An International Monetary Fund (IMF) mission led by Mr. Chris Papageorgiou visited Port Vila during July 13-26, 2016 to hold discussions on the 2016 Article IV consultation. The mission met with the Vanuatu authorities, representatives from the private sector and civil society organizations, and international donors to discuss economic developments and policies 15 months after Cyclone Pam hit the country.

At the conclusion of the visit, Mr. Papageorgiou issued the following statement:

“Vanuatu is gradually recovering from the extensive damages caused by Cyclone Pam last year, and reconstruction efforts have started to yield positive results. Growth is projected to reach 4.0 percent in 2016 and 4.5 percent in 2017 driven by the recovery in tourism and agricultural production, and further ramping-up of infrastructure projects. Inflation is projected to remain below 3 percent thanks to lower commodity prices although expanding domestic demand put some pressure on supply. The current account deficit is expected to widen to around 20 percent of GDP in 2016 due to the high import-content of the reconstruction and infrastructure projects, but the deficit is fully financed by grants and loans.

“These positive developments contribute to full recovery in the near future. The risks to this favorable outlook stem mainly from uncertainty in the rate of implementation of the public infrastructure projects. On the external front, a larger-than-expected slowdown in emerging and advanced economies could negatively impact Vanuatu’s agricultural sector via weaker commodity prices and a knock-on effect on tourism. Natural disasters are an ever-present risk.

“Government spending is projected to increase by 16 percentage points of GDP due to cyclone-related expenditure, which includes delayed spending from 2015. As a result, the fiscal deficit is projected to reach 11.3 percent of GDP fully financed by grants, loans, and government deposits. Fiscal prudence is called for in the future to ensure fiscal and debt sustainability. Looking ahead, Vanuatu should continue its effort to strengthen resilience to environmental shocks by building fiscal buffers, promoting resilient infrastructure, and putting in place simple but effective disaster-response mechanisms.

“The government’s ambitious development agenda that is partly financed by external borrowing will raise the government debt substantially in 2016 and over the medium term. While the new debt is mostly concessional, repayment obligations may put pressure on fiscal accounts. To ensure that the public debt to GDP ratio declines in the medium term, the government should harness careful fiscal planning and discipline, seeking mostly grant financing at least in the next few years.

“On structural reforms, the mission commends the authorities for launching a comprehensive tax reform initiative, including the introduction of income and corporate taxes to provide a stable source of revenue. The mission also welcomes the authorities’ plan to submit the Government Business Enterprise (GBE) law to Parliament that will help improve fiscal discipline, accountability, and financial viability of GBEs. The mission encourages authorities to proceed with anti-money laundering regulations and expects a steady implementation of the action plan in line with international standards.

“The peg to an undisclosed basket of currencies continues to serve Vanuatu well in promoting stability and confidence, and therefore should be maintained. Despite a mild appreciation of the vatu in recent months, staff assessment indicates that the real effective exchange rate remains broadly in line with fundamentals. Vanuatu’s comfortable foreign exchange reserves coverage provides the first line of defense against external shocks.

“To seize growth opportunities, public investment scaling up needs to be complemented by a concerted effort to actively promote private sector investment and attract foreign direct investment. This includes boosting competitiveness by further implementation of land reforms and enhancing quality upgrading especially in the tourism and agriculture sectors.

“Improving access to employment opportunities, basic social services, and infrastructure should continue to be a priority especially in the outer islands. Particular emphasis should be placed on improving financial inclusion and educational attainment of the poor.”