Press Release No. 08/29

Press Release: Statement at the Conclusion of an IMF Staff Mission to Vanuatu

February 22, 2008

The following statement was issued today after the conclusion of an International Monetary Fund (IMF) staff mission to Vanuatu:

"An IMF mission conducted an interim staff visit to Vanuatu during February 11-15, 2008. This is an annual staff visit requested by the authorities for countries on 24-month Article IV consultation cycles. The mission had useful discussions with the authorities on the economic outlook and policy priorities. We would like to express our appreciation to the authorities for their open and constructive engagement and we look forward to continued fruitful cooperation in the future.

"Assuming continued political and macroeconomic stability, Vanuatu's near-term economic prospects remain promising. Driven by robust tourism and construction activity, real GDP is estimated to have grown by 6½ percent in 2007, and is expected to remain in the 5-6 percent in the next 2-3 years. Inflation increased to 4 percent in 2007, reflecting higher civil service wages and fuel prices, but is expected to moderate this year. The fiscal position turned to a deficit of about 1 percent of GDP in 2007, owing to spending through supplementary budgets. For 2008, the government is targeting a broadly balanced budget. Official international reserves increased to about 8 months of imports and are expected to remain strong, with non-debt capital inflows continuing to finance the current account deficit.

"There are some downside risks to the outlook. A slowdown in global growth could have an adverse impact on foreign direct investment and tourism, and dampen growth. A loosening of fiscal policy and rising oil prices could put pressure on prices.

"Ensuring continued macroeconomic stability will require close monetary and fiscal policy coordination. With Vanuatu's basket pegged exchange rate regime, the role for monetary policy in offsetting demand pressures is limited and the burden of adjustment falls largely on fiscal policy. In this context, it will be important that the government avoid additional fiscal spending pressures, beyond the spending that is already budgeted. In addition, restructuring the budget, including through civil service reforms aimed at reducing the wage bill and restructuring loss-making public enterprises, would enhance budget efficiency while limiting demand pressures, and would also create room for development spending over the medium term.

"On the structural front, progress is being made in some areas. Financial sector supervision has been upgraded, and steps are being taken to improve utility pricing and increase competition in the telecommunication sector. However, more needs to be done to create a more conducive investment climate, including by improving the land registration and titling process, ensuring that public enterprises operate efficiently, and eliminating infrastructure bottlenecks by encouraging private sector involvement. Finally, adequate safeguards should be put in place for the Vanuatu Agriculture Development Bank to minimize risks to the financial system. Most importantly, the Bank should be placed under central bank supervision from its inception."