Statement of an IMF Staff Mission at the Conclusion of the 2009 Article IV Discussions with VanuatuPress Release 09/56
March 4, 2009
The following statement was issued today in Port Vila after the conclusion of an International Monetary Fund (IMF) staff mission to Vanuatu:
"An IMF mission, led by Nita Thacker of the Asia and Pacific Department, visited Port Vila during February 18-26 to hold discussions on the 2009 Article IV consultation. The mission met with representatives of the government and the private sector to discuss recent economic developments and the impact of the global slowdown on the macroeconomic outlook for Vanuatu.
"Driven by strong growth in the tourism and construction sectors, and higher-than-expected donor inflows, real GDP is estimated to have grown by 6.6 percent in 2008. Inflation rose from 4.1 percent year-on-year in 2007 to 5.8 percent year-on-year in 2008, reflecting the effects of higher international prices of food and fuel, higher credit growth, and somewhat higher-than-budgeted spending. Despite the higher spending, the fiscal surplus increased to 2.3 percent of GDP due to significant overperformance on revenues, mainly VAT, reflecting buoyant economic activities and improved tax compliance. The Reserve Bank of Vanuatu relaxed its monetary stance in December, in part, to ease the tightening in the domestic liquidity conditions.
"While the effects of the global slowdown, especially the slowdown in Australia and New Zealand, the largest sources of tourism revenues and foreign direct investment (FDI), are yet to manifest themselves in aggregate measures of activity, strains are beginning to show in some areas. Most notably, indications are that new construction activity, funded by large capital inflows from Australia and to a lesser extent New Zealand, has begun to slow. While tourist arrivals remain strong, spending by tourists has begun to decline. That said, some of the adverse impact on activity should be offset by donor inflows, which are expected to remain strong. In addition, the recent easing in monetary policy and a more accommodative fiscal stance for 2009 should help to cushion the impact on growth. GDP growth is expected to be in the 3-4 percent range in 2009 and recover thereafter. Inflation is expected to moderate from last year's level, reflecting lower commodity prices. Official international reserves are expected to remain strong as aid-related inflows continue to finance the bulk of imports.
"In the event of a sharper-than-expected slowdown, the government has some scope to use temporary fiscal stimulus measures given the strong fiscal position and the low stock of public debt. There is also some scope to ease monetary policy. However, given recent excessive credit growth, the Reserve Bank needs to monitor bank balance sheets, which could be adversely affected by the slowdown.
"Progress is being made on structural reforms in some areas. A significant development in the past year has been the deregulation of the telecommunications sector, which has increased the usage of mobile phone services fivefold. While efforts are underway to improve road infrastructure and expand port facilities with assistance from donors, more needs to be done. Further reforms are needed to improve the efficiency of public enterprises and improve the budget framework to establish transparency and accountability. In this context, adequate safeguards should be put in place on the Vanuatu Agricultural Development Bank, including placing it under central bank supervision, to ensure that it operates on commercial principles.
"The mission thanks the authorities for useful discussions and wishes them well in their future endeavors."