Statement of an IMF Mission at the Conclusion of the 2010 Staff Visit to Vanuatu

Press Release No. 10/85
March 12, 2010

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

“An IMF mission led by Mr. Leif Lybecker Eskesen from the Asia and Pacific Department visited Port Vila during March 8-12, 2010 to discuss with the authorities and other key counterparts recent economic developments and the outlook for Vanuatu. The mission team would like to thank these counterparts for the productive and open engagement.

“The Vanuatu economy weathered the global economic crisis well and is expected to recover gradually over the near term. Growth slowed in 2009 across all sectors and is estimated at 3¼ percent. The deceleration in service activity, however, was cushioned by resilient tourism, which benefited from a shift by travelers from Australia and New Zealand to short-haul destinations such as Vanuatu due to the global downturn. Construction activity also held up well supported by donor inflows, while agricultural output decelerated faster in response to declining commodity prices. Growth is projected to pick up moderately to 3¾ percent in 2010 and further to 4¼ percent in 2011. This will be led by tourism as the global economy recovers and agriculture as commodity prices trend up. Construction activity is also likely to hold up supported by donor inflows.

“The risks to the outlook are broadly balanced, depending on the pace of the global economic recovery. On the domestic side, downside risks include an over-extension of credit that could lead to a scale-back in lending if banks face deteriorating asset quality. Moreover, tourism could slow if tourists from Australia and New Zealand return to long-haul destinations sooner than anticipated.

“The expansionary fiscal stance in 2009 was welcome in light of the weak economic environment, but the expected recovery calls for a gradual exit. The broadly neutral fiscal stance envisaged for 2010, therefore, seems appropriate. However, the projected tax revenues would appear to be too optimistic and the budgeted grants may prove difficult to achieve. In turn, this may require a scaling back of expenditures to meet the target of a balanced budget. Meanwhile, if downside risks to growth were to materialize and threaten the recovery, there is sufficient fiscal space to introduce stimulus measures.

“The sound fiscal course should be maintained over the medium term. On the revenue side, continued efforts to broaden the tax bases and strengthen tax administration are encouraged. Moreover, the gradual introduction of income taxation over the medium term may need to be considered to counter the decline in import duties associated with ongoing trade liberalization. On the expenditure side, spending could be re-oriented towards outlays on growth-enhancing basic infrastructure. Increased monitoring, higher accountability, and restructuring of loss-making government enterprises will also be important to sustain the sound fiscal course.

“The easing of monetary policy in late 2008 helped cushion the spillovers from the global economic downturn. However, liquidity conditions have normalized and credit growth remains strong. Monetary policy may, therefore, have to be tightened relatively soon. The current exchange rate policy is appropriate and has helped anchor inflation expectations.

“Rapid credit growth underscores the importance of continuing efforts to strengthen financial supervision and regulation. On- and off-site monitoring needs to be stepped up and prudential reporting requirements could be enhanced. In addition, there is scope to strengthen regulation, including by clarifying the treatment of collateral for purposes of loan classification and provisioning. To level the playing field for financial institutions, it is important that the Reserve Bank of Vanuatu is legally ensured full supervisory powers over the Vanuatu Agricultural Development Bank and the Vanuatu National Provident Fund.

“Progress on structural reform in recent years has been encouraging, but further steps are needed to sustain economic growth over the medium term. Improvements in basic infrastructure such as roads, inter-island shipping, and ports will be important in this regard. The ongoing donor-financed projects in these areas are very encouraging and constitute a significant step forward. There is also scope to strengthen the business climate by making it easier and less costly to start a business, establish property rights, and trade internationally. Finally, it is imperative to ensure that labor markets remain flexible.”



IMF EXTERNAL RELATIONS DEPARTMENT

Public Affairs    Media Relations
E-mail: publicaffairs@imf.org E-mail: media@imf.org
Fax: 202-623-6220 Phone: 202-623-7100