## 1vutea2019001 - 3.5 percent of GDP, driven by windfall revenues from economic citizenship programs, despite ## Source details **Canonical URL:** [1vutea2019001 - 3.5 percent of GDP, driven by windfall revenues from economic citizenship programs, despite](https://www.imf.org/-/media/files/publications/cr/2019/1vutea2019001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2019/1vutea2019001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2019/1vutea2019001.pdf.json) --- ### Recent developments and growth outlook - Real GDP growth: 3.2 percent in 2018, 4.4 percent in 2017, 3.5 percent in 2016, 0.2 percent in 2015, 2.3 percent in 2014. - 2018 drivers: construction led by development-partner-financed infrastructure projects; tourism receipts grew 4.3 percent in 2018. - Agriculture: disrupted by a stronger cyclone season, volcanic eruptions, and weaker export prices. - Growth projections: - 2019: real GDP growth projected at 3.4 percent. - 2020: projected at 2.9 percent. - Medium outlook: modest stability but constrained by natural disaster risk and limited fiscal buffer. - Shared Vision 2030 tourism plan: - Target: raise holiday visitors from 87,000 in 2017 to 300,000 in 2030. - Air Vanuatu centerpiece: four 133-seat Airbus A220 airliners, purchase rights for four more. - VTO marketing spending expected to reach over 1 billion vatu (about 1 percent of GDP) by 2023. ### Fiscal position and public debt - 2018 fiscal outcome: - Fiscal surplus: 4.8 percent of GDP (reversing a -0.9 percent of GDP deficit in 2017). - Surplus driven by an additional 5.9 billion vatu from economic citizenship programs (ECPs). - Early debt repayments financed about 3.2 percent of GDP. - 2019 projection: modest fiscal deficit projected at -3.2 percent of GDP. - Fiscal trajectory: deficits expected to widen after 2019 reflecting spending on new infrastructure projects financed more by concessional lending than grants and decreased revenues from ECPs. - Public and publicly-guaranteed debt (end of period): 52.4 percent of GDP (2018), 52.9 percent (2019), 53.9 percent (2020), 55.3 percent (2021). - Government finance (percent of GDP): - Total revenue: 35.5 (2018), 27.9 (2019), 28.0 (2020), 28.0 (2021). - Taxes: 17.9 (2018), 17.7 (2019), 17.7 (2020), 17.7 (2021). - Other revenue: 11.9 (2018), 4.9 (2019), 4.7 (2020), 4.5 (2021). - Grants: 5.6 (2018), 5.8 (2019), 5.8 (2020), 5.7 (2021). - Expenditure: 30.7 (2018), 31.1 (2019), 31.6 (2020), 32.0 (2021). - Net lending (+)/borrowing (-): 4.8 (2018), -3.2 (2019), -3.6 (2020), -4.0 (2021). - Expense (excl. acquisition of nonfinancial assets): 24.6 (2018), 25.8 (2019), 25.9 (2020), 25.9 (2021). - Acquisition of nonfinancial assets: 6.1 (2018), 5.3 (2019), 5.7 (2020), 6.1 (2021). ### External sector and current account - 2018 current account surplus: 3.5 percent of GDP, driven by strong ECP revenue collection and remittances from seasonal worker programs. - Staff estimates: current account gap of 6.7 percent of GDP and a REER gap of -18.5 percent. - Outlook: - 2019 current account projected at -1.2 percent of GDP. - Current account deficits expected to widen thereafter as ECP inflows moderate and imports increase for new projects (including airplanes for Shared Vision 2030). - Balance of payments (percent of GDP): - Trade balance: -30.3 (2018), -30.4 (2019), -34.0 (2020), -32.8 (2021). - Exports of goods: 6.4 (2018), 6.1 (2019), 6.1 (2020), 6.0 (2021). - Imports of goods: -36.7 (2018), -36.5 (2019), -40.0 (2020), -38.8 (2021). - Tourism receipts: 22.6 (2018), 24.7 (2019), 25.5 (2020), 24.2 (2021). - Capital and financial account: 7.9 (2018), 6.5 (2019), 6.4 (2020), 6.4 (2021). - Overall balance: 11.4 (2018), 5.2 (2019), 1.0 (2020), 1.6 (2021). - Gross international reserves (millions of U.S.$): 502.4 (2018), 552.0 (2019), 562.3 (2020), 579.0 (2021). - Reserves in months of prospective G&S imports: 12.0 (2018), 13.0 (2019), 11.8 (2020), 11.8 (2021). ### Monetary policy and financial sector - Exchange rate regime: vatu pegged to an undisclosed basket of currencies; peg used to import low foreign inflation. - Inflation: kept within 0 and 4 percent range. - Consumer prices (period average): 2.9 (2018), 2.0 (2019 projection), 2.2 (2020), 2.3 (2021). - Consumer prices (end period): 2.6 (2018), 2.6 (2019), 2.2 (2020), 2.5 (2021). - Monetary policy tools: statutory reserve deposit requirements and open market operations; SRD requirement raised to 5.25 percent. - Financial sector: generally sound but with room to support financial inclusion; National Financial Inclusion Strategy 2018–23 expected to improve access to finance. - Directors’ concerns: excess liquidity may reduce monetary policy effectiveness; monitor excess liquidity and non-performing loans with development-partner assistance. - Key banking indicators: - Capital adequacy ratio (CAR): 19.6 percent by 2018Q3. - NPLs to gross loans: 14.9 percent in 2018Q3 (over half in the personal sector). - Loan-to-deposit ratio: rose from 73 percent to 107 percent (regional average 2009–2016). - Liquid assets: represented 15 percent of total assets in 2015, built up to 29 percent by 2017. - Credit to the private sector: declined from 72 percent of GDP in 2014 to 60 percent of GDP in 2018Q2. - NPLs evolution: 7.3 percent to 12.6 percent pre-Cyclone Pam; 17.9 percent in 2018Q2. ### Risks, disaster resilience, and structural issues - Main risk: high exposure to natural disasters (Vanuatu is the world's most at-risk country per the UN World Risk Index). - Fiscal vulnerability: little fiscal space to address another natural disaster; PPG debt expected to breach the government’s 60 percent of GDP target by 2025 under current policies. - Disaster management: - NDMO exists but has funding and staffing shortages. - Proposed Disaster Risk Management Act (DRMA) and national emergency fund seen as opportunity to establish a multi-year fund with consistent government funding. - National emergency fund guidance: - Staff recommends multi-year, self-replenishing fund invested in safe highly-liquid foreign assets; pass DRMA bill and provide specific guidelines in 2019. - Suggested contribution: 0.5 percent of GDP annual contribution from 2022 onward in fiscal reform scenario. - Structural priorities: - Diversification in agriculture and tourism. - Improve business environment to trigger private investment, enhance competition and productivity. - Strengthen governance, reduce corruption vulnerabilities, and improve capacity. ### Executive Board assessment and policy recommendations - Directors’ recommendations (selected): - Continue engagement with development partners for technical assistance, capacity development, and financing. - Build fiscal buffers, strengthen governance, and enhance disaster resilience. - Continue fiscal discipline; prioritize infrastructure investment and pursue fiscal reform, including introducing corporate and personal income taxes while removing inefficient taxes. - Reduce reliance on ECP revenues. - Lower the PPG-debt-to-GDP target to 50 percent (noting reforms would allow this). - Strengthen RBV autonomy per IMF’s 2016 Safeguards Assessment. - Complete the Government Business Enterprises Act and the Tax Administration Act. - Strengthen financial sector regulatory and legal frameworks for fintech and AML/CFT; maintain correspondent banking relationships. - Implement the National Financial Inclusion Strategy 2018–2023. - Analyze excess liquidity and NPLs in the banking sector with development-partner assistance. - Adopt clear mandate and deadlines for the Distributed Ledger Technology taskforce to mitigate ML/TF risks. ### Debt sustainability, baseline projections, and fiscal reform scenario - Fiscal outlook: fiscal deficit expected to be around 4 percent of GDP over the medium-term on current policies. - Public debt evolution: - Public debt rose from 26.1 percent of GDP in 2014 to 52.4 percent in 2018. - DSA forecasts breach of 60 percent PPG-debt-to-GDP target in 2025 unless policies change. - Baseline selected projections (exact figures): - Real GDP growth rate: 2018: 3.2, 2019: 3.4, 2020: 3.0, 2021: 2.8, 2022: 2.8, 2023: 2.9, 2024: 2.9, 2029: 2.6 - CPI inflation rate: 2018: 2.9, 2019: 2.0, 2020: 2.2, 2021: 2.3, 2022: 2.5, 2023: 2.6, 2024: 2.6, 2029: 2.6 - Net lending (+)/borrowing (-): 2018: 4.8, 2019: -3.2, 2020: -3.6, 2021: -4.0, 2022: -4.1, 2023: -4.1, 2024: -4.1, 2029: -4.3 - Government revenue: 2018: 35.5, 2019: 27.9, 2020: 28.0, 2021: 28.0, 2022: 27.8, 2023: 27.7, 2024: 27.6, 2029: 26.8 - Taxes: 2018: 17.9, 2019: 17.7, 2020: 17.7, 2021: 17.7, 2022: 17.6, 2023: 17.6, 2024: 17.5, 2029: 17.2 - Economic citizenship programs: 2018: 9.9, 2019: 2.8, 2020: 2.6, 2021: 2.4, 2022: 2.2, 2023: 2.2, 2024: 2.2, 2029: 2.2 - Government expenditure: 2018: 30.7, 2019: 31.1, 2020: 31.6, 2021: 32.0, 2022: 31.9, 2023: 31.8, 2024: 31.6, 2029: 31.1 - Public and publicly guaranteed debt: 2018: 52.4, 2019: 52.9, 2020: 53.9, 2021: 55.3, 2022: 56.6, 2023: 57.9, 2024: 59.0, 2029: 65.1 - Illustrative fiscal reform scenario (exact figures): - Tax reform could lead to sustained revenue increase of around 2.5 percent of GDP. - Fiscal reform scenario projections (selected): - Net lending (+)/borrowing (-): 2018: 4.8, 2019: -3.2, 2020: -3.6, 2021: -2.9, 2022: -2.8, 2023: -2.8, 2024: -2.7, 2029: -2.6 - Government revenue: 2018: 35.5, 2019: 27.9, 2020: 28.0, 2021: 29.3, 2022: 29.2, 2023: 29.1, 2024: 28.9, 2029: 28.2 - Taxes: 2018: 17.9, 2019: 17.7, 2020: 17.7, 2021: 20.2, 2022: 20.1, 2023: 20.1, 2024: 20.0, 2029: 19.7 - Personal / corporate income taxes (with offset): 2018: 0.0, 2019: 0.0, 2020: 0.0, 2021: 2.5, 2022: 2.5, 2023: 2.5, 2024: 2.5, 2029: 2.5 - Economic citizenship programs: 2018: 9.9, 2019: 2.8, 2020: 2.6, 2021: 1.4, 2022: 1.2, 2023: 1.2, 2024: 1.2, 2029: 1.2 - Contribution to National Emergency Fund: 2022 onward: 0.5 (annual) - Public and publicly guaranteed debt (fiscal reform): 2018: 52.4, 2019: 52.9, 2020: 53.9, 2021: 54.3, 2022: 54.5, 2023: 54.5, 2024: 54.3, 2029: 54.3 - No national emergency fund contributions alternative path shows PPG debt falling to 49.6 by 2029. ### Financial sector policy and fintech - AML/CFT: - Vanuatu removed from FATF “grey list” in June 2018; implementation has just begun. - Continue improvements and request TA for risk-based supervision and capacity building at VFSC and FIU. - Fintech and DLT: - Authorities issued public warning: cryptocurrencies not recognized for payment and ICOs not allowed; moratorium on fintech initiatives declared. - DLT taskforce established; staff recommends clear public guidance on mandate, timelines, reporting deadlines, and focus on mitigating ML/TF risks. - Staff recommendations (selected): - RBV to monitor banking sector closely; IMF-led banking diagnostic assessment scheduled in May 2019. - Reduce NPLs and ensure all banks meet CAR to support correspondent banking relationships. - Advance financial inclusion via NFIS 2018–23: financial literacy, increased bank account enrollment, leveraging technology, financing MSMEs. - Strengthen regulatory and legal frameworks to support fintech use; approach development partners for assistance. - Integrated financial sector policymaking through regular meetings of RBV, VFSC, FIU and MFEM. ### Natural disaster preparedness, fiscal frameworks, and the national emergency fund - Recent contingency and drawdown practice: - Contingency provisions: increased from 25 million vatu in 2017 to 150 million vatu in 2019. - Legal drawdown authority: up to 1.5 percent of a given year’s total appropriation (around 330 million vatu or 0.3 percent of GDP in the 2018 budget) with prior COM approval. - Recent appropriations for disasters: 200 million vatu, additions of 40 million vatu, 200 million vatu, supplementary 362 million vatu; appropriated 532 million vatu for TC Hola and Ambae. - VNPF actions: released about 90 million vatu from retirement accounts for Ambae assistance; Cyclone Pam withdrawals were 1.7 billion vatu. - Proposed National Emergency Fund design and sizing: - Staff recommends multi-year fund, stable funding, investment in highly-liquid foreign assets, pass DRMA and provide guidelines in 2019. - Staff suggests possible earmarking of new taxes—perhaps 0.5 percent of GDP or higher—for permanent contributions. - Calibration evidence: government used 401.6 million vatu (about 0.5 percent of GDP) after Cyclone Pam; PCRAFI estimates average annual long-term losses of US$48 million due to cyclones and earthquakes. ### Data, statistical issues, and NSDP implementation - Data adequacy: broadly adequate for surveillance but large revisions, quality and timeliness remain concerns. - NSDP and e-GDDS: - Vanuatu published key macroeconomic data in a new NSDP end-April 2019 under e-GDDS. - Authorities committed to publish all core e-GDDS data categories except general government operations and stock market; opted to disseminate two supplementary datasets—labor market indicators and financial soundness indicators. - STA mission support and further TA planned (May 2019) to improve BOP and IIP data. - Statistical weaknesses and priorities: - National accounts: compiled annually only; plans to rebase GDP and develop quarterly measure delayed. - CPI weights based on 1998 household surveys covering Port Vila and Luganville only. - GFS: migration to GFSM 2014 underway; GFS data compiled monthly but not reported to STA for IFS (latest IFS data December 2016). - Monetary statistics: reported monthly; RBV reports FSIs quarterly. - Staff recommendation: seek further support from PFTAC and STA on national accounts compilation and local technical capacity. ### Key statistics and memorandum items - Population (2017): 278,726. - IMF quota: SDR 23.8 million (0.01 percent of total). - Main products and exports: Coconut oil, copra, kava, beef. - Key export markets: New Zealand, Australia, Japan. - Per capita GDP (2017): US$3,356. - Literacy rate (2012): 83.4 percent. - Nominal GDP (in billions of vatu): 100.7 (2018), 106.3 (2019), 112.0 (2020), 118.0 (2021). - Nominal GDP (in millions of U.S. dollars): 928 (2018), 947 (2019), 998 (2020), 1,051 (2021). - Exchange rates (vatu per U.S. dollar, period average): 108.5 (2018). - Deposit rate (vatu deposits, end of period): 1.4 (2018). - Lending rate (vatu loans, end of period): 10.3 (2018). *Source: IMF staff report for the 2019 Article IV Consultation (Vanuatu).* ### 3.5 percent of GDP, driven by windfall revenues from economic citizenship programs, despite ### 1vutea2019001 - 3.5 percent of GDP, driven by windfall revenues from economic citizenship programs, despite ### Recent developments and growth outlook - Real GDP growth: 3.2 percent in 2018, 4.4 percent in 2017, 3.5 percent in 2016, 0.2 percent in 2015, 2.3 percent in 2014. - Drivers in 2018: construction led by development-partner-financed infrastructure projects; tourism receipts grew 4.3 percent in 2018. - Agricultural sector: disrupted by a stronger cyclone season, volcanic eruptions, and weaker export prices. - Growth projections: - 2019: real GDP growth projected at 3.4 percent (slightly higher because of some delayed private investment). - 2020: projected to ease to 2.9 percent as fewer development-partner-financed projects occur and tourism and agricultural diversification become primary drivers. - Medium outlook: modest stability but constrained by natural disaster risk and a limited fiscal buffer. ### Fiscal position and public debt - 2018 fiscal outcome: - Fiscal surplus: 4.8 percent of GDP (reversing a -0.9 percent of GDP deficit in 2017). - Surplus driven by an additional 5.9 billion vatu from economic citizenship programs (ECPs). - Early debt repayments financed about 3.2 percent of GDP. - 2019 fiscal projection: - Modest fiscal deficit projected at -3.2 percent of GDP. - Fiscal trajectory: - Deficits expected to widen after 2019 reflecting spending on new infrastructure projects financed more by concessional lending than grants and decreased revenues from ECPs. - Public and publicly-guaranteed debt (end of period): 52.4 percent of GDP in 2018, projected 52.9 percent in 2019, 53.9 percent in 2020, 55.3 percent in 2021. - Government finance (selected items, percent of GDP): - Total revenue: 35.5 (2018), 27.9 (2019 projection), 28.0 (2020), 28.0 (2021). - Taxes: 17.9 (2018), 17.7 (2019), 17.7 (2020), 17.7 (2021). - Other revenue: 11.9 (2018), 4.9 (2019), 4.7 (2020), 4.5 (2021). - Grants: 5.6 (2018), 5.8 (2019), 5.8 (2020), 5.7 (2021). - Expenditure: 30.7 (2018), 31.1 (2019), 31.6 (2020), 32.0 (2021). - Net lending (+)/borrowing (-): 4.8 (2018), -3.2 (2019), -3.6 (2020), -4.0 (2021). - Expense (does not include acquisition of nonfinancial assets): 24.6 (2018), 25.8 (2019), 25.9 (2020), 25.9 (2021). - Acquisition of nonfinancial assets: 6.1 (2018), 5.3 (2019), 5.7 (2020), 6.1 (2021). ### External sector and current account - 2018 current account surplus: 3.5 percent of GDP, driven by strong revenue collection from ECPs and significant growth in remittances from seasonal worker programs in Australia and New Zealand. - Staff estimates: current account gap of 6.7 percent of GDP and a REER gap of -18.5 percent compared with fundamentals and desirable policy settings. - Outlook: - 2019 current account projected at -1.2 percent of GDP. - Current account deficits expected to widen thereafter as ECP inflows moderate and imports increase for new projects (including airplanes for the Shared Vision 2030 plan). - Balance of payments (selected, percent of GDP): - Trade balance: -30.3 (2018), -30.4 (2019), -34.0 (2020), -32.8 (2021). - Exports of goods: 6.4 (2018), 6.1 (2019), 6.1 (2020), 6.0 (2021). - Imports of goods: -36.7 (2018), -36.5 (2019), -40.0 (2020), -38.8 (2021). - Tourism receipts: 22.6 (2018), 24.7 (2019), 25.5 (2020), 24.2 (2021). - Capital and financial account: 7.9 (2018), 6.5 (2019), 6.4 (2020), 6.4 (2021). - Overall balance: 11.4 (2018), 5.2 (2019), 1.0 (2020), 1.6 (2021). - Gross international reserves (millions of U.S.$): 502.4 (2018), 552.0 (2019), 562.3 (2020), 579.0 (2021). - Reserves in months of prospective G&S imports: 12.0 (2018), 13.0 (2019), 11.8 (2020), 11.8 (2021). ### Monetary policy and financial sector - Monetary policy: - Exchange rate regime: vatu officially pegged to an undisclosed basket of currencies; peg used to import low foreign inflation. - Inflation kept within 0 and 4 percent range. - Monetary policy tools: statutory reserve deposit requirements and open market operations used to manage domestic pressures (including the 2018 VAT rate increase). - Monetary policy stance projected to remain neutral going forward. - Inflation: - Consumer prices (period average): 2.9 (2018), 2.0 (2019 projection), 2.2 (2020), 2.3 (2021). - Consumer prices (end period): 2.6 (2018), 2.6 (2019), 2.2 (2020), 2.5 (2021). - Financial sector: - Generally sound but with ample room to support financial inclusion. - National Financial Inclusion Strategy 2018–23 expected to improve access to finance. - Directors noted excess liquidity may reduce monetary policy effectiveness and recommended close monitoring. - Recommendations to analyze excess liquidity and non-performing loans with development-partner assistance. ### Risks, disaster resilience, and structural issues - Main risk: high exposure to natural disasters (Vanuatu is the world's most at-risk country per the UN World Risk Index). - Fiscal vulnerability: little fiscal space to address another natural disaster; public-and-publicly-guaranteed debt expected to breach the government’s target of 60 percent of GDP by 2025 under current policies. - Disaster management: - National Disaster Management Office (NDMO) exists but has funding and staffing shortages. - Proposed Disaster Risk Management Act with national emergency fund seen as opportunity to establish a multi-year fund with consistent government funding. - Structural priorities: - Diversification in agriculture and tourism to underpin growth. - Need for improvements in the business environment to trigger private investment, enhance competition and productivity. - Strengthen governance, reduce corruption vulnerabilities, and improve capacity. ### Executive Board assessment and policy recommendations - Executive Directors welcomed recovery from Cyclone Pam and focus on broader development objectives. - Directors’ key recommendations (selected): - Continue constructive engagement with development partners for technical assistance, capacity development, and financing. - Build adequate fiscal buffers, strengthen governance, and enhance disaster resilience. - Continue fiscal discipline; prioritize infrastructure investment and engage in fiscal reform, including introducing corporate and personal income taxes while removing inefficient taxes. - Reduce reliance on revenues from economic citizenship programs. - Lower the public-and publicly-guaranteed-debt-to-GDP target to 50 percent (noting reforms would allow this). - Strengthen Reserve Bank of Vanuatu (RBV) autonomy per IMF’s 2016 Safeguards Assessment. - Strengthen fiscal governance by completing the Government Business Enterprises Act and the Tax Administration Act. - Strengthen financial sector regulatory and legal frameworks to account for increasing fintech use and to maintain correspondent banking relationships; continue progress enforcing the AML/CFT framework. - Implement the National Financial Inclusion Strategy 2018–2023 to improve access to finance. - Leverage technical assistance programs with PFTAC and development partners to counteract corruption and improve RBV governance, financial supervision, and fiscal governance. - Analyze excess liquidity and non-performing loans in the banking sector with development-partner assistance. - Adopt a clear mandate with deadlines for reporting and recommending for the Distributed Ledger Technology taskforce to mitigate ML/TF risks from new fintech usage. ### Key statistics and memorandum items - Population (2017): 278,726. - IMF quota: SDR 23.8 million (0.01 percent of total). - Main products and exports: Coconut oil, copra, kava, beef. - Key export markets: New Zealand, Australia, Japan. - Per capita GDP (2017): US$3,356. - Literacy rate (2012): 83.4 percent. - Nominal GDP (in billions of vatu): 100.7 (2018), 106.3 (2019), 112.0 (2020), 118.0 (2021). - Nominal GDP (in millions of U.S. dollars): 928 (2018), 947 (2019), 998 (2020), 1,051 (2021). - Exchange rates (vatu per U.S. dollar, period average): 108.5 (2018). - Deposit rate (vatu deposits, end of period): 1.4 (2018). - Lending rate (vatu loans, end of period): 10.3 (2018). *Source: IMF staff report for the 2019 Article IV Consultation (Vanuatu).* ### 7. After a rebound in 2019, growth is projected to slow going forward. Real GDP growth, ### 7. After a rebound in 2019, growth is projected to slow going forward. Real GDP growth, ### Outlook and growth - Real GDP growth strengthened to 3.4 percent in 2019 and is projected to reach 2.9 percent by 2024. - Growth drivers and risks: - Supported by continued development-partner-financed infrastructure projects. - Agriculture outcomes could initially be weaker than previously expected because of negative impacts from natural disasters and the downward revision to the global outlook passing through to export demand. - Increased agricultural diversification efforts by the authorities are expected to mitigate some negative effects. - An increasing shift from public to private investment is expected as delayed private-sector tourism investment commences in 2019. ### Inflation and exchange rate - CPI inflation peaked at 2.9 percent in 2018, boosted by the 2.5 percentage point VAT increase. - Inflation is expected to moderate in the medium term to 2.6 percent. - Inflationary pressures are strongly linked to import prices. - Provided the Reserve Bank of Vanuatu (RBV) continues to successfully maintain its exchange rate peg, Vanuatu should benefit from low inflation in Australia and New Zealand. - Additional temporary downward pressures on inflation are expected from a weaker global outlook for commodity prices relevant to Vanuatu, and the government increasing funding for education tuition fees. - The RBV has maintained CPI inflation in the target range of 0 to 4 percent and raised the statutory reserve deposit (SRD) requirement to 5.25 percent. ### Current account, reserves, and external sector - Current account projections: - Turn into a deficit of 1.2 percent of GDP in 2019. - Followed by average deficits of 4.6 percent of GDP from 2020 to 2024. - Drivers of the current account turnaround: - Lower revenues from the ECPs. - Higher goods imports reflecting airplane orders by Air Vanuatu as part of the Shared Vision 2030 plan. - Offsets: - Slowing imports of goods from fewer development-partner-financed infrastructure projects. - Stronger tourism receipts from more cruise ship arrivals at new international wharfs, the renovated Bauerfield Airport, and increased tourist arrivals from the Shared Vision 2030 plan. - Gross international reserves are expected to cover 12.7 months of prospective imports in 2019 and remain strong from external financing through the current and financial accounts, though external debt repayments are expected to exert downward pressure on reserves in the medium term. ### Shared Vision 2030 (tourism plan) — Box 1 - Main goal: raise holiday visitors from 87,000 in 2017 to 300,000 in 2030. - Main targets: short haul markets (Australia, New Zealand, China) and new long haul markets (Japan, North America, Europe). - Air Vanuatu plans: - Improve air access and connections, expand fleet with more cost-effective and smaller aircraft. - Centerpiece: four 133-seat Airbus A220 airliners, with purchase rights for four more. - VTO role: build demand in core markets and develop awareness in new markets; market development needs at least two years to show returns. - Government support: Ministry of Foreign Affairs (bilateral air service agreements), Ministry of Education (pilot training programs), Ministry of Agriculture (increase food production for hospitality sector). - Expected spillovers: demand from tourism to agriculture, semi-skilled labor (handicrafts), public transportation; stimulate GDP growth, create employment, increase VAT and other tourism-related tax revenues. - Financing and risks: - Total VTO marketing spending is expected to reach over 1 billion vatu (about 1 percent of GDP) by 2023, although the source of such financing remains unclear. - Air Vanuatu is financially overexposed; a 1 billion vatu loan has been requested from the VNPF. Government deposits for some airplanes and potential guarantees create fiscal risks given Air Vanuatu is a SOE and VNPF is an SOE using depositors’ monies. ### Trade agreements and graduation from LDC status - PACER plus: - As members start cutting tariffs (assumed to begin in 2022 in the IMF staff forecast), Vanuatu would experience cheaper imports and mildly stimulated consumption. - Required tariff cuts are expected to reduce government revenues up to 1 percent of GDP in the long term. - Additional positive institutional effects could include technical assistance by Australia and New Zealand for customs modernization. - LDC graduation: - Vanuatu is expected to graduate from LDC status in 2020. - Graduation should not have a major impact on the growth trajectory. - Potential challenge: reduction of preferential market access for trade; the government is seeking alternative preferential access through free trade agreements. ### Risks (Summary Risk Assessment) - Main risk: natural disasters (High likelihood, High impact). - Other significant risks: - Delays in infrastructure projects (High likelihood, High impact). - Unstable revenues from ECPs (High likelihood, Medium impact). - Poorly-timed implementation of tax reform (Medium likelihood, High impact). - Weaker global growth (Medium likelihood, High impact). - Rising protectionism and retreat from multilateralism (High likelihood, High impact). - Large swings in energy prices (Medium likelihood, Medium/High impact). - Sharp tightening of global financial conditions (Medium likelihood, Medium impact). - Reduced financial services by correspondent banks (Medium likelihood, Medium impact). - Upside risks include positive spillovers from large infrastructure projects (Medium likelihood, High impact), higher-than-expected ECP revenues (Medium likelihood, Medium impact), and stronger-than-expected tourism growth (Low likelihood, Medium impact). ### Authorities’ views on outlook and risks - Authorities broadly concurred with staff’s assessment on developments, outlook and risks. - They expected completion of major infrastructure projects by 2019 to strongly support GDP growth. - Authorities’ GDP growth forecasts were on average slightly higher than staff’s from 2018 to 2020, driven primarily by stronger construction growth. - Authorities committed to fostering economic diversification in agriculture and tourism. - They agreed foreign reserves would slowly decline over the medium term because of high import demand and external debt repayment, offsetting inflows from development partner funds and temporary ECP revenues. - Prime risk identified by authorities: fragility of the tourism industry given dependence on trading partners and vulnerability to natural disaster disruption. ### Monetary policy recommendations - Monetary policy should hold the course to maintain Vanuatu’s stable exchange rate and low inflation. - Staff views: - RBV’s monetary policy stance is appropriate for the short term; inflation forecast around 2.6 percent calls for continuation of a neutral stance. - With increased downside risks to the global outlook and import prices, the RBV should maintain its stance but be ready to loosen if necessary. - In the medium term, excess liquidity in the banking sector may hinder monetary policy effectiveness; banks hold large reserves split between voluntary reserves and excess liquidity. - RBV should investigate factors behind large reserves with large financial institutions. - RBV and government can safeguard monetary policy effectiveness by facilitating competition in the banking sector. - Authorities agreed with staff’s view; they raised concerns about excess liquidity coexisting with high lending rates that restrain credit to the private sector. ### Financial sector findings and recommendations - Key statistics: - Capital adequacy ratio (CAR) was 19.6 percent by 2018Q3, with most banks above the 12 percent minimum. - NPLs to gross loans ratio was 14.9 percent in 2018Q3 (over half in the personal sector). - Sector composition: five major banks and a large financing company, plus five credit unions and some cooperatives (details on ownership and expected regulatory changes noted). - Progress on AML/CFT legal framework led to Vanuatu’s removal in 2018 from the FATF “grey list”; implementation has just begun. - Fintech: - Authorities issued a public warning that cryptocurrencies were not recognized for payment and ICOs were not allowed; moratorium on fintech initiatives declared. - A Distributed Ledger Technology (DLT) taskforce was established to consider related issues. - Staff recommendations: - RBV needs to monitor the banking sector carefully and continue strengthening supervisory framework; IMF assisting with a banking diagnostic assessment in May 2019 and ongoing PFTAC technical assistance. - Reduce NPLs and ensure all banks meet CAR to ensure financial stability and support correspondent banking relationships. - Advance financial inclusion through the National Financial Inclusion Strategy 2018–23 (NFIS) and NBV initiatives (financial literacy, increased bank account enrollment, leveraging technology, financing MSMEs); heed credit risk in the personal sector. - Continue improvements to AML/CFT regime implementation and request technical assistance for risk-based supervision and capacity building at VFSC and FIU to alleviate correspondent banking pressures. - Strengthen regulatory and legal frameworks to support fintech use; recommended preparatory actions before expanding into new technologies: - Provide clearer public guidance regarding the DLT taskforce, including a statement of mandate, timelines for reporting and recommendations, and focus on mitigation of ML/TF risks with sufficient staffing for regulatory agencies. - Ensure implementation of the AML/CFT regime and effective oversight of the financial sector. - Consider approaching development partners for assistance. - Integrated financial sector policymaking through regular meetings of the RBV, VFSC, FIU and MFEM is recommended to share information and avoid duplication. ### Fiscal and structural policy guidance - Fiscal policy should build buffers against natural disasters by completing tax reform, reducing reliance on ECP revenues, and rationalizing spending. - Structural policy should focus on diversification to foster stable growth and resilience. - Development partners can support these policies through funding and technical assistance. *International Monetary Fund* ### 29. The fiscal deficit is expected to be around 4 percent of GDP over the medium-term on ### 29. The fiscal deficit is expected to be around 4 percent of GDP over the medium-term on ### Fiscal outlook and debt sustainability - The fiscal deficit is expected to be around 4 percent of GDP over the medium-term on current policies, requiring further action on revenue mobilization and expenditure prioritization to maintain debt sustainability. - The government customarily runs a surplus of domestic revenues over government-funded expenditures. Expenditures prioritize infrastructure, tourism, education and healthcare, based on the National Sustainable Development Plan 2015 to 2030 (NSDP). - The revenue base is limited, depending on VAT, excise taxes, tariffs and hard-to -predict revenues from the ECPs. There is reliance on development partner grants and concessional lending, which is the source of the deficit. - The current trajectories are expected to be inconsistent with the 60 percent public-and-publicly-guaranteed (PPG) debt-to -GDP target adopted in 2019. Key historical and projected public debt dynamics: - Public debt rose from 26.1 percent of GDP in 2014 to 52.4 percent of GDP in 2018. - The DSA forecasts the government will breach its 60 percent PPG-debt-to-GDP target in 2025 unless policies change. ### Debt management framework - The Ministry of Finance and Economic Management’s (MFEM) updated debt management strategy is almost complete, with strong rules regarding concessionality. - Once implemented, the strategy will be complemented by regulations that include a technical committee to make policy recommendations to a debt management committee composed of senior government officials. - Some regulations might be embedded in law by amending the Public Finance and Economic Management Act. Consultation with development partners could strengthen the effectiveness of such emendations. ### Staff’s views and policy recommendations - The success of the debt management strategy is at risk in the medium term without changes in fiscal policy to maintain buffers in the event of potential natural disasters. - The risk of external debt distress is moderate, now attributable to a perceived shift in the speed of accumulation of concessional lending instead of grants after the November 2018 loan agreement with China. - Staff recommends that authorities: - Complete the proposed 2017 tax reforms to increase revenues, including introducing corporate and personal income taxes and shifting away from less efficient taxes that impede growth (especially those related to trade and government procedures). Benefits noted: - Broadens the basis for revenues, increasing resilience in the face of shocks. - Allows for a more progressive tax system: VAT is generally regressive, while personal income tax can be calibrated to skew away from low-income earners. - A corporate income tax would ease the burden on low-profit-margin firms relative to the current turnover tax. - Stabilize expenditures as a share of GDP. This assumes compensation of employees grows only with inflation and does not repeat the government’s one-off 2018 level adjustment. - Focus on grants and loans with higher concessionality. If new bilateral financing after 2022 were grants rather than concessional lending, the PPG debt target would not be breached and the PPG-debt-to -GDP ratio would stabilize around 56 percent. - Limit and prioritize loans, especially less concessional lending. Preventing the breach of the debt target should be a major criterion when accepting loans. Prioritize which loans to accept and limit loans to SOEs or by the VNPF that would likely be publicly guaranteed. ### Illustrative fiscal reform scenario and quantitative impacts - An illustrative fiscal reform scenario suggests the deficit could be less than 3 percent of GDP. - Tax reform could lead to a sustained revenue increase of around 2.5 percent of GDP. - The extra revenue could help achieve a lower deficit even allowing for -1.0 percent of GDP lower ECP revenues and permanent funding for natural disaster relief of 0.5 percent of GDP. - Prioritization of new infrastructure spending to lower concessional borrowing by 10 percent would reduce expenditures around 0.3 percent of GDP. This would stabilize the PPG-debt-to -GDP ratio around 54 percent. - Real GDP growth would be somewhat lower for 3 years under the reform scenario. Selected baseline projections (exact figures from table) - Real GDP growth rate: 2018: 3.2, 2019: 3.4, 2020: 3.0, 2021: 2.8, 2022: 2.8, 2023: 2.9, 2024: 2.9, 2029: 2.6 - CPI inflation rate: 2018: 2.9, 2019: 2.0, 2020: 2.2, 2021: 2.3, 2022: 2.5, 2023: 2.6, 2024: 2.6, 2029: 2.6 - Net lending (+)/borrowing (-): 2018: 4.8, 2019: -3.2, 2020: -3.6, 2021: -4.0, 2022: -4.1, 2023: -4.1, 2024: -4.1, 2029: -4.3 - Government revenue: 2018: 35.5, 2019: 27.9, 2020: 28.0, 2021: 28.0, 2022: 27.8, 2023: 27.7, 2024: 27.6, 2029: 26.8 - Taxes: 2018: 17.9, 2019: 17.7, 2020: 17.7, 2021: 17.7, 2022: 17.6, 2023: 17.6, 2024: 17.5, 2029: 17.2 - Economic citizenship programs: 2018: 9.9, 2019: 2.8, 2020: 2.6, 2021: 2.4, 2022: 2.2, 2023: 2.2, 2024: 2.2, 2029: 2.2 - Government expenditure: 2018: 30.7, 2019: 31.1, 2020: 31.6, 2021: 32.0, 2022: 31.9, 2023: 31.8, 2024: 31.6, 2029: 31.1 - Debt interest payments: 2018: 1.0, 2019: 0.9, 2020: 0.9, 2021: 0.9, 2022: 0.9, 2023: 1.0, 2024: 1.0, 2029: 1.1 - Public and publicly guaranteed debt: 2018: 52.4, 2019: 52.9, 2020: 53.9, 2021: 55.3, 2022: 56.6, 2023: 57.9, 2024: 59.0, 2029: 65.1 Selected fiscal reform scenario figures (exact) - Real GDP growth rate: 2018: 3.2, 2019: 3.4, 2020: 3.0, 2021: 2.4, 2022: 2.6, 2023: 2.8, 2024: 2.9, 2029: 2.6 - CPI inflation rate: 2018: 2.9, 2019: 2.0, 2020: 2.2, 2021: 2.3, 2022: 2.5, 2023: 2.6, 2024: 2.6, 2029: 2.6 - Net lending (+)/borrowing (-): 2018: 4.8, 2019: -3.2, 2020: -3.6, 2021: -2.9, 2022: -2.8, 2023: -2.8, 2024: -2.7, 2029: -2.6 - Government revenue: 2018: 35.5, 2019: 27.9, 2020: 28.0, 2021: 29.3, 2022: 29.2, 2023: 29.1, 2024: 28.9, 2029: 28.2 - Taxes: 2018: 17.9, 2019: 17.7, 2020: 17.7, 2021: 20.2, 2022: 20.1, 2023: 20.1, 2024: 20.0, 2029: 19.7 - Personal / corporate income taxes with offset: 2018: 0.0, 2019: 0.0, 2020: 0.0, 2021: 2.5, 2022: 2.5, 2023: 2.5, 2024: 2.5, 2029: 2.5 - Economic citizenship programs: 2018: 9.9, 2019: 2.8, 2020: 2.6, 2021: 1.4, 2022: 1.2, 2023: 1.2, 2024: 1.2, 2029: 1.2 - Government expenditure: 2018: 30.7, 2019: 31.1, 2020: 31.6, 2021: 32.2, 2022: 32.0, 2023: 31.8, 2024: 31.6, 2029: 30.8 - Contribution to National Emergency Fund: 2022 onward: 0.5 (annual) - Debt interest payments: 2018: 1.0, 2019: 0.9, 2020: 0.9, 2021: 0.9, 2022: 0.9, 2023: 0.8, 2024: 0.8, 2029: 0.6 - Public and publicly guaranteed debt: 2018: 52.4, 2019: 52.9, 2020: 53.9, 2021: 54.3, 2022: 54.5, 2023: 54.5, 2024: 54.3, 2029: 54.3 - No national emergency fund contributions (alternative path): 2018: 52.4, 2019: 52.9, 2020: 53.9, 2021: 53.8, 2022: 53.5, 2023: 53.0, 2024: 52.3, 2029: 49.6 Assumptions (exact statements) - Personal and Corporate Income Taxes (with reductions in less efficient taxes) increase government revenues annually = -2.5 percent of GDP - Government's concessional borrowing is 10 percent lower = -0.3 percent of GDP (approximate) - Lower government annual acceptance rate of applicants for ECPs = +1.0 percent of GDP (about 50 people) - Optional: Annual government contribution to the national emergency fund = +0.5 percent of GDP ### Recommended medium-term target and authorities’ views - Staff recommends the authorities then aim for a 50 percent PPG debt-to-GDP target to provide an additional buffer of up to 10 percent of GDP against fiscal risks from natural disasters. - Authorities’ views: - Committed to a balanced budget outside development partners’ operations; development-partner-financed infrastructure projects have driven the increase in debt since 2014. - Recognized upward pressure on maintenance costs for infrastructure and that revenue mobilization, including introduction of personal and corporate income taxes, may be needed as ECP revenues are not stable. - Plan to run down solid cash reserves accumulated from ECP revenues and were finalizing debt management strategy, debt on-lending policy and debt management unit procedure manuals. - Committed to focus on grants and high concessional loans and maintain a grant-element target of at least 35 percent on new loans. They find it challenging to provide guarantees for SOE borrowing in the near future. ### Natural disaster preparedness and the national emergency fund - Authorities have strengthened the NDMO, launched the National Policy on Climate Change and Disaster-Induced Displacement, and introduced the Disaster Risk Management Act 2018 (DRMA) bill to replace the Natural Disaster Act 2006. - Staff’s views on the national emergency fund: - Should be the central element of Vanuatu’s fiscal framework, carefully designed with stable and substantial funding (Annex VII). - The fund should be a multi-year fund that would grow over time, absent of any drawdowns, with an investment strategy focused on safe highly -liquid foreign assets. - Authorities should pass the DRMA bill and provide specific guidelines on the proposed national emergency fund in 2019. - The authorities could approach development partners to secure an endowment to which it would annually contribute. - Additional recommended measures: - Allocate more funds as part of the annual budget prioritization exercise to meet staffing targets and strengthen training at the NDMO. - Stronger monitoring and evaluation of the framework’s performance. - Complementing large domestic buffers with insurance and externally financed instruments, such as contingent credit lines with multilateral partners. - Updating the Vanuatu National Adaptation Plan for Action 2006, focusing on investing in and maintaining resilient infrastructure consistent with a multi-year fiscal strategy. - Authorities increased contingency provision from 50 million vatu in 2018 to 150 million vatu in 2019 and were considering a Cat DDO with the WBG; they withdrew from PCRAFI. ### Structural policies and governance priorities - Increased activity in agriculture and tourism; EDF-11 grants include a EUR 3 million allocation to enhance production and value chains for beef, coconut products, and fruits and vegetables. - Staff’s recommendations: - Continue to promote agricultural diversification and link small landowners into stronger marketing cooperatives. - Examine proposed loans in the context of debt sustainability and MFEM’s best practices on concessionality. - Improve business environment: simplify customs procedures, regulations for FDI and employment, and reduce bottlenecks in registering property and land titling. - Strengthen RBV governance, internal controls and autonomy by amending the RBV Act and continue engagement with PFTAC and the IMF Legal Department. - Complete the Tax Administration Act TIN regime and pass the Government Business Enterprises Act bill; staff the Government Business Enterprise Unit for monitoring and governance of SOEs. *Source: Vanuatu — IMF staff report content provided in the supplied PDF excerpt.* ### 49. Statistical issues. While broadly adequate for surveillance purposes, large revisions, quality ### 1vutea2019001 - 49. Statistical issues. While broadly adequate for surveillance purposes, large revisions, quality ### Statistical issues - While broadly adequate for surveillance purposes, large revisions, quality and timeliness remain a concern for some data (Informational Annex). - Vanuatu has a National Summary Data Page as part of the e-GDDS, with some work still needed (Annex VIII). - Staff recommendation: - Seek further support from PFTAC and STA on the compilation and development of national accounts statistics and improvements to local technical capacity. ### Staff appraisal — Reconstruction and macro outlook - Reconstruction after Cyclone Pam is near completion with full recovery in sight, four years after the cyclone. - Authorities shifting focus to implementing broader development plans slowed by rebuilding; this will require fiscal discipline and further reforms to maintain debt sustainability. - Continued constructive engagement with development partners for technical assistance, capacity development, and concessional and grant-based funding is recommended to strengthen governance and reduce vulnerabilities to corruption. ### Growth, diversification, and risks - Projections and expectations: - Real GDP growth is set to average 3.3 percent from 2018 to 2020. - Real GDP growth is expected to be 2.9 percent by 2024, underpinned by diversification in agriculture and tourism. - Policy and strategy notes: - Current agricultural diversification efforts are positive, but authorities need to consider domestically-funded agricultural policies beyond reliance on development partner funding. - The integrated air travel and tourism plan Shared Vision 2030 is expected to drive tourism growth. - Risks: - New debt from airplane purchases by Air Vanuatu and optimistic air-travel tourist arrival assumptions increase uncertainty after 2021. - The government must carefully consider the degree of its financial involvement, including exposure via SOEs such as the VNPF, to maintain debt sustainability. - Diversification strategy should be complemented by improvements in the business environment to trigger private investment and enhance competition and productivity. ### Monetary policy and inflation - Monetary stance: - The monetary policy stance is appropriate. - Inflation is expected to stay near the middle of the 0-4 percent target band. - The exchange rate basket peg administered by the RBV remains broadly stable, allowing for low inflation from imported goods. - Given downside risks to growth and inflation, the RBV should stand ready to ease as needed. ### External sector and reserves - The current strength of the external position is temporary, driven by strong revenues from the economic citizenship programs. - Outlook: - A current account deficit averaging 4.0 percent of GDP is expected going forward. - This can be mitigated by a stronger fiscal position. - Reserves and pressures: - Development projects exert pressure on external balances while stimulating growth; FDI and other investment have weakened as sources of financing. - Export growth remains weak as the agriculture sector recovery is still sluggish; tourism arrivals should recover in 2019 after delays. ### Fiscal policy, debt, and recommendations - Fiscal outlook and projections: - Domestic revenues and government-funded expenditures are projected to be in balance or surplus. - Given the strong pipeline of development projects with associated concessional lending, the overall fiscal deficit is expected to be around 4 percent of GDP through 2024. - This trajectory leads to debt exceeding the public-and-publicly-guaranteed-debt-to-GDP target of 60 percent of GDP as of 2025. - Recommendations: - Engage in further fiscal reform, including introducing corporate and personal income taxes while removing inefficient taxes as outlined in the 2017 Vanuatu Revenue Review. - Reduce reliance on ECP revenues. - Prioritize the reduction of future borrowing for infrastructure. - Aim to reduce pressure on public debt and allow for a lower public-and-publicly-guaranteed-debt-to-GDP target of 50 percent. ### Financial sector stability and inclusion - Overall assessment: - The financial sector is broadly stable but should be carefully monitored because of excess liquidity and vulnerabilities to ML/TF. - Most banks are performing well, but some face uncertainties over NPLs and capital adequacy. - Key points: - Excess liquidity may be reducing monetary policy effectiveness; the extent is unclear. - An IMF-led banking sector diagnostic assessment in May 2019 is expected to provide clarification and possible solutions. - Ongoing progress in strengthening the AML/CFT framework should help maintain correspondent banking relationships and support financial inclusion. - The National Financial Inclusion Strategy 2018–2023 is commended and expected to provide clear gains for financial inclusion. - Regulatory and legal frameworks should be examined and strengthened to account for increasing fintech use. - Authorities should clarify the mandate and responsibilities of the Distributed Ledger Technology (DLT) taskforce and publicly provide relevant information. ### Disaster risk management and funding - The national disaster planning framework has improved substantially; further strengthening should focus on meeting future funding demands. - The proposed Disaster Risk Management Act 2018 establishes a national emergency fund. - Staff recommendation: - Use the fund as an opportunity to establish a multi-year, self-replenishing fund with consistent government funding, possibly with an initial endowment from development partners. - Continue efforts to increase insurance and externally financed instruments. ### Governance and institutional reforms - Vanuatu is vulnerable to corruption from gaps in governance due to limited administrative capacity. - Recommended priorities: - Strengthen the RBV’s autonomy, in line with recommendations from the IMF’s 2016 Safeguards Assessment. - Strengthen fiscal governance by completing the Tax Administration Act (a precondition for tax reform). - Complete the Government Business Enterprises Act to strengthen SOE governance. ### Operational recommendation - It is recommended that the next Article IV Consultation takes place on the standard 12-month cycle. *Source: IMF staff assessment and projections as presented in the provided content.* ### Annex I. Authorities’ Responses to Fund Policy Advice ### Annex I. Authorities’ Responses to Fund Policy Advice ### Fiscal Policy - Fund recommendation: Embarking on medium-term fiscal adjustment to address the rising debt and rebuild fiscal buffers. Measures include (i) restraining recurrent spending and (ii) prioritization and selection of public infrastructure projects. - Authorities’ actions: - In 2018, fiscal revenue windfalls from ECPs partially used for debt repayments. - In November 2018, a new concessional loan agreement with China for road construction was reached. - Fund recommendation: Implement tax reform to introduce personal and corporate income taxes in a timely and orderly manner. - Authorities’ actions: - The authorities plan to revise tax administration bill, which prescribes an introduction of a tax identification number. - The authorities’ target of introducing the income tax in 2019 is likely to be missed. - Fund recommendation: Update the debt management strategy annually to safeguard debt sustainability. - Authorities’ actions: - The authorities will finalize an updated debt strategy in 2019. - Fund recommendation: An appropriate medium-term fiscal anchor should be considered based on the nominal public and publicly-guaranteed debt-to-GDP ratio in the range of 50–60 percent. - Authorities’ actions: - The authorities adopted a public-and-publicly-guaranteed debt ceiling as 60 percent of GDP. This includes an implicit understanding that there should be a buffer left for responding to natural disasters, which was also only implicit in the Fund recommendation. ### Monetary Policy - Fund recommendation: Tighten its monetary policy stance through a gradual increase of reserve requirements, with due consideration to financial stability. - Authorities’ actions: - In April 2018, the RBV tightened policy by raising the policy rate by 0.05% to 2.9% and the SRD requirement by 0.25% to 5.25%, without any financial stability implications. - Fund recommendation: A comfortable level of international reserves should be maintained, at above 5 months of imports, to prepare for debt repayment obligations and to provide a buffer against potential external shocks. - Authorities’ actions: - Throughout 2018, foreign exchange reserves continued to remain above 5 months of imports as identified by the External Sector Assessment in the 2018 Staff Report. ### Exchange Rate Policy - Fund recommendation: Maintain the exchange rate basket peg at the current level for now but be ready to review and adjust the level and composition if external position worsens significantly. - Authorities’ actions: - The basket peg regime has been working well, and the REER has remained roughly stable. ### Financial Sector Policy - Fund recommendation: Increase access to financial services and ensure inclusive growth. - Authorities’ actions: - In March 2018, the authorities launched the National Financial Inclusion Strategy 2018-2023. - Fund recommendation: Closely monitor individual banks' liquidity situation to secure the stability of financial system and strengthen banking supervision frameworks. - Authorities’ actions: - The RBV continued monitoring developments in domestic banking system, including profitability and NPLs. - Fund recommendation: Accelerate the implementation of the AML/CFT action plan and ensure its legal framework is in line with international standards. - Authorities’ actions: - In June 2018, Vanuatu was removed from the FATF “greylist.” - The authorities began looking for assistance from other jurisdictions to put in place a proper legal framework for blockchain and distributed ledger technologies. ### Structural Policy - Fund recommendation: Support the private sector by improving the ease of doing business to promote diversification. - Authorities’ actions: - Will use E.U. EDF-11 grants for production and processing of beef, coconut products and fruits and vegetables. - Shared Vision 2030 integrated plan for tourism and air travel. ### Natural Disasters and Climate Change - Fund recommendation: Enhance preparedness to natural disaster risk by strengthening risk assessment and planning, building buffers, and promoting resilient infrastructure and adequate maintenance. - Authorities’ actions: - In December 2018, the Disaster Risk Management Act 2018 bill was tabled in Parliament, including the establishment of an emergency fund, to be defined by the MFEM. - In September 2018, the authorities launched the National Policy on Climate Change and Disaster-Induced Displacement. --- ### Annex II. External Sector Assessment ### Key findings (2018) - The external sector position was stronger compared with fundamentals and desirable policy settings; policy gaps, on net, help improve the external sector position. - The external position is driven largely by windfall revenues from the economic citizenship programs (ECPs); without ECPs the external sector position would have been moderately weaker. - The revised EBA-lite current account (CA) approach indicates a large current account surplus in 2018 and is the focus of the assessment. ### EBA-lite – CA approach results (2018) - CA – Actual: 3.5% - Cyclically adjusted CA: 3.7% - CA – Norm: -3.0% - Elasticity: -0.4 - CA – Gap (Adjusted): 6.7% - of which: policy gap 0.8% - REER Gap (Adjusted): -18.5% ### Additional quantitative points - The government received around US$9 million (about 10 percent of GDP) from the ECPs, almost 4 times higher than estimated in the 2018 budget. - Without the ECP windfall, the current account could have fallen to an estimated deficit between 5–6 percent of GDP and a current account gap around -2.5 percent of GDP. - The current account deficit is expected to stabilize around 5 percent of GDP after 2020 as strong revenues from the ECPs are expected to be temporary. ### Foreign exchange reserves and reserve adequacy - Gross official reserves stood at US$502 million (around 12 months of imports) in 2018. - Staff estimate of adequate reserves: between 4.1 to 5.5 months of imports, depending on probability of a large shock event (sample average 50 percent; Vanuatu vulnerability 75 percent). - The RBV objective: maintain enough official reserves to cover at least 4 months of imports. - Historical shock reference: Cyclone Pam in 2015 destroyed between 70 and 80 percent of GDP, corresponding approximately to the total amount of reserves in 2018. --- ### Annex III. Graduation from the Least Developed Country (LDC) Category ### Key points - Vanuatu was included in the LDC category in 1985. - Graduation decision: Vanuatu is scheduled to graduate from the LDC category in December 2020; the preparatory period was extended three years following Cyclone Pam. - Vanuatu met all three graduation criteria at the 2018 triennial review. ### LDC criteria indicators (as presented) - Criteria 20142015201620172018 - GNI per capita (US$) 1,2302,8693,0113,0923,0703,014 - Human Asset Index6679.278.978.778.578.5 - Economic Vulnerability Index3246.646.346.147.147 ### Implications and transition measures - Impact on bilateral and multilateral cooperation likely limited; development partners consider multiple factors beyond LDC status. - Vanuatu’s GNI per capita in 2018 is US$3,014, higher than the established threshold of US$1,145 in 2019; the Small Island Economies Exception allows continued access to IDA concessional terms despite graduation. - Vanuatu can continue to access benefits of the UN’s Enhanced Integrated Framework (EIF) automatically for three years after graduation. - Preferential market access: graduation might affect duty-free quota-free market access under some GSP schemes; PACER Plus provisions could delay tariff reductions for LDCs and specify timelines in the event of graduation. - Government actions: National LDC Coordinating Committee established in 2017; authorities encouraged to start bilateral discussions with main trading partners. --- ### Annex IV. Risk Assessment Matrix ### Upside risks (selected) 1. Positive spillovers from large infrastructure projects - Likelihood: Medium - Impact: High - Policy response: - Take advantage of upside surprises to lock in an improvement in fiscal buffers and to foster sustainable medium-term growth. - Use some of the gains to invest in resilient infrastructure. 2. Higher-than-expected revenues from ECPs - Likelihood: Medium - Impact: Medium - Policy response: - On an annual basis, use excess ECP revenues annually as national emergency fund contributions up to a threshold (such as 1 percent of GDP) and devote the remainder to reducing public sector debt. 3. Stronger-than-expected growth in the tourism sector - Likelihood: Low - Impact: Medium - Policy response: - Assess the economic and environmental sustainability of development plans. - Continue to promote cooperation among public and private partners as in Shared Vision 2030. - Stimulate investment by improving business environment through improved regulation and facilitating credit provision. ### Downside risks (selected) 1. Natural disasters and climate change - Likelihood: High - Impact: High - Policy response: - Build greater resilience to natural disasters by enhancing adaptation measures (better infrastructure, territorial planning, fiscal buffers). - Improve disaster response planning with more swift coping mechanisms. - Seek global/regional climate financing opportunities. - Additional downside policy responses: - Prioritize public investment project selection and implementation. - Stimulate private sector investment by improving business environment and facilitating credit provision. *Source: Annex I–IV, IMF staff report content as provided.* ### 2. Delays in implementation of infrastructure projects ### 2. Delays in implementation of infrastructure projects ### Risks and implications - "The delays in implementation of major infrastructure projects could have negative spillovers into the economy." - High/Medium risk classification for delays in infrastructure implementation (as presented in the RAM context). - Poorly-timed or delayed tax reform and project implementation could cause: - contractions in household consumption and business investment; - weaker-than-expected social spending or higher-than-expected levels of public debt. ### Risk Assessment Matrix entries (selected risks, likelihoods, and staff recommendations) - 3. Unstable revenues from ECPs - Staff assessment: Medium likelihood / High impact. - Key point: Stronger revenues could motivate delays in tax reform, while weaker could lead to a larger fiscal deficit. - Recommendations: - "Continue to push ahead on tax reform and maintain the current prudent approach to forecasting and spending the ECPs’ excess revenues." - "Seek TA from the IMF on the implementation of tax reforms to secure the expected revenue return and fairness of tax system." - "Pass enabling legislation in a timely fashion, preferably in 2019." - 4. Poorly-timed implementation of tax reform - Staff assessment: Medium likelihood / High impact. - Recommendations: - "Accelerate infrastructure investment where possible to stimulate short-term domestic demand and improve long-term competitiveness." - "Facilitate diversification by introducing new activities and expanding into new markets." - 5. Weaker-than-expected global growth, especially China and Australia - Staff assessment: High likelihood / High impact. - Key point: A decline in exports and tourism receipts from China and/or Australia would worsen the current account, reduce fiscal revenue, and weaken the reserves buffer. - Recommendations: - "Accelerate infrastructure investment where possible to stimulate short-term domestic demand and improve long-term competitiveness." - "Facilitate diversification by introducing new activities and expanding into new markets." - "Engage in regional multilateral deals to offset loss of support from the global system." - 6. Rising protectionism and retreat from multilateralism - Staff assessment: Medium likelihood / Medium/High impact. - Recommendations: - "Expand domestic power sources where available, such as hydroelectric and geothermal (for some islands)." - "Expand efforts to deepen and develop the financial sector and improve the monetary transmission mechanism to assist the foreign exchange market." - "Diversify the export base to support the current account." - 7. Large swings in energy prices - Staff assessment: Medium likelihood / Medium impact. - Key point: Sharp swings could drive up inflation, slow lending and output, worsen the current account, drain foreign exchange reserves, and dampen consumption and investment. - Recommendations: - Short-term: "Authorities should continue with the basket currency peg." - Medium term: "Consider changes to basket currencies and weights if the underlying fundamentals worsen." - 8. Sharp tightening of global financial conditions - Staff assessment: Medium likelihood / Medium impact. - Key point: Strengthening of the U.S. dollar may challenge management of the basket peg, exacerbate real exchange rate appreciation, and erode competitiveness. - Recommendations: - "Follow recommendations of banking diagnostic assessment." - "Ensure timely financial reporting, meet AML/CFT ownership reporting requirements, improve banking regulation and supervision to mitigate risks." - "Continue to strengthen the AML/CFT framework and tax transparency in line with the international standards through TA from development partners." - 9. Reduced financial services by correspondent banks (de-risking) - Staff assessment context: Significant impact on money transfer operators and banks, increasing the cost of inward remittances. ### Exchange-rate competitiveness and sectoral implications (Annex V summary) - Vanuatu exhibits relatively stable effective exchange rates compared with other Pacific island small states; that stability: - may be somewhat disadvantageous for tourism, and to a lesser extent agriculture. - Australia accounts for roughly "54 percent of tourist arrivals after Cyclone Pam." - The Vanuatu vatu has slightly depreciated in both nominal and real terms against the Australian dollar, making Vanuatu more competitive for Australian tourists. - For agriculture, "Australia accounts for only 18 percent (over the 2010-2015 period)" of agricultural exports; over half are to other Asian and Pacific economies (Philippines, Malaysia, Japan, New Caledonia, Fiji, and Papua New Guinea). - Sectoral REER findings: - "Within Vanuatu’s economy, the tourism sector has faced a price competitiveness loss since 2014, while agriculture producers were less affected by exchange rate fluctuations than what the baseline REER suggests into mid-2017, after which point the agricultural sector more or less tracks the baseline REER." ### Excess liquidity and monetary policy effectiveness (Annex VI summary) - Context and drivers - Vanuatu has rapidly accumulated liquid reserves since the GFC around 2009. - In 2018, strong revenue inflows from the economic citizenship programs (ECPs) "have bring up additional liquidity in the banking system as open market operation were insufficient to sterilize them." - The accumulation of free reserves is a longstanding problem in Vanuatu. - Definitions and causes - Free reserves = more liquid reserves than required to meet central bank obligations and lending. - Two common causes: remittances and transfers from development partners (conversion of foreign currency into domestic currency increases central bank official reserves and commercial bank deposits). - Central bank tool: statutory reserve deposit (SRD) requirement to offset free reserves. - Measured developments and key statistics - Vanuatu had the highest loan-to-deposit ratio in the region on average between 2009 and 2016; the ratio rose from "73 percent to 107 percent." - Liquid assets held by commercial banks: represented "15 percent of total assets in 2015" and built up to "29 percent by 2017," roughly stabilizing afterwards. - Credit to the private sector declined from "72 percent of GDP in 2014 to 60 percent of GDP in 2018Q2." - Nonperforming loans (NPLs): - rose from "7.3 percent to 12.6 percent of total gross loans" before Cyclone Pam; - reached "17.9 percent of total gross loans in 2018Q2." - Share of NPLs net of provisions to capital: - "sharply declined from 70 percent in 2015 to 36.5 percent in 2016 but moved up to 55.0 percent by 2018Q2." - ECP revenue inflow in 2018: "The government received around US$90 million as revenue inflows from ECPs in U.S. dollars in 2018." - Implications for monetary policy transmission - Excess liquidity can weaken passthrough from policy actions to interest rates; contractionary policy must reduce free reserves below voluntary levels to be effective. - Other frictions limiting pass-through: monopolistic bank behavior, high switching costs, sticky lending rates, asymmetric information, and relationship banking. - Increasing domestic lending does not absorb excess liquidity; only sterilized interventions (e.g., sale of foreign currency on the open market) reduce the monetary base. - Current RBV framework and recent actions - The Reserve Bank of Vanuatu (RBV) manages a pegged exchange rate for reserve stability and a CPI inflation target range of "0-4 percent." - RBV increased the SRD requirement from "5 to 5.25 percent" and used open market operations in 2018. - These instruments are aimed at targeting domestic inflationary pressures given import-price-driven inflation dynamics. *Source: 1vutea2019001 - 2. Delays in implementation of infrastructure projects.* ### 16. After the Cyclone Pam in 2015, a large share of foreign exchange inflows was not ### 16. After the Cyclone Pam in 2015, a large share of foreign exchange inflows was not ### FX inflows, sterilization, and RBV balance sheet effects - From January 2013 to end-2014, the vatu depreciated by 13 percent against the U.S. dollar while appreciating by 11 percent against the Australian dollar. - The value of international reserves in U.S. dollars increased considerably less than would have been expected from overall surplus in the balance of payment, indicating valuation losses because of U.S. dollar appreciation. - Trend in reserves is obscured by large errors and omissions in the balance of payments. - After the large revaluation, the Reserve Bank of Vanuatu (RBV) strengthened its capital base to cushion the effects of such shocks and build up reserves (IMF 2015). - Sterilizing large capital inflows is costly for a small central bank like the RBV: - Open market operations to reduce the domestic component of the monetary base would offset reserve inflows and ease inflationary threat, but are difficult for smaller authorities such as the Vanuatu government and the RBV without incurring substantial fiscal costs (Lee 1997). ### Monetary policy approach in Fiji (comparative example) - The Reserve Bank of Fiji (RBF) does not actively manage foreign reserves; monetary policy is akin to a currency board system with a pegged exchange rate. The last devaluation was in 2009. - Since the GFC, the RBF has not carried out open-market operations or changes in reserve requirements for commercial banks. - When FX reserves are too high, the RBF allows the national pension fund to invest abroad, with access capped by: - The RBF governor sitting on the pension fund board with direct influence; and - Capital controls on both inflows and outflows; the pension fund must request RBF permission prior to transferring large amounts of foreign currency out of the country. - Liquidity and transmission in Fiji: - During 2009–17, the loan-to-deposit ratio stabilized around 84 percent. - Commercial banks hold most nonlending assets as reserves and have adequate liquidity (Gottschalk 2016). - RBF policy rate influence on lending rates was significant between 2010 and 2014 (IMF 2018). ### Findings on Vanuatu banking liquidity and data needs - The banking system in Vanuatu has large free reserves, with a significant portion held for precautionary motives, complicating assessment of monetary policy transmission. - Recommendation: More disaggregated data on commercial banks’ reserves to identify the share of excess liquidity in free reserves. ### Policy recommendations to manage excess liquidity and reserves - Gradual increase of banks’ SRD requirement over the medium term to tighten monetary policy if excess liquidity is judged to be an issue. - The SRD requirement was increased to 5.25 percent in April 2018. - Historically, the SRD requirement was at 8 percent before the GFC. - Any further increase should be considered only if the central bank decided to raise interest rates because of strong domestic inflationary pressures, which are not currently present. - Risks and sequencing for higher SRD requirements: - Higher SRD requirements would mop up excess liquidity but could shrink voluntary reserves in some banks, increasing financial stability risks. - An SRD increase has a symmetric impact on all banks but may push some banks’ free reserves below voluntary levels, causing upward pressure on interest rates. - Banks with higher NPL ratios tend to hold larger liquidity for precautionary reasons; their liquidity position may worsen. - Prior to changes, conduct a banking diagnostic with development partners to analyze excess liquidity and NPLs among individual banks to avoid unintended consequences. - Encourage VNPF (Vanuatu National Provident Fund) to invest abroad: - In 2018, the VNPF invested 1.3 percent of its portfolio abroad. - The required benchmark in the VNPF’s policy guidelines has been 15 percent. - Greater portfolio diversification would help reduce excess liquidity and diversify risk. - Improve banking sector functioning to reduce lending rates and reinforce monetary passthrough: - Promote competition, financial inclusion, and use of new technologies. - Invest in infrastructure to improve access to fintech and information and computer technology. - Address screening costs by improving availability of credit histories and credit scores. ### Fiscal framework for emergencies: current practice and recent experience - Legal drawdown authority: - Public Finance and Economic Management Act allows drawdown up to 1.5 percent of a given year’s total appropriation (around 330 million vatu or 0.3 percent of GDP in the 2018 budget) with prior Council of Ministers (COM) approval; withdrawal does not require Parliament passage but must be later appropriated by Parliament. - Contingency provisions: - Allocation increased from 25 million vatu in the 2017 budget to 150 million vatu (about 0.6 percent of government-funded expenditure) in 2019. - Recent uses: - After Ambae volcanic activity (state of emergency after September 2017 eruption), COM endorsed a 200 million vatu fund (about 0.2 percent of GDP), appropriated with the 2018 budget. - COM added 40 million vatu in March 2018 and 200 million vatu in August 2018 upon compulsory evacuation of Ambae’s population of 10,000. - June 2018 supplementary budget included a further 362 million vatu for disasters. - Following December 2018 Ambrym eruption, COM put aside up to 100 million vatu from Ambae recovery fund, adding another 50 million vatu in January 2019. - In 2018, the government appropriated a further 532 million vatu for emergency relief from Tropical Cyclone (TC) Hola and Ambae eruption. - VNPF emergency withdrawals: - VNPF released about 90 million vatu from retirement accounts (up to 20 percent) for Ambae assistance. - Relative to Cyclone-Pam-related withdrawals of 1.7 billion vatu, the Ambae-related amount is relatively small, limiting VNPF liquidity impact. - Development partner and NGO assistance provided relief, water, sanitation, and education services to evacuees. ### Proposed National Emergency Fund: purpose, funding, governance, and sizing - Purpose and design considerations: - Authorities intend to establish an emergency fund under the Disaster Risk Management Act 2018 bill (DRMA); guidelines for use, authorization procedures, and types of emergencies are to be prescribed by the Department of Finance within MFEM but are not yet defined. - Potential funding sources: - Government contribution, donations from other sources; initial gifts from development partners desirable. - Revenue windfall from ECPs could be used but is not stable. - Repeated, permanent government contribution possible; staff suggests earmarking some new taxes—perhaps 0.5 percent of GDP or higher—if revenue mobilization proceeds. - Governance and operational recommendations (IMF staff, Cevik and Huang 2018): - Consolidate the fund with budget information; fund balance should appear in financial statements and drawdowns in budget execution reports. - Apply best PFM practices: clear rules for use, normal government accounting standards, publish audited financial statements, define governance rules. - Authorize drawdowns only above a minimum level of fiscal cost; limit use to disasters with large fiscal impacts. - Calibrate fund size to fiscal impact of natural disasters; avoid excessive accumulation that tempts diversion. - Investment strategy should aim for high liquidity; prefer liquid foreign assets given likelihood of post-disaster stress in domestic financial markets. - Intended purpose and suggested scope: - Staff recommends the fund be for large disasters and consider financing more than immediate assistance (e.g., support relocations and interim support following large evacuations). - Calibration and sizing evidence: - Immediate relief indicator: after Cyclone Pam in 2015, the government used 401.6 million vatu (about 0.5 percent of GDP) for relief and recovery. - In 2017 and 2018, government appropriated 200 million vatu (about 0.2 percent of GDP) and 532 million vatu (about 0.5 percent of GDP), respectively, for Ambae volcano and TC Hola relief. - Cross-country examples: Fiji National Disaster Relief and Rehabilitation Fund size was US$1.9 million (0.04 percent of GDP) as of March 2019; Marshall Islands had US$1.5 million (0.8 percent of GDP) as of June 2013. - For longer-term support/reconstruction, much larger size needed: - PCRAFI (2015) estimates average annual long-term losses for Vanuatu of US$48 million due to cyclones and earthquakes. - Public sector assets lack insurance; total yearly premiums were US$13.5 million (about 2 percent of GDP) in 2012. - In 2015, there was a 50 percent probability of a disaster with losses over US$330 million, and a 10 percent probability of one greater than US$540 million. - Conclusion: fund is welcome but requires clear purpose (immediate relief vs. reconstruction), strong funding, and robust governance rules; sufficient size would reduce pressure on external position after large disasters. ### Implementation of the e-GDDS (data dissemination and NSDP) - Vanuatu published in end-April 2019 key macroeconomic data in a new National Summary Data Page (NSDP) under the enhanced General Data Dissemination System (e-GDDS). - e-GDDS objectives: - Support surveillance, improve data transparency, and create synergies between data dissemination and surveillance. - Recommend dissemination of 15 data categories aligned with the Table of Common Indicators Required for Surveillance (TCIRS). - Vanuatu commitments and scope: - Authorities committed to publish all core e-GDDS data categories except for general government operations and stock market (only one level of government exists and no stock market). - Opted to disseminate two supplementary datasets—labor market indicators and financial soundness indicators. - Additional datasets planned: tourism statistics, government bonds outstanding, and financial access survey. - Implementation support: - An STA mission visited Vanuatu in August 2018 to support NSDP preparation. - BOP and IIP data will be included in the NSDP at a later stage; an STA technical assistance mission in May 2019 will help improve BOP and IIP data. *Source: 1vutea2019001 - 16. After the Cyclone Pam in 2015, a large share of foreign exchange inflows was not* ### 4. NSDP’s features and benefits. The NSDP is a national “data portal” that assembles links for ### 4. NSDP’s features and benefits. ### NSDP overview - The NSDP is a national “data portal” that assembles links for e-GDDS recommended data categories and supplementary datasets for a country. - The links provide access to time series in formats readable by humans and computers. - These data are usually compiled by multiple agencies, but their dissemination and regular updating are coordinated by one designated agency. ### Inputs and Outputs for the National Summary Data Page - Source: IMF Statistics Department. - The NSDP benefits data users by: - browse data via link to online datasets that can be easily viewed in time series format or as graphics; - download data in SDMX, a format used for machine-to-machine data sharing; - access to metadata, which describes a country’s practice for data compilation and dissemination. - The NSDP benefits data reporters, data managers, and institutional data users by: - reducing reporting burden via posting data in one data portal in a standardized format that can be accessed by different agencies; - allowing data managers to control data updating processes; - making processing easier for international/regional organizations and other institutional data users due to data dissemination in machine readable format. ### Statistical issues and data adequacy for surveillance - General: Data provision has shortcomings but is broadly adequate for surveillance. In particular, national accounts and external sector statistics need to be further improved, while the coverage of government finance statistics could be expanded. Reporting lags could be shortened. - National accounts: - Improvements in methodology and development of additional data sources have occurred, but the accuracy of expenditure-based GDP estimates could be further improved. - Data are compiled only on an annual basis. - Unsettled staffing has set back plans to rebase GDP and develop a new quarterly measure to at least 2019. - 2016 data have been updated, and 2017 preliminary estimates published in December 2018. - PFTAC is providing technical assistance in national accounts compilation and has refocused on core capacity development to provide a solid basis for reviving development work in FY2021 and FY2022. - Price statistics: - The CPI weights are based on 1998 household surveys, and only cover the two urban centers of Port Vila and Luganville. - Rebasing the CPI to a more recent base year may start after a new Household Income and Expenditure Survey in 2019. - Government finance statistics (GFS): - The budget classification is broadly consistent with the GFSM 2001. - Work is underway to migrate budget classification to the GFSM 2014. - The latest data submitted for the annual GFS database were budgetary central government for 2017. - Data produced by Department of Finance and Treasury (DoFT, part of the Ministry of Finance and Economic Management, MFEM), Vanuatu National Statistics Office (VNSO), and the Reserve Bank of Vanuatu (RBV) still have discrepancies that should be reconciled. - Statistical discrepancies also exist in the balance sheet for transactions in assets and liabilities. - Coverage is being expanded to the general government but there have been significant time delays and data gaps. - GFS data are compiled and published monthly by the DoFT but not reported to STA for inclusion in the International Financial Statistics (IFS); the latest information available in IFS is for December 2016. - Monetary statistics: - Monetary statistics are compiled broadly in line with the Monetary and Financial Statistics Manual. - The RBV reports monthly monetary data, using Standardized Report Forms (SRFs) for the central bank and other depository corporations, which are published in the International Financial Statistics. - Following a regional workshop in 2016, the RBV also reports Financial Soundness Indicators (FSIs) on a quarterly basis, including all 12 core and 7 encouraged indicators for deposit takers. - The data reported by Vanuatu to the Financial Access Survey (FAS) are sparse but include the two indicators adopted by the UN to monitor Target 8.10.1 of the Sustainable Development Goals (SDGs). The last data submission to FAS was in 2017. - External sector statistics: - The RBV releases quarterly BOP and IIP data in its Quarterly Economic Review, although issues were not published in 2018Q1 and 2018Q2, but resumed in 2018Q3. - The Debt Management Unit within the MFEM has been responsible for public debt management and recording since 2015; however, these processes need further improvement. - Two external sector statistics missions visited Vanuatu in the second half of 2015 to assist the authorities in improving the collection and reporting of external debt and external sector statistics. - The latest mission was conducted in May 2019 to improve the reporting of data for services and the financial account, in particular. ### Data standards and participation - Participant in the General Data Dissemination System (GDDS) since April 2004. - Started implementing the enhanced General Data Dissemination System (e-GDDS) in 2018. - No data ROSC is available. ### Table of Common Indicators Required for Surveillance (As of May 2019) — selected data frequencies and dates - Exchange Rates: Date of latest Observation 2/2019; Date Received 4/2019; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M. - International Reserve Assets and Reserve Liabilities of the Monetary Authorities: Date of latest Observation 11/2018; Date Received 1/2019; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M. - Reserve/Base Money: Date of latest Observation 11/2018; Date Received 1/2019; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M. - Broad Money: Date of latest Observation 11/2018; Date Received 1/2019; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M. - Central Bank Balance Sheet: Date of latest Observation 11/2018; Date Received 1/2019; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M. - Consolidated Balance Sheet of the Banking System: Date of latest Observation 11/2018; Date Received 1/2019; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M. - Interest Rates: Date of latest Observation 9/2018; Date Received 4/2019; Frequency of Data Q; Frequency of Reporting Q; Frequency of Publication Q. - Consumer Price Index: Date of latest Observation 9/2018; Date Received 4/2019; Frequency of Data Q; Frequency of Reporting Q; Frequency of Publication Q. - Revenue, Expenditure, Balance and Composition of Financing — Central Government: Date of latest Observation 12/2018; Date Received 2/2019; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M. - GDP/GNP: Date of latest Observation 2017; Date Received 12/2018; Frequency of Data A; Frequency of Reporting A; Frequency of Publication A. - Gross External Debt: Date of latest Observation 12/2017; Date Received 4/2019; Frequency of Data Q; Frequency of Reporting Q; Frequency of Publication Q. - International Investment Position: Date of latest Observation 9/2018; Date Received 4/2019; Frequency of Data Q; Frequency of Reporting Q; Frequency of Publication Q. ### Debt sustainability and public debt: key findings and background - Risk of external debt distress: Moderate. - Overall risk of debt distress: Moderate. - Granularity in the risk rating: Limited space to absorb shock. - The updated DSA suggests that the external risk of debt distress for Vanuatu remains moderate with limited space to absorb shocks. - All external debt indicators remain below the relevant indicative thresholds under the baseline scenario, incorporating the average long-term effects of natural disasters on growth and the fiscal and current account balances. - A tailored natural disaster shock, reflecting Vanuatu’s vulnerability to disasters, would cause the present value (PV) of public and publicly guaranteed (PPG) external debt-to-GDP ratio to breach the threshold from 2024 onwards. - The overall risk of debt distress is assessed as moderate. - Although the PV of the public-debt-to-GDP ratio remains below the 55 percent benchmark under the baseline scenario, the public-debt-to-GDP ratio would breach the authorities’ debt ceiling of 60 percent by 2025. - A tailored natural disaster shock would lead to a significant deterioration in debt sustainability, breaching the benchmark. - The breach of the authorities’ debt ceiling and of the benchmark indicates the need for rebuilding fiscal buffers and enhancing resilience against shocks, including from natural disasters. - This requires both stronger revenue mobilization measures, including an introduction of the proposed income taxes, and expenditure rationalization in the medium term. - When contracting new public infrastructure projects, the authorities are encouraged to seek grants or concessional loans as much as possible to contain its debt burden. - Composite Indicator (CI) index: the two most recent observations are 2.94 and 2.99, indicating that the country’s debt-carrying capacity is medium. ### Public debt coverage and stock of public debt (Stock of Public Debt (External and Domestic) at End-2018) - Public debt coverage for this DSA: central government debt, central government-guaranteed debt, and central bank debt, which has been borrowed on behalf of the government. Non-guaranteed SOE debt and private external debt are not included in the analysis due to data limitations. - Sub-sectors covered (noted as X where covered): - Central government: X - Guarantees (to other entities in the public and private sector, including to SOEs): X - Central bank (borrowed on behalf of the government): X - Stock of Public Debt (External and Domestic) at End-2018 (as presented, preserving numeric formatting): - Total public debt - In million of Vatu: 52,826 - In million of US dollars: 471100.0 - As a share of total debt: 100.0 - In percent of GDP: 52.4 - External - In million of Vatu: 45,520 - In million of US dollars: 40686.2 - As a share of total debt: 86.2 - In percent of GDP: 45.2 - Multilateral - In million of Vatu: 16,466 - In million of US dollars: 14731.2 - As a share of total debt: 31.2 - In percent of GDP: 16.3 - ADB - In million of Vatu: 7,726 - In million of US dollars: 69 - As a share of total debt: 14.6 - In percent of GDP: 7.7 - IDA - In million of Vatu: 6,478 - In million of US dollars: 5812.3 - As a share of total debt: 12.3 - In percent of GDP: 6.4 - IMF - In million of Vatu: 2,262 - In million of US dollars: 204.3 - As a share of total debt: 2.2 - Bilateral - In million of Vatu: 27,332 - In million of US dollars: 24351.7 - As a share of total debt: 51.7 - In percent of GDP: 27.1 - China EXIM Bank - In million of Vatu: 17,080 - In million of US dollars: 152 - As a share of total debt: 32.3 - In percent of GDP: 17.0 - JICA - In million of Vatu: 10,201 - In million of US dollars: 91 - As a share of total debt: 19.3 - In percent of GDP: 10.1 - Others - In million of Vatu: 51 - In million of US dollars: 0 - As a share of total debt: 0.1 - In percent of GDP: 0.1 - Publicly guaranteed debt - In million of Vatu: 1,722 - In million of US dollars: 153.3 - As a share of total debt: 1.7 - In percent of GDP: not separately listed in table beyond share - Domestic - In million of Vatu: 7,307 - In million of US dollars: 6513.8 - As a share of total debt: 13.8 - In percent of GDP: 7.3 - Government bonds - In million of Vatu: 6,267 - In million of US dollars: 5611.9 - As a share of total debt: 11.9 - In percent of GDP: 6.2 - RBV - In million of Vatu: 2,513 - In million of US dollars: 224.8 - As a share of total debt: 2.5 - In percent of GDP: 2.5 - Public Corporation - In million of Vatu: 2,350 - In million of US dollars: 214.4 - As a share of total debt: 2.3 - In percent of GDP: 2.3 - Commercial Banks - In million of Vatu: 1,288 - In million of US dollars: 112.4 - As a share of total debt: 1.3 - In percent of GDP: 1.3 - Others - In million of Vatu: 116 - In million of US dollars: 10.2 - As a share of total debt: 0.1 - In percent of GDP: 0.1 - Publicly guaranteed debt (domestic) - In million of Vatu: 1,040 - In million of US dollars: 92.0 - As a share of total debt: 1.0 - In percent of GDP: not separately listed in table beyond share - Source of the stock table: Vanuatu authorities and IMF staff estimates. ### Public debt background and recent developments - After Cyclone Pam struck Vanuatu in 2015, public sector debt increased sharply to 52.4 percent of GDP in 2018 from 26.1 percent in 2014. - The increase was mainly caused by new disbursements for infrastructure development supported by bilateral partners, including the Japan International Cooperation Agency (JICA) and the Export-Import Bank of China (China EXIM Bank). - IMF disbursement: USD 23.8 million in June 2015. - IDA and ADB have provided loans and grants to support reconstruction and improvement of roads and schools. - As of end-2018, the share of bilateral and multilateral creditors amounted to 51.7 and 31.2 percent of total public debt, respectively. - Of public domestic debt, central government bonds were largely held by public corporations (primarily the Vanuatu National Provident Fund, VNPF), followed by the Reserve Bank of Vanuatu (RBV) and commercial banks. - There are also government-guaranteed debts for state-owned enterprises (SOEs), such as Air Vanuatu prior to 2019. - Windfall revenues from the economic citizenship programs (ECPs) enabled the authorities to embark on a debt reduction program. They paid off domestic and external debt in the amount of VUV 1.8 billion and VUV 1.5 billion, respectively, in 2018. - External loan repayments included VUV 1.0 billion to China, VUV 0.4 billion to the ADB, and VUV 60 million to the IDA. - Following the end of the Tanna and Malekula Road Rehabilitation and Upgrade Program (Phase I), the authorities signed a Phase II loan agreement amounting to VUV 5.7 billion with China in November 2018. - The grant element was 29.2 percent, lower than the authorities’ commitment of a 35 percent grant component. - The authorities intend to retain their 35 percent grant component target as they update the debt management strategy. *Prepared by Xiuzhen Chao (STA) — Excerpted from IMF staff report content provided.* ### 5. Similar to the last DSA, the baseline scenario, which is consistent with the ### 5. Similar to the last DSA, the baseline scenario, which is consistent with the ### Baseline macroeconomic framework and assumptions - Baseline incorporates effects of natural disasters and climate change over the longer-term; years 2019–24 are assumed free from newly-occurring major, costly disasters. - From 2025 onwards, baseline incorporates average long-term effects of natural disasters and climate change based on staff research: - real GDP growth lowered by 0.5 percentage points annually; - current account deficit raised by 1.3 percentage points of GDP; - fiscal deficit increased by 0.35 percentage points of GDP relative to disaster-free projections. - Discount rate used to calculate net present value of external debt: 5 percent. - Main macro assumptions (2019–29 unless stated): - Real GDP growth: projected at 2.8 percent on average during 2019–29. - Inflation (GDP price deflator): average 2.2 percent (in U.S. dollar terms) and 2.5 percent (in domestic currency terms) during 2019–29. - Non-interest current account deficit: projected to rise to 3.8 percent of GDP on average over 2019–29 (historical average 2.7 percent). - Foreign direct investment inflows (net FDI): expected to average 3.3 percent of GDP over 2019–29 (historical average 5.1 percent). - Primary deficit: expected to be 3.1 percent of GDP on average over 2019–2029 (historical average 1.1 percent; last year’s assumption 2.5 percent). - External borrowing and grants: new annual external borrowing expected to average around 5.0 percent of GDP (last year’s assumption 4.2 percent of GDP). - Specific project financing: disbursements for new USD 51 million project supported by China from 2019 to 2021. - Grants and lending from multilateral development partners expected to increase over the medium term because of scaling-up of IDA and ADB financing; grants expected to decline over the longer term as the economy grows. - Government-guaranteed debts as of end-2018 assumed to continue for the projection period; no new guarantees for SOE borrowing (including Air Vanuatu) assumed. ### Realism tool and fiscal adjustment - Realism tool highlights primary balance assumptions are conservative. - Three-year adjustment in the primary deficit between 2018 and 2021: 8.9 percent of GDP. - Deteriorating fiscal position driven by conservative assumptions for ECP proceeds and stronger infrastructure spending. - Assumption on real growth in 2019 and 2020 is lower than alternative model-calculated growth paths based on a one-year fiscal adjustment. - Two charts on public and private investment rates and contributions to real GDP growth unavailable due to lack of data. ### Debt-carrying capacity and thresholds - Composite Indicator (CI) index for Vanuatu: 2.94 (based on April 2019 WEO with updated remittances and 2017 CPIA) — classification: medium. - Indicative thresholds for medium category (PPG external debt): - PV of debt-to-GDP ratio: 40 percent; - PV of debt-to-exports ratio: 180 percent; - debt service-to-exports ratio: 15 percent; - debt service-to-revenue ratio: 18 percent. - Benchmark for PV of total public sector debt under medium capacity: 55 percent of GDP. ### Stress tests and tailored scenarios - Tailored natural disaster shock (LIC-DSF standard for small developing natural-disaster-prone states): one-off shock of 10 percentage points to debt-to-GDP ratio in the second year of projection (2020). - Staff adjusted default parameters: reduction of real GDP and export growth by 4 and 10 percentage points respectively. - Combined contingent liability shock: adjusted increase in public debt from SOEs from 2 percent to 4 percent of GDP to reflect government financial support to Air Vanuatu in 2019. - Default decrease in GDP from financial market turbulence used: 5 percent. - Default 5 percent of GDP contingent liability interpreted as including a capital injection to an undercapitalized domestic bank. - Other stress-test adjustments: - contingent liability components used for analysis total: 9.0 percent of GDP (details: other elements 0.0; SOE’s debt 4.0; PPP 0.0; financial market 5.0). ### External debt sustainability findings - All external PPG debt indicators remain below policy-relevant thresholds under the baseline scenario for the projection period. - PV of external-debt-to-GDP ratio projected to increase from 27.0 percent in 2018 to 35.6 percent in 2029, driven mainly by new disbursements for infrastructure projects. - Main driver of debt dynamics during projection period: current account deficit. - Stress-test results: - Tailored natural disaster shock has largest impact on debt trajectory, causing breach of external-debt-to-GDP threshold from 2024 onwards. - Other shocks (exports, other flows, nominal exchange rate depreciation) also lead to breaches in thresholds. - Export shock is the fourth largest impact (it was the largest impact in the 2018 DSA). ### Public sector debt sustainability findings - PV of public-debt-to-GDP ratio does not breach the 55 percent benchmark under the baseline scenario. - Public-debt-to-GDP ratio would rise from 52.4 percent in 2018 to breach the authorities’ stated public-debt-to-GDP target of 60 percent by 2025. - Breach primarily driven by a primary deficit caused by elevated capital spending. - Stress tests (including contingent liability shock) demonstrate deteriorating debt sustainability: - Tailored natural disaster shock would breach its benchmark in 2029. - Shock to real GDP growth has the third largest impact on debt sustainability. - Contingent liability shock would not lead to breach but results in average deterioration of debt position relative to baseline of 5 percent of GDP. - Authorities need to consider fiscal risk from contingent liabilities across SOEs when providing guarantees. ### Risk rating, vulnerabilities, and policy implications - DSA under revised LIC-DSF: risk of external debt distress remains moderate, with limited space to absorb shocks. - Key implications and recommendations: - Rebuild fiscal buffers to enhance resilience against natural disasters and external shocks. - Contract loan-funded projects on favorable concessional terms where possible and respect authorities’ stated goal of achieving a 35 percent grant element for such loans. - Prioritize which loans to accept and limit guarantees to SOEs (including Air Vanuatu) to safeguard debt sustainability. - Strengthen revenue mobilization measures, including possible introduction of an income tax (personal and/or corporate), and rationalize expenditures in the medium term. - Expand the export base through economic diversification to reduce vulnerability to export shocks. - Even though debt service indicators remain well below thresholds under baseline and stress tests, limited fiscal space necessitates creating fiscal room to address future shocks. ### Authorities’ views - Authorities broadly agreed with staff assessment under the revised LIC-DSF. - Given high infrastructure needs, authorities underscored need for financial support from bilateral and multilateral donors for new projects. - Authorities intend to maintain a grant-element target of at least 35 percent and seek grant financing as much as possible. - Authorities committed to make prepayments to contain debt accumulation using strong cash reserves accumulated from strong ECP revenues starting in 2016. - Noted a limited difference in public sector debt coverage relative to Budget 2019 figures: IMF includes IMF loans disbursed after Cyclone Pam in 2015 directed to the RBV; difference is 2.2 percent of GDP as of end-2018. - Authorities noted the DSA uses original guaranteed debt amounts provided by the authorities. *Source: IMF staff projections and analysis presented in the DSA chapter.* ### 17. The authorities also agreed with the assumptions in the DSA used in its forecasts. This ### 1vutea2019001 - 17. The authorities also agreed with the assumptions in the DSA used in its forecasts. This ### Authorities' agreement and core assumptions - The authorities agreed with the assumptions in the DSA used in its forecasts, including: - a commitment to maintain a grant-element target of at least 35 percent on new loans. - a public and publicly guaranteed (PPG) debt target of 60 percent of GDP. - The DSA’s approach to forecasts for publicly-guaranteed debt matched the government’s strongly stressed intention that it will be difficult to provide any guarantees in the near future for borrowing by SOEs. ### External Debt Sustainability Framework — Baseline Scenario (selected figures and indicators) - External debt (nominal) 1/: 36.2 43.8 45.2 46.0 47.5 49.2 50.6 51.9 53.0 57.2 54.0 19.8 52.5 - of which: public and publicly guaranteed (PPG): 36.2 43.8 45.2 46.0 47.5 49.2 50.6 51.9 53.0 57.2 54.0 19.8 52.5 - Change in external debt: 9.1 7.5 1.4 0.8 1.5 1.7 1.4 1.2 1.1 0.4 -0.6 - Identified net debt-creating flows: -6.9 -1.4 -10.1 -4.5 0.1 -0.3 -0.5 -0.7 -0.5 1.2 0.4 -4.9 -0.2 - Non-interest current account deficit: -0.8 6.1 -4.0 0.7 4.9 4.2 3.8 3.5 3.6 4.4 2.6 2.7 3.8 - Deficit in balance of goods and services: 15.4 12.2 9.7 7.1 10.9 10.0 9.2 8.7 8.5 8.1 4.6 9.0 8.8 - Exports: 43.2 41.5 44.3 46.8 46.5 46.2 45.8 45.5 45.3 44.8 44.9 45.5 45.5 - Imports: 58.6 53.7 54.1 53.9 57.4 56.2 55.0 54.2 53.7 52.9 49.5 54.5 54.3 - Net current transfers (negative = inflow): -16.1 -7.0 -12.3 -4.9 -4.6 -4.3 -4.0 -3.9 -3.9 -3.5 -3.0 -7.6 -4.0 - of which: official: -10.9 -1.8 -2.2 -1.8 -1.7 -1.6 -1.5 -1.5 -1.4 -1.1 -0.6 - Net FDI (negative = inflow): -5.6 -4.5 -4.4 -4.2 -4.0 -3.8 -3.6 -3.4 -3.2 -2.5 -1.5 -5.1 -3.3 - Endogenous debt dynamics: -0.5 -3.0 -1.8 -1.0 -0.8 -0.7 -0.7 -0.8 -0.8 -0.7 -0.7 - Contribution from nominal interest rate: 0.3 0.4 0.5 0.5 0.5 0.5 0.6 0.6 0.6 0.7 0.7 - Contribution from real GDP growth: -0.9 -1.4 -1.3 -1.5 -1.3 -1.3 -1.3 -1.4 -1.4 -1.4 -1.4 - Residual 3/: 16.0 8.9 11.5 5.3 1.5 2.0 1.9 1.9 1.6 -0.7 -1.1 10.2 1.3 - Sustainability indicators: - PV of PPG external debt-to-GDP ratio: ......27.0 28.5 29.5 30.6 31.3 32.0 32.7 35.6 34.4 - PV of PPG external debt-to-exports ratio: ......60.8 60.9 63.5 66.3 68.4 70.3 72.1 79.6 76.7 - PPG debt service-to-exports ratio: 2.1 2.3 5.1 4.1 3.6 3.9 4.1 4.2 4.1 4.5 5.1 - PPG debt service-to-revenue ratio: 4.1 3.6 7.6 8.6 7.5 8.2 8.5 8.6 8.4 9.6 11.1 - Gross external financing need (Million of U.S. dollars): -43.2 22.5 -56.9 -14.9 25.2 23.7 22.9 23.5 27.0 62.7 91.4 - Key macroeconomic assumptions: - Real GDP growth (in percent): 3.5 4.4 3.2 3.4 3.0 2.8 2.8 2.9 2.9 2.6 2.6 2.3 2.8 - GDP deflator in US dollar terms (change in percent): -0.3 5.6 2.1 -1.3 2.3 2.5 2.6 2.6 2.6 2.6 2.6 2.2 2.2 - Effective interest rate (percent) 4/: 1.1 1.2 1.2 1.1 1.2 1.2 1.3 1.3 1.3 1.3 1.3 1.4 1.2 - Growth of exports of G&S (US dollar terms, in percent): 5.0 5.7 12.8 7.7 4.7 4.6 4.6 4.9 4.9 5.1 5.3 4.6 5.2 - Grant element of new public sector borrowing (in percent): .........41.9 43.6 44.9 47.5 47.5 47.2 46.4 44.5 ...46.0 - Government revenues (excluding grants, in percent of GDP): 22.5 26.4 29.9 22.1 22.1 22.2 22.2 22.1 22.0 21.3 20.5 21.1 21.9 - Aid flows (in Million of US dollars) 5/: 66.2 74.1 52.4 82.5 91.2 99.1 107.2 112.4 115.9 143.5 218.6 - Grant-equivalent financing (in percent of GDP) 6/: .........7.8 8.0 8.2 8.1 8.1 7.9 7.7 7.3 ...7.9 - Nominal GDP (Million of US dollars): 798 880 928 947 998 1051 1109 1170 1236 1598 2675 - Nominal dollar GDP growth: 3.1 10.3 5.4 2.1 5.4 5.3 5.5 5.6 5.6 5.3 5.3 4.6 5.1 - Memorandum items: - PV of PPG external debt (in Million of US dollars): 250.2 269.9 295.0 321.9 347.6 374.7 403.5 569.7 920.3 - (PVt-PVt-1)/GDPt-1 (in percent): 2.1 2.6 2.7 2.4 2.4 2.5 2.2 1.5 - Non-interest current account deficit that stabilizes debt ratio: -9.9 -1.5 -5.4 0.0 3.3 2.5 2.4 2.3 2.5 4.0 3.3 ### Public Sector Debt Sustainability Framework — Baseline Scenario (selected figures and indicators) - Public sector debt 1/: 46.4 53.2 52.4 52.9 53.9 55.3 56.6 57.9 59.0 65.1 74.4 27.6 59.0 - of which: external debt: 36.2 43.8 45.2 46.0 47.5 49.2 50.6 51.9 53.0 57.2 54.0 19.8 52.5 - of which: local-currency denominated: 10.1 9.4 7.3 6.9 6.4 6.1 6.0 6.0 6.0 8.0 20.3 - Change in public sector debt: 10.5 6.8 -0.7 0.5 1.0 1.4 1.3 1.2 1.1 1.1 0.8 - Identified debt-creating flows (total): 2.9 -4.8 -5.6 0.5 1.0 1.4 1.3 1.2 1.1 1.1 0.8 0.5 1.2 - Primary deficit: 2.9 -0.1 -5.8 2.3 2.7 3.1 3.2 3.2 3.1 3.2 2.6 1.1 3.1 - Revenue and grants: 30.8 34.8 35.5 27.9 28.0 28.0 27.8 27.7 27.7 26.8 26.2 27.3 27.5 - Primary (noninterest) expenditure: 33.7 34.7 29.7 30.2 30.7 31.1 31.0 30.9 30.7 30.0 28.7 28.3 30.5 - Automatic debt dynamics: 0.0 -4.6 0.2 -1.8 -1.7 -1.7 -1.8 -1.9 -2.0 -2.0 -1.8 - Contribution from interest rate/growth differential: -0.8 -1.7 -1.4 -1.7 -1.5 -1.6 -1.5 -1.6 -1.7 -1.7 -1.5 - of which: contribution from average real interest rate: 0.4 0.3 0.2 0.0 0.0 -0.1 0.0 0.0 -0.1 -0.1 0.3 - of which: contribution from real GDP growth: -1.2 -2.0 -1.6 -1.7 -1.5 -1.5 -1.5 -1.6 -1.6 -1.6 -1.9 - Residual: 7.6 11.6 4.9 -0.1 -0.2 -0.2 -0.3 -0.3 -0.3 -0.3 -0.3 4.7 -0.2 - Sustainability indicators: - PV of public debt-to-GDP ratio 2/: ......35.1 35.4 36.0 36.7 37.4 38.0 38.7 43.6 54.8 - PV of public debt-to-revenue and grants ratio: ......99.0 126.8 128.6 131.2 134.4 137.2 140.4 162.4 209.4 - Debt service-to-revenue and grants ratio 3/: 9.9 9.8 12.4 10.8 12.2 10.9 11.7 11.7 8.6 11.7 16.7 - Gross financing need 4/: 6.0 3.3 -1.4 5.3 6.1 6.2 6.4 6.4 5.5 6.3 7.0 - Key macro-fiscal assumptions (selected): - Real GDP growth (in percent): 3.5 4.4 3.2 3.4 3.0 2.8 2.8 2.9 2.9 2.6 2.6 2.3 2.8 - Average nominal interest rate on external debt (in percent): 1.2 1.2 1.2 1.1 1.2 1.2 1.3 1.3 1.3 1.3 1.3 1.4 1.2 - Average real interest rate on domestic debt (in percent): 7.0 2.5 3.2 4.7 4.7 4.8 4.7 4.8 4.8 4.4 4.1 3.8 4.7 - Inflation rate (GDP deflator, in percent): 1.8 4.2 2.9 2.1 2.3 2.5 2.6 2.6 2.6 2.6 2.6 2.5 2.5 - Growth of real primary spending (deflated by GDP deflator, in percent): -9.2 7.5 -11.7 5.3 4.6 4.3 2.4 2.5 2.2 2.1 2.1 4.9 2.9 - Primary deficit that stabilizes the debt-to-GDP ratio 5/: -7.6 -7.0 -5.1 1.8 1.7 1.7 1.8 1.9 2.0 2.0 1.8 -6.5 1.9 ### Stress tests, sensitivity analysis, and key risks (high-level) - Stress test frameworks applied include scenarios for: historical shocks, natural disasters, combined contingent liabilities, depreciation, exports shock, and tailored tests relevant to Vanuatu. - Table 3 and Table 4 present sensitivity analysis results for key indicators (PV of debt-to-GDP, PV of debt-to-exports, debt service ratios) under: - Alternative scenarios (e.g., key variables at historical averages). - Bound tests (e.g., B1 Real GDP growth; B2 Primary balance; B3 Exports; B4 Other flows; B5 Depreciation; B6 Combination). - Tailored tests (C1 Combined contingent liabilities; C2 Natural disaster). - Selected sensitivity outcomes (examples shown in tables): - PV of debt-to-GDP ratio under Baseline (2019–29): 28 30 31 31 32 33 33 34 35 35 36 - A1 (historical averages) outcomes and bound/tailored test outcomes show material increases in debt and debt-service indicators under adverse shocks, with natural disaster and combined contingent-liability shocks noted as most severe in several indicators. ### Authorities' statement and policy priorities (summary of statement by Nigel Ray and Anna Park) - Context and vulnerabilities: - Vanuatu: 83 volcanic islands. - Key sectors: tourism and agriculture. - High natural disaster exposure: ranked as the most at-risk country in the world by the UN World Risk Index. - Cyclone Pam in 2015 caused extensive damage and reconstruction spending boosted growth. - Fiscal policy and debt management: - Government long-term objectives include maintaining a recurrent budget in surplus over the medium term and keeping nominal public and publicly guaranteed debt below 60 per cent of GDP. - Authorities note staff projections show debt rising above this 60 percent target in the medium term even with a domestic recurrent budget in surplus. - Need for additional revenue mobilization, expenditure restraint, and careful debt management emphasized. - Opportunity from economic citizenship program revenue in 2019 used to reduce debt where possible. - A review of taxes, non-tax revenues, and revenue administration undertaken; an updated Tax Administration Act came into force in 2019; introduction of an income tax at a future date remains a possibility. - Debt management framework strengthened: under the 2015 strategy new loans must have a grant element of at least 35 per cent; improvements to on-lending, guarantee policies, and financial regulations ongoing with partner assistance. - Disaster resilience and financing: - Continued efforts to build resilience: fiscal buffers, adequate international reserves, resilient infrastructure, maintenance. - Historical policy instruments: National Adaptation Program of Action (2007); National Action Plan for Climate Change Adaptation and Disaster Risk Reduction (2015). - New Disaster Risk Management Act 2018: enhance provincial/municipal engagement, support access to donor-funded disaster assistance, and set up a national disaster fund. - Authorities are discussing a development policy grant with a Catastrophe-Deferred Drawdown Option (CAT-DDO) with the World Bank for immediate liquidity following a natural disaster. - Monetary and financial sector: - Reserve Bank of Vanuatu (RBV) policies have contained inflationary pressures; exchange rate regime provides a nominal anchor. - Statutory reserve requirements and open market operations used to address domestic pressures; RBV ready to adjust policy as conditions evolve. - Excess liquidity in the banking sector poses a medium-term challenge; a review of monetary policy instruments is underway. - RBV welcomes IMF banking sector diagnostic and looks forward to further engagement on broadening access to credit and financial sector development through stronger supervision. *Sources: Country authorities; and staff estimates and projections.* ### introduction of a new legal framework for credit unions and work underway with PFTAC ### introduction of a new legal framework for credit unions and work underway with PFTAC ### Financial inclusion and fintech - Authorities progressing financial inclusion initiatives under the National Financial Inclusion Strategy 2018-23. - Fintech applications are recognized as having a role in strengthening financial inclusion, while authorities are conscious of the need to ensure that appropriate regulatory frameworks are in place. - Work underway with PFTAC assistance to review the RBV’s approach to risk-based supervision. ### AML/CFT improvements and correspondent banking - Significant progress made in improving Vanuatu’s AML/CFT framework, resulting in Vanuatu’s removal from the FATF AML/CFT grey list in June 2018. - Banks have been able to maintain correspondent banking relationships, but these remain under pressures and compliance activities have increased costs. - A substantial amount of work was needed to prepare and implement new AML/CFT legislation to enable Vanuatu’s removal from the grey list. - Authorities expressed concern that Vanuatu’s recent inclusion on the European Union list of non-cooperative tax jurisdictions could undermine some of the work done to support correspondent banking relationships. ### Taxation and technical assistance - Work is underway to ensure that Vanuatu fulfils its international obligations in the area of taxation. - Technical assistance is valuable given resource constraints; authorities have engaged additional technical assistance under the Australian Governance for Growth project. ### Enhancing governance and IMF support - Authorities committed to strong governance. - Efforts underway include improving public financial management through the Tax Administration Act. - Authorities working with the ADB to improve the operation of Government Business Enterprises. - Progress made in implementing the IMF Safeguards Assessment recommendations including strengthening the corporate governance structure, internal audit function and overall structure of the RBV. - Ongoing IMF technical assistance in this area is appreciated. *Source: 1vutea2019001 - introduction of a new legal framework for credit unions and work underway with PFTAC* --- _Source: https://www.imf.org/-/media/files/publications/cr/2019/1vutea2019001.pdf_