## VANUATU — IMF Staff Report (1vutea2021002) ## Source details **Canonical URL:** [VANUATU — IMF Staff Report (1vutea2021002)](https://www.imf.org/-/media/files/publications/cr/2021/english/1vutea2021002.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2021/english/1vutea2021002.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2021/english/1vutea2021002.pdf.json) --- ### Recent developments and shocks - Borders closed under a state of emergency since March 2020; to date only three confirmed cases of COVID-19 have been identified at Vanuatu’s borders. - Border closure caused a severe collapse in tourism and spillovers to other sectors; infrastructure projects delayed due to border closure and lack of domestic capacity. - Natural disasters in 2020: - Tropical Cyclone Harold (Category 5) affected an estimated 43 percent of the population. - Volcanic eruption in Tanna Island caused extensive damage and severely affected crop production and food supply. - Damages by TC Harold are estimated at VUV 56.0 billion (damages to infrastructure and assets estimated at VUV 27.7 billion), accounting for over 50 percent of GDP (July 2020, Vanuatu Recovery Strategy 2020-2023, Government of Vanuatu). - Vanuatu lost a key correspondent banking relationship (CBR) at end-June 2021. - Air Vanuatu (SOE) is in the process of being restructured. ### Economic impact and projections - Real GDP (annual percent change): - 2018: 2.9 - 2019: 3.9 - 2020: -6.8 - 2021: 1.2 (projection) - 2022: 3.0 (projection) - 2023: 4.1 (projection) - Drivers of 2021 projected growth: agricultural production, remittance income from seasonal workers, and construction activity. - Tourism-related sectors expected to contract further in 2021 and begin gradual recovery in 2022. - Inflation (consumer prices, period average): - 2018: 2.4 percent - 2019: 2.7 percent - 2020: 5.7 percent - 2021: 5.4 percent (projection) - 2022: 2.6 percent (projection) - 2023: 2.3 percent (projection) - Balance of payments and external indicators: - Travel receipts (percent of GDP): 2018: 32.3; 2019: 29.8; 2020: 7.2; 2021: 0.6 (projection); 2022: 4.4 (projection); 2023: 11.3 (projection) - Current account (percent of GDP): 2018: 12.2; 2019: 16.0; 2020: 3.3; 2021: -6.9 (projection); 2022: -8.0 (projection); 2023: -5.7 (projection) - Gross international reserves (millions of U.S. dollars): 2018: 420.6; 2019: 511.6; 2020: 613.6; 2021: 658.2 (projection); 2022: 673.0 (projection); 2023: 697.7 (projection) - Gross international reserves (months of prospective G&S imports): 2018: 9.6; 2019: 13.3; 2020: 15.3; 2021: 14.7 (projection); 2022: 13.3 (projection); 2023: 11.8 (projection) - Public finances (percent of GDP): - Total revenue: 2018: 39.5; 2019: 38.5; 2020: 44.2; 2021: 40.6 (projection); 2022: 34.2 (projection); 2023: 32.1 (projection) - Taxes: 2018: 18.4; 2019: 17.6; 2020: 14.6; 2021: 16.1 (projection); 2022: 16.5 (projection); 2023: 17.0 (projection) - Other revenue: 2018: 12.0; 2019: 13.9; 2020: 16.0; 2021: 11.2 (projection); 2022: 9.7 (projection); 2023: 8.7 (projection) - Grants: 2018: 9.2; 2019: 7.0; 2020: 13.6; 2021: 13.2 (projection); 2022: 8.0 (projection); 2023: 6.4 (projection) - Expenditure: 2018: 33.3; 2019: 31.8; 2020: 44.4; 2021: 44.0 (projection); 2022: 38.3 (projection); 2023: 36.1 (projection) - Expense: 2018: 26.9; 2019: 28.5; 2020: 37.8; 2021: 36.4 (projection); 2022: 29.6 (projection); 2023: 29.0 (projection) - Net acquisition of nonfinancial assets: 2018: 6.4; 2019: 3.3; 2020: 6.6; 2021: 7.6 (projection); 2022: 8.7 (projection); 2023: 7.1 (projection) - Net lending (+)/borrowing (-): 2018: 6.3; 2019: 6.7; 2020: -0.1; 2021: -3.5 (projection); 2022: -4.1 (projection); 2023: -4.0 (projection) - Public and publicly-guaranteed debt (end of period): 2018: 49.2; 2019: 46.1; 2020: 50.1; 2021: 47.5 (projection); 2022: 50.2 (projection); 2023: 51.4 (projection) - Domestic: 2018: 7.3; 2019: 6.1; 2020: 9.3; 2021: 8.0 (projection); 2022: 6.7 (projection); 2023: 5.7 (projection) - External: 2018: 41.9; 2019: 40.1; 2020: 40.8; 2021: 39.4 (projection); 2022: 43.5 (projection); 2023: 45.8 (projection) ### Policy response to COVID-19 and natural disasters - Fiscal measures: - Fiscal stimulus package announced April 2020 amounting to over 4 percent of GDP; actual disbursements and fee exemptions about 2.5 percent of GDP. - May 2021: second fiscal stimulus announced; government developing further support of around 1.8 percent of GDP through banks and VADB. - TC Harold Relief Assistance Initiative: 0.03 percent of GDP (monetary measure noted). - Monetary and financial measures: - March 2020: RBV cut policy rate by 65 bps to 2.25 percent and increased liquidity support. - Loan repayment deferral and relaxed loan classification requirements until end-September 2021. - Regulatory CAR reduced from 12 percent to 10 percent; CAR remained at 20 percent as of end-2020. - Open market operations rose from 600 million Vatu per week to 800 million Vatu per week; excess reserves over 31 billion Vatu at end-2020 (target level 3 billion Vatu). - Reactivation of ISEFF and DRCF: 500 million Vatu each made available to commercial banks. ### Vaccination rollout (plans and doses) - Authorities plan to vaccinate 20 percent of the population under COVAX in 2021 and 40 percent of the population by June 2022. - Doses received and expected: - 20,000 doses (AstraZeneca) through COVAX; - 20,000 doses (AstraZeneca) from Australia; - 24,000 doses (Sinopharm) from China; - Expect 48,000 doses (AstraZeneca) from Japan in August 2021; - Additional 28,000 doses (AstraZeneca) from Australia expected soon. - Targeted 2021 vaccination groups: health workers and border staff (1 percent of the population), persons over 55 years of age (11.3 percent of the population), and persons aged over 35 with co-morbidities (7.1 percent of the population). ### Financial sector soundness and supervisory recommendations - Financial sector size and indicators: - Financial sector assets about 155 percent of GDP; five commercial banks account for 131 percent of GDP. - System-wide NPL ratio increased from 14.4 percent at end-2019 to 19.0 percent at end-2020. - CAR of all banks above regulatory threshold as of end-2020; CAR remained at 20 percent end-2020. - Selected FSIs: Regulatory capital to risk-weighted assets: 2019: 19.2; 2020: 20.0; 2021Q1: 21.8. Nonperforming loans to total gross loans: 2019: 14.4; 2020: 19.0; 2021Q1: 18.2. - Key recommendations: - Keep monetary policy accommodative until recovery is entrenched; closely monitor inflationary pressures. - Strengthen supervisory frameworks; conduct stress testing; establish crisis management and resolution frameworks. - Guide banks to accumulate general provisioning and restructure debt of temporarily illiquid but solvent borrowers. - Reform judicial process for quicker collateral asset recovery; improve credit bureau and credit information usability. - Promote digitalization to advance financial inclusion while addressing AML/CFT and identification constraints (establish personal identification registration system; legal framework for digital money). ### Correspondent banking relationships (CBR) and ECP links to financial integrity - NBV lost its only USD CBR at end-June 2021; loss may affect NBV profitability though exporters may use other domestic banks for USD clearing. - ECP receipts accounted for about one third of total revenues in 2020 and posed AML/CFT and governance risks. - Annex findings: - Decline in CBRs globally and regionally driven by AML/CFT compliance costs and low profitability. - CBR terminations commonly associated with AML/CFT concerns; Vanuatu’s ECP raised elevated ML/TF risk concerns. - Recommendations: - Strengthen AML/CFT legal frameworks and institutional capacity; improve ECP vetting and transparency. - Coordinate internationally to mitigate de-risking and preserve CBRs. ### Fiscal strategy, debt sustainability, and scenarios - Near-term: continue targeted fiscal support; staff projects fiscal deficit to widen to 3.5 percent of GDP in 2021 from -0.1 percent in 2020. - Medium-term fiscal strategy recommendations: - Anchor consolidation on domestic revenue mobilization, including introduction of personal and corporate income taxes (staff estimates introduction could increase revenues by 2.5 percent of GDP). - Maintain nominal PPG debt below 60 percent of GDP; staff suggests aspirational 50 percent PPG debt-to-GDP target. - Staff recommends a gradual fiscal adjustment of 0.6 percent of GDP annually starting in 2024; two cases: - 2-year adjustment (2024–2025): nominal PPG-debt-to-GDP would remain below 60 percent in medium- to long-term. - 3-year adjustment (2024–2026): ratio would decline below 50 percent of GDP. - Implementing annual fiscal consolidation of 0.6 percent of GDP through 2031 to compensate for potential loss of all ECP revenues from 2022 onwards would keep PV of PPG debt to GDP below DSA threshold of 55 percent. - DSA baseline and stress tests: - Baseline real GDP growth average 2021–31: 2.7 percent (average 3 percent during 2021–24). - PV of PPG external debt-to-GDP projected to increase from 24.0 percent in 2021 to 35.6 percent in 2031 under baseline. - Alternative scenarios: - Sudden fall of ECP revenues to zero from 2022: PV of PPG external debt-to-GDP would reach 40 percent threshold in 2028. - Combined contingent liabilities shock (e.g., Air Vanuatu): breaches thresholds earlier (breach of PV of PPG external debt-to-GDP from 2022 in tailored test). - Natural disaster shock: PV of PPG external debt-to-GDP breaches threshold from 2027. - DSA conclusion: risk of debt distress is "moderate" with "limited space to absorb shocks". ### Climate resilience, disaster management, and public investment - IMF (2021) estimates Vanuatu would need to spend around 13 percent of GDP annually on public adaptation costs. - Institutional and financing measures: - Disaster Risk Management Act 2019 passed and gazetted February 2020. - Cat DDO facility: US$ 10 million contingent grant secured January 2020; payout received April 2020. - Government emergency fund allocation VUV 300 million in 2021; PFEM Act allows reallocation of 1.5 percent of budget appropriation in emergency. - Policy recommendations: - Develop cohesive climate risk financing strategy; consider trust fund using windfall ECP revenues; consider visitor-based green taxes. - Introduce climate change expenditure tagging system; articulate medium-term expenditure and financing roadmap for adaptation plan. - Expand contingent ex-ante financing arrangements and improve insurance/risk-pooling coverage. ### Governance, SOEs, and structural reform priorities - Governance and integrity priorities: - Strengthen transparency and supervision of SOEs (Air Vanuatu highlighted); publish timely financial statements; establish supervisory legal framework for SOEs. - Strengthen AML/CFT frameworks, tax transparency, and central bank autonomy and governance (2016 Safeguards Assessment recommendations remain incomplete). - Fast-track structural reforms to diversify economy, improve connectivity, digitization, energy access, and business environment. - FDI and diversification: - FDI inflows averaged 4.7 percent of GDP in 2010–19; sectoral tilt toward services; agriculture underinvested relative to its GDP share. - Policy advice: review reserved activities and occupations, improve infrastructure, reduce costs, and align investment policy with PACER Plus. ### Risks to the outlook (key items) - Risks are substantial and tilted to the downside; main risks include: - Worsening pandemic requiring longer border closure. - Sharp fall in ECP revenues amid AML/CFT concerns and loss of key CBR. - Acceleration of de-risking by foreign firms, impeding FDI and leading to further loss of CBRs. - Further deterioration of banks’ asset quality and rising NPLs. - Lack of transparency and weak supervision of SOEs increasing contingent liabilities. - Further natural disasters. ### Executive Board assessment and staff recommendations (summary) - Directors commended authorities for decisive health measures and prudent policy management maintaining macro-financial stability. - Emphasized front-loading vaccination strategy with development partner support. - Fiscal: maintain near-term targeted fiscal support; formulate credible medium-term consolidation anchored on domestic revenue mobilization; minimize SOE contingent liabilities. - Monetary/financial: keep accommodative monetary stance until recovery entrenched; strengthen bank supervision; establish crisis management frameworks. - Governance/structural: strengthen AML/CFT, tax transparency, RBV autonomy, SOE oversight; advance economic diversification and climate resilience; continue technical assistance support. *Source: IMF staff report for the 2021 Article IV consultation (1vutea2021002; Mission dates and source content as provided in the chapter).* ### 2020. Due to the authorities’ decisive measures, Vanuatu has had no domestic transmission ### 2020. Due to the authorities’ decisive measures, Vanuatu has had no domestic transmission ### Recent developments and shocks - Borders closed under a state of emergency since March 2020; to date only three confirmed cases of COVID-19 have been identified at Vanuatu’s borders. - Border closure caused a severe collapse in tourism and spillovers to other sectors; infrastructure projects delayed due to border closure and lack of domestic capacity. - Natural disasters in 2020: - Tropical Cyclone Harold (Category 5) caused significant damage to shelter, schools, health infrastructure and supplies, agricultural crops, power and telecommunications; affected an estimated 43 percent of the population. - Volcanic eruption in Tanna Island caused extensive damage and severely affected crop production and food supply. - Damages by TC Harold are estimated at VUV 56.0 billion (damages to infrastructure and assets estimated at VUV 27.7 billion), accounting for over 50 percent of GDP (July 2020, Vanuatu Recovery Strategy 2020-2023, Government of Vanuatu). - Vanuatu lost a key correspondent banking relationship (CBR) at end-June 2021, amplifying concerns over financial integrity and prospects for ECP payments. - Air Vanuatu, a state-owned enterprise (SOE), is in the process of being restructured. ### Economic impact and projections - Real GDP: - 2018: 2.9 - 2019: 3.9 - 2020: -6.8 - 2021: 1.2 (projection) - 2022: 3.0 (projection) - 2023: 4.1 (projection) - Drivers of 2021 projected growth: agricultural production, remittance income from seasonal workers, and construction activity (despite delays pushing several large infrastructure projects into 2022). - Tourism-related sectors expected to contract further in 2021 due to extended border closure and begin gradual recovery in 2022. - Inflation (consumer prices, period average): - 2018: 2.4 percent - 2019: 2.7 percent - 2020: 5.7 percent - 2021: 5.4 percent (projection) - 2022: 2.6 percent (projection) - 2023: 2.3 percent (projection) - Balance of payments and external indicators: - Travel receipts (percent of GDP): 2018: 32.3; 2019: 29.8; 2020: 7.2; 2021: 0.6 (projection); 2022: 4.4 (projection); 2023: 11.3 (projection) - Current account (percent of GDP): 2018: 12.2; 2019: 16.0; 2020: 3.3; 2021: -6.9 (projection); 2022: -8.0 (projection); 2023: -5.7 (projection) - Gross international reserves (in millions of U.S. dollars): 2018: 420.6; 2019: 511.6; 2020: 613.6; 2021: 658.2 (projection); 2022: 673.0 (projection); 2023: 697.7 (projection) - Gross international reserves (in months of prospective G&S imports): 2018: 9.6; 2019: 13.3; 2020: 15.3; 2021: 14.7 (projection); 2022: 13.3 (projection); 2023: 11.8 (projection) - Public finances (percent of GDP): - Total revenue: 2018: 39.5; 2019: 38.5; 2020: 44.2; 2021: 40.6 (projection); 2022: 34.2 (projection); 2023: 32.1 (projection) - Taxes: 2018: 18.4; 2019: 17.6; 2020: 14.6; 2021: 16.1 (projection); 2022: 16.5 (projection); 2023: 17.0 (projection) - Other revenue: 2018: 12.0; 2019: 13.9; 2020: 16.0; 2021: 11.2 (projection); 2022: 9.7 (projection); 2023: 8.7 (projection) - Grants: 2018: 9.2; 2019: 7.0; 2020: 13.6; 2021: 13.2 (projection); 2022: 8.0 (projection); 2023: 6.4 (projection) - Expenditure: 2018: 33.3; 2019: 31.8; 2020: 44.4; 2021: 44.0 (projection); 2022: 38.3 (projection); 2023: 36.1 (projection) - Expense: 2018: 26.9; 2019: 28.5; 2020: 37.8; 2021: 36.4 (projection); 2022: 29.6 (projection); 2023: 29.0 (projection) - Net acquisition of nonfinancial assets: 2018: 6.4; 2019: 3.3; 2020: 6.6; 2021: 7.6 (projection); 2022: 8.7 (projection); 2023: 7.1 (projection) - Net lending (+)/borrowing (-): 2018: 6.3; 2019: 6.7; 2020: -0.1; 2021: -3.5 (projection); 2022: -4.1 (projection); 2023: -4.0 (projection) - Public and publicly-guaranteed debt (end of period): 2018: 49.2; 2019: 46.1; 2020: 50.1; 2021: 47.5 (projection); 2022: 50.2 (projection); 2023: 51.4 (projection) - Domestic: 2018: 7.3; 2019: 6.1; 2020: 9.3; 2021: 8.0 (projection); 2022: 6.7 (projection); 2023: 5.7 (projection) - External: 2018: 41.9; 2019: 40.1; 2020: 40.8; 2021: 39.4 (projection); 2022: 43.5 (projection); 2023: 45.8 (projection) ### Risks to the outlook - Risks are substantial and tilted to the downside; key risks include: - A worsening of the pandemic requiring longer border closure, adversely impacting economic activity. - A sharp fall in revenues from the Economic Citizenship Program (ECP) amid growing concerns on AML/CFT risks and the loss of the key correspondent banking relationship. - Acceleration of de-risking by foreign firms related to AML/CFT and tax transparency issues, impeding foreign direct investment (FDI). - Further deterioration of banks’ asset quality undermining financial soundness. - Lack of transparency and ineffective supervision framework for state enterprises negatively affecting the business environment and fiscal management. - An ever-present downside risk of further natural disasters. ### Executive Board assessment and staff recommendations - Executive Directors commended the authorities for decisive actions that prevented a local outbreak and for prudent policy management maintaining macro-financial stability. - Directors emphasized front-loading the vaccination strategy with development partner support to help support the recovery. - Fiscal policy: - Maintain fiscal support in the near term, well targeted given limited fiscal space, with phasing out state-contingent. - Formulate a credible medium-term fiscal consolidation strategy anchored on domestic revenue mobilization, including introduction of personal and corporate income taxes, to reduce reliance on ECP revenues and fund climate-resilient infrastructure and development needs. - Minimize contingent liabilities of SOEs, including the state-owned airline (Air Vanuatu). - Monetary and financial sector policy: - Keep monetary policy accommodative until recovery is entrenched; closely monitor inflationary pressures. - Remain vigilant about the banking sector; strengthen supervisory frameworks; establish crisis management and resolution frameworks; improve collateral asset recovery environment for liquidation of non-performing loans. - Promote digitalization to advance financial inclusion, while addressing challenges. - Governance and structural reforms: - Improve governance, reduce corruption, and bolster Vanuatu’s risk profile to mitigate risks from weak due diligence of the ECP and loss of correspondent banking relationships. - Strengthen legal frameworks and institutional capacity on AML/CFT, tax transparency, and central bank autonomy and governance. - Establish supervisory frameworks for SOEs and enhance their transparency. - Advance economic diversification and development of quality infrastructure; improve resilience to natural disasters and climate change; operationalize the Disaster Risk Management Act and review the National Adaptation Plan for Action. - Continue to benefit from technical assistance by the Fund and development partners given Vanuatu’s limited capacity. *Source: IMF staff report for the 2021 Article IV consultation (Mission dates: June 28–July 22, 2021; August 16, 2021).* ### 6. The authorities responded with a comprehensive policy package to mitigate the socio- ### Policy Response to the COVID-19 Shock and Twin Natural Disasters ### Policy measures and immediate responses - Fiscal stimulus package announced in April 2020 amounting to over 4 percent of GDP; a major component (almost a quarter of this package) included emergency support to employment in the tourism sector. - Actual disbursements of support and fee exemptions amounted to about 2.5 percent of GDP due in part to limited implementation capacity. - Vanuatu National Provident Fund (VNPF) supported members by providing short-term loans. - May 2021: government announced a second fiscal stimulus package targeted at households and firms most affected by the pandemic. - Government developing a scheme to provide further financial support of around 1.8 percent of GDP through commercial banks and the Vanuatu Agricultural Development Bank (VADB). - In March 2020, the Reserve Bank of Vanuatu (RBV) cut its policy rate by 65 bps to 2.25 percent and increased liquidity support to banks. - RBV allowed loan repayment deferral and relaxed loan classification requirements until end-September 2021 to provide banks additional time to restructure loans. - Regulatory threshold for banks’ Capital Adequacy Ratio (CAR) reduced from 12 percent to 10 percent. - Open market operations rose from 600 million Vatu per week at the beginning of 2020 to 800 million Vatu per week at the end of the year; excess reserves over 31 billion Vatu at end-2020 while the target level is 3 billion Vatu. - Reactivation of Imports Substitution and Export Finance Facility (ISEFF) and Disaster Reconstruction Credit Facility (DRCF): 500 million Vatu made available to commercial banks under each facility. - TC Harold Relief Assistance Initiative: 0.03 percent of GDP (monetary measure noted in table). ### Economic impact and financial sector developments - Real GDP is estimated to have contracted by 6.8 percent in 2020, led by a collapse of activity in tourism and related sectors, including accommodation and food services. - Headline inflation spiked to 5.6 percent in 2020Q2; average inflation rate of 2019Q3-2020Q2 is 3.8 percent. - System-wide nonperforming loan (NPL) ratio increased from 14.4 percent at end-2019 to 19.0 percent at end-2020. - CAR remained well above the regulatory threshold at 20 percent as of end-2020. - The financial sector has assets of about 155 percent of GDP and is dominated by five commercial banks that account for 131 percent of GDP. ### Fiscal and external positions - Despite a surge in expenditures and decline in tax revenues, the overall fiscal position was near balance in 2020 owing to delays in infrastructure spending, windfall ECP receipts (about one third of total revenues), and donor support. - ECP receipts pose AML/CFT and governance risks. - Current account registered a surplus of 3.3 percent of GDP in 2020 despite a sharp decline in tourist arrivals. - International reserves increased to U$613.6 million (about 15 months of prospective import cover). - Vanuatu’s external position in 2020 is assessed to be stronger than fundamentals and desirable policy settings (Appendix III). ### Vaccination rollout - Authorities plan to vaccinate 20 percent of the population under COVAX in 2021 and 40 percent of the population by June 2022. - Doses received and expected: - 20,000 doses (AstraZeneca) through COVAX; - 20,000 doses (AstraZeneca) from Australia; - 24,000 doses (Sinopharm) from China; - Expect 48,000 doses (AstraZeneca) from Japan in August 2021; - Additional 28,000 doses (AstraZeneca) from Australia expected soon. - Sufficient vaccine doses for the entire population expected to be secured through COVAX and donor support in the near term, but rollout faces logistical difficulties and vaccination hesitancy in some areas. - Targeted 2021 vaccination groups: health workers and border staff (1 percent of the population), persons over 55 years of age (11.3 percent of the population), and persons aged over 35 with co-morbidities (7.1 percent of the population). ### Outlook and risks - Real GDP growth expected to increase to 1.2 percent in 2021, led by an uptick in agriculture output, remittances, and construction activity. - Tourism-related sectors expected to contract further in 2021 due to extension of border closures to end-2021 and begin gradual recovery from 2022. - Staff project the economy to recover to pre-pandemic output level by end-2023. - Non-food inflationary pressures expected to remain low. - Current account deficit projected to widen to 6.9 percent of GDP in 2021. - Main downside risks: - Worsening global pandemic requiring longer border closure; - Sharp fall in ECP revenues amid AML/CFT concerns and loss of a key CBR; - Accelerated de-risking by foreign firms leading to further loss of CBRs and impeding FDI; - Further deterioration of banks’ asset quality; - Lack of transparency and effective supervision framework for SOEs increasing contingent liabilities; - Further natural disasters. ### Authorities’ views (summarized) - Authorities broadly concurred with staff’s assessment on economic developments, outlook, and risks; their GDP growth forecasts were more optimistic. - Expected inflation to remain high in first half of 2021 due to temporary food supply shock and increase in global fuel prices; non-food inflation projected to remain under control. - Emphasized importance of supporting agriculture to stabilize supply and prices and to foster economic diversification. - Expressed strong concern over loss of CBRs and called for coordinated international action to reverse the trend. - Confirmed no changes to Vanuatu’s foreign exchange system since the last Article IV consultation. ### Sustaining recovery and growth — Policy recommendations A. Fiscal policy - Near-term: Continue fiscal support; staff projects fiscal deficit to widen to 3.5 percent of GDP in 2021 from 0.1 percent of GDP in 2020 based on the authorities’ 2021 budget. - Staff recommends phasing-out of COVID-related support be state-contingent and targeted at households and firms most affected. - Government support for loans made by commercial banks and VADB should aim at supporting companies most affected but viable to minimize fiscal risks. - Strengthen public expenditure and investment management for more efficient use of public resources. - Front-load vaccination strategy as feasible with development partner support. - Fiscal constraints and DSA: - Debt Sustainability Analysis indicates risk of debt distress is moderate with limited space to absorb shocks. - A sudden stop in ECP revenues could undermine fiscal sustainability and require more rapid fiscal consolidation. - Vanuatu’s development needs and climate vulnerabilities will likely require scaling up infrastructure spending over the medium-term; reliance on external concessional financing expected. - Key staff recommendations: - Complete the proposed 2017 tax reforms; introduction of personal and corporate income taxes could increase government revenues by 2.5 percent of GDP. A phased introduction could be considered. - Stabilize expenditures as a share of GDP; keep the wage bill in check and maintain a positive recurrent spending balance together with conservative ECP revenue projections. - Limit and prioritize external borrowings by SOEs; strengthen monitoring and control of fiscal risks posed by SOEs, including introducing governmental approval of their external borrowing and improving governance. - Fiscal strategy and consolidation scenarios: - Staff’s baseline scenario projects the fiscal deficit to be around 4 percent of GDP over the medium-term, leading to a breach of the authorities’ PPG fiscal anchor in 2028. - A key fiscal anchor: maintain nominal public and publicly guaranteed (PPG) debt below 60 percent of GDP; staff suggests an aspirational 50 percent PPG debt-to-GDP target as recommended in the 2019 Article IV consultation. - Staff recommends a gradual fiscal adjustment of 0.6 percent of GDP annually starting in 2024. Two cases: - 2-year adjustment (2024–2025): nominal PPG-debt-to-GDP would remain below 60 percent in medium- to long-term. - 3-year adjustment (2024–2026): ratio would decline below 50 percent of GDP. - Implementing an annual fiscal consolidation of 0.6 percent of GDP through 2031 to compensate for potential loss of all ECP revenues from 2022 onwards would keep the present value of PPG debt to GDP below the DSA threshold of 55 percent. B. Monetary and financial sector policy - Maintain the current accommodative monetary policy stance with a low policy rate and ample liquidity support until the recovery is entrenched. - Headline CPI inflation has been higher than RBV’s target range of 0 to 4 percent partly due to TC Harold related food supply shock and rising global food prices but is expected to return to the target range. - RBV has stabilized non-food inflation between 0 and 1 percent over past years; current monetary stance judged appropriate but should be closely monitored and periodically reassessed, particularly if unexpected shocks or persistent inflationary pressures emerge. - Continue suspension of onsite examinations with focus on offsite monitoring; temporary suspension of prudential requirement on asset quality and loan repayment deferrals extended to Sep-21 (as noted in policy table). *Source: Vanuatu authorities and IMF staff report content provided in the chapter.* ### 20. The authorities should carefully monitor individual banks and continue to strengthen ### 20. The authorities should carefully monitor individual banks and continue to strengthen supervision. ### Banking sector soundness and supervisory recommendations - As of end-2020, CARs of all banks were above the regulatory threshold while individual banks’ financial positions varied. - Vanuatu’s NPLs net of provisions to capital are higher than in other Pacific Island Countries, and rising NPLs in the wake of the pandemic could pose challenges to financial sector soundness. - The relaxation of loan classification requirements (extended to end-September 2021) may mask vulnerabilities in bank balance sheets. - Recommendations: - Conduct stress testing to highlight potential weaknesses. - If capital and liquidity buffers fall below regulatory minima, the RBV should agree with banks on plans to bring capital and liquidity above the minimum threshold. - RBV should guide banks to accumulate further general provisioning early and restructure the debt of temporarily illiquid but otherwise solvent borrowers. - Establish crisis management and resolution frameworks. ### National Bank of Vanuatu (NBV) and correspondent banking relationships - NBV lost its only CBR of USD at end-June 2021. - NBV is the only domestic bank holding multiple branches in rural areas; the loss of the CBR: - Has limited impact on exporters (other domestic banks provide USD clearing services). - Could cause potential loss of customers needing USD clearing services, adversely affecting NBV’s profitability. - Recommendation: - Authorities should closely monitor NBV’s financial position and appropriately manage any fiscal risks given that NBV is owned by the VNPF and the government. ### Non-performing loans (NPLs) and credit system reforms - The high NPL ratio in the personal credit sector over the years arose from poor credit standards amid efforts to promote financial inclusion; the situation remained broadly unchanged (except for 2020-Q4 affected by relaxation of loan classification). - Recommendations: - Improve the credit system for quicker reduction in existing NPLs and for healthier bank lending. - Reform the judicial process for swifter collateral asset recovery. - Improve accessibility to usable credit information. - Support ongoing efforts to improve Vanuatu’s credit bureau to enrich credit information and make it usable with digital technology. ### Digitalization, identification, and AML/CFT gaps - The pandemic and natural disasters in 2020 increased the use of digital technologies for financial services. - Digital money with blockchain technology was used to deliver aid to households affected by natural disasters (Box 1). - Constraints: - Lack of a personal identification system prevents widespread adoption of digital money. - The current AML/CFT legal framework does not cover digital money activities. - Recommendations: - Establish a personal identification registration system. - Establish a legal framework to supervise digital money activities. - Consider a regulatory sandbox to help develop regulations around the use of e-commerce and digital money. ### Authorities’ views on monetary policy and supervision - The authorities considered the current monetary policy stance as appropriate and committed to close monitoring and periodic reassessment; inflation is expected to remain within target over the medium-term, though risks remain. - The authorities committed to carefully monitoring the banking sector and strengthening supervision; RBV is closely monitoring individual banks and is eager to establish crisis management and resolution frameworks. - Authorities are conducting a holistic review of financial sector regulatory frameworks, including new legislation on national payment systems and improvements in credit reporting; an amendment of Financial Dealers Licensing Act to allow digital asset trading and require physical presence of all license holders in Vanuatu was gazetted in July 2021. ### Macro-structural and governance issues (high-level findings and priorities) - Economic diversification and infrastructure development are essential for sustained and inclusive growth and resilience to shocks; authorities are making progress in agricultural diversification and fisheries, and recent exports include passionfruit and cassava to Australia and New Zealand. - Enhancing climate resilience is essential: the National Adaptation Plan for Action (2006) is being reviewed; it lacks estimated fiscal costs and a financing roadmap. - Recommendation: Articulate a medium-term expenditure and financing roadmap for the adaptation plan and introduce a climate change expenditure tagging system. - Governance and integrity priorities: - ECP and AML/CFT concerns: current vetting process for ECP applicants is inadequate; several individuals who obtained passports through the ECP have been linked to criminal activity. - Recommendation: Strengthen AML/CFT framework and institutional capacity; establish a more stringent vetting process and detect criminal activities by existing and new ECP passport holders. - SOE governance: reform progress has been limited; urgent need to bolster management and transparency, particularly for Air Vanuatu; timely publication of financial statements and a supervisory legal framework for SOEs are recommended. - Tax transparency: legislative amendment to meet the international standard on tax information exchange (which could contribute to delisting from EU’s blacklist) remains under parliamentary discussion; staff recommends implementation as early as possible. - Central Bank autonomy and governance: strengthen RBV autonomy and governance per the recommendations of the 2016 Safeguard Assessment; RBV has appointed a Chief Risk Officer but drafting of RBV Act amendments is incomplete and effective audit committee/internal audit function is absent. ### Capacity development priorities - Technical assistance (TA) needs: - Statistical issues: seek support from PFTAC and Statistics Department on national accounts compilation and development; TA on macro-frameworks to improve forecasting. - Public financial management: TA on public infrastructure management to improve quality of infrastructure management. - Banking supervision: urgent need for TA on crisis management and resolution frameworks, following recommendations of the 2019 banking diagnostic assessment; ongoing risk-based supervision TA from PFTAC has been hindered by the pandemic. - AML/CFT: need to further improve AML/CFT framework and institutional capacity, given the recent loss of a vital CBR. ### Staff appraisal and risks to the outlook - After a severe contraction in 2020, real GDP is expected to return to positive territory in 2021, supported by agricultural production, remittance income, and construction activity (notwithstanding project delays into 2022). Tourism-related sectors are expected to contract further in 2021 and start gradual recovery in 2022. - The current strength of the external position is temporary, driven by strong revenues from the ECP; the external position is assessed to be stronger than implied by fundamentals and desirable policy settings. Current account balances are expected to narrow as ECP-related flows moderate and tourism recovers only gradually. - Risks (substantial and tilted to the downside): - Worsening global pandemic with longer border closure. - Sharp fall in ECP revenues amid AML/CFT concerns, amplified by loss of a key CBR. - Further deterioration of banks’ asset quality eroding financial system soundness. - Lack of transparency and effective supervision of SOEs increasing contingent liabilities (e.g., Air Vanuatu restructuring). - AML/CFT and EU blacklisting issues accelerating de-risking by foreign firms, leading to further loss of CBRs and impeding FDI. - Natural disasters. *Source: VANUATU — INTERNATIONAL MONETARY FUND (excerpt).* ### 37. Continued fiscal support over the near term is necessary. The phasing-out of COVID- ### Continued fiscal support over the near term is necessary. The phasing-out of COVID-related support should be state-contingent. ### Findings on fiscal stance and constraints - Continued fiscal support over the near term is necessary. - Vanuatu has limited fiscal space, which constrains the breadth and duration of fiscal support. ### Policy recommendations — targeting and state contingency - The phasing-out of COVID-related support should be state-contingent. - Ensure that support continues to be well targeted at households and firms most affected by the pandemic. ### Public expenditure and investment management - It would be important to strengthen public expenditure and investment management for a more efficient use of public resources. ### Fiscal risks and contingent liabilities - Properly managing fiscal risks by minimizing the contingent liabilities of Air Vanuatu would be key. ### Health strategy to support recovery - Front-loading the vaccination strategy as feasible with support of development partners should be a priority to help support the recovery. *Source: IMF content unit 1vutea2021002 - 37.* ### 38. Near-term support needs to be embedded in a credible medium-term fiscal strategy ### Near-term support needs to be embedded in a credible medium-term fiscal strategy ### Fiscal strategy and public finances - Near-term support should be embedded in a credible medium-term fiscal strategy that brings about a gradual fiscal adjustment once recovery is firmly entrenched. - The medium-term fiscal trajectory remains uncertain, and Vanuatu’s fiscal space is limited. - Development needs and vulnerabilities to climate change would require a scaling up of infrastructure spending in the medium-term. - A credible forward-looking fiscal strategy, including an introduction of personal and corporate income taxes, should be put in place. - Further fiscal consolidation would allow authorities to reduce reliance on Economic Citizenship Program (ECP) revenues and to use revenues for resilient infrastructure. - Key fiscal numbers (selected): - Population (2020): 301,695 - Per Capita GDP (2020): US$ 3,090 - Real GDP (annual percent change): 2018: 2.9; 2019: 3.9; 2020: -6.8; 2021: 1.2; 2022: 3.0; 2023: 4.1 - Total revenue (in percent of GDP): 2018: 39.5; 2019: 38.5; 2020: 44.2; 2021: 40.6; 2022: 34.2; 2023: 32.1 - Taxes (in percent of GDP): 2018: 18.4; 2019: 17.6; 2020: 14.6; 2021: 16.1; 2022: 16.5; 2023: 17.0 - Of which: Economic citizenship programs (in percent of GDP): 2018: 9.9; 2019: 11.7; 2020: 14.1; 2021: 8.5; 2022: 7.0; 2023: 6.0 - Expenditure (in percent of GDP): 2018: 33.3; 2019: 31.8; 2020: 44.4; 2021: 44.0; 2022: 38.3; 2023: 36.1 - Net lending (+)/borrowing (-) (in percent of GDP): 2018: 6.3; 2019: 6.7; 2020: -0.1; 2021: -3.5; 2022: -4.1; 2023: -4.0 - Public and publicly-guaranteed debt (end of period, in percent of GDP): 2018: 49.2; 2019: 46.1; 2020: 50.1; 2021: 47.5; 2022: 50.2; 2023: 51.4 - Table 2 (central government budgetary operations, selected): Total revenue (2020 estimate): 39,813 (millions of vatu); Of which ECP revenues (2020 estimate): 9,954 (millions of vatu) - Fiscal consolidation should be state-contingent, with initiation of adjustment once recovery is firmly entrenched. ### Monetary policy and reserves - The current accommodative monetary policy stance is appropriate. - The Reserve Bank of Vanuatu (RBV) should maintain the current accommodative stance until the recovery is entrenched and continue to closely monitor and periodically reassess the policy stance, particularly in the event of unexpected shocks or persistent inflationary pressures. - The RBV maintained the SRD at 5.25 per cent in 2020 as inflation is estimated to return to the RBV’s target range. - Gross international reserves (selected): 2018: 420.6 (millions of U.S. dollars); 2019: 511.6; 2020: 613.6; 2021: 658.2; 2022: 673.0; 2023: 697.7 - Gross international reserves (in months of prospective G&S imports): 2018: 9.6; 2019: 13.3; 2020: 15.3; 2021: 14.7; 2022: 13.3; 2023: 11.8 ### Financial sector soundness and risks - The financial sector is broadly stable but should be carefully monitored. - As of end-2020, capital adequacy ratios (CARs) of all banks were above the regulatory threshold while individual banks’ financial positions varied. - Rising nonperforming loans (NPLs) in the wake of the pandemic could pose challenges to financial sector soundness. - Financial soundness indicators (selected): - Regulatory capital to risk-weighted assets: 2019: 19.2; 2020: 20.0; 2021Q1: 21.8 - Nonperforming loans to total gross loans: 2019: 14.4; 2020: 19.0; 2021Q1: 18.2 - Return on assets: 2019: 0.1; 2020: -0.1; 2021Q1: 1.1 - Liquid assets to total assets (liquid asset ratio): 2019: 43.6; 2020: 44.0; 2021Q1: 43.4 - Private credit growth remained stable amid the pandemic while household credit growth somewhat weakened. - Bank profitability has weakened significantly since 2019 but recently improved. - Bank reserves continued to build up, and loan-to-deposit ratio stabilized. ### Economic diversification, infrastructure, and external sector - Economic diversification and development of quality infrastructure are essential for sustained and inclusive growth and resilience to shocks. - Smooth ratification of PACER Plus and improving the regulatory framework could promote vital foreign investment. - External sector developments (selected): - Current account (in percent of GDP): 2018: 12.2; 2019: 16.0; 2020: 3.3; 2021: -6.9; 2022: -8.0; 2023: -5.7 - Travel receipts (in percent of GDP): 2018: 32.3; 2019: 29.8; 2020: 7.2; 2021: 0.6; 2022: 4.4; 2023: 11.3 - Exports of goods (in percent of GDP): 2018: 6.9; 2019: 4.9; 2020: 5.2; 2021: 5.3; 2022: 5.4; 2023: 5.4 - Trade balance (in percent of GDP): 2018: -26.2; 2019: -29.5; 2020: -23.5; 2021: -23.3; 2022: -24.3; 2023: -26.1 ### Climate resilience, disaster management, and public investment - Further enhancing climate resilience is necessary. - Introduction of a climate change expenditure tagging system would help government identify financial gaps and facilitate donor financing. - Staff recommends integrating financing plans, consistent with a medium-term fiscal strategy, for the adaptation plan and disaster response to support resilience-building in a more efficient and effective manner. - Medium-term baseline (selected fiscal projections): - Total revenue (in percent of GDP): 2024: 31.6; 2025: 31.0; 2026: 30.6 - Expenditure (in percent of GDP): 2024: 35.4; 2025: 34.8; 2026: 34.3 - Net lending (+)/borrowing (-) (in percent of GDP): 2024: -3.7; 2025: -3.8; 2026: -3.7 - Public and publicly-guaranteed debt (end of period, in percent of GDP): 2024: 53.2; 2025: 55.5; 2026: 56.8 ### Governance, anti-corruption, and institutional reforms - Improving governance, reducing vulnerabilities to corruption, and bolstering Vanuatu’s risk profile is essential. - It is critical to quickly bolster management and transparency of state-owned enterprises (SOEs), particularly with respect to Air Vanuatu. - Authorities should establish supervisory frameworks for SOEs and enhance their transparency as soon as possible. - Authorities should strengthen legal frameworks and institutional capacities on AML/CFT (especially ECP due diligence), tax transparency, central bank autonomy and governance. These measures should also reduce corruption vulnerabilities. ### Surveillance and consultations - It is recommended that the next Article IV Consultation takes place on the standard 12-month cycle. *Source: IMF staff report (VANUATU), selected sections and tables from the provided content unit.* ### Annex I. Authorities Response to Fund Policy Advice ### Annex I. Authorities Response to Fund Policy Advice ### Fiscal Policy - Fund recommendation: Continue with revenue mobilization and expenditure prioritization to maintain debt sustainability; proposed measures include: - i. Complete the proposed 2017 tax reforms to increase revenues. - ii. Stabilize expenditure as a share of GDP. - iii. Focus on grants and loans with higher concessionality. - iv. Limit and prioritize loans, especially less concessional lending. - Authorities' actions and outcomes: - The authorities did not introduce income tax and pass the Tax administration Act. - Established a national revenue governance committee to oversee the government’s efforts in expanding its revenue base. - ECP revenue windfall used for debt repayments and signed new concessional loan and grant agreement for Climate Change Resilient Transport Project with World Bank IDA. - Fund recommendation: Strengthen the debt management framework; aim for a 50 percent PPG debt-to-GDP target to provide an additional buffer of up to 10 per cent of GDP against fiscal risks from natural disasters (as recommended by 2018 Article IV). - Authorities' actions: - The new national debt management strategy was passed through parliament in 2019 and are in place till 2022. - The authorities adopted a public-and-publicly-guaranteed debt ceiling as 60 per cent of GDP. This includes an implicit understanding that there should be a buffer left for responding to natural disasters. ### Monetary Policy / Exchange Rate Policy - Fund recommendation: RBV should maintain an accommodative monetary policy stance but be ready to ease if necessary; maintain basket peg for now but review if external position worsens. - Authorities' actions and outcomes: - In March 2020, the RBV reduced the policy rate from 2.9% to 2.25% and implemented liquidity provision. - International reserves remained about 15 months of prospective import in 2020. - Non-food inflation is expected to remain stable. - The basket peg regime has been working well, and the REER has remained roughly stable. ### Financial Sector Policy - Fund recommendations: - Work on financial inclusion to further develop the financial sector. - Strengthen regulatory and legal frameworks to support fintech use. - Monitor elevated NPLs and low profitability; strengthen supervisory framework. - Ongoing improvements to AML/CFT regime to strengthen financial sector stability and ease pressures on correspondent banking relationships. - Strengthen RBV’s governance; complete 2016 Safeguards assessment recommendations. - Authorities' actions and outcomes: - In 2020, slow progress toward key financial inclusion goals due to the pandemic. In 2021, the RBV will undertake a mid-term review of the National Financial Inclusion Strategy 2018-2023. - Legislation and supervisory framework to monitor the use of fintech and distributed ledger technology is being developed. The amendment to Financial Dealers Licensing Act became effective in July 2021, allowing the trade of digital assets and requiring physical presence of all license holders in Vanuatu. - The RBV continued monitoring developments in the banking system, including profitability and NPLs. The commercial banks’ loan repayment holiday and the temporary relaxation of loan classification were extended by September 2021. - AML/CFT related bills were passed in Parliament in 2020. Review of current AML/CFT framework by APG/FATF is expected in 2023. - 2016 Safeguards assessment recommendations remain incomplete. ### Structural Policy - Fund recommendation: Focus on diversification to foster stable growth and resilience; complement diversification strategy with improvements in the business environment. - Authorities' actions: - Economic Development Zone (EDZ) legislation is in progress. - The Vanuatu Electronic Single Window (VESW) project, aiming to reduce the cost and time of trading, was completed. ### Natural Disasters and Climate Change - Fund recommendation: Enhance preparedness to natural disaster risk by strengthening risk assessment and planning, building buffers, promoting resilient infrastructure and adequate maintenance; set up a carefully designed national emergency fund with stable and substantial funding. - Authorities' actions: - Disaster Risk Management Act 2019 was passed by parliament in November 2019, and gazetted in February 2020. - The government is setting up a trust account in 2021. The government allocated VUV 300 million to its emergency fund. - The PFEM Act also provides avenues for additional funding of 1.5% of the budget appropriation in emergency. --- ### Annex II. Economic Citizenship Program: An Update ### Overview and features - Vanuatu is the only country in the Asia and Pacific region to have an Economic Citizenship Program (ECP). - ECPs offer commodified citizenship with limited or no residency requirements, restrict scope for income taxation, and increase mobility through visa free access to over a hundred countries. - Vanuatu revived a new ECP in 2016; the government settled on Vanuatu Development Support Program (VDSP) and Vanuatu Contribution Program (VCP) from 2017 onwards. - Schemes offer “honorary citizenship” that includes most ni-Vanuatu rights except voting and political involvement; application requires a background check and takes between 1 to 2 months. ### Pricing, fees, and agents - Initial required amounts: USD 220,000 (single) to USD 280,000 (family with elderly parents). - Reductions over time: - Reduced to USD 150,000 for a single applicant in May 2018. - Reduced to USD 130,000 for a single applicant and USD 180,000 for a family of four in November 2019. - Government fee: USD 80,000 (USD 130,000 for a family of four). - Rest retained by agents (must be born or naturalized Vanuatu citizens); agents pay a 15 percent tax on their revenues. - Number of licensed agents more than doubled in 2020, to over 100. ### Revenue performance and fiscal use - ECP funds collected in 2020 increased by 16.7 percent compared to 2019; 2019 was 23.6 percent higher than revenues in 2018. - ECP revenue accounted for a third of government revenue in 2020 and has been higher than foreign aid since 2018. - ECP revenues are now the largest source of revenue, higher than VAT. - Fiscal outcomes: - Vanuatu ran a large fiscal surplus in 2018 and 2019 and only a small deficit in 2020, despite severe economic impact from the COVID-19 pandemic and natural disasters in 2020. - Government has used surplus ECP revenues for early repayments of debt, one-off expenditures like the COVID-19 stimulus package, natural disaster relief, and mandated restoration of wage levels of public officials. - Government has built and maintained large cash reserves. - Policy guidance: - Any additional surplus should be carefully managed given the threat of sudden stop. - Spending on public consumption would be the riskiest while spending toward public investment and debt consolidation would be safer. - Government should not increase recurrent spending further, particularly on wage bill and use of goods and services. - Vanuatu could potentially pool surplus revenues in a trust fund to cope with high vulnerability to natural disasters and focus on building climate resilience. ### Risks and recommendations - Citizenship-by-investment schemes are associated with financial integrity and corruption risks (money laundering, tax evasion, other crimes). - Risks have manifested: in 2019, questions on effectiveness of AML/CFT regime were raised after international criminals were found holding Vanuatu passports through its ECP. - Concerns: - Insufficient transparency and concerns about stringency of application review process. - No information on citizenship of applicants, acceptance rate and number of approved applications is publicly available. - In current vetting system, Vanuatu’s Financial Intelligence Unit is tasked with conducting only a criminal background check and no further due diligence is performed by the Citizenship Office. - Recommendations: - Urgently mitigate financial integrity risks and reduce growing reliance on ECP revenues. - Strengthen AML/CFT regime and its implementation. - Actively consider revenue mobilization and further expenditure rationalization, given unpredictability of ECP revenues. - Note: Vanuatu has no income or corporate taxes; the revenue base is limited to VAT, tariffs on imported goods and a variety of minor business taxes and fees. --- ### Annex III. External Sector Assessment ### Current account and ECP impact - CA balance: - CA surplus estimated to decline to 3.3 percent of GDP in 2020 from 16 percent of GDP in 2019, largely due to a sharp drop in travel receipts. - Travel receipts (about 30 percent of GDP on average over 2015–19) are estimated to drop by about 75 percent in 2020. - Larger-than-expected windfall revenues from the ECP, increased donor support, and resilience of remittances prevented CA from turning into deficit in 2020. - CA balance is expected to deteriorate in 2021, mainly due to lower ECP and travel receipts. - EBA-lite model for 2020: - CA-Actual: 3.3 - Cyclical contributions (from model): ( - ) 0.6 - COVID-19 adjustor (+) 1/: 8.5 - Additional temporary/statistical factors (+) 2/: -9.7 - Adjusted CA: 1.5 - CA Norm (from model) 3/: -2.0 - Adjusted CA Norm: -2.0 - CA Gap: 3.5 - o/w Relative policy gap: 8.1 - Elasticity: -0.32 - REER Gap (in percent): -11.1 - Notes: - 1/ Additional cyclical adjustment to account for the temporary impact of the pandemic on tourism (8.5 percent of GDP). - 2/ Adjustment to the extraordinary revenue windfall from the ECP (7.8 percent of GDP) measured against forecast ECP revenues over 2021–2026. - 3/ Cyclically adjusted, including multilateral consistency adjustments. - Conclusion: External position for 2020 is stronger than implied by fundamentals and desirable policy setting; main contributors of positive policy gap are the stronger-than-desirable fiscal balance largely due to ECP revenues, lower-than-desirable public health spending, and reserve accumulation. ### Exchange rate, capital flows, and reserves - Exchange rate and competitiveness: - Vatu is linked to a transaction-weighted basket of currencies with weights adjusted periodically. - Real effective exchange rate (REER) appreciated by 1.7 percent on average in 2020, mainly due to higher headline inflation relative to trading partners. - Capital and financial accounts: - Capital and financial accounts inflows recorded a surplus in 2020, driven by donor project-related capital grants and net FDI inflows. - Net FDI inflows (about 4.2 percent of GDP on average over 2015–19) were 2.6 percent of GDP in 2020. - Net errors and omissions were about 4.2 percent of GDP in 2020. - International reserves and adequacy: - Gross official reserves increased to US$613.6 million (about 15 months of imports) in 2020 from US$511.6 million in 2019, largely reflecting windfall ECP receipts and increased donor support. - Reserve adequacy estimated range: 4.2 to 5.6 months of imports, depending on probability of a large shock (sample average 50 percent and Vanuatu’s high vulnerability 75 percent). - Staff’s estimate for reserve adequacy is somewhat higher than RBV’s objective to maintain at least 4 months of imports. - Over time, reserve coverage is expected to remain adequate to finance imports and loan repayments despite slow recovery of tourism and moderating ECP revenues. - Example risk: Cyclone Pam in 2015 destroyed between 70 and 80 percent of GDP and led to large reconstruction and imports needs. --- ### Risk Assessment Matrix (selected risks and policy recommendations) - Unexpected shifts in the Covid-19 pandemic: - Likelihood: Medium - Expected impact: Asynchronous progress could trigger capital outflows, depreciation, inflation pressures, and debt defaults for some EMs. - Main policy recommendation: Continue targeted fiscal measures to affected households and businesses; maintain current accommodative monetary policy stance. - Prolonged border closures: - Likelihood: High - Expected impact: Disruptions to tourism and delays of infrastructure projects; productivity loss in tourism-related sector. - Main policy recommendation: Continue targeted fiscal measures; maintain accommodative monetary policy. - Faster containment: - Likelihood: Medium - Expected impact: Resumption of economic activity could normalize quicker. - Potential drop of ECP revenues: - Likelihood: High - Expected impact: ECP revenues could fall sharply amid AML/CFT concerns and loss of key CBRs; revenue drop might jeopardize medium-term fiscal sustainability. - Main policy recommendation: Formulate a medium-term fiscal strategy; commit to current fiscal rules such as positive recurrent balance and concessional borrowing. - Growing NPLs: - Likelihood: High - Expected impact: Deterioration of asset quality; banks deleveraging; credit tightening. - Main policy recommendation: Guide banks to accumulate further general provisioning early; establish crisis management and resolution frameworks. - Weak governance and AML/CFT issues: - Likelihood: High - Expected impact: Could deter FDI, lead to loss of CBRs, and undermine business environment. - Main policy recommendation: Establish governance structure of SOEs; strengthen AML/CFT institutional capacity; amend tax bill consistent with international standards of tax transparency; complete the 2016 safeguard assessment. - Natural disasters and climate change: - Likelihood: Medium/Low (higher frequency/severity scenario: medium) - Expected impact: Severe economic damage, accelerated emigration, disruptions to trade. - Main policy recommendation: Integrate financing plans, consistent with the medium-term fiscal strategy, for the adaptation plan and disaster response to support resilience-building. *Source: 1vutea2021002 - Annex I. Authorities Response to Fund Policy Advice* ### Annex V. Recent Developments in Correspondent Banking ### Annex V. Recent Developments in Correspondent Banking Relationships in the Pacific Island Countries ### Global and regional trend in correspondent banking relationships (CBRs) - The number of active correspondents has continued to decline globally over a decade, but at a much slower pace and some regions are more affected than others. - A CPMI report published in 2020 based on SWIFT data estimated that the decline in number of active correspondent banks worldwide has been around 22% between 2011 and 2019. - Drivers of the decline: - Correspondent banks’ concerns about risks and weak profitability. - International rules on tax transparency and anti-money laundering and combating of financing of terrorism (AML/CFT) became more stringent following the Global Financial Crisis of 2008. - High costs of AML/CFT compliance and low profitability of transactions made CBRs with banks in Pacific island countries (PICs) less attractive to international correspondent banks. - Regional specifics: - In 2019, the Pacific region saw the largest yearly decline (about 6 percent) in CBRs compared to other regions, including the Caribbean. - The number of active correspondents of USD account has more severely fallen in PICs. - In 2021, the termination of CBRs by an Australian bank with several domestic banks in PICs including Samoa and Vanuatu highlighted heightened economic consequences due to reliance on fewer CBRs. ### Economic role of CBRs for Pacific Island Countries - Definition and function: - CBR involves a financial institution (correspondent bank) in a foreign country facilitating cross border payment services on behalf of a financial institution (respondent bank) in another country. - Importance for PICs: - Financial institutions in PICs are typically too small to have operations in other countries and therefore rely on CBR to conduct cross border payments. - Maintaining CBRs with international banks allows PICs to engage in international trade and develop exporting industries such as agriculture. - CBRs enable transmission of remittances, which are important income sources for PICs. ### Macroeconomic and financial consequences of losing CBRs - Potential adverse effects listed: - Hinder export activities, especially in the case of USD account, a major trade clearing currency. - Lead to inadequate levels of foreign reserves to pay for future imports. - Fiscal sustainability issues if loss of CBR leads to a material reduction in government revenues. - Example: In Solomon Islands, CBR issues threatened to disrupt exports of logs, the main source of foreign reserves and government revenues. - Harm remittances, another source of foreign reserves and a key driver of household consumption in PICs. - Example: Samoa’s recent loss of USD CBR with an Australian Bank could potentially harm future personal remittance inflows. It accounts for 17.2% of GDP in 2019. - Deteriorate banks’ profitability because currency trading is a source of banks’ income. - Example: In Vanuatu, loss of USD CBR in one of the major domestic banks could have material implications on its profitability given that its export clearing service of USD is no longer available. - Increase concentration of CBR in fewer banks, raising systemic instability risk. ### Root causes and AML/CFT-related concerns - CBR terminations commonly associated with AML/CFT related concerns and financial integrity risks. - Observations: - All PICs facing CBR issues previously have been found by the Asia Pacific Group on Money Laundering (APG) to have important deficiencies in their AML/CFT regimes. - International financial centers face heightened ML/TF risks including inadequate entity transparency and inaccurate beneficial ownership information, making them vulnerable to illicit financial flows. - Other contributing factors: negative reputational implications of high-risk activities (e.g., economic citizenship programs) and low profitability. - Specific instance: Elevated reports raised concerns on the strength of due diligence checks linked with criminal activities for Vanuatu’s economic citizenship program, likely contributing to its major domestic bank losing its only USD CBR. - Non-compliance with international standard of tax transparency (e.g., as reflected in the EU list of non-cooperative tax jurisdictions) can also contribute to CBR pressures in the context of de-risking. ### Policy response and technical assistance - Imperatives for PICs: - Actively pursue reforms to strengthen AML/CFT regimes and mitigate financial integrity risks as well as the risk of losing CBR. - Ensure AML/CFT regimes remain resilient to any perceived or actual risks to financial integrity and good governance. - Fund (IMF) support and regional initiatives: - The Fund has assisted PICs to deal with CBR issues through provision of technical assistance and by facilitating regional dialogue among key stakeholders. - Regional dialogue can help identify main drivers behind CBR pressures and potential solutions. - The Fund has a dedicated externally financed thematic fund that supports Fund-delivered technical assistance to targeted PICs to strengthen AML/CFT supervision. - PFTAC is providing secretarial support for a regional KYC facility, contributing to addressing CBR issues in PICs. *Prepared by Seruwaia Cagilaba.* ### 4. Continuing structural reforms and infrastructure development are crucial for ### 4. Continuing structural reforms and infrastructure development are crucial for diversifying growth in Vanuatu ### Key policy recommendations and strategic priorities - Fast track structural reforms that pre-dated the pandemic and align reforms to ensure achievement of the Sustainable Development Goals (see Vanuatu SDG table). - Avoid widespread tax exemptions when implementing the EDZ. - Focus reforms on: - Promoting better connectivity through investment in quality climate resilient infrastructure. - Encouraging digitization of payments and services. - Strengthening governance and transparency. ### Infrastructure and connectivity - Rationale: - Access to key transport infrastructure like roads, wharves, and ports is essential for development and growth because it facilitates trade through connecting buyers to sellers. - Transport infrastructure must be climate change resilient given Vanuatu’s high vulnerability to natural disasters. - Recommendations: - Continue investment in quality transport infrastructure that enables better interisland connectivity and access to markets. ### Digitization, energy, and ICT - Recommendations: - Encourage digitization of payments and services. - Improve energy access to enable wider internet uptake: since 2015, progress on improving access to energy in rural areas has been supported by the World Bank’s Vanuatu Rural Electrification Project. - Additional donor support from the World Bank and the Asian Development Bank is expected to further improve energy access. - Targets and projects: - Government committed to improve internet coverage to 98 percent by 2022 under its Universal Access Policy. - Authorities are actively demonopolizing the ICT sector to encourage competition and private sector investment. - Planned Submarine Cable project and the Interchange Cable Network 2 (ICN2) project expected to enhance internet coverage and connectivity. - Vanuatu Electronic Single Window (VESW), a donor funded project, launched to reduce the cost and time of trading across borders through digitization. ### Governance, transparency, and financial sector reforms - Recommendations: - Fast track implementation of key recommendations from the 2016 Safeguards Assessment on improving RBV governance. - Improve reporting on GBEs, enhance KYC, and strengthen AML/CFT to encourage better quality FDI. - Note on central bank governance (excerpted context): - The text indicates government interference in the financial sector: the central bank is not independent, there is significant control and restrictions on financial institutions, and the central bank has weak control on contract enforcement and fraud prevention in the financial sector. It suggests government ownership and control of financial institutions with a large minority share of overall financial sector assets. ### Foreign Direct Investment (FDI): facts, trends, and policy implications - Aggregate FDI performance: - FDI inflows to Vanuatu averaged 4.7 percent of GDP in 2010–19. - Comparisons: 2.0 percent of GDP in lower middle-income countries and 2.3 percent in middle-income countries. - FDI inflows dropped from a peak of 7.6 percent of GDP in 2011 to 2.9 percent of GDP in 2019, below the average of a group of Pacific island small states. - Despite the decline, Vanuatu’s FDI inflows as a percent of GDP are still twice those of lower middle-income and middle-income countries. - Data sources and limitations: - Disaggregated FDI inflows data are unavailable; proposed investment approved by the Vanuatu Investment Promotion Agency (VIPA) are used as a proxy. - The proposed value of investment in the VIPA data is on average four times larger than the size of FDI inflows in the balance of payments data. - Sectoral allocation and labor impact: - Among the three main economic sectors, the services sector attracted most foreign investment; agriculture attracted the least. - Agriculture accounted for about 20 percent of nominal GDP in 2019 but only attracted 1.3 percent of total proposed foreign investment in 2010–19. - Low investment in agriculture is associated with a low real growth rate in agriculture: 1.6 percent average in 2010–19 versus overall real GDP growth rate of 2.7 percent over the same period. - Foreign-owned businesses’ local employees accounted for one third of Vanuatu’s formal employment in 2018. - Accommodation and food services sector created the most jobs, followed by manufacturing, and wholesale and retail trade. - Source countries and recent shifts: - Australia accounted for 20 percent of total proposed investment in 2015–19 (down from close to half in 2010–14). - Share of proposed investment from China increased from 9 percent in 2010–14 to 16 percent in 2015–19. - Investment policy, labor rules, and recent changes: - VIPA regulates and promotes foreign investment; National Investment Policy Statement updates policies, regulations, and fees. - Foreign Investment Act (2019) replaced the Foreign Investment Promotion Act. - Market access limits: list of 15 business activities reserved for Vanuatu citizens; list of activities open to foreign investors subject to thresholds (example threshold: tour agent with annual sales turnover above vatu 20 million). - Reserved Occupations List under the Employment Act reserves 22 employment categories to Vanuatu citizens (mostly low and semi-skilled). - Non-citizen employees must renew work permits annually, up to a maximum period of four years, to incentivize employer training of citizens. - Recent developments increasing barriers: - Comprehensive review of the Foreign Investment Act includes a proposal for mandatory joint-venture between local and foreign investors after foreign investors renew annual business licenses four times. - In June 2020, 33 new employment categories were proposed to be added to the current 22 reserved occupations; the final number of new categories was reduced to ten. - Expansion of reserved occupations could exacerbate skilled worker shortages; business owners expressed concern in a mid-2018 survey. - Policy advice: - Use the opportunity of adopting PACER Plus to comprehensively review foreign investment policy. - Review lists of reserved activities and reserved occupations to align with PACER Plus; clarify and publish detailed criteria for reservation decisions and thresholds. - Revisit restrictions in FDI in agricultural business given agriculture’s role in employment and diversification. - Improve business operating environment elements critical to attracting FDI: reduce electricity and transportation costs, lower costs of starting a business, resolve bottlenecks in registering property and land titling, and strengthen judicial effectiveness for better contract enforcement. ### Climate vulnerability and recovery opportunity - Context: - Vanuatu is one of the most vulnerable countries to climate change and faces multiple natural disaster risks: tropical cyclones, earthquakes, volcanic eruptions, and droughts. - In 2020, Tropical Cyclone Harold and Yasur volcanic ash fall destroyed farmlands and infrastructure. - The economy was still recovering from TC Pam in 2015 before the COVID-19 crisis hit. - Recommendation: - Recovery from the COVID-19 crisis presents an opportunity to strengthen resilience to natural disasters and climate change through targeted investments and reforms. *Source: Content from chapter 4 of the provided IMF PDF (1vutea2021002).* ### 2. Climate change is likely to impact agriculture, water, coastal and marine resources, ### 2. Climate change is likely to impact agriculture, water, coastal and marine resources, ### Sectoral impacts and health risks - Agriculture - Agricultural productivity could be impacted by the changes in rainfall distribution as agriculture in Vanuatu is entirely rain-fed. - Intense and prolonged rainfall as well as drought combined with higher temperatures could reduce agriculture output and amplify food insecurity. - Marine and fisheries - Projected increases in sea surface temperatures combined with increased ocean acidification are likely to put pressures on the marine food chain and impact the fisheries industry. - Water and disease - The incidence of vector-borne disease such as malaria and dengue fever, and water-borne diseases such as dysentery and diarrhea are likely to increase and shift in distribution. - Tourism and infrastructure - Coastal, marine resources and infrastructure as well as tourism sectors are likely to be impacted. ### Fiscal constraints and exposure - Vanuatu has limited fiscal space to deal with climate change risks; it is under moderate risk of debt distress and is one of the most indebted countries amongst Pacific Island Countries (PICs) with limited revenue mobilization. - Given high debt, the country targets grant financing and highly concessional loans for climate change adaptation. - Until the start of 2016, Vanuatu relied heavily on aid from development partners to cope with natural disasters. ECP revenues allowed the government to build strong cash buffers and support recovery from natural disasters, but uncertainty around the sustainability of ECP revenues remains. - The government can disburse emergency funds up to VUV 300 million before the declaration of state of emergency. - Once a state of emergency is declared, another 1.5 percent of appropriated budget of the year can be reallocated to respond to the shock. - When natural disasters are large, these budget tools may be insufficient; the government relies on grants from development partners and taps into reserves accumulated from windfall ECP revenues. ### Cost estimates and adaptation financing needs - IMF (2021) estimates that Vanuatu would need to spend around 13 percent of GDP annually on public adaptation costs. - Adaptation financing options discussed: - Balanced combination of non-structural interventions (e.g., mapping escaping routes and high-risk areas) and structural measures (e.g., upgrading infrastructure). - Formulating a financing roadmap to meet consistent spending needs over the next decades. - Creating a trust fund with windfall revenues from the ECP and using the returns to finance adaptive capacity building. - Imposing a green tax on visitors (example referenced: Maldives levied a green tax of six dollars per person per day from resorts, vessels, and hotels and three dollars per person per day from guest houses from 2016). - Allocating a share of national budget specifically to resilient infrastructure building (example referenced: Bangladesh’s Climate Fiscal Framework (CFF) where about 2 percent of the national budget was allocated to resilient infrastructure building in 2017). - Incorporating a climate change expenditure tagging system to monitor and track climate-related expenditures in the national budget system. ### Institutional preparedness and recent measures - Vanuatu completed both a National Adaptation Program of Action (NAPA) and a National Action Plan (NAP) for Disaster Risk Reduction; NAPA was last updated in 2006 and would benefit from a revisit. - Disaster Risk Management Act 2019 was passed and gazetted in February 2020. - The National Disaster Management Office (NDMO) coordinates disaster response using a cluster system with a goal to decentralize disaster response and strengthen local government response at community or provincial levels. - Progress in decentralizing disaster management has been made, but more technical assistance is required for greater agility. - The government has started to incorporate climate resilience into new infrastructure building and expanding adaptation capital, though constrained by capacity and high costs. ### Risk financing instruments and experience - Catastrophe Deferred Drawdown Option (Cat DDO) - Vanuatu secured a Cat DDO facility of US$ 10 million contingent grant in January 2020. - Vanuatu received a payout of the whole amount in April 2020 to support response to the combined impacts of the global COVID-19 pandemic and TC Harold. - Instruments like Cat DDO ensure immediate liquidity in the aftermath of disasters and are usually cheaper than the cost of maintaining reserve funds. - Insurance and risk-pooling - Vanuatu has an underinsurance problem; few people have adequate protection in the event of natural disasters. - VNPF has initiated an instrument to provide support of up to VUV 150,000 from the provident fund in the event of a tropical cyclone, but this only caters to a small subset of formal sector employees. - Vanuatu has engaged in the Climate risk insurance initiative, a micro-insurance scheme for farmers and rural households. - Vanuatu does not have any sovereign national disaster risk insurance. - Previous regional risk pool PCRIC: only 5 of the 15 PICs signed up; in 2015 the pilot scheme paid $1.9 million to support Vanuatu’s emergency response after TC Pam; Vanuatu has since withdrawn from the PCRIC due to high expenses and low returns. A Caribbean regional scheme had 19 countries contributing. - Access to multilateral climate funds - Vanuatu is around the median amongst PICs in access to climate financing in terms of amount of funding approved to GDP while the absolute amount is the third largest in the region. - Capacity constraints and stringent requirements for multilateral climate funds like Green Climate Fund (GCF) result in lengthy timelines. - Vanuatu currently has only 1 project under GCF that focuses on resilience development planning and a few in pipeline; this one project under GCF required between three and four years of negotiation. - Vanuatu often relies on regional bodies like the Secretariat of the Pacific Regional Environment Programme (SPREP) to act as accreditation entities, exacerbating a cumbersome coordination process; Vanuatu is trying to get their DoFT to become an accreditation entity, a process expected to take many years. - With more developed capital markets and sustainable debt levels, issuing sovereign green bonds (as Fiji did in 2017) could be considered; for now, tapping into grant financing is the most viable option. ### Policy recommendations and priorities - Strengthen ex-ante resilience (to substantially lower costs of natural disasters) through: - Developing a cohesive and holistic climate risk financing strategy. - Establishing a green fund or trust fund using windfall ECP revenues to finance adaptive capacity building. - Considering visitor-based green taxes to finance resilience, drawing on Maldives’ approach. - Allocating a budget share for resilient infrastructure building (example: Bangladesh’s 2 percent allocation in 2017). - Introducing a climate change expenditure tagging system in public financial management to monitor, track, and evaluate climate-related expenditures and improve accountability. - Enhance disaster risk financing instruments and liquidity options: - Expand use of contingent ex-ante financing arrangements like Cat DDO and consider appropriate mixes of CAT bonds, Cat DDO, and reserve funds tailored to event frequency and severity. - Improve insurance coverage and risk-pooling: - Explore micro-insurance scaling for rural households and farmers and evaluate viable regional or sovereign insurance mechanisms. - Build institutional capacity and streamline access to international climate funds: - Strengthen accreditation capacities to reduce reliance on regional intermediaries and shorten timelines for accessing multilateral funds. - Mobilize more resources from development partners and improve public investment management efficiency to close financing gaps. ### Conclusions - Vanuatu has made strides in adapting to climate change (NAPA, NAP, Disaster Risk Management Act 2019, Cat DDO) but faces severe financing, capacity, and insurance gaps. - Meeting estimated adaptation needs of around 13 percent of GDP annually will require a mix of non-structural and structural measures, improved fiscal instruments, stronger public financial management (including expenditure tagging), and sustained support from development partners and concessional financing sources. *Prepared by Vybhavi Balasundharam.* ### References ### 1vutea2021002 - References ### Fund relations and IMF financial position - Membership Status: joined September 28, 1981; Article VIII. - Quota: "23.80" SDR Million (100.00 percent). - Fund holdings of currency: "19.61" SDR Million (82.38 percent). - Reserves tranche position: "4.20" SDR Million (17.63 percent). - SDR Department net cumulative allocations: "16.27" SDR Million (100.00 percent); holdings: "1.93" SDR Million (11.89 percent). - Outstanding purchases and loans: - RCF Loans: "6.8" SDR Million (28.57 percent quota). - Emergency Assistance: "0.0" SDR Million (0.0 percent). - Projected payments to the Fund (SDR million; based on existing use of resources and presenting holdings of SDRs): - Forthcoming Principal: 2021: "0.85"; 2022: "1.70"; 2023: "1.70"; 2024: "1.70"; 2025: "0.85". - Charges/Interest: 2021: "0.00"; 2022: "0.01"; 2023: "0.01"; 2024: "0.01"; 2025: "0.01". - Total: 2021: "0.85"; 2022: "1.71"; 2023: "1.71"; 2024: "1.71"; 2025: "0.86". - Latest Financial Arrangements: None. - Implementation of HIPC Initiative, Multilateral Debt Relief Initiative, and Catastrophe Containment and Relief: Not applicable. ### Exchange arrangements, consultations, and safeguards - Exchange arrangement: adjustable peg since 1988; vatu linked to a transactions-weighted basket (weights and composition not publicly disclosed). - RBV quotes daily rates vs U.S., Australian, and New Zealand dollars; the euro; the U.K. pound; and the Japanese yen. - Exchange rate as of July 21, 2021: "VT 109.95 per U.S. dollar". - De facto classification: “other managed.” - Article IV consultation cycle: 12–month; previous mission March 26–April 08, 2019; consultation concluded on lapse-of-time basis on June 05, 2019 (Country Report No. 19/162). - Offshore Financial Center Module II Assessment: concluded May 2006. - Safeguards assessment of RBV: completed October 2016; identified weaknesses in governance, autonomy, transparency, and audit; recommendations included: - Draft amendments to the Reserve Bank of Vanuatu Act. - Establish an Audit Committee. - Outsource internal audit services to an independent international audit firm. - Formulate a recapitalization plan. - Progress notes: RBV received technical assistance on recapitalization framework, appointed a Chief Risk Officer, but has not published 2020 financial statements; progress in implementing safeguards recommendations has been slow. - Technical assistance provided mainly through PFTAC on public financial management, revenue administration, banking supervision, macroeconomic management and policy analysis, and statistics. - Resident Representative office for the Pacific Islands opened September 2010 in Suva, Fiji; current Resident Representative: Ms. Leni Hunter. ### Relations with other IFIs - Relations listed with World Bank Group, Asian Development Bank, and Pacific Financial Technical Assistance Center (web links provided in source). ### Statistical issues — data adequacy and dissemination - Overall assessment: Data provision has shortcomings but is broadly adequate for surveillance; frequency and quality of national accounts could be improved; coverage of government finance and external sector statistics could be expanded; data provision lags should be shortened. - National accounts: - Data compiled only on an annual basis. - Plans to rebase GDP and develop a new quarterly measure to at least 2022 have been delayed. - PFTAC providing technical assistance and refocusing on core capacity development for FY2022 and FY2023. - Price statistics: - Quarterly CPI covers Port Vila and Luganville. - Dissemination irregular; most recent release is 2nd quarter of 2020. - CPI weights based on 2010 household surveys; rebasing reprioritized due to delays in 2019 Household Income and Expenditure Survey. - Government finance statistics: - Budget classification broadly consistent with GFSM 2001; migration to GFSM 2014 underway. - Discrepancies across DoFT, VNSO, and RBV need reconciliation. - Central government debt and guarantees compiled quarterly but not publicly available. - Capacity constraints and lack of a dedicated GFS compiler slowed progress. - Monetary statistics: - Compiled broadly in line with the Monetary and Financial Statistics Manual. - RBV reports monthly monetary data using Standardized Report Forms; published in International Financial Statistics. - Vanuatu reports some Financial Access Survey indicators including commercial bank branches per 100,000 adults and ATMs per 100,000 adults. - Financial sector surveillance: - RBV reports Financial Soundness Indicators quarterly, including all 12 core and 7 encouraged indicators for deposit takers; FSI data and metadata published in IMF’s FSI data portal. - FSI data not updated since "2018Q1". - External sector statistics: - RBV releases quarterly BOP and IIP in Quarterly Economic Review; in process of BPM6 dissemination. - Dissemination lag could be shortened. - RBV has collected sufficient information to participate in IMF’s Coordinated Direct Investment Survey (CDIS) and could start compiling external debt statistics. - Coverage could be improved by addressing any incomplete coverage of other financial corporations. - Since April 2019, Vanuatu implemented IMF’s e-GDDS recommendations via National Summary Data Page (NSDP). - No data ROSC available. ### Table of Common Indicators Required for Surveillance (As of July 2021) — selected observations and frequencies - Exchange Rates: Date of latest Observation: "5/2021"; Date Received: "6/2021"; Frequency of Data/Reporting/Publication: M M M. - International Reserve Assets and Reserve Liabilities of the Monetary Authorities: Date of latest Observation: "3/2021"; Date Received: "6/2021"; Frequency: M M M. - Reserve/Base Money: "3/2021" (observed), "6/2021" (received), M M M. - Broad Money, Central Bank Balance Sheet, Consolidated Balance Sheet of the Banking System: all "3/2021" observed, "6/2021" received, M M M. - Interest Rates: Date observed "4/2021"; received "7/2021"; Frequency M M M. - Consumer Price Index: Date observed "6/2020"; received "3/2021"; Frequency Q Q Q. - Central Government revenue, expenditure, balance and composition of financing: latest observation "05/2021"; received "7/2021"; Frequency M M M. - Stocks of Central Government and Central Government-Guaranteed Debt: Date observed "2020"; received "7/2021"; Frequency A A A. - External Current Account Balance; Exports and Imports of Goods and Services; Gross External Debt; International Investment Position: latest observation "12/2020"; received "7/2021"; Frequency Q Q Q. - GDP/GNP: Date of latest observation "2018"; Date received "7/2020"; Frequency A A A. - Notes and footnotes about frequencies and coverage are preserved in source. ### Debt sustainability analysis (DSA) — 2021 results and policy implications - DSA conclusion: risk of debt distress rating for Vanuatu remains "moderate" with "limited space to absorb shocks" and unchanged from 2019 DSA. - Vanuatu’s Composite Indicator (CI) index: "2.93" (based on April 2021 WEO and 2019 CPIA released July 2020) — indicates debt-carrying capacity is "medium". - Shocks and scenarios presented: - Two tailored shocks and an alternative scenario — all lead to significant deterioration in debt sustainability. - Natural disaster shock: PV of PPG external debt-to-GDP ratio would breach the threshold from "2027" onwards. - Contingent liability shock (government took over control of Air Vanuatu): PV of PPG external debt-to-GDP ratio breaches threshold from "2022" onwards. - Combined contingent liabilities: most extreme shock in terms of PV of PPG external debt-to-GDP ratio. - Alternative scenario — sudden fall of Economic Citizenship Program (ECP) revenues: PV of external debt-to-GDP ratio would breach the "40 percent" threshold in "2028" onwards; PV of public debt-to-GDP ratio would breach the "55 percent" benchmark from "2028" onwards. - The most extreme shock in terms of public debt-to-GDP ratio is growth. - Policy implications and recommendations from DSA: - Need to rebuild fiscal buffers and enhance resilience against shocks, including natural disasters. - Early formulation of a medium-term fiscal strategy is required, particularly revenue mobilization measures. - When financing rebuilding costs or investing in new infrastructure, authorities are encouraged to continue seeking grants or concessional loans. - DSA administrative and approval notes: - Approved by Krishna Srinivasan and Maria Gonzalez (IMF) and Hassan Zaman and Marcello Estevão (IDA). - Prepared by staff of the International Monetary Fund and the International Development Association. - DSA summary: Risk of external debt distress: "Moderate"; Overall risk of debt distress: "Moderate"; Granularity in the risk rating: "Limited space to absorb shocks"; Application of judgement: "No". - Date: August 16, 2021. ### Public debt coverage and background on debt - Public debt coverage for the DSA includes: central government debt; central government guaranteed debt; central bank debt borrowed on behalf of the government. Debt of Air Vanuatu is not included due to lack of concrete information and because government has neither assumed nor guaranteed debt of Air Vanuatu. - Limitations: other elements of general government, non-guaranteed SOE debt, and private external debt not included due to data limitations. - PFTAC providing technical assistance to expand GFS coverage from budgetary central government to general government and SOEs. - Public sector debt: "51.5 percent of GDP" as of end-2020; remained stable after 2018. - Historical change: increased from "26.1 percent of GDP" in 2014 to "52.8 percent of GDP" in 2017. - Causes of 2014–2017 increase: new disbursements for post-TC Pam reconstruction and infrastructure support from bilateral partners (China Eximbank, JICA) and multilateral partners (ADB, IDA, IMF). - Composition and creditors: - Debt obligations largely external: "81 percent" of total public debt as of end-2020. - China Eximbank is the largest external creditor: "30 percent" of total public debt. - Government-guaranteed debts for SOEs (such as Air Vanuatu) accounted for "4 percent" of total public debt. - ECP and fiscal impacts: - Stronger-than-expected ECP revenues allowed early repayments on China’s lower concessionality loans: - Early repayments: VUV"1.5 billion" ("1.5 percent of GDP") in 2019; VUV"2 billion" ("2 percent of GDP") in 2020. - Further early repayment planned in 2021: VUV"2 billion". - Revenues enabled Vanuatu to opt not to participate in the Debt Service Suspension Initiative. - Debt Management Strategy (DMS) 2019–22: - Authorities committed to DMS requiring a "35 percent" grant component for all new concessional borrowing. - Authorities plan to prepay lower concessionality loans where feasible. ### Background on macroeconomic forecasts and shocks in 2020 - 2020 shocks: simultaneous COVID-19 pandemic and major natural disasters; borders closed since March 2020; no domestic transmission reported but tourism severely affected. - Tropical Cyclone (TC) Harold: - Affected an estimated "43 percent" of the population. - Damages estimated at VUV "56.0 billion" (damages to infrastructure and assets estimated at VUV "27.7 billion"), accounting for over "50 percent of GDP". - Government fiscal response: - Fiscal stimulus measures; actual disbursements of support and fee exemptions amounted to about "2.6 percent of GDP". - Strong ECP receipts and donor support helped mitigate pandemic impact on fiscal and external balances. - Fiscal and external outcomes in 2020: - Overall fiscal position was near balance. - The current account registered a surplus (exact figure not provided in this excerpt). *Source: 1vutea2021002 - References (Vanuatu staff report excerpts, August 16, 2021).* ### 3.3 percent of GDP. ### 3.3 percent of GDP. ### Baseline assumptions and macro framework - Real GDP growth is projected at 2.7 percent on average during 2021–31. The level of real GDP is expected to recover to the pre-pandemic level by 2023, and average growth rate during 2021-24 is projected at 3 percent. - Inflation (GDP deflator) is projected to average 2.6 percent (in U.S. dollar terms, relevant for external debt) and 2.3 percent (in domestic currency terms, relevant for public debt) during 2021–31. - The non-interest current account deficit is projected to rise to 4.2 percent of GDP on average over 2021–31, relative to the historical average of a surplus of 2.3 percent. - Foreign direct investment inflows are expected to average 3.1 percent of GDP over 2021–31, lower than the historical average of 4.9 percent. - The primary deficit is expected to average 2.9 percent of GDP over 2021–31, a deterioration from the historical average of a surplus of 0.9 percent. - External borrowing and grants are expected to remain strong in the medium term due to recovery needs; grants expected to decline over the longer term as the economy grows. - Government-guaranteed debts as of end-2020 assumed to remain stable for the projection period; staff assumes no new government guarantees for SOE borrowing. - Natural disasters and climate change effects: 2021–26 assumed free from newly-occurring major costly disasters; from 2027 onwards, baseline incorporates long-term average effects: real GDP growth lowered by 0.5 percentage points annually, current account deficit raised by 1.3 percentage points of GDP, and 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 remains at 5 percent. - Vaccination plan noted: authorities currently plan to vaccinate 20 percent of the population under COVAX in 2021 and 40 percent of the population by June 2022; faster rollout is an upside risk. - Inflation in 2021 is projected to be 5.8 percent (USD terms) and 3.9 percent (domestic currency), reflecting food supply shocks and higher international food prices. ### Key fiscal and external projections (selected figures) - Real GDP growth: 2.7 percent average during 2021–31; average 3 percent during 2021–24. - Inflation (GDP deflator): 2.6 percent (USD) and 2.3 percent (domestic) average during 2021–31. - Non-interest current account deficit: 4.2 percent of GDP on average over 2021–31. - FDI inflows: 3.1 percent of GDP average over 2021–31. - Primary deficit: 2.9 percent of GDP average over 2021–31. - PV of external-debt-to-GDP ratio: increases from 24.0 percent in 2021 to 35.6 percent in 2031 under the baseline. - Alternative fiscal risk: aircraft purchase contract for Air Vanuatu could represent USD 185 million (around 20 percent of GDP) based on publicly available information. ### Scenario and stress-test design - Standard natural disaster shock: one-off shock of 10 percentage points to the debt-to-GDP ratio in 2022; real GDP growth and exports lowered by 4 and 10 percentage points respectively in the year of the shock. - Combined contingent liability shock: magnitude of SOE debt shock adjusted from default 2 percent to 22 percent to capture fiscal risk from Air Vanuatu contingent liabilities; financial market default value of 5 percent retained. - Alternative scenario: sudden drop of ECP revenues to zero from 2022 onwards (ECP revenues accounted for one-third of total revenue in 2020) to capture revenue volatility risk. ### External debt sustainability findings - Temporary breaches in 2021 of two indicative thresholds: external debt service-to-exports ratio and PV of external debt-to-exports ratio, driven by planned early repayment to China and low services exports. - PV of external-debt-to-GDP projected to rise to 35.6 percent by 2031, with current account deficit as a main driver of debt dynamics. - Stress tests show largest impact from combined contingent liabilities shock, leading to breach of PV of debt-to-GDP threshold from 2022 onwards. - Tailored natural disaster shock would elevate PV of debt-to-GDP ratio from 2022 and cause breach of the threshold starting in 2027. - Alternative scenario (loss of ECP revenues) projects PV of debt-to-GDP ratio reaching the 40 percent threshold in 2028. ### Public sector debt sustainability findings - PV of public debt-to-GDP ratio does not breach the 55 percent benchmark under the baseline scenario. - Public nominal debt-to-GDP ratio expected to rise from 47.5 percent in 2021 and is projected to breach the authorities’ stated public debt-to-GDP target of 60 percent by 2028. - Stress tests: growth shock (assumed growth rate of -1.7 percentage points in 2022 and 2023) causes breach of PV of public debt-to-GDP benchmark from 2027 onwards. - Alternative scenario (loss of ECP revenues) would cause PV of public debt-to-GDP ratio to reach the 55 percent threshold in 2028. ### Risk rating, vulnerabilities, and policy implications - Overall risk of external debt distress assessed as moderate, with limited space to absorb shocks. - One-year breaches in 2021 are automatically disregarded under LIC-DSF guidance; however, stress tests show contingent liabilities, natural disasters, and adverse macro shocks can cause longer breaches. - Key vulnerabilities: contingent liabilities from SOEs (notably Air Vanuatu), reliance on volatile ECP revenues, vulnerability to natural disasters, and narrow export base. - Policy recommendations and implications: - Manage and, if necessary, restructure Air Vanuatu to avoid materializing contingent liabilities (including careful handling of the aircraft purchase contract). - Build fiscal buffers and a legal framework for supervision and oversight of government business enterprises to alleviate fiscal risk from contingent liabilities. - Secure grant support from development partners and contract loan-funded projects on concessional terms; authorities’ stated goal: receive a 35 percent grant element for such loans. - Formulate a medium-term fiscal strategy emphasizing revenue mobilization to reduce reliance on ECP revenues. - Enhance resilience to natural disasters and climate change; consider adopting a more stringent debt anchor (example: 50 percent PPG-debt-to-GDP target) to better withstand shocks. - Promote economic diversification and FDI to expand the export base. ### Authorities’ views - Authorities broadly agreed with staff analysis and appreciated the alternative scenario that assumes no ECP revenues from 2022 onwards. - Authorities acknowledged ECP revenues are not sustainable but noted strong cash reserves from ECP revenues should provide short-term liquidity support. - Authorities stressed strong commitment to maintaining a positive recurrent balance over the medium term and intention to only contract external loans with a grant-element of at least 35 percent. *Source: 1vutea2021002 - 3.3 percent of GDP.* ### 22. The authorities also agreed with the assumptions used in the DSA. These include the ### 22. The authorities also agreed with the assumptions used in the DSA. These include the ### DSA assumptions and authorities' concurrence - Authorities agreed with DSA assumptions on: - "positive recurrent balance over the medium term" - "grant element of new loans" - assumption that "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." - Note: The public DSA allows for domestic financing to cover the additional financing needs generated by the stress tests. ### Debt indicators and alternative scenarios (2021–2031) - Figures present indicators of Public and Publicly Guaranteed External Debt and Public Debt under alternative scenarios: Baseline; Most extreme shock 1/; Historical scenario; Default; User defined. - Terms of marginal debt components presented include: - Domestic MLT debt: "Avg. real interest rate on new borrowing"; "Avg. maturity (incl. grace period)"; "Avg. grace period" - Domestic short-term: "Avg. real interest rate" - External MLT debt: "Avg. nominal interest rate on new borrowing in USD"; "Avg. maturity (incl. grace period)"; "Avg. grace period" - Stress test rule: "1/ The most extreme stress test is the test that yields the highest ratio in or before 2031. The stress test with a one-off breach is also presented (if any), while the one-off breach is deemed away for mechanical signals. When a stress test with a one-off breach happens to be the most exterme shock even after disregarding the one-off breach, only that stress test (with a one-off breach) would be presented." ### Drivers of debt dynamics — baseline - Figures decompose: - Gross Nominal PPG External Debt (in percent of GDP) - Gross Nominal Public Debt (in percent of GDP) - Debt-creating flows and Unexpected Changes in Debt (past 5 years, percent of GDP) - The endogenous debt dynamics formula used: "Derived as [r - g - ρ(1+g) + Ɛα (1+r)]/(1+g+ρ+gρ) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, ρ = growth rate of GDP deflator in U.S. dollar terms, Ɛ=nominal appreciation of the local currency, and α= share of local currency-denominated external debt in total external debt." ### Realism tools and fiscal adjustment–growth interaction - Fiscal adjustment and possible growth paths shown for multipliers: "Multiplier = 0.2", "Multiplier = 0.4", "Multiplier = 0.6", "Multiplier = 0.8". - 3-Year Adjustment in Primary Balance: distributional evidence from Fund-supported programs for LICs since 1990; "Projected 3-yr adjustment" and "3-year PB adjustment greater than 2.5 percentage points of GDP in approx. top quartile." ### Qualification of the Moderate Category (2021–2031) - Thresholds used for qualification: - "For the PV debt/GDP and PV debt/exports thresholds, x is 20 percent and y is 40 percent." - "For debt service/Exports and debt service/revenue thresholds, x is 12 percent and y is 35 percent." - Indicators displayed: "Debt service-to-revenue ratio"; "PV of debt-to-exports ratio"; "PV of debt-to GDP ratio"; "Debt service-to-exports ratio"; with space categories: "Some space", "Substantial space", "Limited space", "Threshold", "Baseline". ### External Debt Sustainability Framework — Baseline Scenario (2018–2041) — selected series and key assumptions - External debt (nominal) 1/: 2018–2041 snapshot begins: "41.9 40.1 40.8 39.4 43.5 45.8 47.9 50.2 52.3 54.2 56.0 57.5 58.8 59.9 64.1 27.2 51.4" (series as printed). - Change in external debt: "-1.5 -1.8 0.7 -1.4 4.0 2.3 2.2 2.3 2.1 1.9 1.8 1.5 1.2 1.1 -0.2" (series as printed). - Identified net debt-creating flows: "-18.4 -18.6 -6.0 3.5 3.9 1.1 0.0 -0.8 -0.4 -0.2 -0.4 -0.5 -0.5 -0.9 -2.4 -9.5 0.4" - Non-interest current account deficit: "-12.6 -16.5 -3.7 6.5 7.5 5.2 3.9 3.0 3.5 3.7 3.4 3.3 3.4 3.0 1.2 -2.3 4.2" - Deficit in balance of goods and services: "3.1 8.8 26.1 31.6 29.6 25.6 23.5 22.2 22.8 23.2 23.3 23.8 24.3 24.2 27.1 10.5 24.9" - Exports: "47.2 41.1 17.8 11.1 15.1 21.9 29.2 33.0 32.4 32.5 32.7 32.9 32.9 32.9 32.6" - Imports: "50.3 49.9 43.9 42.7 44.7 47.5 52.7 55.2 55.2 55.8 56.0 56.7 57.2 57.1 59.7" - Net current transfers (negative = inflow): "-12.3 -16.9 -19.2 -15.3 -10.7 -8.9 -8.0 -7.4 -7.1 -6.9 -6.8 -6.9 -6.8 -6.7 -5.4 -10.8 -8.3" - of which official: "-12.0 -15.3 -18.3 -14.4 -9.9 -8.1 -7.2 -6.6 -6.3 -6.1 -6.0 -6.1 -6.0 -5.8 -4.6" - Net FDI (negative = inflow): "-3.9 -2.7 -2.6 -2.9 -3.0 -2.9 -2.9 -3.1 -3.2 -3.2 -3.2 -3.2 -3.2 -3.2 -2.8 -4.9 -3.1" - Endogenous debt dynamics: "-1.8 0.5 0.3 -0.1 -0.7 -1.2 -1.1 -0.7 -0.7 -0.6 -0.6 -0.7 -0.7 -0.7 -0.7" - Contribution from nominal interest rate: "0.4 0.4 0.5 0.4 0.4 0.5 0.5 0.6 0.6 0.6 0.6 0.7 0.7 0.7 0.8" - Contribution from real GDP growth: "-1.2 -1.6 2.7 -0.5 -1.1 -1.7 -1.6 -1.2 -1.3 -1.3 -1.3 -1.3 -1.4 -1.4 -1.5" - Residual 3/: "16.9 16.8 6.8 -4.9 0.1 1.2 2.2 3.1 2.5 2.0 2.3 2.1 1.7 2.1 2.2 12.8 1.3" - Sustainability indicators: - PV of PPG external debt-to-GDP ratio (selected): "25.7 24.0 25.9 26.9 28.1 29.4 30.6 31.8 32.9 33.9 34.8 35.6 40.1" - PV of PPG external debt-to-exports ratio (selected): "144.6 216.1 171.3 122.8 96.1 89.0 94.6 97.6 100.6 103.1 105.8 108.2 122.8" - PPG debt service-to-exports ratio (selected): "4.7 8.2 21.1 33.6 12.5 8.8 6.4 5.4 5.5 5.8 5.7 5.9 6.2 6.4 7.5" - PPG debt service-to-revenue ratio (selected): "7.3 10.6 12.2 13.7 7.2 7.5 7.4 7.2 7.2 7.7 7.7 8.1 8.6 8.9 10.8" - Gross external financing need (Million of U.S. dollars): "-133.4 -146.4 -24.0 73.0 68.3 47.0 34.5 20.9 27.7 32.2 29.9 31.2 35.1 31.3 20.7" - Key macroeconomic assumptions: - Real GDP growth (in percent): "2.9 3.9 -6.8 1.2 3.0 4.1 3.7 2.7 2.7 2.7 2.5 2.5 2.5 2.5 1.9 2.7" (series as printed) - GDP deflator in US dollar terms (change in percent): "2.5 -3.8 7.8 5.8 3.1 2.2 2.2 2.2 2.2 2.2 2.2 2.2 2.2 2.2 1.9 2.6" - Effective interest rate (percent) 4/: "1.1 1.1 1.2 1.1 1.2 1.2 1.2 1.2 1.2 1.3 1.3 1.3 1.3 1.4 1.3 1.2" - Growth of exports of G&S (US dollar terms, in percent): "14.7 -13.0 -56.5 -33.1 44.4 54.3 40.9 18.6 2.9 5.3 5.3 5.3 4.7 4.7 4.7 -3.3 13.9" - Growth of imports of G&S (US dollar terms, in percent): "-0.7 -0.9 -11.6 4.2 11.2 13.0 17.5 9.9 4.8 5.9 5.2 6.1 5.5 4.6 4.5 1.7 8.0" - Grant element of new public sector borrowing (in percent): "45.2 45.9 48.1 46.8 46.8 46.6 46.4 46.4 46.2 46.0 46.0 44.4 ... 46.4" (as printed) - Government revenues (excluding grants, in percent of GDP): "30.4 31.5 30.7 27.3 26.2 25.7 25.4 24.8 24.5 24.2 24.0 24.0 23.8 23.7 22.7 24.0 24.9" - Aid flows (in Million of US dollars) 5/: "85.0 64.9 126.6 155.7 135.1 123.8 120.1 123.7 126.1 128.6 134.4 137.1 139.9 145.4 181.3" - Grant-equivalent financing (in percent of GDP) 6/: "15.3 11.4 9.4 9.1 8.9 8.7 8.5 8.5 8.3 8.2 8.1 6.6 ... 9.5" (as printed) - Grant-equivalent financing (in percent of external financing) 6/: "85.9 74.0 74.2 73.8 74.3 74.4 74.4 74.3 74.4 74.5 74.3 73.4 ... 75.3" (as printed) - Nominal GDP (Million of US dollars) (selected entries): "928 928 932 999 1,060 1,127 1,194 1,253 1,315 1,377 1,442 1,510 1,582 1,656 2,629" (series as printed) - Nominal dollar GDP growth (selected): "5.5 -0.1 0.5 7.1 6.1 6.3 5.9 5.0 4.9 4.7 4.7 4.7 4.7 4.7 3.8 5.4" - Memorandum items: - PV of external debt 7/: same series as PV of PPG external debt above. - PV of PPG external debt (in Million of US dollars): "240.0 239.9 274.6 303.7 335.0 368.0 402.6 437.3 474.8 512.6 550.2 589.1 1,053.4" (series as printed) - (PVt-PVt-1)/GDPt-1 (in percent): "0.0 3.5 2.7 2.8 2.8 2.8 2.6 2.7 2.6 2.5 2.5 1.9" - Non-interest current account deficit that stabilizes debt ratio: "-11.1 -14.6 -4.5 7.8 3.5 2.9 1.7 0.7 1.4 1.8 1.5 1.8 2.1 1.8 1.4" ### Public Sector Debt Sustainability Framework — Baseline Scenario (2018–2041) — selected series and assumptions - Public sector debt 1/ (selected series): "49.2 46.1 50.1 47.5 50.2 51.4 53.2 55.5 56.8 58.6 60.4 60.4 62.0 63.0 64.2 73.2 35.5 56.6" (series as printed). - of which external debt: matches external nominal series earlier. - Change in public sector debt: "-3.7 -3.0 4.0 -2.7 2.7 1.2 1.8 2.2 1.3 1.8 1.8 1.6 1.1 1.1 1.0 0.9" - Identified debt-creating flows: "-7.1 -8.9 0.4 1.9 1.9 1.2 1.0 1.4 1.2 1.3 1.4 1.1 1.1 1.1 1.0 -2.0 1.3" - Primary deficit (selected): "-7.2 -7.6 -0.7 2.5 3.2 3.2 2.9 2.9 2.8 2.9 3.0 2.8 2.9 2.9 2.8 -0.9 2.9" - Revenue and grants (selected): "39.5 38.5 44.2 40.6 34.2 32.1 31.6 31.0 30.6 30.2 30.0 29.9 29.6 29.4 27.4 32.2 31.8" - of which grants (selected): "9.2 7.0 13.6 13.3 8.0 6.4 6.2 6.2 6.1 6.0 6.0 5.9 5.8 5.7 4.7" - Primary (noninterest) expenditure (selected): "32.3 30.9 43.5 43.1 37.4 35.3 34.6 33.9 33.4 33.1 33.0 32.7 32.5 32.3 30.2 31.3 34.7" - Automatic debt dynamics: "0.1 -1.4 1.1 -0.6 -1.3 -2.0 -1.9 -1.5 -1.6 -1.6 -1.6 -1.7 -1.7 -1.8 -1.8" - Contribution from interest rate/growth differential: "-1.3 -1.7 3.4 -0.6 -1.3 -2.0 -1.9 -1.5 -1.6 -1.6 -1.6 -1.7 -1.7 -1.8 -1.8" - of which: average real interest rate contribution: "0.2 0.2 0.1 0.0 0.0 0.0 -0.1 -0.1 -0.1 -0.2 -0.2 -0.2 -0.2 -0.2 0.0" - of which: contribution from real GDP growth: "-1.5 -1.9 3.4 -0.6 -1.4 -2.0 -1.8 -1.4 -1.5 -1.4 -1.4 -1.5 -1.5 -1.5 -1.8" - Residual: "3.4 5.9 3.7 -4.6 0.9 0.0 0.8 0.9 0.1 0.5 0.5 0.4 -0.1 0.0 -0.1 5.5 0.0" - Sustainability indicators: - PV of public debt-to-GDP ratio (selected): "34.8 31.8 32.6 32.6 33.4 34.6 35.1 36.2 37.4 38.4 39.0 39.8 49.1" - PV of public debt-to-revenue and grants ratio (selected): "78.7 78.5 95.4 101.5 105.5 111.7 114.6 119.7 124.6 128.4 131.9 135.3 179.2" - Debt service-to-revenue and grants ratio (selected): "10.9 11.4 12.7 12.8 10.0 10.3 7.1 6.9 9.4 7.2 7.2 7.5 15.7 8.2 11.4" - Gross financing need 4/: "-2.9 -3.2 4.9 7.7 6.6 6.5 5.2 5.1 5.7 5.1 5.2 5.1 7.5 5.3 5.9" - Key macro/fiscal assumptions mirror external DSA growth and interest assumptions listed earlier. - Primary deficit that stabilizes the debt-to-GDP ratio 5/: "-3.5 -4.5 -4.7 5.2 0.4 2.0 1.1 0.7 1.5 1.1 1.2 1.3 1.8 1.7 1.9 -4.2 1.6" ### Sensitivity analyses — highlights (2021–2031) - Table 3: Sensitivity Analysis for PPG External Debt indicators (PV of debt-to-GDP, PV debt-to-exports, Debt service-to-exports, Debt service-to-revenue) - Baseline PV of debt-to-GDP (2021–2031): "24 26 27 28 29 31 32 33 34 35 36" - Alternative Scenario A2: [Loss of ECP revenues] PV of debt-to-GDP (2021–2031): "24 28 30 33 35 37 39 41 43 44 46" - Tailored Tests C1 (Combined contingent liabilities) PV of debt-to-GDP: "24 40 41 42 43 44 45 46 47 48 49" - Bound Tests B1 (Real GDP growth) PV of debt-to-GDP: "24 28 32 33 35 36 37 39 40 41 42" - Threshold noted for PV-of-debt-to-GDP: "40" - Table 4: Sensitivity Analysis for Public Debt (PV of Debt-to-Revenue Ratio; Debt Service-to-Revenue Ratio; PV of Debt-to-GDP) - Baseline public debt (2021–2031): "32 33 33 33 35 35 36 37 38 39 40" - Alternative Scenario A2: [Loss of ECP revenue] public debt (2021–2031): "32 36 40 43 47 50 54 57 60 63 66" - TOTAL public debt benchmark series: "55 55 55 55 55 55 55 55 55 55 55" - PV of Debt-to-Revenue Ratio listed baseline and alternatives (multiple series printed). - Note: "1/ A bold value indicates a breach of the threshold." ### Authorities' statement — key points and policy implications - Opening note: authorities "appreciate the open and constructive engagement" and "broadly concur with staff’s assessment, analysis, and tailored policy recommendations." - Country characteristics: "small archipelago of 80 islands"; population "just 300,000"; remote location "around 2,000 kilometers east of Australia." - Multiple shocks in 2020: COVID border closures, a tropical cyclone (April 2020), and increased volcanic activity. - COVID-19 health status and vaccination: - As of statement, Vanuatu in "Scenario 1 – No confirmed cases"; "only three active cases, all of which were detected in quarantine"; "From over 23,000 tests conducted in Australia and New Zealand on people arriving from Vanuatu, none have detected the virus." - Vaccination: first batch "24,000 doses of AstraZeneca" received through COVAX in May 2021; "20,000 doses of Sinopharm" in June 2021; vaccination commenced in June 2021; rollout could be drawn out "until the end of 2023". - Economic outlook: - Recovery forecast in 2021 but "initially expected to be uneven"; major drivers: industrial sector and construction; reconstruction linked to implementation of delayed public infrastructure and post-cyclone reconstruction. - Authorities are "more optimistic" than staff and have "slightly higher projections for economic growth." - Risks: asynchronous recovery of trading partners; potential loss of Economic Citizenship Program (ECP) revenue is a major downside risk. - Fiscal policy and vulnerabilities: - Economic support package ~ "almost US$30 million (around 3 per cent of GDP)". - Government "has adequate liquidity buffers and is expecting to record a budget surplus." - Revenue structure concerns: - "One third of revenues are grants" - "Another third of revenue comes from the US dollar-denominated Economic Citizenship Program (ECP)" - Need to "broaden the government’s revenue base (with currently no taxes on income, profits, or dividends)." - Staff scenario shows loss of ECP revenues would "place severe pressure on debt sustainability"; staff and authorities agree that non-essential spending would need cautious winding back when recovery is entrenched and "alternative sources of revenue would need to be mobilized." - Correspondent Banking Relationships (CBR) and AML/CFT: - Ongoing improvements to the AML/CFT regime needed to strengthen stability and ease pressures on CBRs. - Risk: termination of important US dollar CBRs could "entirely cut off" Vanuatu from international payments; remittances average "around 10 per cent of GDP." - Fund and PFTAC provide technical assistance and capacity-building support. - Monetary and financial sector: - RBV reduced policy rate from "2.90 per cent to 2.25 per cent" in March 2020. - Inflation expected to remain within RBV target "0.0 to 4.0 per cent"; projected to increase to the upper end due to high domestic food prices and higher international fuel prices. - Loan guarantee program in place; banks indemnified by government for potential defaults; loan moratorium ends in "September 2021." - Quality of loan portfolios at four commercial banks remains "relatively robust." - Structural reforms and diversification: - Priorities: diversification from tourism and agriculture; foster agricultural exports; value added in fishing industry; potential tertiary sector growth in English and French speaking call centers. - Infrastructure constraints: access to electricity, transport, internet; "Only 26 per cent of the population has access to the internet." - Recognition of severe constraints due to small population, limited natural resources, geographic isolation. - Climate change and disaster resilience: - Authorities plan for natural disasters through domestic budget but significant events remain "very much dependent on donor support." - Climate challenges split into slow-moving sea-level rise (existential threat) and more frequent discrete disasters (cyclones, king tides) requiring reconstruction and resilient infrastructure. - Capacity constraints impede implementation; prioritization of climate-related actions needed within wider policy agenda. *Source: Country authorities; and staff estimates and projections.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2021/english/1vutea2021002.pdf_