## 1. Real Sector Developments ## Source details **Canonical URL:** [1. Real Sector Developments](https://www.imf.org/-/media/files/publications/cr/2025/english/1vutea2025001-source-pdf.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2025/english/1vutea2025001-source-pdf.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2025/english/1vutea2025001-source-pdf.pdf.json) --- ### Context and recent developments - Political and disaster context: - New five-party coalition government elected in January 2025 after a no-confidence motion in late 2024; priorities: stabilize governance, kick-start economic recovery, rebuild critical infrastructure, reform education services, and strengthen international partnerships. - 7.3-magnitude earthquake in December 2024 hit Port Vila hardest; 14 confirmed deaths and damage to commercial buildings in the central business district and the cruise terminal. - Earthquake followed three severe cyclones in 2023 and the liquidation of Air Vanuatu in 2024, compounding strains. - Growth and sectoral performance: - Real GDP growth slowed to 0.9 percent y/y in 2024. - Services sector growth slowed to 0.5 percent y/y in 2024 (down from 2.0 percent y/y in 2023), largely due to Air Vanuatu’s liquidation and tourism disruptions. - Agricultural output reduced due to on-farm labor availability partly related to seasonal overseas programs. - Industry and construction dampened by slower-than-anticipated 2024 capital budget implementation. - Inflation and exchange-rate influences: - Inflation peaked at 11.3 percent in 2023. - Average annual inflation fell to 1.2 percent in 2024, aided by domestic disinflation, lower commodity prices, and a mild appreciation of the vatu against the Australian and New Zealand dollars. - Fiscal and public sector impacts: - Preliminary overall fiscal deficit widened to -2.3 percent of GDP in 2024, compared to -0.9 percent in 2023. - VAT and Economic Citizenship Program (ECP) revenues were stronger than expected, but overall revenues declined by 1.9 percent of GDP relative to 2023 due to reduced donor grant support. - Expenditures were sharply lower than budgeted in 2024; public debt rose marginally to 43 percent of GDP in 2024. - Budget expenditures in 2024 included a VT 2.34 billion (1.7 percent of GDP) payment to Air Vanuatu. - Air Vanuatu developments: - Creditor agreement in August 2024; Supreme Court ordered the liquidation cancelled in October 2024 and shares transferred to AV3 Limited. - Control returned to original directors and management; partial domestic operations resumed (three aircraft: one ATR, two twin otters) servicing 14 ports (previously 23). - IATA certification suspended; airline hopeful of requesting suspension be released by Q4 2025. - Airline entirely dependent on government guarantees; likely to require further subsidies. Government estimated to spend VT 1 billion (0.8 percent of GDP) in the 2025 Budget for additional aircrafts. - Banking and financial sector: - Reported average capital adequacy ratio at 24 percent in March 2025 (regulatory requirement 12 percent); individual banks range from 19 to 54 percent. - Liquidity adequacy ratio at 48 percent in June 2025. - Non-performing loans (NPLs) at 13.1 percent of total loans at end-Q1 2025, primarily concentrated in the state-owned bank. - Stress tests (2024 FSSR) revealed vulnerabilities related to credit and foreign exchange liquidity risks. - External sector and reserves: - Current account deficit estimated to have widened to 15½ percent of GDP in 2024 (from 6.6 percent in 2023), driven by declines in tourism (-16 percent y/y), transport (-48 percent y/y), and postal & couriers (-27 percent y/y). - Gross international reserves at 10.5 months of import cover as of end-2024, above RBV target of 4 months, but on a declining trend. - Vanuatu’s external position assessed as moderately weaker than consistent with fundamentals and desirable policies in 2024. ### Outlook and key projections - Real GDP and inflation: - Real GDP growth projected at 1.7 percent in 2025 (baseline). - Growth expected to pick up to 2.8 percent in 2026 as the cruise port reopens and reconstruction ramps up. - Inflation projected to average 1.7 percent y/y in 2025 and stabilize around 2 percent y/y from 2026 onward absent major supply shocks. - RBV target range for inflation: 0 to 4 percent. - Fiscal and current account: - Fiscal deficit projected to widen to 5.0 percent of GDP in 2025. - Staff view: a fiscal deficit of around 4.0 percent of GDP would be broadly appropriate in 2025. - Current account deficit projected to remain around 11½ percent of GDP in 2025 and 2026 before gradually narrowing over the medium term. - Reserves and external links: - Foreign reserves projected to average around 8 months of import cover into the medium-term (assuming no major external shocks). - The 15 percent tariff on exports to the United States expected to have limited direct impact (exports to U.S. comprise 0.65 percent of GDP), but potential indirect effects via reduced demand from key trading partners are possible. - Numerical medium-term projections (selected): - Real GDP (annual percent change): 2025: 1.7; 2026: 2.8; 2027: 2.7; 2028–2030: 2.3 each year. - Inflation (period average): 2025: 1.7 percent; 2026–2030: 2.2 percent in 2026 and 2.2 percent thereafter (period averages listed). - Current account (percent of GDP): 2025: -11.6; 2026: -11.6; 2027: -9.7; 2028: -6.7; 2029: -5.8; 2030: -5.0. - Gross international reserves (in months of prospective G&S imports): 2025: 9.4; 2026: 8.1; 2027: 7.7; 2028: 7.4; 2029: 7.3; 2030: 7.4. ### Risks and uncertainties - Overall tilt: downside risks predominate. - Key risks: - Post-earthquake recovery path highly uncertain. - Dependence on trade and tourism makes growth vulnerable to external shocks, including global trade tensions. - Potential headwinds: labor shortages, capacity constraints, governance or structural deficiencies, climate-related disasters, volatile commodity prices, sustained political instability. - Specific fiscal risks: - Uncertainty around the future of Air Vanuatu could materially affect fiscal costs. - The Capital Investment Immigration Plan (CIIP) resumed in June 2025 after suspension in March 2025; revenues from citizenship program were around 7 percent of GDP in 2024 (down from 14 percent in 2020). - Need for comprehensive review and independent annual audit of the citizenship program ahead of the Mutual Evaluation Review in 2026. ### Authorities’ views - Authorities anticipate a stronger near-term recovery and project GDP growth of 3.7 percent in 2025, driven by a rebound in tourism, recovery in agriculture, reconstruction activities, and infrastructure spending under the 2024 Capital Budget. - Authorities expect air arrivals to be more than 50 percent higher than in 2024 and highlight minimal earthquake disruption to agricultural production. - Authorities share staff concerns on downside risks: limited domestic connectivity to outer islands, potential delays in reconstruction, and inflation upside from import-price volatility and natural disaster shocks. ### Policy implications and staff recommendations — fiscal policy (selected) - Short-term fiscal stance: - Accommodative near-term fiscal stance to support post-earthquake recovery is appropriate but must be complemented by measures to avoid unwarranted fiscal expansion. - Staff projects deficit widening from 2.3 percent of GDP in 2024 to 5.0 percent of GDP in 2025; a fiscal deficit of around 4.0 percent of GDP would be broadly appropriate in 2025. - Fiscal management guidance: - Maintain prudence for the remainder of the year; phase in spending to avoid overruns and anchor on updated and realistic revenue and grant projections. - Prioritize spending to rebuild critical infrastructure and protect vulnerable households; avoid discretionary wage increases and non-essential goods and services outlays. - Defer low-priority capital projects until implementation capacity improves. - Debt and financing strategy: - Vanuatu’s debt deemed sustainable but overall risk of debt distress remains “high”. - Improvements in external debt profile and donor support have eased external debt distress risk to moderate levels, but domestic debt is rising rapidly. - New external financing should be assumed only on concessional terms or through grants to preserve FX reserves and avert external debt buildup. - Decisive medium-term fiscal consolidation and prudent debt management strategies are essential to avoid further deterioration in debt distress risks. --- ### 15. Decisive medium-term fiscal consolidation to rebuild buffers and safeguard ### Fiscal consolidation and debt sustainability (summary) - Under unchanged policies, large deficits are set to persist, adding to financing pressures and heightening perception of fiscal dominance. - Projected need: shift the primary balance to a small surplus to gradually reduce public debt; recommended medium-term fiscal adjustment: roughly 2–5 percent of GDP. - Supporting measures: stronger revenue mobilization and comprehensive expenditure rationalization, in line with previous IMF recommendations. - Fiscal framework reforms: revitalize the fiscal anchor to allow headroom for frequent natural disasters and adopt a clear operational deficit target linking the anchor to the annual budget process. ### Revenue mobilization and diversification - Urgent need to mobilize additional revenue and diversify funding sources due to high incidence of natural disasters and limits in existing revenue sources. - Comprehensive revenue measures proposed: - Introduction of personal income and/or corporate tax. - Accelerating measures to bolster VAT collection. - Exploring additional excise taxes and duties. - Expediting collection of dividends from SOEs. - Safeguarding ECP revenues through broad-based reforms, fostering transparency, and aligning with best international practices. - Note: ECP revenues significant; increase recorded in first half of 2025 likely reflects invoicing through government FMIS; verification of actual receipts vis-à-vis invoices remains pending. - Domestic financing risks: limited public revenue has spawned fiscal deficits increasingly reliant on the RBV as a domestic financing source; need to diversify the domestic investor base and develop domestic bond market. ### Expenditure composition, SOEs, and reprioritization - Shifts in expenditure composition require correction: - Current spending averaged around 35 percent of GDP since 2020, compared to 27 percent in the preceding five years. - Capital expenditures averaged around 6 percent of GDP since 2020, down from 10 percent in the preceding five years. - Policy priorities: - Adopt a credible business plan for Air Vanuatu urgently; resolve operational shortfalls financed from the budget and financing guarantees. - Strengthen public financial management systems—budget planning, expenditure controls, and SOE oversight. - Reprioritize expenditures, including reviewing recent increases to public employee compensation and allowances (including GRT-related items). - Boost investment spending toward growth-enhancing sectors (e.g., agriculture and education). - Expedite collection of dividends from SOEs by effectively implementing the GBEU Act. ### Authorities’ views on fiscal measures - Authorities agree on urgent need to rebuild fiscal buffers and commit to implementing fiscal reforms. - Planned measures include exploring personal income and corporate tax, fast-tracking VAT monitoring system procurement for 2025 budget target, reviewing Excise Tax Act and import duties, increasing high value procurement threshold from VT10 million to VT30 million, and collecting dividends from SOEs. --- ### Monetary, financial sector, and RBV governance reforms ### Monetary policy stance and operations - Current stance: broadly appropriate. - RBV policy rate unchanged at 2.75 percent since tightening in 2024Q3. - Statutory reserve deposit maintained at 5.50 percent; open market sales used to mop up excess liquidity. - Monetary financing and liquidity: - RBV’s purchases of government bonds impeded effectiveness of OMOs and reinforced fiscal dominance. - Purchases increased to VT6.4 billion in 2024 (4.8 percent of GDP). - Credit and inflation: - Private sector credit expanded by 5.4 percent y/y in 2024. - Policy can support growth recovery, but RBV should monitor conditions and be ready to adjust policy if inflationary pressures reemerge. ### Exchange rate management - Exchange rate has acted as buffer against external shocks and cushioned imported inflation. - Recommendations: adopt new currency basket weights and a clear FX market operations framework, including implementation of recent IMF TA recommendations. ### RBV governance and bond market development - Governance reforms in progress to implement remaining 2016 Safeguards Assessment recommendations (Audit Committee, RBV Act amendments). - Recommended actions: - Phase out monetary financing through primary market purchases of government bonds. - Accelerate development of domestic debt markets. - Maintain RBV financial autonomy and operational independence (including removing government representative from RBV Board). - Authorities support phasing out primary market purchases and have requested additional IMF TA for secondary bond market development. ### Financial sector supervision and AML/CFT - Financial stability: - Banking system resilient to significant vatu outflows but susceptible to credit and FX liquidity risks. - Persistently high NPLs concentrated in one large state-owned bank; illiquid real-estate market and slow legal recoveries. - Supervisory priorities: - Ensure adequate loan-loss provisioning, improve credit reporting bureau, implement frequent on-site inspections and risk-based supervision, and define contingency plans for FX funding shocks. - Replace corporate-insolvency–based regime with an administrative resolution framework under RBV authority. - AML/CFT: - Legislative reforms launched and National AML/CFT Coordinating Committee established ahead of 2026 Mutual Evaluation Review. - Upcoming National Risk Assessment and National AML/CFT Strategy to map reforms for high-risk areas including the ECP, virtual assets, company trust service providers, and online gaming. - Priority gaps: weaknesses in reporting suspicious transactions and inadequate investigation of corruption offenses. --- ### 27. The macro-critical impact of natural disasters on growth and external stability ### Adaptation, financing, and simulation findings - Urgent need to accelerate disaster adaptation measures: enforce building codes, scale up climate finance, invest in early-warning systems, and develop parametric insurance. - Staff simulations using the DIGNAD model: - Ex-ante adaptation investments can substantially mitigate disaster damages, lowering GDP losses and reconstruction financing needs, while supporting faster recovery. - Compared to standard infrastructure spending, adaptation investments reduce disaster-related GDP losses by about 0.4 percent. - Scaling up adaptation with concessional borrowing yields additional benefits, especially when supported by a stronger fiscal position. - Example payout: Vanuatu received its first parametric insurance payout of US$1.2 million after the earthquake in December 2024. ### Recovery, capacity constraints, and staff appraisal - Post-earthquake recovery underway; pace in 2025 constrained by capacity bottlenecks, limited domestic connectivity, and delays in project execution. - More pronounced recovery anticipated in 2026 as reconstruction gathers momentum and tourism capacity normalizes. - Balance of risks tilted to the downside: uncertain future of Air Vanuatu, sustainability of ECP, capacity constraints in public investment execution, high exposure to natural disasters and commodity volatility. ### Policy prescriptions related to disasters - Build adequate buffers during non-crisis periods. - Implement a holistic and credible fiscal strategy to restore policy buffers and safeguard medium-term fiscal sustainability. - Urgently implement a medium-term consolidation plan and reinforce fiscal responsibility framework with a clear anchor and operational rules. - Adopt credible business plan for Air Vanuatu and strengthen ECP governance and transparency. - Rebuild policy buffers through revenue mobilization and expenditure rationalization. --- ### Debt sustainability, contingent liabilities, and public debt dynamics ### Coverage, stock, and composition - Debt coverage: central government, central government guaranteed debt, central bank debt borrowed on behalf of the government. Non-guaranteed SOE debt and private external debt excluded due to data limitations. - Total PPG debt at end-2024: VT60 billion (43.4 percent of GDP). - Comparison: VT54 billion in 2023. - External debt: around 70 percent of total public debt. - Bilateral lender debt: 57 percent of external debt. - Multilateral creditors: 43 percent of external debt. - Largest creditors: - Export-Import Bank of China: 28 percent of total debt. - World Bank (IDA): 19 percent of total debt. - Asian Development Bank: 11 percent of total debt. - Domestic debt: around 30 percent of total debt, primarily domestic bonds held by central bank, domestic banks, and VNPF. - Text Table 1 (stock of public debt at end-2024, reported): - Total Stock of Debt: 59,226 (In Millions of Vatu); 501.4 (In Millions of US dollars); 100.0 (As % of total debt). - External Debt: 41,468; 351.1; 70.0. - Domestic Debt: 17,758; 150.4; 30.0. ### Air Vanuatu contingent liabilities and treatment - Liabilities of Air Vanuatu amount to around 1.5 percent of GDP and are treated as part of public debt in the DSA. - Under the deed of compromise, AV3 agreed to pay USD 3.3 million into a fund to pay back creditors in three tranches (USD 1.1 million each); all three tranches have been paid, though minor claims remain. - Around VUT 2 billion of Air Vanuatu’s debt was assumed by the government; another VUT 13.7 billion in liabilities were written down or paid out to creditors at a steep discount of 5 cents/dollar. ### Domestic debt dynamics and risks - Domestic debt rose around 3 percentage points of GDP to 13 percent of GDP in 2024. - Holders of domestic government debt as of 2024: - VNPF and RBV held a combined 70 percent. - NBV held 23 percent. - BSP held 5 percent. - Government issuance forecasts for 2025: around VT3-4 billion in government bonds could come to the market, bringing outstanding domestic debt to around VT19 billion (17 percent of GDP). - Domestic debt projected to rise from 13 percent of GDP in 2024 to 23 percent by 2030 and 25 percent by 2035. - Risks: shallow domestic market may struggle to absorb issuance, increasing reliance on RBV and monetary financing; domestic financing more expensive (nominal yields between 7-9 percent for longer-term domestic currency bonds). ### DSA projections and stress-test highlights - Baseline public and external debt dynamics: - Public and publicly-guaranteed debt (end of period, percent of GDP): 2024: 46.2; 2025: 49.4; 2026: 52.2; 2030: 60.0. - Domestic debt (percent of GDP): 2024: 13.2; 2025: 16.1; 2026: 19.6; 2030: 22.8. - External public debt (percent of GDP): 2024: 32.9; 2025: 33.2; 2026: 32.5; 2030: 36.5. - Key stress-test results: - Under baseline, none of the external debt indicators breach indicative thresholds (unlike previous DSA). - Export shock causes breaches of multiple external debt metrics (PV of external debt-to-GDP, PV of external debt-to-exports, debt service-to-exports). - Natural disaster scenario causes PV of external debt-to-GDP ratio to breach its threshold beyond 2032. - Alternative zero ECP revenues scenario: PV of external debt-to-GDP breaches the threshold of 40 in 2028 and beyond. - PV of public-debt-to-GDP breaches the 55 benchmark from 2032 under the baseline and earlier under several stress scenarios. - Fiscal outlook and primary deficit: - Primary deficit expected to average 2.1 percent of GDP over 2025–2035. - Projected three-year fiscal adjustment (2024–2027) is a 1.0 percent increase in the primary deficit due to reconstruction, airline support, and capex. - External borrowing and grants: - External borrowing estimated to fall in near-term as development partners shift away from loans following June 2024 “high risk” rating. - Grants estimated at around 9.3 percent of GDP in 2025 (compared to 10.4 percent in 2024), easing to around 7.0 percent in the medium-term. ### Policy implications and recommendations - Urgent need to address fiscal risks, rebuild buffers, and maintain debt sustainability. - Recommended measures: - Diversify revenue sources and introduce personal income tax and corporate tax to bolster medium-term revenues. - Expenditure rationalization and streamlined capex spending. - Improve public investment management and governance. - Adopt a credible business plan for Air Vanuatu and limit accumulation of non-concessional external debt. - Implement MTDS recommendations to deepen domestic bond market and diversify funding sources. - Authorities’ planned actions: - Expect to raise approximately VT 4 billion from domestic bond markets in 2025 — highest annual domestic issuance on record — and plan to issue domestic bonds in smaller lot sizes and via T-bills for the first time. - Do not expect to take on additional concessional external debt in near future, though an EXIM bank loan under negotiation approved for disbursement. --- ### Additional thematic highlights ### Tourism and near-term growth assumptions (Annex I) - Air and cruise arrivals fell by 25 and 17 percent, respectively, in 2024; total tourist arrivals down by 19 percent in 2024. - International connectivity fully recovered by May 2025; air arrivals surged 49 percent in Q1 2025; cruise-ship tourism fell 43 percent in Q1 2025. - Staff baseline projects a 44 percent year-on-year rebound for 2025 (base effect), with recovery picking up in 2026 and reaching pre-pandemic levels by 2028; full cruise recovery not anticipated until 2029. - Post-earthquake reconstruction assumptions: - Total losses estimated at US$197 million — about 17 percent of Vanuatu’s 2023 GDP. - Reconstruction timeline: ramp up in second half of 2025. - Projected contribution to construction sector growth: 2.0 percent in 2025 and 4.0 percent in 2026. - Donor support includes: US$12 million (Rapid Response Option grant), US$30 million Recovery & Resilience grant, ADB: 5, Australia: 4.5 (AUD 7 million), New Zealand: 2.3, IFRC Emergency Appeal: 5.2, World Bank: 42, UN CERF: 1. ### Risk Assessment Matrix (Annex V) — selected entries - Escalating trade measures and prolonged uncertainty: Likelihood: High; Expected Impact: Medium. - Commodity price volatility: Likelihood: High; Expected Impact: Medium. - Political instability delaying infrastructure projects: Likelihood: Medium; Expected Impact: High. - Further drop in ECP revenues amid AML/CFT concerns: Likelihood: High; Expected Impact: High. - Increasing NPLs: Likelihood: Medium; Expected Impact: Medium. - Weak governance of SOEs: Likelihood: High; Expected Impact: High. - Weak financial integrity and central bank autonomy issues: Likelihood: High; Expected Impact: High. - Natural disasters: Likelihood: Medium; Expected Impact: High. - Policy recommendations across risks emphasize stronger PFM, enhanced AML/CFT, SOE governance, disaster-resilient infrastructure, and revenue diversification. ### Labor mobility (selected) - Labor mobility schemes generate positive development gains (remittances, skills); remittances used for daily expenses, housing, small businesses, loan repayment. - Costs: loss of skilled workers affecting tourism, hospitality, construction, and public services; agriculture output reduced. - Policy priorities: invest in education and vocational training, promote female labor force participation, strengthen reintegration programs, foster enabling business environment, and complete review of foreign investment restrictions (expected by mid-2025). *Source: Excerpts from IMF staff report chapters and annexes contained in the provided PDF content unit.* ### 1. Real Sector Developments ____________________________________________________________________ 20 ### 1. Real Sector Developments ### Context and Recent Developments - Political and disaster context: - A new five-party coalition government elected in January 2025 after a no-confidence motion in late 2024; priorities: stabilize governance, kick-start economic recovery, rebuild critical infrastructure, reform education services, and strengthen international partnerships. - A 7.3-magnitude earthquake in December 2024 hit Port Vila hardest; 14 confirmed deaths and damage to commercial buildings in the central business district and the cruise terminal. - The earthquake followed three severe cyclones in 2023 and the liquidation of Air Vanuatu in 2024, compounding strains. - Growth and sectoral performance: - Real GDP growth slowed to 0.9 percent y/y in 2024. - Services sector growth slowed to 0.5 percent y/y in 2024 (down from 2.0 percent y/y in 2023), largely due to Air Vanuatu’s liquidation and tourism disruptions. - Agricultural output reduced due to on-farm labor availability partly related to seasonal overseas programs. - Industry and construction dampened by slower-than-anticipated 2024 capital budget implementation. - Inflation and exchange-rate influences: - Inflation peaked at 11.3 percent in 2023. - Average annual inflation fell to 1.2 percent in 2024, aided by domestic disinflation, lower commodity prices, and a mild appreciation of the vatu against the Australian and New Zealand dollars. - Fiscal and public sector impacts: - Preliminary overall fiscal deficit widened to -2.3 percent of GDP in 2024, compared to -0.9 percent in 2023. - VAT and Economic Citizenship Program (ECP) revenues were stronger than expected, but overall revenues declined by 1.9 percent of GDP relative to 2023 due to reduced donor grant support. - Expenditures were sharply lower than budgeted in 2024; public debt rose marginally to 43 percent of GDP in 2024. - Budget expenditures in 2024 included a VT 2.34 billion (1.7 percent of GDP) payment to Air Vanuatu. - Air Vanuatu developments: - Creditor agreement in August 2024; Supreme Court ordered the liquidation cancelled in October 2024 and shares transferred to AV3 Limited. - Control returned to original directors and management; partial domestic operations resumed (three aircraft: one ATR, two twin otters) servicing 14 ports (previously 23). - IATA certification suspended; airline hopeful of requesting suspension be released by Q4 2025. - Airline entirely dependent on government guarantees; likely to require further subsidies. Government estimated to spend VT 1 billion (0.8 percent of GDP) in the 2025 Budget for additional aircrafts. - Banking and financial sector: - Reported average capital adequacy ratio at 24 percent in March 2025 (regulatory requirement 12 percent); individual banks range from 19 to 54 percent. - Liquidity adequacy ratio at 48 percent in June 2025. - Non-performing loans (NPLs) at 13.1 percent of total loans at end-Q1 2025, primarily concentrated in the state-owned bank. - Stress tests (2024 FSSR) revealed vulnerabilities related to credit and foreign exchange liquidity risks. - External sector and reserves: - Current account deficit estimated to have widened to 15½ percent of GDP in 2024 (from 6.6 percent in 2023), driven by declines in tourism (-16 percent y/y), transport (-48 percent y/y), and postal & couriers (-27 percent y/y). - Gross international reserves at 10.5 months of import cover as of end-2024, above RBV target of 4 months, but on a declining trend. - Vanuatu’s external position assessed as moderately weaker than consistent with fundamentals and desirable policies in 2024. ### Outlook and Key Projections - Real GDP and inflation: - Real GDP growth projected at 1.7 percent in 2025 (baseline). - Growth expected to pick up to 2.8 percent in 2026 as the cruise port reopens and reconstruction ramps up. - Inflation projected to average 1.7 percent y/y in 2025 and stabilize around 2 percent y/y from 2026 onward absent major supply shocks. - RBV target range for inflation: 0 to 4 percent. - Fiscal and current account: - Fiscal deficit projected to widen to 5.0 percent of GDP in 2025. - Staff view: a fiscal deficit of around 4.0 percent of GDP would be broadly appropriate in 2025. - Current account deficit projected to remain around 11½ percent of GDP in 2025 and 2026 before gradually narrowing over the medium term. - Reserves and external links: - Foreign reserves projected to average around 8 months of import cover into the medium-term (assuming no major external shocks). - The 15 percent tariff on exports to the United States expected to have limited direct impact (exports to U.S. comprise 0.65 percent of GDP), but potential indirect effects via reduced demand from key trading partners are possible. ### Risks and Uncertainties - Downside risk tilt: - Post-earthquake recovery path highly uncertain. - Dependence on trade and tourism makes growth vulnerable to external shocks, including global trade tensions. - Potential headwinds: labor shortages, capacity constraints, governance or structural deficiencies, climate-related disasters, volatile commodity prices, sustained political instability. - Specific fiscal risks: - Uncertainty around the future of Air Vanuatu could materially affect fiscal costs. - The Capital Investment Immigration Plan (CIIP) resumed in June 2025 after suspension in March 2025; revenues from citizenship program were around 7 percent of GDP in 2024 (down from 14 percent in 2020). - Need for comprehensive review and independent annual audit of the citizenship program ahead of the Mutual Evaluation Review in 2026. ### Authorities’ Views - Authorities anticipate a stronger near-term recovery and project GDP growth of 3.7 percent in 2025, driven by a rebound in tourism, recovery in agriculture, reconstruction activities, and infrastructure spending under the 2024 Capital Budget. - Authorities expect air arrivals to be more than 50 percent higher than in 2024 and highlight minimal earthquake disruption to agricultural production. - Authorities share staff concerns on downside risks: limited domestic connectivity to outer islands, potential delays in reconstruction, and inflation upside from import-price volatility and natural disaster shocks. ### Policies for Stability and Resilience — Fiscal Policy (selected points) - Staff recommendation: - An accommodative near-term fiscal stance to support post-earthquake recovery is appropriate but must be complemented by measures to avoid unwarranted fiscal expansion. - Staff projects deficit widening from 2.3 percent of GDP in 2024 to 5.0 percent of GDP in 2025; a fiscal deficit of around 4.0 percent of GDP would be broadly appropriate in 2025. - Fiscal management guidance: - Maintain prudence for the remainder of the year; phase in spending to avoid overruns and anchor on updated and realistic revenue and grant projections. - Prioritize spending to rebuild critical infrastructure and protect vulnerable households; avoid discretionary wage increases and non-essential goods and services outlays. - Defer low-priority capital projects until implementation capacity improves. - Debt and financing strategy: - Vanuatu’s debt deemed sustainable but overall risk of debt distress remains “high”. - Improvements in external debt profile and donor support have eased external debt distress risk to moderate levels, but domestic debt is rising rapidly. - New external financing should be assumed only on concessional terms or through grants to preserve FX reserves and avert external debt buildup. - A decisive medium-term fiscal consolidation and prudent debt management strategies are essential to avoid further deterioration in debt distress risks. *Source: 1. Real Sector Developments (chapter content) from the provided IMF PDF content unit.* ### 15. Decisive medium-term fiscal consolidation to rebuild buffers and safeguard ### 15. Decisive medium-term fiscal consolidation to rebuild buffers and safeguard ### Fiscal consolidation and debt sustainability - Under unchanged policies, large deficits are set to persist, adding to financing pressures, heightening the perception of fiscal dominance, and risking crowding out of private credit. - Projected debt dynamics suggest shifting the primary balance to a small surplus is likely needed to gradually reduce public debt over the medium term; a larger surplus would be required for more rapid debt reduction. - Recommended medium-term fiscal adjustment: roughly 2–5 percent of GDP, with the pace calibrated based on how recent shocks and their fiscal impacts unwind and aligning with adjustment needs identified in previous AIV staff reports. - Required supporting measures: a well-balanced package of stronger revenue mobilization and comprehensive expenditure rationalization, in line with previous IMF recommendations. - Fiscal framework reforms: revitalize the fiscal anchor to allow headroom for frequent natural disasters and adopt a clear operational deficit target linking the anchor to the annual budget process. ### Revenue mobilization and diversification - Urgent need to mobilize additional revenue and diversify funding sources due to very high incidence of natural disasters, limits in existing revenue sources, and liquidation of the national airline increasing fiscal and public debt sustainability risks. - Comprehensive revenue measures proposed: - Introduction of personal income and/or corporate tax. - Accelerating measures to bolster VAT collection. - Exploring additional excise taxes and duties. - Expediting collection of dividends from SOEs. - Safeguarding ECP revenues through broad-based reforms, fostering transparency, and aligning with best international practices. - Note on ECP revenues: significant increase recorded in the first half of 2025 likely reflects recent changes to the Citizenship program, including invoicing through the government’s financial management system; verification of actual receipts vis-à-vis invoices remains pending. - Domestic financing risks: limited public revenue has spawned fiscal deficits increasingly reliant on the RBV as a domestic financing source; urgent need to diversify the domestic investor base by bolstering government debt management strategy and developing the domestic bond market (Annex VI). ### Expenditure composition, SOEs, and reprioritization - Government spending comparable to peers, but recent composition shifts require correction: - Current spending averaged around 35 percent of GDP since 2020, compared to 27 percent in the preceding five years. - Capital expenditures averaged around 6 percent of GDP since 2020, down from 10 percent in the preceding five years. - Recent increases in current expenditures (especially wages and allowances) have come at the expense of investment in essential infrastructure. - Policy priorities: - Adopt a credible business plan for Air Vanuatu urgently; resolve operational shortfalls financed from the budget and the need for financing guarantees. - Strengthen public financial management systems—budget planning, expenditure controls, and SOE oversight—to anchor fiscal sustainability. - Reprioritize expenditures, including reviewing recent increases to public employee compensation and allowances (including those pertaining to the Government Remuneration Tribunal (GRT)). - Boost investment spending toward growth-enhancing sectors (e.g., agriculture and education). - Expedite collection of dividends from SOEs by effectively implementing the GBEU Act. ### Authorities’ views on fiscal measures - Authorities concurred on the urgent need to rebuild fiscal buffers and commit to implementing fiscal reforms swiftly. - Authorities noted revenues have surprised on the upside despite the earthquake, including from the ECP, and are preparing a holistic revenue strategy which includes: - Exploring medium-term options to broaden the tax base, including introducing a personal income and corporate tax. - Fast-tracking procurement of a new VAT monitoring system to meet the 2025 budget target. - Undertaking a full review of the Excise Tax Act and import duties. - Increasing the high value procurement threshold from VT10 million to VT30 million. - Collecting dividends from SOEs by implementing the GBEU Act. - Authorities acknowledged challenges to sustain ECP revenues and have undertaken measures to address governance and transparency issues in the citizenship program. - Given earthquake impacts, authorities anticipated increased recovery spending this year and hoped to tighten expenditures in the 2026 Budget cycle; they emphasized identifying sustainable cost savings and reforms in specific sectors (e.g., Education, Labor market, Digital economy). ### Monetary and exchange rate policies - Current monetary policy stance: broadly appropriate. - RBV policy rate unchanged at 2.75 percent since the tightening in 2024Q3. - RBV maintained the statutory reserve deposit at 5.50 percent and continued open market sales to mop up excess liquidity. - Monetary financing and liquidity: - RBV’s purchases of government bonds have impeded effectiveness of open market operations and reinforced fiscal dominance. - These purchases increased to VT6.4 billion in 2024 (4.8 percent of GDP) due to government large domestic borrowing needs and limited local financial sector absorptive capacity. - Credit and inflation: - Private sector credit expanded by 5.4 percent y/y in 2024, driven by higher lending to businesses and households. - Current policy stance can support growth recovery amidst a stable inflation outlook and adequate foreign reserves, but RBV should monitor conditions and be ready to adjust policy if inflationary pressures reemerge. - Exchange rate management: - Exchange rate has acted as a buffer against external shocks and cushioned imported inflation. - Adoption of new currency basket weights and a clear FX market operations framework, including implementation of recent IMF TA recommendations, should guide future adjustments, improve price discovery, and help manage FX liquidity risks. - Vanuatu’s external position is assessed to be moderately weaker than warranted by fundamentals and desired policies in 2024 (Annex IV). ### RBV governance and bond market development - Governance reforms in progress to implement remaining 2016 Safeguards Assessment recommendations: - Enhanced internal oversight and operationalization of an Audit Committee comprising non-executive board members. - Comprehensive amendments to the RBV Act—supported by IMF TA—to strengthen mandate, governance, independence, and accountability. - Recommended policy actions: - Phase out monetary financing through primary market purchases of government bonds. - Accelerate development of domestic debt markets to provide a stable financing alternative for the government. - Maintain RBV financial autonomy by ensuring a strong balance sheet and a sound profit retention and distribution framework. - Preserve institutional and operational independence, including removing government representative from the RBV Board and ensuring RBV consultation prior to legislative changes affecting its mandate. - Authorities’ perspectives: - RBV concurs with staff assessment, supports phasing out primary market purchases, has requested additional IMF TA for secondary bond market development, and is prepared to implement new currency basket weights pending Board approval. ### Financial sector stability, supervision, and AML/CFT - Financial sector resilience and risks: - Banking system resilient to significant vatu outflows but susceptible to credit and FX liquidity risks. - Persistently high NPLs concentrated in one large state-owned bank, exacerbated by an illiquid real-estate market and slow legal recoveries. - As of June 2024, banks’ holdings of domestic debt securities accounted for 6.5 percent of total assets and 45 percent of regulatory capital, with significant variation across banks. - Supervisory and prudential reform priorities: - Ensure adequate loan-loss provisioning and intensify supervisory efforts. - Improve credit reporting bureau to enhance underwriting standards and reduce future NPLs. - Implement frequent on-site inspections, technology-enabled off-site monitoring, risk-based sampling, targeted asset-quality reviews, and adequate provisioning. - Monitor banks’ FX net open positions and define contingency plans for FX funding shocks. - Replace corporate-insolvency–based regime with an administrative resolution framework under RBV authority and strengthen stress testing capacity. - Continued IMF headquarters and PFTAC technical assistance to support reforms. - AML/CFT enhancements: - Government launched legislative reforms and established a National AML/CFT Coordinating Committee to close remaining gaps ahead of the 2026 Mutual Evaluation Review. - Upcoming National Risk Assessment report and National AML/CFT Strategy expected to map reforms, particularly for high-risk areas associated with the ECP, virtual assets, company trust service providers, and online gaming. - Priority gaps to resolve include weaknesses in reporting suspicious transactions and inadequate investigation of corruption offenses. - Authorities’ views: - RBV acknowledges need for stronger supervisory processes, NPL resolution mechanisms, and enhanced AML/CFT governance and transparency. - Authorities support mandatory compliance, regular policy reviews, and seek international support to address cross-border banking relationship constraints and disproportionately high compliance costs for small countries. ### Structural and governance reforms - Key governance and structural priorities: - Improve transparency and governance of existing revenue streams, particularly the Citizenship program, and digitalize systems. - Operationalize the new financial management information system (FMIS) expected to become operational in three years to strengthen PFM and transparency across agencies. - Implement the PFM Roadmap based on updated PEFA assessment. - Strengthen public procurement governance, public access to procurement information, regulatory framework and enforcement, and monitor political interference and corruption risks. - Effectively implement the newly legislated Commercial Government Business enterprises (CGBE) Act to improve SOE oversight and reduce undue political influence. - Strengthen the asset declaration regime: improve public access, systematic verification of submissions, and inter-agency cooperation (e.g., Office of the Ombudsman, Office of the Public Prosecutor) for prosecution of corruption cases. - Labor market and human capital: - Address labor skills shortages exacerbated by brain drain from labor mobility schemes to Australia and New Zealand. - Harness benefits of labor mobility (skills development and remittances) for private sector activity and entrepreneurship. - Undertake comprehensive review of the education curriculum, invest in quality education and vocational training, strengthen women’s participation in the formal labor force, and promote an enabling business environment (Annex VII). *Source: IMF staff chapter "15. Decisive medium-term fiscal consolidation to rebuild buffers and safeguard" from the provided PDF content.* ### 27. The macro-critical impact of natural disasters on growth and external stability ### 27. The macro-critical impact of natural disasters on growth and external stability ### Impact of natural disasters and adaptation measures - Demonstrates "the urgent need to accelerate the pace and scale of disaster adaptation measures." - Recommended measures: - Disaster resilient infrastructure through enforcement of building codes and compliance with environmental impact assessments and regulations. - Scaling up access to climate finance and technical support. - Investing in early-warning systems, and enhancing community awareness and preparedness. - Innovative disaster-risk financing products such as parametric insurance to cover the vulnerable communities to help reduce the financial burden after natural disasters and boost resilience. - Staff simulations using the DIGNAD model show that ex-ante adaptation investments can substantially mitigate disaster damages, lowering GDP losses and reconstruction financing needs, while also supporting faster economic recovery. - Compared to standard infrastructure spending, adaptation investments reduce disaster-related GDP losses by about 0.4 percent. - Scaling up adaptation with concessional borrowing yields additional benefits—especially when supported by a stronger fiscal position, to mitigate the impact on public debt (Annex VIII). - Example statistic: Vanuatu received its first parametric insurance payout of US$1.2 million after the earthquake in December 2024. ### Authorities’ views and priorities - Authorities concurred that overcoming structural challenges is crucial for fostering inclusive growth. - Notable progress and priorities: - Implementation of the new integrated FMIS system, including staffing and contracting firms; project is a key priority for the administration. - Effective implementation of the CGBE Act—including timely submission of audited financial statements from state-owned enterprises—and ongoing work to staff the GBE Unit. - Efforts to secure direct accreditation to the Green Climate Fund, including via technical assistance. - Constraints to adaptation project implementation: - Frequent natural disasters, slow procurement process, lack of skilled workers, and high transport costs. - Education and labor measures: - Agreement that a comprehensive education system reform is needed to make it fit-for-purpose while preserving cultural values, including reviewing the education curriculum, leveraging digital technologies to support online learning, vocational and skills partnerships, and improving teacher’s competency. - Business environment and entrepreneurship: - Importance of creating an enabling business environment and strengthening existing reintegration programs that offer business mentoring and coaching sessions to promote entrepreneurship and job creation. ### Capacity development and data issues - Surveillance and capacity development needs remain critical (Annex IX). - Authorities have followed through on previous Fund policy advice (Annex III) and acknowledged capacity development support from the Fund, including via the Pacific Financial Technical Assistance Centre (PFTAC). - Commitments and requests: - Committed to implementing recent TA recommendations on the RBV Act reform, financial supervision and regulation, foreign exchange market operations, and the currency basket review. - Requested additional TA support to develop the domestic government bond market. - Will continue working with the Fund and PFTAC on ongoing TA and capacity building initiatives on statistics, financial sector supervision, tax policy, PFM and RBV reforms. - Data Adequacy Assessment (DAA) findings: - Data provided to the Fund have some shortcomings that somewhat hamper surveillance. - Significant data gaps in national accounts, balance of payments, fiscal accounts which somewhat impede timely surveillance. - Data collection (such as price collection in Port Villa central business district) and release of statistics were temporarily affected by the December earthquake—but have improved as activity normalized. - Ongoing TA programs are addressing some of these issues, which should help improve data quality. ### Staff appraisal — recovery, risks, and near-term outlook - Recovery status and outlook: - The post-earthquake recovery is underway. - Strong donor support, partial resumption of domestic air services, and a rebound in agricultural production are supporting activities. - Pace of recovery in 2025 will remain constrained by capacity bottlenecks, limited domestic connectivity, and delays in project execution. - A more pronounced recovery is anticipated in 2026 as reconstruction gathers momentum, critical infrastructure is restored, and tourism capacity normalizes. - Despite a comfortable reserves position, Vanuatu’s external position is assessed to be moderately weaker than the level consistent with fundamentals and desirable policies in 2024. - Balance of risks (tilted to the downside): - Key domestic vulnerabilities: uncertain future of Air Vanuatu, sustainability of the Citizenship program, and capacity constraints in executing public investment. - Recommended mitigations: urgently adopt a credible business plan for Air Vanuatu and strengthen its management and financial standing; enhance governance and transparency of the Citizenship Program; build greater resilience in public investment management to ensure timely and efficient project delivery. - External vulnerabilities: high exposure to natural disasters, commodity price volatility, and weaker-than-expected global demand, including from rising global trade tensions. ### Fiscal position, policy recommendations, and debt considerations - Recent shocks have led to deterioration in the underlying fiscal position, leaving little policy room to contend with future risks. - Revenue and expenditure dynamics: - VAT revenues have held up thanks to resilience in the domestic economy and enhanced collection efforts, while other revenue streams weakened. - ECP revenues remain significant but are facing a structural decline, underscoring the need for stronger domestic revenue mobilization, and for subjecting ECP processes to best international practices. - Planned increases in public employee compensation and allowances are substantial, setting a negative precedent on expenditure prioritization, likely to create persistent deficits that would need to be financed with relatively expensive domestic debt, which has experienced a sharp increase. - Policy prescriptions: - Build adequate buffers during non-crisis periods (Annex VI). - While the fiscal expansion envisaged by the budget in 2025 is warranted given ongoing shocks, a holistic and credible fiscal strategy is urgently needed to restore policy buffers and safeguard medium-term fiscal sustainability. - Careful prioritization and expenditure management in the remainder of 2025 to avoid an excessive fiscal expansion. - Urgently implement a medium-term consolidation plan. - Strengthen the management and financial standing of Air Vanuatu’s operation, including by adopting a credible business plan, to avoid posing a protracted burden on the budget and public liabilities. - Reinforce the fiscal responsibility framework with a clear anchor and credible operational rules to underpin responsible public financial management. - Rebuild policy buffers through a comprehensive package of robust revenue mobilization and expenditure rationalization measures. - Fiscal consolidation and a prudent debt management strategy are critical for addressing government funding vulnerabilities (Annex VI) and alleviating domestic financing constraints, which have resulted in a heavy reliance on monetary financing by the RBV. - Note: Annex VI includes a stylized scenario analysis that assesses the impact of Vanuatu’s funding mix (grants vs. loans) on the country’s debt profile. ### Monetary policy and RBV reforms - Monetary policy stance: - Current monetary policy stance is appropriate given the benign inflation outlook, but the RBV should be prepared to respond if inflationary pressures arise. - To improve the effectiveness of OMOs in reducing excess liquidity, monetary financing should be gradually phased out and only allowed under exceptional circumstances going forward. - RBV reforms: - Ongoing legislative reforms to the RBV Act to strengthen its independence and autonomy in line with best practices are critical and should be prioritized. - Safeguarding the RBV’s financial and operational independence requires a strong balance sheet, a transparent approach to profit retention and distribution, and the removal of political influence in policy decisions. ### Financial sector stability and inclusion - Financial stability concerns: - High non-performing loans, combined with low provisioning and a strong sovereign-bank nexus, raise financial stability risks. - Recommendations: strengthen supervisory capacity, enhance loan recovery frameworks, and implement a modern bank resolution framework. - AML/CFT and correspondent banking: - Effective implementation of the AML/CFT framework, targeted measures to address risks from the Economic Citizenship Program and virtual assets, and enhanced cross-border cooperation are essential to preserve correspondent banking relationships. - Financial inclusion: - Expanding financial inclusion, particularly in underserved communities, should be pursued in parallel to ensure financial sector development supports inclusive and sustainable growth. ### Structural reforms and longer-term resilience - Concerted and sustained actions needed to address structural challenges to build long-term resilience and inclusive growth. - Key structural priorities: - Strengthening resilience by investing in more robust infrastructure and improving disaster preparedness to safeguard development gains and reduce economic scarring from repeated climate- and disaster-related shocks. - Leveraging overseas labor mobility programs to support skills development and entrepreneurship. - Investing in quality education and vocational training. - Promoting women’s participation in the formal labor force. - Fostering an enabling business environment to promote private sector growth. *International Monetary Fund — Chapter: "27. The macro-critical impact of natural disasters on growth and external stability"* ### 39. It is recommended that the next Article IV Consultation takes place on the standard ### It is recommended that the next Article IV Consultation takes place on the standard 12-month cycle. ### Real sector developments - Growth has slowed amid repeated shocks and broad-based impacts across sectors; real GDP (annual percent change): - 2021: -1.6 - 2022: 5.2 - 2023: 2.1 - 2024: 0.9 - 2025: 1.7 - 2026: 2.8 - 2027: 2.7 - 2028: 2.3 - 2029: 2.3 - 2030: 2.3 - Inflation (consumer prices, period average): - 2021: 2.3 percent - 2022: 6.7 percent - 2023: 11.2 percent - 2024: 1.2 percent - 2025: 1.7 percent - 2026: 2.2 percent - 2027: 2.2 percent - 2028: 2.2 percent - 2029: 2.2 percent - 2030: 2.2 percent - Inflation (end period): - 2021: 0.7 percent - 2022: 11.2 percent - 2023: 7.0 percent - 2024: -0.7 percent - 2025: 2.2 percent - 2026: 2.3 percent - 2027: 2.2 percent - 2028: 2.2 percent - 2029: 2.2 percent - 2030: 2.2 percent - Tourism and labor: - Travel receipts (percent of GDP): - 2021: 0.2 - 2022: 3.8 - 2023: 12.0 - 2024: 10.0 - 2025: 11.2 - 2026: 12.6 - 2027: 14.4 - 2028: 15.1 - 2029: 15.2 - 2030: 15.2 - Tourist arrivals: recovery disrupted in 2024, in part due to the liquidation of Air Vanuatu (figures and charts provided by Vanuatu Authorities). ### External sector developments - Current account (percent of GDP): - 2021: -11.7 - 2022: -17.6 - 2023: -6.6 - 2024: -15.4 - 2025: -11.6 - 2026: -11.6 - 2027: -9.7 - 2028: -6.7 - 2029: -5.8 - 2030: -5.0 - Trade and goods: - Trade balance (percent of GDP): - 2021: -25.4 - 2022: -28.6 - 2023: -30.4 - 2024: -24.1 - 2025: -29.4 - 2026: -30.7 - 2027: -29.3 - 2028: -27.8 - 2029: -27.7 - 2030: -26.2 - Exports of goods (f.o.b., percent of GDP): - 2021: 5.7 - 2022: 7.0 - 2023: 5.4 - 2024: 6.6 - 2025: 6.3 - 2026: 6.3 - 2027: 6.3 - 2028: 6.3 - 2029: 6.4 - 2030: 6.4 - Imports of goods (f.o.b., percent of GDP): - 2021: 31.1 - 2022: 35.6 - 2023: 35.8 - 2024: 30.7 - 2025: 35.7 - 2026: 37.0 - 2027: 35.6 - 2028: 34.1 - 2029: 34.0 - 2030: 32.7 - Remittances and transfers: - Gross remittances (percent of GDP): - 2021: 20.6 - 2022: 17.8 - 2023: 15.0 - 2024: 15.2 - 2025: 16.3 - 2026: 15.8 - 2027: 15.4 - 2028: 15.0 - 2029: 14.6 - 2030: 14.2 - Secondary income (percent of GDP): - 2021: 17.8 - 2022: 8.9 - 2023: 12.1 - 2024: 9.7 - 2025: 12.0 - 2026: 10.6 - 2027: 10.2 - 2028: 10.0 - 2029: 9.9 - 2030: 9.7 - ECP Revenues (percent of GDP): - 2021: 11.2 - 2022: 7.0 - 2023: 5.3 - 2024: 7.0 - 2025: 5.4 - 2026: 4.3 - 2027: 4.3 - 2028: 4.3 - 2029: 4.3 - 2030: 4.3 - Capital and financial flows: - Capital and financial account (percent of GDP): - 2021: 22.2 - 2022: 9.1 - 2023: 3.6 - 2024: 15.2 - 2025: 7.6 - 2026: 6.3 - 2027: 7.2 - 2028: 6.1 - 2029: 6.0 - 2030: 6.2 - Foreign direct investment (percent of GDP): - 2021: 3.7 - 2022: 2.3 - 2023: 1.1 - 2024: 4.2 - 2025: 3.7 - 2026: 3.3 - 2027: 3.1 - 2028: 3.1 - 2029: 3.0 - 2030: 2.7 - Reserves and external position: - Gross international reserves (in millions of U.S. dollars): - 2021: 665 - 2022: 639 - 2023: 604 - 2024: 623 - 2025: 578 - 2026: 516 - 2027: 485 - 2028: 477 - 2029: 480 - 2030: 496 - Gross international reserves (in months of prospective G&S imports): - 2021: 11.7 - 2022: 11.6 - 2023: 11.2 - 2024: 10.5 - 2025: 9.4 - 2026: 8.1 - 2027: 7.7 - 2028: 7.4 - 2029: 7.3 - 2030: 7.4 ### Fiscal and monetary developments - Large fiscal deficits are expected to persist due to higher spending on post-earthquake rebuilding and infrastructure. - Central government fiscal aggregates (percent of GDP): - Total revenue: - 2021: 46.8 - 2022: 35.5 - 2023: 40.6 - 2024: 38.7 - 2025: 33.0 - 2026: 31.9 - 2027: 31.8 - 2028: 31.4 - 2029: 31.1 - 2030: 30.9 - Expenditure: - 2021: 44.4 - 2022: 42.0 - 2023: 41.6 - 2024: 41.1 - 2025: 38.0 - 2026: 36.6 - 2027: 36.1 - 2028: 35.2 - 2029: 35.0 - 2030: 34.6 - Net lending (+)/borrowing (-): - 2021: 2.4 percent of GDP (surplus) - 2022: -6.5 percent of GDP (deficit) - 2023: -0.9 percent of GDP - 2024: -2.3 percent of GDP - 2025: -5.0 percent of GDP - 2026: -4.7 percent of GDP - 2027: -4.4 percent of GDP - 2028: -3.9 percent of GDP - 2029: -3.9 percent of GDP - 2030: -3.7 percent of GDP - Public debt dynamics: - Public and publicly-guaranteed debt (end of period, percent of GDP): - 2021: 49.5 - 2022: 43.6 - 2023: 42.6 - 2024: 46.2 - 2025: 49.4 - 2026: 52.2 - 2027: 54.6 - 2028: 56.6 - 2029: 58.4 - 2030: 60.0 - Domestic debt (percent of GDP): - 2021: 8.8 - 2022: 9.5 - 2023: 10.3 - 2024: 13.2 - 2025: 16.1 - 2026: 19.6 - 2027: 21.4 - 2028: 22.8 - 2029: 23.4 - 2030: 22.8 - External public debt (percent of GDP): - 2021: 40.7 - 2022: 34.1 - 2023: 32.2 - 2024: 32.9 - 2025: 33.2 - 2026: 32.5 - 2027: 33.1 - 2028: 33.7 - 2029: 35.0 - 2030: 36.5 - Monetary developments and liquidity: - Broad money (M2, annual percentage change): - 2021: 14.2 - 2022: 5.6 - 2023: -0.8 - 2024: 5.7 - 2025: -0.7 - 2026: 3.0 - 2027: 4.4 - 2028: 6.4 - 2029: 7.9 - 2030: 8.6 - Net foreign assets (annual percentage change): - 2021: 7.8 - 2022: -0.1 - 2023: 0.8 - 2024: 11.9 - 2025: -9.2 - 2026: -6.5 - Net domestic assets (annual percentage change): - 2021: 56.2 - 2022: 32.4 - 2023: -6.6 - 2024: -16.5 - 2025: 40.6 - 2026: 35.1 - Reserve money (in millions of vatu; end of period): - 2021: 55,759 - 2022: 57,101 - 2023: 56,892 - 2024: 59,283 - 2025: 55,725 - 2026: 50,410 - The RBV has maintained the SRD requirement, while credit growth picked up in 2024; money supply expanded in 2024, attributed to foreign inflows of disaster-related funds. ### Financial sector developments - Private credit growth and banking sector performance: - Private credit growth (year-on-year percentage change, components shown in figures): - Total credit to private sector and breakdowns by corporate and household credit presented in charts (numerical series in figures). - Bank profitability: - Return on assets (percent): - 2018: 1.5 - 2019: 0.1 - 2020: -0.1 - 2021: 0.8 - 2022: 1.1 - 2023: 2.0 - 2024: 2.3 - Return on equity (percent): - 2018: 13.0 - 2019: 0.9 - 2020: -0.6 - 2021: 6.0 - 2022: 9.1 - 2023: 13.9 - 2024: 16.2 - Liquidity and capitalization: - Liquid assets to total assets (liquid asset ratio): - 2018: 45.2 - 2019: 43.6 - 2020: 44.0 - 2021: 46.7 - 2022: 45.9 - 2023: 46.3 - 2024: 50.3 - Regulatory capital to risk-weighted assets: - 2018: 20.1 - 2019: 19.2 - 2020: 20.0 - 2021: 23.2 - 2022: 23.1 - 2023: 24.1 - 2024: 23.3 - Regulatory Tier 1 capital to risk-weighted assets: - 2018: 16.3 - 2019: 17.9 - 2020: 18.9 - 2021: 21.0 - 2022: 19.8 - 2023: 19.8 - 2024: 19.4 - Asset quality: - Nonperforming loans to total gross loans (percent): - 2018: 16.0 - 2019: 14.3 - 2020: 19.0 - 2021: 15.8 - 2022: 15.1 - 2023: 19.6 - 2024: 14.8 - Nonperforming loans net of provisions to capital (percent): - 2018: 52.2 - 2019: 42.5 - 2020: 57.5 - 2021: 45.4 - 2022: 42.1 - 2023: 56.6 - 2024: 40.3 - Financial access: - Financial access of households is moderately high compared to peers; Financial Development Index (2021) and country comparisons are provided in figures. ### Fiscal tables and budgetary operations (central government) - Selected headlines (in millions of vatu): - Total revenue: - 2021: 48,652 - 2022: 43,260 - 2023: 54,014 - 2024: 51,615 - 2025: 45,694 - 2026: 46,412 - 2027: 48,564 - 2028: 50,134 - 2029: 52,077 - 2030: 54,086 - Expenditure: - 2021: 46,175 - 2022: 51,175 - 2023: 55,274 - 2024: 54,734 - 2025: 52,590 - 2026: 53,306 - 2027: 55,224 - 2028: 56,301 - 2029: 58,540 - 2030: 60,577 - Net lending (+)/borrowing (-) (in millions of vatu): - 2021: 2,476 - 2022: -7,915 - 2023: -1,260 - 2024: -3,118 - 2025: -6,896 - 2026: -6,894 - 2027: -6,659 - 2028: -6,167 - 2029: -6,462 - 2030: -6,491 - Grants and economic citizenship: - Grants from development partners (in millions of vatu): - 2021: 16,934 - 2022: 14,699 - 2023: 20,311 - 2024: 13,867 - 2025: 12,942 - 2026: 12,483 - 2027: 12,055 - 2028: 11,802 - 2029: 11,985 - 2030: 12,151 - Economic citizenship program receipts (part of other revenue, in millions of vatu): - 2021: 11,647 - 2022: 8,482 - 2023: 7,004 - 2024: 9,339 - 2025: 7,471 - 2026: 6,271 - 2027: 6,594 - 2028: 6,923 - 2029: 7,241 - 2030: 7,574 ### Monetary survey highlights - Monetary aggregates (end of period, in millions of vatu): - Net foreign assets: - 2021: 87,579 - 2022: 87,509 - 2023: 88,167 - 2024: 98,696 - 2025: 89,606 - 2026: 83,815 - Total broad money (M2): - 2021: 110,946 - 2022: 117,188 - 2023: 116,215 - 2024: 122,879 - 2025: 121,967 - 2026: 125,644 - Credit to the private sector (percent of GDP): - 2021: 60.9 - 2022: 55.2 - 2023: 53.6 - 2024: 56.3 - 2025: 56.8 - 2026: 56.2 ### Balance of payments summary - Current account and components (percent of GDP) summarized in the external sector section above. - Overall balance (percent of GDP): - 2021: 5.5 - 2022: -2.5 - 2023: -3.0 - 2024: 1.7 - 2025: -4.0 - 2026: -5.3 - 2027: -2.5 - 2028: -0.6 - 2029: 0.2 - 2030: 1.2 - Financing and change in international reserves (percent of GDP): - Change in international reserves (- = increase): - 2021: -5.5 - 2022: 2.5 - 2023: 3.0 - 2024: -1.7 - 2025: 4.0 - 2026: 5.3 - 2027: 2.5 - 2028: 0.6 - 2029: -0.2 - 2030: -1.2 ### Bank financial soundness indicators - Key indicators (selected years): - Regulatory capital to risk-weighted assets: - 2018: 20.1 - 2019: 19.2 - 2020: 20.0 - 2021: 23.2 - 2022: 23.1 - 2023: 24.1 - 2024: 23.3 - Nonperforming loans to total gross loans: - 2018: 16.0 - 2019: 14.3 - 2020: 19.0 - 2021: 15.8 - 2022: 15.1 - 2023: 19.6 - 2024: 14.8 - Return on assets: - 2018: 1.5 - 2019: 0.1 - 2020: -0.1 - 2021: 0.8 - 2022: 1.1 - 2023: 2.0 - 2024: 2.3 - Return on equity: - 2018: 13.0 - 2019: 0.9 - 2020: -0.6 - 2021: 6.0 - 2022: 9.1 - 2023: 13.9 - 2024: 16.2 - Liquid assets to total assets: - 2018: 45.2 - 2019: 43.6 - 2020: 44.0 - 2021: 46.7 - 2022: 45.9 - 2023: 46.3 - 2024: 50.3 ### Key policy implications and considerations (drawn from the findings) - Maintain the standard 12-month Article IV consultation cycle. - Fiscal policy: - Large fiscal deficits are expected to persist due to post-earthquake rebuilding and infrastructure spending; public debt is projected to climb (public and publicly-guaranteed debt rising to 60.0 percent of GDP by 2030). - Revenue composition and reliance on grants and economic citizenship receipts are notable fiscal features; grants and economic citizenship program receipts show substantial year-to-year variation. - External stability: - Reserves are projected to fall as tourism receipts recover more slowly, remittances remain moderate, and ECP revenues show a structural decline; gross international reserves decline to 35.1 percent of GDP (or 35.1 in memorandum series) by 2030 in monthly import coverage terms. - Monetary and financial policy: - The RBV’s maintenance of SRD requirements, expansion of money supply in 2024 due to disaster-related inflows, and pickup in credit growth (notably private and household credit) warrant monitoring. - Banking sector remains profitable, liquid, and adequately capitalized, though NPLs remain elevated in historical context and require ongoing supervision. - External and sectoral shocks: - The liquidation of Air Vanuatu substantially affected tourism in 2024; recovery scenarios for tourism will materially influence current account, reserves, and fiscal outcomes. *Source: Vanuatu authorities; and IMF staff estimates and projections contained in the provided content unit.* ### Annex I. Near-Term Growth Assumptions ### Annex I. Near-Term Growth Assumptions ### Tourism recovery following Air Vanuatu liquidation and the December 2024 earthquake - Context and impact - Air Vanuatu’s liquidation in May 2024 and the closure of its international flights caused significant tourism disruptions. - The December 2024 earthquake damaged the cruise terminal in Port Vila (one of only two in Vanuatu; the other is in Santo, which was unaffected). - Air and cruise arrivals fell by 25 and 17 percent, respectively, dragging total tourist arrivals down by 19 percent in 2024. - Observed connectivity and arrivals (as of May/Q1 2025) - International connectivity to Vanuatu has fully recovered by May 2025, with more flights from Australian and regional carriers than before Air Vanuatu’s liquidation. - Air arrivals surged 49 percent in Q1 2025. - Cruise-ship tourism fell 43 percent in Q1 2025 as the port was damaged by the earthquake; a temporary tender port is in place. - Staff baseline projections - 2025: staff baseline projects a 44 percent year-on-year rebound for 2025—driven by a very low 2024 base—though growth will remain constrained by retail closures and limited domestic connections. - 2026: recovery is expected to pick up in 2026 with the reopening of cruise ports and the resumption of post-earthquake reconstruction. - 2028: recovery reaching pre-pandemic levels by 2028. - Cruise arrivals: calls have started to return in August 2025, with full cruise recovery not anticipated until 2029. - Risks around baseline - Downside: Prolonged domestic connectivity issues and hotel supply constraints (due to earthquake damage) may hinder Vanuatu's tourism appeal, slowing recovery. - Upside: Reliable international and regional carriers could attract more foreign visitors, supporting a stronger tourism rebound. ### Post-earthquake reconstruction - Impact of the December 2024 earthquake - Widespread infrastructure damage, disrupted domestic supply chains, and temporary closure of Port Vila’s Central Business District (CBD). - Many businesses relocated to suburban areas and most jobs were preserved, cushioning economic disruptions and adverse impacts on productive capacity. - Total losses are estimated at US$197 million—about 17 percent of Vanuatu’s 2023 GDP. - Losses are expected to be mitigated via higher external grants and insurance payments expected to support reconstruction spending. - Assumed reconstruction timeline and impact on construction sector - As of August 2025, the CBD has partially reopened, with many businesses that have not already relocated to suburban areas resuming operations. - Staff baseline assumes reconstruction, prioritizing critical infrastructure, will start to ramp up in the second half of 2025. - Projected contribution to construction sector growth: 2.0 percent in 2025 and 4.0 percent in 2026. - Rebuilding is deemed essential to mitigate near- and medium-term adverse impacts and to minimize any permanent losses. - Risks around baseline - Downside: Limited skilled labor, financing constraints, and the authorities’ limited implementation capacity may slow the reconstruction process, along with delays in resuming critical infrastructure and services. - Upside: Faster reconstruction, especially with improved infrastructure, could enhance both near- and medium-term growth prospects. ### Donor support post Dec-2024 earthquake (Table 1: selected entries) - Crisis Preparedness & Response Toolkit: US$12 million in Rapid Response Option grant financing. Effective date: Dec 24, 2024 (US$12 m). - Recovery & Resilience grant: US$30 million; $20 mn of this for rebuilding damaged schools, hospitals and urban roads; $10 mn Contingent Emergency Response Component (CERC) can be tapped for any future disaster or health emergency. Effective date: Jan 16, 2025 (US$30 m). - ADB: 5 — Asia-Pacific Disaster Response Fund grant covering temporary shelters, water-purification units and emergency health services. Effective date: Dec 24, 2024. - Australia: 4.5 — AUD 7 million in humanitarian aid pledged to support earthquake recovery efforts. Effective date: Dec 18, 2024. - New Zealand: 2.3 — Emergency grant delivered urgent humanitarian aid—shelter kits, medical and water-purification support, and search-and-rescue teams—to meet immediate needs after the earthquake. Effective date: Dec 18, 2024. - IFRC Emergency Appeal: 5.2 — International Federation’s multi-donor appeal funds for shelter, livelihoods recovery and disaster-risk-reduction training. Effective date: Dec 20, 2024. - World Bank: 42. - UN CERF: 1 — Central Emergency Response Fund allocated US$1 million, channeled through UNICEF, UNFPA and WHO, to restore safe water, distribute emergency shelter kits and deploy mobile health clinics. Effective date: Dec 19, 2024. *Source: Annex I. Near-Term Growth Assumptions (IMF).* ### Annex V. Risk Assessment Matrix ### Annex V. Risk Assessment Matrix ### Risk assessment entries - Escalating Trade Measures and Prolonged Uncertainty - Likelihood: High - Expected Impact: Medium. Global economic slowdown particularly in main trading partners could negatively affect growth prospects via trade, tourism, and remittances. - Policy Recommendations: Targeted policy support to vulnerable segments of the economy, closely monitoring potential inflationary pressures. - Commodity price volatility - Likelihood: High - Expected Impact: Medium. Vanuatu is highly exposed to increases in global energy and food prices, as well as to supply chain disruptions, given its heavy reliance on imports. Domestic food prices are also particularly vulnerable to the impacts of climate change and natural disasters. - Policy Recommendations: Monitor inflation developments closely and adapt monetary policy as needed to address price pressures, while enhancing climate‐resilient agricultural practices. - Political instability leading to delays in major infrastructure projects - Likelihood: Medium - Expected Impact: High. Delays in major infrastructure projects could negatively affect activity and growth prospects. - Policy Recommendations: Long-term planning and stronger PFM to support effective execution, foster and greater transparency and accountability. - Further drop in ECP revenues amid growing concerns regarding AML/CFT risks, amplified by loss of key correspondent banking relationships - Likelihood: High - Expected Impact: High. A structural decline in ECP revenues could undermine medium-term fiscal sustainability. - Policy Recommendations: Consolidate fiscal position, rebuild buffers, and preserve fiscal space with domestic revenue mobilization and expenditure rationalization. - Increasing nonperforming loans (NPLs) - Likelihood: Medium - Expected Impact: Medium. Higher NPLs could lead to tighter borrowing conditions, and potentially hinder financial inclusion. - Policy Recommendations: Greater supervisory intensity (on-site and offsite) and enhanced risk-based sampling. Prudent loan management to support NPL reduction strategies. - Weak governance (weak oversight of state-owned enterprises (SOEs)) - Likelihood: High - Expected Impact: High. Weak SOE financial performance contributes to higher probability of contingent liabilities materializing. - Policy Recommendations: Strengthen governance and oversight of SOEs, including by implementing the new GBE Act. - Weak financial integrity (weaknesses in the AML/CFT framework and its implementation; lack of central bank autonomy) - Likelihood: High - Expected Impact: High. Weak FDI and instable monetary conditions could lead to slow economic growth and deterioration of external and fiscal sustainability. - Policy Recommendations: Enhance banks’ compliance with global AML/CFT standards, integrated into broader operational risk assessment. Follow through with Safeguards Assessment recommendations. - Natural disasters (frequent natural disasters, including those driven by rising temperatures) - Likelihood: Medium - Expected Impact: High. Vanuatu faces high natural disaster risk, including tropical cyclones, earthquakes, floods, and volcanic activities. Recurring natural disasters are detrimental to growth and stability. - Policy Recommendations: Develop and implement disaster-resilient infrastructure while aligning financing strategies and disaster response plans with a comprehensive medium-term fiscal framework. *Annex V. Risk Assessment Matrix — Source: IMF staff compilation as presented in the provided content.* ### 4. The labor mobility schemes have generated positive development gains for Vanuatu. ### 4. The labor mobility schemes have generated positive development gains for Vanuatu. ### Development gains from labor mobility - Remittances from the labor schemes provide a critical source of foreign exchange and help improve macro-economic stability, especially during economic downturns such as the COVID-19 pandemic and after natural disasters. - Migrant workers benefit from gaining employment and higher incomes abroad. - Remittance spending patterns: daily expenses such as food, school fees and medical expenses; investments in housing (build or renovate homes), starting small businesses, and repaying loans. - Non‑monetary gains for migrant workers include acquiring new skills, education, training and experience applicable upon return to Vanuatu. - Australia introduced a skills development programme in 2021 which offers seasonal workers access to job trainings (such as driver’s license, forklift license) and formal qualifications in aged care and meat processing certificates. - Additional skills and knowledge gained by workers include financial and time management, English language proficiency, work ethic and farming techniques. ### Costs and sectoral impacts from labor outflows - Increasing loss of skilled workers has exacerbated the already small pool of employable and skilled workforce within the domestic labour market. - Private sector impacts: most affected sectors reported by employers are tourism and hospitality, construction and industries requiring technical skills (e.g. refrigeration and engineering), leading to high costs of recruiting and training new staff to fill vacant positions (Vanuatu Chamber of Commerce and Industry, 2023). - Public sector impacts: loss of skills and the provision of government services, especially teachers and police officers that have joined the schemes (Vanuatu Government, 2019). - Broader economic risks from severe skilled labor shortages: - Could impede private sector development, an important catalyst for long-term growth. - Could hamper tourism recovery including the quality of services provided to tourists. - Could delay post-earthquake reconstruction efforts and broader economic recovery. - Agriculture sector impacts: departure of unskilled workers and farmers for seasonal work abroad has led to reduced output and export earnings. ### Policy implications and recommended priorities - Concerted efforts are needed to harness the economic benefits from labor migration while carefully managing its costs. - Recent policy steps: - Seasonal Employment Act adopted in 2007 to manage participation in the RSE. - National Labour Mobility Policy adopted in 2019, reviewed in 2023 and replaced by the National Labor Mobility Policy and Action Plan (2024-2027). - The revised Labor Mobility Policy (2024-2027) key areas include improving regulations, data collection, supporting reintegration for returning workers, child centered family and worker welfare. - Priority policy areas and specific recommendations: - Enhancing investment in education: - Expand the quantity and quality of education and skills development of ni‑Vanuatu workforce, including youths that meet both domestic and international standards. - Review the education curriculum, upgrade school infrastructure and online learning access, provide scholarships, enhance teacher qualifications, and deliver targeted vocational and technical trainings especially in sectors facing skilled labor shortages. - Promoting female labor force participation: - Decentralize government services especially in rural areas to enable easier access to relevant information. - Improve systems for registration and recruitment, such as simplifying pre-departure requirements given language and literacy barriers. - Promote childcare support, affordable medical insurance, better health services, and safe working environments for women. - Strengthening reintegration programs and the business environment: - Incentivize reintegration of returning workers to invest and contribute to the local economy to spur entrepreneurship. - Foster a conducive business environment to lift private sector development and job creation through targeted financial coaching and literacy training, improving business registration support and access to financial services, and improving the quality of infrastructure and basic services. - The current review of restricted and reserved foreign investment activities and regulations is timely, and should help boost foreign direct investment, economic diversification and job opportunities. The Vanuatu Foreign Investment Promotion Agency is leading the review and is expected to be completed by mid-2025. - Contextual notes: - The lack of employment opportunities and basic services are considered as important push factors for labor mobility in Vanuatu. - Reintegration support and improved data/regulatory frameworks are emphasized in the revised Labor Mobility Policy (2024-2027). *Source: IMF staff report chapter on labor mobility in Vanuatu.* ### 1. The coverage of public sector debt for this debt sustainability analysis is unchanged ### 1. The coverage of public sector debt for this debt sustainability analysis is unchanged ### Coverage and methodology - Debt stock covers: - central government - central government guaranteed debt - central bank debt borrowed on behalf of the government - Excluded due to data limitations: - non-guaranteed SOE debt - private external debt - Residency-based definition of external debt is used. - A combined contingent liabilities stress test is included, similar to the June 2024 DSA. - Contingent liabilities scenario treats liabilities of Air Vanuatu as part of public debt because the airline is now wholly-owned by the government. ### Contingent liabilities and SOEs - Liabilities pertaining to Air Vanuatu amount to around 1.5 percent of GDP and are treated as part of public debt in the DSA. - Total debt of other non-financial commercial SOEs (majority-owned by government) amounts to around VT2.8 billion (equivalent to around 2 percent of GDP). - Magnitude of the shock of SOE debt in the stress test is set to the default value of 2.0 percent of GDP. - Contingent liabilities from financial markets are set at the default value of 5 percent of GDP (the average cost to the government of a financial crisis in a low-income country). ### Public and publicly guaranteed (PPG) debt stock at end-2024 - Total PPG debt: VT60 billion (43.4 percent of GDP). - Comparison: VT54 billion in 2023. - External debt comprises around 70 percent of total public debt. - Bilateral lender debt: 57 percent of external debt. - Multilateral creditors: 43 percent of external debt. - Largest creditors and shares of total debt: - Export-Import Bank of China: 28 percent of total debt. - World Bank (International Development Association): 19 percent of total debt. - Asian Development Bank: 11 percent of total debt. - Domestic debt: around 30 percent of total debt, primarily domestic bonds held by: - central bank - domestic banks - Vanuatu National Provident Fund (VNPF) - Government of Vanuatu’s guarantees: around VT1.9 billion. Text Table 1. Stock of Public Debt at end-2024 (as reported) - Total Stock of Debt: 59,226 (In Millions of Vatu); 501.4 (In Millions of US dollars); 100.0 (As % of total debt) - External Debt: 41,468; 351.1; 70.0 - Multilateral: 17,853; 151.2; 30.1 - Asian Development Bank: 6,596; 55.8; 11.1 - International Development Association (World Bank): 11,208; 94.9; 18.9 - Multilateral Government Guarantees: 49; 0.4; 0.1 - Bilateral: 23,615; 199.9; 39.9 - EXIM Bank of China: 16,630; 140.8; 28.1 - Japan International Cooperation Agency: 6,116; 51.8; 10.3 - Bilateral Government Guarantees: 869; 7.4; 1.5 - Domestic Debt: 17,758; 150.4; 30.0 - Domestic Government Bonds: 16,638; 140.9; 28.1 - Domestic Government Guarantees: 1,120; 9.5; 1.9 - Sources cited: Ministry of Finance and Economic Management; and IMF staff estimates ### Air Vanuatu restructuring and implications - August 2024 creditor agreement averted extreme outcomes; Supreme Court ordered liquidation cancelled in October 2024 and shares transferred to a new government-owned special purpose vehicle (AV3 Limited). - Control subsequently handed back to the directors and management team of the original airline; AV3 has partially resumed domestic operations but IATA certification remains suspended. - The airline is entirely dependent on government guarantees to remain operational and might likely require further subsidies to return to full operational capacity. - Under the deed of compromise, AV3 agreed to pay USD 3.3 million into a fund to pay back creditors in three tranches (USD 1.1 million each); all three tranches have since been paid out, though minor claims remain outstanding. - Operational details: - Airline operating three aircraft (one ATR, two twin otters) on domestic routes. - Servicing 14 ports compared to 23 ports prior to liquidation. - Fleet experiencing recurring maintenance issues; IATA certification hopeful to be requested for release by Q4 2025. - Implications for external debt and contingent liabilities: - For the June 2024 DSA (prior to restructuring), staff assumed contingent liabilities of the airline to public sector debt of around USD49 mn or 4 percent of GDP to be realized in 2024, and an additional 2 percent of GDP to be treated as contingent liabilities in future years. - Following the creditor agreement, most liabilities of the airline (approximately 5 percent of GDP) were written off or paid back to creditors at a steep haircut; remaining liabilities moved to AV3 Ltd. - Liabilities transferred to AV3 amount to 1.5 percent of GDP and are now treated as public debt. - External debt for 2024 revised to 31.7 percent of GDP, down from 36.3 percent of GDP estimated in the June 2024 DSA. - According to the Supreme Court Order: - around VUT 2 billion of Air Vanuatu’s debt was assumed by the government (and subsequently moved to the new entity), - another VUT 13.7 billion in liabilities were written down or paid out to creditors at a steep discount of 5 cents/dollar. ### External debt developments in 2024 - Preliminary estimates indicate external debt in 2024 marginally declined from the previous year due to amortization and reduced drawdowns on external loans. - 2024 authority data: - External debt owed to bilateral creditors declined by USD 246,000 in 2024, to USD 23.6 million. - Debt owed to multilateral lenders estimated to have remained relatively unchanged due to slower-than-expected drawdown on loans. ### Domestic debt dynamics and risks - Domestic debt sharply rose in 2024: - Domestic debt outstanding rose around 3 percentage points of GDP, to 13 percent of GDP in 2024 (largest annual increase in at least a decade). - Holders of domestic government debt as of 2024: - VNPF and RBV held a combined 70 percent of domestic government debt. - National Bank of Vanuatu (NBV) held 23 percent. - BSP held 5 percent. - Government issuance forecasts for 2025 suggest: - around VT3-4 billion in government bonds could potentially come to the market, - bringing outstanding domestic debt to around VT19 billion (17 percent of GDP). - Projections: - Domestic debt projected to rise from 13 percent of GDP in 2024 to 23 percent of GDP by 2030 and 25 percent of GDP in 2035 (Figure 6 referenced). - Risks and concerns: - Shallow domestic debt market may struggle to absorb additional issuance, testing borrowing from RBV and increasing reliance on monetary financing. - Domestic financing is more expensive than concessional external debt; longer-term domestic currency bonds estimated to have nominal yields between 7-9 percent. - Increased debt service burden from domestic debt expected to weigh on revenues in the medium-term. - Policy implication: urgent need to deepen domestic government bond markets and diversify revenue sources to maintain fiscal and debt sustainability into the medium-term. ### Medium-Term Debt Management Strategy (MTDS) 2025-27 - MTDS updated in light of the December 2024 earthquake and Air Vanuatu restructuring. - Updated MTDS incorporates macroassumptions on lower revenues and the change in June 2024 DSA risk classification that impacts financing options. - MTDS objectives and conclusions: - Encourage diversification of funding sources, with focus on developing domestic government bond market. - Postulates three alternate borrowing strategies to assess cost/risk profiles and evaluate benefits of introducing new instruments. - Concludes fostering a domestic debt market is crucial given likelihood of declining concessional financing in the medium-term. - Recommended government actions to secure funding at reasonable costs: - Improve issuance process, including providing timely information and clear medium-term objectives. - Proactively engage with investors through regular meetings with banks and publication of the annual borrowing plan. - IMF assistance: Fund providing technical assistance on updating MTDS, reviewing institutional arrangements, and developing local currency bond markets and investor relations. - Note: Vanuatu is required to prepare and implement Performance and Policy Actions (PPAs) under the Sustainable Development Finance Policy (SDFP). Since FY21, Vanuatu has implemented PPAs in areas of debt management and debt transparency and adhered to a zero-Non-Concessional Borrowing Ceiling under the SDFP. ### Macroeconomic shock and projection background - December 2024 earthquake: - Magnitude: 7.3 - Total losses estimated at US$197 million—about 17 percent of Vanuatu’s 2023 GDP (World Bank GRADE, January 2025). - Damaged the business district and the cruise terminal in the capital; disrupted domestic supply chains and temporarily closed Port Vila’s Central Business District (CBD). - Donor support post Dec-2024 earthquake (Text Table 2 highlights): - World Bank: 42 (US $mn) via Crisis Preparedness & Response Toolkit (US$12 million Rapid Response Option grant) and Recovery & Resilience grant (US$30 million). - ADB: 5 (US $mn) Asia-Pacific Disaster Response Fund grant. - UN CERF: 1 (US $mn). - Australia: 4.5 (US $mn) AUD 7 million in humanitarian aid. - New Zealand: 2.3 (US $mn) emergency grant. - IFRC Emergency Appeal: 5.2 (US $mn) multi-donor appeal (just over one-quarter of the target covered so far). - 2024 economic outcomes: - Growth slowed to 0.9 percent y/y in 2024. - Services sector growth slowed to 0.5 percent y/y (down from 2.0 percent y/y in 2023), largely owing to Air Vanuatu’s voluntary liquidation and related tourism disruptions. - Agricultural output fell as many farmers joined seasonal overseas programs. - Slower-than-anticipated rollout of the 2024 capital budget delayed construction projects. - Inflation eased to average annual 1.2 percent y/y in 2024 (peak at 11.3 percent y/y in 2023). - DSA macroeconomic assumptions (Text Table 3 summary): - Real GDP growth: - 2025: 1.7 percent y/y (moderate recovery driven by rebound in air-arrival tourism, stronger agricultural output, increased construction). - 2026: 2.8 percent (pick-up as cruise port reopens and reconstruction ramps up). - Growth over 2025-30 projected to average 2.4 percent (0.3 percentage points higher than June 2024 DSA). - Growth projections for 2025-2035 revised to an average of 2.3 percent (from 2.0 earlier). - Inflation: - Projected to edge higher to 2.2 percent y/y in 2025 and stabilize around 2.2 percent from 2026 onward. - Average inflation over 2025-2035 predicted to be 2.2 percent (marginally higher than previous projection of 2.0). - Current account deficit: - Projected around 11.6 percent of GDP in 2025 and 2026. - Average deficit estimated around 6.0 percent of GDP over 2025–35 (compared to 4.4 percent in previous DSA). - Foreign reserves projected to average around 8 months of import cover into the medium-term (assuming no major external shocks) but are on a downward trajectory. - Primary balance: - Revenue forecasts higher than previous DSA reflecting increased grants after the earthquake. - Expenditures also higher reflecting post-earthquake rebuilding and support for vulnerable populations. - Net effect implies the primary deficit is estimated to be tighter than the previous DSA by around (text truncated in source). *Source: IMF staff report content as provided in the supplied PDF excerpt.* ### 0.3 percentage points in 2025. The primary deficit is expected to average 2.1 percent of GDP ### DEBT SUSTAINABILITY — Vanuatu ### Fiscal outlook and primary deficit - The primary deficit is expected to average 2.1 percent of GDP over 2025–2035, similar to that projected in the previous DSA. - The projected total three-year fiscal adjustment (between 2024 and 2027) is a 1.0 percent increase in the primary deficit, driven by: - enhanced support for rebuilding efforts following the earthquake, - continued support for the stricken national airline, - increased capex plans envisaged in the near-term. ### External borrowing and grants - External borrowing is estimated to fall in the near-term as development partners are shifting away from loans following the “high risk” rating for external debt distress in the June 2024 DSA. - Grant support from donors is expected to increase in the wake of the earthquake. - Grants from development partners are estimated at: - around 9.3 percent of GDP in 2025 (compared to 10.4 percent in 2024), - easing to around 7.0 percent in the medium-term, in line with the historical average level. - The external debt profile benefited from the creditor agreement reached for Air Vanuatu. ### Natural disasters and climate change in the baseline - The baseline scenario assumes no major costly disasters in 2025–29 (beyond those already materialized). - After 2029 the baseline incorporates the average long-term effects of natural disasters and climate change. Based on empirical evidence: - real GDP growth is lowered by 0.5 percentage points annually relative to disaster-free projections, - the current account balance is lowered by 1.3 percent of GDP, - the fiscal deficit is increased by 0.35 percent of GDP. ### Realism tools and projection assessments - Realism tools do not flag substantial risks around the forecast. - The real growth forecast for 2025 is in line with the projected growth path using a fiscal multiplier of 0.2. - A stronger recovery is estimated in 2026 compared to the projected growth path using various fiscal multipliers, reflecting idiosyncratic earthquake impacts and lagged effects from rebuilding. - The realism of projections for public and private investment rates and their contribution to real GDP cannot be assessed due to data availability constraints. ### Debt carrying capacity and CI score - Vanuatu’s debt carrying capacity is assessed as Medium, unchanged from the previous DSA. - The composite index (CI) is 3.018 based on April 2025 WEO data and the 2024 World Bank CPIA. - CI components and contributions (10-year average values and coefficients preserved): - CPIA: coefficient 0.385, 10-year average 3.327, CI component 1.28, contribution 42% - Real growth rate (in percent): coefficient 2.719, 10-year average 1.205, CI component 0.03, contribution 1% - Import coverage of reserves (in percent): coefficient 4.052, 10-year average 57.963, CI component 2.35, contribution 78% - Import coverage of reserves^2 (in percent): coefficient -3.990, 10-year average 33.597, CI component -1.34, contribution -44% - Remittances (in percent): coefficient 2.022, 10-year average 14.560, CI component 0.29, contribution 10% - World economic growth (in percent): coefficient 13.520, 10-year average 2.973, CI component 0.40, contribution 13% - CI Score: 3.018 (100%), CI rating: Medium ### Scenario stress tests (methodology highlights) - Contingent liability test for SOEs and tailored natural disaster shock applied. - For combined contingent liability shock: - staff adjusted the increase in public debt from SOEs to 2.0 percent of GDP to reflect government support to non-financial commercial SOEs. - Default decrease in GDP of 5 percent from financial market turbulence used as in standard approach. - LIC-DSF standard natural disaster shock applied: one-off shock of 10 percentage points in the debt-to-GDP ratio in the second year of the projection period (2026). - Default parameters adjusted by assuming reductions of: - real GDP growth by 4 percentage points, - export growth by 10 percentage points. ### External Debt Sustainability (key results) - Under the baseline scenario, none of the external debt indicators breach their indicative thresholds, unlike the previous DSA. - Stress-test findings: - Export shock has the largest impact and causes breaches of thresholds for multiple external debt metrics: PV of external debt-to-GDP, PV of external debt-to-exports, and debt service-to-exports ratios breach thresholds at various periods. - Under the contingent liabilities scenario (government exposure to SOEs, excluding Air Vanuatu), none of the external debt indicators breach thresholds. - Under the natural disaster scenario, the PV of external debt-to-GDP ratio breaches its threshold beyond 2032. - Alternative scenario assuming zero ECP revenues: - three quarters of lost ECP revenues are projected to be replaced by non-concessional external financing, with the remaining quarter by local debt issuance, - PV of external debt-to-GDP ratio breaches the threshold of 40 in 2028 and beyond, - other external debt indicators breach their thresholds in later years. ### Public Sector Debt Sustainability (key results) - The PV of public-debt-to-GDP ratio breaches the 55 benchmark from 2032 under the baseline and remains marginally above the benchmark thereafter (earlier than the June 2024 DSA breach in 2033). - Under various stress tests: - PV of public-debt-to-GDP breaches the benchmark starting in 2027 and remains above thereafter under multiple shocks, with the growth shock having the largest impact. - Other public debt indicators (PV of debt to revenue and PV of debt service-to-revenue) remain within thresholds under these shocks. - Under the natural disaster scenario the benchmark is breached in 2026 and remains above for the remainder of the horizon (previous DSA breach was in 2025). - Under the contingent liabilities shock (excluding Air Vanuatu) and the zero ECP revenues scenario, PV debt-to-GDP breaches the benchmark starting in 2027 and remains above thereafter; other public debt indicators remain within thresholds. ### Policy implications and recommendations - Urgent need to address growing fiscal risks, rebuild buffers against potential shocks, and maintain debt sustainability. - Recommended policy measures include: - Diversifying revenue sources and introducing taxes on personal income to bolster medium-term revenue prospects. - Expenditure rationalization, including streamlined capex spending. - Improved public investment management and governance and enhanced capacity to oversee infrastructure projects. - Adopting a credible business plan for Air Vanuatu, improving its management and financial standing, and resolving operational shortfalls financed from the budget and financing guarantees. - Preventing accumulation of non-concessional external debt and enhancing revenue collection efforts and tax base broadening. - Implementing income tax and aggressively rationalizing expenditures once the economy stabilizes after the earthquake. - Government has implemented PPAs under the SDFP, including: - not entering into contractual obligations for new external public and publicly guaranteed non-concessional debt during the FY25 period (1 July 2024 - 30 June 2025), - MFEM approved a Cash Management Policy to improve cash buffers, cash forecasting, and integration of cash management and budgetary controls. ### Risk rating and vulnerabilities - External debt distress risk improved from high to moderate: - Creditor agreement for Air Vanuatu (August 2024) created AV3 Limited and contingent liabilities linked to Air Vanuatu (about 4 percent of GDP) are no longer accounted for in external debt in 2024. - June 2024 “high risk” DSA led multiple creditors to shift from loans to grants, flattening the near-term debt profile. - External debt indicators remain within thresholds under the baseline; external debt estimated to remain relatively unchanged through 2027, rising to 40 percent of GDP in 2034. - Sensitivity to export-related shocks, ECP revenue shocks, and natural disaster shocks remains a concern. - Granularity assessment indicates limited space to absorb shocks. - Decisive medium-term fiscal consolidation and prudent external borrowing and debt management strategies are essential. ### Public debt assessment and contingencies - Overall risk of debt distress remains high; public debt is deemed sustainable but vulnerable: - PV public-debt-to-GDP benchmark marginally breached under baseline and breached across multiple stress scenarios. - Public-debt-to-GDP would breach the authorities’ ceiling of 60 percent by 2031. - Sustainability partly contingent on successful restructuring and commercial viability of Air Vanuatu’s domestic operations and government access to highly concessional loans. - Authorities continue to have access to concessional loans from development partners. ### Authorities’ views and planned actions - Authorities prefer to continue supporting Air Vanuatu (AV3) and are sole-owner after joint-venture talks lapsed. - Government in discussions with Airbus regarding settlement on earlier payments and included plans in Budget 2025 to purchase new planes for domestic operations. - Government Business Enterprises (GBE) unit, once fully staffed, will administer Board appointments at AV3 and ensure timely financial reporting. - Authorities concur with staff on urgent need to rebuild fiscal buffers and implement fiscal reforms; they are more optimistic about earthquake impacts and noted revenue upside including from the ECP. - Planned revenue-enhancing measures include: - exploring options to broaden the tax base, including introducing a personal income and corporate tax, - fast-tracking procurement of a new VAT monitoring system to meet the 2025 budget target, - undertaking a full review of the Excise Tax Act and import duties, - increasing the high value procurement threshold from VT10 million to VT30 million, - collecting dividends from SOEs by effectively implementing the GBEU Act. - Authorities acknowledged challenges in sustaining ECP revenues and steps to address governance and transparency in the citizenship program. - Given earthquake-related spending, authorities expect to raise approximately VT 4 billion from domestic bond markets in 2025 — the highest annual domestic issuance on record — and plan to issue domestic bonds in smaller lot sizes and via T-bills for the first time. - Authorities do not expect to take on additional concessional external external debt in the near future, though an EXIM bank loan under negotiation has been approved for disbursement. - The government paid around VT2 billion to Airbus in 2019/2020 as a deposit toward purchase of 4 planes; due to COVID the government didn’t take delivery and is in discussions with Airbus to recover the deposit. *Source: Excerpts from IMF DSA material for Vanuatu (selected chapter content).* ### 29. Authorities acknowledged the upgrade in DSA rating on external debt distress from ### 29. Authorities acknowledged the upgrade in DSA rating on external debt distress from ### DSA rating change and authorities' stance - Authorities acknowledged the upgrade in DSA rating on external debt distress from “high” to “moderate”. - Ongoing discussions with donors to secure primarily grant financing for subsequent years despite this upgrade in status. - Authorities expressed concern over the volatility in the DSA rating changes and the potential impact on grants access. - Authorities acknowledged: - the transparency in the treatment of Air Vanuatu in the DSA; and - the implications of the recent creditors’ agreement on the debt profile. ### Debt sustainability outputs referenced - The source includes multiple DSA and public debt tables and figures covering baseline and alternative scenarios for 2022–45 and 2025–35, including: - Table 1. Vanuatu: External Debt Sustainability Framework, Baseline Scenario, 2022–45 (In percent of GDP, unless otherwise indicated). - Table 2. Vanuatu: Public Sector Debt Sustainability Framework, Baseline Scenario, 2022–45 (In percent of GDP, unless otherwise indicated). - Figures and tables on indicators under alternative scenarios (2025–35), sensitivity analysis (2025–35), drivers of debt dynamics (Baseline Scenario), realism tools, qualification of the Moderate Category (2025-2035), and indicators of domestic debt (2020-2035). ### IMF financial position and projected payments - Quota: 23.80 SDR Million (100.00 percent quota). - 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: 39.08 SDR Million (100.00 percent quota). - Holdings: 16.4 SDR Million (41.98 percent). - Outstanding Purchases and Loans: None. - Latest Financial Arrangements (Outright Loans): - RCF: Type RCF; Date of Commitment Jun 05, 2015; Date Drawn/Expired Jun 15, 2015; Amount Approved (SDR Million) 8.50; Amount Drawn (SDR Million) 8.50. - RFI: Type RFI; Date of Commitment Jun 05, 2015; Date Drawn/Expired Jun 08, 2015; Amount Approved (SDR Million) 8.50; Amount Drawn (SDR Million) 8.50. - Projected Payments to the Fund (SDR Million; based on existing use of resources and presenting holdings of SDRs) — Forthcoming charges/interest: - 2025: 0.34 - 2026: 0.67 - 2027: 0.67 - 2028: 0.67 - 2029: 0.67 - Total per year equals the Charges/Interest amounts listed above for each year. ### Exchange rate arrangement and classification - De jure exchange rate arrangement: adjustable peg. - Current arrangement: vatu linked to a transactions-weighted (trade and tourism receipts) basket of currencies; weights and composition are not publicly disclosed and are adjusted periodically. - The Reserve Bank of Vanuatu (RBV) quotes daily buying and selling rates for the vatu against the U.S., Australian, and New Zealand dollars; the euro; the U.K. pound; and the Japanese yen. - The rate in terms of the U.S. dollar as of August 12, 2025 was VT 121.95 per U.S. dollar. - De facto exchange rate arrangement classification: “other managed,” as the composite weights are not disclosed and cannot be confirmed. - Vanuatu has accepted the obligations of Article VIII, Sections 2(a), 3, and 4 of the IMF’s Articles of Agreement, and maintains an exchange system free of restrictions on making payments and transfers for current international transactions and multiple currency practices. ### Article IV consultations and assessments - Article IV consultation cycle: 12–month. - Previous Article IV consultation mission: June 10 – June 21, 2024; consultation concluded on August 28, 2024 (Country Report No. 24/278). - Most recent Offshore Financial Center Module II Assessment (MFD): concluded in May 2006. - Safeguards Assessment of RBV: - First safeguards assessment completed in October 2016 in connection with emergency financing received in 2015. - Findings: - RBV has a recognized accounting framework and publishes annual financial statements, albeit with some delay. - Identified weaknesses in governance arrangements, autonomy, transparency, and audit mechanisms. - Recommendations included: - drafting amendments to the Reserve Bank of Vanuatu Act to align it with leading practices for central banks; - establishing an Audit Committee; - outsourcing internal audit services to an independent international audit firm; - formulating a recapitalization plan. - Subsequent actions and status: - RBV received technical assistance on the recapitalization framework and appointed a Chief Risk Officer. - Absence of an audit committee and an internal audit function continue to present risks to RBV’s control environment. - Plans to draft relevant amendments to the RBV Act in line with the 2016 safeguards recommendations have not materialized. - Parliament enacted, in June 2022, amendments to the RBV Act that further deteriorate the RBV’s autonomy and governance arrangements. - The authorities committed to repeal the 2022 amendments to the RBV Act in 2023 and continue their efforts. ### Technical assistance and representation - Technical assistance provided mainly through PFTAC on: - macroeconomic analysis and framework; - banking regulation and financial sector supervision; - government finance statistics. - Resident Representative office for the Pacific Islands (including Vanuatu) opened in September 2010 in Suva, Fiji. - Current Resident Representative: Mr. Neil Saker. ### Relations with other international financial institutions - World Bank Group: http://projects.worldbank.org/search?lang=en&searchTerm=&countrycode_exact=VU - Asian Development Bank: https://www.adb.org/countries/vanuatu/main - Pacific Financial Technical Assistance Center: https://www.pftac.org/content/dam/PFTAC/Documents/Workplans/fy23/Vanuatu.pdf *Prepared by The Asia and Pacific Department (In consultation with other departments) — STAFF REPORT FOR THE 2025 ARTICLE IV CONSULTATION—INFORMATIONAL ANNEX (September 8, 2025).* --- _Source: https://www.imf.org/-/media/files/publications/cr/2025/english/1vutea2025001-source-pdf.pdf_