## Preface — IMF Technical Assistance Report (tarea2026026-source-pdf)

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---

### Mission scope and contacts
- A Monetary and Capital Markets (MCM) Department mission visited Port Vila from June 9 to June 13, 2025, following off-site meetings in May, at the request of the Governor of the Reserve Bank of Vanuatu (RBV).
- Objectives: review the currency basket framework, update basket weights, and review RBV FX market operations.
- Key meetings: Hon. August Letlet (Governor, RBV); Cynthia A. Ngweleduru (Acting Director, ERD); Frederic Jacob (Acting Director, FMD); Derek Jr. Alexander (Acting Director, Corporate Services); and staff from NBV bank, ANZ bank, and BRED Bank.

### Executive summary — main findings
- Purpose of TA: respond to RBV request to review and update currency basket weights and FX operations.
- Constraints to effective operationalization of the basket:
  - Technical and data limitations.
  - Absence of a clearly defined FX policy.
  - Limited technical capacity within RBV to analyze trade invoicing data.
  - Insufficient capacity at the Vanuatu Bureau of Statistics (VBoS) to produce CPI monthly.
  - Organizational weaknesses in governance and management of the basket.
  - Basket weights have not been updated since 2016.
- Data and modeling:
  - Given current CPI data limitations, the optimal-basket model cannot be fully operationalized.
  - Interim methodology based on currency denomination of trade flows was presented.
  - An Excel-based tool was introduced for RBV staff without prior programming experience; the underlying model developed in Python was presented to FMD and ERD staff.
  - Full model implementation contingent on availability of monthly CPI data.
- FX market structure and operations:
  - The FX market is underdeveloped; lack of interbank activity means commercial banks rely entirely on RBV for FX liquidity.
  - Transactions allowed only once a week and subject to strict caps, creating inefficiencies and limiting price discovery.
  - RBV FX operations use manually input prices in an unsecured Excel spreadsheet; intra-day FX price movements are not accounted for.
  - RBV allocates both USD and AUD, causing inconsistent pricing due to currency fluctuations.
- Communication, governance, and regulation:
  - No formal FX policy document; minimal public information about the FX regime.
  - Most commercial bank representatives lack a clear understanding of the VUV peg structure.
  - RBV operates without formal FX market conventions or Net Open Position (NOP) limits despite plans for their introduction.

### Key recommendations and operational priorities (selected, preserving source wording and numeric thresholds)
- Currency basket framework:
  - The RBV may consider a basket based on the currency denomination of trade flows. Priority: High. Timeframe: Near-term.
  - VBoS should publish the Consumer Price Index (CPI) at a monthly frequency. Priority: High. Timeframe: Medium-term.
  - Responsibility for producing trade invoicing data should be assigned to the VBoS. Priority: High. Timeframe: Medium-term.
  - The computation of the currency basket should be assigned to ERD, with revisions conducted annually or as needed based on significant deviations such as a change of ±five percent or more in the weight of a major currency. Priority: High. Timeframe: Near-term.
  - A Memorandum of Understanding (MoU) should be established between the RBV and the VBoS to facilitate regular data sharing, including access to trade and CPI data. Priority: High. Timeframe: Near-term.
  - Require Board approval for changes to the currency basket framework. Priority: High. Timeframe: Near-term.
- FX market operations and regulation:
  - FMD should streamline the use of the daily exchange rate file to compute the VUV/USD reference rate to better align with the currency basket. Priority: High. Timeframe: Near-term.
  - Increase the robustness of the Excel based procedure used to calculate the basket value. Priority: High. Timeframe: Near-term.
  - Remove the USD 300,000 per bank weekly cap on FX allocations. Priority: High. Timeframe: Near-term.
  - Deal only in USD when allocating FX to banks. Priority: Medium. Timeframe: Near-term.
  - Terminate the B&S arrangement. Priority: High. Timeframe: Medium-term.
  - Draft and adopt a formal FX policy. Priority: High. Timeframe: Near-term.
  - Finalize and implement FX NOP regulation. Priority: High. Timeframe: Medium-term.
  - Establish a structured dialogue framework through regular meetings with commercial banks. Priority: High. Timeframe: Medium-term.
  - Require FX market participants to obtain Association Cambiste International (ACI) certification. Priority: Medium. Timeframe: Long-term.
- Operational triggers and procedures:
  - Recalculate the day’s official dealing price once the spread between the start of day basket value and its intraday value reaches a predefined trigger. Priority: Low. Timeframe: Medium-term.
  - Eliminate the hurdle for obtaining FX for capital account transactions from the RBV (as long as the RBV’s FX regulation allows capital account transactions). Priority: Medium. Timeframe: Near-term.

### Institutional background and accountability
- RBV last reviewed basket weights in 2016; weights have not been updated since.
- The methodology and data used for 2016 weights are not documented due to absence of a formal handover process and staff reassignments.
- No revisions since 2016 largely due to unclear institutional responsibilities; currently overseen by FMD, which also manages FX market operations and foreign reserves management.
- Recommendation (institutional): Assign computation of the currency basket to ERD and revise on an annual basis or as needed based on significant deviations such as a change of ±five percent or more in the weight of a major currency. Ensure documentation of updated procedures to strengthen institutional continuity and facilitate future handovers.

### Reserve facts and numeraire practice (verbatim)
- Vanuatu’s gross official reserves are equal to USD 660 million (seven months of imports cover), supported by tourism receipts, remittances, and donor support. This level of reserves is above the minimum level of four months of imports targeted by the RBV (source: RBV authorities).
- RBV’s reserve’s numeraire is local currency (VUV). Using local currency as the numeraire is noted as uncommon among central banks in low-income countries and can lead to inaccuracies and comparability issues.

### Daily exchange rate computation and operational vulnerabilities
- Current procedure:
  - VUV/USD is calculated through an unnecessarily complex procedure involving the SDR.
  - The base rate is defined as the USD/SDR and VUV/SDR exchange rate at the latest reference period of January 2025.
  - FMD obtains currency prices from Bloomberg at 8:30 AM, manually enters them into an Excel spreadsheet, communicates the VUV before 9:00 AM by e-mail, and publishes it on the RBV website.
- Operational vulnerabilities and settings:
  - Manual input increases operational risk despite four-eyes principles.
  - Excel spreadsheet cells are not locked, file is not password protected, and no documentation explains file use.
  - RBV does not monitor intra-day variation of the basket intrinsic value; publishes rate only once a day.
  - RBV applies a 0.60 vatu spread between buying and selling price; the algorithm produces a mid-rate and RBV incorporates a bid-offer spread (0.5 percent at time of mission) on transactions with commercial banks, government and other specific clients.
- Recommendation (operational): FMD should streamline the use of the daily exchange rate file to compute the VUV/USD reference rate, automating the process and excluding the SDR from the computation if it yields the same result, to simplify procedure and reduce errors.
- Additional operational recommendations:
  - Password protect the current Excel spreadsheet and its vulnerable cells.
  - Automatize the morning input of FX prices and document the file.
  - Run a second pricing file in parallel, automatically fed FX prices through different data sources to validate published prices.

### CPI, inflation drivers, and data frequency
- RBV’s primary objective: maintain price stability; RBV target inflation is in the range of zero to four percent.
- CPI production and basket composition (weights as of December 2024):
  - Food 47
  - Transport 13
  - Drinks and tobacco 11
  - Housing and utilities 9
  - Miscellaneous 4
  - Household supplies 4
  - Education 3
  - Communications 3
  - Clothing and footwear 3
  - Recreation 1
  - Health 0.3
- Inflation dynamics:
  - Since 2022, headline inflation appears largely driven by imported inflation.
  - Increase in headline inflation was primarily attributable to rising food prices, significantly affected by cyclones on the agricultural sector.
  - Since 2023Q3, imported and domestic inflation have declined, with both measures turning negative.
- Recommendation (data frequency): VBoS should transition to monthly CPI publication to enable model-based recalculation of basket weights using the FX composite model.

### Trade invoicing, currency shares, and interim basket approach
- Import partners and changes (2016 to 2023):
  - China’s share of total imports increased from 18.9 percent in 2016 to 26.3 percent in 2023.
  - United States accounted for 1.77 percent of total imports in 2023.
- Import invoicing and currency shares (customs data):
  - Share of imports denominated in USD rose from 50 percent in 2018 to 59 percent in 2024.
  - Invoice data includes CNY in "other currencies"; direct exposure to China via invoicing is not visible. Share of others is less than four percent.
- Share of Import Payments by Currency in 2024 (Source: RBV Data):
  - USD 58.83%
  - AUD 18.79%
  - NZD 7.77%
  - EUR 3.18%
  - OTHERS 3.42%
- Interim methodology:
  - Absence of monthly CPI constrains use of FX composite model; interim 2024 basket weights should be computed based on trade and tourism data.
  - Use trade-based weights as an interim measure given data constraints; incorporate tourism and (optionally) remittances in alternative calculations, acknowledging remittances are not well captured and are not considered representative of trade structure.
  - Re-estimate weights with FX composite model once monthly CPI is available; an Excel-based tool is available to update weights.

### Optimal basket design, model, and scenarios
- Anchor currency criteria:
  - Strong trade and financial linkages, robust track record of low and stable inflation, similarity of external shocks, and high convertibility.
- FX composite model:
  - Weights should stabilize the basket and minimize pass-through of exchange rate fluctuations to import prices; FX composite model by MCM is the quantitative tool referenced.
  - Optimal currency weights derived conditional on regularization parameter λ with objective:
    - min_w w^T Σ B w + λ |||w − t|||^2
  - Interpretation:
    - λ → 0 aligns basket with minimum exchange rate and ERPT volatility.
    - λ → ∞ aligns with trade weights t.
    - If ERPT (B) cannot be determined reliably, align with t.
- Illustrative scenarios on Vatu stability:
  - Current weights (higher share of AUD): basket index moves with AUD/USD; if USD depreciates, Vatu will follow AUD movements, resulting in a lesser depreciation of the Vatu.
  - Trade weights (higher share of USD): basket index moves with USD; if AUD depreciates, Vatu will follow USD movements, resulting in a lesser depreciation of the Vatu.

### FX market structure, allocation mechanics, and distortions
- Market structure:
  - Vanuatu’s FX market is not developed: small number of banks, no trading, low sophistication.
  - Five banks offer FX services; three money changers transact only in cash bank notes.
  - No interbank activity; RBV does not collect interbank data.
- FX allocation mechanics and caps:
  - Commercial banks clear positions with the RBV; banks allowed to transact once a week with RBV for a capped amount.
  - No bank has sold FX to RBV in the last three years; five banks regularly use weekly RBV facility to obtain USD.
  - RBV set a minimum amount for accessing its FX allocation window: USD 250,000 weekly per bank.
  - The RBV enforces a USD 300,000 per bank weekly cap on FX allocations (Recommendation 77 calls for removal).
- Procedural inefficiencies:
  - Requirement for all members of the RBV’s IC to sign off on FX allocations introduces unnecessary bureaucracy.
  - The IC’s involvement in FX-related decisions is misaligned with its core mandate.
  - Operational constraints reflect a mismatch between reserve management (SAA) and short-term liquidity needs.
- Effects of rationing:
  - Restricting access to FX defers demand, encourages hoarding, and can encourage bypassing administrative controls.
  - Rationing measures create incentives for inappropriate behavior and undue market friction.
- Currency choice and arbitrage:
  - Allocating in USD and AUD blurs RBV’s message and increases arbitrage because the AUD/USD cross rate moves intraday.
  - Allocating at market opening prices harms price discovery and enables sophisticated importers to arbitrage across banks.
- Buy and Sell Back (B&S) operations:
  - B&S reduces banks’ incentive to unwind excess FX positions via interbank trading, offering competitive pricing, or developing FX instruments.
  - Implementation inconsistencies: Notice dated March 16, 2016 contains no maximum, yet RBV caps B&S weekly maturing amount for each bank at USD 500,000.
  - FMD states the cap on B&S size is required to protect RBV’s FX reserves liquidity.
- Commercial bank correspondent risk:
  - Vanuatu’s largest bank lost its USD correspondent due to recent de-risking; RBV ceased USD transactions with that bank and permitted weekly allocation in AUD instead.

### Governance, documentation, market conventions, and human capital
- Governance and documentation gaps:
  - RBV lacks a formal FX policy document; only a draft over 20 years old was retrievable.
  - A front-office (FO) FX procedure manual exists but middle-office documentation does not.
  - FO manual is outdated and contains reference information inaccurate for over five years.
  - Disaster Recovery Plan (DRP) FX market module was successfully tested following the December 2024 earthquake.
- Net Open Position (NOP) limits and market development:
  - No FX NOP framework exists despite plans since at least 2016.
  - Last project iteration would not be constraining: commercial banks’ FX NOP could not exceed 15 and 25 percent of the commercial bank’s capital on a single holding and aggregate currency position respectively.
  - Not implementing binding NOP limits misses market development externalities such as forced buyers/sellers and stimulation of forward contract offerings.
- Market conventions and professionalization:
  - No FX market convention exists; no basic certification or education requirement for FX dealers at RBV or commercial banks.
  - Recommendation: require FX market participants to obtain Association Cambiste International (ACI) certification and develop an FX market convention.

### Selected operational recommendations (exact proposals)
- Initiate a systematic FX market intelligence framework to analyze clients’ transactions, commercial banks’ margins, trends in invoicing currencies, individual and aggregate NOP, and macro trends in the basket’s components price movements.
- Require commercial banks’ weekly reporting on interbank activity to include forward-looking upcoming transactions.
- Remove the USD 300,000 per bank weekly cap on FX allocations; later increase the minimum transaction amount with the RBV (currently USD 250,000) to enhance market efficiency and price discovery.
- Eliminate the hurdle for obtaining FX for capital account transactions from the RBV while the RBV’s FX regulation allows capital account transactions.
- Deal only in USD when allocating FX to banks; if impossible because a bank cannot find a correspondent, consider widening significantly the bid-offer spread on AUD allocations.
- Terminate the B&S arrangement as it hurts market development and will become irrelevant once FX is no longer artificially rationed.
- Maintain opposition to performing FX swaps with domestic banks until the fixed income market and infrastructure are adequate.
- Strengthen communication related to the FX regime:
  - Share a general description of the currency peg via the RBV website and traditional media, including all up-to-date applicable notices and key elements of the FX policy.
  - Discuss basket peg implementation in regular RBV publications (e.g., the Monetary Policy Statement) and in public speeches by the Governor and the Deputy Governor.
- Establish a structured dialogue framework with commercial banks via regular meetings (quarterly or semi-annually) covering FX market and monetary operations issues.
- Draft and adopt a formal FX policy to integrate RBV’s FX market decisions into its monetary policy framework.
- Maintain a digitalized library of all RBV governing documents (cloud-based services could be considered if they satisfy RBV IT security requirements).
- Update the operations manual to fully cover the FX function’s operational cycle and institutionalize operational memory so a new team member can perform FX operations without assistance.
- Recalculate the day’s official dealing price once the spread between the start of day basket value and its intraday value reaches a predefined trigger; use live feeds to automate intraday repricing when a predefined intraday gap threshold is reached.

### Final regulatory and capacity-building recommendations
- Finalize and implement FX NOP regulation to constrain excessive risk-taking and improve price discovery.
- Enhance communication among market participants through a platform for market participants to exchange their appetite to buy or sell USD; RBV could set-up such a platform to nurture interbank FX activity.
- Website communication guidance: clearly explain fixed exchange rate policy, provide information on foreign reserves management, detail operational aspects ensuring the fixed exchange rate arrangement, outline intervention mechanisms, emphasize the link between exchange rates and price stability, and regularly publish reports on foreign reserves and exchange rate developments.
- Develop an FX market convention and require compliance; consider a memorandum of understanding between the banks and the RBV to cover specifics of Vanuatu’s FX market and expected participant behavior.
- Require ACI certification and introduce basic training requirements for participants to be eligible to transact FX with the RBV and their clients.
- Areas for capacity building (next TA phase):
  - (i) Hands-on support to re-estimate the currency basket weights once monthly CPI data become available.
  - (ii) Hands-on assistance to finalize the implementation of the other recommendations.
  - Assess staff experience applying the Excel-based template for updating weights using trade data and identify areas for further clarification, refinement, or capacity building.

*IMF Technical Assistance Report — Preface and selected sections (tarea2026026-source-pdf)*

### Preface ................................................................................................................

### Preface

### Mission scope and contacts
- A Monetary and Capital Markets (MCM) Department mission visited Port Vila from June 9 to June 13, 2025, following off-site meetings in May, at the request of the Governor of the Reserve Bank of Vanuatu (RBV).
- Objectives: review the currency basket framework, update basket weights, and review RBV FX market operations.
- Key meetings: Hon. August Letlet (Governor, RBV); Cynthia A. Ngweleduru (Acting Director, ERD); Frederic Jacob (Acting Director, FMD); Derek Jr. Alexander (Acting Director, Corporate Services); and staff from NBV bank, ANZ bank, and BRED Bank.
- Acknowledgements: Johncy Bebe, Juliana Malasikoto, Pita Toa, Lordan Raplili, Barnabas Aru, Joylin.W. Bisiwei, and colleagues.

### Executive summary — main findings
- Purpose of TA: respond to RBV request to review and update currency basket weights and FX operations.
- Constraints to effective operationalization of the basket:
  - Technical and data limitations.
  - Absence of a clearly defined FX policy.
  - Limited technical capacity within RBV to analyze trade invoicing data.
  - Insufficient capacity at the Vanuatu Bureau of Statistics (VBoS) to produce CPI monthly.
  - Organizational weaknesses in governance and management of the basket.
  - Basket weights have not been updated since 2016.
- Data and modeling:
  - Given current CPI data limitations, the optimal-basket model cannot be fully operationalized.
  - Interim methodology based on currency denomination of trade flows was presented.
  - An Excel-based tool was introduced for RBV staff without prior programming experience; the underlying model developed in Python was presented to FMD and ERD staff.
  - Full model implementation contingent on availability of monthly CPI data.
- FX market structure and operations:
  - The FX market is underdeveloped; lack of interbank activity means commercial banks rely entirely on RBV for FX liquidity.
  - Transactions allowed only once a week and subject to strict caps, creating inefficiencies and limiting price discovery.
  - RBV FX operations use manually input prices in an unsecured Excel spreadsheet; intra-day FX price movements are not accounted for.
  - RBV allocates both USD and AUD, causing inconsistent pricing due to currency fluctuations.
- Communication, governance, and regulation:
  - No formal FX policy document; minimal public information about the FX regime.
  - Most commercial bank representatives lack a clear understanding of the VUV peg structure.
  - RBV operates without formal FX market conventions or Net Open Position (NOP) limits despite plans for their introduction.
- Recommended high-level actions:
  - Strengthen transparency of the currency basket framework and FX market operations.
  - Assign VBoS responsibility for trade invoicing data and monthly CPI production.
  - Assign ERD responsibility for computing basket weights and regular analysis of trade invoicing data.
  - Establish a Memorandum of Understanding (MoU) between RBV and VBoS for regular data sharing.
  - Market development measures: remove obstacles to price discovery; initiate systematic FX market intelligence; draft and adopt a formal FX policy.

### Key recommendations and operational priorities (selected, preserving source wording and numeric thresholds)
- Currency basket framework:
  - The RBV may consider a basket based on the currency denomination of trade flows. Priority: High. Timeframe: Near-term.
  - VBoS should publish the Consumer Price Index (CPI) at a monthly frequency. Priority: High. Timeframe: Medium-term.
  - Responsibility for producing trade invoicing data should be assigned to the VBoS. Priority: High. Timeframe: Medium-term.
  - The computation of the currency basket should be assigned to ERD, with revisions conducted annually or as needed based on significant deviations such as a change of ±five percent or more in the weight of a major currency. Priority: High. Timeframe: Near-term.
  - A Memorandum of Understanding (MoU) should be established between the RBV and the VBoS to facilitate regular data sharing, including access to trade and CPI data. Priority: High. Timeframe: Near-term.
  - Require Board approval for changes to the currency basket framework. Priority: High. Timeframe: Near-term.
- FX market operations and regulation:
  - FMD should streamline the use of the daily exchange rate file to compute the VUV/USD reference rate to better align with the currency basket. Priority: High. Timeframe: Near-term.
  - Increase the robustness of the Excel based procedure used to calculate the basket value. Priority: High. Timeframe: Near-term.
  - Remove the USD 300,000 per bank weekly cap on FX allocations. Priority: High. Timeframe: Near-term.
  - Deal only in USD when allocating FX to banks. Priority: Medium. Timeframe: Near-term.
  - Terminate the B&S arrangement. Priority: High. Timeframe: Medium-term.
  - Draft and adopt a formal FX policy. Priority: High. Timeframe: Near-term.
  - Finalize and implement FX NOP regulation. Priority: High. Timeframe: Medium-term.
  - Establish a structured dialogue framework through regular meetings with commercial banks. Priority: High. Timeframe: Medium-term.
  - Require FX market participants to obtain Association Cambiste International (ACI) certification. Priority: Medium. Timeframe: Long-term.
- Operational triggers and procedures:
  - Recalculate the day’s official dealing price once the spread between the start of day basket value and its intraday value reaches a predefined trigger. Priority: Low. Timeframe: Medium-term.
  - Eliminate the hurdle for obtaining FX for capital account transactions from the RBV (as long as the RBV’s FX regulation allows capital account transactions). Priority: Medium. Timeframe: Near-term.

### Introduction and background (institutional responsibilities and history)
- RBV last reviewed basket weights in 2016; weights have not been updated since.
- The methodology and data used for 2016 weights are not documented due to absence of a formal handover process and staff reassignments.
- No revisions since 2016 largely due to unclear institutional responsibilities; currently overseen by FMD, which also manages FX market operations and foreign reserves management.

### Currency basket objective and design in Vanuatu
- Policy objective chosen: primary objective is maintaining price stability.
- Rationale: Vanuatu’s high import propensity and headline inflation largely driven by imported food prices; exchange rate serves as the sole operational target for RBV to control inflation.
- Basket design: based on the value of trade (exports and imports) and tourism earnings.
- The currency composition of the basket also serves as a target for allocating the foreign reserve portfolio.
- Notable reserve facts preserved verbatim:
  - Vanuatu’s gross official reserves are equal to USD 660 million (seven months of imports cover), supported by tourism receipts, remittances, and donor support. This level of reserves is above the minimum level of four months of imports targeted by the RBV (source: RBV authorities).
- Numeraire practice:
  - RBV’s reserve’s numeraire is local currency (VUV). Using local currency as the numeraire is noted as uncommon among central banks in low-income countries and can lead to inaccuracies and comparability issues.

### Current basket composition and transparency
- Current basket constructed using the top four invoice currencies: US dollar, Australian Dollar, New Zealand Dollar, and Euro.
- Weights calculated based on value of trade and tourism earnings; most recent review conducted in 2016.
- Composition and weights are not publicly disclosed; mission recommends authorities communicate that the basket framework is designed to achieve price stability to strengthen credibility.

*IMF Technical Assistance Report — Preface (content unit) — tarea2026026-source-pdf*

### 8. The absence of an update to the basket weights since 2016 reflects a combination of

### 8. The absence of an update to the basket weights since 2016 reflects a combination of

### Basket weights, institutional capacity, and data access
- Absence of a basket weights update since 2016 reflects:
  - FMD is responsible for multiple functions, including the computation of basket weights, daily exchange rates, and reserve management.
  - The basket weights are not publicly disclosed; they are only disclosed and shared internally with FMD and the investment committee (IC).
  - Access to trade data requires a license from the VBoS.
  - There has been no proper handover process since 2016, compounded by recent staff reassignments.
- Recommendation (institutional):
  - Assign computation of the currency basket to ERD and revise on an annual basis or as needed based on significant deviations such as a change of ±five percent or more in the weight of a major currency.
  - Ensure documentation of updated procedures to strengthen institutional continuity and facilitate future handovers.

### Daily exchange rate computation and operational issues
- FMD computes the daily exchange rate, sends it to commercial banks and publishes it on the RBV website.
- Current procedure:
  - VUV/USD is calculated through an unnecessarily complex procedure involving the SDR.
  - The base rate is defined as the USD/SDR and VUV/SDR exchange rate at the latest reference period of January 2025.
  - FMD obtains currency prices from Bloomberg at 8:30 AM, manually enters them into an Excel spreadsheet, communicates the VUV before 9:00 AM by e-mail, and publishes it on the RBV website.
- Operational vulnerabilities:
  - Manual input increases operational risk despite four-eyes principles.
  - Excel spreadsheet cells are not locked, file is not password protected, and no documentation explains file use.
  - RBV does not monitor intra-day variation of the basket intrinsic value; publishes rate only once a day.
  - RBV applies a 0.60 vatu spread between buying and selling price; the algorithm produces a mid-rate and RBV incorporates a bid-offer spread (0.5 percent at time of mission) on transactions with commercial banks, government and other specific clients.
- Recommendation (operational):
  - FMD should streamline the use of the daily exchange rate file to compute the VUV/USD reference rate, automating the process and excluding the SDR from the computation if it yields the same result, to simplify procedure and reduce errors.

### Currency dynamics since 2016
- Since the basket became fully operational in 2016:
  - USD and EUR have appreciated.
  - Other currencies in the basket have depreciated.
  - AUD (the second largest import-denominated currency in the basket) has depreciated marginally since the last review of the basket peg.
- Source cited for figure: Authorities data and IMF staff calculation.

### Consumer Price Index (CPI)
- RBV’s primary objective: maintain price stability; RBV target inflation is in the range of zero to four percent.
- CPI production and basket composition:
  - The CPI in Vanuatu is currently produced quarterly by the Vanuatu Bureau of Statistics (VBoS).
  - CPI basket consists of eleven categories with the following weights (%):
    - Food 47
    - Transport 13
    - Drinks and tobacco 11
    - Housing and utilities 9
    - Miscellaneous 4
    - Household supplies 4
    - Education 3
    - Communications 3
    - Clothing and footwear 3
    - Recreation 1
    - Health 0.3
  - Date referenced for weights: December 2024.
- Inflation drivers:
  - Since 2022, headline inflation appears largely driven by imported inflation.
  - Increase in headline inflation was primarily attributable to rising food prices, significantly affected by cyclones on the agricultural sector.
  - Since 2023Q3, imported and domestic inflation have declined, with both measures turning negative.
- Recommendation (data frequency):
  - VBoS should transition to monthly CPI publication to enable model-based recalculation of basket weights using the FX composite model.

### Change in import partners and trade invoicing
- Import composition: basic commodities (food and fuel) and capital goods (machines, trucks, vessels); specific imports include refined petroleum, other sea vessels, delivery trucks, poultry meat, baked goods, rice and broadcasting equipment.
- Import partners (composition change 2016 to 2023):
  - China’s share of total imports increased from 18.9 percent in 2016 to 26.3 percent in 2023, becoming Vanuatu’s largest import partner.
  - United States accounted for 1.77 percent of total imports in 2023.
- Import invoicing and currency shares (customs data):
  - Share of imports denominated in USD rose from 50 percent in 2018 to 59 percent in 2024.
  - Invoice data includes CNY in "other currencies"; direct exposure to China via invoicing is not visible. Share of others is less than four percent.
- Table: Share of Import Payments by Currency in 2024 (Source: RBV Data)
  - USD 58.83%
  - AUD 18.79%
  - NZD 7.77%
  - EUR 3.18%
  - OTHERS 3.42%
- Recommendation (data stewardship):
  - ERD should own regular analysis of the trade invoicing data.
  - Efforts needed to improve continuity and historical coverage of import/export-by-currency dataset (available only 2018–2024; no historical series for 2016).

### Recommendations summarized (selected)
- VBoS should transition to monthly CPI publication to enable FX composite model recalculation.
- ERD should take formal responsibility for computing basket weights and monitor trade and CPI data regularly.
- FMD should automate and simplify daily exchange rate computation, removing unnecessary SDR step.
- Establish a Memorandum of Understanding (MoU) between RBV and VBoS to facilitate regular data sharing, including access to trade and CPI data.
- Document updated procedures for the currency basket to strengthen institutional continuity.

### Optimal basket design for Vanuatu (framework and results)
- Anchor currency criteria:
  - Strong trade and financial linkages, robust track record of low and stable inflation, similarity of external shocks, and high convertibility.
- FX composite model:
  - Weights should stabilize the basket and minimize pass-through of exchange rate fluctuations to import prices; FX composite model by MCM is the quantitative tool referenced.
- Data constraints and interim approach:
  - Absence of monthly CPI constrains use of FX composite model; VBoS currently produces CPI only quarterly.
  - Interim 2024 basket weights should be computed based on trade and tourism data to maintain Vatu stability until monthly CPI is available.
  - Once monthly CPI is available, re-estimate weights using the FX composite model.
- Considered currencies: USD, AUD, NZD and EUR.
  - Estimated trade invoicing data shows all four currencies have non-negligible invoicing shares; USD and AUD have the largest impacts.
  - Most trade from China administered using USD; CNY has a low estimated share.
- Scenarios on Vatu stability (illustrative):
  - Current weights (higher share of AUD): basket index moves with AUD/USD; if USD depreciates, Vatu will follow AUD movements, resulting in a lesser depreciation of the Vatu.
  - Trade weights (higher share of USD): basket index moves with USD; if AUD depreciates, Vatu will follow USD movements, resulting in a lesser depreciation of the Vatu.
- Recommendation (methodology):
  - Use trade-based weights as an interim measure given data constraints; incorporate tourism and (optionally) remittances in alternative calculations, acknowledging remittances are not well captured and are not considered representative of trade structure.
  - Re-estimate weights with FX composite model once monthly CPI is available; an Excel-based tool is available to update weights.

### FX market structure and RBV market operations
- Market structure:
  - Vanuatu’s FX market is not developed: small number of banks, no trading, low sophistication.
  - Five banks offer FX services; three money changers transact only in cash bank notes.
  - FX inflows mainly from fruit exports, tourism, remittances and passport sales; outflows largely energy, food and machinery imports.
  - No interbank activity; RBV does not collect interbank data. Commercial banks confirm rationing of FX is not conducive to interbank activity.
- Commercial bank interactions with RBV:
  - Commercial banks clear positions with the RBV; banks allowed to transact once a week with RBV for a capped amount.
  - No bank has sold FX to RBV in the last three years; five banks regularly use weekly RBV facility to obtain USD.
  - RBV set a minimum amount for accessing its FX allocation window: USD 250,000 weekly per bank.
- Market intelligence and monitoring:
  - RBV does not collect interbank data or analyze client FX flows; limited information gathering deprives RBV of market development signals and flow cyclicality.
- Operational adherence and transparency:
  - RBV adheres strictly to its basket algorithm (used for more than 20 years).
  - Timely and synchronized communication of FX rates aligns with best practice, but single daily publication reduces intra-day transparency and price discovery.

*Source: IMF Technical Assistance Report.*

### 48. The current FX allocation process is hindered by procedural inefficiencies that undermine

### 48. The current FX allocation process is hindered by procedural inefficiencies that undermine

### Procedural inefficiencies in FX allocation
- Requirement for all members of the RBV’s IC to sign off on FX allocations and accompanying documents introduces an unnecessary layer of bureaucracy.
- The IC’s involvement in FX-related decisions is misaligned with its core mandate, particularly given that FX controls fall outside the scope of the RBV’s current policy and regulatory framework.
- The weekly cap on FX demand per commercial bank is used by the RBV to curb reserve drawdowns but:
  - The cap is not documented and is not part of the currently prevailing notice.
  - The RBV enforces a USD 300,000 per bank weekly cap on FX allocations (Recommendation 77 calls for removal).
- Operational constraints reflect a mismatch between reserve management (SAA) and short-term liquidity needs; FX operations are guided by a reserve management framework that does not support short-term liquidity demands.

### Effects of administrative rationing and FX restrictions
- Restricting access to FX does not reduce underlying demand; it merely pushes it forward and encourages hoarding of USD and bypassing existing administrative exchange controls.
- Rationing measures:
  - Defer demand and encourage hoarding.
  - Create incentives for inappropriate behavior and undue market friction.
- Market participants have not reported indications of parallel market activity or tempering with invoicing, though the mission could not validate this with importers or exporters.

### Commercial banks’ constraints and capital account transactions
- Commercial banks must use their own funds to satisfy FX demand related to clients’ capital account transactions.
- Although capital account related transactions are allowed, commercial banks are not permitted to source their FX needs linked to capital account transactions via the weekly RBV allocation mechanism. This displaces demand temporarily and shifts other demands into the allocation mechanism.
- The RBV allocates FX in USD and AUD; previously it allocated only USD.
  - Vanuatu’s largest bank lost its USD correspondent due to recent de-risking, frequently changed correspondents, and the RBV ceased USD transactions with that bank to safeguard its relationship with its USD correspondent—the Federal Reserve—permitting that bank to receive weekly allocation in AUD instead.

### Currency choice, price discovery, and arbitrage risk
- Allocating in two currencies (USD and AUD) blurs RBV’s message and increases potential for arbitrage because the AUD/USD cross rate moves intraday.
- Allocating at market opening prices creates differing VUV/USD (or VUV/AUD) market prices during the day and harms price discovery.
- Sophisticated importers can transact in USD with one bank or AUD with another, choosing the best intraday rate and increasing arbitrage opportunities.
- RBV trading outside its FX policy perimeter with a single commercial bank exposes the RBV to reputational risk and perceived unfair treatment by other banks.

### Buy and Sell Back (B&S) operations
- Purpose: allow commercial banks to retain access to their FX and hedge against availability risk amid rationing—banks sell temporary excess USD with prespecified sell-back dates.
- Mechanics:
  - Banks remain exposed to FX price movements but are assured RBV will sell back same amount when needed.
  - Reserves obtained are pooled with other FX reserves; outstanding amounts are not communicated to the market.
- Unintended consequences and market development impacts:
  - B&S reduces banks’ incentive to unwind excess FX positions via:
    - participating in interbank trading;
    - offering more competitive pricing to clients; or
    - developing innovative instruments (e.g., FX forwards).
  - B&S hinders FX market development despite eliminating bank FX risk associated with hoarding.
- Implementation inconsistencies with existing Notice:
  - No maximum amount is set in the Notice (Notice dated March 16, 2016), yet RBV caps B&S weekly maturing amount for each bank at USD 500,000.
  - FMD states the cap on B&S size is required to protect RBV’s FX reserves liquidity.

### Other potential operations and market readiness
- A bank expressed interest in bona fide FX swaps with the RBV rather than simple B&S; however, this is premature given:
  - Underdevelopment of the domestic money market.
  - Absence of adequate legal, risk management, and settlement framework.
- One commercial bank confirmed it was offering FX forwards and FX swaps to its clients despite the RBV’s position.

### Communication and transparency
- Market participants are unaware of Vanuatu’s FX regime:
  - No RBV website information on the exchange rate peg or RBV objectives regarding the VUV.
  - Of three commercial bank executives met, only one knew the VUV was pegged to a basket of currencies and used basket movements to anticipate the next morning’s USD opening price.
- No forum or regular communication with commercial banks on FX-related issues:
  - Weekly allocation discussions are not used to gather broader flow dynamics, gauge bank sentiment, or perform additional analysis.
  - RBV does not hold meetings to communicate views or obtain comments from banks.
- Banks have requested information on their FX market share; RBV has not provided this data.

### Governance, documentation, and operational risk
- The RBV lacks a formal FX policy document; the FX policy was lost and only a draft over 20 years old was retrievable, creating risks including policy inconsistency, credibility risk, market distortion, legal and governance risk, and increased political interference risk.
- Operations manuals:
  - A front-office (FO) FX procedure manual exists but middle-office documentation does not.
  - The FO manual is outdated and contains reference information inaccurate for over five years, exposing RBV to operational risk.
- Disaster Recovery Plan (DRP) FX market module was successfully tested following the December 2024 earthquake; commercial banks expressed satisfaction with swift recovery and timely communication.
- FX controls: there are no FX controls in Vanuatu aside from RBV’s allocation process and administrative hurdles.
- Net Open Position (NOP) limits:
  - No FX NOP framework exists despite plans since at least 2016.
  - Last project iteration would not be constraining: commercial banks’ FX NOP could not exceed 15 and 25 percent of the commercial bank’s capital on a single holding and aggregate currency position respectively.
  - Not implementing binding NOP limits misses market development externalities (forced buyers/sellers, enhanced price discovery, stimulation of forward contract offerings).
- FX market convention: none exists; trading is minimal and no incidents reported, but staff and banks should be informed of and abide by market conventions and behavioral standards.
- No basic certification or education requirement for FX dealers at RBV or commercial banks; pool of qualified staff is limited.

### Recommendations (selected, exact proposals)
- Initiate a systematic FX market intelligence framework to analyze:
  - clients’ transactions;
  - commercial banks’ margins;
  - trends in invoicing currencies;
  - individual and aggregate NOP;
  - macro trends in the basket’s components price movements.
  - Require commercial banks’ weekly reporting on interbank activity to include forward-looking upcoming transactions.
- Increase robustness of the Excel-based procedure for calculating the basket value:
  - Password protect the current Excel spreadsheet and its vulnerable cells.
  - Automatize the morning input of FX prices and document the file.
  - Run a second pricing file in parallel, automatically fed FX prices through different data sources to validate published prices.
- Recalculate the day’s official dealing price once the spread between the start of day basket value and its intraday value reaches a predefined trigger; use live feeds to automate intraday repricing when a predefined intraday gap threshold is reached.
- Remove the USD 300,000 per bank weekly cap on FX allocations; later increase the minimum transaction amount with the RBV (currently USD 250,000) to enhance market efficiency and price discovery.
- Eliminate the hurdle for obtaining FX for capital account transactions from the RBV while the RBV’s FX regulation allows capital account transactions.
- Deal only in USD when allocating FX to banks; if impossible because a bank cannot find a correspondent, consider widening significantly the bid-offer spread on AUD allocations.
- Terminate the B&S arrangement as it hurts market development and will become irrelevant once FX is no longer artificially rationed.
- Maintain opposition to performing FX swaps with domestic banks until the fixed income market and infrastructure are adequate.
- Strengthen communication related to the FX regime:
  - Share a general description of the currency peg via the RBV website and traditional media, including all up-to-date applicable notices and key elements of the FX policy.
  - Discuss basket peg implementation in regular RBV publications (e.g., the Monetary Policy Statement) and in public speeches by the Governor and the Deputy Governor.
- Establish a structured dialogue framework with commercial banks via regular meetings (quarterly or semi-annually) covering FX market and monetary operations issues.
- Draft and adopt a formal FX policy to integrate RBV’s FX market decisions into its monetary policy framework.
- Maintain a digitalized library of all RBV governing documents (cloud-based services could be considered if they satisfy RBV IT security requirements).
- Update the operations manual to fully cover the FX function’s operational cycle and institutionalize operational memory so a new team member can perform FX operations without assistance.

*IMF Technical Assistance Report*

### 87. Finalize and implement FX NOP regulation. In addition to the potential excessive risk-taking by

### 87. Finalize and implement FX NOP regulation. In addition to the potential excessive risk-taking by 

### FX NOP regulation and market behavior
- The absence of NOP limits:
  - Does not allow the FX market price discovery mechanism to benefit fully from potential forced sellers or buyers.
  - Could permit potential excessive risk-taking by market participants.
- Recommendation:
  - Finalize and implement FX NOP regulation to constrain excessive risk-taking and improve price discovery.

### Market communication and interbank platform
- Recommendation:
  - Enhance communication among market participants through a platform for market participants to exchange their appetite to buy or sell USD.
  - RBV could set-up such a platform to nurture interbank FX activity.
- Website communication guidance:
  - Clearly explain its fixed exchange rate policy.
  - Provide information on foreign reserves management.
  - Detail the operational aspects that ensure the fixed exchange rate arrangement.
  - Outline the intervention mechanisms used in the foreign exchange market.
  - Emphasize the link between exchange rates and price stability.
  - Regularly publish reports on foreign reserves and exchange rate developments.

### FX market convention and professionalization
- Recommendation:
  - Develop an FX market convention and require all FX market participants to comply with its provisions.
    - A memorandum of understanding between the banks and the RBV would cover specifics of Vanuatu’s FX market and expected participant behavior.
- Recommendation:
  - Require FX market participants to obtain Association Cambiste International (ACI) certification.
    - Introduce basic training requirements for participants to be eligible to transact FX with the RBV and their clients to mitigate operational and reputation risk.
    - The RBV and market participants would benefit from the professionalization of FX market activity.
    - The reference accreditation for this purpose is the ACI certification.
    - This program would increase knowledge about FX markets mechanics and ethics principles.

### Areas for capacity building (next TA phase)
- A follow-up mission could assist in two main areas:
  - (i) Hands-on support to re-estimate the currency basket weights once monthly CPI data become available.
  - (ii) Hands-on assistance to finalize the implementation of the other recommendations.
- Additional engagement:
  - Assess staff experience applying the Excel-based template for updating weights using trade data.
  - Identify areas where further clarification, refinement, or capacity building may enhance sustainable use of the template.

### Annex I. Currency Basket Framework — core model and optimization
- Model linking exchange rate volatility and import price volatility using a pass-through equation:
  - Reduced form equation:
    - ∆[log⁡(휋푡)]=∑훽푗∆[log(푒푗,푡−푝)]+휀푡,⁡⁡⁡⁡(1)  푁푗=1
  - Definitions:
    - 휋푡 : import price index at time t.
    - 훽푗 : pass-through coefficient of exchange rate to import price index.
    - 푒푗푡 : bilateral exchange at time t.
    - p: number of lag.
    - N: number of trade partners.
- Optimal currency weights derived conditional on regularization parameter λ:
  - Objective:
    - min푤 푤푇퐵∑퐵푤+휆||||푤−푡||||2,(2)
  - Where:
    - w is the vector of weights of the currency basket, and t is the vector of trade weights.
    - B is a diagonal matrix of ERPT.
    - Σ is the covariance of exchange rate changes.
    - λ is a regularization parameter to adjust between currency passthrough volatility (λ → 0) and trade weights t (λ → ∞).
  - Interpretation:
    - Setting λ close to 0 will align the basket with minimum exchange rate and ERPT volatility.
    - A larger λ will align with trade weights t.
    - The value of λ should be set with these considerations in mind.
    - If the ERPT (B) cannot be determined reliably, align with t.
- Modeling note:
  - The mission kept the reduced form specification as simple as possible to ensure the model remains tractable and to facilitate the derivation of a closed-form relationship between import price and exchange rate volatilities.

### Annex II. Excel and Python Tool for Computing Optimal Weights
- Tool description:
  - An Excel file linked to Python code was provided to the RBV to perform regressions and optimization for optimal basket calculation.
  - Excel cells for data can be edited as typical Excel; buttons call Python code to generate output in the Excel file.
  - RBV staff can run the code without learning a new language.
  - The sheet contains all user input cells and three buttons to call the Python code for various functions.
  - A manual is provided to RBV staff for how to run the Excel Application.

### Annex III. Template for the Memorandum of Understanding (MoU) between the RBV and the VBoS
- Structure and suggested guidance highlights:
  - A. Purpose:
    - i. MoU sets terms for cooperation between the RBV and the Vanuatu Bureau of Statistics (VBoS) in sharing information and data, and joint procedures to support monetary policy implementation.
    - ii. Parties agree to cooperate on information sharing and recognize responsibilities set forth.
  - B. Preamble:
    - iii. MoU sets technical and operational framework governing regular exchange of statistical data, particularly trade and Consumer Price Index (CPI) data; outlines roles, frequency, format, procedures for data quality, confidentiality, and coordination mechanisms.
  - E. Procedure in the Event of a Disaster:
    - iv. Parties may agree to temporary reduction in reporting and data deadlines and may use an alternative electronic platform; contact details for disaster recovery are listed in the technical annex.
  - F. Confidentiality:
    - v. Central bank should not publish or disclose any trade, CPI, or other statistical data received from the VBoS without prior authorization; RBV may publish aggregated indicators or derived statistics that do not reveal confidential source data. VBoS shall not publish or disclose any forecast or realized information related to monetary policy operations or decisions unless explicitly authorized.
  - G. Amendment Procedure:
    - vi. Two procedures: a general amendment procedure requiring mutual consent, and a simplified amendment procedure for specific paragraphs amendable by mutual consent of local management; lists of authorized signatories are maintained and exchanged.
  - H. Periodic Review and Revisions:
    - vii. The parties will review the MoU every five years and conduct general amendments, as necessary.
  - I. Termination:
    - viii. Either party may terminate the MoU with six months' notice. The MoU enters into force one month after the day of its signature.
  - J. Signatures:
    - ix. Insert the date and the names of the representatives from the respective institutions to sign the MOU.

*IMF Technical Assistance Report | 27–31*

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_Source: https://www.imf.org/-/media/files/publications/tar/2026/english/tarea2026026-source-pdf.pdf_