## _cr05124 - Executive Summary

## Source details

**Canonical URL:** [_cr05124 - Executive Summary](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2005/_cr05124.pdf)

## Other formats

- [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2005/_cr05124.pdf.md)
- [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2005/_cr05124.pdf.json)

---

### Economic setting and structural constraints
- An improved external environment boosted economic growth in 2003–04 after two years of decline; exports and tourism showed sharp improvement in both years in volume terms.
- Recovery supported by strong macroeconomic policies: improved revenue collection, introduction of expenditure controls, and a cautious monetary and exchange rate policy that kept inflation low.
- Structural weaknesses and rapid population growth have led to poor per capita GDP growth performance over the last decade relative to comparator Pacific and Caribbean countries.
- Underlying structural problems identified:
  - Poor infrastructure.
  - Weak public enterprise sector.
  - High business costs.
  - Need to strengthen the environment for foreign investment.

### Background, political context, and social indicators
- Vanuatu achieved positive real growth in 2003-04 after two years of decline; macroeconomic stability was maintained and some structural progress made.
- Human development and poverty:
  - About 40 percent of the population lives below the poverty line.
  - 80 percent of the labor force is employed in subsistence activities in rural areas.
- Political instability since the early 1990s with frequent coalition changes in the 52-seat Parliament complicated reform progress and inhibited investment.
- 2004 political events summary:
  - May 2004 election called by then Prime Minister Natapei; no party won a majority in early July elections.
  - Fragile coalition under Prime Minister Vohor formed end-July; donor relations deteriorated (expulsion of Australian law enforcement advisors in August).
  - Controversial attempts to grant diplomatic recognition to Taiwan Province of China led to Vohor coalition’s defeat by a no-confidence motion in December 2004.
  - New government under Prime Minister Ham Lini formed in December 2004; Finance Minister Carcasses and Governor Tevi remained in their positions.
  - Initial Lini government statements pointed to an improved budget outlook, resumption of financial sector reforms, and strengthened donor dialogue; comprehensive economic policy not yet announced.

### Recent economic developments (2003–04) and near-term outlook (2005)
- Output and growth:
  - Real GDP growth rebounded to 2.4 percent in 2003 and continued in 2004 with estimated growth of 3 percent, despite crop damage from Cyclone Ivy.
  - Recovery bolstered by supply response to export price recovery, liberalization of trading in cocoa and copra, new markets for kava after EU bans in 2002, and higher tourist arrivals with expanded airline capacity.
- Fiscal developments:
  - Fiscal consolidation continued, largely reflecting sharply reduced development expenditure, new controls on current spending, and improved tax collection.
  - Capital outlays fell to an average 1.6 percent of GDP in 2003–04 from an average 4.5 percent of GDP in 1999–2002.
  - Total public debt, including external debt, fell below 40 percent of GDP.
  - Public Financial and Economic Management Act (1998) limits: total stock of debt at 40 percent of GDP and annual debt service payments to 8 percent of government revenue.
- Monetary and external:
  - Under a basket-peg exchange rate regime, inflation remained subdued at just under 3 percent in 2004.
  - Broad money growth picked up in 2004 as deposits with the banking sector rose and commercial banks’ net foreign assets strengthened.
  - Commercial banks’ liquidity improved in 2004, allowing for lower lending rates and a slight narrowing of the interest rate spread.
  - The external current account deficit narrowed in 2004 due to stronger tourism and exports.
  - In real effective terms the vatu remained broadly stable over the past five years; official reserves recovered since 2002.
- Near-term outlook for 2005:
  - Real GDP growth expected to taper off closer to trend as global commodity prices for many exports ease, despite expected full-year tourism gains.
  - Inflation likely to edge higher with delayed impact of higher world oil prices.
  - Current account deficit should widen slightly as tourism-related imports offset increased tourism revenue.
  - Official foreign reserve levels expected to remain roughly unchanged in U.S. dollars.
  - Early reports of the revised 2005 budget indicate fiscal accounts should be near balance, with higher current spending (including increased parliamentarians’ salaries and higher education spending) accompanied by additional donor funding.

### Growth prospects and scenario projections
- Baseline trajectory:
  - Without an active reform effort addressing weak infrastructure and other sources of high business costs, real GDP growth could fall below even the current moderate level of 2.5–3.0 percent.
- Reform scenario:
  - With a stronger reform effort than that currently contemplated, growth could rise to allow an improvement in per capita GDP over the medium term.
- Sectoral potential:
  - Growth potential especially in agriculture and tourism.
- Infrastructure priorities to support growth:
  - Roads, electricity, water, and transportation both in the main and outer islands.
- Downside risks:
  - Possible absence of political commitment to reform, continued exposure to natural disasters, and dependence on preservation of good relations with major donors to fund development spending through grants.
- Medium-term projections (selected from tables):
  - Baseline (Medium-Term Non-Adjustment Scenario) — Real GDP (% change): 2005: 2.8; 2006: 2.6; 2007: 2.4; 2008: 2.4; 2009: 2.2; 2010: 2.2.
  - Baseline — Consumer prices (period average): 2005: 2.8; 2006: 3.7; 2007: 2.7; 2008: 2.5; 2009: 2.5; 2010: 2.5.
  - Baseline — Current account balance (millions USD): 2005: -14.7; 2006: -14.6; 2007: -16.4; 2008: -17.5; 2009: -18.1; 2010: -18.4.
  - Baseline — Gross official reserves (millions USD, end period): 2005: 63.0; 2006: 66.8; 2007: 68.4; 2008: 68.3; 2009: 66.9; 2010: 64.7.
  - Medium-Term Reform Scenario — Real GDP growth reported in tables: 2005: 2.8; 2006: 2.3; 2007: 2.1; 2008: 2.0; 2009: 1.8; 2010: 1.7 (variants across tables noted).
  - Medium-Term Risk Scenario — reversal of reforms and poor donor relations would lead to slowing GDP growth, deteriorating fiscal and external balances, rising government debt, and declining reserves.

### Fiscal policy strategy and priorities
- Mission recommendation: increase capital spending financed by a combination of revenue and expenditure measures to allow small budget surpluses over the medium term, continuation of critical social spending, and gradual debt reduction.
- Tax administration and revenue measures:
  - VAT and customs administration improved with a new automated entry system; a new computerized system to be introduced during 2005 will link the two data bases for further improved monitoring.
  - Review public enterprise governance and cost structures due to poor dividend collection.
  - Address tax concessions which amount to about 1.5 percent of GDP annually and tighten tax and duty exemption criteria (including plans to remove the full exemption status of statutory authorities and discretionary exemptions for non-strategic industries).
  - Neither mission nor authorities favored introducing new tax measures at this point; Vanuatu’s tax burden is in line with those of other similar-income countries.
- Expenditure composition and priorities:
  - Capital outlays cut back sharply following completion of donor-funded projects.
  - Wage bill remains large: 56 percent of recurrent expenditure or over 11 percent of GDP in 2004.
  - Government’s development expenditure goal: increase over time to about 25 percent of total expenditure (government’s 2004–06 policy); actual development expenditure declining to about 7 percent of total expenditure in the 2004 budget outcome.
  - Suggested expenditure realignment measures:
    - Public entities have net debts to the government of about 1 percent of GDP, while another 0.5 percent of GDP is transferred to them annually through a direct budget grant.
    - Curtail discretionary tax and duty exemptions (about 1.5 percent of GDP).
    - Contain the public wage bill.
- Authorities’ planned measures and constraints:
  - Preference to rely on donor funds for capital spending and to prepare a well-considered public investment program before large capital spending; a donor-funded macroeconomist expected to prepare an investment plan by mid-2005.
  - Measures to control the wage bill: extension of the Financial Visa System to the education sector and plans to cut the civil service by 20 percent over the medium term.
  - Mission recommended reversing a proposed 20 percent increase in salaries for parliamentarians to avoid upward pressure on general public sector wages; authorities considered reversal unlikely for political reasons.
  - Mission recommended reviewing education sector cost structure and deferring further increases in education spending pending audit (an audit of the Education Ministry will take place in 2005 with EU assistance).
- Fiscal prudence and debt policy:
  - Vanuatu aims to limit total stock of debt to no more than 40 percent of GDP and requires new external borrowing to deliver a financial rate of return to cover the costs of debt servicing.
  - RBV deficit financing cap: included within the 40 percent of GDP debt cap and limited to 20 percent of the previous three years’ government budget current revenue.
  - Continued fiscal consolidation would minimize financing concerns and allow further reductions in debt and build-up of a contingency for natural disasters.

### Monetary, exchange rate, and external position
- Monetary anchor and exchange rate:
  - Basket peg has successfully kept inflation low; authorities strongly committed to continue restrained monetary stance to maintain the peg.
  - Adjustable peg exchange rate arrangement considered broadly appropriate.
  - Real effective exchange rate broadly stable since the late-1990s.
- External and reserves:
  - Export and tourism receipts grew rapidly in 2003–04 in both value and volume terms; export market share roughly stable over the past ten years.
  - Official reserves rebuilt to 6 months of imports, one of the highest levels in the region.
- Steps toward greater flexibility and market development:
  - RBV widened buy and sell margins slightly and started offering to buy foreign exchange within the full range of its published rates.
- RBV institutional strengthening encouraged:
  - Strengthen internal audit procedures and reserve management, including a risk management system.
  - Upgrade the payments system to allow for automated operations.
  - Increase transparency via the Governor’s semi-annual monetary policy statements.

### Financial sector reforms, vulnerabilities, and policy advice
- Reforms and supervisory improvements:
  - Passage of the International Banking Act in 2002 and broadening of RBV supervisory responsibilities to the offshore banking sector and the Vanuatu National Provident Fund (VNPF).
  - Measures taken that allowed the OECD to remove Vanuatu from the list of uncooperative tax havens in 2003.
  - Mission urged early passage of AML/CFT amendments to the Financial Transactions Reporting Act (FTRA).
  - Mission advocated strengthening the Financial Intelligence Unit (FIU) and recruiting additional staff; FIU not yet fully operational.
  - Mission recommended strengthening the Vanuatu Financial Service Commission’s (VFSC) resources and passing necessary legislation (including the Insurance Act) and increasing staff resources.
  - An overall cost-benefit assessment of the offshore sector’s impact, as recommended by MFD, is underway and should be completed this spring.
- Financial soundness indicators and risks:
  - Nonperforming loans (NPL ratio) rose to 18.5 percent in September 2004 from 8.4 percent at end-2003, reflecting downgrading of a small number of loans at one private commercial bank; loans are fully provisioned.
  - Banking system: deposits with the banking system are more than double GDP (given the offshore banking sector); banks are liquid and capital adequacy is solid (Tier 1 capital nearly 98 percent of total capital).
  - The state-owned National Bank of Vanuatu showing a small profit following restructuring in 2000 and contracting out management to experienced bankers.
- Mission advice on government involvement in credit:
  - Mission advised against proposals to expand the role of government financial institutions (reintroducing a publicly funded development bank or increasing VNPF lending).
  - Recommended relying on market-related mechanisms such as the collateral loan project with AsDB assistance and the existing microfinance window in the commercial banking sector.

### Public enterprises, trade policy, and structural reforms
- Public enterprise performance and reform:
  - Progress in reforming public enterprises remains slow; public enterprise finances are poor in part reflecting absence of market-based management.
  - Mission encouraged reevaluating the financial status of all public entities and considering options of introducing competition or dismantling them.
  - Example: incorporate remaining licensing responsibilities of the liberalized Vanuatu Commodities Marketing Board (VCMB) within the Ministry of Finance.
  - Minimum conditionality recommended: condition existing transfers and tax exemptions for public enterprises on receipt of full financial statements.
  - Authorities plan to begin an intensive review of the sector beginning with the television and radio company.
- Trade policy and regional integration:
  - Vanuatu has an open trade regime and is expanding regional trade links; participation in PICTA and PACER ratified in 2004.
  - Participation in Economic Partnership Agreement negotiations with the EU.
  - Authorities plan in 2005 to sharply reduce the number of tariff rates to four (including a zero rate) while maintaining revenue neutrality.
  - Recent liberalization of trade in copra and cocoa through the reorganization of the VCMB benefited export receipts.
  - Mission recommended removing ministerial discretion in banning imports, removing the VCMB’s 2 percent fee on copra and cocoa exports, and safeguarding tourism assets by protecting the environment and managing non-renewable fishing and forestry resources.

### Data, statistics, and technical assistance
- Data improvements:
  - Vanuatu began participating in the Fund’s General Data Dissemination System (GDDS) in 2003.
  - Core economic data updated regularly and timely, enhancing surveillance.
- Remaining weaknesses:
  - National accounts and balance of payments remain weak.
  - Data not available for public enterprise operations and the labor market.
- Technical assistance:
  - Substantial TA from PFTAC, IMF departments (MFD, STA, LEG), AusAID, ADB, and World Bank in areas including banking supervision, monetary policy, BOP, GFS, AML/CFT, and statistics.

### Key macroeconomic statistics and indicators (selected)
- Nominal GDP (2003): US$ 284 million
- Population (2003): 207,400
- GDP per capita (2003): US$ 1,361
- Quota: SDR 17.0 million
- Real GDP growth (annual): 2000: 2.7; 2001: -2.7; 2002: -4.9; 2003: 2.4; 2004 (est.): 3.0
- Consumer prices (period average): 2000: 2.5; 2001: 3.7; 2002: 2.0; 2003: 3.0; 2004 (est.): 2.8
- Fiscal outcomes (percent of GDP):
  - Total revenue and grants: 2000: 22.1; 2001: 21.6; 2002: 21.6; 2003: 21.1; 2004: 22.4; 2005 (proj.): 22.0
  - Total expenditure: 2000: 29.0; 2001: 25.3; 2002: 25.7; 2003: 22.8; 2004: 21.4; 2005 (proj.): 21.9
  - Overall balance: 2000: -7.0; 2001: -3.7; 2002: -4.1; 2003: -1.7; 2004: 1.0; 2005 (proj.): 0.1
- Money and credit (annual percentage change):
  - Broad money: 2000: 6.7; 2001: 5.6; 2002: -1.7; 2003: -0.8; 2004: 9.8; 2005 (proj.): 6.1
  - Net foreign assets: 2000: 11.7; 2001: 6.6; 2002: -6.0; 2003: -0.3; 2004: 11.7; 2005 (proj.): 6.1
  - Domestic credit: 2000: 0.8; 2001: 5.4; 2002: 12.0; 2003: 5.3; 2004: 7.9; 2005 (proj.): 6.7
- External sector (selected):
  - Current account balance (millions USD): 2000: 4.8; 2001: 4.7; 2002: -14.1; 2003: -23.5; 2004 (est.): -11.3; 2005 (proj.): -14.7
  - Exports, f.o.b. (millions USD): 2000: 27.2; 2001: 19.9; 2002: 20.1; 2003: 26.6; 2004 (est.): 34.2; 2005 (proj.): 39.1
  - Imports, f.o.b. (millions USD): 2000: 77.5; 2001: 78.1; 2002: 74.6; 2003: 86.8; 2004 (est.): 92.0; 2005 (proj.): 105.0
  - Gross official reserves (end period, millions USD): 2000: 39.1; 2001: 37.7; 2002: 36.4; 2003: 44.3; 2004: 62.1; 2005 (proj.): 63.0
  - Reserves in months of imports of goods: 2000: 5.1; 2001: 4.8; 2002: 4.9; 2003: 5.1; 2004: 6.3; 2005 (proj.): 5.7
- External debt:
  - External debt (percent of GDP): 2000: 28.2; 2001: 29.7; 2002: 30.0; 2003: 28.8; 2004: 26.9; 2005 (proj.): 25.9
  - External debt service (percent of exports of goods and services): 2000: 0.9; 2001: 1.0; 2002: 1.5; 2003: 1.5; 2004: 1.7; 2005 (proj.): 1.5
- Selected fiscal table highlights (central government, 2000–05; in millions of vatu and percent of GDP):
  - Total revenue and grants (millions of vatu): 2000: 7,423; 2001: 7,366; 2002: 7,082; 2003: 7,111; 2004: 7,484; 2005 (Est./Proj.): 7,925–8,180
  - Total expenditure and net lending (millions of vatu): 2000: 9,773; 2001: 8,613; 2002: 8,410; 2003: 7,683; 2004: 7,340; 2005 (Est./Proj.): 7,561–8,136
  - Wages and salaries (millions of vatu): 2000: 3,747; 2001: 3,734; 2002: 3,929; 2003: 4,070; 2004: 4,064; 2005 (Est./Proj.): 4,053–4,191
  - Capital expenditure (millions of vatu): 2000: 2,877; 2001: 1,598; 2002: 1,253; 2003: 576; 2004: 414; 2005 (Est./Proj.): 563–621
  - Overall balance (millions of vatu): 2000: -2,350; 2001: -1,247; 2002: -1,328; 2003: -572; 2004: 144; 2005 (Est./Proj.): 364–44
  - Memoranda: Public debt (percent of GDP): 2000: 35.4; 2001: 37.9; 2002: 40.5; 2003: 41.0; 2004: 38.6; 2005 (proj.): 38.0
- Monetary and financial sector indicators (selected):
  - Net foreign assets (millions of vatu, end period): Mar-2002: 24,744; Jun-2002: 24,679; Sep-2002: 26,768; Dec-2002: 27,960; 2005 projections to Dec: 29,254
  - Total broad money (millions of vatu): 2002 end: 35,009; 2003 end: 34,729; 2004 end: 36,559; 2005 projections: 40,480
  - Credit to private sector (in percent of GDP) noted as rising to 42.9 and 46.0 in memoranda
  - Nonperforming loans (share of total loans) through end-September 2004: 4.5; 3.8; 3.9; 8.4; 18.5 (series reported)
  - Share of foreign currency deposits in total deposits (percent): 2000: 77.8; 2001: 79.2; 2002: 75.3; 2003: 72.9; 2004: 70.7; 2005 (proj.): 68.7
- Tourism and external receipts:
  - Travel receipts (millions USD): 2000: 56.3; 2001: 46.1; 2002: 44.2; 2003: 52.0; 2004: 57.0; 2005 (proj.): 69.0
  - Trade balance (millions USD): 2000: -50.3; 2001: -58.1; 2002: -54.6; 2003: -60.2; 2004: -57.8; 2005 (proj.): -65.9
  - Services balance (millions USD): 2000: 59.1; 2001: 46.2; 2002: 36.0; 2003: 40.3; 2004: 46.0; 2005 (proj.): 57.7

### Staff appraisal, policy recommendations, and priorities
- Staff appraisal summary:
  - Progress made since the last Article IV consultation on fiscal balances (strengthened tax revenue, excise tax on alcohol and tobacco, and expenditure controls) and on offshore bank supervision.
  - Remaining priorities: restructuring public enterprises, improving infrastructure, and deepening reforms to raise medium-term growth.
  - Authorities found mission views useful and welcomed interim-year staff visits.
- Key policy recommendations:
  - Continue responsible fiscal and monetary policies.
  - Reorient government spending toward more productive capital outlays through revenue and expenditure measures, while maintaining needed social spending.
  - Further strengthen the financial sector to improve availability and lower costs of domestic credit.
  - Implement structural reforms to improve the environment for private sector activity: regulate monopoly utilities, pass a competition law, streamline investment approval (electronic “one-stop shop”), and undertake an intensive review of public enterprises.
  - Maintain current restrictions on RBV financing of the government sector and ensure close fiscal-monetary coordination.

### Key risks, external relations, and next steps
- Main downside risks:
  - Reversal or delay of reforms and deterioration in donor relations.
  - Political instability and governance changes that undermine reform continuity.
  - Exposure to natural disasters and adverse commodity price movements.
- Potential upside:
  - Stronger reform effort could raise private investment, donor grants, reserves, and economic growth; allow greater development spending and reduce government debt.
- IMF and external relations:
  - Membership since 9/28/81; Article VIII accepted.
  - Fund holdings of currency: SDR 14.51 (85.3 percent of quota); reserve position in Fund: 2.50 (14.7 percent of quota).
  - Executive Board concluded the 2004 Article IV consultation on February 25, 2005.
  - Proposed next Article IV consultation on the 24-month cycle; authorities expressed interest in a staff visit in 2005.
- Technical assistance and external partners:
  - Substantial TA from PFTAC, IMF departments (MFD, STA, LEG), AusAID, ADB, and World Bank.
  - World Bank: five IDA credits totaling $18.9 million (through 2001) and analytic/advisory support.
  - Asian Development Bank: nine loans totaling US$51.25 million and 53 TA projects (US$14.96 million) through end-2004; indicative lending program up to US$6.0 million over next three years and TA around US$1.5 million.

*Source — IMF staff report content as provided in the supplied PDF chapter/section.*

### Executive Summary ......................................................................................................

### _cr05124 - Executive Summary

### Economic Setting
- An improved external environment provided a boost to economic growth in 2003–04 after two years of decline, with exports and tourism showing sharp improvement in both years in volume terms.
- Recovery was supported by strong macroeconomic policies: improved revenue collection, introduction of expenditure controls, and a cautious monetary and exchange rate policy that kept inflation low.
- Structural weaknesses and rapid population growth have led to poor per capita GDP growth performance over the last decade relative to comparator Pacific and Caribbean countries.
- Underlying structural problems identified:
  - Poor infrastructure.
  - Weak public enterprise sector.
  - High business costs.
  - Need to strengthen the environment for foreign investment.

### Key Policy Issues
- Medium-term growth potential exists, especially in agriculture and tourism, if appropriate policies are in place.
- Political instability during 2004, until the change in government in December, distracted government focus from economic policy priorities.
- Fiscal expenditure reorientation is required to raise medium-term growth while meeting development needs.
  - Resources for infrastructure could be generated within the current fiscal envelope by reducing current spending (particularly the wage bill) and improving tax compliance.
  - Development needs could be met within ongoing fiscal consolidation plans, allowing room for social spending and gradual public debt reduction.
- Structural reforms needed:
  - Further strengthening of banking supervision (good progress noted, but additional measures required).
  - Overhaul of the weak public enterprise sector.
  - Regulation of monopoly utilities.
  - Passage of a competition law.
  - Streamlining steps required for investment approval.

*Background and Context*

### Background
- Vanuatu achieved positive real growth in 2003-04 after two years of decline.
- Macroeconomic stability was maintained and some structural progress made.
- Human development indicators are among the lowest of the Pacific island countries.
- Poverty and employment indicators:
  - About 40 percent of the population lives below the poverty line.
  - 80 percent of the labor force is employed in subsistence activities in rural areas.
- Political environment:
  - High degree of political instability since the early 1990s, with frequent coalition changes in the 52-seat Parliament.
  - Political fractionalization complicates reform progress and inhibits investment.
  - 2004 political events:
    - May 2004 election called by then Prime Minister Natapei; no party won a majority in early July elections.
    - Fragile coalition formed end-July under Prime Minister Vohor; donor relations deteriorated (expulsion of Australian law enforcement advisors in August; donor concerns and warnings of aid reductions).
    - Controversial attempts to grant diplomatic recognition to Taiwan Province of China led to Vohor coalition’s defeat by a no-confidence motion in December 2004.
    - New government under Prime Minister Ham Lini formed in December 2004; Finance Minister Carcasses and Governor Tevi remained in their positions.
    - Initial Lini government statements pointed to an improved budget outlook, resumption of financial sector reforms, and strengthened donor dialogue; comprehensive economic policy not yet announced.

### Recent Economic Developments
- Output and growth:
  - Real GDP growth rebounded to 2.4 percent in 2003 and continued in 2004 with estimated growth of 3 percent, despite crop damage from Cyclone Ivy.
  - Recovery bolstered by supply response to export price recovery, liberalization of trading in cocoa and copra, new markets for kava after EU bans in 2002, and higher tourist arrivals with expanded airline capacity.
- Fiscal developments:
  - Fiscal consolidation continued over the past two years, largely reflecting sharply reduced development expenditure, new controls on current spending, and improved tax collection.
  - Capital outlays fell to an average 1.6 percent of GDP in 2003–04 from an average 4.5 percent of GDP in 1999–2002.
  - Total public debt, including external debt, fell below 40 percent of GDP.
  - Public Financial and Economic Management Act (1998) limits: total stock of debt at 40 percent of GDP and annual debt service payments to 8 percent of government revenue.
- Monetary and external:
  - Under a basket-peg exchange rate regime, inflation remained subdued at just under 3 percent in 2004.
  - Broad money growth picked up in 2004 as deposits with the banking sector rose and commercial banks’ net foreign assets strengthened.
  - Commercial banks’ liquidity improved in 2004, allowing for lower lending rates and a slight narrowing of the interest rate spread.
  - The external current account deficit narrowed in 2004 due to stronger tourism and exports.
  - In real effective terms the vatu remained broadly stable over the past five years; official reserves recovered since 2002.
- Near-term outlook for 2005:
  - Real GDP growth expected to taper off closer to trend as global commodity prices for many exports ease, despite expected full-year tourism gains from increased airline capacity.
  - Inflation likely to edge higher with delayed impact of higher world oil prices.
  - Current account deficit should widen slightly as tourism-related imports offset increased tourism revenue.
  - Official foreign reserve levels expected to remain roughly unchanged in U.S. dollars.
  - Early reports of the revised 2005 budget indicate fiscal accounts should be near balance, with higher current spending (including increased parliamentarians’ salaries and higher education spending) accompanied by additional donor funding.

### Policy Discussions — Overview
- Mission focus: policy priorities needed to raise Vanuatu’s economic growth rate sustainably above population growth.
- Key recommended components:
  - Continue the responsible fiscal and monetary policies followed in recent years.
  - Reorient government spending toward more productive capital outlays through revenue and expenditure measures, while maintaining needed social spending.
  - Further strengthen the financial sector to improve availability and lower costs of domestic credit.
  - Implement structural reforms to improve the environment for private sector activity.

### Staff Appraisal (summary points reflected in text)
- Progress has been made since the last Article IV consultation on fiscal balances (strengthened tax revenue, excise tax on alcohol and tobacco, and expenditure controls) and on offshore bank supervision.
- Remaining priorities include: restructuring public enterprises, improving infrastructure, and deepening reforms to raise medium-term growth.
- Authorities found mission views useful and welcomed interim-year staff visits.

*IMF Staff Report: Executive Summary (cr05124)*

### 10.      Growth prospects over the medium term are not bright without a stronger

### 10. Growth prospects over the medium term are not bright without a stronger policy commitment for deeper reform

### Growth outlook and scenarios
- Baseline trajectory: without an active reform effort addressing weak infrastructure and other sources of high business costs, real GDP growth could fall below even the current moderate level of 2.5–3.0 percent.
- Reform scenario: with a stronger reform effort than that currently contemplated, growth could rise to allow an improvement in per capita GDP over the medium term.
- Sectoral potential: Vanuatu has growth potential, especially in agriculture and tourism.
- Infrastructure priorities to support growth: roads, electricity, water, and transportation both in the main and outer islands.
- Downside risks: large, including possible absence of political commitment to reform, continued exposure to natural disasters, and dependence on preservation of good relations with major donors to fund development spending through grants.

### Structural constraints and productivity
- Structural factors (weak infrastructure, high non-price costs, limited transport/communication, constrained market access for farmers) underlie poor total factor productivity and weak growth.
- Tourism concentration: largely centered in urban areas on the two larger islands due to weak power, transportation, and communication limiting outward expansion.
- Recommendations to address structural weaknesses:
  - Reorient fiscal spending toward well-targeted social and infrastructure needs.
  - Introduce further financial sector reform.
  - Create an investment-friendly environment (including a competition law and an electronic “one-stop shop” for investment approval).
  - Improve quality investment in human capital and infrastructure by redirecting government expenditure toward development spending and improving the environment for private investment.

### Fiscal policy: strategy and priorities
- Mission recommendation: increase capital spending financed by a combination of revenue and expenditure measures to allow small budget surpluses over the medium term, continuation of critical social spending, and gradual debt reduction.
- Tax administration and revenue measures:
  - VAT and customs administration improved with a new automated entry system; a new computerized system to be introduced during 2005 will link the two data bases for further improved monitoring.
  - Mission recommended reviewing public enterprise governance and cost structures due to poor dividend collection.
  - Mission advocated addressing tax concessions which amount to about 1.5 percent of GDP annually and tightening tax and duty exemption criteria (including plans to remove the full exemption status of statutory authorities and discretionary exemptions for non-strategic industries).
  - Neither the mission nor the authorities favored introducing new tax measures at this point; Vanuatu’s tax burden is in line with those of other similar-income countries.
- Expenditure composition and priorities:
  - Capital outlays have been cut back sharply following completion of donor-funded projects.
  - The wage bill remains large: 56 percent of recurrent expenditure or over 11 percent of GDP in 2004.
  - Development expenditure goal: increase over time to about 25 percent of total expenditure (government’s 2004–06 policy). Current reality: development expenditure is declining and about 7 percent of total expenditure in the 2004 budget outcome.
  - Suggested areas to realign expenditure:
    - Public entities have net debts to the government of about 1 percent of GDP, while another 0.5 percent of GDP is transferred to them annually through a direct budget grant.
    - Curtail discretionary tax and duty exemptions (about 1.5 percent of GDP).
    - Contain the public wage bill.
- Authorities’ planned measures and constraints:
  - Preference to rely on donor funds for capital spending and to prepare a well-considered public investment program before large capital spending to avoid using scarce revenue or incurring debt for non-productive projects; a donor-funded macroeconomist is expected to prepare an investment plan by mid-2005.
  - Measures to control the wage bill: extension of the Financial Visa System to the education sector and plans to cut the civil service by 20 percent over the medium term.
  - Mission recommended reversing a proposed 20 percent increase in salaries for parliamentarians to avoid upward pressure on general public sector wages; authorities considered reversal unlikely for political reasons.
  - Mission recommended reviewing the cost structure and productivity of the education sector and deferring further increases in education spending pending the outcome of this review; authorities noted an audit of the Education Ministry will take place in 2005 with EU assistance.
- Fiscal prudence and debt policy:
  - Vanuatu aims to limit the total stock of debt to no more than 40 percent of GDP and requires new external borrowing to deliver a financial rate of return to cover the costs of debt servicing.
  - The rate-of-return constraint does not bind domestic borrowing, though authorities are mindful of crowding out private activity.
  - Mission cautioned strongly against considering raising the limit on Reserve Bank of Vanuatu (RBV) deficit-financing; RBV deficit financing, included within the 40 percent of GDP debt cap, is limited to 20 percent of the previous three years’ government budget current revenue.
  - Continuing the trend toward fiscal consolidation would minimize financing concerns and allow further reductions in debt and the build-up of a contingency for unforeseen natural disasters.

### Monetary and exchange rate policy
- Monetary anchor: basket peg has successfully kept inflation low; authorities strongly committed to continue restrained monetary stance needed to maintain the peg.
- Policy coordination: monetary policy alone cannot support the peg; close coordination with fiscal authorities to limit government borrowing from the RBV is needed.
- Exchange rate regime: the adjustable peg remains broadly appropriate. The real effective exchange rate has been broadly stable since the late-1990s.
- External and reserves position:
  - Export and tourism receipts grew rapidly in 2003–04 in both value and volume terms; export market share roughly stable over the past ten years.
  - Official reserves rebuilt to 6 months of imports, one of the highest levels in the region.
- Steps toward greater flexibility and market development: RBV widened buy and sell margins slightly and started offering to buy foreign exchange within the full range of its published rates.
- RBV institutional strengthening encouraged:
  - Strengthen internal audit procedures and reserve management, including a risk management system.
  - Upgrade the payments system to allow for automated operations.
  - Increase transparency via the Governor’s semi-annual monetary policy statements.

### Financial sector reforms, strengths, and vulnerabilities
- Reforms and supervisory improvements:
  - Passage of the International Banking Act in 2002 and broadening of RBV supervisory responsibilities to the offshore banking sector and the Vanuatu National Provident Fund (VNPF).
  - Measures taken that allowed the OECD to remove Vanuatu from the list of uncooperative tax havens in 2003.
  - Mission urged early passage of AML/CFT amendments to the Financial Transactions Reporting Act (FTRA).
  - Mission advocated strengthening the Financial Intelligence Unit (FIU) and recruiting additional staff; FIU not yet fully operational.
  - Mission recommended strengthening the Vanuatu Financial Service Commission’s (VFSC) resources and passing necessary legislation (including the Insurance Act) and increasing staff resources.
  - An overall cost-benefit assessment of the offshore sector’s impact, as recommended by MFD, is underway and should be completed this spring.
- Financial soundness indicators and risks:
  - Increase in nonperforming loans: NPL ratio rose to 18.5 percent in September 2004 from 8.4 percent at end-2003, reflecting downgrading of a small number of loans at one private commercial bank; loans are fully provisioned.
  - Banking system: deposits with the banking system are more than double GDP (given the offshore banking sector); banks are liquid and capital adequacy is solid (Tier 1 capital nearly 98 percent of total capital).
  - The state-owned National Bank of Vanuatu is showing a small profit following restructuring in 2000 and contracting out management to experienced bankers.
- Mission advice on government involvement in credit:
  - Mission advised against proposals to expand the role of government financial institutions (reintroducing a publicly funded development bank or increasing VNPF lending). Instead, rely on market-related mechanisms such as the collateral loan project with AsDB assistance and the existing microfinance window in the commercial banking sector.
- Other structural reforms to improve private sector environment:
  - Review of public utilities’ tariff structure, benefits, and inputs.
  - Creation of a small regulatory unit with oversight over utility monopolies.
  - Introduce a competition law and speed up establishment of an electronic “one-stop shop” for investment approval.

*Source: IMF staff report excerpt (chapter on growth prospects, fiscal, monetary, and structural policies).*

### 23.      Progress in reforming public enterprises remains slow. Public enterprise finances

### 23.      Progress in reforming public enterprises remains slow. Public enterprise finances

### Public enterprise performance and reform status
- Progress in reforming public enterprises remains slow.
- Public enterprise finances are poor, overall, in part reflecting the absence of market-based management.
- The mission encouraged reevaluating the financial status of all public entities and considering the options of introducing competition or dismantling them.
- Example recommendation: the remaining licensing responsibilities of the liberalized Vanuatu Commodities Marketing Board (VCMB) could be incorporated within the Ministry of Finance.
- Minimum conditionality recommended: condition existing transfers and tax exemptions for public enterprises on receipt of full financial statements.
- Authorities agreed on the need to improve efficiency and transparency of public enterprises and plan to begin an intensive review of the sector beginning with the television and radio company.

### Trade policy and regional integration
- Vanuatu has an open trade regime and is expanding its regional trade links.
- Participation details:
  - Participation in the Pacific Island Countries Trade Agreement (PICTA) and the Pacific Agreement on Closer Economic Relations (PACER) was ratified by Parliament in 2004.
  - Vanuatu also participates in the Economic Partnership Agreement negotiations with the EU.
- Mission welcomed authorities’ plan for 2005 to sharply reduce the number of tariff rates to four (including a zero rate) while maintaining revenue neutrality.
- Recent liberalization of trade in copra and cocoa through the reorganization of the VCMB benefited export receipts.
- Mission recommended:
  - Removing existing ministerial discretion in banning imports to provide for a more open trade regime.
  - Removing the VCMB’s 2 percent fee on copra and cocoa exports, noting it appears to effectively amount to an export tax.
  - Safeguarding tourism assets by protecting the environment, including careful management of non-renewable fishing and forestry resources.

### Macroeconomic data and statistics
- Vanuatu’s macroeconomic data improved since the last consultation, although further upgrading would allow more comprehensive economic analysis and surveillance.
- Vanuatu began participating in the Fund’s General Data Dissemination System (GDDS) in 2003.
- Core economic data are updated in a regular and timely manner, which has enhanced surveillance.
- Remaining weaknesses despite donor technical assistance:
  - Two key statistical areas—national accounts and the balance of payments—remain weak.
  - Data are not available for public enterprise operations and the labor market.

### Staff appraisal — growth and fiscal outlook
- Vanuatu achieved positive real growth over the last two years, following two years of decline, but the outlook for future growth is not bright without a reinvigorated policy commitment to deeper reform.
- Growth rebound in 2003–04 was supported by a favorable external environment and macroeconomic policies.
- Fiscal consolidation continued, albeit in large part reflecting sharply reduced development expenditure, and total public debt remained at a manageable level.
- Careful monetary and exchange rate policies have succeeded in keeping inflation low.
- Medium-term potential sectors: agriculture and tourism.
- Continued fiscal and structural weaknesses limit prospects; the current improved economy is an appropriate environment for proceeding with needed reforms.

### Fiscal policy recommendations and public spending
- A reduction in current spending, particularly the wage bill, and increased tax compliance could finance higher outlays for targeted social and infrastructure expenditure.
- Staff welcomes authorities’ plans to introduce a cross-compliance monitoring system between the VAT and custom duties data bases.
- Expenditure-side steps recommended:
  - Reducing the wage bill.
  - Removing discretionary tax and duty exemptions.
  - Improving efficiency in education spending.
- With appropriate policies in place, development needs could be met within the ongoing plans for fiscal consolidation, allowing total public debt to be reduced gradually over the medium term.

### Monetary and exchange rate policy
- Monetary and exchange rate policies have been managed successfully in recent years.
- Recommendation: the current restrictions on RBV financing of the government sector should be firmly maintained.
- Staff finds the current level of the exchange rate and the existing adjustable peg exchange rate arrangement to be broadly appropriate for the Vanuatu economy.

### Banking supervision, AML/CFT, and financial sector regulation
- Good progress was made in strengthening banking supervision, but additional measures are needed.
- Positive reform: recent extension of the RBV’s supervisory responsibility to cover the offshore sector and the VNPF.
- Concern: lack of adequate staffing and resources in the FIU should be addressed without delay.
- Authorities are encouraged to:
  - Pass the Insurance Act promptly.
  - Adopt the proposed amendments to the FTRA.
  - Introduce further measures needed for strengthening the AML/CFT legislative framework.

### Government financial institutions and lending proposals
- Staff advises against plans for increased lending operations by government financial institutions.
- Specific concerns:
  - Proposals to raise the limits on VNPF lending.
  - Proposals to revive a publicly funded development bank.
- Rationale: both types of proposals previously resulted in financial crises in Vanuatu.
- Alternative suggested approach: improve access to credit in rural areas by expanding existing market-based microcredit operations in collaboration with commercial banks and donors.

### Structural reform priorities
- Further efforts are needed on structural reforms to improve the environment for private activity.
- Recommended steps:
  - Reduce Vanuatu’s high cost structure through introducing regulation over monopoly utilities.
  - Passage of a competition law.
  - Streamlining steps required for investment approval.
  - Upgrading infrastructure.
- Staff welcomes authorities’ intentions to address these issues and urges rapid progress on the planned review of the poorly performing public enterprise sector.

### Data quality and availability — implications for surveillance
- While progress was made in statistical reporting, there remains a need to ensure accurate and timely data are available for policymakers.
- Staff welcomes participation in the Fund’s GDDS and the improvement in the quality and availability of government budget and monetary aggregate data.
- However, staff’s analysis was affected by shortcomings in certain areas, given continued weaknesses in data quality and availability for the national accounts, the balance of payments, public enterprises and the labor market.

*IMF staff appraisal excerpt from the mission report.*

### 33.      It is proposed that the next Article IV consultation be conducted on the 24-

### _cr05124 - 33.      It is proposed that the next Article IV consultation be conducted on the 24-

### Overview and context
- The next Article IV consultation is proposed on the 24-month cycle. The authorities expressed interest in a staff visit in 2005.
- The Executive Board concluded the 2004 Article IV consultation with Vanuatu on February 25, 2005.
- Nominal GDP (2003): US$ 284 million
- Population (2003): 207,400
- GDP per capita (2003): US$ 1,361
- Quota: SDR 17.0 million

### Recent macroeconomic performance (2000–2004 / 2003–2004 highlights)
- Real GDP growth:
  - 2000: 2.7
  - 2001: -2.7
  - 2002: -4.9
  - 2003: 2.4
  - 2004 (est.): 3.0
- Consumer prices (period average):
  - 2000: 2.5
  - 2001: 3.7
  - 2002: 2.0
  - 2003: 3.0
  - 2004 (est.): 2.8
- Fiscal outcomes (in percent of GDP):
  - Total revenue and grants: 2000: 22.1; 2001: 21.6; 2002: 21.6; 2003: 21.1; 2004: 22.4; 2005 (proj.): 22.0
  - Total expenditure: 2000: 29.0; 2001: 25.3; 2002: 25.7; 2003: 22.8; 2004: 21.4; 2005 (proj.): 21.9
  - Overall balance: 2000: -7.0; 2001: -3.7; 2002: -4.1; 2003: -1.7; 2004: 1.0; 2005 (proj.): 0.1
- Money and credit (annual percentage change):
  - Broad money: 2000: 6.7; 2001: 5.6; 2002: -1.7; 2003: -0.8; 2004: 9.8; 2005 (proj.): 6.1
  - Net foreign assets: 2000: 11.7; 2001: 6.6; 2002: -6.0; 2003: -0.3; 2004: 11.7; 2005 (proj.): 6.1
  - Domestic credit: 2000: 0.8; 2001: 5.4; 2002: 12.0; 2003: 5.3; 2004: 7.9; 2005 (proj.): 6.7
- External sector (2004 and recent):
  - Current account balance (in millions of U.S. dollars): 2000: 4.8; 2001: 4.7; 2002: -14.1; 2003: -23.5; 2004 (est.): -11.3; 2005 (proj.): -14.7
  - Exports, f.o.b. (millions USD): 2000: 27.2; 2001: 19.9; 2002: 20.1; 2003: 26.6; 2004 (est.): 34.2; 2005 (proj.): 39.1
  - Imports, f.o.b. (millions USD): 2000: 77.5; 2001: 78.1; 2002: 74.6; 2003: 86.8; 2004 (est.): 92.0; 2005 (proj.): 105.0
  - Gross official reserves (end of period, millions USD): 2000: 39.1; 2001: 37.7; 2002: 36.4; 2003: 44.3; 2004: 62.1; 2005 (proj.): 63.0
  - Reserves in months of imports of goods: 2000: 5.1; 2001: 4.8; 2002: 4.9; 2003: 5.1; 2004: 6.3; 2005 (proj.): 5.7
- External debt and debt service:
  - External debt (in percent of GDP): 2000: 28.2; 2001: 29.7; 2002: 30.0; 2003: 28.8; 2004: 26.9; 2005 (proj.): 25.9
  - External debt service (percent of exports of goods and services): 2000: 0.9; 2001: 1.0; 2002: 1.5; 2003: 1.5; 2004: 1.7; 2005 (proj.): 1.5

### Fiscal structure and public finances (tables and details)
- Table highlights (central government, 2000–05; in millions of vatu and percent of GDP):
  - Total revenue and grants (millions of vatu): 2000: 7,423; 2001: 7,366; 2002: 7,082; 2003: 7,111; 2004: 7,484; 2005 (Est./Proj.): 7,925–8,180
  - Total expenditure and net lending (millions of vatu): 2000: 9,773; 2001: 8,613; 2002: 8,410; 2003: 7,683; 2004: 7,340; 2005 (Est./Proj.): 7,561–8,136
  - Wages and salaries (millions of vatu): 2000: 3,747; 2001: 3,734; 2002: 3,929; 2003: 4,070; 2004: 4,064; 2005 (Est./Proj.): 4,053–4,191
  - Capital expenditure (millions of vatu): 2000: 2,877; 2001: 1,598; 2002: 1,253; 2003: 576; 2004: 414; 2005 (Est./Proj.): 563–621
  - Overall balance (millions of vatu): 2000: -2,350; 2001: -1,247; 2002: -1,328; 2003: -572; 2004: 144; 2005 (Est./Proj.): 364–44
- Memoranda:
  - Public debt (percent of GDP): 2000: 35.4; 2001: 37.9; 2002: 40.5; 2003: 41.0; 2004: 38.6; 2005 (proj.): 38.0

### Monetary and financial sector indicators
- Monetary survey (selected, end-period and percent changes, 2002–05):
  - Net foreign assets (millions of vatu, end period): Mar-2002: 24,744; Jun-2002: 24,679; Sep-2002: 26,768; Dec-2002: 27,960; 2005 projections to Dec: 29,254
  - Total broad money (millions of vatu): 2002 end: 35,009; 2003 end: 34,729; 2004 end: 36,559; 2005 projections: 40,480
  - Credit to private sector (in percent of GDP) noted as rising to 42.9 and 46.0 in memoranda
- Financial sector vulnerabilities:
  - Nonperforming loans (share of total loans) through end-September 2004: 4.5; 3.8; 3.9; 8.4; 18.5 (series reported)
  - Share of foreign currency deposits in total deposits (percent): 2000: 77.8; 2001: 79.2; 2002: 75.3; 2003: 72.9; 2004: 70.7; 2005 (proj.): 68.7

### External sector developments and tourism
- Tourism importance:
  - Tourism receipts and arrivals have a close correlation with GDP growth; tourism accounts for a large part of service exports.
  - Travel receipts (millions USD): service receipts include travel: 2000 travel 56.3; 2001: 46.1; 2002: 44.2; 2003: 52.0; 2004: 57.0; 2005 (proj.): 69.0
- Trade and current account trends:
  - Trade balance (millions USD): 2000: -50.3; 2001: -58.1; 2002: -54.6; 2003: -60.2; 2004: -57.8; 2005 (proj.): -65.9
  - Services balance (millions USD): 2000: 59.1; 2001: 46.2; 2002: 36.0; 2003: 40.3; 2004: 46.0; 2005 (proj.): 57.7

### Medium-term outlook and scenario projections (2003–10 / multiple scenarios)
- Baseline (Medium-Term Non-Adjustment Scenario, Table 5 projections):
  - Real GDP (% change): 2005: 2.8; 2006: 2.6; 2007: 2.4; 2008: 2.4; 2009: 2.2; 2010: 2.2
  - Consumer prices (period average): 2005: 2.8; 2006: 3.7; 2007: 2.7; 2008: 2.5; 2009: 2.5; 2010: 2.5
  - Current account balance (millions USD): 2005: -14.7; 2006: -14.6; 2007: -16.4; 2008: -17.5; 2009: -18.1; 2010: -18.4
  - Gross official reserves (millions USD, end period): 2005: 63.0; 2006: 66.8; 2007: 68.4; 2008: 68.3; 2009: 66.9; 2010: 64.7
  - Overall fiscal balance (percent of GDP): projected -1.0 to -1.1 range in later years
  - Public debt (percent of GDP): projected 2003–10 range under non-adjustment ~40.5 → 35.7 → 35.3 → 35.4 etc.
- Medium-Term Reform Scenario (Table 7):
  - Real GDP growth improves modestly: 2005: 2.8; 2006: 2.3; 2007: 2.1; 2008: 2.0; 2009: 1.8; 2010: 1.7 (note: different variants reported across tables)
  - Under stronger reform effort, projections indicate higher growth, positive fiscal balances, reduction in government debt, and strengthened external current account and reserves relative to baseline.
- Medium-Term Risk Scenario (Table 8):
  - A high-risk scenario (including reversal of reforms and poor donor relations) would lead to gradual slowing of GDP growth, deterioration of fiscal and external balances, rising government debt levels, and declining official reserves.

### Structural and policy issues (staff and Executive Board messages)
- Key constraints identified:
  - Weak environment for private activity: poor infrastructure, high business costs, and political instability.
  - Narrow output and export base; vulnerability to external shocks and natural disasters.
  - Rapid population growth and high share of population in subsistence activities (about 80 percent in rural subsistence; about 40 percent below poverty line).
- Fiscal policy priorities recommended:
  - Sustain fiscal consolidation while avoiding excessive cuts in capital spending that undermine development.
  - Maintain revenue growth via strengthened tax compliance and reduction of tax and duty exemptions.
  - Reduce wage bill and improve efficiency in education spending.
  - Reallocate spending toward infrastructure and basic social services.
  - Continue cautious public debt policy; keep public debt below 40 percent of GDP.
- Monetary and exchange rate policy:
  - Endorsement of Reserve Bank’s cautious stance to keep inflation low and build international reserves.
  - Adjustable peg exchange rate arrangement considered broadly appropriate; requires sound macro policies and reforms to preserve competitiveness.
  - Limit government borrowing from the Reserve Bank through close fiscal-monetary cooperation.
- Financial sector and regulatory reforms:
  - Strengthened oversight: International Banking Act (2002), Reserve Bank extended supervisory responsibilities (including offshore banking and Vanuatu National Provident Fund).
  - Continue to monitor high levels of nonperforming loans and reinforce supervision.
  - Continue anti-money laundering / combating terrorism financing (AML/CFT) measures; enact additional legislation promptly; staff the Financial Intelligence Unit adequately; reinforce oversight of nonbank financial institutions.
  - Caution advised against reviving a publicly funded development bank.
- Structural reform and private sector development:
  - Promote private investment and diversification: streamline investment procedures, upgrade infrastructure, reduce business costs.
  - Restructure and, where appropriate, privatize public enterprises to improve efficiency and transparency.
  - Use the current favorable climate to build broad support for reinvigorated structural reforms to attract private investment and donor confidence.
- Statistical improvements:
  - Progress in national accounts, balance of payments, and participation in GDDS; continued efforts encouraged to upgrade national accounts and BOP statistics.

### External relations, technical assistance, and institutional matters
- IMF relations:
  - Membership since 9/28/81; Article VIII accepted.
  - Fund holdings of currency: SDR 14.51 (85.3 percent of quota); reserve position in Fund: 2.50 (14.7 percent of quota).
  - Last Article IV discussions held in Port Vila during August 2002; Executive Board concluded consultation on November 22, 2002; PIN issued March 11, 2005 summarizing Executive Board views.
- Technical assistance:
  - Substantial TA from PFTAC, IMF departments (MFD, STA, LEG), AusAID, ADB, and World Bank in areas including banking supervision, monetary policy, BOP, GFS, AML/CFT, and statistics.
- Relations with other institutions:
  - World Bank: five IDA credits totaling $18.9 million (through 2001) and analytic/advisory support; recent and planned engagement in infrastructure and private sector support.
  - Asian Development Bank: nine loans totaling US$51.25 million and 53 TA projects (US$14.96 million) through end-2004; indicative lending program up to US$6.0 million over next three years and TA around US$1.5 million.

### Key risks and conclusions
- Main downside risks:
  - Reversal or delay of reforms and deterioration in donor relations.
  - Political instability and governance changes that undermine reform continuity.
  - Exposure to natural disasters and adverse movements in commodity prices.
- Potential upside:
  - Stronger reform effort could raise private investment, donor grants, reserves, and economic growth; allow greater development spending and reduce government debt.
- Authorities’ stance (statement highlights):
  - Emphasis on prudent macroeconomic management, self-imposed public debt limit below 40 percent of GDP, appreciation for Fund and PFTAC technical assistance, and recognition of need for longer-term reform though constrained by political realities and geographic challenges.

*Italic: Source — IMF staff report content as provided in the supplied PDF chapter/section.*

---


_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2005/_cr05124.pdf_