## VANUATU 2011 ARTICLE IV REPORT — INTRODUCTION (content unit: _cr11120) ## Source details **Canonical URL:** [VANUATU 2011 ARTICLE IV REPORT — INTRODUCTION (content unit: _cr11120)](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr11120.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr11120.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr11120.pdf.json) --- ### Recent economic developments and outlook - Economy and shocks: - Vanuatu is a small open economy with a limited production base; tourism is an opportunity, manufacturing constrained by small population and distance to markets, and agricultural production limited to a few products. - Recent external shocks included sharp increases in global commodity prices and a temporary but significant drop in tourist arrivals. - Recovery signals: - All three engines of growth stalled in 2009 and early 2010: copra production fell, infrastructure project launches were delayed, and tourism declined after a temporary surge. - Later in 2010 tourism—particularly cruise ship arrivals—started to pick up; global copra prices surged, incentivizing more copra production. - Domestic demand indicators strengthened: loans to households increased; private investment in tourism and commercial real estate picked up (partially financed with cash); imports for domestic use rose; energy consumption rebounded. - Growth and inflation projections: - Staff baseline: combined GDP growth projected to rise moderately to 3¾ percent in 2011 and strengthen further in 2012. - Authorities projected GDP growth of 3 percent in 2011 and 4 percent in 2012. - Inflation: CPI inflation jumped to 3.4 percent year/year (y/y) in Q4 2010 from 2.3 percent the previous quarter. - Staff projection: inflation projected to reach 4 percent in 2011; authorities projected inflation to average 3.9 percent in 2011. - Balance of payments and reserves: - Goods and services trade deficit remained high at 7 percent of GDP in 2009–10, financed by strong FDI inflows and official grants (including MCA disbursements). - Reserves were stable around $150–$160 million (covering six months of imports) in 2010; SDR allocation of $26 million helped the rise. - Exchange rate assessment: - The vatu moved little in effective terms since 2009 and is assessed to be moderately overvalued relative to medium-term fundamentals. - Model-based assessments suggest overvaluation of around 8–13 percent, with large margins of error. ### Risks and scenarios - Downside risks highlighted: - Infrastructure projects planned for 2011 may be further delayed. - Natural disasters (floods in Australia, earthquake in New Zealand, cyclone hitting several Vanuatu islands) could have more lasting negative impacts on tourism and trade. - Reserve and external shock scenarios: - Current foreign reserves cover about six months of imports; RBV aims to maintain reserves above four months of import cover. - Four stress scenarios considered: a sharp decline in tourism; termination of donor financing; continued decline in banks’ net foreign assets; lower GDP growth with continued strong domestic demand. - Box 3 findings: - If tourism receipts decline by 40 percent, reserves would last more than two years. - Simultaneous tourism and foreign aid shock would leave reserves lasting a bit longer than a year. - Continuous decline in banks’ net foreign assets would deplete net foreign assets in about two years (including official reserves). - Only domestic-sector-led growth would shrink reserves gradually and deplete them in the medium term. ### Fiscal stance, vulnerabilities, and recommendations - 2010 fiscal outcome and 2011 target: - Fiscal deficit deteriorated to an estimated 2.7 percent of GDP in 2010 as revenue fell well short of budget projections. - Total revenue excluding grants shrunk 2.4 percent from 2009, versus a budgeted increase of 17 percent. - Authorities target reducing the deficit to 0.7 percent of GDP in 2011 by capping the wage bill broadly at the 2010 level and lowering capital expenditure; budget retains priority social projects including universal primary education with foreign partner support. - Structural fiscal issues: - Public debt is low at 20 percent of GDP. - Total revenue at 18 percent of GDP (excluding grants) is low compared with other PICs. - The public sector wage bill accounts for more than 40 percent of total public expenditure. - Transfers to SOEs and quasi-government entities were 8 percent of current expenditure in 2010. - Revenue mobilization options (staff suggestions): - Introducing income tax as a medium-term option. - Raising current tax rates, including scope to raise the VAT rate from 12.5 percent to 15 percent; raising excise taxes. - Improving tax administration and compliance (strengthen collection from large taxpayers and businesses, improve customs controls, ensure correct declaration of land purchase prices). - Expenditure-side recommendations: - Contain the wage bill; reorient spending away from government employment toward areas supporting inclusive long-term growth. - Improve SOE efficiency and accountability; restructure, sell, or close continuously loss-making SOEs. - Facilitate smoother donor financing to reduce lumpiness and improve predictability. ### Monetary policy, financial stability, and prudential guidance - Monetary operations and liquidity: - RBV eased policy in late 2008: rediscount rate lowered by 25 bps to 6 percent; SRD reduced by 300 bps to 5 percent. - In August 2010 RBV increased SRD requirement by 100 bps to 6 percent, withdrawing liquidity amounting to 0.5 billion vatu. - RBV net-injected 1 billion vatu in the same quarter compared with the same period the previous year. - Banks expanded credit to the private sector at a pace of 12 percent (y/y) in the last quarter of 2010; lending to households picked up significantly and foreign currency–denominated loans surged. - Staff monetary advice: - With emerging inflation pressures and ample banking liquidity leading to sharp increases in household lending, staff advise beginning to tighten monetary conditions. - To contain inflation pressures and restrain credit growth it is appropriate to tighten monetary policy; this year’s inflation expected at the top end of RBV’s target range of 0–4 percent. - Consideration should be given to further raising SRD requirements. - Financial sector vulnerabilities and supervisory recommendations: - Concern over pickup in foreign currency–denominated lending and reduction in banks' net foreign assets; systemic currency-mismatch risk if trends continue. - Bank indicators (reported): - Capital adequacy ratio (CAR): 30 percent in September 2010. - Ratio of liquid assets to total assets: 16 percent. - Ratio of liquid assets to demand deposits: 73 percent. - Return on equity (ROE): 5 percent. - Aggregate NPL ratio: 5.9 percent (through end-September 2010). - Recommendations: - Monitor foreign currency lending closely; impose prudential measures if trends continue. - Strengthen regulatory and legal framework, finalize prudential requirements, impose liquidity requirements on foreign exchange liabilities, clarify lending-limit exemptions. - Extend supervisory coverage to the whole financial system, including micro lenders. - Complete policy guidelines to banks on prudential requirements as a priority; intrusive supervision with stepped-up on- and off-site monitoring and additional training. - Establish a bank resolution mechanism where costs are borne first by owners and creditors and not public funds. - Authorities’ actions: - RBV raised capital-asset ratio from 8 percent to 12 percent; all banks met the new requirement. - Considering prudential regulations on the size of foreign exchange loans relative to foreign assets. - Offshore banks declined from more than 100 to low single digits in three years; RBV has assumed insurance supervision and strengthened cooperation with Financial Intelligence Unit. - Staffing shortages remain a constraint; authorities welcome Fund and international assistance in capacity building. ### External sector, exchange rate, and reserves metrics - Trade and current account: - Goods trade deficit is large: 29 percent of GDP (as stated in the unit). - Services surplus and grants compensate for the goods trade deficit. - Tourism receipts projected to pick up; tourism is expected to be "an engine of growth in Vanuatu." - Exchange rate guidance: - "Inflation has been moderate." - Staff recommendation: "the vatu should be allowed to depreciate in effective terms—within the current exchange rate framework—with appropriate adjustments to monetary policy to take into account additional increases in import prices." - Warning: resisting persistent depreciation pressures would exacerbate pressures and increase the cost of adjustment. - Reserve adequacy and projections: - Gross official reserves (end of period, millions of U.S. dollars): 2009: 148.6; 2010: 161.4; 2011: 157.2. - Reserve coverage in months of corresponding imports (c.i.f.): 2009: 6.0; 2010: 6.6; 2011: 5.9. - Prudential metrics (Box 3): reserves relative to imports five–six months in recent years; reserves around 25 percent of broad money; reserves around 20 percent of GDP. - Staff view: current reserves adequate but expected to gradually decline to four months of imports unless reserves are built up commensurate with growth of external flows. ### Debt sustainability and medium-term baseline projections - Debt distress assessment: - Vanuatu is at a low risk of debt distress under the LIC DSA; public debt level is low and should remain manageable provided fiscal deficit is reduced substantially from 2010 levels. - Key baseline projections (selected): - Real GDP (annual percentage change): 2011: 3.8; 2012–2016: 4.2, 4.0, 4.0, 4.0, 4.0. - Consumer prices (period average): 2011: 4.0; 2012–2016: 3.5, 3.2, 3.0, 3.0, 3.0. - Current account (percent of GDP): 2011: -5.7; 2012–2016: -6.0; -6.0; -6.0; -6.1; -6.0. - Gross official reserves (end of period, millions of U.S. dollars): 2011: 157.2; 2012: 149.5; 2013: 149.4; 2014: 150.2; 2015: 156.0; 2016: 164.4. - Public debt (percent of GDP, medium- and long-term public debt only): 2011: 20.4; 2012–2016: 19.3; 18.5; 17.7; 17.2; 16.7. - Current account (in millions of U.S. dollars): 2011: -43.7; 2012: -49.3; 2013: -52.9; 2014: -57.1; 2015: -61.7; 2016: -65.5. - DSA key assumptions (Box 1): - Real GDP growth projected to average around 4 percent in the long term. - GDP deflator (U.S. dollar terms) projected around 5¾ percent over 2010–15 and 3 percent over the long term. - Primary deficit projected to decline to ¼ percent of GDP by 2012 and close to zero over the long term. - Present value of contingent liabilities assumed to be 10 percent of GDP for the whole projection period. - Foreign aid projected to remain stable in Australian dollars over 2011–16 and gradually drop to below 1 percent of GDP over the long term. - Stress-test findings: - A consecutive 4½ percent reduction in export values during 2011–12 would raise the present value of PPG external debt to 61 percent of exports by next year, though declining over the long term. - Contingent liabilities or a permanent 1 percentage point slowdown in GDP growth would materially increase vulnerabilities. ### Executive Board conclusions and policy guidance - Board summary: - Directors commended authorities for policies that led to a strong rebound. - Key challenge: support recovery while guarding against inflation risks and advancing fiscal consolidation. - Recommendation for 2012: a broadly balanced budget to restore room for policy maneuver. - Specific Director recommendations: - Limit total expenditure to budgeted level, particularly by containing the wage bill. - Allow automatic stabilizers on the revenue side if needed. - Mobilize revenue, improve tax administration, and reduce contingent liabilities at public enterprises. - Unwind accommodative monetary stance early given rising inflation risks. - Maintain vigilance on rapid household credit growth and foreign currency loans; adopt additional prudential measures if necessary. - Safeguard external buffers by maintaining adequate foreign exchange reserves. - Strengthen regulatory and supervisory framework covering the whole financial system, including micro lenders and offshore banks. ### Institutional and statistical notes - Article IV timing recommendation: - It is recommended that the next Article IV consultation take place on the 24-month cycle. - Data and statistical adequacy: - Data provision has shortcomings but is broadly adequate for surveillance; national accounts, government finance, and external sector statistics need further improvement. - CPI weights based on 1998 household surveys covering only Port Vila and Luganville. - Expenditure-based GDP estimates not yet available; constant price GDP uses 1983 base year with rebasing to 2006 underway. - Vanuatu participant in GDDS since April 2004. - Fund relations (as of February 28, 2011): - Membership joined September 28, 1981; Article VIII. - Quota: 17.00 SDR Million; Percent Quota: 100.00. *Source: IMF staff report “VANUATU 2011 ARTICLE IV REPORT — INTRODUCTION” (content unit: _cr11120).* ### INTRODUCTION ____________________________________________________________________ 3 ### INTRODUCTION ### A Gradual Rebound — Recent Economic Developments - Vanuatu is a small open economy with a limited production base; tourism is an opportunity, manufacturing constrained by small population and distance to markets, and agricultural production limited to a few products. - Recent external shocks (sharp increases in global commodity prices and a temporary but significant drop in tourist arrivals) adversely affected external accounts and domestic markets; external shocks will continue to have a significant impact. - Economic activity showed signs of a moderate rebound: - All three engines of growth had stalled in 2009 and early 2010: copra production fell, infrastructure project launches were delayed, and tourism declined after a temporary surge. - Later in 2010: tourism—particularly cruise ship arrivals—started to pick up; global copra prices surged, incentivizing more copra production. - Domestic demand indicators strengthened: loans to households increased; private investment in tourism and commercial real estate picked up (partially financed with cash); imports for domestic use rose; energy consumption rebounded. - Inflation developments: - CPI inflation jumped to 3.4 percent year/year (y/y) in Q4 2010 from 2.3 percent the previous quarter, reversing a two-year downward trend. - Food price increases were a main contributor, but most other consumption basket components also increased. - The rise in inflation was partially capped by a reduction in healthcare fees and the introduction of free primary education in 2010. - Balance of payments and reserves: - Goods and services trade deficit remained high at 7 percent of GDP in 2009–10, fully financed by strong FDI inflows and official grants, including disbursements from the Millennium Challenge Account (MCA). - Reserves were stable around $150–$160 million (covering six months of imports) in 2010 after rising throughout 2009; SDR allocation of $26 million helped the rise. - Financial and monetary conditions: - RBV maintained an easy monetary stance established at the onset of the global financial crisis: in late 2008 RBV lowered the rediscount rate by 25 bps to 6 percent and reduced the Statutory Reserve Deposit (SRD) requirement by 300 bps to 5 percent. - In August 2010 RBV increased the SRD requirement by 100 bps to 6 percent, withdrawing liquidity amounting to 0.5 billion vatu. - During the same quarter RBV reduced open market operations and injected in net terms 1 billion vatu compared to the same period the previous year. - These operations compensated for declining government deposits and helped banks expand credit to the private sector at a pace of 12 percent (y/y) in the last quarter of 2010. - Lending to households picked up significantly and foreign currency–denominated loans surged; banks financed partly by borrowing from abroad, increasing foreign liabilities while foreign assets shrunk, halving banks’ net foreign assets in 2010. - Exchange rate assessment: - The vatu moved little in effective terms since 2009 and is assessed to be moderately overvalued relative to medium-term fundamentals (Box 1). - Model-based assessments suggest overvaluation of around 8–13 percent, with large margins of error. - Other indicators are mixed but on balance point to overvaluation; net foreign assets of the banking system have been declining since early 2010 and the goods trade deficit remains much larger than the surplus in services. ### A Gradual Rebound — Outlook and Risks - Staff’s baseline projection: - Copra production expected to remain strong as global copra prices are expected to remain elevated. - Private investment projected to continue to grow, supported by loans to households and government efforts to boost tourism. - A number of infrastructure projects expected to commence later in 2011, encouraging growth in manufacturing and construction. - Spike in cruise ship arrivals bodes well for tourism despite decline in air travel in early 2011 (low season). - Combined GDP growth projected to rise moderately to 3¾ percent in 2011 and strengthen further in 2012 given momentum and plans for additional infrastructure projects. - Inflation projected to reach 4 percent in 2011 due to higher food and oil prices and strengthening domestic demand; risks on the upside from rising global commodity prices. - Downside risks identified by staff: - Infrastructure projects planned to commence in 2011 may be further delayed. - Recent natural disasters (floods in Australia, earthquake in New Zealand, cyclone hitting several Vanuatu islands) could have more lasting negative impacts on tourism and trade than currently projected. - Authorities’ views: - Authorities broadly agreed with staff’s growth assessment; they conservatively projected GDP growth of 3 percent in 2011 based on more pessimistic tourism expectations and potential additional cyclone impacts. - Authorities highlighted measures to boost growth: a marketing campaign to promote tourism regionally; measures to cut red tape to facilitate quicker investment decisions; measures to encourage agricultural production in a variety of products. - Authorities expected growth to strengthen to 4 percent in 2012 as infrastructure projects take hold. - Authorities agreed with inflation outlook and projected inflation to average 3.9 percent in 2011; they expected competition in communication services and renewal of utility contracts to ease some price pressures but saw overall risks on the upside from commodity prices and cyclone-induced crop damage. ### Managing the Rebound — Fiscal and Monetary Context - Fiscal developments: - The 2009–10 slowdown worsened the fiscal position; the global commodity price surge is exacerbating inflationary pressures. - Key near-term policy challenge: support economic recovery while moving toward fiscal consolidation and guarding against high inflation. - In 2010 the fiscal deficit deteriorated to an estimated 2.7 percent of GDP as revenue fell well short of budget projections. - Total revenue excluding grants shrunk 2.4 percent from 2009, compared with a budgeted increase of 17 percent, reflecting weaknesses in external trade and domestic activity revenue. - Authorities implemented expenditure cuts and restrained total expenditure to 7.3 percent below the budget. - For 2011 authorities target a reduction in the deficit to 0.7 percent of GDP by capping the wage bill broadly at the 2010 level and lowering capital expenditure (albeit to historically high levels); budget retains priority social projects including universal primary education with foreign partner support. - Monetary stance and recommendation: - RBV’s easing during the global crisis was appropriate; however, with emerging inflation pressures and ample banking liquidity leading to sharp increases in household lending, staff advise beginning to tighten monetary conditions. - This year’s inflation expected at the top end of RBV’s target range of 0–4 percent. - To contain inflation pressures and restrain credit growth it is appropriate to tighten monetary policy. ### Managing the Rebound — Policy Guidance and Risks to Fiscal Consolidation - Staff assessment of 2010 stance: - The fiscal stance in 2010 was appropriate—allowing some fiscal loosening while restraining overall expenditure growth. - Short-term policy priorities: - For 2011 it is important to stick to the overall budget expenditure ceiling to reaffirm commitment to fiscal consolidation and maintain confidence in public finances. - Particular attention should be paid to containing the wage bill. - On revenue, downside risks exist if growth is weaker than projected; total revenue should be allowed to function as an automatic stabilizer if shortfalls occur. - Any shortfall should be made up next year to broadly balance the budget and create room for fiscal policy to respond to future shocks. - Maintaining fiscal deficits at around the 2010 level in 2011 and beyond would lead public debt to eventually exceed prudent levels (Appendix 1). ### Enhancing Resilience to Shocks (Overview) - The report emphasizes the need to move beyond near-term management: - Investing in people, strengthening institutions, and bolstering macroeconomic tools and buffers to attain strong sustainable growth. - Safeguarding fiscal soundness, ensuring adequate foreign reserves, and strengthening financial stability are highlighted as areas for enhancing resilience (detailed treatment appears in subsequent sections). *Source: IMF staff report “VANUATU 2011 ARTICLE IV REPORT — INTRODUCTION”* ### 1.2 percent in December 2010. ### _cr11120 - 1.2 percent in December 2010. ### External balances, trade, and services - Goods trade deficit is large: "29 percent of GDP". - Services surplus and grants currently compensate for the goods trade deficit. - Recommendation: reduce the goods trade deficit and increase the services surplus to reduce dependency on grants in the medium run. - Tourism: - "Tourism receipts are projected to pick up." - Short-run downside risks: floods in Australia and the earthquake in New Zealand. - Long-run outlook: tourism is expected to be "an engine of growth in Vanuatu." ### Inflation and exchange rate - "Inflation has been moderate." - "There are no signs of sustained downward pressures on goods prices that would bring about a depreciation of the vatu in effective terms." - External pressures: - Global commodity price surge expected to be long lasting and to create a "persistent negative terms of trade shock on Vanuatu." - Recommendation: "the vatu should be allowed to depreciate in effective terms—within the current exchange rate framework—with appropriate adjustments to monetary policy to take into account additional increases in import prices." - Warning: "Resisting persistent depreciation pressures would exacerbate the pressures and increase the cost of adjustment." ### Financial sector risks and monetary policy - Bank lending: - Impact of policy rate changes on bank lending rates "has traditionally been weak." - Consideration should be given to "further raising SRD requirements." - "Efforts should be stepped up to ensure that banks lending to households is based on sound credit risk assessments and, if necessary, prudential policies should be tightened." - Foreign currency lending and net foreign assets: - Pickup in foreign currency–denominated lending and reduction in banks' net foreign assets are "of concern." - Currently foreign-currency loans are extended to entities generating foreign currency revenues, but "such lending cannot be naturally hedged indefinitely" and will create systemic currency-mismatch risk. - Recommendation: "Foreign currency lending should be monitored carefully and if the current trends continue, prudential measures on foreign currency lending should be put in place." - Monetary stance and liquidity: - Authorities plan to "gradually tighten monetary conditions." - They are "closely monitoring the liquidity situation in the banking system" and will take into account government domestic borrowing plans to "avoid a temporary liquidity squeeze." - Authorities are "considering prudential measures ... to cool foreign currency lending." ### Fiscal position and vulnerabilities - Fiscal fundamentals: - "Public debt is low at 20 percent of GDP." - Government deficits have been small for a number of years. - Authorities reconfirmed commitment to fiscal sustainability by "capping expenditure to below the budgeted levels" and targeting a "much smaller deficit this year." - Structural fiscal issues to be addressed: - Low revenue: "Total revenue at 18 percent of GDP (excluding grants) is low compared with other Pacific Island Countries (PICs)." Regional tariff reductions expected to further reduce revenue. - High wage bill: "The public sector wage bill accounts for more than 40 percent of total public expenditure." - Inefficient SOEs and quasi-government entities: transfers were "8 percent of current expenditure" in 2010; possible accumulating contingent liabilities; scarce public information. - Staff recommendations to strengthen revenue (considering efficiency, equity, feasibility, macro-stability): - "Introducing income tax" — potential to raise significant revenue and increase equity; could be offset by improving the business climate. - "Raising the current tax rates" — scope to raise the VAT rate "from 12.5 percent to 15 percent"; caution on regressivity; excise taxes could be raised further. - "Improving tax administration and compliance" — strengthen collection from large taxpayers and businesses, improve customs controls, ensure correct declaration of land purchase prices. - Donor financing: - Recommendation: authorities and donors "should facilitate smoother donor financing" to reduce lumpiness and fluctuations in economic activity and improve predictability of donor financing and project implementation. - Wage bill and public spending reallocations: - Recommendation: reduce the wage bill and reorient spending "away from government employment toward areas that support inclusive long-term growth." - Specific measures: improve efficiency in education and link salaries to qualifications; consider outsourcing management in healthcare; review government service provision; place some directors general under contract to increase accountability. ### State-owned enterprises (SOEs) and quasi‑government entities - SOE performance: - Most SOEs "drain budgetary resources and produce very low returns." - Transfers to these entities were "8 percent of current expenditure" in 2010. - Contingent liabilities may be accumulating; information is scarce. - Staff recommendations: - Strengthen the monitoring framework for SOEs. - SOEs that make continuous losses should be "restructured, sold, or closed." - Conduct "a comprehensive review of the sector, possibly with external support." - SOE reform aims to "reduce the need for budgetary support, increase dividends, and lead to improvements in the business climate." - Authorities’ approach: - Authorities aim to "enhance regulatory capacity and let the private sector own and operate businesses" while recognizing capacity and time constraints. - They will estimate contingent liabilities within SOEs and quasi-government bodies with a view "to reduce and eventually eliminate them in the medium run." - Exception: government may support loss-making enterprises that provide "irreplaceable services to the tourism industry and generate positive externalities." ### Revenue mobilization diagnostics and policy design - Current tax structure: - "VAT rate is 12.5 percent." - VAT, excises, and import duties account for "about 80 percent of tax revenue." - No corporate or personal income tax currently. - Import duties account for "about 6 percent of GDP." - Box 2 key elements and assessment criteria: - Efficiency: single-rate VAT with broad base preferred; minimizing exemptions. - Equity: progressive income tax promotes vertical equity; VAT exemptions or differentiated rates can affect equity and efficiency. - Feasibility: align tax design with administration capacity; focus enforcement on large taxpayers. - Macroeconomic stability: broader, more stable tax base strengthens automatic stabilizers. - Authorities’ views on revenue measures: - Authorities plan intensified customs inspections, increased penalties for VAT avoidance, enforcement of truthful land transaction declarations, and tightening conditions for voluntary VAT inclusion by SMEs. - Authorities wary that an income tax "would not raise much revenue" and may be inequitable due to avoidance and passthrough to consumers; nevertheless, they consider income tax "an option to be considered in the medium term." ### Illustrative medium-term alternative scenario (2006–16) — selected projected series (In percentage of GDP, unless otherwise stated) - Real GDP (annual percentage change): - "7.46.56.23.52.23.84.24.34.34.34.3" - Current account balance: - "-6.5-7.0-11.1-8.2-5.9-5.7-6.0-5.9-6.0-6.0-6.0" - Revenue and grants: - "20.722.327.726.824.824.024.224.124.224.224.2" - Revenue: - "18.920.421.119.518.018.018.719.219.720.120.4" - Grants: - "1.81.86.67.36.86.05.55.04.54.13.8" - Total expenditure and net lending: - "20.222.027.927.627.524.924.424.324.324.324.3" - Current expenditure: - "17.419.418.618.619.718.818.318.318.318.318.3" - Capital expenditure: - "2.12.67.69.07.26.06.06.06.06.06.0" - Primary balance: - "1.20.90.4-0.2-2.2-0.30.40.40.40.40.5" - Overall balance: - "0.50.3-0.2-0.7-2.7-0.9-0.2-0.1-0.1-0.1-0.1" *Source: _cr11120 - 1.2 percent in December 2010.* ### 33. Currently foreign reserves cover about ### _cr11120 - 33. Currently foreign reserves cover about ### Foreign reserves: current status and benchmarks - Currently foreign reserves cover about six months of Vanuatu’s imports. - The Reserve Bank of Vanuatu (RBV) aims to maintain foreign reserves above a minimum threshold of four months of import cover. - Based on standard prudential norms, current reserve coverage is: - six months of imports; and - 20 percent of GDP. - Reserves are described as "comfortable" and broadly in line with peers in the region (Box 3). - Reserve coverage is expected to gradually decline to four months of imports as the current account deficit remains large and the economy grows. ### Staff views on reserve buffers and adequacy - Foreign liquidity buffers: - Can help smooth consumption in response to shocks. - Can create room for policy adjustment in case of persistent shocks. - Assessment of adequacy: - Current reserves considered adequate. - Current coverage of six months of imports and 20 percent of GDP is comfortable. - Reserve trajectory and recommendation: - Reserves are expected to decline to four months of imports over time. - To maintain the current buffer, reserves need to gradually increase in the medium term at a rate commensurate with the growth of external flows. ### Stress scenarios and sensitivity analysis - Four low-probability but high-impact scenarios considered: - A sharp decline in tourism. - Termination of donor financing. - Continued decline in banks’ net foreign assets. - Lower GDP growth owing to weak exports but continued strong domestic demand. - Findings from scenarios: - Current level of reserves would provide sufficient time for authorities to implement remedial measures. - A significant decline in reserves would sharply increase the vulnerability of the economy to shocks. - Reserves need to be built up to maintain the buffer against such scenarios. Box 3 — Reserve Adequacy (summary of prudential metrics and scenarios) - Prudential metrics: - Reserves relative to imports: five–six months of imports in recent years. - Reserves relative to broad money: around 25 percent of broad money. - Reserves relative to GDP: around 20 percent of GDP in recent years. - Scenario-specific outcomes: - Large tourism shock: if tourism receipts decline by 40 percent, reserves would last more than two years. - Simultaneous tourism and foreign aid shock: concurrent sharp decline in tourism and drying up of foreign aid would leave reserves lasting a bit longer than a year. - Continuous decline in banks’ net foreign assets: net foreign assets of the entire banking system—including official reserves—would be depleted in about two years. - Only domestic-sector-led growth: reserves would shrink gradually and be depleted in the medium term. ### Authorities’ views on reserves and vulnerabilities - Authorities agree with staff assessment: reserves adequate provided they remain above four months of imports. - Concerns expressed: - Dependency of reserves on foreign aid flows. - Economy cannot generate sufficient foreign funds to be self-sustained. - A shift in growth pattern away from exports to domestic demand could increase imports to an unmanageable size and deplete reserves in the medium term. ### Financial stability: banking sector soundness and risks - Banking sector indicators (as reported): - Capital adequacy ratio (CAR) was 30 percent in September 2010. - Ratio of liquid assets to total assets: 16 percent. - Ratio of liquid assets to demand deposits: 73 percent. - Return on equity (ROE) was 5 percent. - Aggregate non-performing loan (NPL) ratio: 5.9 percent. - Role of Vanuatu National Provident Fund (VNPF): - 8 percent of wages and salaries are accumulated in the fund. - VNPF size is about 18 percent of GDP. - VNPF deposits most funds in local banks and significantly impacts banks’ liquidity. ### Staff views on banking supervision and vulnerabilities - Vigilance and risks: - Authorities should remain vigilant against deterioration of banks’ asset quality. - Rapid credit growth of around 30 percent (y/y) in 2008–09 could translate into higher NPL ratios as growth moderates. - Sharp increase in lending to households and foreign currency lending should be carefully watched. - Regulatory and legal framework recommendations: - Continue strengthening regulatory and legal framework. - Incorporate measures such as imposing liquidity requirements on foreign exchange liabilities and clarifying criteria for loans exempt from lending limits. - Finalize policy guidelines to banks on prudential requirements as a priority. - Improve internal capacity to identify and assess banking risks. - Extend supervisory and regulatory coverage to the whole financial system, including micro lenders. - Further implement recommendations of the 2006 Asia Pacific Group mutual evaluation report to enhance AML/CFT effective implementation. - Supervisory approach: - Supervision should be intrusive with stepped-up on- and off-site monitoring supported by additional training. - RBV should fully use supervisory powers over entities such as the Vanuatu Agriculture Development Bank. - Close cooperation between RBV and VNPF in managing liquidity is mutually beneficial and necessary. - Offshore banks: - Offshore banks pose potential risks due to opaque governing structures; liquidity problems or bankruptcies could cause reputational impact. - RBV should exercise full oversight over offshore banks. - Consideration should be given to further reducing the number of offshore banks with a view to eliminating them in the medium term. - Bank resolution mechanism: - Vanuatu should establish a bank resolution mechanism to facilitate orderly resolution of weak banks. - Public funds should not be used; costs should be borne first by owners and creditors, with any shortfall covered by the industry. ### Authorities’ actions and views on financial sector resilience - Authorities’ assessments: - Broad agreement with staff on banking system assessment. - Expectation that overall NPLs would decline, though NPLs in areas such as personal loans could increase moderately. - Banks in process of raising provisioning for NPLs. - Ample liquidity in the system, but unevenly distributed; authorities monitoring developments and ready to provide liquidity against appropriate collateral. - Measures taken: - RBV raised capital-asset ratio from 8 percent to 12 percent this year; all banks comfortably met the new requirement. - Considering prudential regulations on the size of foreign exchange loans relative to foreign assets. - Regular on-site inspections focusing on credit risk management, operational risk management, and AML/CFT compliance. - Offshore banks declined from more than 100 to low single digits in three years; role in local economy small. - Efforts to strengthen RBV regulatory and supervisory capacity: - Strengthened cooperation with the Financial Intelligence Unit. - Insurance supervision moved from the Financial Services Commission to the RBV in late 2009. - Supervisory department restructured to accommodate insurance supervision unit. - Staffing shortages remain a constraint; authorities welcome Fund and international assistance in capacity building. ### Staff appraisal: macroeconomic outlook and policy advice - Economic outlook: - Economic activity is gradually rebounding; inflation is picking up. - Strengthening external and domestic demand expected to raise GDP growth rate to 3¾ percent this year and higher in 2012. - Two key downside risks: slower-than-expected growth in tourism and delays in large investment projects. - Surge in global commodity prices likely to create persistent pressures on inflation and on the external accounts. - Fiscal policy recommendations: - Fiscal policy was appropriately balanced in 2010 between stimulus and fiscal sustainability. - 2011 budget target for expenditure is appropriate; authorities should make every effort to meet it. - If revenue falls short owing to slower growth, toleration of the shortfall is suggested. - Next year, as investments take effect and growth solidifies, aim for a broadly balanced budget to restore fiscal space. - Continue strengthening fiscal buffers, mobilize revenue, reduce rigidity on expenditure side. - Consider other means to mobilize revenue, including introducing income tax in the medium term. - Reduce the large wage bill as a priority and improve SOE efficiency and accountability. - Monetary policy recommendations: - Begin tightening monetary policy in response to rising inflationary pressures. - Gradually unwind the accommodative stance and drain excess liquidity in the banking system. - RBV should pay particular attention to systemic risks from strong household lending growth and foreign exchange-denominated lending and impose additional prudential measures if needed. - Exchange rate policy: - Authorities should not resist depreciation pressures on the vatu. - Decline in banks’ net foreign assets suggests more demand for foreign currency than supply. - If pressure on external accounts persists, allow the vatu to depreciate and adjust monetary policy for rising imported goods prices. - Delays likely to worsen the cost of adjustment. - External buffers: - Authorities should remain vigilant against pressures that would significantly lower foreign reserves and continue to gradually build up reserves to maintain good coverage of external flows. - Financial stability: - Banking sector is stable. - To maintain financial stability, bank supervision should be intrusive. - RBV should exercise to the fullest extent its supervisory powers over the whole financial system and step up on- and off-site supervision. - Continue strengthening regulatory framework and supervisory staff skills with international assistance. *Source: 2011 ARTICLE IV REPORT VANUATU — selected excerpts provided in the content unit.* ### 56. It is recommended that the next Article ### _cr11120 - 56. It is recommended that the next Article IV consultation take place on the 24-month cycle. ### Recommendation on Article IV timing - It is recommended that the next Article IV consultation take place on the 24-month cycle. ### Key macroeconomic indicators (Selected Economic and Financial Indicators, 2006–11) - Real GDP (annual percentage change): 2006: 7.4; 2007: 6.5; 2008: 6.2; 2009: 3.5; 2010: 2.2; 2011 (Est.): 3.8. - Nominal GDP (annual percentage change): 2006: 12.7; 2007: 11.6; 2008: 11.2; 2009: 4.8; 2010: 5.1; 2011 (Est.): 7.9. - Consumer prices (period average): 2006: 2.0; 2007: 3.9; 2008: 4.8; 2009: 4.3; 2010: 2.8; 2011 (Est.): 4.0. - Consumer prices (end period): 2006: 1.9; 2007: 4.1; 2008: 5.8; 2009: 2.3; 2010: 3.4; 2011 (Est.): 4.0. ### Government finance (in percent of GDP, 2006–11) - Total revenue and grants: 2006: 20.7; 2007: 22.3; 2008: 27.7; 2009: 26.8; 2010: 25.0; 2011 (Est.): 24.2. - Revenue: 2006: 18.9; 2007: 20.4; 2008: 21.1; 2009: 19.5; 2010: 18.1; 2011: 18.1. - Tax: 2006: 16.8; 2007: 18.2; 2008: 19.1; 2009: 17.2; 2010: 16.5; 2011: 16.5. - Non-tax: 2006: 2.1; 2007: 2.2; 2008: 2.0; 2009: 2.3; 2010: 1.7; 2011: 1.7. - Grants: 2006: 1.8; 2007: 1.8; 2008: 6.6; 2009: 7.3; 2010: 6.8; 2011: 6.0. - Total expenditure and net lending: 2006: 20.2; 2007: 22.0; 2008: 27.9; 2009: 27.6; 2010: 27.7; 2011: 25.1. - Current expenditure: 2006: 17.4; 2007: 19.4; 2008: 18.6; 2009: 18.6; 2010: 19.8; 2011: 19.0. - Wages and salaries: 2006: 10.7; 2007: 11.8; 2008: 11.7; 2009: 11.4; 2010: 11.6; 2011: 10.9. - Capital expenditure: 2006: 2.1; 2007: 2.6; 2008: 7.6; 2009: 9.0; 2010: 7.3; 2011: 6.1. - Overall balance (percent of GDP): 2006: 0.5; 2007: 0.3; 2008: -0.2; 2009: -0.7; 2010: -2.7; 2011: -1.0. ### Monetary and financial sector (annual percentage change and levels) - Broad money (M2): 2006: 7.0; 2007: 16.1; 2008: 13.2; 2009: 0.5; 2010: -6.0; 2011: ... - Net foreign assets (annual percentage change): 2006: 10.5; 2007: 15.0; 2008: 9.0; 2009: -18.3; 2010: -34.6; 2011: ... - Domestic credit (annual percentage change): 2006: 7.2; 2007: 10.6; 2008: 36.7; 2009: 22.1; 2010: 17.4; 2011: ... - Credit to private sector (annual percentage change): 2006: 9.7; 2007: 12.3; 2008: 43.3; 2009: 19.9; 2010: 11.6; 2011: ... - Interest rates (end of period, weighted average): - Deposit rate (vatu deposits): 2006: 1.9; 2007: 2.0; 2008: 2.7; 2009: 3.2; 2010: 1.8; 2011: ... - Lending rate (vatu loans): 2006: 11.3; 2007: 10.3; 2008: 10.3; 2009: 10.9; 2010: 10.3; 2011: ... ### External sector and balance of payments (2006–11) - Current account (in millions of U.S. dollars): 2006: -28.4; 2007: -36.9; 2008: -65.8; 2009: -48.5; 2010: -41.0; 2011 (Est.): -43.7. - Current account (percent of GDP): 2006: -6.5; 2007: -7.0; 2008: -11.1; 2009: -8.2; 2010: -5.9; 2011: -5.7. - Tourism exports (in millions of U.S. dollars): 2006: 104.2; 2007: 137.0; 2008: 170.6; 2009: 186.9; 2010: 219.6; 2011: 233.9. - Merchandise exports, f.o.b. (in millions of U.S. dollars): 2006: 37.7; 2007: 29.7; 2008: 41.7; 2009: 55.2; 2010: 51.4; 2011: 55.0. - Merchandise exports (annual percentage change): 2006: -1.3; 2007: -21.2; 2008: 40.7; 2009: 32.1; 2010: -6.8; 2011: 7.0. - Merchandise imports, f.o.b. (in millions of U.S. dollars): 2006: 141.2; 2007: 176.0; 2008: 265.2; 2009: 247.0; 2010: 246.3; 2011: 267.2. - Merchandise imports (annual percentage change): 2006: 7.6; 2007: 24.6; 2008: 50.6; 2009: -6.8; 2010: -0.3; 2011: 8.5. - Gross official reserves (end of period, in millions of U.S. dollars): 2006: 105.1; 2007: 119.6; 2008: 115.3; 2009: 148.6; 2010: 161.4; 2011: 157.2. - In months of corresponding imports of goods (c.i.f.): 2006: 7.5; 2007: 6.8; 2008: 4.4; 2009: 6.0; 2010: 6.6; 2011: 5.9. - In months of next year's imports of goods (c.i.f.): 2006: 6.0; 2007: 4.5; 2008: 4.7; 2009: 6.0; 2010: 6.1; 2011: 5.4. - External debt: - External debt (percent of GDP, medium- and long-term public debt only): 2006: 15.8; 2007: 13.5; 2008: 16.8; 2009: 17.3; 2010: 16.0; 2011: 14.4. - External debt service (in percent of exports of goods and non-factor services): 2006: 1.3; 2007: 1.2; 2008: 1.3; 2009: 1.5; 2010: 1.4; 2011: 1.4. - Exchange rates: - Exchange rate regime: officially pegged to an undisclosed basket of currencies. - Vatu per U.S. dollar (period average): 2006: 110.6; 2007: 102.4; 2008: 101.3; 2009: 106.7; 2010: 95.5; 2011: ... - Real effective exchange rate (average, 2005=100): 2006: 98.2; 2007: 99.6; 2008: 98.3; 2009: 103.0; 2010: 106.7; 2011: ... ### Balance of payments breakdown (Table 2, 2006–11, in millions of U.S. dollars) - Current account balance: 2006: -28.4; 2007: -36.9; 2008: -65.8; 2009: -48.5; 2010: -41.0; 2011: -43.7. - Trade balance: 2006: -103.6; 2007: -146.4; 2008: -223.4; 2009: -191.9; 2010: -194.9; 2011: -212.2. - Services balance: 2006: 72.8; 2007: 113.6; 2008: 121.8; 2009: 137.0; 2010: 150.7; 2011: 163.2. - Services receipts: 2006: 157.6; 2007: 204.1; 2008: 232.8; 2009: 244.5; 2010: 279.2; 2011: 298.2. - Services payments: 2006: -84.8; 2007: -90.6; 2008: -111.0; 2009: -107.5; 2010: -128.6; 2011: -135.0. - Income (net): 2006: -20.6; 2007: -25.9; 2008: 0.1; 2009: -18.6; 2010: -20.3; 2011: -20.6. - Income receipts: 2006: 33.0; 2007: 40.3; 2008: 41.8; 2009: 30.6; 2010: 37.1; 2011: 39.7. - Income payments: 2006: -53.6; 2007: -66.2; 2008: -41.7; 2009: -49.1; 2010: -57.4; 2011: -60.3. - Capital and financial account: 2006: 66.5; 2007: 24.9; 2008: 36.3; 2009: 45.2; 2010: 57.4; 2011: 39.5. - Capital account: 2006: 6.0; 2007: 6.9; 2008: 9.6; 2009: 29.5; 2010: 21.4; 2011: 18.5. - Financial account: 2006: 60.5; 2007: 18.0; 2008: 26.7; 2009: 15.8; 2010: 36.1; 2011: 21.1. - Foreign direct investment: 2006: 70.3; 2007: 55.7; 2008: 42.8; 2009: 30.5; 2010: 38.7; 2011: 41.8. - Portfolio investment: 2006: -0.8; 2007: -1.5; 2008: -7.7; 2009: 0.8; 2010: -0.8; 2011: -0.8. - Other investment: 2006: -9.0; 2007: -36.2; 2008: -8.4; 2009: -15.5; 2010: -1.9; 2011: -20.0. - Net errors and omissions: 2006: -0.6; 2007: 26.5; 2008: 25.2; 2009: 36.6; 2010: -3.7; 2011: 0.0. - Overall balance: 2006: 37.5; 2007: 14.4; 2008: -4.3; 2009: 33.4; 2010: 12.8; 2011: -4.2. - Financing (net): 2006: -37.5; 2007: -14.4; 2008: 4.3; 2009: -33.4; 2010: -12.8; 2011: 4.2. ### Central government fiscal operations (Table 3, 2006–11, percent of GDP) - Total revenue and grants: 2006: 20.7; 2007: 22.3; 2008: 27.7; 2009: 26.8; 2010: 25.0; 2011 (Budget): 24.4; 2011 (Proj.): 24.2. - Revenue: 2006: 18.9; 2007: 20.4; 2008: 21.1; 2009: 19.5; 2010: 18.1; 2011 (Budget/Proj.): 18.3/18.1. - Grants (cash grants only): 2006: 1.8; 2007: 1.8; 2008: 6.6; 2009: 7.3; 2010: 6.8; 2011 (Budget): 6.0; 2011 (Proj.): 6.0. - Total expenditure and net lending: 2006: 20.2; 2007: 22.0; 2008: 27.9; 2009: 27.6; 2010: 27.7; 2011 (Budget): 25.1; 2011 (Proj.): 25.1. - Primary balance (percent of GDP): 2006: 1.2; 2007: 0.9; 2008: 0.4; 2009: -0.2; 2010: -2.2; 2011 (Budget): -0.1; 2011 (Proj.): -0.3. - Financing (percent of GDP): total financing figures include foreign financing (net) and domestic financing (net); public debt: 2006: 22.2; 2007: 19.1; 2008: 21.1; 2009: 21.2; 2010: 21.0; 2011 (Est.): 20.4. - Domestic debt (percent of GDP): 2006: 6.4; 2007: 5.5; 2008: 4.3; 2009: 3.9; 2010: 5.0; 2011: 5.8. - External debt (percent of GDP): 2006: 15.8; 2007: 13.5; 2008: 16.8; 2009: 17.3; 2010: 16.0; 2011: 14.4. ### Monetary survey highlights (2005–10 levels and annual changes) - Net foreign assets (end of period, millions of vatu): 2005: 27,575; 2006: 29,488; 2007: 32,596; 2008: 37,497; 2009: 40,878; 2010: 33,409; 2010: 21,864 (note: table spans years). - Total broad money (end of period, millions of vatu): 2005: 38,148; 2006: 42,562; 2007: 45,555; 2008: 52,908; 2009: 59,873; 2010: 60,146; 2010 (later row): 56,540. - Quasi-money and narrow money components listed with levels and changes; private sector credit (in percent of GDP): 2004–2006 series culminates at 66.2. ### Medium-term baseline scenario (2006–16, Table 5) - Real GDP (annual percentage change) projection: 2011: 3.8; 2012–2016: 4.2, 4.0, 4.0, 4.0, 4.0 respectively. - Nominal GDP (annual percentage change) projection: 2011: 7.9; 2012–2016: 7.9, 7.3, 7.1, 7.1, 7.1 respectively. - Consumer prices (period average) projection: 2011: 4.0; 2012–2016: 3.5, 3.2, 3.0, 3.0, 3.0. - Current account balance (in millions of U.S. dollars) projection: 2011: -43.7; 2012: -49.3; 2013: -52.9; 2014: -57.1; 2015: -61.7; 2016: -65.5. - Current account (percent of GDP) projection: 2011: -5.7; 2012–2016: -6.0; -6.0; -6.0; -6.1; -6.0. - Gross official reserves (end of period, millions of U.S. dollars) projection: 2011: 157.2; 2012: 149.5; 2013: 149.4; 2014: 150.2; 2015: 156.0; 2016: 164.4. - In months of next year's imports of goods (c.i.f.) projection: 2011: 5.4; 2012: 4.8; 2013: 4.5; 2014: 4.2; 2015: 4.1; 2016: ... - Central government (percent of GDP) projections: - Revenue and grants: 2011: 23.6 (note table shows 2011 row includes Budget/Proj variations); 2012–2016: 23.6; 23.1; 22.6; 22.1; 21.9. - Total expenditure and net lending: 2011: 24.1; 2012–2016: 24.1; 23.6; 23.1; 22.8; 22.5. - Primary balance (percent of GDP): 2011: -0.3; 2012–2016: 0.1; 0.1; 0.0; -0.1; -0.1. - Overall balance (percent of GDP): 2011: -1.0; 2012–2016: -0.4; -0.4; -0.5; -0.6; -0.6. - Public debt (percent of GDP, medium- and long-term public debt only): 2011: 20.4; 2012–2016: 19.3; 18.5; 17.7; 17.2; 16.7. - GDP in current prices (in billions of vatu) projection: 2011: 77.1; 2012: 82.7; 2013: 88.6; 2014: 94.9; 2015: 101.6. ### Social indicators, vulnerability, and Millennium Development Goals (selected) - Social indicators (latest available 2000–09): - Population total (millions) for Vanuatu: 0.21. - Population growth rate (percent annual): 2.5. - Urban population (percent of population): 25.2. - Total fertility rate (births per woman): 4.0. - GNI per capita (U.S. dollars): 2,620. - Health public expenditure (percent of GDP): 2.7. - Education public expenditure (percent of GDP): 6.1. - Net primary enrollment (percent of age group): 97. - Life expectancy at birth (years): Total: 70; Male: 68; Female: 72. - Vulnerability indicators (2006–11, percent of GDP unless otherwise indicated): - Public debt: 2006: 22.2; 2007: 19.1; 2008: 21.1; 2009: 21.2; 2010: 21.0; 2011: 20.4. - Broad money (percent change, 12-month basis): 2006: 7.0; 2007: 16.1; 2008: 13.2; 2009: 0.5; 2010: -6.0; 2011: ... - Private sector credit (percent change, 12-month basis): 2006: 9.7; 2007: 12.3; 2008: 43.3; 2009: 19.9; 2010: 11.6; 2011: ... - Non-performing loans (share of total loans, through end-September 2010): 2006: 16.7; 2007: 12.5; 2008: 9.9; 2009: 7.3; 2010: 5.9; 2011: ... - Share of foreign currency deposits in total deposits (percent): 2006: 55.5; 2007: 54.2; 2008: 51.3; 2009: 48.4; 2010: 37.4; 2011: 37.2. - Current account balance (excl. official transfers, percent of GDP): 2006: -11.0; 2007: -11.1; 2008: -16.8; 2009: -11.9; 2010: -9.1; 2011: -8.8. - Inward foreign direct investment (percent of GDP): 2006: 16.1; 2007: 10.6; 2008: 7.2; 2009: 5.2; 2010: 5.6; 2011: 5.5. - Gross official reserves (millions of U.S. dollars): 2006: 105.1; 2007: 119.6; 2008: 115.3; 2009: 148.6; 2010: 161.4; 2011: 157.2. ### Fund relations and institutional notes (Annex I: Fund Relations, as of February 28, 2011) - Membership: Joined: September 28, 1981; Article VIII. - Quota and SDR position: - Quota: 17.00 SDR Million; Percent Quota: 100.00. - Fund holdings of currency: 14.51 SDR Million; 85.33 percent. - Reserve position in Fund: 2.50 SDR Million; 14.68 percent. - Net cumulative SDR allocation: 16.27 SDR Million; Percent Allocation: 100.00. - Holdings: 1.54 SDR Million; 9.45 percent. - Outstanding purchases and loans: None. - Financial arrangements: None. - Projected obligations to the Fund (charges/interest, SDR Million): 2011: 0.05; 2012: 0.06; 2013: 0.06; 2014: 0.06; 2015: 0.06. - Exchange arrangements: - Since 1988, Vanuatu has maintained an adjustable peg exchange rate arrangement linked to a transactions weighted (trade and tourism receipts) basket of currencies; weights and composition are not publicly disclosed and are adjusted periodically. - RBV quotes daily buying and selling rates for the vatu against the U.S., Australian, and New Zealand dollars; the euro; the U.K. pound; and the Japanese yen. - Rate in terms of the U.S. dollar as of January 31, 2010: VT 93.88 per U.S. dollar. - De facto classification: “other managed,” as composite weights are not disclosed. - Article IV consultations: - Last Article IV consultation discussions were held in Port Vila during February 2009. - Executive Board concluded the consultation on May 11, 2009. - Technical assistance and assessments: - Offshore Financial Center Module II Assessment concluded May 2006. - LEG, MCM, PFTAC, and STA provided technical assistance on anti-money laundering, banking supervision and regulation, reserve management, tax and fiscal accounts, tax administration and policy, balance of payments, and national accounts. - Resident representative: None. *Source: IMF staff report and informational annex for the 2011 Article IV Consultation—Vanuatu (content unit: _cr11120 - 56).* ### ANNEX II. VANUATU: RELATIONS WITH THE PACIFIC ### ANNEX II. VANUATU: RELATIONS WITH THE PACIFIC ### Financial Technical Assistance Center (PFTAC) — Overview - Since 2008, the Center’s assistance to Vanuatu has included 20 advisory missions. - Vanuatu has sent officials to the Center’s regional seminars, workshops, and training courses and has attached a revenue official to a PFTAC mission. - Footnote: PFTAC in Suva, Fiji is a multi-donor technical assistance institution, financed by the IMF, AsDB, AusAID, NZODA, and, until 2001, by the UNDP, with the IMF as Executing Agency. The Centre’s aim is to build skills and institutional capacity for effective economic and financial management that can be sustained at the national level. Member countries are: Cook Islands, Federated States of Micronesia, Fiji, Kiribati, Marshall Islands, Nauru, Niue, Palau, Papua New Guinea, Samoa, Solomon Islands, Tokelau, Tonga, Tuvalu, and Vanuatu. ### Financial Sector Supervision — PFTAC assistance to the Reserve Bank of Vanuatu (RBV) - Primary focus: strengthen RBV capacity to supervise and regulate domestic and offshore banking institutions. - Advisory and training mission timeline and activities: - April 2009: PFTAC Financial Sector Supervision Advisor visited RBV to review and provide recommendations for strengthening prudential guidelines (regulations) and review the adequacy of prudential reporting requirements for banking institutions. - May 2010: Follow-up visit to assess status of proposed revisions to prudential guidelines and to provide training to supervision staff in on-site examination and off-site monitoring of banking institutions. - January 2011: Third visit to provide training and assistance in conducting an on-site examination of an offshore bank in response to identified weaknesses in RBV supervision staff capacity to properly examine and assess banking risks. - Late 2011 (planned at RBV request): Follow-up visit to assist authorities in finalizing revisions to prudential returns and to provide training and assistance to supervision staff in off-site monitoring and analysis and the preparation of quarterly analysis reports. ### Public Financial Management — Complementary roles with AusAid - AusAid funded extensive technical assistance in budget management; PFTAC complemented this assistance by: - Advising on prioritization and sequencing of needed reforms. - In 2003, providing training of staff on moving budget reporting to a GFS basis. - Providing a peripatetic advisor on macroeconomic forecasting and analysis. - Providing training for line ministry officials on Public Financial Management and costing of projects. ### Tax Administration and Policy — Addressing revenue risks from regional trade agreements - Identified risk: potential loss of revenue arising from regional trade agreements and arrangements (PICTA and PACER). - PFTAC assistance to minimize revenue loss included: - Development of a compliance improvement strategy and plan. - In-country training to improve skills and techniques in audit, taxpayer services, debt collection and return management. - Development of a longer-term corporate strategy. - Policy assistance to analyze and consider the possible introduction of additional taxes. ### Economic Statistics — GDDS/PFTAC project and standards transition - Outcomes and technical assistance delivered: - Result: Vanuatu producing quarterly balance of payments and international investment position statistics consistent with the BPM5. - Ongoing assistance is helping with the transition to BPM6. - During 2010, PFTAC trained staff and developed methodology for presenting government finance statistics on the basis of the 2001GFS Manual and for integration of GFS classifications with the budget and accounting systems. Data based on the new standards is nearing completion. - PFTAC provided peer review of national accounts compilation in 2005 and 2006. - PFTAC missions in 2008 and 2009 reviewed source data and developed methodology to produce GDP by expenditure approach. *ANNEX II. VANUATU: RELATIONS WITH THE PACIFIC — FINANCIAL TECHNICAL ASSISTANCE CENTER (PFTAC).* ### ANNEX V. VANUATU: STATISTICAL ISSUES ### ANNEX V. VANUATU: STATISTICAL ISSUES ### I. Assessment of Data Adequacy for Surveillance - General: Data provision has some shortcomings, but is broadly adequate for surveillance. In particular, data on national accounts, government finance, and external sector statistics need to be further improved. - National Accounts: - Expenditure-based GDP estimates are not yet available. - Data are compiled only on an annual basis. - Constant price GDP estimates still use 1983 as the base year; work on rebasing the estimates to 2006 are underway. - Price statistics: - CPI weights are based on 1998 household surveys, and only cover the two urban centers of Port Vila and Luganville. - The CPI basket does not reflect recent structural changes in the consumption basket (for example telecommunication prices and related utilities). - Government finance statistics: - Budget classification is broadly consistent with the 1986 GFSM. - Government operations data include all central government agencies but exclude public enterprises and operations of provincial governments and the two municipalities. - The operations of the budget are recorded on a cash plus invoice basis. - Monetary statistics: - The Reserve Bank of Vanuatu (RBV) reports monthly monetary data, including the accounts of the monetary authorities, commercial banks, and interest rates in its monthly bulletin posted on its website. - The RBV also publishes a quarterly report covering wider financial data including fiscal transactions and financial soundness indicators (e.g., amount of non-performing loans and earnings). - External sector statistics: - Quarterly and annual balance of payments data are compiled according to The Balance of Payment Manual, Fifth Edition. - Trade data have been compiled using customs declaration forms collected from the two shipping ports of entry, Port Vila and Santo. Imported items by air are also captured, but imported goods and services through the post office have not been captured. - Data on capital account also need further improvements. Errors and omissions remain quite large. ### II. Data Standards and Quality - Participant in the General Data Dissemination System (GDDS) since April 2004. - No data ROSC is available. ### III. Reporting to STA - Exchange rate and reserves data are only available through August 2010. - Monthly monetary statistics data have been reported through December 2010. - Annual balance of payments data have been published through 2007. - Quarterly consumer price data are available through Q2 2010. - Imports and exports annual trade figures are available only through 2007. - Both the trade and price data are gathered from other sources; no data are sent by the authorities. - Annual GFS data through 1999 have been reported for publication in the GFS Yearbook, using the 1986 GFS format. - No sub-annual fiscal data have been reported for publication in International Financial Statistics since 2001. ### Table V.1 — Table of Common Indicators Required for Surveillance (As of March 16, 2011) - Exchange Rates: Date of Latest Observation: Feb. 2011; Date Received: Feb. 2011; Frequency of Data: D; Frequency of Reporting: D; Frequency of Publication: M - International Reserve Assets and Reserve Liabilities of the Monetary Authorities: Date of Latest Observation: Dec. 2010; Date Received: Mar. 2011; Frequency of Data: M; Frequency of Reporting: M; Frequency of Publication: M - Reserve/Base Money: Date of Latest Observation: Dec. 2010; Date Received: Mar. 2011; Frequency of Data: M; Frequency of Reporting: M; Frequency of Publication: M - Broad Money: Date of Latest Observation: Dec. 2010; Date Received: Mar. 2011; Frequency of Data: M; Frequency of Reporting: M; Frequency of Publication: M - Central Bank Balance Sheet: Date of Latest Observation: Dec. 2010; Date Received: Mar. 2011; Frequency of Data: M; Frequency of Reporting: M; Frequency of Publication: M - Consolidated Balance Sheet of the Banking System: Date of Latest Observation: Dec. 2010; Date Received: Mar. 2011; Frequency of Data: M; Frequency of Reporting: M; Frequency of Publication: M - Interest Rates: Date of Latest Observation: Dec. 2010; Date Received: Mar. 2011; Frequency of Data: M; Frequency of Reporting: M; Frequency of Publication: M - Consumer Price Index: Date of Latest Observation: Dec. 2010; Date Received: Jan. 2011; Frequency of Data: Q; Frequency of Reporting: Q; Frequency of Publication: Q - Revenue, Expenditure, Balance and Composition of Financing – General Government: NA; Date Received: NA; Frequency of Data: NA; Frequency of Reporting: NA; Frequency of Publication: NA - Revenue, Expenditure, Balance and Composition of Financing – Central Government: Date of Latest Observation: Dec. 2010; Date Received: Feb. 2011; Frequency of Data: Q; Frequency of Reporting: Q; Frequency of Publication: Q - Stocks of Central Government and Central Government-Guaranteed Debt: Date of Latest Observation: Dec. 2010; Date Received: Feb. 2011; Frequency of Data: A; Frequency of Reporting: A; Frequency of Publication: A - External Current Account Balance: Date of Latest Observation: Dec. 2010; Date Received: Mar. 2011; Frequency of Data: Q; Frequency of Reporting: Q; Frequency of Publication: Q - Exports and Imports of Goods and Services: Date of Latest Observation: Dec. 2010; Date Received: Mar. 2011; Frequency of Data: Q; Frequency of Reporting: Q; Frequency of Publication: Q - GDP/GNP: Date of Latest Observation: 2009; Date Received: Jan. 2011; Frequency of Data: A; Frequency of Reporting: I; Frequency of Publication: I - Gross External Debt: Date of Latest Observation: Dec. 2010; Date Received: Feb. 2011; Frequency of Data: A; Frequency of Reporting: A; Frequency of Publication: A - International Investment Position: Date of Latest Observation: Dec. 2010; Date Received: Mar. 2011; Frequency of Data: Q; Frequency of Reporting: Q; Frequency of Publication: Q *Any reserve assets that are pledged or otherwise encumbered should be specified separately. Also, data should comprise short-term liabilities linked to a foreign currency, but settled by other means, as well as the notional values of financial derivatives to pay and to receive foreign currency, including those linked to a foreign currency but settled by other means.* ### Debt Sustainability Analysis (Selected Sections) - Overall finding: Vanuatu remains at a low risk of debt distress based on the Low-Income Country Debt Sustainability Assessment (LIC DSA). Vanuatu’s overall public debt level is low and should remain manageable, provided the fiscal deficit is reduced substantially as planned from the 2010 level. The level of public debt distress may rise if potential GDP growth slows or large contingent liabilities materialize. - 2010 snapshot: - Public debt: 20 percent of GDP. - Total external debt increased to 34 percent of GDP, reflecting higher external liabilities of local banks. - Public and publicly guaranteed (PPG) external debt remained at around 15 percent of GDP. - Note: Due to data limitation, external liabilities of local banks are used as a proxy for total private external debt. #### A. Background (DSA setup) - Framework: DSA based on standard LIC DSA framework; baseline built on assumptions in Box 1. - Baseline key expectations: - Near-term GDP growth will recover to 4 percent. - Current account deficit will remain below 6 percent of GDP. - Primary deficit will decline to close to zero over the long term. - Grants will remain stable in the medium term and gradually decline as a share of GDP in the longer term. #### Box 1 — Key Assumptions (Key Macroeconomic Assumptions) - Real GDP growth is projected to average around 4 percent in the long term. - GDP deflator (in U.S. dollar terms) is projected to be around 5¾ percent over the period 2010–15 and 3 percent over the long term. - Primary deficit is projected to decline to ¼ percent of GDP by 2012 and close to zero over the long term. - The present of value of contingent liabilities is assumed to be 10 percent of GDP for the whole projection period. - Foreign aid is projected to remain stable in Australian dollars over 2011–16 and gradually drop to below 1 percent of GDP over the long term. - The current account deficit is expected to remain below 6 percent of GDP over the medium term; over the long term it is projected to decline to below 5 percent of GDP. - Financing assumptions: Deficit financing mostly by net FDI; new external borrowings assumed to grow gradually in the long run (around half a billion vatu during 2012–16 and double during 2017–30). #### B. External Debt Sustainability - Baseline projections: - Total external debt projected to decline to 30 percent of GDP in the medium term and to 25 percent of GDP over the long term. - PPG external debt projected to decline to 11 percent of GDP in the medium term and to 6 percent of GDP over the long term. - Present value of PPG external debt, ratio of PPG debt service to exports, and ratio of PPG debt service to revenue all remain well below indicative thresholds under the baseline. - Drivers of sustainability: - Fiscal deficit is expected to shrink. - Large trade deficit expected to continue to be financed by foreign aid and FDI rather than debt-creating flows. - Stress test: - A reduction in exports (of goods and services) value by 4½ percent consecutively during 2011–12 would raise the present value of PPG external debt to 61 percent of exports by next year, but the ratio would decline to around 20 percent over the long term. #### C. Public Debt Sustainability - Baseline projection: - Public sector debt projected to remain below 20 percent of GDP and decline steadily over the medium and long term. - Risks: - If the primary deficit is kept at the 2010 level of 2¼ percent of GDP, public debt and related indicators would increase drastically. The present value of debt-to-GDP ratio would reach around 30 percent in 2010 and continue to increase throughout the projection period. - Contingent liabilities or a growth shock could materially increase vulnerabilities. - Stress test for contingent liabilities: a 10-percent of GDP increase in other debt-creating flows (used as a proxy for contingent liabilities) would cause debt levels to increase significantly and only return to current levels in the long run. - A permanent slowdown in GDP growth by about 1 percentage point would cause the debt-to-GDP ratio to rise steadily albeit slowly. *Prepared by the staffs of the International Monetary Fund and the International Development Association (as of January 31, 2011).* ### 9. Vanuatu is at a low risk of debt ### 9. Vanuatu is at a low risk of debt ### Assessment - Vanuatu is at a low risk of debt distress, but medium-term vulnerabilities remain. - External and public debt levels are low. - To maintain fiscal and external debt levels at manageable levels, current plans to strengthen revenue and reduce the wage bill need to be implemented. - The government needs to remain vigilant against contingent liabilities building up in the SOEs and the banking system, and ensure Vanuatu’s growth potential remains strong. ### Indicators and scenarios (2010–30) — key insights from figures and stress tests - Baseline projections show declining indicators over the medium term: - PV of PPG external debt (percent of GDP): 14.1 (2010), 12.6 (2011), 11.5 (2012), 11.0 (2013), 10.5 (2014), 10.1 (2015), 9.6 (2020), 5.0 (2030). - PV of PPG external debt (percent of exports): 27.7 (2010), 26.4 (2011), 25.0 (2012), 24.1 (2013), 23.2 (2014), 22.4 (2015), 21.5 (2020), 17.8 (2020?), 10.8 (2030). - Debt service-to-exports ratio (in percent): 2.5 (2007), 2.4 (2008), 2.7 (2009), 3.1 (2010), 3.3 (2011), 3.4 (2012), 3.4 (2013), 3.4 (2014), 4.1 (2020), 4.6 (2030). - PPG debt service-to-revenue ratio (in percent): 2.5 (2007), 2.8 (2008), 3.9 (2009), 3.7 (2010), 3.5 (2011), 3.5 (2012), 3.3 (2013), 3.2 (2014), 3.7 (2020), 3.8 (2030), 2.5 (2030?). - Sensitivity analysis (Table 2) highlights vulnerability to export shocks and combined shocks: - PV of debt-to-exports ratio under baseline: 69 (2010), 63 (2011), 61 (2012), 58 (2013), 56 (2014), 54 (2015), 45 (2020), 28 (2030). - Under Export value growth shock (historical average minus one standard deviation in 2011-2012), PV of debt-to-exports rises to 85 (2011), 122 (2012), 118 (2013), 114 (2014), 110 (2015), 85 (2020), 37 (2030). - Bound tests show the PV of debt-to-GDP and PV of debt-to-revenue ratios increase under adverse scenarios (e.g., combination shocks, depreciation, declines in non-debt creating flows). ### Public sector debt dynamics and projections (2007–30) - Public sector debt (percent of GDP): 19.1 (2007), 21.1 (2008), 21.2 (2009), 20.2 (2010), projected 19.7 (2011), 18.7 (2012), 17.8 (2013), 17.2 (2014), 16.6 (2015), 14.5 (2020), 12.0 (2030). - Of which foreign-currency denominated (percent of GDP): 13.5 (2007), 16.8 (2008), 17.3 (2009), 15.2 (2010), 13.6 (2011), 12.9 (2012), 12.2 (2013), 11.6 (2014), 11.0 (2015), 9.2 (2020), 6.0 (2030). - Identified debt-creating flows (percent of GDP): primary deficit and automatic debt dynamics are key determinants: - Primary deficit (percent of GDP): -0.9 (2007), -0.4 (2008), 0.2 (2009), 0.5 (2010), 2.5 (2011), 2.2 (2012), 0.3 (2013), -0.1 (2014), -0.1 (2015), -0.1 (2010-15 average). - Revenue and grants (percent of GDP): 22.3 (2007), 27.7 (2008), 26.8 (2009), 25.0 (2010), 24.2 (2011), 23.6 (2012), 23.1 (2013), 22.6 (2014), 22.2 (2015), 20.5 (2020), 18.7 (2030). - Primary (noninterest) expenditure (percent of GDP): 21.4 (2007), 27.3 (2008), 27.1 (2009), 27.2 (2010), 24.5 (2011), 23.5 (2012), 23.0 (2013), 22.6 (2014), 22.2 (2015), 20.5 (2020), 18.8 (2030). - Other sustainability indicators: - PV of public sector debt (percent of GDP): 18.0 (2010), 17.5 (2011), 17.5 (2012), 16.8 (2013), 16.1 (2014), 15.7 (2015), 15.3 (2020), 13.3 (2030), 11.0 (2030). - PV of contingent liabilities (not included in public sector debt): assumed 10.0 (2010–2030) in projections. - Gross financing need (percent of GDP): 0.7 (2007), 2.8 (2008), 2.4 (2009), 3.8 (2010), 2.3 (2011), 1.8 (2012), 2.3 (2013), 2.0 (2014), 2.2 (2015), 1.9 (2020), 1.3 (2030). ### Key macroeconomic assumptions used in projections - Real GDP growth (in percent): 6.5 (2007), 6.2 (2008), 3.5 (2009), 3.5 (2010), projections: 4.1 (2011), 2.2 (2012), 3.8 (2013), 4.2 (2014), 4.0 (2015), 4.0 (2016-30 average), 3.7 (2010-15 average). - GDP deflator in U.S. dollar terms (change in percent): 13.2 (2007), 5.9 (2008), -3.8 (2009), 4.8 (2010), 6.9 (2011), 14.9 (2012), 6.6 (2013), 3.5 (2014), 3.2 (2015), 3.0 (2020/2030 assumptions). - Effective interest rate (percent): 1.1 (2007), 1.4 (2008), 1.3 (2009), 1.2 (2010), 0.2 (2011), 1.7 (2012), 1.3 (2013), 1.7 (2014), 1.8 (2015), 2.0 (2020), 2.1 (2030). - Growth of exports of G&S (U.S. dollar terms, percent): 19.8 (2007), 17.4 (2008), 9.1 (2009), 8.7 (2010), 13.2 (2011), 10.3 (2012), 6.8 (2013), 6.8 (2014), 6.6 (2015), 6.6 (2020/2030). - Growth of imports of G&S (U.S. dollar terms, percent): 18.0 (2007), 41.1 (2008), -5.8 (2009), 9.7 (2010), 16.7 (2011), 5.7 (2012), 7.3 (2013), 7.3 (2014), 6.6 (2015). ### Policy recommendations (drawn from assessment) - Implement current plans to strengthen revenue. - Reduce the wage bill as planned. - Remain vigilant against contingent liabilities building up in SOEs and the banking system. - Ensure Vanuatu’s growth potential remains strong to preserve debt sustainability. *Source: 2011 Article IV Report — Debt Sustainability Analysis (Vanuatu), IMF staff estimates and projections.* ### conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of ### conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of ### Executive Board assessment and policy guidance - Directors commended the authorities for implementing appropriate policies that led to a strong rebound in economic activity. - Key challenge: support the recovery while guarding against inflation risks and advancing fiscal consolidation. - Over the medium term, rebuilding fiscal, external, and financial buffers is crucial to enhance Vanuatu’s resilience to shocks. - Directors recommended a broadly balanced budget for 2012 to restore room for policy maneuver against future shocks. - Directors encouraged: - Limiting total expenditure to the budgeted level, particularly by containing the wage bill. - Allowing free play of the automatic stabilizers on the revenue side, if needed. - Further efforts to mobilize revenue, improve tax administration, and reduce contingent liabilities at public enterprises. - Early action to unwind the accommodative monetary stance given rising inflation risks. - Continued vigilance on rapid growth in credit to households and foreign currency loans, and, if necessary, additional prudential measures. - Safeguarding external buffers by maintaining an adequate level of foreign exchange reserves. - Strengthening the regulatory and supervisory framework covering the whole financial system, including micro lenders and offshore banks. ### Fiscal developments and outlook - The fiscal deficit deteriorated to 2.7 percent of GDP in 2010 as revenue fell short of budget projections. - Total revenue excluding grants shrunk 2.4 percent from 2009, compared with a budgeted increase of 17 percent. - Authorities’ 2011 target: reduce the deficit to 0.7 percent of GDP by maintaining the nominal wage bill broadly at the 2010 level and lowering capital expenditure. - Selected government finance indicators (in percent of GDP): - Total revenue and grants: 2006: 20.7; 2007: 22.3; 2008: 27.7; 2009: 26.8; 2010: 25.0; 2011: 24.2 - Revenue: 2006: 18.9; 2007: 20.4; 2008: 21.1; 2009: 19.5; 2010: 18.1; 2011: 18.1 - Tax: 2006: 16.8; 2007: 18.2; 2008: 19.1; 2009: 17.2; 2010: 16.5; 2011: 16.5 - Non-tax: 2006: 2.1; 2007: 2.2; 2008: 2.0; 2009: 2.3; 2010: 1.7; 2011: 1.7 - Grants: 2006: 1.8; 2007: 1.8; 2008: 6.6; 2009: 7.3; 2010: 6.8; 2011: 6.0 - Total expenditure and net lending: 2006: 20.2; 2007: 20.0; 2008: 27.9; 2009: 27.6; 2010: 27.7; 2011: 25.1 - Current expenditure: 2006: 17.4; 2007: 19.4; 2008: 18.6; 2009: 18.6; 2010: 19.8; 2011: 19.0 - Capital expenditure: 2006: 2.1; 2007: 2.6; 2008: 7.6; 2009: 9.0; 2010: 7.3; 2011: 6.1 - Overall balance: 2006: 0.5; 2007: 0.3; 2008: -0.2; 2009: -0.7; 2010: -2.7; 2011: -1.0 - Public debt: - Total debt (in percent of GDP): 2006: 22.2; 2007: 19.1; 2008: 21.1; 2009: 21.2; 2010: 21.0; 2011: 20.4 - External debt (in percent of GDP) 1/: 2006: 15.8; 2007: 13.5; 2008: 16.8; 2009: 17.3; 2010: 16.0; 2011: 14.4 - External debt service 2/: 2006: 1.3; 2007: 1.2; 2008: 1.3; 2009: 1.5; 2010: 1.4; 2011: 1.4 ### Monetary policy, liquidity, and financial sector - The Reserve Bank of Vanuatu (RBV) maintains an easy monetary stance established at the onset of the global financial crisis. - There is ample liquidity in the banking system; bank lending grew by 12 percent (y/y) in 2010. - Loans to households and foreign exchange denominated loans increased significantly. - The vatu has changed little in effective terms since 2009. - Directors welcomed progress in bolstering banking sector soundness, particularly the recent decision to tighten capital and liquidity requirements. - Directors encouraged further efforts to strengthen regulatory and supervisory coverage for the whole financial system, including micro lenders and offshore banks. - Monetary and credit indicators (annual percentage change): - Broad money (M2): 2006: 7.0; 2007: 16.1; 2008: 13.2; 2009: 0.5; 2010: -6.0; 2011: ... - Net foreign assets: 2006: 10.5; 2007: 15.0; 2008: 9.0; 2009: -18.3; 2010: -34.6; 2011: ... - Domestic credit: 2006: 7.2; 2007: 10.6; 2008: 36.7; 2009: 22.1; 2010: 17.4; 2011: ... - Credit to private sector: 2006: ...; 2007: 9.7; 2008: 12.3; 2009: 43.3; 2010: 19.9; 2011: 11.6; ... - Interest rates (in percent, end of period): - Deposit rate (vatu deposits): 2006: 1.9; 2007: 2.0; 2008: 2.7; 2009: 3.2; 2010: 1.8; 2011: ... - Lending rate (vatu loans): 2006: 11.3; 2007: 10.3; 2008: 10.3; 2009: 10.9; 2010: 10.3; 2011: ... ### External sector, reserves, and balance of payments - Directors saw scope for some exchange rate depreciation as part of a broader macroeconomic response to persistent pressures on Vanuatu’s official foreign exchange reserves. - Emphasis on maintaining an adequate level of foreign exchange reserves to safeguard external buffers. - Balance of payments and external indicators: - Current account (in millions of U.S. dollars): 2006: -28.4; 2007: -36.9; 2008: -65.8; 2009: -48.5; 2010: -41.0; 2011: -43.7 - Current account (In percent of GDP): 2006: -6.5; 2007: -7.0; 2008: -11.1; 2009: -8.2; 2010: -5.9; 2011: -5.7 - Tourism exports (in millions of U.S. dollars): 2006: 104.2; 2007: 137.0; 2008: 170.6; 2009: 186.9; 2010: 219.6; 2011: 233.9 - Merchandise exports, f.o.b. (in millions of U.S. dollars): 2006: 37.7; 2007: 29.7; 2008: 41.7; 2009: 55.2; 2010: 51.4; 2011: 55.0 - Merchandise exports (Annual percentage change): 2006: -1.3; 2007: -21.2; 2008: 40.7; 2009: 32.1; 2010: -6.8; 2011: 7.0 - Merchandise imports, f.o.b. (in millions of U.S. dollars): 2006: 141.2; 2007: 176.0; 2008: 265.2; 2009: 247.0; 2010: 246.3; 2011: 267.2 - Merchandise imports (Annual percentage change): 2006: 7.6; 2007: 24.6; 2008: 50.6; 2009: -6.8; 2010: -0.3; 2011: 8.5 - Gross official reserves (end of period): - In millions of U.S. dollars: 2006: 105.1; 2007: 119.6; 2008: 115.3; 2009: 148.6; 2010: 161.4; 2011: 157.2 - In months of corresponding imports of goods (on c.i.f. basis): 2006: 7.5; 2007: 6.8; 2008: 4.4; 2009: 6.0; 2010: 6.6; 2011: 5.9 - In months of prospective imports of goods (on c.i.f. basis): 2006: 6.0; 2007: 4.5; 2008: 4.7; 2009: 6.0; 2010: 6.1; 2011: 5.4 ### Economic activity and prices - Real GDP (annual percentage change): 2006: 7.4; 2007: 6.5; 2008: 6.2; 2009: 3.5; 2010: 2.2; 2011: 3.8 - Nominal GDP (annual percentage change): 2006: 12.7; 2007: 11.6; 2008: 11.2; 2009: 4.8; 2010: 5.1; 2011: 7.9 - Consumer prices (period average): 2006: 2.0; 2007: 3.9; 2008: 4.8; 2009: 4.3; 2010: 2.8; 2011: 4.0 *International Monetary Fund, conclusion of the discussion (Managing Director summary of Executive Directors' views).* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr11120.pdf_