Press Release: IMF Concludes Article IV Mission to Vanuatu and Reaches Staff-level Agreement on Financial Assistance Under Rapid Credit Facility and Rapid Financing Instrument

April 28, 2015

End-of-mission press releases include statements of IMF staff teams that convey preliminary findings after a visit to a country. The views expressed in this statement are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board. Based on the preliminary findings of this mission, staff will prepare a report that, subject to management approval, will be presented to the IMF's Executive Board for discussion and decision.

Press Release No. 15/182
April 28, 2015

An International Monetary Fund (IMF) mission led by Vladimir Klyuev visited Port Vila and Luganville, Vanuatu, during April 15-28 to conduct the 2015 Article IV Consultation, and discuss policies and IMF financial assistance to support economic recovery in the wake of Cyclone Pam. At the end of the visit, Mr. Klyuev issued the following statement:

“On behalf of the whole team I would like to express our heartfelt sympathies to the people of Vanuatu for the loss of life and destruction wreaked by Cyclone Pam. The cyclone caused significant disruption to economic activity and inflicted damages and losses in the order of 50 percent of GDP. We welcome the measures taken by the authorities to address immediate needs, and support their request for IMF emergency assistance of SDR17 million (approximately US$23.5 million) provided in equal shares under the Rapid Credit Facility (RCF) and the Rapid Financing Instrument (RFI).1 The request will be submitted to the IMF’s Executive Board for approval in June 2015.

“Cyclone Pam caused serious damage to production facilities and a sharp fall in economic activity. Tourism and agricultural output are expected to sustain a large decline in 2015, although reconstruction activities and the commencement of several large infrastructure projects will provide a partial offset. On balance, real GDP is projected to decline by 2 percent this year—in contrast to the pre-cyclone forecast of about 3.5 percent growth. Growth is projected to rebound to 5 percent in 2016, driven by a recovery in tourism and agriculture combined with further ramping-up of spending on infrastructure.

“Dealing with the consequences of the cyclone requires resolute measures. Cyclone preparedness can be credited with limiting the loss of life, and the emergency response by the government and the international community was strong and agile. However, the scale of the devastation requires substantial recovery and reconstruction efforts by the government and the private sector. The country will have to draw on buffers accumulated during better times and on the support of the international community to rehabilitate the economy and provide relief to vulnerable groups. The government should reprioritize spending and exploit synergies between its pre-cyclone public investment plans and reconstruction activities. To the extent possible, the government should seek grant financing for these expenditures, although concessional debt can also be used to cover part of the financing gap. IMF support will have a catalytic role in securing financial assistance from development partners.

“After dealing with the aftermath of the cyclone, the authorities should seek to rebuild fiscal buffers over the medium term. Public debt is projected to increase sharply over the next three years, mainly because reconstruction and new investment projects would be financed in part by loans. However, prudent fiscal policies would ensure that the public debt ratio would decline after 2017.

“The peg to a basket of currencies has served Vanuatu well in providing stability and guiding expectations. Staff analysis suggests that the value of the vatu is broadly in line with fundamentals, and the mission recommends maintaining the current parity to help preserve stability and confidence.

“The RBV acted appropriately to support economic recovery and financial stability by lowering its policy rate, reducing the statutory reserve deposit, and activating new credit facilities. Clarifying the details of these facilities would expedite their use, and controls need to be in place to make sure that resources are directed toward productive activities. To safeguard against financial stability risks in the face of an anticipated pickup in credit demand, RBV should ensure that banks follow prudential norms in assessing loans.

“On structural reforms, the mission welcomes the Government Business Enterprise (GBE) Policy approved by the Cabinet in October 2013, which will help improve discipline, accountability and financial viability of GBEs. Building on that momentum, it is important to submit the new GBE law to Parliament without delay, and proceed with rationalization plans developed for several commercial GBEs.

“To support the government’s reform efforts, the IMF continues to provide technical assistance in the areas of tax and nontax revenue administrations, public financial management, and macroeconomic statistics, among others.

“The team met with Prime Minister Joe Natuman, Minister of Finance Maki Stanley Simelum, Minister of Lands Ralph John Regenvanu, and Deputy Governor of Reserve Bank of Vanuatu (RBV) Peter Tari Merakali, as well as other senior officials, private sector representatives, and development partners. I express our gratitude to the authorities and other key stakeholders for their hospitality and comprehensive discussions despite the difficult circumstances.”

1 The RCF provides rapid concessional financial assistance to low-income countries facing an urgent balance of payments need. Fund support under the RCF is provided as an outright disbursement without explicit program-based conditionality or reviews. Financing under the RCF carries a zero interest rate, has a grace period of 5½ years, and a final maturity of 10 years. The RFI provides rapid and low-access financial assistance to any member country facing an urgent balance of payments need. Financial assistance provided under the RFI is subject to the same financing terms as the Stand-By Arrangement and should be repaid within 3¼ to 5 years. Currently the interest rate on the RFI is 1.05 percent per annum.


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