IMF Staff Concludes 2018 Article IV Mission to Vanuatu

IMF News, February 7, 2018

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IMF staff projects growth to continue at around 4 percent in 2018, driven by recovery in tourism and agriculture, and scaling up of infrastructure.
Statement by mission head Mr. Chris Papageorgiou: growth bouncing back with real GDP growth expected to be around 4 percent in 2017 and 2018.
Inflation estimates and drivers:
- Inflation is estimated to pick up to 3.1 percent in 2017 driven by domestic demand.
- Inflation is expected to rise further to 4.8 percent in 2018 mainly due to a temporary VAT increase, from 12.5 to 15 percent, before gradually reverting to modest levels in the medium term.
External balance:
- The current account deficit is expected to widen to above 10 percent of GDP in 2017 and 2018, due to the high import content of infrastructure projects.

Fiscal deficit and drivers:
- Fiscal deficit is expected to remain high just shy of 8 percent in 2018.
- The fiscal deficit is expected to remain high at around 7 to 8 percent of GDP in 2017 and 2018, reflecting elevated spending on reconstruction and infrastructure.
Public and publicly-guaranteed debt:
- Public and publicly-guaranteed debt increased sharply since 2014 mainly due to disbursements for reconstruction and infrastructure projects, though the new external borrowing was highly concessional.
Policy guidance:
- Once reconstruction and infrastructure scaling up are over, authorities should consider embarking on fiscal adjustment measures to address the rising debt and to rebuild fiscal buffers.
- An appropriate medium-term fiscal anchor, with fiscal target and debt ceiling in place, is required to facilitate this consolidation.
- External financing should continue to be contracted as much as possible in the form of grants, or on concessional terms.
Risks to fiscal outlook:
- Delayed implementation of revenue mobilization measures, such as the introduction of the income tax, could put a strain on fiscal accounts.

Monetary stance:
- Given recent signs of excess liquidity along with building up of inflation pressure, the Reserve Bank of Vanuatu should be ready to tighten its monetary policy stance through the gradual increase of reserve requirements.
Exchange rate regime:
- The basket peg regime is working well in Vanuatu, and the real effective exchange rate (REER) remains broadly in line with fundamentals and desirable policies.
Reserves:
- Vanuatu’s comfortable foreign exchange reserves should be maintained at above 5 months of imports to provide foreign currency for government’s debt repayment obligations.

Correspondent banking and global conditions:
- While the withdrawal of correspondent banking and the negative impact of weaker-than-expected global growth have so far been limited, they pose non-negligible risks.
Current account and imports:
- The high import content of infrastructure projects is driving a widening current account deficit to above 10 percent of GDP in 2017 and 2018.

Disaster resilience and economic diversification:
- Resilience to natural disasters should be at the core of any development strategy to ensure sustainable and inclusive growth.
- Diversification of economic activity is required: tourism needs strategic segmentation across locations, and efforts to diversify into the agricultural sector need to be intensified.
Private sector and ease of doing business:
- To facilitate diversification, supporting the private sector by improving the ease of doing business and reaching out to small businesses in need for credit is necessary.
Financial inclusion:
- Although the overall credit-to-GDP ratio is relatively high, credit is not evenly distributed between large firms and small and medium-sized enterprises (SMEs) or between urban areas and rural areas.
- Increasing private access to financial services for SMEs and households in rural areas and outer islands should remain a priority.

Downside risks:
- Risks stem mainly from uncertainty in the rate of implementation of public infrastructure projects.
- The danger of natural disasters is ever-present.
Mission details and next steps:
- An International Monetary Fund (IMF) mission led by Mr. Chris Papageorgiou visited Port Vila during January 29–February 8, 2018 to hold discussions on the 2018 Article IV consultation.
- The IMF Executive Board is expected to discuss the 2018 Article IV consultation in April 2018.

Press Release No. 18/39 — IMF Staff Concludes 2018 Article IV Mission to Vanuatu; February 7, 2018