IMF Staff Concludes 2019 Article IV Mission to Vanuatu

IMF News, April 29, 2019

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IMF staff projects growth at around 3.4 percent in 2019.
Real GDP growth should average 3.2 percent per year from 2018 to 2020.
Construction remains a main driver of growth, sustained by development-partner-funded infrastructure projects.
Tourism receipts grew 4.3 percent in 2017, the strongest since Cyclone Pam, and that strength should continue based on private sector investment and the Shared Vision 2030 plan.

The current account temporarily shifted to a surplus of 3.5 percent of GDP in 2018, driven by significant growth in economic citizenship program revenues and remittances from seasonal worker programs in Australia and New Zealand.
The current account is expected to revert to deficit in 2019, starting around 2.3 percent of GDP, and deteriorating towards 5 percent of GDP in the medium term.
Deterioration driven by higher imports from airplane orders by Air Vanuatu as part of the Shared Vision 2030 plan.
Positive offsets: stronger tourism receipts from the Shared Vision 2030 plan, the conclusion of Bauerfield Airport renovation, and high remittances from Australia and New Zealand.

Domestic revenues exceed government-funded spending.
When infrastructure projects financed on concessional terms by development partners are taken into account, there will be an overall government deficit.
The fiscal position in 2018 was strong, but primarily from the windfall revenues from Vanuatu’s economic citizenship programs.
Once forecasted concessional lending from development partners to finance infrastructure projects is included this will increase Vanuatu’s debt obligations.
The government should complete its tax reforms to buttress its revenue base, reduce pressure on its debt, and allow it to continue to build buffers in advance of potential natural disasters.
More rapid accumulation of government debt, with increased interest payments crowding out other government spending, is identified as the main downside domestic risk.

Monetary policy remains appropriately accommodative, after some tightening in mid-2018 as CPI inflation peaked at 2.9 percent because of the VAT increase.
Inflation should moderate in the medium term to 2.6 percent as the Reserve Bank’s policy of a stable exchange rate peg allows it to import low inflation from its major trading partners, Australia and New Zealand.

Vanuatu is expected to graduate from LDC status in 2020, but without a major impact on its growth trajectory.
After graduation, relationships with development partners are expected to remain strong, as most development partners conduct their funding decisions based primarily on development needs and debt sustainability.
Potential challenge after graduation: reduction of preferential market access for exports.
Government efforts to find alternative means of preferential access include the “PACER plus” free trade agreement with Australia, New Zealand and other Pacific island states, and the bilateral free trade agreement with New Caledonia.
New approaches and policies for economic diversification in the agriculture and tourism sectors are welcome.

External downside risks: weaker-than-expected global growth and global trade tensions that could lower remittances, development partner funding, export demand and tourism.
External upside possibilities: the Shared Vision 2030 plan may bolster tourism growth more than expected, and remittances and consumption could be even higher from the expanded seasonal work programs in Australia and New Zealand.
Natural disasters remain a significant risk; reconstruction is near completion with full recovery in sight four years after Cyclone Pam.
The IMF Executive Board is expected to discuss the 2019 Article IV consultation in June 2019.

IMF Press Release No. 19/127, April 29, 2019.