IMF Staff Concludes 2021 Article IV Mission to Vanuatu
IMF News, July 23, 2021
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Bibliographic details
- Published: July 23, 2021
Mission timing and context
- Press Release No. 21/225; July 23, 2021.
- IMF team led by Koki Harada held virtual meetings with the Vanuatu authorities during June 28–July 22, 2021.
- The views expressed are those of IMF staff and do not necessarily represent the views of the IMF’s Executive Board.
Economic impact and near-term outlook
- The COVID-19 pandemic and major natural disasters hit the Vanuatu economy severely in 2020.
- Due to the authorities’ decisive measures, Vanuatu has had no domestic transmission of COVID-19.
- The border closure brought tourism to a virtual stop and delayed infrastructure projects.
- Tropical Cyclone Harold and a volcanic eruption in Tanna Island caused extensive damage in the first half of 2020.
- Strong receipts of the Economic Citizenship Programs (ECP) and donor support helped mitigate the impact on fiscal and external balances.
- Real GDP growth:
- After a severe contraction in 2020, real GDP growth is expected to rise to 1.2 percent in 2021.
- Sectoral notes:
- Agricultural production and remittance income from seasonal workers will help support a return to positive growth in 2021.
- Construction activity will support growth, despite delays that will push several large infrastructure projects into 2022.
- Tourism-related sectors are expected to contract further in 2021 due to the extended border closure and are expected to start a gradual recovery beginning in 2022.
Risks to the outlook
- Risks are substantial and tilted to the downside.
- Identified downside risks include:
- A worsening of the pandemic requiring longer border closure that would adversely impact economic activity.
- ECP revenues could fall sharply amid growing concerns on AML/CFT risks following the recent loss of the key correspondent banking relationship.
- Further deterioration of banks’ asset quality could erode the soundness of Vanuatu’s financial system.
- Lack of transparency and an ineffective supervision framework for state enterprises could negatively affect the business environment and fiscal management.
- Issues concerning AML/CFT and EU blacklisting related to tax transparency could accelerate de-risking by foreign firms and impede foreign direct investment (FDI).
- An ever-present downside risk relates to further natural disasters.
Fiscal policy recommendations
- Continue fiscal support over the near term; ensure support is well targeted at the most vulnerable.
- Strengthen public expenditure and investment management.
- Near-term support should be embedded in a credible medium-term fiscal strategy that brings about a gradual fiscal adjustment once recovery is firmly entrenched.
- The initiation of fiscal adjustment should remain state-contingent, but a credible forward-looking fiscal strategy should be put in place.
- Further fiscal consolidation would allow the authorities to reduce reliance on ECP revenues and to use ECP revenues for resilient infrastructure.
- In the medium term, development needs and vulnerabilities to climate change require scaling up infrastructure spending.
- Staff recommends integrating financing plans, consistent with a medium-term fiscal strategy, for the adaptation plan and disaster response to support resilience-building in a more efficient and effective manner.
Monetary and financial sector recommendations
- The Reserve Bank of Vanuatu (RBV) should:
- Maintain the current accommodative stance until the recovery is entrenched.
- Closely monitor and periodically reassess the policy stance, particularly in the event of unexpected shocks.
- Carefully monitor the banking sector and continue to strengthen supervisory frameworks.
- Establish crisis management and resolution frameworks and improve the collateral asset recovery environment for liquidation of NPLs.
- Encourage banks to accumulate further provisioning and to restructure the debt of temporarily illiquid but otherwise solvent borrowers.
- Digitalization could advance financial inclusion, but challenges remain.
Macro-structural and governance recommendations
- Economic diversification and development of quality infrastructure are essential for sustained and inclusive growth and resilience to shocks.
- Smooth ratification of PACER Plus and improving the regulatory framework could promote vital foreign investment.
- Further enhancing climate resilience is necessary.
- Improve governance, reduce vulnerabilities to corruption, and bolster Vanuatu’s risk profile.
- Urgently establish stronger management and transparency of Government Business Enterprises (GBEs)—particularly with respect to Air Vanuatu.
- Establish supervisory frameworks for GBEs and enhance their transparency as soon as possible.
- Strengthen legal frameworks and institutional capacities on:
- AML/CFT (especially ECP due diligence)
- Tax transparency
- Central bank autonomy and governance
International Monetary Fund staff statement, July 23, 2021.