IMF Executive Board Concludes 2023 Article IV Consultation with Vanuatu

IMF News, March 22, 2023

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IMF Executive Board Concludes 2023 Article IV Consultation with Vanuatu

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• Published: March 22, 2023

Overview and near-term outlook

• Reopening of borders and strong public infrastructure investment are paving the way for a faster recovery.
• GDP growth is expected to rise to 3.5 percent in 2023.
• Agricultural production, remittance inflows, and strong recovery in trading partners will support economic activity.
• High energy and global commodity prices are pushing up headline inflation and widening the current account deficit, while core inflation remains subdued for now.
• Fiscal policy is expected to remain expansionary in the near term as the implementation of externally financed infrastructure projects accelerates.
• Monetary policy remains appropriately on hold amid weak private credit growth and negative output gap.
• The Economic Citizenship Program (ECP) is facing significant challenges with important implications for revenue collection and governance.
• The financial and operational challenges of Air Vanuatu are worsening and affecting the economy, particularly the tourism sector.
• The banking sector weathered the pandemic well, but elevated non-performing loans (NPLs), particularly for households, remain a concern.

Risks to the outlook

• Short-term to near-term risks (tilted to the downside):
  • Spread of COVID-19 variants following the reopening of borders delaying implementation of major infrastructure projects.
  • Slowdown in main trading partners’ growth negatively weighing on tourism and remittances.
  • Additional losses in ECP revenue that could derail medium-term fiscal sustainability.
• Structural risks:
  • Increasing NPLs and their effects on banks’ financial performance and lending capacity.
  • Weak governance and anti-corruption framework.
  • Extreme vulnerability to climate change.
• Specific operational risks:
  • Labor and materials shortages and cost overruns could delay externally financed infrastructure projects.
  • Operational and financial challenges at the national airline (Air Vanuatu) pose risks to tourism and domestic connectivity.

Executive Board assessment — policy priorities and recommendations

• Fiscal policy and debt sustainability:
  • A credible medium-term fiscal strategy that secures adequate consolidation is essential for preserving debt sustainability given projected decline in ECP revenues.
  • Vanuatu’s infrastructure agenda must be accompanied by tax revenue mobilization and expenditure rationalization to reduce deficits and keep debt below 60 percent of GDP over the next decade.
  • Increasing tax revenues—including through the introduction of corporate or personal income taxes and through base broadening—should be at the core of any fiscal strategy.
  • Promptly launching fiscal consolidation efforts and securing at least two percent of GDP in savings would help meet the fiscal anchor while protecting capital spending.
  • Fiscal buffers should be strengthened given vulnerability to natural disasters, including expanding the sizeable cash reserves built in recent years.
• Air Vanuatu:
  • The restructuring of Air Vanuatu must be completed urgently to reduce fiscal risks.
  • A careful analysis of restructuring options is needed to identify a sustainable solution that minimizes contingent liabilities and transfers from the government while preserving the airline’s systemic economic role.
• Monetary policy:
  • The current monetary policy stance is appropriate: keep policy on hold given weak private credit growth, subdued core inflation, and negative output gap.
  • Monetary policy should remain data-driven; the Reserve Bank of Vanuatu should stand ready to tighten if there are signs of second-round effects such as rapid increases in core inflation.
• Financial sector:
  • Focus on tackling elevated non-performing loans.
  • Strengthen the supervisory and resolution framework, increase minimum capital requirements, and provisioning for some banks.
  • Introducing a debt-service-to-income ratio can help contain formation of unsustainable debt.
• Structural reforms to unlock growth:
  • Promote economic diversification, particularly in the agricultural sector.
  • Improve the public investment management process to strengthen capacity to implement large-scale projects.
  • Prioritize streamlining administrative processes for FDI and implement policies to address labor shortages.
• AML/CFT and governance:
  • Address significant deficiencies in Vanuatu’s AML/CFT regime, including better assessing ML/TF risks, strengthening the AML/CFT framework in line with international standards (including to regulate virtual asset service provider activities), and bolstering capacity of competent authorities and law enforcement.
  • Address governance risks surrounding the ECP.
  • Use the upcoming APG review as an opportunity to show tangible results.
  • Strengthen governance in the public sector, particularly with respect to the central bank and state-owned enterprises.

Key statistics and projections (selected, as reported)

• Population (2020): 301,695
• Per Capita GDP (2020): US$ 3,341
• IMF quota: SDR 23.8 million (0.01 percent of total)
• Main products and exports: Kava, coconut oil, copra, cocoa, beef
• Key export markets: New Caledonia, Australia, New Zealand

Selected annual figures (2019–28) — output, prices, and government finance (values as reported)

• Real GDP (annual percent change): 2019: 3.2; 2020: -5.0; 2021: 0.6; 2022: 1.9; 2023: 3.5; 2024: 3.6; 2025: 3.9; 2026: 3.1; 2027: 3.0; 2028: 2.5
• Consumer prices (period average): 2019: 2.7; 2020: 5.3; 2021: 2.3; 2022: 4.6
• Total revenue (percent of GDP): 2019: 42.6; 2020: 41.4; 2021: 45.7; 2022: 38.1; 2023: 40.0; 2024: 35.7; 2025: 34.0; 2026: 33.5; 2027: 33.2; 2028: 32.9
• Taxes (percent of GDP): 2019: 16.9; 2020: 14.0; 2021: 15.4; 2022: 16.0; 2023: 17.8; 2024: 18.3; 2025: 18.2; 2026: 18.1
• Grants (percent of GDP): 2019: 11.7; 2020: 11.5; 2021: 12.9; 2022: 14.3; 2023: 10.5; 2024: 9.0; 2025: 8.7; 2026: 8.5; 2027: 8.2
• Expenditure (percent of GDP): 2019: 39.8; 2020: 43.4; 2021: 44.7; 2022: 46.1; 2023: 42.9; 2024: 41.0; 2025: 39.5; 2026: 39.3; 2027: 39.0
• Net lending (+)/borrowing (-) (percent of GDP): 2019: 2.8; 2020: -1.9; 2021: -6.6; 2022: -6.2; 2023: -7.3; 2024: -6.9; 2025: -6.0; 2026: -6.1
• Public and publicly-guaranteed debt (end of period, percent of GDP): 2019: 45.9; 2020: 48.9; 2021: 48.4; 2022: 46.6; 2023: 49.2; 2024: 53.1; 2025: 56.1; 2026: 58.5; 2027: 61.4; 2028: 64.3
  • Domestic (percent of GDP): 2019: 6.0; 2020: 8.6; 2021: 10.1; 2022: 8.8; 2023: 9.3; 2024: 9.6; 2025: 10.3; 2026: 13.1
  • External (percent of GDP): 2019: 39.9; 2020: 40.4; 2021: 36.5; 2022: 40.5; 2023: 43.7; 2024: 46.5; 2025: 48.3; 2026: 49.7; 2027: 51.1
• Broad money (M2) (annual percent change): 2019: 9.2; 2020: 14.2; 2021: 7.4; 2022: 13.7; 2023: 7.1; 2024: 8.4
• Domestic credit (annual percent change): 2019: -6.4; 2020: -9.5; 2021: 5.8; 2022: 1.2; 2023: 5.0; 2024: 4.8; 2025: 5.7; 2026: 7.6; 2027: 7.8
• Credit to private sector (annual percent change): 2019: 0.4; 2020: 1.5; 2021: 0.3; 2022: 1.6
• Lending rate (vatu loans, percent, end of period): 2019: 9.9; 2020: 9.5; 2021: 9.4
• Current account (percent of GDP): 2019: 27.8; 2020: -2.2; 2021: -3.6; 2022: -1.2; 2023: 2.2; 2024: 2.6
• Trade balance (percent of GDP): 2019: -24.0; 2020: -22.8; 2021: -24.9; 2022: -27.0; 2023: -32.2; 2024: -30.0; 2025: -29.0; 2026: -27.9; 2027: -27.6
• Exports of goods (percent of GDP): 2019: 5.1; 2020: 6.1; 2021: 5.9
• Imports of goods (percent of GDP): 2019: -28.9; 2020: -27.8; 2021: -30.4; 2022: -33.1; 2023: -38.4; 2024: -35.9; 2025: -34.9; 2026: -33.8; 2027: -33.6; 2028: -33.5
• Travel receipts (percent of GDP): 2019: 28.8; 2020: 0.2; 2021: 18.9; 2022: 22.9; 2023: 22.6; 2024: 22.4; 2025: 22.2
• Gross Remittances (percent of GDP): 2019: 15.5; 2020: 11.9; 2021: 16.3; 2022: 17.0; 2023: 16.6; 2024: 15.7
• Gross international reserves (in millions of U.S. dollars): 2019: 511.6; 2020: 613.6; 2021: 664.8; 2022: 706.0; 2023: 754.5; 2024: 801.4; 2025: 871.1; 2026: 950.5; 2027: 1,030.2; 2028: 1,122.7
• Gross international reserves (in months of prospective G&S imports): 2019: 13.6; 2020: 10.9; 2021: 12.0; 2022: 12.4; 2023: 12.7; 2024: 13.0
• External debt service (in percent of GNFS exports): 2019: 27.3; 2020: 4.5
• Vatu per U.S. dollar (period average): 2019: 115.6; 2020: 104.1; 2021: 112.9; 2022: 113.5
• Vatu per U.S. dollar (end of period): 2019: 114.3; 2020: 107.7; 2021: 112.2; 2022: 114.8
• Nominal GDP (in millions of U.S. dollars): 2019: 930; 2020: 1,008; 2021: 942; 2022: 1,001; 2023: 1,064; 2024: 1,137; 2025: 1,217; 2026: 1,293; 2027: 1,372; 2028: 1,449
• GDP per capita (U.S. dollars): 2019: 3187.4; 2020: 3341.0; 2021: 3017.7; 2022: 3103.0; 2023: 3188.5; 2024: 3292.4; 2025: 3408.6; 2026: 3501.9; 2027: 3592.6; 2028: 3668.2

Source: IMF Executive Board Concludes 2023 Article IV Consultation with Vanuatu (Press Release No. 23/83, March 22, 2023).

References

• https://www.imf.org/-/media/images/imf/bios/imfboard.jpg
• The Executive Board
• Vanuatu and the IMF
• IMF Policy Advice -- A Factsheet
• Press Releases
• PRESS CENTER
• https://www.imf.org/en/home