IMF Staff Completes 2024 Article IV Mission to Vanuatu

IMF News, June 20, 2024

Source details

Growth is expected to slow in 2024 to around 1 percent y/y and to around 1½ percent y/y in 2025.
There is significant uncertainty regarding the future of the airline (Air Vanuatu).
Temporary price shocks from the airline liquidation are likely.
Inflation is expected to decelerate more in 2024 and fall to below 4 percent y/y by Q3.

The fiscal deficit is likely to deteriorate in 2024 given reduced revenues and elevated current spending due to the resolution of the airline, modest transfers, and support.
Capital expenditure is expected to decline as the Government reprioritizes spending.
Key policy measures recommended:
- Keep a tight rein on non-priority spending.
- Urgently deploy ambitious revenue measures to reduce heightened risks to debt sustainability.
- Reconsider the design of interim spending measures and increases to public employee compensation and allowances to prioritize support amid the emergency.
- Strengthen revenue mobilization, including aiming for better VAT collection and continuing to explore new revenue measures (for example, via income tax and capital gains tax, fisheries licenses, higher VAT rates, and a widening of the tax base).

The voluntary liquidation of Air Vanuatu in May 2024 is a major economic shock with significant spillovers.
Decline in tourism will directly impact the services sector through the hospitality industry, transport, retail and wholesale trade, and other activities.
Disruptions in air transportation are likely to:
- Limit availability and mobility of labor and cargo networks for infrastructure investment and commerce.
- Directly impact the industry sector.
- Have more pronounced effects outside Efate where flights are still disrupted.
Alongside measurable economic shocks, there may be significant social and welfare effects via disrupted access to healthcare, education, and public services.

Monetary policy remains appropriately accommodative, but fiscal dominance needs to be reduced.
The Statutory Reserve Deposit ratio was increased marginally in January 2024 to address large excess liquidity.
Monetary policy, including through open market operations, has not been very effective in reducing liquidity, suggesting the urgent need to address fiscal dominance and concerted efforts to lower it over the medium term.
The financial system appears broadly stable, but the elevated non-performing loans are a concern.
Other financial stability concerns and recommendations:
- The large sovereign-financial sector nexus, reflected in significant holdings of Government liabilities by SOEs, can amplify financial stability risks.
- Improve the supervisory function, including increasing loan-loss provisioning for impaired loans, and enhancing capital requirements to encourage banks to accumulate additional buffers.
- Improve loan recovery and realize losses on nonperforming assets to help banks strengthen their balance sheet.
- Improve regulatory and supervisory capacity and practices, and reinstate regular on-site inspections.

Improving governance and reducing vulnerabilities to corruption need to be prioritized.
Specific governance and institutional actions recommended:
- Strengthened management and monitoring of state-owned enterprises (SOEs).
- Enhanced transparency of contingent liabilities to the government.
- Rapid approval and implementation of the Commercial Government Business Enterprises Act to enforce timely release of audited financial statements of SOEs and regular reporting for timely monitoring.
- Implement the 2016 Safeguard Assessment recommendations, amend the 2022 Reserve Bank Act, and adopt leading central banking practices to improve the RBV's integrity, autonomy, and governance.
Structural challenges to address:
- Labor shortages and skills drain.
- Climate risks.
- Recommendations include development partner-funded investment in quality education and skills development through targeted technical and vocational training, policies to promote a conducive business environment for investment, entrepreneurship and job creation, and integrating climate investment into the medium-term fiscal strategy with adequate prioritization of projects given financial and capacity constraints.

Managing the emergency will require providing needed targeted support to growth while keeping the fiscal deficit contained to secure sustainability.
The mission thanks the authorities for frank and engaging discussions, and their warm hospitality.

Press Release No. 24/230 — IMF Staff Completes 2024 Article IV Mission to Vanuatu, June 20, 2024