IMF Staff Concludes 2016 Article IV Mission to Vanuatu
IMF News, July 26, 2016
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- Published: July 26, 2016
Mission overview
- Mission leader: Mr. Chris Papageorgiou.
- Visit dates: July 13-26, 2016.
- Meetings with: Vanuatu authorities, representatives from the private sector and civil society organizations, and international donors.
- Purpose: Hold discussions on the 2016 Article IV consultation and assess economic developments and policies 15 months after Cyclone Pam.
Growth, inflation, and external sector projections
- Growth projections:
- 2016: 4.0 percent.
- 2017: 4.5 percent.
- Drivers cited: recovery in tourism and agricultural production, and further ramping-up of infrastructure projects.
- Inflation projection:
- Projected to remain below 3 percent due to lower commodity prices, though expanding domestic demand puts some pressure on supply.
- Current account:
- Expected to widen to around 20 percent of GDP in 2016 due to high import-content of reconstruction and infrastructure projects.
- The deficit is fully financed by grants and loans.
- External buffers:
- Vanuatu’s comfortable foreign exchange reserves coverage is described as providing the first line of defense against external shocks.
- Exchange rate:
- The peg to an undisclosed basket of currencies is assessed to continue serving Vanuatu well and should be maintained.
- Despite a mild appreciation of the vatu in recent months, staff assessment indicates the real effective exchange rate remains broadly in line with fundamentals.
Fiscal developments, debt, and risks
- Government spending:
- Projected to increase by 16 percentage points of GDP due to cyclone-related expenditure, which includes delayed spending from 2015.
- Fiscal deficit:
- Projected to reach 11.3 percent of GDP in 2016.
- Financing: fully financed by grants, loans, and government deposits.
- Public debt:
- The government’s ambitious development agenda partly financed by external borrowing will raise government debt substantially in 2016 and over the medium term.
- New debt is described as mostly concessional, but repayment obligations may put pressure on fiscal accounts.
- Risks to the outlook:
- Uncertainty in the rate of implementation of public infrastructure projects.
- External risk from a larger-than-expected slowdown in emerging and advanced economies affecting agriculture via weaker commodity prices and tourism.
- Natural disasters are an ever-present risk.
Policy recommendations and structural reforms
- Fiscal policy and debt management:
- Fiscal prudence is called for to ensure fiscal and debt sustainability.
- To ensure the public debt to GDP ratio declines in the medium term, the government should pursue careful fiscal planning and discipline, seeking mostly grant financing at least in the next few years.
- Strengthen resilience to environmental shocks by building fiscal buffers, promoting resilient infrastructure, and putting in place simple but effective disaster-response mechanisms.
- Revenue and public enterprise reforms:
- Commendation for launching a comprehensive tax reform initiative, including introduction of income and corporate taxes to provide a stable source of revenue.
- Welcome for the plan to submit the Government Business Enterprise (GBE) law to Parliament to improve fiscal discipline, accountability, and financial viability of GBEs.
- Financial sector and standards:
- Encouragement to proceed with anti-money laundering regulations and implement the action plan in line with international standards.
- Private sector and investment:
- Public investment scaling up should be complemented by active promotion of private sector investment and attraction of foreign direct investment.
- Boost competitiveness through further implementation of land reforms and enhancing quality upgrading, especially in the tourism and agriculture sectors.
- Social and inclusion priorities:
- Continue improving access to employment opportunities, basic social services, and infrastructure, especially in the outer islands.
- Particular emphasis on improving financial inclusion and educational attainment of the poor.
Press Release No. 16/362 — July 26, 2016