An International Monetary Fund (IMF) mission led by Mr. Chris Papageorgiou
visited Port Vila during January 29–February 8, 2018 to hold discussions on
the 2018 Article IV consultation. At the conclusion of the visit, Mr.
Papageorgiou issued the following statement:
“Vanuatu is poised to fully recover from the extensive damages caused by
Cyclone Pam in 2015, with several large infrastructure projects near
completion and growth bouncing back. A recovery in tourism and agriculture
combined with further ramping-up of infrastructure projects is expected to
continue to propel real GDP growth to around 4 percent in 2017 and 2018.
Inflation is estimated to pick up to 3.1 percent in 2017 driven by domestic
demand, and rise further to 4.8 percent in 2018 mainly due to a temporary
VAT increase, from 12.5 to 15 percent, before gradually reverting to modest
levels in the medium term. The current account deficit is expected to widen
to above 10 percent of GDP in 2017 and 2018, due to the high import content
of infrastructure projects.
“The downside risks to this favorable outlook stem mainly from uncertainty
in the rate of implementation of the public infrastructure projects. The
delayed implementation of revenue mobilization measures, such as the
introduction of the income tax, could put a strain on fiscal accounts. On
the external front, while the withdrawal of correspondent banking and the
negative impact of weaker-than-expected global growth have so far been
limited, they pose non-negligible risks. The danger of natural disasters is
ever-present.
“Looking further ahead, economic growth in Vanuatu needs to be stronger and
more stable. In this regard, resilience to natural disasters should be at
the core of any development strategy for the country to ensure sustainable
and inclusive growth. It is in this context that diversification of
economic activity is required. Tourism sector needs to be strategically
segmented across locations, and efforts to diversify the economy into the
agricultural sector need to be intensified. To facilitate diversification,
supporting the private sector by improving the ease of doing business and
reaching out to small businesses in need for credit is necessary.
“The public and publicly-guaranteed debt increased sharply since 2014
mainly due to disbursements for reconstruction and infrastructure projects,
though the new external borrowing was highly concessional. The fiscal
deficit is expected to remain high at around 7 to 8 percent of GDP in 2017
and 2018, again reflecting elevated spending on reconstruction and
infrastructure.
“Once the reconstruction and infrastructure scaling up are over, the
authorities should consider embarking on fiscal adjustment measures to
address the rising debt and to rebuild fiscal buffers. An appropriate
medium-term fiscal anchor, with fiscal target and debt ceiling in place, is
required to facilitate this consolidation. External financing should
continue to be contracted as much as possible in the form of grants, or on
concessional terms.
“Given recent signs of excess liquidity along with building up of inflation
pressure, the Reserve Bank of Vanuatu should be ready to tighten its
monetary policy stance through the gradual increase of reserve
requirements. The basket peg regime is working well in Vanuatu, and the
real effective exchange rate (REER) remains broadly in line with
fundamentals and desirable policies. Vanuatu’s comfortable foreign exchange
reserves should be maintained at above 5 months of imports to provide
foreign currency for government’s debt repayment obligations.
“Although the overall credit-to-GDP ratio is relatively high, credit is not
evenly distributed between large firms and small and medium-sized
enterprises (SMEs) or between urban areas and rural areas. Increasing
private access to financial services for SMEs and households in rural areas
and outer islands should remain a priority.
“The team would like to express its appreciation to the authorities for
their excellent cooperation and warm hospitality during its visit. The IMF
Executive Board is expected to discuss the 2018 Article IV consultation in
April 2018.
