{
  "title": "IMF Staff Concludes 2021 Article IV Mission to Vanuatu",
  "publication": "IMF News, July 23, 2021",
  "sourceUrl": "https://www.imf.org/en/news/articles/2021/07/23/pr21225-vanuatu-imf-staff-concludes-2021-article-iv-mission",
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  "summary": "Press Release No. 21/225; July 23, 2021.",
  "publishDate": "2021-07-23",
  "sections": [
    {
      "heading": "Mission timing and context",
      "content": "- Press Release No. 21/225; July 23, 2021.\n- IMF team led by Koki Harada held virtual meetings with the Vanuatu authorities during June 28–July 22, 2021.\n- The views expressed are those of IMF staff and do not necessarily represent the views of the IMF’s Executive Board."
    },
    {
      "heading": "Economic impact and near-term outlook",
      "content": "- The COVID-19 pandemic and major natural disasters hit the Vanuatu economy severely in 2020.\n- Due to the authorities’ decisive measures, Vanuatu has had no domestic transmission of COVID-19.\n- The border closure brought tourism to a virtual stop and delayed infrastructure projects.\n- Tropical Cyclone Harold and a volcanic eruption in Tanna Island caused extensive damage in the first half of 2020.\n- Strong receipts of the Economic Citizenship Programs (ECP) and donor support helped mitigate the impact on fiscal and external balances.\n- Real GDP growth:\n  - After a severe contraction in 2020, real GDP growth is expected to rise to 1.2 percent in 2021.\n- Sectoral notes:\n  - Agricultural production and remittance income from seasonal workers will help support a return to positive growth in 2021.\n  - Construction activity will support growth, despite delays that will push several large infrastructure projects into 2022.\n  - 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."
    },
    {
      "heading": "Risks to the outlook",
      "content": "- Risks are substantial and tilted to the downside.\n- Identified downside risks include:\n  - A worsening of the pandemic requiring longer border closure that would adversely impact economic activity.\n  - ECP revenues could fall sharply amid growing concerns on AML/CFT risks following the recent loss of the key correspondent banking relationship.\n  - Further deterioration of banks’ asset quality could erode the soundness of Vanuatu’s financial system.\n  - Lack of transparency and an ineffective supervision framework for state enterprises could negatively affect the business environment and fiscal management.\n  - Issues concerning AML/CFT and EU blacklisting related to tax transparency could accelerate de-risking by foreign firms and impede foreign direct investment (FDI).\n  - An ever-present downside risk relates to further natural disasters."
    },
    {
      "heading": "Fiscal policy recommendations",
      "content": "- Continue fiscal support over the near term; ensure support is well targeted at the most vulnerable.\n- Strengthen public expenditure and investment management.\n- 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.\n- The initiation of fiscal adjustment should remain state-contingent, but a credible forward-looking fiscal strategy should be put in place.\n- Further fiscal consolidation would allow the authorities to reduce reliance on ECP revenues and to use ECP revenues for resilient infrastructure.\n- In the medium term, development needs and vulnerabilities to climate change require scaling up infrastructure spending.\n- 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."
    },
    {
      "heading": "Monetary and financial sector recommendations",
      "content": "- The Reserve Bank of Vanuatu (RBV) should:\n  - Maintain the current accommodative stance until the recovery is entrenched.\n  - Closely monitor and periodically reassess the policy stance, particularly in the event of unexpected shocks.\n  - Carefully monitor the banking sector and continue to strengthen supervisory frameworks.\n  - Establish crisis management and resolution frameworks and improve the collateral asset recovery environment for liquidation of NPLs.\n  - Encourage banks to accumulate further provisioning and to restructure the debt of temporarily illiquid but otherwise solvent borrowers.\n- Digitalization could advance financial inclusion, but challenges remain."
    },
    {
      "heading": "Macro-structural and governance recommendations",
      "content": "- Economic diversification and development of quality infrastructure are essential for sustained and inclusive growth and resilience to shocks.\n- Smooth ratification of PACER Plus and improving the regulatory framework could promote vital foreign investment.\n- Further enhancing climate resilience is necessary.\n- Improve governance, reduce vulnerabilities to corruption, and bolster Vanuatu’s risk profile.\n- Urgently establish stronger management and transparency of Government Business Enterprises (GBEs)—particularly with respect to Air Vanuatu.\n- Establish supervisory frameworks for GBEs and enhance their transparency as soon as possible.\n- Strengthen legal frameworks and institutional capacities on:\n  - AML/CFT (especially ECP due diligence)\n  - Tax transparency\n  - Central bank autonomy and governance\n\nInternational Monetary Fund staff statement, July 23, 2021.\n\n---\n\n\n References\n\n- IMF COVID-19 Hub\n- Policy Tracker\n- Financial Assistance\n- Questions & Answers\n- Vanuatu and the IMF\n- IMF Policy Advice -- A Factsheet\n- Press Releases\n- PRESS CENTER\n- https://www.imf.org/en/home\n\nSource: https://www.imf.org/en/news/articles/2021/07/23/pr21225-vanuatu-imf-staff-concludes-2021-article-iv-mission"
    }
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    "Published: July 23, 2021",
    "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.",
    "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:",
    "Sectoral notes:",
    "Risks are substantial and tilted to the downside.",
    "Identified downside risks include:",
    "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.",
    "The Reserve Bank of Vanuatu (RBV) should:",
    "Digitalization could advance financial inclusion, but challenges remain.",
    "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:",
    "[IMF COVID-19 Hub](https://www.imf.org/en/Topics/imf-and-covid19)",
    "[Policy Tracker](https://www.imf.org/en/Topics/imf-and-covid19/Policy-Responses-to-COVID-19)",
    "[Financial Assistance](https://www.imf.org/en/Topics/imf-and-covid19/COVID-Lending-Tracker)",
    "[Questions & Answers](https://www.imf.org/en/About/FAQ/imf-response-to-covid-19)",
    "[Vanuatu and the IMF](http://www.imf.org/external/country/VUT/index.htm)",
    "[IMF Policy Advice -- A Factsheet](https://www.imf.org/en/about/factsheets/imf-surveillance)",
    "[Press Releases](https://www.imf.org/en/news/searchnews)",
    "[PRESS CENTER](http://presscenter.imf.org/)",
    "[https://www.imf.org/en/home](https://www.imf.org/en/home)"
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