## IMF Staff Concludes 2021 Article IV Mission to Vanuatu

_IMF News, July 23, 2021_

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## Bibliographic details
- Published: July 23, 2021

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### Mission timing and context
- 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.

### Economic impact and near-term outlook
- 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:
  - After a severe contraction in 2020, real GDP growth is expected to rise to 1.2 percent in 2021.
- Sectoral notes:
  - Agricultural production and remittance income from seasonal workers will help support a return to positive growth in 2021.
  - Construction activity will support growth, despite delays that will push several large infrastructure projects into 2022.
  - 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.

### Risks to the outlook
- Risks are substantial and tilted to the downside.
- Identified downside risks include:
  - A worsening of the pandemic requiring longer border closure that would adversely impact economic activity.
  - ECP revenues could fall sharply amid growing concerns on AML/CFT risks following the recent loss of the key correspondent banking relationship.
  - Further deterioration of banks’ asset quality could erode the soundness of Vanuatu’s financial system.
  - Lack of transparency and an ineffective supervision framework for state enterprises could negatively affect the business environment and fiscal management.
  - Issues concerning AML/CFT and EU blacklisting related to tax transparency could accelerate de-risking by foreign firms and impede foreign direct investment (FDI).
  - An ever-present downside risk relates to further natural disasters.

### Fiscal policy recommendations
- 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.

### Monetary and financial sector recommendations
- The Reserve Bank of Vanuatu (RBV) should:
  - Maintain the current accommodative stance until the recovery is entrenched.
  - Closely monitor and periodically reassess the policy stance, particularly in the event of unexpected shocks.
  - Carefully monitor the banking sector and continue to strengthen supervisory frameworks.
  - Establish crisis management and resolution frameworks and improve the collateral asset recovery environment for liquidation of NPLs.
  - Encourage banks to accumulate further provisioning and to restructure the debt of temporarily illiquid but otherwise solvent borrowers.
- Digitalization could advance financial inclusion, but challenges remain.

### Macro-structural and governance recommendations
- 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:
  - AML/CFT (especially ECP due diligence)
  - Tax transparency
  - Central bank autonomy and governance

*International Monetary Fund staff statement, July 23, 2021.*

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## References

- [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)

_Source: https://www.imf.org/en/news/articles/2021/07/23/pr21225-vanuatu-imf-staff-concludes-2021-article-iv-mission_