IMF Executive Board Concludes 2021 Article IV Consultation with Vanuatu
IMF News, September 14, 2021
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- Published: September 14, 2021
Economic impact of COVID-19 and natural disasters
- 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.
- Border closure dealt a heavy blow to tourism; infrastructure projects have been delayed.
- 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 have helped mitigate the impact of the pandemic on fiscal and external balances.
Outlook and projections
- After a severe contraction in 2020, real GDP growth is expected to rise to 1.2 percent in 2021.
- Drivers of the 2021 recovery:
- Agricultural production and remittance income from seasonal workers.
- Construction activity, 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.
- Selected projections and estimates from Table 1 (2018–23):
- Real GDP: 2018 = 2.9; 2019 = 3.9; 2020 = -6.8; 2021 = 1.2; 2022 = 3.0; 2023 = 4.1 (annual percent change).
- Consumer prices (period average): 2018 = 2.4; 2019 = 2.7; 2020 = 5.7; 2021 = 5.4; 2022 = 2.6; 2023 = 2.3.
- Total revenue (percent of GDP): 2018 = 39.5; 2019 = 38.5; 2020 = 44.2; 2021 = 40.6; 2022 = 34.2; 2023 = 32.1.
- Expenditure (percent of GDP): 2018 = 33.3; 2019 = 31.8; 2020 = 44.4; 2021 = 44.0; 2022 = 38.3; 2023 = 36.1.
- Net lending (+)/borrowing (-) (percent of GDP): 2018 = 6.3; 2019 = 6.7; 2020 = -0.1; 2021 = -3.5; 2022 = -4.1; 2023 = -4.0.
- Public and publicly-guaranteed debt (end of period, percent of GDP): 2018 = 49.2; 2019 = 46.1; 2020 = 50.1; 2021 = 47.5; 2022 = 50.2; 2023 = 51.4.
- Travel receipts (percent of GDP): 2018 = 32.3; 2019 = 29.8; 2020 = 7.2; 2021 = 0.6; 2022 = 4.4; 2023 = 11.3.
- Gross international reserves (in millions of U.S. dollars): 2018 = 420.6; 2019 = 511.6; 2020 = 613.6; 2021 = 658.2; 2022 = 673.0; 2023 = 697.7.
- Gross international reserves (in months of prospective G&S imports): 2018 = 9.6; 2019 = 13.3; 2020 = 15.3; 2021 = 14.7; 2022 = 11.8; 2023 = (not shown).
- Nominal GDP (in millions of U.S. dollars): 2018 = 928; 2019 = 932; 2020 = 999; 2021 = 1,060; 2022 = 1,127; 2023 = (not shown in table extract).
Downside risks to the outlook
- Risks are substantial and tilted to the downside:
- A worsening of the pandemic requiring longer border closure 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.
Executive Board assessment and recommendations
- Directors commended authorities for decisive actions preventing local COVID-19 outbreaks and for prudent policy management maintaining macro-financial stability.
- Priority recommendation:
- Front-loading the vaccination strategy with support of development partners to help support the recovery.
- Fiscal policy:
- Maintain fiscal support over the near term, anchored on a credible medium-term fiscal consolidation strategy.
- Ensure support is well targeted and complemented by improvements in public expenditure and investment management.
- Fiscal strategy should be based on domestic revenue mobilization, including the introduction of personal and corporate income taxes, to reduce reliance on ECP revenues and provide resources for investment in climate resilient infrastructure and other development needs.
- Further manage fiscal risks by minimizing contingent liabilities of SOEs, including the state-owned airline.
- Monetary and financial sector policy:
- Monetary policy should remain accommodative until the recovery is entrenched; close monitoring of inflationary pressures is warranted.
- Remain vigilant of developments in 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 non-performing loans.
- Digitalization could advance financial inclusion, but challenges remain.
- Governance, AML/CFT, and transparency:
- Improve governance, reduce corruption, and bolster Vanuatu’s risk profile to mitigate risks from weak due diligence of the ECP and loss of correspondent banking relationships (CBRs).
- Strengthen legal frameworks and institutional capacity pertaining to AML/CFT, tax transparency, and central bank autonomy and governance.
- Establish supervisory frameworks for state‑owned enterprises and enhance their transparency.
- Development and resilience:
- Economic diversification and development of quality infrastructure are essential for sustained and inclusive growth.
- Improve resilience to natural disasters and climate change; welcomed the operationalization of the Disaster Risk Management Act and the ongoing review of the National Adaptation Plan for Action.
- Continue to benefit from technical assistance by the Fund and development partners, given Vanuatu’s limited capacity.
Key country indicators (from Table 1)
- Population (2020): 301,695
- Per Capita GDP (2020): US$ 3,090
- IMF quota: SDR 23.8 million (0.01 percent of total)
- Literacy rate (2018): 87.5 percent
- Main products and exports: Kava, coconut oil, copra, cocoa, beef
- Key export markets: New Caledonia, Australia, New Zealand
Press Release No. 21/263 — IMF Communications Department
