Washington, DC: The Executive Board of the International Monetary Fund (IMF) completed the Article IV Consultation for Vanuatu and endorsed the staff appraisal without a meeting on a lapse-of-time basis.[1],[2]
Vanuatu’s growth is expected to gradually recover to 1.7 percent in 2025 after a marked slowdown last year, and to further strengthen to 2.8 percent in 2026. The capital city, Port Vila, was hit by a major earthquake in December 2024, following the liquidation of Air Vanuatu in May 2024 and three cyclones in 2023. Headline inflation has returned to the Reserve Bank of Vanuatu (RBV)’s target band and is projected to edge higher, remaining within the band, though upside risks remain. The fiscal deficit is projected to widen in 2025 due to weaker revenues and an increase in expenditures related to post-earthquake rebuilding, support for households and Air Vanuatu’s operational needs. The current account deficit is projected to remain wide in 2025 and 2026 due to higher imports, while foreign reserves are projected to remain adequate—supported by external grants, remittances, and a gradual recovery in tourism earnings—albeit on a downward trajectory. Monetary is broadly appropriate to support the growth recovery amidst a stable inflation outlook and adequate foreign reserves. The financial sector remains stable, but vulnerabilities persist, including elevated non-performing loans.
Uncertainty around the outlook remains high and the balance of risks is tilted to the downside. With the full impact yet to be determined, the post-earthquake recovery path and tourism sector prospects remain highly uncertain. Uncertainty over domestic connectivity, a deeper or longer-lasting slump in Economic Citizenship Program (ECP) revenues, delays in reconstruction, and external demand shocks including from ongoing global trade tensions could further strain growth, revenues, and reserves. Vanuatu also faces high risk of natural disasters, skills shortages, governance weaknesses, and political fragmentation which increase vulnerabilities.
Executive Board Assessment
In concluding the 2025 Article IV consultation with Vanuatu, Executive Directors endorsed the staff’s appraisal, as follows:
The post-earthquake recovery is underway. Strong donor support, partial resumption of domestic air services, and a rebound in agricultural production are supporting activities. However, the pace of recovery in 2025 will remain constrained by capacity bottlenecks, limited domestic connectivity, and delays in project execution. A more pronounced recovery is anticipated in 2026 as reconstruction gathers momentum, critical infrastructure is restored, and tourism capacity normalizes. Despite a comfortable reserves position, Vanuatu’s external position is assessed to be moderately weaker than the level consistent with fundamentals and desirable policies in 2024.
The balance of risks is tilted to the downside. Key domestic vulnerabilities stem from the uncertain future of Air Vanuatu, sustainability of the Citizenship program, and capacity constraints in executing public investment. To mitigate these risks, the authorities should urgently adopt a credible business plan for Air Vanuatu and strengthen its management and financial standing, enhance governance and transparency of the Citizenship Program, and build greater resilience in public investment management to ensure timely and efficient project delivery. On the external front, Vanuatu remains highly exposed to natural disasters, commodity price volatility, and weaker-than-expected global demand, including from rising global trade tensions.
A series of recent shocks have led to deterioration in the underlying fiscal position, leaving little policy room to contend with future risks. VAT revenues have held up thanks to the resilience in the domestic economy and the authorities’ enhanced efforts in collection, while other revenue streams weakened. ECP revenues remain significant but are facing a structural decline, underscoring the need for stronger domestic revenue mobilization, and for subjecting ECP processes to best international practices. On government spending, the planned increases in public employee compensation and allowances are substantial, setting a negative precedent on expenditure prioritization, likely to create persistent deficits that would need to be financed with relatively expensive domestic debt, which has experienced a sharp increase. This, combined with the increasing susceptibility to natural disasters and climate-related shocks and the high reliance on donor grants warrants building adequate buffers during non-crisis periods.
While the fiscal expansion envisaged by the budget in 2025 is warranted given ongoing shocks, a holistic and credible fiscal strategy is urgently needed to restore policy buffers and safeguard medium-term fiscal sustainability. Careful prioritization and expenditure management in the remainder of 2025 should be deployed to avoid an excessive fiscal expansion, and a medium-term consolidation plan should be urgently implemented. Strengthening the management and financial standing of Air Vanuatu’s operation, including by adopting a credible business plan, is urgent to avoid posing a protracted burden on the budget, as well as on public liabilities. The fiscal responsibility framework should be reinforced and provided with a clear anchor and credible operational rules to underpin responsible public financial management. This will guide the medium-term fiscal consolidation strategy to rebuild policy buffers through a comprehensive package of robust revenue mobilization and expenditure rationalization measures. Fiscal consolidation and a prudent debt management strategy are critical for addressing government funding vulnerabilities and alleviating domestic financing constraints, which have resulted in a heavy reliance on monetary financing by the RBV.
Improving governance and reducing risks of corruption are critical for long-term development. Effective implementation of the CGBE Act along with adequate resourcing of the GBE unit, will help bolster the oversight and evaluation of SOEs performance. Additionally, enhancing transparency and governance of existing revenue streams, especially the Citizenship program, and digitizing systems remain key for compliance. The implementation of the PFM Roadmap and the new financial management system will also strengthen PFM transparency.
Monetary policy should remain agile, and RBV reforms should be prioritized. The current monetary policy stance is appropriate given the benign inflation outlook, but the RBV should be prepared to respond if inflationary pressures arise. To improve the effectiveness of OMOs in reducing excess liquidity, monetary financing should be gradually phased out and only allowed under exceptional circumstances going forward. The ongoing legislative reforms to the RBV Act to strengthen its independence and autonomy in line with best practices are critical and should be prioritized. In particular, safeguarding the RBV’s financial and operational independence requires a strong balance sheet, a transparent approach to profit retention and distribution, and the removal of political influence in policy decisions.
Stronger safeguards are needed to preserve financial stability. High non-performing loans, combined with low provisioning and a strong sovereign-bank nexus, raise financial stability risks. Strengthening supervisory capacity, enhancing loan recovery frameworks, and implementing a modern bank resolution framework will be critical to bolster resilience. Effective implementation of the AML/CFT framework, targeted measures to address risks from the Economic Citizenship Program and virtual assets, and enhanced cross-border cooperation are essential to preserve correspondent banking relationships. Expanding financial inclusion, particularly in underserved communities, should be pursued in parallel to ensure that financial sector development supports inclusive and sustainable growth.
Concerted and sustained actions are needed to address structural challenges to build long-term resilience and inclusive growth. Strengthening resilience—by investing in more robust infrastructure and improving disaster preparedness—remains essential to safeguard development gains and reduce the economic scarring from repeated climate- and disaster-related shocks. Leveraging the benefits of overseas labor mobility programs to support skills development and entrepreneurship, investing in quality education and vocational training, promoting women’s participation in the formal labor force, and fostering an enabling business environment are critical for promoting private sector growth.
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Table 1. Vanuatu: Selected Economic Indicators, 2021-2026 |
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Population (2021): 312,039 |
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Per Capita GDP (2021): US$ 2,952 |
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IMF quota: SDR 23.8 million (0.01 percent of total) |
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Literacy rate (2018): 87.5 percent |
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Main products and exports: Kava, coconut oil, copra, cocoa, beef |
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Key export markets: New Caledonia, Australia, New Zealand |
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2021 |
2022 |
2023 |
2024 |
2025 |
2026 |
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Estimate |
Forecast |
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Output and prices (annual percent change) |
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Real GDP |
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-1.6 |
5.2 |
2.1 |
0.9 |
1.7 |
2.8 |
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Consumer prices (period average) |
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2.3 |
6.7 |
11.2 |
1.2 |
1.7 |
2.2 |
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Consumer prices (end period) |
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0.7 |
11.2 |
7.0 |
-0.7 |
2.2 |
2.3 |
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Government finance (in percent of GDP) |
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Total revenue |
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46.8 |
35.5 |
40.6 |
38.7 |
33.0 |
31.9 |
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Taxes |
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15.7 |
15.0 |
17.1 |
18.0 |
16.1 |
16.8 |
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Other revenue |
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14.8 |
8.5 |
8.3 |
10.4 |
7.6 |
6.5 |
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Grants |
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16.3 |
12.1 |
15.3 |
10.4 |
9.3 |
8.6 |
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Expenditure |
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44.4 |
42.0 |
41.6 |
41.1 |
38.0 |
36.6 |
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Expense |
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38.8 |
37.2 |
35.9 |
33.9 |
33.1 |
32.4 |
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Net acquisition of non financial assets |
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5.5 |
4.8 |
5.7 |
7.2 |
4.9 |
4.2 |
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Net lending (+)/borrowing (-) |
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2.4 |
-6.5 |
-0.9 |
-2.3 |
-5.0 |
-4.7 |
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Public and publicly-guaranteed debt (end of period) |
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49.5 |
43.6 |
42.6 |
46.2 |
49.4 |
52.2 |
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Domestic |
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8.8 |
9.5 |
10.3 |
13.2 |
16.1 |
19.6 |
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External |
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40.7 |
34.1 |
32.2 |
32.9 |
33.2 |
32.5 |
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Money and credit (annual percentage change) |
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Broad money (M2) |
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14.2 |
5.6 |
-0.8 |
5.7 |
-0.7 |
3.0 |
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Net foreign assets |
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7.8 |
-0.1 |
0.8 |
11.9 |
-9.2 |
-6.5 |
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Domestic credit |
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7.0 |
21.4 |
11.9 |
10.1 |
11.9 |
12.3 |
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Of which: Credit to private sector |
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0.3 |
6.1 |
5.9 |
5.4 |
4.8 |
4.0 |
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Interest rates (in percent, end of period) 1/ |
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Deposit rate (vatu deposits) |
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0.5 |
0.4 |
0.4 |
0.3 |
… |
… |
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Lending rate (vatu loans) |
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9.4 |
9.0 |
8.8 |
8.6 |
… |
… |
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Balance of payments (in percent of GDP) |
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Current account |
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-11.7 |
-17.6 |
-6.6 |
-15.4 |
-11.6 |
-11.6 |
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Trade balance |
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-25.4 |
-28.6 |
-30.4 |
-24.1 |
-29.4 |
-30.7 |
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Exports of goods |
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5.7 |
7.0 |
5.4 |
6.6 |
6.3 |
6.3 |
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Imports of goods |
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31.1 |
35.6 |
35.8 |
30.7 |
35.7 |
37.0 |
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Travel receipts |
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0.2 |
3.8 |
12.0 |
10.0 |
11.2 |
12.6 |
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Gross Remittances |
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20.6 |
17.8 |
15.0 |
15.2 |
16.3 |
15.8 |
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Capital and financial account |
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22.2 |
9.1 |
3.6 |
15.2 |
7.6 |
6.3 |
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Of which: Foreign direct investment |
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3.7 |
2.3 |
1.1 |
4.2 |
3.7 |
3.3 |
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Overall balance |
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5.5 |
-2.5 |
-3.0 |
1.7 |
-4.0 |
-5.3 |
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Gross international reserves (in millions of U.S. dollars) |
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664.8 |
638.5 |
604.5 |
622.9 |
577.6 |
515.6 |
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Gross international reserves (in months of prospective G&S imports) |
11.7 |
11.6 |
11.2 |
10.5 |
9.4 |
8.1 |
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External debt service (in percent of GNFS exports) |
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16.4 |
40.6 |
26.9 |
14.6 |
7.9 |
9.0 |
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Exchange rates 2/ |
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Vatu per U.S. dollar (period average) |
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112.9 |
117.6 |
118.1 |
122.3 |
… |
… |
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Vatu per U.S. dollar (end of period) |
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112.2 |
117.2 |
116.5 |
123.8 |
… |
… |
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Memorandum items: |
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Nominal GDP (in millions of U.S. dollars) |
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921 |
1,035 |
1,125 |
1,090 |
1,119 |
1,176 |
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GDP per capita (U.S. dollars) |
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2951.7 |
3206.3 |
3371.2 |
3156.5 |
3132.9 |
3184.8 |
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Sources: Vanuatu authorities; and IMF staff estimates and projections. |
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1/ Weighted average rate of interest for total bank deposits and loans. |
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2/ The vatu is officially pegged to an undisclosed basket of currencies. |
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[1] Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.
[2] The Executive Board takes decisions under its lapse-of-time procedure when the Board agrees that a proposal can be considered without convening formal discussions.
