Technical Assistance Reports

At the request of the Reserve Bank of Vanuatu (RBV), IMF technical assistance reviewed the monetary policy implementation framework supporting Vanuatu’s currency basket peg. Strengthening the framework would enhance the resilience of the exchange rate regime and better prepare the RBV for potentially more demanding domestic and external conditions. The mission examined how interest rate calibration, monetary policy instruments, and foreign exchange monitoring could reinforce the credibility and sustainability of the peg.

The mission found that persistent excess liquidity and the limited and fragmented issuance of RBV Notes across multiple maturities leave the effective return on Vatu liquidity well below the policy rate. Monetary transmission is consequently weak, while higher returns on foreign currency deposits, together with their relatively favorable reserve requirement treatment, increase their attractiveness relative to Vatu deposits.

The mission recommended using monetary policy instruments more actively to support the peg. The policy rate should be informed by the rates of the basket currencies and Vanuatu’s country risk premium. A weekly fixed rate, full allotment seven-day RBV Note at the policy rate would establish a clearer operational signal, while variable rate 91-day Notes would absorb structural excess liquidity. Remunerating excess reserves below the policy rate, narrowing the interest rate corridor, and harmonizing reserve requirements across Vatu and foreign currency deposits would strengthen the relative attractiveness of Vatu assets and improve transmission. These reforms should be supported by stronger foreign exchange flow monitoring, enhanced liquidity forecasting, and clearer communication that the exchange rate peg is the nominal anchor of monetary policy.