IMF Executive Board Concludes 2009 Article IV Consultation with Vanuatu

Public Information Notice (PIN) No. 09/67
May 21, 2009

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

On May 11, 2009, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Vanuatu.1


Vanuatu’s economic performance has remained strong over the past several years. Backed by a booming tourist sector, strong performance of the service sector and aid inflows, growth averaged 6 percent in 2003–08, outperforming most of the other Pacific Island countries (PICs).

Inflation accelerated to 5.8 percent in 2008 from 4.1 percent in 2007, due mainly to higher international food and fuel prices. However, core inflation remained relatively stable. While the current account deficit widened in 2008 reflecting higher imports of food, fuel, and aid-related capital imports, an uptick in aid inflows helped to finance the large import bill. Foreign exchange reserves remain comfortable at about 5½ months of projected imports of goods.

Fiscal performance improved further. The overall fiscal surplus increased to 2.2 percent of GDP in 2008 from a slight surplus in 2007, as higher-than-projected spending on goods and services was more than offset by improved VAT collections and trade taxes. Development expenditure also picked up as the long-awaited donor financing from the Millennium Challenge Account (MCA) began to feed into capital projects. The public debt-to-GDP ratio is estimated to have declined to 18½ percent of GDP in 2008 from over 40 percent in 2002.

Credit growth accelerated in 2008, in part reflecting the entry of a fourth foreign-owned commercial bank in the market. Most bank loans went to the construction and consumer finance sectors. However, a tightening of liquidity conditions in the domestic money market combined with stricter lending standards in light of the deteriorating global economic environment, has led to a slowdown in credit growth in the fourth quarter. That said, banks remain well capitalized and nonperforming loans remain low.

Progress was also made on structural reforms. Most notably, a new Utilities Act aimed at strengthening the regulatory framework was passed in 2007. The Personal Property Securities Act, which broadens the range of assets that can be used as collateral and strengthens the rights of secured creditors, was passed in 2008. In addition, the telecommunications sector was further liberalized and opened to foreign competition.

The global slowdown is likely to affect Vanuatu more than some of the other PICs, given its heavy dependence on tourism. As a result, growth is expected to slow in 2009. However, strong tourist arrivals expected at least for the first few months combined with higher donor disbursements are expected to help alleviate some of the negative impact on growth. In addition, the recent easing in monetary policy and a more accommodative fiscal stance for the 2009 budget would help cushion the impact on growth. Lower international food and fuel prices will likely contribute to lower inflation and narrow the current account deficit, improving the overall external balance.

Executive Board Assessment

Executive Directors welcomed Vanuatu’s robust economic performance in recent years, underpinned by strong fiscal and monetary policies. They noted that the impact of the global slowdown on Vanuatu’s economy has so far been limited, and acknowledged that adverse effects this year are likely to be largely confined to spillovers via the tourism and foreign direct investment channels.

Directors welcomed the improvement in the fiscal position in recent years. They commended the authorities for their efforts at maintaining a fiscal surplus for five consecutive years and reducing the debt-to-GDP ratio significantly. Directors supported staff’s recommendation that, in the event of a sharper-than-expected slowdown, the authorities could provide additional fiscal stimulus, including by expediting pending projects and by further strengthening the social safety net. Directors also emphasized the importance of well coordinated donor support.

Directors underscored that various fiscal structural reforms are needed for a more effective fiscal policy over the medium term. They noted that prioritization of spending is crucial to promoting growth while keeping expenditure pressures manageable. In particular, they emphasized the need to monitor the large public sector wage bill and loss-making public enterprises. In addition, improvements in tax administration and widening the tax base would help finance development expenditure as foreign aid begins to gradually taper off as the economy matures.

Directors agreed that the central bank could cautiously ease the monetary stance if the slowdown is deeper and longer than expected. They saw room for further monetary easing, given the wide interest-rate differentials with major central banks. Nonetheless, Directors stressed that the authorities should be mindful of rapid credit expansion, given the inflation experience of the recent past.

In this context, and building on recent achievements, Directors emphasized that banking supervision should be strengthened further to help preserve a stable and sustainable pro-growth environment. They stressed that supervisors need to be vigilant against a possible worsening of bank balance sheets, and welcomed the authorities’ plan to expand central bank supervision to the Vanuatu Agricultural Development Bank. They also saw the need to implement the regulations related to Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT) expeditiously.

Directors acknowledged that the current exchange rate regime remains appropriate. They noted that the exchange rate remains broadly in line with economic fundamentals and that the prevailing exchange rate regime provides a useful inflation anchor and has helped the currency to gain credibility.

Directors stressed that further structural reforms should help sustain economic growth in the future. They acknowledged that past reforms had enabled the recent rapid economic growth, and that the authorities had a strong track record and a high degree of credibility for tackling the difficult reforms ahead. Directors particularly emphasized moving ahead with priority reforms related to improving road and port infrastructure, strengthening management and efficiency at public enterprises, and ensuring flexible labor markets.

Directors welcomed the authorities’ intention to improve the capacity for statistics. They noted that improvements in key data would help enhance transparency in the economy and aid effective decision making on macroeconomic policies.

Vanuatu: Selected Economic and Financial Indicators, 2004–09

  2004 2005 2006 2007 2008 2009
          Est. Proj.

Output and prices (annual percentage change)


Real GDP

5.5 6.5 7.4 6.8 6.6 3.0

Consumer prices (period average)

1.4 1.2 2.0 3.9 4.8 4.3

Government finance (in percent of GDP) 1/


Total revenue and grants 2/

21.5 21.7 21.8 23.1 28.6 26.6

Total expenditure 2/

20.7 19.7 21.3 22.9 26.4 26.6

Current expenditure

18.6 17.9 19.0 20.2 19.6 19.6

Capital expenditure 2/

2.0 1.8 2.2 2.7 6.7 7.0

Overall balance

0.9 2.0 0.5 0.3 2.2 0.0

Money and credit (annual percentage change)


Broad money (M2)

9.8 11.6 7.0 16.1 13.2 ...

Net foreign assets

11.7 6.9 10.5 15.0 9.0 ...

Domestic credit

7.9 8.7 7.2 10.6 36.7 ...

Balance of payments


Current account (in millions of U.S. dollars)

-16.5 -27.5 -17.1 -30.0 -42.3 -33.4

(In percent of GDP)

-5.0 -7.4 -4.1 -5.9 -7.4 -6.0

Of which: tourism exports (in millions of U.S. dollars)

    92.4 118.0 160.9 139.5

Merchandise exports, f.o.b. (in millions of U.S. dollars)

38.1 38.1 37.7 29.7 41.7 37.1

(Annual percentage change)

43.3 0.1 -1.1 -21.3 40.7 -11.2

Merchandise imports, f.o.b. (in millions of U.S. dollars)

106.7 124.7 134.4 167.9 239.1 216.0

(Annual percentage change)

22.9 16.9 7.7 25.0 42.4 -9.7

Gross official reserves (end of period)


In millions of U.S. dollars

62.1 67.6 105.1 119.6 115.2 135.3

In months of corresponding imports of goods 3/

5.8 5.4 7.8 7.1 4.8 6.3

Public debt


Total debt (in percent of GDP)

33.7 28.1 23.4 19.8 18.5 17.3

External debt (in percent of GDP) 4/

24.2 19.8 16.7 14.1 14.1 14.4

External debt service 5/

1.6 3.1 1.4 1.3 1.3 2.4

Sources: Vanuatu authorities; and IMF staff estimates and projections.
1/ 2007–08 figures are based on the authorities' budget estimates, with adjustments by staff.
2/ Includes Millennium Challenge Account (MCA) project grant, which was launched in 2006.
3/ Imports values are on c.i.f. basis.
4/ Medium- and long-term public debt only.
5/ In percent of exports of goods and nonfactor services.

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. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities.


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