IMF Executive Board Concludes 2011 Article IV Consultation with Vanuatu

Public Information Notice (PIN) No. 11/59
May 23, 2011

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 April 22, 2011, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Vanuatu.1


Economic activity is showing signs of a moderate rebound after both external and domestic demand slowed down in 2009–10. Private investment is picking up, tourism is gradually expanding, and agricultural production is increasing partly in response to sharp rises in copra prices. The key downside risks are delays in infrastructure investment and slower tourism growth owing to recent natural disasters in the region. Inflation is ticking up and is expected to reach 4 percent on the back of higher food and oil prices, as well as rising domestic demand.

The balance of payments has been stable. The current account deficit remained high at about 6 percent of GDP in 2010, but was fully financed by foreign direct investment inflows and official grants. Official reserves remained around US$160 million (covering six months of imports) in 2010 after rising throughout 2009 (helped by the Special Drawing Rights allocation).

The fiscal deficit deteriorated to 2.7 percent of GDP in 2010 as revenue fell short of budget projections. Total revenue excluding grants shrunk 2.4 percent from 2009, compared with a budgeted increase of 17 percent, reflecting weaknesses in revenue from both external trade and domestic activity. For 2011, the authorities are targeting a substantial reduction in the deficit to 0.7 percent of GDP. They expect to achieve this reduction by maintaining the nominal wage bill broadly at the 2010 level and lowering capital expenditure.

The Reserve Bank of Vanuatu (RBV) maintains an easy monetary stance established at the onset of the global financial crisis. There is ample liquidity in the banking system, and bank lending grew by 12 percent (year-on-year) in 2010, with loans to households and foreign-exchange denominated loans increasing significantly. The vatu has changed little in effective terms since 2009.

Executive Board Assessment

Executive Directors commended the authorities for implementing appropriate policies, leading to a strong rebound in economic activity. The challenge now is to support the recovery while guarding against inflation risks and pushing ahead with fiscal consolidation. Over the medium term, rebuilding fiscal, external, and financial buffers is crucial to enhance Vanuatu’s resilience to shocks.

Directors considered this year’s budget expenditure target to be appropriate. They stressed the importance of limiting total expenditure to the budgeted level, particularly by containing the wage bill, but encouraged the authorities to allow free play of the automatic stabilizers on the revenue side, if needed. Directors recommended a broadly balanced budget for 2012, which would restore room for policy maneuver against future shocks. Further efforts to mobilize revenue, improve tax administration, and reduce contingent liabilities at public enterprises will also strengthen fiscal buffers.

With rising inflation risks, Directors encouraged early action to unwind the accommodative monetary stance. Rapid growth in credit to households and foreign currency loans calls for continued vigilance and, if necessary, additional prudential measures. Directors saw scope for some exchange rate depreciation as part of a broader macroeconomic response to persistent pressures on Vanuatu’s official foreign exchange reserves. More broadly, they underscored the need to safeguard external buffers by maintaining an adequate level of foreign exchange reserves.

Directors welcomed progress in bolstering the soundness of the banking sector, particularly the recent decision to tighten capital and liquidity requirements. They encouraged further efforts to strengthen the regulatory and supervisory framework that covers the whole financial system, including micro lenders and offshore banks.

Vanuatu: Selected Economic and Financial Indicators, 2006–11





Est. Proj.
  2006 2007 2008 2009 2010 2011


Output and prices (annual percentage change)







 Real GDP

7.4 6.5 6.2 3.5 2.2 3.8

 Nominal GDP

12.7 11.6 11.2 4.8 5.1 7.9

 Consumer prices (period average)

2.0 3.9 4.8 4.3 2.8 4.0

Government finance (in percent of GDP)







 Total revenue and grants

20.7 22.3 27.7 26.8 25.0 24.2


18.9 20.4 21.1 19.5 18.1 18.1


16.8 18.2 19.1 17.2 16.5 16.5


2.1 2.2 2.0 2.3 1.7 1.7


1.8 1.8 6.6 7.3 6.8 6.0

 Total expenditure and net lending

20.2 22.0 27.9 27.6 27.7 25.1

  Current expenditure

17.4 19.4 18.6 18.6 19.8 19.0

  Capital expenditure

2.1 2.6 7.6 9.0 7.3 6.1

 Overall balance

0.5 0.3 -0.2 -0.7 -2.7 -1.0

Money and credit (annual percentage change)







 Broad money (M2)

7.0 16.1 13.2 0.5 -6.0

 Net foreign assets

10.5 15.0 9.0 -18.3 -34.6

 Domestic credit

7.2 10.6 36.7 22.1 17.4

  Credit to private sector

9.7 12.3 43.3 19.9 11.6

Interest rates (in percent, end of period)







 Deposit rate (vatu deposits)

1.9 2.0 2.7 3.2 1.8

 Lending rate (vatu loans)

11.3 10.3 10.3 10.9 10.3

Balance of payments







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

-28.4 -36.9 -65.8 -48.5 -41.0 -43.7

   (In percent of GDP)

-6.5 -7.0 -11.1 -8.2 -5.9 -5.7

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

104.2 137.0 170.6 186.9 219.6 233.9

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

37.7 29.7 41.7 55.2 51.4 55.0

   (Annual percentage change)

-1.3 -21.2 40.7 32.1 -6.8 7.0

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

141.2 176.0 265.2 247.0 246.3 267.2

   (Annual percentage change)

7.6 24.6 50.6 -6.8 -0.3 8.5

Gross official reserves (end of period)







  In millions of U.S. dollars

105.1 119.6 115.3 148.6 161.4 157.2

  In months of corresponding imports of goods (on c.i.f. basis)

7.5 6.8 4.4 6.0 6.6 5.9

  In months of prospective imports of goods (on c.i.f. basis)

6.0 4.5 4.7 6.0 6.1 5.4

Public debt







 Total debt (in percent of GDP)

22.2 19.1 21.1 21.2 21.0 20.4

 External debt (in percent of GDP) 1/

15.8 13.5 16.8 17.3 16.0 14.4

 External debt service 2/

1.3 1.2 1.3 1.5 1.4 1.4

Sources: Vanuatu authorities; and IMF staff estimates and projections.

1/ Medium- and long-term public debt only, denominated in local currency.

2/ In percent of exports of goods and non-factor 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. An explanation of any qualifiers used in summings up can be found here:


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