- Douglas Scott, and Christopher Browne
- Published Date:
- June 1989
The Republic of Vanuatu, previously known as the New Hebrides, is an archipelago of some 80 small islands, with a land area of 12,000 square kilometers. The population of 140,000 is 94 percent Melanesian; the expatriate community consists mainly of Europeans, Chinese, and Vietnamese. Population growth has exceeded 3 percent annually in recent years. Most people live on the coastal plains where the soil is fertile and the rainfall predictable. The largest concentration of population is in the capital, Port Vila. Cultivation of the interior is difficult because of the mountainous terrain. There are more than 100 different languages. The traditional society is characterized by strong clan affinities and religious beliefs. Education indicators are below the regional average, including high illiteracy rates and low primary school enrollment.
The first contacts with Europeans were through explorers, whalers, and traders. In the second half of the nineteenth century, planters settled in increasing numbers, while many Melanesians were recruited to work on sugar plantations in Fiji and Australia. The United Kingdom and France set up a joint naval commission in 1888 to maintain order in the islands, an arrangement that was strengthened with the formation of the Anglo-French Condominium in 1906. Over the next 75 years, a complex administrative structure was built, featuring parallel British, French, and joint services. There was no integrated public expenditure program, as each administration financed and administered projects according to its own priorities and special interests. In a move that would have repercussions to this day, titles covering approximately one fifth of the total land area were granted to European settlers.
Vanuatu became independent in 1980. Legislative functions are entrusted to a single-chamber Parliament of 46 members elected every four years, and executive powers are held by the Prime Minister and Council of Ministers. Under the Constitution, indigenous citizens have an unalienable right to all land, except that the Government may hold or acquire land in the public interest. Following independence, land granted to European settlers reverted to custom ownership, but many disputes arose between rival claimants. Adjudication by the courts has been slow, and there is a large backlog of unresolved cases. The Government has the authority to lease disputed land for up to 75 years, but has used this power sparingly. The resolution of land tenure issues would aid agricultural development.
Annual per capita GDP is SDR 750, somewhat above the average for the Pacific region, partly reflecting the relatively high expatriate incomes. Although the economy is heavily dependent on a few traditional agricultural commodities, it has achieved an important degree of diversification into tourism and offshore banking services since the early 1970s. After a brief period of social and economic disruption surrounding independence, Vanuatu sustained a satisfactory rate of growth for several years. Assisted by large receipts of concessional aid and cautious demand management, the external position was sound and inflation was moderate. However, the economy remained vulnerable to adverse external developments, as shown in 1985–87, when declining prices of primary exports contributed to a weakening in the growth and balance of payments performance.
Production and Prices
Agriculture accounts for about 40 percent of GDP. The main cash crop is copra; cocoa cultivation and beef production are other important activities. Subsistence agriculture is the principal means of livelihood for 80 percent of the population, although its contribution to GDP is only 25 percent. The relative importance of plantation agriculture has declined during the past 20 years as a result of aging trees, lack of investment, and a strong preference of the rural population for subsistence farming rather than plantation employment. The problems have been compounded since independence by land tenure issues and the lack of trained management. Rehabilitation of plantations is feasible, however, in most areas.
Fish and forestry resources appear to have potential, but exploitation has been minimal. The fish cannery halted operations in 1986 because of inadequate supplies. Mining activity ceased in 1980 with the depletion of manganese deposits. Manufacturing, which is mainly agro-based and includes the processing of beef for export, accounts for only 5 percent of GDP. Obstacles to development include inadequate transport facilities and the small size and fragmented nature of the domestic market. In light of these constraints, the Government favors export-oriented industries and places little emphasis on import substitution, except in a few carefully chosen areas that promote the use of local raw materials.
The economy is dominated by service activities, which account for more than 50 percent of GDP. Long-established functions include trading and shipping, which were originally associated closely with the operations of the plantations. The fastest growing areas in recent years have been public administration, tourism, financial and banking services, and flag-of-convenience registration of ships. While their number has declined since independence, foreign experts are welcome in positions requiring special skills, as they are considered critical for further economic development.
Consumer prices are determined primarily by import prices, especially of goods imported from Australia. Price controls are applied to a few basic food items. Wages are influenced strongly by trends in the public sector, where a relatively high wage structure was inherited at independence. With the shortage of skilled labor and the large number of expatriates, attempts to reduce real wages have been firmly resisted by employees. However, restraint in public sector salaries has recently become an important element in the policies to moderate growth in public current expenditure. Income disparities between the modern and subsistence sectors are large by regional standards, partly reflecting the cost of expatriate services.
Balance of Payments
Exports consist of a small range of goods with copra representing three fourths of the total. Export earnings fluctuate widely but average only 10–15 percent of GDP. Imports are equivalent to 40 percent of GDP, reflecting the limited variety of domestic production, substantial amounts of foreign aid, and the large tourist sector. Food and other consumer goods comprise about 40 percent of the total. Major categories of imports also include construction materials and capital equipment, particularly aid-financed goods for government projects. The direction of trade has not changed substantially since independence. While exports to Japan have grown, most exports continue to be destined for Western Europe. Imports are supplied predominantly by Australia, New Zealand, and Japan.
The external current account (including grants) has normally recorded surpluses. Large trade deficits have been more than offset by receipts from tourism and financial services, private transfers in the form of expenditure by foreign residents, and official grants from the United Kingdom, France, Australia, and New Zealand. Net outflows have normally been registered on the capital account, especially during 1980–81 when substantial private funds were transferred abroad. Relatively large official international reserves have been maintained, because of the volatility of export earnings and the large foreign currency deposits held by residents. External commercial borrowing has been avoided, which in part accounts for the low external debt service ratio of 3 percent of current receipts. The vatu has been fixed in relation to a basket of currencies since February 1988; previously, since 1981, the vatu had been fixed in relation to the SDR.
The public sector comprises the central government, 11 regional governments, and 12 public enterprises. The central government budget, which covers the calendar year, is organized through nine ministries. The Budget Office in the Ministry of Finance, assisted by the Budget Committee that includes representatives of the Central Bank, the National Planning and Statistics Office, and the Public Service Commission, oversees the formulation of the current revenue and expenditure estimates. Following approval of the Council of Ministers, a draft budget is submitted to Parliament in October for review and discussion; final approval is usually granted in December. Supplementary budgets must also be approved by the Council of Ministers and Parliament.
Development projects and technical assistance expenditure, which are mainly financed with cash grants from abroad, are administered jointly with the donor countries through the Development Fund. Consolidated public sector accounts are not available, as data relating to local government and public enterprise activities are scarce. Public enterprises operate on a commercial basis and generally do not require budgetary support from the Government.
The central government plays a preponderant role in the economy, with total expenditure amounting to over 50 percent of GDP. Domestic revenue is about 25 percent of GDP, with foreign trade taxes representing well over half of the total. There are no individual and corporate income taxes, capital gains taxes, or estate and gift duties. Foreign grants have declined from 50 percent of GDP at independence to 20 percent, as a result of the gradual withdrawal of budgetary support from the United Kingdom and France, and reductions in technical assistance from abroad. Current expenditure is about 25 percent of GDP, with approximately two fifths attributable to general public services. Technical and development assistance account for about 10 percent of GDP each. However, development expenditure is constrained by shortages of expertise and locally trained labor.
The financial sector embraces the Central Bank; three commercial banks, which are subsidiaries or branch offices of foreign banks; the Development Bank of Vanuatu; and the Vanuatu Cooperative Savings Bank. The Central Bank of Vanuatu was established in 1980. The domestic currency, the vatu, was introduced in 1981. The New Hebrides franc ceased to be legal tender in 1983. The Central Bank does not use reserve requirements to influence bank liquidity. Interest rates are market determined. Reflecting the absence of exchange controls, the commercial banks may transact deposit and loan business in both domestic and foreign currencies. Residents are free to hold bank deposits denominated in any currency; in 1987, about two thirds of the total were held in foreign currency.
The Development Bank of Vanuatu was established in 1979 to promote rural and industrial development, with emphasis on the processing of raw materials; to provide employment and training; and to improve the balance of payments. The financial resources of the Bank come mainly from foreign grants and concessionary loans. The principal goal of the Savings Bank is to mobilize rural savings. In addition to accepting deposits from villagers, the bank collects loan installment payments on behalf of the Development Bank, makes salary payments for the Government, and arranges for money transfers. A National Provident Fund was established in 1987. Employers and employees are each required to contribute 3 percent of wages and salaries to the Fund.
The Finance Center was established in 1971 by the British authorities, with the tacit approval of the French authorities, as an offshore financial center and tax haven. Banks, law firms, accountants, and trust companies provide services to over 1,000 registered companies. While these enterprises pay a registration fee, they are not subject to taxes and are guaranteed secrecy about their business activities; however, they are prohibited from engaging in local operations. The center is estimated to contribute about 10 percent of GDP, and is an important source of employment and training.
Developments in the 1970s
Steady economic growth was achieved in the 1970s. Copra output of smallholders and beef production increased in response to stronger world demand. However, mainly because of insufficient investment and maintenance on plantations, coffee and cocoa output declined. Tourism benefited from improved airline connections and hotel facilities and from increased visits by cruise ships. Financial activities expanded after the establishment of the offshore center. Government services were largely financed by assistance from France and the United Kingdom. The public accounts consistently showed surpluses and the Government maintained a net creditor position with the banking system. Little credit was extended to the private sector and most assets of the commercial banks were invested abroad. With growing earnings from exports of goods and services and inflows of foreign aid, Vanuatu recorded external current account and overall balance of payments surpluses.
In preparation for independence, the colonial powers drew up a series of development proposals during the 1970s. They identified the main structural problems as the duplication of government services by the French and British administrations; the shortage of skilled manpower with over 80 percent of the population illiterate and only 10 percent having completed six or more years of education; and the poor transport system, which inhibited the distribution of economic opportunities throughout the country. However, little progress was made in tackling these issues. At independence, infrastructure remained inadequate, particularly with regard to transport and communications.
Developments in the 1980s
The Government’s development strategy for the 1980s has emphasized better utilization of available natural and human resources, balanced regional and rural growth, and the preservation of the cultural and environmental heritage of Vanuatu. It has sought to gradually reduce dependence on external aid through the mobilization of domestic resources. A larger role was envisaged for the private sector because, with lower external assistance, the size of the public sector would exceed the country’s ability to support it. Foreign direct investment is generally welcomed.
Disruption and Recovery in 1980–84
In 1980, the economy faced severe problems from the civil disruptions that accompanied independence and from a serious deterioration in the external terms of trade. Real GDP dropped by 10 percent while supply shortages and the higher cost of imports prompted a sharp increase in consumer prices. Agricultural output and exports fell because of the sudden departure of expatriates who had held managerial positions in the plantation sector. In addition, tourist arrivals declined, investment came to a halt, and private capital outflows increased. In 1981–82, although real GDP grew by 1–2 percent annually, Vanuatu was affected by the decline in copra prices, which fell by more than the price of most other primary commodities in this period. Moreover, in contrast to most other Pacific island economies that received increased aid at independence, Vanuatu experienced declining assistance.
Despite these difficulties, the external current account recorded surpluses in 1980–82. Imports initially fell with the departure of expatriates and the weak economy. With a return to political stability, tourism and offshore banking expanded. Agriculture recovered more slowly, partly because of depressed export prices. To limit fluctuations in the incomes of copra producers and thereby encourage greater output, the Vanuatu Commodities Marketing Board was established in 1982. The Board took over the procurement and export of copra from foreign-owned trading companies, and its price support operations helped to limit the decline in production. With the recovery in import demand as the economy gathered strength, the trade deficit increased and the current account surplus was reduced. However, with renewed capital inflows, the balance of payments recorded an overall surplus in 1982.
During 1983–84, the growth rate picked up and the balance of payments strengthened. The rate of real GDP growth accelerated to 3 percent in 1983 and to 7 percent in 1984. Exports rebounded strongly mainly because of higher world copra prices. While the Commodities Board allocated a substantial part of the increased earnings to reserves, procurement prices were raised several times. The trade deficit fell sharply, although import demand expanded because of buoyant export income, higher wages and salaries in the public sector, increased investment, and growth in tourism. The downward trend in official transfers was temporarily halted. Compensatory grants were received from the European Community for earlier low export prices and the grants were made by the United Kingdom to help meet claims on the Government arising from the civil disturbances at independence. In view of the strength of the external accounts, the vatu was revalued by 5.6 percent against the SDR in March 1984.
With the large drop in external cash support, the Government budget shifted into deficit in 1982–83, but a surplus was restored in 1984. Domestic revenue increased from 17 percent of GDP in 1982 to 21 percent in 1984. The Government placed greater reliance on import duties, raising rates in successive years on various goods, principally coffee, beer, spirits, tobacco, gasoline, and motor vehicles. It also introduced measures to broaden the tax base, including an airport departure tax, a turnover tax on hotel rooms and restaurant services, and work permit fees for nonresidents. However, the ability to mobilize revenue was constrained because the tax base was narrow and the effectiveness of higher import duties was undermined by frequent exemptions.
The Government reduced current expenditure from 28 percent of GDP in 1982 to 25 percent in 1984 and made progress in streamlining the public administration by eliminating overlapping services inherited from the condominium powers. To this end, it abolished several ministries and merged a number of functions. Tight controls were maintained on government employment, including the periodic imposition of hiring freezes. However, pronounced pressures for additional expenditure included demands for a wider range of facilities than had existed prior to independence, steps to strengthen project implementation capacity, and efforts to maintain the growing capital stock. Education needs absorbed one fourth of the current budget and one third of the salaried work force.
Development spending averaged 10 percent of GDP during this period. Agriculture, land, and natural resources received about one half of the total. The next largest categories were transport and communications, primarily in the form of improved interisland port and telephone services, and education, including school buildings. The allocation of funds was broadly consistent with longer-term objectives, although the recurrent costs of new projects were not always fully appraised prior to implementation.
Liquidity grew rapidly during 1981–84, chiefly because of the balance of payments surpluses. Its impact on domestic prices was limited, because of the strong demand for financial savings. Interest rates were largely market determined on both vatu and foreign currency deposits. Depositors chose to maintain an increasing proportion of their assets in foreign accounts, particularly since higher interest rates were available in international markets. Deposits in vatu also grew steadily, but despite ample bank liquidity and firm support from the Government for more domestic lending to the private sector, the growth of domestic credit was small. The banks adopted a cautious attitude toward private sector lending because of the high servicing costs of small loans, especially in rural areas, and the shortage of qualified staff. The Government maintained a net creditor position with the banking system.
Less Favorable Developments in 1985–87
Real GDP remained more or less unchanged in 1985–87. Two cyclones caused a decline in agricultural output in 1985, and a downturn in the Australian economy and a depreciation of the Australian dollar led to a fall in tourist arrivals. Agricultural production rebounded in 1986, but tourism continued to decline, partly because the national airline ceased operations following the termination of its management contract with a foreign airline. Another severe cyclone struck Vanuatu in early 1987, causing loss of life and extensive property damage to the capital. Despite rehabilitation expenditure, especially on the reconstruction of buildings, economic activity remained depressed in 1987.
The balance of payments was affected by the lower world price of copra. While the support operations of the Commodities Marketing Board helped to maintain the volume of output, the value of exports fell in 1986. The value of imports increased in 1985 but fell sharply in 1986, as a result of lower oil prices, lower requirements in the tourist sector, and weak domestic demand. Official transfers declined, despite additional grants for cyclone rehabilitation. After the large surpluses of preceding years, the current account and the overall balance of payments recorded deficits in 1985–86, which were financed by drawing down the net foreign assets of the commercial banks. The external position strengthened in 1987, mainly because of temporarily high grants from the European Community’s STABEX facility and cyclone-related insurance claims and concessional aid.
The central government budget moved into deficit in 1985 and the deficit reached 6–7 percent in 1986–87. Although import duties and license fees were increased, budgetary receipts declined in relation to GDP because of the lower official grants. Current expenditure rose because of wage and salary increases and measures to repair cyclone damage. Fiscal adjustment was implemented in 1987. Revenue was boosted by further increases in import duties and royalty payments from the U.S.S.R. under a one-year fishing agreement. Additional inflows of foreign aid were received for cyclone reconstruction. The Government also decided that STABEX compensation received from the European Community consequent upon the fall in export prices would not be fully transferred to the Commodities Board, as had been done in the past. However, expenditure continued to grow strongly, despite a freeze on recruitment.
Liquidity growth was modest in 1985–87, mainly because of the smaller expansionary impact of external factors. Although the Government drew down its deposits for most of the period to help finance the budget deficit, private sector credit demand was generally weak because of depressed economic activity. With the less restrictive stance of fiscal policy, the authorities adopted a more flexible exchange rate policy in order to help strengthen competitiveness and protect the external position. The vatu was depreciated by a total of 29 percent in three stages during 1985–86. Subsequently, exchange rate policy has continued to be directed toward protecting the external position, with close attention focused on the competitiveness of the tourist industry.
|Agriculture, forestry, and fisheries||2,649||2,831||2,771||2,648||2,591|
|Transport and communications||757||808||770||741||762|
|Wholesale and retail trade, hotels, and restaurants||3,627||3,740||3,753||3,518||3,599|
|Real estate and business services||526||587||611||591||534|
|Community and personal services||72||72||74||76||79|
|Less: bank service charges||-465||-410||-548||-654||-721|
|GDP at constant market prices||10,150||10,846||10,966||10,751||10,821|
|GDP at current market prices||10,150||12,339||12,534||12,150||13,143|
|Change in real GDP (in percent)||3.0||6.9||1.1||-2.0||0.7|
|Beverages and tobacco||10.2||15.2||28.7||12.0||3.4||10.5||5.3||5.2||15.8|
|Clothing and footwear||14.1||3.1||12.6||8.6||11.5||12.7||0.3||1.1||5.4|
|Rent, water, fuel, and electricity||2.1||15.4||31.2||24.4||11.8||5.2||2.7||-1.3||6.6|
|Transport and communications||9.7||19.7||24.3||13.7||2.5||6.5||4.3||6.1||23.2|
|Recreation, health, and education||9.5||2.6||13.1||7.4||2.3||4.7||3.9||4.7||14.1|
|(End-of-period percentage change)|
Low-income groups in Port Vila, March 31, 1976 = 100.
Low-income groups in Port Vila, March 31, 1976 = 100.
|Revenue and grants||4,902||5,301||4,958||4,493||5,625||5,710||5,263||6,504|
|Domestic banking system||-439||-492||435||89||-568||-130||557||656|
|(In percent of GDP)|
|Revenue and grants||66.4||61.0||51.7||44.3||45.6||45.6||43.3||49.5|
|Goods and services||124||151||247||317||460||489||576||521|
|Work permit fees||—||3||3||6||23||25||32||33|
|Rents and interest||125||157||139||154||159||160||146||74|
|Fines and fees||30||26||28||37||50||83||92||117|
|Wages and salaries||1,171||1,306||1,362||1,544||1,735||1,865||1,970|
|Purchases of goods and services||857||923||952||960||990||1,143||1,094|
Includes transfers of STABEX funds.
Includes transfers of STABEX funds.
|Net foreign assets||2.3||4.3||6.0||9.3||9.9||11.2||11.7|
|Other items, net||-0.3||-0.8||-1.6||-0.9||-0.7||-1.2||-0.9|
|Currency outside banks||0.6||0.6||0.7||0.9||1.0||0.9||1.0|
|Demand deposits (vatu)||0.7||0.9||1.1||1.2||1.2||1.3||1.8|
|Time and savings deposits (vatu)||0.7||1.5||1.9||2.2||1.8||2.7||2.0|
|Time and savings deposits (foreign currency)||1.6||2.6||3.3||4.8||6.1||6.3||6.7|
|Demand deposits (foreign currency)||0.2||0.3||0.3||1.5||1.0||1.0||1.4|
|Deposits of the Vanuatu|
|Commodities Marketing Board||—||—||0.5||1.4||1.2||0.7||0.5|
|Total liquidity (annual percentage change)||…||55.3||23.7||45.2||4.7||14.4||0.8|
Includes government foreign currency deposits with commercial banks.
Includes public enterprises.
Includes government foreign currency deposits with commercial banks.
Includes public enterprises.
|Vatu savings deposits||4.00–8.00||4.00–6.00||4.00–6.00||4.00–6.50||4.00–6.50||4.00–4.50||2.00–4.00|
|Vatu time deposits|
|Above 6 months||8.50–11.00||8.50–11.25||8.50–11.50||7.00–9.50||6.00–9.00||4.85–8.50||3.00–6.75|
|Australian dollar deposits|
|Private transfers, net||2.3||3.0||7.4||5.6||6.8||6.6||6.0||4.4|
|Official transfers, net||40.0||35.2||31.8||24.5||31.4||25.2||19.1||35.0|
|STABEX grants and other||—||0.9||0.5||—||5.2||0.1||0.3||16.8|
|Nonmonetary capital, net||…||…||7.8||5.9||8.3||5.4||5.1||10.8|
|Errors and omissions||…||…||-4.7||1.4||5.2||-15.5||-13.8||-12.5|
|Current account (in percent of GDP)||20.9||34.5||15.1||9.6||21.2||7.2||-2.7||6.5|
|Vatu per SDR (period average)||88.8||103.0||106.2||106.2||101.6||107.5||124.1||141.9|
|Beef, fresh and frozen|
|Imports for domestic consumption||40,450||37,687||43,606||49,237||57,276||60,093||47,468||52,487|
|Food and beverages||11,170||10,681||10,763||11,516||13,805||13,612||10,378||8,243|
|Fuels and lubricants||5,714||4,760||5,876||5,235||6,755||5,989||4,558||3,783|
|Imports for re-export1||14,916||11,488||9,718||10,104||9,695||9,889||1,608||1,325|
Mainly tuna fish for processing. The cannery was closed during 1986.
Mainly tuna fish for processing. The cannery was closed during 1986.
|External debt (end of period)|
|External debt (in percent of GDP)||4.0||3.2||4.1||3.6||3.3||3.9||5.5||6.8|
|Debt service (in percent of current receipts)||1.8||1.1||1.7||1.3||0.9||1.7||3.1||2.9|
|Reserve position in IMF||—||—||1.0||1.6||1.6||1.6||1.6||1.6|
|Central bank liabilities||—||—||0.4||0.2||0.1||0.2||0.2||—|
|Net official reserves||9.6||15.8||12.0||10.1||15.1||20.0||20.1||28.8|
|Official assets (in months of imports)||3.4||6.0||3.8||2.9||3.6||4.7||6.1||7.8|
|Vatu per SDR (end or period)||93.1||106.2||106.1||106.6||100.5||110.1||142.2||142.7|