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Business and Economics > Public Finance

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Cover IMF Staff Country Reports
Vanuatu: 2024 Article IV Consultation-Press Release and Staff Report
International Monetary Fund. Asia and Pacific Dept
The 2024 Article IV Consultation highlights that as Vanuatu was recovering from the multiple natural disasters of 2023, the voluntary liquidation of Air Vanuatu in May 2024 created a major shock with significant effects on growth and business confidence. There is a strong need to address immediate risks to growth and stability, and then redouble efforts to rebuild buffers and tackle structural issues with policy reforms. Fiscal challenges abound and call for urgent and comprehensive action. In the near term, targeted and strategic support is needed to help stabilize the economy, while ensuring fiscal accounts remain under control. Monetary policy is appropriately accommodative but monetary financing needs to be reduced and eventually stopped. The currency basket needs close monitoring. Structural issues remain ever important, and action is needed such as reprioritization of investment needs and integration to the medium-term fiscal strategy, and an increase in efforts to address labor shortages and skills drain.
Keywords:
control environment; article IV consultation mission; recapitalization plan; Vanuatu's authorities; internal audit function; Debt sustainability analysis; Debt sustainability; Pacific Islands; Global; Australia and New Zealand
Cover Technical Notes and Manuals
User Manual for the DIGNAD Toolkit
Mr. Zamid Aligishiev
,
Cian Ruane
, and
Azar Sultanov
This note is a user’s manual for the DIGNAD toolkit, an application aimed at facilitating the use of the DIGNAD model (Debt-Investment-Growth and Natural Disasters) by economists with no to little knowledge of MATLAB and Dynare via a user-friendly Excel-based interface. DIGNAD is a dynamic general equilibrium model of a small open economy developed at the International Monetary Fund. The model can help economists and policymakers with quantitative assessments and policy scenario analysis of the macrofiscal effects of natural disasters and adaptation infrastructure investments in low-income developing countries and emerging markets. DIGNAD is tailored to disaster-prone countries, which typically are small countries or low-income countries that are particularly exposed to large climate shocks—countries where shocks that can disrupt the entire economy are frequent. However, DIGNAD can be relevant also for larger countries that may potentially be exposed to extreme climatic disasters in the future.
Keywords:
natural disasters; adaptation; resilient infrastructure; public investment; public investment efficiency; debt sustainability; DIGNAD toolkit; IMF copyright; DIGNAD model; GNU General Public License; third-party software; Infrastructure; Public investment spending; Total factor productivity; Depreciation; Sub-Saharan Africa
Cover IMF Staff Country Reports
Vanuatu: 2023 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Vanuatu
International Monetary Fund. Asia and Pacific Dept
This 2023 Article IV Consultation discusses that following a successful coronavirus disease 2019 containment strategy, the border reopened in July 2022, and tourism is returning to Vanuatu. Economic activity is expected to be strong in the near term, with real gross domestic product growing around 3.4 percent in 2023, as tourism and construction activities resume. High imported prices are likely to stoke inflation and push the current account into deficit, while fiscal policy will turn more expansionary. The report recommends capitalizing on the recovery to adopt a credible medium-term fiscal strategy, consolidate, and enact meaningful reforms. The strategy should contain new revenue mobilization policies, including a well-designed income tax, and an expenditure rationalization agenda, while protecting productive and climate-critical infrastructure spending. Coordination toward careful calibration of an appropriate fiscal and monetary policy mix is needed to keep inflation under control while supporting growth. The exchange rate should continue to act as a shock absorber.
Keywords:
staff appraisal; reconstruction effort; fuel shortage; money market rate; baseline projection; liability positions vis-à-vis nonresident; ECP revenue; Natural disasters; External sector statistics; Anti-money laundering and combating the financing of terrorism (AML/CFT); Global; Pacific Islands; Australia and New Zealand; Asia and Pacific
Cover Departmental Papers
Funding the Future: Tax Revenue Mobilization in the Pacific Island Countries
Mouhamadou Sy
,
Mr. Andrew Beaumont
,
Enakshi Das
,
Mr. Georg Eysselein
,
Mr. David Kloeden
, and
Katrina R Williams
Pacific Island Countries (PICs) face daunting spending needs related to achieving the UN Sustainable Development Goals (SDGs) and adapting to the effects of climate change. Boosting tax revenues will need to be an essential pillar in creating the fiscal space to meet SDG and climate-adaptation spending needs. This paper assesses the additional tax revenue that PICs could potentially collect and discusses policy options to achieve such gains. The main objectives of the paper are to (1) review the critical medium-term development spending requirements and available financing options, (2) document the main stylized facts about tax revenues in the PICs and estimate the additional tax revenue that countries could raise, (3) highlight the main bottlenecks preventing the PICs from further increasing their tax revenue collection with an emphasis on weaknesses in VAT systems, (4) draw lessons from successful emerging and developing countries that have managed to substantially and durably increased their tax revenues, and (5) propose tax policy and revenue administration reform priorities for Pacific Island Countries to boost tax revenues. The paper’s main findings are (1) The current revenue mix is skewed toward non-tax revenues, (2) PICs could collect an additional 3 percent of tax revenue in the short to medium term, (3) Many bottlenecks are preventing the PICs from boosting their tax revenue collection, and (4) The potential offered by efficient VAT systems is not fully exploited. To increase tax revenue in the Pacific Islands, the paper proposes the following reforms: (1) unwinding recent fiscal relief measures, (2) strengthening or introducing a VAT system; (3) rationalizing tax exemptions, (4) closing loopholes in the tax system, (5) reforming tax administration, and (6) introducing a medium-term revenue strategy.
Keywords:
Domestic resource mobilization; Pacific Island Countries; Value added tax; tax policy; tax administration; tax exemptions; tax exemption; Revenue administration measure; VAT system; B. VAT potential; Revenue administration reform; Value-added tax; Tax administration core functions; Revenue mobilization; Consumption taxes; Pacific Islands; Asia and Pacific
Cover IMF Working Papers
Growth at Risk from Natural Disasters
Mr. Tamim Bayoumi
,
Mr. Saad N Quayyum
, and
Sibabrata Das
The paper analyzes the impact of natural disasters on per-capita GDP growth. Using a quantile regressions and growth-at-risk approach, the paper examines the impact of disasters and policy choices on the distribution of growth rather than simply its average. We find that countries that have in place disaster preparedness mechanisms and lower public debt have lower probability of witnessing a significant drop in growth as a consequence of a natural disaster, but our innovative methodology in this paper finds that the two policies are complements since their effectiveness vary across different disaster scenarios. While both are helpful for small to mid-size disasters, lower debt—and hence more fiscal space—is more beneficial in the face of very large disasters. A balanced strategy would thus involve both policies.
Keywords:
disaster preparedness; impact of disaster; quantile regression; impact of natural disaster; regression estimator; Natural disasters; Fiscal space; Caribbean
Cover IMF Staff Country Reports
Vanuatu: 2021 Article IV Consultation -Press Release; Staff Report; and Statement by the Executive Director for Vanuatu
International Monetary Fund. Asia and Pacific Dept
Border closures and other pandemic containment measures have kept Vanuatu free from COVID-19. However, they have dealt a heavy blow to economic activity as tourism has come to a virtual halt. On top of the pandemic, Tropical Cyclone Harold and a volcanic eruption in Tanna Island caused extensive economic damage in 2020. In the context of a continued loss of correspondent banking relationships (CBRs) in the Pacific, Vanuatu also lost a key CBR at end-June 2021. Air Vanuatu, one of the state-owned enterprises (SOEs), is in the process of being restructured.
Keywords:
Vanuatu economy; Vanuatu authorities; authorities in Vanuatu; liability positions vis-à-vis nonresident; money market rate; Natural disasters; Anti-money laundering and combating the financing of terrorism (AML/CFT); External sector statistics; Pacific Islands; Global
Cover IMF Working Papers
Managing Fiscal Risks from National Airlines in Pacific Island Countries
Vybhavi Balasundharam
,
Ms. Leni Hunter
,
Iulai Lavea
, and
Mr. Paul G Seeds
Pacific island countries (PICs) rely on national airlines for connectivity, trade, and tourism. These airlines are being struck hard by COVID-19. Losses will weigh on public sector balance sheets and pose risks to economic recovery. With a backdrop of tight fiscal space and increasing government debt, losses in airlines are adding to fiscal risks in some PICs. This paper discusses tools to evaluate and manage the fiscal risks from national airlines in the Pacific. We present a snapshot of the current state of Public Financial Management (PFM) practices in PICs and detail the best practices. This exercise would illustrate the areas in which PICs have scope to improve their risk management with regard to national airlines. We then discuss the use of diagnostic tools and capacity development to enhance monitoring and risk management. Greater transparency and accountability in the airlines, combined with rigorous oversight, would be the first step towards improved financial management of national airlines.
Keywords:
B. airline planning process; airline Support; national Airlines; PFM perspective; D. budget execution consideration; financial support; Fiscal risks; Budget planning and preparation; Financial statements; Public enterprises; COVID-19; Pacific Islands
Cover IMF Working Papers
A Possible Approach to Fiscal Rules in Small Islands — Incorporating Natural Disasters and Climate Change
Ryota Nakatani
A big challenge for the economic development of small island countries is dealing with external shocks. The Pacific Islands are vulnerable to natural disasters, climate change, commodity price changes, and uncertain donor grants. The question that arises is how should small developing countries formulate a fiscal policy to achieve economic stability and fiscal sustainability when prone to various shocks? We study how natural disasters affect long-term debt dynamics and propose fiscal policy rules that could help insulate the economy from such unexpected shocks. We propose fiscal rules to address these shocks and uncertainties using the example of Papua New Guinea. Our study finds the advantages of expenditure rules, especially a recurrent expenditure rule based on non-resource and non-grant revenue, interdependently determined by government debt and budget balance targets with expected disaster shocks. This paper contributes to the literature and policy dialogue by theoretically analyzing the impact of natural disasters on debt sustainability and proposing fiscal rules against natural disasters and climate changes. Our fiscal policy framework is practically applicable for many developing countries facing increasing frequency and impact of natural disasters and climate change. Our rules-based fiscal framework is crucial for sustainable and countercyclical macroeconomic policies to build resilience against devastating natural hazards.
Keywords:
WP; expenditure rule; stabilization fund; capping expenditure growth; revenue rule; resource revenue; cash-flow constraint; revenue volatility; government activity; appropriation strategy; government deficit bias; C. expenditure rule; budget balance rule; Natural disasters; Fiscal rules; Climate change; Pacific Islands
Cover IMF Working Papers
Fiscal Buffers for Natural Disasters in Pacific Island Countries
Hidetaka Nishizawa
,
Mr. Scott Roger
, and
Huan Zhang
Pacific island countries (PICs) are vulnerable severe natural disasters, especially cyclones, inflicting large losses on their economies. In the aftermath of disasters, PIC governments face revenue losses and spending pressures to address post-disaster relief and recovery efforts. This paper estimates the effects of severe natural disasters on fiscal revenues and expenditure in PICs. These are combined with information on the frequency of large disasters to calculate the rate of budgetary savings needed to build appropriate fiscal buffers. Fiscal buffers provide self-insurance against natural disaster shocks and facilitate quick disbursement for recovery and relief efforts, and protection of spending on essential services and infrastructure. The estimates can provide a benchmark for policymakers, and should be adjusted to take into account other sources of financing, as well as budget risks from less severe as well as more frequent disasters.
Keywords:
WP; private sector; real GDP; government expenditure; Natural Disasters; Pacific Islands Countries; Fiscal Cost; Fiscal Buffers; PIC government; contingent government liability; government cash buffer; government financing source; financial support; Fiscal space; Disaster aid; Budget planning and preparation; Pacific Islands
Cover IMF Staff Country Reports
Vanuatu: 2019 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Vanuatu
International Monetary Fund. Asia and Pacific Dept
Four years after Cyclone Pam struck Vanuatu causing extensive damages, reconstruction is near completion with full recovery in sight. The authorities are now focused on implementing their broader development plans that were slowed by the rebuilding process, which will require fiscal discipline and reforms to maintain debt sustainability. The authorities should continue their constructive engagement with development partners for technical assistance, capacity development, and concessional and grant-based funding. In parallel continuing to reform and strengthen the governance of institutions and removing vulnerabilities to corruption will be important.
Keywords:
ISCR; CR; authority; Vanuatu; exchange rate; debt; IMF banking sector diagnostic; monetary policy stance; IMF quota; liability positions vis-à-vis nonresident; Vanuatu authorities; debt management framework; Natural disasters; Loans; Anti-money laundering and combating the financing of terrorism (AML/CFT); Australia and New Zealand; Pacific Islands; Global