Resilience and Growth in the Small States of the Pacific
Chapter

Appendix 12. Vanuatu

Author(s):
Hoe Khor, Roger Kronenberg, and Patrizia Tumbarello
Published Date:
August 2016
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Vanuatu’s 82 islands, 65 of them inhabited, cover a distance of some 1,300 kilometers separating the outermost islands. About a quarter of Vanuatu’s estimated population of 270,000 lives in urban areas, including Port Vila, the capital. In March 2015, tropical Cyclone Pam destroyed or significantly damaged a large share of housing on several major islands, and caused severe damage to crops and tourist facilities. Estimated damage and losses to the economy exceed 60 percent of GDP.

A parliamentary republic, the country gained independence from France and the United Kingdom in 1980. The president is the head of state elected for a five-year term by an electoral college of members of parliament and the presidents of the regional councils. The government is led by the prime minister, who is elected by other members of parliament. The 52 members of parliament are elected by popular vote for four-year terms.

Sources of Growth and Economic Profile

Main sources of growth. Since the global financial crisis, primarily exports and private consumption have driven growth. Tourism has expanded particularly vigorously, with tourism receipts accounting for 30 percent of GDP. Most tourists come from Australia and New Zealand.

Production, employment, exports, and imports. Most of the population is employed in small-scale agriculture, and the main exports are agricultural commodities (coconut oil, copra, kava, beef) destined mainly for Asia. The services sector employs about a third of the labor force, but comprises about two-thirds of the economy’s value added. Tourism receipts are the main source of foreign exchange, while goods exports—primarily agricultural commodities—bring in considerably less revenue. Merchandise imports, mainly from China, constitute about 30 percent of GDP and include machinery and equipment, food, and fuel. Industrial activity is nascent. The government sector is small compared to most other Pacific island countries.

External income. Remittances are also less important than in many other Pacific island countries. Despite considerable official transfers, current account deficits are sizable, amounting to about 6 percent of GDP on average during 2010–15. However, foreign direct investment and capital grants comfortably finance these deficits, with Australia the main source for both. Substantial international reserves provide a buffer against external shocks.

Development aid. Vanuatu benefits from considerable bilateral and multilateral aid, though the size of grants has been among the smallest in the Pacific island countries. Official grants amounted to about 5 percent of GDP on average during 2010–15; Australia, New Zealand, and, increasingly, China are the main sources of bilateral aid. The Asian Development Bank—focusing on private sector development and helping government address transport, urban development, and energy constraints—has provided 11 loans totaling $85.6 million and 62 technical assistance projects for $22.5 million, since Vanuatu joined the Asian Development Bank in 1981. The World Bank supports government efforts to extend electricity to lower-income households and is a major provider of technical assistance. The IMF provided SDR 17 million (100 percent of the quota) under the Rapid Credit Facility and the Rapid Financing Instrument in June 2015 to support Vanuatu’s international reserves after Cyclone Pam. Technical assistance is provided in a number of areas, including tax administration, banking supervision, and national account and balance of payments statistics.

Government finance. The public sector is relatively small, with government expenditures at about 25 percent of GDP in recent years. Fiscal deficits and public debt are low, with the public debt ratio about 20 percent of GDP. At the same time, public finances would benefit from a medium-term fiscal framework and from better control over government business enterprises.

Financial sector. The onshore financial system includes four major banks. Three of these are foreign-owned branches and subsidiaries. Vanuatu has four insurance companies, two of which are local. Banks are well capitalized and profitable, but nonperforming loans are rather high.

Business and investment climate. Vanuatu ranked 94th out of 189 countries in the World Bank’s 2016 Doing Business report, higher than most Pacific island countries. It has, however, considerably lower rankings in the categories of ease of starting a business and protecting minority investors. High energy and transportation costs, partly as a result of monopolistic market structures, raise the cost of doing business.

Monetary policy. Vanuatu pegs its currency, the vatu, to an undisclosed basket of currencies, which anchors monetary policy. The regime has served the country well, with inflation staying in the low single digits in the last few years. The main policy instrument is the Reserve Bank of Vanuatu’s rediscount rate.

Exchange rate and competitiveness. The exchange rate is broadly in line with Vanuatu’s fundamentals. The real effective exchange rate has been roughly stable, with currency movements against the U.S. dollar and against the Australian dollar offsetting one another.

Growth Challenges, Vulnerabilities, and Spillovers

Main growth challenges. Vanuatu faces considerable infrastructure bottlenecks, and the government has announced ambitious, largely debt-financed investment plans to overcome them. The government will need to ensure infrastructure projects align with the country’s development priorities and that scale is commensurate with its implementation and debt repayment capacity.

Main vulnerabilities. Vanuatu’s small size, as is the case for other Pacific countries, inhibits economic diversification and increases output volatility. It also shares the region’s vulnerability to cyclones and tsunamis. Enhancing resilience against natural disasters will be important for long-term sustainable growth.

Regional and global economic spillovers. Vanuatu’s dependence on tourism from Australia leaves it susceptible to that country’s business cycle.

Appendix Table 12.1Vanuatu: Selected Economic Indicators, 2010–15
Nominal GDP (2014): US$822.2 millionGDP per capita (2014): US$3,132
Main export products: coconut oil, copra, kava, beefPopulation (2014): 262,559.
Remoteness (GDP-weighted distance): 9,175 km
Sources: Vanuatu authorities; and IMF, “Vanuatu: Staff Report for the 2015 Article IV Consultation and Request for Disbursement Under the Rapid Credit Facility and Purchase Under the Rapid Financing Instrument” (Country Report No. 15/149).Note: … = data not available.

Current balance excludes grants and development (capital expenditure).

Index, 2005 = 100.

Share in total loans, not including small loan scheme.

World Bank, Doing Business reports.

United Nations Development Programme.

1991–20002001–092010–152015
AverageAverageAverage20102011201220132014Estimate
GDP, GDP growth, employment, and prices
Real GDP (percent change)4.01.41.61.21.82.02.3−0.8
Real GDP per capita (percent change)1.6−0.9−0.8−1.1−0.5−0.30.0−3.0
Unemployment (percent)
Consumer prices (percent change, average)3.01.72.70.71.41.31.03.3
Shares in GDP (percent)
Largest sector (tourism)20.024.030.031.028.031.036.031.022.0
Second largest sector (crop production)18.316.015.516.316.016.216.214.0
Third largest sector (public administration)12.712.012.111.511.512.011.912.7
Agriculture
Contributions to GDP growth (percent)
(real based)
Crop production0.30.00.60.90.00.50.4−2.5
Public administration0.30.30.6−0.50.20.70.20.6
Share in GDP (percent)
Private consumption64.561.059.360.461.161.963.160.4
Private investment
Public consumption15.414.915.715.414.915.014.114.3
Public investment
Exports minus imports−9.8−8.9−11.9−5.9−6.8−8.2−8.5−12.2
Sources: Vanuatu authorities; and IMF, “Vanuatu: Staff Report for the 2015 Article IV Consultation and Request for Disbursement Under the Rapid Credit Facility and Purchase Under the Rapid Financing Instrument” (Country Report No. 15/149).Note: … = data not available.

Current balance excludes grants and development (capital expenditure).

Index, 2005 = 100.

Share in total loans, not including small loan scheme.

World Bank, Doing Business reports.

United Nations Development Programme.

Contributions to real GDP growth (percent)
(real terms)
Private consumption1.61.31.51.81.82.02.7−2.3
Private investment
Public consumption0.50.10.7−0.1−0.20.3−0.50.3
Public investment
Exports minus imports−1.10.11.55.9−1.1−1.6−0.5−3.8
Public finances
Central government finance (percent of GDP)
Revenue and grants23.921.224.124.622.321.821.323.331.4
Total domestic revenue20.618.319.018.118.118.819.219.220.5
Grants3.32.85.26.54.23.02.24.110.9
Expenditure and net lending26.721.825.327.124.423.421.522.332.9
Current (excluding grants)19.119.222.522.221.921.820.621.427.2
Of which: wages and salaries11.111.311.111.511.111.611.110.610.9
Development (capital)6.62.62.84.92.71.60.90.95.8
Current balance11.5−0.8−3.6−4.2−3.7−3.1−1.5−2.3−6.7
Overall balance−3.1−0.6−1.2−2.5−2.2−1.6−0.21.0−1.5
Financing1.40.60.22.52.21.60.2−0.8−4.8
Assets0.0−0.50.8−0.9−0.5−0.2−0.40.76.3
Debt1.40.21.01.61.71.5−0.2−0.11.5
Of which: external1.80.20.10.40.4−0.5−0.6−0.41.5
Of which: concessional1.80.20.10.40.4−0.5−0.6−0.41.5
Other
Public-debt-to-GDP ratio (percent)24.428.120.419.420.721.720.619.520.5
Balance of payments (percent of GDP)
Current account−7.0−5.9−6.5−8.4−9.4−1.40.5−10.1
Current account including official transfers−11.8−10.0−9.5−9.7−11.2−3.8−2.9−23.2
Overall balance3.02.31.91.51.1−0.60.69.2
External debt service (percent of exports of goods and services)1.51.61.41.51.41.72.0
Foreign direct investment8.17.15.65.77.54.94.22.68.9
External debt19.219.913.414.514.714.012.711.712.9
Main sources of external income (total)6.03.54.84.15.2
Sources: Vanuatu authorities; and IMF, “Vanuatu: Staff Report for the 2015 Article IV Consultation and Request for Disbursement Under the Rapid Credit Facility and Purchase Under the Rapid Financing Instrument” (Country Report No. 15/149).Note: … = data not available.

Current balance excludes grants and development (capital expenditure).

Index, 2005 = 100.

Share in total loans, not including small loan scheme.

World Bank, Doing Business reports.

United Nations Development Programme.

Compensation of employees1.41.91.72.73.4
Grants4.61.63.11.41.9
Investment income5.41.73.12.01.5
Contributions to external income growth (percent)
External income growth2.1−22.42.9−16.310.9
Compensation of employees1.3−5.2−1.013.210.1
Grants1.9−10.0−5.0−18.57.5
Investment income−1.1−7.18.9−11.0−6.7
Exchange rate (vatu to U.S. dollar period average)119.7116.596.396.989.592.694.597.1107.0
Real effective exchange rate (period average)290.8195.58104.31100.0102.5104.9104.9105.8107.8
(percent change)5.39.12.12.52.30.00.81.9
Money, credit, and financial sector
Broad money (percent change)−1.8−6.01.3−0.6−5.58.63.1
Credit to private sector (percent of GDP)45.567.364.767.470.568.771.1
(percent change)8.611.69.46.95.8
Bank assets (percent of GDP)101.789.893.391.090.184.890.1
Short–term treasury bill interest rate
Nonperforming loan ratio9.14.98.18.113.511.1
Foreign bank market share (percent)3
Business climate indicators
Business environment rankings4
Doing business (overall)80787470709694
Construction permits785316973144143
Getting electricity1101421491021097782
Enforcing contracts9573717275138139
Getting credit54646874523628
Human development index50.60.60.60.60.60.6
Memorandum:
Nominal GDP (vatu million)29,20147,29674,77467,91170,87372,41575,80379,81981,825
Nominal GDP (US$ million)243420777701792782802822765
Sources: Vanuatu authorities; and IMF, “Vanuatu: Staff Report for the 2015 Article IV Consultation and Request for Disbursement Under the Rapid Credit Facility and Purchase Under the Rapid Financing Instrument” (Country Report No. 15/149).Note: … = data not available.

Current balance excludes grants and development (capital expenditure).

Index, 2005 = 100.

Share in total loans, not including small loan scheme.

World Bank, Doing Business reports.

United Nations Development Programme.

Sources: Vanuatu authorities; and IMF, “Vanuatu: Staff Report for the 2015 Article IV Consultation and Request for Disbursement Under the Rapid Credit Facility and Purchase Under the Rapid Financing Instrument” (Country Report No. 15/149).Note: … = data not available.

Current balance excludes grants and development (capital expenditure).

Index, 2005 = 100.

Share in total loans, not including small loan scheme.

World Bank, Doing Business reports.

United Nations Development Programme.

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