Vanuatu
Recent Economic Developments
Author: International Monetary Fund
Publication Date:
23 Oct 2000
eISBN:
9781451840520
ISBN:
9781451840520
Language:
English
Keywords:
ISCR; CR; U.S. dollar; broad money; real GDP; foreign exchange; balance of payments; interest rate; foreign direct investment; private sector; capital expenditure; debt service
Download PDF (1.8 MB)

A variety of shocks have affected Vanuatu's recent economic performance. The government approved the Comprehensive Reform Program (CRP) developed with the support of the Asian Development Bank (AsDB). The IIIrd phase of the program is focused on entrenching and deepening the reforms already introduced, extending government reforms to embrace the parliament and the legal sector, and promoting economic growth. In addition, the government aims to strengthen the focus on social reforms, to ensure that the benefits of CRP are shared, and that reform is sustained.

Abstract

A variety of shocks have affected Vanuatu's recent economic performance. The government approved the Comprehensive Reform Program (CRP) developed with the support of the Asian Development Bank (AsDB). The IIIrd phase of the program is focused on entrenching and deepening the reforms already introduced, extending government reforms to embrace the parliament and the legal sector, and promoting economic growth. In addition, the government aims to strengthen the focus on social reforms, to ensure that the benefits of CRP are shared, and that reform is sustained.

Vanuatu: Summary Indicators

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Sources: Data provided by the Vanuatu authorities; World Development Indicators 2000.

Total population is the preliminary result of the 1999 census; other population characteristics data are for 1998.

Vanuatu: Summary Indicators

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Sources: Data provided by the Vanuatu authorities; and Fund staff estimates and projections.

Weighted average rate of interest for Total bank deposits end loans.

Imports for domestic consumption; i.e., excludes imports for reexports.

Medium- and long-term public debt only.

In percent of exports of goods and nonfactor services.

Real effective exchange rate, period average; 1990=100,

I. Overview

1. Vanuatu maintained macroeconomic stability during the 1990s, with annual inflation averaging 2-3 percent after 1993, international reserves equivalent to 6-7 months of imports, and a low debt service ratio and modest ratio of debt to GDP (Summary Indicators). However, real GDP growth slowed from an average of about 4 percent annually during the first half of the decade to an estimated 1 percent a year during 1996-99 (Table 1), despite the receipt of considerable foreign assistance and the implementation of structural reforms in 1998-99 under the Comprehensive Reform Program (CRP), supported by the Asian Development Bank (AsDB) and other donors. With population growth averaging more than 3 percent annually, GDP per capita declined over the period, reaching an estimated US$1,100 in 1999.

Table 1.

Vanuatu: Gross Domestic Product by Type of Economic Activity in Constant 1983 Prices, 1995–99

(In millions of vatu)

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Sources: Statistics Office; and Reserve Bank of Vanuatu.

2. A variety of shocks have affected Vanuatu’s recent economic performance. In 1998, public demonstrations against alleged mismanagement led the government to authorize massive withdrawals from the Vanuatu National Provident Fund (VNPF), the country’s public retirement savings program. The withdrawals led to a sharp increase in liquidity, a consequent bulge in consumption, and significant rise in imports. These factors and a large increase in development spending caused real GDP to grow by an estimated 6 percent, although the inflation rate rose only slightly, to about 3 percent. Higher development spending and one-time expenditures associated with the VNPF payout and the restructuring of government-owned banks boosted the fiscal deficit to an estimated 11⅓ percent of GDP, of which 6⅓ percent was financed domestically. However, unrecorded net inflows contributed to a balance of payments surplus of US$9 million, boosting gross official reserves to more than 7 months of imports.

3. In 1999, adverse weather conditions brought about a marked decline in agricultural output, and service disruptions resulting from damage to the national airline’s aircraft reduced tourist arrivals. These factors and a fall in development expenditure contributed to a decline in real GDP estimated at 2½ percent, while the inflation rate decreased slightly, to 2.8 percent. Delays in development projects and the absence of one-time expenditures led to a sharp decrease in government outlays, and the overall budget deficit fell to an estimated 1⅓ percent of GDP. However, unrecorded net outflows contributed to a balance of payments deficit of about US$2 million, reducing gross official reserves to the equivalent of about 6⅔ months of imports.

II. Output and Expenditure1

4. Vanuatu is a small economy located in the southwest Pacific Ocean, comprising some 83 islands with a total population of about 193,000 as of mid-1999. More than 75 percent of the population is engaged in subsistence agriculture, mainly small-scale production of copra, kava (a natural relaxant), cocoa, and beef. Services, particularly tourism, government, and an offshore financial center, dominate the formal sector, and there is a wide disparity in incomes between the formal and subsistence sectors. A high rate of illiteracy, estimated at 66 percent of the population (Summary Indicators), has been a major curb on development and has contributed to a low real GDP growth rate, estimated to average less than 3 percent a year during the 1990s. As the rate of population growth averaged 3.1 percent a year from 1989 to 1999, real GDP per capita is estimated to have fallen over the decade.

A. Economic Structure

5. Agriculture and tourism represent the main activities in Vanuatu, as in many other Pacific Island economies. Commercial agriculture and forestry account for about 13 percent of GDP at current market prices, with copra, cocoa, and, more recently, kava representing the main products, together with beef and wood products (Table 2). Subsistence agriculture represents another 7 percent of GDP. Services account for more than 70 percent of GDP, with about 40 percent of GDP coming from trade, hotels, and restaurants, which are closely linked to tourism. Also within the service sector, about 8 percent of GDP derives from finance and insurance, which includes the offshore financial center. The industrial sector, which includes manufacturing, construction, and utilities, has represented about 9-10 percent of GDP in recent years. Agriculture and forestry, particularly copra, cocoa, kava, beef, and wood products, provide most merchandise export earnings. Travel receipts, reflecting income from tourism, have grown substantially in recent years and in 1999 were twice the size of merchandise exports (Figure 1, lower panel).

Table 2.

Vanuatu: Gross Domestic Product by Type of Economic Activity in Current Prices, 1995–99

(In millions of vatu)

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Sources: Statistics Office; and Reserve Bank of Vanuatu.
Figure 1.
Figure 1.

VANUATU Nominal GDP and Export Earnings by Sector

Citation: IMF Staff Country Reports 2000, 999; 10.5089/9781451840520.002.A001

Source: Date provided by the Vanuatu authorities.1/ Finance and insurance less imputed bank service charges.

6. Vanuatu’s economic structure changed during the 1990s (Figure 1, upper panel). Tourism grew in importance, and the share of GDP from trade, hotels, and restaurants rose from about 32 percent in 1990 to nearly 40 percent in 1999. By comparison, the share of industry fell from about 15 percent of GDP in 1990 to less than 10 percent in 1999, and the share of transport, storage, and communication also declined. Within the agricultural sector, kava production expanded relative to that of other products, including subsistence agriculture.

B. Aggregate Supply and Demand

7. Vanuatu’s economy grew slowly during the last half of the 1990s, with estimated real GDP growth averaging only 1 percent a year during the period 1996-99 (Table 1). Following two years in which real GDP is estimated to have grown by less than 1 percent, real GDP is estimated to have risen by about 6 percent in 1998. On the supply side, output from agriculture and forestry is estimated to have grown by nearly 7 percent, reflecting a nearly 90 percent increase in real kava production, in response to rising foreign demand, and a 6 percent rise in copra output (Table 1). Services are estimated to have grown by about 5½ percent in real terms, as trade, hotels, and restaurants are reported to have expanded by an estimated 6 percent, and government services are estimated to have risen by more than 12 percent, reflecting a large increase in development outlays associated with loans supporting the Comprehensive Reform Program (CRP) and specific projects. The industrial sector is also estimated to have grown by about 9 percent in real terms, mainly because of a large increase in electricity production. On the demand side, the government decision to allow unlimited withdrawals from the Vanuatu National Provident Fund (VNPF) led to a sharp increase in liquidity, a noticeable rise in private consumption, and a marked increase in consumer imports. The acceleration of development spending also contributed to higher government investment.

8. In 1999 GDP is estimated to have declined by about 2½ percent Real value added in agriculture and forestry is estimated to have fallen by more than 11 percent, reflecting adverse weather conditions. In addition, the real value of services declined slightly, reflecting some decrease in tourist earnings following service disruptions resulting from damage to the national airline’s aircraft and about a 1 percent decrease in real government services, as delays in project implementation contributed to a noticeable decrease in development spending. On the demand side, the slowdown in government expenditure, with a consequent decrease in government investment and moderation in government consumption, represented the main development. The estimated decline in real GDP is mirrored in the drop in imports of petroleum products, which fell even more sharply, by nearly 20 percent, in 1999 (Table 5).

Table 3.

Vanuatu: Agricultural Production, 1995-99

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Sources: Reserve Bank of Vanuatu; Vanuatu Commodities Marketing Board (VCMB); and Department of Agriculture and Horticulture.

Data by center relates only to the copra received by VCMB. In 1996, data exclude copra received by Carmille Trading, which was in operation just for 1996.

Tons of exports on a dried weight volume basis. Kava exported for pharmaceutical purposes is dried whereas kava for the beverage market is sold fresh (green).

Total volume slaughtered in Port Vila and Lunganville abattoirs.

Port Vila abattoir only.

Production from Melektree Dairy.

Production of Toa Enterprise and Chicken City on Efate.

Includes transport allowance.

Table 4.

Vanuatu: Electricity Production by Union Electrique du Vanuatu in Port Vila and Luganville, 1995-99

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Source: Energy Unit, Ministry of Lands, Energy and Geology and Mines, based on extracts from the Annual Technical Report of Union Electrique du Vanuatu.
Table 5.

Vanuatu: Imports of Petroleum Products, 1995-99

(In thousands of barrels of oil equivalent) 1/

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Source: Energy Unit, Ministry of Natural Resources.

The conversion factor is one kiloliter = 6.29 barrels of oil for petrol, distillate, kerosene, and aviation gas; in the case of LPG, the conversion factor is one ton LPG/butane = 10.9 barrels of oil equivalent (boe).

Excluding jet fuel for reexport.

C. Sectoral Developments

9. Agricultural production has been particularly affected by the weather, although other factors have also played a role. After growing at an estimated rate of more than 5 percent annually in real terms from 1995 through 1998, excess rainfall and the effects of cyclone Danni contributed to a fall in agricultural production estimated at more than 11 percent in 1999. Lower producer prices contributed to the sharp decrease in value added for copra, estimated at more than 28 percent. In 1999 marketed copra output fell by 30 percent, to 31 metric tons (Table 3). Value added from kava fell by about 30 percent, and the volume of kava exports decreased by 40 percent, reflecting the decision by the Vanuatu Commodities Marketing Board to restrict export licenses in response to the decline in quality and surge in output observed in 1998. Adverse weather and a decline in the producer price also contributed to the 40 percent decline in cocoa production. However, cattle output increased by about 5 percent, and the volume of processed beef rose by almost 9 percent.

10. The composition of agricultural production has changed in recent years. Copra and cattle have remained the principal products, accounting for about 40 percent of all value added in real terms. However, kava production has grown sharply in recent years, and in 1998 export proceeds from kava exceeded those for beef. This development may have tempered the effects of the Asian crisis on Vanuatu’s economy, since the United States is the major importer of Vanuatu’s kava, while Bangladesh and Japan are the major markets for the country’s copra and beef, respectively. During 1999, a private consortium moved to establish a coconut oil mill, which would generate higher value added from copra production, and the mill began production during the first half of 2000.

11. Real value added in the industrial sector declined by an estimated 15 percent between 1995 and 1999, reflecting declines in manufacturing, electricity, and construction (Table 1). Real value added in manufacturing is estimated to have fallen by more than 15 percent in 1997 and has since stagnated. Real value added in electricity has varied from year to year but remained below its 1995 level, as maximum demand has increased little since 1997, despite a significant rise in installed capacity in 1999 (Table 4). Construction output is also estimated to have declined in the years after 1995 and has been affected by the large fluctuations in government development expenditure from year to year.

12. Against this background, the Vanuatu Foreign Investment Board (VFIB) was established in 1998 to promote foreign investment by simplifying the approvals process. Although the VFTB has shortened the time for processing proposals, the limited scope of VFIB jurisdiction, which does not override the regulatory authority of localities, means that some projects can still face administrative obstacles. Through end-1999, the VFB3 received 171 applications and approved 156, with total planned investment of about 13 billion vatu (equivalent to about USS100 million). About 30 percent (2.1 billion vatu) of the planned investments were in manufacturing. Although actual investment for all projects has averaged less than 20 percent of planned levels, about half of the planned investments in manufacturing has been implemented.

13. Services account for more than 70 percent of GDP at current prices. Traditionally, finance and industry have played a major role in the economy, as Vanuatu has maintained a significant offshore financial center. However, tourism has grown strongly in recent years, and output from trade, hotels, and restaurants, which strongly reflects tourist activity, now represents more than half of all value added in the service sector. Tourist related activities are estimated to have grown by about 6 percent in 1998 and to have contracted in 1999. The decrease in 1999 resulted largely from damage to Air Vanuatu’s aircraft during a hailstorm, which disrupted tourist arrivals during the last half of the year. The number of tourist arrivals rose by 9 percent in 1998 and fell by about 8 percent in 1999 (Table 6).

Table 6.

Vanuatu: Data on Tourism, 1995-99

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Sources: Immigration Department; Customs Department; and Statistics Office.

14. Australia represents the main source of visitors to Vanuatu, accounting for more than half of all arrivals. New Zealand and New Caledonia, accounting for about 12 percent and 9 percent of arrivals, are the next most important sources of visitors. Hotel accommodations have increased only marginally since 1996, and capacity utilization averaged 52 percent for rooms and 46 percent for beds in 1999. These figures represent averages, however, and capacity utilization was reported to be much higher for superior-grade properties than for simpler hotels and guest houses.

15. The National Tourist Office forecast a 7 percent rise in visitors during 2000, on the assumption that the unusual problems experienced in 1999 will not recur. In addition, several projects have been announced that are likely to increase tourist arrivals and proceeds in coming years. An additional cruise ship from Australia was scheduled to arrive beginning in the second half of2000. In addition, a new luxury grade hotel, under construction during 2000, is expected to open in 2001. Modernization of the Port Vila airport to accommodate larger aircraft has also been underway. This could allow a significant rise in tourist arrivals, since the capacity of Air Vanuatu, the major carrier, has recently averaged 85 percent.

III. Prices and Population

A. Prices

16. Inflation, as measured by the consumer price index for the main urban centers, has remained moderate in recent years. After rising by 1-3 percent a year during 1995-97, the consumer price index rose somewhat faster, by 3.3 percent in 1998 (Table 7). The slight acceleration reflected several factors, including the sharp increase in liquidity associated with the VNPF payouts, the de facto depreciation of the vatu vis-à-vis the U.S. dollar (as a result of an adjustment in the weights of the currency basket), and the replacement of the manufacturing turnover tax by a value added tax during the second half of the year, whose effects were slightly moderated by a 22 percent reduction in import tariffs. Inflation slowed to 2.8 percent in 1999, reflecting the decline in economic activity and absorption of excess liquidity. The inflation rate slowed further during the first quarter of 2000, to less than 1 percent on an annual basis, reflecting continued sluggishness in most commercial activities.

Table 7.

Vanuatu: Consumer Price Index, 1995-2000Q1 1/

(Percent change)

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Source: Statistics Office.

Period average. Figures for 20QQQ1 are percent changes relative to 1999Q1.

The weights are derived from 1985 Household and Expenditure Survey and have been revalued in terms of the 1990Q1 prices.

B. Population

17. Vanuatu has experienced a high rate of population increase since independence. Preliminary results of the 1999 census indicate that population growth averaged 3.1 percent a year during the 1989-99 period, an increase from the 2.5 percent yearly average recorded during 1979-89. (Table 8). Vanuatu’s rate of population growth far exceeds the averages for all lower-middle income countries and for East Asia and Pacific countries. It is also relatively high for Pacific Island countries (Figure 2). The high rate of population growth explains the decline in Vanuatu’s per capita GDP since 1990 and has made raising the overall growth rate a prime policy objective.

Table 8.

Vanuatu: Population Growth, 1989-99

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Source: Statistics Office.

Official estimates.

Preliminary’ report.

Figure 2.
Figure 2.

VANUATU Population and Population Growth Rates of Selected Countries and Territories in the South Pacific

Citation: IMF Staff Country Reports 2000, 999; 10.5089/9781451840520.002.A001

Source: Data provided by the national authorities.

18. Although population has grown throughout the country, growth has been especially rapid in urban areas. The two main towns, Port Vila and Luganville, experienced average population growth of 4.6 percent and 5 percent a year, respectively, during 1989-99, compared with an average annual growth rate of 2.7 percent in rural areas. The rapid growth in the urban centers has reflected, among other factors, migration from outer islands that has contributed to a growing unemployment problem in these centers.

IV. Public and Finance2

19. Vanuatu’s fiscal sector comprises the central government and some public sector institutions. Although there are also a number of municipalities and provincial governments, comprehensive data are not available for these units of the general government sector.

20. The implementation of the Comprehensive Reform Program (CRP—see section VII, below) has led to important reforms in the fiscal sector, especially in tax policy and institutional strengthening. Traditionally, international trade taxes have represented the largest share of revenues, representing about 60 percent of all receipts through 1997, with taxes on goods and services being the next most important sources (Figure 3). However, since 1998, with changes in the tax regime (see paragraph 23 for details) introduced under the CRP, the importance of international trade taxes as the major source of revenue has diminished steadily. General public services and education have represented the main components of budgetary expenditure.

Figure 3.
Figure 3.

VANUATU Fiscal Indicators, 1995-99

Overall Fiscal Developments (percent of GDP)

Citation: IMF Staff Country Reports 2000, 999; 10.5089/9781451840520.002.A001

Source: Data provided by the Vanuatu authorities.

21. Until very recently, domestic demand for government securities has been limited to the commercial banks, which have been interested only in holding small volumes of short-term government securities. Because the authorities have been reluctant to amass large volumes of non-concessional debt, for most of the 1990s the government ran a current budget surplus, with financing limited to concessional external borrowing for development projects.

22. During the period 1992-97, the central government’s current balance (excluding grants and interest payments) recorded a fairly steady average surplus of around 1½ percent of GDP, with revenue at around 24 percent of GDP and current expenditure, excluding interest payments, limited to about 22½ percent of GDP. In 1998, the confluence of several factors, including changes to the tax system, economic developments, and one time expenditure outlays to meet the costs of restructuring some of the public sector financial institutions and the financial problems in the Vanuatu National Provident Fund (VNPF), led to significant departures from the experience of the recent past. As a result of the combined effects of these factors, the current balance (excluding interest payments) fell from a surplus of 2½ percent of GDP in 1997 to a deficit of 1½ percent of GDP in 1998, while the overall fiscal deficit rose sharply from ¾ percent of GDP to 11¼ percent of GDP (Table 9). In 1999 revenue was maintained at about 24½ percent of GDP, despite the economic slowdown, as the VAT became fully operational. On the expenditure side, the absence of the one-time expenditures that occurred in 1998 and a decline in development outlays reduced total expenditure by 9⅓ percent of GDP. The current balance (excluding interest payments) registered a surplus of about 2⅔ percent of GDP, and the overall deficit contracted to l⅓ percent of GDP.

Table 9.

Vanuatu: Central Government Fiscal Operations, 1995-99

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Sources: Data provided by the Vanuatu authorities; and Fund staff estimates.

Net of tax rebate for import duties paid by Union Electrique du Vanuatu (UNELCO).

Cash grants only.

Excludes transfers to the Development Fund.

Change in nonbank holding of government bonds.

The authorities’ definition of recurrent revenue includes import duties due from UNELCO. Recurrent expenditure includes transfers to the Development Fund, principal debt repayments, and bond redemption provisions, but excludes subsidies to the VCMB.

A. Developments in 1998

23. In August 1998, Vanuatu’s tax system underwent significant changes. The existing 4 percent turnover tax on businesses was replaced by a 12½ percent value-added tax (VAT). Financial services were exempt from the VAT, where the 4 percent turnover tax remained in force. Moreover, import duties and business license fees were reduced and simplified, with the average effective import duty falling from 29 percent to less than 23 percent, and export taxes were abolished. The impact of these changes was not fully felt in 1998, since they became effective only in the second half of the year, and the tax administration system took time to adapt to the new tax regime.

24. In the event, total tax revenue in 1998 rose from 20½ percent of GDP in 1997 to 21¾ percent of GDP (Table 10). Although the VAT was only introduced in the second half of the year, total tax revenue from goods and services rose from 6½ percent of GDP in 1997 to 9¾ percent of GDP in 1998. Reflecting the changes in the structure of import tariffs, international trade taxes fell to 11⅓ percent of GDP in 1998 from 13⅓ percent of GDP in the previous year, although they remained the largest source of revenue (45 percent of total non-grant revenue).

Table 10.

Vanuatu: Central Government Revenue, 1995-99

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Sources: Data provided by the Vanuatu authorities; and Fund staff estimates.

Hotel/restaurant sales tax.

Business licenses, vehicle licenses, fishing licenses and agreement fees, liquor licenses, arms and prospecting licenses, air traffic rights, and cocoa licenses.

Gaming tax, video tax, rent tax. cheque levy, beer duty, and lotteries tax.

Gross income of water supplies and Post and Telecommunications.

Police and immigration fees, primary education fees, hospital fees, fines, and forfeits plus other miscellaneous fees and sales.

Other port and marine revenue, other property income, miscellaneous customs revenue, miscellaneous civil aviation and revenue under Heading 185, excluding lottery and fishing agreement fees. Includes revenue from asset sales.

25. Public expenditure rose dramatically in 1998. Much of the increase was due to large capital outlays and funding for VNPF payouts (Table 13) and the restructuring of financial institutions. Capital expenditure rose from 2½ percent of GDP in 1997 to 9 percent of GDP in 1998, reflecting an increase in donor funds following the start of the Comprehensive Reform Program (CRP). The liquidation of the Development Bank of Vanuatu (DBV) and restructuring of the government-owned but commercial National Bank of Vanuatu (NBV) cost the government 4½ percent of GDP. In the course of the year, the government reduced its staff by 7 percent through attrition and sizable layoffs. However, the action led to no significant overall savings, as the associated restructuring of staff positions effectively raised average salary levels.

Table 11.

Vanuatu: Central Government Current Expenditure, 1995-99

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Sources: Data provided by the Vanuatu authorities; and Fund staff estimates.

Including service charges on loans.

Excluding transfers to the Development Fund.

Excluding technical assistance.

Excluding VCMB subsidies.

Excluding principal repayments of loans and bond redemptions, and transfers to the Development Fund.

Table 12.

Vanuatu: Operations of the Vanuatu Commodities Marketing Board, 1995-99 1/

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Source: Data provided by the Vanuatu authorities.

Year ending in September.

Includes various receipts and administrative expenses.

Table 13.

Vanuatu: Operations of the Vanuatu National Provident Fund, 1995-99 1/

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Source: Vanuatu National Provident Fund (VNPF).

The VNPF was established in 1986 and its coverage of the Vanuatu labor market is now universal.

Includes private sector equity holdings and loans, and Luganville municipality bonds.

26. The deficit of 11⅓ percent of GDP in 1998 was financed using both external and domestic resources. While concessional foreign borrowing raised 5 percent of GDP, domestic financing contributed 6⅓ percent of GDP, of which 1¾ percent of GDP was from nonbank sources. As a result, public debt rose to 32½ percent of GDP, with external debt amounting to 24½ percent of GDP.

B. Developments in 1999

27. The revenue collected in 1999 was again about 24½ percent of GDP, despite a weaker economy. Domestic taxes on goods and services rose by more than 2½ percent of GDP from the 1998 level, to 12⅓ percent of GDP. Much of this improvement was due to the effects of the VAT introduced in the second half of 1998, as VAT receipts totaled 8⅓ percent of GDP. Moreover, domestic indirect taxes edged out international trade taxes as the largest source of revenue. International trade taxes fell despite a rise in imports, reflecting lower tariffs and a change in the customs administration system that was only partially completed during the year.

28. Total expenditure fell by 9⅓ percent of GDP, reflecting the end of the one-time outlays in 1998 and shortfalls in capital spending. Current expenditure increased slightly, due to an increase in the wage bill, as the hiring of additional personnel in health and education raised total government employment by about 2 percent. Wages and salaries continued to remain the single largest item in current expenditure (Table 11). However, capital expenditure dropped by 6 percent of GDP as a result of delays in project implementation. The overall deficit of 1⅓ percent of GDP was more than financed by foreign borrowing of 2⅓ percent of GDP, which allowed domestic debt of about 1 percent of GDP to be retired.

29. In 1999, plans to corporatize the Civil Aviation, Postal, and Marine authorities were completed, and implementation is expected to take place during 2000. The corporatization of these three entities is expected to cost the government between ½ and 1 percent of GDP in nontax revenue on a net basis. In addition, plans have been made to convert the state-owned Vanuatu Commodities Marketing Board (VCMB) into a limited liability corporation. In 1999, the VCMB’s profits more than doubled over the previous year, due to the large increase in copra exports (Table 12).

30. During 1999, government accounts began to be prepared on the basis of Government Finance Statistics (GFS) classification on a monthly basis. However, the government is yet to release expenditure data disaggregated on the basis of a functional classification consistent with GFS categories.

C. The 2000 Budget

31. The budget statement for 2000 set out the economic and financial performance targets for the next three years of the new government that took office in November 1999. Its main objectives include the following:

  • achieving a average real growth rate of 4 percent over the period 2000-02;

  • limiting inflation to 3 percent and maintaining a competitive real exchange rate;

  • raising non-grant revenue to about 25 percent of GDP;

  • generating a current budget surplus; and

  • keeping the overall budget deficit within 2 percent of GDP

32. The 2000 budget also intends to keep net domestic financing to zero and annual debt service to less than 8 percent of revenue (excluding foreign grants). In addition, the budget statement also provides medium-term quantitative targets for various expenditure items. Current expenditure is to be reduced from around 80 percent of total expenditure (the average of current expenditure in the 1997-99 budgets) to 75 percent, while development spending is targeted to be raised from 20 percent of total expenditure (the average of development expenditure in the 1997-99 budgets) to 25 percent. This reallocation is to be achieved through reductions in the outlays of administrative and economic ministries from 16 percent to 9 percent of total expenditure, while the budget for the ministry of education is to be raised from 22 percent to 26 percent of total expenditure, and that of the ministry of health from 11 percent to 14 percent of total expenditure.

33. Against these medium-term targets, the budget for 2000 envisages an overall deficit of 6¾ percent of GDP, with a current surplus (excluding interest payments) of 1⅓ percent of GDP. Tax revenue is expected to decline by about 1 percent of GDP to 20½ percent of GDP, due mainly to a reduction in turnover tax on financial transactions. Current expenditure is also budgeted to decline by about 1½ percent of GDP from the 1999 level to about 23 percent of GDP. Most of this reduction is planned in salaries and transfers. With the anticipated completion of development projects left unfinished from 1999, capital expenditure is expected to rise by 7 percent of GDP to close to 10 percent of GDP. This will raise the overall deficit—for which foreign financing has been identified—by 5 percent of GDP, from 1½ percent of GDP observed in 1999.

V. Financial Sector

34. Vanuatu’s domestic financial sector includes the Reserve Bank of Vanuatu (RBV), four main commercial banks (the government-owned NBV and three subsidiaries or branches of foreign banks),3 a number of trust and insurance companies, the Vanuatu National Provident Fund (VNPF), and several smaller financial institutions. Data on the domestic monetary institutions, including the now-defunct DBV, which was merged into the NBV in 1998, are reported in Tables 15—20. In addition, Vanuatu has a prominent offshore financial center (OFC) comprising some 63 banks with offshore banking licenses and a number of other international and local companies registered in the center. Offshore banks may not accept local deposits from Vanuatu citizens or make loans domestically. The number of offshore banks has declined since the mid 1990s, when the number totaled about 80.

Table 14.

Vanuatu: Factors Affecting Reserve Money, 1995-March 2000

(In millions of vatu; end of period)

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Source: Reserve Bank of Vanuatu.
Table 15.

Vanuatu: Monetary Survey, 1995-March 2000

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Source: Data provided by the Vanuatu authorities, and Fund staff estimates.

For March 2000, relative to the same period in 1999.