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© 2002 International Monetary Fund

December 2002

IMF Country Report No. 02/265

Vanuatu: 2002 Article IV Consultation—Staff Report; Staff Statement; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for Vanuatu

Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. In the context of the 2002 Article IV consultation with Vanuatu, the following documents have been released and are included in this package:

  • the staff report for the 2002 Article IV consultation, prepared by a staff team of the IMF, following discussions that ended on August 29, 2002, with the officials of Vanuatu on economic developments and policies. Based on information available at the time of these discussions, the staff report was completed on November 7, 2002. The views expressed in the staff report are those of the staff team and do not necessarily reflect the views of the Executive Board of the IMF.

  • a staff statement of November 21, 2002 updating information on recent developments.

  • a Public Information Notice (PIN) summarizing the views of the Executive Board as expressed during its November 22, 2002 discussion of the staff report that concluded the Article IV consultation.

  • a statement by the Executive Director for Vanuatu.

The document (s) listed below have been or will be separately released.

  • Selected Issues and Statistical Appendix Paper

The policy of publication of staff reports and other documents allows for the deletion of market-sensitive information.

To assist the IMF in evaluating the publication policy, reader comments are invited and may be sent by e-mail to

Copies of this report are available to the public from

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Price: $15.00 a copy

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Staff Report for the 2002 Article IV Consultation

Prepared by the Staff Representatives for the 2002 Consultation with Vanuatu

Approved by Daniel Citrin and Shigeo Kashiwagi

November 7, 2002

  • The 2002 Article IV consultation discussions were held in Port Vila during August 20-29. The staff team comprised David Cowen (head), Alexander Wolfson, and Jian Ming Ni (all APD). Vanuatu is on a 24-month cycle.

  • The mission met with Minister of Finance and Economic Management Molisa, Reserve Bank of Vanuatu Governor Kausiama, and other senior government officials, and with representatives from the private sector and major donors.

  • At the conclusion of the last Article IV consultation in August 2000, Directors commended the authorities for maintaining macroeconomic stability, but recognized the need for strengthening the fiscal and external positions. They welcomed the progress made under the government’s Comprehensive Reform Program, which aimed at raising public sector efficiency and improving economic management. However, Directors noted that broader and deeper reforms in fiscal and structural areas were necessary for sustained growth. They supported the steps taken to strengthen oversight of the onshore and offshore financial sectors, but cautioned that efforts to combat money laundering needed to be brought up to international standards.

  • Vanuatu has accepted the obligations of Article VIII, Sections 2, 3, and 4, and maintains an exchange system that is free of restrictions on payments and transfers for current international transactions.

  • Data quality and coverage still impede effective surveillance of policies and developments in Vanuatu, but improvements have been made since the last consultation.

  • The principal author of this report is David Cowen.


  • Executive Summary

  • I. Recent Economic and Political Developments

  • II. Outlook and Risks

  • III. Policy Discussions

    • A. Fiscal Policy

    • B. Monetary and Exchange Rate Policy

    • C. Financial Sector Policy

    • D. Other Issues

  • IV. Staff Appraisal

  • Boxes

  • 1. Regional Comparison of Competitiveness

  • 2. Fiscal Management and the Comprehensive Reform Program

  • 3. Medium-Term Outlook and Risks

  • 4. Policy Challenges and Responses

  • 5. Offshore Financial Center

  • Figures

  • 1. Selected Economic Indicators, 1997–2002

  • 2. External Sector Developments, 1996–2002

  • 3. Monetary and Financial Indicators, 1998–2002

  • Tables

  • 1. Selected Economic and Financial Indicators, 1998–2003

  • 2. Balance of Payments, 2000–2007

  • 3. Central Government Fiscal Operations, 1998–2002

  • 4. Monetary Survey, 1999–2002

  • 5. Vulnerability Indicators, 1998–2002,

  • 6. Medium-Term Scenario, 2000–2007

  • Annexes

  • I. Fund Relations

  • II. Relations with the Pacific Financial Technical Assistance Center

  • III. Relations with the World Bank Group

  • IV. Relations with the Asian Development Bank

  • V. Statistical Issues

  • VI. Social and Demographic Indicators

Executive Summary

  • Economic growth in Vanuatu has slowed considerably since the mid-1990s, owing to persistent fiscal and structural weaknesses, which limit competitiveness. Combined with the effects from several cyclones and a weak external environment in 2001, real GDP contracted by 2 percent. Macroeconomic management has been reasonably sound. As a result, inflation has stayed low, but reserves have declined in recent years, in part reflecting poor export performance.

  • With little sign of recovery, real GDP growth is expected to be slightly negative again in 2002. Growth would be expected to pick up over the medium term, absent major shocks and with a renewed reform effort, as well as sufficient resources to support outer island development.

  • Risks to medium-term growth prospects primarily arise from difficulties in reaching political consensus on addressing policy weaknesses. Frequent changes in government over the past three years have slowed reforms in some key areas, but recent progress on bank supervision is a positive sign. A coalition government in place since April 2001 strengthened its hold on Parliament in a national election in May 2002, which could yield a more stable and reform-oriented policy environment.

  • The authorities and staff agreed that the underlying fiscal situation, while showing signs of improvement in 2001 and 2002, still required corrective actions. To safeguard revenue performance and fund key social and infrastructure needs, tax compliance needs to be strengthened and expenditure priorities shifted away from wage outlays.

  • In view of the deterioration in the external position, the staff also underscored the need to ensure the exchange rate regime is consistent with maintaining a comfortable reserve cushion and protecting external competitiveness. Given Vanuatu’s high cost structure, competition gains could accrue from a sounder fiscal stance and a deepening of structural reforms.

  • The authorities and staff agreed that forceful action was required to regulate and supervise the offshore financial center (OFC). A rapid alignment of the onshore and offshore supervisory regimes and strict enforcement of financial regulations would act to safeguard the domestic financial system and reduce the reputational harm from hosting an OFC that is largely noncompliant with Basel Core Principles. The OECD designated Vanuatu as an uncooperative tax haven in April 2002, in part because of a lack of transparency and information sharing.

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November 22, 2002

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Public Information Notice (PIN) No. 02/134


December 11, 2002

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November 22, 2002

Vanuatu: 2002 Article IV Consultation-Staff Report; Staff Statement; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for Vanuatu
Author: International Monetary Fund