This update of the debt sustainability analysis (DSA) shows that Vanuatu’s risk rating for debt distress remains moderate, since the evolution of debt indicators remains similar to that obtained in the 2015 DSA. The level of public debt began to rise in 2015 and will continue to increase over the next few years due to the implementation of major public infrastructure projects and reconstruction activities. This is expected to be manageable provided that the financing terms are concessional and the surge in financing needs is temporary. Nonetheless, repayment obligations will likely put pressure on the economy and will require fiscal adjustment over the medium term. The DSA has been extended to include an alternative scenario of a Cyclone Pam-like natural disaster within 5 years, under which debt sustainability deteriorates in the aftermath of the event. The authorities are recommended to pursue prudent fiscal policies, including spending reprioritization and tax reform implementation, and seek grant financing for infrastructure investments in the next few years to ensure debt sustainability over the medium term.
In addition to the extreme natural disaster shock scenario we have considered adjusting macro projections to reflect the average impact of natural disasters by calculating the historical annual average damage to the economy as reported by EM-DAT for the period 1990–2014. This was found to be modest at 0.12% of GDP growth – despite Vanuatu’s high rate of natural disasters. Given the small magnitude of the average effect, we chose not to incorporate it in the medium-term growth projections.