Vanuatu: Staff Report for the 2018 Article IV Consultation—Informational Annex
Author: International Monetary Fund. Asia and Pacific Dept
Publication Date:
26 Apr 2018
eISBN:
9781484353127
Language:
English
Keywords:
ISCR; CR; debt; Vanuatu; IMF staff estimate; basket of currencies; financial asset; adjustable peg; ADB-World Bank; country operations business plan; Government finance statistics; External sector statistics
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2018 Article IV Consultation-Press Release; and Staff Report

Abstract

2018 Article IV Consultation-Press Release; and Staff Report

Fund Relations

(As of February 28, 2018)

Membership Status: joined September 28, 1981; Article VIII

General Resources Account:

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SDR Department:

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Outstanding Purchases and Loans:

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Emergency Assistance may include ENDA, EPCA, and RFI.

Latest Financial Arrangements: None

Projected Payments to the Fund 2/

(SDR million; based on existing use of resources and presenting holdings of SDRs);

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When a member has overdue financial obligations outstanding for more than three months, the amount of such arrears will be shown in this section.

Implementation of HIPC Initiative: Not applicable

Implementation of Multilateral Debt Relief Initiative: Not applicable

Implementation of Post-Catastrophe Debt Relief: Not applicable

Exchange Arrangements

Since 1988, Vanuatu has officially maintained an adjustable peg exchange rate arrangement. Currently, the exchange rate of the vatu is linked to a transactions-weighted (trade and tourism receipts) basket of currencies. The weights and composition of the basket, which are not publicly disclosed, are adjusted periodically. The Reserve Bank of Vanuatu (RBV) quotes daily buying and selling rates for the vatu against the U.S., Australian, and New Zealand dollars; the euro; the U.K. pound; and the Japanese yen. The rate in terms of the U.S. dollar as of March 9, 2018 was VT 107.01 per U.S. dollar. The de facto classification is “other managed,” as the composite weights are not disclosed and cannot be confirmed. 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.

Article IV Consultation

Vanuatu is on a 12–month consultation cycle. The previous Article IV consultation mission took place during July 13–26, 2016 and the consultation was concluded on October 21, 2016 (Country Report No. 16/336).

OFC Assessments

The most recent Offshore Financial Center Module II Assessment, conducted by MFD, was concluded in May 2006.

Safeguards Assessments

The first safeguards assessment of the RBV was completed in October 2016. The assessment found that the RBV has a recognized accounting framework and publishes annual financial statements, albeit with some delay. It also identified several weaknesses in its governance arrangements, autonomy, transparency, and audit mechanisms. Recommendations included: (i) drafting amendments to the RBV Act to align it with leading practices for central banks; (ii) establishing an Audit Committee; (iii) outsourcing internal audit services to an independent international audit firm; and (iv) formulating a recapitalization plan. Progress on the implementation of the recommendations has been slow.

Technical Assistance

LEG, MCM, and PFTAC have provided more than 20 technical assistance missions between August 2016 and February 2018 including fiscal tax law, national accounts statistics, government finance statistics, reserve management, RBV recapitalization, internal audit, and public financial management.

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Resident Representative

The resident representative office for the Pacific Islands, including Vanuatu, was opened in September 2010 in Suva, Fiji and Mr. Tubagus Feridhanusetyawan was the Resident Representative until February 5, 2018. Ms. Leni Hunter is the incoming Resident Representative.

Relations With the Pacific Financial Technical Assistance Center (PFTAC)

(As of February 2018)

Economic Statistics

Vanuatu received technical assistance (TA) as part of the three-year Government Finance Statistics (GFS) capacity-building project for selected Asian and Pacific Island Countries, funded by the Japan Administered Account for Selected IMF Activities (JSA1) till late 2015. PFTAC conducted a mission in November 2017, focusing on expanding coverage to the rest of the general government and reconciling GFS data publications between the Department of Finance and Treasury, National Statistics Office and the Reserve Bank. The mission further assisted in the compilation and dissemination of the Budgetary Central Government GFS data (2012–2016) for the annual Government Finance Statistics Yearbook.

The Vanuatu National Statistics Office (VNSO) has benefited from five national accounts TA missions since 2012 (most recently in August 2017) and attendance at annual sub-regional workshops. TA had focused on developing quarterly GDP estimates as well as an intended rebase, but staff losses caused delays in GDP publication, and forced TA to refocus on support for basic functionality. By August 2017 however, capacity had improved, and the last mission improved the use of administrative data, estimated the impact of Cyclone Pam and set out a new plan to rebase in 2019/2020. The next mission should take place in the first half of FY2019.

Public Financial Management (PFM)

Vanuatu has regularly sent officials to PFTAC-sponsored regional training events. During FY2017 and FY2018, several missions were conducted to: (i) develop a PFM Reform Roadmap following on from a PEFA self-assessment; (ii) formulate a medium-term accounting and reporting reform plan leading to orientation of government accountants on the basic principles and features of IPSAS and developing accounting policies/regulations; and (iii) building capacity in internal audit and the development of strategic and annual plans and development of an internal audit manual.

Follow-up TA is planned in FY2019 to meet the requests of the Ministry of Finance including: (i) improving the 2019 Vanuatu Budget; (ii) payroll systems and procurement audit; (iii) progress review of the recommendations to improve accounting internal control; and (iv) capacity-development in adopting the new accounting regulations.

Macroeconomics

In the macroeconomic area, PFTAC has provided assistance to the Reserve Bank of Vanuatu (RBV) in developing a Model Of the Vanuatu Economy (MOVE). The MOVE, which generates medium-term projections within an internally consistent macroeconomic and fiscal framework, has been used by the Ministry of Finance and Economic Management (MFEM) to inform a review of Vanuatu’s tax system. MFEM has also implemented revenue forecasting by industries which is possible because of the consistent use of industry classification by the Department of Customs and Inland Revenue (DCIR) and the VNSO. In addition, staff members from the Office of the Prime Minister, MFEM, the RBV, and the VNSO participated in regional workshops on GDP compilation and forecasting and medium-term expenditure planning for national sustainable development.

Tax Administration

Supported by PFTAC, Vanuatu has made steady progress over the last few years which has included: (a) implementation of a new strategic and business plan; (b) a risk-based compliance improvement strategy; (c) implementation of performance standards; and (d) the development of an IT strategy followed by the implementation of an IT system that has facilitated taxpayer compliance. A Revenue Review Governance Committee and a Project Team have made recommendations for modernizing Vanuatu’s tax system including introduction of Income Tax (as previously recommended by the IMF), and an enhanced organizational structure and governance arrangements which PFTAC supported through technical assistance missions.

Financial Supervision

In 2017, PFTAC assisted the Reserve Bank of Vanuatu with developing its regulatory framework for credit unions, and will continue that work with a mission in April 2018, to assist the Reserve Bank in finalizing drafting of the Credit Union law and prudential standards. In 2018, PFTAC will also assist the Reserve Bank in enhancing its risk-based supervision framework by developing an effective risk-rating and supervisory action planning process.

Relations With the World Bank

(As of February 2018)

The Bank and Fund country teams have exchanged views on the main macroeconomic issues facing Vanuatu and appropriate policy responses.

Fiscal Issues

The teams agree that careful fiscal planning will be required to finance necessary development expenditure (including Cyclone Pam-related reconstruction spending) while at the same time ensuring debt sustainability. Where possible, the authorities should seek external financing on grant or highly concessional credit terms. The authorities should also aim to rebuild fiscal buffers over the medium term, including by taking steps to increase domestic revenues through the introduction of income and corporate taxes. The teams agree that formulating an infrastructure investment plan in line with national priorities, and ensuring discipline and allocative efficiency in public expenditure more generally, will be important in responding to fiscal challenges.

Public Investment

The scaling up of investments in infrastructure should be complemented with broad reforms aimed at enhancing the business environment, promoting tourism (including in newer long-haul markets), and improving the resilience, consistency and quality of agricultural output. The teams welcome efforts to strengthen institutions for climate change adaptation and disaster risk management, including the recently-established early warning systems. Both teams noted the importance of promoting inclusive growth, which will be supported by government strategies to ensure the widespread provision of basic services and employment opportunities, particularly in the less-populated islands.

Exchange Rate and AML/CFT Issues

The teams agree that the vatu peg to a basket of currencies has served Vanuatu well and should be maintained, given the importance of exchange rate stability for maintaining confidence. Both the IMF and the Bank welcome the government’s commitment to address current deficiencies in controls on anti-money laundering and combating the financing of terrorism, noting considerable progress in technical compliance with a number of legislative amendments,

Collaboration

The teams have the following requests for information and collaboration from their counterparts:

  • The Fund team requests to be kept informed of progress in various projects and analytical work undertaken by the Bank in order to use resources efficiently and avoid work overlaps.

  • The Bank team requests that the Fund make available to the Bank its latest macroeconomic assessments and macroeconomic data from time to time, as inputs to the Bank’s lending and non-lending operations.

  • Further details on collaboration, as necessary, will be agreed at the technical level as work progresses. Table 1 details the specific activities planned by the two country teams over the next year, along with their expected deliverables.

Table 1.

Vanuatu: Bank and Fund Planned Activities in Macro-critical Structural Reform Areas

(March 2018–April 2019)

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Relations With the Asian Development Bank

(As of February 2018)

Operational Strategy

The Pacific Approach, 2016–2020 serves as the operational framework of the Asian Development Bank (ADB) for the Pacific region. The ADB program in Vanuatu contributes to the objectives of the Pacific Approach by: reducing costs; managing risk; and enabling value creation. ADB’s country operations business plan for 2018–2020 is aligned with the government’s priorities and continues ADB’s support in (i) transport; (ii) urban development; and (iii) energy. Consistent with the government’s strategy of fostering private sector-led growth, ADB has also focused on improving access to financial services, reforming business laws, and supporting state-owned enterprise (SOE) reform.

ADB’s indicative allocation to Vanuatu of Asian Development Fund loan and grant resources is USD37.29 million for 2017–19, including USD9.73 million in disaster risk reduction financing. To leverage ADB’s impact and reduce borrowing costs, co-financing opportunities will be pursued with other development partners.

Portfolio Status

Since joining ADB in 1981, Vanuatu has received 16 loans amounting to USD95.96 million, 14 grants totaling USD83.40 million, and 69 TA projects totaling USD23.05 million. More than 50 percent of the loans and TA projects were for the transport sector. There are six ongoing projects totaling USD128.80 million, including a grant provided by the Asia Pacific Disaster Response Fund after the September 2017 Manaro volcano eruption. There are two ongoing TA projects amounting to USD1.87 million: TA 7938-VAN: Establishment of the Maritime Safety Administration; and TA 9263-VAN: Supporting the Vanuatu Project Management Unit and the Ministry of Infrastructure and Public Utilities.

Interisland Shipping Support Project

The project aims to improve the efficiency and effectiveness of interisland shipping services. It comprises: (i) infrastructure investments in Port Vila and five outer islands, and (ii) establishment of a shipping support scheme to catalyze the provision of services to remote noncommercial destinations. The project is complemented by TA to improve sector governance. ADB is providing a loan of USD29.30 million, the Government of New Zealand a parallel grant of USD17.25 million, and the Government of Vanuatu USD5.57 million.

Port Vila Urban Development Project

The project aims to support affordable and effective drainage, roads, and sanitation systems that are climate resilient and sustainable in and around Port Vila. ADB is providing a loan of USD5.00 million and administering the corresponding grant of USD31.00 million from the Government of Australia. The Government of Vanuatu is providing a contribution of USD3.10 million. An additional grant of USD2.87 million from the Global Environment Facility was approved in December 2016.

Energy Access Project

The project aims to increase energy access and renewable energy generation on the islands of Espiritu Santo and Malekula, which are the second and third largest population centers after Efate.

The project will assist Vanuatu install hydropower generation to replace diesel generation in Malekula and will extend the distribution grid in both Malekula and Espiritu Santo. The project was approved in December 2017. ADB is providing a USD2.50 million loan, a USD2.50 million grant, and is administering a USD12.00 million grant from the Strategic Climate Fund.

Private Sector Development

The Pacific Private Sector Development Initiative (PSDI) is a regional technical assistance facility co-financed by the Government of Australia, the Government of New Zealand, and ADB. PSDI works with Pacific developing member countries to improve the enabling environment for business and support inclusive, private sector-led economic growth. ADB’s support under PSDI focuses on (i) improving access to financial services; (ii) business law reform; and (iii) state-owned enterprise reform.

  • Improving Access to Financial Services. ADB supported the secured transactions framework reform through the drafting and passage of the Personal Property Securities Act, and the installation, and later upgrade, of an electronic registry to record the filing of security interests.

  • Business Law Reform. ADB assistance has focused on drafting a new Companies Act, a new Companies (Insolvency and Receiverships) Act, and a new Insolvency (Cross Border) Act. Support was also provided for online companies, business names, and charitable associations registry.

  • State-Owned Enterprise Reform. ADB supported preparation of an SOE reform policy, approved by Cabinet in October 2013, and the subsequent drafting of SOE legislation. ADB has also been working with several SOEs on reform and rationalization strategies, including recommending liquidation where appropriate.

Cyclone Response

Following Tropical Cyclone Pam in March 2015, ADB’s immediate support to the government comprised (i) the approval of USD1.0 million grant financing from the Asia Pacific Disaster Response Fund, and (ii) deployment of urban and infrastructure specialists to Port Vila. This was followed by approval of the: Cyclone Pam School Reconstruction Project (USD5.00 million), co-financed by the Government of Japan; and the Cyclone Pam Road Reconstruction Project (USD24.50 million).

Proposed Pipeline Projects

ADB’s forward pipeline includes a proposed urban development project for Luganville and a second phase of the Port Vila Urban Development Project. A Project Development Facility is also proposed to support project design and implementation readiness of infrastructure projects. Vanuatu’s participation in regional projects relating to the finance sector is being discussed with the government.

ADB Extended Mission in Vanuatu

An ADB–World Bank joint Development Coordination Office was opened in Port Vila in June 2010. In 2017, ADB upgraded the Development Coordination Office to an Extended Mission (EM-VAN), further strengthening ADB’s presence on the ground.

The ADB’s Pacific Liaison and Coordination Office in Sydney is responsible for country programming in Vanuatu, supported by the Pacific Operations Division in Manila.

Statistical Issues

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Vanuatu: Table of Common Indicators Required for Surveillance

(As of February 2018)

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Daily (D), Weekly (W), Monthly (M), Quarterly (Q), Annually (A), Irregular (I), and Not Available (N/A).

Includes reserve assets pledged or otherwise encumbered as well as net derivative positions.

Both market-based and officially-determined, including discount rates, money market rates, rates on treasury bills, notes and bonds.

Foreign and domestic financing.

Includes external gross financial asset and liability positions vis-à-vis nonresidents.

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Cover IMF Staff Country Reports
Vanuatu: 2018 Article IV Consultation-Press Release; and Staff Report
Author: International Monetary Fund. Asia and Pacific Dept
Volume/Issue:
Volume 2018: Issue 109
Publisher:
International Monetary Fund
ISBN:
9781484353127
ISSN:
1934-7685
Pages:
71
DOI:
https://doi.org/10.5089/9781484353127.002