Vanuatu is poised to fully recover from the extensive damages caused by Cyclone Pam in 2015, with several large infrastructure projects near completion and growth bouncing back. Real GDP growth rebounded to 3.5 percent in 2016 from 0.2 percent in 2015, driven by recovery in tourism and agriculture combined with scaling-up of infrastructure. Inflation dipped below 1 percent in 2016 from 2.5 percent in 2015, due to low commodity prices. The current account deficit declined to about 4 percent of GDP in 2016 from 10.5 percent of GDP in 2015, due to rebounding exports and tourism activities.
A recovery in tourism and agriculture combined with further ramping-up of infrastructure projects is expected to propel real GDP growth to around 4 percent in 2017 and 2018. Inflation is estimated to pick up to 3.1 percent in 2017 driven by domestic demand, and rise further to 4.8 percent in 2018 mainly due to a temporary VAT increase, from 12.5 to 15 percent, before gradually reverting to modest levels in the medium term. The current account deficit is expected to widen to around 9 percent of GDP in 2017 and 2018, due to the high import content of infrastructure projects. The downside risks to this favorable outlook stem mainly from uncertainty in the rate of implementation of the public infrastructure projects and the ever-present danger of natural disasters.
The public and publicly-guaranteed debt increased sharply since 2014 mainly due to disbursements for reconstruction and infrastructure projects, though the new external borrowing was highly concessional. The fiscal deficit is expected to remain high at around 7 to 8 percent of GDP in 2017 and 2018, again reflecting elevated spending on reconstruction and infrastructure.
The accommodative monetary policy stance has played a crucial role in supporting economic recovery and financial stability after the cyclone. Over the past year, however, excess liquidity in the banking system has been associated with building up of inflation pressure. Financial sector remains sound, but there exists ample room to support financial inclusion. Private access to financial services for small and medium-sized enterprises (SMEs) and households in rural areas and outer islands has remained limited.
Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.
The Executive Board takes decisions under its lapse-of-time procedure when the Board agrees that a proposal can be considered without convening formal discussions.