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IMF Country Report No. 19/162
VANUATU
2019 ARTICLE IV CONSULTATION—PRESS RELEASE; STAFF REPORT; AND STATEMENT BY THE EXECUTIVE DIRECTOR FOR VANUATU
June 2019
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 2019 Article IV consultation with Vanuatu, the following documents have been released and are included in this package:
A Press Release summarizing the views of the Executive Board as expressed during its June 5, 2019 consideration of the staff report that concluded the Article IV consultation with Vanuatu.
The Staff Report prepared by a staff team of the IMF for the Executive Board’s consideration on June 5, 2019, following discussions that ended on April 8, 2019, 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 May 20, 2019.
An Informational Annex prepared by the IMF staff.
A Debt Sustainability Analysis prepared by the staffs of the IMF and the International Development Association (IDA).
A Statement by the Executive Director for Vanuatu.
The IMF’s transparency policy allows for the deletion of market-sensitive information and premature disclosure of the authorities’ policy intentions in published staff reports and other documents.
Copies of this report are available to the public from
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© 2019 International Monetary Fund
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VANUATU
STAFF REPORT FOR THE 2019 ARTICLE IV CONSULTATION
May 20, 2019
Key Issues
Context: Four years after Cyclone Pam struck Vanuatu causing extensive damages, reconstruction is near completion with full recovery in sight. The authorities are now focused on implementing their broader development plans that were slowed by the rebuilding process, which will require fiscal discipline and reforms to maintain debt sustainability. The authorities should continue their constructive engagement with development partners for technical assistance, capacity development, and concessional and grant-based funding. In parallel continuing to reform and strengthen the governance of institutions and removing vulnerabilities to corruption will be important.
Outlook and Risks: Real GDP growth softened somewhat to 3.2 percent in 2018 but should remain relatively stable going forward. Modest fiscal and current account deficits are expected in 2019 (3.2 and 1.2 percent of GDP, respectively), but the deficits will widen thereafter, reflecting spending on new infrastructure projects and decreased revenues from economic citizenship programs. The largest uncertainty for the economy remains the ever-present danger of natural disasters. On current policies, there is little fiscal space to address another natural disaster as public-and-publicly-guaranteed debt is expected to breach the government’s target of 60 percent of GDP by 2025.
Main Policy Recommendations:
Further fiscal reform, including the introduction of a broader tax regime and more prioritization of expenditures, to reduce reliance on revenues from economic citizenship programs, and to remain well below the government’s debt target. This would maintain an extra buffer to manage risks from natural disasters.
Analyze excess liquidity and non-performing loans in the banking sector with assistance from development partners, so as to guide the sector in reducing those burdens as needed, and safeguard efforts at financial inclusion.
Help ensure that Vanuatu’s AML/CFT regime is properly applied to and mitigates ML/TF risks arising from new fintech usage, by adopting a clear mandate with deadlines for reporting and recommending for its Distributed Ledger Technology taskforce.
Continue reforms to improve Reserve Bank of Vanuatu (RBV) governance, financial supervision and fiscal governance by leveraging technical assistance programs with PFTAC and its development partners, to counteract corruption.
Approved By
Odd Per Brekk (APD) and Maria Gonzalez (SPR)
Discussions took place in Port Vila during March 27–April 8, 2019. The staff team comprised Dirk Muir (head), Hidetaka Nishizawa, and Charlotte Sandoz (all APD). Anna Park (OED) participated in policy discussions with Anna Robinson (WB), Matthew Hodge and Jacqueline Connell (both ADB) as observers. The mission met with Minister of Finance and Economic Management Gaetan Pikioune, Governor of Reserve Bank of Vanuatu (RBV) Simeon Malachi Athy, and the economic committee of the Parliament, as well as other senior officials from the government and RBV, representatives from the private sector and civil society organizations, and development partners. Anthony di Bello and Antoinette Kanyabutembo (both APD) assisted in preparing this report.
Contents
BACKGROUND
RECENT DEVELOPMENTS, OUTLOOK AND RISKS
A. Recent Developments
B. Outlook
C. Risks
D. Authorities’ Views on Outlook and Risks
ALIGNING MACROECONOMIC POLICIES FOR GROWTH
A. Monetary Policy
B. Financial Sector Issues
C. Fiscal Policy
D. Structural Policies
E. Addressing Risks from Natural Disasters
IMPROVING GOVERNANCE AND FOSTERING GROWTH
OTHER ISSUES
STAFF APPRAISAL
BOX
Shared Vision 2030
FIGURES
1. Reconstruction is Drawing to a Close, but Growth Could be Stronger
2. Development Projects Exert Pressure on External Balances while Stimulating Growth
3. Public Finance Needs More Reform While Monetary Policy is Supportive
4. Financial Sector is in Recovery, while Financial Inclusion is Increasing
TABLES
1. Selected Economic and Financial Indicators, 2014–21
2. Central Government Budgetary Operations, 2014–24
3. Reconciling the Domestic Budget with the IMF Presentation, 2014–24
4. Monetary Survey, 2014–21
5. Balance of Payments, 2014–24
6. Medium-Term Baseline Scenario, 2014–24
7. Banks’ Financial Soundness Indicators, 2012–18Q3
8. SDGs Identified in the National Sustainable Development Plan 2016 to 2030
9. Indicators of Capacity to Repay the Fund, 2019–28
ANNEXES
I. Authorities’ Response to Fund Policy Advice
II. External Sector Assessment
III. Graduation from the Least Developed Country (LDC) Category
IV. Risk Assessment Matrix
V. An Update on Exchange Rate Issues: Competitors and Sectors
VI. Excess Liquidity and the Effectiveness of Monetary Policy in Vanuatu
VII. The Fiscal Framework in the Event of Emergencies and its Application
VIII. Implementation of the Enhanced General Data Dissemination System (eGDDS)
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VANUATU
STAFF REPORT FOR THE 2019 ARTICLE IV CONSULTATION— INFORMATIONAL ANNEX
May 20, 2019
Prepared By
The Asia and Pacific Department (In consultation with other departments)
Contents
FUND RELATIONS
RELATIONS WITH OTHER INTERNATIONAL FINANCIAL INSTITUTIONS
STATISTICAL ISSUES
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VANUATU
STAFF REPORT FOR THE 2019 ARTICLE IV CONSULTATION—DEBT SUSTAINABILITY ANALYSIS1
May 20, 2019
Approved By
Odd Per Brekk (IMF) Lalita Moorty (IDA)
Prepared by the staff of the International Monetary Fund and the International Development Association
| Risk of external debt distress: | Moderate |
| Overall risk of debt distress: | Moderate |
| Granularity in the risk rating: | Limited space to absorb shock |
| Application of judgement: | No |
| Risk of external debt distress: | Moderate |
| Overall risk of debt distress: | Moderate |
| Granularity in the risk rating: | Limited space to absorb shock |
| Application of judgement: | No |
The updated DSA suggests that the external risk of debt distress for Vanuatu remains moderate with limited space to absorb shocks. All external debt indicators remain below the relevant indicative thresholds under the baseline scenario, incorporating the average long-term effects of natural disasters on growth and the fiscal and current account balances. A tailored natural disaster shock, reflecting Vanuatu’s vulnerability to disasters, would cause the present value (PV) of public and publicly guaranteed (PPG) external debt-to-GDP ratio to breach the threshold from 2024 onwards.
The overall risk of debt distress is assessed as moderate. Although the PV of the public-debt-to-GDP ratio remains below the 55 percent benchmark under the baseline scenario, the public-debt-to-GDP ratio would breach the authorities’ debt ceiling of 60 percent by 2025. Moreover, a tailored natural disaster shock would lead to a significant deterioration in debt sustainability, breaching the benchmark. The breach of the authorities’ debt ceiling and of the benchmark indicates the need for rebuilding fiscal buffers and enhancing resilience against shocks, including from natural disasters. This requires both stronger revenue mobilization measures, including an introduction of the proposed income taxes, and expenditure rationalization in the medium term. When contracting new public infrastructure projects, the authorities are encouraged to seek grants or concessional loans as much as possible to contain its debt burden.
Contents
PUBLIC DEBT COVERAGE
BACKGROUND ON DEBT
BACKGROUND ON MACROECONOMIC FORECASTS
COUNTRY CLASSIFICATION
DETERMINATION OF SCENARIO STRESS TESTS
DEBT SUSTAINABILITY
A. External Debt Sustainability Analysis
B. Public Sector Debt Sustainability Analysis
RISK RATING AND VULNERABILITIES
AUTHORITIES’ VIEWS
TABLE
1. Vanuatu: External Debt Sustainability Framework, Baseline Scenario, 2016–39
2. Vanuatu: Public Sector Debt Sustainability Framework, Baseline Scenario, 2016–39
3. Vanuatu: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, 2019–29
4. Vanuatu: Sensitivity Analysis for Key Indicators of Public Debt 2019–29
FIGURE
1. Vanuatu: Indicators of Public and Publicly Guaranteed External Debt under Alternative Scenarios, 2019–29
2. Vanuatu: Indicators of Public Debt Under Alternative Scenarios, 2019–29
3. Vanuatu: Drivers of Debt Dynamics – Baseline Scenario
4. Vanuatu: Realism Tools
5. Vanuatu: Qualification of the Moderate Category, 2019–29
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Press Release No. 19/216
FOR IMMEDIATE RELEASE
June 13, 2019
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