On June 5, 2019, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation1 with Vanuatu.
Four years after Cyclone Pam struck Vanuatu causing extensive damages, reconstruction is near completion with full recovery in sight. Real GDP growth reached 4.4 percent in 2017 and stayed strong, if somewhat softer, at 3.2 percent in 2018. There was a current account surplus in 2018 of 3.5 percent of GDP, driven by windfall revenues from economic citizenship programs, despite still-strong demand for imports for development-partner-financed projects. Consequently, there was also a fiscal surplus of 4.8 percent of GDP.
Going forward real GDP growth in 2019 will be slightly higher at 3.4 percent because of some delayed private investment but will ease to 2.9 percent as there are fewer projects financed by development partners, and tourism and agricultural diversification become the primary growth drivers. Vanuatu will graduate from LDC status in 2020, with little expected impact on their growth trajectory. Vanuatu is also are expected to implement the “PACER plus” free trade agreement with Australia, New Zealand and eight other Pacific island small states.
Modest fiscal and current account deficits are expected in 2019, at 3.2 and 1.2 percent of GDP, respectively. The deficits will widen thereafter, reflecting spending on new infrastructure projects financed more by concessional lending than grants and decreased revenues from Vanuatu’s economic citizenship programs. The current account deficit will face further pressure from imports of airplanes for the new Shared Vision 2030 plan for air travel and tourism, jointly carried out by the Vanuatu Tourism Office, Air Vanuatu and the airports authority.
Monetary policy has maintained inflation within its 0 and 4 percent range using its pegged exchange rate regime to import low foreign inflation and used its statutory reserve deposit requirements and open market operations to overcome any domestic pressures, such as the increase in 2018 of the VAT rate. The monetary policy stance is projected to remain neutral going forward. The financial sector is generally sound, but there exists ample room to support financial inclusion, as reflected by the new National Financial Inclusion Strategy 2018–23.
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.
At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country’s authorities. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.