Abstract
IMF Country Report No. 21/208
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IMF Country Report No. 21/208
VANUATU
2021 ARTICLE IV CONSULTATION—PRESS RELEASE; STAFF REPORT; AND STATEMENT BY THE EXECUTIVE DIRECTOR FOR VANUATU
September 2021
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 2021 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 August 31, 2021 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 August 31, 2021, following discussions that ended on July 22, 2021, 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 August 16, 2021.
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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© 2021 International Monetary Fund
PR21/263
IMF Executive Board Concludes 2021 Article IV Consultation with Vanuatu
FOR IMMEDIATE RELEASE
Washington, DC – September 14, 2021: The Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation1 with Vanuatu.
The COVID-19 pandemic and major natural disasters hit the Vanuatu economy severely in 2020. Due to the authorities’ decisive measures, Vanuatu has had no domestic transmission of COVID-19. However, the border closure dealt a heavy blow to tourism. Infrastructure projects have also been delayed. In addition, Tropical Cyclone Harold and a volcanic eruption in Tanna Island caused extensive damage the first half of 2020. Notwithstanding the authorities’ policy responses, the reduction in travel receipts led to severe economic contraction. Strong receipts of the Economic Citizenship Programs (ECP) and donor support have helped mitigate the impact of the pandemic on fiscal and external balances.
After a severe contraction in 2020, real GDP growth is expected to rise to 1.2 percent in 2021. Agricultural production and remittance income from seasonal workers will help to support a return to positive growth in 2021. Growth will also be supported by construction activity, despite delays which will push several large infrastructure projects into 2022. Tourism related sectors are expected to contract further in 2021 due to the extended border closure and are expected to start a gradual recovery beginning in 2022.
Risks to the outlook are substantial and tilted to the downside. A worsening of the pandemic requiring longer border closure would adversely impact economic activity. ECP revenues could fall sharply amid growing concerns on AML/CFT risks to ECP under the recent loss of the key correspondent banking relationship. Further deterioration of banks’ asset quality could erode the soundness of Vanuatu’s financial system. Lack of transparency and effective supervision framework for state enterprises could negatively affect the business environment and fiscal management. Issues concerning AML/CFT and EU blacklisting related to tax transparency could accelerate de-risking by foreign firms and impede foreign direct investment (FDI). An ever-present downside risk relates to further natural disasters.
Executive Board Assessment2
Executive Directors commended the authorities for their decisive actions to prevent a local outbreak of the pandemic, and for prudent policy management which has helped maintain macro-financial stability despite the challenges from the pandemic and natural disasters.
Directors emphasized that front-loading the vaccination strategy with support of development partners should be a priority to help support the recovery.
Directors concurred with the need for maintaining fiscal support over the near term, anchored on a credible medium-term fiscal consolidation strategy. They stressed that the support should be well targeted and complemented by improvements in public expenditure and investment management. Directors underscored that a fiscal strategy based on domestic revenue mobilization, including the introduction of personal and corporate income taxes, would both allow the authorities to reduce the reliance on revenues from the Economic Citizenship Program (ECP) and provide resources for investment in climate resilient infrastructure and other development needs. Directors urged the authorities to further manage fiscal risks by minimizing the contingent liabilities of SOEs, including of the state-owned airline.
Directors agreed that monetary policy should remain accommodative until the recovery is entrenched. Close monitoring of inflationary pressures is warranted. Directors emphasized that the authorities should remain vigilant of developments in the banking sector and continue to strengthen supervisory frameworks. They encouraged the authorities to establish crisis management and resolution frameworks and to improve the collateral asset recovery environment for liquidation of non-performing loans. Directors noted that digitalization could advance financial inclusion, but challenges remain.
Directors underscored the importance of improving governance, reducing corruption, and bolstering Vanuatu’s risk profile, to mitigate risks stemming from weak due diligence of the ECP and the loss of correspondent banking relationships (CBRs). Directors urged the authorities to further strengthen legal frameworks and the institutional capacity pertaining to AML/CFT, tax transparency, and central bank autonomy and governance. They also underscored the need for the authorities to establish supervisory frameworks for the state-owned enterprises and enhance their transparency.
Directors agreed that economic diversification and development of quality infrastructure is essential for sustained and inclusive growth. They also underscored the need for improving Vanuatu’s resilience to natural disasters and climate change and welcomed the operationalization of the Disaster Risk Management Act and the ongoing review of the National Adaptation Plan f or Action. Noting Vanuatu’s limited capacity, Directors encouraged the authorities to continue to benefit from technical assistance by the Fund and development partners.
Vanuatu: Selected Economic Indicators, 2018–23
Weighted average rate of interest for total bank deposits and loans.
The vatu is officially pegged to an undisclosed basket of currencies.
Vanuatu: Selected Economic Indicators, 2018–23
| Population (2020): 301,695 | Per Capita GDP (2020): US$ 3,090 |
| IMF quota: SDR 23.8 million (0.01 per cent of total) | Literacy rate (2018): 87.5 percent |
| Main products and exports: Kava, coconut oil, copra, cocoa, beef | |
| Key export markets: New Caledonia, Australia, New Zealand |
| 2018 | 2019 | 2020 | 2021 | 2022 | 2023 | ||||
|---|---|---|---|---|---|---|---|---|---|
| Estimates | Projections | ||||||||
| Output and prices (annual percent change) | |||||||||
| Real GDP | 2.9 | 3.9 | -6.8 | 1.2 | 3.0 | 4.1 | |||
| Consumer pr ices (period aver age) | 2.4 | 2.7 | 5.7 | 5.4 | 2.6 | 2.3 | |||
| Consumer pr ices (end period) | 1.9 | 3.5 | 7.0 | 3.9 | 2.3 | 2.2 | |||
| Government finance (in percent of GDP) | |||||||||
| Total revenue | 39.5 | 38.5 | 44.2 | 40.6 | 34.2 | 32.1 | |||
| Taxes | 18.4 | 17.6 | 14.6 | 16.1 | 16.5 | 17.0 | |||
| Other revenue | 12.0 | 13.9 | 16.0 | 11.2 | 9.7 | 8.7 | |||
| Gr an ts | 9.2 | 7.0 | 13.6 | 13.2 | 8.0 | 6.4 | |||
| Expenditure | 33.3 | 31.8 | 44.4 | 44.0 | 38.3 | 36.1 | |||
| Expense | 26.9 | 28.5 | 37.8 | 36.4 | 29.6 | 29.0 | |||
| Net acquisition of non financial assets | 6.4 | 3.3 | 6.6 | 7.6 | 8.7 | 7.1 | |||
| Net lending (+)/borrowing (-) | 6.3 | 6.7 | -0.1 | -3.5 | -4.1 | -4.0 | |||
| Public and publicly-guaranteed debt (end of period) | 49.2 | 46.1 | 50.1 | 47.5 | 50.2 | 51.4 | |||
| Domestic | 7.3 | 6.1 | 9.3 | 8.0 | 6.7 | 5.7 | |||
| External | 41.9 | 40.1 | 40.8 | 39.4 | 43.5 | 45.8 | |||
| Money and credit (annual percentage change) | |||||||||
| Broad money (M2) | -0.5 | 9.2 | 5.3 | -3.0 | 3.8 | 6.0 | |||
| Net foreign assets | 39.0 | 24.2 | 16.9 | 0.0 | 5.2 | 6.3 | |||
| Domestic credit | -4.4 | -6.4 | -9.5 | -6.8 | -1.3 | 1.6 | |||
| Of which: Cr edit to private sector | 1.2 | 0.4 | 1.5 | -3.2 | 0.8 | 1.8 | |||
| Interest rates (in percent, end of period) 1/ | |||||||||
| Deposit rate (vatu deposits) | 1.2 | 0.8 | 0.7 | … | … | … | |||
| Lending rate (vatu loans) | 0.0 | 0.0 | 0.0 | … | … | … | |||
| Balance of payments (in percent of GDP) | |||||||||
| Cur rent account | 12.2 | 16.0 | 3.3 | -6.9 | -8.0 | -5.7 | |||
| Trade balance | -26.2 | -29.5 | -23.5 | -23.3 | -24.3 | -26.1 | |||
| Exports of goods | 6.9 | 4.9 | 5.2 | 5.3 | 5.4 | 5.4 | |||
| Imports of goods | -33.1 | -34.4 | -28.7 | -28.5 | -29.7 | -31.5 | |||
| Travel receipts | 32.3 | 29.8 | 7.2 | 0.6 | 4.4 | 11.3 | |||
| Capital and financial account | -16.0 | -6.5 | 3.5 | 11.4 | 9.4 | 7.9 | |||
| Of which: Foreign direct investment | 3.9 | 2.7 | 2.6 | 2.9 | 3.0 | 2.9 | |||
| Overall balance | 2.7 | 9.8 | 10.9 | 4.5 | 1.4 | 2.2 | |||
| Gross international reserves (in millions of U.S. dollars) | 420.6 | 511.6 | 613.6 | 658.2 | 673.0 | 697.7 | |||
| Gross international reserves (in months of prospective G&S imports) | 9.6 | 13.3 | 15.3 | 14.7 | 13.3 | 11.8 | |||
| External debt service (in percent of GNFS exports) | 4.0 | 6.7 | 18.7 | 31.5 | 11.1 | 7.8 | |||
| Exchange rates 2/ | |||||||||
| Vatu per U.S. dollar (period aver age) | 108.5 | 115.6 | 109.1 | … | … | … | |||
| Vatu per U.S. dollar (en d of period) | 112.3 | 114.3 | 108.0 | … | … | … | |||
| Memorandum items: | |||||||||
| Nominal GDP (in billions of vatu) | 100.8 | 107.2 | 101.7 | 107.0 | 112.6 | 119.8 | |||
| Nominal GDP (in millions of U.S. dollars) | 928 | 928 | 932 | 999 | 1,060 | 1,127 | |||
Weighted average rate of interest for total bank deposits and loans.
The vatu is officially pegged to an undisclosed basket of currencies.
Vanuatu: Selected Economic Indicators, 2018–23
| Population (2020): 301,695 | Per Capita GDP (2020): US$ 3,090 |
| IMF quota: SDR 23.8 million (0.01 per cent of total) | Literacy rate (2018): 87.5 percent |
| Main products and exports: Kava, coconut oil, copra, cocoa, beef | |
| Key export markets: New Caledonia, Australia, New Zealand |
| 2018 | 2019 | 2020 | 2021 | 2022 | 2023 | ||||
|---|---|---|---|---|---|---|---|---|---|
| Estimates | Projections | ||||||||
| Output and prices (annual percent change) | |||||||||
| Real GDP | 2.9 | 3.9 | -6.8 | 1.2 | 3.0 | 4.1 | |||
| Consumer pr ices (period aver age) | 2.4 | 2.7 | 5.7 | 5.4 | 2.6 | 2.3 | |||
| Consumer pr ices (end period) | 1.9 | 3.5 | 7.0 | 3.9 | 2.3 | 2.2 | |||
| Government finance (in percent of GDP) | |||||||||
| Total revenue | 39.5 | 38.5 | 44.2 | 40.6 | 34.2 | 32.1 | |||
| Taxes | 18.4 | 17.6 | 14.6 | 16.1 | 16.5 | 17.0 | |||
| Other revenue | 12.0 | 13.9 | 16.0 | 11.2 | 9.7 | 8.7 | |||
| Gr an ts | 9.2 | 7.0 | 13.6 | 13.2 | 8.0 | 6.4 | |||
| Expenditure | 33.3 | 31.8 | 44.4 | 44.0 | 38.3 | 36.1 | |||
| Expense | 26.9 | 28.5 | 37.8 | 36.4 | 29.6 | 29.0 | |||
| Net acquisition of non financial assets | 6.4 | 3.3 | 6.6 | 7.6 | 8.7 | 7.1 | |||
| Net lending (+)/borrowing (-) | 6.3 | 6.7 | -0.1 | -3.5 | -4.1 | -4.0 | |||
| Public and publicly-guaranteed debt (end of period) | 49.2 | 46.1 | 50.1 | 47.5 | 50.2 | 51.4 | |||
| Domestic | 7.3 | 6.1 | 9.3 | 8.0 | 6.7 | 5.7 | |||
| External | 41.9 | 40.1 | 40.8 | 39.4 | 43.5 | 45.8 | |||
| Money and credit (annual percentage change) | |||||||||
| Broad money (M2) | -0.5 | 9.2 | 5.3 | -3.0 | 3.8 | 6.0 | |||
| Net foreign assets | 39.0 | 24.2 | 16.9 | 0.0 | 5.2 | 6.3 | |||
| Domestic credit | -4.4 | -6.4 | -9.5 | -6.8 | -1.3 | 1.6 | |||
| Of which: Cr edit to private sector | 1.2 | 0.4 | 1.5 | -3.2 | 0.8 | 1.8 | |||
| Interest rates (in percent, end of period) 1/ | |||||||||
| Deposit rate (vatu deposits) | 1.2 | 0.8 | 0.7 | … | … | … | |||
| Lending rate (vatu loans) | 0.0 | 0.0 | 0.0 | … | … | … | |||
| Balance of payments (in percent of GDP) | |||||||||
| Cur rent account | 12.2 | 16.0 | 3.3 | -6.9 | -8.0 | -5.7 | |||
| Trade balance | -26.2 | -29.5 | -23.5 | -23.3 | -24.3 | -26.1 | |||
| Exports of goods | 6.9 | 4.9 | 5.2 | 5.3 | 5.4 | 5.4 | |||
| Imports of goods | -33.1 | -34.4 | -28.7 | -28.5 | -29.7 | -31.5 | |||
| Travel receipts | 32.3 | 29.8 | 7.2 | 0.6 | 4.4 | 11.3 | |||
| Capital and financial account | -16.0 | -6.5 | 3.5 | 11.4 | 9.4 | 7.9 | |||
| Of which: Foreign direct investment | 3.9 | 2.7 | 2.6 | 2.9 | 3.0 | 2.9 | |||
| Overall balance | 2.7 | 9.8 | 10.9 | 4.5 | 1.4 | 2.2 | |||
| Gross international reserves (in millions of U.S. dollars) | 420.6 | 511.6 | 613.6 | 658.2 | 673.0 | 697.7 | |||
| Gross international reserves (in months of prospective G&S imports) | 9.6 | 13.3 | 15.3 | 14.7 | 13.3 | 11.8 | |||
| External debt service (in percent of GNFS exports) | 4.0 | 6.7 | 18.7 | 31.5 | 11.1 | 7.8 | |||
| Exchange rates 2/ | |||||||||
| Vatu per U.S. dollar (period aver age) | 108.5 | 115.6 | 109.1 | … | … | … | |||
| Vatu per U.S. dollar (en d of period) | 112.3 | 114.3 | 108.0 | … | … | … | |||
| Memorandum items: | |||||||||
| Nominal GDP (in billions of vatu) | 100.8 | 107.2 | 101.7 | 107.0 | 112.6 | 119.8 | |||
| Nominal GDP (in millions of U.S. dollars) | 928 | 928 | 932 | 999 | 1,060 | 1,127 | |||
Weighted average rate of interest for total bank deposits and loans.
The vatu is officially pegged to an undisclosed basket of currencies.
Title page
VANUATU
STAFF REPORT FOR THE 2021 ARTICLE IV CONSULTATION
August 16, 2021
KEY ISSUES
Context: Border closures and other pandemic containment measures have kept Vanuatu free from COVID-19. However, they have dealt a heavy blow to economic activity as tourism has come to a virtual halt. On top of the pandemic, Tropical Cyclone Harold and a volcanic eruption in Tanna Island caused extensive economic damage in 2020. In the context of a continued loss of correspondent banking relationships (CBRs) in the Pacific, Vanuatu also lost a key CBR at end-June 2021. Air Vanuatu, one of the state-owned enterprises (SOEs), is in the process of being restructured.
Outlook and Risks: Following a severe contraction in 2020, real GDP is expected to grow by 1.2 percent in 2021, supported by agricultural production, remittance income, and construction activity. Tourism and related sectors are expected to contract further this year. Risks to the outlook are substantial and tilted to the downside. They include a potential worsening of the pandemic; a sharp fall in revenues from the Economic Citizenship Program (ECP) that offers passports in return for investment; an acceleration of de-risking by foreign firms concerning AML/CFT and tax transparency; further deterioration of banks’ asset quality; and vulnerability to natural disasters.
Main Policy Recommendations:
Maintain accommodative macroeconomic and financial policies in the near term to support the recovery. Given Vanuatu’s limited fiscal space, fiscal suppo rt s ho uld continue to be well targeted while its phasing out being state-contingent. Front-load the vaccination strategy as feasible with support of development partners.
Formulate a medium-term fiscal strategy based on gradual fiscal consolidation, including the introduction of personal and corporate income taxes. Integrate financing plans consistent with the fiscal strategy for the climate change adaptation pla n a nd building resilience to natural disasters. Properly manage fiscal risks by minimizing the contingent liabilities of Air Vanuatu.
Closely monitor the banking sector, establish crisis management and resolution frameworks, and improve collateral asset recovery environment for NPL liquidation.
Establish effective supervision and transparency of SOEs and strengthen further legal frameworks and institutional capacities on AML/CFT, tax transparency, central bank autonomy and governance, leading to reduce corruption vulnerabilities.
Approved By
Krishna Srinivasan (APD) and Maria Gonzalez (SPR)
Mission dates: June 28–July 22, 2021
Mission team: Koki Harada (Head), Seruwaia Cagilaba, Gabriela Cugat, Leni Hunter (resident representative) and Yinqiu Lu (all APD). Kathleen Kao (LEG), Chris Becker (OED), Lodewijk Smets (WB), David Richard Fay and Nancy Wells (both ADB) participated in some of the meetings. Vybhavi Balasundharam (FAD) contributed to the preparations for the mission a nd b ack gr ound pa pers. The mis s io n met with Minister of Finance and Economic Management Johnny Koanapo Rasou, Governor of Reserve Bank of Vanuatu (RBV) Simeon Malachi Athy, other senior officials from the government and RBV, and representatives from the private sector and civil society organization, and development partners. Yadian Chen, Francis Landicho, and K ristine Laluces (all APD) assisted in preparing this report.
Contents
THE PRE-PANDEMIC LANDSCAPE AND CHALLENGES
RECENT DEVELOPMENTS, OUTLOOK AND RISKS
SUSTAINING RECOVERY AND GROWTH
A. Fiscal Policy
B. Monetary and Financial Sector Policy
C. Macro-Structural and Governance Issues
CAPACITY DEVELOPMENT INTEGRATION
STAFF APPRAISAL
BOX
1. Oxfam’s Unblocked Cash Transfer Program
FIGURES
1. Real Sector Developments
2. External Sector Developments
3. Fiscal and Monetary Sector Developments
4. Financial Sector Developments
TABLES
1. Selected Economic Indicators, 2018–2023
2. Central Government Budgetary Operations, 2018–2023
3. Reconciling the Domestic Budget with the IMF Presentation, 2018–2023
4. Monetary Survey, 2018–2023
5. Balance of Payments, 2018–2023
6. Medium-Term Baseline Scenario, 2018–2026
7. Banks’ Financial Soundness Indicators, 2016–2021
8. Indicators of Capacity to Repay the Fund, 2020–2029
9. Integration Matrix of Surveillance Issues and Capacity Building
ANNEXES
I. Authorities Response to Fund Policy Advice
II. Economic Citizenship Program: An Update
III. External Sector Assessment
IV. Risk Assessment Matrix
V. Recent Developments in Correspondent Banking Relationships in the Pacific Island Countries
VI. Promoting Economic Diversification in the Post-COVID Era
VII. Foreign Direct Investment in Vanuatu
VIII. Adaptation to Climate Change in Vanuatu
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
