The IMF has concluded an Article IV consultation with Vanuatu. Economic performance has remained strong over the past several years - the impact of the global slowdown largely confined to spillovers via the tourism and foreign direct investment channels.
Backed by a booming tourist sector, strong performance of the service sector and aid inflows, growth averaged 6% in 2003–08, outperforming most of the other Pacific Island countries (PICs). Inflation accelerated to 5.8% in 2008 from 4.1% in 2007 with higher food and fuel import prices, but core inflation remained relatively stable. A surge in aid inflows helped to finance a widening current account deficit in 2008. Foreign exchange reserves remain comfortable at more than 5 months' imports.
A fiscal surplus has been maintained for five consecutive years. The overall fiscal surplus increased to 2.2% of GDP in 2008 after a modest surplus in 2007, as higher than projected spending on goods and services was more than offset by improved VAT collections and trade taxes. Development expenditure also picked up as the long awaited donor financing from the Millennium Challenge Account (MCA) began to feed into capital projects. The public debt to GDP ratio is estimated to have declined to 18.5% of GDP in 2008 from over 40% - only 6 years earlier.
Credit growth accelerated in the first three quarters of 2008, in part reflecting the entry of a fourth foreign-owned commercial bank. Most bank loans went to the construction and consumer finance sectors. However, tightening liquidity and stricter lending led to a slowdown in credit growth in the fourth quarter. Banks remain well capitalized and non-performing loans remain low. Banking supervision needs to be strengthened further in the view of the IMF and, in this regard, central bank supervision will be extended to the Vanuatu Agricultural Development Bank.
Recent reforms include a new Utilities Act to strengthen the regulatory framework, a Personal Property Securities Act, to improve the rights of secured creditors and the telecommunications sector was liberalized and opened to foreign competition.
Growth is expected to slow in 2009 given Vanuatu's heavy dependence on tourism, but the recent easing in monetary policy and a more accommodative fiscal stance for the 2009 budget should help cushion the impact. Lower food and fuel import prices should lower inflation and improve the overall external balance.
The IMF Directors made the following comments:
"Directors welcomed the improvement in the fiscal position in recent years. They commended the authorities for their efforts at maintaining a fiscal surplus for five consecutive years and reducing the debt-to-GDP ratio significantly. Directors supported staff’s recommendation that, in the event of a sharper-than-expected slowdown, the authorities could provide additional fiscal stimulus, including by expediting pending projects and by further strengthening the social safety net. Directors also emphasized the importance of well coordinated donor support."
"Directors underscored that various fiscal structural reforms are needed for a more effective fiscal policy over the medium term. They noted that prioritization of spending is crucial to promoting growth while keeping expenditure pressures manageable. In particular, they emphasized the need to monitor the large public sector wage bill and loss-making public enterprises. In addition, improvements in tax administration and widening the tax base would help finance development expenditure as foreign aid begins to gradually taper off as the economy matures."
"Directors agreed that the central bank could cautiously ease the monetary stance if the slowdown is deeper and longer than expected. They saw room for further monetary easing, given the wide interest-rate differentials with major central banks. Nonetheless, Directors stressed that the authorities should be mindful of rapid credit expansion, given the inflation experience of the recent past."
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