Vanuatu economy is based primarily on small-scale agriculture, which provides a living for about two-thirds of the population. Fishing, offshore financial services, and tourism, are the other mainstays of the economy.
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. A recovery in tourism and agriculture combined with further ramping-up of infrastructure projects is expected to continue 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 above 10 percent of GDP in 2017 and 2018, due to the high import content of infrastructure projects.
Looking further ahead, economic growth in Vanuatu is stronger and more stable.
In this regard, Vanuatu is taking resilience to natural disasters as an integral part of its development strategy for the country to ensure sustainable and inclusive growth. It is in this context that Vanuatu require diversification of its economic activity. Tourism sector needs to be strategically segmented across locations, and efforts to diversify the economy into the agricultural sector need to be intensified. To facilitate diversification, supporting the private sector by improving the ease of doing business and reaching out to small businesses in need for credit is necessary.
Once the reconstruction and infrastructure scaling up are over, the government will consider embarking on fiscal adjustment measures to address the rising debt and to rebuild fiscal buffers. An appropriate medium-term fiscal anchor, with fiscal target and debt ceiling in place, is required to facilitate this consolidation. External financing should continue to be contracted as much as possible in the form of grants, or on concessional terms.
Given recent signs of excess liquidity along with building up of inflation pressure, the
Reserve Bank of Vanuatu is working to tighten its monetary policy stance through the gradual increase of reserve requirements. The basket peg regime is working well in Vanuatu, and the real effective exchange rate (REER) remains broadly in line with fundamentals and desirable policies. Vanuatu’s comfortable foreign exchange reserves should be maintained at above 6 months of imports to provide foreign currency for government’s debt repayment obligations.
Although the overall credit-to-GDP ratio is relatively high, credit is not evenly distributed between large firms and small and medium-sized enterprises (SMEs) or between urban areas and rural areas. Increasing private access to financial services for SMEs and households in rural areas and outer islands remain a key priority for the government.
In closing, Vanuatu Government remains committed to initiatives derived under regional platforms such as the Framework for Pacific Regionalism, and specifically the Framework for Resilient Development in the Pacific.
In addition to being a Least Development Country (LDC), Vanuatu has also been recently ranked by the UN University World Risk Index, as the world’s ‘most at-risk’ for natural hazards; and seeks to cooperate with Japan in addressing environmental issues and connectivity through quality infrastructure and the promotion of trade, investment and tourism.
In the latter connection, Vanuatu intends to seek preferential trade access for its limited export base with Japan, in preparation for its graduation from LDC-status in 2020. Vanuatu continues to enjoy duty-free access for its world-renowned organic beef to the Japanese market and looks forward to discussing an arrangement to ensure continued preferential access post-LDC graduation.