Washington, DC: On August 28, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation[1] with Vanuatu.
As Vanuatu was recovering from the natural disasters of 2023 and prolonged disturbance from the pandemic, the voluntary liquidation of Air Vanuatu in May 2024 created a major shock to the economy with substantial implications for growth and confidence. The loss of air connectivity has significant direct effects on economic activity through the decline in tourism and services, and on domestic and international labor mobility and cargo networks. Adverse developments in the Economic Citizenship Program (ECP) are also creating significant impairments to fiscal revenue and financial integrity.
Assuming a resumption of international air connectivity by 2024Q3 and domestic connections to be restored gradually by end-2024, real GDP growth is expected to slow to 0.9 percent y/y in 2024 and recover to 1½ percent y/y in 2025 (from an estimated 2.2 percent y/y in 2023). Limited fiscal revenue and high costs associated with the airline liquidation are expected to exacerbate the deficit and reduce the government's fiscal space. Consequently, capital spending will likely decline as expenditures are reprioritized, affecting medium- and long-term growth. Although foreign reserves will remain above the RBV's benchmark, they are forecast to decline due to lower tourism earnings and remittances.
While the loss of connectivity may produce price shocks, inflation, which peaked in 2023, will continue to decelerate as internal and external price pressures ease, supported by reduced demand from tourism and investment. Risks to the outlook remain tilted to the downside, including a worse-than-expected resolution of Air Vanuatu's liquidation, political instability, geopolitical tensions, China's slowdown, and severe natural disasters.
Executive Board Assessment[2]
Executive Directors agreed with the thrust of the staff appraisal. They noted the significant economic shock created by the voluntary liquidation of Air Vanuatu just as the economy was recovering from the multiple natural disasters of 2023. With real GDP growth expected to decelerate markedly in 2024, and the balance of risks tilted to the downside, Directors called for urgent measures to address the immediate risks to growth and stability, and then to rebuild buffers and tackle structural issues with accelerated policy reforms.
Directors agreed that in the near term targeted and strategic support is needed to help stabilize the economy. Starting in 2025, they called for urgent fiscal consolidation to reduce sustainability concerns, including re‑establishing and adhering to the fiscal anchor. Against the backdrop of the voluntary liquidation of Air Vanuatu, as well as declining Economic Citizenship Program (ECP) proceeds, Directors also highlighted the structural revenue weakness in Vanuatu and supported calls to strengthen public finances. They emphasized the importance of stronger revenue mobilization, expenditure rationalization, efficiency enhancements for spending, and a strong adherence to the principles of responsible public financial management.
Directors agreed that monetary policy remains appropriately accommodative, but fiscal dominance needs to be reduced. While recognizing that the exchange rate has acted as a buffer, they noted that it requires close monitoring, and welcomed the authorities' efforts to review the currency basket.
Directors stressed the importance of addressing bank asset quality concerns and enhancing safeguards against financial vulnerabilities, including through upgrading regulatory, supervisory, and monitoring practices. They also agreed that improving governance and reducing vulnerabilities to corruption should remain a priority. In this context, Directors emphasized the crucial importance of enhancing anti‑corruption frameworks and the transparency and supervision of SOEs, including through ensuring an expedited approval of the Commercial Government Business Enterprises Act.
Directors commended the authorities' efforts to adapt to climate impacts and build resilience against future disasters and called for these efforts to be accelerated. They agreed that investing in quality education and skills training and improving the ease of doing business are crucial to addressing labor and skills shortages in Vanuatu.
[1] 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.
[2] 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.
