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Vanuatu: Economic Survey
Patrick de Fontenay, ANU
A Strong Economic Performance
• From 2003 to 2008, real GDP growth was about
6%, and 4% in 2009
• Tourism and construction were the main drivers,
while agriculture lagged
• Inflation reached a low of 2.3% in the Dec quarter
• Gross official reserves rose to the equivalent of
close to 6 months of imports
Annual growth rate: real GDP
8
7.2
6.7
7
6.3
6
Percentage
5.1
5
4
4.4
4.0
3.7
3
2
1
0
2003
2004
2005
2006
Year
2007
2008
2009
Comparative economic indicators
Short-Term Prospects
• Growth in 2010 may reach the 2009 rate, if tourism and
exports recover. The completion of the MCC program
will be a negative factor but the increase in government
capital expenditure in the 4th quarter of 2009 and
budgeted for 2010 should work in the opposite direction
• A mild pick up in inflation, due in part to tax changes
and the impact of the appreciation of the Australian
dollar, may pick up if commodity prices continue to rise.
• Balance of payments results will also depend on
tourism and exports, as imports remain on a rising trend
• Both fiscal and monetary policies are expansionary
Consumer price index
(year-end): percentage change
7
6
Percentage
5
4
3
2
1
0
2003
2004
2005
2006
2007
Year
* First quarter 2010 over first quarter 2009
2008
2009
2010*
Tourism indicators
Number
Change in Total Arrivals (y-o-y)
35000
30000
25000
20000
15000
10000
5000
0
-5000
2005
2006
2007
2008
2009
2010*
Year
* Change in arrivals from first four months of 2009 to first four months of 2010
Balance of payments
Policy Stance: Monetary Policy
• The RBV has achieved its targets in the face of wide
swings in monetary aggregates
• Total domestic credit growth has decelerated through
2009 and the first 4 months of 2010 but remains above
13% (53% for credit to households, other than for
housing and land purchases).
•The RBV has stepped up sales of RBV notes but banks
remain “cashed up” and their net foreign assets have
diminished
•Short-term interest rates trail those in Australia
•The share of residents’ foreign currency deposits has
come down
Money and Credit: year-to-year percentage change
50
Percentage
40
30
20
10
0
-10
2004
2005
2006
2007
2008
2009
2010*
-20
-30
Year
Net Foreign As s et
Dom es tic Credit
* First quarter 2010 over first quarter 2009
Liquidity (M2)
Policy Stance: Fiscal policy
• Fiscal policy since 2004 has been moderate. Budgets
have shown surpluses. Recurrent expenditure has
increased slightly as a percentage of nominal GDP.
Development expenditure have expanded strongly in line
with foreign grants
• The 2010 budget departs from the norm with a
projected increase of 27% in recurrent expenditure. The
overall budget remains balanced, but the projected 12.2
increase in current revenue appears optimistic in view of
the first quarter results
• Public debt is not a problem so long as it is the
counterpart of productive investment
Central government finances
Sources of Vanuatu’s Success
• Reform
• An active land market
• Political and macroeconomic stability
• Donors
• Foreign investment
• Luck
Looking Ahead
• The agenda (Priorities and Action Agenda 2006-15)
• The potential
- Tourism
- Agriculture, forestry, fishing
- Finance
- Renewable energy
• Lessons from Mauritius
• Vulnerabilities
Natural disasters, reversal of progress toward political stability
and governance, populist policies, economic downturn in Australia
and New Zealand, reduction in foreign aid
The Challenges
• Demographic pressure
• Public sector efficiency
• Human capital
• Labour market
• Infrastructure
• Competitiveness
The Reform Agenda
• The ADB assessment
• Role of AusAid’s Governance for Growth Program
• The Land Sector Framework agenda
• Integration or decentralization
Conclusions
• On the 30th anniversary of its independence, Vanuatu
can be proud of its achievements but it remains
vulnerable
• Given its high rate of population growth it must aim at
continued rapid growth, relying on the sectors that have
the greatest potential and on infrastructure building
• The political and business climate for foreign
investment must be favorable and the reform process
should be continued
• Macroeconomic policies should remain prudent
Thank you