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

3.7

4.4

5.1

7.2

6.76.3

4.0

0

1

2

3

4

5

6

7

8

2003 2004 2005 2006 2007 2008 2009

Year

Perc

enta

ge

Comparative economic indicators

Population Growth (%), 2008

0.0

0.5

1.0

1.5

2.0

2.5

3.0

GDP Grow th (%), 2010 forecast

-1.0-0.50.00.51.01.52.02.53.03.54.04.5

Inflation (%, y-o-y), 2009

0

1

2

3

4

5

6

7

Fiscal Balance (% of GDP), 2009

-12

-10

-8

-6

-4

-2

0

2

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

0

1

2

3

4

5

6

7

2003 2004 2005 2006 2007 2008 2009 2010*

Year

Perc

enta

ge

* First quarter 2010 over first quarter 2009

Tourism indicators

* Change in arrivals from first four months of 2009 to first four months of 2010

Change in Total Arrivals (y-o-y)

-50000

5000100001500020000250003000035000

2005 2006 2007 2008 2009 2010*

Year

Num

ber

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

-30

-20-10

0

10

2030

40

50

2004 2005 2006 2007 2008 2009 2010*

Year

Perc

enta

ge

Net Foreign Asset Domestic Credit Liquidity (M2)

* First quarter 2010 over first quarter 2009

Money and Credit: year-to-year percentage change

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