Vanuatu: Economic Survey

1. Vanuatu: Economic Survey Patrick de Fontenay, ANU

2. 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

3. Annual growth rate: real GDP

4. Comparative economic indicators

5. 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

6. Consumer price index(year-end): percentage change * First quarter 2010 over first quarter 2009

7. Tourism indicators * Change in arrivals from first four months of 2009 to first four months of 2010

8. Balance of payments

9. 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

10. Moneyand Credit: year-to-year percentage change * First quarter 2010 over first quarter 2009

11. 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

12. Central government finances

13. Sources of Vanuatu’s Success • Reform • An active land market • Political and macroeconomic stability • Donors • Foreign investment • Luck

14. Looking Ahead • The agenda (Priorities and Action Agenda 2006-15) • The potential - Tourism - Agriculture, forestry, fishing - Finance - Renewable energy • Lessons from Mauritius • VulnerabilitiesNatural disasters, reversal of progress toward political stability and governance, populist policies, economic downturn in Australia and New Zealand, reduction in foreign aid

15. The Challenges • Demographic pressure • Public sector efficiency • Human capital • Labour market • Infrastructure • Competitiveness

16. The Reform Agenda • The ADB assessment • Role of AusAid’s Governance for Growth Program • The Land Sector Framework agenda • Integration or decentralization

17. 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

18. Thank you