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This Selected Issues paper and Statistical Appendix summarizes the factors explaining Vanuatu’s recent growth performance, which has weakened since the mid-1990s. The paper highlights that Vanuatu’s annual rate of growth averaged 3⁄4 percent during 1997–2001, compared with 43⁄4 percent during 1992–1996. The paper compares Vanuatu’s external competitiveness with several other small island economies in the South Pacific region. The paper describes the development and structure of Vanuatu’s offshore financial center, examines its macroeconomic impact, and highlights some key recent developments. It also provides a preliminary assessment of the prospects for the sector.

Vanuatu

International Monetary Fund. Asia and Pacific Dept

Published: 2015-06-16

Total Pages: 85


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This 2015 Article IV Consultation highlights that Vanuatu’s Real GDP is expected to decline by 2 percent in 2015 because of the cyclone damage to Vanuatu’s main export sectors—tourism and agriculture—which will be only partially offset by reconstruction activities and infrastructure investment. Risks to the outlook are biased to the downside since reconstruction may be constrained by availability of funding and by implementation capacity. Public sector recovery needs are estimated at about 20 percent of GDP. In 2016, a recovery in tourism and agriculture combined with further ramping-up of infrastructure projects is expected to propel growth to 5 percent.
Solomon Islands and Vanuatu are two small states that have struggled to develop successful social policies since independence. This study traces their social histories and examines factors that have hindered progress. Future development requires a move away from traditional social structures and a focus on political stability and economic growth.
Small states have learned in recent decades that capital accumulates where taxes are low; as a result, tax havens have increasingly competed for the attention of international investors with tax and regulatory concessions. Economically powerful countries including France, Britain, Japan, and the United States, however, wished to stanch the offshore flow of domestic taxable capital. Since 1998 the Organisation for Economic Co-operation and Development (OECD) has attempted to impose common tax regulations on more than three dozen small states. In a fascinating book based on fieldwork and interviews in twenty-two countries in the Caribbean, North America, Europe, and islands in the Pacific and Indian Oceans, J. C. Sharman shows how the struggle was decided in favor of the tax havens, which eventually avoided common regulation. No other book on tax havens is based on such extensive fieldwork, and no other author has had access to so many of the key decision makers who played roles in the conflict between onshore and offshore Sharman suggests that microstates succeeded in their struggle with great powers because of their astute deployment of reputation and effective rhetorical self-positioning. In effect, they persuaded a transnational audience that the OECD was being untrue to its own values by engaging in a hypocritical, bullying exercise inimical to free competition.
This Selected Issues paper analyzes fiscal management and strategy for growth for Vanuatu. It presents an overview of recent fiscal policy and outcomes. The main structural changes in the financial sector since independence in 1980 are discussed. The paper highlights some key features common to most Pacific Island countries’ financial systems. It concludes that despite the recovery from the 1998 financial crisis, the financial system needs further reforms to promote private sector-led development in the medium term.