Catalog

Vanuatu

In its fifth consecutive year of growth, GDP increased in 2007 by an estimated 6.6%. This reflected strong expansion in tourism, real estate, and finance, as well as an improved contribution from agriculture. Continued political stability supported business confidence, while tourism was helped by new air services by Air New Zealand and Solomon Airlines. Total visitor arrivals rose by 8.4%, with arrivals by air climbing by 19.3%: the latter were at their highest in 5 years in the third quarter.

Government revenue collection was aided by improved compliance and the buoyant economy. This helped offset an increase in civil service wages, leaving a balanced budget for the year. The civil service wage bill in 2007 rose to 62% of total recurrent expenditures and limited ministries' ability to buy goods and services for public service delivery. The official intention is to ensure that the recurrent budget balances in 2008, but this may be difficult with a general election scheduled for July this year. Public debt has declined to less than 30% of GDP, from 40% in 2002.

Inflation has remained in the 0–4% target range set by the Reserve Bank of Vanuatu in recent years, though increases in fuel and food prices led to a pickup in inflation in the first quarter of 2007, which prompted the central bank to tighten monetary policy. The year-average inflation rate for 2007 was 2.5%, and is expected to edge up to 3% in 2008 (Figure 3.34.32).

The central bank forecast an overall balance-of-payments deficit for 2007 and a decline in foreign reserves to 7.5 months of import cover, still well above a target level of 4 months. This reflected an increase in the current account deficit to 9.5% of GDP from 7.5% in 2006 (Figure 3.34.33). The current account deficit is expected to remain at similar levels in 2008 but is being largely covered by foreign investment.

The economy remains fragile, with a growing population scattered across many, often isolated island communities. GDP per capita is at levels similar to those of 20 years ago, with growth having failed to exceed population growth. In addition, the rural population has seen few benefits of economic growth. Internal migration continues to fuel the expansion of urban squatter settlements and unemployment. Unlike many other Pacific nations, Vanuatu does not have easy access to migration or overseas work opportunities to reduce this population pressure, so that rural development is an imperative.

GDP growth is projected to ease to 5.7% in 2008 (Figure 3.34.34), moderating to around 4.3% in 2009. This expected slowing reflects structural constraints, which, though being addressed by the Government, make recent growth rates difficult to sustain. A historically high rate of growth is nonetheless projected, with tourism likely to benefit from expansion of air services and new public development projects. Planned infrastructure spending, largely for rural areas and funded by a $65.9 million US Millennium Challenge Corporation Compact, is expected to be key source of increased economic activity through 2011.