Regions and Countries

	Table of Contents
p. 2 of 20 BACK | NEXT I. Country Performance Assessment A. Economic Performance Assessment B. Poverty Assessment C. Assessment of Socio-Environmental Performance D. Governance: Sound Development Management E. Implementation Assessment II. Country Operational Strategy III. Sector Strategies IV. Regional Cooperation V. Donor Activities and Aid Coordination VI. Cofinancing and Catalyzing External Resources VII. ADB’s Operational Program VIII. Economic and Sector Work Program IX. Local Cost Financing

Country Assistance Plans - Vanuatu : I. Country Performance Assessment

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A. Economic Performance Assessment

1. The Republic of Vanuatu, with a population of almost 200,000, has considerable agriculture, tourism, and fisheries resources. However, without adequate economic management and political stability its overall economic performance over the past two decades has been mixed with some erratic fluctuations. Major structural weaknesses and volatile political developments have affected the country's economic performance. Vanuatu has a high cost structure, underdeveloped infrastructure, a small private sector with few ni-Vanuatu businesses, and a lack of education and skills necessary to participate fully in modern, efficient business activities. A Comprehensive Reform Program (CRP) was introduced in 1998 to improve the efficiency in public sector and economic management.

2. Between independence in 1980 and 1998, real gross domestic product (GDP) grew at an average annual rate of about 3 percent barely keeping pace with the population growth rate. The economy began to recover in 2000 with estimated growth of around 2.5 percent following a decline in growth by 2.9 percent in 1999. The tourism and construction sectors are leading the recovery. Poor weather conditions and damage to Air Vanuatu's aircraft adversely affected the agriculture and tourism sectors in 1999. Although tourism is growing the agriculture sector continued to experience weakness in 2000. Sustained marketing campaigns and the recent problems in Fiji and the Solomon Islands are benefiting Vanuatu's tourism industry. Major ongoing construction projects include the Efate ring road, the expansion of the main airports on Efate and Santo, rehabilitation from Cyclone Dani and the Urban Infrastructure Project. Detailed country performance indicators are provided in Appendix 1.

3. While no balance of payments pressure was evident, the official foreign reserves dropped during 2000 to a level of 4.5-5.0 months of imports from a level of around 6 months coverage in 1999. This caused a short-term disturbance in the exchange rate of Vatu in the first quarter of 2000, which however did not entail substantial depreciation. No significant policy-induced changes in the nominal effective exchange rate are anticipated.

4. The CPI inflation rate has picked up to 1.5 percent in the second quarter of 2000 from its low level of 0.5 percent in the first quarter, affected mainly by the high price for imported fuel and partly by the depreciation in the local currency. During the first half of 2000, the money supply (M2) increased by 0.7 percent from that of the end of 1999. At the end of the second quarter of 2000, the weighted-average lending and deposit rates stood at 12.7 percent and 3.1 percent, respectively, so the interest spread was as high as 9.6 percent. The sectoral distribution of the commercial banks' loans and advances showed that a majority was allocated to construction, personal, and housing sectors, whereas only a minimal level of 2-6 percent was allocated to key productive sectors such as agriculture, tourism, and transport. The lack of efficient financing to the key sectors is a major impediment to the economic growth.

5. The Government is facing a difficult fiscal situation caused by limited revenue sources. The 2000 budget provided for a balanced recurrent budget, an increase in development expenditure, and an overall deficit of 3 percent of GDP, to be financed by external concessional loans. The actual revenue estimate was 0.7 percent above the 1999 budget level, while the actual expenditure estimate was 7.5 percent below the 1999 budget level. Although the fiscal situation has been substantially stabilized, there remains substantial concern over the revenue shortage. Without income taxation, the revenue base is very narrow and the annual revenue remains at only a quarter of GDP, which is very low by international standards. The Government is planning to increase specific duties for alcohol, tobacco, and fuel and selected business license fees, and to enforce better compliance with existing taxes.

6. Vigorous pursuance of the reform program aimed at providing a favorable environment to private sector investment will be the key to the economic success. A most pressing need in Vanuatu is to promote private sector investment and create new job opportunities. The overall environment for private sector investment should be further improved. High cost in financing, procuring equipment, and running business; lack of skilled labor force; difficulty in land acquisition; and weak policy coordination are major hindrances to private sector investment. Continued efforts should be made to address the monopoly or oligopoly in public utilities, banking, and commodity sectors. The Government needs to carry on the reform program in such a direction that governance, accountability, transparency in the public sector are further enhanced and the positive impacts from the reform are spread out to outerislands, mitigating the severe gap in the living standards between the urban and rural areas.

7. Substantial progress has been made with the rehabilitation of government-owned financial institutions, which have completed their right-sizing exercise. The National Bank of Vanuatu has been operating on a fully commercial basis with restored capital adequacy and an improved audit. The Asset Management Unit was fully operational to recover outstanding debt, but its activity has been staggering since its management suddenly resigned. A quick recovery of its management functions is imperative.

8. While substantial achievements have been made in both the economic and governance frameworks in Vanuatu, there still is a long way to go before those reforms are entrenched. Medium-term prospects for the economy will depend heavily on continued progress with the reform and the confidence of private sector investors. Due to the diversity of languages and cultures, the geographic and social distance between Port Vila and the outer islands, a lack of infrastructure, and the recent stagnation of the economy, the poverty situation in most of outer islands largely remains unaddressed. Skills and capacity constraints remain within the public service. Continued efforts are needed to disseminate the principles of the CRP to rural areas involving wider dialogue and a participation by the grass-root people; provide better infrastructure and financial services to the outer islands to help produce more cash crops and set up new businesses; establish national policy frameworks for the agriculture and fisheries sectors; update existing policy framework in other sectors; and support development of vocational skills.

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