Countries and Regions

	Table of Contents
p. 2 of 5 BACK | NEXT I. Development Situation II. Country Strategy III. Implementation of the Country Strategy and Program IV. Portfolio Management Issues V. Country Performance and Lending Level

Country Strategy and Program Update 2002-2004: Vanuatu

---

II. Country Strategy

A. Strategic Focus and Objectives

10. The National Summit of 2000 endorsed the third phase of the CRP, to be implemented in 2001-2003, which has the following reform targets: (i) entrench and broaden governance reform; (ii) extend public sector reform to encompass the Parliament, judiciary, and legal sector; (iii) promote economic growth; (iv) implement social reform to ensure that the CRP benefits are shared and the reform is sustained; and (v) improve economic and social conditions at the village level. The Government's policy initiatives have three objectives: (i) stable government, (ii) private sector development, and (iii) social equity and sustainability. Relevant measures include (i) balancing the recurrent budget; (ii) implementing the next phase of the CRP, which emphasizes outer island development; and (iii) establishing reform impact-monitoring systems.

11. While Vanuatu has good growth prospects based on abundant natural resources, it also suffers from (i) weak economic management and governance, (ii) inferior social services and lack of access to basic social services such as health and education, (iii) low social development indicators, (iv) increasing unemployment caused by rapid population and slow economic growth, and (v) poor implementation of private sector investment. ADB's strategy for Vanuatu thus focuses on (i) reforms in economic policy, public sector management, governance, and public services; (ii) poverty reduction; and (iii) private sector development. Specific objectives of the ADB's strategy are to (i) build local capacities for sound economic and financial management and good governance, (ii) increase employment and income, and (iii) redress disparities in living standards and access to social services.

B. Sector Strategies

1. Public Sector

12. The CRP focuses on public sector reforms, including improvements in governance, economic and social conditions, public expenditure management, and the use of external assistance. In 2000, however, the Government lacked commitment to reform, which caused overall institutional capacity to remain weak despite the ongoing Institutional Strengthening Project³ and Public Service Reform Project.⁴ In particular, Parliament's ability to review bills and policies remains extremely weak. The legal sector has severe capacity problems. Governance is weak. Sectoral policy-making and policy coordination need substantial improvement, which means that the reform program must be integrated into the budget process and macroeconomic framework. ADB will thus help deepen the CRP process, strengthen the capacity of Parliament and the legal sector, and improve economic management and service delivery over the next 2-3 years.

2. Agriculture Sector

13. Agriculture is the economy's mainstay, accounting for 80 percent of exports and 19 percent of GDP.⁵ A large proportion of marketed agricultural and livestock products is raised by smallholders on land allocated to them by villages, following traditional customary rights and privileges. Forestry is important, particularly on the larger islands. The fisheries sector is underdeveloped. Forty-one percent of the land is arable, yet less than half of arable land is cultivated. Major constraints to development include (i) traditional land and marine tenure systems, (ii) ministries' severe lack of institutional capacity, (iii) lack of technical skills, (iv) frequent cyclones, and (v) dispersal and isolation of communities. Uncertain Government policies, poor public enterprise management, and unclear land ownership have limited investment in commercial activities. The CRP seeks to improve the agriculture sector by raising the living standards of smallholders by providing them with better health and education services, rural credit services, improved coastal shipping, and more efficient quarantine and inspection services.⁶ ADB support will address infrastructure bottlenecks that prevent productive sector development.⁷ ADB reviewed the agriculture and fisheries sector in 2000,⁸ and has programmed a follow-up policy study for 2001 under the TA to strengthen development policies,⁹ and another such study for 2002 on the TA to build capacity for agriculture sector development.

3. Financial Sector

14. Substantial progress has been made in rehabilitating Government-owned financial institutions, which have completed their right-sizing exercise. The National Bank of Vanuatu is now operating on a fully commercial basis with restored capital adequacy and an improved audit. The Asset Management Unit is fully operational to recover outstanding debt, and its activity has picked up in 2001 under new management. The Offshore Financial Center (OFC) has been warned by the Organisation of Economic Co-operation and Development (OECD) about alleged involvement in money laundering and harmful tax effects. A banking sector task force was thus formed and new OFC legislation is being prepared with ADB TA projects for the State Law Office (SLO). The commercial banking sector serves only a narrow market, mainly large urban businesses. The sector's interest margins remain the worst among the Pacific island countries. Interest rate spreads between average lending and deposit rates widened from an average of 8.3 percent in 1996 to 10.4 percent in the third quarter of 2000, for an average of 9.7 percent in the first three quarters of 2000. Certain lending practices greatly widen the effective spread. For example, borrowers must borrow twice as much as they need and put half their loan on deposit. Competition in the banking sector is thus weak, and the Government should use the National Bank, as it is mandated to do, to broaden banking services to outside urban areas, with lower interest rates.

15. A microfinance scheme was announced in March 2001 to use grant funds from the People's Republic of China, and to have Government departments act as lending agencies. However, Government departments do not have the skills, capacity, or efficiency required for the task. The Development Bank failed massively, and more failure would undermine confidence in future schemes. The Government should use existing commercial banks for its rural banking schemes. The National Bank has the mandate and capacity to engage in rural banking. In 2000, ADB provided the Government a project preparatory TA to formulate a rural banking and business advisory service project.¹⁰ As requested by the Government, ADB will assess ways of providing rural financial services under the TA and consider funding a rural financial services project in 2003.

4. Infrastructure Sector

16. Transport infrastructure is inadequate. The Government gives priority to improving infrastructure in the outer islands as well as in urban areas. The Government is also committed to providing institutional and funding arrangements to sustain maintenance of existing and new assets. The national infrastructure master plan was prepared in 2000. In addition to the ongoing Urban Infrastructure Project,¹¹ the Government is preparing an outer islands infrastructure development project for consideration in 2002. This project will focus on building priority rural roads, wharves, and airstrips in the outer islands, and providing institutional and financial arrangements for effective operations and maintenance of infrastructure.

5. Social Infrastructure

17. Health. Vanuatu's health system lacks qualified staff, especially midwives, doctors, and specialists. Despite measures to address this lack, basic service delivery, especially to rural communities, is stagnating or deteriorating. Local community-funding requirements are considerable, including salaries of aid-post staff. ADB provided a TA to strengthen the efficiency of distribution of medical supplies to outer islands.¹² An ADB TA is proposed for 2003 to formulate an urban public health and environment project. Other funders provide substantial support to improve the health sector over the medium term, including an Australia-funded institutional strengthening project in the Ministry of Health.

18. Education. Similar constraints exist in the education sector, where service provision has barely kept pace with population growth. Many outer island primary schools are small and isolated, making them expensive to operate and service. Many have poor infrastructure and transportation, limited opportunities to generate revenue, and difficulty recruiting staff. The quality of teachers is poor. About 15 rural training centers run by churches and nongovernment organizations (NGOs) offer life skills to rural school leavers, but cater to only about 10 percent of them each year. The private sector is the major provider of vocational skills training. Education has a very high priority in the CRP. In 2000, ADB provided a TA program to selected frontline public services more efficient and effective.¹³ The World Bank funded the development of the Education Master Plan and proposed a pilot program to the Government, which included a preschool program using the vernacular language, and a two-year extension to the regular program. Based on an ADB TA to study options for formal and informal vocational skills development, the Ministry of Education proposed a technical vocational education and training project for possible ADB funding (Appendix 2).

Back I. Development Situation	Next III. Implementation of the Country Strategy and Program