Vanuatu: Economy

Vanuatu’s economy is now expected to contract slightly more than previously forecast mainly due to the adverse effect of Cyclone Pam that hit Vanuatu in March 2015.

Selected economic indicators (%) 2015 2016
  ADO 2015 Update ADO 2015 Update
GDP Growth -0.5 -1.0 4.0 4.5
Inflation 4.0 4.0 2.0 2.5
Current Account Balance (share of GDP) -10.0 -15.0 -7.0 -13.0

Source: ADB estimates.

Economic performance

The damage wrought by Cyclone Pam that hit Vanuatu in March is weighing heavily on tourism and agriculture, and reconstruction efforts have suffered delays. By June, visitor arrivals by air were down by 24% from a year earlier and arrivals by cruise ship were down by 56%. Agriculture export receipts increased in the second quarter over a year earlier because of a large but temporary increase in coconut oil exports. Exports of other major commodities fell significantly relative to a year earlier.

In the aftermath of the cyclone, the government responded through fiscal and monetary measures. A supplementary budget increased expenditures by 1.3%, and value-added tax and import duties were waived for building materials and relief items. The Reserve Bank of Vanuatu reduced the policy rate, lowered bank reserve requirements, and activated targeted credit facilities. These actions helped stabilize liquidity, but the weak monetary transmission mechanism limited benefits to the real economy. National Provident Fund members were permitted to withdraw up to 20% of their retirement account to finance private recovery efforts. Insurance payouts should also help financing of the economic recovery.

Reconstruction has proceeded more slowly than anticipated owing to delays in the planning and approval process, with the government finalizing its plan for recovery only in August. The bulk of reconstruction is being financed by development partners. External grants received in the first half of 2015 were up by more than tenfold over the same period last year. The inflation forecast for 2015 is unchanged. Consumer prices rose by 5.7% year on year in the second quarter. However, underlying inflationary pressures remain contained, and softening global food and fuel prices should keep inflation on track with the Asian Development Outlook 2015 forecast.

Economic prospects

Growth is expected to rebound in 2016 somewhat above the forecast in ADO 2015, as several large infrastructure projects financed by development partners get under way, reconstruction continues, and tourism and agriculture recover.

The inflation forecast for 2016 is raised in line with expectations of stronger growth next year. Projections of the current account deficit are revised for 2015 and 2016 to accommodate the doubling of the trade deficit observed in the second quarter and continued high imports for reconstruction and infrastructure projects financed by development partners.

Excerpted from the Asian Development Outlook 2015 Update.