The Vanuatu economy grew in 2014 at its fastest rate in several years but will likely contract in 2015 following a severe tropical cyclone in March. A rebound is expected in 2016 on reconstruction spending and recovery in agriculture and tourism. A medium-term development challenge is to find new revenue sources and control growth in government spending to free up fiscal resources for infrastructure projects and maintain fiscal sustainability.
|Selected Economic Indicators (%) - Vanuatu||2015||2016|
|Current Account Balance (share of GDP)||-10.0||-7.0|
Source: ADB estimates.
Vanuatu has enjoyed over a decade of uninterrupted growth, though the economy slowed in the years after the global financial crisis. Growth accelerated in 2014 to 3.6%, the fastest rate since 2008. Government estimates show, however, that economic growth and output have languished below potential for the past 5 years.
Growth in 2014 was driven by commercial construction and projects funded by development partners. Expenditure on major projects is projected to quadruple from 2014 to 2016. Although visitor arrivals by air declined in 2014, the number of arrivals by cruise ship grew strongly. This contributed to growth related to tourism, notably in hotels and restaurants, transport, retail trade, and telecommunications.
A category 5 cyclone struck Vanuatu in mid-March. Tropical Cyclone Pam reportedly destroyed or damaged 90% of buildings on Efate Island, which includes the capital, Port Vila. Damage is expected to severely disrupt economic activity and hinder growth in 2015. Early assessments suggest that agriculture output and tourism will suffer large declines.
Increased spending on cyclone recovery related construction and the planned implementation of a number of major infrastructure projects later in the year are expected to offset the shocks to agriculture and tourism. The economy is now expected to contract in 2015 - reversing a forecast of growth at about 4.0% made before the cyclone - but a detailed forecast will depend on firmer information about cyclone damage and disaster response. If the economy does contract this year, it will be Vanuatu’s first annual gross domestic product contraction since 2002. Growth is expected to rebound to 4.0% in 2016 as infrastructure works and recovery in tourism and agriculture continue.
Excerpted from the Asian Development Outlook 2015.