This Selected Issues paper analyzes fiscal management and strategy for growth for Vanuatu. It presents an overview of recent fiscal policy and outcomes. The main structural changes in the financial sector since independence in 1980 are discussed. The paper highlights some key features common to most Pacific Island countries’ financial systems. It concludes that despite the recovery from the 1998 financial crisis, the financial system needs further reforms to promote private sector-led development in the medium term.
This Selected Issues paper on Samoa reviews limitations to the existing framework of monetary policy, and suggests ways to improve its effectiveness. It examines current instruments at the disposal of the central bank to conduct monetary policy, before showing why monetary policy execution can be sometimes difficult. It also shows that such problems are not uncommon in economies with shallow financial markets. The paper also takes stock of developments since the early 1990s, and asks what major impediments to sustained private development remain.
Facility), which was used more often by nonbanks than banks.
Early in 1998, the financial system came under stress when social unrest prompted the government to allow the public to withdraw their retirement savings from the Vanuatu National Provident Fund (VNPF). In response to a sharp rise in liquidity in the financial system, the RBV introduced liquidity asset ratios, the so-called Prescribed Reserve Asset (PRA) requirement. The PRA required banks to hold 16 percent of vatu deposit liabilities in the form of government securities and/or RBVnotes. In addition, the
International Monetary Fund. Asia and Pacific Dept
’s access to liquidity and supporting the government’s rehabilitation efforts. The RBV took swift action and agreed to tie its policy rate to the 91-day RBVNote (variable) rate, which implied a decrease from 5.25 percent to about 1.85 percent, and to reduce the Statutory Reserve Deposit (SRD) requirement, which comprises reserve deposits of commercial banks held as reserves at the RBV, from 7 to 5 percent. Additional measures were taken, including the activation of an additional credit facility for commercial banks, an interest rate decrease on the RBV’s Secured Advance
International Monetary Fund. Asia and Pacific Dept
This 2016 Article IV Consultation highlights that Vanuatu’s economy is gradually recovering from the extensive damages caused by Cyclone Pam, which hit the country in March 2015. The cyclone led to a decline in GDP of about 0.8 percent in 2015. The current account deficit widened to 11 percent of GDP in 2015 from an average of 3 percent of GDP in the previous three years. Near-term prospects are favorable, but risks to the outlook are tilted to the downside. Real GDP growth is expected to reach 4 percent in 2016 and 4.5 percent in 2017 driven by the recovery in tourism and agriculture, and further ramping-up of infrastructure projects.
Vanuatu has maintained macroeconomic stability, but real GDP growth slowed despite the receipt of considerable foreign assistance and the implementation of structural reforms under the Comprehensive Reform Program (CRP). A sharp increase in liquidity, a consequent bulge in consumption, and a rise in imports have affected Vanuatu's recent economic performance. Inflation, as measured by the consumer price index for the main urban centers, has remained moderate in recent years. The paper also discusses prices and population, financial sector, and external sector developments of Vanuatu.
holdings of government bonds, as well as RBVnotes, demand deposits, and cash. Around the same time the RBV began issuing its own Reserve Bank notes, having a 91 day maturity. In addition, during May the Reserve Bank raised its minimum lending rate from 5 percent to nearly 11 percent. This action helped restore confidence and reduced pressure on the exchange rate. In November 1998 the Reserve Bank reintroduced the SRD at the rate of 10 percent on vatu deposits and reduced the PRA to 6 percent. In addition, a repurchase facility, covering short-term government bonds and
A variety of shocks have affected Vanuatu's recent economic performance. The government approved the Comprehensive Reform Program (CRP) developed with the support of the Asian Development Bank (AsDB). The IIIrd phase of the program is focused on entrenching and deepening the reforms already introduced, extending government reforms to embrace the parliament and the legal sector, and promoting economic growth. In addition, the government aims to strengthen the focus on social reforms, to ensure that the benefits of CRP are shared, and that reform is sustained.
banks could count their holdings of government bonds, as well as RBVnotes, demand deposits, and cash. Around the same time the RBV began issuing its own Reserve Bank notes, having a 91 day maturity. In addition, during May the Reserve Bank raised its minimum lending rate from 5 percent to nearly 11 percent. This action helped restore confidence and reduced pressure on the exchange rate. In November 1998 the Reserve Bank reintroduced the SRD at the rate of 10 percent on vatu deposits and reduced the PRA to 6 percent. In addition, a repurchase facility, covering short
the use of direct instruments when faced with difficulties in controlling liquidity . The National Reserve Bank of Tonga (NRBT) used reserve requirement control and credit ceilings to deal with the rapid monetary growth in the late-1990s. Since then, the NRBT has often relied on the reserve requirement ratio and credit ceilings to control the liquidity. Similarly, the Reserve Bank of Vanuatu (RBV) introduced LAR to induce commercial banks in holding government securities and/or the RBVnotes (the central bank securities).