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Growth projections

Filipe Naigulevu
Friday, February 09, 2018

ECONOMIC growth in Vanuatu is projected to continue around 4 per cent this year, driven by recovery in tourism and agriculture, and scaling up of infrastructure.

According to an International Monetary Fund (IMF) mission that recently concluded their 2018 Article IV Mission to Vanuatu, the country's fiscal deficit was expected to remain high, just shy of 8 per cent in 2018 while fiscal consolidation was required to address the rising debt.

The team, led by Chris Papageorgiou, also highlighted that monetary tightening was warranted, given excess liquidity and inflation pressure.

"Vanuatu is poised to fully recover from the extensive damage caused by Cyclone Pam in 2015, with several large infrastructure projects near completion and growth bouncing back," Mr Papageorgiou said in a statement.

"A recovery in tourism and agriculture combined with further ramping-up of infrastructure projects is expected to continue to propel real GDP growth to around 4 per cent in 2017 and 2018.

"Inflation is estimated to pick up to 3.1 per cent in 2017 driven by domestic demand, and rise further to 4.8 per cent in 2018 mainly due to a temporary VAT increase, from 12.5 to 15 per cent, before gradually reverting to modest levels in the medium term."

The current account deficit in Vanuatu is also expected to widen to above 10 per cent of GDP in 2017 and 2018, because of the high import content of infrastructure projects.

Mr Papageorgiou however stressed that downside risks to this favourable outlook stemmed mainly from uncertainty in the rate of implementation of the public infrastructure projects.

"The delayed implementation of revenue mobilisation measures, such as the introduction of the income tax, could put a strain on fiscal accounts," he said.

"On the external front, while the withdrawal of correspondent banking and the negative impact of weaker-than-expected global growth have so far been limited, they pose non-negligible risks. The danger of natural disasters is ever-present."

Looking further ahead, Mr Papageorgiou recommended that economic growth in Vanuatu needed to be stronger and more stable with financial inclusion remaining as a priority.

"In this regard, resilience to natural disasters should be at the core of any development strategy for the country to ensure sustainable and inclusive growth," he said.

"It is in this context that diversification of economic activity is required.

"Tourism sector needs to be strategically segmented across locations, and efforts to diversify the economy into the agricultural sector need to be intensified. To facilitate diversification, supporting the private sector by improving the ease of doing business and reaching out to small businesses in need for credit is necessary."

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