Peter Tari: Overview of the Vanuatu economic performance
Presentation by Mr Peter Tari, Deputy Governor of the Reserve Bank of Vanuatu, at the Reserve Bank
of Vanuatu, Port Vila, 7 June 2006.
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Overview and performance
• Vanuatu's economic performance has been affected by a number of factors, including the
smallness and isolations of the islands, globalizations and gradual loss of preferential
markets, natural calamities, lack of capacity and political instability.
• Vanuatu is made up of some 80 mostly volcanic islands that extend approximately 1,176km
in a north-south direction. The total land area is 12,281.25 Km2 and the current crude
population density is estimated at 17 persons per Km2. The country's population growth rate
is 2.6 percent per annum and a real GDP per capita estimated at USD718 in 2004. The
current population is estimated to be around 240,000, of which 80% are said to be living in
rural areas and are engaging agriculture.
• Agriculture is the mainstay of the economy, and it makes up approximately 70 percent of the
country's exports. Despite the fact that agriculture supports the bulk of the population, it is
not the leading contributor to GDP. In the last six years agriculture make up on average 18.3
percent of GDP. The services sector dominates the economy, accounting for around 73% of
total GDP followed by the agriculture. Within the services sector, the wholesale and retail
sector dominates with around 40%. Tourism, which makes up around 16% of GDP, is
becoming an important sector of the economy generating around 75% of the total foreign
exchange earned by the country.
• Economic growth since independence in 1980 has been erratic. The fluctuating trend in
Vanuatu's economic growth was caused by a number of factors including political instability,
the country's vulnerability to natural disasters and changing international prices for Vanuatu's
exports, and a whole of other factors.
• The last five years also saw marked variations in growth. After two successive years of
contraction in 2001 and 2002, real GDP rebounded in 2003 and has since been recording
positive growth. Growth in 2003 and 2004 ranged from 4-5% and has been driven by
Agriculture and Services sectors. Positive real GDP growth continued in 2005 but at lower
magnitude compared the preceding two years. In 2005, the services and industry sectors
continue to grow therefore more than offset a negative contribution from the Agriculture
sector. The services sector grew by 4.7 percent in 2005, with much of the growth being
attributed to growth in transport and communication by 12.1 percent and in Finance and
Insurance by 16.3 percent.
• The Agriculture sector declined in 2005 after experiencing growth for 2003 and 2004. The
downturn in Agriculture is driven by copra which in turn was caused by a drop in copra prices
which had an effect on production. Cocoa also indicated a decline in 2005, mainly due to a
drop in export prices. Kava also experienced a decline in 2005, following a temporary ban in
Fiji for Vanuatu kava. This lower decline in agriculture output continues towards the first half
of 2006 but is expected to improve towards the end of the year.
• On the fiscal front, the Government has for the past few years achieved fiscal consolidation.
Much of the improvement has been attributed to improving economic conditions and inflows
of donor funds but also to good control measures over expenditures. Reflecting the good
outturn in fiscal operations the Government managed to retire some of its domestic debts in
2005. Also the Government is no longer heavily dependent on the overdraft facility at the
Reserve Bank of Vanuatu given its improve fiscal management.
• The Reserve Bank makes regular assessment of the economy and adjusts its monetary
policy stance accordingly. Last year in June 2005, the Bank, following its regular assessment
of the economy was satisfied that macroeconomic stability has been achieved and that the
macroeconomic variables that it monitors against its policy settings have improved. Based
on this assessment it relaxed its monetary policy stance by reducing its rediscount rate from
6.5 to 6.25 percent. On 15th March 2006 the Bank further relaxed its monetary policy stance
by reducing its official interest rate from 6.25 percent to 6.00 percent.
Challenges for Vanuatu
1. Continue to maintaining macroeconomic stability in order to promote growth;
2. Promoting private sector development as an engine of growth;
3. Political Stability has to be maintained for a conducive investment climate;
4. Raising investments by removing impediments
5. Promoting Small and Medium Enterprises so that economic growth is more balanced and
broad based;
The private sector development is more challenged because of good governance issues,
unpredictable policy environment, poor infrastructure and the need for improvement of law and order.
Outlook
• The current favorable performance of the economy is expected to continue in 2006 and for
the next two years. In 2006, the economy has been forecasted to grow by 3.9 percent and by
4.3 percent during 2007. The services sector is expected to continue to drive the economy
forward but also the industry sector is expected to contribute favorably if the Millennium
Challenge Account projects are implemented. The agriculture sector is also anticipated to
improve in 2006.
• The Balance of Payment of the country outlook appears favorable. Official international
reserves have increased to a comfortable level of 6 months of import cover in May 2006, and
are expected to continue to increase in 2006.