VANUATU ROCKY ROAD TO RECOVERY

April 13, 2025 11:05 pm | Posted in Features | Share now TwitterFacebook

ECONOMIC CHALLENGES MOUNT FOR
NAPAT GOVERNMENT IN 2025

The 2025 Snap Election

On the 16th January, Vanuatu held elections for the 14th Legislature. The f inal results of the 2025 snap election were released on 29th January 2025. 15 out of the 52 sitting Members of Parliament lost their seats with the majority of the existing MPs returned while 17 new MP’s won seats in the new legislature.

Improved voter turnout despite drop
in Registered voters

Like the snap election in 2022 which caught many of the parties unprepared there was a similar number of contestants in 2025. In the 2019 election there were 291 contestants. In 2022, 219 contestants and in 2025, it was slightly lower at 217. Voter turnout was also much lower with a dramatic drop in the number of registered voters. In the 2022 Snap Election, there were 302,258 registered voters with valid votes of 132,331, and a voter turnout of 43.78%. In 2025, the number of registered voters dropped to 212,245 but valid votes increased to 146,628, an increase of 14,298 votes and a % voter turnout of 69%. The new legislature comprised of a coalition government lead by PM Jothan Napat of the Leaders Party of Vanuatu, the Vanua’aku Party, the Graon mo Jastis Party, the Reunification Movement for Change and the Iauko Group

The December 17 Earthquake Rocks
Vila

On the 17th December 2024, a severe 7.3 magnitude earthquake lasting for 19 seconds struck the island of Efate and the capital, Port Vila. The earthquake resulted in 14 deaths and impacted an estimated 80,000 lives, causing widespread destruction to numerous buildings and critical infrastructure like hospitals, bridges, and water reservoirs. There have been unsubstantiated estimates that the total losses incurred to be approximately VT15 billion. This followed the economic downturn triggered by the voluntary liquidation of Air Vanuatu early in 2024. The Port Vila CBD has been under lockdown and largely remains a ghost town since the earthquake struck with numerous businesses unable to operate. At the time of writing this report the following buildings have been demolished changing the whole look of the City.

• Billabong
• Casa De Andrea
• Chantilly’s on the Bay
• The Olympic Hotel
• Caillard & Kaddour
• Oceania Building
• Lolam House
• Ex VAT office

Other buildings in the CBD including the National Bank have yet to be demolished. A number of other buildings outside of the CBD have also been earmarked for demolition. These include the Wong Garage Building and the 2 chinese owned buildings in Tebakor. Currently, road access to the residential communities of Dreamcove and Ifira Point remain blocked due to a landslide behind the wharf that has restricted access and buried power lines. Whilst water is available, electricity supply from UNELCO is still not connected and residents in these communities have had to turn to the installation of off Grid solar power and generators to power their houses.

The 2024 Pre-Election Economic and Fiscal Update

Prior to the Election the Ministry of Finance and Economic Management issued a Pre-Election Economic and Fiscal Update. In 2022, Vanuatu’s GDP grew by 5.2%, recovering from a contraction of 1.6% in 2021 as the country emerged from the COVID Pandemic. However, in 2023 the economy continued to be hit by additional challenges such as Tropical Cyclones Judy and Kevin in 2023 and the voluntary liquidation of Air Vanuatu in May 2024.

Real GDP growth for 2024 was revised downward to 2.1% (from 5.2% previously forecasted). Medium-term growth (2025-2029) was projected to average 3.7%, down from earlier estimates.

Annual inflation decelerated significantly to 2.2% in June 2024, down from 5.3% in March 2024 and 14.4% in June 2023. This decline was attributed to lower global commodity prices, improved domestic food supply, and the mandatory use of scales in local markets.

The Reserve Bank of Vanuatu (RBV) tightened its monetary policy in September 2024, raising the policy rate from 2.25% to 2.75% and increasing the capital adequacy ratio (CAR) from 10.0% to 12.0%. These measures were introduced to address excess liquidity in the banking sector and ensure price stability.

The conclusion of the report was that Vanuatu’s economy had faced significant headwinds in 2024, particularly due to the impact of Air Vanuatu’s liquidation on tourism and delays in capital project implementation. However, the medium-term outlook remained cautiously optimistic, with growth expected to recover to 3.7% annually from 2025 to 2029. The key to this recovery being the successful implementation of capital projects, revival of the tourism sector, and continued support from development partners. Fiscal and monetary policies needed to remain prudent to navigate the ongoing challenges and ensure long-term economic stability. Then the Earthquake struck.

The Economic Impact of the
Earthquake

The Minister of Finance, tabled the 2025 appropriation budget in the 1st Ordinary session of Parliament in 2025. The 2025 budget was finalized at the time when the economy was still recovering from the voluntary liquidation of Air Vanuatu and the effects of the December 17 Earthquake.

In the budget speech, the Minister of Finance advised that GDP growth in 2024 had been revised downward from an initial forecast of 2.8% to 2.2%, reflecting the impact of the Air Vanuatu Liquidation on the tourism sector. Looking ahead, growth has been downgraded for every year in the budget forecast with 2025 growth to reach 3.6%, followed by an average of 4% from 2026 to 2029.

Government revenue is estimated to decrease by 4.7% from VT47.4b in 2024 to VT45.2b in 2025, primarily due to an anticipated reduction in Value Added Tax and revenues from the Citizenship Program. The Prime Minister announced in Parliament that there would be a suspension of the CIIP program due to concerns with the way it has been managed. The total budget appropriation totalling VT49.7b with the funding balance coming from Asset sales, VAT from other Government departments, and VT4.1b from the issuance of government bonds.

In addition to government financing, there will be contributions and grants from aid donors and development partners of VT29b to fund capital projects. The total receipts from the government and Aid donors is estimated to be VT78.9b to fund the 2025 budget.

Economic observers have noted that the forecasts in the 2025 budget have failed to properly acknowledge and recognize the severe economic impact that the earthquake would have on the economy. There is anecdotal evidence that VAT collections in the months following the Earthquake have fallen dramatically with limited recovery in sight.

A recent business survey conducted by the Vanuatu Chamber of Commerce and Industry (VCCI) has revealed the brutal impact of the earthquake on business conditions. Its findings were as follows.

1. 60% of businesses with staff expect the earthquake to reduce their turnover by at least 25% in the first half of 2025, with 39% expecting a fall of more than 50%
2. 38% of businesses reported currently making a loss, and 42% of these consider this unsustainable.
3. For microbusinesses, estimated average the weekly reported income has fallen by 58%
4. The proportion of microbusinesses earning under VUV 10,000/week has jumped from 14% to 60% after the earthquake
5. 44% of micro businesses reported being very short on money and struggling to afford basic necessities.

The CBD largely remains a ghost town with condemned buildings awaiting demolition, indicating significant disruption to commercial activities within the services sector. Traffic congestion as a result of road closures are severely impacting the livelihoods of Bus operators who are now spending more time in traffic than carrying passengers to their destinations. This in turn has directly affected work attendance with falls in Staff productivity. The VCCI has urged the government to accelerate plans for a stimulus roll-out to support businesses affected by the earthquake.

The Government aims for a balanced budget in 2025, but this objective will be challenging given the increased expenditure needs for earthquake recovery and potential decreases in revenue due to economic disruption. The fiscal deficit of VT 2,037.4 million experienced in 2024 was partly attributed to the earthquake’s effects on revenue collection.

A significant portion of the 2025 appropriation budget is committed to funding relief, response, and recovery efforts from the December 2024 earthquake. Specifically, VT 765.3 million has been allocated for earthquake-related recovery funds.

The debt of the country is currently forecast to be VT63.4b or around 41.9% of GDP which is well under the desired threshold of 60%. Currently, the country is actively exploring alternative financing options due to limited debt-carrying capacity. Major infrastructure projects funded through grants and loans will see major works and disbursements in 2025, partly related to disaster recovery. Due to the significant changes caused by the earthquake a review of the Medium Term Debt Management Strategy (MTDS) 2023-2026 will be necessary.

The earthquake has likely increased the need for imported goods for reconstruction and aid, directly affecting the current account balance (CAB) which is expected to further worsen in 2025 due to increased import payments for recovery purposes and reductions in service receipts, although partially offset by disaster relief grants. In addition, Trade balance accounts are estimated to be negatively affected by the decline in service receipts from abroad, primarily due to Air Vanuatu issues, and increased imports of goods, likely exacerbated by post-earthquake needs.

Official foreign reserves are expected to remain within threshold, but the risk of persistent high import payments, now potentially higher due to recovery needs, remains a huge concern.

Key Challenges and Priorities (Post Earthquake): The most significant challenge for Vanuatu in 2025 is survival and recovery following the devastating earthquake. On top of existing economic vulnerabilities, the 2025 budget prioritizes building capacity for resiliency, which is now even more critical in the aftermath of the earthquake.

The VCCI report highlights the urgent need to resolve domestic connectivity, likely disrupted by the earthquake, and to improve communication and transparency around the CBD reopening to facilitate economic recovery.

The slow implementation of planned capital expenditures remains a concern, and the earthquake recovery efforts will require efficient and timely execution of projects.

The debate over responsibility for building code adherence, particularly concerning damaged government owned buildings like the presidential palace, and who will foot the post earthquake repair bill, estimated in the hundreds of millions of dollars, adds complexity to the recovery process. Insurance companies are likely to shoulder the bulk of the bill but concerns have already been raised in the speed and the way in which claims have been processed contributing to the delays in recovery and reconstruction.

In summary, the economic outlook for Vanuatu in 2025 is now heavily shaped by the devastating earthquake in December 2024. While a GDP growth rebound was initially projected, the earthquake has caused significant economic particularly impacting disruption, businesses and infrastructure. The government’s priority is now focused on relief and recovery, which will necessitate substantial budgetary resources and efficient implementation. The findings of the VCCI survey underscore the severe impact on the private sector and the urgent need for government support and a clear path towards recovery. The challenges of rebuilding and restoring economic activity while managing debt and external balances will be central to Vanuatu’s economic performance in 2025