Vanuatu Economy to Grow Below 2% in 2024: RBV
September 10, 2024 4:08 am | Posted in Business News | Share now TwitterFacebook
By Doddy Morris
The Reserve Bank of Vanuatu (RBV) has reported that an independent forecast predicts Vanuatu’s economy will grow by just under 2% in 2024 (between 1% and 1.5%) and an additional 1% in 2025, due to low economic growth.
RBV Governor August Letlet shared this information during a press conference held yesterday to address the recent decision by the RBV Board to tighten the monetary policy stance of the Bank. The Policy Rate will be increased from 2.25% to 2.75%, and the Capital Adequacy Ratio (CAR) will be raised from 10.0% to 12.0%.
“The International Monetary Fund (IMF) conducted an assessment in June and July this year, forecasting that the Vanuatu economy will grow by just under 2% in 2024 (between 1% and 1.5%) and an additional 1% in 2025,” he said. “This assessment is part of the IMF’s responsibilities to its member countries, including Vanuatu, to evaluate economic health.
“In Vanuatu, the macroeconomic committee, which also conducts assessments, had forecast a 5.2% growth for 2023, driven by anticipated support from government capital budgeting. However, by March, the situation had changed slightly as the government had not fully implemented its capital budget policy, impacting industrial activity. The macroeconomic committee revised the growth forecast for Vanuatu down to 4%.
“Inflation, which the RBV monitors closely, rose beyond the target level of 0 to 4%. Starting at around 14% in June 2023, it decreased to 12% in September, 7% in December, and remained at 5.2% in March of this year.”
Given these indicators, the RBV has determined that further intervention is necessary. Last October, RBV tightened its open market operations to reduce the amount of money in the system. In January, RBV further tightened by raising the statutory reserve deposit from 5.25% to 5.5%, aimed at reducing excess liquidity.
“In July, when the macroeconomic committee met again, it observed that the economy was still not showing signs of the expected growth. Consequently, the growth forecast was further reduced to 2.8% for 2024. Despite these adjustments, liquidity remains high, and inflation continues to exceed our targets,” Mr. Letlet said.
Governor Letlet added that the RBV aims to increase transparency in how it communicates with the media about decisions affecting public livelihoods. “During the Board of Directors’ meeting on September 2nd and 3rd, 2024, decisions were made regarding our economic outlook. The role of the RBV is to control the money supply and monitor price levels, and ensure stability in the exchange rate. However, the economy in 2024 has been slow.”
Governor Letlet further stated that the RBV has decided to tighten its monetary policy further. This includes increasing the CAR from 10% to 12%, with the CAR having been reduced from pre-COVID levels to release liquidity. Current assessments indicate improved levels in banks. “Consultations with commercial banks confirm that their CAR currently averages 19.4%, with a high of 45.5%. Even with the increased CAR, banks should be able to handle immediate needs during economic shocks,” he said.
“Additionally, the RBV will raise the rediscount rate from 2.25% to 2.75% to control inflation and liquidity. Our target is to bring inflation, which was 5.7% in March, down to 3.3% by the end of this year, within the RBV’s target range. Along with the CAR adjustment, this should ensure the banks remain stable and address non-performing loans.”
He added that while these measures may not greatly impact the expected 2.8% growth, they are also mindful of the upcoming cyclone season. Policies may be adjusted based on evolving circumstances. Currently, the RBV believes further tightening is appropriate and that these measures will help manage inflation, excess liquidity, and maintain economic activity. “We also encourage the government to support this environment of monetary tightening to stimulate economic growth and development,” Mr. Letlet said.
