Budget Policy Statement 2025

October 1, 2024 4:12 am | Posted in Features | Share now Twitter Facebook

Statement of Responsibility

This statement of responsibility confirms the Government’s commitment in preparation and finalisation of the 2025 Budget. It outlines the core economic and financial policies of the Government that are in line with the legal requirements of sections 9 and 10 of the Public Finance and Economic Management (PFEM) Act [CAP 244]. These policies aim to achieve Government’s policy objectives and targets that were outlined in the Government’s National Sustainable Development Plan (NSDP) or the people’s plan 2030, in order to enhance economic growth and improve service delivery.

Section 9 of the PFEM Act requires the Government to:

specify its economic and financial policies, including those relating to key economic and fiscal variables; and
State the discipline it will adhere to in its economic and financial dealings.

Section 10 of the PFEM Act requires the Government to:

state its long-term objectives for fiscal policy in terms of major economic and fiscal variables;
specify the main strategic priorities guiding the preparation of the budget;
indicate the Government’s targets for fiscal and economic variables; and
provide an assurance that the long-term objectives outlined in the statement are:
a. consistent with the Principles of Responsible Fiscal Management laid down in Section 22 of the PFEM Act; and
b. Consistent with the previous year’s Budget Policy Statement – that is, policies have remained consistent over time or, otherwise, justifications have been made for their departure.

In line with section 9 and 10, this Budget Policy Statements also confirms that the Government’s economic and fiscal policy objectives, strategic priorities and intentions are also consistent with the Principles of Responsible Fiscal Management specified in section 22 of the PFEM ACT [CAP 244]. On this note, the Government will continue to enhance its revenue collection, allocate its financial resources and at the same time manage state debt to improve service delivery as well as enhance economic growth.

As the Minister and Director General responsible for deciding and implementing the economic, financial and fiscal policy of the Government, it is our honour to confirm that the 2025 Budget Policy Statement is in line with Sections 9, 10 and 22 of the Public Finance and Economic Management (PFEM) Act [CAP 244].

2. Economic and Financial Policies

2025 Budget will be finalised in line with section 9, 10 and 22 of the Public Finance and Economic Management (PFEM) Act [CAP 244]. On this note, the Government will continue to raise revenue and allocate its financial resources towards both the productive sector and social sector in 2025 following the four budget policy priority outcomes in this budget policy statement in in order to improve service delivery, enhance wellbeing of all the people in Vanuatu and at the same time improve economic growth.

The guiding principles for the finalisation and implementation of Budget 2025 is the principles of responsible fiscal management in section 22 of the Public Finance and Economic Management (PFEM) Act [CAP 244], which are provided in the box below. These require the Government to pursue its budget policy objectives.

Section 22 of the PFEM ACT: Principles of Responsible Fiscal Management

Reducing and then managing debt at prudent levels so as to provide a buffer against factors that may impact adversely on the level of debt in the future, by ensuring that, unless such levels have been achieved, the total overall expenditures of the State in each financial year are less than its total overall receipts in the same financial year;
Achieving and maintaining levels of State net worth that provide a buffer against factors that may impact adversely on the State’s net worth in the future;
Managing prudently the fiscal risks facing the State; and
Pursuing policies that are consistent with a reasonable degree of predictability about the level and stability of tax rates for future years.

3. Budget Policies

The 2025 Budget policies have been developed in line with sections 9, 10 and 22 of the Public Finance and Economic Management (PFEM) Act [CAP 244]. The Budget policies, objectives, and targets are crucial in the process of developing and finalising the Budget 2025.

The 2025 Budget policies consist of:

Budget Policy Priorities for 2025;
Economic and Fiscal Targets for 2025; and
Long Term Economic Policy Objectives

A. Budget Policy Priorities for 2025

Background

As per the provisions of the Government Act, the Prime Minister (PM) sets strategic policy-planning and significant administrative decisions for the Republic of Vanuatu. That legal mandate allows for the developing of the 2025 Government Policy Priorities for the country. While the Government Act provides for the determination of policy priorities with the Council of Ministers, the PFEM Act Section 9 ensures that allocated financial resources are in line with those policy priorities of the Government. Vanuatu 2030: The People’s Plan- or the National Sustainable Development Plan remains as the guiding policy document for this government when developing the 2025 policy priorities to achieve the people’s vision.

2025 is an important year as it will mark 10 years of the journey of making ‘sustainable development’ a nationally and internationally shared goal. The conception of the National Sustainable Development Plan or the People’s Plan 2030, has been the first national development agenda that was widely consulted through Government agencies, non-Government entities, private corporations, Community Based and Civil Societies, pillar representatives and Development partners. A plan that also domesticated globally aspired SDG goals. With only 5 years before the lapse of the People’s Plan, NSDP review has identified less than 50% implementation of its policy objectives. Thus, the Government Policy Priorities of 2025 will provide a platform for the stakeholders to revisit and recommit our efforts in implementing our Plan with 5 more years to go before 2030.

After 44 years as an independent country and 4 years after graduating from being a Least Developing to a Developing Country, Vanuatu has reached the cross-road in its development agenda. One that it must dread carefully. While Vanuatu aspires to be a developing country, it must ask itself what it is willing to sacrifice. Apart from the ongoing threats of climatic events and the associated reconstruction costs, Vanuatu’s rural population has been dwindling for the bright lights of urban centres and the systematic encouragement and support work schemes that lure people to find work elsewhere despite government’s investments into productive sector over the couple of years. The country finds itself dependent on outside economies such as thriving tourism sector, economic boost through construction after cyclones and increased Overseas Development Assistance and Remittances from Overseas work schemes. There is a widening intergenerational gap that threatens our identity as a Melanesian country with its unique cultural linguistic diversity borne through lack of appropriate measures to strengthen our Melanesian values such as languages and protection of land rights and the systemic alienation, deprivation and eviction of indigenous people from indigenous lands in the name of development. We have not been good stewards of our environment and our people. Proper planning is needed in urban areas to prevent the polluting of harbours, our lagoons and rivers and in the rural areas’ conservation and protection of native flora and fauna. Introduced Invasive species of birds, fish and bugs threaten our native birds and fish species including the ongoing threat of the rhinoceros beetle one of our main export commodities which is copra. Non-Communicable Diseases are threatening the very resource and lives of our people at alarming rates through high dependency of manufactured food items. As a society, we have been neglecting our children through lack of investments in early childhood development as well as those living with disabilities. We can only move forward, if we all move together. This is especially true for our islands. Smaller islands with less resources have been neglected for far too long because the government has chosen to invest in the bigger islands to create opportunities. After 44 years, only 4 islands out of 83 islands have some sort of tar-sealed roads and only the 6 main provincial headquarters have access to hospital proper infrastructure for education. With the influx of people leaving to find work elsewhere, many islands remain under-developed with many households now being looked after by a single mother or an elderly couple. This is concerning during times of disasters with distribution of relief supplies and in evacuation centres where abuses can happen. All these concerns including the under average performance of the government in the first 5 years of implementing the People’s plan, as per the findings of the NSDP review, led to the government calling for a ‘Resetting’ of the National Agenda. This Led to the 1st Summit of the People and the Government in 2023. The government, through its ‘Resetting’ Agenda, had a three -pronged approach which was to integrate NSDP review recommendations and constitutional mandates to complement and accelerate the People’s Plan 2030 and strengthening resiliency.

The first prong targeted policy and governance Reforms in the public and private Sectors including creating and establishing enabling environments to improve conditions for a renewed and targeted national and sub-national growth.
The second prong is built on the premise of strengthened partnerships to support Infrastructure and growth in an ever-changing environment posed by threats of extreme weather events such as the unprecedented two Cat 5 tropical cyclones, health security and peace targeting a resilient society.
The third prong is to guarantee our people a just and fair Society that leaves no one behind and an Environment that can continue to sustain and support the continuous pursuit of prosperity for us, our children and their descendants.

These ‘Resetting Agenda prongs’ formed the basis of the Summit dialogue of the Government and the people in 2023. The Summit brought together all major stakeholders of the People’s Plan and adopted the ‘Leaders Understanding’ which committed to the need to re-focus and step up or accelerate efforts in meeting the targets of the People’s Plan especially in the provinces through a well – coordinated and decentralised services.

The Directors’ Strategic Planning Meeting that followed the Summit translated the ‘Leaders Understanding’ into the NSDP Acceleration Plan which included the development of a National Sustainable Development Policy, a Development Strategy and Sub-National Action Plans.

In 2021, DSPPAC conducted a review of the NSDP implementation along with key partners such as Vanuatu National Statistics Office (VNSO) and implementing Government agencies and partners. The findings and recommendations of this review along with the Summit resolutions will form the basis of the Government’s Policy Priorities for the next five (5) years to ensure we are on target in meeting our Policy Objectives and hence assuring ourselves our collective vision for a ‘stable, sustainable and prosperous Vanuatu.’ The main findings of the tools of NSDP implementation such as the National Planning Framework (NPF) and the Monitoring and Evaluation framework while being adhered to appeared to be poorly implemented. These were partly due to lack of understanding, human resources capacity and very ambitious plans with lack of proper execution in regards to grouping targets into specific timeframes that can be implemented and tracked.

In ensuring that the government maximises its resources to meet the Outcomes of the People’s Plan by 2030, it developed a Roadmap of Government Priorities based on the three (3) ‘prongs’ of the Resetting Agenda. Thus, Government Policy Priorities for 2022-2023 were focussed on Reforms and Partnerships. With seven years remaining before the NSDP 2030 lapses, the government decided to develop a targeted approach to achieve a maximum impact on its efforts. This was later agreed to at the National Summit and translated into the NSDP Acceleration Plan. Hence, there will be a targeted focus on the implementation of the Economic pillar policy priorities in 2024 followed by Society and Environment pillar policy priorities in 2025. In 2026, the government will evaluate these accelerative measures before proposing its policy priorities based on indicators that need more efforts to implement by 2030.

PRONG 1
(2023)

National and Sub-national Reforms and Partnerships (2023) The Government Policy Priorities focused mainly on National Level reforms including the National Summit of the People to establish development priorities. Much of this work was led by the National Parliament, the Office of the Prime Minister, Office of the Public Service Commission, State Law Office, the Ministry of Foreign Affairs International Cooperation and External Trade, Ministry of Finance and Economic Management and Ministry of Internal Affairs. It looked at pressing domestic issues as well as foreign concerns including labor mobility, minimum wage, remuneration and political reforms including Political party integrity constitutional reforms as currently witnessed by the pending referendum.

In 2024, the government’s New Policy Priorities have been reduced from its previous seven (7) priorities to only four (4) to allow for a better coordination and targeted approach to ensure progress can be properly measured and reported on. Thus, in 2024 there will be focus on promoting capabilities for resilience and prosperity especially after three (3) severe cyclones in three (3 years, the caucus and constitutional priorities and the need to address NSDP review in the remaining six (6) years.

PRONG 2
(2024)

National and Sub-national Resilient Infrastructure and Economic Growth In 2024, the Government is committed to implement policy options aimed at strengthening Vanuatu’s economic resilience and recovery through building resilient infrastructure for economic, social and environmental sectors at both the national and subnational levels to facilitate ‘building back better’ recovery while creating resiliency to minimize future macro-economic and human impacts from disaster. The other key focus for 2024 is on economic growth especially in rural areas. In 2024, the Government will stage the National Economic Forum as part of its renewed focus on accelerating the implementation of its Economic pillar targets.

PRONG 3
(2025)

Resilient People and Environment The third prong is to guarantee our people a just and fair Society that leaves no one behind and an Environment that can continue to sustain and support the continuous pursuit of prosperity for us, our children, and their descendants. The Government’s Policy priorities of the past have always put economic and infrastructure development as its priority focus. This has seen large investments of government going to waste with projects not being sustained. The re-focus on people and their environment is also about investing in development that has people at the heart of decision making and involving them as stakeholders in development and democracy creating ownership, accountability, and pride so they are an active participant in implementing The People’s Plan and in achieving the National Vision for a Stable, Sustainable and Prosperous Vanuatu. A key aspect of this priority is resiliency and involves working with Indigenous governance in each island and province to develop a workable model and linkage with the formal system to support service delivery in rural communities. In 2025, the Government will organise the National Society and Environment Forum to ensure that implementation of NSDP Environment and Society Pillars are being met.

Core Policy Priorities Analysis and Justification for support in 2025

The current Government remains committed to public sector reforms including existing priorities captured in recurrent budgets of ministries to deliver the People’s Plan 2030. However, the main focus of 2025 will be on building capacity for resiliency and prosperity through the Society and Environment Pillar targets. It does not mean that the government is reducing investment in economic pillar. The government has developed legislation to explore opportunities to partner with Private Sector through the Public, Private Partnership ventures to implement infrastructure and economic priorities of the government. This should open up more recurrent budget for the government to implement programmes for social, environmental and cultural development. In 2025, the government’s New Policy Priorities will continue to focus on government’s recurrent budget on four (4) priorities to allow for a better coordination and targeted approach to ensure progress can be properly measured and reported on. Thus, in 2025 there will be a continued focus on promoting capabilities for resilience and prosperity especially after ongoing reconstruction efforts and threats of climatic events, implementing the Outcomes of the National Summit, caucus constitutional priorities and the need to address NSDP review and implement the Acceleration Strategy in the remaining 5 years before 2030 through the following priority outcomes and Targets:

Policy focus for 2025: Strengthening the three (3) levels of Government through resilient People and Environment, resilient infrastructure, and Sustainable Growth

Vanuatu, a Pacific Island nation with a rich cultural heritage and diverse ecosystems, faces significant challenges in achieving sustainable development. Rapid population growth, environmental degradation, and vulnerability to natural disasters threaten the well-being of its people and the integrity of its ecosystems.

To address these challenges and ensure a prosperous and resilient future for all citizens, Vanuatu must adopt a comprehensive national sustainable development policy and implementation strategy. The 2025 Government Policy Priorities outlines the government’s intention on meeting its People’s Plan and sets out key priorities for achieving these through integrated planning, stakeholder engagement, and targeted interventions.

The burden of implementing the People’s Plan has all been on the government despite private, civil society and communities all having vested interests. The Government’s expectation is changing from the traditional role of sole provider of public order and public goods. The development of the NSDP Acceleration Framework has defined the Government’s emerging new role as facilitating and managing expectations of its stakeholders with diverging interests relating to climate change, demographic challenges and having better educated and well-informed citizens.

In 2025, the government, as per its ‘Resetting Agenda’, will prioritize emphasis on development of resilient people and environment through a strength-based, people-centered development approach. This outlook allows the government to look at development from a perspective of what it already has instead of what it does not have. The greatest asset of the government are its people and its environment-its cultural heritage. The inter-connectedness of the people and their environment is integral to Vanuatu achieving its vision for a ‘stable, sustainable and prosperous’ future. People are the custodians of their environment. Their sustainable use of the environment is important to their survival and to sustainable economic growth. In 2025, the government’s intention is to commit its recurrent resources towards developing the potential of its children, its youth and maximizing the participation of women in development and democracy. Furthermore, it will explore the opportunities of utilizing the role of indigenous governance models and practices to support the government deliver services to the people especially in the rural areas. This priority is set on the premise that investment in people and the environment will have longer term and sustained benefits for the government in reducing expenses to address social issues such as unhealthy population for instance the prevalence of life-style diseases, crime and unemployment as well as maximize returns for economic growth and development. Land disputes have been a plaque on development aspirations in the past. Working with the Indigenous custodians is a progressive new outlook that will allow government to partner with the custom owners through local authorities established by government and Island Council of Chiefs to agree on development initiatives and land for development before resources are committed.

The focus in 2025 on resilient people and environment does not remove government’s urgency and importance on building resilient infrastructure for economic, social and environmental sectors at both the national and provincial levels. These remain as important priorities for government. The Government wants to continue to create an enabling environment to encourage more Public Private Partnerships and Joint Ventures with local and foreign investors through the Public Private Partnership Policy, in order to spread economic development and benefits equitably. The proposed legislation of Public Private Partnership will allow the Government to pursue options of partnering with private sector to deliver services for economic and infrastructure development and meeting the targets of the NSDP Economic Pillar.

In 2025, Key priorities include:

Strengthening institutional governance at all levels for quality and effective service delivery and protection of our environment and natural resources – to strengthen resiliency and governance at national, provincial, area councils and communities including resourcing these to deliver quality decentralised services for all our people and protection of our natural based resources including ocean, land, and forest
Improved and well-maintained resilient infrastructure and establishing an enabling business environment including supporting Public Private Partnerships for resilient infrastructure, creating business opportunities and employment for entrepreneurs throughout Vanuatu with a focus on strengthening rural and urban economy that increasingly contributes to national prosperity and establishing model villages and communities
Resourcing the implementation of Vanuatu National Acceleration Framework for the National Sustainable Development Plan through identification of human resource needs and resources needed to deliver services effectively and efficiently especially in the provinces
Continue to implement Government reform, essential services, and development initiatives to support implementation of economic, social, and environmental development especially in human resources and infrastructure development for rural areas

Priority Outcome 1: A Happy, Resilient, Fair and Just Society in harmony with their Environment

The government will improve conditions by ensuring people are respected and their dignities are upheld and that they enjoy a quality life through choice and quality lifelong education and training; quality healthcare service and improved welfare, access to affordable, relevant and inclusive justice services, improved and better coordinated reliable, relevant and accessible protection and support services for children, youth, the elderly and people living with disabilities, as well as continuing to build our resilience to climate change, natural hazards while promoting the protection of our environment by:

Improving and strengthening Quality Education and training for all to ensure the six (6) provinces of Vanuatu have access to quality education including building community capacity in delivering education outcomes and supporting implementation of Human resources training for business and employment and linking to incentives for private and public sector skills development.
Improving and strengthening quality healthcare for all to ensure the six (6) provinces of Vanuatu have access to quality healthcare including building community capacity in managing community welfare and supporting implementation of Health strategy
Improving climate change adaptation, disaster risk and environmental management governance at all levels to mitigate the effects and impacts of climate change and other disasters on the economy and population including protecting and preserving our environment.
Improving Environmental governance at all levels to protect and preserve our nature-based resources including ocean, land, and forest.
Increasing equitable, accessible, safe, and affordable water supply, sanitation, and energy– to increase communities’ access to safe and secure drinking water sources and, electricity.
Strengthening government agencies including social and cultural institutions that have a strong legislation and governance framework to support decentralisation of services.
Increase support and strengthen programmes for children, young people, women, People Living with Disabilities, and the elderly to ensure they have access to relevant, reliable, and timely services
Establish a cultural hub -to develop a model of linking the formal and informal systems of governance that can be replicated in other provinces as a best practice for distributing some of the burden of implementing the People’s Plan to businesses, civil societies, chiefs and individual citizens.
Enhance implementation of Decentralization – by strengthening the provincial governments, adopting whole-of-government integrated approach, empowering area councils, establishing a governance accountability mechanism, and developing and rolling out sub-national work and training manuals on planning and budgeting that must be risk informed.

Target Outcomes:

Improved planning and resourcing for Disaster Risk Financing and climate financing by National and Subnational Governments including implementing the Standard Operating Procedures for Preparedness, Response Plans, Recovery Plans for Natural Disasters and Pandemics.
Improved education quality, accessibility and training outcomes for children and young people
Improved Quality Health Care
Improved Service Delivery
Improved Resilience and Natural Resource Management
Guaranteed Social Inclusion, Security, Peace and Justice
Government services must be decentralized down to Provincial and Area Councils
Improved investment and support for Early Childhood care and education
Develop and establish TAFEA as the country’s National Cultural Hub, and Tanna to host the 2025 National Forum on Culture, Society and Environment
Improved safe drinking water coverage and security for all population.
Improved sanitation coverage • Increased population access to reliable and sustainable energy sources, including renewable energy for urban and ruralareas
Development of standards for Household, Business, and Industry Waste Management; and to improve rubbish collection management and disposals at landfills
Improved waste management and pollution control.
Improved management and sustainable use of forestry resources for TC Harold recovery and industrial developments in compliance with the Forestry Act
Improved sustainable management of land and sea based resources in compliance with Mines and Minerals Act as well as Petroleum Act and the Environmental Protection and Conservation Act
Developed cultural impact assessment to protect sacred sites and promote heritage sites
Increase support to the protection and the conservation of endangered species and wildlife
Review of Climate Change and Disaster Risk Reduction related policies, strategies, and legislations

Priority Outcome 2: Improved and Well-maintained resilient infrastructure that facilitates a strong rural and urban economy

This focus continues to be a priority of the government given the versatility of our economic dependency. While tourism and remittances bring in lots of revenue, these options are dependent on overseas thriving economies. Covid-19 experience and threats of terrorism allow us to re-think that our model of revenue generation cannot be overly dependent on tourism and remittances. Vanuatu needs to invest and encourage investment into the productive sector and encourage this as a viable option for income generation through incentives that can attract people to venture into these.

The Government is committed to implement policy options aimed at strengthening Vanuatu’s economic resilience and recovery as well as reducing government expenditures through: Resilient Infrastructure is a core government priority in 2025 Improved and resilient public buildings, roads, wharves and airports, including energy and telecommunication infrastructure will continue to strengthen connectivity between essential government services, agriculture, value addition, tourism and markets in the future through:

Rehabilitating and improving maintenance of high priority rural infrastructure – through partnership arrangements with private sectors, development partners and local communities to improve rural (including feeder) roads, upgrading wharves and jetties, building of warehouses, sports and recreational facilities, health, education, justice, security, and facilities women, Children, youth and People Living With Disabilities including completing transport infrastructure maintenance fund strategies.
Improving airport infrastructure including AToNs– through the finalization of the airport master plan, which allows for the continued development of Code E terminals at the Bauerfield International Airport, acquiring land for airport development, moving the water source, upgrading major key airfields, sealing the existing air space agreement. Strengthening the regulatory arm of the industry is also required to keep up with operational demand.
Expanding access, and reducing the costs of energy and telecommunication– by promoting alternative sources of energy in rural areas such as solar energy and hydropower, and other renewable sources of energy, improving accessibility and affordability of telecommunication in rural areas. Increase accessible, affordable, secure, reliable, and sustainable energy for
all.
Expanding access of clean and safe drinking water through infrastructure support to communities
and ensuring proper governance is established for maintenance and expansion
Strengthening the enforcement of compliance services to ensure implementation of government
policies and legislation such as Environmental Impact Assessments, especially those targeting inclusive resilient infrastructure, revenue generation and good governance.

Target Outcomes:

Strengthen Health Infrastructure and Capacity in the country especially in ensuring accessibility of health care in rural communities
Strengthen Education Infrastructure and Capacity in the country especially in ensuring accessibility of quality education and training in rural communities
Strengthen justice and security Infrastructure and Capacity in the country especially in ensuring accessibility of justice and maintenance of law and order in rural communities
Strengthen nfrastructure and Capacity in the country especially in ensuring accessibility of services for men (chiefs), women, youth, People with special needs including early childhood development, church, and business networks in rural communities
Continued development of multi-purpose courts for the development of physical and recreational activities in rural communities
Continued support to the implementation, completion and maintenance of large on-going infrastructure projects, including Feeder Road Projects, with required disaster risk informed building standards, including in Disaster Affected/prone Areas.
Improving Waste Management and sanitation infrastructure and operations to reduce pollution impacts
Strengthened regulatory arm of the aviation industry including an interactive website where clients can file applications, obtain standard information. Continue negotiating the airspace agreement.
Improved transport infrastructure facilities, including wharves, roads and airports to facilitate trade within and between islands; opening of rural feeder roads; develop road assets; and implement sustainable public road policy.
Support capacity development of personnel and Safer Marine approaches through an increased installation of Marine Aids to Navigation (AToN’s) network at identified locations, and development of hydrographic surveys, security, management of facilities and the collection of revenues.
Continued support in domestic shipping services to provide shipping subsidy
Increased number of households with access to clean energy and electricity in rural areas, by continuing support and review of the National Green Energy Fund.
Increased number of households with access to quality and safe water supply infrastructures
Improved reliable and affordable access to telecommunications by extending the Government Broadband Network to rural areas to connect Government services to where it is needed, in line with Government’s decentralization priorities
Increase primary production and market access for commodity crops, animal, fish and forest products through increased mechanization, Public Private Partnerships (PPPs), and support to Vanuatu Primary Producers Association (VPPA), Vanuatu Cooperative Business Networks, and improve trade facilitation.
Strengthening of the food supply chains starting from farm production, logistics, to market outlets and to consumers for ensuring food security and nutrition for the population.
Improving the management of land leases and customary land as a catalyst for enhancing economic development and livelihoods of people living in rural areas.
Promoting a strong economic diversification through commodity production and exports.
Increase Value-addition, infrastructure facilities, Agro processing and Quality control to enter a competitive market and expand the capacity for managing biosecurity and border control risks of pest and disease incursion.
Expanding the service sector, such as businesses that serve the productive sector such as the Vanuatu Rural Development Bank (VRDB) while improving implementation of tourism initiatives
Support the proposal for the establishment of model villages and communities to implement intersectoral government priority services that reduce costs while integrating natural and cultural aspects of that locality
Support Public Private Partnerships (PPP) for companies and rural communities to develop socio -economic infrastructure and private business ventures

Target Outcomes:

Improved participation rate of Ni-Vanuatu business in the formal cash economy
Improved food and nutrition security for every household
Increase support to VPPA and Indigenous Ni-Vanuatu Agro- Industry Council (INAC)
Improved Research & Development for productive sectors including support to Vanuatu Agriculture Research and Technical Centre (VARTC)
Increased production and supply of poultry, fish, meat, and agricultural crops to local market outlets and export markets.
Increased support to Commodities Subsidy and Root Crops Subsidy
Increased market access through increased value addition and agro-processing and quality control
Reduced backlog of court cases relating to customary land disputes and leases
Increased support for land compensation and acquisition that promote public investment
Increase support for Public Private Partnership (PPP) ventures and investment.
Increased Vanuatu exports by reducing Technical Barriers to Trade (TBT) to compete in niche markets
Increased number of local entrepreneurs, registered farmers, fishers, and foresters receiving necessary government support.
Increased support to the businesses, and cooperative development in rural communities
Improved access to financial capital for MSMEs through VRBD, Industry Development Fund, and Cooperative Development Fund, and other Banking Facilities.
Increased earnings and volume of trade due to existing/ newly trade agreements.
Improved private sector investment through PPP by both local and foreign investors in the productive sectors.
Reduced risks and spread of pest and diseases entering Vanuatu including the Coconut Rhinoceros Beetle.
Vanuatu Sustainable Tourism Policy 2019-2030 and Vanuatu Sustainable Tourism Strategy 2021-2023 implemented.
Strengthened revenue base, develop new revenue initiatives; strengthen compliance system. tax administration and
Continue to plan and coordinate with relevant stakeholders and businesses/agencies the employment stabilization to enable the program to assist businesses
Support the creation of a disaster-recovery related development account within the Treasury Department
Develop and implement the MTEF and provide capacity building program for other sectors to follow including the MOE, MIPU and the rest of the 13 ministries.
Developed and strengthened appropriate regulations for trade and commerce
Improve the timely Collection and dissemination of national official data especially for monitoring implementation of NSDP indicators • Strengthen Customs Border Control Systems to continue to upgrade the Asycuda systems to achieve its operational objectives
Model villages and communities that display all the community services needed while integrating features of the customs, cultures and environmental uniqueness of that locality

Priority Outcome 3: Vanuatu National Acceleration Framework for the National Sustainable Development Plan is adequately resourced to ensure its implementation

The National Acceleration Framework is a series of actions needed to ensure the achievement of development aspirations as aspired to in the People’s Plan 2030: These include:

National Sustainable Development Policy 2024-2030 with its policy goals for Social Equity, Environmental Sustainability, Economic Development and Governance and Institutional Capacity
Strategies to implement the National Sustainable Development Policy: Social Strategy, Environment Strategy and Economic Strategy. DCO will have mandate over these strategies.
Establishment of the following Steering Committees to provide oversight on the implementation of Strategies: Social Strategy Steering Committee, Environment Strategy Steering Committee and Economic Strategy Steering Committee made up of respective DGs and 1st PAs
Establishment of Action Plans to implement Strategy in provinces and municipalities. The Directors will have mandate over the Provincial and Municipal Action Plans. These will be for a period of 3 years as well.
Formal Working frameworks will be signed with provinces and municipalities by each Ministry to implement the action plan. This will allow budget to be appropriated by each Ministry and respective Director Generals
Provincial Officers will develop annual activities to implement activities coordinated through SG and Provincial Technical Advisory Committee who are also responsible on reporting on the activities per year.

Target Outcomes:

National Acceleration Plan on the Implementation of the NSDP is finalised
National Sustainable Development Policy Developed
National Implementation strategies for Economic, Social, Environment and Cultural development developed and Implemented
Provincial and Municipal Action Plans developed and Implemented

Priority Outcome 4: Continued implementation and sustaining government reforms, essential services and commitments

To manage resources and development effectively and sustainably, the Government will continue to ensure there are resources available to implement and maintain development initiatives and support government obligations including responding to disasters and early recovery.

Continued support for 2024 Government Policy priorities to implement continued infrastructure and economic initiatives
Continued support for recovery efforts to implement policy options aimed at strengthening Vanuatu’s economic resilience and recovery through building resilient infrastructure for economic, social and environmental sectors at both the national and subnational levels to facilitate ‘building back better’ recovery while creating resiliency to minimize future macro-economic and human impacts from disaster as well as develop Vanuatu’s economic potential.
Continued payment of Government Loans and legal obligations to ensure efficient fiscal management
Preparedness and Emergencies to allow government to prepare and respond to threats of natural and other disasters without affecting allocated services budgets.

Allocation of Fiscal Space to Priority Outcomes (tentative)

Thus, the Government Policy focus for 2025 is Strengthening the 3 levels of Government- National level, Provincial and Area Council, to deliver quality and targeted resourcing with 4 key policy outcomes.

The DSPPAC with the assistance of DoFT have been closely monitoring the trend of actual fiscal space allocation over the past years. After analyzing the trends of the actual fiscal space allocation over the past years, it is proposed that the overall fiscal space allocation for MBC to allocate to the Policy Outcomes are as follows:

Priority Outcome 1: A Happy, Resilient, Fair and Just Society- 50%
Priority Outcome 2: Improved and Well-maintained resilient infrastructure – 20%
Priority Outcome 3: National Acceleration Framework on NSDP Implemented – 10%
Priority Outcome 4: Government Reforms, Essential Services and Commitments implemented – 20%

DSPPAC Policy Analysts will work with sectors to analyze their NPPs to ensure they are in-line with one of the four (4) policy priority outcomes of 2025 and meeting targets of NSDP, prior to working with Expenditure Analysts at DOFT to prepare submissions for the Ministerial Budget Committee (MBC) members. This will assist MBC decision-making especially in targeted allocation and allowing for a comparison between the final allocation and the 2025 budget priorities allocation in this paper.

Support provided to Programs by Development Partners

The Government with support from its development partners, will provide assistance to all policy outcomes. The Government, through the implementation of the ODA Management Policy and the ODA Management Implementation Strategy, continues to dialogue with all development partners to ensure the alignment of their programs (ongoing and new) to identified Government priorities. This dialogue will continue in 2025.

B. Fiscal Policies

The Government’s fiscal policy will continue to be guided by the principles of responsible fiscal management. Together with Government reforms and sound financial management, the fiscal policies will continue to place more emphasis on growing the economy through increasing Government revenue, and meeting Government expenditure programs and activities, at the same t ime enhance service delivery to improve the wellbeing of all the people in Vanuatu.

C Economic Update in 2024 World Economic Outlook (WEO)

The July 2024 World Economic Outlook Update presents a global economy at a crossroads. While maintaining the overall growth projection of 3.2 percent for 2024, the IMF has adjusted its 2025 forecast slightly upward to 3.3 percent. The IMF has highlighted significant regional disparities, with emerging markets and developing economies, particularly in Asia, showing stronger performance. China’s growth forecast for 2024 has been revised upward to 5.0 percent, driven by rebounding private consumption and robust exports. Conversely, advanced economies face challenges, with the United States seeing a downward revision to 2.6 percent growth in 2024. The euro area shows signs of recovery, albeit modest, with a projected growth of 0.9 percent in 2024. The IMF emphasizes the complex interplay of factors affecting the global outlook, including persistent inflation in the services sector, evolving monetary policies, and the potential impact of geopolitical tensions on trade and economic stability.

The baseline forecast shows offsetting growth revisions have shifted the composition of growth. Among advanced economies, growth is expected to converge over the coming quarters. The growth forecast for emerging markets and developing economies has been revised upward due to stronger activity in Asia, particularly China and India. However, growth has been revised downward for Latin America and the Caribbean, the Middle East and Central Asia, and sub-Saharan Africa. The report emphasizes the need for policymakers to carefully calibrate and sequence the policy mix to restore price stability and address the legacies of recent crises, including replenishing lost buffers and durably

The outlook for advanced economies shows a convergence in growth over the coming quarters. The overall growth projection for advanced economies remains unchanged at 1.7 percent for 2024 and 1.8 percent for 2025. However, there are some notable variations among countries. The United States is projected to grow by 2.6 percent in 2024, slightly lower than previously forecast, with growth expected to slow to 1.9 percent in 2025 as the labour market cools and consumption moderates. The euro area is expected to see a modest pickup of 0.9 percent in 2024, driven by stronger momentum in services and higher than-expected net exports. Japan’s growth forecast for 2024 has been revised downward to 0.7 percent due to temporary supply disruptions, but a turnaround in private consumption is expected in the second half of the year. Overall, while advanced economies are projected to maintain stable growth, they face challenges such as persistent inflation in services prices and the need to carefully manage monetary policy normalization.

The forecast for growth in emerging markets and developing economies has been revised upward. The projected increase is primarily driven by stronger activity in Asia, particularly in China and India. China’s growth forecast has been revised upward to 5.0 percent in 2024, mainly due to a rebound in private consumption and strong exports in the first quarter. India’s growth forecast has also been revised upward to 7.0 percent for the year. However, the outlook is not uniformly positive across all regions. Growth projections have been revised downward for Latin America and the Caribbean, with Brazil affected by flooding and Mexico experiencing moderation in demand. The Middle East and Central Asia face challenges from oil production cuts and regional conflicts, while sub-Saharan Africa’s growth forecast has been revised downward, mainly due to weaker-than-expected activity in Nigeria. Overall, emerging markets and developing economies are expected to grow by 4.3 percent in both 2024 and 2025, showing resilience despite varied regional challenges and global economic uncertainties.

The global inflation is on a downward trajectory but faces challenges in its path to normalization. The global consumer price inflation decreased from 6.7 percent in 2023 to a projected 5.9 percent in 2024, with a further decline to 4.4 percent expected in 2025. However, the pace of disinflation is slowing, particularly in advanced economies, due to persistent inflation in services prices and higher commodity prices. The report highlights differing sectoral dynamics, with stronger disinflation in goods prices partially offsetting sticky services inflation. Emerging markets and developing economies are experiencing a slower decline in inflation compared to advanced economies

The global outlook presents a balanced view of global economic risks, with some near-term concerns gaining prominence. On the upside, faster implementation of macrostructural reforms and policies promoting multilateralism could boost productivity, growth, and generate positive global spillovers. However, several downside risks loom larger. These include persistent inflation, particularly in the services sector, and potential price pressures from renewed trade or geopolitical tensions. The prospect of higher-for-longer interest rates could increase external, fiscal, and financial vulnerabilities. Economic policy uncertainty due to elections and the potential for increased protectionism pose additional challenges. Prolonged dollar appreciation might disrupt capital flows and complicate monetary policy easing in some economies. The report emphasizes that while overall risks remain balanced, policymakers must carefully navigate these challenges to maintain growth momentum and ensure a return to price stability.

Regional Economic Outlook (REO)

The Pacific Island Countries (PICs) are experiencing a robust recovery fueled by the reopening of borders. Tourism arrivals and remittances are rebounding significantly. Notably, Fiji, a leader in reopening, achieved pre-pandemic tourist levels in 2023, providing a positive signal for the region’s tourism sector.

The July 2024 WEO update by the IMF largely maintains the growth projections outlined in the April 2024 WEO. The region is anticipated to grow at 4.0 percent in 2024 (excluding Australia and New Zealand), reflecting an upward revision from 3.3 percent the prior year. This growth is expected to moderate to 3.5 percent in 2025, followed by an average of 2.1 percent over the medium term. Vanuatu’s growth trajectory is projected to be slower but steady, with forecasts of 3.0 percent and 3.5 percent in 2024 and 2025, respectively.

Papua New Guinea’s initial growth projections have been revised downward due to the recent civil unrest. However, the IMF completed its second program review and expects positive growth of 4.5 percent for 2024. This outlook is supported by the resumption of major mining operations, particularly the Porgera gold mine, and favorable commodity prices. The government has also undertaken ambitious fiscal consolidation efforts to strengthen debt sustainability

Inflationary pressures are easing in the region, reflecting both domestic and global central bank efforts at monetary policy t ightening. Growth projections for Australia and New Zealand remain unchanged for 2024 at 1.5 percent and 1.0 percent, respectively, with stable medium-term prospects. However, the region remains exposed to external shocks. Ongoing Russia-Ukraine conflict tensions could disrupt supply chains, hamper international trade, and potentially cause renewed inflationary pressures. The ever-present challenge of climate change and natural disasters necessitates continued multilateral cooperation to support affected countries

Vanuatu Economic Outlook (VEO) Overview

Vanuatu started 2024 on a cautiously optimistic note, with the economy having weathered the impacts of twin cyclones Judy and Kevin at the beginning of 2023 and TC Lola in October, and activity in key sectors such as tourism slowly recovering from the Covid-19 pandemic. The effects of the global inflationary shocks following the end of the pandemic and the war in Europe are also fading, with inflation falling in the first quarter of 2024, reaching 5.3 percent, down from its recent peak of 14.4 percent in quarter 2 of 2023. In the country, the RBV aims to control excess liquidity and keep inflation within its target range of 0-4 percent; thus, has gradually tightened its monetary policy stance.

The voluntary liquidation of Air Vanuatu in May 2024 has significantly clouded the outlook for the economy. It is likely that in the short run, output in the tourism and transport sectors will be directly and significantly affected, due to the sharp decline in the number of visitor arrivals. Other sectors, including retail, wholesale, finance, telecommunications, manufacturing, electricity production, and beef production will be hurt indirectly through a reduction in aggregate demand.

Overall, GDP growth for 2024 has been revised downwards to 2.8 percent, from the 3.3 percent forecasted in the first quarter. The main driver of this downgrade is the services sector, which has been downgraded from 4.6 percent growth in the first quarter to 3.3 percent. The agriculture and industry sectors have also both been downgraded, from 2.7 percent to 2.5 percent, and 6.8 percent to 5.7 percent respectively. The downward revision in the agriculture sector was further exacerbated by the absence of farmers who have traveled out temporarily for seasonal work programs. Expectations are that the capital project may not be implemented fully in 2024 as planned therefore forecasted to spread over three years will be responsible for supporting growth over the medium within the industry sector, as well as having positive spillover to the agriculture and service sector

On the downside, long-term reputation damage to Vanuatu as a tourist destination might affect tourist preference to come to Vanuatu as a result of air Vanuatu grounding and unexpected changes in domestic routes. Delays to implement capital investments could also lead to slower growth in the industry sector, while the risk of the Coconut Rhinoceros Beetle spreading to Malampa, Penama, and Torba provinces will impact copra production over the medium term. These risks come on top of the persistent risks faced by the Vanuatu economy, arising from lower-than-budgeted revenue collections, tropical cyclones, labour shortages, land disputes and issues surrounding the corresponding banking relationships.

Agriculture, Fisheries, and Forestry Sector

While experiencing consistent growth in the sector, the agriculture, fisheries, and forestry sector remain pivotal in the economic landscape amid challenges in the labour market and production. The projected growth rate for this sector in 2024 and 2025 is 2.5 percent, rising to 3.3 percent on average from 2025– 29. With this sectoral growth, there are mixed developments in crop production, weaker than expected demand for animal production while there is stable developments in the forestry and fisheries subsectors that have contributed significantly to its developments.

The crop production remains a vital subsector projected to grow by 2.5 percent in 2024. Quarterly Statistical Indicators (QSI) of quarter 4 2023 produced by Vanuatu Bureau of Statistics shows that cocoa, kava, and coffee prices have increased significantly and remain steady in the first half of 2024 which would boost production of these commodities. The government continues to subsidise copra prices to sustain production mainly in rural areas. Challenges are still faced with commodity price movements, severe weather patterns, skilled and unskilled labour force temporarily leaving for seasonal work programs and Coconut Rhinoceros Beetle (CRB) presents in Santo likelihood of spreading to other northern provinces over the medium term.

Animal production is projected at 1.7 percent growth in 2024 and 2.0 percent in 2025. Developments have been hindered by supply shocks that affect exports however domestic demand is expected to remain steady in 2024 and 2025. The government maintains its ongoing support through pasture improvement programs, cattle restocking, and production of small ruminants. Downside risks are associated with the expiration of the lease of major plantations, farm maintenance, and a decline in the participation of small-scale holders. Solid domestic demand for t imber production offsets declines in exports in the first half of 2024. Increased demand for timber is driven mainly by returning seasonal workers. Forestry is projected to grow by 2.4 percent in 2024 and 3.4 percent in 2025. Similarly, household demand for f ish continues to remain solid with growth forecast at 3.0 percent in 2024 and 2025 respectively. Although retail prices per kg have increased in urban centers, demand still exceeds supply. A major challenge faced is the high cost of production due to the high price of fuel so often fresh fish is unaffordable for low-income earners.

The agriculture, fishing and forestry sectors growth remains sluggish compare to other sectors reflecting risks associated with labour shortage, exposure to natural disasters, and CBR spread. It is very important to derive policies that can enhance sustainable agriculture production.

Industry Sector

The Industry sector being the fastest growing sector in the economy is expected to continue to remain solid at 5.7 percent in 2024 and 9.8 percent in 2025. Growth is expected to be driven by the implementation of the 2024 capital project worth more than VT 14 billion, however, delays in implementation have caused a downward revision of growth in 2024 by 1.1 percentage points as previously forecasted in the first quarter of 2024.

Infrastructure projects have continued in both the private and public sectors. Public infrastructure projects have been the major driver of growth over the years in the construction sub-sector where growth is projected at 8.7 percent in 2024 and 13.1 percent in 2025. Ongoing major infrastructure projects driving growth in 2024 and 2025 include Vanuatu Road Rehabilitation Project Phase 2, Pentecost Road Phase 1, and Vanuatu Climate Resilient Transport of which private sector projects also contribute positively to growth estimate. In the private sector, a recent economic assessment in urban areas indicates an increasing number of building permits, signifying heightened activity within the construction subsector. In addition, more than VT 14 billion worth of Vanuatu Government Capital Projects budgeted to be implemented in 2024 has commenced but at a delayed pace. There a lot of factors associated with the delay such as the risk of overheating of the economy that could cause supply shocks, price and wage spiral, and capacity constraints. As such, project implementation is expected to spread over 3 years to mitigate such effects as well as address government fiscal management to achieve a successful execution plan. Major challenges include lower-than-expected revenue collection in 2024 that hinders project implementation plans, poor weather conditions, lack of special skills workforce and inflation.

Growth forecasts for manufacturing in 2024 and 2025 were 2.2 percent and 2.5 percent respectively. There is huge potential for the manufacturing industry in Vanuatu to expand supported with ongoing development programs funded by the 11th EDF, Industry Development Fund (IDF), Industry Support Fund (ISF), Micro Small and Medium Enterprise (MSME) projects that target domestic production and exports. Though huge government focus directed to manufacturing in recent years, local industries are still faced with skilled labour shortages, high prices of raw imported materials and labour drain to seasonal work programs. Growth in water and electricity is estimated at 2.0 percent in 2024 and is projected to surge to 9.0 percent in 2025. Lower than previously projected growth in 2024 simply reflects an expected slower demand for utility mainly in the tourism industry following the liquidation of the air Vanuatu on May 2024. There is an increase demand on solar energy for household consumption mainly in rural areas with the trend extending to urban areas lately. The hydropower expansion in Luganville and Brenwei in Malekula aims to reduce tariff charges to consumers. However, respondents from recent surveys reveal consumers from both Lakatoro and Luganville are still faced with high electric costs.

This could require the attention of the regulator or the lag effect of the recent increase in fuel price.

Services Sector

Growth in 2023 is expected to have been relatively strong, at 4.6 percent, driven by faster growth within the accommodation and food services sector. This was driven by stronger-than-expected tourist arrivals data, which showed that total visitor arrivals for 2023 had reached 62.0 percent of 2019 levels. Cruise ship visitor numbers also performed well, while the Melanesian Arts and Cultural Festival (MACFEST) in July 2023 further boosted growth.

The outlook for the services sector has significantly worsened since the beginning of the year due to repeated delays and cancellations by Air Vanuatu and its eventual liquidation hampering the recovery of the tourism sector, with resorts reporting reduced turnover and squeezed margins. The final liquidation of Air Vanuatu in May 2024 pushed the services sector to a critical condition – while the main impacted sector is in the tourism-related services, mostly felt through the accommodation and food services sector. The repercussions of the liquidation will be felt elsewhere including wholesale, and information and communication.

Growth for 2024 in the services sector has been revised down to 3.3 percent, down from the 4.6 percent forecast in Q1. The main driver is accommodation and food services, where growth has been revised down to just 1.4 percent for 2024, with the remaining growth driven exclusively by domestic demand such as nakamals, while tourist-driven subsectors see flat growth. This modest growth contrasts with the 20.4 percent forecast in Q1. Within the accommodation and food sector, it is likely that the outer islands, especially Santo and Tanna will be the hardest hit since they have lost all air connectivity, while Port Vila is still accessible by other airlines.

Other sectors have also seen a downward revision from the first quarter due to the liquidation of Air Vanuatu, notably air transport (to -5.0 percent, from 5.0 percent), retail (to 3.0 percent from 4.2 percent), wholesale (to 1.5 percent from 2.0 percent) and telecommunication (to 2.8 percent, from 5.0 percent). These revisions mostly reflect the negative spillovers arising from the loss of tourism. Partially offsetting these falls, growth in the land and sea transport sector has been revised upwards to 6.5 percent, from 6.0 percent, due to an increase in shipping activities amidst a lack of domestic air connectivity.

While the loss of Air Vanuatu is undoubtedly negative for the services sector, it should be noted that there have been several more recent positive developments, such as the increase in the frequency of Virgin Australia flights to and from Brisbane and Fiji Airways flights to Nadi; as well as the quick resumption of Solomon’s flights to Auckland and on the Brisbane-Santo route. Further, both Qantas and Jetstar have announced new routes to Brisbane and Sydney respectively, which should more than make up for the loss of Air Vanuatu’s international capacity. This means that pending the resumption of domestic connectivity, there is potential for a strong end to the year following a troubled beginning. However, this will rely on the ability of the sector to bounce back, and initiatives to attract visitors will be crucial.

Elsewhere, growth within the finance and insurance sector is expected at a respectable 3.0 percent, reflecting moderate domestic activity as well as the continued flow of remittances, although growth is slower than in 2023 as a result of the winding down of Covid-19 support schemes, as well as a slight downgrade due to the liquidation of Air Vanuatu affecting business customers. This could lead to higher insurance premiums and a decrease in investment in the finance sector. The real estate sector is expected to post strong growth of 7.2 percent, due to strong demand for residential and commercial sales and rentals in urban areas, combined with new subdivisions. Public administration, the second largest subsector, is expected to grow at 1.8 percent as government and donor programs continue.

Looking ahead, overall growth in the services sector is expected to pick up slightly to 3.6 percent in 2025, again downgraded compared to MEC 1. However, beneath these figures, a divergent picture emerges. Growth in the accommodation and food services sector has been revised up, as the sector is expected to bounce back following the resumption of flights, growing at 21.3 percent up from the 19.0 percent forecast in quarter 1. It should be noted however that in levels terms, output in the sector remains 14 percent lower in 2025 than that which was forecast in quarter 1. This indicates that there will be some medium-term impact on the sector even after flights have resumed.

Offsetting this faster growth in accommodation and food services in 2025 is slower growth in the air transport sector, which is expected to grow at just 0.5 percent, and indeed not recover to its 2023 level until 2029. This is because even though international f lights are expected to resume, they will be operated solely by foreign airlines, thus most of the activity will not be included in Vanuatu’s GDP unlike before.

Over the medium term, growth in the services sector is expected to average 3.2 percent over 2026-2029. The key drivers are expected to be positive spill-over from the Capital Budget in sectors such as wholesale and professional services; the continued flow of remittances; and the eventual full recovery of the tourism sector.

The main risk to this outlook in the near term is that the impacts of Air Vanuatu’s liquidation are more long-lasting. For example, anecdotal evidence suggests that some resorts in Santo laid off staff following the cancellation of flights, thus it may take longer for such businesses to recover. Over the latter years of the forecast period, the main risk is that the Capital Budget is delayed or scaled back. This would result in fewer positive spillovers to the aforementioned sectors. Meanwhile, the persistent challenges faced by the services sector remain – including labour shortages, lack of skilled labour, and the high cost of doing business.

Monetary Update

The Reserve Bank of Vanuatu (RBV) gradually tightened monetary policy in late 2023 and early 2024. Although the policy rate was kept at 2.25 percent. In October 2023, the RBV doubled the volume of RBV notes to VT200 million per month. In January 2024, the commercial banks statutory reserves deposit ratio (SRD) was increased to 5.50 percent from 5.25 percent. Furthermore, the exchange rate regime has continued to help cushion the passthrough of import prices to domestic inflation. The RBV is likely to pursue further monetary policy tightening in coming months to address the ongoing excess liquidity in the system.

In terms of monetary policy targets, inflation is projected to fall within the RBVs inflation target of 0-4 percent during the June quarter 2024 and remain within target until the December quarter of 2024. Deceleration in inflation largely reflected the easing in international commodity prices, including food and energy prices, slowdown in inflation of Vanuatu’s major trading partners, consistent supply of domestic food and further t ightening of the RBV’s monetary policy stance. Similarly, official foreign reserves have remained adequate above the minimum threshold of 4.0 months of import for the first half of the year. At the end of June 2024 official reserves were sufficient to finance 6.7 months of imports. High import financing, government external debt payments and slowdown in inflows from donor funds and government revenue from abroad pose significant concerns to the current level of foreign reserves. Official reserves were projected to cover 6.7 months of imports at the end of 2024.

Monetary conditions remain supportive to growth, as money supply (M2) rose by 3.3 percent over the year to May 2024. M2 growth is projected at 3.2 percent over the year to June 2024 and 4.3 percent for the year to the end 2024. Money growth was attributed to domestic credit, in particularly the increase in net claims on the government and the rebound in private sector credit (PSC) from COVID levels. The upward trend in net claims on the central government with the banking system, reflected the significant rise in domestic borrowing combined with the reduction in government deposits held with both the commercial banks and the Reserve Bank. Domestic credit is projected to drive money growth until the end of the year, given the expectations that government will continue to borrow domestically as the need to source additional financing becomes more evident due to continuous fiscal challenges. Growth in net foreign assets (NFA) was relatively weak in the first half of 2024 and is forecasted to slow until the end of the year. This downward movement reflected net outflows of foreign currencies via both the Reserve Bank and Commercial banks. Overall, the subdued growth in NFA continues to reflect tighter international financial conditions, higher import costs, increased government external payments, and slowdown in Government inflows from abroad, in terms of revenue and donor financing.

In terms of money components, M2 growth was attributed to both narrow money (M1) and quasi-money. The upward trend in M1 implies that money flow into the economy to support economic activities has risen during the first half of the year relative to the same period in 2023. Growth in currency in circulation was more pronounced thus remain the main driver of M1. High level of currency in circulation continues to reflect high personal consumption associated with the rebound in private sector credit, government spending, persistent inflows of remittances to individual and households from seasonal workers abroad and regular income from formal and informal employment. At the same time, residents have accumulated their interest-bearing deposits during the first half of 2024, relative to a year ago. This attributed to rise in quasi-money. Growth in M1 is projected to remain steady and will drive money growth until the end of the year.

In terms of financial stability, commercial banks in Vanuatu continue to be profitable, maintain high level of liquidity and having adequate capital during the first half of 2024. High level of non-performing loans (NPLs) and corresponding banking relationship are significant concerns. Efforts to address high NPLs are on-going with some key components being outside the commercial banks control such as on-going delay in registration of mortgages as well as court foreclose processes. Though majority of the banking sector loan book are performing loans. Commercial banks continue to maintain adequate levels of provisioning against any expected losses. Overall, financial stability is projected to be maintain in the short to medium term.

Inflation

Vanuatu’s year on year headline inflation rate increased by 5.3 percent in the March quarter 2024, compared to 7.0 percent recorded over the December quarter 2023, and lower compared to 11.6 percent recorded over the same quarter of 2023. Prices have eased reflecting high peaks recorded in 2023, the lagged effects of reduction in international commodity prices, adequate domestic food supplies and compulsory use of scale in local markets amidst minimal domestic supply shocks. The underlying inflation rate rose by 3.2 percent over the March quarter relative to 8.4 percent over the December quarter 2023, reflecting eases in domestic prices of goods and services; excluding food and energy prices. Though the underlying inflation rate rose over the quarter, it has nearly reached its normal trend of 2 percent recorded over the pre-pandemic period (2018-2019).

The main categories contributing to the year-on-year inflation were food, drinks and tobacco, clothing and footwear, and household supplies. Accordingly, increases were driven by a notable increase in prices of fruits and vegetables, dairy and related products, meat and seafood, beer, spirits and tobacco, clothing and home appliances. These all portray the spending patterns of the growing population on goods items in contrary to services which recorded reductions; in particular housing utilities, communication and transport related prices. Over the second quarter period, prices are estimated to remain low compared to previous year’s level with temporary spillover effects of surge in air fare prices which are estimated to have impact on overall transport prices over the reviewed period.

In terms of outlook, the year-ended headline inflation is projected to reach the RBV internal target of 0-4 per cent in mid-2024 and remain in target throughout the rest of 2024; due to both international and domestic factors. International factors that are expected to slow down prices includes, fall in global demand that is expected to weigh on overall prices. In addition, Vanuatu’s main trading partners’ headline inflation is forecasted to further drop this year relative to the previous year. Referring to domestic factors, adequate food supplies and lower overall demand in particularly relating to the tourism sector, expected over the rest of the year will drive down overall prices. In addition, domestic fuel prices have been observed to have been falling over the f irst half of the year and expected to remain volatile in line with international crude oil prices. Upside risks on overall outlook remains, including; the intensification of the middle-east war and OPEC oil production cuts, climatic conditions such as the dry season from May to October and any potential cyclones developing towards the end of year. The RBV remains committed to further tighten its policy tools to control level of liquidity and overall inflation.

Balance of payments

Vanuatu’s current account balance (CAB) is estimated to have improved by 78 percent in 2023 relative to 2022. Main developments included improved services receipts in particular tourism receipts and inward receipts from labor employed abroad; in particular the labor mobility program. Imports of goods further worsened reflecting pick up in domestic activities and increased prices abroad. The current account balance is estimated to ease slightly over the first six months of 2024 due to expected reductions in primary income balance and trade in goods balance which is expected to offset reductions in services balance and secondary income balances. Vanuatu’s official foreign reserves registered a slower growth over the first half of 2024 compared to the same period of 2023. This largely reflected increased demand for private import financing, public external debt financing and moderate increase in income from investments placed offshore. Similarly, grants from abroad continues to grow on a moderate pace, for recovery and development purposes. Overall, official reserves are sufficient to cover for approximately 6.7 months of import cover at the end of June 2024.

In terms of outlook, overall current account balance is expected to worsen in 2024 compared to 2023, underpinned mainly by high import payments with moderate increases in remittances and tourism receipts from abroad. Official reserves are expected to remain within RBV’s target of 4 months of import cover at the end of 2024, as the Bank continues to monitor both domestic and international developments.

Movements of the Vatu vis-à-vis the major foreign trading currencies reflect developments in the economic and financial conditions of Vanuatu’s major trading partners. Over the period of January to June 2024, the Vatu appreciated against the AUD and NZD by 0.8 percent and 0.9 percent, while it depreciated against the USD and EURO by 1.2 percent and 0.8 percent in nominal terms, respectively. The RBV continues to pursue a stable nominal effective exchange rate in support of the current adequate levels of foreign reserves in the Banking system

D. Budget Management

The Government will continue to raise additional revenue in 2025 through effective tax administration compliance and enforcement of both new and existing taxes to meets its expenditure programs and activities and at the same time manage its debt. On this note, the Government will continue to ensure that a balance budget is presented and approved by Parliament this year for implementation next year. However, on occasions where the Government continues to face tight cash flow position next year then the Government will continue to implement both revenue and expenditure control measures next year.

In addition, the Government continues to acknowledge its development partners and is looking forward to their financial assistance as well next year to meet Government budget policy priority outcomes.

E. Government Debt and Borrowing

Due to the significant decrease in revenue from the citizenship program and increasing pressure on expenditures, there is an urgent need to proactively manage the primary fiscal balance. To effectively tackle these challenges, it is essential to strengthen our Medium-Term Debt Management Strategy.

The current total debt is VT 60.0 billion, which is 45.0 percent of the GDP. Out of this, VT 41.0 billion is external debt, accounting for 31.0 percent of the GDP, while VT 16.6 billion is domestic debt, representing 12.6 percent of the GDP. In addition, the government guarantees stock stood at VT 2.0 billion. It is crucial to carefully manage public debt to ensure long-term fiscal sustainability.

The government’s strategy regarding borrowing from external creditors is twofold. Firstly, it will continue borrowing with a 35.0 percent grant element, ensuring that a substantial portion of funds comes in the form of grants or highly concessional f inancing to minimize the financial burden on future generations. Secondly, the government will only borrow for capital projects that promise long-term benefits and economic growth, focusing on productive investments that generate returns and bolster infrastructure. To finance next year’s budget through domestic bonds, the government plans to roll over all maturing bonds and limit new bond issuance to VT 2.0 billion, maintaining f iscal responsibility. To strengthen public debt management, a specialized Debt Management Committee will oversee all aspects of borrowing, repayment, and risk management. Additionally, the government will develop a comprehensive Public Debt Management Regulation to ensure clear guidelines, transparency, and accountability in managing the country’s debt.

The MTDS 2023-2026 establishes debt management targets based on Vanuatu’s current debt portfolio and management objectives. The government will prioritize domestic financing, long-term maturity of securities, and prepayment of loans with less than 35.0 percent grant element. Efforts will also focus on developing the domestic debt market to enhance depth, liquidity, and efficiency while expanding the investor base to reduce dependency on a few investors. These targets aim to minimize costs and risks, providing measurable guidelines for monitoring.

Vanuatu’s Debt to DGP in Net Present Value

Vanuatu has been the only country regionally with a moderate debt distress rating for a while now when compared to other countries regionally. Still recovering from all three cyclones last year and compounding with Air Vanuatu’s liquidation, the moderate rate of debt distress rating may again be factored by the IMF to increase to a high debt distress rating. The rating can be short-lived pending how quickly the Country can recover and in the event that Air Vanuatu’s liquidation saga ends well this year with a better scenario than the one where the Government is expected to assume all Air Vanuatu outstanding. Vanuatu continues its debt service payments for both domestic and external creditors. It is one of the very few countries in the world that has a program of debt prepayments every year to manage its debt stock (both domestic and external) and this year will see a break from this as it manages more urgent demands.

If the IMF increases Vanuatu’s debt distress rating, the country will halt all borrowing and rely solely on grants for project financing. The World Bank’s International Development Assistance and the Asian Development Bank’s Country Program will convert their 50/50 grant-credit arrangements into full 100.0 percent grants, each worth about USD 74.0 million. These funding packages, renewed every five years, will undergo consultations on priority areas later this year or early next year. Currently, Vanuatu also uses debt financing for infrastructure projects with positive economic returns, although greater scrutiny is being applied to new projects. The government is committed to prudent monitoring of debt costs and risks to ensure medium to long term debt sustainability.

Furthermore, Figure 3 illustrates the present value (PV) of the total external debt baseline (blue) to remain for the near term below the 40 percent threshold (green dotted line), but the space at which to borrow is now greatly affected by the rise in the baseline in the current trajectory to intersect the threshold in the year 2027. The light green line indicates the alternative effect to the baseline (blue) if Vanuatu was to lose completely the Economic Citizenship Program (ECP). Last year’s publications of the UK visa-free suspension with increased scrutiny of our Citizenship program abroad have affected the number of new citizenship applications. The granularity in the risk rating indicates limited space to absorb shocks, which underscores the importance of creating fiscal space to accommodate future unprecedented occurrences.

Again, despite the moderate ranking in debt distress, Vanuatu will need to continue to dialogue with all its development and multilateral partners as it seeks to path new revenue alternatives both domestically and internationally. Vanuatu continues to be ranked first as the country in the world which is the most vulnerable country to natural disasters. As such, Vanuatu must not only invest in public resilient infrastructure projects but must also be bold in seeking new revenue and financing options including from the domestic market.

F. Revenue and Taxes

If there is one crucial area that requires greater attention from the government, it will be the need to expand its domestic revenue base to meet the ever-increasing public expenditure demand, as the current government continues to uphold this as one of its major priorities reflected within the revised NSDP plans for the next 6 years 2025 – 2030.

During the first six months of this financial year 2024, we have witnessed a mixed performance in the collection of revenue from all government current revenue initiatives. Some major revenue policy initiatives such as VAT, those from the Fisheries Sector, Department of Health, Ministry of Youth Development and Training, and Ministry of Internal Affairs have been on track as far as collections against budget forecasts are concerned.

Value Added Tax (VAT), Excise Tax and other revenue-collecting items have performed well in the past 6 months compared to previous years. While there are high expectations in VAT collections for the financial year 2024, the Ministry of Finance and Economic Management is reminded to ensure compliance efforts are strengthened and supported to ensure the results are achieved, without which the government will likely fall short of its recurrent revenue target for this financial year 2024.

On the other hand, a few other main revenue initiatives have performed below expectation such as those within the International trade and transaction, Ports and Harbour, and Department of Lands. One of the key revenue initiatives that has fared less than anticipated is revenue collection from the citizenship program, which has recently received attention due to its continued declining trend in collections. It is becoming clear that the citizenship program’s revenue collections will not be the same as they were in the past years. Revenue from the Citizenship Program has continued to decline in both the 2023 and 2024 f inancial years. Authorities are currently reviewing the policies that govern these initiatives and recommending adjustments that will help the program survive in the future.

Ongoing Revenue Policy Reforms

The Minister responsible for Finance and Economic Management has now confirmed appointments for its Revenue Governance Committee and a Revenue Technical Committee to assist the government in its effort to expand its domestic revenue base by working with the respective revenue-raising government ministries to identify potential revenue initiatives that can be implemented to boost its revenue base. Ministries are also encouraged to establish their own Revenue Governance Committees to ensure ownership and successful implementation of new revenue initiatives.

Vanuatu Commitments with OECD Global Forum and EU Code of Conduct

Vanuatu continues its efforts to meet international standards of good tax practices. This includes the ones set by the OECD’s Global Forum on Transparency and Exchange of Information for Tax purposes (Global Forum) and the European Union’s Code of Conduct Group (EU CoCG). Vanuatu is making ongoing progress in its obligations with the OECD Global Forum which eventually resulted in our approval to undergo an onsite review in Q2 or Q3 of financial year 2025. Officers from the Tax Policy Unit, along with the Vanuatu Competent Authority (VCA) are currently working on ensuring all requirements are in place before the review is launched.

Vanuatu is on the EU List of Non-Cooperative Jurisdictions for Tax Purposes due to its facilitation of offshore structures and arrangements that generate profits without real economic substance. Vanuatu has introduced two bills that are pending parliamentary approval. These are:

Bill for the Resident Entity (Economic Substance) Act and Bill for the Resident Entity (Consequential Amendments) Act.

These Bills will require resident entities with a high risk of international tax evasion to demonstrate economic substance in Vanuatu. Before Vanuatu may be removed from the EU Black Lists, these bills must be approved by Parliament and published in the Gazette before Vanuatu responds to EU to provide their review on the requirement. The next meeting of the EU Council to update the list of non-compliant jurisdictions is in October 2024, this implies that if the Economic Substance Bills are passed before then, Vanuatu should be removed from the list of non cooperative countries during this meeting.

Outstanding Revenue

The concerns surrounding unresolved revenue payments within line ministries and agencies will remain until all outstanding payments are cleared. Adequate policies must be put in place to control the accumulation of unpaid tax dues. Current outstanding non-tax revenue stands at VT 1.7 billion. Outstanding VAT revenue is likely to be more than VT 4.0 billion despite new regulations in the Tax Administration Act concerning late payments and related penalties.

The main reasons for the Government not yet fully addressing its outstanding revenue include:

A lot of the current outstanding debts have exceeded their status of limitation validity;
Accumulation of penalties and lack of stringent compliance efforts from both the Departments as well as taxpayers have contributed to the ongoing accumulation of outstanding payments; and
Companies have closed down or liquidated and company owners may have already left the country or died with taxes owed still being recorded as outstanding.

The National Write-off Committee is now inactive, but the Ministry intends to revive it so that it may continue working with other authorities to handle the backlog of outstanding revenue. This can ensure an in-depth assessment of the outstanding revenue balances that will better inform decisions to write-off as necessary so that outstanding balances represent a true and fair view of the government’s receivables.

The implementation of all approved Government expenditure programs and activities for the budget year depends on revenue collection. The Government will continue to boost its revenue collection by strengthening the administration, compliance, and enforcement of existing tax laws as well as newly-introduced fees and charges to boost revenue collection efforts

G. Expenditure Programme and Policies

The 2025 Budget Appropriation will be finance by both existing and any new revenue-generating mechanisms along with Government bonds as well as receipts from major development partners. In 2025, the allocation of the Government’s and donor f inancial resource will be in line with the four Governments budget policy priorities in this budget policy statement. Therefore, the Government will continue to adopt sound financial management and fiscal discipline to ensure that there is sufficient cash to implement the Government’s expenditure program and polices as well as achieve its expenditure priority outcomes in 2025.

4. New Policy Proposals (NPPs)

The allocation of the 2025 fiscal space towards NPPs will fall in line with the four budget policy priority outcomes identified in 3.A.The NPPs will be considered only if they have been approved by the head of the agency and submitted in the Government financial management systems with supporting documents.

In addition, NPPs must be:

able to be accommodated within the overall aggregate f iscal envelope;
accompanied by well-researched and detailed proposals to reinforce the Government’s key policies, programs, and activities;
within the capacity of the Ministry to implement over the suggested time frame;
able to expand and develop the economic capacity and growth rate of the country;
financially sustainable (if the activity is to become ongoing activity) and
within the capacity to generate greater revenue potentials to the Government

5. Economic and Fiscal Targets for 2025

The following economic, financial and fiscal policies, objectives, and target are crucial for financial resource allocation and at the same time for achieving a balanced budget in 2025.

6. Conclusion

This Budget Policy statement is finalised and presented in line with section 9, 10 and 22 of the Public Finance and Economic Management Act [CAP 244] and it will be used as a basic guiding principle to allocate and finalised 2025 budget appropriation that will be appropriated in Parliament before the end of this f inancial year. On this note, the 2025 budget appropriation will be financed by both the Government and its development partners to meet the Government’s expenditure programs, policy objectives and targets that were outlined in this budget policy statement as well as the National Sustainable Development Plan (NSDP) – the Peoples’ Plan 2030 to enhanced economic growth, service delivery and wellbeing for all the people in Vanuatu.

Budget Policy Statement 2025

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