Vanuatu’s 2026 Rebound: A Fiscal Windfall in Search of a Real Economy

January 19, 2026 10:13 pm | Posted in Business News | Share now TwitterFacebook

After one of the slowest post- COVID recoveries in the Pacific, Vanuatu is forecast to grow 3.9 % in 2026—its fastest pace since 2017 and almost double the 2.2 % IMF estimate for 2025. The acceleration, however, is built on an unusual foundation: a record-breaking fiscal surplus, a citizenship-for-investment scheme that is suddenly the country’s second-largest export, and a rebounding tourism industry. Whether our archipelago of 320,000 people can convert this windfall into durable, private-sector-led expansion is now the central question for investors, donors and the government itself.

The Fiscal Surplus

When Treasury published its September monthly report last month, jaws dropped in regional finance ministries. In the first nine months of 2025 the central government recorded a net operating surplus of VT 9.97 billion—6.8 % of GDP—compared with a deficit of 4.2 % in the original budget. Include donor flows and the surplus widens to VT 12.3 billion, the largest nine-month surplus in relative terms, ever posted by a Pacific island country.

Three forces explain the turnaround. First, expenditure has been chronically behind schedule. The wage bill—usually the most predictable line item—was 30 % below its cash-flow forecast because vacant posts in health, education and customs have not been filled. Second, capital projects are even further adrift: only VT 2.7 billion of the VT 8.9 billion development budget had been spent by September, a 30 % execution rate that implies either a massive fourth-quarter rush or a large roll-over into 2026. Third, and most dramatically, the Vanuatu Development Support Programme (VDSP) and its sister Vanuatu Contribution Programme (VCP) generated VT 11.7 billion in the nine-month period—154 % of the full-year target and 80 % more than the same period in 2024. Passport sales are now the single largest line in the “other revenue” column, ahead of excise tax and just behind VAT.

Tax base: steady but narrow

Strip away the citizenship windfall and the domestic tax base is growing, but only just. VAT receipts rose 6 % year-on-year to VT 11.7 billion, a respectable outcome in a country where the consumer recovery is only half-complete in the aftermath of the December earthquake. Import-duty collections also edged up 6 %, helped by a 12 % jump in CIF values of machinery and construction materials, probably driven by the building and renovation boom post-Earthquake. Yet both taxes are still below their 2019 peaks in real terms, confirming that private consumption and formal-sector import demand remain soft outside Port Vila and Santo.

Excise on tobacco and alcohol has actually fallen 1.6 % in real terms, a sign that households are substituting into informal, unbranded products. The narrowness of the tax base makes the budget hostage to two volatile items: passport fees and import volumes. Commentators have said, “We are now more dependent on citizenship revenue than on tourism,”

Tourism: Rebounds

Vanuatu was one of the last countries in the world to reopen its border (July 2022) and the delay shows. International holiday arrivals are expected to reach 116,000 in 2026—still 4 % below the level recorded when borders were technically shut in 2020. The cruise segment has rebounded—about 230,000 day-trippers will step ashore this season—but their average on-shore spend is USD 90, one-third of a stay-over visitor.

Air Vanuatu’s liquidation in 2024, has opened up the skies leaving other international operators like Qantas, Virgin and Solomon Airlines to fill the vacuum created.

Across all major benchmarks, 2025 visitor numbers arriving by air are tracking well above 2024, with the rebound driven by post-earthquake recovery marketing, extra airline capacity and strong Australian demand. Single-month July arrivals more than doubled versus the same month in 2024 (+130 %), setting an all-time July record. By August 2025 Vanuatu had already welcomed more Australian visitors than in the whole of 2024—an improvement of roughly+27 % in just eight months.

In 2019 (pre-COVID), total annual international visitor arrivals were about 120,628 with July 2019 air arrivals around 10,192. This marked one of the strongest years for Vanuatu tourism before the disruptions caused by the pandemic and other crises. As a comparison, in 2025, July air arrivals reached approximately 13,362, which represents an improvement over pre-COVID years but annual totals are still working toward the 2019 annual peak.

In summary, 2025 tourism in Vanuatu is recovering strongly, with monthly arrivals now comparable or slightly surpassing some pre-COVID monthly levels, especially air arrivals in July. However, the overall annual total for 2025 is still catching up and has not fully reached the peak visitor numbers seen in 2019 before the pandemic.

Is the economy overheating?

With a fiscal surplus equal to 4 % of GDP and passport money flowing in to the Government coffers, could Vanuatu be experiencing some demand-side overheating? The short answer is no—at least not yet. The IMF estimates potential GDP output at 154 billion vatu in 2026; even if the government hits its 3.9 % growth target, GDP will still be 2–3 % below that ceiling. More importantly, none of the classic pressure gauges are flashing red:

Labour:urban unemployment is officially 12 % but private surveys put under-employment closer to 25 %. The public-sector wage bill is underspent because posts are vacant, not because wages have exploded.

Credit:private-sector loan growth is 1.8 % year-on-year, half the rate of nominal GDP. The Reserve Bank’s policy rate has been 3 % since November 2023, and banks are still more eager to buy government securities than to lend. Banks are currently flush with vatu liquidity.

Prices:headline inflation eased to 3.3 % in the September quarter, while the core index (excluding volatile food and fuel) is below 2 %. Electricity output is 8 % below its 2019 peak, cement imports are only 60 % of pre-COVID volumes, and there is no hint of capacity bottlenecks at the ports or on the roads.

Asset market:Commercial rents in Port Vila have risen dramatically in 12 months, but the central bank attributes that to a supply shock rather than to a credit-fuelled boom. Cyclones in 2023-24 and the December 2024 earthquake destroyed a significant number of commercial rental buildings. There have been significant transactions involving sale of prime commercial properties and vacant land in the commercial district.

The 2026 Budget: a VT 64 billion Gamble

Prime Minister Jotham Napat’s government has banked the windfall. The 2026 Budget presented in November lifts total spending to VT 64 billion, 19 % higher than the 2025 original plan and the largest nominal envelope in the country’s history. Roughly VT 20 billion is earmarked for infrastructure: sealing the 140 km East Efate ring road, rebuilding the earthquake-damaged Luganville wharf, and extending Bauerfield airport’s runway to accept A330s. Another VT 4 billion is set aside for a cyclone-resilient school programme and VT 1.2 billion for a small-business loan guarantee scheme that Treasury hopes will lever private credit.

The arithmetic is heroic. The budget assumes 3.9 % real growth, 2 % inflation, and—crucially—VT 15 billion of citizenship revenue, only VT 3 billion less than the windfall just printed in 2025. If applications slow, or if the EU’s 2025 suspension of visa-free access to Schengen finally bites, that plug disappears. On the other hand, if there is a repeat of the 30 % pace of 2025, the surplus will persist and the stimulus will kick in and drive the economy to higher levels.

Private sector: waiting for the multiplier

Businesses are cautiously positioning for the multiplier. ANZ’s latest Pacific Pulse survey shows 42 % of Vanuatu respondents expecting higher revenue in 2026, up from 28 % a year ago. Yet only 17 % plan to expand payroll, the lowest ratio in the Pacific.

“Everyone is waiting to see if the road contracts actually break ground, If they do, transport costs fall and rural kava, copra and cocoa become competitive again. If they don’t, the money stays in Vila and we get another consumption spike followed by a bust.”

Construction firms are already stretched. The Chamber of Commerce estimates a 30 % shortfall in skilled trades and a 50 % gap in project-management capacity. The budget allocates VT300 million for TVET scholarships, but training welders, carpenters and tradesmen takes longer than pouring concrete. In the meantime, Chinese contractors are winning the largest tenders, raising local-content questions and remitting part of the wage bill offshore.

Risks: climate, politics and the passport

Three clouds hang over the outlook. The first is climate: Vanuatu was hit by two Category-4 cyclones and a magnitude-7 earthquake in 2024, causing damage equal to 25 % of GDP. The 2026 Budget includes VT1.5 billion of contingent emergency lines, but another severe season could wipe out the surplus overnight. Second, politics: the country has had four changes of prime minister since 2020. A split in the governing coalition could stall the capital programme and trigger another round of supplementary budgets. Third, external demand for passports: the European Commission’s suspension of Schengen visa-free access for Vanuatu citizen does not appear to have affected demand, but would dent its appeal for Middle-Eastern and African clients who value the mobility clause.

Outlook: a window, not a destiny

Most independent forecasters converge on 3½–4 % growth in 2026, inflation around 3 %, and a narrowing of the current-account deficit to 7 %. The fiscal surplus is expected to shrink but remain positive, pushing public debt below 45 % of GDP and giving Vanuatu rare fiscal space in the Pacific.

The bigger question is whether the windfall is used to diversify the economy or merely to paper over its old vulnerabilities. If the Efate Ring road repairs, the Luganville wharf and the Bauerfield extension are finished on time, rural agriculture and outer-island tourism can expand into a domestic market that is currently unreachable. If they are not, the citizenship money will leak into consumption, the currency will appreciate and Vanuatu will wake up in 2028 with better roads but the same narrow tax base—and no second passport programme to rescue it.

Some commentators are optimistic. “We have never had the luxury of a surplus before. If we cannot convert cash into capital this time, the fault will be ours, not the cyclone’s.”

For a country that has spent most of its independent life juggling shocks, that is a refreshing change of narrative—provided the execution matches the arithmetic.