Economic update 2020
By Gene Wong.
Vanuatu experienced 2 crises at the beginning of 2020.
In March, due to the threat posed by COVID-19, the Vanuatu Government closed its borders and in doing so, closed down the Tourism Sector. There were great concerns this would have on the economy and the effect this would have on businesses that relied on tourism. The closure of borders resulted in a large departure of Expatriates from the country many of whom have yet to return. In response, the banking sector offered relief packages for businesses that would be affected by the economic downturn. For its part to provide support to the economy, the Government announced a stimulus package.The Economic Stimulus Package was a combination or grants and subsidies, in combination with the waiver of taxes and fees paid by the private sector.
At the beginning of April, Tropical Cyclone Harold, a Category 5 cyclone passed over the northern island of Santo causing massive damage to infrastructure, food gardens and buildings. The losses from this natural disaster was in excess of US$100m. The Vanuatu Government declared a State of Emergency and with the assistance of NGO’s, relief agencies, and Aid Donors, are lief and recovery program was implemented.
During this period, revenues from the sales of passports continued to increase, with the government announcing that by the middle of August VT9.6b had been collected, exceeding budget forecasts for the entire year. This revenue trend has continued from 2019 when revenues from passport sales exceeded VAT. In 2019, prudent fiscal management by the Salwai Government coupled with revenues from passport sales had contributed to a surplus and this has continued in 2020 for the first half of the year, despite the 2 crises.
In July, over a period of 7 declared public holidays, the country celebrated its 40th Year of Independence. A reported budget of VT100m was spent by the government in these celebrations.
It was within this context that the Budget Policy Update 2021 was announced and published in the Daily Post in July. This document outlines the priorities on which the 2021 Budget will be prepared and the allocation of fiscal support in the 7 Priority outcomes that the government has identified. These outcomes and the % allocation official support were as follows.
- Improved Business
Resilience and investment
environment – 20%
- Improved Resilient
Infrastructure – 15%
- Improved Education Quality
and accessibility – 15%
- Improved Quality Healthcare
- – 15%
- Improved Service Delivery –
- Improved resilience
- and Natural Resource
- Management – 15%
- Social Inclusion, security,
- peace and Justice – 10%
The Budget Policy Statemen thas clearly identified where the Government priorities are for 2021 and the future. The two areas in which is appears to be focused on directing fiscal support is to boost the Primary sectors of agriculture, fisheries and forestry,to meet a greater proportion of domestic consumption through import substitution, and embark on massive infrastructure expenditure in the outer islands.In its policy statement, the government has stated that the economic crises from COVID-19 and TC Harold, has highlighted the vulnerabilities faced by relying too heavily on one sector for economic growth, particularly Tourism. Of the 17 target outcomes under the government priorities to enhanced business opportunities, only one of these referred specifically to the Tourism Sector.
global downturn as a result of the COVID-19 crisis with a lot of uncertainty in 2021. In its budget Policy Statement, negative Global growth was projected to be -3.0 percent in 2020 followed by an increase to 5.5 percent in 2021. This has since been revised down to -4.9 percent reflecting acknowledgement that the pandemic is causing a lot more damage to the world economy than originally forecast. The economic outlook for Vanuatu is better with the government projecting growth of 0.6 percent in 2020, revised significantly down from 3.4 percent due to the impact of COVID-19 and TC Harold. However, when broken down in to the different economic sectors, it shows that there are large variations in projected growth.
Table 3: Major Economic Indicators (in percentage change)
It should be noted that there is general consensus from many economists that the above projections are questionable due to the way it has been calculated.
The emergence of new outbreaks of corona virus in New Zealand, Australia and Papua New Guineas has dashed hopes of any travel Bubbles between Vanuatu and it is likely that the closure of borders will remain well into 2021.
VAT collections reflect levels of consumption in the economy. In the half year fiscal update published by MFEM, despite the closure of the Tourism sectors, VAT revenues were marginally less than 2019 for the same period. VT3,859.5m was collected by the end of June. This was only 0.3 percent less than the same period in 2019. This has raised interesting questions about the general resilience of the broad economy. Any VAT revenues from the Tourism sector from the period since the borders were closed would have disappeared. Despite this, the VAT revenues have stayed near 2019 levels and this suggests that other factors have played a significant role in maintaining domestic consumption and how this has contributed to VAT revenues.
A few factors may have provided some degree of a buffer to falls in VAT collections as a result of the closure of the Tourism Sector. The VNPF announced that in response to the crisis, it would allow withdrawals in member funds under hardship loans. The actual amount injected in to the economy was VT2b. However, this amount needs to be confirmed.
At the beginning of May, the Government commenced employment stabilization payments under the ESP to employers in the Tourism and Hospitality industry. There was a change to the eligibility to these grants which was only available to the Tourism and Hospitality sectors. In addition, large infrastructure projects in the outer islands were fast tracked which may have also contributed to higher amounts of spending.
Expenditure by the Government and Relief Agencies in the country as part of the recovery operation after TC Harold, may have also boosted sales from local suppliers of food and relief supplies.
Passport Sales have also generated a large local economy as commission agents are receiving a minimum of U$50,000 per passport sold that is to be
used for due diligence, sub-agent commissions and other costs. VAT of 15% is payable on these costs and may have also contributed to VAT revenues collected.
There is anecdotal evidence that despite the fact that VAT revenues have not fallen dramatically, for the half year, businesses that the VBR have spoken to have advised that in the second quarter of 2020, there has been a large fall in Sales for 2020 as compared to 2019. The drop in Sales have ranged between 20- 30%. In July, as a result of the Independence Celebrations, retailers have reported relatively good sales as the mood in the country was upbeat. The hangover from the party will come in August when pockets had been emptied and the end of the Employment stabilization payments results in large numbers of staff redundancies in the Tourism Sector.
The services sector appears to have been where most of the falls in revenues have happened.
As a result of the destruction caused by TC Harold in the Northern Islands, and the huge rebuilding programs, the Industry Sector, in particular the Building and Construction sub sector, appears to have been able to weather the economic downturn with is sector projecting 40% growth in 2020. In addition the government has fast-tracked major infrastructure projects.
TOURISM’s CONTRIBUTION TO ECONOMY?
In 2019, Vanuatu received 120,628 visitors by air and 135,357 cruise ship arrivals. Approximately 80% of arrivals by air came on holidays and stayed on average 9 days. In a 2017 survey of Tourists, prepared by the New Zealand Tourism Research Institute, the results from the survey stated that on average, $1312 was spent prior to arrival on airfares and accommodation. Of the pre-spend, 62.5% flowed in to the Vanuatu Economy and a further $92 per day was spent in country. Combined, it was estimated that $1,545 was the total spend flowing in to the Vanuatu Economy.
The question that many observers have posed is, what is the value-added percentage that remains in the country and what is taken up by external inputs that flow back out of the country? The value-added inputs cover costs of employment, property related expenditures, local purchases and other inputs. In addition to this, other sectors of the economy, mainly the services sector, relies heavily on the Tourism sector for support. The value added component is what we can refer to as the “profit” element that Vanuatu makes through Tourism. This component varies from country to country depending upon its own costs structures. The actual percentage in Vanuatu has been suggested of being between 20 – 30%. Other countries with strong Tourism sectors have value added component much lower.
If we use the above numbers we can make a rough extrapolation of the value added component that Tourists arriving by Air brings to Vanuatu.
Approximately 120,000 visitors in
2019 X 80% on holidays = 96,000 tourists
96,000 tourist X U$1500 = U$144m (approx.VT17b)
Using a value added component of 30%, this equates to VT5.1b.
The above excludes the contribution from cruise ship arrivals which totaled 135,357 in 2019.
To put things in to perspective, the export of primary produce, a high percentage component of which is value added in Vanuatu, totaled VT5.4b in 2019, a drop from 2018 which was VT6.9b. About half of the primary produce exports comprised of Kava. The Vanuatu Government appears to be well aware of the importance that the Tourism sector is, as a driver of Economic Growth, but is also cognizance of the fact that the Primary Produce Sector is equally important and this is reflected in the messaging that appears to be coming out of the Budget Policy Statement. Without directly saying this, it would appear that the Government has sent a message to the private sector that it has given it 4 months, (the period during which the ESP payments were paid), to restructure their businesses to be more efficient, negotiate with their banks on loans, recapitalize balance sheets, so that they can be survive the current period.
Despite intense lobbying from the private sector, the Government appears to be prepared to accept large job losses in the Tourism Sector, closure of businesses and that it is not willing to continue what it thinks are handouts to one sector of the Economy at the expense of the others. What is definitely needed is an in depth analysis of the contribution to the Vanuatu Economy of the Tourism Sector.
There is general consensus that the Borders will not re-open until 2021. This means that there will be significant pain for businesses that are already struggling to survive in the current crisis. Banks have continued to support clients who have struggled but in April 2021, it will be a year since the COVID-19 crisis started and banks will need to make hard decision on how they will be treating their exposure to the clients. Post April 2021 may see many bank foreclosures, as they decide which clients to refinance and which to let go. When the borders eventually re-open, the situation will also be different with the worldwide economic recession also affecting worldwide Tourism.
Fiscally, the Vanuatu Government will continue to benefit from the boom in passport sales which has provided the additional revenues that have enabled it to provide some economic stimulus to the private sector through the ESP, be able to repay significant amounts of External Loans, whilst at the same time maintaining a balanced Budget.
What is clear is that post COVID-19, will be vastly different to the past and the country needs to decide where its priorities are and how it will allocate resources. A national dialogue with all stakeholders is needed as this will be an important policy decision that the Leaders of the country need to decide on the long term future and direction of Vanuatu.