Half Yearly Economic and Fiscal Update 2022

By Gene Wong.

In July, the Vanuatu Govt published its half-yearly Economic and Fiscal Update. The published report outlines the state of the Economy and how the Vanuatu Government has been managing its fiscal policy. In this article, the VBR will summarize the key points covered in this report

As reported in the IMF’s April 2022 World Economic Outlook, (WEO) while governments continued to invest in vaccination rollouts worldwide, they have been under pressure to deal with the economic repercussions of the pandemic, at the center of which is inflation, that has been driven by supply chain issues, commodity price increases, and the Russie-Ukraine War. Vanuatu as a Pacific
Island Country developing economy has not been immune to the worldwide repercussions of the spillovers.

In March 2022, the country went into lockdown as a result of its first COVID-19 case of community transmission. The immediate effect of this was a shutdown of most business activity for the following 2 months. Despite this, in its second-quarter 2022 meeting, the Macroeconomic Committee (MEC) upgraded its growth forecast for 2022. From the first-quarter estimate of 3.0 percent, the
forecast was revised up to 3.6 percent – reflecting mainly the economy-wide benefits of border re-opening on the 1st of July. Over the medium term (2023 – 2026), average growth is projected at 4.0 percent. This is driven by the recovery in the tourism sector,
large public infrastructure projects, implementation of the second and third phases of the economic stimulus package, the Special COVID-19 Banking Facility, and planned cruise ship tourism resuming in the latter part of 2022.

On the fiscal side, as a result of the lockdown in March and the ramifications of this on VAT revenues, the Government’s total net operating balance including donor financing stood at VT 133.2 million while the net operating balance excluding donor financing was a deficit of VT 1,166 million at the end of June. Government revenue was 13.9 percent lower than the forecast of VT 16,151 million for the first six months of this year due to major revenues such as VAT, Tax on international trade and transactions, excise tax, and honorary citizenship programs falling well short of their budget target at the end of June.

World Economic and Regional Outlook

The IMF WEO projects that the global economy to slow down from an estimated 6.1 percent in 2021 to 3.6 percent in both 2022 and 2023. Worldwide Inflation exacerbated by the Ukraine War, continued supply chain problems, and high commodity prices have been identified to be the main threat to the Global Economy. To address the threat of high inflation, both the Federal Reserve and the European Central Bank have raised interest rates. Inflation is projected to reach 8.7 percent for Emerging Markets and developing Economies.

After two years of recession, growth in the Pacific alone is expected to accelerate to 3.9 percent in 2022 and 5.4 percent in 2023. Many small island states are heavily reliant on tourism and the border re-openings have boosted confidence.

Vanuatu Economic Outlook

The 2020 National Accounts recently released by the Vanuatu National Statistics Office reported that the Vanuatu economy experienced negative growth of -5.0 percent in 2020. The main contributing factors were the dual disasters of Tropical Cyclone (TC) Harold and COVID-19 which saw Vanuatu completely shutting off its borders to international tourists in March of the same year. The services sector experienced were worse affected but this was balanced with growth in the industry sector mainly driven by large government infrastructure projects.

The economy is expected to improve with growth forecast to be 3.6 percent in 2022 and 5 percent in 2023 mainly driven by the industry sector which is expected to grow at 14.6% and 13.6% in 2022/23 respectively. A solid rebound in the services sector is expected following the soft border reopening on July 1st, 2022, and the return of tourists. Projections thus stand at 2.3 percent in 2022 and 3.5 percent in 2023. Over the medium term, the services sector is expected to remain healthy as long as visitors are permitted to enter the country.

The Vanuatu Government continues to provide financial support to the business sector through the implementation of the third economic stimulus, wage subsidies, and small business grants.

Despite healthy economic growth projections, risks surrounding the forecast remain. The much higher freight costs and shipping route changes have affected Vanuatu’s international trade in recent months with an increasing backlog of inventory of products waiting to be imported from the rest of the world resulting in imported inflation in the domestic economy. The higher inflation, projected at 4.2 percent in 2022, is driven mainly by the increase in fuel and food prices and will negatively affect consumers and
industries by narrowing profit margins and potentially delaying new investment plans.

On the positive side despite the pressures on the domestic economy in the first half of 2022, government revenues from abroad and remittances from seasonal workers have contributed to increases in the foreign reserves which stood at VT71.7billion at the end of May, sufficient to cover 14 months of import cover.

Fiscal Update

Total Government revenue collection excluding development financing recorded VT 13,899 million in the first half of this year, representing 40.3 percent of the revised budget target of VT 34,464 million and is 18.6 percent lower than the VT 17,088.9 million that was collected up to June last year. On average, revenue collections were 13.9 percent lower than the budget forecast of VT 16,151 million for the first half of this year. This was due to the COVID-19 pandemic, community transmission lockdown, and border closure.

Government expenses over the first half of this year recorded a total of VT 15,098 million, representing 44.4 percent of the 2022 revised budget target of VT 33,969 million and 9.0 percent more than the VT 13,853 million that was spent in the first six months of last year. The revised Budget Target also included the 2022 normal supplementary and Financial supplementary of VT 2,409 million that will be funded by the Government, and budget support provided by the Development partners. On average, total Government expenses were only 1.5 percent less than budget forecasts in each of the first six months of 2022.

Revenue and Tax Policy

The dual impacts of the COVID-19 pandemic and the RussiaUkraine war have undermined the Government’s ability to raise adequate revenue to meet its public expenditure programs. In comparison to the 2020 and 2021 financial years, the national revenue collections over the first 6 months of 2022 were lower than budgeted for and overall, revenue collections fell below the 50% target for the first 6 months. However, with the re-opening of the borders on the 1st of July 2022, the Government remains optimistic that it will recoup these shortfalls over the remaining half of the financial year.

With tourism activities slowly returning to normalcy, in the second half of 2022, the Vanuatu Government is expecting a slight increase in revenues collected through VAT and other taxes administrated by the DCIR. The increase in remittances through labour mobility schemes in Australia and New Zealand and the increase in the price of fuel should contribute to some positive growth in revenue collections from Excise and Import Duties and also VAT.

On 4 May, the EU suspended the waiver on Vanuatu passport holders for short stay visas to the Schengen countries. This would have had an immediate negative effect on the attractiveness of a Vanuatu passport. The VDSP and VCP packages under the current Vanuatu citizenship program has been a major revenue initiative for the government for the last 5 years. This, however, is unlikely to
be the case for 2022. Revenues from the sale of Vanuatu Citizenship are 16.8% lower that the same period in 2021

Public Debt

Vanuatu continues to service and manage its debt on both the domestic and external fronts. 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). Government debt as of July 2022 is forecasted to reach 44.3 percent of GDP, well under the threshold of 60.0 percent. Vanuatu also continues
to borrow for infrastructure projects to support its productive sector focus, including the recovery of damaged infrastructure like schools and health centers.