The Year ahead 2023


Global growth is slowing sharply in the face of elevated inflation, higher interest rates, reduced investment, and disruptions caused by Russia’s invasion of Ukraine, according to the World Bank’s latest Global Economic Prospects report. The developed world will experience a significant slowdown.

The global economy is projected to grow by 1.7% in 2023 and 2.7% in 2024. The sharp downturn in growth is expected to be widespread, with forecasts in 2023 revised down for 95% of advanced economies and nearly 70% of emerging market and developing economies.

Excluding China, growth in emerging market and developing economies is expected to decelerate from 3.8% in 2022 to 2.7% in 2023, reflecting significantly weaker external demand compounded by high inflation, currency depreciation, tighter financing conditions, and other domestic headwinds.


IMF Economic Outlook

On 24 January, the IMF issued a mission concluding statement after the end of a fact finding mission on the state of the Vanuatu economy and the outlook for 2023. Parts of the mission concluding statement are published below in Italics Growth is returning. The gradual economic recovery started in 2022, with estimated real GDP growth at 1.9 percent in 2022 . Growth is expected to strengthen in 2023, reaching 3.4 percent , driven by the return of tourism, higher public infrastructure spending (construction), which slowed down during lockdowns, and the ongoing recovery of trading partners. Inflation remains a concern and is expected to accelerate and remain elevated, potentially above the Reserve Bank of Vanuatu’s (RBV) 4 percent upper end of the inflation target. A current account deficit is forecast for 2023 on the back of higher import prices (including commodities) but will narrow over the medium-term on the return of tourism and strong remittances.

In late March after the first case of community transmission, Vanuatu went through a temporary lockdown. Domestic restrictions were eased in June and in July, the borders were reopened for international travel paving the way for the Tourism sector to re-establish itself. In November Cruise lines returned.

However, the new government faces many challenges. The pandemic and surging commodity prices have reduced macroeconomic policy buffers and aggravated structural vulnerabilities. In 2022, the European Union and Switzerland suspended visa waiver agreements for Vanuatu passport holders, citing weaknesses in due diligence for Economic Citizenship Program (ECP) applicants, and triggered a steep decline in revenue. Air Vanuatu faces operational and financial distress and is posing substantial risks to the economy given its systemically important status.

The Government will be facing budgetary pressures as pressure mounts on a financial bailout of our troubled Airline coupled with steep revenue declines from the sale of passport.

There are substantial downside risks to the outlook. Nearterm risks include:

i) The spread of COVID variants which could lead to new lockdowns;
ii) Weaker tourism and lower remittances due to a potential slowdown among main trading partners;
iii) A greater loss of ECP revenue which could jeopardize medium-term fiscal and debt sustainability, and quickly erode reserve buffers.
iv) Key structural risks include further increases in nonperforming loans (NPLs), which could impact bank profitability and capital, thus affecting credit availability

The departure of many qualified and experienced ni-vanuatu workers to the SWP and RSE programs in New Zealand and Australia have created headwinds for businesses in the Tourism and Hospitality sectors trying to re-establish and have lost many qualified staff to seasonal work. The problem is also widespread across all sectors of the economy. On the positive side, remittances from seasonal workers has assisted the economy and contributed greatly to GDP with annual remittances estimated to be in excess of VT10b per year and increasing.


Fiscal prudence as the economy recovers. The fiscal deficit is estimated around 3 percent of GDP in 2022 partly as delays in donor-financed infrastructure projects have postponed spending, but is expected to widen in 2023, in line with greater donor-financed capital expenditure. The 2023 budget is currently being prepared, and Parliament is expected to approve it in March. While the fiscal stance is expected to be expansionary, scaling back non-priority spending is essential to protect the limited fiscal space and avoid the erosion of buffers, especially given the decline in ECP revenue.

A medium-term fiscal strategy is needed to secure adequate consolidation and ensure consistency with fiscal targets.

The fiscal anchor of public and publicly guaranteed (PPG) debt below 60 percent of GDP has served Vanuatu well but is expected to be breached by 2029 in the context of declining ECP revenue and elevated current spending. A medium-term fiscal strategy should incorporate substantial tax revenue mobilization and expenditure rationalization to reduce deficits and ensure consistency with fiscal targets,

i) completing the proposed 2017 tax reforms which envision the introduction of corporate and personal income taxes; ii) gradually reducing the size of the wage bill; and iii) streamlining transfers to state-owned enterprises (SOEs).

When revenues from the ECP started exceeding VAT as a source of Government Revenue, the need to identify other sources of Government revenues diminished and the proposal to introduce Corporate and Income Tax that was under consideration under the Salwai Government was placed on hold. With ECP revenues now falling, the concept of Corporate and Income Tax is now back on the table. The graph below shows government revenues under projections for the first half of 2022. It shows revenues below projections for every month January to July 2022. The second half of 2022 figures are not available currently.

The approval of the medium-term debt management strategy and a swift resolution of financial distress of Air Vanuatu are essential to preserve debt sustainability. The risk of debt distress remains moderate, with limited space to absorb shocks. However, given a projected gradual decline in donor support and persistent fiscal deficits, Vanuatu will need to increasingly rely on domestic issuance to meet financing needs over the long term.

The financial distress of Air Vanuatu must be resolved in a sustainable way that minimizes contingent liabilities and stems the flow of fiscal transfers.

On the 11 January, an assessment team of aviation experts from Australia arrived in Port Vila to undertake a rapid assessment of the current situation of Vanuatu’s national flag carrier, Air Vanuatu.

Close sources from the airline said their arrival in the country followed the request of the office of Prime Minister (PM), Ishmael Kalsakau, who is one of the shareholders of Air Vanuatu. Air Vanuatu is in urgent need of an injection of capital to provide long term viability. The Vanuatu Government is once again faced with the need to provide additional financial support to our National Airline which is so vital to the Tourism Sector and economic growth. The return of Virgin Airlines flying five times a week will help alleviate some of the stresses caused by operational problems of Air Vanuatu.


The Reserve Bank of Vanuatu should stand ready to tighten if there are signs of second round effects on inflation. The monetary policy stance remains appropriate given the ongoing recovery, slow private sector credit growth, and subdued underlying inflation. However, the RBV should tighten if rapid increases in underlying inflation emerge. Monetary policy tightening could be achieved by increasing the Statutory Reserve Deposits ratio and reducing excess liquidity through open market operations.

Inflation remains a concern worldwide and Vanuatu is no exception. The proposed increase in minimum wage and higher wage rates needed to stop workers going to New Zealand and Australia on seasonal work will provide added inflationary pressures on costs and also dampen economic growth.

Financial Sector Issues

The authorities should strengthen the supervisory framework, increase loan-loss provisioning, and tackle elevated NPLs. The banking system remains profitable and liquid, but elevated Non Performing Loans (NPLs), particularly among household loans, remain a concern especially for the largest domestic bank. As a result, impaired loans could increase further, especially in sectors where the recovery has not taken hold yet. The level of provisioning appears low in some banks which need to accumulate higher reserves to preempt the decline in loan servicing capacity. While bank capital levels are adequate, increasing minimum regulatory capital requirements can help shore up stronger buffers.

In its recently published results for the 2022 year, ANZ Bank reported a 27% decline in interest revenues despite an increase in the amount of lending. Net Profit also dropped by 19.5%. Other banks have not published results for 2022. The banking sector has been experiencing lower interest margin on lending which have affected profitability. In 2021, the combined reported profits of the 5 major Commercial Banks
was VT1b, a substantial increase over 2020 of only VT111m.

Macro – Structural and Governance Issues

Policies to address skill shortages and improve labor market conditions should be expedited. Following the reopening of borders, key economic sectors like tourism are facing labor shortages due to the increased participation of Vanuatu’s workforce in international seasonal worker programs . Reintegrating these labor resources in the domestic market could alleviate shortages and help skills transfer.


Under the new Government led by Ishmael Kalsakau, significant challenges face the country. Vanuatu’s Economy is expected to slowly improve in 2023 as the Tourism Sector recovers and business confidence returns. However the main constraints that stand in the way of growth that need to be addressed are the serious operational issues with the National Airline that needs to be addressed, the urgent need to address the decline in ECP revenues by resolving the concerns raised by the EU that have created the suspension of the visa waiver agreements for Vanuatu Passport holders and addressing the
labour market problems that have created shortages of skilled workers.