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VANUATU ECONOMY AT THE CROSSROADS

The National Government and Business Forum 2020

In September 2020, 6 months after Vanuatu’s border closure, due to the COVID-19 pandemic, the Vanuatu Chamber of Commerce and Industry, (VCCI), organized and facilitated the National Government and Business Forum at the Vanuatu National Convention Centre. In attendance were representatives from the VCCI, the government and business owners who engaged in two days of dialogue on the way forward.


During the forum, the VCCI presented the Vanuatu Economic Outlook Report which was based upon data collected from interviews with business owners across all sectors of the economy. The Report painted a picture of an economy under severe strain due to falls in revenue of many businesses and loss of confidence. This was acknowledged by the Government. It was agreed that there would be ongoing dialogue between the private sector through the VCCI and the Vanuatu Government and the importance of working together to decide where Government & Private Sector collaboration could be prioritized during the current economic crisis.
During the high level dialogue, various proposals were discussed.

Government VAT Revenues Affected

As a result of the economic crisis, the Vanuatu Government reported significant falls in VAT revenues in the third and fourth quarters of 2020. The following table is a quarterly summary of revenues from VAT and duties on imports which were extracted from the Treasury Monthly report for December 2020. The VBR was also able to obtain the same data from the corresponding period in 2019.

On a direct year on year comparison, with VAT payments made by the Government netted out, there was a 25.6% fall in VAT revenues from 2019 to 2020. Of greater significance is that for the first two quarters of 2020, the effect of the border closures had not been felt with VAT revenues only slightly lower than the same levels as the previous year. This was most likely because the border closures were implemented in March and due to a combination of the ESP payments to the Tourism and Hospitality sectors and the release of funds by the VNPF, there was a certain degree of buffering to the downturn. In addition, commercial banks were supportive of their customers offering loan repayment moratoriums to assist.

With the realization that the economic crisis facing Vanuatu and the World was going to extend well in to 2021, employers commenced restructuring their businesses to reduce costs in order to survive. It was only in the third and fourth quarters of2020 with revenues down 38.97% and 43.35% respectively, that there were clear signs of deteriorating business conditions. Some businesses laid off staff and others reduced working hours. Inventory levels of businesses were scaled back to generate cash by reducing purchases. VAT revenues are taxes on consumption and is an indirect reflection of personal consumer spending in the economy. It is a tax on the Value added component of Business Revenues.

A large percentage of the Value Added component on business revenues is Wages and Salaries of employees as expenditures between business entities with VAT are normally claimed back. The fact that compensation to employees by the Government in 2020 actually increased by 11.5%, suggests that the fall in payroll expenditure by the private sector would have been more pronounced.
In addition to the fall in VAT revenues, there were similar drops in collections of import duties with Taxes on International Trade and Transactions falling by 13.5%, most of which was also in the latter half of 2020, a clear sign that businesses had scaled back inventory levels in order to generate funds. There were complaints from the public that shops were running out of items to sell and also a lack of motor vehicle parts from the car dealers.
The numbers that have come out of the Government statistics tell a story of a trend in deteriorating business conditions.

Trouble in the Banking Sector

When the borders were closed due to COVID-19, the Tourism Sector of the Economy was effectively shut down. The Vanuatu Banks recognized that many businesses that were directly and indirectly reliant on Tourism would be affected and offered packages to assist until the borders would re-open. These packages were reviewed individually on a case by case basis but were basically a freeze on either principle repayments or both Principle and interest.
The VBR has been able to do a comparative study of the Financial Statements of all Vanuatu Banks which were published recently. The collective results of the banks tell the same story as the statistics that have come out of MFEM. The Vanuatu Banks have also been affected by the economic downturn and this is reflected in the results published. For its comparative analysis, the VBR compared 2020 with 2019 and 2018 as there was a one off accounting transaction in the ANZ accounts which created a large loss and a distortion in the 2019 figures.
A combination of the future uncertainty, low business confidence has resulted in falls in the value of the Bank Loan Books. The high vatu liquidity that is currently held in the Balance Sheets of the banks is also creating downward pressure on interest rates for both depositors and lenders and ultimately affecting profit margins on bank lending. Bank profitability had fallen from a combined VT1.577b in 2018 to VT111m in 2020. Interest income had also fallen with increased operating expenses.

Vanuatu Banks

At the end of March 2021, moratoriums on loan repayments that were offered to many of their clients by banks stopped and principal and interest repayments commenced. In some cases, loan balances had increased due to capitalized interest and lenders were facing increased monthly repayments. Some were extended to the end of June. With many of their borrowers facing increasing financial difficulties, banks are faced with a dilemma. The issue is how to manage a bank client who is now facing increased loan repayments in deteriorating business conditions.
Withdrawal of financial support would mean closures of businesses, increased impairment losses on the books, and loss of future income streams for the banks. Additional support to their clients would increase their exposure and the question is whether to provide funds to a business that was already doomed to fail under the current situation.

To further complicate the current situation facing banks on managing the relationships with their clients is the issue of correspondent banking. There is a real threat that there will be a withdrawal of correspondent bank services by the National Australia Bank with the National Bank of Vanuatu, one of the local banks in Vanuatu. This withdrawal will affect foreign currency transfers in and out of the country and have grave ramifications to the rest of the Financial Sector, ultimately affecting the cost of doing business through higher transaction fees and the reputation of Vanuatu’s Financial Institutions. Fortunately, three other Banks, ANZ, BRED and BSP will not be affected due to support from their parent companies.

The term correspondent bank refers to a financial institution that provides services to another one—usually in another country. It acts as an intermediary or agent, facilitating wire transfers, conducting business transactions, accepting deposits, and gathering documents on behalf of another bank. Correspondent Bank Definition – Investopedia

The reason for the withdrawal of correspondent banking services has been the subject of debate amongst observers. Whatever the main reason, it will have serious consequences for the Vanuatu Government’s Citizenship program and its agents who have been mainly using the National Bank of Vanuatu for the movement of USD.

Passport Sales continue to Increase

In 2020, the Vanuatu Development Support Program (VDSP) and Vanuatu Contribution Program (VCP) together collected VT14.3b, which was 57.4% more than the revised budget and 14.3% more than what was collected in 2019. Again, revenues from the Sales of Vanuatu Citizenship exceeded VAT as the main source of Government Revenue.
Holders of Vanuatu Passports are able to travel visa free to Schengen areas without requiring a visa for up to 90 days.
They can also travel to the UK and it’s crown dependencies for up to 6 months without a visa, including the Republic of Ireland. In March 2021, an article was published in the IFC reported that “ according to officials, by the near future, the arbitration to blacklist Vanuatu from the visa-free list of the EU and UK would be recommended due to the inadequate

procedure of vetting the applicants, which might pave the path for illegal activities in the respective countries.”
Such a move would have had serious implications for the Citizenship Program of Vanuatu. In response, the Government of Vanuatu dismissed the report refuting the validity of the entire article in a statement claiming:

“The reports published regarding the status of Vanuatu’s visa privileges, is nothing more than a malicious attempt to discredit Vanuatu and the work the country is undertaking, to manage and improve the structure of its highly successful Citizenship Investment Program. The article, materially and factually deficient, has achieved little traction or credibility in the mainstream media space.”

“Nevertheless, it has understandably generated some concerns domestically within Vanuatu which should be addressed,” the statement from the Minister of Foreign Affairs said. The Ministry of Foreign Affairs assured that the Government of Vanuatu is engaged in an active dialogue with the European Union to ensure mutual understandings are reached regarding the current and future management of Vanuatu’s Citizenship Program.

Whilst both the UK and the EU have confirmed that the visa free status still exists, this has shone a light on the urgent need for higher levels of due diligence and backgrounds checks for citizenship applicants.
Combined with concerns on the ramifications of loss of Correspondent Bank Services from the National Australia Bank, with the NBV, it is clear that the Vanuatu Government needs to urgently address and protect whatever threats are perceived against the main source of its revenue, the Sale of Passports.

ESP Mark11
There is general consensus between key stakeholders in the Economy that business conditions are dire. Some sectors continue to do well but the majority of Business that the VBR spoke to have expressed grave concern about survival. However, in a recent report

issued by Pacific Trade Invest, (PTI), and covered in an article in the Daily post, while high levels of confidence in business survival is low in Vanuatu, 80% of businesses are somewhat confident they will survive the COVID-19 crisis.
In response, the VCCI has presented a number of proposals to the Vanuatu Government to provide some economic stimulus, one of which is a Wage Subsidy and Small business stimulus package based upon certain criteria. This proposal was presented to the Government in December 2020 and would cost the Government VT150m per month.
The proposal was for the Government to subsidize businesses with VT15,000 per month per employee with the criteria that they needed to demonstrate falls in sales of 30%. Such a proposal was criticized by some observers for the 30% criteria as it would not cover some businesses who had experienced falls in revenue but did not meet the 30% criteria. Then there was the other argument that if the government provided this to ALL businesses, there was a distinct possibility that businesses who are currently doing well despite the crisis would benefit from a subsidy that they should not qualify to receive. This highlights the difficulty in implementing any form of stimulus which would be able to be implemented equitably.
In addition to the wage subsidy

the Government is also seriously considering implementing a loan Guarantee that was discussed in 2020 whereby it would provide VT2.8b to the Banks to lend out at very low concessional rates. The VBR sort comment from the Commercial Banks on this proposal and whilst there is general support for such a scheme, concerns have been raised about how such a scheme could be implemented.
Both proposals are currently under review. Whatever the final outcome and, if and when anything is implemented, for some small businesses and their staff, it may well be too little too late.

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