Vanuatu’s emerging economic emergency?

August 22, 2024 1:22 am | Posted in Features | Share now TwitterFacebook

At the end of July, the Vanuatu Government released its Half Year Economic and Fiscal Update. It is a stark and concerning read.

Firstly, Government revenue was 23% below target until June, with no single revenue source meeting its target. Other revenue (mostly citizenship schemes) was the worst performing revenue source – reaching just 60% of its target.

VAT started the year off very well, but the liquidation of Air Vanuatu has had a clear and crushing impact on the economy. VAT returns in June were 25% lower than 2023.

On the expenditure side, the Government is spending but not investing. Expenses (day-to-day spending) hit a record high (VUV 19.7 billion or 53% of the budget), but investment remains low and slow. Just 4.6% (VUV 790m) of the capital budget for the year had been spent by June. Expenses pay salaries and boost demand, but investment is what builds wealth over the long-term.

The Government has also downgraded its GDP forecasts for both this year (from 5.2% to 2.8%), and for the period 20252028 (from 23% to 16%). The IMF (1%) and ADB (1.5%) both have significantly lower growth estimates for 2024. The World Bank estimates that GDP is 2.8% lower than in 2019, and that GDP/capita is 11% lower.

In the HYEFU, forecasts for Government expenses are stagnant and Government investment forecasts have been downgraded. The Government has been the main economic driver over the past decade, and if this no longer will be the case, then growth will have to come from elsewhere.

However, new private sector investment remains limited and often does little to boost productive capacity, while a number of possible large investors have pulled out. Many existing businesses are unsure of the future and have very low confidence in the Government. Very few public institutions are working as they should. This is in a world of rapid technological and geopolitical change where new investment is desperately needed. Inflation in Vanuatu has been high. The Government estimates it has been 28% since 2019, while ADB estimate it at 37% – the highest of 13 Pacific countries.

The debt level is still modest (48% of GDP), and the HYEFU forecasts it to fall to 38% by 2028. The IMF conversely expects debt to increase to 64% by 2028. The key factors here are what happens to Government revenue (especially citizenship programs) and economic growth. The Government is increasingly looking to the domestic bond market to fund its operations, but it remains a major unknown how much can be absorbed with the Air Vanuatu creditors compromise becoming extremely expensive for the Government.

This all raises the question – is Vanuatu in the middle of an economic emergency? Of course, this is a big question, and there are a number of further points to make.

Firstly – we just do not have enough data to be sure. There are no tourism numbers since April, before Air Vanuatu went into liquidation. Anecdotally Efate tourism businesses are struggling but are coping, whereas it has been a complete disaster for outer island businesses. There is no trade data yet for any of 2024, but anecdotally commodities such as kava and cacao are fine. More information is needed about the impacts of the Coconut Rhinoceros Beetle, particularly in Santo.

There are then the wider and more fundamental data gaps that always exist. For example, there is no data which captures how the urban poor or remote rural communities have been impacted by recent inflation. A simpler example is the lack of regular employment data, despite VNPF collecting information which could easily illustrate the impact of the Air Vanuatu crisis on jobs. Vanuatu is a complex and diverse nation, and far too much is based on anecdotes.

The second point is that there is certainly a possibility that this is just (yet another) challenging few months. With Qantas and Jetstar due to start f lying soon, there is both strong cause for hope and a plausible scenario where tourism numbers boom towards Christmas and into 2025.

Finally, when considering whether this is an economic emergency, any analysis must also consider the improving the business environment to finally achieve take-off economic bigger picture. In 2022 the Vanuatu Government declared a ‘climate emergency’. All parts of society must respond appropriately to this. Probably the single best way to adapt to the climate crisis and to build resilience is to get rich.

However, Vanuatu’s economic performance since 1980 has been average at best. The country is simply not rich enough to be able to provide the basic services the people need. Real GDP/capita was 8% lower in 2023 than 2000 and there is a very real chance it will fall below 1980 levels in 2024.

The single most important input in the long-run – education – is woeful, under huge strain, and arguably getting worse. Just 21% of children met the minimum standards for year 4 literacy, and the teachers are on strike.

If the economy is not growing as it must in the face of the climate emergency, and if most important long-term input is falling far short, then does that count as an economic emergency?

So what should Vanuatu do in the face of these challenges? At a basic level, the answer is relatively simple – build on Vanuatu’s immense foundations and unleash its vast potential by:

1. Drastically reforming and improving the education system to give the people of Vanuatu the skills and knowledge they need to thrive

2. Drastically reforming and development

Of course, it is very easy to just state this, but the details of how to achieve this are immensely difficult. Education is beyond the scope of this article, but some simple starting suggestions for the economic side are given below.

1. The Government consistently communicate should their commitment to growing the economy and supporting the private sector. Yes, talk is cheap and must be backed up by actions but talk also matters.

2. One reason business environment reform is difficult is because it’s so cross-cutting. The Government should therefore set up an Investment Committee chaired by the Prime Minister, and which includes key ministers, the private sector, and unions.

3. The VCCI’s Economic and Investment Forum generated 80 ideas for improving the business environment. An obvious first step for an Investment Committee would be to go through these ideas and rapidly implement the best ones.

4. If the offer to buy a majority of Air Vanuatu is of sufficient quality, then the Government should do everything it can to fast-track this. This could transform domestic connectivity, remove the Government’s biggest headache, and show the private sector that the Government is serious about changing things.

Peter Judge is Director of Economics and Research at Pacific Consulting Limited. All views expressed are solely his own.