Air Vanuatu liquidation hits Vanuatu’s economy, World Bank Report urges Pacific investment across 11 nations

October 17, 2024 9:53 pm | Posted in Business News | Share now TwitterFacebook

By Ezra Toara.

Vanuatu’s economy experienced a substantial shock in 2024 due to the liquidation of Air Vanuatu, which profoundly impacted tourism and related sectors, as well as overall economic activity.

Growth is estimated to slow to 0.9 percent, with a gradual recovery expected by 2025. Inflation is projected to moderate to 4.2 percent as supply bottlenecks ease. Meanwhile, the fiscal deficit is forecast to reach 6.7 percent of Gross Domestic Product (GDP), driven by reduced non-tax revenues and increased expenditures related to the liquidation.

Over the past four years, GDP growth has fluctuated, starting at 1.9 percent, increasing to 2.2 percent, then dropping to 0.9 percent before recovering slightly to 1.5 percent. Meanwhile, the Consumer Price Index (CPI) inflation saw a sharp rise from 6.7 percent to 11.2 percent, easing to 4.2 percent and further down to 2.8 percent. During this period, the public debt-to-GDP ratio steadily increased, rising from 46.6 percent to 49.2 percent, then to 53.1 percent, and eventually reaching 56.1 percent. These indicators reflect an economy facing inflationary pressures alongside increasing public debt.

Between 2022 and 2024, the economy showed notable fluctuations in GDP growth, inflation, and public debt. In 2022, GDP growth was modest at 1.9 percent, while inflation surged to 6.7 percent, indicating rising prices. Public debt also climbed, reaching 46.6 percent of GDP. By 2023, economic growth improved slightly to 2.2 percent, but inflation spiked significantly to 11.2 percent, reflecting more severe inflationary pressures. Public debt continued its upward trend, increasing to 49.2 percent of GDP.

In 2024, GDP growth slowed to 0.9 percent, and while inflation eased to 4.2 percent, it remained elevated compared to previous years. Public debt also grew further, reaching 53.1 percent of GDP. These three years witnessed rising debt and significant inflationary challenges.

However, projections for 2025 suggest a shift. While GDP growth is expected to recover slightly to 1.5 percent, inflation is projected to decline more substantially to 2.8 percent, signalling improved price stability. Nonetheless, the public debt-to-GDP ratio is anticipated to rise further to 56.1 percent, indicating that fiscal challenges will persist despite an improving inflation outlook. This paints a picture of an economy grappling with inflationary pressures and rising public debt.

A recent report launched by the World Bank this week, titled Diminishing Growth amid Global Uncertainty: Ramping Up Investment in the Pacific, sheds light on the broader economic challenges facing the Pacific region. The report emphasises the need for significant investment to combat slowing economic growth, improve infrastructure, and build resilience against climate change. It highlights that without swift action, Pacific nations may struggle to reduce poverty and create new economic opportunities.

According to the report, growth across the Pacific dropped to 3.6 percent in 2024, down from 5.8 percent in 2023, as the post-pandemic economic rebound lost momentum. Weaker investment, increasing climate risks, and structural challenges, compounded by global uncertainty, have all contributed to the slowdown. The report underscores that increased investment in high-potential sectors, such as agriculture, sustainable tourism, and the blue economy, is vital to stimulate job creation and support rural communities.

Stephen Ndegwa, World Bank Country Director for the Pacific and Papua New Guinea (PNG), stressed the importance of prioritising investment in key sectors, stating, “The Pacific faces mounting challenges, but there is also an opportunity for transformation. By prioritising investments in key sectors and increasing efficiency, Pacific countries can unlock economic growth that directly benefits local communities, creates jobs, and strengthens resilience to the impacts of climate change.”

The Pacific Economic Update outlines six key recommendations to drive investment, including greater investment in infrastructure, building fiscal and climate resilience, and attracting private sector involvement through regulatory reforms. The report stresses the importance of leveraging international financial support to finance high-impact projects that directly benefit Pacific communities. With the right policies and a focus on boosting investment, Pacific nations, including Vanuatu, can overcome current economic challenges and build a more resilient future.