Vanuatu - Economy

Vanuatu’s economy is gradually recovering from the extensive damages caused by Cyclone Pam, which hit the country in March 2015, and reconstruction efforts have started to yield positive results. In June 2015, the IMF Board approved a disbursement of about USD23.8 million under the Rapid Credit Facility and the Rapid Financing Instrument. The IMF’s financial assistance helped Vanuatu cope with its immediate balance of payments needs and played a key role in catalyzing critical donor support for the recovery.

The cyclone led to a decline in GDP of about 0.8 percent in 2015, relative to pre-cyclone projections of 3.5 percent. Reconstruction activity and infrastructure investment pushed inflation up to 2.5 percent in 2015 from about 1 percent in 2014. The current account deficit widened to 11 percent of GDP in 2015 from an average of 3 percent of GDP in the previous three years with sharply increased imports and depressed exports due to severe damages to tourism facilities and agricultural production.

This South Pacific island economy is based primarily on small-scale agriculture, which provides a living for about two-thirds of the population. Fishing, offshore financial services, and tourism, with nearly 350,000 visitors in 2016, are other mainstays of the economy. Tourism has struggled after Efate, the most populous and popular island for tourists, was damaged by Tropical Cyclone Pam in 2015. Ongoing infrastructure difficulties at Port Vila’s Bauerfield Airport have caused air travel disruptions, further hampering tourism numbers. Australia and New Zealand are the main source of tourists and foreign aid. A small light industry sector caters to the local market. Tax revenues come mainly from import duties. Mineral deposits are negligible; the country has no known petroleum deposits.

Economic development is hindered by dependence on relatively few commodity exports, vulnerability to natural disasters, and long distances from main markets and between constituent islands. In response to foreign concerns, the government has promised to tighten regulation of its offshore financial center.

Since 2002, the government has stepped up efforts to boost tourism through improved air connections, resort development, and cruise ship facilities. Agriculture, especially livestock farming, is a second target for growth.

Vanuatu's economy is primarily agricultural; 80% of the population is engaged in agricultural activities that range from subsistence farming to smallholder farming of coconuts and other cash crops. Copra is by far the most important cash crop (making up more than 35% of the country's exports), followed by timber, beef, and cocoa. Kava root extract exports also have become important. Coconut oil, copra, kava, and beef account for more than 75% of Vanuatu's total agricultural exports, and agriculture accounts for approximately 20% of GDP. Tourism is a key driver of the economy.

The government has maintained Vanuatu's preindependence status as a tax haven and international off-shore financial center. About 2,000 registered institutions offer a wide range of offshore banking, investment, legal, accounting, and insurance and trust-company services. Vanuatu also maintains an international shipping register in New York City. In 2002, following increasing international concern over money laundering, Vanuatu increased oversight and reporting requirements for its off-shore sector.

Vanuatu claims an exclusive economic zone of 735,893 square kilometers and possesses substantial marine resources. Currently, only a limited number of ni-Vanuatu are involved in fishing, while foreign fleets exploit this potential.

Vanuatu's economic growth of 3.4% in 2006 was broad-based and strongly driven by the services sector, especially tourism at 20% of GDP. Other sectors that contributed significantly were construction (15.7%), wholesale and retail sector (12.4%), and the real estate and business service sector (11.2%). The agricultural sector showed improved performance due to better domestic prices for copra. Other items including cocoa, beef, and kava supported the growth. In 2007 tourism again contributed 20% of GDP. Vanuatu continued to experience strong economic growth through 2008, averaging nearly 6%. There was an increase in agricultural output, which was supported by high international commodity prices in mid-2008. While the global financial crisis did not have a severe impact on Vanuatu’s economy, the crisis caused low commodity prices that led to a decline in the domestic production of most commodities. Higher international prices in 2010 for copra, coconut oil, and beef saw an improvement in the agricultural sector. Construction activity, agriculture, tourism, services, and real estate were the main sectors that drove economic growth in 2010.

The Recognized Seasonal Employer (RSE) program is an agreement that allows unskilled Vanuatu laborers, such as fruit pickers and farm workers, to work in New Zealand. Starting from June 2007, RSE is anticipated to bring over 20 million vatu into Vanuatu's economy.