Vanuatu: taking the pandemic in its economic stride

Economic data out of Vanuatu indicates that the country’s economy has been less affected than expected by the COVID-19 pandemic. No doubt there has been real economic pain. But the latest GDP figures show a fall of only 2.1%, much less than the 10% the ADB had earlier predicted. This comes as a surprise given the country’s dependence on tourism, but also calls into question the extent of that dependence.

Agriculture, fishing and forestry also suffered in 2020 from Cyclone Harold, but kava is a bright spot with an estimated 5% growth. To quote from Vanuatu’s 2021 budget: “As kava prices gradually appreciate in value relative to other commodities, combined with the prospect of kava being accepted to the European market as a beverage, production is expected to be scaled up over the medium term.”

Revenue has taken a bigger hit than GDP. The predicted inflation-adjusted drop in government revenue (excluding aid) is 14% compared to 2019 levels, due to the reduction in tourism and resultant job losses. (All data from our updated COVID-19 economic response database.)

But here too there is good news. Say what you want about Vanuatu’s citizenship-for-sale schemes, but they are certainly lucrative, and continue to grow. Here we update our analysis from last year of the Vanuatu Development Support Program (VDSP) and Vanuatu Contribution Program (VCP). In 2020, Vanuatu had more applications into  its schemes, and made more money from them than ever. The two citizenship schemes are now responsible for 35% of total government revenue, up from 29% in 2019, 25% in 2018, and just 7% in 2017. Clearly the schemes are COVID-proof. After all, you don’t need to actually visit Vanuatu to get a passport.

Compared to other Pacific countries, Vanuatu did well in 2020 to increase expenditure in response to COVID-19, with increased spending on subsidies and goods and services.

Anyone arguing that Vanuatu should dump its citizenship schemes should have a good look at the above figure. The only two countries shown in the graph able to mount a serious fiscal response to COVID-19 have been ones with fiscal buffers: Timor-Leste has a sovereign wealth fund with oil earnings, and Vanuatu has its citizenship proceeds.

Vanuatu ran a deficit in 2020 due to the pandemic. But after years of large surpluses (again thanks to those citizenship schemes), its debt position remains comfortable, and the country has declined to participate in the international Debt Service Suspension Initiative.

There are two dark clouds. One is the country’s low vaccination rate. As of the end of July, only 7,000 vaccines have been administered, which is about 7% of the population. Vanuatu has kept COVID-19 out of the country so far, but with more infectious strains around, for how long will that be possible? Even if Vanuatu does keep COVID-19 at bay, the opening of international borders looks ever further away, at least in this part of the world.

Vanuatu’s second big risk is international financial isolation. In March, the National Bank of Vanuatu put out a statement to the effect that, since the National Australia Bank (NAB) had decided to end its correspondent banking relationship with it, no new USD accounts could be opened, and it might not be possible to provide USD to its clients in the future. The decline in correspondent banking relationships is a Pacific-wide phenomenon, and NAB has withdrawn from the Pacific completely. But some argue that this decision was linked to concerns about the citizenship-for-sale schemes (which are paid for in USD). Whether it is or not, it is clearly a negative development, and the IMF last month specifically warned that “revenues could fall sharply amid growing concerns on AML/CFT [regulatory] risks” to Vanuatu’s citizenship programs.

So, some serious challenges ahead but, in what has been a gloomy period, Vanuatu’s recent economic performance is definitely good news.

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This research was undertaken with support from the Pacific Research Program, funded by the Department of Foreign Affairs and Trade. The views are those of the authors only.

Stephen Howes

Stephen Howes is Director of the Development Policy Centre and Professor of Economics at the Crawford School of Public Policy at The Australian National University.

Sherman Surandiran

Sherman Surandiran was a Research Officer at the Development Policy Centre until July 2021.

1 Comment

  • This analysis from the Development Policy centre is a welcome contribution that makes important points. I disagree with the conclusion, though. I don’t see the latest economic numbers as ‘good’ news. They are admittedly not as dire as some predicted.

    Let me touch on a few points….

    VAT revenues are a decent indicator of commercial activity in the country. In 2020, they fell off a cliff.

    If we look at year-on-year numbers for the last 3 quarters only (i.e. post-COVID), we see a 30% drop in revenues.

    Vanuatu monthly tax revenues percentage change 2019 – 2020

    Vanuatu monthly tax revenues percentage change Q2 – Q4 only

    Most businesses here are in crisis mode.

    The DevPolicy figure showing passport revenue ably demonstrates why public revenues have withstood the worst. Public revenues may still be relatively healthy, but public assistance has been excruciatingly slow in coming. Only now are the first 2021 benefits arriving for the majority of the recipients.

    Stimulus has been smart, but way too slow.

    Probably the most telling indicator of local hardship and lack of opportunity is the immense popularity of Ponzi schemes here, a fad imported from Fiji, afflicted for similar reasons.

    One operation hit the headlines when caused traffic jams as thousands flocked to sign up. Authorities have been quick to call it a scam, but public support among people desperate for relief remains alarmingly strong.

    The article rightly lists region-wide de-risking behaviour by (mostly) Australian banks as dark cloud. I couldn’t agree more. I don’t think we can cry wolf loudly enough about this.

    And despite the warnings, there seems to be no political appetite here to stop doing the things that put us at risk.

    This analysis rightly states that the risk is in part because a number of questionable decisions concerning citizenship applicants, as related recently in The Guardian. But the recent removal of a ban on blockchain-related trading, and worse-than-lax forex oversight are equally important drivers.

    It’s expected that Vanuatu passport holders will lose visa-free access to the Schengen bloc of countries and the UK some time fairly soon unless radical steps are taken to improve our AML/CFT activities. Some are surprised it hasn’t happened already.

    If that happens, passport revenues could dry up, and our government will be left to face this historical crisis with little more than goodwill.

    I can’t bring myself to call these figures good news. I’d prefer to say we’re ‘surviving’ or ‘coping well’. But we’re not nearly out of the woods, and the future is very uncertain.

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