IMF Staff Completes 2025 Article IV Mission to Vanuatu

July 22, 2025

• The economy is expected to recover gradually, with real GDP growth projected at 1.6 percent in 2025 and 2.6 percent in 2026. However, risks remain tilted to the downside as uncertainty around the outlook remains high.
• The fiscal deficit is projected to widen in 2025 given weaker revenues and higher post-earthquake spending. An improved fiscal policy mix that prioritizes spending on targeted support to vulnerable households and to rebuild critical infrastructure, along with decisive medium-term consolidation are needed to preserve debt sustainability.
• Strengthening governance and reducing corruption remain top priorities. Effective implementation of the Commercial Government Business Enterprises Act will help improve the oversight and performance of SOEs, while stronger financial supervision is needed to address elevated NPLs and AML/CFT gaps. Efforts are needed to address labor and skills shortages as well as climate risks, including through education and resilience investments.

Washington, D.C.: An International Monetary Fund (IMF) team, led by Mr. Mike Li, conducted discussions on the 2025 Article IV Consultation with the Vanuatu authorities and other stakeholders from July 10 to July 23, 2025. At the conclusion of the discussions, Mr. Li issued the following statement:

"Vanuatu's growth is expected to gradually recover to 1.6 percent in 2025 and 2.6 percent in 2026 after experiencing a notable slowdown last year. The capital city was hit by a major earthquake in December 2024, following the liquidation of Air Vanuatu in May 2024 and three cyclones in 2023. Headline inflation has returned to the Reserve Bank of Vanuatu (RBV)'s target band and is projected to edge higher, remaining within the band, though upside risks remain. The fiscal deficit is projected to widen in 2025 due to weaker revenues and an increase in expenditures associated with post-earthquake rebuilding and support for households. The current account deficit is projected to remain wide in 2025 due to higher imports, while foreign reserves are projected to remain adequate-thanks to support from external grants, remittances, and a gradual recovery in tourism earnings-albeit on a downward trajectory.

"However, uncertainty around the outlook remains high and the balance of risks is tilted to the downside. With the full impact yet to be determined, the post-earthquake recovery path and tourism sector prospects remain highly uncertain. Uncertainty over domestic connectivity, a deeper or longer-lasting slump in Economic Citizenship Program (ECP) revenues, delays in reconstruction, and external demand shocks including from ongoing global trade tensions could further strain growth, revenues, and reserves. Vanuatu also faces high risk of natural disasters, skills shortages, governance weaknesses, and political fragmentation which increase vulnerabilities.

"Post-earthquake fiscal support should be well targeted and anchored with a decisive medium-term consolidation strategy to safeguard debt sustainability. Given the limited fiscal policy space, spending should be prioritized and better targeted, with a focus on rebuilding critical infrastructure and protecting vulnerable households while limiting discretionary public wage increases. Stronger revenue mobilization-as emphasized in Budget 2025-and comprehensive expenditure rationalization are needed to rebuild fiscal buffers over the medium term. Refocusing efforts to develop domestic government bond markets will help provide a stable financing alternative for the government.

"Monetary policy is broadly appropriate. The RBV maintained its policy rate in June 2025 to support economic recovery amidst a stable inflation outlook and still adequate foreign reserves. The RBV's internal oversight, governance, and independence will be further reinforced by ongoing legislative reform efforts to amend the RBV Act to align it with best practices, including phasing out monetary financing to strengthen central bank independence and avoid crowding out high-quality private credit.

"The financial sector remains largely stable but requires stronger safeguards against vulnerabilities. Persistently high NPLs underscore the need to enhance prudential frameworks and supervisory capacity, including through frequent on-site inspections, robust underwriting standards, and adequate provisioning. Greater efforts are also needed to mitigate risks associated with the sovereign-bank nexus and foreign currency liquidity shocks. Establishing a resolution framework for distressed financial institutions is essential for financial stability.

"Strengthening financial integrity, governance, and anti-corruption remain crucial. This includes effective implementation of the Commercial Government Business Enterprise Act to enhance the oversight and performance of State-Owned Enterprises (SOEs) against political influence, closing gaps in public financial management, and strengthening anti-corruption measures. Adopting a risk-based approach to AML/CFT supervision and promoting institutional capacity building to address deficiencies, especially in high-risk areas such as ECP and virtual assets, is vital.

"Concerted efforts are needed to address structural challenges such as labor and skills shortages and climate risks. Promoting investment in quality education and vocational training, creating an enabling business environment to boost entrepreneurship and job creation, and increasing women's participation in the formal labor market remain crucial priorities for inclusive growth. Climate adaptation efforts should include investing in resilient infrastructure and early warning systems, as well as scaling up access to climate finance and international support.

"The IMF team would like to thank the authorities for the frank and engaging discussions, and their warm hospitality."