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Vanuatu's Fragile Politics and Economic Challenges

Strategic Insights

— 1 min read

In 2010-11, Vanuatu's politics will remain volatile with Prime Minister Edward Natapei's coalition government facing no-confidence motions and a fragile parliamentary majority. The economy will begin to recover due to a pickup in global trade and investment flows, but financing the current-account deficit will be a major challenge. Foreign-exchange reserves are currently worth around US$110m, equivalent to about six months of imports, and the country must continue to attract foreign investment to avoid financial difficulties.

Key Takeaways:

  • The Prime Minister, Edward Natapei, will remain vulnerable to no-confidence motions due to his coalition government's small majority in parliament.
  • In 2009, the economy experienced a slowdown in growth, estimated to be 3.8%, due to the global recession and its impact on the tourism sector.
  • The Vanuatu Financial Services Commission recommends legislation to strengthen the country's regulatory framework, which may improve the performance of the services sector.
  • The Asian Development Bank (ADB) has expressed concern about Vanuatu's slow progress in meeting its Millennium Development Goals, particularly in terms of access to sanitation and maternal mortality.
  • The Reserve Bank of Vanuatu aims to keep year-on-year inflation between 0% and 4% and has stated that the main contributor to price pressures is the rise in the cost of food.
  • In 2009, the local currency, the vatu, depreciated by more than 20% but has since recovered most of those losses.
  • The economy is expected to grow by 4.6% in 2010, driven by higher agricultural commodity prices and recovering tourism, while the construction sector will benefit from infrastructure projects.

Statistics:

  • Real GDP growth rate in 2008: 6.6%
  • Estimated growth in 2009: 3.8%
  • Real GDP estimated growth rate in 2010: 4.6%
  • GDP growth rate in 2011: 4.2% (forecasted)
  • Current-account deficit in 2009: Vt1.6bn (US$16m) in the first quarter, narrowed to Vt1bn (US$10m) in the second quarter
  • Foreign-exchange reserves: US$112m at end-June, equivalent to 5.8 months of imports
  • Merchandise trade deficit: narrowed to Vt4.6bn in the first quarter, from Vt4.3bn in the second quarter
  • Inflation rate in the third quarter of 2009: 4.4% (year-on-year)

Sources:

  • Economist Intelligence Unit Overview (no date)
  • Reserve Bank of Vanuatu (no date)
  • Asian Development Bank (no date)
  • Vanuatu Financial Services Commission (no date)
  • United Nations Development Programme (no date)
  • The Vanuatu Times (no date)

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