Pacific Studies Series Vanuatu Economic Report 2009: Accelerating Reform Over the last several years, Vanuatu has become one of the fastest growing economies in the Pacific region driven primarily by tourism, construction, and aid inflows. The achievement of strong economic growth has also occurred on the back of improved economic policy, effective fiscal management, and improved environment for private sector development. While recent gains have been impressive, more remains to be done to sustain growth and ensure the benefits are distributed throughout the nation. Employment and revenue reform, improved governance, and the need to give greater attention to the management of the natural environment remain among the key development priorities. In addition, improved health and education services are needed to meet the ever-rising expectations of the fast growing population. Infrastructure works are also a key development priority, both to support economic growth and to address the rising pressures on the all-important natural environment. Continued improvement in institutional performance lies at the heart of an effective response to these needs. The Government is now on a sound financial footing and is well placed to address key development issues. The report discusses options for responding to these needs with a view to helping guide public policy formulation in Vanuatu. About the Asian Development Bank ADB’s vision is an Asia and Pacific region free of poverty. Its mission is to help its developing member countries substantially reduce poverty and improve the quality of life of their people. Despite the region’s many successes, it remains home to two-thirds of the world’s poor: 1.8 billion people who live on less than $2 a day, with 903 million struggling on less Vanuatu Economic than $1.25 a day. ADB is committed to reducing poverty through inclusive economic growth, environmentally sustainable growth, and regional integration. Report 2009 Based in Manila, ADB is owned by 67 members, including 48 from the region. Its main instruments for helping its developing member countries are ACCELERATING REFORM policy dialogue, loans, equity investments, guarantees, grants, and technical assistance. Asian Development Bank 6 ADB Avenue, Mandaluyong City 1550 Metro Manila, Philippines www.adb.org ISBN 978-971-561-882-3 Publication Stock No. RPT101358 Printed in the Philippines VAN PIER-Main Report-cover.indd 1 29/01/2010 4:16:45 PM i Vanuatu Economic Report 2009 ACCELERATING REFORM ii© 2009 AsianVanuatu Development Economic Report Bank 2009: Accelerating Reform All rights reserved. Published in 2009. Printed in the Philippines. Publication Stock No. RPT101358 ISBN 978-971-561-882-3 Cataloging-In-Publication Data Asian Development Bank. Vanuatu economic report 2009: accelerating reform. Mandaluyong City, Philippines: Asian Development Bank, 2009. 1. Poverty reduction 2. economic growth 3. Vanuatu. I. Asian Development Bank. Th e views expressed in this report are those of the authors and do not necessarily refl ect the views and policies of the Asian Development Bank (ADB), its Board of Governors, or the governments they represent. ADB does not guarantee the accuracy of the data included in this publication and accepts no responsibility for any consequence of their use. By making any designation of or reference to a particular territory or geographic area, or by using the term “country” in this document, ADB does not intend to make any judgments as to the legal or other status of any territory or area. ADB encourages printing or copying information exclusively for personal and noncommercial use with proper acknowledgment of ADB. Users are restricted from reselling, redistributing, or creating derivative works for commercial purposes without the express, written consent of ADB. Cover on photo by Sally Shute-Trembath 6 ADB Avenue, Mandaluyong City 1550 Metro Manila, Philippines Tel +63 2 632 4444 Fax +63 2 636 2444 www.adb.org Pacifi c Liaison and Coordination Offi ce Level 18, 1 Margaret Street Sydney NSW 2000, Australia Tel +61 2 8270 9444 Fax +61 2 8270 9445 www.adb.org/plco For orders, contact Department of External Relations Fax +63 2 636 2648 [email protected] Contents iii Contents ABBREVIATIONS v CURRENCY EQUIVALENTS vi FOREWORD vii MAP ix OVERVIEW 1 DEVELOPMENT PERFORMANCE, ISSUES, AND POLICIES 16 An Overview of Human Development 16 Development Issues 19 Challenges and Opportunities 22 Development Policies 23 THE ECONOMY 26 Introduction 26 Macroeconomic Targets 27 Economic Growth 28 Exchange Rates, Trade, and the Balance of Payments 32 Prices and the Monetary Sector 37 Debt and Liquidity 43 Fiscal Aspects 46 Outlook 49 Continuing Reforms 50 SOCIAL CHALLENGES 52 Demographic Profi le 52 Traditional Social Structure 52 Health 53 Education 59 Employment and Livelihoods 67 Gender Equity 70 iv Vanuatu Economic Report 2009: Accelerating Reform Urbanization: Informal and Squatter Settlements 72 Conclusions and Recommendations 75 THE PRIVATE SECTOR AND PRODUCTIVE SECTOR 78 Th e Private Sector 78 Tourism 80 Agriculture 86 Fisheries 90 Conclusions 93 INFRASTRUCTURE DEVELOPMENT 96 Introduction 96 Economic Infrastructure 99 Urbanization 113 Development Policies and Strategies 119 Conclusions and Recommendations 119 GOVERNANCE AND PUBLIC SECTOR MANAGEMENT 123 Introduction 123 Public Sector Performance 125 Fiscal Management 133 Land Management 137 Conclusions 139 ENVIRONMENT 143 Introduction 143 Issues, Causes, and Constraints 143 Mainstreaming the Environment 146 Conclusions 148 CONCLUSION AND KEY RECOMMENDATIONS 149 Conclusion 149 Key Recommendations 152 APPENDIX 154 v Abbreviations ADB Asian Development Bank AusAID Australian Agency for International Development BPS budget policy statement CEDAW Convention for the Elimination of All Forms of Discrimination Against Women CNFC China National Fisheries Corporation CPI consumer price index CRP comprehensive reform program DEMC Department of Environmental Management and Conservation DGMWR Department of Geology, Mines and Water Resources DPH Department of Ports and Harbors DTIS Diagnostic Trade Integration Study EIA environmental impact assessment EMC Environmental Management and Conservation ERC Expenditure Review Committee EU European Union FDI foreign direct investment GACAP Governance and Anticorruption Action Plan GDP gross domestic product GEF Global Environment Facility GFG Governance for Growth HDI human development index HIES Household Income and Expenditure Survey IMF International Monetary Fund JICA Japan International Cooperation Agency LDC least developed country LSF Land Sector Framework MAQFF Ministry of Agriculture, Quarantine, Forestry and Fisheries MCC Millennium Challenge Corporation MDG Millennium Development Goal MFEM Ministry of Finance and Economic Management MIPU Ministry of Infrastructure and Public Utilities MOE Ministry of Education MOH Ministry of Health NBV National Bank of Vanuatu NGO nongovernment organization NZAID New Zealand Agency for International Development OAG Offi ce of the Auditor General PAA Priorities and Action Agenda PEA preliminary environmental assessment PEFA Public Expenditure and Financial Accountability PFEM Public Finance and Expenditure Management Act PFM public fi nancial management PFTAC Pacifi c Financial Technical Assistance Centre PGI poverty gap index PPA physical planning area vi Vanuatu Economic Report 2009: Accelerating Reform PPP purchasing power parity PRAI Pacifi c Regional Audit Initiative PSC Public Service Commission PWD Public Works Department RBV Reserve Bank of Vanuatu SOE state-owned enterprise SRD statutory reserve deposit TA technical assistance TVET technical and vocational education and training TVL Telecom Vanuatu Limited UGMS Urban Growth Management Strategy UN United Nations UNDP United Nations Development Programme UNELCO Union Électrique du Vanuatu Limited UNESCAP United Nations Economic and Social Commission for Asia and the Pacifi c UNICEF United Nations Children’s Fund URA Utilities Regulatory Authority US United States VADB Vanuatu Agriculture Development Bank VARTC Vanuatu Agricultural Research and Training Center VAT value-added tax VCMB Vanuatu Commodities Marketing Board VESAP Vanuatu Education Support Action Plan VESS Vanuatu Education Sector Strategy VIT Vanuatu Institute of Technology VNPF Vanuatu National Provident Fund VTAP Vanuatu Tourism Action Plan VTSSP Vanuatu Transport Sector Support Program WHO World Health Organization WTO World Trade Organization Currency Equivalents (As of 30 June 2009) Currency Unit–vatu (Vt) Vt1.00 = $0.009438 $1.00 = Vt105.96 In this report, “$” refers to US dollars unless otherwise stated. NOTE: Th is report contains information available as of 30 June 2009. vii FOREWORD anuatu has made significant economic and social gains since 2003, with the rate of economic growth averaging 6% from 2003 through 2008. Construction activity, tourism, services, and a robust real estate sector were the main drivers of this growth. Th e achievement Vof strong economic growth has occurred on the back of improved economic policy and eff ective fiscal management. Greater political stability has also been important, bringing with it improved investor confidence, better policy outcomes, and stronger development partner support. Continued eff orts to improve the enabling environment for private sector development will ensure sound economic and social outcomes as the nation continues to develop. While recent gains have been impressive, more remains to be done to sus- tain growth, reduce poverty, and ensure the