PACIFIC ECONOMIC BULLETIN Economic surveys

Recent developments in

David Ambrose and Savenaca Siwatibau

After a year of lurching from crisis to crisis, in early David Ambrose is Convenor of 1997 the Government of Vanuatu announced a the State, Society and Governance comprehensive reform program, to include in Melanesia project and Visiting strengthening of government capacity and Fellow at the Research School of legislation to regulate financial dealings. The Pacific and Asian Studies, The Australian National University. benefits to Vanuatu of the reform program will Savenaca Siwatibau is Head, be far-reaching, but the success of these reforms Pacific Operations Centre, United calls for much determination and leadership on the Nations Economic and Social part of policymakers if it is to succeed. Commission for Asia and the Pacific, Port Vila.

The broad background population growth rate, reflecting the accelerating pace of urbanisation in the There are more than 80 islands in country. Population growth had steadily Vanuatu, spread out over more than 1,000 declined from the 3.4 per cent average for kilometres, with a total land area of about the period 1967 to late-1970s as estimated 4,700 square miles. Air services which in the 1979 census. The projected support a promising tourist industry and population structure will however remain afford potential for airfreighting low- predominantly young for the next ten to bulk, high-value agricultural and fisheries twenty years. The fiscal burden on products, are well developed. The sea government for providing social infra- transport system within the Vanuatu structure and services in health, education islands and with its external markets is and social welfare will stretch its domestic not as well developed and shipping resource mobilisation capacity to the services are irregular and expensive. limit. The large influx of young people in search of jobs and other gainful economic The population of Vanuatu was pursuits will continue. The rate of estimated at about 160,000 in 1994. With absorption into an expanding economy of population growth projected at an these young people will depend critically average annual 2.4 per cent, the popula- on the level of private sector investments, tion is currently in the vicinity of 173,000. effective training programs for skills Some 32,000 people live in Port Vila, and acquisition, enlightened domestic policies a further 10,000 in Luganville, the only and an expanding pipeline of well thought other urban centre, located on the largest out public sector investment programs island, Santo. These urban centres are which effectively support private growing at more than twice the national initiatives and investments.

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The country is well endowed with will steadily decline in importance as a natural resources. It has good soils; some source of first resort for development 40 per cent of the total land area has expenditures and balance-of-payments fertile soils. Its isolation has some support. offsetting advantages such as the relative Skills, at all levels, are scarce. For each absence of pests and a pollution-free 120 young people, at the age of six, only environment. About 80 per cent of the 100 are able to secure places in the first country’s total population live in the rural year of primary schooling. Of these, some areas. These people depend entirely upon 80 leave school before reaching the sixth agriculture, fisheries and forestry for form and only about 5 of the remaining 20 subsistence and cash income. As in the may ultimately get into tertiary other larger island economies in the institutions. Facilities for training and Pacific, the rural economy provides a ensuring relevant skills acquisition in the dependable and effective economic shock vocational and technical areas for the 115 absorber for the country. Traditional food who have no formal schooling or drop crops provide ready substitutes in times out of school are grossly inadequate. of budgetary and balance of payments difficulties. Although supporting the Gross domestic investment rates livelihood of the bulk of the population, hover around 30 per cent in Vanuatu; a the contribution of the subsistence sector figure comparable to some of the dynamic to the country’s gross domestic product, economies of Asia. Reflecting the annual GDP, is featured in the national accounts deficits in the current account of the at only 9 per cent. This figure appears to balance of payments, domestic savings be a gross underestimate, reflecting the traditionally fall well below national weakness of national accounting capacity domestic investments. Financing of in the Statistics Office. investments from external sources including reinvestments of profits by Substantial external aid receipts are overseas-owned entities and external available to Vanuatu each year, including public sector borrowings was, in recent external soft loans sourced from multi- years, regularly resorted to. But high lateral sources, which form a small domestic investment rates are associated proportion of the total. Aid receipts with low average economic growth rates amounted to 3,174 million vatu in 1993, since independence. So the quality of 3,600 million vatu in 1994 and 5,550 investments, particularly of the public million vatu in 1995.1 Since independence sector has been relatively low. The social in 1980, aid has financed the bulk of and economic yields of such investments government development expenditures were low or average capital/output ratios and effectively underwritten the stability very high. of Vanuatu’s balance of payments and external reserve positions. The land tenure system remains one of the many serious bottlenecks to private But the aid-giving climate appears to investment in Vanuatu. The Constitution be changing. Larger developing countries declares that all lands in the Republic which are strategically and economically belong to the indigenous custom owners more important to traditional donors and their descendants. All existing have added to the collective demand on freehold titles were therefore voided when diminishing aid budget allocations. So, as the country became independent. But in other island countries, aid in Vanuatu legislation has been enacted in an attempt

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to facilitate the leasing of lands in order to Recent political trends provide security to investors and to lenders. The general elections in Vanuatu in The government is now effectively December 1991 marked the beginning of a lessor of all urban lands and leases of such new phase in the politics of the country. lands are readily bought and sold in the Those elections brought to an end the market place. But accessing custom lands unbroken post-independence rule of the outside of the plantations and the two Vanua’aka Party (VP) which had led the urban areas of Port Vila and Luganville is successful indigenous struggle for fraught with difficulties. Permission from independence from the Condominium government is required for someone to powers of and Britain in 1980. Its negotiate a lease with custom owners. success as a political party stemmed from The boundaries of land claimed by custom an effective grassroots organisation groups are not determined. So lease extending throughout the islands, a negotiations and agreements with a land- coherent nationalist political agenda, and owning group generally end up in the an unexpectedly high recognition and island court or proceed all the way to the respect internationally deriving from its Supreme Court to sort out competing strong anti-colonial credentials and claims from other custom groups. The membership of the Non-Aligned land dispute resolution processes are Movement. Even more importantly for its inadequate. dominance of domestic politics post- independence, it enjoyed internal unity The Offshore Financial Centre, OFC, behind a charismatic leader and a cohesion is the best developed in the region. It was which arose from popular support for its established in 1971 and is effectively nationalist platform among a majority of supervised by the Vanuatu Financial the predominantly anglophone, Protestant Services Commission, VFSC, a regulatory population who shared its anti-French body set up under statute. Licensed character and ambitions. offshore banks, trust companies, insurance companies and shipping companies, The VP’s loss of government at the operating in the OFC, like other entities in elections in 1991 was attributable to its the country, are exempt from all direct loss of internal party unity rather than any taxes. These entities are also protected radical shift of voter preference away from under domestic secrecy laws and are not traditional linguistic and denominational required to file annual financial statements affiliations. A split in the once-dominant with the authorities. party and the division of its support base into two prevented either faction from The annual benefit to the country from gaining a majority in the elections. the OFC is difficult to determine because of the paucity of information about the The four years of francophone-led activities of entities within it. It employs coalition governments which followed skilled people and undertakes in-house provided an object lesson in the dangers training relevant for other sectors of the to political stability of unnatural alliances economy. It currently employs about 400 based on opportunistic self-interest and people and pays annual registration fees to held together more by the desire and government. The Reserve Bank estimates opportunity to destroy one’s enemies that the OFC contributes about 2.5 per than by any congruence of policy or cent of total GDP. political orientation. Although Maxime

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Carlot-Korman was able to remain Prime contesting the ballot in 15 constituencies. Minister throughout the full four-year These numbers merely confirmed the term 1991–95, it was at the head of a growing fissiparousness in Vanuatu’s succession of unstable coalitions, assembled erstwhile, seemingly stable, party-based and re-assembled from internally politics—a characteristic common in fragmenting elements of the anglophone other parts of Melanesia but clearly splinter group, the National United Party. detrimental to policy coherence and good governance as party allegiances are soon Principle and policy coherence were subordinated to individual market the first casualties in the process of leverage. Against such fractious and coalition formation and hybrid govern- fragmenting party politics, the elections ment; the steady politicisation of the seemed doomed to result in a further public service, and a concomitant erosion period of uneasy coalition government. of its technical and administrative capacities, then ensured the insidious When officially announced on 7 abandonment of the good governance of December, the results confirmed that no the country as a duty of office. party had secured a simple majority in its own right and thus served only to When, therefore, Vanuatu went to the entrench the trend towards coalition polls, as scheduled in November 1995, for government. Indeed, the interval between its fourth post-independence general the elections and the installation of a new election, more was seen to be at stake in government saw a farrago of improbable the outcome than in any previous election. alliances and betrayals as leaders sought For twelve years after independence, the to forge a majority coalition. Aware of the country’s anglophone majority had held high stakes they were playing for, many government and its constituents had of Vanuatu’s most senior and experienced enjoyed the benefits that being in office politicians gambled with the country’s brings. For VP politicians and constituents fortunes in a winner-take-all power play. alike, the four years spent in Opposition, In doing so they unleashed, at least in the 1991–95, were a painful lesson in the view of the sympathetic bystander, an consequences of electoral defeat. By annus horribilis in which the institutions of contrast, the francophone minority who, the state were continuously assaulted and in their own view, had endured more their integrity dangerously threatened. than a decade of disadvantage and discrimination under anglophone rule, having finally won office in 1991 had only begun to redress those years of perceived Table 1 The General Elections November injustice and inequality. By the end of 1995: official results of political party seats 1995 there was, in both communities, a better appreciation of the real benefits of Vanua’aku Pati 13 office. This sharpened the competition Tan Union Unity Front 2 } 20 between not only rival parties but also Melanesian Progressive Pati 5 between individual leaders and factions Union of Moderate Parties 17 National United Pati 9 within parties. The general elections were Nagriamel 1 held on 30 November, with a record Fren Melanesian Pati 1 number of 170 candidates, 12 political Independent 2 parties and 19 independents officially

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If the anglophones lost government in elections on 4 December, when Vohor, 1991 as a result of internal disunity and claiming the support of a dozen MPs, divisions, the francophones in 1995 signed a memorandum of understanding hastened to follow their example. The on coalition government with the Unity francophone Union of Moderate Parties Front (UF, which with 20 seats controlled (UMP) had never been more than an the largest bloc of seats in the Parliament), umbrella which sheltered different in which he would accept deputy-prime political groups sharing little more than ministership. Two days later Carlot francophonie and opposition to the earlier Korman’s faction announced an unitary anglophone majority. The agreement with NUP to re-establish the disintegration of that anglophone coalition entered into in the first UMP-led solidarity seemed to precipitate similar government in 1991. Over the ensuing self-destructive tendencies among the days, changes were constantly rung on francophones. these combinations as Vohor brokered his numbers between UF, the rump of From early in 1995, the ruling UMP Korman’s UMP and NUP. Finally the had begun increasingly to show signs of Parliament sat and on 21 December internal disunity with rival factions, installed Vohor as the new leader of a conscious of the approaching elections, UMP/NUP government, in which former forming in support of the Party President long-serving Prime Minister Father and his main opponent, the Walter Lini agreed to become deputy- incumbent Prime Minister Maxime Carlot- Prime Minister and Minister for Justice, Korman. The two men had a long history Culture and Women’s Affairs. Ironically, of rivalry which only became acute when his sister, and Vanuatu’s only women MP, UMP emerged from the 1991 general Hilda Lini was denied a Cabinet post. elections in a position to form government. At that time, Vohor, both as President of Not only were Vohor and Lini the party, and because within the party he politically poles apart, but their hold on a commanded the strongest following, had majority was extremely frail. It took only expected to become Prime Minister. His until the end of January before the first disappointment at Carlot-Korman’s formal challenge was issued by petition to appointment as Prime Minister and the Speaker for an extraordinary session frustration at having to serve in his of Parliament to debate a motion of no- government were open secrets in Port Vila. confidence in the government. Their personal rivalry, which was During the entire year, the country increasingly fought out during the year lurched from crisis to crisis: first, an over the endorsement of party candidates attempt by the Vohor-Lini government to for the elections, ultimately led to a break- avoid defeat in the Parliament by a series away party of young disaffected party of illegal acts which could be seen to have members, an increase in the number of attempted a coup d’etat by administrative candidates standing as independents and means; a succession of highly dubious finally to litigation to decide the UMP’s investment schemes which ran the risk of official candidate list; all of which served bankrupting the country and brought the to divide the UMP’s normal electoral vote. Ombudsman into courageous but risky These rifts in the UMP were thrown conflict with the powers of the day; a into sharp relief immediately after the parliamentary crisis which ended in a

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second successful vote of no-confidence managed to sign a formal Memorandum and change in government after the of Agreement to maintain their cooperation Parliament was ordered by the Supreme for the full-term until 1999. The memo- Court to sit and the Speaker was cited for randum, however, also contained some contempt; a crisis in the para-military opaque language on proportional wing of the security force which escalated distribution of ministerial and other from insubordination and a refusal to statutory offices which could have obey orders by a large segment of the unsettling effects on their solidarity. With force to their kidnap of the President, four ministerial portfolios each, the NUP coercion of a civil aircraft and pilot, a (which brings only half as many MPs to grant of immunity from prosecution by the coalition as the UMP and VP), is the acting Prime Minister (which yielded obviously disproportionately endowed. them a virtual veto over government The VP backbench is particularly restive decisions they did not like), abduction of and chafing at their exclusion from a an expatriate official and final arrest and more liberal enjoyment of the spoils of detention pending charges. office and Carlot-Korman too has called for a more equitable redistribution as he By the end of 1996, although the seeks to keep alive simmering internal country appeared to have survived this UMP discontents. There seems little succession of crises, the Supreme Court prospect of real political stability in the had three major cases awaiting its government. attention in the new year, all heavily freighted with political significance—the While the politicians thus toyed with prosecution of Peter Swanson for his the institutions of democracy and resorted alleged involvement in the fraudulent to the Supreme Court as though to a US$100 million bank guarantee scheme, gaming-house, apparently indifferent to the prosecution of the mutinous members the obligations of office, they seem not to of the VMF, behind which lurks the have noticed a growing disenchantment shadow of a possible coup attempt among voters with their reckless politicking involving other non-military figures, and and the impact of an accompanying the appeal by the former Chief Justice decline in services across the board. Voter against wrongful dismissal. turnout at the general elections in November 1995 overall had been On the positive side of the balance comparable to previous years, but in the sheet, the government commanded a urban electorate of Port Vila, where majority in parliament large enough to observation of the political process is enable the implementation of policy and closest and most informed, voter turnout programs for the first time in twelve fell to a low of 51 per cent. Similar months; tentative moves, begun late in disenchantment most probably accounts 1996, to reunite the two wings of the UMP for the fate which befell the most high- seemed to have foundered, at least for the profile casualty of the elections, Deputy time being, by February this year, with Prime Minister Sethy Regenvanu, who Carlot-Korman again blaming Vohor for lost his seat in Malekula, after serving in unwillingness to make concessions to his every government since independence. followers (one suspects his complaint His PDP, in fact, failed to retain a single reflects an unsurprising refusal to yield seat, despite (or perhaps because of) its the Prime Ministership to him); and, in having been crucial to the longevity of March, the three coalition parties finally Carlot-Korman’s tenure in office.

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This trend towards loss of public paralysed by the need for decisiveness in confidence in the politicians and for the face of a difficult problem. In the voting patterns to be less predictably aftermath of the successful arrest of the along traditional party lines was further mutinous VMF stand-down group, the confirmed in March this year when voter government established a Committee to turnout at the Port Vila Municipal Elections conduct a Strategic Review of the security plummeted to an alarming 23 per cent. of the nation under the chairmanship of The results also tended to confirm other Peter Taurokoto, political first secretary to trends that are beginning to emerge with Fr Lini. The Review, although planned a further fall in support for the NUP earlier, and more for reasons of fiscal (perhaps caused by the resignation from restraint than to question, much less pre- the party by Hilda Lini who is returned to judge, the real need to retain the two the national parliament from the Port Vila elements of the security force, was to electorate), and another success for the consider Vanuatu’s security environment Liberal Party at the local government level; and the roles and tasks of the security remarkable because the party was only forces. The Review very quickly came to founded in 1996 and by a woman, Maria be seen as a device through which to Kalsakau, a non-indigenous ni-Vanuatu. recommend to Parliament the disestablishment of the Mobile Force, a Looking ahead, there are some course of action the Minister and a encouraging signs that the institutions of significant number of other senior leaders the state are holding despite constant were thought to favour. The Committee battery and some internal subversion. The included in its membership represent- Supreme Court, while itself the object of atives of women, chiefs and churches and politically motivated interference, held public hearings around the country continues to be seen as arbiter of the to ensure widespread consultation and a constitutionality of the political stratagems comprehensive range of views. It and ruses being used in the struggle for presented its report to the Minister in late power. It retained, for all contestants, its March and its recommendations may be ultimate authority and its decisions were considered when Parliament sits in sought in order to validate political ordinary session in May 1997. While the triumph and defeat. The acting Chief Committee’s final recommendations are Justice, in opening the legal year in not known, an interim report revealed March, and no doubt conscious of the that there was wide public support for profile of the court in recent years, set out the retention of the para-military wing the need for the integrity of the Judiciary separate from the police force. Those to be protected from political interference; public views are, however, more likely to a reference the more valuable because reflect local area concern with made by a francophone ni-Vanuatu. Fr employment and appreciation of the Lini having been enjoined on becoming construction work of the VMF Engineers, Minister for Justice in November to ceremonial displays and the deployment resolve the crisis within the Mobile Force, of the Band for public enjoyment than any acted with a daring and boldness which assessment of Vanuatu’s security outlook, might justly have earned him the the VMF’s defence capability or the honorific of ‘saviour of the nation’ to add government’s inability to finance a to his existing ‘father of independence’, separate service to combat a non-existent and demonstrated that at least he was not threat.

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At the end of March, the three major particular the confrontation between the court cases that awaited trial at the end of military commander and the Prime 1996 remained unconcluded with their Minister, they may even begin to regret explosive potential undefused. The trial not having pressed their abortive coup of Peter Swanson in the bank guarantee plans further. case had been heard but a decision had not been handed down. The government’s defence of its dismissal of Chief Justice Recent economic developments D’Imecourt (which is costing it a lot of money through continued payment of his Vanuatu is regularly subjected to external salary pending resolution of his claim) and domestic economic shocks over became even more difficult when the which it has no control. In recent years, Attorney-General revoked the appoint- the country has also been subjected to ment of the government’s counsel, Roger domestic economic shocks stemming de Robillard, who was cited by the acting from political developments of its own Chief Justice for contempt of court. De making. Economic shocks are generated Robillard added to the gravamen of his by natural disasters such as hurricanes alleged contempt by appearing on which destroy crops and infrastructure, television to repudiate the charge and adverse movements in export and import failing to return the case files on the prices or adverse movements in exchange grounds that he had not been paid. The rates and interest rates. Such shocks Attorney-General consequently issued a invariably result in falling current account warrant for his arrest. Prime Minister receipts, government revenue and national Vohor then suspended the Attorney- income, increased government expend- General saying he had been disloyal and itures and national import bills and incompetent and that he no longer had accompanying deterioration in balance of confidence in him. At the end of the payments, fiscal position of government, month, on returning to Vanuatu from external reserves and liquidity in the Australia, De Robillard was arrested and banking system. Managing national gaoled for two months. At a critical time, economic shocks is normally a delicate the Judiciary and the principal law officer exercise requiring depth of experience of the state were once again entangled in and expertise and luck. But in Vanuatu the snares of political cronyism and their this problem has, to date, been effectively roles vulnerable to potentially serious addressed with generous aid and other harm. The trial of the 76 members of the windows of assistance such as STABEX VMF was set down for hearing in late under the Lomé Convention. April, and all the detainees had been The economy is narrowly based; it released on bail, some under very depends upon a very limited number of exacting conditions which effectively agricultural exported items. These are confined them to their houses except for copra, beef, cocoa, coffee, kava and more attendance at Church on Sundays. Their recently squash. The total export receipts sense of grievance at their long detention from the sale of these items rose from and the further delay before their 1,600 million vatu in 1991 to about 2,550 scheduled court appearance is likely to million vatu in 1995. accentuate their resentment and pugnacity. Against the background of the Economic growth over the last ten recent crisis in Papua New Guinea, in years averaged about 3 per cent per

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annum. Annual growth rates also There are no direct taxes in Vanuatu; fluctuated widely, mainly as a result of corporate or personal income tax are not natural disasters affecting agricultural levied. Reliance upon indirect trade taxes and services outputs and uncertainties in is therefore heavy. Import taxes accounted policymaking. As real growth rates barely for 75 per cent of total tax revenue and 55 kept up with the population growth rates, per cent of total revenue in 1990. The the standard of living in the country has corresponding actual figures for 1995 and not improved during the period. budgeted for 1997 are 62 per cent and 46 The services sector, including tourism, per cent, and 66 per cent and 52 per cent, government and the finance sector, respectively. Trade taxes distort the contributed some 64 per cent to GDP in allocation of domestic resources. They 1995. The contribution to GDP of the impose high protection on inefficient Agriculture, Forestry and Fisheries sector domestic production and add to the costs has fluctuated over the last ten years, of exporters, thereby eroding their mainly due to varying commodity prices competitiveness. and disruptions to production in the The government accepts an open and wake of inclement weather, it was 28.7 outward-looking trading relationship as per cent in 1985, 18.5 per cent in 1989, 22 part of its development strategy. It has per cent in 1993 and 22.7 per cent in 1995. made formal application for membership The manufacturing sector is small but has of the WTO and has expressed its gradually increased its share of GDP from determination to honour the obligations 3.9 per cent in 1985 to 5.2 per cent in 1995. that will be imposed under the WTO The GDP growth rate was estimated at rules. So import licensing will have to be 3.2 per cent in 1995 and 3.0 per cent in totally removed and over time the level 1996. It is expected to decelerate further and dispersion of tariffs will need to be during the current year. brought down. Sequencing this trade Domestic inflation is heavily influ- deregulation program must be handled enced by price movements in Australia, with care. New tax bases will need to be New Zealand, Japan, Fiji, brought into the tax net to ensure that the and France, countries from where the level of revenue is protected and the bulk of Vanuatu’s imports are sourced. elasticity of the tax system with respect to There is no price control legislation and GDP enhanced. At the same time, prices are determined by supply and adjustment to the exchange rate will be demand in the market place. But a necessary to add additional support to number of distortions in the market place, the traded goods and services sector such as import licensing on a range of while allowing the import substituting important essential goods, bear heavily businesses breathing space within which upon the level of prices in the country. to make the necessary adjustments. Inflation, measured in movements in the A report on the taxation system consumer price index, has declined reforms for Vanuatu prepared by Warren steadily from about 4 per cent in 1992 to and Whyte in 1994 made enlightened tax near zero per cent in 1996. This trend proposals for Vanuatu. The main reflects falling overseas inflation rates, recommendations were declining levels of economic activity in Vanuatu and absence of hurricanes • revenue losses through progressive during the period. reduction in tariff rates should be offset

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by a comprehensive consumer tax which different direction. Since independence, could ultimately take the form of a value- development expenditures were added tax and introduction of business determined by Cabinet outside of and personal taxes set at relatively low Parliament. Pipelines of projects were levels. Progressive personal income tax assessed by the National Development could be grafted on to the schedule at a Commission and Cabinet through the later stage. A levy of 1 per cent on the National Planning Office. Approved wage and salary bills of all employers expenditure programs were determined including government, to fund training, should be introduced according to available finance from donors and the soft windows of the • a 3 per cent wage and salaries tax Multilateral Financial Institutions. should be imposed and the proceeds of it However, in 1992, the government began earmarked for education, health and to push through additional development infrastructure programs projects, most of which were not • a 4 per cent business sales tax effectively quality tested, and were well should replace the business license fees in excess of available financial resources from traditional funding sources. • tax concessions under the customs legislations which were readily given Additional development expenditures without strict guidelines and which were had therefore to be financed through substantially eroding the country’s tax running down government deposits with base should be severely restricted. the banking system and domestic and external borrowings. The net positive Warren and Whyte’s proposals, made balances of government with the Reserve after extensive discussions with the Bank and the commercial banks which government, the private sector and other was about 1,000 million vatu in 1991 is sections of society were widely debated. now near zero. Vigorous objections from the corporate sector, particularly the offshore banking External debts, which have been very sector, put paid to all proposals save for low because of the prudent approach to the last recommendation which was development financing in the past, have accepted only after much difficulty. But increased at an annual rate of 12 per cent the need for tax reform cannot be put off since 1990. While the current level of debt for long. The share of government revenue service burden at about 1 per cent is low to GDP will continue to decline with by international standards, its rapid rate progressive reduction in tariff rates while of increase is of concern. Fiscal prudence the pressures upon the government budget is an important pre-condition for stable will most certainly continue to escalate. future development as widening fiscal deficits, expanding external debt and The government has adopted a policy apparent lack of capacity for sound and of maintaining balance in the recurrent determined policymaking by the budget for some time. Small annual sur- authorities conjures up in the minds of pluses in the recurrent budgets were in fact investors and consumers the real achieved for most of the years 1987–95, likelihood of rapid inflation, widening enabling annual transfers for the financing budget and balance of payments deficits, of development expenditures to be made. evaporating external reserves, capital But concerns about fiscal develop- flight, slow economic growth, falling ments in Vanuatu have arisen from a demand, corporate losses followed by

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tight fiscal and monetary policies and But the widening overall budget deficit, if exchange rate adjustments to re-establish it continues, could well result in escalation national financial stability. Faced with such in borrowings from the banking system prospects a potential investor may well for working capital requirements and decide to sit and wait or find alternative progressively ‘crowd out’ the private countries within which to invest. sector from the domestic credit market. Wide trade deficits are recorded for Vanuatu each year. But services, particularly tourism, the domestic finance Adjustment and reform for future sector and the Offshore Finance Centre development which register surpluses annually and official transfers or aid, help to offset the Because of prudent fiscal management in trade deficits each year. However, deficits the past and generous aid receipts, the in the current account of the balance of authorities have been able to maintain payments have persisted since 1991 and domestic and external financial stability were financed with relative ease through or stable domestic prices and balance of inflows in the capital account and there payments positions since independence. were positive changes in net foreign But private investment and growth have assets of the banking system in three out not kept up with the needs and of the five years from 1991 to 1995. aspirations of the expanding population. Standards of living have not improved The country’s external reserves held and the quality of social services, by the Reserve Bank and commercial particularly in education and health, banks increased from 16.702 million vatu appear to be steadily deteriorating. The in 1990 to 23,808 million vatu at the end future of aid, which has underpinned of 1996. External reserves held by the development spending and the external Reserve Bank were equivalent to about sector, has to be re-assessed. Expectations 6.2 months of imports in 1996. This is only are that aid will most likely decrease in about 23 per cent of the country’s total real terms. This implies that future aid external reserves. The other 77 per cent is must be used more efficiently and held and invested in short-term invest- increased domestic resource mobilisation ments overseas by the commercial banking given the highest priority. system. Among the Pacific island countries, Vanuatu has the highest level Encouraged by the Asian of external reserves—some 27 months of Development Bank, the government imports—available for funding announced early this year that it will international transactions at present. embark upon a comprehensive reform program for Vanuatu. A number of Unlike the other island countries, the experts provided by the Asian Vanuatu government has up to now been Development Bank and bilateral donors, a net lender to the banking system working with officials of the Reserve including the Reserve Bank. Liquidity in Bank, Department of Finance and the the banking system, reflecting the high National Planning Office, are to prepare external reserves and sluggish economic draft briefing and policy papers for growth, is high. And so far, the private submission to two separate task teams— sector has not had to compete with the one on public sector reforms and the public sector for credit from the banks. other on economic reforms. The task

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teams are to be chaired by senior • the recommended allocation of Ministers and to include representatives resources, both aid and budgetary, reflect from the private sector, non-government the assessed and balanced needs of all organisations, government, the churches, sectors of the economy. trade unions and the opposition. Public sector reform is generating Variations to policy proposals may be much interest within the relevant task made by the Task Teams before they are force and members of the public. It is presented to the Council of Ministers for increasingly appreciated that inefficiency decision. in the public sector imposes additional Refocusing the future role of costs and burden on the private sector. government in national development is An inefficient and bloated public service central to the exercise. The focus is also raises the possibility of increased expected to be upon the maintenance of taxes, deteriorating fiscal and debt law and order, good governance; sound positions, and erosion of investor policies for macroeconomic stability, confidence. Measures for improvement in supportive legal framework for dynamism efficiency and productivity in the public in the economy, sound microeconomic service are likely to include policies for encouraging private invest- • training in technical and ments, productivity and competitiveness administrative areas in the economy, economic and social • insistence on merit as the only policies which ensure wide participation determinant for recruitment and in the development process by all sections promotion of the population and better access to social services, particularly education and • strict observation of legal provisions health, for the economically weak, and which vest in the Public Service Commission the power to hire and fire the formulation and implementation of well appraised public sector investment • introduction of an appraisal system programs which yield high social and which sets out targets for assessing staff economic returns and complement • better understanding of the private sector investments. boundaries of responsibilities between the The strengthening of government Ministers and their political secretaries on machinery for improved decision-making the one hand and departmental directors on the other. Ministers, as part of this and coordination will also need to be exercise, will need to understand the addressed. Such a machinery, with the relevant provisions of the Constitution Planning Office providing secretariat and the various statutes administered by support, should ensure that them. • decision-makers are regularly Other important objectives which the briefed reform program is targeting in the pursuit • policy decisions are made quickly of good governance, an important pre- as circumstances change condition for stable long-term development, include • collective decisions are based upon detailed analysis with arguments for and • strengthening current legislative against the various decision options provisions such that parliamentary carefully presented authorisation should be required for all

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government loans which must be and some will benefit in the short term as confined to approved development adjustment and reform involves expenditures redistribution of opportunities, income • future development expenditures and ultimately wealth and economic should be presented in a capital budget power among sections of the community. which must require the approval of Normally, adjustment and reform are parliament adopted by governments following gross • loan or project negotiations, financial management or economic particularly with outside third parties, shocks over which they have no control. should be undertaken by a selected group In such cases, a country will have gone of officials with relevant experience and through a period of unsustainable balance negotiating within guidelines previously of payments positions and fiscal approved by government difficulties, exhausted external reserves, • strengthening legislation on mounting external debt and tight financial and audit procedures and liquidity in the banking system. No provision and use of sanctions in cases external funding would be on tap except where rules are not followed with a comprehensive adjustment and reform program designed by the Bretton • strengthening of accounting and Woods Institutions. In such audit capacity in government circumstances, political will during the • progressive deregulation and period of assistance, would certainly be gradual removal of discretions on the present on the part of the government as granting of business licenses, customs there would in fact be no option to concessions and other forms of assistance implementing such a program. to businesses The case of Vanuatu is, however, • strengthening the police, the somewhat different. They are launching a judiciary and the offices of the Ombuds- reform program when external reserves man and Director of Public Prosecution are high and liquidity in the banking • encouragement to civil societies to system is abundant. They in fact do not strengthen themselves and participate need the inputs of the Bretton Woods more actively in policy and other national Institutions. It is of course a very debates commendable approach for a country to • freedom for the media. adopt, particularly at a time when worrying signs of fiscal mismanagement The adjustment and reform exercise is are emerging. It is for Vanuatu a currently going through the educational voluntary exercise which calls for much and policy formulation stage. The details determination, leadership and political of the policies and measures which will from leaders and the Government of government will need to adopt will Vanuatu if it is to succeed. slowly emerge. Ideally, these must carry the collective support of the various interest groups if they are to have easy Note passage to implementation. Different groups are likely to be 1 The mid-rate of the vatu was 114.92 affected differently. Some will be losers vatu to the US dollar on 30 June 1997.

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References

Quarterly Economic Reports, Reserve Bank of Vanuatu.

Quarterly Statistical Indicators, Vanuatu Statistics Office.

Annual Estimates of Revenue and Expenditure, Department of Finance, Vanuatu, 1991 to 1997.

Pacific Economic Bulletin, National Centre for Development Studies, various issues.

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